---




UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





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


The Securities Exchange Act of 1934





For the quarterly period ended September 30, 2002





Commission File Number: 001-15089





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FIDELITY BANCSHARES (N.C.), INC.


(Exact name of Registrant as specified in its charter)





Delaware (State or other
jurisdiction of incorporation or organization)

56-1586543 (I.R.S.
Employer Identification Number)





100 South Main Street, Fuquay-Varina, North Carolina (Address of principal executive offices)

27526 (Zip code)





(919) 552-2242


(Registrants telephone number, including area code)





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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past one hundred eighty-one
days.  Yes  x  No  ̈





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


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





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PART I. FINANCIAL INFORMATION





ITEM 1.  FINANCIAL STATEMENTS





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





CONSOLIDATED BALANCE SHEETS





September 30,


December 31,


September 30,2002


2001


2001(unaudited)





(unaudited)ASSETSCash and due from banks

$
41,990,331


$
46,517,398


$
38,337,277Interest bearing deposits in other banks


11,976,854



28,462,716



23,251,220Overnight funds sold


38,500,000



51,200,000



55,100,000Total cash and cash equivalents


92,467,185



126,180,114



116,688,497Investment securities:Held to maturity (estimated fair value of $128,542,787, $126,502,713, and $142,352,947, respectively)



128,003,982



125,446,167



140,743,082Available for sale (cost of $3,515,623, $3,633,777 and $3,647,604, respectively)


11,947,212



11,595,935



10,139,501Total investment securities


139,951,194



137,042,102



150,882,583Loans


722,206,880



668,984,155



647,894,005Allowance for loan losses


(10,778,214
)


(9,312,384
)


(9,125,322
)Loans, net


711,428,666



659,671,771



638,768,683Federal Home Loan Bank of Atlanta stock, at cost


2,467,600



2,309,400



2,309,400Premises and equipment, net


34,970,604



35,575,442



35,135,314Accrued interest receivable


3,345,586



5,453,035



5,515,275Intangible assets


16,226,369



17,311,024



17,691,551Other assets


1,476,898



1,176,004



1,628,161Total assets

$
1,002,334,102


$
984,718,892


$
968,619,464LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Noninterest-bearing demand deposits

$
160,471,853


$
140,965,066


$
133,096,367Savings and interest-bearing deposits


307,628,165



294,219,134



283,675,811Time deposits


396,858,974



406,251,104



408,671,531Total deposits


864,958,992



841,435,304



825,443,709Short-term borrowings


18,460,605



27,072,692



27,712,037Long-term borrowings


23,000,000



23,000,000



23,000,000Accrued interest payable


3,320,192



6,257,923



7,674,065Other liabilities


2,319,740



1,922,588



2,270,800Total liabilities


912,059,529



899,688,507



886,100,611Shareholders equity:Common stock ($25 par value; 29,200 shares authorized; 28,011,28,026, and 28,026 shares issued and outstanding,
respectively)


700,275



700,650



700,650Surplus


6,163,380



6,166,681



6,166,681Accumulated other comprehensive income


5,101,111



4,817,106



3,927,598Retained earnings


78,309,807



73,345,948



71,723,924Total shareholders equity


90,274,573



85,030,385



82,518,853Total liabilities and shareholders equity

$
1,002,334,102


$
984,718,892


$
968,619,464





See accompanying notes to consolidated financial statements.




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





CONSOLIDATED STATEMENTS OF INCOME





Three months ended September 30,


Nine months ended September 30,2002


2001


2002


2001(unaudited)


(unaudited)Interest income:Interest and fees on loans

$
12,925,958


$
13,918,258


$
38,154,942


$
42,806,054Interest and dividends on investment securities:Taxable interest income


775,432



1,952,682



3,170,468



6,383,127Dividend income


70,360



75,948



205,954



225,994Interest on overnight funds sold


198,067



427,900



503,550



1,399,844Total interest income


13,969,817



16,374,788



42,034,914



50,815,019Interest expense:Deposits


4,013,038



6,608,458



12,842,763



21,239,897Short-term borrowings


60,121



167,292



187,393



632,259Long-term borrowings


488,750



488,750



1,466,250



1,466,250Total interest expense


4,561,909



7,264,500



14,496,406



23,338,406Net interest income


9,407,908



9,110,288



27,538,508



27,476,613Provision for loan losses


550,000



750,000



2,000,000



2,250,000Net interest income after provision for loan losses


8,857,908



8,360,288



25,538,508



25,226,613Noninterest income:Service charges on deposit accounts


1,661,947



1,652,809



4,864,292



4,457,873Other service charges and fees


936,329



819,084



2,734,131



2,373,214Other income


42,814



39,204



135,634



86,799Gain (loss) on marketable equity securities


(53,166
)






(124,234
)


501,478Total noninterest income


2,587,924



2,511,097



7,609,823



7,419,364Noninterest expense:Salaries and employee benefits


4,364,104



4,172,300



13,453,902



12,601,241Occupancy and equipment


1,224,407



1,166,525



3,665,494



3,562,626Data processing


796,168



723,187



2,390,592



2,224,104Amortization of intangibles


362,085



380,527



1,084,655



1,108,163Other expense


1,203,196



1,358,879



3,537,214



3,923,692Impairment loss (recovery) on fixed assets


144



(7,232
)


143,368



470,740Total noninterest expense


7,950,104



7,794,186



24,275,225



23,890,566Net income before income taxes


3,495,728



3,077,199



8,873,106



8,755,411Income tax expense


1,284,501



1,130,448



3,203,039



3,204,966Net income

$
2,211,227


$
1,946,751


$
5,670,067


$
5,550,445Per share information:Net income

$
78.94


$
69.45


$
202.39


$
197.83Cash dividends declared

$
8.00


$
8.00


$
24.00


$
24.00Weighted average shares outstanding


28,011



28,031



28,015



28,057





See accompanying notes to consolidated financial statements.






