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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 March 31, 2004

Commission File No. 0-10852

SOUTHERN BANCSHARES (N.C.), INC.

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate the number of shares outstanding of the Registrant’s common stock as of the close of the quarter covered by this report.     111,029 shares

Part i—FINANCIAL INFORMATION

Item 1—Financial Statements.

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

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)

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

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

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Dollars in thousands except share and per share data)

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

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

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003

(Dollars in thousands except per share data)

(Unaudited)

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

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

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

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

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Summary Of Significant Accounting Policies

Basis of Financial Statement Presentation

Southern BancShares (N. C.), Inc. (“BancShares”) is a bank holding company for Southern Bank and Trust Company (“Southern”), which operates 51 commercial banking offices in eastern North Carolina. Southern, which began operations January 29, 1901, has a non-bank 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 statements should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended December 31, 2003, incorporated by reference in the 2003 Annual Report on Form 10-K.

Principles Of Consolidation

The consolidated financial statements include the accounts of BancShares and its wholly-owned subsidiary, Southern. 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.

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

Notes to Consolidated Financial Statements (Unaudited)

(Dollars In thousands)

Note 1. Summary of Significant Accounting Policies—continued

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 (MSRs) represent the estimated value of the right to service mortgage loans for others. Capitalization of MSRs occurs when the underlying loans are sold. Capitalized MSRs are amortized into income over the projected servicing life of the underlying loans. Capitalized MSRs are periodically reviewed for impairment. The net MSR balances were $939,000 and $523,000 at March 31, 2004 and 2003 respectively. A valuation allowance for impairment of Mortgage Servicing Rights of $209,000 was recorded as of March 31, 2003. No valuation allowance for impairment was required at March 31, 2004.

The following is a summary of the gross carrying amounts and accumulated amortization of intangible assets as of March 31, 2004 and December 31, 2003.

(Dollars in thousands)

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There was a $1,000 increase in the gross carrying amount of unamortizable goodwill at March 31, 2004 compared to December 31, 2003 as a result of an independent third party analysis of the intangible resulting from the October 2003 branch acquisition. The $1,000 was previously included in amortizable intangible assets.

The scheduled remaining amortization expense for intangible assets at March 31, 2004 for the years ended December 31, 2004, 2005, 2006, 2007 and 2008 and thereafter is as follows:

(Dollars in thousands)

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The actual amortization expense in future periods may be subject to change based on changes in the useful life of the assets, expectations for loan prepayments, future acquisitions and future loan sales.

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 March 31, 2004 is $8.1 million. At March 31, 2004, BancShares has recorded no liability for the current carrying amount of the obligation to perform as a guarantor, as such amounts are deemed immaterial.

Reclassifications

Certain 2003 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.

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

Notes to consolidated financial statements

Dollars in thousands

Note 2. Investment securities

Note 3. ALLOWANCE FOR LOAN LOSSES

(Dollars in thousands)

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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 2004 or 2003, 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)

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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 March 31, 2004, beneficially owned 32,751 shares, or 29.50%, of BancShares’ outstanding common stock and 4,966 shares, or 1.39%, of BancShares’ outstanding Series B preferred stock. At the same date, the second significant shareholder beneficially owned 27,422 shares, or 24.70%, of BancShares’ outstanding common stock.

These two significant shareholders are directors and executive officers of the Corporation and at March 31, 2004, beneficially owned 2,525,933 shares, or 28.84%, and 1,378,593 shares, or 15.74%, of the Corporation’s outstanding Class A common stock, and 656,688 shares, or 39.14%, and 206,159 shares, or 12.29%, of the Corporation’s outstanding Class B common stock. The above totals include 467,327 Class A common shares, or 5.34%, and 104,644 Class B Common shares, or 6.24%, that are considered to be beneficially owned by both of the shareholders and, therefore, are included in each of their totals.

BancShares is related through common ownership with The Fidelity Bank, (“Fidelity”), in that the aforementioned two significant shareholders of BancShares and certain of their related parties are also significant shareholders of Fidelity. Fidelity has contracted with BancShares for BancShares to service, on Fidelity’s behalf, $2.6 million of Fidelity’s mortgage loans at March 31, 2004.

The following table lists the various charges paid to the Corporation during the three months ended March 31, 2004 and the three months ended March 31, 2003 in accordance with the aforementioned service contracts:

(Dollars in thousands)

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Note 9. 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 pro forma impact of the acquisitions as though they had been made at the beginning of the periods presented is not considered material to BancShares’ consolidated financial statements.

