<PAGE>   1



                                                                      EXHIBIT 13


       ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1997



<PAGE>   2

                              FNB BANCSHARES, INC.



                               1997 ANNUAL REPORT





<PAGE>   3

                              FNB BANCSHARES, INC.



                                Table of Contents
<TABLE>
<CAPTION>
                                                                                                           Page
                                                                                                           ----
<S>                                                                                                        <C>
Shareholder's Letter                                                                                           2
Summary of Selected Financial Data                                                                             3
Management's Discussion and Analysis                                                                        4-14
Report of Independent Auditors                                                                                15
Consolidated Balance Sheets                                                                                   16
Consolidated Statements of Operations                                                                         17
Consolidated Changes in Stockholder's Equity                                                                  18
Consolidated Statements of Cash Flows                                                                         19
Notes to Consolidated Financial Statements                                                                 20-32
Dirctors, Officers and Services                                                                               33
Corporate Data                                                                                                34
</TABLE>




<PAGE>   4


                              FNB BANCSHARES, INC.



To our Stockholders:

1997 was a good year of growth for First National Bank of the Carolinas as we
have continued to build our financial organization and become an active
participant in the Cherokee County banking community. By being able to make
decisions locally we have been able to quickly respond to the needs of our
customers.

First National Bank has become a good neighbor for our community. Through
contributions and volunteer service of our employees we have been able to assist
over 30 worthwhile community organizations. As we continue to grow, we will
always strive to give back to our community.

Deposit growth for 1997 exceeded our original goals and we were able to continue
attracting low cost deposits, thus keeping our cost of funds low. These stable
funds enable us to continue to make affordable loans which help our local
economy.

We continue to see a strong loan demand as we made over $14,000,000 in new loans
during 1997. At the same time our loan losses were extremely low, reflecting our
commitment to quality loan growth. While we continue to seek additional loan
customers, we stand firm in our commitment to asset quality. A third party
consultant has been contracted to periodically review our loan portfolio.

During 1998 we will seek ways to maximize our sources of revenue. While interest
income on loans will continue to be our most important revenue source, we plan
to initiate some programs to enhance our fee income. This should provide a
steady income source while maximizing the use of our facilities and employees.

Plans are being finalized to begin construction of our new main office facility
in Gaffney. Construction on a new 11,000 square foot two story facility will
begin in the Spring of 1998 and we should be able to move into the new building
by December, 1998. This cannot come soon enough as we are currently limited due
to the size of our current temporary facilities.

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

I hope that you will be able to join us for the Annual Shareholders meeting on
Tuesday April 28, 1998 at 5:30 p.m. at the Holiday Inn Express in Gaffney, South
Carolina. We are grateful for your continued support in our success. The
directors and employees of First National Bank of the Carolinas are committed to
building a strong community bank and improving shareholder value.



Bill H. Mason
Chairman of the Board



V. Stephen Moss
President

                                       2

<PAGE>   5


                              FNB BANCSHARES, INC.

                             SELECTED FINANCIAL DATA


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



<TABLE>
<CAPTION>
Years ended December 31, 1997 and 1996 and the                  1997                  1996                 1995
                                                                ----                  ----                 ----
period September 27, 1995 to December 31, 1995

(Dollars in thousands, except per share)

<S>                                                           <C>                   <C>                  <C>
BALANCE SHEET:
         Securities held to maturity                          $   1,501             $   344              $   --
         Allowance for loan losses                                  153                  20                  --
         Net loans                                               14,016               2,024                  --
         Premises and equipment - net                               761                 734                   4
         Total assets                                            19,920              11,733                  75
         Non-interest bearing deposits                            2,478               1,125                  --
         Interest bearing deposits                               11,083               4,679                  --
         Total deposits                                          13,560               5,804                  --
         Total liabilities                                       14,211               5,839                 102
         Total shareholders' equity                               5,709               5,894                 (27)

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

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


PER SHARE DATA:
         Weighted average common shares outstanding             616,388             616,388                  --
         Basic earnings (loss) per share                      $    (.30)            $  (.32)             $   --
         Diluted earnings (loss) per share                    $    (.30)            $  (.32)             $   --
</TABLE>


DESCRIPTION OF THE COMPANY'S BUSINESS

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

                                       3

<PAGE>   6


                              FNB BANCSHARES, INC.

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


DESCRIPTION OF THE COMPANY'S BUSINESS - CONTINUED

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. This commentary should be
read in conjunction with the consolidated financial statements and the related
notes and the other statistical information in this report.

RESULTS OF OPERATIONS

1997 COMPARED TO 1996:

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

1996 COMPARED TO 1995:

The Company commenced operations on October 18, 1996. The 1995 expenses were a
result of the start-up of the Company; therefore, comparison of the 1996 to 1995
results is not meaningful.

NET INTEREST INCOME

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

Net interest income was $852,333 for the year ended December 31, 1997. In 1997,
the significant portion of the $1,247,857 in interest income was attributable to
the $886,790 in income from loans. Interest expense for the year ended December
31, 1997 was $395,524.

Net interest income for the year ended December 31, 1996 was $164,089. The
significant portion of the $205,952 in interest income was the $176,393 in
income from federal funds. Cash from the stock offering was invested in federal
funds until the day the Bank commenced operations. Interest expense was $41,863
for the year ended December 31, 1996.

                                       4

<PAGE>   7

                              FNB BANCSHARES, INC.

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

COMPARATIVE AVERAGE BALANCES, YIELDS AND RATES

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.

<TABLE>
<CAPTION>
                                                  1997                             October 18 - December 31, 1996
                                                  ----                             ------------------------------
                                 Average                         Yield/        Average                         Yield/
                                 Balance         Interest         Rate         Balance         Interest         Rate
                                --------         --------        -----         -------         --------        -----
(Dollars in thousands)
<S>                             <C>              <C>             <C>          <C>              <C>              <C>
ASSETS:
Taxable Securities              $  1,254          $   71         5.66%        $   187           $  2             5.16%
Time deposits with other banks       276              16         5.79%
Federal funds sold                 4,982             274         5.50%          6,705             74             5.34%
Loans                              8,637             887        10.27%          1,054             28            12.71%
                                --------          ------                      -------           ----            -----

     Total earning assets         15,149           1,248         8.24%          7,946            104             6.37%
                                --------          ------                      -------           ----
Cash and due from banks              658                                          680
Allowance for loan losses            (82)                                          (5)
Premises and equipment               798                                          512
Other assets                         443                                          252
                                --------                                      -------
     Total assets               $ 16,966                                      $ 9,385
                                ========                                      =======

LIABILITIES AND SHAREHOLDERS'
EQUITY:
Interest bearing deposits       $  8,394             371         4.42%        $ 2,794             27             4.70%
Securities sold under
agreements to repurchase             597              24         4.02%             --             --               --
                                --------          ------                      -------           ----
     Total interest-bearing
     liabilities                   8,991             395         4.39%          2,794             27             4.70%
                                                  ------                                        ----
Non-interest bearing deposits      2,224                                          628
Accrued interest and other
liabilities                          137                                            9
Shareholders' equity               5,614                                        5,954
                                --------                                      -------
     Total liabilities and                                                    $ 9,385
                                                                              =======
     shareholders' equity
Net interest income/interest
rate spread                                       $  853         3.85%                          $ 77             1.67%
                                                  ======        =====                           ====            =====
Net interest margin on
earning assets                                                   5.63%                                           4.71%
                                                                =====                                           =====
</TABLE>

                                       5

<PAGE>   8
                              FNB BANCSHARES, INC.