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





CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY


(unaudited)





Common Stock





Accumulated othercomprehensiveincome

Retained earnings


Comprehensive income

Totalshareholders equityShares


Amount


SurplusBalance December 31, 2000

28,070


$
701,750


$
6,176,362


$
3,688,615

$
66,946,042





$
77,512,769Net income
















5,550,445


$
5,550,445


5,550,445Cash dividends ($24.00 per share)
















(673,344
)





(673,344
)Purchase and retirement of common stock

(44
)


(1,100
)


(9,681
)





(99,219
)





(110,000
)Unrealized gain on securities   available for sale, net of
deferred taxes of $98,434













238,983






238,983


238,983Comprehensive income



















$
5,789,428Balance September 30, 2001

28,026


$
700,650


$
6,166,681


$
3,927,598

$
71,723,924





$
82,518,853Balance December 31, 2001

28,026


$
700,650


$
6,166,681


$
4,817,106

$
73,345,948





$
85,030,385Net income
















5,670,067


$
5,670,067


5,670,067Cash dividends ($24.00 per share)
















(672,384
)





(672,384
)Purchase and retirement of common stock

(15
)


(375
)


(3,301
)





(33,824
)





(37,500
)Unrealized gain on securities   available for sale, net of
  deferred taxes of $185,425













284,005






284,005


284,005Comprehensive income



















$
5,954,072Balance September 30, 2002

28,011


$
700,275


$
6,163,380


$
5,101,111

$
78,309,807





$
90,274,573

















See accompanying notes to consolidated financial statements






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





CONSOLIDATED STATEMENTS OF CASH FLOWS


(unaudited)





Nine months ended September 30,2002


2001Cash flows from operating activities:Net income

$
5,670,067


$
5,550,445Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


2,924,999



2,913,897Accretion on investment securities


(157,449
)


(163,560
)Loss on disposition of premises and equipment


19,274



661Impairment loss on fixed assets


143,368



470,740Provision for loan losses


2,000,000



2,250,000Origination of loans held for sale






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






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






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






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


76,989



(43,083
)Loss on impairment of available for sale securities


47,245



Proceeds from sales of other real estate owned


405,400



172,055(Gain) loss on disposition of other real estate


(17,087
)


14,945Decrease in accrued interest receivable


2,107,449



446,492Increase in other assets, net


(183,807
)


(297,352
)Increase in other liabilities, net


30,696



482,401(Decrease) increase in accrued interest payable


(2,937,731
)


1,367,884Net cash provided by operating activities


10,129,413



12,707,130Cash flows from investing activities:Purchase of securities held to maturity


(167,401,804
)


(130,675,124
)Purchase of securities available for sale


(56,184
)


(1,003,003
)Proceeds from maturities and issuer calls of securities held to maturity


165,001,438



133,000,395Proceeds from sale of securities available for sale


50,103



501,478Purchase of FHLB of Atlanta stock


(158,200
)


(139,700
)Net increase in loans


(53,962,295
)


(30,037,837
)Purchases of premises and equipment


(1,517,117
)


(1,770,373
)Net cash received on branch purchases






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


(58,044,059
)


8,569,944Cash flows from financing activities:Net increase in deposits


23,523,688



3,438,349Net (decrease) increase in short-term borrowings


(8,612,087
)


1,070,451Cash dividends paid


(672,384
)


(673,344
)Purchase and retirement of common stock


(37,500
)


(110,000
)Net cash provided by financing activities


14,201,717



3,725,456Net (decrease) increase in cash and cash equivalents


(33,712,929
)


25,002,530Cash and cash equivalents at beginning of period


126,180,114



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

$
92,467,185


$
116,688,497Supplemental disclosures of cash flow information:Cash paid during the period for interest

$
17,434,137


$
21,970,522Cash paid during the period for income taxes

$
4,049,995


$
3,791,160Supplemental disclosure of noncash financing and investing activities:Unrealized gains on available-for-sale securities, net of deferred taxes of $185,425 and $98,434,
respectively

$
284,005


$
238,983Foreclosed loans transferred to other real estate

$
505,400


$
415,000Loans originated in the sale of real estate

$
300,000


$






See accompanying notes to consolidated financial statements.






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





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





In the opinion of management, the consolidated financial statements contain all material adjustments necessary to present fairly the
consolidated financial position of BancShares as of and for each of the periods presented, and all such adjustments are of a normal recurring nature. The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.





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





Note 2.Adoption of New Accounting Standards





On July 20, 2001, The Financial
Accounting Standards Board (FASB) issued Statement No. 141, Business Combinations and Statement No. 142, Goodwill and Other Intangible Assets. 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.





BancShares was required to adopt the provisions of Statement 141 as
of June 30, 2001 and was required to adopt Statement 142 effective January 1, 2002. Any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001
will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate accounting literature issued prior to Statement 142. Goodwill and intangible assets acquired in business combinations completed before July 1,
2001 were amortized in 2001 prior to the adoption of Statement 142 on January 1, 2002.





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





BancShares determined that upon adoption of Statement 142 on January 1, 2002, BancShares had
$744,000 of goodwill that was no longer amortized beginning on January 1, 2002. The amortization expense associated with this goodwill during the






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nine months ended September 30, 2001 was $58,000. In accordance with Statement 142, BancShares performed a transitional impairment test of this
goodwill in the first six months of 2002 and deemed that no goodwill impairment existed. BancShares will continue to perform an annual impairment test of the goodwill hereafter.





The remaining intangible assets, totaling $16,567,000 at January 1, 2002, relate to acquisitions of branches that are being accounted for in accordance with Statement of Financial Accounting
Standards No. 72 (Statement 72), Accounting for Certain Acquisitions of Banking and Thrift Institutions. Statement 72, which was not amended by Statement 142, requires that identified intangible assets and unidentified intangible assets
associated with certain acquisitions of branches be amortized into expense. Accordingly, these intangible assets will continue to be amortized over their useful lives. Management has reviewed the useful lives of these assets, and will continue to do
so in future periods, adjusting them downward where appropriate. The amortization expense associated with these branches was $1,085,000 and $1,050,000 for the nine months ended September 30, 2002 and 2001, respectively.





