SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-KSB

|(Mark One)                                                    |                                                                                   
|------------------------------------------------------------- | ----------------------------------------------------------------------------------
|ý                                                             | Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934    
|                                                              | For the fiscal year ended December 31, 2003                                       
|                                                              | or                                                                                
|o                                                             | Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|For the transition period
from                             to

Commission file no. 000-22505

FNB BANCSHARES, INC.(Name of Small Business Issuer in Its Charter)

|South Carolina(State or Other Jurisdiction
of Incorporation or Organization)             |  | 57-1033165(I.R.S. Employer
Identification No.)
|---------------------------------------------------------------------------------------- |  | ----------------------------------------------
|217 North Granard Street
Gaffney, South Carolina(Address of Principal Executive Offices) |  | 29341(Zip Code)                               

(864) 488-2265Issuer's Telephone Number, Including Area Code

Securities
registered pursuant to Section 12(b) of the Act: None

Securities
registered pursuant to Section 12(g) of the Act: Common Stock

Check
whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days.
Yes ý    No o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ý

The issuer's revenues for its most recent fiscal year were $4,931,353. As of March 15, 2004, 690,304 shares of Common Stock were issued and outstanding.

The
aggregate market value of the Common Stock held by non-affiliates of the Company on March 15, 2004 was $11,159,535.

Transitional
Small Business Disclosure Format. (Check one):
Yes o    No ý

DOCUMENTS INCORPORATED BY REFERENCE

None.



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Item 1. Description of Business

This Report contains "forward-looking statements" relating to, without limitation, future economic performance, plans and objectives of management for future
operations, and projections of revenues and other financial items that are based on the beliefs of management, as well as assumptions made by and information currently available to management. The
words "may," "will," "anticipate," "should," "would," "believe," "contemplate," "expect," "estimate," "continue," "may," and "intend," as well as other similar words and expressions of the future, are
intended to identify forward-looking statements. Our actual results may differ materially from the results discussed in the forward-looking statements, and our operating performance each quarter is
subject to various risks and uncertainties that are discussed in detail in our filings with the Securities and Exchange Commission, including, without limitation:



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General

FNB Bancshares, Inc. was incorporated in South Carolina on September 27, 1995 for the purpose of operating as a bank holding company. Our wholly
owned subsidiary, First National Bank of the Carolinas, commenced business on October 18, 1996 and is primarily engaged in the business of accepting savings and demand deposits and providing
mortgage, consumer, and commercial loans to the general public. Our bank has a main office in Gaffney and two branch offices in Blacksburg, South Carolina and Gaffney, South Carolina. The bank is
organized as a national banking association under
the laws of the United States, with deposits insured by the FDIC. The bank is a member of the Federal Reserve System.

Pending Merger

On November 5, 2003, the Company entered into a definitive merger agreement with American Community Bancshares, Inc. of Charlotte, North Carolina.
Shareholders of the Company as of the close of the merger will be entitled to receive a combination of cash and American Community common stock which, at the time the merger was announced, had a value
of $20.50 per share of the Company's common stock. The shareholders of both companies approved the merger at meetings held on March 4, 2004. The merger, which is subject to regulatory approval,
is expected to be completed in April 2004. Please refer to the Registration Statement on Form S-4 filed by American Community with the SEC for more information about the
merger, American Community, and the risks related to American Community common stock.

Location and Service Area

The bank engages in a general commercial and retail banking business, emphasizing the needs of small-to medium-sized businesses, professional concerns, and
individuals, primarily in Gaffney, South Carolina and the surrounding area, including Cherokee County. The principal executive offices of both the company and the bank are located at 217 North Granard
Street, Gaffney, South Carolina 29342. The address of the Blacksburg office is 207 West Cherokee Street, Blacksburg, South Carolina 29702. The address of the second Gaffney office is 626 Chesnee
Highway, Gaffney, South Carolina 29341. The company's telephone number is (864) 488-2265. See "Item 2. Description of Property."

Our
primary service area is Cherokee County, South Carolina. Blacksburg and Gaffney are approximately eight miles from each other and are the two largest municipalities in Cherokee
County. Cherokee County is part of a five-county metropolitan statistical area covering the "upstate" area of South Carolina, including Greenville, Spartanburg, Pickens, Cherokee, and
Laurens Counties. Cherokee County is located between the major metropolitan statistical areas of Greenville-Spartanburg-Anderson of South Carolina and Charlotte-Gastonia-Rock Hill of North
Carolina. The counties from Greenville-Spartanburg-Anderson to Charlotte-Gastonia-Rock Hill and Cherokee and Laurens make up an area that is known to many as the "I-85 Business
Belt." The presence of I-85 enhances the economic potential of the area by linking the seven counties to other major southeastern markets, including the Charlotte and Atlanta markets,
which are easily accessible to this area by I-85.

Cherokee
County's economy is dominated by manufacturing and agriculture. With over 60 manufacturing plants, including the Nestle Frozen Foods Company, Milliken &
Co.Magnolia Finishing Plant, and the Timken Company, Cherokee County enjoys a
diversified manufacturing community. Manufacturing companies employ approximately 50% of the county's workforce, and the textile mills products sector accounts for nearly 50% of this manufacturing
employment.

Marketing Focus

Most of the banks in the Cherokee County area are now local branches of large regional banks. Although size gives the larger banks certain advantages in competing
for business from large corporations, including higher lending limits and the ability to offer services in other areas of South

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Carolina
and the Cherokee County area, management believes there has been a void in the community banking market in the Cherokee County area and believes that the bank is successfully filling this
void. As a result, we generally do not attempt to compete for the banking relationships of large corporations, but we concentrate our efforts on small- to medium-sized businesses and on individuals.

Banking Services

The bank offers a full range of deposit services that are typically available in most banks and savings and loan associations, including checking accounts, NOW
accounts, savings accounts, and other time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit. The transaction accounts and time
certificates are tailored to the bank's principal market area at rates competitive to those offered in the Cherokee County area. In addition, we offer certain retirement account services, such as
Individual Retirement Accounts (IRAs) and, through Raymond James, brokerage services. All deposit accounts are insured by the FDIC up to the maximum amount allowed by law (generally, $100,000 per
depositor, subject to aggregation rules). The bank solicits these accounts from individuals, businesses, associations and organizations, and governmental authorities.

Lending Activities

General.The bank emphasizes a range of lending services, including real estate, commercial and consumer loans, to
individuals and small- to medium-sized businesses and professional concerns that are located in or conduct a substantial portion of their business in the bank's market area.

Real Estate Loans.One of the primary components of the bank's loan portfolio is loans secured by first or second mortgages
on real estate. These loans generally consist of commercial real estate loans, construction and development loans, and residential real estate loans (but exclude home equity loans, which are
classified as consumer loans). Loan terms generally are limited to five years or less, although payments may be structured on a longer amortization basis. Interest rates are fixed or adjustable. The
bank generally charges an origination fee. Management attempts to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where
the loan-to-value ratio, established by independent appraisals, does not exceed 80%. In addition, the bank typically requires personal guarantees of the principal owners of the
property backed with a review by the bank of the personal financial statements of the principal owners. The principal economic risk associated with each category of loans, including real estate loans,
is the creditworthiness of the bank's borrowers. The risks associated with real estate loans vary with many economic factors, including employment levels and fluctuations in the value of real estate.
The bank competes for real estate loans with a number of bank competitors which are well established in the Cherokee County area. Most of these competitors have substantially greater resources and
lending limits than the bank. As a result, the bank occasionally must charge a lower interest rate to attract borrowers. See "Competition". The bank also originates loans for sale into
the secondary market. The bank attempts to limit interest rate risk and credit risk on these loans by locking the interest rate for each loan with the secondary investor and receiving the investor's
underwriting approval prior to originating the loan.

