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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

The Securities Exchange Act of 1934



For the quarterly period ended September 30, 2003



Commission File Number: 001-15089



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Fidelity BancShares (N.C.), Inc.

(Exact name of Registrant as specified in
its charter)



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



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



(919) 552-2242

(Registrants telephone number, including area code)



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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 November 13, 2003)



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PART I. FINANCIAL INFORMATION



|ITEM  1. |  | FINANCIAL STATEMENTS
|-------- |  | --------------------



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



CONSOLIDATED BALANCE SHEETS



|                                                                                                     |  | September 30, 2003 |               |   | December 31, 2002 |   |               | September 30, 2002   | 
|---------------------------------------------------------------------------------------------------- |  | ------------------ | ------------- | - | ----------------- | - | ------------- | -------------------- | 
|                                                                                                     |  | (unaudited)        |               |   |                   |   |               | (unaudited,          | 
|                                                                                                     |  |                    |               |   |                   |   |               | Restated-see Note 1) | 
|                                                                                                     |  |                    |              
|Assets                                                                                               |  |                    |               |   |                   |   |               |                      | 
|Cash and due from banks                                                                              |  | $                  | 50,581,619    |   |                   | $ | 47,809,871    |                      | 
|Interest bearing deposits in other banks                                                             |  |                    | 26,131,404    |   |                   |   | 32,106,848    |                      | 
|Overnight funds sold                                                                                 |  |                    | 45,900,000    |   |                   |   | 50,800,000    |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|Total cash and cash equivalents                                                                      |  |                    | 122,613,023   |   |                   |   | 130,716,719   |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|Investment securities:                                                                               |  |                    |               |   |                   |   |               |                      | 
|Held to maturity (estimated fair value of $204,978,696, $94,622,654, and $128,542,787, respectively) |  |                    | 204,822,969   |   |                   |   | 94,085,650    |                      | 
|Available for sale (cost of $3,387,593, $3,468,310, and $3,515,623 respectively)                     |  |                    | 12,837,586    |   |                   |   | 11,512,609    |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|Total investment securities                                                                          |  |                    | 217,660,555   |   |                   |   | 105,598,259   |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|Loans                                                                                                |  |                    | 741,624,881   |   |                   |   | 729,101,387   |                      | 
|Allowance for loan losses                                                                            |  |                    | (12,539,023   | ) |                   |   | (11,838,076   | )                    | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|Loans, net                                                                                           |  |                    | 729,085,858   |   |                   |   | 717,263,311   |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|Federal Home Loan Bank of Atlanta stock, at cost                                                     |  |                    | 2,656,700     |   |                   |   | 2,467,600     |                      | 
|Premises and equipment, net                                                                          |  |                    | 37,038,001    |   |                   |   | 34,590,338    |                      | 
|Accrued interest receivable                                                                          |  |                    | 3,078,068     |   |                   |   | 3,588,368     |                      | 
|Intangible assets                                                                                    |  |                    | 24,195,583    |   |                   |   | 17,002,830    |                      | 
|Other assets                                                                                         |  |                    | 3,826,209     |   |                   |   | 2,972,759     |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|Total assets                                                                                         |  | $                  | 1,140,153,997 |   |                   | $ | 1,014,200,184 |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|                                                                                                     |  |                    |              
|Liabilities and Shareholders Equity                                                                 |  |                    |               |   |                   |   |               |                      | 
|Deposits:                                                                                            |  |                    |               |   |                   |   |               |                      | 
|Noninterest-bearing demand deposits                                                                  |  | $                  | 182,996,864   |   |                   | $ | 156,932,202   |                      | 
|Savings and interest-bearing deposits                                                                |  |                    | 362,720,602   |   |                   |   | 318,460,309   |                      | 
|Time deposits                                                                                        |  |                    | 438,855,602   |   |                   |   | 393,940,013   |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|Total deposits                                                                                       |  |                    | 984,573,068   |   |                   |   | 869,332,524   |                      | 
|Short-term borrowings                                                                                |  |                    | 27,025,214    |   |                   |   | 22,591,378    |                      | 
|Long-term borrowings                                                                                 |  |                    | 23,000,000    |   |                   |   | 23,000,000    |                      | 
|Accrued interest payable                                                                             |  |                    | 3,206,425     |   |                   |   | 3,515,541     |                      | 
|Other liabilities                                                                                    |  |                    | 3,864,392     |   |                   |   | 3,425,103     |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|Total liabilities                                                                                    |  |                    | 1,041,669,099 |   |                   |   | 921,864,546   |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|Shareholders equity:                                                                                |  |                    |               |   |                   |   |               |                      | 
|Common stock ($25 par value; 29,200 shares authorized; 28,011 shares issued and outstanding)         |  |                    | 700,275       |   |                   |   | 700,275       |                      | 
|Surplus                                                                                              |  |                    | 6,163,380     |   |                   |   | 6,163,380     |                      | 
|Accumulated other comprehensive income                                                               |  |                    | 5,702,434     |   |                   |   | 4,866,801     |                      | 
|Retained earnings                                                                                    |  |                    | 85,918,809    |   |                   |   | 80,605,182    |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|Total shareholders equity                                                                           |  |                    | 98,484,898    |   |                   |   | 92,335,638    |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 
|Total liabilities and shareholders equity                                                           |  | $                  | 1,140,153,997 |   |                   | $ | 1,014,200,184 |                      | 
|                                                                                                     |  |                    |               |   |                   |   |               |                      | 



See accompanying notes
to consolidated financial statements.



2



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



CONSOLIDATED STATEMENTS OF INCOME



(unaudited)



