---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended June 30, 2002





Commission File Number: 001-15089





Fidelity BancShares (N.C.), Inc.


(Exact name of Registrant as specified in its
charter)





Delaware

56-1586543(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification Number)





100 South Main Street, Fuquay-Varina, North Carolina 27526


(Address of principal executive offices) (Zip code)





(919) 552-2242


(Registrants telephone number, including area code)





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





Yes  x    No  ̈





Common Stock, $25 Par Value28,011 shares


(Number of shares outstanding, by
class, as of August 13, 2002)





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PART I.    FINANCIAL INFORMATION





ITEM 1.    FINANCIAL STATEMENTS





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





CONSOLIDATED BALANCE SHEETS





June 30, 2002


December 31, 2001


June 30, 2001(unaudited)





(unaudited)ASSETSCash and due from banks

$
38,693,697


$
46,517,398


$
39,909,797Interest bearing deposits in other banks


24,376,494



28,462,716



57,444,366Overnight funds sold


34,800,000



51,200,000



60,800,000Total cash and cash equivalents


97,870,191



126,180,114



158,154,163Investment securities:Held to maturity (estimated fair value of $118,545,700, $126,502,713, and $110,887,388, respectively)



118,067,930



125,446,167



109,975,854Available for sale (cost of $3,566,009, $3,633,777 and $3,644,668, respectively)


12,917,315



11,595,935



12,694,789Total investment securities


130,985,245



137,042,102



122,670,643Loans


707,360,831



668,984,155



631,041,705Allowance for loan losses


(10,437,661
)


(9,312,384
)


(8,606,851
)Loans, net


696,923,170



659,671,771



622,434,854Federal Home Loan Bank of Atlanta stock, at cost


2,467,600



2,309,400



2,309,400Premises and equipment, net


34,845,734



35,575,442



34,685,348Accrued interest receivable


4,218,272



5,453,035



4,735,676Intangible assets


16,588,454



17,311,024



18,072,079Other assets


1,480,081



1,176,004



1,787,669Total assets

$
985,378,747


$
984,718,892


$
964,849,832LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing demand deposits

$
151,406,417


$
140,965,066


$
130,108,033Savings and interest-bearing demand deposits


298,994,546



294,219,134



278,266,199Time deposits


391,497,761



406,251,104



411,509,026Total deposits


841,898,724



841,435,304



819,883,258Short-term borrowings


24,528,546



27,072,692



28,633,244Long-term borrowings


23,000,000



23,000,000



23,000,000Accrued interest payable


4,573,892



6,257,923



7,652,632Other liabilities


2,533,722



1,922,588



3,226,664Total liabilities


896,534,884



899,688,507



882,395,798Shareholders equity:Common stock ($25 par value; 29,200 shares authorized; 28,011, 28,026, and 28,070 shares issued and outstanding,
respectively)


700,275



700,650



701,750Surplus


6,163,380



6,166,681



6,176,362Accumulated other comprehensive income


5,657,540



4,817,106



5,475,323Retained earnings


76,322,668



73,345,948



70,100,599Total shareholders equity


88,843,863



85,030,385



82,454,034Total liabilities and shareholders equity

$
985,378,747


$
984,718,892


$
964,849,832





See accompanying notes to consolidated financial statements.




2




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





CONSOLIDATED STATEMENTS OF INCOME





Three months ended June 30,

Six months ended June 30,2002


2001

2002


2001(unaudited)

(unaudited)Interest income:Interest and fees on loans

$
12,726,068


$
14,199,407

$
25,228,984


$
28,887,796Interest and dividends on investment securities:Taxable interest income


1,047,637



1,983,952


2,395,036



4,430,445Dividend income


69,236



74,267


135,594



150,046Interest on federal funds sold


119,406



699,375


305,483



971,944Total interest income


13,962,347



16,957,001


28,065,097



34,440,231Interest expense:Deposits


4,220,215



7,139,879


8,829,725



14,631,439Short-term borrowings


61,695



219,501


127,272



464,967Long-term borrowings


488,750



488,750


977,500



977,500Total interest expense


4,770,660



7,848,130


9,934,497



16,073,906Net interest income


9,191,687



9,108,871


18,130,600



18,366,325Provision for loan losses


700,000



750,000


1,450,000



1,500,000Net interest income after provision for loan losses


8,491,687



8,358,871


16,680,600



16,866,325Noninterest income:Service charges on deposit accounts


1,637,208



1,562,994


3,202,345



2,805,064Other service charges and fees


946,352



813,873


1,797,802



1,554,130Other income


50,607



25,409


92,820



47,595Gain on exchange of marketable equity securities













458,395Gain (loss) on sale of marketable equity securities


(71,068
)


43,083


(71,068
)


43,083Total noninterest income


2,563,099



2,445,359


5,021,899



4,908,267Noninterest expense:Salaries and employee benefits


4,575,916



4,244,581


9,089,798



8,428,941Occupancy and equipment


1,212,521



1,195,216


2,441,087



2,396,101Data processing


809,441



789,888


1,594,424



1,500,917Amortization of intangibles


361,285



380,528


722,570



727,636Other expense


1,158,124



1,303,529


2,334,018



2,564,812Impairment loss on fixed assets


143,224



173,317


143,224



477,972Total noninterest expense


8,260,511



8,087,059


16,325,121



16,096,380Net income before income taxes


2,794,275



2,717,171


5,377,378



5,678,212Income tax expense


995,392



993,013


1,918,538



2,074,518Net income

$
1,798,883


$
1,724,158

$
3,458,840


$
3,603,694Per share information:Net income

$
64.22


$
61.42

$
123.46


$
128.38Cash dividends declared

$
8.00


$
8.00

$
16.00


$
16.00Weighted average shares outstanding


28,011



28,070


28,017



28,070





See accompanying notes to consolidated financial statements.




