<PAGE>
                                                                      EXHIBIT 13




                              FNB BANCSHARES, INC.

                               2001 ANNUAL REPORT

<PAGE>
                              FNB BANCSHARES, INC.


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                PAGE
                                                                                                                ----
<S>                                                                                                             <C>
Shareholders' Letter..............................................................................................2
Summary of Selected Financial Data................................................................................3
Management's Discussion and Analysis...........................................................................4-18
Independent Auditors' Report.....................................................................................19
Consolidated Balance Sheets......................................................................................20
Consolidated Statements of Income................................................................................21
Consolidated Statements of Changes in Shareholders' Equity.......................................................22
Consolidated Statements of Cash Flows............................................................................23
Notes to Consolidated Financial Statements....................................................................24-39
Directors, Officers, and Services................................................................................40
Corporate Data...................................................................................................41
</TABLE>




<PAGE>
                              FNB BANCSHARES, INC.

To our Shareholders:

2001 was a year in which we expanded our banking facilities. In February we
moved into a full service 2600 square foot building in Blacksburg. This replaced
a temporary unit which we had occupied since we opened in 1996. In August of
2001 we completed and opened a new full service branch at 626 Chesnee Highway in
Gaffney. This area is experiencing rapid growth, and we feel that this office
will eventually be a major contributor to our growth and profitability. Building
these two new offices did have a temporary negative impact on our profitability
as evidenced by our lower earnings for 2001. However we feel that these new
facilities were necessary for achieving our long term growth and profitability
expectations.

The bank continued to grow in 2001 as its marketshare in Cherokee County
continued to increase. We are now the fastest growing bank in the county. Local
decision-making and a commitment to personal service continue to be keys to our
success.

Total assets increased $6,291,792 and ended the year at $51,233,766. Deposits
increased $3,633,974 and were $40,419,191 at year end. We were able to continue
increasing our deposits with local core deposit growth even though we did not
pay above market rates.

Loans increased by $4,453,677 to $40,099,660 at year end. Federal Reserve Bank
rate increases in 1999 and 2000 and a slowing economy impacted loan demand in
the last two quarters of 2001. However Federal Reserve Bank rate cuts which
began in 2001 and signs of an improving economy have led to increased loan
demand in early 2002. We anticipate a steady growth in our loans as the economy
continues to improve and we increase our market share. Loan losses were low for
the year, and at year end the allowance for loan losses was at 1.36% of total
loans. The loan loss reserve of $546,376 should provide adequate coverage for
future losses inherent in the loan portfolio. A third party consultant continues
to review our loans on a quarterly basis.

Profitability decreased slightly in 2001 as a result of the construction of the
two new facilities. Disposal of the temporary building in Blacksburg resulted in
a fixed asset write-down of $76,654. Without this one-time charge, income for
2001 would have increased slightly over 2000, even with the construction of two
new offices and the hiring of additional staff. The tangible book value of our
stock increased to $10.61 per share at year end.

Fee income will continue to be an important aspect in our profitability growth.
In 2001 other income was $460,153 an increase of 29% over 2000. We are
continuing to seek new sources of fee income and opportunities to expand upon
our existing products.

During 2001 we established an investment services department. An agreement was
reached with Raymond James Securities whereby we can now offer a full line of
investment products. This will provide us with an additional source of revenue
and also provide another service for our customers.

We, the directors and employees of 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. The necessary resources and people are now in place to continue
our opportunities for long term growth and profitability.

Please join us for the annual Shareholders meeting Tuesday April 23, 2002 at
5:30 p.m. in the lobby of our main office at 217 N. Granard Street in Gaffney,
South Carolina. The directors and employees of First National Bank of the
Carolinas are committed to building a strong community bank and improving
shareholder value. We remain grateful for your continued support in our success.

Bill H. Mason
Chairman of the Board


V. Stephen Moss
President


                                        2
<PAGE>
                              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 & Caskey, 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>

YEAR ENDED DECEMBER 31,                         2001           2000           1999           1998           1997
                                              --------       --------       --------       --------       ---------
<S>                                           <C>            <C>            <C>            <C>            <C>
(Dollars in thousands, except per share)

INCOME STATEMENT DATA:
  Interest income                             $  3,698       $  3,485       $  2,660       $  2,059       $   1,248
  Interest expense                               1,479          1,407            939            755             396
                                              --------       --------       --------       --------       ---------
  Net interest income                            2,219          2,078          1,721          1,304             852
  Provision for loan losses                        104            152            140            160             138
                                              --------       --------       --------       --------       ---------
  Net interest income after provision for        2,115          1,926          1,581          1,144             714
   loan losses
  Other income                                     460            358            311            193             101
  Other expense                                  2,188          1,846          1,633          1,207           1,072
                                              --------       --------       --------       --------       ---------
  Income (loss) before income taxes                387            438            259            130            (257)
  Income tax expense (benefit)                     139            157             88              3             (72)
                                              --------       --------       --------       --------       ---------
    Net income (loss)                         $    248       $    281       $    171       $    127       $    (185)
                                              ========       ========       ========       ========       =========

BALANCE SHEET DATA:
  Securities held-to-maturity                 $  3,749       $  3,545       $  2,349       $  1,800       $   1,501
  Allowance for loan losses                        546            467            429            303             153
  Net loans                                     39,553         35,179         27,401         19,952          14,016
  Premises and equipment, net                    3,410          2,598          2,214          1,804             761
  Total assets                                  51,234         44,942         35,196         28,035          19,920
  Noninterest-bearing deposits                   7,302          5,044          4,565          3,070           2,478
  Interest-bearing deposits                     33,117         31,741         22,670         18,026          11,082
  Total deposits                                40,419         36,785         27,235         21,096          13,560
  Total liabilities                             44,697         38,653         29,188         22,199          14,211
  Total shareholders' equity                     6,537          6,289          6,008          5,837           5,709

PER SHARE DATA:
  Weighted-average common shares               616,338        616,338        616,338        616,338         616,338
   outstanding
  Basic earnings per share                    $   0.40       $   0.46       $ 0.28 6      $    0.21       $   (0.30)
  Diluted earnings per share                  $   0.40       $   0.46       $ 0.28 6      $    0.21       $   (0.30)
  Tangible book value (period end)            $  10.61       $  10.20       $   9.75      $    9.47       $   9.266
</TABLE>


                                        3
<PAGE>
                              FNB BANCSHARES, INC.


                      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.

In 2001, the Company made several changes to its banking franchise. The
construction of a new permanent facility was completed in Blacksburg and was
available for business on February 12, 2001. Immediately following the
construction of the Blacksburg branch, the contractors began construction of an
additional branch off of Highway 11 in Gaffney. The construction of this branch
was completed on August 30, 2001. We also began offering brokerage services
through Raymond James Company in April 2001.


                              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. 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.

The terrorist attacks that occurred in New York City and Washington, D.C. on
September 11, 2001, and the United States' subsequent response to these events
have resulted in a general economic slowdown that may adversely affect our
banking business. Economic slowdowns or recessions in our primary market area
may be accompanied by reduced demand for credit, decreasing interest margins and
declining real estate values, which may in turn result in a decrease in net
earnings and an increased possibility of potential loan losses in the event of
default. Any sustained period of decreased economic activity, increased
delinquencies, foreclosures or losses could limit our growth and negatively
affect our results of operations. We cannot predict the extent or duration of
these events or their effect upon our business and operations. We will, however,
closely monitor the effect of these events upon our business, and make
adjustments to our business strategy as we deem necessary.


                                        4
<PAGE>
                              FNB BANCSHARES, INC.


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

YEAR ENDED DECEMBER 31, 2001, COMPARED WITH YEAR ENDED DECEMBER 31, 2000

Net income for the year ended December 31, 2001 was $247,525, or $0.40 per
share, compared to $281,164, or $0.46 per share, for the year ended December 31,
2000. Net interest income increased $140,932, or 6.78% to $2,218,694 for the
year ended December 31, 2001. Other income also increased $102,320 to $460,153
for the year ended December 31, 2001, primarily as a result of fees generated
from mortgage originations and from the newly formed brokerage service. Despite
these increases in income, other operating expense increased as well. The other
operating expense increase of $342,782 included expenses associated with moving
one branch and opening another and a one-time charge for the writedown of fixed
assets associated with the temporary facility in Blacksburg.

YEAR ENDED DECEMBER 31, 2000, COMPARED WITH YEAR ENDED DECEMBER 31, 1999

Net income for the year ended December 31, 2000 was $281,164, or $0.46 per
share, compared to $171,249, or $0.28 per share, for the year ended December 31,
1999. An increase in net interest income of $356,594 over the 1999 amount of
$1,721,168 was the primary reason for the increase in net income from 1999 to
2000. Other income increased $46,680, or 15%, to $357,833 for the year ended
December 31, 2000 as compared to a year earlier. Other expenses increased from
$1,633,137 for 1999 to $1,845,551 for 2000.

                               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 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 $2,077,762 in 2000 to $2,218,694 in 2001,
resulting in an increase of 6.78%. Income from loans increased by 6.45% to
$3,409,651 for 2001 as compared to $3,203,076 for 2000. This increase was
attributable to the growth in the loan portfolio from $35,645,983 in 2000 to
$40,099,660 in 2001. There was also an increase in investment income of $65,345,
an increase of 45.20% over the 2000 amount of $144,568. The net interest spread
and net interest margin were 4.44% and 5.20% in 2001 as compared to 4.61% and
5.61% in 2000.

