<PAGE>   1
                                                                     EXHIBIT 13

                              FNB BANCSHARES, INC.
                               1998 ANNUAL REPORT





                                Table of Contents

<TABLE>
<CAPTION>
                                                                        Page
                                                                       -----
<S>                                                                    <C>
Shareholders' Letter                                                       2
Summary of Selected Financial Data                                         3
Management's Discussion and Analysis                                    4-17
Report of Independent Auditors                                            18
Consolidated Balance Sheets                                               19
Consolidated Statements of Income                                         20
Consolidated Changes in Shareholder's Equity                              21
Consolidated Statements of Cash Flows                                     22
Notes to Consolidated Financial Statements                             23-36
Directors, Officers and Services                                          37
Corporate Data                                                            38
</TABLE>




<PAGE>   2

                              FNB BANCSHARES, INC.


To our Shareholders:

1998 was a continued year of growth for First National Bank of the Carolinas as
we established ourselves as a viable banking institution in the Cherokee County
community. Our local decision making and commitment to personal service continue
to be the key to our success.

We are pleased to announce that 1998 was a profitable year for First National.
This was accomplished in only our second full year of operations. Net income for
the year was $127,000, even after we increased our provision for loan losses by
$150,000. This compared with a net loss of $185,000 in 1997.

Deposit growth for 1998 remained steady and we were able to continue attracting
low cost deposits, thus keeping our cost of funds low. With these stable funding
sources we are not forced to pay above market rates for deposits, enabling us to
make affordable loans which help our local economy.

Loan demand remained strong in 1998 and we were able to continue growing our
portfolio with quality loans. Charge offs were very low, reflecting our
continued commitment to making quality loans. At the same time we increased our
allowance for loan losses by $150,000 to prevent against any unforeseen losses.
Our loan loss reserve now stands at $303,000, although we have no identifiable
losses in our portfolio. While we continue to aggressively seek good quality
loan customers, we stand firm in our commitment to asset quality. A third party
consultant continues to review our loan portfolio on a quarterly basis.

During 1998 we made a concerted effort to increase fee income. While interest
income on loans continued to be our most important revenue source, we were able
to generate good fee income by aggressively seeking sources of additional
revenues. Fee income increased by 93% to $194,000. We will continue to explore
additional avenues to increase this relatively steady source of income.

A major accomplishment in 1998 was the construction of our new main office
facility in Gaffney which we occupied on January 20, 1999. The 10,500 square
foot two story brick building, was completed on time and under budget. If you
have not had the opportunity to visit the new building, please stop by and visit
with us. I feel that you will be proud of what we have accomplished.

Each of you are aware of the concerns being raised regarding the year 2000, or
Y2K problem. This is explained in detail later in the report to shareholders,
but you can rest assured that we are continuing to test our systems and plan for
any predictable contingencies. We are confident that we will be ready when the
date change rolls around.

We, the directors and employees, at First National Bank of the Carolinas, remain
optimistic about our continued growth and success. We will continue seeking ways
to improve our efficiency and customer service, thus adding value for our
shareholders. We feel that the necessary resources and people are in place which
will continue to enhance our opportunities for long term growth and
profitability.

We hope that you will be able to join us for the Annual Shareholders meeting on
Tuesday April 27, 1999 at 5:30 p.m. in the lobby of our new main office at 217
North Granard Street in Gaffney, South Carolina. We are grateful for your
continued support in our success. The directors and employees of First National
Bank of the Carolinas are committed to building a strong community bank and
improving shareholder value.


Bill H. Mason
Chairman of the Board


V. Stephen Moss
President


                                       2
<PAGE>   3

                              FNB BANCSHARES, INC.

                             SELECTED FINANCIAL DATA


The following table sets forth certain selected financial data concerning FNB
Bancshares, Inc. (the "Company"). The selected financial data has been derived
from the consolidated financial statements which have been audited by Tourville,
Simpson & Henderson, L.L.P., independent accountants. This information should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations.

<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996 and the
period September 27, 1995 to December 31, 1995        1998           1997            1996        1995 
                                                    --------      ---------       ---------      -----
(Dollars in thousands, except per share)
<S>                                                 <C>           <C>             <C>            <C> 
BALANCE SHEET:
  Securities held to maturity                       $  1,800      $   1,501       $    344       $ --
  Allowance for loan losses                              303            153             20         --
  Net loans                                           19,952         14,016          2,024         --
  Premises and equipment - net                         1,804            761            734          4
  Total assets                                        28,035         19,920         11,733         75
  Non-interest bearing deposits                        3,070          2,478          1,125         --
  Interest bearing deposits                           18,026         11,082          4,679         --
  Total deposits                                      21,096         13,560          5,804         --
  Total liabilities                                   22,199         14,211          5,839        102
  Total shareholders' equity                           5,837          5,709          5,894        (27)

RESULTS OF OPERATIONS:
  Interest income                                   $  2,059      $   1,248       $    206       $ --
  Interest expense                                       755            396             42         --
                                                    --------      ---------       --------       ----
  Net interest income                                  1,304            852            164         --
  Provision for loan losses                              160            138             20         --
                                                    --------      ---------       --------       ----
  Net interest income after provision                  1,144            714            144         --
  Other income                                           193            101              6         --
  Other expenses                                       1,207          1,072            431         27
  Income tax expense (benefit)                             3            (72)           (84)        --
                                                    --------      ---------       --------       ----

  Net income (loss)                                 $    127      $    (185)      $   (197)      $(27)
                                                    ========      =========       ========       ====


PER SHARE DATA:
  Weighted average common shares outstanding         616,338        616,338        616,338         --
  Basic earnings (loss) per share                   $    .21      $    (.30)      $   (.32)      $ --
  Diluted earnings (loss) per share                 $    .21      $    (.30)      $   (.32)      $ --
</TABLE>


DESCRIPTION OF THE COMPANY'S BUSINESS

The Company was organized as a bank holding company on September 27, 1995. Its
subsidiary, First National Bank of the Carolinas (the "Bank"), commenced
operations on October 18, 1996. FNB Bancshares, Inc. is a South Carolina
corporation which was incorporated primarily to hold all of the capital stock of
First National Bank of the Carolinas. The Bank engages in commercial and retail
banking, emphasizing the needs of small to medium businesses, professional
concerns, and individuals, primarily in Gaffney and Blacksburg, South Carolina
and the surrounding area. The Company currently engages in no other business
other than owning and managing the Bank.


                                       3
<PAGE>   4


                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


RESULTS OF OPERATIONS

This discussion and analysis is intended to assist the reader in understanding
the financial condition and results of operations of FNB Bancshares, Inc. and
its subsidiary, First National Bank of The Carolinas. The Bank commenced
operations in the fourth quarter of 1996. Comparisons of the Company's results
for all of the periods presented, particularly with respect to the banking
operations, should be made with an understanding of the Company's short
operating history. This commentary should be read in conjunction with the
consolidated financial statements and the related notes and the other
statistical information in this report.

1998 TO 1997:

Net income for the year ended December 31, 1998 was $127,392, or $.21 per share,
compared to a net loss of $185,145, or negative $.30 per share, for the year
ended December 31, 1997. The Company was in its first full year of operations in
1997 and the costs associated with opening a new bank affected 1997's
performance. An increase in net interest income of $451,475 over the 1997 amount
of $852,333 was the primary reason for the increase in net income from 1997 to
1998. Comparisons of the Company's results for all of the periods presented,
particularly with respect to the banking operations, should be made with an
understanding of the Company's short operating history. Other income increased
$93,268, or 92.7%, to $193,884 for the year ended December 31, 1998 as compared
to a year earlier. Other expenses increased from $1,072,095 for 1997 to
$1,207,204 for 1998. Expenses associated with building the new corporate
headquarters contributed to this increase. The Company completed construction of
these headquarters, which also includes the Bank's Gaffney office, in late 1998,
and the Company and the Bank moved into these new facilities in January 1999.

1997 COMPARED TO 1996:

The comparison of information between 1997 and 1996 is not meaningful since the
Bank was open for business only 2.5 months in 1996.

NET INTEREST INCOME

To a large degree, earnings are dependent on net interest income. Net interest
income represents the difference between interest earned on assets and the
interest paid on liabilities. Interest rate spread and net interest margin are
two significant elements in analyzing the Company's net interest income.
Interest rate spread is the difference between the yield on average earning
assets and the rate on average interest bearing liabilities. Net interest margin
is net interest income divided by earning assets.

Net interest income increased from $852,333 in 1997 to $1,303,808 in 1998,
resulting in an increase of 53.0%. Income from loans increased by 92.5% to
$1,707,484 for 1998, as compared to $886,790 for 1997. This increase was
attributable to the growth in the loan portfolio from $14,168,832 in 1997 to
$20,254,948 in 1998. There was also an increase in investment income of $37,943,
an increase of 53.5% over the 1997 amount of $70,974. The net interest spread
and net interest margin were 4.32% and 5.55% in 1998 as compared to 3.85% and
5.63% in 1997.

Net interest income was $852,333 for the year ended December 31, 1997, as
compared to $164,089 for the year ended December 31, 1996. Amounts for 1996
represent the parent company's operations for the year and only 2.5 months of
operations for the Bank. The net increase spread and net interest margin were
3.85% and 5.63%, respectively, in 1997.


                                       4
<PAGE>   5


                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


NET INTEREST INCOME - CONTINUED

The following table sets forth, for the periods indicated, the weighted average
yields earned, the weighted average yields paid, the net interest spread and the
net interest margin on earning assets. The table also indicates the average
monthly balance and the interest income or expense by specific categories.

AVERAGE BALANCES, INCOME, EXPENSES, AND RATES

<TABLE>
<CAPTION>
                                                           1998                                   1997                          
                                             ----------------------------------     ---------------------------------
                                             Average                     Yield/      Average                   Yield/
                                             Balance      Interest        Rate       Balance    Interest        Rate 
                                             -------      --------        ----       -------    --------        ---- 
(Dollars in thousands)
<S>                                          <C>          <C>            <C>        <C>         <C>            <C>              
ASSETS:
Taxable securities                           $ 1,856       $  109        5.87%      $ 1,254      $   71         5.66%            
Time deposits with other banks                   503           29        5.78%          276          16         5.79%
Federal funds sold                             3,904          214        5.48%        4,982         274         5.50%
Loans (1)                                     17,222        1,707        9.91%        8,637         887        10.27%
                                             -------       ------                   -------      ------
    Total earning assets                      23,485        2,059        8.77%       15,149       1,248         8.24%
                                                           ------                                ------
Cash and due from banks                        1,019                                    658     
Allowance for loan losses                       (227)                                   (82)    
Premises and equipment                           992                                    798     
Other assets                                     566                                    443     
                                             -------                                -------     
                                                                                                
    Total assets                             $25,835                                $16,966     
                                             =======                                =======     
                                                                                                
LIABILITIES AND                                                                                 
 SHAREHOLDERS' EQUITY:                                                                          
Interest bearing deposits                    $16,368          731        4.47%      $ 8,394         371         4.42%
Securities sold under agreements                                                                
    to repurchase                                613           24        3.92%          597          24         4.02%
                                             -------       ------                   -------      ------
    Total interest-                                                                             
     bearing liabilities                      16,981          755        4.45%        8,991         395         4.39%
                                                           ------                                ------
Non-interest bearing deposits                  2,951                                  2,224     
Accrued interest and                                                                            
 other liabilities                               160                                    137     
Shareholders' equity                           5,743                                  5,614     
                                             -------                                -------     
    Total liabilities and                                                                       
       shareholders' equity                  $25,835                                $16,966     
                                             =======                                =======     
                                                                                                
Net interest income/                                                                            
 interest rate spread                                      $1,304        4.32%                   $  853         3.85%
                                                           ======        ====                    ======         ==== 
                                                                                                
Net interest margin on earning assets                                    5.55%                                  5.63%
                                                                         ====                                   ==== 
</TABLE>

(1) The effect of loans in non-accrual status and fees collected is not
significant to the computations. All loans and deposits are domestic.