3




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





CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY


(unaudited)





Common Stock


Surplus


Accumulated other Comprehensive income

Retained earnings


Comprehensive income

Total shareholders equityShares


AmountBalance December 31, 2000

28,070


$
701,750


$
6,176,362


$
3,688,615

$
66,946,042





$
77,512,769Net income
















3,603,694


$
3,603,694


3,603,694Cash dividends ($16.00 per share)
















(449,137
)





(449,137
)Unrealized gain on securities available for sale, net of deferred taxes of $1,108,933













1,786,708






1,786,708


1,786,708Comprehensive income



















$
5,390,402Balance June 30, 2001

28,070


$
701,750


$
6,176,362


$
5,475,323

$
70,100,599





$
82,454,034Balance December 31, 2001

28,026


$
700,650


$
6,166,681


$
4,817,106

$
73,345,948





$
85,030,385Net income
















3,458,840


$
3,458,840


3,458,840Cash dividends ($16.00 per share)
















(448,296
)





(448,296
)Purchase and retirement of common stock

(15
)


(375
)


(3,301
)





(33,824
)





(37,500
)Unrealized gain on securities available for sale, net of deferred taxes of $548,714













840,434






840,434


840,434Comprehensive income



















$
4,299,274Balance June 30, 2002

28,011


$
700,275


$
6,163,380


$
5,657,540

$
76,322,668





$
88,843,863





See accompanying notes to consolidated financial statements.




4




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





CONSOLIDATED STATEMENTS OF CASH FLOWS


(unaudited)





Six months ended June 30,2002


2001Cash flows from operating activities:Net income

$
3,458,840


$
3,603,694Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


1,967,935



1,934,004Amortization (accretion) on investment securities


68,436



(301,210
)Gain on disposition of premises and equipment


(12,758
)


(9,542
)Impairment loss on fixed assets


143,224



477,972Provision for loan losses


1,450,000



1,500,000Origination of loans held for sale






(5,972,250
)Proceeds from sales of loans held for sale






6,004,882Gain on sales of loans held for sale






(32,632
)Gain on exchange of marketable equity securities






(458,395
)Loss (gain) on sale of securities available for sale


71,068



(43,083
)Proceeds from sales of other real estate owned


405,400



100,003Gain on other real estate


(12,087
)


Decrease in accrued interest receivable


1,234,763



1,226,091Increase in other assets, net


(231,987
)


(369,861
)Increase in other liabilities, net


62,419



427,765(Decrease) increase in accrued interest payable


(1,684,031
)


1,346,451Net cash provided by operating activities


6,921,222



9,433,889Cash flows from investing activities:Purchase of securities held to maturity


(97,690,963
)


(89,770,124
)Purchase of securities available for sale


(49,170
)


(1,000,066
)Proceeds from maturities and issuer calls of securities held to maturity


105,000,762



123,000,272Proceeds from sale of securities available for sale


45,870



501,478Purchase of FHLB of Atlanta stock


(158,200
)


(139,700
)Net increase in loans


(39,166,798
)


(12,954,009
)Purchases of premises and equipment


(646,124
)


(718,071
)Net cash received on branch purchases






38,694,108Net cash (used) provided by investing activities


(32,664,623
)


57,613,888Cash flows from financing activities:Net increase (decrease) in deposits


463,420



(2,122,102
)Net (decrease) increase in short-term borrowings


(2,544,146
)


1,991,658Cash dividends paid


(448,296
)


(449,137
)Purchase and retirement of common stock


(37,500
)


Net cash used by financing activities


(2,566,522
)


(579,581
)Net (decrease) increase in cash and cash equivalents


(28,309,923
)


66,468,196Cash and cash equivalents at beginning of period


126,180,114



91,685,967Cash and cash equivalents at end of period

$
97,870,191


$
158,154,163Supplemental disclosures of cash flow information:Cash paid during the period for interest

$
11,618,528


$
14,727,455Cash paid during the period for income taxes

$
2,352,995


$
2,367,160Supplemental disclosure of noncash financing and investing activities:Unrealized gains on available-for-sale securities, net of deferred taxes of $548,714 and $1,108,933,
respectively

$
840,434


$
1,786,708Foreclosed loans transferred to other real estate

$
465,400


$
415,000





See accompanying notes to consolidated financial statements.




5




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


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Note 1.    Basis of Presentation





Fidelity BancShares (N.C.), Inc. (BancShares) is the holding company for The Fidelity Bank (the
Bank), which operates 64 branches primarily in central North Carolina, and FIDBANK Capital Trust I (the Trust), a statutory business trust created under the laws of the State of Delaware that issued $23.0 million of 8.50%
Capital Securities (the Capital Securities) in June 1999 maturing in 2029. The Bank also has two wholly owned subsidiaries, Fidelity Properties, Inc. and TFB Financial Services.





The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements.





In the opinion of management, the consolidated financial statements contain all material adjustments necessary to
present fairly the consolidated financial position of BancShares as of and for each of the periods presented, and all such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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.





These financial statements should be read in conjunction with financial statements and notes included in Fidelity BancShares (N.C.), Inc.s Form 10K filed with the Securities and Exchange Commission. Certain amounts for prior
periods have been reclassified to conform with statement presentations for 2002. However, the reclassifications have no effect on shareholders equity or net income as previously reported.





Note 2.    Adoption of New Accounting Standards





On July 20, 2001, The Financial Accounting Standards Board (FASB) issued Statement No. 141, Business Combinations; and Statement No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria which must be met for intangible assets acquired in a purchase method business combination to be
recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS
No. 142. SFAS No. 142 also requires that identifiable intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.





BancShares was required to adopt the provisions of SFAS No. 141 as of June 30, 2001 and was required to adopt SFAS No. 142 effective January 1, 2002. Any goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate accounting literature issued prior to SFAS No. 142.
Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 were amortized in 2001 prior to the adoption of SFAS No. 142 on January 1, 2002.





As of January 1, 2002, BancShares had intangible assets totaling $17,311,000. Management evaluated the BancShares existing intangible assets and goodwill as of January 1,
2002 and made appropriate reclassifications to conform to the new criteria in Statement 141 for recognition apart from goodwill, as further described below.





BancShares determined that upon adoption of Statement 142 on January 1, 2002, BancShares had $744,000 of goodwill that was no longer amortized beginning on January 1, 2002. The amortization expense
associated with this goodwill during the six months ended June 30, 2001 was $38,000. In accordance with Statement 142, BancShares performed a transitional impairment test of this goodwill in the first six months of 2002 and deemed that no goodwill
impairment existed. BancShares will continue to perform an annual impairment test of the goodwill hereafter.