Net interest income increased from $1,721,168 in 1999 to $2,077,762 in 2000,
resulting in an increase of 20.72%. Income from loans increased by 33.01% to
$3,203,076 for 2000 as compared to $2,408,140 for 1999. This increase was
attributable to the growth in the loan portfolio from $27,830,158 in 1999 to
$35,645,983 in 2000. There was also an increase in investment income of $6,483,
an increase of 4.69% over the 1999 amount of $138,085. The net interest spread
and net interest margin were 4.61% and 5.61% in 2000 as compared to 4.74% and
5.73% in 1999.

                                        5
<PAGE>
                              FNB BANCSHARES, INC.


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

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>

YEAR ENDED DECEMBER 31,                     2001                                2000                              1999
                                -----------------------------       ----------------------------      ----------------------------
                                AVERAGE    INCOME/     YIELD/       AVERAGE    INCOME/     YIELD/     AVERAGE    INCOME/     YIELD/
(Dollars in thousands)          BALANCE    EXPENSE      RATE        BALANCE    EXPENSE      RATE      BALANCE    EXPENSE      RATE
                                -------    -------      ----        -------    -------      ----      -------    -------      ----
<S>                             <C>        <C>           <C>        <C>       <C>           <C>        <C>        <C>         <C>
ASSETS:
 Earning Assets:
  Securities, taxable           $ 3,572    $   194       5.43%      $2,164    $   130       6.00%      $2,282     $  126      5.52%

  Securities, nonmarketable         320         16       5.00          301         15       4.98          206         12      5.83
  Time deposits with other
   banks                             --         --         --           --         --         --           17          1      5.88
  Federal funds sold              1,754         78       4.45        2,089        137       6.56        2,265        113      4.99
  Loans (1)                      37,028      3,410       9.21       32,493      3,203       9.86       25,261      2,408      9.53
                                -------    -------                 -------    -------                  ------     ------
    Total earning assets         42,674      3,698       8.67       37,047      3,485       9.41       30,031      2,660      8.86
                                -------    -------                 -------    -------                  ------     ------
  Cash and due from banks         1,629                              1,589                              1,405
  Allowance for loan losses        (512)                              (427)                              (371)
  Premises and equipment          3,065                              2,358                              2,176
  Other assets                      682                                690                                477
                                -------                            -------                            -------
    Total assets                $47,538                            $41,257                            $33,718
                                =======                            =======                            =======

LIABILITIES AND
  SHAREHOLDER'S EQUITY
  Interest-bearing liabilities:
    Interest-bearing deposits   $32,817      1,397       4.26%     $27,509      1,302       4.73%      22,206        915      4.12%

    Advances from FHLB            1,227         49       3.99        1,183         79       6.68           25          2      8.00
    Securities sold under
      agreements to repurchase
      and federal funds
      purchased                     902         33       3.66          638         26       4.08          538         22      4.09
                                -------    -------                 -------    -------                  ------     ------
      Total interest-bearing     34,946      1,479       4.23       29,330      1,407       4.80       22,769        939      4.12
      liabilities               -------    -------                 -------    -------                  ------     ------

  Noninterest-bearing             6,096                              5,532                              4,797
   deposits
  Accrued interest and other        122                                221                                258
   liabilities
  Shareholders' equity            6,374                              6,174                              5,894
                                -------                            -------                            -------
      Total liabilities
      and shareholders'
      equity                    $47,538                            $41,257                            $33,718
                                =======                            =======                            =======
Net interest spread                                      4.44%                              4.61%                             4.74%
Net interest income                        $ 2,219                            $ 2,078                             $1,721
                                           =======                            =======                             ======
Net interest margin                                      5.20%                              5.61%                             5.73%


</TABLE>

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


                                       6
<PAGE>
                              FNB BANCSHARES, INC.


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

The following table sets 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 during the periods indicated.


ANALYSIS OF CHANGES IN NET INTEREST INCOME

<TABLE>
<CAPTION>



YEAR ENDED DECEMBER 31,                         2001 COMPARED WITH 2000                     2000 COMPARED WITH 1999
                                       ----------------------------------------      -------------------------------------
                                                     VARIANCE DUE TO                             VARIANCE DUE TO
 (Dollars in thousands)                 VOLUME (1)       RATE (1)       TOTAL        VOLUME (1)      RATE (1)        TOTAL
                                        ----------   ---------------    -----        ----------  ---------------     -----
<S>                                     <C>          <C>                <C>          <C>         <C>                 <C>
EARNING ASSETS

Securities, taxable                       $  77          $ (13)         $  64          $   2          $   2          $   4
Nonmarketable equity securities               1             --              1              2              1              3
Time deposits with other banks               --             --             --             (1)            --             (1)
Federal funds sold                          (20)           (39)           (59)           (12)            36             24
Loans                                       427           (220)           207            712             83            795
                                          -----          -----          -----          -----          -----          -----
  Total interest income                     485           (272)           213            703            122            825
                                          -----          -----          -----          -----          -----          -----

INTEREST-BEARING LIABILITIES
Interest-bearing deposits                   235           (140)            95            135            252            387
Advances from FHLB                            3            (33)           (30)            78             (1)            77
Securities sold under agreements
 to repurchase and federal funds
 to repurchase and federal funds
 purchased                                   10             (3)             7              4             --              4
                                          -----          -----          -----          -----          -----          -----
 Total interest expense                     248           (176)            72            217            251            468
                                          -----          -----          -----          -----          -----          -----

Net interest income                       $ 237          $ (96)         $ 141          $ 486          $(129)         $ 357
                                          =====          =====          =====          =====          =====          =====


</TABLE>

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

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, 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.


                                       7

<PAGE>
                              FNB BANCSHARES, INC.


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

The following table presents the Company's rate sensitivity at each of the time
intervals indicated as of December 31, 2001. 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                      SEVEN TO
DECEMBER 31, 2001                                     THREE        FOUR TO SIX      TWELVE      ONE TO FIVE   OVER FIVE
(Dollars in thousands)                                MONTHS         MONTHS         MONTHS          YEARS       YEARS      TOTAL
                                                     --------      -----------     ---------    ------------  ----------   -----
<S>                                                  <C>             <C>            <C>             <C>         <C>        <C>
 ASSETS
 Earning Assets
   Loans                                             $ 12,837        $ 1,751        $  2,124        $18,095     $5,293     $40,100
   Securities held-to-maturity                             --             --              --          3,749         --       3,749
   Nonmarketable equity securities                        358                                                                  358
   Federal funds sold                                     738             --              --             --         --         738
                                                     --------        -------        --------        -------     ------     -------
     Total earning assets                              13,933          1,751           2,124         21,844      5,293      44,945
                                                     --------        -------        --------        -------     ------     -------

 LIABILITIES
 Interest-bearing liabilities:
   Interest-bearing deposits:
     Demand deposits                                    6,152             --              --             --         --       6,152
     Savings deposits                                   6,091             --              --             --         --       6,091
     Time deposits                                      5,840          5,385           8,418          1,231         --      20,874
                                                     --------        -------        --------        -------     ------     -------
       Total interest-bearing deposits                 18,083          5,385           8,418          1,231         --      33,117
   Advances from Federal Home Loan Bank                    --             --           1,000          2,000         --       3,000
   Securities sold under agreements to repurchase       1,125             --              --             --         --       1,125
                                                     --------        -------        --------        -------     ------     -------
     Total interest-bearing liabilities                19,208          5,385           9,418          3,231         --      37,242
                                                     --------        -------        --------        -------     ------     -------
 Period gap                                          $ (5,275)       $(3,634)       $ (7,294)       $18,613     $5,293
                                                     ========        =======        ========        =======     ======
 Cumulative gap                                      $ (5,275)       $(8,909)       $(16,203)       $ 2,410     $7,703
                                                     ========        =======        ========        =======     ======
 Cumulative gap ratio (2)                              (11.74)%       (19.82)%        (36.05)%         5.36%     17.14%
                                                     ========        =======        ========        =======     ======
</TABLE>

(1)      All savings and interest-bearing transaction accounts are included in
         the less than three months category.
(2)      Ratio of cumulative 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. Securities sold under agreements to repurchase mature
on a daily basis and are reflected in the earliest pricing period. Advances from
Federal Home Loan Bank are reflected at their contractual maturity date.


                                       8
<PAGE>
                              FNB BANCSHARES, INC.


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

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 to twelve month time frame. 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 noncore 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 has developed policies and procedures for evaluating the overall
quality of its credit portfolio and the timely identification of potential
problem credits. On a quarterly basis, Bank's Board of Directors reviews and
approves the appropriate level for the Bank's allowance for loan losses based
upon management's recommendations, the results of the internal monitoring and
reporting system, analysis of economic conditions in its markets, and a review
of historical statistical data for both the Company and other financial
institutions.

