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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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Quarterly Report Pursuant to Section 13 or 15(d) of

The Securities Exchange
Act of 1934



For the quarterly period ended March 31,
2004



Commission File Number: 001-15089



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Fidelity BancShares (N.C.), Inc.

(Exact name of Registrant as specified in
its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 56-1586543                             
|(state or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer 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 ninety days.    Yes  x    No ̈



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



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

(Number of shares outstanding, by class, as of May 7, 2004)



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PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



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



CONSOLIDATED BALANCE SHEETS



|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|----------------------------------------------------------------------------------------------------- |  | -------------- | ------------- | - | ----------------- | - | ------------- | -------------- |  | - | ------------- | -
|                                                                                                      |  | March 31, 2004 |               |   | December 31, 2003 |   |               | March 31, 2003 | 
|                                                                                                      |  | (unaudited)    |               |   |                   |   |               | (unaudited)    | 
|Assets                                                                                                |  |                |               |   |                   |   |               |                |  |   |               |  
|Cash and due from banks                                                                               |  |                | 40,387,243    |   |                   |   | 51,065,293    |                |  |   | 42,404,579    |  
|Interest bearing deposits in other banks                                                              |  |                | 34,244,214    |   |                   |   | 38,187,190    |                |  |   | 35,949,275    |  
|Overnight funds sold                                                                                  |  |                | 60,600,000    |   |                   |   | 64,000,000    |                |  |   | 44,000,000    |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Total cash and cash equivalents                                                                       |  |                | 135,231,457   |   |                   |   | 153,252,483   |                |  |   | 122,353,854   |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Investment securities:                                                                                |  |                |               |   |                   |   |               |                |  |   |               |  
|Held to maturity (estimated fair value of $170,453,241, $165,252,132, and $120,168,201, respectively) |  |                | 170,086,969   |   |                   |   | 165,359,375   |                |  |   | 119,845,472   |  
|Available for sale (cost of $3,398,531, $3,390,010, and $3,405,228 respectively)                      |  |                | 14,438,384    |   |                   |   | 14,165,194    |                |  |   | 11,610,313    |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Total investment securities                                                                           |  |                | 184,525,353   |   |                   |   | 179,524,569   |                |  |   | 131,455,785   |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Loans                                                                                                 |  |                | 760,593,796   |   |                   |   | 748,271,779   |                |  |   | 718,957,053   |  
|Allowance for loan losses                                                                             |  |                | (12,784,657   | ) |                   |   | (12,818,463   | )              |  |   | (11,911,051   | )
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Loans, net                                                                                            |  |                | 747,809,139   |   |                   |   | 735,453,316   |                |  |   | 707,046,002   |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Federal Home Loan Bank of Atlanta stock, at cost                                                      |  |                | 2,604,800     |   |                   |   | 2,656,700     |                |  |   | 2,656,700     |  
|Premises and equipment, net                                                                           |  |                | 36,512,059    |   |                   |   | 36,990,715    |                |  |   | 34,286,720    |  
|Accrued interest receivable                                                                           |  |                | 3,530,734     |   |                   |   | 3,348,175     |                |  |   | 2,887,420     |  
|Intangible assets                                                                                     |  |                | 23,817,220    |   |                   |   | 24,035,220    |                |  |   | 16,925,782    |  
|Other assets                                                                                          |  |                | 5,694,094     |   |                   |   | 3,488,008     |                |  |   | 2,944,047     |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Total assets                                                                                          |  | $              | 1,139,724,856 |   |                   | $ | 1,138,749,186 |                |  | $ | 1,020,556,310 |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Liabilities and Shareholders Equity                                                                  |  |                |               |   |                   |   |               |                |  |   |               |  
|Deposits:                                                                                             |  |                |               |   |                   |   |               |                |  |   |               |  
|Noninterest-bearing demand deposits                                                                   |  |                | 194,189,208   |   |                   |   | 184,655,766   |                |  |   | 163,266,781   |  
|Savings and interest-bearing deposits                                                                 |  |                | 354,571,022   |   |                   |   | 357,918,683   |                |  |   | 317,192,960   |  
|Time deposits                                                                                         |  |                | 435,190,236   |   |                   |   | 436,913,294   |                |  |   | 393,237,582   |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Total deposits                                                                                        |  |                | 983,950,466   |   |                   |   | 979,487,743   |                |  |   | 873,697,323   |  
|Short-term borrowings                                                                                 |  |                | 22,386,611    |   |                   |   | 27,007,204    |                |  |   | 22,671,696    |  
|Long-term borrowings                                                                                  |  |                | 23,711,350    |   |                   |   | 23,711,350    |                |  |   | 23,000,000    |  
|Accrued interest payable                                                                              |  |                | 3,114,308     |   |                   |   | 3,107,811     |                |  |   | 3,027,174     |  
|Other liabilities                                                                                     |  |                | 3,802,070     |   |                   |   | 4,508,720     |                |  |   | 3,908,860     |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Total liabilities                                                                                     |  |                | 1,036,964,805 |   |                   |   | 1,037,822,828 |                |  |   | 926,305,053   |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Shareholders equity:                                                                                 |  |                |               |   |                   |   |               |                |  |   |               |  
|Common stock ($25 par value; 29,200 shares authorized; 28,011 shares issued and outstanding)          |  |                | 700,275       |   |                   |   | 700,275       |                |  |   | 700,275       |  
|Surplus                                                                                               |  |                | 6,163,380     |   |                   |   | 6,163,380     |                |  |   | 6,163,380     |  
|Accumulated other comprehensive income                                                                |  |                | 6,679,111     |   |                   |   | 6,504,176     |                |  |   | 4,949,265     |  
|Retained earnings                                                                                     |  |                | 89,217,285    |   |                   |   | 87,558,527    |                |  |   | 82,438,337    |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Total shareholders equity                                                                            |  |                | 102,760,051   |   |                   |   | 100,926,358   |                |  |   | 94,251,257    |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  
|Total liabilities and shareholders equity                                                            |  | $              | 1,139,724,856 |   |                   | $ | 1,138,749,186 |                |  | $ | 1,020,556,310 |  
|                                                                                                      |  |                |               |   |                   |   |               |                |  |   |               |  



See accompanying notes
to consolidated financial statements.



2



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



CONSOLIDATED STATEMENTS OF INCOME

(unaudited)



|                                                    |  |                              |            |      |            |  
|--------------------------------------------------- |  | ---------------------------- | ---------- | ---- | ---------- | -
|                                                    |  | Three months ended March 31, |           
|                                                    |  | 2004                         |            | 2003 |           
|Interest income:                                    |  |                              |            |      |            |  
|Interest and fees on loans                          |  |                              | 11,465,744 |      | 11,894,936 |  
|Interest and dividends on investment securities:    |  |                              |            |      |            |  
|Taxable interest income                             |  |                              | 827,229    |      | 658,075    |  
|Tax-exempt interest income                          |  |                              | 843        |      |           |  
|Dividend income                                     |  |                              | 65,820     |      | 68,443     |  
|Interest on overnight funds sold                    |  |                              | 80,106     |      | 106,710    |  
|                                                    |  |                              |            |      |            |  
|Total interest income                               |  |                              | 12,439,742 |      | 12,728,164 |  
|                                                    |  |                              |            |      |            |  
|Interest expense:                                   |  |                              |            |      |            |  
|Deposits                                            |  |                              | 2,564,166  |      | 3,365,550  |  
|Short-term borrowings                               |  |                              | 46,963     |      | 62,713     |  
|Long-term borrowings                                |  |                              | 503,866    |      | 488,750    |  
|                                                    |  |                              |            |      |            |  
|Total interest expense                              |  |                              | 3,114,995  |      | 3,917,013  |  
|                                                    |  |                              |            |      |            |  
|Net interest income                                 |  |                              | 9,324,747  |      | 8,811,151  |  
|Provision for loan losses                           |  |                              | 132,000    |      | 200,000    |  
|                                                    |  |                              |            |      |            |  
|Net interest income after provision for loan losses |  |                              | 9,192,747  |      | 8,611,151  |  
|                                                    |  |                              |            |      |            |  
|Noninterest income:                                 |  |                              |            |      |            |  
|Service charges on deposit accounts                 |  |                              | 1,554,894  |      | 1,589,544  |  
|Other service charges and fees                      |  |                              | 885,711    |      | 918,659    |  
|Other income                                        |  |                              | 33,710     |      | 106,878    |  
|Loss on marketable equity securities                |  |                              |           |      | (65,488    | )
|                                                    |  |                              |            |      |            |  
|Total noninterest income                            |  |                              | 2,474,315  |      | 2,549,593  |  
|                                                    |  |                              |            |      |            |  
|Noninterest expense:                                |  |                              |            |      |            |  
|Salaries and employee benefits                      |  |                              | 4,969,811  |      | 4,611,001  |  
|Occupancy and equipment                             |  |                              | 1,340,177  |      | 1,228,978  |  
|Data processing                                     |  |                              | 1,026,634  |      | 858,928    |  
|Amortization of intangibles                         |  |                              | 189,181    |      | 77,048     |  
|Other expense                                       |  |                              | 1,138,323  |      | 1,177,435  |  
|                                                    |  |                              |            |      |            |  
|Total noninterest expense                           |  |                              | 8,664,126  |      | 7,953,390  |  
|                                                    |  |                              |            |      |            |  
|Net income before income taxes                      |  |                              | 3,002,936  |      | 3,207,354  |  
|Income tax expense                                  |  |                              | 1,120,090  |      | 1,150,111  |  
|                                                    |  |                              |            |      |            |  
|Net income                                          |  | $                            | 1,882,846  |      | 2,057,243  |  
|                                                    |  |                              |            |      |            |  
|Per share information:                              |  |                              |            |      |            |  
|Net income                                          |  | $                            | 67.22      |      | 73.44      |  
|Cash dividends declared                             |  | $                            | 8.00       |      | 8.00       |  
|Weighted average shares outstanding                 |  |                              | 28,011     |      | 28,011     |  