6




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





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The remaining intangible assets, totaling $16,567,000 at January 1,
2002, relate to acquisitions of branches that are being accounted for in accordance with Statement of Financial Accounting Standards No. 72 (Statement 72), Accounting for Certain Acquisitions of Banking and Thrift Institutions. Statement
72, which was not amended by Statement 142, requires that identified intangible assets and unidentified intangible assets associated with certain acquisitions of branches be amortized into expense. Accordingly, these intangible assets will continue
to be amortized over their useful lives. Management has reviewed the useful lives of these assets, and will continue to do so in future periods, adjusting them downward where appropriate. The amortization expense associated with these branches was
$723,000 and $689,000 for the six months ended June 30, 2002 and 2001, respectively.





The following is a summary
of the gross carrying amount and accumulated amortization of amortized intangible assets as of June 30, 2002 and December 31, 2001 and the carrying amount of unamortized intangible assets as of June 30, 2002 and December 31, 2001.





June 30, 2002

December 31, 2001Gross Carrying Amount

Accumulated Amortization

Gross Carrying Amount

Accumulated Amortization(Dollars in thousands)Amortized intangible assets:Branch acquisitions

$
22,094

$
6,250

$
22,094

$
5,527Unamortized intangible assets:Goodwill

$
744




$
744








There was no change in the carrying amount of goodwill at June 30,
2002 compared to December 31, 2001.





The estimated amortization expense for intangible assets for the years ended
December 31, 2002, 2003, 2004, 2005, 2006 and thereafter is as follows:





Estimated Amortization Expense(Dollars in thousands)2002

$
1,4452003


1,4452004


1,4452005


1,4452006


1,4452007 and after


9,342Total

$
16,567




7




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





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The following table presents the adjusted effect on net income and on
basic net income per share excluding the amortization of goodwill for the six months ended June 30, 2002 and 2001 and for the years ended December 31, 2001, 2000 and 1999:





For the six months ended June
30,2002

2001(Dollars in thousands, except per share data)Net income

$
3,459

$
3,604Add back: Goodwill amortization

$


$
38Adjusted net income

$
3,459

$
3,642Net income per share:As reported

$
123.46

$
128.38Goodwill amortization

$


$
1.35Adjusted net income per share

$
123.46

$
129.73





For the years ended December 312001

2000

1999(Dollars in thousands, except
per share data)Net income

$
7,397

$
8,101

$
7,637Add back: Goodwill amortization

$
77

$
77

$
77Adjusted net income

$
7,474

$
8,178

$
7,714Net income per share:As reported

$
263.71

$
287.97

$
270.05Goodwill amortization

$
2.75

$
2.74

$
2.72Adjusted net income per share

$
266.46

$
290.71

$
272.77





Note 3.    Net Income Per Share





Net income per share has been computed by dividing net income by the weighted average number of shares outstanding during the period. For
all periods presented, BancShares had no potential dilutive common stock.





Note 4.    Allowance for Loan Losses





A summary of the allowance for loan losses follows:





Six months ended June 30,2002


2001(Unaudited)Balance at beginning of year

$
9,312,384


$
7,297,833Provision for loan losses


1,450,000



1,500,000Loans charged off


(1,322,101
)


(787,112
)Loan recoveries


997,378



596,130Balance at end of the period

$
10,437,661


$
8,606,851




8




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





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 5.    Long Term Borrowings





The $23.0 million long-term obligations at June 30, 2002 are Capital Trust Securities of the Trust. These long-term obligations, which
qualify as Tier 1 Capital for BancShares, bear interest at 8.50% and mature in 2029. BancShares may redeem the long-term obligations in whole or in part on or after June 30, 2004. The sole asset of the Trust is $23.7 million of 8.50% Junior
Subordinated Debentures of BancShares due 2029. BancShares has entered into a guaranty agreement which, when taken together with its obligations under the trust agreement under which the Trust exists, the junior subordinated debentures, and the
indenture under which the debentures were issued, provides a full and unconditional guarantee on a subordinated basis by BancShares of the Trusts payment of distributions and other payments on the capital securities.





Note 6.    Branch Acquisitions





In February 2001, BancShares acquired the Mebane, Rockingham and Yanceyville, North Carolina branches of First Union National Bank. This acquisition was accounted for as a purchase, and, therefore the
results of operations prior to purchase of the branches are not included in the consolidated financial statements. The combined loans and deposits acquired were $3.9 million and $49.5 million, respectively, and the purchase included $6.0 million in
Statement 72 intangible assets.





Note 7.    Gain on Marketable Equity Securities





During the second quarter of 2002, BancShares recognized a securities loss of $71,068. This loss was the result of selling some available
for sale equity securities. There were no securities gains or losses recognized in the first quarter of 2002. During the first quarter of 2001, BancShares recognized a securities gain of $458,395. This gain was recognized as a result of a business
combination involving a company in which BancShares had an equity interest. During the second quarter of 2001, BancShares recognized a securities gain of $43,083 when the equity interest received in the business combination was sold.





Note 8.    Impairment Loss on Fixed Assets





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





In May 2002, BancShares approved the closing of one branch. BancShares analyzed the results of operations of the branch since its inception in 1999 and determined that the loss experience would not turn around in the near
future. At June 30, 2002, BancShares had accrued disposition costs of $143,000 including $103,000 for losses on fixed assets, $20,000 for lease cancellation fees, and $20,000 for costs to close the branch.





Note 9.    Related Parties





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





The first significant shareholder at June 30, 2002, beneficially owned
11,155 shares, or 39.82%, of BancShares outstanding common stock. At the same date, the second significant shareholder beneficially owned 1,696 shares, or 6.05%, of BancShares outstanding common stock.





These two significant shareholders are directors and executive officers of the Corporation and at June 30, 2002, beneficially owned
2,529,080 shares, or 28.75%, and 1,404,121 shares, or 15.96%, of the Corporations outstanding Class A common stock, and 650,678 shares, or 38.66%, and 199,052 shares, or 11.83%, of the Corporations outstanding Class B common stock. The
above totals include 472,855 Class A common shares, or 5.38%, and 104,644 Class B Common shares, or 6.22%, that are considered to be beneficially owned by both of the shareholders and, therefore, are included in each of their totals.