Additions to the allowance for loan losses, which are expensed as the provision
for loan losses on the Company's income statement, are made periodically to
maintain the allowance at an appropriate level based on management's analysis of
the potential risk in the loan portfolio. Loan losses and recoveries are charged
or credited directly to the allowance. The amount of the provision is a function
of the level of loans outstanding, the level of nonperforming loans, historical
loan loss experience, the amount of loan losses actually charged against the
reserve during a given period, and current and anticipated economic conditions.
During 2001, the Company transferred $104,000 from earnings to the reserve for
loan losses, increasing the balance to $546,376 on December 31, 2001 after
deducting current year net chargeoffs. The reserve for loan losses was
approximately 1.36% and 1.31% of total loans on December 31, 2001 and 2000,
respectively.

The Company's allowance for loan losses is based upon judgments and assumptions
of risk elements in the portfolio, future economic conditions, and other factors
affecting borrowers. The process includes identification and analysis of loss
potential in various portfolio segments utilizing a credit risk grading process
and specific reviews and evaluations of significant problem credits. In
addition, management monitors the overall portfolio quality through observable
trends in delinquency, chargeoffs, and general and economic conditions in the
service area. The adequacy of the allowance for loan losses and the
effectiveness of the Company's monitoring and analysis system are also reviewed
periodically by the banking regulators and the Company's independent auditors.

Based on present information and an ongoing evaluation, management considers the
allowance for loan losses to be adequate to meet presently known and inherent
risks in the loan portfolio. Management's judgment 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 allowance for loan losses will
not be required. The Company does not allocate the allowance for loan losses to
specific categories of loans but evaluates the adequacy on an overall portfolio
basis utilizing a risk grading system.


                                       9
<PAGE>
                              FNB BANCSHARES, INC.


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

                                  OTHER INCOME

Other income for the year ended December 31, 2001 was $460,153, as compared to
$357,833 for the year ended December 31, 2000. The most significant portion of
other income was from NSF and overdraft fees which totaled $209,503, as compared
to $211,293 in the prior year. Mortgage origination fees increased $56,201, or
248.80% to $78,790 for the year ended December 31, 2001. The increase was a
result of home mortgage refinancings resulting from the significant decline in
the overall interest rate environment. In addition, the Company began offering
brokerage services through Raymond James in February 2001. Fees earned from this
service totaled $59,150 for the year ended December 31, 2001.

Other income for the year ended December 31, 2000 was $357,833, as compared to
$311,153 for the year ended December 31, 1999. The most significant portion of
other income was from NSF and overdraft fees which totaled $211,293, as compared
to $140,309 in the prior year. The increase in NSF and overdraft fees was
attributable to an increase in the per item charge from $22 to $25 per item and
an overall increase in deposit accounts.

                                 OTHER EXPENSES

Noninterest expenses were $2,188,333 for the year ended December 31, 2001, as
compared to $1,845,551 for the year ended December 31, 2000. This was comprised
primarily of salaries and employee benefits totaling $1,078,970, as compared to
$905,586 for the year ended December 31, 2000. The increase in salaries was
partially due to the opening of an additional branch on August 30, 2001 on
Highway 11 in Gaffney. All other operating expenses increased as well as a
result of the continued growth of the Company and expenses associated with
opening the Highway 11 branch. Other expenses also included a one-time charge of
$76,654 for the writedown of fixed assets relating to the closing of the
temporary facility in Blacksburg.

Noninterest expenses were $1,845,551 for the year ended December 31, 2000, as
compared to $1,633,137 for the year ended December 31, 1999. This was comprised
of salaries and employee benefits of $905,586, furniture and equipment expense
of $157,592, occupancy expense of $145,094, data processing expense of $150,322,
office supplies expense of $44,361, and other operating expenses of $442,596.

                                  INCOME TAXES

For the years ended December 31, 2001 and 2000, the Company recorded income tax
expense in the amounts of $138,989 and $157,380, respectively. This resulted in
an effective tax rate of 36% for the years ended December 31, 2001 and 2000. The
decrease in income taxes is a result of a decrease in income before income
taxes. For the year ended December 31, 1999, the Company recorded income tax
expense in the amount of $88,185. This resulted in an effective tax rate of 34%.


                                       10
<PAGE>
                              FNB BANCSHARES, INC.


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

                                CAPITAL RESOURCES
Total capital of the Company was increased by net income in 2001 of $247,525.
Total capital of the Company was increased by net income in 2000 of $281,164.

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 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>
 (Dollars in thousands)                                   THE BANK                 THE COMPANY
                                                        -----------                -----------
<S>                                                     <C>                        <C>

 Tier 1 capital
   Common shareholders' equity                          $ 5,095,883                $ 6,536,511
   Less:  intangibles                                            --                         --
                                                        -----------                -----------
     Total Tier 1 capital                                 5,095,883                  6,536,511
 Tier 2 capital
   Allowable allowance for loan losses                      530,390                    530,393
                                                        -----------                -----------
     Total qualifying capital                           $ 5,626,273                $ 7,066,904
                                                        ===========                ===========

 Risk-adjusted total assets
        (including off-balance sheet exposures)         $42,431,264                $42,431,460
                                                        ===========                ===========
     Total average assets                               $48,818,336                $47,538,254
                                                        ===========                ===========

 Risk-based capital ratios:
   Tier 1 risk-based capital ratio                            12.01%                     15.40%
   Total risk-based capital ratio                             13.26%                     16.65%
   Tier 1 leverage ratio                                      10.44%                     13.75%
</TABLE>


                                       11
<PAGE>
                              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. An additional advance from
the Federal Home Loan Bank was also obtained in 2001 for liquidity purposes. The
Company also has the ability to borrow additional funds from the Federal Home
Loan Bank of up to 10% of the Bank's assets. Management has established policies
and procedures governing the length of time to maturity on loans and
investments. In the opinion of management, the Company's short-term liquidity
needs can be adequately supported by the Company's deposit base.

                     IMPACT OF OFF-BALANCE SHEET INSTRUMENTS

The Company has certain off-balance-sheet instruments in the form of contractual
commitments to extend credit to customers. These legally binding commitments
have set expiration dates and are at predetermined interest rates. The
underwriting criteria for these commitments is the same as for loans in the
Company's loan portfolio. Collateral is also obtained, if necessary, based on
the credit evaluation of each borrower. Although many of the commitments will
expire unused, management believes that they have the necessary resources to
fund these commitments.

                     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 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, 2001 and 2000.

INVESTMENT SECURITIES PORTFOLIO COMPOSITION

HELD-TO-MATURITY

<TABLE>
<CAPTION>

December 31,                                              2001                 2000
                                                         ------               ------
<S>                                                      <C>                  <C>
(Dollars in thousands)
 U.S. Government Agencies and Corporations                3,749                3,545
 Nonmarketable equity securities                            358                  308
                                                         ------               ------

   Total securities                                      $4,107               $3,853
                                                         ======               ======

</TABLE>


                                       12
<PAGE>
                              FNB BANCSHARES, INC.


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

INVESTMENT SECURITIES PORTFOLIO MATURITY DISTRIBUTION AND YIELDS

<TABLE>
<CAPTION>
DECEMBER 31, 2001                                                 2001
                                                     -----------------------------
(Dollars in thousands)                                AMOUNT                YIELD
                                                     ---------             --------
<S>                                                  <C>                   <C>
U.S. Government agencies due:
  After one year but within five years               $  3,749               4.86%
                                                     ========
</TABLE>

                                 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;
however, 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. 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 is expected to grow or contract disproportionately in 2001.


                                       13

<PAGE>
                              FNB BANCSHARES, INC.


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

                         LENDING ACTIVITIES (continued)

Total loans outstanding were $40,099,660 and $35,645,983 at December 31, 2001
and 2000, respectively. The loan demand remains strong in the Company's market
area. 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.

The Company's ratio of loans to deposits was 99% and 97% at December 31, 2001
and 2000, 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.

The following table summarizes the composition of the loan portfolio at December
31, 2001 and 2000.


LOAN PORTFOLIO COMPOSITION

<TABLE>
<CAPTION>

DECEMBER 31,                                           2001                                             2000
                                         ------------------------------------             -----------------------------------
                                                                  PERCENT OF                                       PERCENT OF
Dollars in thousands)                     AMOUNT                     TOTAL                  AMOUNT                   TOTAL
                                         --------                 ----------               --------               -----------
<S>                                      <C>                      <C>                     <C>                    <C>
 Commercial and industrial               $  7,597                     18.94%              $  6,415                    18.00%
 Real estate
 Construction                               2,165                      5.40                  1,119                     3.14
 Mortgage                                  23,927                     59.67                 21,735                    60.97
 Consumer and other                         6,411                     15.99                  6,377                    17.89
                                         --------                  --------               --------                 --------
  Total loans                              40,100                    100.00%                35,646                   100.00%
                                                                   ========               ========
 Allowance for loan losses                   (546)                                            (467)
                                         --------                                         --------
 Net loans                               $ 39,554                                         $ 35,179
                                         ========                                         ========


</TABLE>

The Company's loan portfolio is comprised largely of real estate mortgage loans.
Real estate mortgage loans increased $2,191,779 or 10.08% to $23,926,931 at
December 31, 2001. At December 31, 2001 real estate mortgage loans represented
59.67% of the total loan portfolio, as compared to 60.97% at December 31, 2000.

