Edgar Filing: SOUTHERN BANCSHARES NC INC

Form 10-Q

UNITED STATES

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 June 30, 2005

Commission File No. 0-10852

SOUTHERN BANCSHARES (N.C.), INC.

(Exact name of registrant as specified in its charter)


DELAWARE		56-1538087
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

121 East Main Street Mount Olive, North Carolina		28365
(Address of Principal Executive offices)		(Zip Code)

Registrant’s Telephone Number, including Area Code: (919) 658-7000

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 12 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 90 days. Yes x No ¨

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

Indicate the number of shares outstanding of the Registrant’s common stock as of the close of the quarter, June 30, 2005, covered by this report.

108,920 shares

Part I – FINANCIAL INFORMATION

Item 1 – Financial Statements.

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

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except for per share data)


	(Unaudited) June 30 2005			December 31, 2004*
ASSETS
Cash and due from banks	$	39,692		$	22,283
Overnight funds sold		18,480			35,872
Investment securities:
Available-for-sale, at fair value (amortized cost of $46,968 and $43,600, respectively)		75,768			74,903
Held-to-maturity, at amortized cost (fair value of $206,414 and $236,172, respectively)		206,935			236,609
Loans		674,656			639,311
Loans held for sale		3,849			4,880
Less allowance for loan losses		(10,792	)		(10,259	)

Net loans		667,713			633,932
Accrued interest receivable		5,183			4,929
Premises and equipment		34,693			34,513
Goodwill		7,712			7,712
Intangible assets		2,966			3,687
Other assets		2,809			3,010

Total assets	$	1,061,951		$	1,057,450

LIABILITIES
Deposits:
Noninterest-bearing	$	186,550		$	183,762
Interest-bearing		723,751			726,760

Total deposits		910,301			910,522
Accrued interest payable		1,843			1,447
Short-term borrowings		19,669			16,017
Long-term obligations		23,711			23,711
Other liabilities		8,032			9,735

Total liabilities		963,556			961,432

SHAREHOLDERS’ EQUITY
Series B non-cumulative preferred stock, no par value; $3,506 liquidation value at both June 30, 2005 and December 31, 2004; 408,728 shares authorized; 350,593 shares issued and outstanding at both June 30, 2005 and December 31, 2004		1,753			1,753

Series C non-cumulative preferred stock, no par value; $397 liquidation value at both June 30, 2005 and December 31, 2004; 43,631 shares authorized; 39,657 shares issued and outstanding at both June 30, 2005 and December 31, 2004		525			525

Common stock, $5 par value; 158,485 shares authorized; 108,920 and 110,126 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively		545			551

Surplus		10,000			10,000
Retained earnings		68,122			64,528
Accumulated other comprehensive income		17,450			18,661

Total shareholders’ equity		98,395			96,018

Total liabilities and shareholders’ equity	$	1,061,951		$	1,057,450

The accompanying notes are an integral part of these consolidated financial statements.

*	Derived from audited consolidated financial statements

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

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Dollars in thousands except for share and per share data)


	(Unaudited)
	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Interest income:
Loans	$	10,926		$	9,393		$	21,110		$	18,764
Investment securities:
U. S. Government		1,224			820			2,328			1,663
State, county and municipal		284			265			609			517
Other		527			613			1,035			962

Total investment securities interest income		2,035			1,698			3,972			3,142
Overnight funds sold		120			93			276			207

Total interest income		13,081			11,184			25,358			22,113

Interest expense:
Deposits		3,163			2,467			5,992			4,933
Short-term borrowings		103			26			178			50
Long-term obligations		422			475			897			949

Total interest expense		3,688			2,968			7,067			5,932

Net interest income		9,393			8,216			18,291			16,181
Provision for loan losses		300			300			600			600

Net interest income after provision for loan losses		9,093			7,916			17,691			15,581

Noninterest income:
Service charges on deposit accounts		1,732			1,765			3,383			3,487
Other service charges and fees		683			626			1,372			1,224
Gain on sale of loans		226			33			369			359
Investment securities gain, net		681			5			916			3
Other		112			122			251			261

Total noninterest income		3,434			2,551			6,291			5,334
Noninterest expense:
Personnel		4,850			4,645			9,707			9,235
Data processing		944			923			1,872			1,767
Occupancy		897			851			1,785			1,742
Furniture and equipment		513			540			986			1,027
Intangibles amortization		239			301			657			766
Professional fees		118			286			336			473
Other		1,181			1,060			2,199			2,151

Total noninterest expense		8,742			8,606			17,542			17,161

Income before income taxes.		3,785			1,861			6,440			3,754
Income taxes		1,235			602			1,990			1,000

Net income		2,550			1,259			4,450			2,754

Other comprehensive income, net of tax:
Unrealized losses arising during period		(222	)		(1,677	)		(1,055	)		(721	)
Less: tax effect		86			646			407			278
Less: Reclassification adjustment for gains included in net income		(681	)		(5	)		(916	)		(3	)
Less: tax effect		263			3			353			2

Total other comprehensive loss		(554	)		(1,033	)		(1,211	)		(444	)

Comprehensive income	$	1,996		$	226		$	3,239		$	2,310

Per share information:
Net income per common share	$	22.61		$	10.56		$	39.10		$	23.18
Cash dividends declared on common shares		0.40			0.40			0.80			0.80
Weighted average common shares outstanding		109,043			111,029			109,445			111,251

The accompanying notes are an integral part of these consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(Dollars in thousands except for share and per share data)

(Unaudited)


	Preferred Stock													Surplus		Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
	Series B					Series C			Common Stock
	Shares		Amount			Shares	Amount		Shares		Amount
BALANCE, DECEMBER 31, 2003	358,316		$	1,745		39,657	$	552	111,530		$	558		$	10,000	$	59,919		$	15,744		$	88,518

Net income	—			—		—		—	—			—			—		2,754			—			2,754
Purchase and retirement of stock	(2,422	)		(11	)	—		—	(501	)		(3	)		—		(226	)		—			(240	)
Cash dividends:
Common stock ($.80 per share)	—			—		—		—	—			—			—		(89	)		—			(89	)
Preferred B ($.44 per share)	—			—		—		—	—			—			—		(158	)		—			(158	)
Preferred C ($.44 per share)	—			—		—		—	—			—			—		(17	)		—			(17	)
Unrealized gain on securities available- for-sale, net of tax	—			—		—		—	—			—			—		—			(444	)		4,047

BALANCE, JUNE 30, 2004	355,894		$	1,734		39,657	$	552	111,029		$	555		$	10,000	$	62,183		$	15,300		$	90,324

BALANCE, DECEMBER 31, 2004	350,593		$	1,753		39,657	$	525	110,126		$	551		$	10,000	$	64,528		$	18,661		$	96,018

Net income	—			—		—		—	—			—			—		4,450			—			4,450
Purchase, retirement and reclass of stock	—			—		—		—	(1,206	)		(6	)		—		(597	)		—			(603	)
Cash dividends:
Common stock ($.80 per share)	—			—		—		—	—			—			—		(88	)		—			(88	)
Preferred B ($.44 per share)	—			—		—		—	—			—			—		(154	)		—			(154	)
Preferred C ($.44 per share)	—			—		—		—	—			—			—		(17	)		—			(17	)
Unrealized gain on securities available-for-sale, net of tax	—			—		—		—	—			—			—		—			(1,211	)		(1,211	)

BALANCE, JUNE 30, 2005	350,593		$	1,753		39,657	$	525	108,920		$	545		$	10,000	$	68,122		$	17,450		$	98,395

The accompanying notes are an integral part of these consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Six Months ended June 30,
	2005			2004
OPERATING ACTIVITIES:
Net income	$	4,450		$	2,754
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		600			600
Gains on sales, donations and issuer calls of securities		(916	)		(3	)
Loss on sale and abandonment of premises and equipment		2			25
Loss on sale of foreclosed assets		42			—
Gain on sale of loans		(369	)		(359	)
Net accretion of discounts of premiums on investments		23			386
Amortization of intangibles and mortgage servicing rights		811			766
Depreciation		1,335			1,378
Proceeds from sales of loans held for sale		35,914			32,339
Origination of loans held for sale		(37,333	)		—
Net increase in intangible assets		(90	)		(42	)
Net (increase) decrease in accrued interest receivable		(254	)		422
Net increase (decrease) in accrued interest payable		396			(32	)
Net increase in other assets		(887	)		(688	)
Net (decrease) increase in other liabilities		(1,697	)		291