9




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





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The following table lists the various charges paid to the
Corporation:





Six Months Ended June
30,2002

2001(Unaudited)(Dollars in thousands)Data and item processing

$
1,612

$
1,542Forms, supplies and equipment


143


159Trustee for employee benefit plans


30


35$
1,785

$
1,736





The Bank also has a correspondent relationship with the
Corporation. Correspondent account balances with the Corporation included in cash and due from banks and overnight funds sold totaled $32,545,839 and $41,448,498 at June 30, 2002 and December 31, 2001, respectively.





BancShares is related through common ownership with Southern Bank and Trust Co. (Southern) in that the aforementioned two
significant shareholders of BancShares and certain of their related parties are also significant shareholders of Southern. BancShares has contracted with Southern to service on its behalf $5.5 million of BancShares mortgage loans.




10




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





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







TABLE 1.





FINANCIAL SUMMARY





2002


2001Second Quarter


First Quarter


Fourth Quarter


Third Quarter


Second Quarter(Dollars in thousands, except per share data)Summary of OperationsInterest income

$
13,962


$
14,103


$
15,341


$
16,375


$
16,957Interest expense


4,770



5,164



6,175



7,265



7,848Net interest income


9,192



8,939



9,166



9,110



9,109Provision for loan losses


700



750



750



750



750Net interest income after provision for loan losses


8,492



8,189



8,416



8,360



8,359Noninterest income


2,563



2,459



2,531



2,511



2,445Noninterest expense


8,261



8,065



8,027



7,794



8,087Net income before income taxes


2,794



2,583



2,920



3,077



2,717Income taxes


995



923



1,074



1,130



993Net income

$
1,799


$
1,660


$
1,846


$
1,947


$
1,724Selected Period-End BalancesTotal assets

$
985,379


$
982,674


$
984,719


$
968,619


$
964,849Investment securities and overnight funds sold


165,785



187,994



188,242



205,983



183,471Loans, gross


707,361



685,901



668,984



647,894



631,042Interest earning assets


899,990



898,203



887,998



879,437



874,266Deposits


841,899



837,960



841,435



825,444



819,883Interest bearing liabilities


738,021



747,142



750,543



743,060



741,408Shareholders equity


88,844



86,722



85,030



82,519



82,454Common shares outstanding


28,011



28,011



28,026



28,026



28,070Selected Average BalancesTotal assets

$
974,639


$
973,966


$
972,894


$
957,883


$
953,347Investment securities and overnight funds sold


168,825



184,895



192,836



202,344



189,354Loans, gross


696,944



677,628



659,783



640,277



628,356Interest earning assets


893,310



889,398



887,880



874,718



868,094Deposits


833,664



832,021



830,242



813,840



812,867Interest bearing liabilities


738,015



743,769



743,768



735,973



736,776Shareholders equity


88,377



86,530



84,509



83,627



81,522Common shares outstanding


28,011



28,023



28,026



28,031



28,070Profitability RatiosRate of return (annualized) on:Total assets


0.74
%


0.69
%


0.75
%


0.81
%


0.73
%Shareholders equity


8.16
%


7.78
%


8.67
%


9.24
%


8.48
%Dividend payout ratio (1)


12.46
%


13.51
%


12.14
%


11.52
%


13.02
%Liquidity and Capital Ratios (averages)Loans to deposits


83.60
%


81.44
%


79.47
%


78.67
%


77.30
%Shareholders equity to total assets


9.07
%


8.88
%


8.69
%


8.73
%


8.55
%Per Share of Common StockNet income

$
64.22


$
59.24


$
65.88


$
69.45


$
61.42Cash dividends


8.00



8.00



8.00



8.00



8.00Book value (2)


3,171.75



3,096.01



3,033.98



2,944.37



2,937.44


---

|(1) |  | For each indicated period, total common dividends declared divided by net income.
|--- |  | ---------------------------------------------------------------------------------

|(2) |  | At the end of each indicated period, shareholders equity divided by the number of common shares outstanding.
|--- |  | -------------------------------------------------------------------------------------------------------------



11




---



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





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







TABLE 2.


Consolidated Taxable Equivalent Rate/Volume Variance AnalysisYear to date





2002


2001


Increase (decrease) due to:Average Balance


Interest Income/ Expense

Yield/ Rate


Average Balance


Interest Income/ Expense

Yield/ Rate


Volume


Yield/ Rate


Total Change(Dollars in thousands)ASSETSInterest earning assets:Loans (1) (2)

$
687,339


$
25,260

7.41
%

$
625,130


$
28,938

9.33
%

$
2,583


$
(6,261
)

$
(3,678
)Taxable investment securities


128,380



2,193

3.44



129,896



3,555

5.52



(34
)


(1,328
)


(1,362
)Overnight funds sold


36,231



305

1.70



42,892



972

4.57



(104
)


(563
)


(667
)Other investments


14,603



136

1.88



12,723



150

2.38



16



(30
)


(14
)Interest bearing deposits in other banks


24,812



203

1.65



36,927



875

4.78



(193
)


(479
)


(672
)Total interest earning assets

$
891,365


$
28,097

6.36
%

$
847,568


$
34,490

8.21
%

$
2,268


$
(8,661
)

$
(6,393
)Noninterest earning assets:Cash and due from banks


34,715









33,384Premises and equipment


35,317









34,834Other assets


22,456









24,992Reserve for loan losses


(9,534
)








(8,119
)Total assets

$
974,319








$
932,659LIABILITIES & EQUITYInterest bearing liabilities:Demand deposits

$
107,874


$
171

0.32
%

$
106,473


$
530

1.00
%

$
(46
)

$
(313
)

$
(359
)Savings deposits


190,838



1,490

1.57



167,428



2,405

2.90



279



(1,194
)


(915
)Time deposits


395,841



7,169

3.65



401,376



11,696

5.88



(131
)


(4,396
)


(4,527
)Short-term borrowings


23,323



127

1.10



25,038



465

3.75



(20
)


(318
)


(338
)Long-term borrowings


23,000



978

8.57



23,000



978

8.57











Total interest bearing liabilities

$
740,876


$
9,935

2.70
%

$
723,315


$
16,074

4.48
%

$
82


$
(6,221
)

$
(6,139
)Noninterest bearing liabilities:Demand deposits


138,294









118,906Other liabilities


7,691









10,011Shareholders equity


87,458









80,427Total liabilities and equity

$
974,319








$
932,659Interest rate spread (3)








3.66
%








3.73
%Net interest income and net interest margin (4)





$
18,162

4.11
%





$
18,416

4.38
%

$
2,186


$
(2,440
)

$
(254
)


---

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

|(2) |  | The average rate on nontaxable loans has been adjusted to a tax equivalent yield using a 39.485% tax rate for 2002 and 2001. The taxable equivalent adjustment
was approximately $31,000 and $50,000 for the years 2002 and 2001, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Interest rate spread is the difference between earning asset yield and interest bearing liability rate.
|--- |  | -------------------------------------------------------------------------------------------------------

|(4) |  | Net interest margin is net interest income divided by average earning assets.
|--- |  | -----------------------------------------------------------------------------



12




---



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





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







TABLE 3.