                                       5
<PAGE>   6

                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


NET INTEREST INCOME - CONTINUED

The following tables set forth the effect which the varying levels of earning
assets and interest-bearing liabilities and the applicable rates have had on
changes in net interest income from 1997 to 1998.

ANALYSIS OF CHANGES IN NET INTEREST INCOME

<TABLE>
<CAPTION>

                                                            1998 compared with 1997
                                                                Variance Due to
(Dollars in thousands)                              Volume (1)      Rate (1)       Total   
                                                    ----------      --------       -----   
<S>                                                   <C>            <C>          <C> 
EARNING ASSETS                                                                  
  Taxable securities                                  $ 35           $  3         $ 38
  Time deposits with other banks                        13              0           13
  Federal funds sold                                   (59)            (1)         (60)
  Loans                                                852            (32)         820
                                                      ----           ----         ----
                                                                                
            Total interest income                      841            (30)         811
                                                      ----           ----         ----
                                                                                
INTEREST-BEARING LIABILITIES                                                    
  Interest-bearing deposits                            356              4          360
  Securities sold under agreements to repurchase         1             (1)           0
                                                      ----           ----         ----
            Total interest expense                     357              3          360
                                                      ----           ----         ----
                                                                                
            Net interest income                       $484           $(33)        $451
                                                      ====           ====         ====
</TABLE>

(1) Volume-rate changes have been allocated to each category based on the
percentage of the total change.

A comparison of 1997 to 1996 is not meaningful because the Bank was only in
operation for 2.5 months in 1996 and therefore the Company has omitted the table
analyzing the changes in net interest income as it would not be meaningful. All
interest income and interest expense is attributable to the volume of earning
assets and interest-bearing liabilities, respectively.

The Company monitors and manages the pricing and maturity of its assets and
liabilities in order to diminish the potential adverse impact that changes in
interest rates could have on its net interest income. The principal monitoring
technique employed by the Company is the measurement of the Company's interest
sensitivity "gap", which is the positive or negative dollar difference between
assets and liabilities that are subject to interest rate repricing within a
given period of time. Interest rate sensitivity can be managed by repricing
assets or liabilities, selling securities available for sale, replacing an asset
or liability at maturity, or adjusting the interest rate during the life of an
asset or liability. Managing the amount of assets and liabilities repricing in
this same time interval helps to hedge the risk and minimize the impact on net
interest income of rising or falling interest rates.


                                       6
<PAGE>   7



                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


NET INTEREST INCOME - CONTINUED

The following table presents the Company's rate sensitivity at each of the time
intervals indicated as of December 31, 1998. The table may not be indicative of
the Company's rate sensitivity position at other points in time.

INTEREST RATE SENSITIVITY ANALYSIS

<TABLE>
<CAPTION>
                                        Less than        4-6           7-12          1-5         Over 5
(Dollars in thousands)                  3 months        months        months        years         years          Total  
                                        --------        ------        ------        -----         -----          -----  
<S>                                     <C>            <C>           <C>           <C>           <C>            <C>    
Interest earning assets:
  Taxable securities                     $    --       $   351       $   200       $ 1,320       $     --       $ 1,871
  Time deposits with other banks 500          --            --            --            --            500
  Federal funds sold                       2,350            --            --            --             --         2,350
  Loans                                    6,122         1,475           658         8,864          3,136        20,255
                                         -------       -------       -------       -------       --------       -------
  Total                                    8,972         1,826           858        10,184          3,136        24,976
                                         -------       -------       -------       -------       --------       -------
Interest bearing liabilities -
  Interest bearing deposits(1)            10,502         2,170         4,641           712              1        18,026
  Securities sold under
    agreements to repurchase                 869            --            --            --             --           869
                                         -------       -------       -------       -------       --------       -------
                                          11,371         2,170         4,641           712              1        18,895

Interest sensitivity gap                 $(2,399)      $  (344)      $(3,783)      $ 9,472       $  3,135       $ 6,081
                                         =======       =======       =======       =======       ========       =======

Cumulative interest
  sensitivity gap                        $(2,399)      $(2,743)      $(6,526)      $ 2,946       $  6,081       $ 6,081
                                         =======       =======       =======       =======       ========       =======

Gap ratio(2)                               (9.61)%      (10.98)%      (26.13)%       11.80%        24.35%
                                         =======       =======       =======       =======       =======

Cumulative gap ratio(2)                    (9.61)%      (20.59)%      (46.72)%      (34.92)%      (10.57)%
                                         =======       =======       =======       =======       =======
</TABLE>

(1) All savings and transaction accounts are included in the less than three
months category.

(2) Ratio of gap to total earning assets.

The above table reflects the balances of interest-earning assets and
interest-bearing liabilities at the earlier of their repricing or maturity
dates. Overnight federal funds are reflected at the earliest pricing interval
due to the immediately available nature of the instruments. Debt securities are
reflected at each instrument's ultimate maturity date. Scheduled payment amounts
of fixed rate amortizing loans are reflected at each scheduled payment date.
Scheduled payment amounts of variable rate amortizing loans are reflected at
each scheduled payment date until the loan may be repriced contractually; the
unamortized balance is reflected at that point. Interest-bearing liabilities
with no contractual maturity, such as savings deposits and interest-bearing
transaction accounts, are reflected in the earliest repricing period due to
contractual arrangements which give the Company the opportunity to vary the
rates paid on those deposits within a thirty-day or shorter period. Fixed rate
time deposits, principally certificates of deposit, are reflected at their
contractual maturity date.


                                       7
<PAGE>   8

                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


NET INTEREST INCOME - CONTINUED

The Company generally would benefit from increasing market rates of interest
when it has an asset-sensitive gap position and generally would benefit from
decreasing market rates of interest when it is liability-sensitive. The Company
is liability sensitive over the one month, three month, and one year time
frames. However, the Company's gap analysis is not a precise indicator of its
interest sensitivity position. The analysis presents only a static view of the
timing of maturities and repricing opportunities, without taking into
consideration that changes in interest rates do not affect all assets and
liabilities equally. For example, rates paid on a substantial portion of core
deposits may change contractually within a relatively short time frame, but
those rates are viewed by management as significantly less interest-sensitive
than market-based rates such as those paid on non-core deposits. Accordingly,
management believes a liability-sensitive gap position is not as indicative of
the Company's true interest sensitivity as it would be for an organization which
depends to a greater extent on purchased funds to support earning assets. Net
interest income may be impacted by other significant factors in a given interest
rate environment, including changes in the volume and mix of earning assets and
interest-bearing liabilities.

PROVISION FOR LOAN LOSSES

The Company maintains a reserve for loan losses which is funded by charges to
current earnings. This reserve is intended to be an adequate allowance to absorb
losses on loans outstanding and is based on management's continuing review and
evaluation of the Company's loan portfolio. During 1998, the Company transferred
$160,000 from earnings to the reserve for loan losses increasing the balance to
$303,248 on December 31, 1998 after deducting current year net charge offs.

Reserve for loan losses was approximately 1.50% and 1.08% of total loans on
December 31, 1998 and 1997, respectively. As the Company continues to mature,
management will evaluate its reserve policy and adjust the policy based on
historical loss experience, changes in economic conditions, growth in the
portfolio and evaluations of specific loans. Management believes the level of
the allowance for loan losses is sufficient to provide for potential losses in
the loan portfolio. However, management's judgement as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes to be reasonable, but which may or may not be valid. Thus, there can be
no assurance that chargeoffs in future periods will not exceed the allowance for
loan losses or that additional increases in the loan loss allowance will not be
required.

OTHER INCOME

Other income for the year ended December 31, 1998 was $193,884, as compared to
$100,616 for the year ended December 31, 1997. The most significant portion of
other income was from service charges, commissions, and fees which totaled
$170,922, as compared to $89,734 in the prior year.

Other income for the year ended December 31, 1997 was $100,616. The most
significant portion of other income was from service charges, commissions and
fees which totaled $89,734.

OTHER EXPENSES

Non-interest expenses were $1,207,204 for the year ended December 31, 1998, as
compared to $1,072,095 for the year ended December 31, 1997. This was comprised
primarily of salaries and employee benefits of $623,635, furniture and equipment
expense of $103,590, occupancy expense of $95,484, and other operating expenses
of $384,495.

Non-interest expenses were $1,072,095 for the year ended December 31, 1997. This
was comprised primarily of salaries and employee benefits of $586,135, furniture
and equipment expense of $80,523, occupancy expense of $95,653, and other
operating expenses of $309,784.


                                       8
<PAGE>   9

                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


INCOME TAXES

For the year ended December 31, 1998, the Company recorded income tax expense in
the amount of $3,096. Net operating loss carryforwards from prior years were
used to reduce the current year expense. The Company's net loss before income
taxes of $257,146 resulted in an income tax benefit of $72,001 for the year
ended December 31, 1997.
CAPITAL RESOURCES

Total capital of the Company was increased by net income in 1998 of $127,392.
Total capital of the Company was reduced by the net loss in 1997 of $185,145.

The Federal Reserve Board and bank regulatory agencies require bank holding
companies and financial institutions to maintain capital at adequate levels
based on a percentage of assets and off-balance sheet exposures, adjusted for
risk weights ranging form 0% to 100%. Under the risk-based standard, capital is
classified into two tiers. Tier 1 capital of the Company consists of common
shareholders' equity, excluding the unrealized gain (loss) on securities
available-for-sale, minus certain intangible assets. Tier 2 capital consists of
the allowance for loan losses subject to certain limitations. A bank holding
company's qualifying capital base for purposes of its risk-based capital ratio
consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum
requirements are 4% for Tier 1 and 8% for total risk-based capital. The holding
company and banking subsidiary are also required to maintain capital at a
minimum level based on average assets, which is known as the leverage ratio.
Only the strongest bank holding companies and banks are allowed to maintain
capital at the minimum requirement. All others are subject to maintaining ratios
100 to 200 basis points above the minimum.

RISK-BASED CAPITAL RATIOS

<TABLE>
<CAPTION>
                                           The Bank        The Company
                                           --------        -----------
<S>                                      <C>               <C>        
Tier 1 capital:
 Common shareholders' equity             $ 4,389,399       $ 5,836,573
Less: intangibles                            (40,921)          (51,493)
Less: disallowed deferred tax assets        (168,984)         (233,074)
                                         -----------       -----------
Total Tier 1 capital                       4,179,494         5,552,006
Tier 2 capital:
 Allowable allowance for loan losses         270,883           272,913
                                         -----------       -----------
     Tier 2 capital additions                270,883           272,913
                                         -----------       -----------
     Total capital                       $ 4,450,377       $ 5,824,919
                                         ===========       ===========

Risk adjusted assets                     $21,638,329       $21,751,232
                                         ===========       ===========

Total assets                             $27,977,837       $28,035,079
                                         ===========       ===========

Risk-based capital ratios:
  Tier 1 capital                               19.32%            25.53%
  Total capital                                20.57             26.78
  Tier 1 leverage ratio                        13.96             18.59
</TABLE>

The Company was in the process of completing the construction of its new
corporate headquarters at December 31, 1998. The total cost is expected to be
approximately $1,500,000. No other material commitments for capital expenditures
existed at December 31, 1998.


