SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

Fidelity BancShares (N.C.), Inc.

(Exact name of Registrant as specified in its charter)

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

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

(919) 552-2242

(Registrant’s telephone number, including area code)

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

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

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

(Number of shares outstanding, by class, as of November 13, 2003)

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		$	41,990,331
Interest bearing deposits in other banks		26,131,404			32,106,848			11,976,854
Overnight funds sold		45,900,000			50,800,000			38,500,000

Total cash and cash equivalents		122,613,023			130,716,719			92,467,185

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			128,003,982
Available for sale (cost of $3,387,593, $3,468,310, and $3,515,623 respectively)		12,837,586			11,512,609			11,947,212

Total investment securities		217,660,555			105,598,259			139,951,194

Loans		741,624,881			729,101,387			722,206,880
Allowance for loan losses		(12,539,023	)		(11,838,076	)		(10,778,214	)

Loans, net		729,085,858			717,263,311			711,428,666

Federal Home Loan Bank of Atlanta stock, at cost		2,656,700			2,467,600			2,467,600
Premises and equipment, net		37,038,001			34,590,338			34,970,604
Accrued interest receivable		3,078,068			3,588,368			3,345,586
Intangible assets		24,195,583			17,002,830			17,079,880
Other assets		3,826,209			2,972,759			2,799,729

Total assets	$	1,140,153,997		$	1,014,200,184		$	1,004,510,444


Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand deposits	$	182,996,864		$	156,932,202		$	160,471,853
Savings and interest-bearing deposits		362,720,602			318,460,309			307,628,165
Time deposits		438,855,602			393,940,013			396,858,974

Total deposits		984,573,068			869,332,524			864,958,992
Short-term borrowings		27,025,214			22,591,378			18,460,605
Long-term borrowings		23,000,000			23,000,000			23,000,000
Accrued interest payable		3,206,425			3,515,541			3,320,192
Other liabilities		3,864,392			3,425,103			3,954,101

Total liabilities		1,041,669,099			921,864,546			913,693,890

Shareholders’ equity:
Common stock ($25 par value; 29,200 shares authorized; 28,011 shares issued and outstanding)		700,275			700,275			700,275
Surplus		6,163,380			6,163,380			6,163,380
Accumulated other comprehensive income		5,702,434			4,866,801			5,101,111
Retained earnings		85,918,809			80,605,182			78,851,788

Total shareholders’ equity		98,484,898			92,335,638			90,816,554

Total liabilities and shareholders’ equity	$	1,140,153,997		$	1,014,200,184		$	1,004,510,444

See accompanying notes to consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three months ended September 30,					Nine months ended September 30,
	2003			2002		2003			2002
				(Restated- see Note 1)					(Restated-see Note 1)
Interest income:
Interest and fees on loans	$	11,679,106		12,925,958		$	35,344,344		38,154,942
Interest and dividends on investment securities:
Taxable interest income		709,500		775,432			1,922,191		3,170,468
Dividend income		63,110		70,360			198,132		205,954
Interest on overnight funds sold		160,034		198,067			430,607		503,550

Total interest income		12,611,750		13,969,817			37,895,274		42,034,914

Interest expense:
Deposits		2,934,191		4,013,038			9,383,425		12,842,763
Short-term borrowings		45,587		60,121			153,098		187,393
Long-term borrowings		488,750		488,750			1,466,250		1,466,250

Total interest expense		3,468,528		4,561,909			11,002,773		14,496,406

Net interest income		9,143,222		9,407,908			26,892,501		27,538,508
Provision for loan losses		407,000		550,000			995,000		2,000,000

Net interest income after provision for loan losses		8,736,222		8,857,908			25,897,501		25,538,508

Noninterest income:
Service charges on deposit accounts		1,753,201		1,661,947			4,963,031		4,864,292
Other service charges and fees		1,101,535		936,329			3,171,836		2,734,131
Other income		34,928		42,814			218,093		135,634
Loss on marketable equity securities		(22,215	)	(53,166	)		(87,703	)	(124,234	)

