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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

The Securities Exchange
Act of 1934



For the quarterly period ended June 30, 2004



Commission File Number: 001-15089



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Fidelity BancShares (N.C.), Inc.

(Exact name of Registrant as specified in
its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 56-1586543                             
|(state or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                                     |  |           
|---------------------------------------------------- |  | ----------
|100 South Main Street, Fuquay-Varina, North Carolina |  | 27526     
|(Address of principal executive offices)             |  | (zip code)



(919) 552-2242

(Registrants telephone number, including area code)



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



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



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

(Number of shares
outstanding, by class, as of August 11, 2004)



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PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



2



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



CONSOLIDATED BALANCE SHEETS



|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | ------------- | - | ------------ | - | ------------- | ----------- |  | - | ------------- | -
|                                                                                                      |  | June 30,    |               |   | December 31, |   |               | June 30,    | 
|                                                                                                      |  | 2004        |               |   | 2003         |   |               | 2003        | 
|                                                                                                      |  | (unaudited) |               |   |              |   |               | (unaudited) | 
|Assets                                                                                                |  |             |               |   |              |   |               |             |  |   |               |  
|                                                                                                      |  |             |              
|Cash and due from banks                                                                               |  | $           | 48,358,384    |   |              | $ | 51,065,293    |             |  | $ | 47,119,163    |  
|Interest bearing deposits in other banks                                                              |  |             | 36,646,453    |   |              |   | 38,187,190    |             |  |   | 48,892,845    |  
|Overnight funds sold                                                                                  |  |             | 18,900,000    |   |              |   | 64,000,000    |             |  |   | 79,100,000    |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Total cash and cash equivalents                                                                       |  |             | 103,904,837   |   |              |   | 153,252,483   |             |  |   | 175,112,008   |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Investment securities:                                                                                |  |             |               |   |              |   |               |             |  |   |               |  
|Held to maturity (estimated fair value of $193,757,524, $165,252,132, and $160,166,527, respectively) |  |             | 195,218,914   |   |              |   | 165,359,375   |             |  |   | 159,796,826   |  
|Available for sale (cost of $3,401,369, $3,390,010, and $3,407,438, respectively)                     |  |             | 14,230,253    |   |              |   | 14,165,194    |             |  |   | 12,305,577    |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Total investment securities                                                                           |  |             | 209,449,167   |   |              |   | 179,524,569   |             |  |   | 172,102,403   |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Loans                                                                                                 |  |             | 771,540,558   |   |              |   | 748,271,779   |             |  |   | 743,223,261   |  
|Allowance for loan losses                                                                             |  |             | (12,649,638   | ) |              |   | (12,818,463   | )           |  |   | (12,346,255   | )
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Loans, net                                                                                            |  |             | 758,890,920   |   |              |   | 735,453,316   |             |  |   | 730,877,006   |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Federal Home Loan Bank of Atlanta stock, at cost                                                      |  |             | 2,604,800     |   |              |   | 2,656,700     |             |  |   | 2,656,700     |  
|Premises and equipment, net                                                                           |  |             | 36,670,131    |   |              |   | 36,990,715    |             |  |   | 36,600,786    |  
|Accrued interest receivable                                                                           |  |             | 3,485,107     |   |              |   | 3,348,175     |             |  |   | 3,013,204     |  
|Intangible assets                                                                                     |  |             | 23,628,038    |   |              |   | 24,035,220    |             |  |   | 24,438,379    |  
|Other assets                                                                                          |  |             | 3,815,540     |   |              |   | 3,488,008     |             |  |   | 3,412,358     |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Total assets                                                                                          |  | $           | 1,142,448,540 |   |              | $ | 1,138,749,186 |             |  | $ | 1,148,212,844 |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Liabilities and Shareholders Equity                                                                  |  |             |               |   |              |   |               |             |  |   |               |  
|                                                                                                      |  |             |              
|Deposits:                                                                                             |  |             |               |   |              |   |               |             |  |   |               |  
|Noninterest-bearing demand deposits                                                                   |  | $           | 201,557,924   |   |              | $ | 184,655,766   |             |  | $ | 188,891,823   |  
|Savings and interest-bearing deposits                                                                 |  |             | 360,430,740   |   |              |   | 357,918,683   |             |  |   | 359,509,538   |  
|Time deposits                                                                                         |  |             | 424,733,740   |   |              |   | 436,913,294   |             |  |   | 446,140,650   |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Total deposits                                                                                        |  |             | 986,722,404   |   |              |   | 979,487,743   |             |  |   | 994,542,011   |  
|Short-term borrowings                                                                                 |  |             | 21,293,915    |   |              |   | 27,007,204    |             |  |   | 26,779,487    |  
|Long-term borrowings                                                                                  |  |             | 23,711,350    |   |              |   | 23,711,350    |             |  |   | 23,000,000    |  
|Accrued interest payable                                                                              |  |             | 2,939,916     |   |              |   | 3,107,811     |             |  |   | 3,309,702     |  
|Other liabilities                                                                                     |  |             | 3,470,688     |   |              |   | 4,508,720     |             |  |   | 4,020,784     |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Total liabilities                                                                                     |  |             | 1,038,138,273 |   |              |   | 1,037,822,828 |             |  |   | 1,051,651,984 |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Shareholders equity:                                                                                 |  |             |               |   |              |   |               |             |  |   |               |  
|Common stock ($25 par value; 29,200 shares authorized; 28,011 shares issued and outstanding)          |  |             | 700,275       |   |              |   | 700,275       |             |  |   | 700,275       |  
|Surplus                                                                                               |  |             | 6,163,380     |   |              |   | 6,163,380     |             |  |   | 6,163,380     |  
|Accumulated other comprehensive income                                                                |  |             | 6,551,474     |   |              |   | 6,504,176     |             |  |   | 5,368,563     |  
|Retained earnings                                                                                     |  |             | 90,895,138    |   |              |   | 87,558,527    |             |  |   | 84,328,642    |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Total shareholders equity                                                                            |  |             | 104,310,267   |   |              |   | 100,926,358   |             |  |   | 96,560,860    |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  
|Total liabilities and shareholders equity                                                            |  | $           | 1,142,448,540 |   |              | $ | 1,138,749,186 |             |  | $ | 1,148,212,844 |  
|                                                                                                      |  |             |               |   |              |   |               |             |  |   |               |  



See accompanying notes
to consolidated financial statements.



3



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



CONSOLIDATED STATEMENTS OF INCOME

(unaudited)



|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|--------------------------------------------------- |  | --------------------------- | ---------- | ------------------------- | ---------- | ---- | - | ---------- |  | ---------- | -
|                                                    |  | Three months ended June 30, |            | Six months ended June 30, |           
|                                                    |  | 2004                        |            | 2003                      |            | 2004 |   | 2003       | 
|Interest income:                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Interest and fees on loans                          |  | $                           | 11,636,570 |                           | 11,766,367 |      | $ | 23,102,314 |  | 23,661,303 |  
|Interest and dividends on investment securities:    |  |                             |            |                           |            |      |   |            |  |            |  
|Taxable interest income                             |  |                             | 878,490    |                           | 554,616    |      |   | 1,705,719  |  | 1,212,691  |  
|Tax-exempt interest income                          |  |                             | 1,940      |                           |           |      |   | 2,783      |  |           |  
|Dividend income                                     |  |                             | 63,280     |                           | 66,579     |      |   | 129,100    |  | 135,022    |  
|Interest on overnight funds sold                    |  |                             | 36,157     |                           | 163,863    |      |   | 116,263    |  | 270,573    |  
|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Total interest income                               |  |                             | 12,616,437 |                           | 12,551,425 |      |   | 25,056,179 |  | 25,279,589 |  
|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Interest expense:                                   |  |                             |            |                           |            |      |   |            |  |            |  
|Deposits                                            |  |                             | 2,480,426  |                           | 3,083,684  |      |   | 5,044,592  |  | 6,449,234  |  
|Short-term borrowings                               |  |                             | 43,328     |                           | 44,798     |      |   | 90,291     |  | 107,511    |  
|Long-term borrowings                                |  |                             | 473,634    |                           | 488,750    |      |   | 977,500    |  | 977,500    |  
|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Total interest expense                              |  |                             | 2,997,388  |                           | 3,617,232  |      |   | 6,112,383  |  | 7,534,245  |  
|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Net interest income                                 |  |                             | 9,619,049  |                           | 8,934,193  |      |   | 18,943,796 |  | 17,745,344 |  
|Provision for loan losses                           |  |                             | 188,000    |                           | 388,000    |      |   | 320,000    |  | 588,000    |  
|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Net interest income after provision for loan losses |  |                             | 9,431,049  |                           | 8,546,193  |      |   | 18,623,796 |  | 17,157,344 |  
|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Noninterest income:                                 |  |                             |            |                           |            |      |   |            |  |            |  
|Service charges on deposit accounts                 |  |                             | 1,615,864  |                           | 1,620,286  |      |   | 3,170,758  |  | 3,209,830  |  
|Other service charges and fees                      |  |                             | 946,447    |                           | 1,151,642  |      |   | 1,832,158  |  | 2,070,301  |  
|Other income                                        |  |                             | 65,156     |                           | 80,222     |      |   | 98,866     |  | 187,100    |  
|Loss on marketable equity securities                |  |                             |           |                           |           |      |   |           |  | (65,488    | )
|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Total noninterest income                            |  |                             | 2,627,467  |                           | 2,852,150  |      |   | 5,101,782  |  | 5,401,743  |  
|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Noninterest expense:                                |  |                             |            |                           |            |      |   |            |  |            |  
|Salaries and employee benefits                      |  |                             | 5,088,794  |                           | 4,657,023  |      |   | 10,058,605 |  | 9,268,024  |  
|Occupancy and equipment                             |  |                             | 1,313,802  |                           | 1,203,020  |      |   | 2,653,979  |  | 2,431,998  |  
|Data processing                                     |  |                             | 1,029,173  |                           | 827,877    |      |   | 2,055,807  |  | 1,686,805  |  
|Amortization of intangibles                         |  |                             | 189,182    |                           | 77,048     |      |   | 378,363    |  | 154,096    |  
|Other expense                                       |  |                             | 1,390,245  |                           | 1,187,841  |      |   | 2,528,568  |  | 2,365,276  |  
|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Total noninterest expense                           |  |                             | 9,011,196  |                           | 7,952,809  |      |   | 17,675,322 |  | 15,906,199 |  
|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Net income before income taxes                      |  |                             | 3,047,320  |                           | 3,445,534  |      |   | 6,050,256  |  | 6,652,888  |  
|Income tax expense                                  |  |                             | 1,145,380  |                           | 1,331,141  |      |   | 2,265,470  |  | 2,481,252  |  
|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Net income                                          |  | $                           | 1,901,940  |                           | 2,114,393  |      | $ | 3,784,786  |  | 4,171,636  |  
|                                                    |  |                             |            |                           |            |      |   |            |  |            |  
|Per share information:                              |  |                             |            |                           |            |      |   |            |  |            |  
|Net income                                          |  | $                           | 67.90      |                           | 75.48      |      | $ | 135.12     |  | 148.93     |  
|Cash dividends declared                             |  | $                           | 8.00       |                           | 8.00       |      | $ | 16.00      |  | 16.00      |  
|Weighted average shares outstanding                 |  |                             | 28,011     |                           | 28,011     |      |   | 28,011     |  | 28,011     |  