In September 2002, the FASB issued Statement on Financial Accounting Standards No. 147 (Statement 147), Acquisitions of Certain Financial
Institutions, which brings all business combinations involving financial institutions, except mutuals, into the scope of Statement 141, Business Combinations. Statement 147 requires that all acquisitions of financial institutions that
meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with Statement 141 and the related intangibles accounted for in accordance with
Statement 142, Goodwill and Other Intangible Assets. Statement 147 removes such acquisitions from the scope of Statement 72, which was adopted in February 1983 to address financial institutions acquisitions during a period when many of
such acquisitions involved troubled institutions. Statement 147 also amends Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets to include in its scope long-term customer-relationship intangible assets of
financial institutions. Statement 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of Statement 72.
BancShares will adopt Statement 147 during the fourth quarter of 2002 and will restate its previously issued 2002 financial statements (including separate quarterly results) to remove the effects of amortization of intangibles previously recorded
under Statement 72, to the extent that its prior branch acquisitions are deemed to be business combinations as defined in Emerging Issues Task Force Consensus 98-3. Management expects to complete this analysis during the fourth quarter
of 2002. If all of its prior branch acquisitions are deemed to meet the definition of a business combination pursuant to EITF 98-3, its net income for the nine months ended September 30, 2002 would increase by $656,000.





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





September 30, 2002

December 31, 2001Gross Carrying Amount

Accumulated Amortization

Gross Carrying Amount

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

$
22,094

$
6,612

$
22,094

$
5,527Unamortized intangible assets:Goodwill

$
744




$
744








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





The scheduled amortization expense for intangible assets (prior to the adoption of Statement 147) for the years ended
December 31, 2002, 2003, 2004, 2005, 2006 and thereafter is as follows:






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ScheduledAmortization Expense(Dollars in thousands)2002

$
1,4452003


1,4452004


1,4452005


1,4452006


1,4452007 and after


9,342Total

$
16,567





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





For the nine months ended September 30,2002

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

$
5,670

$
5,550Add back: Goodwill amortization

$


$
58Adjusted net income

$
5,670

$
5,608Net income per share:As reported

$
202.39

$
197.83Goodwill amortization

$


$
2.07Adjusted net income per share

$
202.39

$
199.90





For the years ended December 31,2001

2000

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

$
7,397

$
8,101

$
7,637Add back: Goodwill amortization

$
77

$
77

$
77Adjusted net income

$
7,474

$
8,178

$
7,714Net income per share:As reported

$
263.71

$
287.97

$
270.05Goodwill amortization

$
2.75

$
2.74

$
2.72Adjusted net income per share

$
266.46

$
290.71

$
272.77





Note 3.Net Income Per Share





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





Note 4.Allowance for Loan Losses





A summary of the allowance for loan losses follows:






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Nine months ended September 30,2002


2001(Unaudited)Balance at beginning of year

$
9,312,384


$
7,297,833Provision for loan losses


2,000,000



2,250,000Loans charged off


(2,043,436
)


(1,193,380
)Loan recoveries


1,509,266



770,869Balance at end of the period

$
10,778,214


$
9,125,322





Note 5.Long Term Borrowings





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





Note 6.Branch Acquisitions





In February 2001, BancShares acquired the Mebane, Rockingham and Yanceyville, North Carolina branches of First Union National Bank. This acquisition was accounted for as a purchase in accordance with Statement 72, and, therefore the
results of operations prior to purchase of the branches are not included in the consolidated financial statements. The combined loans and deposits acquired were $3.9 million and $49.5 million, respectively, and the purchase included $6.0 million in
Statement 72 intangible assets (see note 2).





Note 7.Gain (loss) on Marketable Equity Securities





During the third quarter of 2002, BancShares recognized a securities loss of $5,921 as a result of selling available for sale equity securities. Also
during the third quarter, BancShares wrote down the carrying value of certain available for sale equity securities to their current market value and recognized a loss of $47,245. This was a result of unrealized losses that were deemed to be other
than temporary. During the second quarter of 2002, BancShares recognized a securities loss of $71,068. This loss was the result of selling available for sale equity securities. There were no securities gains or losses recognized in the first quarter
of 2002. During the first quarter of 2001, BancShares recognized a securities gain of $458,395. This gain was recognized as a result of a business combination involving a company in which BancShares had an equity interest. During the second quarter
of 2001, BancShares recognized a securities gain of $43,083 when the equity interest received in the business combination was sold.





Note 8.Impairment Loss on Fixed Assets





In May 2002, BancShares approved the closing of one
branch. BancShares analyzed the results of operations of the branch since its inception in 1999 and determined that the loss experience would not turn around in the near future. At June 30, 2002, BancShares had accrued impairment losses of
approximately $143,000 including $103,000 for losses on fixed assets, $20,000 for lease cancellation fees, and $20,000 for costs to close the branch. During the third quarter of 2002, BancShares closed the branch with no material adjustments being
made to the accrued impairment costs.





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






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Note 9.Related Parties





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





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





These two significant shareholders are directors and executive officers of the Corporation and at September 30, 2002, beneficially owned 2,529,158 shares, or
28.76%, and 1,384,121 shares, or 15.74%, of the Corporations outstanding Class A common stock, and 650,678 shares, or 38.68%, and 199,052 shares, or 11.83%, of the Corporations outstanding Class B common stock. The above totals include
472,855 Class A common shares, or 5.38%, and 104,644 Class B Common shares, or 6.22%, that are considered to be beneficially owned by both of the shareholders and, therefore, are included in each of their totals.