There were no acquisitions during the three months ended March 31, 2003 or 2004.

BancShares has received regulatory approval to acquire two branches from Capital Bank located in Seaboard and Woodland, North Carolina. The acquisitions are expected to be completed during the third quarter of 2004. As of the date of the purchase agreement, the branches had combined deposits of $28.5 million (unaudited), loans of $8.9 million (unaudited), and cash of $17.2 million (unaudited). BancShares expects to pay approximately $2.1 million (unaudited) for these acquisitions.

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS—THREE MONTHS ENDED

MARCH 31, 2004 VS. THREE MONTHS ENDED MARCH 31, 2003

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, 2003, incorporated by reference in the 2003 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 markets and the level of financial services competition within those markets. During 2004 and 2003, general economic uncertainty and very 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 also provided many customers with an opportunity to refinance existing loans and the ability to either reduce their overall loan requirements or expand their loan requirements 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.

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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 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 decreased $635,000 from $2.1 million in the first three months of 2003 to $1.5 million in the first three months of 2004, a decrease of 29.81%. This decrease resulted primarily from a $385,000 before-tax decrease in net interest income and a $610,000 before-tax decrease in gains on sales of loans held-for-sale. The interest rate market during 2003 resulted in significantly increased opportunities for sales of loans compared to the interest rate market of the current year quarter. Increased support staff, the acquisition of the Norlina branch from another bank in October 2003 and the opening of a new Kenansville office in February 2003 (for which a full quarter impact was not yet felt during the three months ended March 31, 2003) resulted in increased operating expenses for the three months ended March 31, 2004.

Per share net income available to common shares for the first three months of 2004 was $12.62, a decrease of $5.46, or 30.20%, from $18.08 for the first three months of 2003. The annualized return on average equity decreased to 6.65%, for the three months ended March 31, 2004, from 10.85% for the three months ended March 31, 2003.

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At March 31, 2004, BancShares’ assets totaled $1.024 billion, an increase of $8.2 million, or 0.80%, from the $1.016 billion reported at December 31, 2003. During this three month period, cash and due from banks decreased $12.3 million, or 27.67% from $44.6 million to $32.2 million. During this three month period, overnight funds sold increased $19.1 million, or 47.68% from $40.0 million to $59.1 million. During this three month period, net loans decreased $12.7 million, or 2.04%, from $621.1 million to $608.4 million. The decrease in loans reflects both the normal agricultural lending cycle and the continued relatively weak economy in BancShares eastern North Carolina markets. During the three months ended March 31, 2004 investment securities increased $14.2 million, or 5.63% from $253.0 million at December 31, 2003 to $267.2 million at March 31, 2004. Total deposits increased $7.0 million, or 0.80% from $876.5 million at December 31, 2003 to $883.5 million at March 31, 2004. The above changes resulted from the seasonal impact of the agricultural markets served by Southern, the continued slow economy and the continued low market interest rates during the three months ended March 31, 2004.

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 three months ended March 31, 2004 or 2003. BancShares opened an additional full service branch in Kenansville in February 2003 and acquired an existing RBC Centura branch in Norlina, North Carolina in October 2003. The Norlina acquisition increased BancShares’ deposits by $18.3 million and increased BancShares’ loans by $1.2 million. BancShares paid $1.7 million for the Norlina acquisition.

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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, although management does not consider these sources of noninterest income to be a core source of revenues for BancShares. The sale of mortgage loans also results in the recognition of mortgage servicing rights (MSRs) income. MSRs represent the estimated value of the right to service mortgage loans for others. Capitalization of MSRs occurs when the underlying mortgage loans are sold and the servicing rights for the mortgage loans sold are retained. Capitalized MSRs are amortized into income over the projected servicing life of the underlying loans.

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

In 2003 one de novo branch was opened in the first quarter and one branch acquisition was completed in the third quarter. On May 10, 2004 a de novo branch was opened in Manteo, North Carolina to expand the Kill Devil Hills financial services market. BancShares has received regulatory approval to acquire a branch in Seaboard, North Carolina and Woodland, North Carolina from Capital Bank. These acquisitions are expected to be completed in the third quarter of 2004 to expand BancShares northeastern North Carolina market service area into Northampton County. The two acquisitions are expected to result in additions of approximately $28.5 million of deposits, $8.9 million of loans and $17.2 million of cash. BancShares expects to pay approximately $2.1 million for the acquisitions.