The Company also has a significant amount of commercial and industrial loans.
Commercial and industrial loans increased $1,182,280, or 18.43% to $7,597,065 at
December 31, 2001. Commercial and industrial loans comprised 18.94% and 18.00%
of the total loan portfolio at December 31, 2001 and 2000, respectively.


                                       14
<PAGE>
                              FNB BANCSHARES, INC.


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


MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES:

The following table summarizes the loan maturity distribution, by type, at
December 31, 2001 and related interest rate characteristics:


<TABLE>
<CAPTION>
                                                                       OVER ONE
DECEMBER 31, 2001                           ONE YEAR OR               YEAR THROUGH             OVER FIVE
(Dollars in thousands)                          LESS                   FIVE YEARS                 YEARS               TOTAL
                                            -----------               ------------              ---------            -------
<S>                                         <C>                       <C>                       <C>                  <C>
Commercial and industrial                    $ 3,598                   $ 3,669                   $   330             $ 7,597
Real estate - construction                     1,742                         4                       419               2,165
Real estate - mortgage                         9,539                    10,058                     4,330              23,927
Consumer and other                             1,833                     4,364                       214               6,411
                                             -------                   -------                   -------             -------
                                             $16,712                   $18,095                   $ 5,293             $40,100
                                             -------                   -------                   -------             -------

 Loans maturing after one year with:
 Fixed interest rates                                                                                                $12,752
 Floating interest rates                                                                                              10,636
                                                                                                                     -------
                                                                                                                     $23,388
                                                                                                                     =======

</TABLE>

                                  RISK ELEMENTS

At December 31, 2001, there were no loans past due 90 days or more and still
accruing interest, and loans totaling $279,231 were in nonaccrual status. At
December 31, 2000, there were no loans past due 90 days or more and still
accruing interest, and loans totaling $51,869 were in nonaccrual status.

SUMMARY OF LOAN LOSS EXPERIENCE

<TABLE>
<CAPTION>
 (Dollars in thousands)                                           2001                         2000
                                                                --------                     --------
<S>                                                             <C>                          <C>
Total loans outstanding at end of year                          $ 40,100                     $ 35,646
                                                                ========                     ========
Average loans outstanding                                       $ 37,028                     $ 32,493
                                                                ========                     ========

Balance, beginning of year                                      $    467                     $    429
Loans charged off                                                    (59)                        (123)
Recoveries on loans previously charged off                            34                           10
                                                                --------                     --------
  Net chargeoffs                                                      15                         (113)
                                                                --------                     --------
Provision charged to operations                                      104                          151
                                                                --------                     --------
  Balance, end of year                                          $    546                     $    467
                                                                ========                     ========

Ratios:
  Allowance for loan losses to average loans                        1.47%                        1.44%
  Allowance for loan losses to period end loans                     1.36%                        1.31%


</TABLE>

Management has allocated the majority of its allowance for loan losses to real
estate and commercial loans at December 31, 2001.

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.


                                       15
<PAGE>
                              FNB BANCSHARES, INC.

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

                            RISK ELEMENTS (continued)

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, 2001, 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 $38,913,264 and $33,040,971 during 2001 and 2000,
respectively. The increase in deposits was attributable to an increased presence
in the Bank's market areas. All types of deposits increased in 2001 with the
exception of certificates of deposit. Total certificates of deposit decreased
$501,538 or 2.35% to $20,874,039 at December 31, 2001. The decrease is a result
of declining interest rates and the desire of customers not to be locked into an
interest rate for an extended period of time.

Certificates of deposit over $100,000 totaled $4,958,558 and $4,625,975 at
December 31, 2001 and 2000, respectively. Of this total, scheduled maturities at
December 31, 2001 were as follows: three months or less - $1,207,304; over three
months through six months - $2,022,574; over six months through twelve months -
$1,457,843; and greater than twelve months - $270,837.

The following table summarizes the Bank's deposits at December 31, 2001 and
2000.

<TABLE>
<CAPTION>

DECEMBER 31,                                                2001                         2000
(Dollars in thousands)                             ------------------------     ----------------------
                                                                 PERCENT OF      PERCENT
                                                    AMOUNT        DEPOSITS        AMOUNT      DEPOSITS
                                                    ------       ----------      --------    ---------
<S>                                                 <C>          <C>             <C>           <C>
Noninterest-bearing demand                          $ 7,302         18.07%       $ 5,044       13.71%
Interest-bearing transaction accounts                 6,152         15.22          5,912       16.07
Savings                                               6,091         15.07          4,454       12.11
Certificates of deposit                              20,874         51.64         21,375       58.11
                                                    -------       -------        -------     -------

   Total deposits                                   $40,419        100.00%       $36,785      100.00%
                                                    =======       =======        =======     =======
</TABLE>

Core deposits, which exclude 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 $35,460,633 and
$32,159,242 at December 31, 2001 and 2000, respectively.


                                       16
<PAGE>
                              FNB BANCSHARES, INC.


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

                    ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank totaled $3,000,000 at December 31,
2001. Advances consisted of a $1,000,000 variable rate advance bearing an
interest rate of 1.83% and is scheduled to mature December 24, 2002. The
$2,000,000 advance bears a fixed rate of 2.93% and is scheduled to mature on
November 7, 2003. Advances averaged $1,227,397 during 2001 as compared to
$1,183,060 in 2000.

                              SHORT-TERM BORROWINGS

At December 31, 2001 and 2000 the Company had short term borrowings which
consisted of securities sold under agreements to repurchase of $1,125,204 and
$638,988, 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
$2,247,924 and $1,141,284, during 2001 and 2000, respectively. The average
interest rate paid on the repurchase agreement was 3.67% and 4.00% during 2001
and 2000, respectively.

                           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.

<TABLE>
<CAPTION>
                                                      2001           2002
                                                     ------         -------
<S>                                                  <C>            <C>
Return on average assets                              0.52%            .68%

Return on average equity                              3.89%           4.55%

Equity to assets ratio                               13.41%          14.96%
</TABLE>


                    ACCOUNTING AND FINANCIAL REPORTING ISSUES

In July, 2001 the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS 141 eliminates the pooling
of interests method of accounting for business combinations and requires the use
of the purchase method. The Statement also requires that intangible assets be
reported separately from goodwill. This Statement is effective for all
transactions initiated after June 30, 2001. Under SFAS 142, goodwill is no
longer subject to amortization; however, it should be evaluated for impairment
on at least an annual basis and adjusted to its fair value. In addition, an
acquired intangible should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged,
regardless of intent to do so. However, the FASB recommends that financial
institutions continue to follow the basic guidelines of SFAS 72 in recording and
amortizing goodwill and other unidentifiable intangible assets. The Company
adopted SFAS 141 on July 1, 2001. SFAS 142 is effective for entities with fiscal
years beginning after December 15, 2001. The Company plans to adopt SFAS 142 on
January 1, 2002. The adoption of these Statements is not expected to have a
material impact on the consolidated financial statements.

In June 1998, the FASB issued Statement (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, which as amended by SFAS No, 137
and SFAS 138 is effective for fiscal years beginning after June 15, 2000. This
Statement establishes accounting and reporting standards for derivative
instruments and hedging activities, including certain derivative instruments
embedded in other contracts, and requires that an entity recognize all
derivatives as assets or liabilities in the balance sheet and measure them at
fair value. The accounting for changes in the fair value of a derivative depends
on how the derivative is used and how the derivative is designated. The Company
adopted SFAS 133 on January 1, 2001. The adoption of SFAS No. 133 did not have
any impact on the consolidated financial statements since the Company did not
have any derivative instruments nor any derivative instruments embedded in other
contracts in 2001 or 2000.


                                       17
<PAGE>
                              FNB BANCSHARES, INC.

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

                           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; (iii) the Company's
growth and operating strategies; and (iv) the quality of the Company's loan
portfolio. 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 2001 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).

                                REGULATORY ISSUES

On November 4, 1999, the U.S. Senate and House of Representatives each passed
the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. The Act was signed into law by President Clinton in
November 1999. Among other things, the Act repeals the restrictions on banks
affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also creates a new "financial holding company" under
the Bank Holding Company Act, which will permit holding companies to engage in a
statutorily provided list of financial activities, including insurance and
securities underwriting and agency activities, merchant banking, and insurance
company portfolio investment activities. The Act also authorizes activities that
are "complementary" to financial activities. The Act is intended to grant to
community banks certain powers as a matter of right that larger institutions
have accumulated on an ad hoc basis. Nevertheless, the Act may have the result
of increasing the amount of competition that the Bank faces from larger
institutions and other types of companies. In fact, it is not possible to
predict the full effect that the Act will have on the Bank.

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.


                                       18
<PAGE>
                              FNB BANCSHARES, INC.


                        Consolidated Financial Statements

              For the Years Ended December 31, 2001, 2000 and 1999

                                       and

                          Independent Auditors' Report



<PAGE>


                              FNB BANCSHARES, INC.