Commercial Loans.The bank makes loans for commercial purposes in various lines of businesses. Equipment loans typically are
made for a term of five years or less at fixed or variable rates, with the loan fully amortized over the term and secured by the financed equipment and with a loan-to-value
ratio of 80% or less. Working capital loans typically have terms not exceeding one year and are usually secured by accounts receivable, inventory, or personal guarantees of the principals of the
business. For loans secured by accounts receivable or inventory, principal is typically repaid as the assets securing the loan are converted into cash, and in other cases principal is typically due at
maturity. The principal economic risk associated with each category of loans, including commercial loans, is the creditworthiness of the bank's borrowers. The risks associated with commercial loans
vary with many economic factors, including the economy in the Cherokee County area, especially the tourist economy.

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The
well-established banks in the Cherokee County area will make proportionately more loans to medium- to large-sized businesses than the bank. Many of the bank's commercial loans are made
to small- to medium-sized businesses which may be less able to withstand competitive, economic, and financial conditions than larger borrowers.

Consumer Loans.The bank makes a variety of loans to individuals for personal and household purposes, including secured and
unsecured installment and term loans, home equity loans and lines of credit, and
revolving lines of credit such as credit cards. These loans typically carry balances of less than $25,000 and, in the case of non-revolving loans, are amortized over a period not exceeding
48 months. The revolving loans typically bear interest at a fixed rate and require monthly payments of interest and a portion of the principal balance. The underwriting criteria for home equity
loans and lines of credit is generally the same as applied by the bank when making a first mortgage loan, as described above, and home equity lines of credit typically expire fifteen years or less
after origination. As with the other categories of loans, the principal economic risk associated with consumer loans is the creditworthiness our borrowers, and the principal competitors for consumer
loans are the established banks in the Cherokee County area.

Loan Approval and Review.The bank's loan approval policies provide for various levels of officer lending authority. When the
amount of aggregate loans to a single borrower exceeds an individual officer's lending authority, the loan request is considered and approved by an officer with a higher lending limit. We have
established a management loan committee that must approve to its limit any loan over the President's lending limit. The bank's loan committee approves any loan over the management loan committee
authority. We do not make any loans to directors, officers, or employees of the bank unless the loan is approved by our board of directors and is made on terms not more favorable to such person than
would be available to a person not affiliated with us (excluding consumer loans less than $20,000 which are available at employee rates).

Lending Limits.The bank's lending activities are subject to a variety of lending limits imposed by federal law. While
differing limits apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower's relationship to us), in general we are subject to a
loan-to-one-borrower limit. This limit will increase or decrease as the bank's capital increases or decreases. Unless we are able to sell participations in our
loans to other financial institutions, we will not be able to meet all of the lending needs of loan customers requiring aggregate extensions of credit above these limits.

Other Banking Services

Other bank services include cash management services, safe deposit boxes, travelers checks, direct deposit of payroll and social security checks, brokerage
services, telephone banking and automatic drafts for various accounts. The bank is associated with a shared network of automated teller machines that may be used by our customers throughout South
Carolina and other regions. We also offer MasterCard and VISA credit card services through a correspondent bank as an agent for the bank.

Competition

The banking business is highly competitive. The bank competes as a financial intermediary with other commercial banks, savings and loan associations, credit
unions, and money market mutual funds operating in the Cherokee County area and elsewhere. As of December 31, 2003, there were four commercial banks (none of which are headquartered in Cherokee
County), one savings bank, and one credit union operating in Cherokee County. A number of these competitors are well established in the Cherokee County area. Most of them have substantially greater
resources and lending limits than our bank and offer certain services, such as extensive and established branch networks and trust services, that we either do not expect to provide or do not currently
provide. As a result of these competitive factors, the bank may have to pay higher rates of interest to attract deposits.

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Employees

We had 27 full-time employees as of December 31, 2003.

SUPERVISION AND REGULATION

We are subject to extensive state and federal banking laws and regulations which impose specific requirements or restrictions on, and provide for general
regulatory oversight of, virtually all aspects of our operations. These laws and regulations are generally intended to protect depositors, not shareholders. The following summary is qualified by
reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on our business and prospects. Our operations may be affected by
legislative changes and the policies of various regulatory authorities. We cannot predict the effect that fiscal or monetary policies, economic control, or new federal or state legislation may have on
our business and earnings in the future.

As
noted above, we have entered into a merger agreement with American Community Bancshares, Inc., and the merger is scheduled to close in April 2004. American Community is
regulated as a bank holding company. Its wholly owned subsidiary, American Community Bank, is a North Carolina state-chartered bank, subject to regulation by the Federal Deposit Insurance Corporation
and the North Carolina Commissioner of Banks. For more information about American Community and the regulation of its activities, please see American Community's periodic reports as filed with the
SEC.

The
following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on our operations. It is
intended only to briefly summarize some material provisions.

On
October 28, 2003, President Bush signed into law the Check Clearing for the 21st Century Act, also known as Check 21. The new law, which is not effective until
October 28, 2004, gives "substitute checks," such as a digital image of a check and copies made from that image, the same legal standing as the original paper check. Some of the major
provisions include:



FNB Bancshares, Inc.

Because our holding company, FNB Bancshares, Inc., owns the outstanding capital stock of our bank, our holding company is a bank holding company under the
federal Bank Holding Company Act of 1956 and the South Carolina Banking and Branching Efficiency Act.

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The Bank Holding Company Act.Under the Bank Holding Company Act, our holding company is subject to periodic examination by
the Federal Reserve and required to file periodic reports of its operations and any additional information that the Federal Reserve may require. Our activities at the holding company level are limited
to:



Investments, Control, and Activities.With certain limited exceptions, the Bank Holding Company Act requires every bank
holding company to obtain the prior approval of the Federal Reserve before:



In
addition, and subject to certain exceptions, the Bank Holding Company Act and the Change in Bank Control Act require Federal Reserve approval prior to any person or company acquiring
"control" of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company. Control is
rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities and either the company has registered securities under Section 12 of the
Securities Exchange Act of 1934 or no other person owns a greater percentage of that class of voting securities immediately after the transaction. Our common stock is registered under the Securities
Exchange Act of 1934. The regulations provide a procedure for challenge of the rebuttable control presumption.

Under
the Bank Holding Company Act, a bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in, nonbanking activities unless the Federal Reserve Board has found those activities to be so closely related to banking or managing or controlling banks as to be a proper incident
thereto. Some of the activities that the Federal Reserve Board has determined by regulation to be proper incidents to the business of a bank holding company include:



The
Federal Reserve Board imposes certain capital requirements on our holding company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of
"qualifying" capital to risk-weighted assets. These requirements are described below under "Capital Regulations." Subject to capital requirements and certain other restrictions, our
holding company is able to borrow money to make a capital contribution to our bank, and these loans may be repaid from dividends paid from our bank to our company. Our ability to pay dividends is
subject to regulatory

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restrictions
as described below in "First National Bank of the CarolinasDividends." Our holding company is also able to raise capital for contribution to our bank by issuing securities
without having to receive regulatory approval, subject to compliance with federal and state securities laws.

Source of Strength; Cross-Guarantee.In accordance with Federal Reserve Board policy, our holding company is expected to act
as a source of financial strength to our bank and to commit resources to support our bank in circumstances in which our holding company might not otherwise do so. Under the Bank Holding Company Act,
the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary, other than a nonbank subsidiary of a bank, upon the Federal
Reserve Board's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank's holding company.
Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture
may aid the depository institution's financial condition.

South Carolina State Regulation.As a South Carolina bank holding company under the South Carolina Banking and Branching
Efficiency Act, we are subject to limitations on sale or merger and to regulation by the South Carolina Board of Financial Institutions. Prior to acquiring the capital stock of a national bank, we are
not required to obtain the approval of the Board, but we must notify them at least 15 days prior to doing so. We must receive the Board's approval prior to engaging in the acquisition of a
South Carolina state chartered bank or another South Carolina bank holding company.

First National Bank of the Carolinas

Our bank, First National Bank of the Carolinas, operates as a national banking association incorporated under the laws of the United States and subject to
examination by the Office of the Comptroller of the Currency. Deposits in the bank are insured by the FDIC up to a maximum amount, which is generally $100,000 per depositor subject to aggregation
rules.