Management continues to look for growth opportunities offered though acquisition opportunities and to plan for de novo expansion within its eastern North Carolina markets. The acquisition of existing branches from other financial institutions also 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 an investor 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 primarily to fund the 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.

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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 mortgage loan production is sold into the mortgage secondary markets with the servicing rights retained by the Bank. 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 their purchases.

During 2004, management anticipates increased loan growth among loans to commercial borrowers due to the continued low interest rate environment and an overall improvement in the economy. The current low market interest rates are expected to remain for most of 2004. Demand among retail customers has shifted to open-end credit products such as equityline loans. Growth in equityline loans is also expected during 2004.

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 decreased $730,000, or 7.23%, from $10.1 million for the three months ended March 31, 2003 to $9.4 million for the three months ended March 31, 2004. This decrease resulted from decreased loan portfolio yields that were partially offset by increased average loan balances. Average loans for the three months ended March 31, 2004 were $627.9 million, an increase of 1.62% from $617.9 million for the prior year comparable period. This increase in average loans was principally the result of growth within the existing branches and the new branch and acquisition discussed above. The yield on the loan portfolio decreased to 6.14% for the three months ended March 31, 2004 from 6.83% for the three months ended March 31, 2003.

Due to the continued generally slow 2004 eastern North Carolina economy, loan production opportunities are relatively weak. As a result of the deposit growth in existing markets, the 2003 Norlina branch acquisition, relatively weak loan demand and the expected continued low interest rate market management by the Federal Reserve, investments in primarily two-year maturity or less, held-to-maturity, U. S. Treasury securities have been made by management.

Management continues to maintain a portfolio of securities with relatively short maturities and call dates, consistent with BancShares’ focus on liquidity. The average investment maturity at March 31, 2004 was 19.8 months compared to 20.8 months at December 31, 2003. Investment securities available for sale include marketable equity securities that are recorded at their fair value, with the unrealized net gain or loss included as a component of shareholders’ equity, net of deferred taxes.

Interest income from investment securities, including U. S. Treasury and Government obligations, obligations of state and county subdivisions and other securities decreased $168,000 or 10.42%, from $1.6 million in the three months ended March 31, 2003 to $1.4 million in the three months ended March 31, 2004. This decrease was due to a significant decrease in yields for the three months ended March 31, 2004 that was partially offset by increased average investment securities. The average investment securities for the three months ended March 31, 2004 was $258.4 million as compared to $185.3 million for the same 2003 period. The increase in volume principally resulted from increased deposit growth which exceeded loan growth. The yield on investment securities was 3.92% for the three-month period ended March 31, 2003 and 2.52% for the three-month period ended March 31, 2004.

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Interest income on overnight funds sold decreased $3,000, or 2.56%, from $117,000 for the three months ended March 31, 2003 to $114,000 for the three months ended March 31, 2004. This decrease in income resulted from a decrease in the average overnight funds sold yields from 1.12% for the three months ended March 31, 2003, to 0.90% for the three months ended March 31, 2004. The decreased yields more than offset an increase in the average overnight funds sold to $50.4 million for the three months ended March 31, 2004 from an average of $42.0 million for the three months ended March 31, 2003.

Total interest income decreased $901,000 or 7.62%, from $11.8 million for the three months ended March 31, 2003 to $10.9 million for the three months ended March 31, 2004. This decrease was the result of a 102 basis point decrease in average earning asset yields which more than offset an increase of $84.1 million in average earning assets.

Average earning asset yields for the three months ended March 31, 2004 decreased to 4.93% from 5.95% for the three months ended March 31, 2003 as a result of the overall decline in market rates. Average earning assets increased from $826.5 million in the three months ended March 31, 2003 to $910.6 million in the three months ended March 31, 2004. This $84.1 million increase in the average earning assets resulted primarily from growth in existing branches, the branch acquisition and the opening of the new branch discussed above.

INTEREST EXPENSE

Interest-bearing liabilities include interest-bearing deposits, short-term borrowings and long-term obligations. Southern’s primary funding source is deposits. Other short-term funding sources include commercial customer requirements for cash management services and a borrowing line of credit from another financial institution. Long-term borrowings also provide additional capital under guidelines established by the Federal Reserve.