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

RATE SENSITIVITY

The following table presents the Company's rate sensitivity at each of the time
intervals indicated as of December 31, 1997. 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                           7-12                         Over
(Dollars in thousands)         3 months      4-6 months           months    1-5 years          5 years      Total
                               --------      ----------           ------    ---------          -------      -----
<S>                            <C>           <C>            <C>           <C>           <C>           <C>
Interest earning assets:
    Taxable securities         $       400    $      --      $     199     $      902    $       --    $    1,501
    Time deposits with other           600           --             --             --            --           600
    banks
    Federal funds sold               1,430           --             --             --            --         1,430
    Loans                            5,454          408            519          5,448         2,340        14,169
                               -----------    ---------      ---------     ----------    ----------    ==========
       Total                         7,884          408            718          6,350         2,340        17,700
                               ===========    ---------      =========     ==========    ==========    ==========
Interest bearing liabilities
    Interest bearing                 5,318        2,241          2,789            619           115        11,082
    deposits (1)
    Securities sold under              424           --             --             --            --           424
    agreements to repurchase   -----------    ---------      ---------     ----------    ----------    ----------
                                     5,742        2,241          2,789            619           115        11,506

Interest sensitivity gap             2,142       (1,833)        (2,071)         5,731         2,225         6,194
                               ===========    ==========     =========     ==========    ==========    ==========
Cumulative interest                  2,142          309         (1,762)         3,969         6,194         6,194
                               ===========    =========      =========     ==========    ==========    ==========
sensitivity gap
Gap ratio (2)                        12.10 %     (10.36%)       (11.70)%        32.38%        12.57%
                               ===========    =========      =========     ==========    ==========
Cumulative gap ration (2)            12.10 %       1.75%         (9.95)%        22.42%        34.99%
                               ===========    =========      =========     ==========    ==========
</TABLE>

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

(2) Ratio of gap to total earning assets.

Interest rates paid on deposits and borrowed funds and interest rates earned on
loans and investments have generally followed the fluctuations in market rates
in 1997 and 1996. A rate sensitive asset or liability is one that can be
repriced either up or down in interest rate within a certain time interval. When
a proper balance between rate sensitive assets and rate sensitive liabilities
exists, market interest rate fluctuations should not have a significant impact
on earnings. The larger the imbalance, the greater the interest rate risk
assumed by the Company and the greater the positive or negative impact of
interest rate fluctuations on earnings. The Company seeks to manage its assets
and liabilities in a manner that will limit interest rate risk and stabilize
long-term earning powers. The principal monitoring technique employed by the
Company is the measurement of the Company's interest sensitivity "gap," which is
the positive or negative dollar difference between assets and liabilities that
are subject to interest rate repricing within a given period of time. Interest
rate sensitivity can be managed by repricing assets or liabilities, selling
securities available-for-sale, replacing an asset or liability at maturity, or
adjusting the interest rate during the life of an asset or liability. Managing
the amount of assets and liabilities repricing in this time interval helps to
hedge the risk and minimize the impact on net interest income of rising or
falling interest rates.

                                       6

<PAGE>   9

                              FNB BANCSHARES, INC.

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


RATE SENSITIVITY - CONTINUED

The Company generally would benefit from increasing market rates of interest
when it has an asset-sensitive gap position and generally would benefit from
decreasing market rates of interest when it is liability-sensitive. However, the
Company's gap analysis is not a precise indicator of its interest sensitivity
position. The analysis presents only a static view of the timing of maturities
and repricing opportunities, without taking into consideration that changes in
interest rates do not affect all assets and liabilities equally. For example,
rates paid on a substantial portion of core deposits may change contractually
within a relatively short time frame, but those rates are viewed by management
as significantly less interest-sensitive than market-based rates such as those
paid on non-core deposits. 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.

RATE/VOLUME ANALYSIS

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

PROVISION FOR LOAN LOSSES

The Company maintains a reserve for loan losses which is funded by charges to
current earnings. This reserve is intended to be an adequate allowance to absorb
losses on loans outstanding and is based on management's continuing review and
evaluation of the Company's loan portfolio. During 1997, the Company transferred
$138,000 from earnings to the reserve for loan losses increasing the balance to
$152,614 on December 31, 1997 after deducting current year net charge offs.

Reserve for loan losses was approximately 1.08% and 1.00% of total loans on
December 31, 1997 and 1996, respectively. As the Company continues to mature,
management will evaluate its reserve policy and adjust the policy based on
historical loss experience, changes in economic conditions, growth in the
portfolio and evaluations of specific loans. Management believes the level of
the allowance for loan losses is sufficient to provide for potential losses in
the loan portfolio. However, management's 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 charge-offs in future periods will not exceed the allowance
for loan losses or that additional increases in the loan loss allowance will not
be required.

OTHER INCOME

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

Other income was $5,976 in 1996. This was comprised primarily of loan and
deposit fees.

OTHER EXPENSES

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

                                       7

<PAGE>   10

                              FNB BANCSHARES, INC.

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


Non-interest expenses were $431,602 in 1996. This was comprised primarily of
salaries of $238,606, furniture, fixtures and equipment of $11,991, occupancy of
$29,846 and other operating expense of $151,159.

INCOME TAXES

The Company's net loss before income taxes of $257,146 resulted in an income tax
benefit of $72,001 for the year ended December 31, 1997. In 1996, an income tax
benefit of $84,460 was recorded due to the Company's net loss of $281,537.

CAPITAL RESOURCES

Total capital of the Company was reduced by the net loss in 1997 of $185,145. In
1996, capital was reduced by the net loss of $197,077.

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%. The Federal Reserve guidelines also
contain an exemption from the capital requirements for bank holding companies
with less than $150 million in consolidated assets. Because the Company has less
than $150 million in assets, it is not currently subject to these rules. Under
the risk-based standard, capital is classified into two tiers. Tier 1 capital of
the Company consists of common stockholders' equity, excluding the unrealized
gain (loss) on securities available-for-sale, minus certain intangible assets.
Tier 2 capital consists of general reserve 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 total assets, which is known as
the leverage ratio. Only the strongest bank holding companies and banks are
allowed to maintain capital at the minimum requirement. All others are subject
to maintaining ratios 100 to 200 basis points above the minimum.

