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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

The Securities Exchange Act of 1934



For the quarterly period ended June 30, 2003



Commission File Number: 001-15089



Fidelity BancShares (N.C.), Inc.

(Exact name of Registrant as specified in its charter)



|Delaware                                                       |  | 56-1586543                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(state or other jurisdiction of 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)



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 August 13, 2003)



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PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS





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



CONSOLIDATED BALANCE SHEETS



|                                                                                                     |  | June 30,    |               |   | December 31, |   |               | June 30,                         | 
|---------------------------------------------------------------------------------------------------- |  | ----------- | ------------- | - | ------------ | - | ------------- | -------------------------------- | 
|                                                                                                     |  | 2003        |               |   | 2002         |   |               | 2002                             | 
|                                                                                                     |  | (unaudited) |               |   |              |   |               | (unaudited,Restated- see Note 1) | 
|Assets                                                                                               |  |             |               |   |              |   |               |                                  | 
|Cash and due from banks                                                                              |  | $           | 47,119,163    |   |              | $ | 47,809,871    |                                  | 
|Interest bearing deposits in other banks                                                             |  |             | 48,892,845    |   |              |   | 32,106,848    |                                  | 
|Overnight funds sold                                                                                 |  |             | 79,100,000    |   |              |   | 50,800,000    |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Total cash and cash equivalents                                                                      |  |             | 175,112,008   |   |              |   | 130,716,719   |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Investment securities:                                                                               |  |             |               |   |              |   |               |                                  | 
|Held to maturity (estimated fair value of $160,166,527, $94,622,654, and $118,545,700, respectively) |  |             | 159,796,826   |   |              |   | 94,085,650    |                                  | 
|Available for sale (cost of $3,407,438, $3,468,310, and $3,566,009, respectively)                    |  |             | 12,305,577    |   |              |   | 11,512,609    |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Total investment securities                                                                          |  |             | 172,102,403   |   |              |   | 105,598,259   |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Loans                                                                                                |  |             | 743,223,261   |   |              |   | 729,101,387   |                                  | 
|Allowance for loan losses                                                                            |  |             | (12,346,255   | ) |              |   | (11,838,076   | )                                | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Loans, net                                                                                           |  |             | 730,877,006   |   |              |   | 717,263,311   |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Federal Home Loan Bank of Atlanta stock, at cost                                                     |  |             | 2,656,700     |   |              |   | 2,467,600     |                                  | 
|Premises and equipment, net                                                                          |  |             | 36,600,786    |   |              |   | 34,590,338    |                                  | 
|Accrued interest receivable                                                                          |  |             | 3,013,204     |   |              |   | 3,588,368     |                                  | 
|Intangible assets                                                                                    |  |             | 24,438,379    |   |              |   | 17,002,830    |                                  | 
|Other assets                                                                                         |  |             | 3,412,358     |   |              |   | 2,972,759     |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Total assets                                                                                         |  | $           | 1,148,212,844 |   |              | $ | 1,014,200,184 |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Liabilities and Shareholders Equity                                                                 |  |             |               |   |              |   |               |                                  | 
|Deposits:                                                                                            |  |             |               |   |              |   |               |                                  | 
|Noninterest-bearing demand deposits                                                                  |  | $           | 188,891,823   |   |              | $ | 156,932,202   |                                  | 
|Savings and interest-bearing deposits                                                                |  |             | 359,509,538   |   |              |   | 318,460,309   |                                  | 
|Time deposits                                                                                        |  |             | 446,140,650   |   |              |   | 393,940,013   |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Total deposits                                                                                       |  |             | 994,542,011   |   |              |   | 869,332,524   |                                  | 
|Short-term borrowings                                                                                |  |             | 26,779,487    |   |              |   | 22,591,378    |                                  | 
|Long-term borrowings                                                                                 |  |             | 23,000,000    |   |              |   | 23,000,000    |                                  | 
|Accrued interest payable                                                                             |  |             | 3,309,702     |   |              |   | 3,515,541     |                                  | 
|Other liabilities                                                                                    |  |             | 4,020,784     |   |              |   | 3,425,103     |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Total liabilities                                                                                    |  |             | 1,051,651,984 |   |              |   | 921,864,546   |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Shareholders equity:                                                                                |  |             |               |   |              |   |               |                                  | 
|Common stock ($25 par value; 29,200 shares authorized; 28,011 shares issued and outstanding)         |  |             | 700,275       |   |              |   | 700,275       |                                  | 
|Surplus                                                                                              |  |             | 6,163,380     |   |              |   | 6,163,380     |                                  | 
|Accumulated other comprehensive income                                                               |  |             | 5,368,563     |   |              |   | 4,866,801     |                                  | 
|Retained earnings                                                                                    |  |             | 84,328,642    |   |              |   | 80,605,182    |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Total shareholders equity                                                                           |  |             | 96,560,860    |   |              |   | 92,335,638    |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 
|Total liabilities and shareholders equity                                                           |  | $           | 1,148,212,844 |   |              | $ | 1,014,200,184 |                                  | 
|                                                                                                     |  |             |               |   |              |   |               |                                  | 