The
Office of the Comptroller of the Currency and the FDIC regulate or monitor virtually all areas of our bank's operations, including:



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The
Office of the Comptroller of the Currency requires banks to maintain specified capital ratios and imposes limitations on banks' aggregate investment in real estate, bank premises,
and furniture and fixtures. The Office of the Comptroller of the Currency also requires banks to prepare quarterly reports on their financial condition and to conduct annual audits of their financial
affairs in compliance with its minimum standards and procedures.

Under
the FDIC Improvement Act, all insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured
depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to
submit annual reports to the FDIC, their federal regulatory agency, and their state supervisor when applicable. The FDIC Improvement Act directs the FDIC to develop a method for insured depository
institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report
of condition or any other report of any insured depository institution. The FDIC Improvement Act also requires the federal banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions and depository institution holding companies relating, among other things, to the following:



National
banks and their holding companies which have been chartered or registered or have undergone a change in control within the past two years or which have been deemed by the Office
of the Comptroller of the Currency or the Federal Reserve Board to be troubled institutions must give the Office of the Comptroller of the Currency or the Federal Reserve Board 30 days' prior
notice of the appointment of any senior executive officer or director. Within the 30 day period, the Office of the Comptroller of the Currency or the Federal Reserve Board, as the case may be,
may approve or disapprove any such appointment.

Deposit Insurance.The FDIC has adopted a risk-based assessment system for determining an insured depository
institutions' insurance assessment rate. This system takes into account the risks attributable to different categories and concentrations of assets and liabilities. An institution is placed into one
of three capital categories: (1) well capitalized; (2) adequately capitalized; or (3) undercapitalized. The FDIC also assigns an institution to one of three supervisory subgroups,
based on the FDIC's determination of the institution's financial condition and the risk posed to the deposit insurance funds. Assessments range from 0 to 27 cents per $100 of deposits, depending on
the institution's capital group and supervisory subgroup. In addition, the FDIC imposes assessments to help pay off the $780 million in annual interest payments on the $8 billion
Financing Corporation bonds issued in the late 1980s as part of the government rescue of the thrift industry. The FDIC assessment rate on our bank deposits currently is zero, but may change in the
future. The FDIC may increase or decrease the assessment rate schedule on a semiannual basis. An increase in the BIF assessment rate could have a material adverse effect on our earnings, depending on
the amount of the increase.

The
FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.

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Transactions With Affiliates and Insiders.Our bank is subject to the provisions of Section 23A of the Federal Reserve
Act, which places limits on the amount of loans or extensions of credit to, or investments in, or certain other transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of our bank's capital and surplus and, as
to all affiliates combined, to 20% of the bank's capital and surplus. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements.
Compliance is also required with certain provisions designed to avoid the taking of low quality assets.

Our
bank is also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution from engaging in certain transactions with
certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable
transactions with nonaffiliated companies. Our bank is subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related
interests. Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

The
Federal Reserve Board has recently issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with
respect to affiliate
transactions. Regulation W incorporates the exemption from the affiliate transaction rules but expands the exemption to cover the purchase of any type of loan or extension of credit from an
affiliate. In addition, under Regulation W:



Regulation W
generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the
Federal Reserve Board decides to treat these subsidiaries as affiliates. Concurrently with the adoption of Regulation W, the Federal Reserve Board has proposed a regulation which would further
limit the amount of loans that could be purchased by a bank from an affiliate to not more than 100% of the bank's capital and surplus.

Dividends.A national bank may not pay dividends from its capital. All dividends must be paid out of undivided profits then on hand, after
deducting expenses, including reserves for losses and bad debts. In addition, a national bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated
capital, unless there has been transferred to surplus no less than one-tenth of the bank's net profits of the preceding two consecutive half-year periods (in the case of an
annual dividend). The approval of the Office of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net
profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus.

Branching.National banks are required by the National Bank Act to adhere to branch office banking laws applicable to state
banks in the states in which they are located. Under current South Carolina law, the bank may open branch offices throughout South Carolina with the prior approval of

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the
Office of the Comptroller of the Currency. In addition, with prior regulatory approval, the bank will be able to acquire existing banking operations in South Carolina. Furthermore, federal
legislation permits interstate branching, including out-of-state acquisitions by bank holding companies, interstate branching by banks if allowed by state law, and interstate
merging by banks. South Carolina law, with limited exceptions, currently permits branching across state lines through interstate mergers.

Community Reinvestment Act.The Community Reinvestment Act requires that, in connection with examinations of financial
institutions within their respective jurisdictions, the Federal Reserve, the FDIC, or the Office of the Comptroller of the Currency shall evaluate the record of each financial institution in meeting
the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or
facility. Failure to adequately meet these criteria could impose additional requirements and limitations on our bank. Under the Gramm-Leach-Bliley Act, banks with aggregate assets of not more than
$250 million will be subject to a Community Reinvestment Act examination only once every 60 months if the bank receives an outstanding rating, once every 48 months if it receives
a satisfactory rating, and as needed if the rating is less than satisfactory. Additionally, under the Gramm-Leach-Bliley Act, banks are required to publicly disclose the terms of various Community
Reinvestment Act-related agreements.

Other Regulations.Interest and other charges collected or contracted for by the bank are subject to state usury laws and
federal laws concerning interest rates. The bank's loan operations are also subject to federal laws applicable to credit transactions, such as:



The
deposit operations of the bank also are subject to:



Capital Regulations.The federal bank regulatory authorities have adopted risk-based capital guidelines for banks
and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and account for
off-balance sheet items. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating significant expansion programs should not

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allow
expansion to diminish their capital ratios and should maintain ratios in excess of the minimums. We have not received any notice indicating that either our holding company or our bank is subject
to higher capital requirements. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of
which at least 4% must be Tier 1 capital. Tier 1 capital includes common shareholders' equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated
subsidiaries, but excludes accumulated other comprehensive income, excludes goodwill and most other intangibles and excludes the allowance for loan and lease losses. Tier 2 capital includes the excess
of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock, and general
reserves for loan and lease losses up to 1.25% of risk-weighted assets.

Under
these guidelines, banks' and bank holding companies' assets are given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance sheet items
are given credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight applies. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property and, under certain circumstances, residential
construction loans, both of which carry a 50% rating. Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% rating, and direct
obligations of or obligations guaranteed by the United States Treasury or United States Government agencies, which have a 0% rating.

The
federal bank regulatory authorities have also implemented a leverage ratio, which is equal to Tier 1 capital as a percentage of average total assets less intangibles, to be used as a
supplement to the risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its
equity capital base. The minimum required leverage ratio for top-rated institutions is 3%, but most institutions are required to maintain an additional cushion of at least 100 to 200 basis
points.

The
FDIC Improvement Act established a new capital-based regulatory scheme designed to promote early intervention for troubled banks which requires the FDIC to choose the least expensive
resolution of bank failures. The new capital-based regulatory framework contains five categories of compliance with regulatory capital requirements, including "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." To qualify as a "well capitalized" institution, a bank must have a leverage ratio of no less than
5%, a Tier 1
risk-based ratio of no less than 6%, and a total risk-based capital ratio of no less than 10%, and the bank must not be under any order or directive from the appropriate
regulatory agency to meet and maintain a specific capital level. Currently, we qualify as "well capitalized."