                                       9
<PAGE>   10

                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY

The Company manages its liquidity from both the asset and liability side of the
balance sheet through the coordination of the relative maturities of its assets
and liabilities. Short-term liquidity needs are generally met from cash, due
from banks, federal funds sold, and deposit levels. Management has established
policies and procedures governing the length of time to maturity on loans and
investments. The Company maintained a high level of liquidity during 1996 which
was attributable to the growth in deposits and capitalization of the Bank during
the year. Liquidity leveled off to normal levels during 1997 and 1998. In the
opinion of management, the Company's short-term liquidity needs can be
adequately supported by the Company's deposit base.

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements and related financial data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and the liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant impact on
a financial institution's performance than does the effect of inflation.

While the effect of inflation on a bank is normally not as significant as its
influence on those businesses that have large investments in plant and
inventories, it does have an effect. Interest rates generally increase as the
rate of inflation increases, but the magnitude of the change in rates may not be
the same. While interest rates have traditionally moved with inflation, the
effect on income is diminished because both interest earned on assets and
interest paid on liabilities vary directly with each other. Also, increases in
the price of goods and services will generally result in increased operating
expenses.

INVESTMENT PORTFOLIO

The following tables summarize the carrying value of investment securities and
weighted average yields of those securities at December 31, 1998 and 1997.

INVESTMENT SECURITIES PORTFOLIO COMPOSITION

HELD TO MATURITY

<TABLE>
<CAPTION>
                                                 1998           1997     
                                              ----------     ----------
<S>                                           <C>            <C>       
U.S. Treasury securities                      $  550,619     $1,151,331
U.S. Government agencies and corporations      1,249,172        350,000
Nonmarketable equity securities                   71,100             --
                                              ----------     ----------
     Total securities
                                              $1,870,891     $1,501,331
                                              ==========     ==========
</TABLE>

INVESTMENT SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELDS

<TABLE>
<CAPTION>
                                                             1998              
                                                    ---------------------
                                                      Amount        Yield    
<S>                                                 <C>             <C>  
U.S. Treasury and U.S. Government agencies due:
  Within one year                                   $  550,619      6.13%
  After one year but within five years               1,249,172      5.49
                                                    ----------      ----

                                                    $1,799,791      5.68%
                                                    ==========      ====
</TABLE>


                                       10
<PAGE>   11

                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


LOAN PORTFOLIO

CREDIT RISK MANAGEMENT

Credit risk entails both general risk, which is inherent in the process of
lending, and risk that is specific to individual borrowers. The management of
credit risk involves both the process of loan underwriting and loan
administration. The Company manages credit risk through a strategy of making
loans within the Company's primary marketplace and within the Company's limits
of expertise. Although management seeks to avoid concentrations of credit by
loan type or industry through diversification, a substantial portion of the
borrowers' ability to honor the terms of their loans is dependent on the
business and economic conditions in Cherokee County and the surrounding areas
comprising the Company's marketplace. Additionally, since real estate is
considered by the Company as the most desirable nonmonetary collateral, a
significant portion of the Company's loans are collateralized by real estate.
Even though a substantial portion of the Company's loans are collateralized by
real estate, the cash flow of the borrower or the business enterprise is
generally considered as the primary source of repayment. Generally, the value of
real estate is not considered by the Company as the primary source of repayment
for performing loans. The Company also seeks to limit total exposure to
individual and affiliated borrowers. The Company manages the risk specific to
individual borrowers through the loan underwriting process and through an
ongoing analysis of the borrower's ability to service the debt as well as the
value of the pledged collateral.

The Bank's loan officers and loan administration staff are charged with
monitoring the Company's loan portfolio and identifying changes in the economy
or in a borrower's circumstances which may affect the ability to repay the debt
or the value of the pledged collateral. In order to assess and monitor the
degree of risk in the Company's loan portfolio, several credit risk
identification and monitoring processes are utilized. The Company uses an
outside consultant to perform loan reviews on a quarterly basis.

LENDING ACTIVITIES

The Company extends credit primarily to consumers and small businesses in
Cherokee County and, to a limited extent, customers in surrounding areas.

The Company's service area is mixed in nature. The corporate office is located
in Gaffney, South Carolina. The economy of Cherokee County is a regional
business center whose economy contains elements of medium and light
manufacturing, higher education, regional health care, and distribution
facilities. Outside the incorporated city limits of Gaffney, the economy
includes manufacturing, agriculture, timber, and recreational activities. No
particular category or segment of the economy previously described are expected
to grow or contract disproportionately in 1999.

There are no significant concentrations of loans in the Company's loan portfolio
to any particular individuals or industry or group of related individuals or
industries.

Total loans outstanding were $20,254,948 and $14,168,832 at December 31, 1998
and 1997, respectively. The loan demand remains strong in the Company's market
area, supported in part, by customers moving from larger financial institutions
after recent mergers. There are no significant concentrations of loans in the
Company's loan portfolio in any particular individuals or industry or group of
related individuals or industries.

The Company's ratio of loans to deposits was 96% and 104% on December 31, 1998
and 1997, respectively. The loan to deposit ratio is used to monitor a financial
institution's potential profitability and efficiency of asset distribution and
utilization. Generally, a higher loan to deposit ratio is indicative of higher
interest income since loans yield a higher return than alternative investment
vehicles. Management has concentrated on maintaining quality in the loan
portfolio while continuing to increase the deposit base.


                                       11
<PAGE>   12


                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

LOAN PORTFOLIO - CONTINUED

LOAN PORTFOLIO COMPOSITION

The following table summarizes the composition of the loan portfolio at December
31, 1998 and 1997:

<TABLE>
<CAPTION>
                                             1998        1997   
                                           -------     -------
(Dollars in thousands)
<S>                                        <C>         <C>    
Commercial, financial and agricultural     $ 5,212     $ 3,227
Real estate - construction                     567         207
Real estate - mortgage                       9,571       6,725
Consumer and other                           4,905       4,010
                                           -------     -------
                                           $20,255     $14,169
                                           =======     =======
</TABLE>

MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES:

The following table summarizes the loan maturity distribution, by type, at
December 31, 1998 and related interest rate characteristics:

<TABLE>
<CAPTION>
                                             One year        One to          After
                                             or less       five years      five years         Total       
                                           ----------     -----------      ----------     -----------
<S>                                        <C>             <C>             <C>            <C>        
Commercial, financial and agricultural     $2,392,556     $ 2,465,462      $  354,375     $ 5,212,393
Real estate - construction                    290,892         270,168           5,660         566,720
Real estate - mortgage                      1,959,954       4,184,270       3,427,238       9,571,462
Consumer and other                            909,211       3,300,622         694,540       4,904,373
                                           ----------     -----------      ----------     -----------
                                           $5,552,613     $10,220,522      $4,481,813     $20,254,948
                                           ==========     ===========      ==========     ===========
Predetermined rate,
  maturing greater than one year                          $ 8,864,460      $3,136,329     $12,000,789
                                                          ===========      ==========     ===========
Variable rate or maturing
  within one year                          $8,254,159                                     $ 8,254,159
                                           ==========                                     ===========
</TABLE>

RISK ELEMENTS

At December 31, 1998, there were no loans past due 90 days or more and still
accruing interest and three loans totaling $22,911 in nonaccrual status. At
December 31, 1997, there were no loans past due 90 days or more and still
accruing interest and one loan of $2,993 in nonaccrual status.

SUMMARY OF LOAN LOSS EXPERIENCE

<TABLE>
<CAPTION>
                                                          1998             1997 
                                                      -----------      -----------
<S>                                                   <C>              <C>        
Loans outstanding at the end of year                  $20,254,948      $14,168,832
                                                      ===========      ===========

Average amount of loans outstanding                   $17,221,796      $ 8,637,132
                                                      ===========      ===========

Balance, beginning of year                            $   152,614      $    20,000
                                                      -----------      -----------
Total loans charged off                                     9,768            5,386
Recoveries of loans previously charged off                    402               --
                                                      -----------      -----------
          Net charge-offs                                   9,366            5,386
                                                      -----------      -----------
Provision charged to operations                           160,000          138,000
                                                      -----------      -----------
Balance, end of year                                  $   303,248      $   152,614
                                                      ===========      ===========

Ratios:
  Allowance for loan losses to average loans                 1.76%            1.77%
  Allowance for loan losses to loans, end of year            1.50%            1.08%
</TABLE>


                                       12
<PAGE>   13

                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


LOAN PORTFOLIO - CONTINUED

Management has allocated the majority of its allowance for loan losses to real
estate and commercial loans at December 31, 1998.

The allowance for loan losses is maintained at a level determined by management
to be adequate to provide for probable losses inherent in the loan portfolio
including commitments to extend credit. The allowance is maintained through the
provision for loan losses which is a charge to operations. The potential for
loss in the portfolio reflects the risks and uncertainties inherent in the
extension of credit.

The Bank's provision and allowance for loan losses is subjective in nature and
relies on judgments and assumptions about future economic conditions and other
factors affecting borrowers. Management is not aware of any trends, material
risks or uncertainties affecting the loan portfolio nor is management aware of
any information about any significant borrowers which causes serious doubts as
to the ability of the borrower to comply with the loan repayment terms. However,
it should be noted that no assurances can be made that future charges to the
allowance for loan losses or provisions for loan losses may not be significant
to a particular accounting period.

Impaired loans are measured based on the present value of discounted expected
cash flows. When it is determined that a loan is impaired, a direct charge to
bad debt expense is made for the difference between the net present value of
expected future cash flows based on the contractual rate and discount rate and
the Bank's recorded investment in the related loan. The corresponding entry is
to a related valuation account. Interest is discontinued on impaired loans when
management determines that a borrower may be unable to meet payments as they
become due.

At December 31, 1998, management reviewed its loan portfolio and determined that
no impairment on loans existed that it believes would have a material effect on
the Company's consolidated financial statements.

AVERAGE DAILY DEPOSITS

Average deposits were $19,319,869 and $10,618,491 during 1998 and 1997,
respectively. Certificates of deposit over $100,000 totaled $2,988,725 and
$2,141,145 at December 31, 1998 and 1997, respectively. Of this total, scheduled
maturities of three months or less were $1,309,181 at December 31, 1998; over
three months through six months were $379,916 at December 31, 1998; over six
months through twelve months were $1,299,628 at December 31, 1998; and none over
twelve months at December 31,1998.

The following table summarizes the Bank's deposits for the years ended December
31, 1998 and 1997.

<TABLE>
<CAPTION>
                                                      1998                          1997                      
                                            --------------------------     -------------------------
(Dollars in thousands)                                       Percent                       Percent
                                             Amount        of Deposits      Amount       of Deposits 
                                            -------        -----------     -------       -----------
<S>                                         <C>            <C>             <C>           <C>   
Non-interest bearing demand                 $ 3,070           14.55%       $ 2,478         18.28%
Interest bearing transaction accounts         3,281           15.55%         2,532         18.67%
Savings                                       3,116           14.77%         1,358         10.01%
Certificates of deposit                      11,629           55.13%         7,192         53.04%
                                            -------          ------        -------        ------
                                            $21,096          100.00%       $13,560        100.00%
                                            =======          ======        =======        ======
</TABLE>

Core deposits, which excludes certificates of deposit of $100,000 or more,
provide a relatively stable funding source for the Company's loan portfolio and
other earning assets. The Company's core deposits were $18,107,111 and
$11,418,723 at December 31, 1998 and 1997, respectively.


                                       13
<PAGE>   14


                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


SHORT-TERM BORROWINGS

At December 31, 1998 and 1997 the Company had short term borrowings which
consisted of securities sold under agreements to repurchase of $869,269 and
$424,413, respectively. The Company entered into a repurchase agreement with a
local electric cooperative which generally matures on a one day basis. The
maximum amount outstanding at any month-end for the repurchase agreement was
$1,089,170 and $937,123 during 1998 and 1997, respectively. The average interest
rate paid on the repurchase agreement was 4.00% during 1998.