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 June 30, |            |                        | Six months ended June 30, |  
|--------------------------------------------------- |  | --------------------------- | ---------- | ---------------------- | ------------------------- | -
|                                                    |  | 2003                        |            | 2002                   |                           |  
|                                                    |  |                             |            | (Restated- see Note 1) |                           |  
|Interest income: Interest and fees on loans         |  | $                           | 11,768,406 |                        | 12,726,068                |  
|Interest and dividends on investment securities:    |  |                             |            |                        |                           |  
|Taxable interest income                             |  |                             | 554,616    |                        | 1,047,637                 |  
|Dividend income                                     |  |                             | 66,579     |                        | 69,236                    |  
|Interest on overnight funds sold                    |  |                             | 163,863    |                        | 119,406                   |  
|                                                    |  |                             |            |                        |                           |  
|Total interest income                               |  |                             | 12,553,464 |                        | 13,962,347                |  
|                                                    |  |                             |            |                        |                           |  
|Interest expense:                                   |  |                             |            |                        |                           |  
|Deposits                                            |  |                             | 3,083,684  |                        | 4,220,215                 |  
|Short-term borrowings                               |  |                             | 44,798     |                        | 61,695                    |  
|Long-term borrowings                                |  |                             | 488,750    |                        | 488,750                   |  
|                                                    |  |                             |            |                        |                           |  
|Total interest expense                              |  |                             | 3,617,232  |                        | 4,770,660                 |  
|                                                    |  |                             |            |                        |                           |  
|Net interest income                                 |  |                             | 8,936,232  |                        | 9,191,687                 |  
|Provision for loan losses                           |  |                             | 388,000    |                        | 700,000                   |  
|                                                    |  |                             |            |                        |                           |  
|Net interest income after provision for loan losses |  |                             | 8,548,232  |                        | 8,491,687                 |  
|                                                    |  |                             |            |                        |                           |  
|Noninterest income:                                 |  |                             |            |                        |                           |  
|Service charges on deposit accounts                 |  |                             | 1,620,286  |                        | 1,637,208                 |  
|Other service charges and fees                      |  |                             | 1,151,642  |                        | 946,352                   |  
|Other income                                        |  |                             | 78,183     |                        | 50,607                    |  
|Loss on marketable equity securities                |  |                             |           |                        | (71,068                   | )
|                                                    |  |                             |            |                        |                           |  
|Total noninterest income                            |  |                             | 2,850,111  |                        | 2,563,099                 |  
|                                                    |  |                             |            |                        |                           |  
|Noninterest expense:                                |  |                             |            |                        |                           |  
|Salaries and employee benefits                      |  |                             | 4,657,023  |                        | 4,575,916                 |  
|Occupancy and equipment                             |  |                             | 1,203,020  |                        | 1,212,521                 |  
|Data processing                                     |  |                             | 827,877    |                        | 809,441                   |  
|Amortization of intangibles                         |  |                             | 77,048     |                        | 77,048                    |  
|Other expense                                       |  |                             | 1,187,841  |                        | 1,158,124                 |  
|Impairment loss on fixed assets                     |  |                             |           |                        | 143,224                   |  
|                                                    |  |                             |            |                        |                           |  
|Total noninterest expense                           |  |                             | 7,952,809  |                        | 7,976,274                 |  
|                                                    |  |                             |            |                        |                           |  
|Net income before income taxes                      |  |                             | 3,445,534  |                        | 3,078,512                 |  
|Income tax expense                                  |  |                             | 1,331,141  |                        | 1,099,138                 |  
|                                                    |  |                             |            |                        |                           |  
|Net income                                          |  | $                           | 2,114,393  |                        | 1,979,374                 |  
|                                                    |  |                             |            |                        |                           |  
|Per share information:                              |  |                             |            |                        |                           |  
|Net income                                          |  | $                           | 75.48      |                        | 70.66                     |  
|Cash dividends declared                             |  | $                           | 8.00       |                        | 8.00                      |  
|Weighted average shares outstanding                 |  |                             | 28,011     |                        | 28,011                    |  



3



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



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(unaudited)



|                                                                                                 |  | Common Stock |   |  |        |         |   | Accumulatedother comprehensive |   |           | Retained |  |   | Comprehensive |   |  | Total shareholders |           
|------------------------------------------------------------------------------------------------ |  | ------------ | - |  | ------ | ------- | - | ------------------------------ | - | --------- | -------- |  | - | ------------- | - |  | ------------------- | ----------
|                                                                                                 |  | Shares       |   |  | Amount |         |   | Surplus                        |   |           | income   |  |   | earnings      |   |  | income              |           
|Balance December 31, 2001                                                                        |  | 28,026       |   |  | $      | 700,650 |   |                                | $ | 6,166,681 |          |  | $ | 4,817,106     |   |  | $                   | 73,345,948
|                                                                                                 |  |              |   |  |        |         |   |                                |   |           |          |  |   |               |   |  |                     |           
|Net income (Restated-see Note 1)                                                                 |  |             |   |  |        |        |   |                                |   |          |          |  |   |              |   |  |                     | 3,819,822 
|Cash dividends ($16.00 per share)                                                                |  |             |   |  |        |        |   |                                |   |          |          |  |   |              |   |  |                     | (448,296  
|Purchase and retirement of common stock                                                          |  | (15          | ) |  |        | (375    | ) |                                |   | (3,301    | )        |  |   |              |   |  |                     | (33,824   
|Unrealized gain on securities available for sale, net of deferred taxes of $548,714              |  |             |   |  |        |        |   |                                |   |          |          |  |   | 840,434       |   |  |                     |          
|                                                                                                 |  |              |   |  |        |         |   |                                |   |           |          |  |   |               |   |  |                     |           
|Comprehensive income                                                                             |  |              |   |  |        |         |   |                                |   |           |          |  |   |               |   |  |                     |           
|                                                                                                 |  |              |   |  |        |         |   |                                |   |           |          |  |   |               |   |  |                     |           
|Balance June 30, 2002                                                                            |  | 28,011       |   |  | $      | 700,275 |   |                                | $ | 6,163,380 |          |  | $ | 5,657,540     |   |  | $                   | 76,683,650
|                                                                                                 |  |              |   |  |        |         |   |                                |   |           |          |  |   |               |   |  |                     |           
|Balance December 31, 2002                                                                        |  | 28,011       |   |  | $      | 700,275 |   |                                | $ | 6,163,380 |          |  | $ | 4,866,801     |   |  | $                   | 80,605,182
|                                                                                                 |  |              |   |  |        |         |   |                                |   |           |          |  |   |               |   |  |                     |           
|Net income                                                                                       |  |             |   |  |        |        |   |                                |   |          |          |  |   |              |   |  |                     | 4,171,636 
|Cash dividends ($16.00 per share)                                                                |  |             |   |  |        |        |   |                                |   |          |          |  |   |              |   |  |                     | (448,176  
|Unrealized gain on securities available for sale, net of deferred taxes of $337,266              |  |             |   |  |        |        |   |                                |   |          |          |  |   | 516,573       |   |  |                     |          
|Additional pension charge related to unfunded pension liability, net of deferred taxes of $9,664 |  |             |   |  |        |        |   |                                |   |          |          |  |   | (14,811       | ) |  |                     |          
|                                                                                                 |  |              |   |  |        |         |   |                                |   |           |          |  |   |               |   |  |                     |           
|Comprehensive income                                                                             |  |              |   |  |        |         |   |                                |   |           |          |  |   |               |   |  |                     |           
|                                                                                                 |  |              |   |  |        |         |   |                                |   |           |          |  |   |               |   |  |                     |           
|Balance June 30, 2003                                                                            |  | 28,011       |   |  | $      | 700,275 |   |                                | $ | 6,163,380 |          |  | $ | 5,368,563     |   |  | $                   | 84,328,642
|                                                                                                 |  |              |   |  |        |         |   |                                |   |           |          |  |   |               |   |  |                     |           



See accompanying notes
to consolidated financial statements.