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 equity |  
|                                                                                                 | Shares |              | Amount |         |         |                                        |   |          
|Balance December 31, 2002                                                                        |        | 28,011       |        | $       | 700,275 |                                        | $ | 6,163,380 |                   | $ | 4,866,801 |                      |  | $ | 80,605,182                 |   |  |   |           |   |  | $ | 92,335,638  |  
|                                                                                                 |        |              |        |         |         |                                        |   |           |                   |   |           |                      |  |   |                            |   |  |   |           |   |  |   |             |  
|Net income                                                                                       |        |             |        |         |        |                                        |   |          |                   |   |          |                      |  |   | 2,057,243                  |   |  | $ | 2,057,243 |   |  |   | 2,057,243   |  
|Cash dividends ($8.00 per share)                                                                 |        |             |        |         |        |                                        |   |          |                   |   |          |                      |  |   | (224,088                   | ) |  |   |           |   |  |   | (224,088    | )
|Unrealized gain on securities available for sale, net of deferred taxes of $63,510               |        |             |        |         |        |                                        |   |          |                   |   | 97,275    |                      |  |   |                           |   |  |   | 97,275    |   |  |   | 97,275      |  
|Additional pension charge related to unfunded pension liability, net of deferred taxes of $9,664 |        |             |        |         |        |                                        |   |          |                   |   | (14,811   | )                    |  |   |                           |   |  |   | (14,811   | ) |  |   | (14,811     | )
|                                                                                                 |        |              |        |         |         |                                        |   |           |                   |   |           |                      |  |   |                            |   |  |   |           |   |  |   |             |  
|Comprehensive income                                                                             |        |              |        |         |         |                                        |   |           |                   |   |           |                      |  |   |                            |   |  | $ | 2,139,707 |   |  |   |             |  
|                                                                                                 |        |              |        |         |         |                                        |   |           |                   |   |           |                      |  |   |                            |   |  |   |           |   |  |   |             |  
|Balance March 31, 2003                                                                           |        | 28,011       |        |         | 700,275 |                                        |   | 6,163,380 |                   |   | 4,949,265 |                      |  |   | 82,438,337                 |   |  |   |           |   |  |   | 94,251,257  |  
|                                                                                                 |        |              |        |         |         |                                        |   |           |                   |   |           |                      |  |   |                            |   |  |   |           |   |  |   |             |  
|Balance December 31, 2003                                                                        |        | 28,011       |        | $       | 700,275 |                                        | $ | 6,163,380 |                   | $ | 6,504,176 |                      |  | $ | 87,558,527                 |   |  |   |           |   |  | $ | 100,926,358 |  
|                                                                                                 |        |              |        |         |         |                                        |   |           |                   |   |           |                      |  |   |                            |   |  |   |           |   |  |   |             |  
|Net income                                                                                       |        |             |        |         |        |                                        |   |          |                   |   |          |                      |  |   | 1,882,846                  |   |  | $ | 1,882,846 |   |  |   | 1,882,846   |  
|Cash dividends ($8.00 per share)                                                                 |        |             |        |         |        |                                        |   |          |                   |   |          |                      |  |   | (224,088                   | ) |  |   |           |   |  |   | (224,088    | )
|Unrealized gain on securities available for sale, net of deferred taxes of $104,544              |        |             |        |         |        |                                        |   |          |                   |   | 160,124   |                      |  |   |                           |   |  |   | 160,124   |   |  |   | 160,124     |  
|Change in unfunded pension liability, net of deferred taxes of $9,664                            |        |             |        |         |        |                                        |   |          |                   |   | 14,811    |                      |  |   |                           |   |  |   | 14,811    |   |  |   | 14,811      |  
|                                                                                                 |        |              |        |         |         |                                        |   |           |                   |   |           |                      |  |   |                            |   |  |   |           |   |  |   |             |  
|Comprehensive income                                                                             |        |              |        |         |         |                                        |   |           |                   |   |           |                      |  |   |                            |   |  | $ | 2,057,781 |   |  |   |             |  
|                                                                                                 |        |              |        |         |         |                                        |   |           |                   |   |           |                      |  |   |                            |   |  |   |           |   |  |   |             |  
|Balance March 31, 2004                                                                           |        | 28,011       |        | $       | 700,275 |                                        | $ | 6,163,380 |                   | $ | 6,679,111 |                      |  | $ | 89,217,285                 |   |  |   |           |   |  | $ | 102,760,051 |  
|                                                                                                 |        |              |        |         |         |                                        |   |           |                   |   |           |                      |  |   |                            |   |  |   |           |   |  |   |             |  



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)



|                                                                                                                     |  |                              |             |   |      |             |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ---- | ----------- | -
|                                                                                                                     |  | Three months ended March 31, |            
|                                                                                                                     |  | 2004                         |             |   | 2003 |            
|Cash flows from operating activities:                                                                                |  |                              |             |   |      |             |  
|Net income                                                                                                           |  | $                            | 1,882,846   |   |      | 2,057,243   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                    |  |                              |             |   |      |             |  
|Depreciation and amortization                                                                                        |  |                              | 799,668     |   |      | 643,553     |  
|Net accretion of premiums and discounts                                                                              |  |                              | (210,653    | ) |      | (154,219    | )
|Loss on disposition or abandonment of premises and equipment                                                         |  |                              | 10,542      |   |      | 1,485       |  
|Provision for loan losses                                                                                            |  |                              | 132,000     |   |      | 200,000     |  
|Impairment loss on marketable equity securities                                                                      |  |                              |            |   |      | 65,488      |  
|Gain on sales of other real estate                                                                                   |  |                              | (3,664      | ) |      | (57,324     | )
|(Increase) decrease in accrued interest receivable                                                                   |  |                              | (182,559    | ) |      | 700,948     |  
|(Increase) decrease in other assets, net                                                                             |  |                              | (2,296,793  | ) |      | 70,824      |  
|Increase (decrease) in other liabilities, net                                                                        |  |                              | (767,595    | ) |      | 376,647     |  
|Increase (decrease) in accrued interest payable                                                                      |  |                              | 6,497       |   |      | (488,367    | )
|                                                                                                                     |  |                              |             |   |      |             |  
|Net cash (used) provided by operating activities                                                                     |  |                              | (629,711    | ) |      | 3,416,278   |  
|                                                                                                                     |  |                              |             |   |      |             |  
|Cash flows from investing activities:                                                                                |  |                              |             |   |      |             |  
|Purchase of securities held to maturity                                                                              |  |                              | (79,706,965 | ) |      | (99,605,666 | )
|Purchase of securities available for sale                                                                            |  |                              | (45,692     | ) |      | (3,166      | )
|Proceeds from maturities and issuer calls of securities held to maturity                                             |  |                              | 75,000,056  |   |      | 74,000,063  |  
|Proceeds from sale of securities available for sale                                                                  |  |                              | 37,170      |   |      | 759         |  
|Proceeds from sales of other real estate owned and repossessed assets                                                |  |                              | 201,901     |   |      | 219,000     |  
|Redemption (purchase) of FHLB of Atlanta stock                                                                       |  |                              | 51,900      |   |      | (189,100    | )
|Net (increase) decrease in loans                                                                                     |  |                              | (12,623,132 | ) |      | 9,842,309   |  
|Purchases of premises and equipment                                                                                  |  |                              | (158,272    | ) |      | (264,371    | )
|Proceeds from sales of premises and equipment                                                                        |  |                              | 7,400       |   |      |            |  
|                                                                                                                     |  |                              |             |   |      |             |  
|Net cash used by investing activities                                                                                |  |                              | (17,235,634 | ) |      | (16,000,172 | )
|                                                                                                                     |  |                              |             |   |      |             |  
|Cash flows from financing activities:                                                                                |  |                              |             |   |      |             |  
|Net increase in deposits                                                                                             |  |                              | 4,689,000   |   |      | 4,364,799   |  
|Net increase (decrease) in short-term borrowings                                                                     |  |                              | (4,620,593  | ) |      | 80,318      |  
|Cash dividends paid                                                                                                  |  |                              | (224,088    | ) |      | (224,088    | )
|                                                                                                                     |  |                              |             |   |      |             |  
|Net cash provided by (used in) financing activities                                                                  |  |                              | (155,681    | ) |      | 4,221,029   |  
|                                                                                                                     |  |                              |             |   |      |             |  
|Net decrease in cash and cash equivalents                                                                            |  |                              | (18,021,026 | ) |      | (8,362,865  | )
|Cash and cash equivalents at beginning of period                                                                     |  |                              | 153,252,483 |   |      | 130,716,719 |  
|                                                                                                                     |  |                              |             |   |      |             |  
|Cash and cash equivalents at end of period                                                                           |  | $                            | 135,231,457 |   |      | 122,353,854 |  
|                                                                                                                     |  |                              |             |   |      |             |  
|Supplemental disclosures of cash flow information:                                                                   |  |                              |             |   |      |             |  
|Cash paid during the period for interest                                                                             |  | $                            | 3,108,498   |   |      | 4,405,380   |  
|                                                                                                                     |  |                              |             |   |      |             |  
|Cash paid (refunded) during the period for income taxes                                                              |  | $                            | (67,649     | ) |      | 465,047     |  
|                                                                                                                     |  |                              |             |   |      |             |  
|Supplemental disclosure of noncash investing and financing activities:                                               |  |                              |             |   |      |             |  
|Unrealized gains on available for sale securities, net of deferred tax effects of $104,544 and $63,510, respectively |  | $                            | 160,124     |   |      | 97,275      |  
|                                                                                                                     |  |                              |             |   |      |             |  
|Transfer of foreclosed loans to other real estate and repossessed assets                                             |  | $                            | 107,500     |   |      | 175,000     |  
|                                                                                                                     |  |                              |             |   |      |             |  



See accompanying notes
to consolidated financial statements.



5



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Fidelity BancShares (N.C.), Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)



Note 1.
Basis of Presentation



Fidelity BancShares (N.C.), Inc. (BancShares) is the
holding company for The Fidelity Bank (the Bank), which operates 66 branches in North Carolina and Virginia. The Bank also has two wholly owned subsidiaries, Fidelity Properties, Inc. and TFB Financial Services.