                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                       PAGE NO.
                                                                                       --------
<S>                                                                                    <C>

Independent Auditors' Report.......................................................... 19
Consolidated Balance Sheets........................................................... 20
Consolidated Statements of Income..................................................... 21
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income... 22
Consolidated Statements of Cash Flows................................................. 23
Notes to Consolidated Financial Statements............................................ 24-39
</TABLE>



<PAGE>


                       TOURVILLE, SIMPSON & CASKEY, L.L.P.
                          CERTIFIED PUBLIC ACCOUNTANTS
                              POST OFFICE BOX 1769
                         COLUMBIA, SOUTH CAROLINA 29202

                            TELEPHONE (803) 252-3000
                               FAX (803) 252-2226

WILLIAM E. TOURVILLE, CPA                                MEMBER AICPA SEC AND
HARRIET S. SIMPSON, CPA, CISA, CDP                          PRIVATE COMPANIES
R. JASON CASKEY, CPA                                        PRACTICE SECTIONS
--------------------
JOHN T. DRAWDY, JR., CPA
TIMOTHY R. ALFORD, CPA
W. CLAYTON HESLOP, CPA
TIMOTHY S. VOGEL, CPA

                          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, 2001 and 2000, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years ended December 31, 2001, 2000 and 1999. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the
consolidated results of their operations and cash flows for the years ended
December 31, 2001, 2000 and 1999 in conformity with accounting principles
generally accepted in the United States of America.

Tourville, Simpson & Caskey, L.L.P.
Columbia, South Carolina
January 17, 2002


                                       19
<PAGE>

                              FNB BANCSHARES, INC.

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000


<TABLE>
<CAPTION>
                                                                        2001              2000
                                                                    ------------      ------------
<S>                                                                 <C>               <C>
ASSETS:
  Cash and cash equivalents:
    Cash and due from banks                                         $  2,769,532      $  1,487,957
    Federal funds sold                                                   738,000         1,150,000
                                                                    ------------      ------------
      Total cash and cash equivalents                                  3,507,532         2,637,957
                                                                    ------------      ------------

  Investment securities:
    Securities held-to-maturity (estimated market value:
     2001 - $3,780,078; 2000 - $3,536,482)                             3,749,464         3,544,730
    Nonmarketable equity securities                                      358,311           308,311
                                                                    ------------      ------------
      Total investment securities                                      4,107,775         3,853,041
                                                                    ------------      ------------

  Loans receivable:                                                   40,099,660        35,645,983
    Less allowance for loan losses                                      (546,376)         (466,835)
                                                                    ------------      ------------
      Loans, net                                                      39,553,284        35,179,148

  Premises, furniture and equipment, net                               3,409,580         2,597,536
  Accrued interest receivable                                            312,075           317,271
  Other assets                                                           343,520           357,021
                                                                    ------------      ------------
      Total assets                                                  $ 51,233,766      $ 44,941,974
                                                                    ============      ============

LIABILITIES:
  Deposits:
    Noninterest-bearing transaction accounts                        $  7,302,392      $  5,043,706
    Interest-bearing transaction accounts                              6,152,178         5,912,179
    Savings                                                            6,090,582         4,453,755
    Time deposits $100,000 and over                                    4,958,558         4,625,975
    Other time deposits                                               15,915,481        16,749,602
                                                                    ------------      ------------
      Total deposits                                                  40,419,191        36,785,217

  Securities sold under agreements to repurchase                       1,125,204           638,988
  Advances from the Federal Home Loan Bank                             3,000,000         1,000,000
  Accrued interest payable                                                60,597            75,632
  Other liabilities                                                       92,263           153,151
                                                                    ------------      ------------
      Total liabilities                                               44,697,255        38,652,988
                                                                    ------------      ------------

Commitments and contingencies (Notes 4 and 16)

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                                   6,163             6,163
  Capital surplus                                                      6,112,318         6,112,318
  Retained earnings                                                      418,030           170,505
                                                                    ------------      ------------
      Total shareholders' equity                                       6,536,511         6,288,986
                                                                    ------------      ------------

      Total liabilities and shareholders' equity                    $ 51,233,766      $ 44,941,974
                                                                    ============      ============
</TABLE>

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


                                       20
<PAGE>

                              FNB BANCSHARES, INC.

                        CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999


<TABLE>
<CAPTION>
                                                            2001           2000           1999
                                                        ----------     ----------     ----------
<S>                                                     <C>            <C>            <C>
INTEREST INCOME:
  Loans, including fees                                 $3,409,651     $3,203,076     $2,408,140
  Investment securities:
    Taxable                                                193,538        129,766        126,036
    Nonmarketable securities                                16,375         14,802         12,049
  Federal funds sold                                        77,985        136,803        112,666
  Other                                                        590            200          1,000
                                                        ----------     ----------     ----------
    Total                                                3,698,139      3,484,647      2,659,891
                                                        ----------     ----------     ----------

INTEREST EXPENSE:
  Time deposits $100,000 and over                          284,716        214,556        177,710
  Other deposits                                         1,112,648      1,087,494        737,792
  Federal funds purchased                                      421            802             --
  Securities sold under agreements to repurchase            32,718         25,006         21,512
  Advances from the Federal Home Loan Bank                  48,942         79,027          1,709
                                                        ----------     ----------     ----------
    Total                                                1,479,445      1,406,885        938,723
                                                        ----------     ----------     ----------

NET INTEREST INCOME                                      2,218,694      2,077,762      1,721,168

Provision for loan losses                                  104,000        151,500        139,750
                                                        ----------     ----------     ----------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES      2,114,694      1,926,262      1,581,418
                                                        ----------     ----------     ----------

OTHER OPERATING INCOME:
  Service charges on deposit accounts                      231,093        246,757        173,187
  Mortgage origination fees                                 78,790         22,589         75,697
  Brokerage service fees                                    59,150             --             --
  Other service charges, commissions, and fees              91,120         88,487         62,269
                                                        ----------     ----------     ----------
    Total                                                  460,153        357,833        311,153
                                                        ----------     ----------     ----------

OTHER OPERATING EXPENSES:
  Salaries and benefits                                  1,078,970        905,586        790,095
  Occupancy expense                                        146,765        145,094        105,272
  Furniture and equipment                                  211,315        157,592        142,891
  Write-down on disposal of assets                          76,654             --         45,894
  Office supplies                                           55,588         44,361         44,665
  Data processing                                          171,363        150,322        136,866
  Other operating expenses                                 447,678        442,596        367,454
                                                        ----------     ----------     ----------
    Total                                                2,188,333      1,845,551      1,633,137
                                                        ----------     ----------     ----------

INCOME BEFORE INCOME TAXES                                 386,514        438,544        259,434

Income tax provision                                       138,989        157,380         88,185
                                                        ----------     ----------     ----------

NET INCOME                                              $  247,525     $  281,164     $  171,249
                                                        ==========     ==========     ==========

Basic earnings per share                                $     0.40     $     0.46     $     0.28
Diluted earnings per share                              $     0.40     $     0.46     $     0.28
</TABLE>


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


                                       21
<PAGE>

                              FNB BANCSHARES, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999


<TABLE>
<CAPTION>
                                                    COMMON STOCK                              RETAINED
                                                 ---------------------        CAPITAL         EARNINGS
                                                 SHARES         AMOUNT        SURPLUS         (DEFICIT)        TOTAL
                                                 -------        -------     -----------      ----------     -----------
<S>                                              <C>            <C>         <C>              <C>            <C>
 BALANCE, DECEMBER 31, 1998                      616,338        $ 6,163     $ 6,112,318      $ (281,908)    $ 5,836,573

 Net income                                                                                     171,249         171,249
                                                 -------        -------     -----------      ----------     -----------

 BALANCE, DECEMBER 31, 1999                      616,338          6,163       6,112,318        (110,659)      6,007,822

 Net income                                                                                     281,164         281,164
                                                 -------        -------     -----------      ----------     -----------

 BALANCE, DECEMBER 31, 2000                      616,338          6,163       6,112,318         170,505       6,288,986

 Net income                                                                                     247,525         247,525
                                                 -------        -------     -----------      ----------     -----------

 BALANCE, DECEMBER 31, 2001                      616,338        $ 6,163     $ 6,112,318       $ 418,030     $ 6,536,511
                                                 =======        =======     ===========       =========     ===========
</TABLE>



