SOUTHERN BANCSHARES NC INC - Quarter Report: 2005 September (Form 10-Q)

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 quarter ended September 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 by check mark whether the Registrant is a shell company (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 latest practicable date.

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) September 30, 2005			December 31, 2004*
ASSETS
Cash and due from banks	$	49,958		$	22,283
Overnight funds sold		19,526			35,872
Investment securities:
Available-for-sale, at fair value (amortized cost of $47,556 and $43,600, respectively)		82,130			74,903
Held-to-maturity, at amortized cost (fair value of $198,819 and $236,172, respectively)		199,605			236,609
Loans		690,734			639,311
Loans held for sale		8,082			4,880
Less allowance for loan losses		(11,012	)		(10,259	)

Net loans		687,804			633,932
Accrued interest receivable		6,523			4,929
Premises and equipment		34,640			34,513
Goodwill		7,712			7,712
Other intangible assets		2,634			3,687
Other assets		2,859			3,010

Total assets	$	1,093,391		$	1,057,450

LIABILITIES
Deposits:
Noninterest-bearing	$	197,501		$	183,762
Interest-bearing		732,860			726,760

Total deposits		930,361			910,522
Accrued interest payable		2,272			1,447
Short-term borrowings		21,097			16,017
Long-term obligations		23,711			23,711
Other liabilities		11,593			9,735

Total liabilities		989,034			961,432
SHAREHOLDERS’ EQUITY
Series B non-cumulative preferred stock, no par value; $3,506 liquidation value at both September 30, 2005 and December 31, 2004, 408,728 shares authorized; 350,593 shares issued and outstanding at both September 30, 2005 and December 31, 2004		1,753			1,753
Series C non-cumulative preferred stock, no par value; $397 liquidation value at both September 30, 2005 and December 31, 2004; 43,631 shares authorized; 39,657 shares issued and outstanding at both September 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 September 30, 2005 and December 31, 2004, respectively		545			551
Surplus		10,000			10,000
Retained earnings		70,536			64,528
Accumulated other comprehensive income		20,998			18,661

Total shareholders’ equity		104,357			96,018

Total liabilities and shareholders’ equity	$	1,093,391		$	1,057,450

*	Derived from audited consolidated financial statements

The accompanying notes are an integral part of these 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 September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Interest income:
Loans	$	12,024		$	9,575		$	33,134		$	28,339
Investment securities:
U. S. Government		1,280			819			3,608			2,482
State, county and municipal		217			275			826			792
Other		498			428			1,533			1,390

Total investment securities interest income		1,995			1,522			5,967			4,664
Overnight funds sold		169			128			445			335

Total interest income		14,188			11,225			39,546			33,338
Interest expense:
Deposits		3,689			2,558			9,681			7,491
Short-term borrowings		135			42			313			92
Long-term obligations		400			473			1,297			1,422

Total interest expense		4,224			3,073			11,291			9,005

Net interest income		9,964			8,152			28,255			24,333
Provision for loan losses		300			300			900			900

Net interest income after provision for loan losses		9,664			7,852			27,355			23,433
Noninterest income:
Service charges on deposit accounts		1,769			1,835			5,152			5,322
Other service charges and fees		716			600			2,088			1,824
Gain on sale of loans		236			138			605			497
Investment securities gain, net		93			—			1,009			3
Other		150			153			401			414

Total noninterest income		2,964			2,726			9,255			8,060

Noninterest expense:
Personnel		4,825			4,695			14,532			13,930
Data processing		889			906			2,761			2,673
Occupancy		904			902			2,689			2,644
Furniture and equipment		517			501			1,503			1,528
Intangibles amortization		289			361			946			1,127
Professional fees		179			203			515			676
Other		1,197			1,005			3,396			3,156

Total noninterest expense		8,800			8,573			26,342			25,734

Income before income taxes.		3,828			2,005			10,268			5,759
Income taxes		1,280			560			3,270			1,560

Net income		2,548			1,445			6,998			4,199

Other comprehensive income, net of tax:
Unrealized gains (losses) arising during period		5,867			110			4,812			(613	)
Less: tax effect		(2,262	)		(42	)		(1,855	)		237
Less: Reclassification adjustment for gains included in net income		(93	)		—			(1,009	)		(1	)
Less: tax effect		36			—			389			—

Total other comprehensive income (loss)		3,548			68			2,337			(377	)

Comprehensive income	$	6,096		$	1,513		$	9,335		$	3,822

Per share information:
Net income per common share	$	22.56		$	12.25		$	61.65		$	35.43
Cash dividends declared on common shares		0.40			0.40			1.20			1.20
Weighted average common shares outstanding		108,920			110,701			109,268			111,043

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 NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

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

(Unaudited)


	Preferred Stock								Common Stock					Surplus		Retained Earnings			Accumulated Other Compre-hensive 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	—			—		—		—	—			—			—		4,199			—			4,199
Purchase and retirement of stock	(6,255	)		(30	)	—		—	(914	)		(5	)		—		(425	)		—			(460	)
Cash dividends:
Common stock ($1.20 per share)	—			—		—		—	—			—			—		(133	)		—			(133	)
Preferred B ($.67 per share)	—			—		—		—	—			—			—		(238	)		—			(238	)
Preferred C ($.67 per share)	—			—		—		—	—			—			—		(27	)		—			(27	)
Unrealized gain on securities available-for-sale, net of tax	—			—		—		—	—			—			—		—			(377	)		(377	)