Consolidated Taxable Equivalent Rate/Volume Variance Analysis  Second Quarter





2002


2001


Increase (decrease) due to:Average Balance


Interest Income/ Expense

Yield/ Rate


Average Balance


Interest Income/ Expense

Yield/ Rate


Volume


Yield/ Rate


Total Change(Dollars in thousands)ASSETSInterest earning assets:Loans (1) (2)

$
696,944


$
12,742

7.33
%

$
628,356


$
14,222

9.08
%

$
1,404


$
(2,884
)

$
(1,480
)Taxable investment securities


127,946



945

2.96



112,616



1,470

5.24



157



(682
)


(525
)Overnight funds sold


28,242



118

1.68



65,122



699

4.31



(275
)


(306
)


(581
)Other investments


15,105



70

1.86



13,925



74

2.13



5



(9
)


(4
)Interest bearing deposits in other banks


25,073



104

1.66



48,075



513

4.28



(170
)


(239
)


(409
)Total interest earning assets

$
893,310


$
13,979

6.28
%

$
868,094


$
16,978

7.84
%

$
1,121


$
(4,120
)

$
(2,999
)Noninterest earning assets:Cash and due from banks


33,955









34,079Premises and equipment


35,119









34,853Other assets


22,030









24,724Reserve for loan losses


(9,775
)








(8,403
)Total assets

$
974,639








$
953,347LIABILITIES & EQUITYInterest bearing liabilities:Demand deposits

$
105,890


$
82

0.31
%

$
105,667


$
193

0.73
%

$
(13
)

$
(98
)

$
(111
)Savings deposits


194,633



757

1.56



172,235



1,088

2.53



124



(455
)


(331
)Time deposits


392,167



3,381

3.46



410,352



5,859

5.73



(208
)


(2,270
)


(2,478
)Short-term borrowings


22,325



61

1.10



25,522



220

3.46



(18
)


(141
)


(159
)Long-term borrowings


23,000



489

8.53



23,000



489

8.53











Total interest bearing liabilities

$
738,015


$
4,770

2.59
%

$
736,776


$
7,849

4.27
%

$
(115
)

$
(2,964
)

$
(3,079
)Noninterest bearing liabilities:Demand deposits


140,974









124,613Other liabilities


7,273









10,436Shareholders equity


88,377









81,522Total liabilities and equity

$
974,639








$
953,347Interest rate spread (3)








3.69
%








3.57
%Net interest income and net interest margin (4)





$
9,209

4.14
%





$
9,129

4.22
%

$
1,236


$
(1,156
)

$
80


---

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

|(2) |  | The average rate on nontaxable loans has been adjusted to a tax equivalent yield using a 39.485% tax rate for 2002 and 2001. The taxable equivalent adjustment
was approximately $15,000 and $23,000 for the years 2002 and 2001, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Interest rate spread is the difference between earning asset yield and interest bearing liability rate.
|--- |  | -------------------------------------------------------------------------------------------------------

|(4) |  | Net interest margin is net interest income divided by average earning assets.
|--- |  | -----------------------------------------------------------------------------



13




---




ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Introduction





Managements discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations
of Fidelity BancShares (N.C.), Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report. The focus
of this discussion concerns BancShares banking subsidiary, The Fidelity Bank (the Bank), which operates 64 branches in North Carolina.





Critical Accounting Policies





BancShares significant accounting policies are set
forth in note 1 of the consolidated financial statements in the annual report on Form 10K. Of these significant accounting policies, BancShares considers its policy regarding the allowance for loan losses to be a critical accounting policy, because
it requires managements most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations.
BancShares has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio.
BancShares assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers, which is not known to management at the time of the
issuance of the consolidated financial statements. For additional discussion concerning BancShares allowance for loan losses and related matters, see Asset Quality and Provision for Loan Losses.





Financial Condition and Results of Operations.





Net Income.    In the first six months of 2002, BancShares net income decreased $145,000 to $3.5 million from $3.6 million in the second quarter of 2001, a decrease of
4.02%. Net income for the second quarter of 2002 increased $75,000 or 4.33% when compared to the same period of 2001. The increase in net income for the second quarter resulted primarily from the decline in interest rates, which resulted in an
increase in net interest income, and an increase in noninterest income, which was partially offset by increased noninterest expense.





Net income per share for the first six months of 2002 was $123.46, a decrease of $4.92 per share, or 3.83%, from $128.38 per share in 2001. For the second quarter of 2002, net income per share was $64.22, an increase of
$2.80 or 4.56%, from $61.42 per share for the second quarter of 2001. Return on average assets for the first six months of 2002 and 2001 was 0.72% and 0.78%, respectively. For the second quarter of 2002 and 2001, return on average assets was 0.74%
and 0.73%, respectively. Return on average equity for the first six months of 2002 and 2001 was 7.98% and 9.04%, respectively. For the second quarter of 2002 and 2001, return on equity was 8.16% and 8.48%. Various profitability, liquidity and
capital ratios are presented in Table 1. To understand the changes and trends in interest earning assets and interest bearing liabilities, refer to the average balance sheets and net interest income analysis presented in Table 2.





Net Interest Income.    The greatest portion of BancShares earnings is from net interest
income, which is the difference between interest income on interest earning assets and interest paid on deposits and other interest bearing liabilities. The primary factors affecting net interest income are changes in the volume and yields/rates on
interest earning assets and interest bearing liabilities, and the ability to respond to changes in interest rates through asset/liability management. For the first six months of 2002, net interest income was $18.1 million as compared to $18.4
million for the same period in 2001, a decrease of $236,000 or 1.28%. An increase in the volume of interest earning assets and interest bearing liabilities increased net interest income by $2.2 million. This was offset by the impact of rate changes
which decreased net interest income by $2.4 million, which together with the $2.2 million increase, caused a decrease of $236,000 in net interest income. The net interest margin for the first six months of 2002 and 2001 was 4.11% and 4.38%,
respectively. Net interest income and net interest margin for the second quarter of 2002 and 2001 were $9.2 million and 4.14% and $9.1 million and 4.22%, respectively.