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


                                       22
<PAGE>

                              FNB BANCSHARES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

<TABLE>
<CAPTION>
                                                                      2001             2000             1999
                                                                  -----------      -----------      -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                               <C>              <C>              <C>
  Net income                                                      $   247,525      $   281,164      $   171,249
  Adjustments to reconcile net income to net cash
   provided in operating activities:
    Provision for possible loan losses                                104,000          151,500          139,750
    Depreciation and amortization expense                             219,500          175,916          172,684
    Accretion and premium amortization                                 (2,004)            (326)             467
    Write-down on disposal of assets                                   76,654               --           45,894
    Deferred income tax provision (benefit)                           (16,830)          10,033          (11,343)
    (Increase) decrease in interest receivable                          5,196         (109,595)         (80,100)
    Increase (decrease) in interest payable                           (15,035)          25,887            1,946
    (Increase) decrease in other assets                                66,867          674,622          (32,636)
    Increase (decrease) in other liabilities                          (60,888)          (3,693)         (28,758)
                                                                  -----------      -----------      -----------
      Net cash provided in operating activities                       624,985        1,205,508          379,153
                                                                  -----------      -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of securities held-to-maturity                       (5,802,730)      (1,495,078)      (1,900,002)
    Maturities of securities held-to-maturity                       5,600,000          300,000        1,350,000
    Purchase of nonmarketable equity securities                       (50,000)         (92,161)         (12,600)
    Maturities of time deposits with other banks                           --               --          500,000
    Net increase in loans to customers                             (4,514,672)      (8,076,135)      (8,159,120)
    Purchases of premises and equipment                            (1,108,198)        (559,640)        (628,833)
                                                                  -----------      -----------      -----------
      Net cash used in investing activities                        (5,875,600)      (9,923,014)      (8,850,555)
                                                                  -----------      -----------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in demand deposits, interest-bearing
   transaction accounts, and savings accounts                       4,135,512        2,345,743        3,596,448
  Net increase (decrease) in time deposits                           (501,538)       7,204,510        2,542,680
  Net increase (decrease) in securities sold under agreements
    to repurchase                                                     486,216         (107,193)        (123,088)
  Increase in advances from the Federal Home Loan Bank              2,000,000               --        1,000,000
                                                                  -----------      -----------      -----------
      Net cash provided in financing activities                     6,120,190        9,443,060        7,016,040
                                                                  -----------      -----------      -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  869,575          725,554       (1,455,362)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                      2,637,957        1,912,403        3,367,765
                                                                  -----------      -----------      -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                          $ 3,507,532      $ 2,637,957      $ 1,912,403
                                                                  ===========      ===========      ===========

SUPPLEMENTAL DISCLOSURES:
  Cash paid during the year for interest                          $ 1,494,480      $ 1,380,998      $   936,777
  Cash paid during the year for taxes                             $   144,600      $   168,692      $    88,141

SUPPLEMENTAL NONCASH INVESTING ACTIVITIES:
  Loans transferred to repossessed assets                         $    36,536      $   146,596      $   569,961
</TABLE>


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


                                       23
<PAGE>


                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - 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.

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.

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.

CONCENTRATIONS OF CREDIT RISK - Financial instruments, which potentially subject
the Bank 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. By policy, time deposits are limited to amounts insured
by the FDIC. Management believes credit risk associated with these financial
instruments is not significant.

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
Federal Reserve Bank, and Community Financial Services, Inc. These stocks have
no quoted market value and no ready market exists. Investment in Federal Home
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 $3,000,000 in
outstanding advances at December 31, 2001. At December 31, 2001 and 2000, the
investment in Federal Home Loan Bank stock was $150,000 and $100,000,
respectively. Investment in Federal Reserve Bank stock is required by law of
every national bank. The investment in Federal Reserve Bank Stock was $132,450
at December 31, 2001 and 2000. The investment in Community Financial Services,
Inc. was $75,861 at December 31, 2001 and 2000.


                                       24
<PAGE>



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

FORECLOSED ASSETS - Assets acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried
at the lower of the carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in
other expenses on the consolidated statements of income.

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 the
collateral exceeds the principal balance and accrued interest. When interest
accruals are discontinued, income earned but not collected is reversed.

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 losses 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.

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.

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 are eliminated
from the accounts, and the resulting gains or losses are reflected in the income
statement when incurred. Maintenance and repairs are charged to the current year
statement of income. The costs of major renewals and improvements are
capitalized.

RETIREMENT PLAN - The Company has a contributory 401(k) plan 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 2001, 2000,
and 1999 for the plan were $8,275, $7,769, and $5,727, respectively.


                                       25
<PAGE>




                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 and depreciable premises and equipment.

STOCK COMPENSATION PLANS - Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, encourages all entities to
adopt a fair value based method of accounting for employee stock compensation
plans, whereby compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually
the vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, whereby compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date (or other measurement
date) over the amount an employee must pay to acquire the stock. Stock options
issued under the Company's stock option plan have no intrinsic value at the
grant date, and under Opinion No. 25, no compensation cost is recognized for
them. The Company has elected to continue with the accounting methodology in
Opinion No. 25 and, as a result, has provided pro forma disclosures of net
income and earnings per share and other disclosures, as if the fair value based
method of accounting had been applied.

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 17.

STATEMENTS OF CASH FLOWS - For purposes of reporting cash flows in the financial
statements, the Company considers certain investments 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.

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

RECENT ACCOUNTING PRONOUNCEMENTS - In July, 2001 the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 141, Business Combinations. SFAS 141 eliminates the pooling of interests
method of accounting for business combinations and requires the use of the
purchase method. The Statement also requires that intangible assets be reported
separately from goodwill. This Statement is effective for all transactions
initiated after June 30, 2001. The Company adopted SFAS 141 on July 1, 2001. The
adoption of this Statement is not expected to have a material impact on the
consolidated financial statements.


                                      26
<PAGE>



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In June 1998, the FASB issued Statement (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, which as amended by SFAS No. 137
and SFAS No. 138 is effective for fiscal years beginning after June 15, 2000.
This Statement establishes accounting and reporting standards for derivative
instruments and hedging activities, including certain derivative instruments
embedded in other contracts, and requires that an entity recognize all
derivatives as assets or liabilities in the balance sheet and measure them at
fair value. The accounting for changes in the fair value of a derivative depends
on how the derivative is used and how the derivative is designated. The Company
adopted SFAS 133 on January 1, 2001. The adoption of SFAS 133 did not have any
impact on the consolidated financial statements since the Company did not have
any derivative instruments nor any derivative instruments embedded in other
contracts in 2001 or 2000.

RECLASSIFICATIONS - Certain captions and amounts in the 2000 and 1999 financial
statements were reclassified to conform with the 2001 presentation.

NOTE 2 - 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 3 - INVESTMENT SECURITIES

The amortized costs and estimated market values of securities held to maturity
at December 31, 2001 and 2000 were:

<TABLE>
<CAPTION>
                                                                      GROSS         GROSS
                                                 AMORTIZED        UNREALIZED      UNREALIZED      ESTIMATED
                                                   COST              GAINS          LOSSES        FAIR VALUE
                                                 ----------       ----------      ----------      ----------
<S>                                              <C>              <C>             <C>             <C>
DECEMBER 31, 2001
U.S. government agencies and corporations        $3,749,464        $  35,536        $4,922        $3,780,078
                                                 ==========        =========        ======        ==========

DECEMBER 31, 2000
U.S. government agencies and corporations        $3,544,730        $      --        $8,248        $3,536,482
                                                 ==========        =========        ======        ==========
</TABLE>

The following is a summary of maturities of securities held-to-maturity as of
December 31, 2001. 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>
                                                        SECURITIES
                                                     HELD-TO-MATURITY
                                                ---------------------------
                                                AMORTIZED         ESTIMATED
                                                   COST           FAIR VALUE
                                                ----------        ----------
<S>                                             <C>               <C>
Due after one year but within five years        $3,749,464        $3,780,078
                                                ==========        ==========
</TABLE>

At December 31, 2001 and 2000, investment securities with a book value of
$3,599,464 and $3,544,730, respectively, and a market value of $3,632,188 and
$3,536,482, respectively, were pledged as collateral to secure public deposits
and for other purposes as required and permitted by law.


                                       27
<PAGE>



                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - LOANS

Major classifications of loans receivable as of December 31, 2001 and 2000 are
summarized as follows:

<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                               ------------------------------
                                                   2001               2000
                                               -----------        -----------
<S>                                            <C>                <C>
Commercial, financial, and agricultural        $ 7,597,065        $ 6,414,785
Real estate - construction                       2,165,128          1,118,659
Real estate - other                             23,926,931         21,735,152
Consumer and other                               6,410,536          6,377,387
                                               -----------        -----------

    Total gross loans                          $40,099,660        $35,645,983
                                               ===========        ===========
</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, 2001, 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,
2001, 2000, and 1999 are summarized below:

<TABLE>
<CAPTION>
                                                     2001              2000              1999
                                                  ---------         ---------         ---------
<S>                                               <C>               <C>               <C>
Balance, beginning of year                        $ 466,835         $ 429,049         $ 303,248
Provision charged to operations                     104,000           151,500           139,750
Recoveries on loans previously charged off           34,618             9,712            12,956
Loans charged off                                   (59,077)         (123,426)          (26,905)
                                                  ---------         ---------         ---------

Balance, end of year                              $ 546,376         $ 466,835         $ 429,049
                                                  =========         =========         =========
</TABLE>

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. 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
nonperformance 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.


                                       28
<PAGE>



                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - LOANS (continued)

The following table summarizes the Company's off-balance-sheet financial
instruments whose contract amounts represent credit risk as of December 31, 2001
and 2000:

<TABLE>
<CAPTION>
                                                  2001                2000
                                              ------------        ----------
<S>                                           <C>                 <C>
Commitments to extend credit                  $  5,117,920        $2,885,763
</TABLE>

NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                         2001              2000
                                      ----------        ----------
<S>                                   <C>               <C>
Land                                  $  436,037        $  436,037
Building and land improvements         2,618,488         1,709,998
Furniture and equipment                1,043,625           681,420
Construction in progress                   3,896           303,477
                                      ----------        ----------
  Total                                4,102,046         3,130,932
Less, accumulated depreciation           692,466           533,396
                                      ----------        ----------

  Premises and equipment, net         $3,409,580        $2,597,536
                                      ==========        ==========
</TABLE>

NOTE 6 - DEPOSITS

At December 31, 2001, the scheduled maturities of time deposits are as follows:

<TABLE>
<CAPTION>
MATURING IN                                            AMOUNT
-----------                                        ------------
<S>                                                <C>
 2002                                              $ 19,918,759
 2003                                                   628,978
 2004                                                    65,050
 2005                                                   191,533
 2006                                                    69,719
                                                   ------------

     Total                                         $ 20,874,039
                                                   ============
</TABLE>


NOTE 7 - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank consist of a $1,000,000 variable rate
advance bearing an interest rate of 1.83% and a $2,000,000 fixed rate advance
bearing an interest rate of 2.93%. The $1,000,000 advance is scheduled to mature
on December 24, 2002, and the $2,000,000 advance is scheduled to mature November
7, 2003.