During 1999, BancShares formed FIDBANK Capital Trust I as a Delaware business trust (the
trust) as a wholly-owned finance subsidiary. The trust sold $23,000,000 in preferred trust securities to the public and used the proceeds, together with the proceeds from the trusts sale of all its common securities to BancShares, to purchase
an aggregate of $23,711,350 in junior subordinated debentures issued by BancShares. The debentures call for interest payable quarterly at a rate of 8.50% per annum, with principal payable in full during 2029, and may be redeemed by BancShares in
whole or in part on or after June 30, 2004. BancShares owns all of the trusts common securities. Subject to certain limitations, BancShares has fully and unconditionally guaranteed the trusts obligations under its preferred trust
securities. Since its organization, BancShares has treated the trust as a consolidated subsidiary for financial statement purposes, and the trusts assets and liabilities have been included in BancShares consolidated financial statements.
However, as a result of the application of Financial Accounting Standards Board Interpretation No. 46, as revised (FIN 46R), as of December 31, 2003, BancShares has deconsolidated the trust. Additional information regarding FIN 46R and the effect of
the deconsolidation of the trust is contained in Note 2 to BancShares consolidated financial statements.



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 2004. However, the reclassifications have no effect on shareholders equity or net income as previously
reported.



Note 2. Adoption of New
Accounting Standards



In July 2001, the FASB issued Statement of Financial
Accounting Standards No. 141 (Statement 141), Business Combinations, and Statement of Financial Accounting Standards No. 142 (Statement 142), Goodwill and Other Intangible Assets. Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies criteria which must be met for intangible assets acquired in a purchase method business combination to be recognized and reported
apart from goodwill. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement
142 also requires that identifiable intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Statement 121 was subsequently superseded by Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. BancShares adopted the provisions of Statement 141 as of June 30, 2001 and fully adopted Statement 142 as of January 1, 2002. Accordingly, goodwill ceased being amortized on January 1, 2002.



Statement 141 requires, upon adoption of Statement 142, that BancShares evaluate its existing
intangible assets and goodwill that were acquired in prior purchase business combinations, and to make any necessary reclassifications in order to conform



6



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



In October 2002, the FASB issued Statement of Financial Accounting Standards No. 147 (Statement 147), Acquisitions of Certain Financial Institutions, which addresses the financial accounting and reporting for the acquisition of
all or part of a financial institution. This standard removes certain acquisitions of financial institutions from the scope of Statement of Financial Accounting Standards No. 72 (Statement 72). This statement requires financial institutions to
reclassify goodwill, which was created from a qualified business acquisition, from Statement 72 goodwill to goodwill subject to the provisions of Statement 142. The reclassified goodwill will no longer be amortized but will be subject to an annual
impairment test, pursuant to Statement 142. Statement 147 required BancShares to retroactively restate its previously issued 2002 interim financial statements, to reverse Statement 72 goodwill amortization expense recorded in the first three
quarters of the 2002 fiscal year, the year in which BancShares adopted Statement 142. BancShares adopted Statement 147 on October 1, 2002. BancShares had $14.0 million of Statement 72 goodwill which was reclassified and will no longer be amortized.
This resulted in the reversal of $854,000 ($538,000 or $19.20 per share, after-tax) of amortization expense for the nine months ended September 30, 2002. In accordance with Statement 147, BancShares performed an impairment test of this goodwill in
the fourth quarter of 2002 and began performing an annual impairment analysis in the fourth quarter of 2003. As a result of this testing, no impairment charges were recorded. BancShares will perform an annual impairment test of the goodwill in 2004
and thereafter.



The following is a summary of the gross carrying amount and
accumulated amortization of amortized intangible assets as of March 31, 2004 and December 31, 2003 and the carrying amount of unamortized intangible assets as of March 31, 2004 and December 31, 2003.



|                               |  |                      |        |                         |   |                      |  |                         |        |  |   |      
|------------------------------ |  | -------------------- | ------ | ----------------------- | - | -------------------- |  | ----------------------- | ------ |  | - | -----
|                               |  | March 31, 2004       |        | December 31, 2003      
|(Dollars in thousands)         |  | Gross CarryingAmount |        | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|Amortized intangible assets:   |  |                      |        |                         |   |                      |  |                         |        |  |   |      
|Branch acquisitions            |  | $                    | 7,746  |                         | $ | 3,041                |  | $                       | 7,746  |  | $ | 2,852
|                               |  |                      |        |                         |   |                      |  |                         |        |  |   |      
|Unamortized intangible assets: |  |                      |        |                         |   |                      |  |                         |        |  |   |      
|Goodwill                       |  | $                    | 19,112 |                         |   |                     |  | $                       | 19,112 |  |   |     
|Pension Intangible             |  |                      |       |                         |   |                     |  |                         | 29     |  |   |     
|                               |  |                      |        |                         |   |                      |  |                         |        |  |   |      
|Total                          |  | $                    | 19,112 |                         | $ |                     |  | $                       | 19,141 |  | $ |     
|                               |  |                      |        |                         |   |                      |  |                         |        |  |   |      



The scheduled amortization expense for
intangible assets for the years ended December 31, 2004, 2005, 2006, 2007, 2008 and thereafter is as follows:



|                       |  |                               |      
|---------------------- |  | ----------------------------- | -----
|(Dollars in thousands) |  | ScheduledAmortization Expense
|2004                   |  | $                             | 732  
|2005                   |  |                               | 689  
|2006                   |  |                               | 653  
|2007                   |  |                               | 623  
|2008                   |  |                               | 579  
|2009 and after         |  |                               | 1,618
|                       |  |                               |      
|Total                  |  | $                             | 4,894
|                       |  |                               |      



7



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In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 143 (Statement 143), Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement
cost. This standard requires BancShares to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the
acquisition, construction, development and or normal use of the assets. BancShares also is to record a corresponding increase to the carrying amount of the related long-lived asset and to depreciate that cost over the life of the asset. The
liability is changed at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the initial fair value measurement. This statement is effective for fiscal years beginning after June 15, 2002.
BancShares adopted SFAS No. 143 on January 1, 2003 with no material effect on its consolidated financial statements.



In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144). In accordance with Statement 144, long-lived
assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the
balance sheet. BancShares adopted Statement 144 on January 1, 2002. The adoption of Statement 144 did not affect BancShares financial statements.



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (Statement
145). Statement 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary. Statement 145 also amends SFAS No. 13 to require sale-leaseback accounting
for certain lease modifications that have economic effects similar to sale-leaseback transactions. The adoption of Statement 145 for transactions is effective for fiscal years beginning after May 15, 2003 and is not expected to have a material
effect on our consolidated financial statements.



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



In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS No. 149), Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under Statement of Financial Accounting Standards No. 133 (SFAS No. 133). This
statement clarifies when a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative instrument contains a financing component, amends the definition of an underlying to conform it to language used
in Financial Accounting Standards Board Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and amends certain other existing
pronouncements. This Statement requires that contracts with comparable characteristics be accounted for similarly. This Statement is effective for most contracts entered into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. For contracts with forward purchases or sales of TBA-type securities or other securities that do not yet exist, this Statement is effective for both existing contracts and new contracts entered into after June 30, 2003. All
provisions of this Statement should be applied prospectively. Adoption of SFAS No. 149 on July 1, 2003 did not have a material effect on BancShares consolidated financial statements.



In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS No.
150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the



8



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beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative
effect of a change in accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. Adoption of SFAS No. 150 on July 1, 2003 did not have a
material effect on BancShares consolidated financial statements.



In
November 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which
addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee, such
as the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required
even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The disclosure requirements are effective for interim and annual
financial statements ending after December 15, 2002. The initial recognition and measurement provisions are effective for all guarantees within the scope of FIN 45 issued or modified after December 31, 2002. BancShares issues standby letters of
credit whereby BancShares guarantees performance if a specified triggering event or condition occurs. The guarantees generally mature within one year and may be automatically renewed depending on the terms of the guarantee and the credit-worthiness
of the customer. The maximum potential amount of undiscounted future payments related to standby letters of credit at March 31, 2004 is $2,903,000. At March 31, 2004, BancShares has recorded no liability for the current carrying amount of the
obligation to perform as a guarantor, as such amounts are deemed immaterial.



In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, which addresses consolidation of variable interest entities (VIEs), certain of
which are also referred to as special-purpose entities (SPE). VIEs are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinate financial support from other parties. Under the provisions of FIN 46, a company is deemed to be the primary beneficiary, and thus required to consolidate a VIE if the company has a variable
interest (or combination of variable interests) that will absorb a majority of the VIEs expected losses, that will receive a majority of the VIEs expected residual returns, or both. The provisions of FIN 46 were applicable to variable
interests in VIEs created after January 31, 2003. Variable interests in VIEs created before February 1, 2003, were originally subject to the provisions of FIN 46 no later than July 1, 2003. In October 2003, the FASB issued guidance that provided for
a deferral of the effective date of applying FIN 46 to entities created before February 1, 2003, to no later than December 31, 2003. In addition, the deferral permitted a company to apply FIN 46 as of July 1, 2003, to some or all of the VIEs in
which it holds an interest, and the rest on December 31, 2003.



In December
2003, the FASB issued a revision to FIN 46 (FIN 46R), which clarified and interpreted certain of the provisions of FIN 46, without changing the basic accounting model in FIN 46. The provisions of FIN 46R are effective no later than March 31, 2004.
However, companies must apply either FIN 46 or FIN 46R to those entities considered SPEs no later than December 31, 2003.



BancShares adopted FIN 46R on December 31, 2003. In connection with the adoption, we have deconsolidated the trust associated with our trust preferred securities. Prior
to deconsolidation the trust preferred securities were classified as long-term obligations in BancShares consolidated financial statements. Following deconsolidation, junior subordinated debentures between BancShares and the former trust
subsidiary are classified as long-term obligations amounting to $23,711,350.



In December 2003, FASB Statement No. 132 (revised), Employers Disclosures about Pensions and Other Postretirement Benefits,was issued. Statement 132 (revised) prescribes employers disclosures about pension plans and
other postretirement benefit plans; it does not change the measurement or recognition of those plans. The Statement retains and revises the disclosure requirements contained in the original Statement 132. It also requires additional disclosures
about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The Statement generally is effective for fiscal years ending after December 15, 2003. BancShares
disclosures in note 9 incorporate the requirements of Statement 132 (revised).