Total noninterest income		2,867,449		2,587,924			8,265,257		7,609,823

Noninterest expense:
Salaries and employee benefits		4,795,809		4,364,104			14,063,833		13,453,902
Occupancy and equipment		1,299,145		1,224,407			3,731,143		3,665,494
Data processing		910,742		796,168			2,597,547		2,390,592
Amortization of intangibles		189,183		77,048			343,279		231,144
Other expense		1,423,735		1,203,196			3,789,011		3,537,214
Impairment loss on fixed assets		—		144			—		143,368

Total noninterest expense		8,618,614		7,665,067			24,524,813		23,421,714

Net income before income taxes		2,985,057		3,780,765			9,637,945		9,726,617
Income tax expense		1,170,803		1,388,539			3,652,055		3,514,569

Net income	$	1,814,254		2,392,226		$	5,985,890		6,212,048


Per share information:
Net income	$	64.77		85.40		$	213.70		221.74
Cash dividends declared	$	8.00		8.00		$	24.00		24.00
Weighted average shares outstanding		28,011		28,011			28,011		28,015

See accompanying notes to consolidated financial statements.

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			Accumulated other comprehensive income			Retained earnings			Comprehensive income			Total shareholders’ equity
Balance December 31, 2001	28,026		$	700,650		$	6,166,681		$	4,817,106		$	73,345,948					$	85,030,385

Net income (Restated- see Note 1)	—			—			—			—			6,212,048		$	6,212,048			6,212,048
Cash dividends ($24.00 per share)	—			—			—			—			(672,384	)					(672,384	)
Purchase and retirement of common stock	(15	)		(375	)		(3,301	)		—			(33,824	)					(37,500	)
Unrealized gain on securities available for sale, net of deferred taxes of $185,425	—			—			—			284,005			—			284,005			284,005

Comprehensive income															$	6,496,053

Balance September 30, 2002	28,011		$	700,275		$	6,163,380		$	5,101,111		$	78,851,788					$	90,816,554

Balance December 31, 2002	28,011		$	700,275		$	6,163,380		$	4,866,801		$	80,605,182					$	92,335,638

Net income	—			—			—			—			5,985,890		$	5,985,890			5,985,890
Cash dividends ($24.00 per share)	—			—			—			—			(672,263	)					(672,263	)
Unrealized gain on securities available for sale, net of deferred taxes of $555,249	—			—			—			850,444			—			850,444			850,444
Additional pension charge related to unfunded pension liability, net of deferred taxes of $9,664	—			—			—			(14,811	)		—			(14,811	)		(14,811	)

Comprehensive income															$	6,821,523

Balance September 30, 2003	28,011		$	700,275		$	6,163,380		$	5,702,434		$	85,918,809					$	98,484,898

See accompanying notes to consolidated financial statements.

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

Consolidated Statements of Cash Flows

(unaudited)

	Nine months ended September 30,
	2003			2002
				(Restated- see Note 1)
Cash flows from operating activities:
Net income	$	5,985,890		6,212,048
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,058,929		2,071,488
Net accretion of premiums or discounts		(766,022	)	(157,449	)
Loss (gain) on disposition of premises and equipment		(24,358	)	19,274
Impairment loss on fixed assets		—		143,368
Provision for loan losses		995,000		2,000,000
Impairment loss on marketable equity securities		87,703		47,245
Loss on sale of securities available for sale		—		76,989
Gain on other real estate		(59,393	)	(17,087	)
Decrease in accrued interest receivable		510,300		2,107,449
Increase in other assets, net		(953,132	)	(1,066,621	)
Increase (decrease) in other liabilities, net		(159,559	)	1,225,040
Decrease in accrued interest payable		(309,116	)	(2,937,731	)