NET CASH PROVIDED BY OPERATING ACTIVITIES		2,027			37,837

INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities available-for-sale		9,372			32,451
Proceeds from maturities and issuer calls of investment securities held-to-maturity		64,877			16,303
Proceeds from sales of investment securities available-for-sale		728			—
Purchases of investment securities held-to-maturity		(30,075	)		(60,079	)
Purchases of investment securities available-for-sale		(16,417	)		(11,232	)
Net increase in loans		(31,547	)		(34,745	)
Purchases of premises and equipment		(1,517	)		(1,385	)

NET CASH USED BY INVESTING ACTIVITIES		(4,579	)		(58,687	)

FINANCING ACTIVITIES:
Net increase in demand and interest-bearing demand deposits		(6,664	)		(135	)
Net increase in time deposits		6,443			6,155
Net proceeds of short-term borrowed funds		3,652			2,190
Cash dividends paid		(259	)		(264	)
Purchase and retirement of stock		(603	)		(240	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		2,569			7,706

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		17			(13,144	)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR		58,155			84,572

CASH AND CASH EQUIVALENTS AT THE END OF PERIOD	$	58,172		$	71,428

SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE YEAR FOR:
Interest	$	6,671		$	5,964
Income taxes	$	2,893		$	1,319

SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Unrealized gains on available-for-sale securities, net of tax	$	(1,211	)	$	(444	)
Foreclosed loans transferred to other real estate	$	1,064		$	394

The accompanying notes are an integral part of these consolidated financial statements.

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

Notes to Consolidated Financial Statements

Note 1. Summary Of Significant Accounting Policies

Basis of Financial Statement Presentation

Southern BancShares (N. C.), Inc. (“BancShares”) is the holding company for Southern Bank and Trust Company (“Southern”), which operates 53 banking offices in eastern North Carolina and Southern Bank Community Development, LLC, a wholly owned subsidiary for the construction or rehabilitation of low to moderate income residential or commercial properties primarily in rural Eastern North Carolina markets served by Southern. Southern, which began operations January 29, 1901, has a wholly-owned subsidiary, Goshen, Inc. whose insurance agency operations compliment the operations of its parent. BancShares and Southern are headquartered in Mount Olive, North Carolina. BancShares has no foreign operations and BancShares’ customers are principally located in eastern North Carolina.

The consolidated financial statements in this report are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the quarters presented have been included.

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. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting periods. Actual results could differ from those estimates. The results presented are for the six months ended June 30, 2005 and may not be indicative of results for the full year of 2005. The statements should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended December 31, 2004, included in the 2004 Annual Report on Form 10-K.

Principles of Consolidation

The consolidated financial statements include the accounts of BancShares and its wholly-owned subsidiaries, Southern and Southern Bank Community Development, LLC. The statements also include the accounts of Goshen, Inc., a wholly-owned subsidiary of Southern. BancShares’ financial resources are primarily provided by dividends from Southern. All significant intercompany balances have been eliminated in consolidation.

Cash And Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks and overnight funds sold.

Goodwill and Other Intangible Assets

Intangible assets are composed primarily of goodwill, core deposit premiums and mortgage servicing rights. Core deposit premiums are generally amortized on an accelerated basis, over a period of 5 to 10 years as determined by independent third parties based on studies, and the useful lives are periodically reviewed for reasonableness. The net deposit premium balances were $2.1 million and $2.8 million at June 30, 2005 and December 31, 2004, respectively. Mortgage servicing rights (“MSR”) represent the estimated value of the right to service mortgage loans for others. Capitalization of MSR occurs when the underlying loans are sold. Capitalized MSR are amortized into income over the projected servicing life of the underlying loans. Capitalized MSR are periodically reviewed for impairment. The net MSR balances were $796,000 and $861,000 at June 30, 2005 and December 31, 2004 respectively. No valuation allowance for impairment was required at June 30, 2005 or at December 31, 2004.

The following is a summary of the gross carrying amounts and accumulated amortization of amortized intangible assets as of June 30, 2005 and December 31, 2004:

(Dollars in thousands)


	June 30, 2005				December 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Branch acquisitions	$	14,691	$	12,544	$	14,691	$	11,888
Mortgage servicing rights		2,700		1,904		2,610		1,749

Totals	$	17,391	$	14,448	$	17,301	$	13,637

Unamortized intangible assets:
Goodwill	$	7,712		—	$	7,712		—
Pension	$	23		—	$	23		—

Southern issues standby letters of credit whereby Southern guarantees performance if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. The maximum potential amount of undiscounted future payments related to standby letters of credit at June 30, 2005 is $5.8 million. At June 30, 2005, BancShares has recorded no liability for the current carrying amount of the standby letter obligations to perform as a guarantor, as such amounts are deemed immaterial.

Accounting and Other Matters

In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-3, Accounting for Loans or Certain Debt Securities Acquired in a Transfer. The SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences relate to a deterioration of credit quality. The SOP also prohibits companies from “carrying over” or creating a valuation allowance in the initial accounting for loans acquired that meet the scope criteria of the SOP. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of this SOP did not have a material impact on the Company’s financial position or results of operations.

In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this Statement are effective for the first interim reporting period of the first fiscal year that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending March 31, 2006. The Company does not have a stock option plan and adoption of SFAS No. 123(R) will not have any effect on the consolidated financial statements.

Note 2. Investment Securities

The amortized cost and estimated fair values of investment securities were as follows:

(Dollars in Thousands)


	June 30, 2005									December 31, 2004
	Gross Amortized Cost		Gross Unrealized Gains		Unrealized Losses			Fair Value		Gross Amortized Cost		Gross Unrealized Gains		Unrealized Losses			Fair Value
SECURITIES
HELD-TO-MATURITY:
U. S. Treasuries	$	190,859	$	28	$	(1,348	)	$	189,539	$	185,798	$	—	$	(1,235	)	$	184,563
U. S. Agencies		—		—		—			—		15,018		—		(46	)		14,972
Obligations of states and political subdivisions		16,076		811		(12	)		16,875		35,793		857		(13	)		36,637

	$	206,935	$	839	$	(1,360	)	$	206,414	$	236,609	$	857	$	(1,294	)	$	236,172

SECURITIES AVAILABLE-FOR-SALE:
U. S. Treasuries	$	4,988	$	—	$	(32	)	$	4,956	$	—	$	—	$	—		$	—
U. S. Agencies		—		—		—			—		6,001		—		(7	)		5,994
Marketable equity securities		33,069		28,599		(127	)		61,541		26,766		30,991		(143	)		57,614
Obligations of states and political subdivisions		5,055		172		—			5,227		6,401		238		—			6,639
Mortgage-backed securities		3,856		191		(3	)		4,044		4,432		224		—			4,656

	$	46,968	$	28,962	$	(162	)	$	75,768	$	43,600	$	31,453	$	(150	)	$	74,903

TOTALS	$	253,903	$	29,801	$	(1,522	)	$	282,182	$	280,209	$	32,310	$	(1,444	)	$	311,075

Securities with a carrying value of $103,755 were pledged at June 30, 2005 to secure public deposits and for other purposes as required by law and contractual arrangement.

Note 3. ALLOWANCE FOR LOAN LOSSES

(Dollars in thousands)


	Six Months Ended June 30,
	2005			2004
Balance at beginning of year	$	10,259		$	10,095
Provision for loan losses		600			600
Loans charged off		(384	)		(504	)
Loan recoveries		317			101

Balance at end of the year	$	10,792		$	10,292

Note 4. Earnings Per Common Share

Earnings per common share are computed by dividing income applicable to common shares by the weighted average number of common shares outstanding during the period. Income applicable to common shares represents net income reduced by dividends paid to preferred shareholders. Since BancShares had no potentially dilutive securities during 2005 or 2004, the computation of basic and diluted earnings per share is the same. The following table presents the components of the earnings per share computations:

(Dollars in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Net income	$	2,550		$	1,259		$	4,450		$	2,754
Less: Preferred dividends		(85	)		(87	)		(171	)		(175	)

Net income applicable to common shares	$	2,465		$	1,172		$	4,279		$	2,579

Weighted average common shares outstanding during the period		109,043			111,029			109,445			111,251

Note 5. 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 Company. The Corporation has two significant shareholders, who also are significant shareholders of BancShares.

The first significant shareholder is a director of BancShares and, at June 30, 2005, beneficially owned 32,751 shares, or 30.07%, of BancShares’ outstanding common stock and 4,966 shares, or 1.42%, of BancShares’ outstanding Series B preferred stock. At the same date, the second significant shareholder beneficially owned 27,422 shares, or 25.18%, of BancShares’ outstanding common stock.