The following table lists the various charges paid to the Corporation pursuant to the service contracts:





Nine Months Ended September 30,2002

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

$
2,430

$
2,303Forms, supplies and equipment


211


237Trustee for employee benefit plans


45


56Other


1


$
2,687

$
2,596





The Bank also has a correspondent relationship with the Corporation. Correspondent account
balances with the Corporation included in cash and due from banks and overnight funds sold totaled $31,470,999 and $41,448,498 at September 30, 2002 and December 31, 2001, respectively.





BancShares is related through common ownership with Southern Bank and Trust Co. (Southern) in that the aforementioned two significant shareholders of BancShares and certain of
their related parties are also significant shareholders of Southern. BancShares has contracted with Southern to service on its behalf $4.9 million of BancShares mortgage loans.






---




TABLE 1.


Financial Summary





2002


2001Third Quarter


Second Quarter


First Quarter


Fourth Quarter


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

$
13,970


$
13,962


$
14,103


$
15,341


$
16,375Interest expense


4,562



4,770



5,164



6,175



7,265Net interest income


9,408



9,192



8,939



9,166



9,110Provision for loan losses


550



700



750



750



750Net interest income after provision for loan losses


8,858



8,492



8,189



8,416



8,360Noninterest income


2,588



2,563



2,459



2,531



2,511Noninterest expense


7,950



8,261



8,065



8,027



7,794Net income before income taxes


3,496



2,794



2,583



2,920



3,077Income taxes


1,285



995



923



1,074



1,130Net income

$
2,211


$
1,799


$
1,660


$
1,846


$
1,947Selected Period-End BalancesTotal assets

$
1,002,334


$
985,379


$
982,674


$
984,719


$
968,619Investment securities and overnight funds sold


178,451



165,785



187,994



188,242



205,983Loans, gross


722,207



707,361



685,901



668,984



647,894Interest earning assets


915,103



899,990



898,203



887,998



879,437Deposits


864,959



841,899



837,960



841,435



825,444Interest bearing liabilities


745,948



738,021



747,142



750,543



743,060Shareholders equity


90,275



88,844



86,722



85,030



82,519Common shares outstanding


28,011



28,011



28,011



28,026



28,026Selected Average BalancesTotal assets

$
983,802


$
974,639


$
973,966


$
972,894


$
957,883Investment securities and overnight funds sold


168,124



168,825



184,895



192,836



202,344Loans, gross


714,084



696,944



677,628



659,783



640,277Interest earning assets


903,991



893,310



889,398



887,880



874,718Deposits


843,403



833,664



832,021



830,242



813,840Interest bearing liabilities


739,436



738,015



743,769



743,768



735,973Shareholders equity


90,344



88,377



86,530



84,509



83,627Common shares outstanding


28,011



28,011



28,023



28,026



28,031Profitability RatiosRate of return (annualized) on:Total assets


0.89
%


0.74
%


0.69
%


0.75
%


0.81
%Shareholders equity


9.71
%


8.16
%


7.78
%


8.67
%


9.24
%Dividend payout ratio(1)


10.13
%


12.46
%


13.51
%


12.14
%


11.52
%Liquidity and Capital Ratios (averages)Loans to deposits


84.67
%


83.60
%


81.44
%


79.47
%


78.67
%Shareholders equity to total assets


9.18
%


9.07
%


8.88
%


8.69
%


8.73
%Per Share of Common StockNet income

$
78.94


$
64.22


$
59.24


$
65.88


$
69.45Cash dividends


8.00



8.00



8.00



8.00



8.00Book value(2)


3,222.83



3,171.75



3,096.01



3,033.98



2,944.37


---

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



---




TABLE 2.


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





2002


2001


Increase (decrease) due to:Average Balance


Interest Income/ Expense

Yield/ Rate


Average Balance


Interest Income/ Expense

Yield/ Rate


Volume


Yield/ Rate


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

$
696,352


$
38,201

7.33
%

$
630,234


$
42,876

9.10
%

$
4,063


$
(8,738
)

$
(4,675
)Taxable investmentsecurities


121,409



2,883

3.17



133,164



5,240

5.26



(371
)


(1,986
)


(2,357
)Overnight funds sold


40,170



504

1.68



45,471



1,400

4.12



(115
)


(781
)


(896
)Other investments


14,728



206

1.87



13,327



226

2.27



19



(39
)


(20
)Interest bearing deposits in other banks


22,960



287

1.67



34,521



1,143

4.43



(264
)


(592
)


(856
)Total interest earning assets

$
895,619


$
42,081

6.28
%

$
856,717


$
50,885

7.94
%

$
3,332


$
(12,136
)

$
(8,804
)Noninterest earning assets:Cash and due from banks


34,635









33,129Premises and equipment


35,205









34,881Other assets


22,055









24,827Reserve for loan losses


(10,000
)








(8,395
)Total assets

$
977,514








$
941,159LIABILITIES & EQUITYInterest bearing liabilities:Demand deposits

$
106,440


$
250

0.31
%

$
104,930


$
663

0.84
%

$
(50
)

$
(363
)

$
(413
)Savings deposits


193,703



2,212

1.53



169,984



3,423

2.69



397



(1,608
)


(1,211
)Time deposits


394,982



10,381

3.51



404,166



17,155

5.67



(316
)


(6,458
)


(6,774
)Short-term borrowings


22,265



188

1.13



25,501



632

3.31



(53
)


(391
)


(444
)Long-term borrowings


23,000



1,466

8.52



23,000



1,466

8.52











Total interest bearing liabilities

$
740,390


$
14,497

2.62
%

$
727,581


$
23,339

4.29
%

$
(22
)

$
(8,820
)

$
(8,842
)Noninterest bearing liabilities:Demand deposits


141,279









121,728Other liabilities


7,414









10,344Shareholders equity


88,431









81,506Total liabilities and equity

$
977,514








$
941,159Interest rate spread(3)








3.66
%








3.65
%Net interest income and net interest margin(4)





$
27,584

4.12
%





$
27,546

4.30
%

$
3,354


$
(3,316
)

$
38


---

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

|(2) |  | The average rate on nontaxable loans has been adjusted to a tax equivalent yield using a 39.485% tax rate for 2002 and 2001. The taxable equivalent adjustment
was approximately $46,000 and $70,000 for the periods in 2002 and 2001, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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





---




TABLE 3.