Interest income for the first six months of 2002 was $28.1 million as compared to $34.4 million in 2001, a decrease of $6.4 million or 18.51%. The decrease in interest
income for the first six months of 2002 over the first six months of 2001 is attributable to a decline in interest rates, the effect of which was offset partially by growth in average earning asset balances. Interest income from loans amounted to
$25.2 million in the first six months of 2002 as compared to $28.9 million in the first six months of 2001, a decrease of $3.7 million or 12.67%. BancShares loan growth is largely due to growth within the existing branch network. Earnings from
investments and federal funds sold provided the balance of interest income, contributing $2.8 million and $5.6 million for the




14




---

first six months of 2002 and 2001, respectively. Average interest earning assets for the first six months of 2002 increased to $891.4 million, a 5.17% increase, from $847.6 million in the first
six months of 2001. The yield on interest earnings assets for the first six months of 2002 and 2001 was 6.36% and 8.21%, respectively. Trends in interest earning assets are shown in Table 2.





Interest expense for the first six months of 2002 was $9.9 million compared to $16.1 million in 2001, a decrease of $6.1 million or 38.19%. The decrease in interest expense
in the first six months of 2002, compared to the first six months of 2001, is attributable to decreased interest rates on deposit balances, primarily time deposits and savings accounts. Average interest bearing deposits increased $19.3 million or
2.85%, from $675.3 million in the first six months of 2001 to $694.6 million in the first six months of 2002. The average rate paid on interest bearing deposits was 2.56% and 4.37% for the first six months of 2002 and 2001, respectively. Borrowings
contributed $1.1 million in interest expense during the first six months of 2002 compared to $1.4 million during the first six months of 2001, a decrease of $338,000 or 23.4%. The yield on interest bearing liabilities for the first six months of
2002 and 2001 was 2.70% and 4.48%, respectively. Trends in interest bearing liabilities are shown in Table 2.





Asset Quality and Provision for Loan Losses.    Because BancShares loan portfolio represents its largest earning asset, BancShares continually monitors the quality of its loan portfolio. The Bank
operates in a diversified economic environment and, in the opinion of management, is not unduly exposed to any one particular industry. For the second quarter of 2002 and 2001, management added $700,000 and $750,000, respectively, to the allowance
for loan losses as provisions for loan losses. During the first six months of 2002, management charged-off loans totaling $1.3 million and had recoveries of $997,000 resulting in net charge-offs of $325,000. During the same period in 2001,
management charged-off $787,000 in loans and had recoveries of $596,000, resulting in net charge-offs of $191,000. Charge-offs were higher for the first six months of 2002 than the same period of 2001 due to charge-offs of four loans. The ratio of
allowance for loan losses to loans increased to 1.48% at June 30, 2002 from 1.39% at December 31, 2001. The following table presents BancShares comparative asset quality ratios:





June 30, 2002


December 31, 2001Ratio of annualized net loans charged off to average loans

0.09
%

0.15
%Allowance for loan losses to loans

1.48


1.39Non-performing assets to total gross loans and other real estate owned

0.02


Non-performing assets to total assets

0.02








Management considers the June 30, 2002 allowance for loan losses
adequate to cover probable losses inherent in the loan portfolio. Managements periodic evaluation of the adequacy of the allowance is based on the Banks past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrowers experience, the estimated value of any underlying collateral, current economic conditions, analysis of peer bank trends, and other risk factors. Management believes it has established the allowance in
accordance with accounting principles generally accepted in the United States of America and in consideration of the current economic environment. While management uses the best information available to make evaluations, future adjustments may be
necessary if economic or other conditions differ substantially from the assumptions used. During the quarter, management continued to refine allocations of the allowance for loan losses to reflect trends in the loan portfolio.





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





BancShares had no impaired loans at June 30, 2002. BancShares had non-accrual loans totaling
$89,000 at June 30, 2002 and none at June 30, 2001. 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.




15




---




Noninterest Income.    Noninterest income increased
$114,000 or 2.32% for the first six months of 2002 over the first six months of 2001. Noninterest income, consisting primarily of service charges on deposit accounts and other service charges and fees, increased during the first six months of 2002
primarily due to the increased deposit base from three branch openings in the third and fourth quarters of 2001 as well as growth in the existing branch network. BancShares average deposits increased $38.7 million or 4.87% to $832.8 million in
the first six months of 2002 from $794.2 million in the first six months of 2001. Noninterest income for the first six months of 2001 includes a securities gain of $501,478. This gain was recognized as a result of an exchange and subsequent sale of
an equity investment. For the first six months of 2002, increases in noninterest income were partially offset by securities losses of $71,068, all of which were recognized in the second quarter. For the second quarter of 2002, noninterest income
increased $118,000 or 4.81% over the same period of 2001.





Noninterest
Expense.    Noninterest expense increased $229,000 or 1.42% from $16.1 million in the first six months of 2001 to $16.3 million in the first six months of 2002, including increases of $661,000 in salaries and employee
benefits, $45,000 in occupancy and equipment expense, and $94,000 in data processing cost, which were offset by decreases of $231,000 in other expenses and $5,000 in intangibles amortization. The fluctuations represented increases of 7.84% in
salaries and employee benefits, 1.88% in occupancy and equipment expenses, and 6.23% in data processing costs, which were offset by decreases of 9.00% in other expenses and 0.70% in intangibles amortization over the first six months of 2001. For the
second quarter of 2002 noninterest expense increased $173,000 or 2.14% over the same period in 2001. Noninterest expense increased due to increased salaries from the three new branches opened in the second half of 2001 as well as increased activity
within the existing branch network. BancShares also had an impairment loss of $477,972 on fixed assets during the six months ended June 30, 2001, of which $173,317 was recorded in the second quarter. During April 2001, BancShares analyzed the
results of operations of two branches through the first three months of 2001 taking into consideration recent economic conditions and the projected performance of these branches. BancShares concluded the carrying value of these branches were
impaired and therefore recorded an impairment loss of $304,656 in the first quarter of 2001 to reduce the carrying value of these branches to fair value. The fixed assets consisted primarily of leasehold improvements, which are deemed to have very
minimal fair value. In the second quarter of 2001 the Board of Directors of BancShares approved to close these two branches and recorded an additional charge of $173,000 for the remaining lease payments and costs to close these branches. BancShares
had an impairment loss of $143,224 in the second quarter of 2002. In May 2002, BancShares analyzed the operations of one branch since its inception in 1999 and determined that the loss experience would not turn around in the near future. The Board
of Directors of BancShares approved to close this branch and at June 30, 2002, BancShares has accrued disposition costs which include $103,000 for losses on fixed assets, $20,000 for lease cancellation fees, and $20,000 for costs to close the
branch.