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.



9



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Note 4. Allowance for Loan Losses



A summary of the allowance for loan losses follows:



|                             |  |                              |            |   |      |   |            |  
|---------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                             |  | (Unaudited)                  |           
|                             |  | Three months ended March 31, |           
|                             |  | 2004                         |            |   | 2003 |  
|Balance at beginning of year |  | $                            | 12,818,463 |   |      | $ | 11,838,076 |  
|Provision for loan losses    |  |                              | 132,000    |   |      |   | 200,000    |  
|Loans charged off            |  |                              | (226,233   | ) |      |   | (210,707   | )
|Loan recoveries              |  |                              | 60,427     |   |      |   | 83,682     |  
|                             |  |                              |            |   |      |   |            |  
|Balance at end of the period |  | $                            | 12,784,657 |   |      | $ | 11,911,051 |  
|                             |  |                              |            |   |      |   |            |  



At March 31, 2004 the Bank had
$1,089,000 of nonperforming assets which included $1,021,000 of impaired loans, which comprise all of the Companys nonaccrual loans, and $68,000 of other real estate and repossessed assets. At December 31, 2003, the Bank had $566,000 of
nonperforming assets which included $407,000 of impaired loans, which comprise all of the Companys nonaccrual loans, and $159,000 of other real estate owned. At March 31, 2004, and December 31, 2003 the Bank had $1,393,000 and $1,338,000,
respectively, of accruing loans 90 days or more past due.



Note 5. Long Term Borrowings



The
$23,000,000 of long-term obligations at March 31, 2003 consisted of trust preferred capital securities of a formerly consolidated finance subsidiary, FidBank Capital Trust I, which were issued during 1999. The proceeds from the issuance of the trust
preferred securities were invested in junior subordinated debentures issued by BancShares, and that investment became the sole asset of the trust. On December 31, 2003, BancShares adopted the provisions of FIN 46R for financial accounting purposes;
and as discussed in Note 2, the issuing trust was deconsolidated within the BancShares consolidated financial statements and the amount of junior subordinated debentures between BancShares and the trust were classified as long-term
obligations, resulting in an increase thereof of $711,350, or total long-term obligations of $23,711,350, which has not changed as of March 31, 2004. These long-term obligations, which qualify as Tier 1 Capital for the regulatory capital adequacy
requirements of 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. However, except for accounting treatment, the relationship between BancShares and
FidBank Capital Trust I has not changed. FidBank Capital Trust I continues to be a wholly-owned finance subsidiary of BancShares, and the full and unconditional guarantee of BancShares for the repayment of the trust preferred securities remains in
effect.



Note 6. Branch Acquisitions



On June 20, 2003, BancShares acquired the Ramseur and Thomasville, North
Carolina and the Martinsville and Collinsville, Virginia branches of First-Citizens Bank & Trust Company (FCB), a related party (see Note 8 to the consolidated financial statements). This acquisition was accounted for as a purchase, and,
therefore the results of operations prior to the purchase of the branches are not included in the consolidated financial statements. The combined loans and deposits acquired were $31.4 million and $113.5 million, respectively. The total purchase
price was $7.5 million. Of this, $3.1 million was determined to be a core deposit intangible asset and $4.4 million was determined to be goodwill. This acquisition has been accounted for using the purchase method of accounting for business
combinations with the assets and liabilities recorded based on estimates of fair values as of June 20, 2003. The following is a condensed balance sheet disclosing the amount assigned to each major asset and liability caption of the four FCB branches
as of June 20, 2003, and the related fair value adjustments recorded by BancShares to reflect the acquisition.



10



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|                                                                                                  |  |                  |         |                       |       |     |                            |   |         |  
|------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | --------------------- | ----- | --- | -------------------------- | - | ------- | -
|(Dollars in thousands)                                                                            |  | AsRecorded byFCB |         | Fair ValueAdjustments |       |     | AsRecorded byFidelity Bank |  
|Assets:                                                                                           |  |                  |         |                       |       |     |                            |   |         |  
|Cash                                                                                              |  | $                | 784     |                       |      |     |                            |   | 784     |  
|Loans, gross                                                                                      |  |                  | 31,380  |                       | 334   | (a) |                            |   | 31,714  |  
|Premises and Equipment                                                                            |  |                  | 1,251   |                       | 624   | (b) |                            |   | 1,875   |  
|Prepaid expenses                                                                                  |  |                  | 11      |                       |      |     |                            |   | 11      |  
|Other-identifiable intangible asset                                                               |  |                  |        |                       | 3,121 | (c) |                            |   | 3,121   |  
|                                                                                                  |  |                  |         |                       |       |     |                            |   |         |  
|Total                                                                                             |  |                  | 33,426  |                       | 4,079 |     |                            |   | 37,505  |  
|                                                                                                  |  |                  |         |                       |       |     |                            |   |         |  
|Liabilities:                                                                                      |  |                  |         |                       |       |     |                            |   |         |  
|Deposits                                                                                          |  | $                | 113,459 |                       | 981   | (d) |                            |   | 114,440 |  
|                                                                                                  |  |                  |         |                       |       |     |                            |   |         |  
|Total                                                                                             |  |                  | 113,459 |                       | 981   |     |                            |   | 114,440 |  
|                                                                                                  |  |                  |         |                       |       |     |                            |   |         |  
|Fair value of identifiable net assets (liabilities) acquired, excluding cash received from seller |  |                  |         |                       |       |     |                            | $ | (76,935 | )
|                                                                                                  |  |                  |         |                       |       |     |                            |   |         |  



The following shows the calculation of
the goodwill recorded in this transaction



|                                                                                                                         |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | - | ------- | -
|Purchase price paid for acquisition                                                                                      |  | $ | 7,500   |  
|                                                                                                                         |  |   |         |  
|Fair value of identifiable net assets (liabilities) acquired, excluding cash received from seller                        |  |   | (76,935 | )
|Cash received from seller at closing, excluding reduction for purchase price of $7,500                                   |  |   | 80,019  |  
|                                                                                                                         |  |   |         |  
|Net fair value of assets acquired from seller                                                                            |  |   | 3,084   |  
|                                                                                                                         |  |   |         |  
|Goodwill recorded for acquisition, representing then excess of purchase price over the fair value of net assets acquired |  | $ | 4,416   |  
|                                                                                                                         |  |   |         |  



Explanation of Fair Value
Adjustments



| | (a) | This fair value adjustment was recorded because the interest rates on FCBs loans exceeded current interest rates on similar loans. This amount will be amortized to reduce
interest income over the remaining lives of the related loans, which have an average life of 36 months.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | This fair value adjustment was recorded because the fair market value of the buildings acquired exceeded the book value. This amount will be amortized to increase depreciation
expense over the remaining lives of the three acquired buildings, which range from 7 to 18 years.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | This fair value adjustment represents the value of the core deposit base assumed in the acquisition based on a study performed by an independent consulting firm. This amount was
recorded by BancShares as an identifiable intangible asset and will be amortized as expense on an accelerated basis over an eleven year period based on an amortization schedule provided by the consulting firm.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | This fair value adjustment was recorded because the interest rates on FCBs time deposits exceeded current interest rates on similar time deposits. This amount will be
amortized to reduce interest expense over the remaining lives of the related CDs, which have an average life of 13 months.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Note 7. Loss on Marketable Equity Securities



During the first quarter of 2003, BancShares wrote down the carrying value of certain available for sale equity securities to their current
market value and recognized a loss of $65,000. This was a result of unrealized losses that were deemed to be other than temporary. There were no such write downs in the first quarter of 2004.



11



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Note 8. Related Parties



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



The first significant shareholder at March 31, 2004, 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 March 31, 2004, beneficially owned 2,525,933 shares, or 28.84%, and 1,378,593 shares, or 15.74%, of the Corporations outstanding Class A common stock, and 656,688 shares, or 39.14%, and 206,159 shares, or 12.29%, of the
Corporations outstanding Class B common stock. The above totals include 467,327 Class A common shares, or 5.34%, and 104,644 Class B Common shares, or 6.24%, that are considered to be beneficially owned by both of the shareholders and,
therefore, are included in each of their totals.



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



|                                   |  |                                          |       |      |   |    
|---------------------------------- |  | ---------------------------------------- | ----- | ---- | - | ---
|(Dollars in thousands)             |  | (Unaudited) Three Months Ended March 31,
|                                   | 
|                                   |  | 2004                                     |       | 2003
|Data and item processing           |  | $                                        | 973   |      | $ | 856
|Furniture and equipment            |  |                                          | 28    |      |   | 17 
|Forms and supplies                 |  |                                          | 13    |      |   | 21 
|Trustee for employee benefit plans |  |                                          | 16    |      |   | 14 
|Other                              |  |                                          | 107   |      |   | 1  
|                                   |  |                                          |       |      |   |    
|                                   |  | $                                        | 1,137 |      | $ | 909
|                                   |  |                                          |       |      |   |    



The increase in other charges in 2004
consist of computer installation charges paid to the Corporation in relation to new computers throughout the branch network.



BancShares also has a correspondent relationship with the Corporation. Correspondent account balances with the Corporation included in cash and due from banks and
overnight funds sold totaled $37,798,948 and $50,013,839 at March 31, 2004 and December 31, 2003, respectively. The rate paid on overnight funds by the Corporation was 0.88% at March 31, 2004 and 0.71% at December 31, 2003.



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 $2.6 million of BancShares
mortgage loans.



See Note 6 for a discussion of branch purchases from a
subsidiary of the Corporation.