Consolidated Taxable Equivalent Rate/Volume Variance AnalysisThird quarter





2002


2001


Increase (decrease) due to:Average Balance


Interest Income/ Expense

Yield/ Rate


Average Balance


Interest Income/ Expense

Yield/ Rate


Volume


Yield/ Rate


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

$
714,084


$
12,941

7.19
%

$
640,277


$
13,938

8.64
%

$
1,472


$
(2,469
)

$
(997
)Taxable investment securities


107,696



690

2.54



139,592



1,685

4.79



(295
)


(700
)


(995
)Overnight funds sold


47,918



199

1.65



50,547



428

3.36



(17
)


(212
)


(229
)Other investments


14,978



70

1.85



14,514



76

2.08



3



(9
)


(6
)Interest bearing deposits in other banks


19,315



84

1.73



29,788



268

3.57



(70
)


(114
)


(184
)Total interest earning assets

$
903,991


$
13,984

6.14
%

$
874,718


$
16,395

7.44
%

$
1,093


$
(3,504
)

$
(2,411
)Noninterest earning assets:Cash and due from banks


34,482









32,627Premises and equipment


34,984









34,974Other assets


21,262









24,503Reserve for loan losses


(10,917
)








(8,939
)Total assets

$
983,802








$
957,883LIABILITIES & EQUITYInterest bearing liabilities:Demand deposits

$
103,621


$
79

0.30
%

$
101,893


$
133

0.52
%

$
(5
)

$
(49
)

$
(54
)Savings deposits


199,339



722

1.44



175,013



1,018

2.31



118



(414
)


(296
)Time deposits


393,293



3,212

3.24



409,656



5,458

5.29



(176
)


(2,070
)


(2,246
)Short-term borrowings


20,183



61

1.20



26,411



167

2.51



(30
)


(77
)


(107
)Long-term borrowings


23,000



488

8.42



23,000



489

8.44











Total interest bearing liabilities

$
739,436


$
4,562

2.45
%

$
735,973


$
7,265

3.92
%

$
(93
)

$
(2,610
)

$
(2,703
)Noninterest bearing liabilities:Demand deposits


147,150









127,278Other liabilities


6,872









11,005Shareholders equity


90,344









83,627Total liabilities and equity

$
983,802








$
957,883Interest rate spread(3)








3.69
%








3.52
%Net interest income and netinterest margin(4)





$
9,422

4.14
%





$
9,130

4.14
%

$
1,186


$
(894
)

$
292


---

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

|(2) |  | The average rate on nontaxable loans has been adjusted to a tax equivalent yield using a 39.485% tax rate for 2002 and 2001. The taxable equivalent adjustment
was approximately $15,000 and $20,000 for the periods in 2002 and 2001, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



---




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





Introduction





Managements discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of Fidelity BancShares (N.C.), Inc. and Subsidiaries
(BancShares). This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report. The focus of this discussion concerns BancShares banking
subsidiary, The Fidelity Bank (the Bank), which operates 63 branches in North Carolina.





Critical Accounting Policies





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





Financial Condition and Results of Operations.





Net
Income.    In the first nine months of 2002, BancShares net income increased $120,000 to $5.7 million from $5.6 million in the same period of 2001, an increase of 2.16%. Net income for the third quarter of 2002
increased $264,000 or 13.59% when compared to the same period of 2001. The increase in net income for the third quarter resulted primarily from the decline in interest rates, which resulted in an increase in net interest income, and an increase in
noninterest income, which was partially offset by increased noninterest expense.





Net income per share for the
first nine months of 2002 was $202.39, an increase of $4.56 per share, or 2.31%, from $197.83 per share in 2001. For the third quarter of 2002, net income per share was $78.94 an increase of $9.49 or 13.67%, from $69.45 per share for the third
quarter of 2001. Return on average assets for the first nine months of 2002 and 2001 was 0.78% and 0.79%, respectively. For the third quarter of 2002 and 2001, return on average assets was 0.89% and 0.81%, respectively. Return on average equity for
the first nine months of 2002 and 2001 was 8.57% and 9.10%, respectively. For the third quarter of 2002 and 2001, return on equity was 9.71% and 9.24%. 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.





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. During 2002, net interest income was impacted most significantly by lower interest rates as the Federal Reserve continued to decrease its
discount rate throughout much of 2001 in order to stimulate the economy. Since BancShares interest earning assets are more rate sensitive in the one-year horizon than its interest bearing liabilities, its net interest income has been
negatively impacted by these declining interest rates. These negative effects have been offset by growth in BancShares average earning assets during 2002.





For the first nine months of 2002, net interest income was $27.5 million, which was essentially unchanged when compared to the same period in 2001. An increase in the volume of interest earning assets
and interest bearing liabilities increased net interest income by $3.4 million. This was offset by the impact of rate changes which decreased net interest income by $3.3 million, which together with the $3.4 million increase, caused an increase of
$62,000 in net interest income. The net interest margin for the first nine months of 2002 and 2001 was 4.12% and 4.30%, respectively. Net interest income and net interest margin for the third quarters of 2002 and 2001 were $9.4 million and 4.14% and
$9.1 million and 4.14%, respectively.





Interest income for the first nine months of 2002 was $42.0 million as
compared to $50.8 million in 2001, a decrease




---

of $8.8 million or 17.28%. The decrease in interest income for the first nine months of 2002 over the first nine months of 2001 is attributable
to a decline in interest rates, the effect of which was offset partially by growth in average earning asset balances. Interest income from loans amounted to $38.2 million in the first nine months of 2002 as compared to $42.8 million in the first
nine months of 2001, a decrease of $4.7 million or 10.87%. BancShares loan growth is largely due to growth within the existing branch network. Earnings from investments and overnight funds sold provided the balance of interest income,
contributing $3.9 million and $8.0 million for the first nine months of 2002 and 2001, respectively. Average interest earning assets for the first nine months of 2002 increased to $895.6 million, a 4.54% increase, from $856.7 million in the first
nine months of 2001. The yield on interest earning assets for the first nine months of 2002 and 2001 was 6.28% and 7.94%, respectively. Trends in interest earning assets are shown in Table 2.