Net cash provided by operating activities		7,366,242		9,724,013

Cash flows from investing activities:
Purchase of securities held to maturity		(324,161,579	)	(167,401,804	)
Purchase of securities available for sale		(9,495	)	(56,184	)
Proceeds from sale of securities available for sale		2,508		50,103
Proceeds from maturities and issuer calls of securities held to maturity		214,000,314		165,001,438
Proceeds from sales of other real estate owned and repossessed assets		498,377		405,400
Purchase of FHLB of Atlanta stock		(189,100	)	(158,200	)
Net decrease (increase) in loans		18,557,750		(53,962,295	)
Purchase of premises and equipment		(2,271,627	)	(1,517,117	)
Net cash received on branch purchases		73,313,818		—

Net cash used by investing activities		(20,259,034	)	(57,638,659	)

Cash flows from financing activities:
Net increase in deposits		2,783,458		23,523,688
Net increase (decrease) in short-term borrowings		2,677,901		(8,612,087	)
Cash dividends paid		(672,263	)	(672,384	)
Purchase and retirement of common stock		—		(37,500	)

Net cash provided by financing activities		4,789,096		14,201,717

Net decrease in cash and cash equivalents		(8,103,696	)	(33,712,929	)
Cash and cash equivalents at beginning of year		130,716,719		126,180,114

Cash and cash equivalents at end of period	$	122,613,023		92,467,185

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	11,311,889		17,434,137

Cash paid during the period for income taxes	$	4,494,187		4,049,995

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		284,005

Transfer of foreclosed loans to other real estate and repossessed assets	$	310,514		505,400

See accompanying notes to consolidated financial statements.

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

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 Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Branch acquisitions	$	7,746	$	2,662	$	4,626	$	2,319

Unamortized intangible assets:
Goodwill	$	19,112		—	$	14,696		—

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	$	532
	2004		732
	2005		689
	2006		653
	2007		623
	2008 and after		2,198

	Total	$	5,427

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

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

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

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

In November 2002, the Financial Accounting Standards Board issued Financial Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee, such as 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.

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			2002
Balance at beginning of year	$	11,838,076		$	9,312,384
Provision for loan losses		995,000			2,000,000
Loans charged off		(636,017	)		(2,043,436	)
Loan recoveries		341,964			1,509,266

Balance at end of the period	$	12,539,023		$	10,778,214

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.

(Dollars in thousands)	As Recorded by FCB		Fair Value Adjustments		As Recorded by Fidelity Bank
Assets:
Cash	$	784	—			784
Loans, gross		31,380	334	^(a)		31,714
Premises and Equipment		1,251	624	^(b)		1,875
Prepaid expenses		11	—			11
Other-identifiable intangible asset		—	3,121	^(c)		3,121

Total		33,426	4,079			37,505


Liabilities:
Deposits	$	113,459	981	^(d)		114,440

Total		113,459	981			114,440


Fair value of identifiable net assets (liabilities) acquired, excluding cash received from seller					$	(76,935	)

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

Purchase price paid for acquisition	$	7,500

Fair value of identifiable net assets (liabilities) acquired, excluding cash received from seller		(76,935	)
Cash received from seller at closing, excluding 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

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 Ended September 30,
(Dollars in thousands)	2003		2002
Data and item processing	$	2,598	$	2,430
Forms, supplies and equipment		254		211
Trustee for employee benefit plans		45		45
Other		4		1

	$	2,901	$	2,687

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.

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)	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter
Summary of Operations
Interest income	$	12,612		$	12,553		$	12,730		$	13,693		$	13,970
Interest expense		3,469			3,617			3,917			4,344			4,562

Net interest income		9,143			8,936			8,813			9,349			9,408
Provision for loan losses		407			388			200			1,225			550

Net interest income after provision for loan losses		8,736			8,548			8,613			8,124			8,858
Noninterest income		2,868			2,850			2,548			2,823			2,588
Noninterest expense		8,619			7,953			7,954			7,716			7,665

Net income before income taxes		2,985			3,445			3,207			3,231			3,781
Income taxes		1,171			1,331			1,150			1,253			1,389