These two significant shareholders are directors and executive officers of the Corporation and at June 30, 2005, beneficially owned 2,538,130 shares, or 28.98%, and 1,378,970 shares, or 15.75%, of the Corporation’s outstanding Class A common stock, and 666,825 shares, or 39.75%, and 208,622 shares, or 12.44%, of the Corporation’s outstanding Class B common stock. The above totals include 465,104 Class A common shares, or 5.31%, 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.

BancShares is related through common ownership with Fidelity Bancshares NC Inc, (“Fidelity”) and Heritage BancShares, Inc. (“Heritage”), in that the aforementioned two significant shareholders of BancShares and certain of their related parties are also significant shareholders of Fidelity and Heritage. Fidelity has contracted with BancShares for BancShares to service, on Fidelity’s behalf, $1.6 million of Fidelity’s mortgage loans at June 30, 2005. BancShares also provides underwriting and processing services for mortgage loans originated though Fidelity and Heritage.

The following table lists the various charges paid to the Corporation during the six months ended June 30, 2005 and the six months ended June 30, 2004 in accordance with the aforementioned service contracts:

(Dollars in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Data and item processing	$	782	$	801	$	1,584	$	1,573
Forms, supplies and equipment		216		315		456		609
Internet banking		44		35		86		76
Consulting fees		23		24		47		52
Trustee for employee benefit plans		18		17		36		34
Other services		30		55		49		70

Total	$	1,113	$	1,247	$	2,258	$	2,414

Note 6. Acquisitions

BancShares has consummated numerous bank branch acquisitions in recent years. All of the acquisitions have been accounted for under the purchase method of accounting, with the results of operations not included in BancShares’ Consolidated Statements of Income until after the transaction date. The proforma impact of the acquisitions, as though they had been made at the beginning of the periods presented, is not considered material to BancShares’ consolidated financial statements.

There were no acquisitions during the six months ended June 30, 2004 or 2005.

Note 7. Retirement Plans

Southern has a noncontributory, defined benefit pension plan which covers substantially all full-time employees. Employees who qualify under length of service and other requirements participate in the noncontributory defined benefit pension plan. Under the plan, retirement benefits are based on years of service and average earnings. The policy is to fund the maximum amount allowable for federal income tax purposes. The plan’s assets consist primarily of investments in First-Citizens Bank & Trust Company pooled investment funds, which include listed common stocks, fixed income securities and individual trust preferred securities. It is Southern’s policy to determine the service cost and projected benefit obligation using the Projected Unit Credit Cost method.

The following sets forth pertinent information regarding the components of net periodic benefit pension plan costs:

Components of net periodic benefit cost:

(Dollars in thousands)


	Pension Benefits.
Three months ended June 30:	2005			2004
Service cost	$	248		$	226
Interest cost		294			259
Expected return on assets		(274	)		(239	)

		268			246

Amortization cost:
Prior service cost		2			2
Net loss		90			68

Total amortizations		92			70

Net periodic benefit cost	$	360		$	316


	Pension Benefits.
Six months ended June 30:	2005			2004
Service cost	$	496		$	449
Interest cost		588			540
Expected return on assets		(548	)		(487	)

		536			502

Amortization cost:
Prior service cost		4			4
Net loss		180			156

Total amortizations		184			160

Net periodic benefit cost	$	720		$	662

The expected long-term rate of return on plan assets is 8.50% for 2005.

Employer contributions

In its December 31, 2004 financial statements, BancShares disclosed that it expected to contribute approximately $1.0 million to its plan trusts in 2005. For the six months ended June 30, 2005, BancShares has contributed $1.3 million to its plan trusts. BancShares does not expect to make any additional contributions in 2005.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2005 VS. SIX MONTHS ENDED JUNE 30, 2004

INTRODUCTION

This discussion provides information concerning changes in the consolidated financial condition and results of operations of Southern BancShares (N.C.), Inc. (“BancShares”) and its subsidiary, Southern Bank and Trust Company (“Southern”). The comments are intended to supplement, and should be reviewed in conjunction with, the consolidated financial statements, related notes and selected financial data presented elsewhere herein. The comments should also be read in conjunction with the consolidated financial statements and accompanying notes for the year ended December 31, 2004, included in the 2004 Annual Report on Form 10-K.

BancShares’ earnings and cash flows are primarily derived from the commercial banking activities conducted by Southern. Southern’s commercial banking activities include commercial and consumer lending, deposit and cash management products and various other financial management products and services typically associated with commercial banking. Southern gathers interest-bearing and noninterest-bearing deposits from retail and commercial customers and gathers supplemental short-term funding through various non-deposit sources. The liquidity generated from these funding sources is primarily invested in interest-earning assets consisting of various types of loans, investment securities, overnight funds sold investments and the banking premises and equipment used in the delivery of financial services.

Numerous factors influence customer demand for Southern’s deposit and loan products including the overall economy within Southern’s eastern North Carolina markets and the level of financial services competition within those markets. During the majority of 2005 and 2004, general economic uncertainty and rising interest rates managed by the Federal Reserve significantly impacted customer demand for both deposit and loan products. The rising interest rate market caused some customers, anticipating additional increases in rates, to choose shorter term deposit products including short-term certificates of deposit, transaction, savings and money market accounts. The still relatively low interest rate market provided some customers with an opportunity to refinance existing loans, provided some customers with the ability to reduce their overall loan requirements and provided some customers an opportunity to increase their loan balances at relatively low interest rates.

The overall strength of the economy also influences the quality and collectability of loans and the level of customer bankruptcies. Southern utilizes various asset and liability management tools to minimize the potential adverse impact of economic trends and to maximize opportunities provided by favorable economic trends.

Financial institutions typically focus their strategic planning and operating goals on maximizing profitability and the improvement of the return on average assets and return on average shareholders’ equity performance profitability measures. BancShares has historically placed significant emphasis on asset quality, liquidity and capital conservation, even when those goals may ultimately be detrimental to current period earnings’ performance as reflected by the return on average assets and return on average shareholders’ equity performance measures. Accordingly, BancShares’ return on average assets and return on average equity have historically compared unfavorably to financial institutions of similar size.

BancShare’s strategic analyses of its corporate and competitive strengths indicate many opportunities for growth and expansion of financial services within its markets. Southern operates in diverse eastern North Carolina geographic markets that offer opportunities to expand varying types of services to existing customers as well as opportunities to expand market share through strategic acquisitions of existing branch locations from competitor financial institutions. Southern also believes that, through superior customer service, there are opportunities to increase earnings performance by attracting customers of its financial competitors.

BancShares focuses on mitigating, where possible, growth and profitability risks. BancShares has limited control of risks such as economic, competitive and regulatory risks. Southern considers overall economic risk to be its greatest risk area. Primarily, economic risks of recession, rapid changes in market interest rates and significant increases in inflation are of the most concern to management. Southern’s smaller asset size and limited capital resources, as compared to its primary market financial service competitors, require significant and constant management attention to all areas of economic risk.

An analysis of BancShares’ overall financial condition and growth can be made by examining the changes and trends in the interest-earning asset and interest-bearing liability components in the following tables, discussions, consolidated financial statements and notes to the consolidated financial statements. Tables and discussions are also presented detailing the impact of branch acquisitions, capital position, loan loss experience, allowance for loan losses, non-interest expenses and non-interest income.

The net income of BancShares increased $1.7 million from $2.8 million in the first six months of 2004 to $4.5 million in the first six months of 2005, an increase of 61.58%. This increase resulted primarily from a $2.1 million before tax increase in net interest income and a $913,000 increase in gains on sale of available-for-sale securities. Net interest income increased as a result of the slowly increasing market interest rates being managed by the Federal Reserve. The average return on interest-earning assets increased at a greater rate than the increase in the average cost of interest-bearing liabilities. Personnel expense increased primarily as a result of annual merit increases for existing personnel and the opening of one new branch and the acquisition of two branches in 2004. There have been no branch acquisitions or new branches opened in the six months ended June 30, 2005.

Per share net income available to common shares for the first six months of 2005 was $39.10, an increase of $15.92, or 68.68%, from $23.18 for the first six months of 2004. The annualized return on average equity increased to 9.73%, for the period ended June 30, 2005, from 6.11% for the period ended June 30, 2004 and the annualized return on average assets increased to 0.85%, for the period ended June 30, 2005, from 0.54% for the period ended June 30, 2004.