4



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



CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                                                      |  | Six months ended June 30, |             
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------------
|                                                                                                                      |  | 2003                      |             
|                                                                                                                      |  |                           |             
|Cash flows from operating activities:                                                                                 |  |                           |             
|Net income                                                                                                            |  | $                         | 4,171,636   
|Adjustments to reconcile net income to net cash provided by operating activities:                                     |  |                           |             
|Depreciation and amortization                                                                                         |  |                           | 1,286,056   
|(Accretion) amortization on investment securities                                                                     |  |                           | (382,480    
|Gain on disposition of premises and equipment                                                                         |  |                           | (29,974     
|Impairment loss on fixed assets                                                                                       |  |                           |            
|Provision for loan losses                                                                                             |  |                           | 588,000     
|Impairment loss on marketable equity securities                                                                       |  |                           | 65,488      
|Loss on sale of securities available for sale                                                                         |  |                           |            
|Gain on other real estate                                                                                             |  |                           | (60,294     
|Decrease in accrued interest receivable                                                                               |  |                           | 575,164     
|Increase in other assets, net                                                                                         |  |                           | (303,503    
|Increase in other liabilities, net                                                                                    |  |                           | 214,816     
|Decrease in accrued interest payable                                                                                  |  |                           | (205,839    
|                                                                                                                      |  |                           |             
|Net cash provided by operating activities                                                                             |  |                           | 5,919,070   
|                                                                                                                      |  |                           |             
|Cash flows from investing activities:                                                                                 |  |                           |             
|Purchase of securities held to maturity                                                                               |  |                           | (204,328,860
|Purchase of securities available for sale                                                                             |  |                           | (6,224      
|Proceeds from sale of securities available for sale                                                                   |  |                           | 1,607       
|Proceeds from maturities and issuer calls of securities held to maturity                                              |  |                           | 139,000,164 
|Proceeds from sales of other real estate owned and repossessed assets                                                 |  |                           | 258,500     
|Purchase of FHLB of Atlanta stock                                                                                     |  |                           | (189,100    
|Net decrease (increase) in loans                                                                                      |  |                           | 16,872,698  
|Purchase of premises and equipment                                                                                    |  |                           | (1,860,914  
|Net cash received on branch purchases                                                                                 |  |                           | 74,506,426  
|                                                                                                                      |  |                           |             
|Net cash provided (used) by investing activities                                                                      |  |                           | 24,254,297  
|                                                                                                                      |  |                           |             
|Cash flows from financing activities:                                                                                 |  |                           |             
|Net increase in deposits                                                                                              |  |                           | 12,237,924  
|Net increase (decrease) in short-term borrowings                                                                      |  |                           | 2,432,174   
|Cash dividends paid                                                                                                   |  |                           | (448,176    
|Purchase and retirement of common stock                                                                               |  |                           |            
|                                                                                                                      |  |                           |             
|Net cash provided (used) by financing activities                                                                      |  |                           | 14,221,922  
|                                                                                                                      |  |                           |             
|Net increase (decrease) in cash and cash equivalents                                                                  |  |                           | 44,395,289  
|Cash and cash equivalents at beginning of year                                                                        |  |                           | 130,716,719 
|                                                                                                                      |  |                           |             
|Cash and cash equivalents at end of period                                                                            |  | $                         | 175,112,008 
|                                                                                                                      |  |                           |             
|Supplemental disclosures of cash flow information:                                                                    |  |                           |             
|Cash paid during the period for interest                                                                              |  | $                         | 7,740,084   
|                                                                                                                      |  |                           |             
|Cash paid during the period for income taxes                                                                          |  | $                         | 2,934,047   
|                                                                                                                      |  |                           |             
|Supplemental disclosure of noncash financing and investing activities:                                                |  |                           |             
|Unrealized gains on available-for-sale securities, net of deferred tax effects of $337,266 and $548,714,
respectively |  | $                         | 516,573     
|                                                                                                                      |  |                           |             
|Transfer of foreclosed loans to other real estate and repossessed assets                                              |  | $                         | 305,514     
|                                                                                                                      |  |                           |             



See accompanying notes
to consolidated financial statements.



5



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

Notes to Consolidated Financial Statements



Note 1. Basis of Presentation



Fidelity BancShares (N.C.), Inc. (BancShares) is the holding company for The Fidelity Bank (the Bank), which operates 66 branches in North
Carolina and Virginia, and FIDBANK Capital Trust I (the Trust), a statutory business trust created under the laws of the State of Delaware that issued $23.0 million of 8.50% Capital Securities (the Capital Securities) in June
1999 maturing in 2029. The Bank also has two wholly owned subsidiaries, Fidelity Properties, Inc. and TFB Financial Services.



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



In the opinion of management, the consolidated financial statements contain
all material adjustments necessary to present fairly the consolidated financial position of BancShares as of and for each of the periods presented, including the restatement of 2002 for the application of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets upon adoption of Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions (see Note 2). All other 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 2003. 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 141, Business Combinations, and 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. 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. 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.



6



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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 earnings per share, after-tax), of amortization expense for the nine months ended September 30, 2002, including $568,000 ($361,000 or $12.88 earnings per share, after tax) for the six months
ended June 30, 2002 and $284,000 ($180,000 or $6.44 earnings per share after tax) for the three months ended June 30, 2002. In accordance with Statement 147, BancShares performed a transitional impairment test of this goodwill in the fourth quarter
of 2002. As a result of this testing, no impairment charges were recorded. BancShares will perform an annual impairment test of the goodwill in 2003 and thereafter.



The following is a summary of the gross carrying amount and accumulated amortization of amortized intangible assets as of June 30, 2003 and
December 31, 2002 and the carrying amount of unamortized intangible assets as of June 30, 2003 and December 31, 2002.



|                               |  | June 30, 2003        |        | December 31, 2002      
|------------------------------ |  | -------------------- | ------ | -----------------------
|(Dollars in thousands)         |  | Gross CarryingAmount |        | AccumulatedAmortization
|Amortized intangible assets:   |  |                      |        |                        
|Branch acquisitions            |  | $                    | 7,746  |                        
|                               |  |                      |        |                        
|Unamortized intangible assets: |  |                      |        |                        
|Goodwill                       |  | $                    | 19,165 |                        
|                               |  |                      |        |                        



The scheduled amortization expense for
intangible assets for the years ended December 31, 2003, 2004, 2005, 2006, 2007 and thereafter is as follows:



|(Dollars in thousands) |  | ScheduledAmortization Expense
|---------------------- |  | -----------------------------
|2003                   |  | $                            
|2004                   |  |                              
|2005                   |  |                              
|2006                   |  |                              
|2007                   |  |                              
|2008 and after         |  |                              
|                       |  |                              
|Total                  |  | $                            
|                       |  |                              



In August 2001, the Financial
Accounting Standards Board (the 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 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



7



---

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 will not be 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 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 Financial 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 June 30, 2003 is $3,672,000. At June 30, 2003, 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 FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46). FIN 46 addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. FIN 46 applies
immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after January 31, 2003. FIN 46 applies in the first fiscal year or interim
period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The application of FIN 46 is not expected to have an impact on BancShares
consolidated financial statements.



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.