Interest expense for the first nine months of 2002 was $14.5 million compared to $23.3 million in 2001, a decrease of $8.8 million or 37.89%. The decrease in interest
expense in the first nine months of 2002, compared to the first nine months of 2001, is attributable to decreased interest rates on deposit balances, primarily time deposits and savings accounts. Average interest bearing deposits increased $16.0
million or 2.36%, from $679.1 million in the first nine months of 2001 to $695.1 million in the first nine months of 2002. The average rate paid on interest bearing deposits was 2.47% and 4.18% for the first nine months of 2002 and 2001,
respectively. Borrowings contributed $1.7 million in interest expense during the first nine months of 2002 compared to $2.1 million during the first nine months of 2001, a decrease of $445,000 or 21.2%. The yield on interest bearing liabilities for
the first nine months of 2002 and 2001 was 2.62% and 4.29%, respectively. Trends in interest bearing liabilities are shown in Table 2.





Asset Quality and Provision for Loan Losses.    Because BancShares loan portfolio represents its largest earning asset, BancShares continually monitors the quality of its loan portfolio. The
Bank operates in a diversified economic environment and, in the opinion of management, is not unduly exposed to any one particular industry. For the third quarter of 2002 and 2001, management added $550,000 and $750,000, respectively, to the
allowance for loan losses as provisions for loan losses. During the first nine months of 2002, management charged-off loans totaling $2.0 million and had recoveries of $1.5 million resulting in net charge-offs of $534,000. During the same period in
2001, management charged-off $1.2 million in loans and had recoveries of $771,000, resulting in net charge-offs of $423,000. Charge-offs were higher for the first nine months of 2002 than the same period of 2001 due to charge-offs of five large
loans which had been previously reserved for in its allowance for loan losses. The ratio of allowance for loan losses to loans increased to 1.49% at September 30, 2002 from 1.39% at December 31, 2001. The following table presents BancShares
comparative asset quality ratios:





September 30, 2002


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

0.10
%

0.15
%Allowance for loan losses to loans

1.49


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

0.07


Non-performing assets to total assets

0.05








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





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





BancShares had impaired loans of $432,000 at September 30, 2002 (all of which are on non-accrual
status) and




---

none at September 30, 2001. There were no separate valuation allowances on impaired loans during 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 $190,000 or 2.57% for the first nine months of 2002 over
the first nine months of 2001. Noninterest income, consisting primarily of service charges on deposit accounts and other service charges and fees, increased during the first nine months of 2002 primarily due to the increased deposit base from three
branch openings in the third and fourth quarters of 2001 as well as growth in the existing branch network. BancShares average deposits increased $35.6 million or 4.45% to $836.4 million in the first nine months of 2002 from $800.8 million in
the first nine months of 2001. Noninterest income for the first nine months of 2001 includes a securities gain of $501,478. This gain was recognized as a result of an exchange and subsequent sale of an equity investment. Other increases in
noninterest income were partially offset by securities losses of $124,234, which were recognized in the second and third quarters due to sales of available for sale equity securities and write downs on certain available for sale equity securities
whose unrealized losses were deemed to be other than temporary. For the third quarter of 2002, noninterest income increased $77,000 or 3.06% over the same period of 2001, primarily due to growth in service charges and fee income.





Noninterest Expense.    Noninterest expense increased $385,000 or 1.61% from $23.9 million in the
first nine months of 2001 to $24.3 million in the first nine months of 2002, including increases of $853,000 in salaries and employee benefits, $103,000 in occupancy and equipment expense, and $166,000 in data processing cost, which were offset by
decreases of $386,000 in other expenses, a decrease in impairment loss on fixed assets of $327,000 and $24,000 in intangibles amortization. The fluctuations represented increases of 6.77% in salaries and employee benefits, 2.89% in occupancy and
equipment expenses, and 7.49% in data processing costs, which were offset by decreases of 9.85% in other expenses, 69.54% in impairment loss on fixed assets, and 2.12% in intangibles amortization over the first nine months of 2001. For the third
quarter of 2002 noninterest expense increased $156,000 or 2.00% over the same period in 2001. Noninterest expense increased due to increased salaries from the three new branches opened in the second half of 2001 as well as increased activity within
the existing branch network. BancShares also had an impairment loss of $477,972 on fixed assets during the nine months ended September 30, 2001, with a recovery of $7,232 in the third quarter. During April 2001, BancShares analyzed the results of
operations of two branches through the first three months of 2001 taking into consideration recent economic conditions and the projected performance of these branches. BancShares concluded the carrying value of these branches were impaired and
therefore recorded an impairment loss of $304,656 in the first quarter of 2001 to reduce the carrying value of these branches to fair value. The fixed assets consisted primarily of leasehold improvements, which are deemed to have very minimal fair
value. In the second quarter of 2001 the Board of Directors of BancShares approved to close these two branches and recorded an additional charge of $173,000 for the remaining lease payments and costs to close these branches. BancShares had an
impairment loss of $143,224 in the second quarter of 2002. In May 2002, BancShares analyzed the operations of one branch since its inception in 1999 and determined that the loss experience would not turn around in the near future. The Board of
Directors of BancShares approved to close this branch and at June 30, 2002, BancShares has accrued disposition costs which include $103,000 for losses on fixed assets, $20,000 for lease cancellation fees, and $20,000 for costs to close the branch.
During the third quarter of 2002, BancShares closed the branch with no material adjustments being made to the accrued impairment costs.