Income Taxes.    In the first six months of 2002, BancShares had income tax
expense of $1.9 million, a decrease of $156,000 or 7.52%, from $2.1 million in the first six months of 2001. The resulting effective income tax rates, based on the accruals for the six months ended June 30, 2002 and 2001, were 35.68% and 36.53%,
respectively.





Capital Resources.





Shareholders Equity and Capital Adequacy.    Sufficient levels of capital are necessary to sustain growth and absorb losses. To this end, the Federal Reserve, which
regulates BancShares, and the FDIC, which regulates the Bank, has established minimum capital guidelines for the institutions they supervise.





Regulatory guidelines define minimum requirements for BancShares leverage capital ratio. Leverage capital equals total equity and certain long-term borrowings less goodwill and certain other
intangibles and is measured relative to total adjusted assets as defined by regulatory guidelines. According to these guidelines, BancShares leverage ratio at June 30, 2002 was 9.35% as compared to 8.99% at December 31, 2001.





BancShares is also required to meet minimum requirements for risk-based capital (RBC). BancShares assets,
including loan commitments and other off-balance sheet items, are weighted according to federal guidelines for the risk considered inherent in each asset. At June 30, 2002, the Total Capital Ratio was 14.12% as compared to 14.03% at December 31,
2001.




16




---




The following table presents regulatory capital amounts calculations and ratios
of BancShares:





June 30, 2002

December 31, 2001(Dollars in thousands)Tier 1 capital

$
89,598

$
85,902Total capital


102,935


98,245Leverage capital ratio


9.35%(1)


8.99%(1)Tier 1 capital ratio


12.29   (1)


12.27   (1)Total capital ratio


14.12   (1)


14.03   (1)


---

|(1) |  | These ratios exceed the minimum required regulatory capital ratios.
|--- |  | -------------------------------------------------------------------




At June 30, 2002, and December 31, 2001, BancShares was in compliance with its regulatory capital requirements, and all of its regulatory capital ratios exceed the minimum
ratios required for it to be classified as well capitalized. Growth in BancShares assets resulting from acquisitions of branch offices and the opening of de novo branches has reduced, and is expected to continue to reduce,
BancShares capital ratios.





Commitments, Contingencies and Off-balance sheet risk.





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





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





As of June 30, 2002 and December 31, 2001, outstanding financial instruments whose contract amounts
represent credit risk were as follows:





June 30, 2002

December 31, 2001Outstanding commitments to lend, unfunded loans and lines of credit

$
229,366,319

221,656,178Standby and commercial letters of credit

$
3,151,499

3,275,000





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





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





Liquidity, Market Risk and Interest Sensitivity.





Liquidity.    Liquidity refers to the ability of BancShares to generate sufficient funds to meet its financial obligations and commitments at a
reasonable cost. Maintaining liquidity ensures that funds will be available for reserve requirements, customer demand for loans, withdrawal of deposit balances and maturities of other deposits and liabilities. Past 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.




17




---




In assessing liquidity, many relevant factors are considered, including stability
of deposits, quality of assets, economy of the markets served, business concentration, competition and BancShares overall financial condition. BancShares liquid assets include all investment securities (minus pledged securities),
overnight funds sold, interest bearing deposits in other banks and cash and due from banks. These assets represented 17.86% of deposits at June 30, 2002, a decrease from 22.08% at December 31, 2001. BancShares liquidity ratio, which is defined
as cash plus short-term marketable securities (minus pledged securities) divided by deposits and short-term liabilities, was 17.35% at June 30, 2002, compared to 21.39% at December 31, 2001.





The consolidated statements of cash flows disclose the principal sources and uses of cash from operating, investing and financing activities for the six months ended June
30, 2002 and 2001. 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. Most jumbo deposit customers have other
relationships with the Bank, including savings, demand and other time deposits, and in some cases, loans. At June 30, 2002, and December 31, 2001, jumbo time deposits represented 10.84% and 11.52%, respectively, of total deposits.





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





BancShares has obligations under existing contractual obligations that will require payments in future periods. The following table presents aggregated information about
such payments to be made in future periods. Transaction deposit accounts with indeterminate maturities have been classified as having payments due in less than one year.





CONTRACTUAL OBLIGATIONS


As of June 30, 2002





Payments due by periodLess than 1 year

1-3 years

4-5 years

Over 5 years

Total(Dollars in thousands)Deposits

$
757,238

73,907

10,754



841,899Short-term borrowings


24,529







24,529Long-term borrowings








23,000

23,000Lease obligations


343

442

123

905

1,813Total contractual cash obligations

$
782,110

74,349

10,877

23,905

891,241





Market Risk.    Market risk reflects the
risk of economic loss resulting from adverse changes in market price and interest rates. The risk of loss can be reflected in either diminished current market values or reduced potential net interest income in future periods.





BancShares market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities.
Management seeks to manage this risk through the use of short-term maturities. The composition and size of the investment portfolio is managed so as to reduce the interest rate risk in the deposit and loan portfolios while at the same time
maximizing the yield generated by the portfolio.





The table below presents in tabular form the contractual
balances and the estimated fair value of financial instruments at their expected maturity dates as of June 30, 2002. The expected maturity categories take into consideration historical prepayment experience as well as managements expectations
based on the interest rate environment as of June 30, 2002. For core deposits without contractual maturity (i.e. interest bearing checking, savings and money market accounts), the table presents principal cash flows as maturing in one year since
they are subject to immediate repricing.