RISK-BASED CAPITAL RATIOS

<TABLE>
<CAPTION>
                                                                    The Bank                      The Company
<S>                                                             <C>                             <C>
Tier 1 capital:
     Common shareholders' equity                                $     4,259,710                 $    5,709,181
Less:  intangibles                                                      (56,148)                       (69,043)
Less:  disallowed deferred tax assets                                  (102,479)                      (167,319)
                                                                ---------------                 --------------
Total Tier 1 capital                                                  4,101,083                      5,472,819
Tier 2 capital:
   Allowable allowance for loan losses                                  152,614                        152,614
                                                                ---------------                 --------------
     Tier 2 capital additions                                           152,614                        152,614
                                                                ---------------                 --------------
     Total capital                                              $     4,253,697                 $    5,625,433
                                                                ===============                 ==============

Risk adjusted assets                                            $    14,840,250                 $   14,848,975
                                                                ===============                 ==============

Total assets                                                    $    19,697,215                 $   19,920,308
                                                                ===============                 ==============

Risk-based capital ratios:
     Tier 1 capital                                                       27.64%                         36.86%
     Total capital                                                        28.67%                         37.88%
     Tier 1 leverage ratio                                                21.20%                         28.09%
</TABLE>

                                       8
<PAGE>   11

                              FNB BANCSHARES, INC.

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


At December 31, 1997 the Company has no outstanding significant commitments for
capital expenditures. However, the Company plans to construct new corporate
headquarters in Gaffney in 1998 which are expected to cost approximately
$1,500,000.

LIQUIDITY

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

IMPACT OF INFLATION AND CHANGING PRICES

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

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

INVESTMENT PORTFOLIO

The following tables summarize the carrying value of investment securities and
weighted average yields of those securities at December 31, 1997 and 1996.

INVESTMENT SECURITIES PORTFOLIO COMPOSITION

HELD TO MATURITY

<TABLE>
<CAPTION>
                                                                         1997                        1996
                                                                         ----                        ----
<S>                                                                  <C>                         <C>
U.S. Treasury securities                                             $   1,151,331               $    344,190
U.S. Government agencies and corporations                                  350,000                          -
                                                                     -------------               ------------

                                                                     $   1,501,331               $    344,190
                                                                     =============               ============
</TABLE>

INVESTMENT SECURITIES PORTFOLIO MATURITY SCHEDULE

                                       9

<PAGE>   12

                              FNB BANCSHARES, INC.

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

<TABLE>
<CAPTION>
                                                                                       1997
                                                                                       ----
                                                                        Amount                      Yield
                                                                        ------                      -----
<S>                                                                  <C>                            <C>
U.S. Treasury and U.S. Government agencies due:
     Within one year                                                 $     599,241                   5.65%
     After one year but within five years                                  902,090                   6.08%
                                                                     -------------                   ----

                                                                     $   1,501,331                   5.90%
                                                                     =============                   ====
</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 Bank's loans are collateralized by real estate. Even
though a substantial portion of the Company's loans are collateralized by real
estate, the cash flow of the borrower or the business enterprise is generally
considered as the primary source of repayment. Generally, the value of real
estate is not considered by the Company as the primary source of repayment for
performing loans. The Company also seeks to limit total exposure to individual
and affiliated borrowers. The Company manages the risk specific to individual
borrowers through the loan underwriting process and through an ongoing analysis
of the borrower's ability to service the debt as well as the value of the
pledged collateral.

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

LENDING ACTIVITIES

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

The Company's service area is mixed in nature. The corporate office is located
in Gaffney, South Carolina. The economy of Cherokee County is a regional
business center whose economy contains elements of medium and light
manufacturing, higher education, regional health care, and distribution
facilities. Outside the incorporated city limits of Gaffney, the economy
includes manufacturing, agriculture, timber, and recreational activities. No
particular category or segment of the economies previously described are
expected to grow or contract disproportionately in 1998.

Management is of the opinion that the loan portfolio is adequately diversified.
There are no significant concentrations of loans in any particular individuals
or industry or group of related individuals or industries.

                                       10

<PAGE>   13

                              FNB BANCSHARES, INC.

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

Total loans outstanding were $14,168,832 and $2,043,972 at December 31, 1997 and
1996, respectively. The loan demand remains strong in the Company's market area,
supported in part, by customers moving from larger financial institutions after
recent mergers.

The Company's ratio of loans to deposits was 104% and 35% on December 31, 1997
and 1996, 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.

LOAN PORTFOLIO COMPOSITION

The following table summarizes the composition of the loan portfolio at December
31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                     1997                           1996
                                                                     ----                           ----
<S>                                                               <C>                             <C>
(Dollars in thousands)
Commercial, financial and agricultural                            $   3,227                       $     887
Real estate - construction                                              207                              --
Real estate - mortgage                                                6,725                             523
Consumer and other                                                    4,010                             634
                                                                  ---------                       ---------
                                                                  $  14,169                       $   2,044
                                                                  =========                       =========
</TABLE>


MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES:

The following table summarizes the loan maturity distribution, by type, at
December 31, 1997 and related interest rate characteristics:

<TABLE>
<CAPTION>

                                                      One year          One to           After
                                                       or less        five years      five years          Total
                                                   ------------     ------------     -----------          -----
<S>                                                <C>              <C>             <C>              <C>
Commercial, financial and agricultural             $   1,110,422    $  1,853,669    $    263,470     $   3,227,561
Real estate - construction                                 7,000         199,531              --           206,531
Real estate - mortgage                                 1,829,933       2,144,203       2,750,585         6,724,721
Consumer and other                                     1,040,512       2,200,156         769,351         4,010,019
                                                   -------------    ------------    ------------     -------------

                                                   $   3,987,867    $  6,397,559    $  3,783,406       $14,168,832
                                                   =============    ------------    ============        ==========

Predetermined rate, maturing greater than one                       $  5,447,322    $  2,339,579     $   7,786,901
                                                                    ============    ============     =============
     year

Variable rate or maturing within one year          $   6,381,931                                     $   6,381,931
                                                   =============                                     =============
</TABLE>

RISK ELEMENTS

At December 31, 1997, there were no loans past due 90 days or more and still
accruing interest and one loan of $2,993 in non-accrual status. There were no
nonaccrual loans or loans 90 days or more past due at December 31, 1996.

                                       11

<PAGE>   14

                              FNB BANCSHARES, INC.