At June 30, 2005, BancShares’ assets totaled $1.1 billion, an increase of $4.5 million, or 0.43%, from the $1.1 billion reported at December 31, 2004. During this six month period, cash and due from banks increased $17.4 million, or 78.13% from $22.3 million to $39.7 million. Overnight funds sold decreased $17.4 million, or 48.48% from $35.9 million to $18.5 million. Loans, excluding loans held for sale, increased $35.3 million, or 5.53%, from $639.3 million to $674.7 million primarily as a result of seasonal loan activity, a slowly improving economy and continued relatively low market interest rates. Investment securities decreased $28.8 million, or 9.25% from $311.5 million at December 31, 2004 to $282.7 million at June 30, 2005. Total deposits decreased $221,000, or 0.02% from $910.5 million at December 31, 2004 to $910.3 million at June 30, 2005 primarily due to the seasonal impact of customer agricultural business activity and customer tax payments.

CRITICAL ACCOUNTING POLICIES

BancShares’ significant accounting policies are set forth in Note 1 of the consolidated financial statements in the annual report on Form 10-K. Of these significant accounting policies, BancShares considers its policy regarding the allowance for loan losses to be its single 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, or 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.

ACQUISITIONS, NEW OFFICES AND CONSOLIDATIONS

BancShares did not acquire any additional locations in the six months ended June 30, 2005 or in the six months ended June 30, 2004. On May 10, 2004 BancShares opened a de novo branch in Manteo, North Carolina to expand the Kill Devil Hills financial services market. On September 13, 2004 BancShares acquired an existing branch in Seaboard, North Carolina and an existing branch in Woodland, North Carolina from Capital Bank. These two branch acquisitions expanded BancShares northeastern North Carolina market service area into Northampton County. The two Capital Bank Northampton county branch acquisitions added $28.0 million of deposits, $10.7 million of loans and $15.4 million of cash. BancShares paid $1.9 million for the Seaboard and Woodland branch acquisitions.

Applications have been approved to open de novo Southern Branches in Red Oak, North Carolina and Winterville, North Carolina. The Red Oak branch, the 54th location for BancShares, is expected to open in the fourth quarter of 2005. The Winterville branch is expected to open in the second quarter of 2006.

Franchise expansion has also contributed to growth in noninterest income, but has also resulted in large increases in noninterest expenses, especially personnel-related costs, occupancy expenses, equipment expenses and intangible asset amortization expenses.

Management continues to look for growth opportunities offered though existing branch acquisition opportunities and to plan for de novo expansion within its eastern North Carolina markets. The acquisition of existing branches from other financial institutions results in the payment of acquisition premiums which are allocated to non-earning assets or charged to operating earnings over time.

INTEREST INCOME

Interest-earning assets include loans, investment securities and overnight investments. Interest-earning assets reflect varying interest rates based on the risk level and maturity of the asset. Riskier investments typically carry a higher rate and expose BancShares to potentially higher levels of default. Southern has historically focused on maintaining high asset quality, requiring management to perform significant underwriting and monitoring procedures. Southern’s investment portfolio includes primarily United States Treasury and Government agency securities. The level of investment securities is primarily the result of overall loan and deposit trends. When deposit growth exceeds loan growth, the excess liquidity primarily increases investment securities. When loan growth exceeds deposit growth, maturing investment securities are utilized to fund loan growth rather than being reinvested into the securities market. Southern maintains an operating liquidity level of overnight funds sold investments with other financial institutions that are within Southern’s risk tolerance levels.

Loan production is principally driven by the eastern North Carolina economy. Management primarily seeks commercial lending opportunities collateralized by real estate. Traditional mortgage loan production is also a goal of management. Most of the mortgage loan production is sold into the mortgage secondary markets with the Bank retaining the loan servicing rights. Loan demand in recent years for consumer loans has declined as consumers have responded to retailer financing promotions and utilized mortgage equity lines of credit to finance purchases.

During 2005, management anticipates increased commercial loan growth due to the continued relatively low interest rate environment and an expected slow improvement in the eastern North Carolina economy. Market interest rates are expected to continue to slowly increase during the remainder of 2005 and into 2006. Loan demand among retail customers has shifted to open-end credit products such as equityline loans. Growth in equityline loans is also expected during the remainder of 2005 and 2006.

To minimize the potential adverse impact of interest rate fluctuations, management monitors the maturity and repricing distribution of the loan portfolio. BancShares offers variable rate loan products and fixed rate callable loans to reduce interest rate risk.

Interest and fees on loans increased $2.3 million, or 12.50%, from $18.8 million for the six months ended June 30, 2004 to $21.1 million for the six months ended June 30, 2005. This increase resulted primarily from higher loan portfolio yields resulting from the slowly rising interest rate market being managed by the Federal Reserve, the branch acquisitions discussed above, the de novo branch expansion discussed above and overall loan growth in the existing eastern North Carolina branch network.

Average loans for the six months ended June 30, 2005 were $649.0 million, an increase of 3.06% from $629.7 million for the prior year period. The average yield on the loan portfolio increased to 6.56% for the six months ended June 30, 2005 from 6.01% for the six months ended June 30, 2004 primarily as a result of the continued increasing interest rate market being managed by the Federal Reserve.

Management continues to maintain a portfolio of securities with relatively short maturities and call dates, consistent with BancShares’ focus on liquidity. The weighted average investment maturity at June 30, 2005 was 17.9 months compared to 18.5 months at December 31, 2004. Investment securities available for sale include marketable equity securities that are recorded at their fair value, with the unrealized net gain or loss included as a component of shareholders’ equity, net of deferred taxes.

Interest income from investment securities, including U. S. Treasury and Government obligations, obligations of state and county subdivisions and other securities increased $830,000 or 26.42%, and totaled $4.0 million in the six months ended June 30, 2005 compared to $3.1 million in the six months ended June 30, 2004. This increase was due to both an increase in the yield on the investment portfolio and an increase in the volume of average investment securities. Investment securities for the six months ended June 30, 2005 averaged $277.2 million compared to an average of $237.7 million for the same 2004 period. The increase in average volume principally resulted from a reduction of average overnight funds sold. The yield on investment securities was 2.67% for the six-month period ended June 30, 2004 and 2.89% for the six-month period ended June 30, 2005.

Interest income on overnight funds sold increased $69,000, or 33.33% from $207,000 for the six months ended June 30, 2004 to $276,000 for the six months ended June 30, 2005. This increase in income resulted from a decrease in the average overnight funds sold to $20.7 million for the six months ended June 30, 2005 from an average of $46.8 million for the six months ended June 30, 2004 that was more than offset by an increase in the yield on overnight funds to 2.65% for the six months ended June 30, 2005 from 0.88% for the six months ended June 30, 2004. The decrease in average overnight funds resulted primarily from an increase in investments. The increase in yields resulted principally from increases in market rates.

Total interest income increased $3.2 million or 14.67%, from $22.1 million for the six months ended June 30, 2004 to $25.4 million for the six months ended June 30, 2005. This increase was the result of both a 52 basis point increase in average earning asset yields and an increase of $33.0 million in average earning assets.

As a result of the overall increase in market rates, average earning asset yields for the six months ended June 30, 2005 increased to 5.40% from the 4.88% yield on average earning assets for the six months ended June 30, 2004. Average earning assets increased from $914.0 million in the six months ended June 30, 2004 to $947.0 million in the six months ended June 30, 2005. This $33.0 million increase in the average earning assets resulted primarily from existing branches, the September 2004 acquisitions discussed above and the May 2004 de novo branch discussed above.

INTEREST EXPENSE

Interest-bearing liabilities include interest-bearing deposits, short-term borrowings and long-term obligations. Southern’s primary funding source is deposits. Other short-term funding sources include commercial repurchase agreements and a borrowing line of credit from First-Citizens Bank & Trust Company. Long-term borrowings also provide additional capital under guidelines established by the Federal Reserve.

During the quarter ended March 31, 2004, the year ended December 31, 2004 and the quarter ended March 31, 2005, BancShares had long-term obligations including 8.25% junior subordinated debentures totaling $23.7 million issued to Southern Capital Trust I with a maturity date of 2028. Southern Capital Trust I is a wholly-owned finance subsidiary of BancShares. During the second quarter of 2005, in order to lower BancShares annual interest costs by approximately $308,000, Southern Capital Trust I redeemed the $23.7 million of 8.25% long-term obligations of Southern Capital Trust I. Southern Capital Trust II was then formed as a wholly-owned finance subsidiary of BancShares and issued $23.7 million of 6.95% long-term obligations. The $23.7 million of 6.95% long-term obligations qualify as Tier 1 Capital for BancShares, are redeemable in whole or in part after April 28, 2010 and mature in 2035. BancShares fully and unconditionally guarantees the repayment of the $23.7 million 6.95% trust preferred securities.