Income Taxes.    In the first nine months of 2002, BancShares had income tax expense of $3.2 million, which was essentially unchanged when compared to the first nine months of 2001. The resulting
effective income tax rates, based on the accruals for the nine months ended September 30, 2002 and 2001, were 36.10% and 36.61%, respectively.





Capital Resources.





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





Regulatory guidelines define minimum requirements for
BancShares leverage capital ratio. Leverage capital equals total equity and certain long-term borrowings less goodwill and certain other intangibles and is measured relative to total adjusted assets as defined by regulatory guidelines.
According to these guidelines, BancShares leverage ratio at September






---

30, 2002 was 9.50% as compared to 8.99% at December 31, 2001.





BancShares is also required to meet minimum requirements for risk-based capital (RBC). BancShares assets, including loan commitments and other off-balance
sheet items, are weighted according to federal guidelines for the risk considered inherent in each asset. At September 30, 2002, the Total Capital Ratio was 14.27% as compared to 14.03% at December 31, 2001.





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





September 30, 2002


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

$
91,947


$
85,902Total capital


104,951



98,245Leverage capital ratio


9.50
%(1)


8.99
%(1)Tier 1 capital ratio


12.51
(1)


12.27
(1)Total capital ratio


14.27
(1)


14.03
(1)


---

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




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





Commitments, Contingencies and Off-balance sheet risk.





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





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





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





September 30, 2002

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

$
234,054,516

221,656,178Standby and commercial letters of credit

$
3,986,668

3,275,000





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





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






---




Liquidity, Market Risk and Interest Sensitivity.





Liquidity.    Liquidity refers to the ability of BancShares to generate sufficient funds to meet its financial
obligations and commitments at a reasonable cost. Maintaining liquidity ensures that funds will be available for reserve requirements, customer demand for loans, withdrawal of deposit balances and maturities of other deposits and liabilities. Past
experiences help management anticipate cyclical demands and amounts of cash required. These obligations can be met by existing cash reserves or funds from maturing loans and investments, but in the normal course of business are met by deposit
growth.





In assessing liquidity, many relevant factors are considered, including stability of deposits, quality of
assets, economy of the markets served, business concentration, competition and BancShares overall financial condition. BancShares liquid assets include all investment securities (minus pledged securities), overnight funds sold, interest
bearing deposits in other banks and cash and due from banks. These assets represented 17.81% of deposits at September 30, 2002, a decrease from 22.19% at December 31, 2001. BancShares liquidity ratio, which is defined as cash plus short-term
marketable securities (minus pledged securities) divided by deposits and short-term liabilities, was 17.44% at September 30, 2002, compared to 21.49% at December 31, 2001.





The consolidated statements of cash flows disclose the principal sources and uses of cash from operating, investing and financing activities for the nine months ended
September 30, 2002 and 2001. BancShares has no brokered deposits. Jumbo time deposits are considered to include all time deposits of $100,000 or more. BancShares has never aggressively bid on these deposits. Most jumbo deposit customers have other
relationships with the Bank, including savings, demand and other time deposits, and in some cases, loans. At September 30, 2002, and December 31, 2001, jumbo time deposits represented 11.31% and 11.52%, respectively, of total deposits.





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





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





CONTRACTUAL OBLIGATIONS


As of September 30, 2002


(Dollars in thousands)





Payments due by periodLess than 1
year

1-3 years

4-5 years

Over 5 years

TotalDeposits

$
754,627

92,773

17,559



864,959Short-term borrowings


18,461







18,461Long-term borrowings








23,000

23,000Lease obligations


311

375

119

878

1,683Total contractual cash obligations

$
773,399

93,148

17,678

23,878

908,103





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





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






---




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





Maturing in period ended September 30,


Total


Fair Value2003


2004


2005


2006


2007


Thereafter(Dollars in thousands)ASSETSLoans:Fixed rate

$
88,330


$
88,893


$
94,166


$
12,879


$
6,696


$
11,050


$
302,014


$
301,971Average rate (%)


8.78
%


8.27
%


7.90
%


7.55
%


7.37
%


7.60
%


8.23
%Variable rate

$
200,942


$
35,073


$
51,820


$
11,859


$
19,290


$
101,209


$
420,193


$
420,193Average rate (%)


5.61
%


5.46
%


5.53
%


5.33
%


5.22
%


5.40
%


5.51
%Investment securities(1):Fixed rate

$
107,889


$
20,109














$
6


$
128,004


$
128,543Average rate (%)


2.32
%


3.11
%














10.93
%


2.45
%LIABILITIESSavings and interest bearingchecking:Fixed rate

$
307,628






















$
307,628


$
307,628Average rate (%)


0.87
%






















0.87
%Certificates of deposit:Fixed rate

$
286,527


$
69,185


$
23,588


$
17,559










$
396,859


$
402,645Average rate (%)


2.73
%


3.69
%


4.95
%


4.86
%










3.13
%Short-term obligations:Variable rate

$
18,461






















$
18,461


$
18,461Average rate (%)


1.31
%






















1.31
%Long-term obligations:Fixed rate





















$
23,000


$
23,000


$
23,115Average rate (%)






















8.50
%


8.50
%


---

|(1) |  | Marketable equity securities with a book value of approximately $3,515,623 and a fair value of approximately $11,947,212 have been excluded from this table.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



---




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





As of September 30, 2002, BancShares had a positive one-year cumulative gap position of 21.87% and a positive total cumulative gap position of 18.48%. At December 31, 2001,
BancShares had a one-year positive cumulative gap position of 13.98% and a total positive cumulative gap position of 15.48%. The increase in the one-year cumulative gap position at September 30, 2002 is due to the repositioning of securities, which
at December 31, 2001, would mature in greater than one year and at September 30, 2002, will mature in less than one year.