Net income	$	1,814		$	2,114		$	2,057		$	1,978		$	2,392


Selected Period-End Balances
Total assets	$	1,140,154		$	1,148,213		$	1,020,556		$	1,014,200		$	1,004,511
Investment securities and overnight funds sold		263,561			251,202			175,456			156,398			178,451
Loans, gross		741,625			743,223			718,957			729,101			722,207
Interest earning assets		1,033,974			1,045,975			933,019			920,074			915,103
Deposits		984,573			994,542			873,697			869,333			864,959
Long-term obligations		23,000			23,000			23,000			23,000			23,000
Interest bearing liabilities		851,602			855,430			756,103			757,991			745,948
Shareholders’ equity		98,485			96,561			94,251			92,336			90,817
Common shares outstanding		28,011			28,011			28,011			28,011			28,011


Selected Average Balances
Total assets	$	1,127,477		$	1,025,623		$	1,003,666		$	1,005,872		$	984,916
Investment securities and overnight funds sold		235,018			179,898			154,421			165,288			168,124
Loans, gross		746,440			716,514			727,288			725,231			714,084
Interest earning assets		1,031,741			939,378			919,624			921,630			903,991
Deposits		969,945			875,776			857,172			863,213			843,403
Long-term obligations		23,000			23,000			23,000			23,000			23,000
Interest bearing liabilities		846,096			765,615			754,192			752,411			739,436
Shareholders’ equity		98,587			96,276			94,046			92,119			90,344
Common shares outstanding		28,011			28,011			28,011			28,011			28,011


Profitability Ratios
Rate of return (annualized) on:
Total assets		0.64	%		0.83	%		0.83	%		0.78	%		0.96	%
Shareholders’ equity		7.30	%		8.81	%		8.87	%		8.52	%		10.51	%
Dividend payout ratio ⁽¹⁾		12.35	%		10.60	%		10.89	%		11.33	%		9.37	%


Liquidity and Capital Ratios (averages)
Loans to deposits		76.96	%		81.81	%		84.85	%		83.45	%		84.67	%
Shareholders’ equity to total assets		8.74	%		9.39	%		9.37	%		9.16	%		9.17	%


Per Share of Common Stock
Net income	$	64.77		$	75.48		$	73.44		$	70.60		$	85.40
Cash dividends		8.00			8.00			8.00			8.00			8.00
Book value ⁽²⁾		3,515.94			3,447.25			3,364.79			3,296.41			3,242.17

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

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

TABLE 2.

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

	2003							2002							Increase (decrease) due to:
(Dollars in thousands)	Average Balance			Interest Income/ Expense		Yield/ Rate		Average Balance			Interest Income/ Expense		Yield/ Rate		Volume		Yield/ Rate			Total Change
ASSETS
Interest earning assets:
Loans ⁽¹⁾ ⁽²⁾	$	730,151		$	35,387	6.48	%	$	696,352		$	38,201	7.33	%	$	1,746	$	(4,560	)	$	(2,814	)
Taxable investment securities		122,150			1,593	1.74			121,409			2,883	3.17			14		(1,304	)		(1,290	)
Overnight funds sold		55,779			431	1.03			40,170			504	1.68			158		(231	)		(73	)
Other investments		14,748			198	1.79			14,728			206	1.87			4		(12	)		(8	)
Interest bearing deposits in other banks		41,164			329	1.07			22,960			287	1.67			187		(145	)		42

Total interest earning assets	$	963,992		$	37,938	5.26	%	$	895,619		$	42,081	6.28	%	$	2,109	$	(6,252	)	$	(4,143	)

Noninterest earning assets:
Cash and due from banks		39,309							34,635
Premises and equipment		35,436							35,205
Other assets		26,058							22,738
Reserve for loan losses		(12,089	)						(10,000	)

Total assets	$	1,052,706						$	978,197


LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits	$	121,658		$	201	0.22	%	$	106,440		$	250	0.31	%	$	32	$	(81	)	$	(49	)
Savings deposits		209,033			1,248	0.80			193,703			2,212	1.53			124		(1,088	)		(964	)
Time deposits		410,724			7,935	2.58			394,982			10,381	3.51			359		(2,805	)		(2,446	)
Short-term borrowings		24,556			153	0.83			22,265			188	1.13			17		(52	)		(35	)
Long-term borrowings		23,000			1,466	8.52			23,000			1,466	8.52			—		—			—