RETURN ON EQUITY AND ASSETS

The following table shows the return on average assets (net income divided by
average total assets), return on average equity (net income divided by average
equity), equity to assets ratio (average equity divided by average total
assets), for the period indicated. Since its inception, the Company has not paid
cash dividends. Average balances in these computations are based on those
presented in the table on page 5.

<TABLE>
<CAPTION>
                                       1998         1997    
                                     -------      -------
<S>                                  <C>          <C>    
Return on average assets                .49%       (1.09)%
                                   
Return on average equity               2.21%       (3.30)%
                                   
Equity to assets ratio                22.23%       33.09%
</TABLE>

ACCOUNTING AND FINANCIAL REPORTING ISSUES

In April 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-5. SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. Initial application of this
SOP is to be reported as the cumulative effect of a change in accounting
principle.

This SOP is effective for fiscal years beginning after December 15, 1998. The
Company has certain organizational costs relating to the formation of the Bank
that fall under the scope of this statement. The Company adopted SOP 98-5 as of
January 1, 1999.

In June 1998, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure these instruments at fair values. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The Company generally does not
purchase derivative instruments or enter into hedging activities.

This statement is effective for fiscal years beginning after June 15, 1999.

THE YEAR 2000

Issues. Some computers, software, and other equipment include programming codes
in which calendar year data is abbreviated to only two digits. As a result of
this design decision, some of these systems could fail to operate or fail to
produce correct results if "00" is interpreted to mean 1900, rather than 2000.
These problems are widely expected to increase in frequency and severity as the
year 2000 approaches and are commonly referred to as the "Year 2000 Problem".


                                       14
<PAGE>   15


                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


THE YEAR 2000 - CONTINUED

Assessment. The Year 2000 Problem could affect computers, software, and other
equipment that the Company uses. Accordingly, the Company has developed a plan
that provides for, among other things, the replacement or modification of
existing information systems as necessary. Because the primary hardware and
software systems are presently certified by their vendors as Year 2000
compliant, the Company has not incurred any significant costs to date relating
to software modifications or new installations for the other systems. Most
systems are made compliant through periodic software upgrades provided by the
various vendors as part of the license agreements. However, while the Company
does not expect the cost of these efforts to be material to its financial
position or any year's operating results, there can be no assurance to this
effect.

Internal Infrastructure. The Company utilizes an outsourced data processing
system, Fiserv, for most of its accounting functions. The Company's primary
systems and those of Fiserv, have been tested by proxy with the software
provider, who has tested in environments with like software and hardware systems
as the Company. Banking regulators have approved this type of testing as a valid
means of testing. The Company has received confirmation of Fiserv's testing
results. Based on this review, the Company does not believe that the data
processing system has any material Year 2000 issues. The Company believes that
it has also identified substantially all of the major computers, software
applications, and related equipment used in connection with its internal
operations that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption of its business. Management has completed
upgrading and is in the process of testing the systems that it has determined
are not prepared for the Year 2000. Management believes that the testing of its
systems should be completed by March 31, 1999. Management has spent
approximately $40,000 to get all of its systems Year 2000 compliant. The Company
does not believe that any additional cost related to these efforts will be
material to its business, financial condition, or operating results.

Systems Other Than Information Technology Systems. In addition to computers and
related systems, the operation of the Company's office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems, and
other devices, may be affected by the Year 2000 Problem. The Company has
completed its assessment of the potential effect of, and the costs of
remediating, the Year 2000 Problem on this equipment. The Company estimates that
its total cost of completing any required modifications, upgrades, or
replacements of these internal systems will not have a material effect on its
business, financial condition, or operating results.

Suppliers and Other Third Parties. The Company has been gathering information
from and has initiated communications with its suppliers and other third parties
to identify and, to the extent possible, resolve issues involving the Year 2000
Problem. However, the Company has limited or no control over the actions of its
suppliers and others. Therefore, while the Company expects that it will be able
to resolve any significant Year 2000 Problem with its own system, it cannot
guarantee that its suppliers or others will resolve any or all Year 2000
Problems with their systems before the occurrence of a material disruption to
its business. Any failure of these suppliers or others to resolve the Year 2000
Problems with their systems in a timely manner could have a material adverse
effect on the Company's business, financial condition, or operating results.

Customers. The Company believes that the largest Year 2000 Problem exposure to
most companies is the preparedness of the customers of the companies. Management
is addressing with its customers the possible consequences of not being prepared
for Year 2000. Should large borrowers not sufficiently address this issue, the
Company may experience an increase in loan defaults. The amount of potential
loss from this issue is not quantifiable. Management is attempting to reduce
this exposure by educating its customers. The Company has implemented a
comprehensive Year 2000 credit review policy for all existing loans that exceed
$100,000 as well as an underwriting policy for all new loan requests. At
present, the Company's review indicates that the Company's exposure to credit
risks associated with Year 2000 is considered to be low. The Company's credit
review procedures will continue to include these policies throughout 1999.


                                       15
<PAGE>   16


                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


THE YEAR 2000 - CONTINUED

Most Likely Consequences of Year 2000 Problems. The Company expects to identify
and resolve all Year 2000 Problems that could materially adversely affect its
business, financial condition, or operating results. However, the Company
believes that it is not possible to determine with complete certainty that all
Year 2000 Problems affecting it have been identified or corrected. The number of
devices that could be affected and the interactions among these devices are
simply too numerous. In addition, the Company cannot accurately predict how many
failures related to the Year 2000 Problem will occur with its suppliers,
customers, or other third parties or the severity, duration, or financial
consequences of such failures.

As a result, the Company expects that it could possibly suffer the following
consequences:

-        A number of operational inconveniences and inefficiencies for the
         Company, its service providers, or its customers that may divert the
         Company's time and attention and financial and human resources from its
         ordinary business activities; and

-        System malfunctions that may require significant efforts by the Company
         or its service providers or customers to prevent or alleviate material
         business disruptions.

Contingency Plans. The Company has developed contingency plans to be implemented
as part of its efforts to identify and correct Year 2000 Problems affecting its
internal systems. The Company's Board of Directors approved the contingency
plans on October 27, 1998. Depending on the systems affected, these plans
include (a) accelerated replacement of affected equipment or software; (b) short
term use of backup equipment and software; (c) increased work hours for the
Company's personnel or use of contract personnel to correct, on an accelerated
schedule, any Year 2000 Problems which arise; and (d) other similar approaches.
If the Company is required to implement any of these contingency plans, these
plans could have a material adverse effect on its business, financial condition,
or operating results.

FORWARD LOOKING INFORMATION

This Annual Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in a
number of places in this Report and include all statements that are not
historical statements of fact regarding the intent, belief, or current
expectations of the Company or its directors or its officers with respect to,
among other things: (i) the Company's financing plans; (ii) trends affecting the
Company's financial condition or results of operations; and (iii) the Company's
growth and operating strategies. Words such as "may," "would," "could," "will,"
"expect," "estimate," "anticipate," "believe," "intend," and "plans" are
intended to identify forward-looking statements. Investors are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, many of which are beyond the Company's control.
Actual results may differ materially from those projected in the forward-looking
statements as a result of various factors. Among the key risks, assumptions, and
factors that may affect operating results, performance, and financial condition
are the Company's ability to continue and manage its growth, fluctuations in its
quarterly results, Year 2000 risks and concerns, competition, and other factors
discussed in this Annual Report and in the Company's filings with the Securities
and Exchange Commission, including the "Risk Factors" section of the Company's
Registration Statement on Form S-1 (Registration Number 333-1546).



                                       16
<PAGE>   17


                              FNB BANCSHARES, INC.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


FORWARD LOOKING INFORMATION - CONTINUED

In the 1994 legislative session, South Carolina amended its bank holding act to
allow nationwide interstate banking beginning in 1996. The Interstate Banking
Act, passed by Congress in 1994, allows unrestricted interstate bank mergers,
unrestricted interstate acquisition of banks by bank holding companies, and
interstate de novo branching by banks if allowed by state law. In 1997,
legislation was passed in North Carolina which provides that until June 1, 1999,
an out-of-state bank, such as the Bank, could establish and maintain a de novo
branch in North Carolina or acquire and maintain an existing branch from another
bank only if the laws of the home state of the out-of-state bank contain
reciprocal provisions permitting North Carolina banks to establish and maintain
de novo branches or acquire branches from another bank in that state. South
Carolina law does not contain such reciprocal provisions, and therefore the
North Carolina legislation has the effect of prohibiting the Bank from
establishing a de novo branch in North Carolina prior to June 1, 1999.

In February 1998, the Supreme Court ruled that federal credit unions must limit
their membership to employees of the companies that sponsor the credit union.
Banking leaders throughout the country have argued that credit unions have an
unfair competitive advantage because they do not pay income taxes and are not
subject to the same level of regulatory oversight. The Supreme Court ruling
applies only to federal credit unions. State-chartered credit unions were not
directly affected by the ruling. The lower courts will determine whether current
members who are not employed by the credit union sponsor will be forced to close
their accounts. Management does not expect the ruling to have an immediate
effect on the financial position or results of operations of the Company.

From time to time, various bills are introduced in the United States Congress
with respect to the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. The Bank cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect the
Bank.


                                       17
<PAGE>   18


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
FNB Bancshares, Inc.
Gaffney, South Carolina


We have audited the accompanying consolidated balance sheets of FNB Bancshares,
Inc., and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years ended December 31, 1998, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FNB
Bancshares, Inc., and subsidiary as of December 31, 1998 and 1997, and the
consolidated results of their operations and cash flows for the years ended
December 31, 1998, 1997 and 1996 in conformity with generally accepted
accounting principles.



Tourville, Simpson & Henderson, L.L.P.
March 3, 1999
Columbia, South Carolina



                                       18
<PAGE>   19


                              FNB BANCSHARES, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997


<TABLE>
<CAPTION>
ASSETS                                                            1998              1997 
                                                              -----------       -----------
<S>                                                           <C>               <C>        
Cash and cash equivalents:
   Cash and due from banks                                    $ 1,017,765       $ 1,007,433
   Federal funds sold                                           2,350,000         1,430,000
                                                              -----------       -----------
                                                                3,367,765         2,437,433
Securities:
   Securities held to maturity (estimated market value of
     $1,803,397 in 1998 and $1,506,203 in 1997)                 1,799,791         1,501,331
   Nonmarketable equity securities                                 71,100                --
                                                              -----------       -----------
                                                                1,870,891         1,501,331

Time deposits with other banks                                    500,000           600,000

Loans receivable                                               20,254,948        14,168,832
   Less allowance for loan losses                                (303,248)         (152,614)
                                                              -----------       -----------
      Loans, net                                               19,951,700        14,016,218

Premises and equipment, net                                     1,803,557           760,843
Accrued interest receivable                                       127,576           122,499
Other assets                                                      413,590           481,984
                                                              -----------       -----------

            Total assets                                      $28,035,079       $19,920,308
                                                              ===========       ===========

LIABILITIES
Deposits:
   Non-interest bearing transaction accounts                  $ 3,070,299       $ 2,478,018
   Interest bearing transaction accounts                        3,281,387         2,532,105
   Savings                                                      3,115,763         1,358,378
   Time deposits $100,000 and over                              2,988,725         2,141,145
   Other time deposits                                          8,639,662         5,050,222
                                                              -----------       -----------
                                                               21,095,836        13,559,868