BALANCE, SEPTEMBER 30, 2004	352,061		$	1,715		39,657	$	552	110,616		$	553		$	10,000	$	63,295		$	15,367		$	91,482

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

Net income	—			—		—		—	—			—			—		6,998			—			6,998
Purchase, retirement and reclass of stock	—			—		—		—	(1,206	)		(6	)		—		(597	)		—			(603	)
Cash dividends:
Common stock ($1.20 per share)	—			—		—		—	—			—			—		(131	)		—			(131	)
Preferred B ($.67 per share)	—			—		—		—	—			—			—		(235	)		—			(235	)
Preferred C ($.67 per share)	—			—		—		—	—			—			—		(27	)		—			(27	)
Unrealized gain on securities available-for-sale, net of tax	—			—		—		—	—			—			—		—			2,337			2,337

BALANCE, SEPTEMBER 30, 2005	350,593		$	1,753		39,657	$	525	108,920		$	545		$	10,000	$	70,536		$	20,998		$	104,357

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

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

CONSOLIDATED STATEMENTS OF CASH FLOWS


	(Unaudited) Nine Months Ended September 30,
	(Unaudited) Nine Months Ended September 30,
(In thousands)	2005			2004
OPERATING ACTIVITIES:
Net income	$	6,998		$	4,199
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses		900			900
Gains on sales, donations and issuer calls of securities		(1,009	)		(3	)
Loss (gain) on sale and abandonment of premises and equipment		7			(5	)
Gain on sale of foreclosed assets		(11	)		—
Gain on sale of loans		(605	)		(497	)
Net amortization of premiums on investments		73			548
Amortization of intangibles and mortgage servicing rights		1,178			1,127
Depreciation		2,000			2,087
Proceeds from sales of loans held for sale		58,244			28,019
Origination of loans held for sale		(66,188	)		—
Net (increase) decrease in intangible assets		(125	)		77
Net increase in accrued interest receivable		(1,594	)		(497	)
Net increase (decrease) in accrued interest payable		825			(36	)
Net increase in other assets		(886	)		(1,075	)
Net increase (decrease) in other liabilities		1,858			(120	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		1,665			34,724

INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of investment securities available-for-sale		7,878			43,839
Proceeds from maturities and issuer calls of investment securities held-to-maturity		86,894			28,970
Proceeds from sales of investment securities available-for-sale		1,119			—
Purchases of investment securities held-to-maturity		(46,310	)		(92,590	)
Purchases of investment securities available-for-sale		(16,531	)		(10,583	)
Net cash received for branches acquired		—			14,551
Net increase in loans		(45,175	)		(33,906	)
Purchases of premises and equipment		(2,134	)		(1,539	)

NET CASH USED BY INVESTING ACTIVITIES		(14,259	)		(51,258	)

FINANCING ACTIVITIES:
Net increase in demand and interest-bearing demand deposits		6,255			8,004
Net increase (decrease) in time deposits		13,584			(4,904	)
Net proceeds of short-term borrowed funds		5,080			1,795
Cash dividends paid		(393	)		(398	)
Purchase and retirement of stock		(603	)		(460	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		23,923			4,037

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		11,329			(12,497	)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR		58,155			84,572

CASH AND CASH EQUIVALENTS AT THE END OF PERIOD	$	69,484		$	72,075

SUPPLEMENTAL DISCLOSURES OF CASH PAID DURING THE YEAR FOR:
Interest	$	10,466		$	7,618
Income taxes	$	2,893		$	1,319

SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Unrealized gains on available-for-sale securities, net of tax	$	2,337		$	(377	)
Foreclosed loans transferred to other real estate	$	1,064		$	780

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, Southern Capital Trust II, a wholly-owned finance subsidiary, 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 complement 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 nine months ended September 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, incorporated by reference 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. 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 $753,000 and $861,000 at September 30, 2005 and December 31, 2004, respectively. No valuation allowance for impairment was required at September 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 September 30, 2005 and December 31, 2004:

(Dollars in thousands)


	September 30, 2005				December 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Branch acquisitions	$	14,691	$	12,833	$	14,691	$	11,888
Mortgage servicing rights		2,735		1,982		2,610		1,749

Totals	$	17,426	$	14,815	$	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 September 30, 2005 is $5.9 million. At September 30, 2005, BancShares has recorded no liability for the current carrying amount of the obligation to perform as a guarantor, as such amounts are deemed immaterial.

Accounting 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.

Reclassifications

Certain 2005 year-to-date and quarter-to-date balances have been reclassified to conform to the current period presentation. Such reclassifications had no effect on net income or shareholders’ equity as previously reported.

Note 2. Investment Securities

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

(Dollars in thousands)


	September 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	$	184,878	$	54	$	(1,542	)	$	183,390	$	185,798	$	—	$	(1,235	)	$	184,563
U. S. Agencies		—		—		—			—		15,018		—		(46	)		14,972
Obligations of states and political subdivisions		14,727		702		—			15,429		35,793		857		(13	)		36,637

	$	199,605	$	756	$	(1,542	)	$	198,819	$	236,609	$	857	$	(1,294	)	$	236,172

SECURITIES AVAILABLE-FOR-SALE:
U. S. Treasuries	$	4,990	$	—	$	(56	)	$	4,934	$	—	$	—	$	—		$	—
U. S. Agencies		—		—		—			—		6,001		—		(7	)		5,994
Marketable equity securities		33,912		34,471		(133	)		68,250		26,766		30,991		(143	)		57,614
Obligations of states and political subdivisions		5,055		196		(49	)		5,202		6,401		238		—			6,639
Mortgage-backed securities		3,599		163		(18	)		3,744		4,432		224		—			4,656

	$	47,556	$	34,830	$	(256	)	$	82,130	$	43,600	$	31,453	$	(150	)	$	74,903

TOTALS	$	247,161	$	35,586	$	(1,798	)	$	280,949	$	280,209	$	32,310	$	(1,444	)	$	311,075

Securities with a carrying value of $105,372 were pledged at September 30, 2005 to secure public deposits and for other purposes as required by law and contractual arrangement.