12



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Note 9. Pension Plan



Components of Net Periodic Benefit Cost



|                          |  |                              |          |   |      |          |  
|------------------------- |  | ---------------------------- | -------- | - | ---- | -------- | -
|                          |  | (Unaudited)                  |         
|                          |  | Three months ended March 31, |         
|                          |  | 2004                         |          |   | 2003 |         
|Pension Benefits          |  |                              |          |   |      |          |  
|Service Cost              |  | $                            | 153,300  |   |      | 135,900  |  
|Interest Cost             |  |                              | 194,000  |   |      | 182,700  |  
|Expected Return on Assets |  |                              | (212,300 | ) |      | (146,500 | )
|Amortization Cost:        |  |                              |          |   |      |          |  
|Prior service cost        |  |                              | 1,400    |   |      | 2,200    |  
|Net loss                  |  |                              | 26,100   |   |      | 5,800    |  
|                          |  |                              |          |   |      |          |  
|Total Amortizations       |  |                              | 27,500   |   |      | 8,000    |  
|                          |  |                             
|Net Periodic Benefit Cost |  | $                            | 162,500  |   |      | 180,100  |  



Components of net periodic benefit
cost for the first quarter of 2003 and 2004 are based upon estimated cost numbers and will be trued up to reflect actual costs later in the year when they become available.



The expected long-term rate of return on plan assets is 8.50% in 2004.



13



---

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



TABLE 1.

Financial Summary



|                                                    |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|--------------------------------------------------- |  | ------------- | --------- | - | -------------- | - | --------- | ------------- |  | - | -------------- | - |  | ------------- | --------- | - |  | - | --------- | -
|(Dollars in thousands, except per share data)       |  | 2004          |           |   | 2003           |  
|                                                    |  | First Quarter |           |   | Fourth Quarter |   |           | Third Quarter |  |   | Second Quarter |   |  | First Quarter |          
|Summary of Operations                               |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Interest income                                     |  | $             | 12,440    |   |                | $ | 12,670    |               |  | $ | 12,612         |   |  | $             | 12,553    |   |  | $ | 12,730    |  
|Interest expense                                    |  |               | 3,115     |   |                |   | 3,273     |               |  |   | 3,469          |   |  |               | 3,617     |   |  |   | 3,917     |  
|                                                    |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Net interest income                                 |  |               | 9,325     |   |                |   | 9,397     |               |  |   | 9,143          |   |  |               | 8,936     |   |  |   | 8,813     |  
|Provision for loan losses                           |  |               | 132       |   |                |   | 420       |               |  |   | 407            |   |  |               | 388       |   |  |   | 200       |  
|                                                    |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Net interest income after provision for loan losses |  |               | 9,193     |   |                |   | 8,977     |               |  |   | 8,736          |   |  |               | 8,548     |   |  |   | 8,613     |  
|Noninterest income                                  |  |               | 2,474     |   |                |   | 2,689     |               |  |   | 2,868          |   |  |               | 2,850     |   |  |   | 2,548     |  
|Noninterest expense                                 |  |               | 8,664     |   |                |   | 8,618     |               |  |   | 8,619          |   |  |               | 7,953     |   |  |   | 7,954     |  
|                                                    |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Net income before income taxes                      |  |               | 3,003     |   |                |   | 3,048     |               |  |   | 2,985          |   |  |               | 3,445     |   |  |   | 3,207     |  
|Income taxes                                        |  |               | 1,120     |   |                |   | 1,183     |               |  |   | 1,171          |   |  |               | 1,331     |   |  |   | 1,150     |  
|                                                    |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Net income                                          |  | $             | 1,883     |   |                | $ | 1,865     |               |  | $ | 1,814          |   |  | $             | 2,114     |   |  | $ | 2,057     |  
|                                                    |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Selected Period-End Balances                        |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Total assets                                        |  | $             | 1,139,725 |   |                | $ | 1,138,749 |               |  | $ | 1,140,154      |   |  | $             | 1,148,213 |   |  | $ | 1,020,556 |  
|Investment securities and overnight funds sold      |  |               | 245,125   |   |                |   | 243,525   |               |  |   | 263,561        |   |  |               | 251,202   |   |  |   | 175,456   |  
|Loans, gross                                        |  |               | 760,594   |   |                |   | 748,272   |               |  |   | 741,625        |   |  |               | 743,223   |   |  |   | 718,957   |  
|Interest earning assets                             |  |               | 1,042,568 |   |                |   | 1,032,641 |               |  |   | 1,033,974      |   |  |               | 1,045,975 |   |  |   | 933,019   |  
|Deposits                                            |  |               | 983,950   |   |                |   | 979,488   |               |  |   | 984,573        |   |  |               | 994,542   |   |  |   | 873,697   |  
|Long-term obligations                               |  |               | 23,711    |   |                |   | 23,711    |               |  |   | 23,000         |   |  |               | 23,000    |   |  |   | 23,000    |  
|Interest bearing liabilities                        |  |               | 835,860   |   |                |   | 845,550   |               |  |   | 851,602        |   |  |               | 855,430   |   |  |   | 756,103   |  
|Shareholders equity                                |  |               | 102,760   |   |                |   | 100,926   |               |  |   | 98,485         |   |  |               | 96,561    |   |  |   | 94,251    |  
|Common shares outstanding                           |  |               | 28,011    |   |                |   | 28,011    |               |  |   | 28,011         |   |  |               | 28,011    |   |  |   | 28,011    |  
|                                                    |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Selected Average Balances                           |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Total assets                                        |  | $             | 1,125,444 |   |                | $ | 1,134,552 |               |  | $ | 1,127,477      |   |  | $             | 1,025,623 |   |  | $ | 1,003,666 |  
|Investment securities and overnight funds sold      |  |               | 235,902   |   |                |   | 255,219   |               |  |   | 235,018        |   |  |               | 179,898   |   |  |   | 154,421   |  
|Loans, gross                                        |  |               | 754,705   |   |                |   | 743,255   |               |  |   | 746,440        |   |  |               | 716,514   |   |  |   | 727,288   |  
|Interest earning assets                             |  |               | 1,028,808 |   |                |   | 1,038,161 |               |  |   | 1,031,741      |   |  |               | 939,378   |   |  |   | 919,624   |  
|Deposits                                            |  |               | 965,146   |   |                |   | 975,728   |               |  |   | 969,945        |   |  |               | 875,776   |   |  |   | 857,172   |  
|Long-term obligations                               |  |               | 23,711    |   |                |   | 23,008    |               |  |   | 23,000         |   |  |               | 23,000    |   |  |   | 23,000    |  
|Interest bearing liabilities                        |  |               | 836,146   |   |                |   | 847,160   |               |  |   | 846,096        |   |  |               | 765,615   |   |  |   | 754,192   |  
|Shareholders equity                                |  |               | 102,520   |   |                |   | 100,319   |               |  |   | 98,587         |   |  |               | 96,276    |   |  |   | 94,046    |  
|Common shares outstanding                           |  |               | 28,011    |   |                |   | 28,011    |               |  |   | 28,011         |   |  |               | 28,011    |   |  |   | 28,011    |  
|                                                    |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Profitability Ratios                                |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Rate of return (annualized) on:                     |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Total assets                                        |  |               | 0.67      | % |                |   | 0.65      | %             |  |   | 0.64           | % |  |               | 0.83      | % |  |   | 0.83      | %
|Shareholders equity                                |  |               | 7.39      | % |                |   | 7.37      | %             |  |   | 7.30           | % |  |               | 8.81      | % |  |   | 8.87      | %
|Dividend payout ratio (1)                           |  |               | 11.90     | % |                |   | 12.02     | %             |  |   | 12.35          | % |  |               | 10.60     | % |  |   | 10.89     | %
|                                                    |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Liquidity and Capital Ratios (averages)             |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Loans to deposits                                   |  |               | 78.20     | % |                |   | 76.17     | %             |  |   | 76.96          | % |  |               | 81.81     | % |  |   | 84.85     | %
|Shareholders equity to total assets                |  |               | 9.11      | % |                |   | 8.84      | %             |  |   | 8.74           | % |  |               | 9.39      | % |  |   | 9.37      | %
|                                                    |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Per Share of Common Stock                           |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  
|Net income                                          |  | $             | 67.22     |   |                | $ | 66.55     |               |  | $ | 64.77          |   |  | $             | 75.48     |   |  | $ | 73.44     |  
|Cash dividends                                      |  |               | 8.00      |   |                |   | 8.00      |               |  |   | 8.00           |   |  |               | 8.00      |   |  |   | 8.00      |  
|Book value (2)                                      |  |               | 3,668.56  |   |                |   | 3,603.10  |               |  |   | 3,515.94       |   |  |               | 3,447.25  |   |  |   | 3,364.79  |  
|                                                    |  |               |           |   |                |   |           |               |  |   |                |   |  |               |           |   |  |   |           |  

---

|(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.
|--- | -------------------------------------------------------------------------------------------------------------



14



---

TABLE 2.