Under
the FDIC Improvement Act regulations, the applicable agency can treat an institution as if it were in the next lower category if the agency determines (after notice and an
opportunity for hearing) that the institution is in an unsafe or unsound condition or is engaging in an unsafe or unsound practice. The degree of regulatory scrutiny of a financial institution
increases, and the permissible activities of the institution decreases, as it moves downward through the capital categories. Institutions that fall into one of the three undercapitalized categories
may be required to do some or all of the following:



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These
capital guidelines can affect us in several ways. If we grow at a rapid pace, our capital may be depleted too quickly, and a capital infusion from our holding company may be
necessary which could impact our ability to pay dividends. Our capital levels currently are adequate; however, rapid growth, poor loan portfolio performance, poor earnings performance, or a
combination of these factors could change our capital position in a relatively short period of time. If we fail to meet these capital requirements, our bank would be required to develop and
file a plan with the Office of the Comptroller of the Currency describing the means and a schedule for achieving the minimum capital requirements. In addition, our bank would generally not
receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless our bank could demonstrate a reasonable plan to meet
the capital requirement within a reasonable period of time. A bank that is not "well capitalized" is also subject to certain limitations relating to so-called "brokered" deposits. Bank
holding companies controlling financial institutions can be called upon to boost the institutions' capital and to partially guarantee the institutions' performance under their capital restoration
plans.

Enforcement Powers.The Financial Institutions Reform, Recovery and Enforcement Act expanded and increased civil and criminal
penalties available for use by the federal regulatory agencies against depository institutions and certain "institution-affiliated parties." Institution-affiliated parties primarily include
management, employees, and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the
financial institution's affairs. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of
inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have been increased to 20 years. In
addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination
of deposit insurance. Furthermore, banking agencies' power to issue cease-and-desist orders were expanded. Such orders may, among other things, require affirmative action to
correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnification or guarantees against loss. A financial institution may also be ordered to restrict its
growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.

Effect of Governmental Monetary Policies.Our earnings are affected by domestic economic conditions and the monetary and
fiscal policies of the United States government and its agencies. The Federal Reserve Bank's monetary policies have had, and are likely to continue to have, an important impact on the operating
results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve
Board have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount
rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Proposed Legislation and Regulatory Action.New regulations and statutes are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations, and competitive relationships of the nation's financial institutions. We cannot predict whether or in what form any
proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

13

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Item 2. Description of Property

Gaffney Property.Our principal place of business and the main office of the bank is located on property that we own at the
corner of Granard Street and West Meadow Street in Gaffney, South Carolina. The banking facility is approximately 11,000 square feet and cost approximately $1,500,000, including furniture, fixtures,
and equipment. We completed construction of this facility in late 1998 and commenced operations from this new facility in January 1999.

Blacksburg Property.We also operate a branch of the bank out of a Blacksburg office facility at 207 West Cherokee Street,
Blacksburg, South Carolina 29702. The Blacksburg site, which we own, is on approximately one acre of land. We have constructed a permanent banking facility of 2,550 square feet on the site at an
approximate cost of $600,000, which was paid out of funds from operations of the bank and, to the extent necessary, remaining proceeds of the offering.

Chesnee Highway Property.We also operate a branch of the bank out of a second Gaffney office facility at 626 Chesnee
Highway, Gaffney, South Carolina 29341. The Chesnee Highway site, which we own, is on approximately two acres of land. We have constructed a permanent banking facility of 2,550 square feet on the site
at an approximate cost of $700,000, which was paid out of funds from operations of the bank.

We
believe that these facilities will adequately serve our needs for at least the next 12 months of operation.

Item 3. Legal Proceedings.

Neither the company nor the bank is a party to, nor is any of their property the subject of, any material pending legal proceedings incidental to the business of
the company or the bank.

Item 4. Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. As noted above, the merger agreement
with American Community was approved by our shareholders on March 4, 2004.

Item 5. Market for Common Equity and Related Stockholder Matters.

Our common stock is quoted on the OTC Bulletin Board under the symbol "FNBC.OB." Market makers of our common stock include FIG Partners LLC., Hill Thompson Magid,
L.P., Hoefer & Arnett, Incorporated, Keefe, Bruyette & Woods, Inc., Schwab Capital Markets L.P., Ryan Beck & Co., and Monroe Securities, Inc. As of
December 31, 2003, there were 522 shareholders of record.

Our
ability to pay cash dividends is dependent upon receiving cash in the form of dividends from First National Bank of the Carolinas. However, certain restrictions exist regarding the
ability of the bank to transfer funds to the company in the form of cash dividends. All of the bank's dividends to the company are payable only from the undivided profits of the bank.

14

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The
following table sets forth the high and low bid information as quoted on the OTC Bulletin Board during the periods indicated. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual transactions.

2003

2002High

Low

High

LowFirst Quarter

$
10.95

$
10.05

$
12.01

$
9.29Second Quarter


11.75


8.67


12.38


9.97Third Quarter


15.55


11.75


10.71


10.00Fourth Quarter


21.75


15.51


10.48


10.01


15

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Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations

Selected Financial Data

The following table sets forth certain selected financial data concerning FNB Bancshares, Inc. The selected financial data has been derived from the
consolidated financial statements. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations.

|                       |                                                     | 2003       |   | 2002    |     | 2001 |         | 2000 |   | 1999   
|---------------------- | --------------------------------------------------- | ---------- | - | ------- | --- | ---- | ------- | ---- | - | -------
|
|
|Income Statement Data: |                                                     |            |   |         |     |      |         |      |   |        
|                       | Interest and dividend income                        |            | $ | 4,098   |     | $    | 3,880   |      | $ | 3,698  
|                       | Interest expense                                    |            |   | 1,037   |     |      | 1,079   |      |   | 1,479  
|                       |                                                     |            |   |         |     |      |         |      |   |        
|                       | Net interest income                                 |            |   | 3,061   |     |      | 2,801   |      |   | 2,219  
|                       | Provision for loan losses                           |            |   | 185     |     |      | 186     |      |   | 104    
|                       |                                                     |            |   |         |     |      |         |      |   |        
|                       | Net interest income after provision for loan losses |            |   | 2,876   |     |      | 2,615   |      |   | 2,115  
|                       | Other operating income                              |            |   | 833     |     |      | 660     |      |   | 460    
|                       | Other operating expense                             |            |   | 2,809   |     |      | 2,448   |      |   | 2,188  
|                       |                                                     |            |   |         |     |      |         |      |   |        
|                       | Income before income taxes                          |            |   | 900     |     |      | 827     |      |   | 387    
|                       | Income tax expense                                  |            |   | 325     |     |      | 295     |      |   | 139    
|                       |                                                     |            |   |         |     |      |         |      |   |        
|                       |                                                     | Net income |   | $       | 575 |      | $       | 532  |   | $      
|                       |                                                     |            |   |         |     |      |         |      |   |        
|Balance Sheet Data:    |                                                     |            |   |         |     |      |         |      |   |        
|                       | Securities available for sale                       |            | $ | 8,260   |     | $    | 5,546   |      | $ |       
|                       | Securities held to maturity                         |            |   |        |     |      | 800     |      |   | 3,749  
|                       | Allowance for loan losses                           |            |   | 673     |     |      | 576     |      |   | 546    
|                       | Net loans                                           |            |   | 57,545  |     |      | 51,217  |      |   | 39,553 
|                       | Premises and equipment, net                         |            |   | 3,144   |     |      | 3,416   |      |   | 3,410  
|                       | Total assets                                        |            |   | 76,553  |     |      | 70,206  |      |   | 51,236 
|                       | Noninterest-bearing deposits                        |            |   | 14,444  |     |      | 8,658   |      |   | 7,302  
|                       | Interest-bearing deposits                           |            |   | 49,675  |     |      | 49,271  |      |   | 33,117 
|                       | Total deposits                                      |            |   | 64,119  |     |      | 57,929  |      |   | 40,419 
|                       | Total liabilities                                   |            |   | 68,870  |     |      | 63,077  |      |   | 44,700 
|                       | Total shareholders' equity                          |            |   | 7,683   |     |      | 7,129   |      |   | 6,537  
|Per Share Data: (1)    |                                                     |            |   |         |     |      |         |      |   |        
|                       | Average shares outstandingbasic                    |            |   | 679,279 |     |      | 679,279 |      |   | 679,279
|                       | Net incomebasic                                    |            | $ | 0.85    |     | $    | 0.78    |      | $ | 0.36   
|                       | Average shares outstandingdiluted                  |            |   | 719,415 |     |      | 693,859 |      |   | 689,528
|                       | Net incomediluted                                  |            | $ | 0.80    |     | $    | 0.77    |      | $ | 0.36   
|                       | Tangible book value (period end)                    |            | $ | 11.31   |     | $    | 10.49   |      | $ | 9.62   