See accompanying notes
to consolidated financial statements.



4



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



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(unaudited)



|                                                                                                 |  |              |  |        |         |         |   |                                      |  |   |                  |   |  |                     |            |   |                          |   |           |   |  |   |             |  
|------------------------------------------------------------------------------------------------ |  | ------------ |  | ------ | ------- | ------- | - | ------------------------------------ |  | - | ---------------- | - |  | ------------------- | ---------- | - | ------------------------ | - | --------- | - |  | - | ----------- | -
|                                                                                                 |  | Common Stock |  |        |         |         |   |                                      |  |   |                  |   |  |                     |            |  
|                                                                                                 |  | Shares       |  | Amount |         | Surplus |   | Accumulated othercomprehensiveincome |  |   | Retainedearnings |   |  | Comprehensiveincome |            |   | Totalshareholdersequity |  
|                                                                                                 |  |              |  |        |         |         |  
|Balance December 31, 2002                                                                        |  | 28,011       |  | $      | 700,275 |         | $ | 6,163,380                            |  | $ | 4,866,801        |   |  | $                   | 80,605,182 |   |                          |   |           |   |  | $ | 92,335,638  |  
|                                                                                                 |  |              |  |        |         |         |   |                                      |  |   |                  |   |  |                     |            |   |                          |   |           |   |  |   |             |  
|                                                                                                 |  |              |  |        |         |         |  
|Net income                                                                                       |  |             |  |        |        |         |   |                                     |  |   |                 |   |  |                     | 4,171,636  |   |                          | $ | 4,171,636 |   |  |   | 4,171,636   |  
|Cash dividends ($16.00 per share)                                                                |  |             |  |        |        |         |   |                                     |  |   |                 |   |  |                     | (448,176   | ) |                          |   |           |   |  |   | (448,176    | )
|Unrealized gain on securities available for sale, net of deferred taxes of $337,266              |  |             |  |        |        |         |   |                                     |  |   | 516,573          |   |  |                     |           |   |                          |   | 516,573   |   |  |   | 516,573     |  
|Additional pension charge related to unfunded pension liability, net of deferred taxes of $9,664 |  |             |  |        |        |         |   |                                     |  |   | (14,811          | ) |  |                     |           |   |                          |   | (14,811   | ) |  |   | (14,811     | )
|                                                                                                 |  |              |  |        |         |         |   |                                      |  |   |                  |   |  |                     |            |   |                          |   |           |   |  |   |             |  
|Comprehensive income                                                                             |  |              |  |        |         |         |   |                                      |  |   |                  |   |  |                     |            |   |                          | $ | 4,673,398 |   |  |   |             |  
|                                                                                                 |  |              |  |        |         |         |   |                                      |  |   |                  |   |  |                     |            |   |                          |   |           |   |  |   |             |  
|Balance June 30, 2003                                                                            |  | 28,011       |  |        | 700,275 |         |   | 6,163,380                            |  |   | 5,368,563        |   |  |                     | 84,328,642 |   |                          |   |           |   |  |   | 96,560,860  |  
|                                                                                                 |  |              |  |        |         |         |   |                                      |  |   |                  |   |  |                     |            |   |                          |   |           |   |  |   |             |  
|                                                                                                 |  |              |  |        |         |         |  
|Balance December 31, 2003                                                                        |  | 28,011       |  | $      | 700,275 |         | $ | 6,163,380                            |  | $ | 6,504,176        |   |  | $                   | 87,558,527 |   |                          |   |           |   |  | $ | 100,926,358 |  
|                                                                                                 |  |              |  |        |         |         |   |                                      |  |   |                  |   |  |                     |            |   |                          |   |           |   |  |   |             |  
|Net income                                                                                       |  |             |  |        |        |         |   |                                     |  |   |                 |   |  |                     | 3,784,786  |   |                          | $ | 3,784,786 |   |  |   | 3,784,786   |  
|Cash dividends ($16.00 per share)                                                                |  |             |  |        |        |         |   |                                     |  |   |                 |   |  |                     | (448,175   | ) |                          |   |           |   |  |   | (448,175    | )
|Unrealized gain on securities available for sale, net of deferred taxes of $21,213               |  |             |  |        |        |         |   |                                     |  |   | 32,487           |   |  |                     |           |   |                          |   | 32,487    |   |  |   | 32,487      |  
|Change in unfunded pension liability, net of deferred taxes of $9,664                            |  |             |  |        |        |         |   |                                     |  |   | 14,811           |   |  |                     |           |   |                          |   | 14,811    |   |  |   | 14,811      |  
|                                                                                                 |  |              |  |        |         |         |   |                                      |  |   |                  |   |  |                     |            |   |                          |   |           |   |  |   |             |  
|Comprehensive income                                                                             |  |              |  |        |         |         |   |                                      |  |   |                  |   |  |                     |            |   |                          | $ | 3,832,084 |   |  |   |             |  
|                                                                                                 |  |              |  |        |         |         |   |                                      |  |   |                  |   |  |                     |            |   |                          |   |           |   |  |   |             |  
|Balance June 30, 2004                                                                            |  | 28,011       |  | $      | 700,275 |         | $ | 6,163,380                            |  | $ | 6,551,474        |   |  | $                   | 90,895,138 |   |                          |   |           |   |  | $ | 104,310,267 |  
|                                                                                                 |  |              |  |        |         |         |   |                                      |  |   |                  |   |  |                     |            |   |                          |   |           |   |  |   |             |  



See accompanying notes
to consolidated financial statements.