Total interest bearing liabilities	$	788,971		$	11,003	1.86	%	$	740,390		$	14,497	2.62	%	$	532	$	(4,026	)	$	(3,494	)

Noninterest bearing liabilities:
Demand deposits		159,959							141,279
Other liabilities		7,456							8,097
Shareholders’ equity		96,320							88,431

Total liabilities and equity	$	1,052,706						$	978,197

Interest rate spread ⁽³⁾						3.40	%						3.66	%

Net interest income and net interest margin ⁽⁴⁾				$	26,935	3.74	%				$	27,584	4.12	%	$	1,577	$	(2,226	)	$	(649	)

⁽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.

TABLE 3.

Consolidated Taxable Equivalent Rate/Volume Variance Analysis – Third quarter

	2003							2002							Increase (decrease) due to:
(Dollars in thousands)	Average Balance			Interest Income / Expense		Yield/ Rate		Average Balance			Interest Income / Expense		Yield/ Rate		Volume		Yield/ Rate			Total Change
ASSETS
Interest earning assets:
Loans ⁽¹⁾ ⁽²⁾	$	746,440		$	11,694	6.22	%	$	714,084		$	12,941	7.19	%	$	547	$	(1,794	)	$	(1,247	)
Taxable investment securities		149,916			597	1.58			107,696			690	2.54			220		(311	)		(91	)
Overnight funds sold		71,951			160	0.88			47,918			199	1.65			77		(115	)		(38	)
Other investments		15,807			63	1.58			14,978			70	1.85			4		(11	)		(7	)
Interest bearing deposits in other banks		47,627			112	0.93			19,315			84	1.73			95		(67	)		28

Total interest earning assets	$	1,031,741		$	12,626	4.86	%	$	903,991		$	13,984	6.14	%	$	943	$	(2,298	)	$	(1,355	)

Noninterest earning assets:
Cash and due from banks		40,894							34,482
Premises and equipment		36,832							34,984
Other assets		30,390							22,377
Reserve for loan losses		(12,380	)						(10,917	)

Total assets	$	1,127,477						$	984,917


LIABILITIES & EQUITY
Interest bearing liabilities:
Demand deposits	$	130,067		$	53	0.16	%	$	103,621		$	79	0.30	%	$	15	$	(41	)	$	(26	)
Savings deposits		223,312			357	0.63			199,339			722	1.44			61		(426	)		(365	)
Time deposits		441,819			2,526	2.27			393,293			3,212	3.24			337		(1,024	)		(687	)
Short-term borrowings		27,898			45	0.64			20,183			61	1.20			18		(34	)		(16	)
Long-term borrowings		23,000			488	8.42			23,000			488	8.42			—		—			—

Total interest bearing liabilities	$	846,096		$	3,469	1.63	%	$	739,436		$	4,562	2.45	%	$	431	$	(1,525	)	$	(1,094	)

Noninterest bearing liabilities:
Demand deposits		174,747							147,150
Other liabilities		8,047							7,987
Shareholders’ equity		98,587							90,344

Total liabilities and equity	$	1,127,477						$	984,917

Interest rate spread ⁽³⁾						3.23	%						3.69	%

Net interest income and net interest margin⁽⁴⁾				$	9,157	3.52	%				$	9,422	4.14	%	$	512	$	(773	)	$	(261	)

⁽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.

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

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

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.