BancShares has historically avoided excessive reliance on time deposit accounts with balances in excess of $100,000. At June 30, 2005, the time deposits greater than $100,000 were 13.79 % of total deposits, compared to 14.61 % of June 30, 2004 total deposits.

Total interest expense increased $1.1 million, or 19.13%, from $5.9 million in the six months ended June 30, 2004 to $7.1 million for the six months ended June 30, 2005. The principal reasons for this increase were increases in the cost of funds for both deposits and short-term borrowings. As a result of the overall increases in market rates, BancShares’ total cost of funds increased from 1.59% for the six months ended June 30, 2004 to 1.87% for the six months ended June 30, 2005. Average interest-bearing deposits were $722.7 million in the six months ended June 30, 2005, an increase of $11.3 million from the $711.4 million average in the six months ending June 30, 2004. The increase in interest-bearing deposits was primarily the result of growth within existing branches, the acquisitions of two branches in September 2004 and the opening of a de novo branch in May 2004.

NET INTEREST INCOME

A principal objective of BancShares’ asset/liability function is to manage interest rate risk or the exposure to changes in interest rates. Management maintains portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities that protect against wide interest rate fluctuations, thereby limiting, to the extent possible, the ultimate interest rate exposure. As a result of the continued relatively weak eastern North Carolina economy, consumer concerns over the economy’s impact on the equity markets and the Federal Reserve continuing to manage relatively low interest rates, many consumers have moved cash into the shorter maturity deposit products of the Bank.

Net interest income before provision for loan losses was $18.3 million for the six months ended June 30, 2005 and $16.2 million for the six months ended June 30, 2004.

The interest rate spread for the six months ended June 30, 2005 was 3.53%, an increase of 24 basis points from the 3.29% interest rate spread for the six months ended June 30, 2004. The increase in the interest rate spread was primarily due to interest-bearing liabilities repricing upward during the six months ended June 30, 2005 at a slower rate than the upward repricing of interest-earning assets.

ASSET QUALITY AND PROVISION FOR LOAN LOSSES

Maintaining excellent asset quality is one of the key performance measures for, and a primary focus area of, BancShares’ management. BancShares and Southern dedicate significant resources to ensuring prudent lending practices, loan performance monitoring and management and prudent, timely recognition of losses. In some cases property that was used as collateral for loans is foreclosed to satisfy repayment of the loan. Upon completion of foreclosure, this property is classified as an other real estate nonperforming asset. Other real estate nonperforming assets are aggressively marketed by management.

Management evaluates the risk characteristics of the loan portfolio under current economic conditions, reviews the financial condition of borrowers, estimates the fair market value of the loan collateral and considers any other pertinent factors to estimate current credit losses. Southern provides an allowance for loan losses on a reserve basis and includes in operating expenses a provision for loan losses determined by management. The allowance is reduced by charge-offs and increased by subsequent recoveries. Management’s periodic evaluation of the adequacy of the allowance is based on Southern’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect borrowers’ experience, the estimated value of any underlying collateral, current economic conditions 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.

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

Primarily as a result of the slowly improving 2005 eastern North Carolina economy, Southern has experienced a $336,000, or 83.37%, decrease in net loan charge-offs for the six months ended June 30, 2005 compared to the six months ended June 30, 2004. Primarily as a result of increased average loans, management recorded $600,000 as a provision for loan losses for the six months ended June 30, 2005. For the six months ended June 30, 2004, management also recorded $600,000 as a provision for loan losses. During the first six months of 2005, management charged-off loans totaling $384,000 and received recoveries of $317,000, resulting in net charge-offs of $67,000. The allowance for loan losses accordingly increased $533,000 from December 31, 2004. During the same period in 2004, $504,000 in loans were charged-off and recoveries of $101,000 were received, resulting in net charge-offs of $403,000. The ratio of annualized net charge-offs to average loans was 0.16% for the year ended December 31, 2004 and 0.02% for the six months ended June 30, 2005.

The following table presents comparative Asset Quality ratios of BancShares at or for the six months ended June 30, or the twelve months ended December 31:


	June 30, 2005		December 31, 2004		June 30, 2004
Ratio of annualized net loans charged off to average loans	0.02	%	0.16	%	0.13	%
Allowance for loan losses to loans excluding loans held-for sale	1.60	%	1.60	%	1.64	%
Non-performing loans to loans excluding loans held-for-sale	0.49	%	0.26	%	0.48	%
Non-performing loans and assets to total assets	0.40	%	0.21	%	0.37	%
Allowance for loan losses to non-performing loans	326.44	%	616.53	%	343.41	%

The allowance for loan losses represented 1.60% of loans, excluding loans held-for-sale, at both June 30, 2005 and December 31, 2004. The ratio of the allowance for loan losses to loans, net of loans held-for-sale, was impacted by management’s decision to add to the provision for loan losses due to the increase in loans and an increase in foreclosed other real estate. Loans, net of loans held-for-sale, increased $35.3 million, or 5.53% from $639.3 million at December 31, 2004 to $674.7 million at June 30, 2005.

The ratio of nonperforming loans to loans, net of loans held-for-sale, increased from 0.26% at December 31, 2004 to 0.49% at June 30, 2005. Nonperforming loans and assets to total assets increased to 0.40% at June 30, 2005 from 0.21% at December 31, 2004. The allowance for loan losses represented 326.44% of nonperforming loans at June 30, 2005, a decrease from the 616.53% at December 31, 2004.

The above performance changes resulted primarily from an increase in nonperforming loans to $3.3 million at June 30, 2005 from $1.7 million at December 31, 2004. The nonperforming loans at June 30, 2005 included $705,000 of nonaccrual loans, $2.6 million of accruing loans 90 days or more past due and no restructured loans. BancShares had $896,000 of assets classified as other real estate at June 30, 2005. BancShares had $525,000 of assets classified as other real estate at December 31, 2004.

BancShares had impaired loans of $50,000 at June 30, 2005 compared to $832,000 at December 31, 2004. The reduction in impaired loans primarily resulted from the foreclosure of one loan that is included in Other Real Estate at June 30, 2005. No additional allowances for loan losses were required for impaired loans. Management considers the June 30, 2005 allowance for loan losses to be adequate to cover the losses and risks inherent in the loan portfolio at June 30, 2005 and will continue to monitor its portfolio and to adjust the relative level of the allowance as needed.

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

An analysis of BancShares’ financial condition and growth can be made by examining the changes and trends in interest-earning assets and interest-bearing liabilities. Such an analysis also requires an evaluation of noninterest income and noninterest expenses. In recent years, increasing total noninterest income has been a significant focus for BancShares. The introduction of new revenue sources and modifications to existing products and services has allowed service-related noninterest income to grow.

In recent years the recognition of gains and losses on sales of mortgage loans and the recognition of gains and losses on sales of available-for-sale securities has also had a significant impact on total noninterest income. Management does not consider these sources of noninterest income to be core sources of revenues for BancShares. The sale of mortgage loans also results in the recognition of mortgage servicing rights (MSR) income. MSR income represents the estimated value of the right to service mortgage loans for others. Capitalization of MSR occurs when the underlying mortgage loans are sold and the servicing rights for the mortgage loans sold are retained. Capitalized MSR is amortized into income over the projected servicing life of the underlying loans.

Management considers the growth of noninterest income essential to maintaining profitability performance levels. The primary sources of noninterest income are deposit and loan related service charges and fees. Other significant noncore, noninterest income is derived from the sale of mortgage loans into the secondary market and the periodic sale of available-for-sale investment securities.

Income from other service charges and fees includes mortgage loan commitment fees, mortgage loan servicing fees, automated teller machine fees, check cashing fees and other miscellaneous nondeposit-related customer service fees. Increases in this category of noninterest income are primarily the result of customer account growth within the existing branches, the opening of new branches and the acquisitions of existing branches from other financial institutions.

Southern sells mortgage loan production into the secondary mortgage markets and retains servicing on the majority of the loans sold. The resulting interest rate market managed by the Federal Reserve and the timing of interest rate changes within the market directly impacts the level of gains or losses that are realized on mortgage loans sold. Gain on sale of mortgage loans increased $10,000 for the six months ended June 30, 2005 from $359,000 in the six months ended June 30, 2004.

During the six months ended June 30, 2005, BancShares realized a $957,000 increase in noninterest income primarily as a result of a $913,000 increase in net investment securities gains in the six months ended June 30, 2005 compared to the six months ended June 30, 2004.