Consolidated Taxable Equivalent Rate/Volume Variance Analysis  Year to Date



|                                                |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|----------------------------------------------- |  | --------------- | --------- | - | ------------------------ | - | ----------- | --------------------------- | ---- | -------------- |  | - | ---------------------- | - | ---------- | - | ------ | ------ | ---- | ---------- |  | - | ----------- |  | - | ------ | - |  | - | ---- | -
|                                                |  | 2004            |           |   | 2003                     |   |             | Increase (decrease) due to: |     
|(Dollars in thousands)                          |  | Average Balance |           |   | Interest Income/ Expense |   | Yield/ Rate |                             |      | AverageBalance |  |   | InterestIncome/Expense |   | Yield/Rate |   |        | Volume |      | Yield/Rate |  |   | TotalChange | 
|ASSETS                                          |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Interest earning assets:                        |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Loans (1) (2)                                   |  | $               | 754,705   |   |                          | $ | 11,485      |                             | 6.12 | %              |  | $ | 727,288                |   |            | $ | 11,909 |        | 6.64 | %          |  | $ | 433         |  | $ | (857   | ) |  | $ | (424 | )
|Taxable investment securities                   |  |                 | 184,286   |   |                          |   | 744         |                             | 1.62 |                |  |   | 105,847                |   |            |   | 557    |        | 2.13 |            |  |   | 365         |  |   | (178   | ) |  |   | 187  |  
|Non-taxable investment securities (2)           |  |                 | 130       |   |                          |   | 1           |                             | 3.09 |                |  |   |                       |   |            |   |       |        |     |            |  |   | 1           |  |   |       |   |  |   | 1    |  
|Overnight funds sold                            |  |                 | 37,186    |   |                          |   | 80          |                             | 0.87 |                |  |   | 37,313                 |   |            |   | 107    |        | 1.16 |            |  |   |            |  |   | (27    | ) |  |   | (27  | )
|Other investments                               |  |                 | 16,956    |   |                          |   | 66          |                             | 1.57 |                |  |   | 13,756                 |   |            |   | 68     |        | 2.00 |            |  |   | 12          |  |   | (14    | ) |  |   | (2   | )
|Interest bearing deposits in other banks        |  |                 | 35,545    |   |                          |   | 82          |                             | 0.93 |                |  |   | 35,420                 |   |            |   | 101    |        | 1.16 |            |  |   |            |  |   | (19    | ) |  |   | (19  | )
|                                                |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Total interest earning assets                   |  | $               | 1,028,808 |   |                          | $ | 12,458      |                             | 4.87 | %              |  | $ | 919,624                |   |            | $ | 12,742 |        | 5.62 | %          |  | $ | 811         |  | $ | (1,095 | ) |  | $ | (284 | )
|                                                |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Noninterest earning assets:                     |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Cash and due from banks                         |  |                 | 41,839    |   |                          |   |             |                             |      |                |  |   | 38,102                 |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Premises and equipment                          |  |                 | 36,835    |   |                          |   |             |                             |      |                |  |   | 34,578                 |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Other assets                                    |  |                 | 30,816    |   |                          |   |             |                             |      |                |  |   | 23,225                 |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Reserve for loan losses                         |  |                 | (12,854   | ) |                          |   |             |                             |      |                |  |   | (11,863                | ) |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|                                                |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Total assets                                    |  | $               | 1,125,444 |   |                          |   |             |                             |      |                |  | $ | 1,003,666              |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|                                                |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|LIABILITIES & EQUITY                            |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Interest bearing liabilities:                   |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Demand deposits                                 |  | $               | 134,784   |   |                          | $ | 45          |                             | 0.13 | %              |  | $ | 116,233                |   |            | $ | 85     |        | 0.30 | %          |  | $ | 5           |  | $ | (45    | ) |  | $ | (40  | )
|Savings deposits                                |  |                 | 215,928   |   |                          |   | 316         |                             | 0.59 |                |  |   | 198,969                |   |            |   | 470    |        | 0.96 |            |  |   | 27          |  |   | (181   | ) |  |   | (154 | )
|Time deposits                                   |  |                 | 435,270   |   |                          |   | 2,203       |                             | 2.04 |                |  |   | 393,759                |   |            |   | 2,811  |        | 2.90 |            |  |   | 253         |  |   | (861   | ) |  |   | (608 | )
|Short-term borrowings                           |  |                 | 26,453    |   |                          |   | 47          |                             | 0.71 |                |  |   | 22,231                 |   |            |   | 63     |        | 1.15 |            |  |   | 10          |  |   | (26    | ) |  |   | (16  | )
|Long-term borrowings                            |  |                 | 23,711    |   |                          |   | 504         |                             | 8.55 |                |  |   | 23,000                 |   |            |   | 488    |        | 8.60 |            |  |   | 16          |  |   |       |   |  |   | 16   |  
|                                                |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Total interest bearing liabilities              |  | $               | 836,146   |   |                          | $ | 3,115       |                             | 1.50 | %              |  | $ | 754,192                |   |            | $ | 3,917  |        | 2.11 | %          |  | $ | 311         |  | $ | (1,113 | ) |  | $ | (802 | )
|                                                |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Noninterest bearing liabilities:                |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Demand deposits                                 |  |                 | 179,164   |   |                          |   |             |                             |      |                |  |   | 148,211                |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Other liabilities                               |  |                 | 7,614     |   |                          |   |             |                             |      |                |  |   | 7,217                  |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Shareholders equity                            |  |                 | 102,520   |   |                          |   |             |                             |      |                |  |   | 94,046                 |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|                                                |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Total liabilities and equity                    |  | $               | 1,125,444 |   |                          |   |             |                             |      |                |  | $ | 1,003,666              |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|                                                |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Interest rate spread (3)                        |  |                 |           |   |                          |   |             |                             | 3.37 | %              |  |   |                        |   |            |   |        |        | 3.51 | %          |  |   |             |  |   |        |   |  |   |      |  
|                                                |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  
|Net interest income and net interest margin (4) |  |                 |           |   |                          | $ | 9,343       |                             | 3.65 | %              |  |   |                        |   |            | $ | 8,825  |        | 3.89 | %          |  | $ | 500         |  | $ | 18     |   |  | $ | 518  |  
|                                                |  |                 |           |   |                          |   |             |                             |      |                |  |   |                        |   |            |   |        |        |      |            |  |   |             |  |   |        |   |  |   |      |  

---

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

|(2) | The average rate on nontaxable loans and investment securities has been adjusted to a tax equivalent yield generally using a 39.485% tax rate for 2004 and 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

The taxable equivalent adjustment was approximately $19,000 and $14,000 for the periods in 2004 and 2003, 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.
|--- | -----------------------------------------------------------------------------



15



---

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 Subsidiary (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 66 branches in North Carolina and Virginia.



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 three months of 2004, BancShares net income decreased $174,000 to $1.9 million from $2.1 million in the first three months of 2003, a decrease of 8.48%. The decrease in net income
in the first quarter of 2004 compared to the same period in the prior year resulted primarily from increases in noninterest expenses which include salaries, occupancy, data processing, and amortization expenses as well as a decrease in noninterest
income which was slightly offset by a decrease in the provision for loan losses.



Net income per share for the first quarter of 2004 was $67.22, a decrease of $6.23 per share or 8.48% from $73.44 per share in 2003. Return on average assets for the first quarter of 2004 and 2003 was 0.67% and 0.83%,
respectively. Return on average equity for the first quarter of 2004 and 2003 was 7.39% and 8.87%, respectively. 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.



On June 20, 2003, BancShares acquired the Ramseur and Thomasville, North Carolina and the Martinsville and Collinsville, Virginia branches of
First-Citizens Bank & Trust Company, a related party. This acquisition was accounted for as a purchase, and therefore the results of operations prior to the purchase of the branches are not included in the consolidated financial statements. The
combined loans and deposits acquired were $31.4 million and $113.5 million, respectively.



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 quarter of 2004, net interest income was $9.3 million as compared to $8.8 million for the same period in 2003, an increase of $514,000 or 5.83%. Of the $514,000 net increase in net interest income,
an $18,000 increase resulted from interest rate changes on interest earning assets and interest bearing liabilities, the effect of which was combined with the impact of increases in volume which contributed to a $496,000 increase in the net interest
income. The net interest margin for the first quarter of 2004 and 2003 was 3.65% and 3.89%, respectively.



Interest income for the first quarter of 2004 was $12.4 million as compared to $12.7 million in 2003, a decrease of $288,000 or 2.27%. The decrease in
interest income for the first quarter of 2004 over the first quarter of 2003 is attributable mainly to a decline in interest rates, which was offset by growth in average earning asset balances due to the excess funds from the acquisition in June,
2003 being invested in lower earning investment balances rather than loans at this time. Interest income from loans amounted to $11.5 million in the first quarter of 2004 as compared to $11.9 million in the first quarter of 2003, a decrease of
$429,000 or 3.61%. Since approximately 70% of BancShares loans are tied to prime at March 31, 2004 (compared to approximately 60% in the prior year), the decrease in prime rate during 2003 along with the increase in variable rate loans has
contributed to the decrease in interest income on loans. BancShares loan growth is largely due to growth within the existing branch network as well as the acquisition in 2003 which brought in $31.4 million in loans.



16



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Earnings from investments and overnight funds sold provided the balance of interest income, contributing $974,000 and
$833,000 for the first quarter of 2004 and 2003, respectively. Average interest-earning assets for the first quarter of 2004 increased to $1.0 billion, an 11.87% increase, from $919.6 million in the first quarter of 2003. The yield on interest
earning assets for the first quarter of 2004 and 2003 was 4.87% and 5.62%, respectively. The decrease in interest income on investments and overnight funds is due to the decrease in interest rates as well as the reduced average maturity of
securities held, but is partially offset by the increase in volume as a result of more deposits acquired in the acquisition than there were loans made. In the past, investments were typically purchased with two year maturities. They have now matured
and repriced in the low rate environment. Many of the securities purchased to replace these were bought with a three to six month maturity, thus with lower interest rates, hoping that interest rates would begin to rise and not wanting to have a two
year maturity on a low interest security. Trends in interest earning assets are shown in Table 2.



Interest expense for the quarter of 2004 was $3.1 million compared to $3.9 million in 2003, a decrease of $802,000 or 20.48%. The decrease in interest
expense in the first quarter of 2004, compared to the first quarter of 2003, is attributable to decreased interest rates on deposit balances, primarily time deposits and savings accounts. Deposits are not tied to prime; however, their rates have
also been reduced, but as there are CDs and IRAs that have fixed rates, it takes longer for them to reprice, therefore interest expense does not decrease as fast as interest income. Average interest bearing deposits increased $77,000 or
10.86%, from $709.0 million in the first quarter of 2003 to $786.0 million in the first quarter of 2004. The average rate paid on interest-bearing deposits was 1.31% and 1.93% for the first quarter of 2004 and 2003, respectively. Borrowings
contributed $551,000 in interest expense during the first quarter of 2004 and 2003. The yield on interest bearing liabilities for the first quarter of 2004 and 2003 was 1.50% and 2.11%, 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 first quarter of 2004 and 2003, management recognized $132,000 and $200,000, respectively, as provisions for loan losses. The decrease in the provision for loan losses is primarily
attributable to generally lower levels of new credit risk being assumed as evidenced by slower loan growth and lower net charge-offs than in previous periods. During the first quarter of 2004, management charged-off loans totaling $226,000 and had
recoveries of $60,000 resulting in net charge-offs of $166,000. During the same period in 2003, management charged-off $211,000 in loans and had recoveries of $84,000, resulting in net charge-offs of $127,000. Charge-offs were higher for the first
three months of 2004 than the same period of 2003 mainly due to the charge-off of one large mortgage loan and one large real estate loan in the first quarter of 2004. In the first quarter of 2003, there were no large loan charge-offs. The ratio of
allowance for loan losses to loans decreased to 1.68% at March 31, 2004 from 1.71% at December 31, 2003. The following table presents BancShares comparative asset quality ratios:



|                                                                       |  |               |   |  |                  |  
|---------------------------------------------------------------------- |  | ------------- | - |  | ---------------- | -
|                                                                       |  | March 31,2004 |   |  | December 31,2003 |  
|Ratio of annualized net loans charged off to average loans             |  | 0.09          | % |  | 0.06             | %
|Allowance for loan losses to loans                                     |  | 1.68          |   |  | 1.71             |  
|Non-performing assets to total gross loans and other real estate owned |  | 0.14          |   |  | 0.08             |  
|Non-performing assets to total assets                                  |  | 0.10          |   |  | 0.05             |  



Management considers
the March 31, 2004 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. No significant changes were made to allocations or the methodology used to estimate the allowance for loan losses
during the first quarter.