Temporarily Impaired Securities Losses At September 30, 2005:


	Securities Owned Less Than 12 Months				Securities Owned 12 Months Or Longer				Total
	Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value
U. S. Treasuries	$	1,014	$	88,091	$	584	$	100,234	$	1,598	$	188,325
Mortgage-backed securities		—		—		18		1,250		18		1,250
Obligations of states and political subdivisions		—		—		49		5,523		49		5,523

Subtotal, debt securities		1,014		88,091		651		107,007		1,665		195,098
Marketable equity securities		80		5,973		53		2,134		133		8,107

Total temporarily impaired securities	$	1,094	$	94,064	$	704	$	109,141	$	1,798	$	203,205

The above securities losses were considered temporary losses at September 30, 2005 principally resulting from the continued relatively low interest rate market managed by the Federal Reserve during 2004 and 2005. The losses were principally in twelve U. S. Government investments with less than two years until maturity.

Temporarily Impaired Securities Losses At December 31, 2004:


	Securities Owned Less Than 12 Months				Securities Owned 12 Months Or Longer				Total
	Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value
U. S. Treasuries	$	700	$	106,153	$	535	$	78,410	$	1,235	$	184,563
U. S. Agencies		—		—		53		20,966		53		20,966
Obligations of states and political subdivisions		4		4,522		9		205		13		4,727

Subtotal, debt securities		704		110,675		597		99,581		1,301		210,256
Marketable equity securities		127		4,111		16		531		143		4,642

Total temporarily impaired securities	$	831	$	114,786	$	613	$	100,112	$	1,444	$	214,898

The above securities losses were considered temporary losses at December 31, 2004 principally resulting from the low interest rate market managed by the Federal Reserve during the majority of 2003 and 2004. The losses were principally in fifteen U. S. Government investments with less than two years until maturity.

Note 3. Allowance for Loan Losses

(Dollars in thousands)


	Nine Months Ended September 30,
	2005			2004
Balance at beginning of year	$	10,259		$	10,095
Provision for loan losses		900			900
Loans charged off		(517	)		(704	)
Loan recoveries		370			135

Balance at end of the year	$	11,012		$	10,426

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 September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net income	$	2,548		$	1,445		$	6,998		$	4,199
Less: Preferred dividends		(91	)		(90	)		(262	)		(265	)

Net income applicable to common shares	$	2,457		$	1,355		$	6,736		$	3,934

Weighted average common shares outstanding during the period		108,920			110,701			109,268			111,043

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 September 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 September 30, 2005, beneficially owned 2,550,765 shares, or 29.13%, and 1,390,274 shares, or 15.88%, of the Corporation’s outstanding Class A common stock, and 668,777 shares, or 39.86%, and 209,022 shares, or 12.46%, of the Corporation’s outstanding Class B common stock. The above totals include 476,408 Class A common shares, or 5.44%, and 105,044 Class B Common shares, or 6.26%, 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, $1.5 million of Fidelity’s mortgage loans at September 30, 2005. BancShares 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 three and nine months ended September 30, 2005 and 2004 in accordance with the aforementioned service contracts:

(Dollars in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Data and item processing	$	769	$	779	$	2,353	$	2,352
Forms, supplies and equipment		248		229		704		838
Internet banking		46		38		132		114
Consulting fees				24		27		72
Trustee for employee benefit plans		19		17		56		51
Other services		24		19		71		89

Totals	$	1,130	$	1,109	$	3,388	$	3,523

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.

BancShares acquired two Capital Bank, Raleigh, North Carolina branches located in Seaboard, North Carolina and Woodland, North Carolina on September 13, 2004. BancShares acquired deposits of $28.0 million, loans of $10.7 million and cash of $15.4 million. BancShares paid $1.9 million for the Seaboard and Woodland branch acquisitions. There were no acquisitions during the nine months ended September 30, 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 common trust funds, which include listed common stocks and fixed income 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 September 30:	2005			2004
Service cost	$	218		$	224
Interest cost		266			270
Expected return on assets		(294	)		(248	)

		190			246

Amortization cost:
Prior service cost		1			2
Net loss		77			78

Total amortizations		78			80

Net periodic benefit cost	$	268		$	326


	Pension Benefits
Nine months ended September 30:	2005			2004
Service cost	$	714		$	673
Interest cost		854			810
Expected return on assets		(842	)		(735	)