|                                                    |  | Three months ended September 30, |            |   | Nine months ended September 30, |           
|--------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | ----------
|                                                    |  | 2003                             |            |   | 2002                            |           
|                                                    |  |                                  |            |   | (Restated- seeNote 1)           |           
|Interest income:                                    |  |                                  |            |   |                                 |           
|Interest and fees on loans                          |  | $                                | 11,679,106 |   |                                 | 12,925,958
|Interest and dividends on investment securities:    |  |                                  |            |   |                                 |           
|Taxable interest income                             |  |                                  | 709,500    |   |                                 | 775,432   
|Dividend income                                     |  |                                  | 63,110     |   |                                 | 70,360    
|Interest on overnight funds sold                    |  |                                  | 160,034    |   |                                 | 198,067   
|                                                    |  |                                  |            |   |                                 |           
|Total interest income                               |  |                                  | 12,611,750 |   |                                 | 13,969,817
|                                                    |  |                                  |            |   |                                 |           
|Interest expense:                                   |  |                                  |            |   |                                 |           
|Deposits                                            |  |                                  | 2,934,191  |   |                                 | 4,013,038 
|Short-term borrowings                               |  |                                  | 45,587     |   |                                 | 60,121    
|Long-term borrowings                                |  |                                  | 488,750    |   |                                 | 488,750   
|                                                    |  |                                  |            |   |                                 |           
|Total interest expense                              |  |                                  | 3,468,528  |   |                                 | 4,561,909 
|                                                    |  |                                  |            |   |                                 |           
|Net interest income                                 |  |                                  | 9,143,222  |   |                                 | 9,407,908 
|Provision for loan losses                           |  |                                  | 407,000    |   |                                 | 550,000   
|                                                    |  |                                  |            |   |                                 |           
|Net interest income after provision for loan losses |  |                                  | 8,736,222  |   |                                 | 8,857,908 
|                                                    |  |                                  |            |   |                                 |           
|Noninterest income:                                 |  |                                  |            |   |                                 |           
|Service charges on deposit accounts                 |  |                                  | 1,753,201  |   |                                 | 1,661,947 
|Other service charges and fees                      |  |                                  | 1,101,535  |   |                                 | 936,329   
|Other income                                        |  |                                  | 34,928     |   |                                 | 42,814    
|Loss on marketable equity securities                |  |                                  | (22,215    | ) |                                 | (53,166   
|                                                    |  |                                  |            |   |                                 |           
|Total noninterest income                            |  |                                  | 2,867,449  |   |                                 | 2,587,924 
|                                                    |  |                                  |            |   |                                 |           
|Noninterest expense:                                |  |                                  |            |   |                                 |           
|Salaries and employee benefits                      |  |                                  | 4,795,809  |   |                                 | 4,364,104 
|Occupancy and equipment                             |  |                                  | 1,299,145  |   |                                 | 1,224,407 
|Data processing                                     |  |                                  | 910,742    |   |                                 | 796,168   
|Amortization of intangibles                         |  |                                  | 189,183    |   |                                 | 77,048    
|Other expense                                       |  |                                  | 1,423,735  |   |                                 | 1,203,196 
|Impairment loss on fixed assets                     |  |                                  |           |   |                                 | 144       
|                                                    |  |                                  |            |   |                                 |           
|Total noninterest expense                           |  |                                  | 8,618,614  |   |                                 | 7,665,067 
|                                                    |  |                                  |            |   |                                 |           
|Net income before income taxes                      |  |                                  | 2,985,057  |   |                                 | 3,780,765 
|Income tax expense                                  |  |                                  | 1,170,803  |   |                                 | 1,388,539 
|                                                    |  |                                  |            |   |                                 |           
|Net income                                          |  | $                                | 1,814,254  |   |                                 | 2,392,226 
|                                                    |  |                                  |            |   |                                 |           
|                                                    |  |                                  |            |  
|Per share information:                              |  |                                  |            |   |                                 |           
|Net income                                          |  | $                                | 64.77      |   |                                 | 85.40     
|Cash dividends declared                             |  | $                                | 8.00       |   |                                 | 8.00      
|Weighted average shares outstanding                 |  |                                  | 28,011     |   |                                 | 28,011    



See accompanying notes
to consolidated financial statements.



3



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



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



(unaudited)



|                                                                                                 |  | Common Stock |   |  |        |         |   | Accumulated other comprehensive income |   |           | Retained earnings |  |   | Comprehensive income |   |  | Total shareholders equity |           
|------------------------------------------------------------------------------------------------ |  | ------------ | - |  | ------ | ------- | - | -------------------------------------- | - | --------- | ----------------- |  | - | -------------------- | - |  | -------------------------- | ----------
|                                                                                                 |  | Shares       |   |  | Amount |         |   | Surplus                                |   |           |                   |  |  
|Balance December 31, 2001                                                                        |  | 28,026       |   |  | $      | 700,650 |   |                                        | $ | 6,166,681 |                   |  | $ | 4,817,106            |   |  | $                          | 73,345,948
|                                                                                                 |  |              |   |  |        |         |   |                                        |   |           |                   |  |   |                      |   |  |                            |           
|Net income (Restated- see Note 1)                                                                |  |             |   |  |        |        |   |                                        |   |          |                   |  |   |                     |   |  |                            | 6,212,048 
|Cash dividends ($24.00 per share)                                                                |  |             |   |  |        |        |   |                                        |   |          |                   |  |   |                     |   |  |                            | (672,384  
|Purchase and retirement of common stock                                                          |  | (15          | ) |  |        | (375    | ) |                                        |   | (3,301    | )                 |  |   |                     |   |  |                            | (33,824   
|Unrealized gain on securities available for sale, net of deferred taxes of $185,425              |  |             |   |  |        |        |   |                                        |   |          |                   |  |   | 284,005              |   |  |                            |          
|                                                                                                 |  |              |   |  |        |         |   |                                        |   |           |                   |  |   |                      |   |  |                            |           
|Comprehensive income                                                                             |  |              |   |  |        |         |   |                                        |   |           |                   |  |   |                      |   |  |                            |           
|                                                                                                 |  |              |   |  |        |         |   |                                        |   |           |                   |  |   |                      |   |  |                            |           
|Balance September 30, 2002                                                                       |  | 28,011       |   |  | $      | 700,275 |   |                                        | $ | 6,163,380 |                   |  | $ | 5,101,111            |   |  | $                          | 78,851,788
|                                                                                                 |  |              |   |  |        |         |   |                                        |   |           |                   |  |   |                      |   |  |                            |           
|Balance December 31, 2002                                                                        |  | 28,011       |   |  | $      | 700,275 |   |                                        | $ | 6,163,380 |                   |  | $ | 4,866,801            |   |  | $                          | 80,605,182
|                                                                                                 |  |              |   |  |        |         |   |                                        |   |           |                   |  |   |                      |   |  |                            |           
|Net income                                                                                       |  |             |   |  |        |        |   |                                        |   |          |                   |  |   |                     |   |  |                            | 5,985,890 
|Cash dividends ($24.00 per share)                                                                |  |             |   |  |        |        |   |                                        |   |          |                   |  |   |                     |   |  |                            | (672,263  
|Unrealized gain on securities available for sale, net of deferred taxes of $555,249              |  |             |   |  |        |        |   |                                        |   |          |                   |  |   | 850,444              |   |  |                            |          
|Additional pension charge related to unfunded pension liability, net of deferred taxes of $9,664 |  |             |   |  |        |        |   |                                        |   |          |                   |  |   | (14,811              | ) |  |                            |          
|                                                                                                 |  |              |   |  |        |         |   |                                        |   |           |                   |  |   |                      |   |  |                            |           
|Comprehensive income                                                                             |  |              |   |  |        |         |   |                                        |   |           |                   |  |   |                      |   |  |                            |           
|                                                                                                 |  |              |   |  |        |         |   |                                        |   |           |                   |  |   |                      |   |  |                            |           
|Balance September 30, 2003                                                                       |  | 28,011       |   |  | $      | 700,275 |   |                                        | $ | 6,163,380 |                   |  | $ | 5,702,434            |   |  | $                          | 85,918,809
|                                                                                                 |  |              |   |  |        |         |   |                                        |   |           |                   |  |   |                      |   |  |                            |           



See accompanying notes
to consolidated financial statements.