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



17



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BancShares had impaired loans, which comprise all of the Companys nonaccrual loans, of $1,021,000
at March 31, 2004, $917,000 at March 31, 2003, and $407,000 at December 31, 2003. The increase is mainly due to commercial loans. Management actively maintains a current loan watch list and knows of no other loans which are material and (i)
represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware of any
information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.



Noninterest Income. Noninterest income decreased $75,000 or 2.95% for the first quarter of 2004 over the first quarter of 2003. Noninterest income
for the first quarter of 2003 included a gain on the sale of other real estate of $57,000 as well as securities losses of $65,000. Service charges on deposit accounts and other service charges and fees decreased $68,000 or 2.70% during the first
quarter of 2004 primarily due to a decrease in mortgage commission income of $168,000 from $225,000 in the first quarter 2003 to $57,000 in the first quarter 2004. This income is part of other service charges and fees. In addition to increased
refinancing resulting from low mortgage rates, during the first four months of 2003, Fidelity Bank sponsored a promotion designed to increase fee income from new mortgage loans. Associate incentives, company-wide contests, and in-branch marketing
materials contributed to the success of the promotion which resulted in a significant increase in mortgage related fee income. This decrease in mortgage commission income is partially offset by an increase in TFB Financial Services income due to
increased selling of securities which is also in other service charges and fees. Service charges on deposits decreased mainly due to decreased service charges on commercial checking accounts from an increased earnings credit paid on these accounts
in the first quarter of 2004 compared to the first quarter of 2003. For commercial customers who have full analysis checking accounts, an earnings credit is paid on the balances maintained in the account each month which is used to offset some or
all of the service charges the accounts accrue throughout the month. BancShares average deposits increased $108.0 million or 12.60% to $965.1 million in the first quarter of 2004 from $857.2 million in the first quarter of 2003.



Noninterest Expense. Noninterest expense increased $711,000 or 8.94%,
from $8.0 million in the first quarter of 2003 to $8.7 million in the first quarter of 2004, including increases of $359,000 in salaries and employee benefits, $111,000 in occupancy and equipment, $168,000 in data processing costs, and $112,000 in
amortization of intangibles, which were offset by a decrease of $39,000 in other expenses. The fluctuations represented increases of 7.78% in salaries and employee benefits, 9.05% in occupancy and equipment, 19.53% in data processing costs, and
145.54% in amortization of intangibles, which were offset by decreases of 3.32% in other expenses over the first quarter of 2003. Increases in data processing costs were mainly due to increases in deposit processing resulting from the acquisition of
four branches in June, 2003 where the Bank purchased $113.5 million in deposits. Increases in salaries and benefits were partially due to the addition of people in the acquisition as well as normal salary increases, increases in health insurance,
and internal growth. Increases in occupancy and equipment is due to increased rent expense due to two new leased locations, increased depreciation from additional fixed assets, and increased utilities. Amortization of intangibles also increased due
to the acquisition of the four branches for which a core deposit intangible study was done by an independent consulting firm to determine the amount of amortizable intangible.



Income Taxes. In the first quarter of 2004, BancShares had income tax expense of $1.1 million, a decrease of $30,000
or 2.61%, from $1.2 million in the prior year period. The resulting effective income tax rates, based on the accruals for the quarter ended March 31, 2004 and 2003 were 37.30% and 35.86%, 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 March 31, 2004 was 8.71% as compared to 8.47% at December 31, 2003.



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 March 31, 2004, the Total Capital Ratio was 13.92% as compared to 13.89% at December 31, 2003.



18



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The following table presents capital adequacy calculations and ratios of BancShares:



|                       |  |                |         |      |                   |   |         |     
|---------------------- |  | -------------- | ------- | ---- | ----------------- | - | ------- | ----
|(Dollars in thousands) |  | March 31, 2004 |         |      | December 31, 2003 |  
|Tier 1 capital         |  | $              | 95,990  |      |                   | $ | 94,112  |     
|Total capital          |  |                | 110,954 |      |                   |   | 108,787 |     
|Leverage capital ratio |  |                | 8.71    | %(1) |                   |   | 8.47    | %(1)
|Tier 1 capital ratio   |  |                | 12.05   | (1)  |                   |   | 12.02   | (1) 
|Total capital ratio    |  |                | 13.92   | (1)  |                   |   | 13.89   | (1) 

---

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



At March 31, 2004, and December 31,
2003, BancShares and the Bank were in compliance with all of their regulatory capital requirements, and all of their regulatory capital ratios exceed the minimum ratios required for it to be classified as well capitalized.



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 March 31, 2004 and December 31, 2003, outstanding financial instruments whose contract amounts represent credit risk were as follows:



|                                                             |  |                |             |                  |            
|------------------------------------------------------------ |  | -------------- | ----------- | ---------------- | -----------
|                                                             |  | March 31, 2004 |             | December 31,2003
|Outstanding commitments to extend credit and lines of credit |  | $              | 261,694,672 |                  | 260,488,448
|                                                             |  |                |             |                  |            
|Standby letters of credit                                    |  | $              | 2,902,546   |                  | 3,178,745  
|                                                             |  |                |             |                  |            



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 Virginia 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.



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



19



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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.



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 less the federal reserve requirement. These assets represented 20.84% of deposits at March 31, 2004, a decrease from 22.24% at
December 31, 2003. BancShares liquidity ratio, which is defined as cash plus short-term marketable securities (minus pledged securities) less the federal reserve requirement divided by deposits and short-term liabilities, was 22.52% at March
31, 2004, compared to 23.90% at December 31, 2003.



The
consolidated statements of cash flows disclose the principal sources and uses of cash from operating, investing and financing activities for the three months ended March 31, 2004 and 2003.



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 March 31, 2004, and December 31, 2003, jumbo time deposits represented 11.37% and 11.66%, respectively, of total deposits.



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



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



CONTRACTUAL OBLIGATIONS

As of March 31, 2004



|                                   |  |                                               |         |           |        |           |        |              |        |       |          
|---------------------------------- |  | --------------------------------------------- | ------- | --------- | ------ | --------- | ------ | ------------ | ------ | ----- | ---------
|                                   |  | Payments due by period (dollars in thousands)
|                                   |  | Less than 1 year                              |         | 1-3 years |        | 4-5 years |        | Over 5 years |        | Total
|Deposits                           |  | $                                             | 869,918 |           | 75,424 |           | 38,608 |              |       |       | 983,950  
|Short-term borrowings              |  |                                               | 22,387  |           |       |           |       |              |       |       | 22,387   
|Long-term borrowings               |  |                                               |        |           |       |           |       |              | 23,711 |       | 23,711   
|Lease obligations                  |  |                                               | 431     |           | 772    |           | 485    |              | 637    |       | 2,325    
|                                   |  |                                               |         |           |        |           |        |              |        |       |          
|Total contractual cash obligations |  | $                                             | 892,736 |           | 76,196 |           | 39,093 |              | 24,348 |       | 1,032,373
|                                   |  |                                               |         |           |        |           |        |              |        |       |          



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, investing, and deposit taking activities. Management seeks to manage this risk through the use of short-term maturities.



20



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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 March 31, 2004. The expected maturity categories take into consideration historical prepayment experience as well as managements expectations based on the interest rate environment
as of March 31, 2004. 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.