		726			748

Amortization cost:
Prior service cost		5			6
Net loss		257			234

Total amortizations		262			240

Net periodic benefit cost	$	988		$	988

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

Employer Contributions

BancShares 2004 consolidated financial statements disclosed that it expected to contribute $1.0 million to its pension plan in 2005. As of September 30, 2005, $1.4 million has been contributed. 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 - NINE MONTHS ENDED 2005 VS. NINE MONTHS ENDED 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, incorporated by reference 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 relatively low interest rates managed by the Federal Reserve significantly impacted customer demand for both deposit and loan products. The low interest rate market caused some customers, anticipating increases in rates, to choose shorter term deposit products including short-term certificates of deposit, transaction, savings and money market accounts. The low interest rate market provided many customers with an opportunity to refinance existing loans at much lower rates, provided some customers the ability to reduce their overall loan requirements and provided some customers an opportunity to increase their loan balances at much lower 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 approximately $2.8 million from $4.2 million in the first nine months of 2004 to $7.0 million in the first nine months of 2005, an increase of 66.66%. This increase resulted primarily from a $3.9 million before tax increase in net interest income and a increase of $1.1 million in net gains on sales of loans and available-for-sale investments. The opening of a new branch in May 2004 and the acquisition of two branches in September 2004 resulted in increased net interest income, increased noninterest income, increased personnel expense and increased operating expenses for the nine months ended September 30, 2005.

Per share net income available to common shares for the first nine months of 2005 was $61.65, an increase of $26.22, or 74.01%, from $35.43 for the first nine months of 2004. The annualized return on average equity increased to 9.83%, for the period ended September 30, 2005, from 6.19% for the period ended September 30, 2004.

BancShares’ total assets at September 30, 2005 have increased $35.9 million, or 3.40% from December 30, 2004. BancShares assets totaled $1.09 billion at September 30, 2005 compared to $1.06 billion at December 31, 2004. During this nine month period, cash and due from banks increased $27.7 million, or 124.20% from $22.3 million to $50.0 million. Overnight funds sold decreased $16.3 million, or 45.57% from $35.9 million to $19.5 million. Loans, excluding loans held for sale, increased $51.4 million, or 8.04%, from $639.3 million to $690.7 million. Investment securities decreased $29.8 million, or 9.56% from $311.5 million at December 31, 2004 to $281.7 million at September 30, 2005. Total deposits increased $19.8 million, or 2.18% from $910.5 million at December 31, 2004 to $930.4 million at September 30, 2005.

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, 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.

ACQUISITIONS, NEW OFFICES AND CONSOLIDATIONS

BancShares did not acquire any additional locations in the nine months ended September 30, 2005. 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 2004 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 Winterville branch and the Red Oak branch are 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 the remaining quarter of 2005 and into 2006, management anticipates increased commercial loan growth opportunities due to the continued relatively low interest rate environment and an expected continued 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 equity line loans. Growth in equity line loans is also expected during the remainder of 2005 and into 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 $4.8 million, or 16.92%, from $28.3 million for the nine months ended September 30, 2004 to $33.1 million for the nine months ended September 30, 2005. This increase resulted from both increased loan portfolio balances and increased loan yields. Average loans for the nine months ended September 30, 2005 were $662.2 million, an increase of $29.5 million, or 4.66%, from $632.7 million for the prior year period. This increase in average loans was principally the result of a slowly improving eastern North Carolina economy, the opening of a de novo branch in May 2004 and two branch acquisitions in September 2004. The yield on the loan portfolio increased to 6.69% for the nine months ended September 30, 2005 from 5.99% for the nine months ended September 30, 2004.

As a result of the continued generally slow recovery of the eastern North Carolina economy, 2005 loan production opportunities have continued to be relatively limited in several of Southern’s markets. As a result of the deposit growth in Southern’s existing markets, the 2004 Seaboard and Woodland acquisitions, improving loan demand and the relatively low interest rate market management by the Federal Reserve, management has made investments in primarily two-year maturity or less, held-to-maturity, U. S. Treasury securities.

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 September 30, 2005 was 16.8 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 Agency obligations, obligations of state and county subdivisions and other securities increased $1.3 million or 27.94%, from $4.7 million in the nine months ended September 30, 2004 to $6.0 million in the nine months ended September 30, 2005. This increase was due to both an increase in average investment securities and an increase in yields for the nine months ended September 30, 2005. The average investment securities for the nine months ended September 30, 2005 was $269.2 million as compared to $240.7 million for the same 2004 period. The increase in volume principally resulted from the average level of deposits being greater than the average level of loans for the de novo branch in Manteo, North Carolina, opened in May 2004, and the September 2004 acquisitions of existing branches in Seaboard, North Carolina and Woodland, North Carolina from Capital Bank. The yield on investment securities was 2.96% for the nine-month period ended September 30, 2005 and 2.59% for the nine-month period ended September 30, 2004.

Interest income on overnight funds sold increased $110,000, or 32.84%, from $335,000 for the nine months ended September 30, 2004 to $445,000 for the nine months ended September 30, 2005. This increase in income resulted from a decrease in the average overnight funds sold to $20.7 million for the nine months ended September 30, 2005 from an average of $43.6 million for the nine months ended September 30, 2004 more than offset by an increase in the average overnight funds sold yields from 1.01% for the nine months ended September 30, 2004, to 2.84% for the nine months ended September 30, 2005.

Total interest income increased $6.2 million, or 18.62%, from $33.3 million for the nine months ended September 30, 2004 to $39.5 million for the nine months ended September 30, 2005. This increase was the result of both an increase of $35.1 million in average earning assets and a 69 basis point increase in average earning asset yields.

Average earning asset yields for the nine months ended September 30, 2005 increased to 5.55% from the 4.86% yield on average earning assets for the nine months ended September 30, 2004 primarily as a result of the overall increase in market rates managed by the Federal Reserve. Average earning assets increased from $917.0 million in the nine months ended September 30, 2004 to $952.1 million in the nine months ended September 30, 2005. This $35.1 million increase in the average earning assets resulted primarily from growth within the existing branches, the opening of the de novo branch and the acquisitions 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 was 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 September 30, 2005, the time deposits greater than $100,000 were 13.81% of total deposits, compared to 13.76% of September 30, 2004 total deposits.