8



---

Note 4.Allowance for Loan Losses



|                             |  | (Unaudited) Six months ended June 30, |           
|---------------------------- |  | ------------------------------------- | ----------
|                             |  | 2003                                  |           
|Balance at beginning of year |  | $                                     | 11,838,076
|Provision for loan losses    |  |                                       | 588,000   
|Loans charged off            |  |                                       | (328,936  
|Loan recoveries              |  |                                       | 249,115   
|                             |  |                                       |           
|Balance at end of the period |  | $                                     | 12,346,255
|                             |  |                                       |           



A summary of the allowance for loan
losses follows:



At June 30, 2003 the Bank had $758,000 of nonperforming assets
which included $478,000 of impaired loans, all of which were on nonaccrual status, and $280,000 of other real estate and repossessed assets. At December 31, 2002, the Bank had $757,000 of nonperforming assets which included $724,000 of impaired
loans, all of which were on nonaccrual status, and $33,000 of other real estate owned. At June 30, 2003, and December 31, 2002 the Bank had $1,460,000 and $424,000, respectively, of accruing loans 90 days or more past due.



Note 5. Long Term Borrowings



The $23.0 million long-term obligations at June 30, 2003 are Capital Trust Securities of the
Trust. These long-term obligations, which qualify as Tier 1 Capital for BancShares, bear interest at 8.50% and mature in 2029. BancShares may redeem the long-term obligations in whole or in part on or after June 30, 2004. The sole asset of the Trust
is $23.7 million of 8.50% Junior Subordinated Debentures of BancShares due 2029. BancShares has entered into a guaranty agreement which, when taken together with its obligations under the trust agreement under which the Trust exists, the junior
subordinated debentures, and the indenture under which the debentures were issued, provides a full and unconditional guarantee on a subordinated basis by BancShares of the Trusts payment of distributions and other payments on the capital
securities.



Note 6. Branch Acquisitions



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 (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 $114.7 million, respectively. The total purchase price was $7.6 million. Of
this, $3.1 million was determined to be a core deposit intangible asset and $4.5 million was determined to be goodwill. Additional mark to market adjustments are pending final valuations for which there may be possible adjustments in the third
quarter.



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 $65,488. This was a result of unrealized losses that were deemed to be other than temporary. There were no such write downs in the second quarter of 2003.
During the second quarter of 2002, BancShares recognized a gross securities loss of $71,068. This loss was the result of selling certain available for sale equity securities. There were no securities gains or losses recognized in the first quarter
of 2002.



Note 8. Related Parties



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



The first significant shareholder at June 30, 2003, 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.



9



---

These two significant shareholders are directors and executive officers of the Corporation and at June 30, 2003,
beneficially owned 2,530,282 shares, or 28.78%, and 1,384,121 shares, or 15.74%, of the Corporations outstanding Class A common stock, and 651,406 shares, or 38.83%, and 199,477 shares, or 11.89%, of the Corporations outstanding Class B
common stock. The above totals include 472,855 Class A common shares, or 5.38%, and 104,644 Class B Common shares, or 6.24%, 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:



|                                   |  | (Unaudited) Six Months Ended June 30,
|---------------------------------- |  | -------------------------------------
|(Dollars in thousands)             |  | 2003                                 
|Data and item processing           |  | $                                    
|Forms, supplies and equipment      |  |                                      
|Trustee for employee benefit plans |  |                                      
|Other                              |  |                                      
|                                   |  |                                      
|                                   |  | $                                    
|                                   |  |                                      



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 $43,602,810 and $38,454,633 at June 30, 2003 and December 31, 2002, respectively.



BancShares is related through common ownership with Southern Bank and Trust
Co. (Southern) in that the aforementioned two significant shareholders of BancShares and certain of their related parties are also significant shareholders of Southern. BancShares has contracted with Southern to service on its behalf
$3.5 million of BancShares mortgage loans.



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



10



---

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)       |  | 2003          |           |   | 2002         |  
|--------------------------------------------------- |  | ------------- | --------- | - | ------------ | -
|                                                    |  | SecondQuarter |           |   | FirstQuarter |  
|Summary of Operations                               |  |               |           |   |              |  
|Interest income                                     |  | $             | 12,553    |   |              | $
|Interest expense                                    |  |               | 3,617     |   |              |  
|                                                    |  |               |           |   |              |  
|Net interest income                                 |  |               | 8,936     |   |              |  
|Provision for loan losses                           |  |               | 388       |   |              |  
|                                                    |  |               |           |   |              |  
|                                                    |  |               |           |   |              |  
|Net interest income after provision for loan losses |  |               | 8,548     |   |              |  
|Noninterest income                                  |  |               | 2,850     |   |              |  
|Noninterest expense                                 |  |               | 7,953     |   |              |  
|                                                    |  |               |           |   |              |  
|Net income before income taxes                      |  |               | 3,445     |   |              |  
|Income taxes                                        |  |               | 1,331     |   |              |  
|                                                    |  |               |           |   |              |  
|Net income                                          |  | $             | 2,114     |   |              | $
|                                                    |  |               |           |   |              |  
|Selected Period-End Balances                        |  |               |           |   |              |  
|Total assets                                        |  | $             | 1,148,213 |   |              | $
|Investment securities and overnight funds sold      |  |               | 251,202   |   |              |  
|Loans, gross                                        |  |               | 743,223   |   |              |  
|Interest earning assets                             |  |               | 1,045,975 |   |              |  
|Deposits                                            |  |               | 994,542   |   |              |  
|Long-term obligations                               |  |               | 23,000    |   |              |  
|Interest bearing liabilities                        |  |               | 855,430   |   |              |  
|Shareholders equity                                |  |               | 96,561    |   |              |  
|Common shares outstanding                           |  |               | 28,011    |   |              |  
|                                                    |  |               |           |   |              |  
|Selected Average Balances                           |  |               |           |   |              |  
|Total assets                                        |  | $             | 1,025,623 |   |              | $
|Investment securities and overnight funds sold      |  |               | 179,898   |   |              |  
|Loans, gross                                        |  |               | 716,514   |   |              |  
|Interest earning assets                             |  |               | 939,378   |   |              |  
|Deposits                                            |  |               | 875,776   |   |              |  
|Long-term obligations                               |  |               | 23,000    |   |              |  
|Interest bearing liabilities                        |  |               | 765,615   |   |              |  
|Shareholders equity                                |  |               | 96,276    |   |              |  
|Common shares outstanding                           |  |               | 28,011    |   |              |  
|                                                    |  |               |           |   |              |  
|Profitability Ratios                                |  |               |           |   |              |  
|Rate of return (annualized) on:                     |  |               |           |   |              |  
|Total assets                                        |  |               | 0.83      | % |              |  
|Shareholders equity                                |  |               | 8.81      | % |              |  
|Dividend payout ratio (1)                           |  |               | 10.60     | % |              |  
|                                                    |  |               |           |   |              |  
|Liquidity and Capital Ratios (averages)             |  |               |           |   |              |  
|Loans to deposits                                   |  |               | 81.81     | % |              |  
|Shareholders equity to total assets                |  |               | 9.39      | % |              |  
|                                                    |  |               |           |   |              |  
|Per Share of Common Stock                           |  |               |           |   |              |  
|Net income                                          |  | $             | 75.48     |   |              | $
|Cash dividends                                      |  |               | 8.00      |   |              |  
|Book value (2)                                      |  |               | 3,447.25  |   |              |  
|                                                    |  |               |           |   |              |  



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

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



11



---

TABLE 2.