|                                       |  |                                    |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|-------------------------------------- |  | ---------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - | ---------- | - | ------ | ----- |  | - | ---------- | - |  | - | ------- | - |  | - | -------
|                                       |  | Maturing in period ended March 31, |         |   |      |   |        |     
|                                       |  | 2005                               |         |   | 2006 |   |        | 2007 |  |   | 2008   |   |  | 2009 |        |   | Thereafter |   |        | Total |  |   | Fair Value
|                                       |  | (Dollars in thousands)            
|Assets                                 |  |                                    |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Loans:                                 |  |                                    |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                             |  | $                                  | 96,780  |   |      | $ | 58,404 |      |  | $ | 46,606 |   |  | $    | 11,487 |   |            | $ | 12,956 |       |  | $ | 5,218      |   |  | $ | 231,451 |   |  | $ | 229,170
|Average rate (%)                       |  |                                    | 8.06    | % |      |   | 7.70   | %    |  |   | 7.47   | % |  |      | 6.93   | % |            |   | 6.52   | %     |  |   | 7.51       | % |  |   | 7.70    | % |  |   |        
|                                       |  |                                    |         |   |      |   |        |     
|Variable rate                          |  | $                                  | 267,976 |   |      | $ | 59,558 |      |  | $ | 61,341 |   |  | $    | 18,635 |   |            | $ | 16,312 |       |  | $ | 105,321    |   |  | $ | 529,143 |   |  | $ | 529,143
|Average rate (%)                       |  |                                    | 4.85    | % |      |   | 4.83   | %    |  |   | 4.76   | % |  |      | 4.64   | % |            |   | 4.64   | %     |  |   | 4.53       | % |  |   | 4.76    | % |  |   |        
|                                       |  |                                    |         |   |      |   |        |     
|Investment securities (1):             |  |                                    |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                             |  | $                                  | 134,881 |   |      | $ | 35,036 |      |  | $ | 65     |   |  |      |       |   |            |   |       |       |  | $ | 105        |   |  | $ | 170,087 |   |  | $ | 170,453
|Average rate (%)                       |  |                                    | 1.58    | % |      |   | 1.93   | %    |  |   | 1.60   | % |  |      |       |   |            |   |       |       |  |   | 3.84       | % |  |   | 1.66    | % |  |   |        
|                                       |  |                                    |         |   |      |   |        |     
|Liabilities                            |  |                                    |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Savings and interest bearing checking: |  |                                    |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                             |  | $                                  | 354,571 |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  | $ | 354,571 |   |  | $ | 354,571
|Average rate (%)                       |  |                                    | 0.26    | % |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  |   | 0.26    | % |  |   |        
|                                       |  |                                    |         |   |      |   |        |     
|Certificates of deposit:               |  |                                    |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                             |  | $                                  | 321,159 |   |      | $ | 55,627 |      |  | $ | 19,796 |   |  | $    | 38,608 |   |            |   |       |       |  |   |           |   |  | $ | 435,190 |   |  | $ | 440,312
|Average rate (%)                       |  |                                    | 1.87    | % |      |   | 2.81   | %    |  |   | 2.82   | % |  |      | 3.79   | % |            |   |       |       |  |   |           |   |  |   | 2.20    | % |  |   |        
|                                       |  |                                    |         |   |      |   |        |     
|Short-term obligations:                |  |                                    |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Variable rate                          |  | $                                  | 22,387  |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  | $ | 22,387  |   |  | $ | 22,387 
|Average rate (%)                       |  |                                    | 0.79    | % |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  |   | 0.79    | % |  |   |        
|                                       |  |                                    |         |   |      |   |        |     
|Long-term obligations:                 |  |                                    |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                             |  |                                    |        |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  | $ | 23,711     |   |  | $ | 23,711  |   |  | $ | 24,541 
|Average rate (%)                       |  |                                    |        |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   | 8.50       | % |  |   | 8.50    | % |  |   |        

---

|(1) | Marketable equity securities with a cost of approximately $3,398,531 and a fair value of approximately $14,438,384 have been excluded from this table. In addition, Federal Home Loan
Bank stock has been excluded from this table with a cost and fair value of $2,604,800.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest Sensitivity. The table below presents BancShares interest sensitivity position at March 31, 2004. 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 March 31, 2004, BancShares had a positive one-year cumulative gap position of 13.49% and a positive total cumulative gap position of 19.83%. At December 31, 2003, BancShares had a one-year positive cumulative
gap position of 9.45% and a total positive cumulative gap position of 18.12%. In an increasing rate environment there would be a positive effect on the gap due to assets repricing faster than liabilities which would cause interest income to increase
faster than interest expense.



21



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|                                                                     |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|-------------------------------------------------------------------- |  | ------------------- | ------- | - | -------------------- | - | ------- | --------------------- |  | - | ---------------------- | - |  | ------------------------ | ------- | - | ------------------- | - | ------- | ----- |  | - | ------- | - |  | - | --------- | -
|                                                                     |  | March 31, 2004      |        
|                                                                     |  | 1-30 Days Sensitive |         |   | 31-90 Days Sensitive |   |         | 91-180 Days Sensitive |  |   | 181-365 Days Sensitive |   |  | Total One-Year Sensitive |         |   | Total Non Sensitive |   |         | Total | 
|Assets:                                                              |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Loans                                                                |  | $                   | 540,386 |   |                      | $ | 14,274  |                       |  | $ | 24,594                 |   |  | $                        | 40,128  |   |                     | $ | 619,382 |       |  | $ | 141,212 |   |  | $ | 760,594   |  
|Investment securities                                                |  |                     | 5,003   |   |                      |   | 49,966  |                       |  |   | 34,995                 |   |  |                          | 44,917  |   |                     |   | 134,881 |       |  |   | 49,644  |   |  |   | 184,525   |  
|Overnight funds sold                                                 |  |                     | 60,600  |   |                      |   |        |                       |  |   |                       |   |  |                          |        |   |                     |   | 60,600  |       |  |   |        |   |  |   | 60,600    |  
|Other                                                                |  |                     |        |   |                      |   |        |                       |  |   |                       |   |  |                          |        |   |                     |   |        |       |  |   | 2,605   |   |  |   | 2,605     |  
|Interest bearing deposits in other banks                             |  |                     | 34,144  |   |                      |   | 100     |                       |  |   |                       |   |  |                          |        |   |                     |   | 34,244  |       |  |   |        |   |  |   | 34,244    |  
|                                                                     |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Total interest earning assets                                        |  | $                   | 640,133 |   |                      | $ | 64,340  |                       |  | $ | 59,589                 |   |  | $                        | 85,045  |   |                     | $ | 849,107 |       |  | $ | 193,461 |   |  | $ | 1,042,568 |  
|                                                                     |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Liabilities:                                                         |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Savings and checking with interest                                   |  | $                   | 216,299 |   |                      | $ |        |                       |  | $ |                       |   |  | $                        |        |   |                     | $ | 216,299 |       |  | $ |        |   |  | $ | 216,299   |  
|Money market savings                                                 |  |                     | 138,272 |   |                      |   |        |                       |  |   |                       |   |  |                          |        |   |                     |   | 138,272 |       |  |   |        |   |  |   | 138,272   |  
|Time deposits                                                        |  |                     | 73,179  |   |                      |   | 75,024  |                       |  |   | 99,600                 |   |  |                          | 83,716  |   |                     |   | 331,519 |       |  |   | 103,671 |   |  |   | 435,190   |  
|Short-term borrowings                                                |  |                     | 22,387  |   |                      |   |        |                       |  |   |                       |   |  |                          |        |   |                     |   | 22,387  |       |  |   |        |   |  |   | 22,387    |  
|Long-term borrowings                                                 |  |                     |        |   |                      |   |        |                       |  |   |                       |   |  |                          |        |   |                     |   |        |       |  |   | 23,711  |   |  |   | 23,711    |  
|                                                                     |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Total interest bearing liabilities                                   |  | $                   | 450,137 |   |                      | $ | 75,024  |                       |  | $ | 99,600                 |   |  | $                        | 83,716  |   |                     | $ | 708,477 |       |  | $ | 127,382 |   |  | $ | 835,859   |  
|                                                                     |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Interest-sensitivity gap                                             |  | $                   | 189,996 |   |                      | $ | (10,684 | )                     |  | $ | (40,011                | ) |  | $                        | 1,329   |   |                     | $ | 140,630 |       |  | $ | 66,079  |   |  | $ | 206,709   |  
|                                                                     |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Cumulative interest sensitivity gap                                  |  | $                   | 189,996 |   |                      | $ | 179,312 |                       |  | $ | 139,301                |   |  | $                        | 140,630 |   |                     | $ | 140,630 |       |  | $ | 206,709 |   |  | $ | 206,709   |  
|Cumulative interest sensitivity gap to total interest earning assets |  |                     | 18.22   | % |                      |   | 17.20   | %                     |  |   | 13.36                  | % |  |                          | 13.49   | % |                     |   | 13.49   | %     |  |   | 19.83   | % |  |   | 19.83     | %



Accounting and Other Matters.



Refer to Note 2, Adoption of New Accounting Standards in the
Notes to Consolidated Financial Statements.



Forward-Looking Statements



This discussion may contain statements that could be deemed
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to risks and uncertainties. Forward-looking statements are
statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of the qualifying words (and their
derivatives) such as expect, believe, estimate, plan, project, anticipate, or other statements concerning opinions or 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.



22



---

ITEM 4. CONTROLS AND PROCEDURES



As of March 31, 2004, an evaluation was carried out under the supervision and with the participation of BancShares
management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that
BancShares disclosure controls and procedures were effective as of March 31, 2004 to ensure that information required to be disclosed by BancShares in reports that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no significant changes in BancShares internal control over financial reporting during the most recent
quarter that have materially affected, or are reasonably likely to materially affect, BancShares internal control over financial reporting.



PART II. OTHER INFORMATION



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



The annual meeting of BancShares shareholders was held on January 26, 2004. At the meeting, the shareholders elected a complete board of directors
consisting of the eight individuals named below, and ratified the reappointment of KPMG LLP as BancShares independent public accountants for 2004.



The results of voting at the annual meeting were as follows:



1. Election of Directors:



|                       |  |             |  |               
|---------------------- |  | ----------- |  | --------------
|Nominee                |  | Votes For |  | Votes Withheld
|F. Ray Allen           |  | 26,705      |  | 0             
|Haywood A. Lane, Jr.   |  | 26,705      |  | 0             
|D. Gary McRae          |  | 26,705      |  | 0             
|Wallace H. Mitchell    |  | 26,705      |  | 0             
|Sam C. Riddle, Jr.     |  | 26,705      |  | 0             
|David E. Royal         |  | 26,705      |  | 0             
|Ernest W. Whitley, Jr. |  | 26,705      |  | 0             
|Billy T. Woodard       |  | 26,705      |  | 0             



2. Ratification of
appointment of independent accountants:



|            |  |                 |  |        
|----------- |  | --------------- |  | -------
|Votes For |  | Votes Against |  | Abstain
|26,665      |  | 0               |  | 40     



ITEM 6. EXHIBITS AND REPORTS ON
FORM 8K



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



|31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- | ------------------------------------------------------------------------------------------------------

|31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- | ------------------------------------------------------------------------------------------------------

|32 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | No reports on Form 8-K were filed during the quarter ended March 31, 2004.
|--- | --------------------------------------------------------------------------



23



---

SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                   |  |                                  |  |                                      
|------------------ |  | -------------------------------- |  | -------------------------------------
|                   |  | FIDELITY BANCSHARES (N.C.), INC.
|                   |  |                                 
|Dated: May 7, 2004 |  | By:                              |  | /s/ Mary W. Willis                   
|                   |  |                                  |  | Mary W. Willis                       
|                   |  |                                  |  | Chief Financial Officer and Treasurer



24



---

EXHIBIT INDEX



|31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- | ------------------------------------------------------------------------------------------------------

|31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- | ------------------------------------------------------------------------------------------------------

|32 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25