4



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



Consolidated Statements of Cash Flows



(unaudited)



|                                                                                                                     |  | Nine months ended September 30, |             
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------------
|                                                                                                                     |  | 2003                            |             
|                                                                                                                     |  |                                 |             
|Cash flows from operating activities:                                                                                |  |                                 |             
|Net income                                                                                                           |  | $                               | 5,985,890   
|Adjustments to reconcile net income to net cash provided by operating activities:                                    |  |                                 |             
|Depreciation and amortization                                                                                        |  |                                 | 2,058,929   
|Net accretion of premiums or discounts                                                                               |  |                                 | (766,022    
|Loss (gain) on disposition of premises and equipment                                                                 |  |                                 | (24,358     
|Impairment loss on fixed assets                                                                                      |  |                                 |            
|Provision for loan losses                                                                                            |  |                                 | 995,000     
|Impairment loss on marketable equity securities                                                                      |  |                                 | 87,703      
|Loss on sale of securities available for sale                                                                        |  |                                 |            
|Gain on other real estate                                                                                            |  |                                 | (59,393     
|Decrease in accrued interest receivable                                                                              |  |                                 | 510,300     
|Increase in other assets, net                                                                                        |  |                                 | (953,132    
|Increase (decrease) in other liabilities, net                                                                        |  |                                 | (159,559    
|Decrease in accrued interest payable                                                                                 |  |                                 | (309,116    
|                                                                                                                     |  |                                 |             
|Net cash provided by operating activities                                                                            |  |                                 | 7,366,242   
|                                                                                                                     |  |                                 |             
|Cash flows from investing activities:                                                                                |  |                                 |             
|Purchase of securities held to maturity                                                                              |  |                                 | (324,161,579
|Purchase of securities available for sale                                                                            |  |                                 | (9,495      
|Proceeds from sale of securities available for sale                                                                  |  |                                 | 2,508       
|Proceeds from maturities and issuer calls of securities held to maturity                                             |  |                                 | 214,000,314 
|Proceeds from sales of other real estate owned and repossessed assets                                                |  |                                 | 498,377     
|Purchase of FHLB of Atlanta stock                                                                                    |  |                                 | (189,100    
|Net decrease (increase) in loans                                                                                     |  |                                 | 18,557,750  
|Purchase of premises and equipment                                                                                   |  |                                 | (2,271,627  
|Net cash received on branch purchases                                                                                |  |                                 | 73,313,818  
|                                                                                                                     |  |                                 |             
|Net cash used by investing activities                                                                                |  |                                 | (20,259,034 
|                                                                                                                     |  |                                 |             
|Cash flows from financing activities:                                                                                |  |                                 |             
|Net increase in deposits                                                                                             |  |                                 | 2,783,458   
|Net increase (decrease) in short-term borrowings                                                                     |  |                                 | 2,677,901   
|Cash dividends paid                                                                                                  |  |                                 | (672,263    
|Purchase and retirement of common stock                                                                              |  |                                 |            
|                                                                                                                     |  |                                 |             
|Net cash provided by financing activities                                                                            |  |                                 | 4,789,096   
|                                                                                                                     |  |                                 |             
|Net decrease in cash and cash equivalents                                                                            |  |                                 | (8,103,696  
|Cash and cash equivalents at beginning of year                                                                       |  |                                 | 130,716,719 
|                                                                                                                     |  |                                 |             
|Cash and cash equivalents at end of period                                                                           |  | $                               | 122,613,023 
|                                                                                                                     |  |                                 |             
|Supplemental disclosures of cash flow information:                                                                   |  |                                 |             
|Cash paid during the period for interest                                                                             |  | $                               | 11,311,889  
|                                                                                                                     |  |                                 |             
|Cash paid during the period for income taxes                                                                         |  | $                               | 4,494,187   
|                                                                                                                     |  |                                 |             
|Supplemental disclosure of noncash financing and investing activities:                                               |  |                                 |             
|Unrealized gains on available-for-sale secuities, net of deferred tax effects of $555,249 and $185,425,
respectively |  | $                               | 850,444     
|                                                                                                                     |  |                                 |             
|Transfer of foreclosed loans to other real estate and repossessed assets                                             |  | $                               | 310,514     
|                                                                                                                     |  |                                 |             



See accompanying notes
to consolidated financial statements.



5



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

Notes to Consolidated Financial Statements



Note 1. Basis of Presentation



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



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



In the opinion of management, the consolidated financial statements contain
all material adjustments necessary to present fairly the consolidated financial position of BancShares as of and for each of the periods presented, including the restatement of 2002 for the application of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets upon adoption of Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions (see Note 2). All other adjustments are of a normal recurring
nature. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



These financial statements should be read in conjunction with financial statements and notes
included in Fidelity BancShares (N.C.), Inc.s Form 10K filed with the Securities and Exchange Commission. Certain amounts for prior periods have been reclassified to conform with statement presentations for 2003. However, the reclassifications
have no effect on shareholders equity or net income as previously reported.



Note 2. Adoption of New Accounting Standards



In July 2001, the FASB issued Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible
Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies criteria which must be met for intangible assets acquired in a purchase
method business combination to be recognized and reported apart from goodwill. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 also requires that identifiable intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed
for impairment in accordance with Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, as subsequently amended and superceded. Upon adoption of Statement 142, BancShares
reassessed the useful lives and residual values of all identifiable intangible assets acquired in purchase business combinations, and as a result was not required to make any necessary amortization period adjustments. In addition, any intangible
assets classified as goodwill under Statement 142 were subjected to a transitional impairment test during the first six months of 2002 based on the level of goodwill as of January 1, 2002. As a result of this testing, no impairment charges were
recorded.



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



6



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ended September 30, 2002, including $285,000 ($181,000 or $6.46 earnings per share after tax) for the three months ended September 30, 2002. In accordance
with Statement 147, BancShares performed a transitional impairment test of this goodwill in the fourth quarter of 2002. As a result of this testing, no impairment charges were recorded. BancShares will perform an annual impairment test of the
goodwill in 2003 and thereafter.



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



|                               |  | September 30, 2003   |        | December 31, 2002       
|------------------------------ |  | -------------------- | ------ | ------------------------
|(Dollars in thousands)         |  | Gross CarryingAmount |        | Accumulated Amortization
|Amortized intangible assets:   |  |                      |        |                         
|Branch acquisitions            |  | $                    | 7,746  |                         
|                               |  |                      |        |                         
|Unamortized intangible assets: |  |                      |        |                         
|Goodwill                       |  | $                    | 19,112 |                         
|                               |  |                      |        |                         



The scheduled amortization expense for
intangible assets as of January 1, 2003, and including the impact of the acquisition in 2003, for the years ended December 31, 2003, 2004, 2005, 2006, 2007 and thereafter is as follows:



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



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



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



7



---

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



In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS No.
150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before
the issuance date of the Statement and still existing at the beginning of the interim period of adoption. Adoption of SFAS No. 150 on July 1, 2003 did not have a material effect on BancShares consolidated financial statements.



In November 2002, the Financial Accounting Standards Board issued Financial Interpretation
No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which addresses the disclosure to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees. FIN 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee, such as the obligation to stand ready to perform in the event that specified
triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The disclosure requirements are effective for interim and annual financial statements ending after December 15, 2002. The initial
recognition and measurement provisions are effective for all guarantees within the scope of FIN 45 issued or modified after December 31, 2002. BancShares issues standby letters of credit whereby BancShares guarantees performance if a specified
triggering event or condition occurs. The guarantees generally mature within one year and may be automatically renewed depending on the terms of the guarantee and the credit-worthiness of the customer. The maximum potential amount of undiscounted
future payments related to standby letters of credit at September 30, 2003 is $3,335,000. At September 30, 2003, BancShares has recorded no liability for the current carrying amount of the obligation to perform as a guarantor, as such amounts are
deemed immaterial.