Securities sold under agreements to repurchase                    869,269           424,413
Accrued interest payable                                           47,799            72,832
Other liabilities                                                 185,602           154,014
                                                              -----------       -----------
            Total liabilities                                  22,198,506        14,211,127
                                                              -----------       -----------

SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; 10,000,000
   shares authorized and unissued                                      --                --
Common stock, $.01 par value; 10,000,000
   shares authorized; 616,338 shares issued and
   outstanding in 1998 and 1997                                     6,163             6,163
Capital surplus                                                 6,112,318         6,112,318
Retained earnings (deficit)                                      (281,908)         (409,300)
                                                              -----------       -----------
            Total shareholders' equity                          5,836,573         5,709,181
                                                              -----------       -----------

            Total liabilities and shareholders' equity        $28,035,079       $19,920,308
                                                              ===========       ===========
</TABLE>

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


                                       19
<PAGE>   20


                              FNB BANCSHARES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                           1998           1997            1996 
                                                        ----------     ----------       ---------
<S>                                                     <C>            <C>              <C>      
INTEREST INCOME
   Loans, including fees                                $1,707,484     $  886,790       $  27,526
   Investment securities, taxable                          108,917         70,974           2,033
   Federal funds sold                                      213,852        273,854         176,393
   Time deposits with other banks                           29,071         16,239              --
                                                        ----------     ----------       ---------
                                                         2,059,324      1,247,857         205,952
                                                        ----------     ----------       ---------

INTEREST EXPENSE
   Time deposits $100,000 and over                         161,021         90,839           5,645
   Other deposits                                          570,226        281,029          21,357
   Securities sold under agreements to repurchase           24,269         23,656              --
   Short term borrowings                                        --             --          14,861
                                                        ----------     ----------       ---------
                                                           755,516        395,524          41,863
                                                        ----------     ----------       ---------

NET INTEREST INCOME                                      1,303,808        852,333         164,089

Provision for loan losses                                  160,000        138,000          20,000
                                                        ----------     ----------       ---------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES      1,143,808        714,333         144,089
                                                        ----------     ----------       ---------

OTHER INCOME
   Service charges on deposit accounts                      22,962         10,882             583
   Other service charges, commissions and fees             170,922         89,734           5,393
                                                        ----------     ----------       ---------
                                                           193,884        100,616           5,976
                                                        ----------     ----------       ---------

OTHER EXPENSE
   Salaries and employee benefits                          623,635        586,135         238,606
   Occupancy expense                                        95,484         95,653          29,846
   Furniture and equipment                                 103,590         80,523          11,991
   Other operating expense                                 384,495        309,784         151,159
                                                        ----------     ----------       ---------
                                                         1,207,204      1,072,095         431,602
                                                        ----------     ----------       ---------

INCOME (LOSS) BEFORE INCOME TAXES                          130,488       (257,146)       (281,537)

Income tax expense (benefit)                                 3,096        (72,001)        (84,460)
                                                        ----------     ----------       ---------

NET INCOME (LOSS)                                       $  127,392     $ (185,145)      $(197,077)
                                                        ==========     ==========       =========


BASIC EARNINGS (LOSS) PER SHARE                         $      .21     $     (.30)      $    (.32)

DILUTED EARNINGS (LOSS) PER SHARE                       $      .21     $     (.30)      $    (.32)
</TABLE>

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


                                       20
<PAGE>   21


                              FNB BANCSHARES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                     Common Stock                       Retained
                                           ---------------------------------      Capital       Earnings
                                             Shares    Amount      Surplus       (Deficit)       Total     
                                             ------    ------      --------      ---------     ----------
<S>                                        <C>        <C>         <C>            <C>           <C>       
BALANCE, DECEMBER 31, 1995                      10    $    1      $       99     $ (27,078)    $  (26,978)

Common stock issued                        616,328     6,162       6,157,118                    6,163,280

Costs of common
  stock issuance                                                     (44,899)                     (44,899)

Net income (loss)                                                                 (197,077)      (197,077)
                                           -------    ------      ----------     ---------     ----------

BALANCE, DECEMBER 31, 1996                 616,338     6,163       6,112,318      (224,155)     5,894,326

Net income (loss)                                                                 (185,145)      (185,145)
                                           -------    ------      ----------     ---------     ----------

BALANCE, DECEMBER 31, 1997                 616,338     6,163       6,112,318      (409,300)     5,709,181

Net income                                                                         127,392        127,392
                                           -------    ------      ----------     ---------     ----------

BALANCE, DECEMBER 31, 1998                 616,338    $6,163      $6,112,318     $(281,908)    $5,836,573
                                           =======    ======      ==========     =========     ==========
</TABLE>

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


                                       21
<PAGE>   22


                              FNB BANCSHARES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                      1998              1997              1996 
                                                                  -----------      ------------      -----------
<S>                                                               <C>              <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                              $   127,392      $   (185,145)     $  (197,077)
   Adjustments to reconcile net income (loss) to net
      cash provided by operating activities
         Provision for loan losses                                    160,000           138,000           20,000
         Depreciation                                                  92,902            85,551           12,703
         Accretion and premium amortization                               165            (4,737)          (2,033)
         Deferred income taxes                                         (3,695)          (76,041)         (89,247)
         Increase in interest receivable                               (5,077)         (111,319)         (11,180)
         Increase (decrease) in interest payable                      (25,033)           52,619           20,213
         (Increase) decrease in other assets                           72,089           (59,507)        (204,981)
         Increase in other liabilities                                 31,588           140,017           11,886
                                                                  -----------      ------------      -----------
            Net cash provided (used) by operating activities          450,331           (20,562)        (439,716)
                                                                  -----------      ------------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of securities held to maturity                         (2,469,725)       (2,102,404)        (342,156)
  Maturities of securities held to maturity                         2,100,000           950,000               --
  Purchases of time deposits with other banks                      (1,000,000)         (600,000)              --
  Maturities of time deposits with other banks                      1,100,000                --               --
  Net increase in loans made to customers                          (6,095,482)      (12,130,246)      (2,043,972)
  Purchases of premises and equipment                              (1,135,616)         (111,951)        (743,120)
                                                                  -----------      ------------      -----------
        Net cash used by investing activities                      (7,500,823)      (13,994,601)      (3,129,248)
                                                                  -----------      ------------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in demand deposits, interest
      bearing transaction accounts and savings accounts             3,098,948         3,458,332        2,910,169
   Net increase in time deposits                                    4,437,020         4,297,171        2,894,196
   Increase in securities sold under agreements to repurchase         444,856           424,413               --
   Net decrease in short-term borrowings                                   --                --         (100,000)
   Costs of stock issuance                                                 --                --          (44,899)
   Sale of common stock                                                    --                --        6,163,280
                                                                  -----------      ------------      -----------
            Net cash provided by financing activities               7,980,824         8,179,916       11,822,746
                                                                  -----------      ------------      -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  930,332        (5,835,247)       8,253,782

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                      2,437,433         8,272,680           18,898
                                                                  -----------      ------------      -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                            $ 3,367,765      $  2,437,433      $ 8,272,680
                                                                  ===========      ============      ===========

SUPPLEMENTAL DISCLOSURES:

  Cash paid during the year for interest                          $   780,549      $    342,905      $    21,650
  Cash paid during the year for taxes                             $   261,200                --               --
</TABLE>

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



                                       22
<PAGE>   23


                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND CONSOLIDATION - FNB Bancshares, Inc., a bank holding company
(the Company), and its subsidiary, First National Bank of the Carolinas (the
"Bank"), provide banking services to domestic markets principally in Cherokee
County, South Carolina. The Bank commenced operations on October 18, 1996. The
consolidated financial statements include the accounts of the parent company and
its wholly-owned subsidiary after elimination of all significant intercompany
balances and transactions.

PRE-OPERATING EXPENSES AND ORGANIZATIONAL COSTS - The pre-operating income and
expenses through the date the Bank commenced operations are reflected in the
accompanying statement of income for the year ended December 31, 1996. Deferred
organization costs for attorney fees, consultants and filing fees were
capitalized and are being amortized over a five year period. Such amount less
accumulated amortization is included in other assets.

MANAGEMENT'S ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans, including
valuation allowances for impaired loans and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowances for losses on loans and
foreclosed real estate, management obtains independent appraisals for
significant properties. Management must also make estimates in determining the
estimated useful lives and methods for depreciating premises and equipment.

While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
Company's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and foreclosed real estate may change materially
in the near term.

SECURITIES HELD TO MATURITY - Investment securities are stated at cost, adjusted
for amortization of premium and accretion of discount computed by the
straight-line method. The Company has the ability and management has the intent
to hold investment securities to maturity. Reductions in market value considered
by management to be other than temporary are reported as a realized loss and a
reduction in the cost basis of the security.

NONMARKETABLE EQUITY SECURITIES - Nonmarketable equity securities include the
cost of the Company's investment in the stock of the Federal Home Loan Bank. The
stock has no quoted market value and no ready market exists. Investment in
Federal Loan Bank stock is a condition of borrowing from the Federal Home Loan
Bank, and the stock is pledged to secure the borrowings. There were no
borrowings at December 31, 1998. At December 31, 1998, the investment in Federal
Home Loan Bank stock was $71,100.

LOANS - Loans are stated at their unpaid principal balance. Interest income is
computed using the simple interest method and is recorded in the period earned.

When serious doubt exists as to the collectibility of a loan or when a loan
becomes 90 days past due as to principal or interest, interest income is
generally discontinued unless the estimated net realizable value of collateral
exceeds the principal balance and accrued interest. When interest accruals are
discontinued, income earned but not collected is reversed.



                                       23
<PAGE>   24


                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Impaired loans are measured based on the present value of discounted expected
cash flows. When it is determined that a loan is impaired, a direct charge to
bad debt expense is made for the difference between the net present value of
expected future cash flows based on the contractual rate and discount rate and
the Bank's recorded investment in the related loan. The corresponding entry is
to a related valuation account. Interest is discontinued on impaired loans when
management determines that a borrower may be unable to meet payments as they
become due.

ALLOWANCE FOR LOAN LOSSES - An allowance for possible loan losses is maintained
at a level deemed appropriate by management to provide adequately for known and
inherent risks in the loan portfolio. The allowance is based upon a continuing
review of past loan loss experience, current and future economic conditions
which may affect the borrowers' ability to pay and the underlying collateral
value of the loans. Loans which are deemed to be uncollectible are charged off
and deducted from the allowance. The provision for possible loan losses and
recoveries of loans previously charged off are added to the allowance.

PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the
straight-line method, based on the following estimated useful lives: buildings -
40 years; furniture and equipment - 5 to 10 years. The cost of assets sold or
otherwise disposed of, and the related allowance for depreciation is eliminated
from the accounts and the resulting gains or losses are reflected in the income
statement when incurred. Maintenance and repairs are charged to current expense.
The costs of major renewals and improvements are capitalized.

FEDERAL RESERVE BANK STOCK - Other assets includes the cost of the Company's
investment in the stock of the Federal Reserve Bank. The stock has no quoted
market value and no ready market exists. Investment in Federal Reserve Bank
stock is required by law of every national bank.

INCOME AND EXPENSE RECOGNITION - The accrual method of accounting is used for
all significant categories of income and expense. Other miscellaneous fees are
reported when received.

RETIREMENT PLAN - The Company adopted a contributory 401(K) plan in 1998 which
covers substantially all employees. Under the plan, participants are permitted
to make discretionary contributions up to 15% of annual compensation. At its
discretion, the Company can make matching contributions of $.25 per $1.00 up to
6% of the participants' annual compensation. Expenses charged to earnings in
1998 for the plan were $4,096.