NONINTEREST EXPENSE

The primary noninterest expenses are personnel salaries and benefits, occupancy and equipment costs related to branch offices and data processing costs. Noninterest expenses also include the expensing of intangibles amortization resulting from the acquisition of existing branch locations from other financial institutions and the amortizing of mortgage servicing rights resulting from the sale of mortgage loans into the secondary mortgage markets.

Noninterest expense increased $381,000 or 2.22%, from $17.2 million in the six months ended June 30, 2004 to $17.5 million in the six months ended June 30, 2005. This increase was due to an increase in personnel expense of $472,000, or 5.11%, from $9.2 million at June 30, 2004 to $9.7 million at June 30, 2005. Personnel expense increased primarily as a result of annual merit increases for existing personnel as only one de novo branch has been opened and only two new branches have been acquired. The increase in occupancy expense and data processing expenses resulted principally from growth within the existing branches, the acquisition of two branches in September 2004 and the opening of a de novo branch in May 2004.

INCOME TAXES

In the six months ended June 30, 2005, BancShares recorded income tax expense of $2.0 million. In the six months ended June 30, 2004, BancShares recorded income tax expense of $1.0 million. The resulting effective tax rate for the six months ended June 30, 2005 was 30.90%. The tax rate for the year ended December 31, 2004 was 25.05%. The estimated tax rate at June 30, 2005 is higher than the actual full year 2004 effective rate due to a reduction in the level of projected 2005 tax free income to projected earnings for 2005. The estimated tax rate at June 30, 2005 of 30.90% and the effective tax rate of 25.05% for the year ended December 31, 2004 differ from the federal statutory rate of 34.00% primarily due to tax exempt income.

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – SECOND QUARTER OF 2005 VS. SECOND QUARTER OF 2004

INTRODUCTION

Net income of BancShares increased $1.3 million, or 102.54%, from $1.3 million in the three months ended June 30, 2004 to $2.6 million in the three months ended June 30, 2005. The increase in net income for the quarter ended June 30, 2005 resulted principally from increased gains on sales of available-for-sale securities and increased net interest income in the three months ended June 30, 2005 compared to the three months ended June 30, 2004.

Per share net income available to common shares for the three months ended June 30, 2005 was $22.61, an increase of $12.05, or 114.11%, from $10.56 in the three months ended June 30, 2004.

ACQUISITIONS AND CONSOLIDATIONS

BancShares had no acquisitions in the three months ended June 30, 2005 or the three months ended June 30, 2004. BancShares did not open any new branch locations in the three months ended June 30, 2005 but did open one de novo branch in May 2004. BancShares did not close and consolidate any locations in the three months ended June 30, 2005 or the three months ended June 30, 2004.

INTEREST INCOME

Interest and fees on loans increased $1.5 million, or 16.32%, from $9.4 million for the quarter ended June 30, 2004 to $10.9 million for the quarter ended June 30, 2005. This increase was due to both an increase in average loans and interest rates. Average loans for the quarter ended June 30, 2005 were $656.2 million, an increase of 3.91% from $631.5 million for the prior year quarter. The yield on the loan portfolio was 6.68% for the three months ended June 30, 2005 and 5.88% for the three months ended June 30, 2004 primarily as a result of increases in market rates.

Interest income from investment securities, including U. S. Treasury and Government obligations, obligations of state and county subdivisions and other securities increased $337,000, or 19.85%, from $1.7 million in the three months ended June 30, 2004 to $2.0 million in the three months ended June 30, 2005. This increase was due to both increased average investments and increased yields. Deposit growth resulted in an increase in average investment securities for the quarter ended June 30, 2005 to $303.7 million as compared to $268.3 million for the same 2004 quarter. The yield on investment securities was 2.96% for the quarter ended June 30, 2005 and 2.81% for the quarter ended June 30, 2004.

Interest income on overnight funds sold increased $27,000, or 29.03%, from $93,000 for the quarter ended June 30, 2004 to $120,000 for the quarter ended June 30, 2005. This increase in income resulted from an increase in rates partially offset by a decrease in average overnight funds. Management deployed the overnight funds into the higher yielding loan and investment portfolios. The average overnight funds sold were $16.1 million for the quarter ended June 30, 2005 compared to an average of $43.1 million for the quarter ended June 30, 2004. Average overnight federal funds sold yields were 2.96% for the quarter ended June 30, 2005 up from 0.86% for the quarter ended June 30, 2004 principally as a result of increased market rates.

Total interest income increased $1.9 million, or 16.96%, from $11.2 million for the quarter ended June 30, 2004 to $13.1 million for the quarter ended June 30, 2005. This increase was primarily the result of both increased average earning assets and increased average earning asset yields.

Average earning asset yields for the quarter ended June 30, 2005 increased to 5.54% from the 4.83% yield on average earning assets for the quarter ended June 30, 2004. Average earning assets increased from $917.6 million in the quarter ended June 30, 2004 to $948.0 million in the quarter ended June 30, 2005. This $30.4 million increase in the average earning assets resulted primarily from growth within existing branches, the acquisition of two branches in September 2004 and the opening of a new branch in May 2004.

INTEREST EXPENSE

Total interest expense increased $720,000 or 24.26%, from $3.0 million in the three months ended June 30, 2004 to $3.7 million for the quarter ended June 30, 2005. The principal reason for this increase was higher average costs of both deposits and short-term borrowings.

NET INTEREST INCOME

Net interest income before provision for loan losses was $8.2 million for the three months ended June 30, 2004 and $9.4 million for the three months ended June 30, 2005.

The interest rate spread for the quarter ended June 30, 2005 was 3.59%, an increase of 33 basis points from the 3.26% interest rate spread for the quarter ended June 30, 2004. The increase in the interest rate spread was primarily due to the average rate on interest-bearing liabilities repricing upward at a slower rate than the average yield on interest-earning assets.

ASSET QUALITY AND PROVISION FOR LOAN LOSSES

For both the three months ended June 30, 2005 and June 30, 2004, management recorded a $300,000 provision for loan losses. Management recorded the 2005 provision primarily in consideration of loan growth.

During the three months ended June 30, 2005, $250,000 in loans were charged-off and recoveries of $292,000 were received, resulting in net recoveries of $42,000 for the three months ended June 30, 2005. During the three months ended June 30, 2004 management charged-off loans totaling $379,000 and received recoveries of $61,000, resulting in net charge-offs for the three months ended June 30, 2004 of $318,000.

NONINTEREST INCOME

During the three months ended June 30, 2005, BancShares’ noninterest income increased $883,000 principally as a result of increases in gains on sales of available-for-sale securities and gains on the sale of mortgage loans. Gains on sales of available-for-sale securities increased $676,000 and gains on sales of mortgage loans increased $193,000 for the three months ended June 30, 2005 principally as a result of the slowly improving economy.

NONINTEREST EXPENSE

Noninterest expense including personnel, occupancy, furniture and equipment, data processing, FDIC insurance, state assessments, printing, supplies and other expenses, increased $136,000 or 1.58%, from $8.6 million in the three months ended June 30, 2004 to $8.7 million in the three months ended June 30, 2005.

This increase was primarily due to an increase in personnel expense of $205,000, or 4.41%, from $4.6 million for the quarter ended June 30, 2004 to $4.9 million for the quarter ended June 30, 2005, increased occupancy expense and increased data processing expense resulting principally from the existing locations, the opening of a de novo branch in May 2004 and the acquisition of two branches in September 2004.

INCOME TAXES

In the three months ended June 30, 2005, BancShares had income tax expense of $1.2 million, an increase of $633,000 from $602,000 in the prior year quarter. The effective tax rate was 32.63% for the quarter ended June 30, 2005 compared to 32.35% for the quarter ended June 30, 2004. The estimated effective tax rate was higher in 2005 primarily due to a decrease in the ratio of 2005 tax exempt earnings to total 2005 earnings.

SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY

Included in shareholders’ equity is accumulated other comprehensive income which consists of unrealized net gains on securities available-for-sale at the date of the period identified. BancShares owns corporate stock and debt securities investments in several financial institutions. As a result of the daily equity market movement of the value of the individual investment instruments, the net after tax value of these investments above or below the recorded cost of the investments, as of the period date indicated, is reported as accumulated other comprehensive income within shareholders’ equity.

The Federal Reserve Board, which regulates BancShares, and the Federal Deposit Insurance Corporation, which regulates Southern, have established minimum capital guidelines for the institutions they supervise.