In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46). FIN 46 addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. FIN 46 applies immediately
to variable interests in variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after January 31, 2003. FIN 46 applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. BancShares has identified no investments in variable interest entities that would require
consolidation under FIN 46. The application of Interpretation 46 may result in the de-consolidation of the trust that has issued the trust preferred capital securities currently reported in our consolidated financial statements; at this time final
interpretation regarding such application is pending. The trust preferred capital securities are currently disclosed as long-term borrowings within the consolidated financial statements. The potential de-consolidation of the trust would instead
cause the disclosure of junior subordinated debentures between BancShares and the trust subsidiary. Currently, the junior subordinated debentures are eliminated in consolidation, resulting in the disclosure of long-term borrowings. The impact of
this change would not have a material effect on our consolidated financial statements. Treatment of trust preferred securities within BancShares capital ratio calculations in light of FIN 46 is pending further guidance from the banking regulators.
If the banking regulators change the capital treatment for trust preferred securities, our tier 1 and total capital would be reduced by the amount of outstanding trust preferred securities but we believe our capital classifications would remain
unchanged.



8



---

Note 3. Net Income Per Share



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



Note 4. Allowance for Loan Losses



A summary of the allowance for loan losses follows:



|                             |  | (Unaudited) Nine months ended September 30, |           
|---------------------------- |  | ------------------------------------------- | ----------
|                             |  | 2003                                        |           
|Balance at beginning of year |  | $                                           | 11,838,076
|Provision for loan losses    |  |                                             | 995,000   
|Loans charged off            |  |                                             | (636,017  
|Loan recoveries              |  |                                             | 341,964   
|                             |  |                                             |           
|Balance at end of the period |  | $                                           | 12,539,023
|                             |  |                                             |           



At September 30, 2003 the Bank had
$1,050,000 of nonperforming assets which included $1,006,000 of impaired loans, which comprise all of the Companys nonaccrual loans, and $44,000 of other real estate and repossessed assets. At December 31, 2002, the Bank had $944,000 of
nonperforming assets which included $724,000 of impaired loans, which comprise all of the Companys nonaccrual loans, and $220,000 of other real estate owned. At September 30, 2003, and December 31, 2002 the Bank had $1,041,000 and $424,000,
respectively, of accruing loans 90 days or more past due.



Note 5. Long
Term Borrowings



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



Note 6. Branch Acquisitions



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



9



---

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



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



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



Explanation of Fair Value
Adjustments



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

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

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

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



Note 7. Loss on Marketable Equity Securities



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



10



---

recognized a loss of $22,000. This was a result of unrealized losses that were deemed to be other than temporary. During the second quarter of 2002,
BancShares recognized a gross securities loss of $71,000. This loss was the result of selling certain available for sale equity securities. During the third quarter of 2002, BancShares recognized a securities loss of $6,000 as a result of selling
available for sale equity securities. Also during the third quarter, BancShares wrote down the carrying value of certain available for sale equity securities to their current market value and recognized a loss of $47,000. This was a result of
unrealized losses that were deemed to be other than temporary. There were no securities gains or losses recognized in the first quarter of 2002.



Note 8. Related Parties



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



The first significant shareholder at September 30, 2003, beneficially owned 11,155 shares, or 39.82%, of BancShares outstanding common stock. At the same date, the
second significant shareholder beneficially owned 1,696 shares, or 6.05%, of BancShares outstanding common stock.



These two significant shareholders are directors and executive officers of the Corporation and at September 30, 2003, beneficially owned 2,530,322 shares, or 28.89%, and
1,384,121 shares, or 15.80%, of the Corporations outstanding Class A common stock, and 652,285 shares, or 38.88%, and 201,812 shares, or 12.03%, of the Corporations outstanding Class B common stock. The above totals include 472,855 Class
A common shares, or 5.40%, and 104,644 Class B Common shares, or 6.24%, that are considered to be beneficially owned by both of the shareholders and, therefore, are included in each of their totals.



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



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



BancShares also has a correspondent
relationship with the Corporation. Correspondent account balances with the Corporation included in cash and due from banks and overnight funds sold totaled $40,735,545 and $38,454,633 at September 30, 2003 and December 31, 2002, respectively. The
rate paid on overnight funds by the Corporation was .89% at September 30, 2003 and .99% at December 31, 2002.



BancShares is related through common ownership with Southern Bank and Trust Co. (Southern) in that the aforementioned two significant shareholders of BancShares and certain of their related parties are
also significant shareholders of Southern. BancShares has contracted with Southern to service on its behalf $3.0 million of BancShares mortgage loans.



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



11



---

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



TABLE 1.



Financial Summary



|                                                    |  | 2003         |           |   | 2002          |  
|--------------------------------------------------- |  | ------------ | --------- | - | ------------- | -
|(Dollars in thousands, except per share data)       |  | ThirdQuarter |           |   | SecondQuarter |  
|Summary of Operations                               |  |              |           |   |               |  
|Interest income                                     |  | $            | 12,612    |   |               | $
|Interest expense                                    |  |              | 3,469     |   |               |  
|                                                    |  |              |           |   |               |  
|Net interest income                                 |  |              | 9,143     |   |               |  
|Provision for loan losses                           |  |              | 407       |   |               |  
|                                                    |  |              |           |   |               |  
|Net interest income after provision for loan losses |  |              | 8,736     |   |               |  
|Noninterest income                                  |  |              | 2,868     |   |               |  
|Noninterest expense                                 |  |              | 8,619     |   |               |  
|                                                    |  |              |           |   |               |  
|Net income before income taxes                      |  |              | 2,985     |   |               |  
|Income taxes                                        |  |              | 1,171     |   |               |  
|                                                    |  |              |           |   |               |  
|Net income                                          |  | $            | 1,814     |   |               | $
|                                                    |  |              |           |   |               |  
|                                                    |  |              |           |   |              
|Selected Period-End Balances                        |  |              |           |   |               |  
|Total assets                                        |  | $            | 1,140,154 |   |               | $
|Investment securities and overnight funds sold      |  |              | 263,561   |   |               |  
|Loans, gross                                        |  |              | 741,625   |   |               |  
|Interest earning assets                             |  |              | 1,033,974 |   |               |  
|Deposits                                            |  |              | 984,573   |   |               |  
|Long-term obligations                               |  |              | 23,000    |   |               |  
|Interest bearing liabilities                        |  |              | 851,602   |   |               |  
|Shareholders equity                                |  |              | 98,485    |   |               |  
|Common shares outstanding                           |  |              | 28,011    |   |               |  
|                                                    |  |              |           |   |               |  
|                                                    |  |              |           |   |              
|Selected Average Balances                           |  |              |           |   |               |  
|Total assets                                        |  | $            | 1,127,477 |   |               | $
|Investment securities and overnight funds sold      |  |              | 235,018   |   |               |  
|Loans, gross                                        |  |              | 746,440   |   |               |  
|Interest earning assets                             |  |              | 1,031,741 |   |               |  
|Deposits                                            |  |              | 969,945   |   |               |  
|Long-term obligations                               |  |              | 23,000    |   |               |  
|Interest bearing liabilities                        |  |              | 846,096   |   |               |  
|Shareholders equity                                |  |              | 98,587    |   |               |  
|Common shares outstanding                           |  |              | 28,011    |   |               |  
|                                                    |  |              |           |   |               |  
|                                                    |  |              |           |   |              
|Profitability Ratios                                |  |              |           |   |               |  
|Rate of return (annualized) on:                     |  |              |           |   |               |  
|Total assets                                        |  |              | 0.64      | % |               |  
|Shareholders equity                                |  |              | 7.30      | % |               |  
|Dividend payout ratio(1)                            |  |              | 12.35     | % |               |  
|                                                    |  |              |           |   |               |  
|                                                    |  |              |           |   |              
|Liquidity and Capital Ratios (averages)             |  |              |           |   |               |  
|Loans to deposits                                   |  |              | 76.96     | % |               |  
|Shareholders equity to total assets                |  |              | 8.74      | % |               |  
|                                                    |  |              |           |   |               |  
|                                                    |  |              |           |   |              
|Per Share of Common Stock                           |  |              |           |   |               |  
|Net income                                          |  | $            | 64.77     |   |               | $
|Cash dividends                                      |  |              | 8.00      |   |               |  
|Book value(2)                                       |  |              | 3,515.94  |   |               |  
|                                                    |  |              |           |   |               |  