Total interest expense increased $2.3 million, or 25.39%, from $9.0 million in the nine months ended September 30, 2004 to $11.3 million for the nine months ended September 30, 2005. BancShares’ total cost of funds increased from 1.60% for the nine months ended September 30, 2004 to 1.97% for the nine months ended September 30, 2005 as a result of the overall increase in market rates. Average interest-bearing deposits were $724.2 million in the nine months ended September 30, 2005, an increase of $11.9 million from the $712.3 million average in the nine months ending September 30, 2004. The increase in interest-bearing deposits was primarily the result of growth within the existing branches, the opening of the de novo branch and the acquisitions discussed above.

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 relatively slowly improving eastern North Carolina economy, consumer concerns over the improving 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 $28.3 million for the nine months ended September 30, 2005 and $24.3 million for the nine months ended September 30, 2004.

The interest rate spread for the nine months ended September 30, 2005 was 3.60%, an increase of 34 basis points from the 3.26% interest rate spread for the nine months ended September 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 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.

During the first nine months of 2005, management charged-off loans totaling $517,000 and received recoveries of $370,000, resulting in net charge-offs of $147,000. During the same period in 2004, $704,000 in loans were charged-off and recoveries of $135,000 were received, resulting in net charge-offs of $569,000. As a result of the slowly improving eastern North Carolina economy, Southern has experienced a $422,000, or 74.17%, decrease in net loan charge-offs for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004. In consideration of the overall potential impact of decreased year-to-date net loan charge-offs, a higher than normal increase in average loans and an increase in the Bank’s watch list loans, management recorded $900,000 as a provision for loan losses for the nine months ended September 30, 2005. For the nine months ended September 30, 2004 management also recorded a $900,000 provision for loan losses. The ratio of annualized net charge-offs to average loans decreased from 0.16% for the year ended December 31, 2004 to an annualized 0.03% for the nine months ended September 30, 2005. The September 30, 2005 allowance for loan losses increased $753,000 from December 31, 2004.

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


	September 30, 2005		December 31, 2004		September 30, 2004
Ratio of annualized net loans charged off to average loans	0.03	%	0.16	%	0.12	%
Allowance for loan losses to loans excluding loans held-for sale	1.59	%	1.60	%	1.64	%
Non-performing loans to loans excluding loans held-for-sale	0.51	%	0.26	%	0.39	%
Non-performing loans and assets to total assets	0.40	%	0.21	%	0.35	%
Allowance for loan losses to non-performing loans	313.64	%	616.53	%	422.11	%

The allowance for loan losses represented 1.59% of loans, excluding loans held-for-sale, at September 30, 2005 compared to 1.60% of loans, excluding loans held-for-sale, at 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 continued weakness in the economy, a decrease in impaired loans, an increase in the mortgage loan portfolio and an increase in foreclosed other real estate. Loans, net of loans held-for-sale, increased $51.4 million, or 8.04% from $639.3 million at December 31, 2004 to $690.7 million at September 30, 2005.

The ratio of nonperforming loans to loans, net of loans held-for-sale, increased from 0.26% at December 31, 2004 to 0.51% at September 30, 2005. Nonperforming loans and assets to total assets increased to 0.40% at September 30, 2005 from 0.21% at December 31, 2004. The allowance for loan losses represented 313.64% of nonperforming loans at September 30, 2005, a decrease from the 616.53% at December 31, 2004.

Performance declines resulted primarily from increased nonperforming loans of $3.5 million at September 30, 2005 compared to $1.7 million at December 31, 2004. The nonperforming loans at September 30, 2005 included $245,000 of nonaccrual loans, $3.3 million of accruing loans 90 days or more past due and no restructured loans. BancShares had $860,000 of assets classified as other real estate at September 30, 2005. BancShares had $525,000 of assets classified as other real estate at December 31, 2004.

Management considers the September 30, 2005 allowance for loan losses to be adequate to cover the losses and risks inherent in the loan portfolio at September 30, 2005 and will continue to monitor its portfolio and to adjust the relative level of the allowance as needed. BancShares had impaired loans of $17,000 at September 30, 2005 compared to $832,000 at December 31, 2004. No additional allowances for loan losses were required for these impaired loans.

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 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 $108,000 for the nine months ended September 30, 2005 from $497,000 in the nine months ended September 30, 2004 as a result of both increased mortgage loan production and increased sales of mortgage loans into the secondary market.

During the nine months ended September 30, 2005, BancShares realized a $1.2 million increase in noninterest income primarily as a result of a $1.1 million before tax increase in gains on sale of loans and investment securities in the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004.

Service charges on deposit accounts for the nine months ended September 30, 2005 decreased $170,000 and other service charges and fees for the nine months ended September 30, 2005 increased $264,000 over the nine months ended September 30, 2004 primarily as a result of growth within the existing branches, the opening of the de novo branch and the acquisitions discussed above.

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.

Noninterest expense increased $608,000 or 2.36%, from $25.7 million in the nine months ended September 30, 2004 to $26.3 million in the nine months ended September 30, 2005.

This increase was primarily due to an increase in personnel expense of $602,000, or 4.32%, from $13.9 million at September 30, 2004 to $14.5 million at September 30, 2005 and increased occupancy, data processing and other expenses resulting principally from the existing branches, the de novo branch addition and the branch acquisitions discussed above.