5



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

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                                                     |  |                           |              |   |      |              |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------------ | - | ---- | ------------ | -
|                                                                                                                     |  | Six months ended June 30, |             
|                                                                                                                     |  | 2004                      |              |   | 2003 |             
|Cash flows from operating activities:                                                                                |  |                           |              |   |      |              |  
|Net income                                                                                                           |  | $                         | 3,784,786    |   |      | 4,171,636    |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                    |  |                           |              |   |      |              |  
|Depreciation and amortization                                                                                        |  |                           | 1,603,476    |   |      | 1,286,056    |  
|Net accretion of premiums and discounts                                                                              |  |                           | (376,073     | ) |      | (382,480     | )
|Loss (gain) on disposition or abandonment of premises and equipment                                                  |  |                           | 20,304       |   |      | (29,974      | )
|Provision for loan losses                                                                                            |  |                           | 320,000      |   |      | 588,000      |  
|Impairment loss on marketable equity securities                                                                      |  |                           |             |   |      | 65,488       |  
|Gain on sales of other real estate                                                                                   |  |                           | (3,459       | ) |      | (60,294      | )
|(Increase) decrease in accrued interest receivable                                                                   |  |                           | (136,932     | ) |      | 575,164      |  
|Increase in other assets, net                                                                                        |  |                           | (238,944     | ) |      | (303,503     | )
|Increase (decrease) in other liabilities, net                                                                        |  |                           | (1,015,645   | ) |      | 214,816      |  
|Decrease in accrued interest payable                                                                                 |  |                           | (167,895     | ) |      | (205,839     | )
|                                                                                                                     |  |                           |              |   |      |              |  
|Net cash provided by operating activities                                                                            |  |                           | 3,789,618    |   |      | 5,919,070    |  
|                                                                                                                     |  |                           |              |   |      |              |  
|Cash flows from investing activities:                                                                                |  |                           |              |   |      |              |  
|Purchase of securities held to maturity                                                                              |  |                           | (129,863,618 | ) |      | (204,328,860 | )
|Purchase of securities available for sale                                                                            |  |                           | (49,704      | ) |      | (6,224       | )
|Proceeds from maturities and issuer calls of securities held to maturity                                             |  |                           | 100,000,218  |   |      | 139,000,164  |  
|Proceeds from sale of securities available for sale                                                                  |  |                           | 38,344       |   |      | 1,607        |  
|Proceeds from sales of other real estate owned and repossessed assets                                                |  |                           | 201,901      |   |      | 258,500      |  
|Redemption (purchase) of FHLB of Atlanta stock                                                                       |  |                           | 51,900       |   |      | (189,100     | )
|Net (increase) decrease in loans                                                                                     |  |                           | (24,100,223  | ) |      | 16,872,698   |  
|Purchases of premises and equipment                                                                                  |  |                           | (949,232     | ) |      | (1,860,914   | )
|Proceeds from sales of premises and equipment                                                                        |  |                           | 7,400        |   |      |             |  
|Net cash received on branch purchases                                                                                |  |                           |             |   |      | 74,506,426   |  
|                                                                                                                     |  |                           |              |   |      |              |  
|Net cash provided by (used in) investing activities                                                                  |  |                           | (54,663,014  | ) |      | 24,254,297   |  
|                                                                                                                     |  |                           |              |   |      |              |  
|Cash flows from financing activities:                                                                                |  |                           |              |   |      |              |  
|Net increase in deposits                                                                                             |  |                           | 7,687,214    |   |      | 12,237,924   |  
|Net increase (decrease) in short-term borrowings                                                                     |  |                           | (5,713,289   | ) |      | 2,432,174    |  
|Cash dividends paid                                                                                                  |  |                           | (448,175     | ) |      | (448,176     | )
|                                                                                                                     |  |                           |              |   |      |              |  
|Net cash provided by financing activities                                                                            |  |                           | 1,525,750    |   |      | 14,221,922   |  
|                                                                                                                     |  |                           |              |   |      |              |  
|Net increase (decrease) in cash and cash equivalents                                                                 |  |                           | (49,347,646  | ) |      | 44,395,289   |  
|Cash and cash equivalents at beginning of period                                                                     |  |                           | 153,252,483  |   |      | 130,716,719  |  
|                                                                                                                     |  |                           |              |   |      |              |  
|Cash and cash equivalents at end of period                                                                           |  | $                         | 103,904,837  |   |      | 175,112,008  |  
|                                                                                                                     |  |                           |              |   |      |              |  
|Supplemental disclosures of cash flow information:                                                                   |  |                           |              |   |      |              |  
|Cash paid during the period for interest                                                                             |  | $                         | 6,280,278    |   |      | 7,740,084    |  
|                                                                                                                     |  |                           |              |   |      |              |  
|Cash paid during the period for income taxes                                                                         |  | $                         | 1,528,751    |   |      | 2,934,047    |  
|                                                                                                                     |  |                           |              |   |      |              |  
|Supplemental disclosure of noncash investing and financing activities:                                               |  |                           |              |   |      |              |  
|Unrealized gains on available for sale securities, net of deferred tax effects of $21,213 and $337,266, respectively |  | $                         | 32,487       |   |      | 516,573      |  
|                                                                                                                     |  |                           |              |   |      |              |  
|Transfer of foreclosed loans to other real estate and repossessed assets                                             |  | $                         | 287,000      |   |      | 305,514      |  
|                                                                                                                     |  |                           |              |   |      |              |  



See
accompanying notes to consolidated financial statements.



6



---

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

Notes to Consolidated Financial Statements

(unaudited)



Note 1. Basis of Presentation



Fidelity BancShares (N.C.), Inc. (BancShares) is the holding company for The Fidelity Bank
(the Bank), which operates 65 branches in North Carolina and Virginia. 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. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements.



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



These financial statements should be read in conjunction with financial statements and notes included in Fidelity BancShares (N.C.), Inc.s Form 10K filed with the
Securities and Exchange Commission. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2004. However, the reclassifications had no effect on shareholders equity or net income as previously
reported.





Note 2. Investment Securities



The following table shows
investments that are in unrealized loss positions as of June 30, 2004, and the length of time in this position.



|                                                                  |  |                     |             |                     |           |            |         |                  |        |            |             |                  |          
|----------------------------------------------------------------- |  | ------------------- | ----------- | ------------------- | --------- | ---------- | ------- | ---------------- | ------ | ---------- | ----------- | ---------------- | ---------
|                                                                  |  | Less than 12 months |             | 12 months or longer |           | Total     
|Description of Securities                                         |  | Fair Value          |             | UnrealizedLosses    |           | Fair Value |         | UnrealizedLosses |        | Fair Value |             | UnrealizedLosses
|U.S. Treasury obligations and direct obligations of U.S. Agencies |  | $                   | 193,400,165 |                     | 1,448,824 |            |        |                  |       |            | 193,400,165 |                  | 1,448,824
|Obligations of state and political subdivisions                   |  |                     | 352,447     |                     | 13,241    |            |        |                  |       |            | 352,447     |                  | 13,241   
|                                                                  |  |                     |             |                     |           |            |         |                  |        |            |             |                  |          
|Subtotal, debt securities                                         |  | $                   | 193,752,612 |                     | 1,462,065 |            |        |                  |       |            | 193,752,612 |                  | 1,462,065
|                                                                  |  |                     |             |                     |           |            |         |                  |        |            |             |                  |          
|Common stock                                                      |  |                     | 106,902     |                     | 8,415     |            | 111,204 |                  | 12,093 |            | 218,106     |                  | 20,508   
|Total temporarily impaired securities                             |  | $                   | 193,859,514 |                     | 1,470,480 |            | 111,204 |                  | 12,093 |            | 193,970,718 |                  | 1,482,573
|                                                                  |  |                     |             |                     |           |            |         |                  |        |            |             |                  |          





At June 30, 2004, there are sixteen treasury or agency obligations and three state obligations that have been in an unrealized loss position less than twelve months. As
these are held to maturity securities, and the Company does not plan to sell them prior to maturity, this impairment is considered temporary. In addition, these securities are rated Aaa and the Company expects to recover all of the value by the
maturity date. There were five available for sale securities that had been in an unrealized loss position for less than twelve months at June 30, 2004, and five securities that had been in a loss position for over twelve months. It is the
Companys policy to review all securities for impairment on a quarterly basis. None of these securities are considered other than temporarily impaired.



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



7



---

Note 3. Pension Plan



Components of Net Periodic Benefit Cost



|                          |  |                                       |          |   |      |          |  
|------------------------- |  | ------------------------------------- | -------- | - | ---- | -------- | -
|                          |  | (Unaudited) Six months ended June 30, |         
|                          |  | 2004                                  |          |   | 2003 |         
|Pension Benefits          |  |                                       |          |   |      |          |  
|Service Cost              |  | $                                     | 273,000  |   |      | 316,400  |  
|Interest Cost             |  |                                       | 327,900  |   |      | 425,000  |  
|Expected Return on Assets |  |                                       | (311,300 | ) |      | (382,300 | )
|Amortization Cost:        |  |                                       |          |   |      |          |  
|Prior service cost        |  |                                       | 2,300    |   |      | 5,300    |  
|Net loss                  |  |                                       | 63,600   |   |      | 14,000   |  
|                          |  |                                       |          |   |      |          |  
|Total Amortizations       |  |                                       | 65,900   |   |      | 19,300   |  
|                          |  |                                      
|Net Periodic Benefit Cost |  | $                                     | 355,500  |   |      | 378,400  |  



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



BancShares has changed the target allocation for the assets of the pension plan since December 31, 2003. The target allocations are as
follows:



|                  |  |                                       |   |  |                                           |  
|----------------- |  | ------------------------------------- | - |  | ----------------------------------------- | -
|Asset Category    |  | Target Allocation as of June 30, 2004 |   |  | Target Allocation as of December 31, 2003 |  
|Equity securities |  | 60                                    | % |  | 50                                        | %
|Debt securities   |  | 40                                    |   |  | 50                                        |  
|                  |  |                                       |   |  |                                           |  
|Total             |  | 100                                   | % |  | 100                                       | %



Note 4. Related Parties



During the current quarter, the Bank made a loan to a significant shareholder.
This loan was negotiated at arms-length and was approved by BancShares Board of Directors. At June 30, 2004, the balance of the loan was $5,098,245.



8



---

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



TABLE 1.