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



12



---

TABLE 2.



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



|                                               |  | 2003           |           |   | 2002                   |   |            | Increase (decrease) due to: |     
|---------------------------------------------- |  | -------------- | --------- | - | ---------------------- | - | ---------- | --------------------------- | ----
|(Dollars in thousands)                         |  | AverageBalance |           |   | InterestIncome/Expense |   | Yield/Rate |                             |     
|ASSETS                                         |  |                |           |   |                        |   |            |                             |     
|Interest earning assets:                       |  |                |           |   |                        |   |            |                             |     
|Loans(1)(2)                                    |  | $              | 730,151   |   |                        | $ | 35,387     |                             | 6.48
|Taxable investment securities                  |  |                | 122,150   |   |                        |   | 1,593      |                             | 1.74
|Overnight funds sold                           |  |                | 55,779    |   |                        |   | 431        |                             | 1.03
|Other investments                              |  |                | 14,748    |   |                        |   | 198        |                             | 1.79
|Interest bearing deposits in other banks       |  |                | 41,164    |   |                        |   | 329        |                             | 1.07
|                                               |  |                |           |   |                        |   |            |                             |     
|Total interest earning assets                  |  | $              | 963,992   |   |                        | $ | 37,938     |                             | 5.26
|                                               |  |                |           |   |                        |   |            |                             |     
|Noninterest earning assets:                    |  |                |           |   |                        |   |            |                             |     
|Cash and due from banks                        |  |                | 39,309    |   |                        |   |            |                             |     
|Premises and equipment                         |  |                | 35,436    |   |                        |   |            |                             |     
|Other assets                                   |  |                | 26,058    |   |                        |   |            |                             |     
|Reserve for loan losses                        |  |                | (12,089   | ) |                        |   |            |                             |     
|                                               |  |                |           |   |                        |   |            |                             |     
|Total assets                                   |  | $              | 1,052,706 |   |                        |   |            |                             |     
|                                               |  |                |           |   |                        |   |            |                             |     
|                                               |  |                |           |   |                        |   |            |                             |     
|LIABILITIES & EQUITY                           |  |                |           |   |                        |   |            |                             |     
|Interest bearing liabilities:                  |  |                |           |   |                        |   |            |                             |     
|Demand deposits                                |  | $              | 121,658   |   |                        | $ | 201        |                             | 0.22
|Savings deposits                               |  |                | 209,033   |   |                        |   | 1,248      |                             | 0.80
|Time deposits                                  |  |                | 410,724   |   |                        |   | 7,935      |                             | 2.58
|Short-term borrowings                          |  |                | 24,556    |   |                        |   | 153        |                             | 0.83
|Long-term borrowings                           |  |                | 23,000    |   |                        |   | 1,466      |                             | 8.52
|                                               |  |                |           |   |                        |   |            |                             |     
|Total interest bearing liabilities             |  | $              | 788,971   |   |                        | $ | 11,003     |                             | 1.86
|                                               |  |                |           |   |                        |   |            |                             |     
|Noninterest bearing liabilities:               |  |                |           |   |                        |   |            |                             |     
|Demand deposits                                |  |                | 159,959   |   |                        |   |            |                             |     
|Other liabilities                              |  |                | 7,456     |   |                        |   |            |                             |     
|Shareholders equity                           |  |                | 96,320    |   |                        |   |            |                             |     
|                                               |  |                |           |   |                        |   |            |                             |     
|Total liabilities and equity                   |  | $              | 1,052,706 |   |                        |   |            |                             |     
|                                               |  |                |           |   |                        |   |            |                             |     
|Interest rate spread(3)                        |  |                |           |   |                        |   |            |                             | 3.40
|                                               |  |                |           |   |                        |   |            |                             |     
|Net interest income and net interest margin(4) |  |                |           |   |                        | $ | 26,935     |                             | 3.74
|                                               |  |                |           |   |                        |   |            |                             |     



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

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

| | The taxable equivalent adjustment was approximately $42,000 and $46,000 for the periods in 2003 and 2002, respectively.
| | -----------------------------------------------------------------------------------------------------------------------

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

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



13



---

TABLE 3.