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



|                                                |  | 2003           |           |   | 2002                   |   |            | Increase (decrease) due to: |     
|----------------------------------------------- |  | -------------- | --------- | - | ---------------------- | - | ---------- | --------------------------- | ----
|(Dollars in thousands)                          |  | AverageBalance |           |   | InterestIncome/Expense |   | Yield/Rate |                             |     
|ASSETS                                          |  |                |           |   |                        |   |            |                             |     
|Interest earning assets:                        |  |                |           |   |                        |   |            |                             |     
|Loans (1) (2)                                   |  | $              | 721,871   |   |                        | $ | 23,693     |                             | 6.62
|Taxable investment securities                   |  |                | 108,037   |   |                        |   | 996        |                             | 1.86
|Overnight funds sold                            |  |                | 47,559    |   |                        |   | 271        |                             | 1.15
|Other investments                               |  |                | 14,209    |   |                        |   | 135        |                             | 1.92
|Interest bearing deposits in other banks        |  |                | 37,879    |   |                        |   | 217        |                             | 1.16
|                                                |  |                |           |   |                        |   |            |                             |     
|Total interest earning assets                   |  | $              | 929,555   |   |                        | $ | 25,312     |                             | 5.49
|                                                |  |                |           |   |                        |   |            |                             |     
|Noninterest earning assets:                     |  |                |           |   |                        |   |            |                             |     
|Cash and due from banks                         |  |                | 38,503    |   |                        |   |            |                             |     
|Premises and equipment                          |  |                | 34,726    |   |                        |   |            |                             |     
|Other assets                                    |  |                | 23,862    |   |                        |   |            |                             |     
|Reserve for loan losses                         |  |                | (11,941   | ) |                        |   |            |                             |     
|                                                |  |                |           |   |                        |   |            |                             |     
|Total assets                                    |  | $              | 1,014,705 |   |                        |   |            |                             |     
|                                                |  |                |           |   |                        |   |            |                             |     
|LIABILITIES & EQUITY                            |  |                |           |   |                        |   |            |                             |     
|Interest bearing liabilities:                   |  |                |           |   |                        |   |            |                             |     
|Demand deposits                                 |  | $              | 117,383   |   |                        | $ | 148        |                             | 0.25
|Savings deposits                                |  |                | 201,775   |   |                        |   | 891        |                             | 0.89
|Time deposits                                   |  |                | 394,919   |   |                        |   | 5,410      |                             | 2.76
|Short-term borrowings                           |  |                | 22,858    |   |                        |   | 108        |                             | 0.95
|Long-term borrowings                            |  |                | 23,000    |   |                        |   | 978        |                             | 8.57
|                                                |  |                |           |   |                        |   |            |                             |     
|Total interest bearing liabilities              |  | $              | 759,935   |   |                        | $ | 7,535      |                             | 2.00
|                                                |  |                |           |   |                        |   |            |                             |     
|Noninterest bearing liabilities:                |  |                |           |   |                        |   |            |                             |     
|Demand deposits                                 |  |                | 152,448   |   |                        |   |            |                             |     
|Other liabilities                               |  |                | 7,155     |   |                        |   |            |                             |     
|Shareholders equity                            |  |                | 95,167    |   |                        |   |            |                             |     
|                                                |  |                |           |   |                        |   |            |                             |     
|Total liabilities and equity                    |  | $              | 1,014,705 |   |                        |   |            |                             |     
|                                                |  |                |           |   |                        |   |            |                             |     
|Interest rate spread (3)                        |  |                |           |   |                        |   |            |                             | 3.49
|                                                |  |                |           |   |                        |   |            |                             |     
|Net interest income and net interest margin (4) |  |                |           |   |                        | $ | 17,777     |                             | 3.86
|                                                |  |                |           |   |                        |   |            |                             |     

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

|(2) |  | The average rate on nontaxable loans has been adjusted to a tax equivalent yield using a 39.485% tax rate for 2003 and 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

The taxable equivalent adjustment was approximately $28,000 and $31,000 for the periods in 2003 and 2002, respectively.

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

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



12



---

TABLE 3.



Consolidated Taxable Equivalent Rate/Volume Variance Analysis  Second Quarter



|                                                |  | 2003           |           |   | 2002                   |   |             | Increase (decrease) due to: |     
|----------------------------------------------- |  | -------------- | --------- | - | ---------------------- | - | ----------- | --------------------------- | ----
|(Dollars in thousands)                          |  | AverageBalance |           |   | InterestIncome/Expense |   | Yield/ Rate |                             |     
|ASSETS                                          |  |                |           |   |                        |   |             |                             |     
|Interest earning assets:                        |  |                |           |   |                        |   |             |                             |     
|Loans (1) (2)                                   |  | $              | 716,514   |   |                        | $ | 11,782      |                             | 6.60
|Taxable investment securities                   |  |                | 110,203   |   |                        |   | 437         |                             | 1.59
|Overnight funds sold                            |  |                | 57,691    |   |                        |   | 163         |                             | 1.13
|Other investments                               |  |                | 14,660    |   |                        |   | 67          |                             | 1.83
|Interest bearing deposits in other banks        |  |                | 40,310    |   |                        |   | 118         |                             | 1.17
|                                                |  |                |           |   |                        |   |             |                             |     
|Total interest earning assets                   |  | $              | 939,378   |   |                        | $ | 12,567      |                             | 5.37
|                                                |  |                |           |   |                        |   |             |                             |     
|Noninterest earning assets:                     |  |                |           |   |                        |   |             |                             |     
|Cash and due from banks                         |  |                | 38,900    |   |                        |   |             |                             |     
|Premises and equipment                          |  |                | 34,871    |   |                        |   |             |                             |     
|Other assets                                    |  |                | 24,492    |   |                        |   |             |                             |     
|Reserve for loan losses                         |  |                | (12,018   | ) |                        |   |             |                             |     
|                                                |  |                |           |   |                        |   |             |                             |     
|Total assets                                    |  | $              | 1,025,623 |   |                        |   |             |                             |     
|                                                |  |                |           |   |                        |   |             |                             |     
|LIABILITIES & EQUITY                            |  |                |           |   |                        |   |             |                             |     
|Interest bearing liabilities:                   |  |                |           |   |                        |   |             |                             |     
|Demand deposits                                 |  | $              | 118,521   |   |                        | $ | 63          |                             | 0.21
|Savings deposits                                |  |                | 204,549   |   |                        |   | 421         |                             | 0.83
|Time deposits                                   |  |                | 396,068   |   |                        |   | 2,599       |                             | 2.63
|Short-term borrowings                           |  |                | 23,477    |   |                        |   | 45          |                             | 0.77
|Long-term borrowings                            |  |                | 23,000    |   |                        |   | 489         |                             | 8.53
|                                                |  |                |           |   |                        |   |             |                             |     
|Total interest bearing liabilities              |  | $              | 765,615   |   |                        | $ | 3,617       |                             | 1.89
|                                                |  |                |           |   |                        |   |             |                             |     
|Noninterest bearing liabilities:                |  |                |           |   |                        |   |             |                             |     
|Demand deposits                                 |  |                | 156,638   |   |                        |   |             |                             |     
|Other liabilities                               |  |                | 7,094     |   |                        |   |             |                             |     
|Shareholders equity                            |  |                | 96,276    |   |                        |   |             |                             |     
|                                                |  |                |           |   |                        |   |             |                             |     
|Total liabilities and equity                    |  | $              | 1,025,623 |   |                        |   |             |                             |     
|                                                |  |                |           |   |                        |   |             |                             |     
|Interest rate spread (3)                        |  |                |           |   |                        |   |             |                             | 3.48
|                                                |  |                |           |   |                        |   |             |                             |     
|Net interest income and net interest margin (4) |  |                |           |   |                        | $ | 8,950       |                             | 3.82
|                                                |  |                |           |   |                        |   |             |                             |     