Financial Summary



|                                                    |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|--------------------------------------------------- |  | ------------- | --------- | - | ------------- | - | --------- | ------------- |  | - | ------------- | - |  | ------------- | --------- | - |  | - | --------- | -
|(Dollars in thousands, except per share
data)       |  | 2004          |           |   | 2003          |  
|                                                    |  | SecondQuarter |           |   | First Quarter |   |           | FourthQuarter |  |   | Third Quarter |   |  | SecondQuarter |          
|Summary of Operations                               |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Interest income                                     |  | $             | 12,616    |   |               | $ | 12,440    |               |  | $ | 12,670        |   |  | $             | 12,612    |   |  | $ | 12,551    |  
|Interest expense                                    |  |               | 2,997     |   |               |   | 3,115     |               |  |   | 3,273         |   |  |               | 3,469     |   |  |   | 3,617     |  
|                                                    |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Net interest income                                 |  |               | 9,619     |   |               |   | 9,325     |               |  |   | 9,397         |   |  |               | 9,143     |   |  |   | 8,934     |  
|Provision for loan losses                           |  |               | 188       |   |               |   | 132       |               |  |   | 420           |   |  |               | 407       |   |  |   | 388       |  
|                                                    |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Net interest income after provision for loan losses |  |               | 9,431     |   |               |   | 9,193     |               |  |   | 8,977         |   |  |               | 8,736     |   |  |   | 8,546     |  
|Noninterest income                                  |  |               | 2,627     |   |               |   | 2,474     |               |  |   | 2,689         |   |  |               | 2,868     |   |  |   | 2,852     |  
|Noninterest expense                                 |  |               | 9,011     |   |               |   | 8,664     |               |  |   | 8,618         |   |  |               | 8,619     |   |  |   | 7,953     |  
|                                                    |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Net income before income taxes                      |  |               | 3,047     |   |               |   | 3,003     |               |  |   | 3,048         |   |  |               | 2,985     |   |  |   | 3,445     |  
|Income taxes                                        |  |               | 1,145     |   |               |   | 1,120     |               |  |   | 1,183         |   |  |               | 1,171     |   |  |   | 1,331     |  
|                                                    |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Net income                                          |  | $             | 1,902     |   |               | $ | 1,883     |               |  | $ | 1,865         |   |  | $             | 1,814     |   |  | $ | 2,114     |  
|                                                    |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Selected Period-End Balances                        |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Total assets                                        |  | $             | 1,142,449 |   |               | $ | 1,139,725 |               |  | $ | 1,138,749     |   |  | $             | 1,140,154 |   |  | $ | 1,148,213 |  
|Investment securities and overnight funds sold      |  |               | 228,349   |   |               |   | 245,125   |               |  |   | 243,525       |   |  |               | 263,561   |   |  |   | 251,202   |  
|Loans, gross                                        |  |               | 771,541   |   |               |   | 760,594   |               |  |   | 748,272       |   |  |               | 741,625   |   |  |   | 743,223   |  
|Interest earning assets                             |  |               | 1,039,141 |   |               |   | 1,042,568 |               |  |   | 1,032,641     |   |  |               | 1,033,974 |   |  |   | 1,045,975 |  
|Deposits                                            |  |               | 986,722   |   |               |   | 983,950   |               |  |   | 979,488       |   |  |               | 984,573   |   |  |   | 994,542   |  
|Long-term obligations                               |  |               | 23,711    |   |               |   | 23,711    |               |  |   | 23,711        |   |  |               | 23,000    |   |  |   | 23,000    |  
|Interest bearing liabilities                        |  |               | 830,170   |   |               |   | 835,860   |               |  |   | 845,550       |   |  |               | 851,602   |   |  |   | 855,430   |  
|Shareholders' equity                                |  |               | 104,310   |   |               |   | 102,760   |               |  |   | 100,926       |   |  |               | 98,485    |   |  |   | 96,561    |  
|Common shares outstanding                           |  |               | 28,011    |   |               |   | 28,011    |               |  |   | 28,011        |   |  |               | 28,011    |   |  |   | 28,011    |  
|                                                    |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Selected Average Balances                           |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Total assets                                        |  | $             | 1,137,315 |   |               | $ | 1,125,444 |               |  | $ | 1,134,552     |   |  | $             | 1,127,477 |   |  | $ | 1,025,623 |  
|Investment securities and overnight funds sold      |  |               | 236,859   |   |               |   | 235,902   |               |  |   | 255,219       |   |  |               | 235,018   |   |  |   | 179,898   |  
|Loans, gross                                        |  |               | 765,362   |   |               |   | 754,705   |               |  |   | 743,255       |   |  |               | 746,440   |   |  |   | 716,514   |  
|Interest earning assets                             |  |               | 1,039,735 |   |               |   | 1,028,808 |               |  |   | 1,038,161     |   |  |               | 1,031,741 |   |  |   | 939,378   |  
|Deposits                                            |  |               | 979,026   |   |               |   | 965,146   |               |  |   | 975,728       |   |  |               | 969,945   |   |  |   | 875,776   |  
|Long-term obligations                               |  |               | 23,711    |   |               |   | 23,711    |               |  |   | 23,008        |   |  |               | 23,000    |   |  |   | 23,000    |  
|Interest bearing liabilities                        |  |               | 832,933   |   |               |   | 836,146   |               |  |   | 847,160       |   |  |               | 846,096   |   |  |   | 765,615   |  
|Shareholders' equity                                |  |               | 104,062   |   |               |   | 102,520   |               |  |   | 100,319       |   |  |               | 98,587    |   |  |   | 96,276    |  
|Common shares outstanding                           |  |               | 28,011    |   |               |   | 28,011    |               |  |   | 28,011        |   |  |               | 28,011    |   |  |   | 28,011    |  
|                                                    |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Profitability Ratios                                |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Rate of return (annualized) on:                     |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Total assets                                        |  |               | 0.67      | % |               |   | 0.67      | %             |  |   | 0.65          | % |  |               | 0.64      | % |  |   | 0.83      | %
|Shareholders' equity                                |  |               | 7.35      | % |               |   | 7.39      | %             |  |   | 7.37          | % |  |               | 7.30      | % |  |   | 8.81      | %
|Dividend payout ratio (1)                           |  |               | 11.78     | % |               |   | 11.90     | %             |  |   | 12.02         | % |  |               | 12.35     | % |  |   | 10.60     | %
|                                                    |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Liquidity and Capital Ratios (averages)             |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Loans to deposits                                   |  |               | 78.14     | % |               |   | 78.20     | %             |  |   | 76.17         | % |  |               | 76.96     | % |  |   | 81.81     | %
|Shareholders' equity to total assets                |  |               | 9.15      | % |               |   | 9.11      | %             |  |   | 8.84          | % |  |               | 8.74      | % |  |   | 9.39      | %
|                                                    |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Per Share of Common Stock                           |  |               |           |   |               |   |           |               |  |   |               |   |  |               |           |   |  |   |           |  
|Net income                                          |  | $             | 67.90     |   |               | $ | 67.22     |               |  | $ | 66.55         |   |  | $             | 64.77     |   |  | $ | 75.48     |  
|Cash dividends                                      |  |               | 8.00      |   |               |   | 8.00      |               |  |   | 8.00          |   |  |               | 8.00      |   |  |   | 8.00      |  
|Book value (2)                                      |  |               | 3,723.90  |   |               |   | 3,668.56  |               |  |   | 3,603.10      |   |  |               | 3,515.94  |   |  |   | 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.
|--- | -------------------------------------------------------------------------------------------------------------



9



---

TABLE 2.



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



|                                               |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|---------------------------------------------- |  | -------------- | --------- | - | ---------------------- | - | -------------- |  | ---- | -------------- |  | - | ---------------------- | - | -------------- | - | ------ | --------------------------- | ---- | - |  | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|                                               |  | 2004           |           |   | 2003                   |   |                |  |      |                |  |   |                        |   |               
|(Dollars in thousands)                         |  | AverageBalance |           |   | InterestIncome/Expense |   | Yield/Rate (5) |  |      | AverageBalance |  |   | InterestIncome/Expense |   | Yield/Rate (5) |   |        | Increase (decrease) due to: |     
|                                               |  |                |           |   |                        |   | Volume         |  |      | Yield/Rate     |  |   | TotalChange            |  
|ASSETS                                         |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Interest earning assets:                       |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Loans(1)(2)                                    |  | $              | 759,856   |   |                        | $ | 23,139         |  | 6.12 | %              |  | $ | 721,871                |   |                | $ | 23,689 |                             | 6.62 | % |  | $ | 1,202 |   |  | $ | (1,752 | ) |  | $ | (550   | )
|Taxable investment securities                  |  |                | 195,103   |   |                        |   | 1,545          |  | 1.59 |                |  |   | 108,037                |   |                |   | 996    |                             | 1.86 |   |  |   | 746   |   |  |   | (197   | ) |  |   | 549    |  
|Non-taxable investment securities(2)           |  |                | 227       |   |                        |   | 4              |  | 3.54 |                |  |   |                       |   |                |   |       |                             |     |   |  |   | 2     |   |  |   | 2      |   |  |   | 4      |  
|Overnight funds sold                           |  |                | 26,854    |   |                        |   | 116            |  | 0.87 |                |  |   | 47,559                 |   |                |   | 271    |                             | 1.15 |   |  |   | (104  | ) |  |   | (51    | ) |  |   | (155   | )
|Other investments                              |  |                | 16,826    |   |                        |   | 129            |  | 1.54 |                |  |   | 14,209                 |   |                |   | 135    |                             | 1.92 |   |  |   | 17    |   |  |   | (23    | ) |  |   | (6     | )
|Interest bearing deposits in other banks       |  |                | 35,228    |   |                        |   | 162            |  | 0.92 |                |  |   | 37,879                 |   |                |   | 217    |                             | 1.16 |   |  |   | (14   | ) |  |   | (41    | ) |  |   | (55    | )
|                                               |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Total interest earning assets                  |  | $              | 1,034,094 |   |                        | $ | 25,095         |  | 4.88 | %              |  | $ | 929,555                |   |                | $ | 25,308 |                             | 5.49 | % |  | $ | 1,849 |   |  | $ | (2,062 | ) |  | $ | (213   | )
|                                               |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Noninterest earning assets:                    |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Cash and due from banks                        |  |                | 42,298    |   |                        |   |                |  |      |                |  |   | 38,503                 |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Premises and equipment                         |  |                | 36,741    |   |                        |   |                |  |      |                |  |   | 34,726                 |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Other assets                                   |  |                | 31,029    |   |                        |   |                |  |      |                |  |   | 23,862                 |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Reserve for loan losses                        |  |                | (12,782   | ) |                        |   |                |  |      |                |  |   | (11,941                | ) |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|                                               |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Total assets                                   |  | $              | 1,131,380 |   |                        |   |                |  |      |                |  | $ | 1,014,705              |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|                                               |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|LIABILITIES & EQUITY                           |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Interest bearing liabilities:                  |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Demand deposits                                |  | $              | 134,878   |   |                        | $ | 85             |  | 0.13 | %              |  | $ | 117,383                |   |                | $ | 148    |                             | 0.25 | % |  | $ | 7     |   |  | $ | (70    | ) |  | $ | (63    | )
|Savings deposits                               |  |                | 218,155   |   |                        |   | 637            |  | 0.59 |                |  |   | 201,775                |   |                |   | 891    |                             | 0.89 |   |  |   | 48    |   |  |   | (302   | ) |  |   | (254   | )
|Time deposits                                  |  |                | 432,941   |   |                        |   | 4,322          |  | 2.01 |                |  |   | 394,919                |   |                |   | 5,410  |                             | 2.76 |   |  |   | 450   |   |  |   | (1,538 | ) |  |   | (1,088 | )
|Short-term borrowings                          |  |                | 24,855    |   |                        |   | 90             |  | 0.73 |                |  |   | 22,858                 |   |                |   | 108    |                             | 0.95 |   |  |   | 8     |   |  |   | (26    | ) |  |   | (18    | )
|Long-term borrowings                           |  |                | 23,711    |   |                        |   | 978            |  | 8.29 |                |  |   | 23,000                 |   |                |   | 978    |                             | 8.57 |   |  |   | 30    |   |  |   | (30    | ) |  |   |       |  
|                                               |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Total interest bearing liabilities             |  | $              | 834,540   |   |                        | $ | 6,112          |  | 1.47 | %              |  | $ | 759,935                |   |                | $ | 7,535  |                             | 2.00 | % |  | $ | 543   |   |  | $ | (1,966 | ) |  | $ | (1,423 | )
|                                               |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Noninterest bearing liabilities:               |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Demand deposits                                |  |                | 186,112   |   |                        |   |                |  |      |                |  |   | 152,448                |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Other liabilities                              |  |                | 7,437     |   |                        |   |                |  |      |                |  |   | 7,155                  |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Shareholders equity                           |  |                | 103,291   |   |                        |   |                |  |      |                |  |   | 95,167                 |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|                                               |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Total liabilities and equity                   |  | $              | 1,131,380 |   |                        |   |                |  |      |                |  | $ | 1,014,705              |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|                                               |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Interest rate spread(3)                        |  |                |           |   |                        |   |                |  | 3.41 | %              |  |   |                        |   |                |   |        |                             | 3.49 | % |  |   |       |   |  |   |        |   |  |   |        |  
|                                               |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  
|Net interest income and net interest margin(4) |  |                |           |   |                        | $ | 18,983         |  | 3.69 | %              |  |   |                        |   |                | $ | 17,773 |                             | 3.86 | % |  | $ | 1,306 |   |  | $ | (96    | ) |  | $ | 1,210  |  
|                                               |  |                |           |   |                        |   |                |  |      |                |  |   |                        |   |                |   |        |                             |      |   |  |   |       |   |  |   |        |   |  |   |        |  