Consolidated Taxable Equivalent Rate/Volume Variance Analysis  Third quarter



|                                               |  | 2003           |           |   | 2002                    |   |            | Increase (decrease) due to: |     
|---------------------------------------------- |  | -------------- | --------- | - | ----------------------- | - | ---------- | --------------------------- | ----
|(Dollars in thousands)                         |  | AverageBalance |           |   | InterestIncome /Expense |   | Yield/Rate |                             |     
|ASSETS                                         |  |                |           |   |                         |   |            |                             |     
|Interest earning assets:                       |  |                |           |   |                         |   |            |                             |     
|Loans(1)(2)                                    |  | $              | 746,440   |   |                         | $ | 11,694     |                             | 6.22
|Taxable investment securities                  |  |                | 149,916   |   |                         |   | 597        |                             | 1.58
|Overnight funds sold                           |  |                | 71,951    |   |                         |   | 160        |                             | 0.88
|Other investments                              |  |                | 15,807    |   |                         |   | 63         |                             | 1.58
|Interest bearing deposits in other banks       |  |                | 47,627    |   |                         |   | 112        |                             | 0.93
|                                               |  |                |           |   |                         |   |            |                             |     
|Total interest earning assets                  |  | $              | 1,031,741 |   |                         | $ | 12,626     |                             | 4.86
|                                               |  |                |           |   |                         |   |            |                             |     
|Noninterest earning assets:                    |  |                |           |   |                         |   |            |                             |     
|Cash and due from banks                        |  |                | 40,894    |   |                         |   |            |                             |     
|Premises and equipment                         |  |                | 36,832    |   |                         |   |            |                             |     
|Other assets                                   |  |                | 30,390    |   |                         |   |            |                             |     
|Reserve for loan losses                        |  |                | (12,380   | ) |                         |   |            |                             |     
|                                               |  |                |           |   |                         |   |            |                             |     
|Total assets                                   |  | $              | 1,127,477 |   |                         |   |            |                             |     
|                                               |  |                |           |   |                         |   |            |                             |     
|                                               |  |                |           |   |                         |   |            |                             |     
|LIABILITIES & EQUITY                           |  |                |           |   |                         |   |            |                             |     
|Interest bearing liabilities:                  |  |                |           |   |                         |   |            |                             |     
|Demand deposits                                |  | $              | 130,067   |   |                         | $ | 53         |                             | 0.16
|Savings deposits                               |  |                | 223,312   |   |                         |   | 357        |                             | 0.63
|Time deposits                                  |  |                | 441,819   |   |                         |   | 2,526      |                             | 2.27
|Short-term borrowings                          |  |                | 27,898    |   |                         |   | 45         |                             | 0.64
|Long-term borrowings                           |  |                | 23,000    |   |                         |   | 488        |                             | 8.42
|                                               |  |                |           |   |                         |   |            |                             |     
|Total interest bearing liabilities             |  | $              | 846,096   |   |                         | $ | 3,469      |                             | 1.63
|                                               |  |                |           |   |                         |   |            |                             |     
|Noninterest bearing liabilities:               |  |                |           |   |                         |   |            |                             |     
|Demand deposits                                |  |                | 174,747   |   |                         |   |            |                             |     
|Other liabilities                              |  |                | 8,047     |   |                         |   |            |                             |     
|Shareholders equity                           |  |                | 98,587    |   |                         |   |            |                             |     
|                                               |  |                |           |   |                         |   |            |                             |     
|Total liabilities and equity                   |  | $              | 1,127,477 |   |                         |   |            |                             |     
|                                               |  |                |           |   |                         |   |            |                             |     
|Interest rate spread(3)                        |  |                |           |   |                         |   |            |                             | 3.23
|                                               |  |                |           |   |                         |   |            |                             |     
|Net interest income and net interest margin(4) |  |                |           |   |                         | $ | 9,157      |                             | 3.52
|                                               |  |                |           |   |                         |   |            |                             |     



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

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

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

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

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



14



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Introduction



Managements discussion and analysis of earnings and related financial data are presented to assist in understanding the financial condition and
results of operations of Fidelity BancShares (N.C.), Inc. and Subsidiaries (BancShares). This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and related notes presented within
this report. The focus of this discussion concerns BancShares banking subsidiary, The Fidelity Bank (the Bank), which operates 66 branches in North Carolina and Virginia.



Critical Accounting Policies



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



Financial Condition and Results of Operations.



Net Income. In the first nine months of 2003, BancShares net income decreased $226,000 to $6.0 million from
$6.2 million in the first nine months of 2002, a decrease of 3.64%. Net income in the third quarter of 2003 decreased $578,000 or 24.16% when compared to the same period in the prior year. The decreases resulted primarily from decreased interest on
loans and increased non interest expense.



Net income per share
for the first nine months of 2003 was $213.70, a decrease of $8.04 per share or 3.63% from $221.74 per share in 2002. For the third quarter of 2003, net income per share was $64.77, a decrease of $20.63 or 24.16%, from $85.40 per share for the third
quarter of 2002. Return on average assets for the first nine months of 2003 and 2002 was 0.76% and 0.85%, respectively. For the third quarter of 2003 and 2002, return on average assets was 0.64% and 0.96%, respectively. Return on average equity for
the first nine months of 2003 and 2002 was 8.31% and 9.39%, respectively. For the third quarter of 2003 and 2002, return on equity was 7.30% and 10.51%, 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. Due to the timing of this acquisition, results of operations were not significantly
impacted in the second quarter of 2003.



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
nine months of 2003, net interest income was $26.9 million as compared to $27.5 million for the same period in 2002, a decrease of $646,000 or 2.35%. Of the $646,000 net decrease in net interest income, a $2.2 million decrease resulted from interest
rate changes on interest earning assets and interest bearing liabilities, the affect of which was offset by the impact of increases in volume which contributed to a $1.6 million increase in the net interest income. The net interest margin for the
first nine months of 2003 and 2002 was 3.74% and 4.12%, respectively. Net interest income and net interest margin for the third quarter of 2003 and 2002 were $9.1 million and 3.52% and $9.4 million and 4.14%, respectively.



Interest income for the first nine months of 2003 was $37.9 million as
compared to $42.0 million in 2002, a decrease of $4.1 million or 9.85%. The decrease in interest income for the first nine months of 2003 over the first nine months of 2002 is attributable mainly to a decline in interest rates, which was slightly
offset by growth in average earning asset balances. Interest income from loans amounted to $35.3 million in the first nine months of 2003 as compared to $38.2 million in the



15



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first nine months of 2002, a decrease of $2.8 million or 7.37%. BancShares loan growth is largely due to growth within the existing branch network as
well as the acquisition of four branches in the second quarter of 2003. Earnings from investments and overnight funds sold provided the balance of interest income, contributing $2.6 million and $3.9 million for the first nine months of 2003 and
2002, respectively. Average interest-earning assets for the first nine months of 2003 increased to $964.0 million, a 7.09% increase, from $895.6 million in the first nine months of 2002. The yield on interest earning assets for the first nine months
of 2003 and 2002 was 5.26% and 6.28%, respectively. Trends in interest earning assets are shown in Tables 2 and 3.



Interest expense for the nine months of 2003 was $11.0 million compared to $14.5 million in 2002, a decrease of $1.1 million or 23.97%. The decrease in
interest expense in the first nine months of 2003, compared to the first nine months of 2002, is attributable to decreased interest rates on deposit balances, primarily time deposits and savings accounts. Average interest bearing deposits increased
$46.3 million or 6.66%, from $695.1 million in the first nine months of 2002 to $741.4 million in the first nine months of 2003. The average rate paid on interest-bearing deposits was 1.27% and 1.85% for the first nine months of 2003 and 2002,
respectively. Borrowings contributed $1.6 million in interest expense during the first nine months of 2003 and $1.7 million in the first nine months of 2002. The yield on interest bearing liabilities for the first nine months of 2003 and 2002 was
1.86% and 2.62%, 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 third quarter of 2003 and 2002, management added
$407,000 and $550,000, respectively, to the allowance for loan losses as provisions for loan losses. The decrease in the provision for loan losses is primarily attributable to a decline in net charge-offs and lower levels of net loan growth in 2003
compared to 2002. During the first nine months of 2003, management charged-off loans totaling $636,000 and had recoveries of $342,000 resulting in net charge-offs of $294,000. During the same period in 2002, management charged-off $2.0 million in
loans and had recoveries of $1.5 million, resulting in net charge-offs of $534,000. Charge-offs were higher for the first nine months of 2002 than the same period of 2003 due to charge-offs of three real estate loans in 2002. The ratio of allowance
for loan losses to loans increased to 1.69% at September 30, 2003 from 1.62% at December 31, 2002. The following table presents BancShares comparative asset quality ratios:



|                                                                       |  | September 30,2003 |   |  | December 31,2002 |  
|---------------------------------------------------------------------- |  | ----------------- | - |  | ---------------- | -
|Ratio of annualized net loans charged off to average loans             |  | 0.05              | % |  | 0.10             | %
|Allowance for loan losses to loans                                     |  | 1.69              |   |  | 1.62             |  
|Non-performing assets to total gross loans and other real estate owned |  | 0.14              |   |  | 0.13             |  
|Non-performing assets to total assets                                  |  | 0.09              |   |  | 0.09             |  