September 30, 20021-30 Days Sensitive


31-90 Days Sensitive


91-180 Days Sensitive


181-365 Days Sensitive


Total One-Year
Sensitive


Total Non
Sensitive


Total(Dollars in thousands)ASSETS:Loans

$
397,395


$
44,155


$
12,529


$
25,058


$
479,137


$
243,070


$
722,207Investment securities


47,962



29,955



29,972







107,889



32,062



139,951Overnight funds sold


38,500















38,500







38,500Other






















2,468



2,468Interest bearing deposits in other banks


11,977















11,977







11,977Total interest earning assets

$
495,834


$
74,110


$
42,501


$
25,058


$
637,503


$
277,600


$
915,103LIABILITIES:Savings and checking with interest

$



$



$



$



$



$
175,255


$
175,255Money market savings


132,373















132,373







132,373Time deposits


50,902



65,531



88,393



81,702



286,528



110,331



396,859Short-term borrowings


18,461















18,461







18,461Long-term borrowings






















23,000



23,000Total interest bearing   liabilities

$
201,736


$
65,531


$
88,393


$
81,702


$
437,362


$
308,586


$
745,948Interest-sensitivity gap

$
294,098


$
8,579


$
(45,892
)

$
(56,644
)

$
200,141


$
(30,986
)

$
169,155Cumulative interest sensitivity gap

$
294,098


$
302,677


$
256,785


$
200,141


$
200,141


$
169,155


$
169,155Cumulative interest sensitivity gap to total interest earning assets


32.14
%


33.08
%


28.06
%


21.87
%


21.87
%


18.48
%


18.48
%





Accounting and Other Matters.





In October 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144 (Statement 144), Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard provides guidance on differentiating between long-lived assets to be held and
used, long-lived assets to be disposed of other than by sale and long-




---

lived assets to be disposed of by sale. Statement 144 supersedes FASB Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Statement 144 also supersedes Accounting Principals Board Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. This statement is effective for fiscal years beginning after December 15, 2001. BancShares adoption of this statement did not have a material
effect on its consolidated financial statements.





In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (Statement 146), Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This Statement applies to costs associated with
an exit activitythat does not involve an entity newly acquired in a business combination or with a disposal activity covered by Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.Those costs include,
but are not limited to, the following: a) termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual
deferred compensation contract (hereinafter referred to as one-time termination benefits), b) costs to terminate a contract that is not a capital lease and c) costs to consolidate facilities or relocate employees. This Statement does not
apply to costs associated with the retirement of a long-lived asset covered by FASB Statement No. 143, Accounting for Asset Retirement Obligations.A liability for a cost associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period in which the liability is incurred. A liability for a cost associated with an exit or disposal activity is incurred when the definition of a liability is met. The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Adoption of this statement in the first quarter of 2003 will impact the accounting for any exit or disposal activities initiated
after such adoption.





In September 2002, the FASB issued Statement on Financial Accounting Standards No. 147
(Statement 147), Acquisitions of Certain Financial Institutions, which brings all business combinations involving financial institutions, except mutuals, into the scope of Statement 141, Business Combinations. Statement 147
requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with Statement 141
and the related intangibles accounted for in accordance with Statement 142, Goodwill and Other Intangible Assets. Statement 147 removes such acquisitions from the scope of Statement 72, which was adopted in February 1983 to address financial
institutions acquisitions during a period when many of such acquisitions involved troubled institutions. Statement 147 also amends Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets to include in
its scope long-term customer-relationship intangible assets of financial institutions. Statement 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with
acquisitions previously within the scope of Statement 72. BancShares will adopt Statement 147 during the fourth quarter of 2002 and will restate its previously issued 2002 financial statements (including separate quarterly results) to remove the
effects of amortization of intangibles previously recorded under Statement 72, to the extent that its prior branch acquisitions are deemed to be business combinations as defined in Emerging Issues Task Force Consensus 98-3. Management
expects to complete this analysis during the fourth quarter of 2002. If all of its prior branch acquisitions are deemed to meet the definition of a business combination pursuant to EITF 98-3, its net income for the nine months ended
September 30, 2002 would increase by $656,000.





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





Within the 90-day period prior to the
filing of this report, 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 our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Companys disclosure controls and procedures are effective 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. Subsequent to the date of
their evaluation, there were no significant changes in the Companys internal controls or in other factors that could significantly affect the disclosure controls, including any corrective actions with regard to significant deficiencies and
material weaknesses.





PART II. OTHER INFORMATION





ITEM 6.  EXHIBITS AND REPORTS ON FORM 8K





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





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

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

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

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

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

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

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

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

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




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







---




SIGNATURES





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





FIDELITY BANCSHARES (N.C.), INC.Dated: November 13, 2002



By:

/s/    Mary W. WillisMary W. Willis Chief Financial Officer and Treasurer







---




CERTIFICATION





I, Billy T. Woodard, certify that:





|1) |  | I have reviewed this quarterly report on Form 10-Q of Fidelity BancShares (N.C), Inc.;
|-- |  | --------------------------------------------------------------------------------------

|2) |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3) |  | Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4) |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | Evaluated the effectiveness of the registrants disclosures controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. |  | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5) |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent functions);
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|6) |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: November 13, 2002



By:

/s/    Billy T. WoodardBilly T. Woodard Chief Executive Officer




---

CERTIFICATION





I, Mary W. Willis, certify that:





|1) |  | I have reviewed this quarterly report on Form 10-Q of Fidelity BancShares (N.C), Inc.;
|-- |  | --------------------------------------------------------------------------------------

|2) |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3) |  | Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4) |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | Evaluated the effectiveness of the registrants disclosures controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. |  | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5) |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent functions);
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|6) |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date: November 13, 2002



By:

/s/    Mary W. WillisMary W. Willis Chief Financial Officer and Treasurer




---




CERTIFICATION


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





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





By: /s/    BILLY T. WOODARD


---

Date: November 13, 2002


Billy T. Woodard


Chief Executive Officer





By: /s/    MARY W. WILLIS


---

Date: November 13, 2002


Mary W. Willis


Chief Financial Officer and Treasurer