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

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

The taxable equivalent adjustment was approximately $38,000 and $28,000 for the periods in 2004 and 2003, respectively.

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

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

|(5) | Annualized
|--- | ----------



---

TABLE 3.

Consolidated Taxable Equivalent Rate/Volume Variance Analysis  Second Quarter



|                                         |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|---------------------------------------- |  | -------------- | --------- | - | ---------------------- | - | -------------- | --------------------------- | ---- | -------------- |  | - | ---------------------- | - | -------------- | - | ------ | ------ | ---- | - | ---------- | - | ----- | ----------- |  | - | ---- | - |  | - | ---- | -
|                                         |  | 2004           |           |   | 2003                   |   |                | Increase (decrease) due to: |     
|(Dollars in thousands)                   |  | AverageBalance |           |   | InterestIncome/Expense |   | Yield/Rate (5) |                             |      | AverageBalance |  |   | InterestIncome/Expense |   | Yield/Rate (5) |   |        | Volume |      |   | Yield/Rate |   |       | TotalChange | 
|ASSETS                                   |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Interest earning assets:                 |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Loans(1)(2)                              |  | $              | 765,362   |   |                        | $ | 11,654         |                             | 6.12 | %              |  | $ | 716,514                |   |                | $ | 11,780 |        | 6.59 | % |            | $ | 773   |             |  | $ | (899 | ) |  | $ | (126 | )
|Taxable investment securities            |  |                | 205,920   |   |                        |   | 801            |                             | 1.56 |                |  |   | 110,203                |   |                |   | 437    |        | 1.59 |   |            |   | 376   |             |  |   | (12  | ) |  |   | 364  |  
|Non-taxable investment securities(2)     |  |                | 324       |   |                        |   | 3              |                             | 3.72 |                |  |   |                       |   |                |   |       |        |     |   |            |   | 2     |             |  |   | 1    |   |  |   | 3    |  
|Overnight funds sold                     |  |                | 16,523    |   |                        |   | 36             |                             | 0.88 |                |  |   | 57,691                 |   |                |   | 163    |        | 1.13 |   |            |   | (103  | )           |  |   | (24  | ) |  |   | (127 | )
|Other investments                        |  |                | 16,697    |   |                        |   | 63             |                             | 1.52 |                |  |   | 14,660                 |   |                |   | 67     |        | 1.83 |   |            |   | 7     |             |  |   | (11  | ) |  |   | (4   | )
|Interest bearing deposits in other banks |  |                | 34,909    |   |                        |   | 80             |                             | 0.92 |                |  |   | 40,310                 |   |                |   | 118    |        | 1.17 |   |            |   | (14   | )           |  |   | (24  | ) |  |   | (38  | )
|                                         |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Total interest earning assets            |  | $              | 1,039,735 |   |                        | $ | 12,637         |                             | 4.89 | %              |  | $ | 939,378                |   |                | $ | 12,565 |        | 5.37 | % |            | $ | 1,041 |             |  | $ | (969 | ) |  | $ | 72   |  
|                                         |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Noninterest earning assets:              |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Cash and due from banks                  |  |                | 42,721    |   |                        |   |                |                             |      |                |  |   | 38,900                 |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Premises and equipment                   |  |                | 36,646    |   |                        |   |                |                             |      |                |  |   | 34,871                 |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Other assets                             |  |                | 30,923    |   |                        |   |                |                             |      |                |  |   | 24,492                 |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Reserve for loan losses                  |  |                | (12,710   | ) |                        |   |                |                             |      |                |  |   | (12,018                | ) |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|                                         |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Total assets                             |  | $              | 1,137,315 |   |                        |   |                |                             |      |                |  | $ | 1,025,623              |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|                                         |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|LIABILITIES & EQUITY                     |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Interest bearing liabilities:            |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Demand deposits                          |  | $              | 134,971   |   |                        | $ | 40             |                             | 0.12 | %              |  | $ | 118,521                |   |                | $ | 63     |        | 0.21 | % |            | $ | 3     |             |  | $ | (26  | ) |  | $ | (23  | )
|Savings deposits                         |  |                | 220,383   |   |                        |   | 321            |                             | 0.59 |                |  |   | 204,549                |   |                |   | 421    |        | 0.83 |   |            |   | 21    |             |  |   | (121 | ) |  |   | (100 | )
|Time deposits                            |  |                | 430,611   |   |                        |   | 2,119          |                             | 1.98 |                |  |   | 396,068                |   |                |   | 2,599  |        | 2.63 |   |            |   | 198   |             |  |   | (678 | ) |  |   | (480 | )
|Short-term borrowings                    |  |                | 23,257    |   |                        |   | 43             |                             | 0.74 |                |  |   | 23,477                 |   |                |   | 45     |        | 0.77 |   |            |   |      |             |  |   | (2   | ) |  |   | (2   | )
|Long-term borrowings                     |  |                | 23,711    |   |                        |   | 474            |                             | 8.04 |                |  |   | 23,000                 |   |                |   | 489    |        | 8.53 |   |            |   | 15    |             |  |   | (30  | ) |  |   | (15  | )
|                                         |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Total interest bearing liabilities       |  | $              | 832,933   |   |                        | $ | 2,997          |                             | 1.45 | %              |  | $ | 765,615                |   |                | $ | 3,617  |        | 1.89 | % |            | $ | 237   |             |  | $ | (857 | ) |  | $ | (620 | )
|                                         |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Noninterest bearing                      |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|liabilities:                             |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Demand deposits                          |  |                | 193,060   |   |                        |   |                |                             |      |                |  |   | 156,638                |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Other liabilities                        |  |                | 7,260     |   |                        |   |                |                             |      |                |  |   | 7,094                  |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Shareholders equity                     |  |                | 104,062   |   |                        |   |                |                             |      |                |  |   | 96,276                 |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|                                         |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Total liabilities and equity             |  | $              | 1,137,315 |   |                        |   |                |                             |      |                |  | $ | 1,025,623              |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|                                         |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Interest rate spread(3)                  |  |                |           |   |                        |   |                |                             | 3.44 | %              |  |   |                        |   |                |   |        |        | 3.48 | % |            |   |       |             |  |   |      |   |  |   |      |  
|                                         |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|Net interest income and net              |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  
|interest margin(4)                       |  |                |           |   |                        | $ | 9,640          |                             | 3.73 | %              |  |   |                        |   |                | $ | 8,948  |        | 3.82 | % |            | $ | 804   |             |  | $ | (112 | ) |  | $ | 692  |  
|                                         |  |                |           |   |                        |   |                |                             |      |                |  |   |                        |   |                |   |        |        |      |   |            |   |       |             |  |   |      |   |  |   |      |  



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

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

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

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

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

|(5) | Annualized
|--- | ----------



11



---

Introduction

Managements discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of Fidelity BancShares (N.C.), Inc. and Subsidiary (BancShares).
This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within this report. The focus of this discussion concerns BancShares banking subsidiary, The Fidelity
Bank (the Bank), which operates 65 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 2004, BancShares net income decreased $387,000 to $3.8 million from $4.2 million in the first six months of 2003, a decrease of 9.27%. Net income in the second
quarter of 2004 decreased $212,000 or 10.05% when compared to the same period in the prior year. The decrease in net income resulted primarily from increases in noninterest expenses which include salaries, occupancy, data processing, and
amortization expenses as well as a decrease in noninterest income which was slightly offset by a decrease in the provision for loan losses.