Management considers
the September 30, 2003 allowance for loan losses adequate to cover probable losses inherent in the loan portfolio. Managements periodic evaluation of the adequacy of the allowance is based on the Banks past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the borrowers experience, the estimated value of any underlying collateral, current economic conditions, analysis of peer bank trends, and other risk factors. Management
believes it has established the allowance in accordance with accounting principles generally accepted in the United States of America and in consideration of the current economic environment. While management uses the best information available to
make evaluations, future adjustments may be necessary if economic or other conditions differ substantially from the assumptions used. No significant changes were made to allocations or the methodology used to estimate the allowance for loan losses
during the third quarter.



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



BancShares had impaired loans, which comprise all of the Companys nonaccrual loans, of $1,006,000 at September 30, 2003, $432,000 at September 30,
2002, and $724,000 at December 31, 2002. Management actively maintains



16



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a current loan watch list and knows of no other loans which are material and (i) represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.



Noninterest Income. Noninterest income increased $655,000 or 8.61% for the first nine months of 2003 over the first nine months of 2002. Noninterest income for the first nine months of 2003 includes a gain on the sale of other real
estate of $57,000, and increased mortgage commission income of $899,000 for the first nine months of 2003 compared with commissions of $475,000 for the same period in 2002. 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 generated approximately 1,100 new mortgage applications through August 2003 and resulted in a significant increase in mortgage-related fee income. In the first nine months of
2003 and 2002 there were losses taken on certain marketable equity securities. These losses for 2003 and 2002 were $88,000 and $124,000, respectively. Service charges on deposit accounts and other service charges and fees, increased $536,000 or
6.59% during the first nine months of 2003 primarily due to growth in the existing branch network. BancShares average deposits increased $65.0 million or 7.77% to $901.4 million in the first nine months of 2003 from $836.4 million in the first
nine months of 2002. For the third quarter of 2003, noninterest income increased $280,000 or 10.80% over the same period in 2002. This was mainly due to an increase in other service charges and fees of $165,000 or 17.64% and an increase in service
charges on deposit accounts of $91,000 or 5.49% mainly due to growth in the network. The remainder of the increase was due to a loss on marketable equity securities in the three months ended September 30, 2003 of $22,000, compared with a loss of
$53,000 in the three months ended September 30, 2002.



Noninterest Expense. Noninterest expense increased $1.1 million or 4.71%, from $23.4 million in the first nine months of 2002 to $24.5 million in the first nine months of 2003, including increases of $610,000 in salaries and employee
benefits, $66,000 in occupancy and equipment, $207,000 in data processing costs, $112,000 in amortization of intangibles, and $252,000 in other expenses, which were offset by a decrease of $143,000 in impairment losses on fixed assets. The
fluctuations represented increases of 4.63% in salaries and employee benefits, 1.79% in occupancy and equipment, 8.66% in data processing costs, 48.51% in amortization of intangibles, and 7.12% in other income, which were offset by decreases of 100%
in impairment losses over the first nine months of 2002. BancShares had an impairment loss of $143,000 in the second quarter of 2002. In May 2002, BancShares analyzed the operations of one branch since its inception in 1999 and determined that the
loss experience would not turn around in the near future. The Board of Directors of BancShares approved to close this branch and at June 30, 2002, BancShares had accrued disposition costs including $103,000 for losses on fixed assets, $20,000 for
lease cancellation fees, and $20,000 for costs to close the branch. During the third quarter of 2002, BancShares closed the branch with no material adjustments being made to the accrued impairment costs. Management has performed similar analyses in
2003 with no impairment losses resulting.



For the third
quarter of 2003, noninterest expense increased $954,000 or 12.44% over the same period in 2002. Noninterest expense increased due to increases in salaries and employee benefits of $432,000 or 9.89%, $75,000 or 6.10% in occupancy and equipment,
$115,000 or 14.39% in data processing, $112,000 or 145.54% in amortization of intangibles, and $221,000 or 18.33% in other expense.



Income Taxes. In the first nine months of 2003, BancShares had income tax expense of $3.7 million, an increase of $218,000 or 15.68%, from $3.5
million in the prior year period. The resulting effective income tax rates, based on the accruals for the nine months ended September 30, 2003 and 2002, were 37.89% and 36.13%, respectively. The increase in effective income tax rates is due to a
decrease in the proportion of tax exempt income to overall income reported.



Capital Resources.



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



Regulatory
guidelines define minimum requirements for BancShares leverage capital ratio. Leverage capital equals total equity and certain long-term borrowings less goodwill and certain other intangibles and is measured relative to total adjusted assets
as defined by regulatory guidelines. According to these guidelines, BancShares leverage ratio at September 30, 2003 was 8.30% as compared to 9.45% at December 31, 2002.



17



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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 September 30, 2003, the Total Capital Ratio was 13.79% as compared
to 14.24% at December 31, 2002.



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



|(Dollars in thousands) |  | September 30,2003 |         |      | December 31,2002 |  
|---------------------- |  | ----------------- | ------- | ---- | ---------------- | -
|Tier 1 capital         |  | $                 | 91,572  |      |                  | $
|Total capital          |  |                   | 105,418 |      |                  |  
|Leverage capital ratio |  |                   | 8.30    | %(1) |                  |  
|Tier 1 capital ratio   |  |                   | 11.98   | (1)  |                  |  
|Total capital ratio    |  |                   | 13.79   | (1)  |                  |  

---

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



At September 30, 2003, and December 31, 2002, BancShares and the Bank were in compliance with all of their regulatory
capital requirements, and all of their regulatory capital ratios exceed the minimum ratios required for it to be classified as well capitalized. The decrease in Tier 1 capital from December 31, 2002 to September 30, 2003 is due to the
increase in goodwill and core deposit intangibles resulting from the June 2003 acquisition as well as increased unrealized gains on available for sale securities.



Commitments, Contingencies and Off-balance sheet risk



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



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



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



|                                                             |  | September 30,2003 |             | December 31,2002
|------------------------------------------------------------ |  | ----------------- | ----------- | ----------------
|Outstanding commitments to extend credit and lines of credit |  | $                 | 248,130,031 |                 
|                                                             |  |                   |             |                 
|Standby letters of credit                                    |  | $                 | 3,334,682   |                 
|                                                             |  |                   |             |                 



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



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



18



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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.