INCOME TAXES - Income taxes are the sum of amounts currently payable to taxing
authorities and the net changes in income taxes payable or refundable in future
years. Income taxes deferred to future years are determined utilizing a
liability approach. This method gives consideration to the future tax
consequences associated with differences between financial accounting and tax
bases of certain assets and liabilities which are principally the allowance for
loan losses, depreciable premises and equipment and the net operating loss.

PER-SHARE AMOUNTS - Basic earnings per share is computed by dividing net income
by the weighted-average number of shares outstanding for the period excluding
the affects of any dilutive potential common shares. Diluted earnings per share
is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. The dilutive effect of options outstanding under the Company's stock
option plan are reflected in diluted earnings per share by the application of
the treasury stock method. See Note Q.

STATEMENTS OF CASH FLOWS - For purposes of reporting cash flows in the financial
statements, the Company considers certain highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents include amounts due from banks and federal funds sold. Generally,
federal funds are sold for one day periods.



                                       24
<PAGE>   25



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - In the ordinary course of business,
the Company has entered into off-balance-sheet financial instruments consisting
of commitments to extend credit and letters of credit. These financial
instruments are recorded in the financial statements when they become payable by
the customer.

CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of loans
receivable, investment securities, federal funds sold and amounts due from
banks. Management is not aware of any concentrations of loans to classes of
borrowers or industries that would be similarly affected by economic conditions.
Although the Bank's loan portfolio is diversified, a substantial portion of its
borrower's ability to honor the terms of their loans is dependent on business
and economic conditions in Cherokee County and surrounding areas. Management
does not believe credit risk is associated with obligations of the United
States, its agencies or corporations. The Bank places its deposits and
correspondent accounts with and sells federal funds to high credit quality
financial institutions. Management believes credit risk associated with these
financial instruments is not significant.

RECLASSIFICATIONS - Certain captions and amounts in the financial statements of
1997 and 1996 were reclassified to conform with the 1998 presentation.

NOTE B - CHANGE IN ACCOUNTING PRINCIPLE

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 128, "Earnings Per Share",
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 simplifies the standards for computing earnings per share (EPS)
and makes them comparable to international EPS standards. It also requires the
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. A discussion on the
reconciliation of basic and diluted EPS is included in Note Q.

As required by SFAS 128, all prior-period EPS data presented has been restated
to conform with the provisions of the statement.

NOTE C - CASH AND DUE FROM BANKS

The Company is required by regulation to maintain average reserve balances with
the Federal Reserve Bank computed as a percentage of deposits. These
requirements were satisfied by vault cash and cash on hand.

NOTE D - INVESTMENT SECURITIES

The amortized costs and estimated market values of securities held to maturity
at December 31, 1998 and 1997 were:

<TABLE>
<CAPTION>

                                                                Gross         Gross          Estimated
                                              Amortized      Unrealized     Unrealized          Fair
                                                 Cost           Gains         Losses            Value     
                                              ----------        ------        ------         ----------
<S>                                           <C>             <C>           <C>              <C>       
AS OF DECEMBER 31, 1998:
U.S. Treasuries                               $  550,619        $4,412        $   --         $  555,031
U.S. Government agencies and corporations      1,249,172         1,100         1,906          1,248,366
                                              ----------        ------        ------         ----------
                                                                           
                                              $1,799,791        $5,512        $1,906         $1,803,397
                                              ==========        ======        ======         ==========
AS OF DECEMBER 31, 1997:                                                   
U.S. Treasuries                               $1,151,331        $3,133        $  230         $1,154,234
U.S. Government agencies and corporations        350,000         1,969            --            351,969
                                              ----------        ------        ------         ----------
                                              $1,501,331        $5,102        $  230         $1,506,203
                                              ==========        ======        ======         ==========
</TABLE>


                                       25
<PAGE>   26


                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE D - INVESTMENT SECURITIES - CONTINUED

The following is a summary of maturities of securities held to maturity as of
December 31, 1998. The amortized cost and estimated fair values are based on the
contractual maturity dates. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalty.

<TABLE>
<CAPTION>
                                                               Estimated
                                                Amortized         Fair
                                                   Cost           Value  
                                                ---------      ---------
<S>                                             <C>            <C>       
Due within one year                             $  550,619     $  555,031
Due within one to five years                     1,320,272      1,319,466
                                                ----------     ----------
                                             
                                                $1,870,891     $1,874,497
                                                ==========     ==========
</TABLE>

At December 31, 1998 and 1997 investment securities with a book value of
$1,799,791 and $752,422, respectively and a market value of $1,803,397 and
$755,422, respectively were pledged as collateral to secure public deposits and
for other purposes as required and permitted by law.

NOTE E - LOANS

Major classifications of loans receivable as of December 31, 1998 and 1997 are
summarized as follows:

<TABLE>
<CAPTION>
                                              1998            1997 
                                           ----------      ----------
<S>                                        <C>             <C>       
Commercial, financial and agricultural     $ 5,212,393     $ 3,227,562
Real estate - construction                     566,720         206,531
Real estate - other                          9,571,462       6,724,721
Consumer and other                           4,904,373       4,010,018
                                           -----------     -----------
      Total gross loans                    $20,254,948     $14,168,832
                                           ===========     ===========
</TABLE>

The Company identifies impaired loans through its normal internal loan review
process. Loans on the Company's problem loan watch list are considered
potentially impaired loans. These loans are evaluated in determining whether all
outstanding principal and interest are expected to be collected. Loans are not
considered impaired if a minimal delay occurs and all amounts due including
accrued interest at the contractual interest rate for the period of delay are
expected to be collected. At December 31, 1998, management has determined that
no impairment of loans existed that would have a material effect on the
Company's financial statements.

The accrual of interest is discontinued on impaired loans when management
anticipates that a borrower may be unable to meet the obligations of the note.
Accrued interest through the date interest is discontinued is reversed.
Subsequent interest earned is recognized only to the point that cash payments
are received. All payments are applied to principal if the ultimate amount of
principal is not expected to be collected.

Transactions in the allowance for loan losses for the years ended December 31,
1998, 1997 and 1996 are summarized below:

<TABLE>
<CAPTION>
                                                 1998         1997        1996 
                                               --------     --------     -------
<S>                                            <C>          <C>          <C>       
Balance, beginning of year                     $152,614     $ 20,000          --
Provision charged to operations                 160,000      138,000      20,000
Recoveries on loans previously charged off          402           --          --
Loans charged off                                 9,768        5,386          --
                                               --------     --------     -------

Balance, end of year                           $303,248     $152,614     $20,000
                                               ========     ========     =======
</TABLE>



                                       26
<PAGE>   27


                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E - LOANS - CONTINUED

The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit and standby
letters of credit. Commitments to extend 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. A commitment involves, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The Company's exposure to credit
loss in the event of non-performance by the other party to the instrument is
represented by the contractual notional amount of the instrument. Since certain
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company uses the same credit policies in making commitments to extend credit as
it does for on-balance-sheet instruments. Letters of credit are conditional
commitments issued to guarantee a customer's performance to a third party and
have essentially the same credit risk as other lending facilities.

The following table summarizes the Company's off-balance-sheet financial
instruments whose contract amounts represent credit risk as of December 31, 1998
and 1997:

<TABLE>
<CAPTION>

                                                                                    1998            1997     
                                                                                 -----------     -----------
<S>                                                                              <C>             <C>
Commitments to extend credit                                                     $ 3,930,657     $ 2,552,114

</TABLE>

Management is not aware of any significant concentrations of loans to classes
of borrowers or industries that would be affected similarly by economic
conditions. Although the Bank's loan portfolio is diversified, a substantial
portion of its borrowers' ability to honor the terms of their loans is
dependent on the economic conditions in Cherokee County and surrounding areas.

NOTE F - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following at December 31, 1998 and
1997:

<TABLE>
<CAPTION>

                                                                                        1998                1997      
                                                                                    -----------          ---------
<S>                                                                                 <C>                  <C>
Land                                                                                $   245,492          $ 245,492
Building and land improvements                                                          297,927            297,927
Furniture and equipment                                                                 380,578            315,678
Construction in progress                                                            $ 1,070,610                 --
                                                                                    -----------          ---------
                                                                                      1,994,607            859,097
Less, accumulated depreciation                                                         (191,050)           (98,254)
                                                                                    -----------          ---------

Premises and equipment, net                                                         $ 1,803,557          $ 760,843
                                                                                    ===========          =========
</TABLE>

During 1998, the Company capitalized approximately $13,586 of interest on the
construction of the corporate headquarters.

NOTE G - DEPOSITS

At December 31, 1998, the scheduled maturities of time deposits are as follows:

<TABLE>

                  <S>                                                            <C>
                  1999                                                           $ 10,915,504
                  2000 and thereafter                                                 712,883
                                                                                 ------------

                                                                                 $ 11,628,387
                                                                                 ============
</TABLE>



                                      27
<PAGE>   28



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

At December 31, 1998, the Bank had arrangements to sell securities under
agreements to repurchase from a local electric cooperative. Under the terms of
the arrangement, the Bank may borrow at mutually agreed-upon rates for one to
seven day periods. Either party may cancel the arrangement without penalty.
Information concerning securities sold under agreements to repurchase for the
year ended December 31, 1998 is summarized as follows:

<TABLE>

          <S>                                                        <C>
          Average balance during the year                            $   612,632

          Average interest rate during the year                              4.0%

          Maximum month-end balance during the year                  $ 1,089,170
</TABLE>

As of December 31, 1998, the amortized cost and market value of the securities
underlying the agreements were $1,099,791 and $1,102,381, respectively.

NOTE I - RELATED PARTY TRANSACTIONS

Certain parties (principally certain directors and executive officers of the
Company, their immediate families and business interests) were loan customers
of and had other transactions in the normal course of business with the
Company. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility. As of December 31, 1998 and 1997 the Company had
related party loans totaling $36,517, and $44,719, respectively. During 1998,
$94,300 of new loans were made to related parties and repayments totaled
$102,502.

NOTE J - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES

The ability of FNB Bancshares, Inc. to pay cash dividends is dependent upon
receiving cash in the form of dividends from the Bank. However, certain
restrictions exist regarding the ability of the subsidiary to transfer funds to
FNB Bancshares, Inc. in the form of cash dividends, loans or advances. The
approval of the Office of the Comptroller of the Currency is required to pay
dividends in excess of the Bank's net profits (as defined) for the current year
plus retained net profits (as defined) for the preceding two years, less any
required transfers to surplus. The undivided profits of the Bank were negative
at December 31, 1998 and 1997.