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


SUMMARY OF LOAN LOSS EXPERIENCE

<TABLE>
<CAPTION>
                                                                     1997                           1996
                                                                     ----                           ----
<S>                                                               <C>                           <C>
Loans outstanding at the end of year                              $   14,168,832                $   2,043,972
                                                                  ==============                =============

Average amount of loans outstanding                               $    8,637,132                $   1,053,745
                                                                  ==============                =============

Balance, beginning of year                                        $       20,000                $          --
                                                                  --------------                -------------
Total loans charged off                                                    5,386                           --
Recoveries of loans previously charged off                                    --                           --
                                                                  --------------                -------------

     Net charge-offs                                                       5,386                           --
                                                                  --------------                -------------

Provision charged to operations                                          138,000                       20,000
                                                                  --------------                -------------

Balance, end of year                                              $      152,614                $      20,000
                                                                  ==============                =============
Ratios:
     Allowance for loan losses to average loans                             1.77%                        1.90%
     Allowance for loan losses to loans, end of year                        1.08%                         .98%
</TABLE>

Management has allocated the majority of its allowance for loan losses to real
estate and commercial loans at December 31, 1997.

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

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

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

At December 31, 1997, management reviewed its loan portfolio and determined that
no impairment on loans existed that would have a material effect on the
Company's consolidated financial statements.

AVERAGE DAILY DEPOSITS

Average deposits were $10,618,491 during 1997, the first full year of the Bank's
operations. Certificates of deposit over $100,000 totaled $2,141,145 at December
31, 1997. Of this total, scheduled maturities of three months or less were
$722,660; over three months through six months were $575,667; over six through
twelve months were $741,824; and over twelve months $100,994.

                                       12

<PAGE>   15

                              FNB BANCSHARES, INC.

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


The following table summarizes the Bank's deposits for the year ended December
31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                                1997                              1996
                                                                ----                              ----
                                                                      Percent of
                                                       Amount         Deposits           Amount         Percent of
                                                      ---------      -----------        ---------       ----------

                                                                                                         Deposits
<S>                                                   <C>             <C>                <C>            <C>
Non-interest bearing demand                           $   2,478          18.28%          $  1,125         19.38%
Interest bearing transaction accounts                     2,532          18.67%             1,234         21.26%
Savings                                                   1,358          10.01%               534          9.49%
Certificates of Deposit                                   7,192          53.04%             2,894         49.87%
                                                      ---------         ------           --------        ------

                                                      $  13,560         100.00%          $  5,804        100.00%
                                                      =========         ======           ========        ======
</TABLE>

Core deposits, which excludes certificates of deposit of $100,000 or more,
provide a relatively stable funding source for the Company's loan portfolio and
other earning assets. The Company's core deposits were $11,418,723 and
$5,005,600 at December 31, 1997 and 1996, respectively.

SHORT-TERM BORROWINGS

At December 31, 1997 the Company had short term borrowings which consisted of
securities sold under agreements to repurchase of $424,413. 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 $937,123 at December 31, 1997. The average interest
rate paid on the repurchase agreement was 3.96% at December 31, 1997.

RETURN ON EQUITY AND ASSETS

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

<TABLE>
<CAPTION>
                                                                        1997                        1996
                                                                        ----                        ----
<S>                                                                    <C>                         <C>
Return on average assets                                               (1.09)%                     (2.10)%
Return on average equity                                               (3.30)%                     (3.31)%
Equity assets ratio                                                    33.09%                      63.44)%
</TABLE>

ACCOUNTING AND FINANCIAL REPORTING ISSUES

In June 1997, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income." SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income is the change in equity of a
business during a period from transactions and other events and circumstances
from nonowner sources and excludes investments by owners and distributions to
owners. Comprehensive income consists of two components, net income and other
comprehensive income. Other comprehensive income includes, among other things,
the change in the unrealized gain or loss on securities available for sale.

This statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.

                                       13

<PAGE>   16
                              FNB BANCSHARES, INC.

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


In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation," effective for transactions entered into in fiscal years that
begin after December 15, 1995. SFAS 123 recommends that companies account for
stock compensation on a fair value based method which requires compensation cost
to be measured at the grant date based on the value of the award and to be
recognized over the service period. As an alternative, companies may continue to
record compensation cost based on 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. However, if a company elects this
method, it must include in the financial statements certain disclosures which
reflect pro forma amounts as if the fair value method had been used.
Accordingly, this disclosure was made in the consolidated financial statements.

FORWARD LOOKING AND TREND INFORMATION

The Company plans to build new corporate headquarters in Gaffney in 1998. While
no commitments have been made at December 31, 1997 the cost of such building is
expected to be approximately $1,500,000.

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

The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed an implementation plan to resolve this issue. The Year 2000 problem is
a result of computer programs being written using two digits rather than four to
define the applicable year. The Company uses a third party service bureau to
process its significant banking applications including all loan, deposit, and
general ledger activity. Any of the third party provider's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in major system failure or
miscalculations. The Company presently believes that, based on written and oral
statements from the third party provider, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems as so
modified and converted. However, if the third party provider does not make the
necessary modifications and conversions on a timely basis, the Year 2000 problem
may have a material impact on the operations of the Company. The Company cannot
predict with any certainty the costs the Company will incur to respond to any
Year 2000 issues. Further, the business of many of the Company's customers may
be negatively affected by the Year 2000 issue, and any financial difficulties
incurred by the Company's customers in solving Year 2000 issues could negatively
affect such customer's ability to repay any loans which the Bank may have
extended. Therefore, even if the Company and the bank do no incur significant
direct costs in connection with responding to the year 2000 issue, there can be
no assurance that the failure or delay of the Bank's customers or other third
parties in addressing the Year 2000 issue or the costs involved in such process
will not have a material adverse effect on the Company's business, financial
condition and results of operations.

                                       14

<PAGE>   17



                         TOURVILLE, SIMPSON & HENDERSON
                          CERTIFIED PUBLIC ACCOUNTANTS
                              POST OFFICE BOX 8567
                               1615 PICKENS STREET
                              COLUMBIA, S. C. 29202
                            TELEPHONE: (803) 252-3000
                               FAX: (803) 254-0211

                          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, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years ended December 31, 1997 and 1996 and for the period
September 27, 1995 to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FNB
Bancshares, Inc., and subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and cash flows for the years ended
December 31, 1997 and 1996 and for the period September 27, 1995 to December 31,
1995 in conformity with generally accepted accounting principles.