INCOME TAXES

In the nine months ended September 30, 2005, BancShares recorded income tax expense of $3.3 million. In the nine months ended September 30, 2004, BancShares recorded income tax expense of $1.6 million. The resulting effective tax rate for the nine months ended September 30, 2005 was 31.85%. The effective tax rate for the nine months ended September 30, 2004 was 27.09%. The estimated effective tax rate was higher in 2005 due to a decrease in tax-exempt income in 2005 as a percentage of total income before taxes for 2005. The effective tax rates in 2005 of 31.85% and in 2004 of 27.09% 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 – THIRD QUARTER OF 2005 VS. THIRD QUARTER OF 2004

INTRODUCTION

In the three months ended September 30, 2005, the net income of BancShares increased $1.1 million from $1.4 million in the three months ended September 30, 2004 to $2.5 million in the three months ended September 30, 2005, an increase of 76.33%. The increase in net income for the quarter ended September 30, 2005 is attributed principally to a $1.8 million increase in before tax net interest income and a before tax $191,000 increase in gains on sales of loans and available-for-sale investment securities.

Per share net income available to common shares for the three months ended September 30, 2005 was $22.56, an increase of $10.31, or 84.16%, from $12.25 for the three months ended September 30, 2004.

ACQUISITIONS

BancShares had no acquisitions in the quarter ended September 30, 2005. BancShares acquired a Seaboard, North Carolina branch and a Woodland, North Carolina branch from Capital Bank of Raleigh, North Carolina on September 13, 2004. Deposit growth of $28.0 million, loan growth of $10.7 million, additional cash of $15.4 million and intangible assets of $1.9 million resulted from this acquisition.

INTEREST INCOME

Interest and fees on loans increased $2.4 million or 25.58% to $12.0 million for the quarter ended September 30, 2005 from $9.6 million for the quarter ended September 30, 2004. This increase was due to both increased loan balances and higher loan portfolio yields. Average loans for the quarter ended September 30, 2005 were $688.2 million, an increase of 7.75% from $638.7 million for the prior year quarter. The yield on the loan portfolio was 6.93% for the three months ended September 30, 2005 and 5.95% for the three months ended September 30, 2004 primarily as a result of increases in market rates.

Interest income on overnight funds sold increased $41,000, or 32.03%, from $128,000 for the quarter ended September 30, 2004 to $169,000 for the quarter ended September 30, 2005. This increase in income resulted from a decrease in volume more than offset by an increase in yield. The average overnight funds sold was $20.5 million for the quarter ended September 30, 2005 compared to an average of $37.3 million for the quarter ended September 30, 2004. Average overnight funds sold yields were 3.21% for the quarter ended September 30, 2005 an increase from 1.34% for the quarter ended September 30, 2004 primarily as a result of increased market rates.

Total interest income increased $3.0 million, or 26.40%, from $11.2 million for the quarter ended September 30, 2004 to $14.2 million for the quarter ended September 30, 2005. This increase was primarily the result of an increase in the yields on average earning assets resulting primarily from the overall higher market interest rates during the quarter ended September 30, 2005.

Average earning asset yields for the quarter ended September 30, 2005 increased to 5.85% from the 4.83% yield on average earning assets for the quarter ended September 30, 2004. Average earning assets increased from $923.0 million in the quarter ended September 30, 2004 to $962.3 million in the quarter ended September 30, 2005.

INTEREST EXPENSE

Total interest expense increased $1.2 million from $3.1 million for the three months ended September 30, 2004 to $4.2 million for the three months ended September 30, 2005. Interest expense increased as a result of both increased balances and increased costs of deposits and short-term borrowings.

Interest-bearing liability rates for the quarter ended September 30, 2005 increased to 2.03% from the 1.62% cost for the quarter ended September 30, 2004. Average interest-bearing liabilities increased from $754.6 million in the quarter ended September 30, 2004 to $770.1 million in the quarter ended September 30, 2005.

NET INTEREST INCOME

Net interest income before provision for loan losses was $8.2 million for the three months ended September 30, 2004 and $10.0 million for the three months ended September 30, 2005.

The interest rate spread for the quarter ended September 30, 2005 was 3.68%, an increase of 47 basis points from the 3.21% interest rate spread for the quarter ended September 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 the three months ended September 30, 2005, management recorded $300,000 as a provision for loan losses. Management also made a $300,000 provision for loan losses for the quarter ended September 30, 2004. BancShares recorded the 2005 provision for loan losses after consideration of the overall potential impact of higher than normal loan growth, the overall continued relative weakness of the eastern North Carolina economy and decreased net charge-offs for the quarter ended September 30, 2005.

During the three months ended September 30, 2005, $133,000 in loans were charged-off and recoveries of $53,000 were received, resulting in net charge-offs of $80,000 for the three months ended September 30, 2005. During the three months ended September 30, 2004 management charged-off loans totaling $200,000 and received recoveries of $34,000, resulting in $166,000 of net charge-offs for the three months ended September 30, 2004.

NONINTEREST INCOME

During the three months ended September 30, 2005, BancShares’ noninterest income increased $238,000 principally as a result of increased gains on sales of loans and available-for-sale-securities. Service charges on deposit accounts for the three months ended September 30, 2005 decreased $66,000 and other service charges and fees for the three months ended September 30, 2005 increased $116,000 over the three months ended September 30, 2004 primarily as a result of growth within the existing branches, the opening of the de novo branch and the acquisitions discussed above.