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 24.02% of deposits at September 30, 2003, an increase from 16.07% at December 31, 2002. BancShares liquidity ratio, which is defined as cash plus short-term marketable securities (minus pledged securities) less the federal
reserve requirement divided by deposits and short-term liabilities, was 25.52% at September 30, 2003, compared to 17.22% at December 31, 2002.



The consolidated statements of cash flows disclose the principal sources and uses of cash from operating, investing and financing activities for the nine
months ended September 30, 2003 and 2002. BancShares has no brokered deposits. Jumbo time deposits are considered to include all time deposits of $100,000 or more. BancShares has never aggressively bid on these deposits. Most jumbo deposit customers
have other relationships with the Bank, including savings, demand and other time deposits, and in some cases, loans. At September 30, 2003, and December 31, 2002, jumbo time deposits represented 11.01% and 11.27%, respectively, of total deposits.



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



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



CONTRACTUAL
OBLIGATIONS

As of September 30, 2003



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



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



19



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



The
table below presents in tabular form the contractual balances and the estimated fair value of financial instruments at their expected maturity dates as of September 30, 2003. The expected maturity categories take into consideration historical
prepayment experience as well as managements expectations based on the interest rate environment as of September 30, 2003. For core deposits without contractual maturity (i.e. interest bearing checking, savings and money market accounts), the
table presents principal cash flows as maturing in one year since they are subject to immediate repricing.



|                             |  | Maturing in period ended September 30, |         |   |      |   |        |     
|---------------------------- |  | -------------------------------------- | ------- | - | ---- | - | ------ | ----
|                             |  | 2004                                   |         |   | 2005 |   |        | 2006
|                             |  | (Dollars in thousands)                
|Assets                       |  |                                        |         |   |      |   |        |     
|Loans:                       |  |                                        |         |   |      |   |        |     
|Fixed rate                   |  | $                                      | 85,610  |   |      | $ | 64,106 |     
|Average rate (%)             |  |                                        | 8.39    | % |      |   | 7.88   | %   
|                             |  |                                        |         |   |      |   |        |     
|Variable rate                |  | $                                      | 243,468 |   |      | $ | 57,748 |     
|Average rate (%)             |  |                                        | 4.86    | % |      |   | 4.79   | %   
|                             |  |                                        |         |   |      |   |        |     
|Investment securities(1):    |  |                                        |         |   |      |   |        |     
|Fixed rate                   |  | $                                      | 204,817 |   |      | $ |       |     
|Average rate (%)             |  |                                        | 1.48    | % |      |   |       |     
|                             |  |                                        |         |   |      |   |        |     
|Liabilities                  |  |                                        |         |   |      |   |        |     
|Savings and interest bearing |  |                                        |         |   |      |   |        |     
|checking:                    |  |                                        |         |   |      |   |        |     
|Fixed rate                   |  | $                                      | 362,721 |   |      |   |       |     
|Average rate (%)             |  |                                        | 0.32    | % |      |   |       |     
|                             |  |                                        |         |   |      |   |        |     
|Certificates of deposit:     |  |                                        |         |   |      |   |        |     
|Fixed rate                   |  | $                                      | 319,325 |   |      | $ | 66,784 |     
|Average rate (%)             |  |                                        | 1.97    | % |      |   | 3.38   | %   
|                             |  |                                        |         |   |      |   |        |     
|Short-term obligations:      |  |                                        |         |   |      |   |        |     
|Variable rate                |  | $                                      | 27,025  |   |      |   |       |     
|Average rate (%)             |  |                                        | 0.71    | % |      |   |       |     
|                             |  |                                        |         |   |      |   |        |     
|Long-term obligations:       |  |                                        |         |   |      |   |        |     
|Fixed rate                   |  |                                        |        |   |      |   |       |     
|Average rate (%)             |  |                                        |        |   |      |   |       |     

---

|(1) | Marketable equity securities with a cost of approximately $3,387,593 and a fair value of approximately $12,837,586 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 $2,656,700.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest Sensitivity. The table below presents BancShares interest sensitivity position at September 30, 2003. The difference between
interest sensitive asset and interest sensitive liability repricing within time periods is referred to as the



20



---

interest rate sensitivity gap. Assets and liabilities with maturities of one year or less and those that may be adjusted within the period are considered
interest-sensitive. The interest-sensitivity position has meaning only as of the date for which it was prepared. Gaps are identified as either positive (interest sensitive assets in excess of interest sensitive liabilities) or negative (interest
sensitive liabilities in excess of interest sensitive assets).



As of September 30, 2003, BancShares had a positive one-year cumulative gap position of 32.72% and a positive total cumulative gap position of 17.64%. At December 31, 2002, BancShares had a one-year positive cumulative gap position of
23.51% and a total positive cumulative gap position of 17.62%.



|                                                                     |  | September 30, 2003 |        
|-------------------------------------------------------------------- |  | ------------------ | -------
|                                                                     |  | 1-30DaysSensitive  |        
|Assets:                                                              |  |                    |        
|Loans                                                                |  | $                  | 455,097
|Investment securities                                                |  |                    |       
|Overnight funds sold                                                 |  |                    | 45,900 
|Other                                                                |  |                    |       
|Interest bearing deposits in other banks                             |  |                    | 26,131 
|                                                                     |  |                    |        
|Total interest earning assets                                        |  | $                  | 527,128
|                                                                     |  |                    |        
|                                                                     |  |                    |        
|Liabilities:                                                         |  |                    |        
|Savings and checking with interest                                   |  | $                  |       
|Money market savings                                                 |  |                    | 147,351
|Time deposits                                                        |  |                    | 59,100 
|Short-term borrowings                                                |  |                    | 27,025 
|Long-term borrowings                                                 |  |                    |       
|                                                                     |  |                    |        
|Total interest bearing liabilities                                   |  | $                  | 233,476
|                                                                     |  |                    |        
|Interest-sensitivity gap                                             |  | $                  | 293,652
|                                                                     |  |                    |        
|Cumulative interest sensitivity gap                                  |  | $                  | 293,652
|Cumulative interest sensitivity gap to total interest earning assets |  |                    | 28.40  



Accounting and Other Matters.



Refer to Note 2 in the
Notes to Consolidated Financial Statements.



Forward-Looking Statements



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



21



---

|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 September 30, 2003, an evaluation was carried out under the supervision and with the participation of the Companys management, including the
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the
Companys disclosure controls and procedures were effective as of September 30, 2003 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no significant changes in the Companys internal control over financial reporting during the most recent
quarter that have materially affected, or are reasonably likely to materially affect, the Companys 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.
|--- | ---------------------------------------------------------------------



|     | 
|---- | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32   | 

---



|(b) | No reports on Form 8-K were filed during the quarter ended September 30, 2003.
|--- | ------------------------------------------------------------------------------



22



---

SIGNATURES



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



|                         |  | FIDELITY BANCSHARES (N.C.), INC.
|------------------------ |  | --------------------------------
|                         |  |                                 
|Dated: November 13, 2003 |  | By:                             
|                         |  |                                 
|                         |  |                                 



23



---

EXHIBIT INDEX



|     | 
|---- | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32   | 



24