Net income per share for the first six months of 2004 was $135.12, a decrease of $13.81 per share or 9.27% from $148.93 per share in 2003. For the second
quarter of 2004, net income per share was $67.90, a decrease of $7.58 or 10.05% from $75.48 per share for the second quarter of 2003. Return on average assets for the first six months of 2004 and 2003 was 0.67% and 0.83%, respectively. For the
second quarter of 2004 and 2003, return on average assets was 0.67% and 0.83%, respectively. Return on average equity for the first six months of 2004 and 2003 was 7.37% and 8.84%, respectively. For the second quarter of 2004 and 2003 return on
average equity was 7.35% and 8.81%, 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 $113.5 million,
respectively.



Net Interest Income. The greatest portion
of BancShares earnings is from net interest income, which is the difference between interest income on interest earning assets and interest paid on deposits and other interest bearing liabilities. The primary factors affecting net interest
income are changes in the volume and yields/rates on interest earning assets and interest bearing liabilities, and the ability to respond to changes in interest rates through asset/liability management. For the first six months of 2004, net interest
income was $18.9 million as compared to $17.7 million for the same period in 2003, an increase of $1.2 million or 6.73%. Of the $1.2 million net increase in net interest income, a $1.3 million increase resulted from increases in volume of interest
earning assets and interest bearing liabilities, the effect of which was offset with the impact of decreases in rates on interest bearing assets which were not fully offset by decreases in rates for interest bearing liabilities, contributing to a
$100,000 offset to the increases in the net interest income. The net interest margin for the first six months of 2004 and 2003 was 3.69% and 3.86%, respectively. Net interest income and net interest margin for the second quarter of 2004 and 2003
were $9.6 million and 3.73% and $8.9 million and 3.82%, respectively.



Interest income for the first six months of 2004 was $25.1 million as compared to $25.3 million in 2003, a decrease of $227,000 or 0.90%. The decrease in interest income for the first six months of 2004 over the first six months of 2003 is
attributable mainly to a decline in interest rates, which was offset by growth in average earning asset balances due to the excess funds from the acquisition in June, 2003 being invested in lower earning investment balances rather than loans at this
time. Interest income from loans amounted to $23.1 million in the first six months of 2004 as compared to $23.7 million in



12



---

the first six months of 2003, a decrease of $563,000 or 2.38%. Since approximately 70% of BancShares loans are tied to
prime at June 30, 2004 (compared to approximately 60% in the prior year), the decrease in prime rate during 2003 along with the increase in variable rate loans has contributed to the decrease in interest income on loans. BancShares loan growth
is largely due to growth within the existing branch network as well as the acquisition in 2003 which brought in $31.4 million in loans. Earnings from investments and overnight funds sold provided the balance of interest income, contributing $2.0
million and $1.6 million for the first six months of 2004 and 2003, respectively. Average interest-earning assets for the first six months of 2004 increased to $1.0 billion, an 11.25% increase, from $929.6 million in the first six months of 2003.
The yield on interest earning assets for the first six months of 2004 and 2003 was 4.88% and 5.49%, respectively. The decrease in interest income on loans is due to the decrease in interest rates which was partially offset by increases in volume.
Increases in interest income on investments and overnight funds is due to the increase in volume as a result of more deposits acquired in the acquisition than there were loans made which is partially offset by decreases in rates as well as the
reduced average maturity of securities held. In the past, investments were typically purchased with two year maturities. They have now matured and repriced in the low rate environment. Many of the securities purchased to replace these were bought
with a three to six month maturity, thus with lower interest rates, hoping that interest rates would begin to rise and not wanting to have a two year maturity on a low interest security. Trends in interest earning assets are shown in Tables 2 and 3.



Interest expense for the six months of 2004 was $6.1 million
compared to $7.5 million in 2003, a decrease of $1.4 million or 18.87%. The decrease in interest expense in the first six months of 2004, compared to the first six months of 2003, is attributable to decreased interest rates on deposit balances,
primarily time deposits and savings accounts. Deposits are not tied to prime; although their rates have also been reduced, there are CDs and IRAs that have fixed rates which take longer to reprice, therefore interest expense does not
decrease as fast as interest income following rate changes. Average interest bearing deposits increased $72,000 or 10.07%, from $714.1 million in the first six months of 2003 to $786.0 million in the first six months of 2004. The average rate paid
on interest-bearing deposits was 1.22% and 1.71% for the first six months of 2004 and 2003, respectively. Borrowings contributed $1.1 million in interest expense during the first six months of 2004 and 2003. The yield on interest bearing liabilities
for the first quarter of 2004 and 2003 was 1.47% and 2.00%, 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 2004 and 2003, management
recognized $188,000 and $388,000, respectively, as provisions for loan losses. The decrease in the provision for loan losses is primarily attributable to generally lower levels of new credit risk being assumed as evidenced by slower loan growth.
During the first six months of 2004, management charged-off loans totaling $610,000 and had recoveries of $121,000 resulting in net charge-offs of $489,000. During the same period in 2003, management charged-off $329,000 in loans and had recoveries
of $249,000, resulting in net charge-offs of $80,000. Charge-offs were higher for the first six months of 2004 than the same period of 2003 mainly due to the charge-off of one large mortgage loan and three large real estate loans in the first six
months of 2004. In the first six months of 2003, there were no large loan charge-offs. The provision for loan losses for the first six months of 2004 was less than chargeoffs during the same time due to many of the charged off loans having been
reserved for in prior years. The ratio of allowance for loan losses to loans decreased to 1.64% at June 30, 2004 from 1.71% at December 31, 2003. The following table presents BancShares comparative asset quality ratios:



|                                                                       |  |               |   |  |                  |  
|---------------------------------------------------------------------- |  | ------------- | - |  | ---------------- | -
|                                                                       |  | June 30, 2004 |   |  | December 31,2003 |  
|Ratio of annualized net loans charged off to average loans             |  | 0.13          | % |  | 0.06             | %
|Allowance for loan losses to loans                                     |  | 1.64          |   |  | 1.71             |  
|Non-performing assets to total gross loans and other real estate owned |  | 0.09          |   |  | 0.08             |  
|Non-performing assets to total assets                                  |  | 0.06          |   |  | 0.05             |  



Management considers
the June 30, 2004 allowance for loan losses adequate to cover probable losses inherent in the loan portfolio. Managements periodic evaluation of the adequacy of the allowance is based on the Banks past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the borrowers experience, the estimated value of any underlying collateral, current economic conditions, analysis of peer bank trends, and other risk factors. Management
believes it has established the allowance in accordance with accounting principles generally accepted in the United States of America and in consideration of the current economic environment. While management uses the best information available to
make evaluations, future adjustments may be necessary if economic or other conditions differ substantially from the assumptions used. No significant changes were made to allocations or the methodology used to estimate the allowance for loan losses
during the second quarter.



13



---

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.



BancShares had impaired loans,
which comprise all of the Companys nonaccrual loans, of $429,000 at June 30, 2004, $478,000 at June 30, 2003, and $407,000 at December 31, 2003. Management actively maintains a current loan watch list and knows of no other loans which are
material and (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware
of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.



Noninterest Income. Noninterest income decreased $296,000 or 5.48% for the first six months of 2004 over the first six months of 2003. Noninterest
income for the first six months of 2003 included in other income a gain on the sale of other real estate of $57,000 as well as a gain on disposal of an asset of $37,000. Included in noninterest income for 2003 was also a securities loss of $65,000.
Service charges on deposit accounts and other service charges and fees decreased $277,000 or 5.25% during the first six months of 2004 primarily due to a decrease in mortgage commission income of $450,000 from $588,000 in the first six months of
2003 to $138,000 in the first six months of 2004. This income is part of other service charges and fees. In addition to increased refinancing resulting from low mortgage rates, during the first four months of 2003, Fidelity Bank sponsored a
promotion designed to increase fee income from new mortgage loans. Associate incentives, company-wide contests, and in-branch marketing materials contributed to the success of the promotion which resulted in a significant increase in mortgage
related fee income in 2003. The decrease in 2004 in mortgage commission income is partially offset by an increase in TFB Financial Services income due to increased selling of securities as well as increases in credit card income and noncustomer ATM
fees which are also in other service charges and fees. Service charges on deposits decreased mainly due to decreased service charges on commercial checking accounts from an increased earnings credit paid on these accounts in the first six months of
2004 compared to the first six months of 2003. For commercial customers who have full analysis checking accounts, an earnings credit is paid on the balances maintained in the account each month which is used to offset some or all of the service
charges the accounts accrue throughout the month. BancShares average deposits increased $105.6 million or 12.18% to $972.1 million in the first six months of 2004 from $866.5 million in the first six months of 2003.