---

The following discussion describes our results of operations for 2003 as compared to 2002 and also analyzes our financial condition as of
December 31, 2003 as compared to December 31, 2002. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of
funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference
between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the
yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

16

---

We
have included a number of tables to assist in our description of these measures. For example, the "Average Balances" table shows the average balance during 2003 and 2002 of each
category of our assets and liabilities, as well as the yield we earned or the rate we paid with respect to each category. A review of this table shows that our loans typically provide higher interest
yields than do other types of interest earning assets, which is why we intend to channel a substantial percentage of our earning assets into our loan portfolio. Similarly, the "Changes in Net Interest
Income" table helps demonstrate the impact of changing interest rates and changing volume of assets and liabilities during the years shown. We also track the sensitivity of our various categories of
assets and liabilities to changes in interest rates, and we have included a "Interest Rate Sensitivity Analysis" table to help explain this. Finally, we have included a number of tables that provide
detail about our investment securities, our loans, and our deposits and other borrowings.

Of
course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and
maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section we have included a detailed discussion of this process, as well as several
tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.

In
addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this other
operating income, as well as our other operating expense, in the following discussion.

The
following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying
consolidated financial statements. We encourage you to read this discussion and analysis in conjunction with the consolidated financial statements and the related notes and the other statistical
information also included in this report.

Year ended December 31, 2003, compared with year ended December 31, 2002

Net income for the year ended December 31, 2003 was $575,405 or $0.85 per share compared to $532,247 or $0.78 per share for the year ended
December 31, 2002. Net interest income increased $260,067 or 9% to $3,061,451 for the year ended December 31, 2003. Other operating income also increased $173,599 to $833,218 for the
year ended December 31, 2003, primarily as a result of fees generated from brokerage services and from increased service charges on deposit accounts as a result of a new product introduced in
May 2002. Other operating expenses increased $361,326 or 15% and included expenses of $186,580 associated with our planned merger with American Community Bancshares, Inc.

Net Interest Income

Net interest income increased from $2,801,384 for the year ended December 31, 2002 to $3,061,451 for the year ended December 31, 2003. The increase
in net interest income is due to an increase in average interest earning assets of approximately $16.0 million (consisting primarily of an increase in average loans of $7.3 million and
an increase in average marketable securities of $7.1 million) offset by a decrease in yield on earning assets of 135 basis points from 7.23% for the year ended December 31, 2002 to 5.88%
for the year ended December 31, 2003. The increase in average loans is a result of the needs of the small businesses in our market and the local decision making capabilities we have which
allows for timely loan approvals compared to competing banks in our market. In addition, we participate in loans with other community banks in surrounding markets when their customers' borrowing needs
exceed their lending limits. The increase in average marketable securities is a result of increased funding from deposits which was not fully utilized for loan growth. The increase in net interest
income is also a result of the decrease in our cost of interest bearing

17

---

liabilities
of 60 basis points from 2.44% for the year ended December 31, 2002 to 1.84% for the year ended December 31, 2003. This decrease in cost of funds more than offset the increase
in average interest bearing liabilities of approximately $12.3 million (consisting primarily of an increase in interest bearing deposits of $12.2 million). This increase is a result of
specific efforts to gain market share over the banks in our area which are not locally owned. We obtained this growth through slightly higher rates than competitors on money market accounts,
competitive fees on commercial accounts and specific calls to target businesses in our community. In addition, we won bids on $10 million in short-term deposits from a local
government agency in the first quarter of 2003 in an effort to strengthen our relationship with this customer. This same customer held approximately $3 million in non-interest
bearing deposits with us at December 31, 2003 due to tax payments received which were not yet disbursed within the county.

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.

18

---

Average Balances, Income, Expenses, and Rates

|Year ended December 31,              |                                        | 2003                                                                       |                                            | 2002   |       
|------------------------------------ | -------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------
|
|
|Assets:                              |                                        |                                                                            |                                            |        |       
|                                     | Earning Assets:                        |                                                                            |                                            |        |       
|                                     |                                        | Securities, taxable                                                        |                                            | $      | 10,699
|                                     |                                        | Securities, nontaxable                                                     |                                            |        | 908   
|                                     |                                        | Securities, non-marketable                                                 |                                            |        | 391   
|                                     |                                        | Federal funds sold and other                                               |                                            |        | 3,762 
|                                     |                                        | Loans (1)                                                                  |                                            |        | 53,953
|                                     |                                        |                                                                            |                                            |        |       
|                                     |                                        |                                                                            | Total earning assets                       |        |       
|                                     |                                        |                                                                            |                                            |        |       
|                                     | Cash and due from banks                |                                                                            |                                            | 1,932  |       
|                                     | Allowance for loan losses              |                                                                            |                                            | (622   | )     
|                                     | Premises and equipment                 |                                                                            |                                            | 3,291  |       
|                                     | Other assets                           |                                                                            |                                            | 443    |       
|                                     |                                        |                                                                            |                                            |        |       
|                                     |                                        |                                                                            | Total assets                               |        | $     
|                                     |                                        |                                                                            |                                            |        |       
|Liabilities and Shareholder's equity |                                        |                                                                            |                                            |        |       
|                                     | Interest-bearing liabilities:          |                                                                            |                                            |        |       
|                                     |                                        | Interest-bearing transaction accounts                                      |                                            | $      | 8,161 
|                                     |                                        | Savings                                                                    |                                            |        | 17,933
|                                     |                                        | Time deposits                                                              |                                            |        | 26,219
|                                     |                                        |                                                                            |                                            |        |       
|                                     |                                        |                                                                            | Total interest-bearing deposits            |        |       
|                                     |                                        | Advances from FHLB                                                         |                                            |        | 2,951 
|                                     |                                        | Securities sold under agreements to repurchase and federal funds purchased |                                            |        | 1,243 
|                                     |                                        |                                                                            |                                            |        |       
|                                     |                                        |                                                                            | Total interest-bearing liabilities         |        |       
|                                     |                                        |                                                                            |                                            |        |       
|                                     | Noninterest-bearing deposits           |                                                                            |                                            | 10,589 |       
|                                     | Accrued interest and other liabilities |                                                                            |                                            | 183    |       
|                                     | Shareholders' equity                   |                                                                            |                                            | 7,478  |       
|                                     |                                        |                                                                            |                                            |        |       
|                                     |                                        |                                                                            | Total liabilities and shareholders' equity |        | $     
|                                     |                                        |                                                                            |                                            |        |       
|Net interest spread                  |                                        |                                                                            |                                            |        |       
|Net interest income                  |                                        |                                                                            |                                            |        | $     
|                                     |                                        |                                                                            |                                            |        |       
|Net interest margin                  |                                        |                                                                            |                                            |        |       

---

19

---

The following table sets forth the effect which the varying levels of earning assets and interest-bearing liabilities and the applicable rates
have had on changes in net interest income during the periods indicated.