Regulatory guidelines define minimum requirements for Southern’s leverage capital ratio. Leverage capital equals total equity less goodwill and certain other intangibles and is measured relative to total adjusted assets as defined by regulatory guidelines. According to these guidelines, Southern’s leverage capital ratio at June 30, 2005 was 7.81%. At December 31, 2004, Southern’s leverage capital ratio was 7.39%. Both of these ratios exceed the minimum threshold designated as “well capitalized” by the FDIC.

Southern is also required to meet minimum requirements for Risk Based Capital (“RBC”). Southern’s assets, including loan commitments and other off-balance sheet items, are weighted according to federal guidelines for the risk considered inherent in each asset. At June 30, 2005, Southern’s Total RBC ratio was 13.47%. At December 31, 2004 the RBC ratio was 13.45%. Both of these ratios exceed the minimum threshold designated as “well capitalized” by the FDIC.

The regulatory capital ratios above reflect increases in assets and liabilities from acquisitions Southern has made. Each acquisition has resulted in BancShares recording intangible assets in its consolidated financial statements, which are deducted from total equity in the above ratio calculations.

Accumulated other comprehensive income was $17.5 million at June 30, 2005, and $18.7 million at December 31, 2004. Although a part of total shareholders’ equity, accumulated other comprehensive income is not included in the calculation of either the RBC or leverage capital ratios pursuant to regulatory definitions of these capital requirements.

The following tables present capital adequacy calculations and ratios of Southern:


	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of June 30, 2005: (Dollars in thousands)

Total capital (to risk-weighted assets)	$	92,494	13.47	%	$	54,810	8.00	%	$	68,512	10.00	%
Tier 1 capital (to risk-weighted assets)	$	78,314	11.40	%	$	27,405	4.00	%	$	41,107	6.00	%
Tier 1 capital (to average assets)	$	78,314	7.81	%	$	40,126	4.00	%	$	50,157	5.00	%


	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2004: (Dollars in thousands)

Total capital (to risk-weighted assets)	$	88,796	13.45	%	$	52,834	8.00	%	$	66,043	10.00	%
Tier 1 capital (to risk-weighted assets)	$	74,762	11.32	%	$	26,417	4.00	%	$	39,626	6.00	%
Tier 1 capital (to average assets)	$	74,762	7.39	%	$	40,461	4.00	%	$	50,576	5.00	%

ISSUER REPURCHASES OF EQUITY SECURITIES

The following table contains information regarding repurchases by BancShares of shares of its outstanding equity securities during the quarter ended June 30, 2005:


Period	Total Number of Shares Repurchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Maximum Number of Shares that may yet be Purchased Under the Plans.
Month #1: 04/01/05 through 04/30/05
Common Stock	—		N/A	N/A	N/A
Series B Preferred Stock	—		N/A	N/A	N/A
Series C Preferred Stock	—		N/A	N/A	N/A

Month #2: 05/01/05 through 05/31/05
Common Stock	180	$	500.00	N/A	N/A
Series B Preferred Stock	—		N/A	N/A	N/A
Series C Preferred Stock	—		N/A	N/A	N/A

Month #3: 06/01/05 through 06/30/05
Common Stock	14	$	500.00	N/A	N/A
Series B Preferred Stock	—		N/A	N/A	N/A
Series C Preferred Stock	—		N/A	N/A	N/A

Total numbers of shares:
Common Stock	194	$	500.00	N/A	N/A
Series B Preferred Stock	—		N/A	N/A	N/A
Series C Preferred Stock	—		N/A	N/A	N/A

(1)

All purchases were made in unsolicited private transactions pursuant to general authority given each year by BancShares’ Board of Directors and not pursuant to a formal repurchase plan or program. Under that authority BancShares is authorized to repurchase shares of its capital stock from time to time in unsolicited private transactions and/or on the open market. Purchases are subject to various conditions, including price and volume limitations and compliance with applicable law.

Under similar authority during the six months ended June 30, 2004, BancShares repurchased an aggregate of 2,422 shares of Series B Preferred Stock and 501 shares of Common Stock.

LIQUIDITY

Liquidity refers to the ability of Southern 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 concentrations, competition and BancShares’ overall financial condition. BancShares’ liquid assets include cash and due from banks, overnight funds sold and investment securities available-for-sale. The liquidity ratio, which is defined as cash plus short term available-for-sale securities divided by deposits plus short term liabilities, was 23.80% at June 30, 2005 and 26.57% at December 31, 2004.

The Statement of Cash Flows discloses the principal sources and uses of cash from operating, investing and financing activities for the six months ended June 30, 2005 and for the six months ended June 30, 2004. Southern has no brokered deposits. Jumbo time deposits are considered to include all time deposits of $100,000 or more. Almost all jumbo time deposit customers have other relationships with Southern, including savings, demand and other time deposits, and in some cases, loans. At June 30, 2005, jumbo time deposits represented 13.79% of total deposits. At December 31, 2004, jumbo time deposits represented 13.07% of total deposits.

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

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

CONTRACTUAL OBLIGATIONS

As of June 30, 2005

(Dollars in thousands)


	Payments due by period
	Less than 1 year		1-3 years		4-5 years		Over 5 years		Total
Deposits	$	751,523	$	127,482	$	31,296	$	—	$	910,301
Short-term borrowings		19,669		—		—		—		19,669
Long-term obligations		—		—		—		23,711		23,711
Lease obligations		48		89		7		—		144

Total contractual obligations	$	771,240	$	127,571	$	31,303	$	23,711	$	953,825

OTHER MATTERS

Management is not aware of any other trends, events, uncertainties or current recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on BancShares’ liquidity, capital resources or other operations.

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK

In the normal course of business there are various commitments and contingent liabilities outstanding, such as guarantees, commitments to extend credit, etc., which are not reflected in the accompanying financial statements.

Southern is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and undisbursed advances on customer lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet.

Southern is exposed to credit loss, in the event of nonperformance by the other party to the financial instrument, for commitments to extend credit and standby letters of credit which is represented by the contractual notional amount of those instruments. Southern uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements. Southern evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Southern, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include trade accounts receivable, property, plant, and equipment and income-producing commercial properties.

Standby letters of credit are commitments issued by Southern to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Outstanding standby letters of credit as of June 30, 2005 and December 31, 2004 amounted to $5.8 million and $5.9 million, respectively. Outstanding commitments to lend at June 30, 2005 and December 31, 2004 were $182.0 million and $182.1 million. Undisbursed advances on customer lines of credit at June 30, 2005 and December 31, 2004 were $69.6 million and $64.3 million. Outstanding standby letters of credit and commitments to lend at June 30, 2005 generally expire within one year, whereas commitments associated with undisbursed advances on customer lines of credit at June 30, 2005 generally expire within one to five years.

At June 30, 2005, commitments to sell loans amounted to $14.6 million. At December 31, 2004, commitments to sell loans amounted to $11.5 million.

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

Southern grants agribusiness, commercial and consumer loans to customers primarily in eastern North Carolina. Although Southern has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon the agricultural industry.

BancShares is also involved in various legal actions arising in the normal course of business. Management is of the opinion that the outcome of such actions will not have a material adverse effect on the consolidated financial condition of BancShares.

REGULATORY MATTERS

The Sarbanes-Oxley Act of 2002 (“the S-O Act”) is significant federal legislation that was signed into law on July 30, 2002 that addresses accounting, corporate governance and disclosure issues relating to public companies. Some of the provisions of the S-O Act became effective immediately, while others are still in the process of being implemented. In general, the S-O Act mandates important new corporate governance, financial reporting and disclosure requirements intended to enhance the accuracy and transparency of public companies’ reported financial results.

The S-O Act establishes new responsibilities for corporate Chief Executive Officers and Chief Financial Officers, Boards of Directors and Audit Committees of the Boards of Directors in the financial reporting process. The S-O Act also created a new regulatory body to oversee outside auditors of public companies. The economic and operational effects of the S-O Act on public companies, including BancShares, have been, and will continue to be, significant in terms of the increased time, resources and operating costs associated with complying with the new law. Because the S-O Act, for the most part, applies equally to large and small public companies, it will continue to present BancShares with particular challenges. Increased audit fees and compliance costs associated with compliance with the S-O Act could have a negative effect on operating results of BancShares.

FORWARD-LOOKING STATEMENTS

The foregoing 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. Forward-looking statements are inherently subject to risks and uncertainties because they include projections, predictions, expectations or beliefs about future events or results that are not statements of historical fact. Such statements are often characterized by the use of qualifiers such as “expect,” “believe,” “estimate,” “plan,” “project” 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 Disclosures About Market Risk:

Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This 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. The structure of BancShares’ loan and deposit portfolios is such that a significant increase in market rates may adversely impact net interest income. Historical prepayment experience is considered as well as management’s expectations based on the interest rate environment as of June 30, 2005. Management seeks to manage this risk through the use of shorter 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 from the investment 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 June 30, 2005. The expected maturity categories take into consideration historical prepayment experience as well as management’s expectations based on the interest rate environment as of June 30, 2005. 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 2006 since they are subject to immediate repricing. Weighted average variable rates in future periods are based on the implied forward rates in the yield curve as of June 30, 2005.