/s/ Tourville, Simpson & Henderson



February 11, 1998
Columbia, South Carolina

                                       15


<PAGE>   18


                              FNB BANCSHARES, INC.
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                           1997                      1996
                                                                           ----                      ----
<S>                                                                   <C>                       <C>
ASSETS Cash and cash equivalents:
         Cash and due from banks                                      $   1,007,433             $      342,680
         Federal funds sold                                               1,430,000                  7,930,000
                                                                      -------------             --------------
                                                                          2,437,433                  8,272,680

Securities held to maturity (estimated market value of 1997 --            1,501,331                    344,190
$1,506,203;  1996 - $344,083)

Time deposits with other banks                                              600,000                         --

Loans receivable                                                         14,168,832                  2,043,972
         Less allowance for loan losses                                    (152,614)                   (20,000)
                                                                      -------------             --------------
         Loans, net                                                      14,016,218                  2,023,972

Premises and equipment, net                                                 760,843                    734,443
Accrued interest receivable                                                 122,499                     11,180
Other assets                                                                481,984                    346,436
                                                                      -------------             --------------

         Total assets                                                 $  19,920,308             $   11,732,901
                                                                      =============             ==============

LIABILITIES
Deposits:
         Non-interest bearing transaction accounts                    $   2,478,018             $    1,125,050
         Interest bearing transaction accounts                            2,532,105                  1,234,402
         Savings                                                          1,358,378                    550,717
         Time deposits $100,000 and over                                  2,141,145                    798,765
         Other time deposits                                              5,050,222                  2,095,431
                                                                      -------------             --------------
                                                                         13,559,868                  5,804,365

Securities sold under agreements to repurchase                              424,413                         --
Accrued interest payable                                                     72,832                     20,213
Other liabilities                                                           154,014                     13,997
                                                                      -------------             --------------
         Total liabilities                                               14,211,127                  5,838,575
                                                                      -------------             --------------

STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value: 10,000,000 shares authorized                    --                         --
    and unissued
Common stock, $.01 par value; 10,000,000 shares authorized;                   6,163                      6,163
    606,338 shares issued and outstanding in 1997 and 1996
Capital surplus                                                           6,112,318                  6,112,318
Retained earnings (deficit)                                                (409,300)                  (224,155)
                                                                      -------------             --------------
         Total stockholders' equity                                       5,709,181                  5,894,326
                                                                      -------------             --------------
                                                                      $  19,920,308             $   11,732,901
                                                                      =============             ==============
         Total liabilities and stockholders' equity
</TABLE>

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

                                       16

<PAGE>   19


                              FNB BANCSHARES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
               FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
             FOR THE PERIOD SEPTEMBER 27, 1995 TO DECEMBER 31, 1995


<TABLE>
<CAPTION>
                                       1997           1996          1995
                                    -----------    ----------     --------
<S>                                 <C>            <C>            <C>
INTEREST INCOME
Loans, including fees               $   886,790    $   27,526     $     --
Investment securities, taxable           70,974         2,033           --
Federal funds sold                      273,854       176,393           --
Time deposits with other banks           16,239            --           --
                                    -----------    ----------     --------
                                      1,247,857       205,952           --
                                    -----------    ----------     --------

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

NET INTEREST INCOME                     852,333       164,089           --

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

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

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

OTHER EXPENSE
Salaries and employee benefits          586,135       238,606       19,715
Occupancy expense                        95,653        29,846
Furniture and equipment                  80,523        11,991
Other operating expense                 309,784       151,159        7,363
                                    -----------    ----------     --------
                                      1,072,095       431,602       27,078
                                    -----------    ----------     --------

INCOME (LOSS) BEFORE INCOME TAXES      (257,146)     (281,537)     (27,078)

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

NET INCOME (LOSS)                   $  (185,145)   $ (197,077)    $(27,078)
                                    ===========    ==========     ========

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

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


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


                                       17

<PAGE>   20


                              FNB BANCSHARES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
               FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
             FOR THE PERIOD SEPTEMBER 27, 1995 TO DECEMBER 31, 1995




<TABLE>
<CAPTION>
                                                                 Common Stock
                                 ------------------------------------------------------------------------------
                                                                                  Retained
                                                                Capital           Earnings
                                  Shares        Amount          Surplus          (Deficit)           Total
                                  ------       -------          -------          ---------           ------
<S>                               <C>           <C>           <C>                <C>              <C>
Common stock issued                    10       $     1       $         99       $                $        100
Net income (loss)                                                                   (27,078)           (27,078)
                                 --------       -------       ------------       ----------       ------------
BALANCE, DECEMBER 31, 1995             10       $     1       $         99       $  (27,078)      $    (26,978)
Common stock issued               616,328         6,162          6,157,118                           6,163,280
Cost of common stock issuance                                      (44,899)                            (44,899)
Net income (loss)                                                                  (197,077)          (197,077)
                                 --------       -------       ------------       ----------       ------------
BALANCE DECEMBER 31, 1996         616,338         6,163          6,112,318         (224,155)         5,894,326
Net income (loss)                                                                  (185,145)          (185,145)
                                 ========       =======       ============       ==========       ============
BALANCE, DECEMBER 31,1997         616,338       $ 6,163       $  6,112,318       $ (409,300)      $  5,709,181
                                 ========       =======       ============       ==========       ============
</TABLE>

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

                                       18

<PAGE>   21


                              FNB BANCSHARES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
             FOR THE PERIOD SEPTEMBER 27, 1995 TO DECEMBER 31, 1995

<TABLE>
<CAPTION>

                                                                1997               1996             1995
                                                           ---------------    --------------    ------------
<S>                                                        <C>                <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                          $     (185,145)    $    (197,077)      $  (27,078)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Provision for loan losses                                         138,000            20,000               --
Depreciation                                                       85,551            12,703               --
Accretion and premium amortization                                 (4,737)           (2,033)              --
Deferred income taxes                                             (76,041)          (89,247)              --
Increase in interest receivable                                  (111,319)          (11,180)              --
Increase in interest payable                                       52,619            20,213               --
Increase in other assets                                          (59,507)         (204,981)         (52,208)
Increase in other liabilities                                     140,017            11,886            2,110
                                                           --------------     -------------       ----------
Net cash used by operating activities                             (20,562)         (439,716)         (77,176)
                                                           --------------     -------------       ----------

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity                       (2,102,404)         (342,156)              --
Maturities of securities held to maturity                         950,000                --               --
Purchases of time deposits with other banks                      (600,000)               --               --
Net increase in loans made to customers                       (12,130,246)       (2,043,972)              --
Purchases of premises and equipment                              (111,951)         (743,120)          (4,026)
                                                           --------------     -------------       ----------
Net cash used by investing activities                         (13,994,601)       (3,129,248)          (4,026)
                                                           --------------     -------------       ----------

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

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS           (5,835,247)        8,253,782           18,898

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

CASH AND CASH EQUIVALENTS, END OF YEAR                     $    2,437,433     $   8,272,680       $   18,898
                                                           ==============     =============       ==========
</TABLE>


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

                                       19


<PAGE>   22

                            FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

PRE-OPERATING EXPENSES AND ORGANIZATIONAL COSTS - A summary of the assets
acquired and use of funds up through the date the Bank commenced operations are
as follows:

<TABLE>
<S>                                                                <C>
Common stock subscription proceeds,                                $   6,118,481
   net of $44,899 expenses of offering
Pre-opening interest income                                              101,952
Pre-opening expenses                                                    (247,760)
Deferred organization costs                                              (92,603)
Purchase of premises and equipment                                      (361,876)
Acquisition of Bank                                                   (4,775,845)
                                                                   =============
      Remaining cash and cash equivalents                          $     742,349
                                                                   =============
</TABLE>

The pre-operating income and expenses through the date the Bank commenced
operations are reflected in the accompanying statement of income for the year
ended December 31, 1996 and for the period September 27, 1995 to December 31,
1995. Deferred organization costs for attorney fees, consultants and filing fees
were capitalized and are being amortized over a five year period. Such amount
less accumulated amortization is included in other assets.