Analysis of Changes in Net Interest Income

|                                                                           |                                 | 2003 Compared with 2002 |    
|-------------------------------------------------------------------------- | ------------------------------- | ----------------------- | ---
|
|
|
|
|Earning Assets                                                             |                                 |                         |    
|Securities, taxable                                                        |                                 | $                       | 204
|Securites, nontaxable                                                      |                                 |                         | 27 
|Securities, non-marketable                                                 |                                 |                         | 2  
|Federal funds sold and other                                               |                                 |                         | 20 
|Loans                                                                      |                                 |                         | 530
|                                                                           |                                 |                         |    
|                                                                           | Total interest income           |                         |    
|                                                                           |                                 |                         |    
|Interest-Bearing Liabilities                                               |                                 |                         |    
|Interest-bearing transaction accounts                                      |                                 |                         | 2  
|Savings                                                                    |                                 |                         | 104
|Time deposits                                                              |                                 |                         | 100
|                                                                           |                                 |                         |    
|                                                                           | Total interest-bearing deposits |                         |    
|Advances from FHLB                                                         |                                 |                         | 12 
|Securities sold under agreements to repurchase and federal funds purchased |                                 |                         | (4 
|                                                                           |                                 |                         |    
|                                                                           | Total interest expense          |                         |    
|                                                                           |                                 |                         |    
|Net interest income                                                        |                                 | $                       | 569
|                                                                           |                                 |                         |    

---

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

20

---

The following table presents our rate sensitivity at each of the time intervals indicated as of December 31, 2003. The table may not be indicative of our rate sensitivity position
at other points in time.

Interest Rate Sensitivity Analysis

|December 31, 2003             |                                                | Less Than
Three
Months             |                                 | Four to Six
Months |        | Seven to
Twelve
Months |       | One to Five
Years |         | Over Five
Years |       | Total 
|----------------------------- | ---------------------------------------------- | ---------------------------------- | ------------------------------- | ------------------ | ------ | ---------------------- | ----- | ----------------- | ------- | --------------- | ----- | ------
|
|Assets                        |                                                |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       
|Earning Assets                |                                                |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       
|                              | Loans                                          |                                    | $                               | 26,080             |        | $                      | 1,407 |                   | $       | 851             |       | $     
|                              | Securities available for sale                  |                                    |                                 | 5                  |        |                        |      |                   |         |                |       |       
|                              | Non-marketable equity securities               |                                    |                                 | 419                |        |                        |      |                   |         |                |       |       
|                              | Federal funds sold                             |                                    |                                 | 3,955              |        |                        |      |                   |         |                |       |       
|                              |                                                |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       
|                              |                                                | Total earning assets               |                                 |                    | 30,459 |                        |       | 1,407             |         |                 | 851   |       
|                              |                                                |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       
|Liabilities                   |                                                |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       
|Interest-bearing liabilities: |                                                |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       
|                              | Interest-bearing deposits (1):                 |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       
|                              |                                                | Demand deposits                    |                                 |                    | 8,373  |                        |       |                  |         |                 |      |       
|                              |                                                | Savings deposits                   |                                 |                    | 17,148 |                        |       |                  |         |                 |      |       
|                              |                                                | Time deposits                      |                                 |                    | 5,672  |                        |       | 5,469             |         |                 | 4,637 |       
|                              |                                                |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       
|                              |                                                |                                    | Total interest-bearing deposits |                    |        | 31,193                 |       |                   | 5,469   |                 |       | 4,637 
|                              | Advances from Federal Home Loan Bank           |                                    |                                 |                   |        |                        |      |                   |         |                |       |       
|                              | Securities sold under agreements to repurchase |                                    |                                 | 2,552              |        |                        |      |                   |         |                |       |       
|                              |                                                |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       
|                              |                                                | Total interest-bearing liabilities |                                 |                    | 33,745 |                        |       | 5,469             |         |                 | 4,637 |       
|                              |                                                |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       
|Period gap                    |                                                | $                                  | (3,286                          | )                  | $      | (4,062                 | )     | $                 | (3,786  | )               | $     | 17,892
|                              |                                                |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       
|Cumulative gap                |                                                | $                                  | (3,286                          | )                  | $      | (7,348                 | )     | $                 | (11,134 | )               | $     | 6,758 
|                              |                                                |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       
|Cumulative gap ratio (2)      |                                                |                                    | (4.64                           | )%                 |        | (10.37                 | )%    |                   | (15.71  | )%              |       | 9.54  
|                              |                                                |                                    |                                 |                    |        |                        |       |                   |         |                 |       |       

---

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

21

---

mature
on a daily basis and are reflected in the earliest pricing period. Advances from Federal Home Loan Bank are reflected at their contractual maturity date.

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

Provision for Loan Losses

We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem credits.
On a quarterly basis, our bank's board of directors reviews and approves the appropriate level for the bank's allowance for loan losses based upon management's recommendations, the results of the
internal monitoring and reporting system, analysis of economic conditions in its markets, and a review of historical statistical data for both the bank and other financial institutions.

Additions
to the allowance for loan losses, which are expensed as the provision for loan losses on our income statement, are made periodically to maintain the allowance at an appropriate
level based on management's analysis of the probable losses inherent in the loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. The amount of the provision is
a function of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, the amount of loan losses actually charged against the reserve during a given period,
and current economic conditions. During 2003, we provided $185,000 for loan losses, increasing the balance to $672,622 on December 31, 2003 after deducting current year net
charge-offs. The reserve for loan losses was approximately 1.16% and 1.11% of total loans on December 31, 2003 and 2002, respectively. The change in the allowance as a percentage of
gross loans each period is determined by our allowance for loan loss model which reserves certain percentages of pools for performing loans based on historical statistical data for both the bank and
other financial institutions, amounts related to specific loans based on individual reviews or certain performance issues and amounts for economic factors based on current conditions in our market.

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

Based
on present information and an ongoing evaluation, management considers the allowance for loan losses to be adequate to meet presently known and inherent risks in the loan
portfolio. Management's judgment as to the adequacy of the allowance is based upon a number of assumptions

22

---

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 allowance for loan losses will not be required.

Other Operating Income

Other operating income for the year ended December 31, 2003 was $833,218 compared to $659,619 for the year ended December 31, 2002. The most
significant portion of other operating income was from service charges on deposit accounts which totaled $493,998 in 2003 compared to $409,809 in 2002. The increase of $84,189 is a result of the
introduction of a new overdraft privilege product in May 2002. We offer brokerage services through Raymond James. Fees earned from this service totaled $92,951 for the year ended
December 31, 2003, an increase of $46,203 compared to fees earned in 2002 of $46,748. The increase in fees from the brokerage service is due to improving market conditions in 2003 and a large
annuity product sold to a single customer in third quarter 2003. Other service charges, commissions and fees increased $45,879 for the year ended December 31, 2003 as a result of gains
recognized on sales of two commercial loans and the increased transaction volume which is a result of the increase in our customer base.

Other Operating Expenses

Other operating expenses were $2,809,011 for the year ended December 31, 2003 compared to $2,447,685 for the year ended December 31, 2002. Other
operating expenses increased as a result of our continued growth in customers. In addition, director fees were increased in 2003 from $200 per meeting to $600 per meeting based on peer comparison. We
also incurred $186,580 in expenses related to entering into a definitive merger agreement with American Community Bancshares, Inc. These expenses include legal, accounting and investment
advisory fees.

Income Taxes

For the years ended December 31, 2003 and 2002, we recorded income tax expense in the amounts of $325,253 and $295,071, respectively. This resulted in an
effective tax rate of 36.1% and 35.7% for the years ended December 31, 2003 and 2002, respectively.

Capital Resources

Our total capital was increased by 2003 net income of $575,405 offset by unrealized losses of $30,971, net of tax, on securities available for sale. In addition,
we issued a 5% stock dividend on April 25, 2003. Cash paid in lieu of fractional shares was $2,303. Total capital was also increased by the effect of the accelerated vesting of employee stock
options in the amount of $11,643. Our total capital was increased in 2002 by net income of $532,247 and unrealized gains of $60,819, net of tax, on securities available for sale. In addition, we
issued a 5% stock dividend on April 19, 2002. Cash paid in lieu of fractional shares was $368.

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

23

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maintain
capital at the minimum requirement. All others are subject to maintaining ratios 100 to 200 basis points above the minimum. We currently not subject to the requirements for bank holding
companies because the Federal Reserve guidelines contain an exemption for bank holding companies of less than $150,000,000 in consolidated assets; however, the ratios for our company are presented for
information.