NONINTEREST EXPENSE

Noninterest expense including personnel, occupancy, furniture and equipment, data processing, FDIC insurance, state assessments, printing, supplies and other expenses, increased $227,000 or 2.65%, from $8.6 million in the three months ended September 30, 2004 to $8.8 million in the three months ended September 30, 2005.

This increase was primarily due to increased personnel and other expenses resulting principally from the growth within the existing branches, the addition of de novo branch and the branch acquisitions discussed above.

INCOME TAXES

In the three months ended September 30, 2005, BancShares had income tax expense of $1.3 million, an increase of $720,000 from $560,000 in the prior year quarter. This increase is due to increased earnings and an increase in the estimated effective tax rate for the quarter ended September 30, 2005 to 33.44% compared to 27.93% for the quarter ended September 30, 2004. The effective tax rates for the quarters ended September 30, 2005 of 33.44% and September 30, 2004 of 27.93% differ from the federal statutory rate of 34.00% primarily due to the relative proportion of tax exempt income.

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 BancShares and Southern’s leverage capital ratios. 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 September 30, 2005 was 7.93%. 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. According to these guidelines, BancShares’s leverage capital ratio at September 30, 2005 was 9.34%. At December 31, 2004, BancShares’s leverage capital ratio was 8.72%. Both of these ratios exceed the minimum threshold designated as “well capitalized” by the Federal Reserve.

BancShares and Southern are also required to meet minimum requirements for Risk Based Capital (“RBC”). BancShare’s and Southern’s assets, including loan commitments and other off-balance sheet items, are weighted according to regulatory guidelines for the risk considered inherent in each asset. At September 30, 2005, Southern’s Total RBC ratio was 13.64%. At December 31, 2004 Southern’s RBC ratio was 13.45%. Both of these ratios exceed the minimum threshold designated as “well capitalized” by the FDIC. At September 30, 2005, BancShare’s Total RBC ratio was 16.56%. At December 31, 2004 BancShare’s RBC ratio was 16.39%. Both of these ratios exceed the minimum threshold designated as “well capitalized” by the Federal Reserve.

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

Accumulated other comprehensive income was $21.0 million at September 30, 2005 compared to $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 table presents capital adequacy calculations and ratios of BancShares and Southern:

BancShares:


	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
As of September 30, 2005: (Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)	$	120,920	16.56	%	$	58,429	8.00	%	$	73,036	10.00	%
Tier 1 Capital (to risk-weighted assets)	$	96,511	13.21	%	$	29,214	4.00	%	$	43,821	6.00	%
Tier 1 capital (to average assets)	$	96,511	9.34	%	$	41,348	4.00	%	$	51,685	5.00	%

	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
As of December 31, 2004: (Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)	$	111,466	16.39	%	$	54,420	8.00	%	$	68,025	10.00	%
Tier 1 Capital (to risk-weighted assets)	$	89,561	13.17	%	$	27,210	4.00	%	$	40,815	6.00	%
Tier 1 capital (to average assets)	$	89,561	8.72	%	$	41,094	4.00	%	$	51,368	5.00	%

Southern:

	Actual				Minimum for capital adequacy purposes				Minimum to be well capitalized under prompt corrective action provisions
As of September 30, 2005: (Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk-weighted assets)	$	96,481	13.64	%	$	56,606	8.00	%	$	70,758	10.00	%
Tier 1 Capital (to risk-weighted assets)	$	80,849	11.43	%	$	28,303	4.00	%	$	42,455	6.00	%
Tier 1 capital (to average assets)	$	80,849	7.93	%	$	40,787	4.00	%	$	50,984	5.00	%

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

Pursuant to the general authority given each year by BancShares’ Board of Directors, not pursuant to a formal repurchase plan or program, 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. No purchases of capital stock were made during the three months ending September 30, 2005.

Under similar authority during the nine months ended September 30, 2005, BancShares repurchased an aggregate of 1,206 shares of Common Stock in unsolicited private transactions. Under similar authority during the nine months ended September 30, 2004, BancShares repurchased an aggregate of 6,255 shares of Series B Preferred Stock and 914 shares of Common Stock in unsolicited private transactions.

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 24.28% at September 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 nine months ended September 30, 2005 and for the nine months ended September 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 September 30, 2005 jumbo time deposits represented 13.81% 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 September 30, 2005

(Dollars

in thousands)


	Payments due by period
	Less than 1 year		1-3 years		4-5 years		Over 5 years		Total
Deposits	$	772,327	$	127,652	$	30,382	$	—	$	930,361
Short-term borrowings		21,097		—		—		—		21,097
Long-term obligations		—		—		—		23,711		23,711
Lease obligations		64		157		23		—		244

Total contractual obligations	$	793,488	$	127,809	$	30,405	$	23,711	$	975,413

RECENT DEVELOPMENTS AND OTHER MATTERS

BancShares has begun the process of voluntary de-registration of Southern BancShares from the SEC. De-registration will be accomplished by a cash-out merger and will require the reduction of the number of record holders of both the common stock and the Series B Preferred stock. A special meeting of BancShares’ shareholders will be held prior to year-end 2005 to vote on the cash-out merger which will result in the payment of $780.00 per share to common shareholders of less than 35 common shares and $14.85 per share to Series B Preferred shareholders of less than 400 Series B Preferred shares. A definitive proxy statement, to be sent to BancShares’ shareholders, is under review by the SEC.