Noninterest Expense. Noninterest expense increased $1.7 million or
11.12%, from $15.9 million in the first six months of 2003 to $17.7 million in the first six months of 2004, including increases of $791,000 in salaries and employee benefits, $222,000 in occupancy and equipment, $369,000 in data processing costs,
$224,000 in amortization of intangibles, and $163,000 in other expenses. The fluctuations represented increases of 8.53% in salaries and employee benefits, 9.13% in occupancy and equipment, 21.88% in data processing costs, 145.54% in amortization of
intangibles, and 6.90% in other expenses over the first six months of 2003. Increases in data processing costs were mainly due to increases in deposit processing resulting from the acquisition of four branches in June 2003 as well as increases due
to charges for the new teller platform. Increases in salaries and benefits were partially due to the addition of people in the acquisition as well as normal salary increases, increases in health insurance, and internal growth. Increases in occupancy
and equipment is due to increased rent expense due to two new leased locations, increased depreciation from additional fixed assets, and increased utilities. Amortization of intangibles also increased due to the acquisition of the four branches for
which a core deposit intangible study was done by an independent consulting firm to determine the amount of amortizable intangible.



Income Taxes. In the first six months of 2004, BancShares had income tax expense of $2.3 million, a decrease of $216,000 or 8.70%, from $2.5
million in the prior year period. The resulting effective income tax rates, based on the accruals for the six months ended June 30, 2004 and 2003 were 37.44% and 37.30%, respectively.



Capital Resources

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



Regulatory guidelines define minimum requirements for BancShares leverage capital ratio. Leverage capital equals total equity and certain long-term borrowings less goodwill and certain other intangibles and is
measured relative to total adjusted assets as defined by regulatory guidelines. According to these guidelines, BancShares leverage ratio at June 30, 2004 was 8.79% as compared to 8.47% at December 31, 2003.



14



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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, 2004, the Total Capital Ratio was 14.12% as compared to 13.89% at December
31, 2003.



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



|                       |  |               |         |   |  |    |   |                   |   |         |   |  |    |  
|---------------------- |  | ------------- | ------- | - |  | -- | - | ----------------- | - | ------- | - |  | -- | -
|(Dollars in thousands) |  | June 30, 2004 |         |   |  |    |   | December 31, 2003 |   |         |   | 
|Tier 1 capital         |  | $             | 97,842  |   |  |    |   |                   | $ | 94,112  |   |  |    |  
|Total capital          |  |               | 112,731 |   |  |    |   |                   |   | 108,787 |   |  |    |  
|Leverage capital ratio |  |               | 8.79    | % |  | (1 | ) |                   |   | 8.47    | % |  | (1 | )
|Tier 1 capital ratio   |  |               | 12.25   |   |  | (1 | ) |                   |   | 12.02   |   |  | (1 | )
|Total capital ratio    |  |               | 14.12   |   |  | (1 | ) |                   |   | 13.89   |   |  | (1 | )

---

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



At June 30, 2004, and December 31, 2003, BancShares and the Bank were in compliance with all of their regulatory capital requirements, and all of their
regulatory capital ratios exceed the minimum ratios required for it to be classified as well capitalized.



Commitments, Contingencies and Off-balance sheet risk

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



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



As of June 30, 2004 and December 31, 2003, outstanding financial instruments
whose contract amounts represent credit risk were as follows:



|                                                                                 |  |               |             |                   |            
|-------------------------------------------------------------------------------- |  | ------------- | ----------- | ----------------- | -----------
|                                                                                 |  | June 30, 2004 |             | December 31, 2003
|Outstanding commitments to extend credit and lines of credit and lines of credit |  | $             | 261,376,012 |                   | 260,488,448
|                                                                                 |  |               |             |                   |            
|Standby letters of credit                                                        |  | $             | 3,008,130   |                   | 3,178,745  
|                                                                                 |  |               |             |                   |            



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



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



15



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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 19.85% of deposits at June 30, 2004, a decrease from 22.24% at December 31, 2003.
BancShares liquidity ratio, which is defined as cash plus short-term marketable securities (minus pledged securities) less the federal reserve requirement divided by deposits and short-term liabilities, was 21.45% at June 30, 2004, compared to
23.90% at December 31, 2003.



The consolidated statements of
cash flows disclose the principal sources and uses of cash from operating, investing and financing activities for the six months ended June 30, 2004 and 2003.



BancShares has no brokered deposits. Jumbo time deposits are considered to include all time deposits of $100,000 or more. BancShares has never
aggressively bid on these deposits. Most jumbo deposit customers have other relationships with the Bank, including savings, demand and other time deposits, and in some cases, loans. At June 30, 2004, and December 31, 2003, jumbo time deposits
represented 11.14% and 11.66%, respectively, of total deposits.



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



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



CONTRACTUAL OBLIGATIONS

As of June 30, 2004



|                                   |  |                        |         |           |        |           |        |              |        |       |          
|---------------------------------- |  | ---------------------- | ------- | --------- | ------ | --------- | ------ | ------------ | ------ | ----- | ---------
|                                   |  | Payments due by period |         |          
|                                   |  | (dollars in thousands) |         |          
|                                   |  | Less than1 year        |         | 1-3 years |        | 4-5 years |        | Over 5 years |        | Total
|Deposits                           |  | $                      | 879,975 |           | 68,897 |           | 37,850 |              |       |       | 986,722  
|Short-term borrowings              |  |                        | 21,294  |           |       |           |       |              |       |       | 21,294   
|Long-term borrowings               |  |                        |        |           |       |           |       |              | 23,711 |       | 23,711   
|Lease obligations                  |  |                        | 423     |           | 760    |           | 467    |              | 601    |       | 2,251    
|Deferred compensation              |  |                        | 43      |           | 381    |           | 381    |              | 3,099  |       | 3,904    
|                                   |  |                        |         |           |        |           |        |              |        |       |          
|Total contractual cash obligations |  | $                      | 901,735 |           | 70,038 |           | 38,698 |              | 27,411 |       | 1,037,882
|                                   |  |                        |         |           |        |           |        |              |        |       |          



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



BancShares market risk arises primarily from
interest rate risk inherent in its lending, investing, and deposit taking activities. Management seeks to manage this risk through the use of short-term maturities.



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, 2004. The expected maturity categories take into consideration historical prepayment experience as well as managements expectations based on the interest rate environment as of June 30, 2004. For
core deposits without contractual maturity (i.e. interest bearing checking, savings and money market accounts), the table presents principal cash flows as maturing in one year since they are subject to immediate repricing.



16



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|                             |  |                                   |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|---------------------------- |  | --------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - | ---------- | - | ------ | ----- |  | - | ---------- | - |  | - | ------- | - |  | - | -------
|                             |  | Maturing in period ended June 30, |         |   |      |   |        |     
|                             |  | 2005                              |         |   | 2006 |   |        | 2007 |  |   | 2008   |   |  | 2009 |        |   | Thereafter |   |        | Total |  |   | Fair Value
|                             |  | (Dollars in thousands)           
|Assets                       |  |                                   |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Loans:                       |  |                                   |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                   |  | $                                 | 90,344  |   |      | $ | 55,455 |      |  | $ | 52,134 |   |  | $    | 14,445 |   |            | $ | 14,242 |       |  | $ | 4,579      |   |  | $ | 231,199 |   |  | $ | 231,469
|Average rate (%)             |  |                                   | 8.21    | % |      |   | 7.53   | %    |  |   | 7.28   | % |  |      | 6.81   | % |            |   | 6.32   | %     |  |   | 7.57       | % |  |   | 7.62    | % |  |   |        
|                             |  |                                   |         |   |      |   |        |     
|Variable rate                |  | $                                 | 271,505 |   |      | $ | 64,935 |      |  | $ | 59,686 |   |  | $    | 17,740 |   |            | $ | 21,562 |       |  | $ | 104,913    |   |  | $ | 540,341 |   |  | $ | 540,341
|Average rate (%)             |  |                                   | 4.87    | % |      |   | 4.80   | %    |  |   | 4.71   | % |  |      | 4.68   | % |            |   | 4.55   | %     |  |   | 4.53       | % |  |   | 4.76    | % |  |   |        
|                             |  |                                   |         |   |      |   |        |     
|Investment securities (1):   |  |                                   |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                   |  | $                                 | 144,753 |   |      | $ | 45,096 |      |  | $ | 5,065  |   |  | $    | 200    |   |            |   |       |       |  | $ | 105        |   |  | $ | 195,219 |   |  | $ | 193,758
|Average rate (%)             |  |                                   | 1.41    | % |      |   | 1.94   | %    |  |   | 3.22   | % |  |      | 2.00   | % |            |   |       |       |  |   | 3.83       | % |  |   | 1.58    | % |  |   |        
|                             |  |                                   |         |   |      |   |        |     
|Liabilities                  |  |                                   |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Savings and interest bearing |  |                                   |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|checking:                    |  |                                   |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                   |  | $                                 | 360,431 |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  | $ | 360,431 |   |  | $ | 360,431
|Average rate (%)             |  |                                   | 0.41    | % |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  |   | 0.41    | % |  |   |        
|                             |  |                                   |         |   |      |   |        |     
|Certificates of deposit:     |  |                                   |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                   |  | $                                 | 317,987 |   |      | $ | 47,309 |      |  | $ | 21,588 |   |  | $    | 21,298 |   |            | $ | 16,552 |       |  |   |           |   |  | $ | 424,734 |   |  | $ | 425,121
|Average rate (%)             |  |                                   | 1.86    | % |      |   | 2.68   | %    |  |   | 3.58   | % |  |      | 3.92   | % |            |   | 3.46   | %     |  |   |           |   |  |   | 2.21    | % |  |   |        
|                             |  |                                   |         |   |      |   |        |     
|Short-term obligations:      |  |                                   |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Variable rate                |  | $                                 | 21,294  |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  | $ | 21,294  |   |  | $ | 21,294 
|Average rate (%)             |  |                                   | 0.84    | % |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |           |   |  |   | 0.84    | % |  |   |        
|                             |  |                                   |         |   |      |   |        |     
|Long-term obligations:       |  |                                   |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |            |   |  |   |         |   |  |   |        
|Fixed rate                   |  |                                   |        |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  | $ | 23,711     |   |  | $ | 23,711  |   |  | $ | 23,782 
|Average rate (%)             |  |                                   |        |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   | 8.50       | % |  |   | 8.50    | % |  |   |        