(Dollars in thousands)


	Maturing June 30
	2006			2007			2008			2009			2010			Thereafter			Total			Fair Value
Assets
Loans
Fixed rate	$	56,011		$	50,398		$	52,256		$	26,017		$	19,216		$	49,909		$	253,807		$	252,516
Average rate (%)		7.70	%		6.93	%		6.96	%		6.97	%		6.63	%		6.67	%		7.05	%

Variable rate	$	148,719		$	67,666		$	58,905		$	41,800		$	22,395		$	85,213		$	424,698		$	424,698
Average rate (%)		6.81	%		6.69	%		6.40	%		6.62	%		6.55	%		6.47	%		6.63	%

Investment Securities
Fixed rate	$	113,469		$	107,392		$	2,221		$	4,139		$	901		$	54,581		$	282,703		$	282,182
Average rate (%)		2.19	%		3.56	%		11.33	%		6.88	%		7.00	%		4.93	%		3.21	%

Liabilities

Savings and interest bearing checking
Fixed rate	$	505,826			—			—			—			—			—		$	505,826		$	505,826
Average rate (%)		0.67	%		—			—			—			—			—			0.67	%

Certificates of deposit
Fixed rate	$	242,449		$	88,789		$	37,032		$	31,296			—			—		$	399,566		$	414,295
Average rate (%)		2.44	%		3.53	%		3.32	%		3.67	%		—			—			2.86	%

Variable rate	$	3,248		$	1,661			—			—			—			—		$	4,909		$	4,909
Average rate (%)		1.87	%		2.03	%		—			—			—			—			1.93	%

Short-term borrowings
Variable rate	$	19,669			—			—			—			—			—		$	19,669		$	19,669
Average rate (%)		2.39	%		—			—			—			—			—			2.39	%

Long-term debt
Fixed rate		—			—			—			—			—		$	23,711		$	23,711		$	23,711
Average rate (%)		—			—			—			—			—			6.59	%		6.59	%

A principal objective of BancShares’ asset/liability function is to manage interest rate risk or the exposure to changes in interest rates. Management maintains portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities that will protect against wide interest rate fluctuations, thereby limiting, to the extent possible, the ultimate interest rate exposure. The table below provides BancShares’ interest-sensitivity position as of June 30, 2005, which reflected a one year negative interest-sensitivity gap of $247.9 million. As a result of this one year negative gap, increases in interest rates could have an unfavorable impact on net interest income.

One measure of the impact of BancShares interest-sensitivity negative gap is to model the impact of an immediate 100 basis point rate change on net interest income. BancShares, in addition to gap analysis, also utilizes a funds management model that at June 30, 2005 indicates that BancShares could realize a $1.0 million decrease in net interest income if an immediate 100 basis point decrease in rates were to occur. BancShares funds management model at June 30, 2005 indicates that BancShares could realize a $1.0 million increase in net interest income if an immediate 100 basis point increase in rates were to occur.

INTEREST-SENSITIVITY ANALYSIS

(Dollars in thousands)


	June 30, 2005
	1-90 Days Sensitive			91-180 Days Sensitive			181-365 Days Sensitive			Non-Rate Sensitive & Over 1 Year		Total
Interest Earning Assets:

Loans	$	42,996		$	55,157		$	106,577		$	473,775	$	678,505
Investment securities		23,596			42,090			47,783			169,234		282,703
Temporary investments		18,575			—			—			—		18,575

Total earning assets	$	85,167		$	97,247		$	154,360		$	643,009	$	979,783

Interest-Bearing Liabilities:
Savings and core time deposits	$	377,181		$	67,979		$	41,851		$	111,228	$	598,239
Time deposits of $100,000 and more		28,410			21,121			28,431			47,550		125,512
Short-term borrowings		19,669			—			—			—		19,669
Long-term obligations		—			—			—			23,711		23,711

Total interest bearing liabilities	$	425,260		$	89,100		$	70,282		$	182,489	$	767,131

Interest sensitivity gap	$	(340,093	)	$	8,147		$	84,078		$	460,520	$	212,652

Cumulative interest sensitivity gap	$	(340,093	)	$	(331,946	)	$	(247,868	)	$	212,652	$	212,652

It should be noted that this analysis reflects BancShares’ interest sensitivity as of a single point in time and may not reflect the effects of repricings of assets and liabilities in various interest rate environments.

Item 4 – Controls and Procedures:

BancShares’ management, including its Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of BancShares’ disclosure controls and procedures, as defined in Section 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), and have concluded that, as of the end of the period covered by this Report, those disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed by BancShares in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods.

No change occurred in BancShares’ internal control over financial reporting during the period covered by this report that was identified in connection with the above evaluation and that has materially affected, or is reasonably likely to materially affect, BancShares internal control over financial reporting. Changes have been implemented to strengthen the procedures and the verification of consistent reporting.

Part II – OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Information regarding BancShares’ repurchases of its outstanding equity securities is incorporated herein by reference to the information in “Item 2. Managements’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Issuer Repurchases of Equity Securities.”

Item 4. Submission of Matters to a Vote of Security Holders

On April 20, 2005 the annual meeting of BancShares’ shareholders was held and sixteen Directors of BancShares were elected for terms of one year or until their respective successors are duly elected and qualified. No other matters were voted on by shareholders at the annual meeting.

The following table lists the nominees for election as Directors and the Shareholders’ voting results with respect to each nominee:


Matter	For	Against	Withheld	Abstentions	Broker Non-Votes
ELECTION OF DIRECTORS:

Bynum R. Brown	83,698	0	50	0	0
William H. Bryan	83,698	0	50	0	0
Robert J. Carroll	83,698	0	50	0	0
Hope H. Connell	83,698	0	50	0	0
J. Edwin Drew	83,698	0	50	0	0
Moses B. Gilliam, Jr.	83,698	0	50	0	0
LeRoy C. Hand, Jr.*	83,698	0	50	0	0
Frank B. Holding	83,698	0	50	0	0
M. J. McSorley	83,698	0	50	0	0
W. Hunter Morgan	83,698	0	50	0	0
John C. Pegram, Jr.	83,698	0	50	0	0
W. A. Potts	83,698	0	50	0	0
Charles L. Revelle, Jr.	83,698	0	50	0	0
Charles O. Sykes	83,698	0	50	0	0
John N. Walker	83,698	0	50	0	0
R. S. Williams	83,698	0	50	0	0

*	Mr. LeRoy C. Hand, Jr. resigned from the Board of Directors effective June 1, 2005.

Item 6 – Exhibits

The following exhibits are filed or furnished with this Report:


4.1		Southern Capital Trust II Certificate of Trust

4.2		Southern Capital Trust II Amended and Restated Declaration of Trust dated April 28, 2005

4.3		Indenture between BancShares and JP Morgan Chase Bank, National Association, dated April 28, 2005

31.1		Certification of BancShares’ Chief Executive Officer pursuant to Rule 13a-14(a)

31.2		Certification of BancShares’ Chief Financial Officer pursuant to Rule 13a-14(a)

32		Certification of BancShares’ Chief Executive Officer and Chief Financial Officer pursuant to 18 U. S. C. Section 1350

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.


		SOUTHERN BANCSHARES (N.C.), INC.

August 9, 2005		/s/ John C. Pegram, Jr.
Date		John C. Pegram, Jr.,
		Chairman of the Board, President and Chief Executive Officer

August 9, 2005		/s/ David A. Bean
Date		David A. Bean,
		Secretary, Treasurer and Chief Financial Officer

EXHIBIT INDEX


Exhibit Number		Exhibit
4.1		Southern Capital Trust II Certificate of Trust

4.2		Southern Capital Trust II Amended and Restated Declaration of Trust dated April 28, 2005

4.3		Indenture between BancShares and JP Morgan Chase Bank, National Association, dated April 28, 2005

31.1		Certification of BancShares’ Chief Executive Officer pursuant to Rule 13a-14(a)

31.2		Certification of BancShares’ Chief Financial Officer pursuant to Rule 13a-14(a)

32		Certification of BancShares’ Chief Executive Officer and Chief Financial Officer pursuant to 18 U. S. C. Section 1350