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		$	93,466
Total capital		105,418			106,463
Leverage capital ratio		8.30	% ⁽¹⁾		9.45	% ⁽¹⁾
Tier 1 capital ratio		11.98	⁽¹⁾		12.50	⁽¹⁾
Total capital ratio		13.79	⁽¹⁾		14.24	⁽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	231,232,246

Standby letters of credit	$	3,334,682	3,781,003

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

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

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

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 than 1 year		1-3 years	4-5 years	Over 5 years	Total
Deposits	$	865,043	87,300	32,230	—	984,573
Short-term borrowings		27,025	—	—	—	27,025
Long-term borrowings		—	—	—	23,000	23,000
Lease obligations		451	733	493	701	2,378

Total contractual cash obligations	$	892,519	88,033	32,723	23,701	1,036,976

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

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

The table below presents in tabular form the contractual balances and the estimated fair value of financial instruments at their expected maturity dates as of September 30, 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			2007			2008			Thereafter			Total			Fair Value
	(Dollars in thousands)
Assets
Loans:
Fixed rate	$	85,610		$	64,106		$	60,945		$	8,955		$	12,580		$	6,196		$	238,392		$	238,689
Average rate (%)		8.39	%		7.88	%		7.49	%		7.29	%		6.83	%		7.59	%		7.88	%

Variable rate	$	243,468		$	57,748		$	56,285		$	22,227		$	14,145		$	109,360		$	503,233		$	503,233
Average rate (%)		4.86	%		4.79	%		4.81	%		4.54	%		4.67	%		4.59	%		4.77	%

Investment securities ⁽¹⁾:
Fixed rate	$	204,817		$	—			—			—			—		$	6		$	204,823		$	204,979
Average rate (%)		1.48	%		—			—			—			—			10.95	%		1.48	%

Liabilities
Savings and interest bearing
checking:
Fixed rate	$	362,721			—			—			—			—			—		$	362,721		$	362,721
Average rate (%)		0.32	%		—			—			—			—			—			0.32	%

Certificates of deposit:
Fixed rate	$	319,325		$	66,784		$	20,516		$	32,231			—			—		$	438,856		$	445,128
Average rate (%)		1.97	%		3.38	%		3.16	%		3.99	%		—			—			2.39	%

Short-term obligations:
Variable rate	$	27,025			—			—			—			—			—		$	27,025		$	27,025
Average rate (%)		0.71	%		—			—			—			—			—			0.71	%

Long-term obligations:
Fixed rate		—			—			—			—			—		$	23,000		$	23,000		$	23,575
Average rate (%)		—			—			—			—			—			8.50	%		8.50	%

⁽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

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
	1-30 Days Sensitive			31-90 Days Sensitive			91-180 Days Sensitive			181-365 Days Sensitive			Total One-Year Sensitive			Total Non Sensitive			Total
Assets:
Loans	$	455,097		$	50,566		$	16,500		$	33,000		$	555,163		$	186,462		$	741,625
Investment securities		—			104,823			74,746			25,248			204,817			12,844			217,661
Overnight funds sold		45,900			—			—			—			45,900			—			45,900
Other		—			—			—			—			—			2,657			2,657
Interest bearing deposits in other banks		26,131			—			—			—			26,131			—			26,131

Total interest earning assets	$	527,128		$	155,389		$	91,246		$	58,248		$	832,011		$	201,963		$	1,033,974


Liabilities:
Savings and checking with interest	$	—		$	—		$	—		$	—		$	—		$	215,369		$	215,369
Money market savings		147,351			—			—			—			147,351			—			147,351
Time deposits		59,100			65,208			89,220			105,797			319,325			119,531			438,856
Short-term borrowings		27,025			—			—			—			27,025			—			27,025
Long-term borrowings		—			—			—			—			—			23,000			23,000

Total interest bearing liabilities	$	233,476		$	65,208		$	89,220		$	105,797		$	493,701		$	357,900		$	851,601

Interest-sensitivity gap	$	293,652		$	90,181		$	2,026		$	(47,549	)	$	338,310		$	(155,937	)	$	182,373

Cumulative interest sensitivity gap	$	293,652		$	383,833		$	385,859		$	338,310		$	338,310		$	182,373		$	182,373
Cumulative interest sensitivity gap to total interest earning assets		28.40	%		37.12	%		37.32	%		32.72	%		32.72	%		17.64	%		17.64	%

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.

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

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

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

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

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:	/s/ MARY W. WILLIS

		Mary W. Willis Chief Financial Officer and Treasurer

EXHIBIT INDEX


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

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

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

FIDELITY BANCSHARES NC INC /DE/ 10-Q