---

| | (1) | Marketable equity securities with a cost of approximately $3,401,369 and a fair value of approximately $14,230,253 have been excluded from this table. In addition, Federal Home Loan
Bank stock has been excluded from this table with a cost and fair value of $2,604,800.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest Sensitivity. The table below presents BancShares interest sensitivity position at June 30, 2004. The difference between interest
sensitive asset and interest sensitive liability repricing within time periods is referred to as the interest rate sensitivity gap. Assets and liabilities with maturities of one year or less and those that may be adjusted within the period are
considered interest-sensitive. The interest-sensitivity position has meaning only as of the date for which it was prepared. Gaps are identified as either positive (interest sensitive assets in excess of interest sensitive liabilities) or negative
(interest sensitive liabilities in excess of interest sensitive assets).



As of June 30, 2004, BancShares had a positive one-year cumulative gap position of 12.42% and a positive total cumulative gap position of 20.11%. At December 31, 2003, BancShares had a one-year positive cumulative gap
position of 9.45% and a total positive cumulative gap position of 18.12%. In an increasing rate environment there would be a positive effect on the gap due to assets repricing faster than liabilities which would cause interest income to increase
faster than interest expense.



17



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|                                                                     |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|-------------------------------------------------------------------- |  | ------------------- | ------- | - | -------------------- | - | ------- | --------------------- |  | - | ---------------------- | - |  | ------------------------ | ------- | - | ------------------- | - | ------- | ----- |  | - | ------- | - |  | - | --------- | -
|                                                                     |  | June 30, 2004       |        
|                                                                     |  | 1-30 Days Sensitive |         |   | 31-90 Days Sensitive |   |         | 91-180 Days Sensitive |  |   | 181-365 Days Sensitive |   |  | Total One-Year Sensitive |         |   | Total Non Sensitive |   |         | Total | 
|Assets:                                                              |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Loans                                                                |  | $                   | 548,954 |   |                      | $ | 20,446  |                       |  | $ | 22,597                 |   |  | $                        | 36,446  |   |                     | $ | 628,443 |       |  | $ | 143,098 |   |  | $ | 771,541   |  
|Investment securities                                                |  |                     | 29,978  |   |                      |   | 20,030  |                       |  |   | 54,968                 |   |  |                          | 39,777  |   |                     |   | 144,753 |       |  |   | 64,696  |   |  |   | 209,449   |  
|Overnight funds sold                                                 |  |                     | 18,900  |   |                      |   |        |                       |  |   |                       |   |  |                          |        |   |                     |   | 18,900  |       |  |   |        |   |  |   | 18,900    |  
|Other                                                                |  |                     |        |   |                      |   |        |                       |  |   |                       |   |  |                          |        |   |                     |   |        |       |  |   | 2,605   |   |  |   | 2,605     |  
|Interest bearing deposits in other banks                             |  |                     | 36,646  |   |                      |   |        |                       |  |   |                       |   |  |                          |        |   |                     |   | 36,646  |       |  |   |        |   |  |   | 36,646    |  
|                                                                     |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Total interest earning Assets                                        |  | $                   | 634,478 |   |                      | $ | 40,476  |                       |  | $ | 77,565                 |   |  | $                        | 76,223  |   |                     | $ | 828,742 |       |  | $ | 210,399 |   |  | $ | 1,039,141 |  
|                                                                     |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Liabilities:                                                         |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Savings and checking with interest                                   |  | $                   | 217,984 |   |                      | $ |        |                       |  | $ |                       |   |  | $                        |        |   |                     | $ | 217,984 |       |  | $ |        |   |  | $ | 217,984   |  
|Money market savings                                                 |  |                     | 142,447 |   |                      |   |        |                       |  |   |                       |   |  |                          |        |   |                     |   | 142,447 |       |  |   |        |   |  |   | 142,447   |  
|Time deposits                                                        |  |                     | 82,515  |   |                      |   | 62,844  |                       |  |   | 94,946                 |   |  |                          | 77,685  |   |                     |   | 317,990 |       |  |   | 106,744 |   |  |   | 424,734   |  
|Short-term borrowings                                                |  |                     | 21,294  |   |                      |   |        |                       |  |   |                       |   |  |                          |        |   |                     |   | 21,294  |       |  |   |        |   |  |   | 21,294    |  
|Long-term borrowings                                                 |  |                     |        |   |                      |   |        |                       |  |   |                       |   |  |                          |        |   |                     |   |        |       |  |   | 23,711  |   |  |   | 23,711    |  
|                                                                     |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Total interest bearing liabilities                                   |  | $                   | 464,240 |   |                      | $ | 62,844  |                       |  | $ | 94,946                 |   |  | $                        | 77,685  |   |                     | $ | 699,715 |       |  | $ | 130,455 |   |  | $ | 830,170   |  
|                                                                     |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Interest-sensitivity gap                                             |  | $                   | 170,238 |   |                      | $ | (22,368 | )                     |  | $ | (17,381                | ) |  | $                        | (1,462  | ) |                     | $ | 129,027 |       |  | $ | 79,944  |   |  | $ | 208,971   |  
|                                                                     |  |                     |         |   |                      |   |         |                       |  |   |                        |   |  |                          |         |   |                     |   |         |       |  |   |         |   |  |   |           |  
|Cumulative interest sensitivity gap                                  |  | $                   | 170,238 |   |                      | $ | 147,870 |                       |  | $ | 130,489                |   |  | $                        | 129,027 |   |                     | $ | 129,027 |       |  | $ | 208,971 |   |  | $ | 208,971   |  
|Cumulative interest sensitivity gap to total Interest earning assets |  |                     | 16.38   | % |                      |   | 14.23   | %                     |  |   | 12.56                  | % |  |                          | 12.42   | % |                     |   | 12.42   | %     |  |   | 20.11   | % |  |   | 20.11     | %



New Accounting Pronouncements



On March 9, 2004, the Securities and Exchange Commission staff
issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105). SAB 105 provides recognition guidance for entities that issue loan commitments that are required to be accounted for as derivative
instruments. SAB 105 also discusses disclosure requirements for loan commitments and is effective for loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. Adoption of SAB 105 on April 1, 2004 had no material
affect on the 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.



18



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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, 2004, an evaluation was carried out under the supervision and
with the participation of BancShares management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that
evaluation, the CEO and CFO have concluded that BancShares disclosure controls and procedures were effective as of June 30, 2004 to ensure that information required to be disclosed by BancShares in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no significant changes in BancShares internal control over
financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, BancShares internal control over financial reporting.



PART II. OTHER INFORMATION



ITEM 6. EXHIBITS AND REPORTS ON FORM 8K



|     |  |                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)  |  | The following exhibits are included or incorporated into this report.                                                                                                            
|10.1 |  | Amended and Restated Employee Deferred Compensation, Consultation, Post-Retirement Non-Competition and Death Benefit Agreement between Billy T. Woodard and The Fidelity Bank    
|10.2 |  | Amended and Restated Employee Deferred Compensation, Consultation, Post-Retirement Non-Competition and Death Benefit Agreement between Haywood A. Lane, Jr. and The Fidelity
Bank
|10.3 |  | Employee Deferred Compensation, Consultation, Post-Retirement Non-Competition and Death Benefit Agreement between Ernest W. Whitley and The Fidelity Bank                        
|10.4 |  | Employee Deferred Compensation, Consultation, Post-Retirement Non-Competition and Death Benefit Agreement between David E. Royal and The Fidelity Bank                           
|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, 2004.
|--- | -------------------------------------------------------------------------



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: August 11, 2004 |  | By:/s/ Mary W. Willis                
|                       |  | Mary W. Willis                       
|                       |  | Chief Financial Officer and Treasurer



19



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EXHIBIT INDEX



|     |  |                                                                                                                                                                                  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Amended and Restated Employee Deferred Compensation, Consultation, Post-Retirement Non-Competition and Death Benefit Agreement between Billy T. Woodard and The Fidelity Bank    
|10.2 |  | Amended and Restated Employee Deferred Compensation, Consultation, Post-Retirement Non-Competition and Death Benefit Agreement between Haywood A. Lane, Jr. and The Fidelity
Bank
|10.3 |  | Employee Deferred Compensation, Consultation, Post-Retirement Non-Competition and Death Benefit Agreement between Ernest W. Whitley and The Fidelity Bank                        
|10.4 |  | Employee Deferred Compensation, Consultation, Post-Retirement Non-Competition and Death Benefit Agreement between David E. Royal and The Fidelity Bank                           
|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



20