Risk-Based Capital Ratios

|                                                                   |                                                                       | The Bank                 |            | The Company |           
|------------------------------------------------------------------ | --------------------------------------------------------------------- | ------------------------ | ---------- | ----------- | ----------
|
|Tier 1 capital                                                     |                                                                       |                          |            |             |           
|                                                                   | Common shareholders' equity                                           |                          | $          | 6,245,024   |           
|                                                                   | Less: unrealized gains on securities available for sale, net of taxes |                          |            | (29,848     | )         
|                                                                   |                                                                       |                          |            |             |           
|                                                                   |                                                                       | Total Tier 1 capital     |            |             | 6,215,176 
|Tier 2 capital                                                     |                                                                       |                          |            |             |           
|                                                                   | Allowable allowance for loan losses                                   |                          |            | 672,622     |           
|                                                                   |                                                                       |                          |            |             |           
|                                                                   |                                                                       | Total qualifying capital |            | $           | 6,887,798 
|                                                                   |                                                                       |                          |            |             |           
|Risk-adjusted total assets
(including off-balance sheet exposures) |                                                                       | $                        | 63,039,487 |             | $         
|                                                                   |                                                                       |                          |            |             |           
|                                                                   |                                                                       | Total average assets     |            | $           | 73,476,806
|                                                                   |                                                                       |                          |            |             |           
|Risk-based capital ratios:                                         |                                                                       |                          |            |             |           
|                                                                   | Tier 1 risk-based capital ratio                                       |                          |            | 9.86        | %         
|                                                                   | Total risk-based capital ratio                                        |                          |            | 10.92       | %         
|                                                                   | Tier 1 leverage ratio                                                 |                          |            | 8.46        | %         

Liquidity

We manage our liquidity from both the asset and liability side of the balance sheet through the coordination of the relative maturities of our assets and
liabilities. Short-term liquidity needs are generally met from cash, due from banks, federal funds sold, and deposit levels. We also have the ability to borrow additional funds from the
Federal Home Loan Bank of up to 15% of our bank's assets. Management has established policies and procedures governing the length of time to maturity on loans and investments. In the opinion of
management, our short-term liquidity needs can be adequately supported by our deposit base.

Impact of Off-Balance Sheet Arrangements

Through the operations of our bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are
legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At December 31, 2003, we had issued commitments to extend credit of
$10.7 million through various types of lending
arrangements. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is
based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. We manage the
credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

Investment Portfolio

The following table summarizes the maturity distribution and weighted-average yields of our investment portfolio at December 31, 2003.

24

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Investment Securities Portfolio Maturity Distribution and Yields

|                                |                                       | December 31, 2003 |      
|------------------------------- | ------------------------------------- | ----------------- | -----
|
|
|U.S. Government agencies due:   |                                       |                   |      
|                                | After one year but within five years  |                   | $    
|                                |                                       |                   |      
|                                |                                       |                   | 1,800
|Mortgage-backed securities due: |                                       |                   |      
|                                | After one year but within five years  |                   |      
|                                | After five years but within ten years |                   |      
|                                | After ten years                       |                   |      
|                                |                                       |                   |      
|                                |                                       |                   | 5,300
|Municipal securities due:       |                                       |                   |      
|                                | After five years but within ten years |                   |      
|                                | After ten years                       |                   |      
|                                |                                       |                   |      
|                                |                                       |                   | 1,109
|                                |                                       | $                 | 8,209
|                                |                                       |                   |      

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. We manage credit risk through a strategy of making loans within our primary marketplace and within our 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 our marketplace. Additionally, since we consider real estate as the most desirable nonmonetary
collateral, a significant portion of our loans are collateralized by real estate; however, the cash flow of the borrower or the business enterprise is generally considered as the primary source of
repayment. Generally, we do not consider the value of real estate as the primary source of repayment for performing loans. We also seek to limit total exposure to individual and affiliated borrowers.
We manage 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.

Our
bank's loan officers and loan administration staff are charged with monitoring our 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 our loan portfolio, several credit risk identification and monitoring
processes are utilized. We use an outside consultant to perform loan reviews on a quarterly basis.

25

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Lending Activities

We extend credit primarily to consumers and small businesses in Cherokee County and, to a limited extent, customers in surrounding areas.

Our
service area is mixed in nature. The corporate office is located in Gaffney, South Carolina. Cherokee County is a regional business center whose economy contains elements of medium
and light manufacturing, higher education, regional health care, and distribution facilities. Outside the incorporated city limits of Gaffney, the economy includes manufacturing, agriculture, timber,
and recreational activities. No particular category or segment of the economy previously described is expected to grow or contract disproportionately in 2003.

Total
loans outstanding were $58,217,594 and $51,792,893 at December 31, 2003 and 2002, respectively. The loan demand remains strong in our market area. There are no significant
concentrations of loans in our loan portfolio to any particular individuals or industry or group of related individuals or industries.

Our
ratio of loans to deposits was 91% and 89% at December 31, 2003 and 2002, respectively. The loan to deposit ratio is used to monitor a financial institution's potential
profitability and efficiency of asset distribution and utilization. Generally, a higher loan to deposit ratio is indicative of higher interest income since loans yield a higher return than alternative
investment vehicles. Management has concentrated on maintaining quality in the loan portfolio while continuing to increase the deposit base.

The
following table summarizes the composition of the loan portfolio at December 31, 2003 and 2002.

Loan Portfolio Composition

|December 31,              |              | 2003        |       | 2002   |       
|------------------------- | ------------ | ----------- | ----- | ------ | ------
|
|
|Commercial and industrial |              | $           | 8,063 |        | 13.85 
|Real estate               |              |             |       |        |       
|                          | Construction |             |       | 5,898  |       
|                          | Mortgage     |             |       | 38,852 |       
|Consumer and other        |              |             | 5,405 |        | 9.28  
|                          |              |             |       |        |       
|                          |              | Total loans |       |        | 58,218
|                          |              |             |       |        |       
|Allowance for loan losses |              |             | (673  | )      |       
|                          |              |             |       |        |       
|                          | Net loans    |             | $     | 57,545 |       
|                          |              |             |       |        |       

26

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Maturities and Sensitivity of Loans to Changes in Interest Rates:

The following table summarizes the loan maturity distribution, by type, at December 31, 2003 and related interest rate characteristics:

|                                    |                         | One Year or
Less |       | Over One
Year Through
Five Years |   | Over Five
Years |  |  
|----------------------------------- | ----------------------- | ---------------- | ----- | -------------------------------- | - | --------------- |  | -
|
|
|
|Commercial and industrial           |                         | $                | 3,115 |                                  | $ | 4,375           |  | $
|Real estateconstruction            |                         |                  | 1,387 |                                  |   | 4,036           |  |  
|Real estatemortgage                |                         |                  | 4,023 |                                  |   | 24,784          |  |  
|Consumer and other                  |                         |                  | 990   |                                  |   | 3,995           |  |  
|                                    |                         |                  |       |                                  |   |                 |  |  
|                                    |                         | $                | 9,515 |                                  | $ | 37,190          |  | $
|                                    |                         |                  |       |                                  |   |                 |  |  
|Loans maturing after one year with: |                         |                  |       |                                  |   |                 |  |  
|                                    | Fixed interest rates    |                  |       |                                  |   |                 |  |  
|                                    | Floating interest rates |                  |       |                                  |   |                 |  |  
|                                    |                         |                  |       |                                  |   |                 |  |  
|                                    |                         |                  |       |                                  |   |                 |  |  
|                                    |                         |                  |       |                                  |   |                 |  |  

27

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Risk Elements

At December 31, 2003, there was one restructured loan with a balance of $150,935, and loans totaling $152,620 were in nonaccrual status. At
December 31, 2002, there was one restructured loan with a $160,085 which was past due 90 days or more and still accruing interest, and loans totaling $229,510 were in nonaccrual status.