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

|(2) |  | The average rate on nontaxable loans has been adjusted to a tax equivalent yield using a 39.485% tax rate for 2003 and 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

The taxable equivalent adjustment was approximately $14,000 and $15,000 for the years 2003 and 2002, respectively.

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

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



13



---

Introduction



Managements discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of
operations of Fidelity BancShares (N.C.), Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report.
The focus of this discussion concerns BancShares banking subsidiary, The Fidelity Bank (the Bank), which operates 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 six months of 2003, BancShares net income increased $352,000 to $4.2 million from $3.8 million in the six months of 2002, an increase of 9.21%. Net income in the second quarter of 2003 increased $135,000 or 6.82% when
compared to the same period in the prior year. The increase resulted primarily from a decrease in the provision for loan losses and an increase in noninterest income. In addition, BancShares recorded an impairment loss on fixed assets in the second
quarter of 2002 of $143,000, which did not recur in 2003.



Net income per share
for the first six months of 2003 was $148.93, an increase of $12.59 per share or 9.23% from $136.34 per share in 2002. For the second quarter of 2003, net income per share was $75.48, an increase of $4.82 or 6.82%, from $70.66 per share for the
second quarter of 2002. Return on average assets for the first six months of 2003 and 2002 was 0.83% and 0.79%, respectively. For the second quarter of 2003 and 2002, return on average assets was 0.83% and 0.81%, respectively. Return on average
equity for the first six months of 2003 and 2002 was 8.84% and 8.81%, respectively. For the second quarter of 2003 and 2002, return on equity was 8.81% and 8.98%, 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 Tables 2 and 3.



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 $114.7 million, respectively. Due to the timing of this acquisition, results of operations were not significantly impacted.



Net Interest Income. The greatest portion of BancShares earnings
is from net interest income, which is the difference between interest income on interest earning assets and interest paid on deposits and other interest bearing liabilities. The primary factors affecting net interest income are changes in the volume
and yields/rates on interest earning assets and interest bearing liabilities, and the ability to respond to changes in interest rates through asset/liability management. For the first six months of 2003, net interest income was $17.7 million as
compared to $18.1 million for the same period in 2002, a decrease of $381,000 or 2.10%. Of the $381,000 decrease in net interest income, a $1.4 million decrease resulted from interest rate changes on interest earning assets and interest bearing
liabilities, the affect of which was offset by the impact of increases in volume which contributed to a $1.0 million increase in the net interest income. The net interest margin for first six months of 2003 and 2002 was 3.86% and 4.11%,
respectively. Net interest income and net interest margin for the second quarter of 2003 and 2002 were $8.9 million and 3.82% and $9.2 million and 4.14%, respectively.



14



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Interest income for the first six months of 2003 was $25.3 million as compared to $28.1 million in 2002, a decrease of
$2.8 million or 9.91%. The decrease in interest income for the first six months of 2003 over the first six months of 2002 is attributable mainly to a decline in interest rates, which was slightly offset by growth in average earning asset balances.
Interest income from loans amounted to $23.7 million in the first six months of 2003 as compared to $25.2 million in the first six months of 2002, a decrease of $1.6 million or 6.20%. BancShares loan growth is largely due to growth within the
existing branch network as well as the acquisition of four branches in the second quarter of 2003. Earnings from investments and overnight funds sold provided the balance of interest income, contributing $1.6 million and $2.8 million for the first
six months of 2003 and 2002, respectively. Average interest-earning assets for the first six months of 2003 increased to $929.6 million, a 4.28% increase, from $891.3 million in the first six months of 2002. The yield on interest earnings assets for
the first six months of 2003 and 2002 was 5.49% and 6.36%, respectively. Trends in interest earning assets are shown in Tables 2 and 3.



Interest expense for the six months of 2003 was $7.5 million compared to $9.9 million in 2002, a decrease of $2.4 million or 24.16%. The decrease in interest expense in
the first six months of 2003, compared to the first six months of 2002, is attributable to decreased interest rates on deposit balances, primarily time deposits and savings accounts. Average interest bearing deposits increased $19.5 million or
2.81%, from $694.6 million in the first six months of 2002 to $714.1 million in the first six months of 2003. The average rate paid on interest-bearing deposits was 1.82% and 2.56% for the first six months of 2003 and 2002, respectively. Borrowings
contributed $1.1 million in interest expense during the first six months of 2003 as well as the first six months of 2002. The yield on interest bearing liabilities for the first six months of 2003 and 2002 was 2.00% and 2.70%, respectively. Trends
in interest bearing liabilities are shown in Tables 2 and 3.



Asset Quality
and Provision for Loan Losses. Because BancShares loan portfolio represents its largest earning asset, BancShares continually monitors the quality of its loan portfolio. The Bank operates in a diversified economic environment and, in the
opinion of management, is not unduly exposed to any one particular industry. For the second quarter of 2003 and 2002, management added $388,000 and $700,000, respectively, to the allowance for loan losses as provisions for loan losses. The decrease
in the provision for loan losses is primarily attributable to a decline in net charge-offs and lower levels of net loan growth in 2003 compared to 2002. During the first six months of 2003, management charged-off loans totaling $329,000 and had
recoveries of $249,000 resulting in net charge-offs of $80,000. During the same period in 2002, management charged-off $1.3 million in loans and had recoveries of $997,000, resulting in net charge-offs of $325,000. Charge-offs were higher for the
first six months of 2002 than the same period of 2003 due to charge-offs of three real estate loans in 2002. The ratio of allowance for loan losses to loans increased to 1.66% at June 30, 2003 from 1.62% at December 31, 2002. The following table
presents BancShares comparative asset quality ratios:



|                                                                       |  | June 30,2003 |   |  | December 31,2002 |  
|---------------------------------------------------------------------- |  | ------------ | - |  | ---------------- | -
|Ratio of annualized net loans charged off to average loans             |  | 0.02         | % |  | 0.10             | %
|Allowance for loan losses to loans                                     |  | 1.66         |   |  | 1.62             |  
|Non-performing assets to total gross loans and other real estate owned |  | 0.10         |   |  | 0.13             |  
|Non-performing assets to total assets                                  |  | 0.07         |   |  | 0.09             |  



Management considers the June 30, 2003
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 second 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.