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

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

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

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

                                       20

<PAGE>   23

                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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

                                       21

<PAGE>   24



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 P.

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

                                       22

<PAGE>   25


                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

During 1997 and 1996, interest paid on deposits and short-term borrowings
totaled $342,905 and $21,650, respectively. Cash paid for income taxes was
$4,700 in 1997.

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

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

RECLASSIFICATIONS - Certain captions and amounts in the financial statements of
1996 and 1995 were reclassified to conform with the 1997 presentation.

NOTE B - CHANGE IN ACCOUNTING PRINCIPLE

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

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

In October 1995, the FASB issued SFAS 123, "Accounting for Stock-based
Compensation," effective for transactions entered into in fiscal years that
begin after December 15, 1995. SFAS 123 recommends that companies account for
stock compensation on a fair value based method which requires compensation cost
to be measured at the grant date based on the value of the award and to be
recognized over the service period. As an alternative, companies may continue to
record compensation cost based on 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 (APB Opinion No. 25). However, if a
company elects this method, it must include in the financial statements certain
disclosures which reflect pro forma amounts as if the fair value method had been
used. As permitted by SFAS 123, the Company has elected to account for stock
options under APB Opinion No. 25 with pro forma amounts disclosed in the
financial statements. The pro forma disclosures for the Company include the
effects of all awards granted (See Note M).

NOTE C - CASH AND DUE FROM BANKS

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

                                       23

<PAGE>   26

                            FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE D - INVESTMENT SECURITIES

The amortized costs and estimated market values of securities held to maturity
at December 31, 1997 and 1996 were:

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997:                                Amortized         Gross             Gross         Estimated
                                                           Cost         Unrealized        Unrealized        Fair
                                                                          Gains             Losses          Value
                                                       ------------     ----------        -----------    -----------
<S>                                                    <C>               <C>                <C>          <C>
U.S. Treasuries                                        $  1,151,331      $ 3,133            $ 230        $ 1,154,234
U.S. Government agencies and corporations                   350,000        1,969               --            351,969
                                                       ------------      -------            -----        -----------
                                                       $  1,501,331      $ 5,102            $ 230        $ 1,506,203
                                                       ============      =======            =====        ===========
AS OF DECEMBER 31, 1996:
U.S. Treasuries                                        $    344,190      $                  $ 107        $   344,083
                                                       ============      =======            =====        ===========
</TABLE>


The following is a summary of maturities of securities held to maturity as of
December 31, 1997. 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>
                                                   Amortized         Estimated
                                                     Cost               Fair
                                                                       Value
                                                  -----------       ------------
<S>                                               <C>               <C>
Due within one year                               $   599,241       $    599,124
Due within one to five years                          902,090            907,079
                                                  -----------       ------------
                                                  $ 1,501,331       $  1,506,203
                                                  ===========       ============
</TABLE>

At December 31, 1997, investment securities with a book value of $752,422 and a
market value of $755,422 were pledged as collateral to secure public deposits
and for other purposes as required and permitted by law. There were no
investment securities pledged at December 31, 1996.

NOTE E - LOANS

Major classifications of loans receivable as of December 31, 1997 and 1996 are
summarized as follows:

<TABLE>
<CAPTION>
                                                       1997                1996
                                                   -------------       ------------
<S>                                                <C>                 <C>
Commercial and industrial                          $   3,227,562       $    886,758
Real  estate - construction                              206,531                 --
Real  estate - other                                   6,724,721            523,005
Installment and consumer credit lines                  4,010,018            634,209
                                                   -------------       ------------
      Total gross loans                            $  14,168,832       $  2,043,972
                                                   =============       ============
</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, 1997, management has determined that
no impairment of loans existed that would have a material effect on the
Company's financial statements.

                                       24

<PAGE>   27


                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E - LOANS - CONTINUED

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,
1997 and 1996 are summarized below:

<TABLE>
<CAPTION>
                                                                 1997              1996
                                                              ----------         --------
<S>                                                           <C>                <C>
Balance, beginning of period                                  $   20,000         $     --
Provision charged to operations                                  138,000           20,000
Recoveries on loans previously charged off                            --               --
Loans charged off                                                  5,386               --
                                                              ==========         ========
Balance, end of year                                          $  152,614         $ 20,000
                                                              ==========         ========
</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 and standby
letters of credit. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. A commitment involves, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The Company's exposure to credit
loss in the event of non-performance by the other party to the instrument is
represented by the contractual notional amount of the instrument. Since certain
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company uses the same credit policies in making commitments to extend credit as
it does for on-balance-sheet instruments. Letters of credit are conditional
commitments issued to guarantee a customer's performance to a third party and
have essentially the same credit risk as other lending facilities.

The following table summarizes the Company's off-balance-sheet financial
instruments whose contract amounts represent credit risk as of December 31, 1997
and 1996:

<TABLE>
<CAPTION>
                                                         1997              1996
                                                     ------------       -----------
<S>                                                  <C>                <C>
Commitments to extend credit                         $  2,552,114       $ 1,619,000
</TABLE>

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

NOTE F - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
                                                        1997             1996
                                                     ----------       ----------
<S>                                                  <C>              <C>
Land                                                 $  245,492       $  245,492
Building and land improvements                          297,927          192,709
Furniture and equipment                                 315,678          308,945
                                                     ----------       ----------
                                                        859,097          747,146
Less, accumulated depreciation                          (98,254)         (12,703)
                                                     ----------       ----------
Premises and equipment, net                          $  760,843       $  734,443
                                                     ==========       ==========
</TABLE>

                                       25

<PAGE>   28

                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE G - DEPOSITS

At December 31, 1997, the scheduled maturities of time deposits are as follows:

<TABLE>
<C>                                             <C>
1998                                            $ 4,479,390
1999 and thereafter                               2,711,977
                                                -----------
                                                $ 7,191,367
                                                ===========
</TABLE>

NOTE H - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

At December 31, 1997, the Bank had arrangements to sell securities under
agreements to repurchase from a local electric cooperative. Under the terms of
the arrangement, the Bank may borrow at mutually agreed-upon rates for one to
seven day periods. Either party may cancel the arrangement without penalty.
Information concerning securities sold under agreements to repurchase for the
year ended December 31, 1997 is summarized as follows:


<TABLE>
<S>                                                       <C>
Average balance during the year                           $  597,327

Average interest rate during the year                           3.96%

Maximum month-end balance during the year                 $  937,123
</TABLE>

As of December 31, 1997, the amortized cost and market value of the securities
underlying the agreements were $652,457 and $655,297, respectively.