As collateral, the Company has pledged first mortgage loans on one to four
family residences totaling $8,027,242 at December 31, 2001. In addition, the
Company's Federal Home Loan Bank stock is pledged to secure the borrowings.


                                       29
<PAGE>



                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

At December 31, 2001 and 2000, 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 years ended December 31, 2001 and 2000 is summarized as follows:

<TABLE>
<CAPTION>
                                                    2001               2000
                                                 ----------         ----------
<S>                                              <C>                <C>
Average balance during the year                  $  891,057         $  636,463

Average interest rate during the year                  3.67%              4.00%

Maximum month-end balance during the year        $2,247,924         $1,141,284
</TABLE>

As of December 31, 2001 and 2000, the amortized costs and estimated market
values of the securities underlying the agreements were $1,549,732 and
$1,500,000 and $1,562,500 and $1,492,608, respectively.


NOTE 9 - 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, 2001 and 2000, the Company had related
party loans totaling $432,128, and $443,038, respectively. During 2001, $100,675
of new loans were made to related parties and repayments totaled $111,585.


NOTE 10 - 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.


                                       30
<PAGE>



                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - INCOME TAXES

Income tax expense for the years ended December 31, 2001, 2000, and 1999 is
summarized as follows:

<TABLE>
<CAPTION>
                                           2001             2000            1999
                                        ---------         --------        --------
<S>                                     <C>               <C>             <C>
Currently payable:
  Federal                               $ 142,746         $135,006        $ 94,687
  State                                    13,073           12,341           5,167
                                        ---------         --------        --------
    Total current                         155,819          147,347          99,854
                                        ---------         --------        --------
Change in deferred income taxes:
  Federal                                 (14,697)           9,020         (13,684)
  State                                    (2,133)           1,013           2,015
                                        ---------         --------        --------
     Total deferred                       (16,830)          10,033         (11,669)
                                        ---------         --------        --------

Income tax expense                      $ 138,989         $157,380        $ 88,185
                                        =========         ========        ========
</TABLE>

The gross amounts of deferred tax assets and deferred tax liabilities as of
December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                         ------------------------
                                           2001            2000
                                         --------        --------
<S>                                      <C>             <C>
Deferred tax assets:
  Allowance for loan losses              $186,674        $152,458
  Organization costs                           --          15,130
  Accumulated depreciation                     --           2,523
  Net operating loss carryforward             696             509
  Other real estate owned                   8,126              --
  Other                                     2,918              --
                                         --------        --------
    Total deferred tax assets             198,414         170,620
Deferred tax liabilities:
  Accummulated depreciation                10,964              --
                                         --------        --------
    Net deferred tax assets              $187,450        $170,620
                                         ========        ========
</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, 2001 will be
realized and, accordingly, has not established a valuation allowance.

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

<TABLE>
<CAPTION>
                                                              2001              2000             1999
                                                           ---------         ---------         --------
<S>                                                        <C>               <C>               <C>
Tax expense at statutory rate                              $ 131,415         $ 149,105         $ 88,208
Surtax exemption                                                  --                --           (1,702)
State income tax, net of federal income tax benefit            8,628             9,155            5,425
Other, net                                                    (1,054)             (880)          (3,746)
                                                           ---------         ---------         --------

                                                           $ 138,989         $ 157,380         $ 88,185
                                                           =========         =========         ========
</TABLE>


                                       31
<PAGE>


                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12 - OTHER EXPENSES

Other expenses for the years ended December 31, 2001, 2000, and 1999 are
summarized as follows:

<TABLE>
<CAPTION>
                                   2001            2000            1999
                                 --------        --------        --------
<S>                              <C>             <C>             <C>
Correspondent bank fees            38,541          32,739          26,087
Printing and postage               35,675          28,599          27,650
Advertising and promotion          36,461          39,204          22,085
Legal and accounting               58,019          46,824          33,000
Telephone expenses                 26,641          22,865          25,053
Other                             252,341         272,365         233,579
                                 --------        --------        --------

    Total                        $447,678        $442,596        $367,454
                                 ========        ========        ========
</TABLE>

NOTE 13 - STOCK-BASED COMPENSATION

The Company has an Incentive Stock Option Plan (Stock Plan) that provides for
the granting of options to purchase up to 152,450 shares of the Company's common
stock to directors, officers, or employees of the Company. 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, 2001 and 2000, there were 33,319 options available for grant.

The Company applies APB Opinion No. 25 and related interpretations in accounting
for 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 and earnings per share for the years ended December 31,
2001, 2000, and 1999 would have been reduced to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
                                      2001          2000          1999
                                   ---------     ---------     ---------
<S>                                <C>           <C>           <C>
Net income:
  As reported                      $ 247,525     $ 281,164     $ 171,249
  Pro forma                          189,400       222,521       114,893

Basic earnings per share:
  As reported                      $    0.40     $    0.46     $    0.28
  Pro forma                             0.31          0.36          0.19

Diluted earnings per share:
  As reported                      $    0.40     $    0.46     $    0.28
  Pro forma                             0.30          0.36          0.19
</TABLE>


                                       32
<PAGE>



                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 13 - STOCK-BASED COMPENSATION (continued)

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 2000 and
1999: dividend yield of 0 percent; expected volatility of 0 percent; risk-free
interest rates of 6.55% and 5.56% for 2000 and 1999, respectively; and an
expected life of 10 years for both years. There were no options granted in 2001.

The weighted-average fair value of options, calculated using the Black-Scholes
option-pricing model, granted during 2000 and 1999 was $4.75 and $4.21,
respectively.

A summary of the status of the Company's stock option plan as of December 31,
2001, 2000, and 1999 and changes during the years ended on those dates is
presented below:

<TABLE>
<CAPTION>
                                     2001                        2000                         1999
                             ----------------------       ----------------------       ----------------------
                                           WEIGHTED                     WEIGHTED                     WEIGHTED
                                            AVERAGE                      AVERAGE                      AVERAGE
                                           EXERCISE                     EXERCISE                     EXERCISE
                             OPTIONS         PRICE        OPTIONS         PRICE        OPTIONS         PRICE
                             -------       --------       -------       --------       -------       --------
<S>                          <C>           <C>            <C>           <C>            <C>           <C>
Outstanding                  119,131        $10.00        111,131        $10.00        102,846        $10.00
 at beginning of year
Granted                           --        $   --          8,000        $10.00          8,285        $10.00
Exercised                         --        $   --             --        $   --             --        $   --
Cancelled                         --        $   --             --        $   --             --        $   --
                             -------                      -------                      -------        ------
Outstanding
 at ending of year           119,131        $10.00        119,131        $10.00        111,131        $10.00
                             =======                      =======                      =======
</TABLE>

Options exercisable at December 31, 2001, 2000, and 1999 were 84,848, 61,021,
and 38,795, respectively.

At December 31, 2001, the outstanding stock options had a weighted average
remaining life of 6.31 years and a remaining life of 5.87 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 14 - UNUSED LINES OF CREDIT

As of December 31, 2001, the Bank had unused lines of credit to purchase federal
funds from unrelated banks totaling $1,750,000. These lines of credit are
available on a one to fourteen-day basis for general corporate purposes. In
addition, the Bank has a line of credit with Federal Home Loan Bank of ten
percent of total assets or $5,118,000 at December 31, 2001. As of December 31,
2001, the Bank had borrowed $3,000,000 on this line of credit.


                                       33
<PAGE>

                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15 - 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 judgments 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.

Loans - For certain categories of loans, such as variable rate loans which are
repriced frequently and have no significant change in credit risk, 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.

Advances from the Federal Home Loan Bank - The carrying amounts of variable rate
borrowings are reasonable estimates of fair value because they can be repriced
frequently. The fair values of fixed rate borrowings are estimated using a
discounted cash flow calculation that applies the Company's current borrowing
rate from the Federal Home Loan Bank.

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.