NOTE K - INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 1998 and 1997 are
summarized as follows:

<TABLE>
<CAPTION>

                                                                                      1998               1997     
                                                                                 --------------     --------------
<S>                                                                              <C>                <C>
Currently payable
  Federal                                                                        $           --     $        3,823
  State                                                                                      --                217
                                                                                 --------------     --------------
Currently payable income tax expense                                                         --              4,040
                                                                                 --------------     --------------

Deferred income taxes
  Federal                                                                                (2,811)           (64,599)
  State                                                                                   5,907            (11,442)
                                                                                 --------------     --------------
Deferred income tax expense (benefit)                                                     3,096            (76,041)
                                                                                 --------------     --------------

                     Total income tax expense (benefit)                          $        3,096     $      (72,001)
                                                                                 ==============     ==============
</TABLE>




                                      28
<PAGE>   29



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE K - INCOME TAXES - CONTINUED

The Company's deferred tax accounts as of December 31, 1998, 1997 and 1996 are
as follows:

<TABLE>
<CAPTION>

                                                                 1998          1997         1996      
                                                              ---------     ---------     --------
<S>                                                           <C>           <C>           <C>    
Deferred tax assets                                           $ 187,632     $ 177,651     $ 93,091
Deferred tax liabilities                                      $  18,649     $  12,363     $  3,844
Valuation allowance                                           $       0     $       0     $      0
</TABLE>

Deferred income taxes result from timing differences in the recognition of
certain items of income and expense for tax and financial reporting purposes.
The principal sources of these differences and the related deferred tax effects
are as follows:


<TABLE>
<CAPTION>
                                                                                                1998           1997     
                                                                                              --------       --------
<S>                                                                                           <C>            <C>  
Accelerated depreciation                                                                      $  6,286       $  8,519
Provision for loan losses                                                                      (64,735)       (33,201)
Amortization of organizational costs                                                             2,790         14,147
Net operating loss carryforward                                                                 50,840        (64,476)
Other                                                                                            1,124         (1,030)
                                                                                              --------       --------
Total deferred tax expense (benefit)                                                          $ (3,695)      $(76,041)
                                                                                              ========       ========
</TABLE>

The Company has a net operating loss carryforward for income tax purposes of
$78,735 and $297,895 as of December 31, 1998 and 1997, respectively, which
expires in various years through 2012 and 2013, respectively

A reconciliation between the income tax expense (benefit) and the amount
computed by applying the federal statutory rate of 34% to income before income
taxes is as follows:

<TABLE>
<CAPTION>

                                                                                                1998           1997 
                                                                                              --------       --------
<S>                                                                                           <C>            <C>
Tax expense at statutory rate                                                                 $ 44,366       $(87,430)
Surtax exemption                                                                               (10,226)         3,893
Increase in net deferred tax asset attributable
  to applicable estimated federal tax rate                                                     (37,359)        24,705
State income tax, net of federal income tax benefit                                              5,907        (11,299)
Other, net                                                                                         408         (1,870)
                                                                                              --------       --------
                                                                                              $  3,096       $(72,001)
                                                                                              ========       ========
</TABLE>

Deferred tax assets represent the future tax benefit of future deductible
differences and, if it is more likely than not that a tax asset will not be
realized, a valuation allowance is required to reduce the recorded deferred tax
assets to net realizable value. Management has determined that it is more
likely than not that the entire deferred tax asset at December 31, 1998 will be
realized and, accordingly, has not established a valuation allowance.

NOTE L - OTHER EXPENSES

Other expenses for the years ended December 31, 1998, 1997 and 1996 are
summarized as follows:

<TABLE>
<CAPTION>

                                                                      1998               1997               1996  
                                                                   ---------          ---------          ---------
<S>                                                                <C>                <C>                <C>
Amortization of organizational costs                               $  17,850          $  18,276          $   3,046
Data processing and correspondent bank                                92,522             31,741              3,159
Stationery, printing and postage                                      50,038             46,578             36,416
Advertising and promotion                                             14,149             15,519             23,990
Legal and accounting                                                  27,530             46,504              2,726
Telephone                                                             22,729             23,485             10,148
Courier                                                               16,975             17,913                352
Other                                                                142,702            109,768             71,322
                                                                   ---------          ---------          ---------
                                                                   $ 384,495          $ 309,784          $ 151,159
                                                                   =========          =========          =========
</TABLE>




                                      29
<PAGE>   30



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE M - STOCK-BASED COMPENSATION

On April 22, 1997, the shareholders approved an Incentive Stock Option Plan
(Stock Plan) which provides for the granting of options to purchase up to
92,450 shares of the Company's common stock to directors, officers, or
employees of the Company. On April 28, 1998, the shareholders amended the Stock
Plan whereby up to 152,450 shares could be granted. The per-share exercise
price of incentive stock options granted under the Stock Plan may not be less
than the fair market value of a share on the date of grant, nor can the
exercise date of any incentive stock options granted be less than one year from
the date of the grant. The per-share exercise price of stock options granted is
determined by a committee appointed by the Board of Directors. The expiration
date of any option may not be greater than ten years from the date of grant.
Options that expire unexercised or are canceled become available for issuance.
At December 31, 1998 there were 49,604 options available for grant.

The Company will apply APB Opinion No. 25 and related interpretations in
accounting for the stock options. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's stock options been
determined based on the fair value at the grant dates consistent with the
method of FASB Statement 123, the Company's net income (loss) and earnings
(losses) per share for the years ended December 31, 1998, 1997 and 1996 would
have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                                               1998            1997              1996
                                                            ---------       ----------       -----------
<S>                                                         <C>             <C>              <C>
Net income (loss):
            As reported                                     $ 127,392       $ (185,145)      $  (197,077)
            Pro forma                                          82,909         (228,021)         (206,458)

Basic earnings (loss) per share:
            As reported                                     $     .21       $     (.30)      $      (.32)
            Pro forma                                             .13             (.37)             (.33)

Diluted earnings (loss) per share:
            As reported                                     $     .21       $     (.30)      $      (.32)
            Pro forma                                             .13             (.37)             (.33)
</TABLE>

In calculating the pro forma disclosures, the fair value of options granted is
estimated as of the date granted using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants in 1998 and
1996: dividend yield of 0 percent; expected volatility of 0 percent; risk-free
interest rates of 4.62% and 6.40% for 1998 and 1996, respectively; and an
expected life of 10 years for both years. No options were granted in 1997.

The weighted-average fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1998 and 1996 is $3.67, and $4.68,
respectively.

A summary of the status of the Company's stock option plan as of December 31,
1998, 1997 and 1996 and changes during the years ending on those dates is
presented below:

<TABLE>
<CAPTION>

                                   1998                              1997                             1996          
                       -----------------------------     -----------------------------     ----------------------------
                              Weighted-Average                 Weighted-Average                  Weighted-Average     
                       Shares         Exercise Price     Shares         Exercise Price     Shares        Exercise Price
                       -------        --------------     ------         --------------     ------        --------------
<S>                    <C>            <C>                <C>            <C>                <C>           <C>

Outstanding at
beginning of year       45,566           $ 10.00          50,566            $ 10.00            --                 --
Granted                 57,280             10.00              --               -           50,566            $ 10.00
Exercised                   --                --              --               -               --                 --
Canceled                    --                --          (5,000)             10.00            --                 --
                       -------                            ------                           ------
Outstanding at end
of year                102,846             10.00          45,566              10.00        50,566              10.00
                       =======                            ======                           ======
</TABLE>




                                      30
<PAGE>   31



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE M - STOCK-BASED COMPENSATION - CONTINUED

Options exercisable at December 31, 1998, 1997 and 1996 were 18,226, 9,113 and
0, respectively.

At December 31, 1998 the outstanding stock options had a weighted average
remaining life of 9.02 years and a remaining life of 7.82 years for those stock
options that were exercisable. All stock options that have been issued by the
Company have an exercisable price of $10.00.

NOTE N - UNUSED LINES OF CREDIT

As of December 31, 1998, the Bank had unused lines of credit to purchase
federal funds from unrelated banks totaling $1,500,000. These lines of credit
are available on a one to fourteen day basis for general corporate purposes.

NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instruments. Because no market value exists for a
significant portion of the financial instruments, fair value estimates are
based on judgements regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. The following methods and assumptions were used to estimate the fair
value of significant financial instruments:

Cash and Due from Banks - The carrying amount is a reasonable estimate of fair
value.

Federal Funds Sold - Federal funds sold are for a term of one day, and the
carrying amount approximates the fair value.

Investment Securities - The fair values of marketable securities held to
maturity are based on quoted market prices or dealer quotes.

Time Deposits with other Banks - The carrying amount is a reasonable estimate
of fair value.

Loans - For certain categories of loans, such as variable rate loans which are
repriced frequently and have no significant change in credit risk and credit
card receivables, fair values are based on the carrying amounts. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to the borrowers with
similar credit ratings and for the same remaining maturities.

Deposits - The fair value of demand deposits, savings, and money market
accounts is the amount payable on demand at the reporting date. The fair values
of time deposits are estimated using a discounted cash flow calculation that
applies current interest rates to a schedule of aggregated expected maturities.

Securities Sold Under Agreements to Repurchase - The carrying amount is a
reasonable estimate of fair value because these instruments typically have
terms of one day.

Accrued Interest Receivable and Payable - The carrying value of these
instruments is a reasonable estimate of fair value.

Off-Balance Sheet Financial Instruments - The carrying amount for loan
commitments and letters of credit, which are off-balance sheet financial
instruments, approximates the fair value since the obligations are typically
issued on a short-term or floating rate basis.



                                      31
<PAGE>   32



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

The carrying values and estimated fair values of the Company's financial
instruments for the years ending December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>

                                                               December 31, 1998                      December 31, 1997        
                                                        -------------------------------       -------------------------------
                                                          Carrying          Estimated           Carrying          Estimated
                                                           Amount           Fair Value           Amount           Fair Value  
                                                        ------------       ------------       ------------       ------------
<S>                                                     <C>                <C>                <C>                <C>
FINANCIAL ASSETS:
   Cash and due from banks                              $  1,017,765       $  1,017,765       $  1,007,433       $  1,007,433
   Federal funds sold                                      2,350,000          2,350,000          1,430,000          1,430,000
   Securities held-to-maturity                             1,870,891          1,874,497          1,501,331          1,506,203
   Time deposits with other banks                            500,000            500,000            600,000            600,000
   Loans                                                  20,254,948         20,335,093         14,168,832         14,190,779
   Allowance for loan losses                                (303,248)          (303,248)          (152,614)          (152,614)
   Accrued interest receivable                               127,576            127,576            122,499            122,499

FINANCIAL LIABILITIES:
   Demand deposit, interest-bearing
     transaction, and savings accounts                  $  9,467,449       $  9,467,449       $  6,368,501       $  6,368,501
   Time deposits                                          11,628,387         11,614,361          7,191,367          7,209,244
   Securities sold under agreements
     to repurchase                                           869,269            869,269            424,413            424,413
   Accrued interest payable                                   47,799             47,799             72,832             72,832

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
   Commitments to extend credit                         $  3,930,657       $  3,930,657       $  2,552,114       $  2,552,114
</TABLE>

NOTE P - COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company may, from time to time, become
a party to legal claims and disputes. At December 31, 1998, management and
legal counsel are not aware of any pending or threatened litigation or
unasserted claims or assessments that could result in losses, if any, that
would be material to the financial statements.

The Company completed the construction of its corporate office in Gaffney in
January 1999. The cost of construction was approximately $1,500,000. No other
material commitments existed at December 31, 1998.

NOTE Q - EARNINGS PER SHARE

As discussed in Note B, the FASB issued SFAS 128, "Earnings Per Share", in
February 1997. SFAS 128 replaces the presentation of primary earnings per share
(EPS) with a presentation of basic EPS. It requires the presentation of basic
and diluted EPS on the face of the income statement for all entities with a
complex capital structure. Basic EPS excludes dilution and is computed by
dividing net income (loss) available to common shareholders by the
weighted-average number of shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings of
the entity.




                                      32
<PAGE>   33



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE Q - EARNINGS PER SHARE - CONTINUED

The reconciliation of the numerators and denominators used to calculate basic
and diluted earnings per share have not been presented since both calculations
result in the same per share calculation. Options to purchase 102,846 and
45,566 shares of common stock at $10 per share were outstanding at December 31,
1998 and 1997, respectively. The stock options were not included in the
computation of diluted EPS for December 31, 1997 because they would have
resulted in an antidilutive per share amount since the Company had a net loss
in that year.

NOTE R - REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum ratios of Tier I and total capital as a
percentage of assets and off-balance-sheet exposures, adjusted for risk weights
ranging from 0% to 100%. Tier I capital consists of common shareholders'
equity, excluding the unrealized gain or loss on securities available for sale,
minus certain intangible assets. Tier 2 capital consists of the allowance for
loan losses subject to certain limitations. Total regulatory minimum
requirements are 4% for Tier 1 and 8% for total risk-based capital.