18




---




Maturing in period ended June 30,2003


2004


2005


2006


2007


Thereafter


Total


Fair Value(Dollars in thousands)AssetsLoans:Fixed rate

$
94,452


$
76,079


$
112,995


$
14,068


$
8,625


$
12,842


$
319,061


$
319,082Average rate (%)


8.79
%


8.41
%


7.94
%


7.61
%


7.47
%


7.70
%


8.27
%Variable rate

$
189,358


$
29,034


$
42,462


$
10,437


$
17,628


$
99,381


$
388,300


$
388,300Average rate (%)


5.66
%


5.52
%


5.46
%


5.40
%


5.20
%


5.25
%


5.49
%Investment securities(1):Fixed rate

$
97,935


$
20,126














$
7


$
118,068


$
118,546Average rate (%)


2.70
%


3.11
%














10.92
%


2.77
%LiabilitiesSavings and interest bearing checking:Fixed rate

$
298,995






















$
298,995


$
298,995Average rate (%)


1.01
%






















1.01
%Certificates of deposit:Fixed rate

$
306,837


$
50,159


$
23,748


$
10,754










$
391,498


$
395,559Average rate (%)


3.04
%


4.07
%


4.87
%


5.01
%










3.34
%Short-term obligations:Variable rate

$
24,529






















$
24,529


$
24,529Average rate (%)


1.13
%






















1.13
%Long-term obligations:Fixed rate





















$
23,000


$
23,000


$
23,230Average rate (%)






















8.50
%


8.50
%


---

|(1) |  | Marketable equity securities with a book value of approximately $3,566,009 and a fair value of approximately $12,917,315 have been excluded from this table.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------




Interest Sensitivity.    The table below presents BancShares
interest sensitivity position at June 30, 2002. The difference between interest sensitive asset and interest sensitive liability repricing within time periods is referred to as the interest rate sensitivity gap. Assets and liabilities with
maturities of one year or less and those that may be adjusted within the period are considered interest sensitive. The interest sensitivity position has meaning only as of the date for which it was prepared. Gaps are identified as either positive
(interest sensitive assets in excess of interest sensitive liabilities) or negative (interest sensitive liabilities in excess of interest sensitive assets).





As of June 30, 2002, BancShares had a positive one-year cumulative gap position of 16.56% and a positive total cumulative gap position of 18.00%. At December 31, 2001, BancShares had a one-year
positive cumulative gap position of 13.98% and a total positive cumulative gap position of 15.48%. The increase in the one-year cumulative gap position at June 30, 2002 is due to the repositioning of securities, which at December 31, 2001, would
mature in greater than one year and at June 30, 2002, will mature in less than one year.




19




---




June 30, 20021-30 Days Sensitive


31-90 Days Sensitive


91-180 Days Sensitive


181-365 Days Sensitive


Total One-Year Sensitive


Total Non Sensitive


Total(Dollars in thousands)Assets:Loans

$
369,084


$
41,009


$
14,456


$
28,911


$
453,460


$
253,901


$
707,361Investment securities


60,011







17,897



20,026



97,934



33,051



130,985Overnight funds sold


34,800















34,800







34,800Other






















2,468



2,468Interest bearing deposits in other banks


24,376















24,376







24,376Total interest earning assets

$
488,271


$
41,009


$
32,353


$
48,937


$
610,570


$
289,420


$
899,990Liabilities:Savings and checking with interest

$



$



$



$



$



$
168,813


$
168,813Money market savings


130,181















130,181







130,181Time deposits


56,311



69,672



91,860



88,994



306,837



84,661



391,498Short-term borrowings


24,529















24,529







24,529Long-term borrowings






















23,000



23,000Total interest bearing liabilities

$
211,021


$
69,672


$
91,860


$
88,994


$
461,547


$
276,474


$
738,021Interest-sensitivity gap

$
277,250


$
(28,663
)

$
(59,507
)

$
(40,057
)

$
149,023


$
12,946


$
161,969Cumulative interest sensitivity gap

$
277,250


$
248,587


$
189,080


$
149,023


$
149,023


$
161,969


$
161,969Cumulative interest sensitivity gap to total interest earning assets


30.81
%


27.62
%


21.01
%


16.56
%


16.56
%


18.00
%


18.00
%





Accounting and Other Matters.





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





In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 (Statement 146), Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This Statement applies to costs associated with an exit
activitythat does not involve an entity newly acquired in a business combination or with a disposal activity covered by FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.Those costs include, but are
not limited to, the following: a) termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred
compensation contract (hereinafter referred to as one-time termination benefits), b) costs to terminate a contract that is not a capital




20




---

lease and c) costs to consolidate facilities or relocate employees. This Statement does not apply to costs associated with the retirement of a long-lived asset covered by FASB Statement No. 143,
Accounting For Asset Retirement Obligations. A liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in which the liability is incurred. A liability
for a cost associated with an exit or disposal activity is incurred when the definition of a liability is met. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early
application encouraged. The impact of adoption on BancShares is not known at this time.





Forward-Looking Statements





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





ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK





This information is included in Item 2 in the text of BancShares Management Discussion and Analysis of Financial Condition and
Results of Operations (under the caption Liquidity, Market Risk and Interest Sensitivity) and is incorporated herein by reference.





PART II.    OTHER INFORMATION





ITEM 6.    EXHIBITS AND REPORTS
ON FORM 8K





(a) The following exhibits are included in or incorporated into this report.





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




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




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




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




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




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




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




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




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




(b) No reports on Form 8-K were filed
during the quarter ended June 30, 2002.




21




---




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.





Dated: August 13, 2002



FIDELITY BANCSHARES (N.C.), INC.By:

/s/    MARY W. WILLISMary W. WillisChief Financial Officer and Treasurer





CERTIFICATION


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





The undersigned
hereby certifies that, (i) the foregoing Quarterly Report on Form 10-Q filed by Fidelity BancShares (N.C.), Inc. (the Company) for the quarter ended June 30, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and (ii) the information contained in that report fairly presents, in all material respects, the financial condition and results of operations of the Company.





By:

/s/    BILLY T. WOODARDDate:

August 13, 2002Billy T. WoodardChief Executive Officer





By:

/s/    MARY W. WILLISDate:

August 13, 2002Mary W. WillisChief Financial Officer










22