                                       34
<PAGE>



                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

The carrying values and estimated fair values of the Company's financial
instruments at December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                     2001                                  2000
                                                        -----------------------------           --------------------------
                                                          CARRYING          ESTIMATED            CARRYING       ESTIMATED
                                                           AMOUNT          FAIR VALUE              AMOUNT       FAIR VALUE
                                                        -----------        -----------          -----------    -----------
<S>                                                     <C>                <C>                  <C>            <C>
FINANCIAL ASSETS:
  Cash and due from banks                               $ 2,769,532        $ 2,769,532          $ 1,487,957    $ 1,487,957
  Federal funds sold                                        738,000            738,000            1,150,000      1,150,000
  Securities held-to-maturity                             3,749,464          3,780,078            3,544,730      3,536,482
  Loans                                                  40,099,660         40,513,225           35,645,983     35,419,957
  Allowance for loan losses                                (546,376)          (546,376)            (466,835)      (466,835)
  Accrued interest receivable                               312,075            312,075              317,271        317,271

FINANCIAL LIABILITIES:
  Demand deposit, interest-bearing                      $19,545,152        $19,545,152          $15,409,640     15,409,640
   transaction, and savings accounts
  Time deposits                                          20,874,039         21,011,133           21,375,577    $21,357,744
  Advances from the Federal Home Loan Bank                3,000,000          2,985,660            1,000,000      1,000,000
  Securities sold under agreements to repurchase          1,125,204          1,125,204              638,988        638,988
  Accrued interest payable                                   60,597             60,597               75,632         75,632
</TABLE>

<TABLE>
<CAPTION>
                                                          NOTIONAL          ESTIMATED             NOTIONAL       ESTIMATED
                                                           AMOUNT           FAIR VALUE             AMOUNT        FAIR VALUE
                                                        -----------        -----------          -----------    -----------
<S>                                                     <C>                <C>                  <C>            <C>
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS:
  Commitments to extend credit                          $ 5,117,920        $ 5,117,920          $ 2,885,763    $ 2,885,763
</TABLE>



                                       35
<PAGE>



                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 16 - 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, 2001, 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.


NOTE 17 - EARNINGS PER SHARE

Net income per share - basic is computed by dividing net income by the weighted
average number of common shares outstanding. Net income per share - diluted is
computed by dividing net income by the weighted average number of common shares
outstanding and dilutive common share equivalents using the treasury stock
method. Dilutive common share equivalents include common shares issuable upon
exercise of outstanding stock options.

<TABLE>
<CAPTION>
                                                   2001         2000         1999
                                                 --------     --------     --------
<S>                                              <C>          <C>          <C>
NET INCOME PER SHARE - BASIC COMPUTATION:

Net income available to common shareholders      $247,525     $281,164     $171,249
                                                 ========     ========     ========

Average common shares outstanding - basic         616,338      616,338      616,338
                                                 ========     ========     ========

Net income per share - basic                     $   0.40     $   0.46     $   0.28
                                                 ========     ========     ========

NET INCOME PER SHARE - DILUTED COMPUTATION:

Net income available to common shareholders      $247,525     $281,164     $171,249
                                                 ========     ========     ========

Average common shares outstanding - basic         616,338      616,338      616,338

Incremental shares from assumed conversions:
  Stock options                                     9,159           --           --
                                                 --------     --------     --------

Average common shares outstanding - diluted       625,497      616,338      616,338
                                                 --------     --------     --------

Net income per share - diluted                   $   0.40     $   0.46     $   0.28
                                                 ========     ========     ========
</TABLE>

Since the option exercise price was greater than the average market price of a
common share during 2000 and 1999, options outstanding at the end of these years
were not included in the above computation of diluted earnings.


                                       36
<PAGE>


                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 18 - 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 judgments 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 1 and total capital as a
percentage of assets and off-balance-sheet exposures, adjusted for risk weights
ranging from 0% to 100%. Tier 1 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 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, 2001, 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, 2001 and 2000.


<TABLE>
<CAPTION>
                                                                                             TO BE WELL-
                                                                                          CAPITALIZED UNDER
                                                                        FOR CAPITAL       PROMPT CORRECTIVE
                                                      ACTUAL        ADEQUACY PURPOSES     ACTION PROVISIONS
                                              -------------------   ------------------   --------------------
                                                AMOUNT      RATIO     AMOUNT     RATIO     AMOUNT       RATIO
                                              ----------    -----   ----------   -----   ----------     -----
<S>                                           <C>           <C>     <C>          <C>     <C>            <C>
DECEMBER 31, 2001
 Total capital (to risk-weighted assets)      $5,626,270    13.26%  $3,394,480    8.00%  $4,243,100     10.00%
 Tier 1 capital (to risk-weighted assets)      5,095,883    12.01%   1,697,240    4.00%   2,545,860      6.00%
 Tier 1 capital (to average assets)            5,095,883    10.44%   1,952,720    4.00%   2,440,900      5.00%

DECEMBER 31, 2000
 Total capital (to risk-weighted assets)      $5,296,737    14.34%  $2,954,738    8.00%  $3,693,423     10.00%
 Tier 1 capital (to risk-weighted assets)      4,834,572    13.09%   1,477,369    4.00%   2,216,054      6.00%
 Tier 1 capital (to average assets)            4,834,572    10.78%   1,794,318    4.00%   2,242,898      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.


                                       37
<PAGE>



                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 19 - FNB BANCSHARES, INC. (PARENT COMPANY ONLY)

                                 BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                2001           2000
                                                            ----------     ----------
<S>                                                         <C>            <C>
ASSETS:
  Cash                                                      $1,440,432     $1,437,200
  Investment in banking subsidiary                           5,095,883      4,846,573
  Other assets                                                     196          5,213
                                                            ----------     ----------

    Total assets                                            $6,536,511     $6,288,986
                                                            ==========     ==========

LIABILITIES

SHAREHOLDERS' EQUITY:
  Common stock                                              $    6,163     $    6,163
  Capital surplus                                            6,112,318      6,112,318
  Retained earnings                                            418,030        170,505
                                                            ----------     ----------
    Total shareholders' equity                               6,536,511      6,288,986
                                                            ----------     ----------
    Total liabilities and shareholders' equity              $6,536,511     $6,288,986
                                                            ==========     ==========
</TABLE>


                              STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999


<TABLE>
<CAPTION>
                                                              2001           2000           1999
                                                           ---------      ---------      ---------
<S>                                                        <C>            <C>            <C>
INCOME                                                     $      --      $      --      $      --

EXPENSES                                                       3,021          3,625          3,625
                                                           ---------      ---------      ---------

INCOME BEFORE INCOME TAXES AND EQUITY IN                      (3,021)        (3,625)        (3,625)
 UNDISTRIBUTED EARNINGS OF BANKING SUBSIDIARY

Income tax benefit                                             1,236          1,236          1,254

Equity in undistributed earnings of banking subsidiary       249,310        283,553        173,620
                                                           ---------      ---------      ---------

  NET INCOME                                               $ 247,525      $ 281,164      $ 171,249
                                                           =========      =========      =========
</TABLE>


                                       38
<PAGE>



                              FNB BANCSHARES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 19 - FNB BANCSHARES, INC. (PARENT COMPANY ONLY) (continued)
----------------------------------------------------

                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999


<TABLE>
<CAPTION>
                                                                   2001             2000             1999
                                                               -----------      -----------      -----------
<S>                                                            <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                   $   247,525      $   281,164      $   171,249
  Adjustments to reconcile net income to net cash provided
  by operating activities:
    Decrease in other assets                                         5,017            4,856           64,404
    Increase (decrease) in other liabilities                            --           (1,255)           1,255
    Equity in undistributed earnings of banking subsidiary        (249,310)        (283,553)        (173,620)
                                                               -----------      -----------      -----------
    Net cash provided by operating activities                        3,232            1,212           63,288
                                                               -----------      -----------      -----------

INCREASE IN CASH                                                     3,232            1,212           63,288

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                   1,437,200        1,435,988        1,372,700
                                                               -----------      -----------      -----------

CASH AND CASH EQUIVALENTS, ENDING OF PERIOD                    $ 1,440,432      $ 1,437,200      $ 1,435,988
                                                               ===========      ===========      ===========
</TABLE>



                                       39
<PAGE>

                              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

                       Kim Barrs, Chief Financial Officer





                                    OFFICERS

              Danny Ham, Vice President, Blacksburg City Executive

                  Mike Grubbs, Vice President, Consumer Banker

            Tina Gainey, Assistant Vice President, Operations Officer




                                    SERVICES

<TABLE>
<S>                                     <C>                                 <C>
All-Day Banking                         Commercial Loans                    Personal Checking
American Express Travelers Checks       Direct Deposits                     Personal Lines of Credit
ATM Service                             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>


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<PAGE>


                              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 23, 2002 at our offices at 217 North Granard Street, Gaffney,
South Carolina.

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 & Caskey, L.L.P.
P.O. Box 29                          P.O. Box 1769
Columbia, South Carolina 29202       Columbia, S.C. 29202

STOCK INFORMATION:

The Common Stock of FNB Bancshares, Inc. is not listed on any exchange. However,
the Company's stock trades under the symbol "FNBC" on the OTC Bulletin Board.
Market makers of the Company's stock include Legg Mason Wood Walker,
Incorporated at 831 East Morehead Street, Suite 850, Charlotte, North Carolina
28232. The latest trades of which the Company is aware were at $10.30 per share.
As of December 31, 2001, there were 541 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 the Company in the form of cash dividends. All of the
Bank's dividends to the Company 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 KIM BARRS, 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 Corporation's Rules and
Regulations. THIS STATEMENT HAS NOT BEEN REVIEWED, OR CONFIRMED FOR ACCURACY OR
RELEVANCE BY THE OFFICE OF THE COMPTROLLER OF THE CURRENCY.


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