The Bank is also required to maintain a capital at a minimum level based on
average assets, which is known as the leverage ratio. Banks are to maintain
capital at the minimum requirement of 3%.

As of December 31, 1998, the most recent notification from the Bank's primary
regulator categorized the Bank as well-capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events that
management believes have changed the Bank's category.

The following table summarizes the capital amounts and ratios of the Bank and
the regulatory minimum requirements at December 31, 1998 and 1997.

<TABLE>
<CAPTION>

                                                                                                             To Be Well
                                                                                                             Capitalized Under
                                                                                           For Capital       Prompt Corrective
                                                                              Actual    Adequacy Purposes    Action Provisions   
                                                                  ---------------------------------------    -----------------
(Dollars in thousands)                                            Amount       Ratio    Amount      Ratio    Amount      Ratio
                                                                  ------       -----    ------      -----    ------      -----

<S>                                                               <C>          <C>      <C>         <C>      <C>         <C>
DECEMBER 31, 1998
    Total capital (to risk weighted assets)                       $4,450       20.57%   $1,731       8.00%   $2,164      10.00%
    Tier 1 capital (to risk weighted assets)                       4,179       19.32       866       4.00     1,298       6.00
    Tier 1 capital (to average assets)                             4,179       13.96     1,197       4.00     1,497       5.00

DECEMBER 31, 1997
    Total capital (to risk weighted assets)                      $ 4,254       28.67%   $1,187       8.00%   $1,484      10.00%
    Tier 1 capital (to risk weighted assets)                       4,101       27.64       594       4.00       890       6.00
    Tier 1 capital (to average assets)                             4,101       21.20       776       4.00       970       5.00
</TABLE>

The Federal Reserve Board has similar requirements for bank holding companies.
The Company is currently not subject to these requirements because the Federal
Reserve guidelines contain an exemption for bank holding companies of less than
$150,000,000 in consolidated assets.



                                      33
<PAGE>   34



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE S - FNB BANCSHARES, INC. (PARENT COMPANY ONLY)

                                 BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                      1998              1997  
                                                                  -----------       -----------
<S>                                                               <C>               <C>
Assets
  Cash and cash equivalents                                       $ 1,372,700       $ 1,374,170
  Investment in banking subsidiary                                  4,389,400         4,259,710
  Other assets                                                         74,473            75,301
                                                                  -----------       -----------

        Total assets                                              $ 5,836,573       $ 5,709,181
                                                                  ===========       ===========

Shareholders' equity
   Common stock                                                         6,163             6,163
   Capital surplus                                                  6,112,318         6,112,318
   Retained earnings (deficit)                                       (281,908)         (409,300)
                                                                  -----------       -----------

        Total liabilities and shareholders' equity                $ 5,836,573       $ 5,709,181
                                                                  ===========       ===========
</TABLE>


                              STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                          1998            1997            1996  
                                                                       ---------       ---------       ---------
<S>                                                                    <C>             <C>             <C>   
Income
 Interest income                                                       $      --       $  15,611       $ 108,530

Expenses                                                                  (3,650)        (11,263)        (14,862)
                                                                       ---------       ---------       ---------

Income before income taxes and equity in
  undistributed earnings (losses) of banking subsidiary                   (3,650)          4,348          93,668

Income tax expense (benefit)                                               1,352           1,217         (37,114)

Equity in undistributed earnings (losses)
  of banking subsidiary                                                  129,690        (188,276)       (327,859)
                                                                       ---------       ---------       ---------

Net income (loss)                                                      $ 127,392       $(185,145)      $(197,077)
                                                                       =========       =========       =========
</TABLE>



                                      34
<PAGE>   35



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE S - FNB BANCSHARES, INC. (PARENT COMPANY ONLY) - CONTINUED

                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                           1998               1997              1996 
                                                                        -----------       -----------       -----------
<S>                                                                     <C>               <C>               <C>    
Operating activities:
  Net income (loss)                                                     $   127,392       $  (185,145)      $  (197,077)
  Adjustments to reconcile net income (loss) to net
  cash provided by operating activities
    (Increase) decrease in other assets                                         828           (15,834)           (3,233)
    Increase (decrease) in other liabilities                                     --              (100)         (102,010)
    Equity in undistributed (earnings) losses of
      banking subsidiary                                                   (129,690)          188,276           327,859
                                                                        -----------       -----------       -----------
        Net cash provided (used) by operating activities                     (1,470)          (12,803)           25,539
                                                                        -----------       -----------       -----------

Financing activities:
  Sale of common stock                                                           --                --         6,163,280
  Purchase of bank stock                                                         --                --        (4,775,845)
  Cost of stock issuance                                                         --                --           (44,899)
                                                                        -----------       -----------       -----------
        Net cash provided by financing activities                                --                --         1,342,536
                                                                        -----------       -----------       -----------

Net increase in cash                                                         (1,470)          (12,803)        1,368,075

Cash, beginning                                                           1,374,170         1,386,973            18,898
                                                                        -----------       -----------       -----------

Cash, ending                                                            $ 1,372,700       $ 1,374,170       $ 1,386,973
                                                                        ===========       ===========       ===========
</TABLE>


NOTE T - THE YEAR 2000

Some computers, software, and other equipment include programming codes in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches and are commonly referred to as the "Year 2000 Problem."

The Year 2000 Problem could affect computers, software, and other equipment
that the Company uses. Accordingly, the Company has completed its review of its
internal computer programs and systems to determine whether they will be Year
2000 compliant. The Company believes that its computer systems will be Year
2000 compliant in a timely manner. Because the primary hardware and software
systems are presently certified by their vendors as Year 2000 compliant, the
Company has not incurred any significant costs to date relating to software
modifications or new installations for the other systems. Most systems are made
compliant through periodic software upgrades provided by the various vendors as
part of the license agreements. However, while the Company does not expect the
cost of these efforts to be material to its financial position or any year's
operating results, there can be no assurance to this effect.



                                      35
<PAGE>   36



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE T - THE YEAR 2000 - CONTINUED

The Company utilizes an outsourced data processing system for most of its
accounting functions. The Company's primary systems and those of Fiserv, have
been tested by proxy with the software provider, who has tested in environments
with like software and hardware systems as the Company. Banking regulators have
approved this type of testing as a valid means of testing. The Company has
received results and the results are available for review. The testing process
did not reveal any problems relating to the Year 2000. The Company believes
that it has identified substantially all of the major computers, software
applications, and related equipment used in connection with its internal
operations that must be modified, upgraded, or replaced to minimize the
possibility of a material disruption of its business. Management has completed
upgrading and is in the process of testing the systems that it has determined
are not prepared for the Year 2000. Management believes that the testing of its
systems should be completed by March 31, 1999. Management has spent
approximately $40,000 to get all of its systems Year 2000 compliant. The
Company does not believe that the cost related to these efforts will be
material to its business, financial condition, or operating results.

In addition to computers and related systems, the operation of the Company's
office and facilities equipment, such as fax machines, photocopiers, telephone
switches, security systems, and other devices, may be affected by the Year 2000
Problem. The Company has completed its assessment of the potential effect of,
and the costs of remediating, the Year 2000 Problem on this equipment. The
Company estimates that its total cost of completing any required modifications,
upgrades, or replacements of these internal systems will not have a material
effect on its business, financial condition, or operating results.



                                      36
<PAGE>   37


                              FNB BANCSHARES, INC.


                               BOARD OF DIRECTORS

Dr. Richard D. Gardner                                V. Stephen Moss

   Barry L. Hamrick                              Harold D. Pennington, Jr.

  Haskell D. Mallory                             Harold D. Pennington, Sr.

    Bill H. Mason                                   Heyward W. Porter





                                SENIOR OFFICERS

                           V. Stephen Moss, President

                      Thomas W. Hale, Chief Credit Officer

                     John W. Hobbs, Chief Financial Officer





                                    OFFICERS

              Danny Ham, Vice President, Consumer Banking Manager

                  Mike Grubbs, Vice President, Consumer Banker


                                      ss.



                                    SERVICES

<TABLE>

   <S>                                     <C>                                   <C>
            All Day Banking                       Commercial Loans                     Personal Checking
   American Express Travelers Checks              Direct Deposits                   Personal Lines of Credit
              ATM Service                    Discount Brokerage Service                  Personal Loans
             Bank By Mail                         Drive-In Service                      Regular Savings
        Bond Coupon Redemption             Individual Retirement Accounts              Safe Deposit Boxes
           Business Checking                     Interest Checking                      Senior Checking
            Cashiers Checks                      Letters of Credit               Treasury, Tax & Loan Deposits
        Certificates of Deposit                Money Market Accounts                   U.S. Savings Bonds
            Christmas Clubs                       Night Depository                    Visa and Master Card
           Collection Items                     Overdraft Protection                     Wire Transfers
</TABLE>




                                      37
<PAGE>   38



                              FNB BANCSHARES, INC.


                                 CORPORATE DATA


ANNUAL MEETING:

The Annual Meeting of Shareholders of FNB Bancshares, Inc. will be held at 5:30
p.m. on April 27, 1999 at our offices at 217 North Granard Street, Gaffney,
South Carolina.

<TABLE>

<S>                                                 <C>
CORPORATE OFFICE:                                   GENERAL COUNSEL:

217 N. Granard Street                               Nelson Mullins Riley & Scarborough, L.L.P.
Gaffney, South Carolina 29341                       First Union Plaza, Suite 1400
Phone (864) 488-2265                                999 Peachtree Street, NE
Fax (864) 488-0041                                  Atlanta, Georgia, 30309

STOCK TRANSFER DEPARTMENT:                          INDEPENDENT AUDITORS:

First Citizens Bank                                 Tourville, Simpson & Henderson, L.L.P.
P.O. Box 29                                         P.O. Box 8567
Columbia, South Carolina 29202                      Columbia, S.C. 29202
</TABLE>

STOCK INFORMATION:

The Common Stock of FNB Bancshares, Inc. is not listed on any exchange.
However, the stock is traded on the over-the-counter bulletin board. The
Company's stock trades under the symbol "FNBC" on the Nasdaq OTC Bulletin
Board. Trading and quotations of the common stock have been limited and
sporadic. Management is not aware of the prices at which all shares of stock
have been traded. The only trades of which the Company is aware is at $10.00
per share. As of December 31, 1998, there were 569 shareholders of record.

The ability of FNB Bancshares, Inc. to pay cash dividends is dependent upon
receiving cash in the form of dividends from First National Bank of the
Carolinas. However, certain restrictions exist regarding the ability of the
Bank to transfer funds to FNB Bancshares in the form of cash dividends. All of
the bank's dividends to the Company are subject to the prior approval of the
Office of the Comptroller of the Currency and are payable only from the
undivided profits of the Bank.

FORM 10-K

The Company will furnish upon request, free of charge, copies of the Annual
Report and the Company's Report to the Securities and Exchange Commission (Form
10-K) by contacting John Hobbs, Chief Financial Officer, FNB Bancshares, Inc.,
P.O. Box 1539, Gaffney, South Carolina 29342.

This Annual Report serves as the ANNUAL FINANCIAL DISCLOSURE STATEMENT
furnished pursuant to Part 350 of the Federal Deposit Insurance Corporations
Rules and Regulations. THIS STATEMENT HAS NOT BEEN REVIEWED, OR CONFIRMED FOR
ACCURACY OR RELEVANCE BY THE OFFICE OF THE COMPTROLLER OF THE CURRENCY.



                                      38