NOTE I - RELATED PARTY TRANSACTIONS

Certain parties (principally certain directors and executive officers of the
Company, their immediate families and business interests) were loan customers of
and had other transactions in the normal course of business with the Company.
Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility. As of December 31, 1997 the Company had related party loans
totaling $44,719. There were no related party loans as of December 31, 1996.

NOTE J - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES

The ability of FNB Bancshares, Inc. to pay cash dividends is dependent upon
receiving cash in the form of dividends from the Bank. However, certain
restrictions exist regarding the ability of the subsidiary to transfer funds to
FNB Bancshares, Inc. in the form of cash dividends, loans or advances. The
approval of the Office of the Comptroller of the Currency is required to pay
dividends in excess of the Bank's net profits (as defined) for the current year
plus retained net profits (as defined) for the preceding two years, less any
required transfers to surplus. As of December 31, 1997 and 1996, the Bank had
not posted a profit.

                                       26

<PAGE>   29
                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE K - INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 1997 and 1996 are
summarized as follows:

<TABLE>
<CAPTION>
                                                       1997            1996
                                                     ---------       ---------
<S>                                                  <C>             <C>
Currently payable
   Federal                                           $   3,823       $      --
   State                                                   217           4,787
                                                     ---------       ---------
Currently payable income tax expense                     4,040           4,787
                                                     ---------       ---------

Deferred income taxes
   Federal                                             (64,599)        (71,362)
   State                                               (11,442)        (17,885)
                                                     ---------       ---------
Deferred income tax expense (benefit)                  (76,041)        (89,247)
                                                     ---------       ---------

Total income tax expense (benefit)                   $ (72,001)      $ (84,460)
                                                     =========       =========
</TABLE>

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

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

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

<TABLE>
<CAPTION>
                                                       1997            1996
                                                     ---------       ---------
<S>                                                  <C>             <C>
Accelerated depreciation                             $   8,519       $   3,844
Provision for loan losses                              (33,201)         (2,384)
Amortization of organizational costs                    14,147         (58,064)
Net operating loss carry-forward                       (64,476)        (32,643)
Other                                                   (1,030)             --
                                                     ---------       ---------
Total deferred tax expense (benefit)                 $ (76,041)      $ (89,247)
                                                     =========       =========
</TABLE>

The Company has a net operating loss carry-forward for income tax purposes of
$297,895 and $83,115 as of December 31, 1997 and 1996, respectively, which
expires in various years through 2011 and 2012, respectively.

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

<TABLE>
<CAPTION>
                                                                1997            1996
                                                              ---------       ---------
<S>                                                           <C>             <C>
Tax expense at statutory rate                                 $ (87,430)      $ (95,723)
Surtax exemption                                                 28,598          24,162
State income tax, net of federal income tax benefit             (11,299)        (14,726)
Other, net                                                       (1,870)          1,827
                                                              ---------       ---------
                                                              $ (72,001)        (84,460)
                                                              =========       =========
</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, 1997 will be
realized and, accordingly, has not established a valuation allowance.


                                       27

<PAGE>   30

                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE L - OTHER EXPENSES

Other expenses for the years ended December 31, 1997 and 1996 and for the period
September 27, 1995 to December 31, 1995 are summarized as follows:

<TABLE>
<CAPTION>
                                                        1997             1996            1995
                                                     ----------       ----------      --------
<S>                                                  <C>              <C>              <C>
Amortization of organizational costs                 $   18,276       $    3,046       $    --
Data processing and correspondent bank                   31,741            3,159            --
Stationery, printing and postage                         46,578           36,416            --
Advertising and promotion                                15,519           23,990            --
Legal and accounting                                     46,504            2,726            --
Telephone                                                23,485           10,148            --
Courier                                                  17,913              352            --
Other                                                   109,768           71,322         7,363
                                                     ----------       ----------       -------
                                                     $  309,784       $  151,159       $ 7,363
                                                     ==========       ==========       =======
</TABLE>

NOTE M - STOCK-BASED COMPENSATION

On April 22, 1997, the stockholders approved an Incentive Stock Option Plan
(Stock Plan) which provides for the granting of options to purchase up to 92,451
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.

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

<TABLE>
<CAPTION>
                                                        1997              1996
                                                     ------------      -----------
<S>                                                  <C>               <C>
Net income (loss):
   As reported                                       $ (185,145)       $ (197,077)
   Pro forma                                           (228,021)         (206,458)

Net income (loss) per share:
   As reported                                       $     (.30)       $     (.32)
   Pro forma                                               (.37)             (.33)
</TABLE>

In calculating the pro forma disclosures, the fair value of options granted is
estimated as of the date granted using the Black-Scholes option pricing model
with the following weighted-average assumptions: dividend yield of 0 percent;
expected volatility of 0 percent; risk-free interest rate of 6.41 percent; and
an expected life of 10 years.

As of December 31, 1996, options were granted to purchase up to 50,817 shares of
the Company's common stock for $10 per share. The options were subject to the
approval of the Stock Plan by the stockholders on April 22, 1997. As of December
31, 1997 and 1996, none of the options had been exercised and at December 31,
1996 no options were exercisable. At December 31, 1997, options totaling 9,113
were excercisable. As of December 31, 1997, 5,000 options had been canceled and
at December 31, 1996, none had been canceled. The weighted-average remaining
contractual life was 10.8 years and 9.8 years at December 31, 1997 and 1996,
respectively. The fair value of options, calculated using the Black-Scholes
option pricing model, granted during 1996 was $4.68 per share.

                                       28

<PAGE>   31


                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N - 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.

Time deposits with other banks - The carrying amount is a reasonable estimate of
fair value.

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

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

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

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

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

                                       29

<PAGE>   32

                            FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED

The carrying values and estimated fair values of the Company's financial
instruments for the years ending December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                      December 31, 1997                  December 31, 1996
                                              ----------------------------------   -------------------------------
                                                  Carrying        Estimated            Carrying      Estimated
                                                   Amount        Fair Value             Amount       Fair Value
                                                --------------  --------------       -------------  -------------
<S>                                             <C>             <C>                  <C>            <C>
FINANCIAL ASSETS:
   Cash and due from banks                      $   1,007,433   $   1,007,433        $    342,680   $    342,680
   Federal funds sold                               1,430,000       1,430,000           7,930,000      7,930,000
   Securities held-to-maturity                      1,501,331       1,506,203             344,190        344,083
   Time deposits with other banks                     600,000         600,000                  --             --
   Loans                                           14,168,832      14,190,779           2,043,972      2,046,417
   Allowance for loan losses                         (152,614)       (152,614)            (20,000)       (20,000)
   Accrued interest receivable                        122,499         122,499              11,180         11,180

FINANCIAL LIABILITIES:
   Demand deposit, interest-bearing             $   6,368,501   $   6,368,501        $  2,910,169   $  2,910,169
      transaction, and savings accounts
   Time deposits                                    7,191,367       7,209,244           2,894,196      2,897,018
   Securities sold under agreements                   424,413         424,413                  --             --
      to repurchase
   Accrued interest payable                            72,832          72,832              20,213         20,213

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
   Commitments to extend credit                 $   2,552,114   $   2,552,114        $  1,619,000   $  1,619,000
</TABLE>

NOTE O - 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, 1997, management and legal
counsel are not aware of any pending or threatened litigation or unasserted
claims or assessments that could result in losses, if any, that would be
material to the financial statements.