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 at both September 30, 2005 and December 31, 2004 were $5.9 million. Outstanding commitments to lend at September 30, 2005 were $210.8 million compared to $182.1 million at December 31, 2004. Undisbursed advances on customer lines of credit were $72.3 million at September 30, 2005 compared to $64.3 million at December 31, 2004. Outstanding standby letters of credit and commitments to lend at September 30, 2005 generally expire within one year, whereas commitments associated with undisbursed advances on customer lines of credit at September 30, 2005 generally expire within one to five years.

At September 30, 2005, commitments to sell loans amounted to $14.3 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 mandated 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 established 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 September 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 September 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 September 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 2005 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 September 30, 2005.


(Dollars in thousands)	Maturing September 30
(Dollars in thousands)	2006			2007			2008			2009			2010			Thereafter			Total			Fair Value
Assets

Loans
Fixed rate	$	61,809		$	57,991		$	51,868		$	26,948		$	21,093		$	47,951		$	267,660		$	251,048
Average rate (%)		6.96	%		6.75	%		6.79	%		6.61	%		6.67	%		6.54	%		6.75	%

Variable rate	$	233,457		$	61,570		$	49,281		$	37,978		$	24,666		$	24,204		$	431,156		$	431,156
Average rate (%)		7.12	%		6.94	%		6.81	%		6.92	%		6.96	%		7.03	%		7.03	%

Investment Securities
Fixed rate	$	112,264		$	84,549		$	670		$	2,389		$	1,828		$	45,461		$	247,161		$	280,949
Average rate (%)		2.24	%		3.42	%		7.89	%		7.31	%		5.84	%		5.36	%		3.31	%

Liabilities

Savings and interest bearing checking
Fixed rate	$	322,052			—			—			—			—			—		$	322,052		$	322,052
Average rate (%)		0.82	%		—			—			—			—			—			0.82	%

Certificates of deposit
Fixed rate	$	249,261		$	98,735		$	27,522		$	30,382			—			—		$	405,900		$	382,754
Average rate (%)		2.79	%		3.58	%		3.40	%		3.72	%		—			—			3.10	%

Variable rate	$	3,513		$	1,395			—			—			—			—		$	4,908		$	4,908
Average rate (%)		1.79	%		2.03	%		—			—			—			—			1.86	%

Short-term borrowings
Variable rate	$	21,097			—			—			—			—			—		$	21,097		$	21,097
Average rate (%)		2.73	%		—			—			—			—			—			2.73	%

Long-term debt
Fixed rate		—			—			—			—			—		$	23,711		$	23,711		$	23,711
Average rate (%)		—			—			—			—			—			6.95	%		6.95	%

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 September 30, 2005, which reflected a one year negative interest-sensitivity gap of $168.9 million. As a result of this one year negative gap, increases in interest rates could have an unfavorable impact on net interest income. This type of gap measurement considers non-maturity interest-bearing deposits as repricing immediately when interest rates change.

One measure of the impact of BancShares’ interest-sensitivity negative gap is to model the impact of an immediate 100 basis point rate increase or decrease on net interest income while considering non-maturity interest-bearing deposits as repricing immediately. The results of this, non-maturity immediately repricing, type of gap analysis at September 30, 2005 is shown in the table below.

BancShares also utilizes a funds management model that considers that non-maturity interest-bearing deposits also reprice over time, not immediately. This funds management model indicates that at September 30, 2005, BancShares could realize an $1.1 million decrease in net interest income if an immediate 100 basis point rate decrease were to occur. This funds management model indicates that, at September 30, 2005, BancShares could realize a $955,000 increase in net interest income if an immediate 100 basis point rate increase were to occur.

INTEREST-SENSITIVITY ANALYSIS


(Dollars in thousands)	September 30, 2005
(Dollars in thousands)	1-90 Days Sensitive			91-180 Days Sensitive			181-365 Days Sensitive			Non-Rate Sensitive & Over 1 Year		Total
Interest Earning Assets:

Loans	$	157,857		$	57,905		$	79,504		$	403,550	$	698,816
Investment securities		42,164			21,458			48,642			169,471		281,735
Temporary investments		19,526			—			—			—		19,526

Total earning assets	$	219,547		$	79,363		$	128,146		$	573,021	$	1,000,077

Interest-Bearing Liabilities:
Savings and core time deposits	$	395,167		$	45,003		$	52,213		$	111,977	$	604,360
Time deposits of $100,000 and more		32,680			22,549			27,214			46,057		128,500
Short-term borrowings		21,097			—			—			—		21,097
Long-term obligations		—			—			—			23,711		23,711

Total interest bearing liabilities	$	448,944		$	67,552		$	79,427		$	181,745	$	777,668

Interest sensitivity gap	$	(229,397	)	$	11,811		$	48,719		$	391,276	$	222,409

Cumulative interest sensitivity gap	$	(229,397	)	$	(217,586	)	$	(168,867	)	$	222,409	$	222,409

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.

Part II – OTHER INFORMATION

Item 6. Exhibits

The following exhibits are filed or furnished with this Report:


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.

November 7, 2005 Date		/s/ John C. Pegram, Jr.
November 7, 2005 Date		John C. Pegram, Jr.,
		Chairman of the Board, President and Chief Executive Officer

November 7, 2005 Date		/s/ David A. Bean
November 7, 2005 Date		David A. Bean,
		Secretary, Treasurer and Chief Financial Officer

EXHIBIT INDEX


Exhibit Number		Exhibit
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