15



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BancShares had impaired loans of $478,000 at June 30, 2003 (all of which are on non-accrual status) and $89,000 at June
30, 2002. 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 increased $376,000 or
7.49% for the first six months of 2003 over the first six months of 2002. Noninterest income for the first six months of 2003 includes a gain on the sale of other real estate of $57,000, and increased mortgage commission income of $588,000 for the
first six months of 2003 compared with commissions of $303,000 for the same period in 2002. In the first six months of 2003 and 2002 there were losses taken on certain marketable equity securities. These losses for 2003 and 2002 were $65,488 and
$71,068, respectively. Service charges on deposit accounts and other service charges and fees, increased $280,000 or 5.60% during the first six months of 2003 primarily due to growth in the existing branch network. BancShares average deposits
increased $33.7 million or 4.04% to $866.5 million in the first six months of 2003 from $832.8 million in the first six months of 2002. For the second quarter of 2003, noninterest income increased $287,000 or 11.20% over the same period in 2002.
This was mainly due to an increase in other service charges and fees of $205,000 or 21.69% mainly due to growth in the network. The remainder of the increase was due to a loss on marketable equity securities in the three months ended June 30, 2002
of $71,068, which did not recur in the three months ended June 30, 2003.



Noninterest Expense. Noninterest expense increased $150,000 or 0.95%, from $15.8 million in the first six months of 2002 to $15.9 million in the first six months of 2003, including increases of $178,000 in salaries and employee
benefits, $92,000 in data processing costs, and $31,000 in other expenses, which were offset by a decrease of $9,000 in occupancy and equipment and a decrease of $143,000 in impairment losses on fixed assets. The fluctuations represented increases
of 1.96% in salaries and employee benefits, 5.79% in data processing costs, and 1.34% in other income, which were offset by decreases of 0.37% in occupancy and equipment and 100% in impairment losses over the first six months of 2002.



For the second quarter of 2003, noninterest expense decreased $23,000 or 0.29% over the same
period in 2002. Noninterest expense decreased due to the decrease in impairment losses on fixed assets of $143,000 or 100% as well as a decrease of $10,000 or 0.78% in occupancy and equipment which were offset by increases of $81,000 or 1.77% in
salaries and employee benefits, $18,000 or 2.28% in data processing and $30,000 or 2.57% in other expense. BancShares had an impairment loss of $143,224 in the second quarter of 2002. In May 2002, BancShares analyzed the operations of one branch
since its inception in 1999 and determined that the loss experience would not turn around in the near future. The Board of Directors of BancShares approved to close this branch and at June 30, 2002, BancShares had accrued disposition costs including
$103,000 for losses on fixed assets, $20,000 for lease cancellation fees, and $20,000 for costs to close the branch.



Income Taxes. In the first six months of 2003, BancShares had income tax expense of $2.5 million, an increase of $355,000 or 16.71%, from $2.1 million in the prior
year period. The resulting effective income tax rates, based on the accruals for the six months ended June 30, 2003 and 2002, were 37.30% and 35.76%, respectively. The increase in effective income tax rates is due to a decrease in tax exempt income
from securities held by the Bank.



Capital Resources.



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



Regulatory guidelines define minimum requirements for BancShares leverage capital
ratio. Leverage capital equals total equity and certain long-term borrowings less goodwill and certain other intangibles and is measured relative to total adjusted assets as defined by regulatory guidelines. According to these guidelines,
BancShares leverage ratio at June 30, 2003 was 8.96% as compared to 9.45% at December 31, 2002.



BancShares is also required to meet minimum requirements for risk-based capital (RBC). BancShares assets, including loan commitments and other off-balance sheet items, are weighted according to
federal guidelines for the risk considered inherent in each asset. At June 30, 2003, the Total Capital Ratio was 13.32% as compared to 14.24% at December 31, 2002.



16



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



|(Dollars in thousands) |  | June 30,2003 |         |      | December 31,2002 |  
|---------------------- |  | ------------ | ------- | ---- | ---------------- | -
|Tier 1 capital         |  | $            | 89,739  |      |                  | $
|Total capital          |  |              | 103,487 |      |                  |  
|Leverage capital ratio |  |              | 8.96    | %(1) |                  |  
|Tier 1 capital ratio   |  |              | 11.55   | (1)  |                  |  
|Total capital ratio    |  |              | 13.32   | (1)  |                  |  

| | 
| | 

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



At June 30, 2003, and December 31, 2002, 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 June 30, 2003 and December 31, 2002, outstanding financial instruments whose contract
amounts represent credit risk were as follows:



|                                                                    |  | June 30, 2003 |             | December 31,2002
|------------------------------------------------------------------- |  | ------------- | ----------- | ----------------
|Outstanding commitments to lend, unfunded loans and lines of credit |  | $             | 261,020,043 |                 
|                                                                    |  |               |             |                 
|Standby letters of credit                                           |  | $             | 3,672,178   |                 
|                                                                    |  |               |             |                 



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



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



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.





17



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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 25.07% of deposits at June 30, 2003, an increase from 16.07% at December 31, 2002. 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 26.52% at June 30, 2003, compared to 17.22% at
December 31, 2002.