The Company plans to construct a corporate office in Gaffney in 1998. While no
commitments have been made at December 31, 1997, the Company estimates the cost
of construction to be approximately $1,500,000.

NOTE P - EARNINGS PER SHARE

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

The reconciliation of the numerators and denominators used to calculate basic
and diluted earnings per share have not been presented since both calculations
result in the same per share calculation. Options to purchase 45,817 and 50,817
shares of common stock at $10 per share were outstanding at December 31, 1997
and 1996, respectively, but were not included in the computations of diluted EPS
because they would have resulted in an antidilutive per share amount since the
Company had a net loss for both years.

                                       30

<PAGE>   33



                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE Q - 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 I and total capital as a
percentage of assets and off-balance-sheet exposures, adjusted for risk weights
ranging from 0% to 100%. Tier I capital consists of common stockholders' equity,
excluding the unrealized gain or loss on securities available for sale, minus
certain intangible assets. Tier 2 capital consists of the allowance for loan
losses subject to certain limitations. Total regulatory minimum requirements are
4% for Tier 1 and 8% for total risk-based capital.

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

As of December 31, 1997, 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, 1997 and 1996.

<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, 1997
   Total capital (to risk weighted assets)     $ 4,254        28.67%    $ 1,187       8.00%    $ 1,484      10.00%
   Tier 1 capital (to risk weighted assets)      4,101        27.64         594       4.00         890       6.00
   Tier 1 capital (to average assets)            4,101        21.20         776       4.00         970       5.00
DECEMBER 31, 1996
   Total capital (to risk weighted assets)       4,565       107.44         340       8.00         425      10.00
   Tier 1 capital (to risk weighted assets)      4,545       106.97         170       4.00         255       6.00
   Tier 1 capital (to average assets)            4,545        40.83         347       4.00         434       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.

                                       31

<PAGE>   34


                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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


                                 BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                            1997               1996
                                                         -----------       ------------
<S>                                                      <C>               <C>
Assets
   Cash and cash equivalents                             $ 1,374,170       $  1,386,973
   Investment in banking subsidiary                        4,259,710          4,447,986
   Other assets                                               75,301             59,467
                                                         -----------       ------------
      Total assets                                       $ 5,709,181       $  5,894,426
                                                         ===========       ============
Other liabilities                                        $        --       $        100
Stockholders' equity                                       5,709,181          5,894,326
                                                         -----------       ------------
      Total liabilities and stockholders'
      equity                                             $ 5,709,181       $  5,894,426
                                                         ===========       ============
</TABLE>


                              STATEMENTS OF INCOME
               FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
             FOR THE PERIOD SEPTEMBER 27, 1995 TO DECEMBER 31, 1995


<TABLE>
<CAPTION>
                                                                       1997              1996              1995
                                                                    -----------       -----------       -----------
<S>                                                                 <C>               <C>               <C>
Income
   Interest income                                                  $    15,611       $   108,530       $        --

Expenses                                                                (11,263)          (14,862)          (27,087)
                                                                    -----------       -----------       -----------

Income before income taxes and equity in undistributed
   earnings (losses) of banking subsidiary                                4,348            93,668           (27,078)

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

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

Net income (loss)                                                   $  (185,145)      $  (197,077)      $   (27,078)
                                                                    ===========       ===========       ===========

</TABLE>
                                       32

<PAGE>   35


                              FNB BANCSHARES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

                            STATEMENTS OF CASH FLOWS
               FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
             FOR THE PERIOD SEPTEMBER 27, 1995 TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
                                                                    1997               1996              1995
                                                                    ----               ----              ----
<S>                                                              <C>                <C>               <C>
Operating activities:
    Net income (loss)                                            $  (185,145)       $  (197,077)      $   (27,078)
Adjustments to reconcile net income (loss) to net cash
    provided by operating activities
Increase in other assets                                             (15,834)            (3,233)          (56,234)
    Increase (decrease) in other liabilities                            (100)          (102,010)          102,110
Equity in undistributed (earnings) losses of banking
    subsidiary                                                       188,276            327,859                --
                                                                 -----------        -----------       -----------
      Net cash provided (used) by operating activities               (12,803)            25,539            18,798
                                                                 -----------        -----------       -----------

Financing activities
    Sale of common stock                                                  --          6,163,280               100
    Purchase of bank stock                                                --         (4,775,845)               --
    Cost of stock issuance                                                --            (44,899)               --
                                                                 -----------        -----------       -----------
      Net cash provided by financing activities                           --          1,342,536               100
                                                                 -----------        -----------       -----------

Net increase in cash                                                 (12,803)         1,368,075            18,898

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

Cash, ending                                                     $ 1,374,170        $ 1,386,973       $    18,898
                                                                 ===========        ===========       ===========
</TABLE>

NOTE S - RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the FASB released SFAS 130, "Reporting Comprehensive Income." SFAS
130 requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is the change in equity of a business during a
period from transactions and other events and circumstances from nonowner
sources and excludes investments by owners and distributions to owners.
Comprehensive income consists of two components, net income and other
comprehensive income. Other comprehensive income includes, among other things,
the change in the unrealized gain or loss on securities available for sale.

This statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.

                                       33

<PAGE>   36

                              FNB BANCSHARES, INC.





                               BOARD OF DIRECTORS

   Dr. Richard D. Gardner                               V. Stephen Moss

      Barry L. Hamrick                               Harold D. Pennington, Jr.

     Haskell D. Mallory                              Harold D. Pennington, Sr.

        Bill H. Mason                                  Heyward W. Porter





                                 SENIOR OFFICERS

                           V. Stephen Moss, President

                      Thomas W. Hale, Chief Credit Officer

                     John W. Hobbs, Chief Financial Officer





                                    OFFICERS

               Danny Ham, Vice President, Consumer Banking Manager



                                       ss.



                                    SERVICES

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


                                       34

<PAGE>   37


                              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 28, 1998 at Holiday Inn Express, 100 Ellis Ferry Avenue, Gaffney,
South Carolina.

CORPORATE OFFICE:                             GENERAL COUNSEL:

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


STOCK TRANSFER DEPARTMENT:                    INDEPENDENT AUDITORS:

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

STOCK INFORMATION:

The Common Stock of FNB Bancshares, Inc. is not listed on any exchange, nor is
there a recognized or established market. There were approximately 572
shareholders of record on December 31, 1997.

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

FORM 10-K

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

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


                                       35