The consolidated statements of cash flows disclose the
principal sources and uses of cash from operating, investing and financing activities for the six months ended June 30, 2003 and 2002. BancShares has no brokered deposits. Jumbo time deposits are considered to include all time deposits of $100,000
or more. BancShares has never aggressively bid on these deposits. Most jumbo deposit customers have other relationships with the Bank, including savings, demand and other time deposits, and in some cases, loans. At June 30, 2003, and December 31,
2002, jumbo time deposits represented 11.25% and 11.27%, 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 June 30, 2003



|                                   |  | Payments due by period
|---------------------------------- |  | ----------------------
|                                   |  | (dollars in thousands)
|                                   |  | Less than1 year       
|Deposits                           |  | $                     
|Short-term borrowings              |  |                       
|Long-term borrowings               |  |                       
|Lease obligations                  |  |                       
|                                   |  |                       
|Total contractual cash obligations |  | $                     
|                                   |  |                       



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



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



18



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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 June 30, 2003. The expected maturity categories take into consideration historical prepayment experience as well as managements expectations based on the interest rate environment as of June 30, 2003. 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 June 30, |         |   |      |   |        |     
|-------------------------------------- |  | --------------------------------- | ------- | - | ---- | - | ------ | ----
|                                       |  | 2004                              |         |   | 2005 |   |        | 2006
|                                       |  | (Dollars in thousands)           
|Assets                                 |  |                                   |         |   |      |   |        |     
|Loans:                                 |  |                                   |         |   |      |   |        |     
|Fixed rate                             |  | $                                 | 81,704  |   |      | $ | 87,310 |     
|Average rate (%)                       |  |                                   | 8.53    | % |      |   | 7.90   | %   
|                                       |  |                                   |         |   |      |   |        |     
|Variable rate                          |  | $                                 | 226,058 |   |      | $ | 1,681  |     
|Average rate (%)                       |  |                                   | 4.88    | % |      |   | 4.75   | %   
|                                       |  |                                   |         |   |      |   |        |     
|Investment securities (1):             |  |                                   |         |   |      |   |        |     
|Fixed rate                             |  | $                                 | 159,791 |   |      | $ |       |     
|Average rate (%)                       |  |                                   | 1.56    | % |      |   |       |     
|                                       |  |                                   |         |   |      |   |        |     
|Liabilities                            |  |                                   |         |   |      |   |        |     
|Savings and interest bearing checking: |  |                                   |         |   |      |   |        |     
|Fixed rate                             |  | $                                 | 359,510 |   |      |   |       |     
|Average rate (%)                       |  |                                   | 0.34    | % |      |   |       |     
|                                       |  |                                   |         |   |      |   |        |     
|Certificates of deposit:               |  |                                   |         |   |      |   |        |     
|Fixed rate                             |  | $                                 | 302,944 |   |      | $ | 90,165 |     
|Average rate (%)                       |  |                                   | 2.06    | % |      |   | 3.48   | %   
|                                       |  |                                   |         |   |      |   |        |     
|Short-term obligations:                |  |                                   |         |   |      |   |        |     
|Variable rate                          |  | $                                 | 26,779  |   |      |   |       |     
|Average rate (%)                       |  |                                   | 0.65    | % |      |   |       |     
|                                       |  |                                   |         |   |      |   |        |     
|Long-term obligations:                 |  |                                   |         |   |      |   |        |     
|Fixed rate                             |  |                                   |        |   |      |   |       |     
|Average rate (%)                       |  |                                   |        |   |      |   |       |     

---

|(1) |  | Marketable equity securities with a cost of approximately $3,407,438 and a fair value of approximately $12,305,577 have been excluded from this table.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



Interest Sensitivity. The table below presents BancShares interest sensitivity
position at June 30, 2003. The difference between interest sensitive asset and interest sensitive liability repricing within time periods is referred to as the interest rate sensitivity gap. Assets and liabilities with maturities of one year or less
and those that may be adjusted within the period are considered interest-sensitive. The interest-sensitivity position has meaning only as of the date for which it was prepared. Gaps are identified as either positive (interest sensitive assets in
excess of interest sensitive liabilities) or negative (interest sensitive liabilities in excess of interest sensitive assets).



As of June 30, 2003, BancShares had a positive one-year cumulative gap position of 32.56% and a positive total cumulative gap position of 18.22%. At December 31, 2002,
BancShares had a one-year positive cumulative gap position of 23.51% and a total positive cumulative gap position of 17.62%.



19



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|                                                                     |  | June 30, 2003      |        
|-------------------------------------------------------------------- |  | ------------------ | -------
|                                                                     |  | 1-30 DaysSensitive |        
|Assets:                                                              |  |                    |        
|Loans                                                                |  | $                  | 441,422
|Investment securities                                                |  |                    | 19,999 
|Overnight funds sold                                                 |  |                    | 79,100 
|Other                                                                |  |                    |       
|Interest bearing deposits in other banks                             |  |                    | 48,893 
|                                                                     |  |                    |        
|Total interest earning assets                                        |  | $                  | 589,414
|                                                                     |  |                    |        
|Liabilities:                                                         |  |                    |        
|Savings and checking with interest                                   |  | $                  |       
|Money market savings                                                 |  |                    | 147,866
|Time deposits                                                        |  |                    | 56,464 
|Short-term borrowings                                                |  |                    | 26,779 
|Long-term borrowings                                                 |  |                    |       
|                                                                     |  |                    |        
|Total interest bearing liabilities                                   |  | $                  | 231,109
|                                                                     |  |                    |        
|Interest-sensitivity gap                                             |  | $                  | 358,305
|                                                                     |  |                    |        
|Cumulative interest sensitivity gap                                  |  | $                  | 358,305
|Cumulative interest sensitivity gap to total interest earning assets |  |                    | 34.26  



Accounting and Other Matters.



In July 2001, the FASB issued Statement 141, Business
Combinations, and 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. 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. 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



20



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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 earnings per share, after-tax), of amortization expense for the nine months ended September 30, 2002, including $568,000 ($361,000 or $12.88 earnings per share, after tax) for the six months ended June
30, 2002 and $284,000 ($180,000 or $6.44 earnings per share after tax) for the three months ended June 30, 2002. In accordance with Statement 147, BancShares performed a transitional impairment test of this goodwill in the fourth quarter of 2002. As
a result of this testing, no impairment charges were recorded. BancShares will perform an annual impairment test of the goodwill in 2003 and thereafter.



In August 2001, the Financial Accounting Standards Board (the 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 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 will not be 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 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 Financial 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



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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 June 30,
2003 is $3,672,000. At June 30, 2003, 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 FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51 (FIN 46). FIN 46 addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. FIN 46 applies immediately to variable interests in
variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after January 31, 2003. FIN 46 applies in the first fiscal year or interim period beginning after June 15, 2003,
to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The application of FIN 46 is not expected to have an impact on BancShares 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.



ITEM 4. CONTROLS AND PROCEDURES



As of June 30, 2003, an evaluation was carried out under the supervision and with the
participation of the Companys 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 the Companys disclosure controls and procedures were effective as of June 30, 2003 to ensure that information required to be disclosed by the Company 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 the Companys internal
controls over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.



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PART II. OTHER INFORMATION



ITEM 6. EXHIBITS AND REPORTS ON FORM 8K



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



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

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

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

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

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

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

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

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

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

|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 June 30, 2003.
|--- |  | -------------------------------------------------------------------------



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SIGNATURES



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



|Dated: August 13, 2003 |  | FIDELITY BANCSHARES (N.C.), INC.                                           
|---------------------- |  | ---------------------------------------------------------------------------
|                       |  | By:  /s/ Mary W. WillisMary W. Willis Chief Financial Officer and
Treasurer



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