Summary of Loan Loss Experience

|                                           |                                               | 2003 |        | 2002  |   
|------------------------------------------ | --------------------------------------------- | ---- | ------ | ----- | --
|
|Total loans outstanding at end of year     |                                               | $    | 58,218 |       | $ 
|                                           |                                               |      |        |       |   
|Average loans outstanding                  |                                               | $    | 53,953 |       | $ 
|                                           |                                               |      |        |       |   
|Balance, beginning of year                 |                                               | $    | 576    |       | $ 
|Loans charged off                          |                                               |      |        |       |   
|                                           | Commercial and industrial                     |      |        | (64   | ) 
|                                           | Real estatemortgage                          |      |        | (11   | ) 
|                                           | Consumer and other                            |      |        | (26   | ) 
|                                           |                                               |      |        |       |   
|                                           |                                               |      | (101   | )     |   
|                                           |                                               |      |        |       |   
|Recoveries on loans previously charged off |                                               |      |        |       |   
|                                           | Commercial and industrial                     |      |        | 7     |   
|                                           | Real estatemortgage                          |      |        |      |   
|                                           | Consumer and other                            |      |        | 6     |   
|                                           |                                               |      |        |       |   
|                                           |                                               |      | 13     |       |   
|                                           |                                               |      |        |       |   
|                                           | Net charge-offs                               |      |        | (88   | ) 
|                                           |                                               |      |        |       |   
|Provision charged to operations            |                                               |      | 185    |       |   
|                                           |                                               |      |        |       |   
|                                           | Balance, end of year                          |      | $      | 673   |   
|                                           |                                               |      |        |       |   
|Ratios:                                    |                                               |      |        |       |   
|                                           | Allowance for loan losses to average loans    |      |        | 1.25  | % 
|                                           | Allowance for loan losses to period end loans |      |        | 1.16  | % 
|                                           | Net charge-offs to average loans              |      |        | (0.16 | )%

Management
has allocated the majority of its allowance for loan losses to real estate and commercial loans at December 31, 2003 and 2002.

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. 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 recorded at fair value, which is determined based upon the present value of expected cash flows discounted at the loan's effective interest rate, the market price of
the loan, if

28

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available,
or the value of the underlying collateral. All cash receipts on impaired loans are applied to principal until such time as the principal is brought current, and thereafter according to the
contractual terms of the agreement. After principal has been satisfied, future cash receipts are applied to interest income, to the extent that any interest has been foregone.

At
December 31, 2003, management reviewed its loan portfolio and determined that no impairment on loans existed that it believes would have a material effect on our consolidated
financial statements.

Average Daily Deposits

Average deposits were $62,903,039 and $47,840,226 during 2003 and 2002, respectively. This increase is a result of specific efforts to gain market share over the
banks in our area which are not locally owned. We obtained this growth through slightly higher rates than competitors on money market accounts, competitive fees on commercial accounts and specific
calls to target businesses in our community. In addition, we won bids on $10 million in short-term deposits from a local government agency in the first quarter of 2003 in an effort
to strengthen our relationship with this customer. This
same customer held approximately $3 million in non-interest bearing deposits with us at December 31, 2003 due to tax payments received which were not yet disbursed within the
county.

Certificates
of deposit over $100,000 totaled $6,826,139 and $6,347,568 at December 31, 2003 and 2002, respectively. Of this total, scheduled maturities at December 31,
2003 were as follows: three months or less$1,829,619; over three months through six months$1,447,794; over six months through twelve months$990,679; and greater
than twelve months$2,558,047.

The
following table summarizes the bank's deposits at December 31, 2003 and 2002.

|December 31,                          |  | 2003 |        | 2002 |       
|------------------------------------- |  | ---- | ------ | ---- | ------
|
|
|Noninterest-bearing demand            |  | $    | 14,444 |      | 22.53 
|Interest-bearing transaction accounts |  |      | 8,373  |      | 13.06 
|Savings                               |  |      | 17,147 |      | 26.74 
|Certificates of deposit               |  |      | 24,155 |      | 37.67 
|                                      |  |      |        |      |       
|Total deposits                        |  | $    | 64,119 |      | 100.00
|                                      |  |      |        |      |       

Core
deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits
were $54,293,014 and $51,581,481 at December 31, 2003 and 2002, respectively. Core deposits at December 31, 2003 also exclude the $3 million in non-interest bearing
deposits held by the local government agency discussed above.

Advances From The Federal Home Loan Bank

Advances from the Federal Home Loan Bank totaled $2,000,000 and $3,000,000 at December 31, 2003 and 2002, respectively. Advances consist of a $1,000,000
fixed rate advance bearing an interest rate of 3.90% scheduled to mature July 16, 2012 and a $1,000,000 fixed rate advance bearing an interest rate of 2.00% scheduled to mature
October 3, 2005. Advances averaged $2,950,684 during 2003 as compared to $2,580,821 in 2002.

29

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Short-Term Borrowings

At December 31, 2003 and 2002, we had short term borrowings which consisted of securities sold under agreements to repurchase of $2,551,763 and $1,951,169,
respectively. We entered into a repurchase agreement with a local electric cooperative which generally matures on a one-day basis. The average interest rate paid on the repurchase
agreement was 1.05% and 1.35% at December 31, 2003 and 2002, respectively. The maximum amount outstanding at any month-end for the repurchase agreement was $2,551,763 and
$8,267,140, during 2003 and 2002, respectively. The average amount outstanding for the repurchase agreement was $1,230,235 and $1,505,524, during 2003 and 2002, respectively. The average interest rate
paid on the repurchase agreement was 1.18% and 2.20% during 2003 and 2002, respectively.

Return on Equity and Assets

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average
equity), equity to assets ratio (average equity divided by average total assets), for the periods indicated. Since our inception, we have not paid cash dividends.

|                         |  | 2003  |   | 2002  |  
|------------------------ |  | ----- | - | ----- | -
|Return on average assets |  | 0.77  | % | 0.90  | %
|Return on average equity |  | 7.69  | % | 7.77  | %
|Equity to assets ratio   |  | 10.00 | % | 11.62 | %

Critical Accounting Policies

We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the
preparation of our consolidated financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements.

Certain
accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. The judgments and
assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make,
actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

We
believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial
statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

Accounting and Financial Reporting Issues

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities. This interpretation addresses the
consolidation by business enterprises of variable interest entities as defined in the interpretation. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) to clarify some of the
provisions of FIN 46 and to exempt certain entities from its requirements. Public entities, other than small business issuers, must apply FIN 46R no later than the end of the first reporting period
ending after March 15, 2004. (Small business issuers must apply FIN 46R no later than the end of the first reporting period ending after December 15, 2004.) FIN 46 is effective for
public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. We do not expect the impact of this
statement to be material to our consolidated financial statements.

30

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Item 7. Financial Statements

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, 2003 and 2002 and the related consolidated statements of income,
changes in shareholders' equity and comprehensive income and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 financial position of FNB Bancshares, Inc., and subsidiary as of
December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of
America.

/s/DIXON HUGHES, PLLCDixon Hughes PLLC
Charlotte, North Carolina
January 23, 2004

31

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FNB BANCSHARES, INC.
Consolidated Balance Sheets
December 31, 2003 and 2002

|                                               |                                                                                                   | 2003                                                                             |                                            | 2002       |           
|---------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------
|Assets:                                        |                                                                                                   |                                                                                  |                                            |            |           
|                                               | Cash and cash equivalents:                                                                        |                                                                                  |                                            |            |           
|                                               |                                                                                                   | Cash and due from banks                                                          |                                            | $          | 2,784,365 
|                                               |                                                                                                   | Federal funds sold                                                               |                                            |            | 3,955,000 
|                                               |                                                                                                   |                                                                                  |                                            |            |           
|                                               |                                                                                                   |                                                                                  | Total cash and cash equivalents            |            |           
|                                               |                                                                                                   |                                                                                  |                                            |            |           
|                                               | Investment securities:                                                                            |                                                                                  |                                            |            |           
|                                               |                                                                                                   | Securities available for sale (amortized cost:
2003$8,212,835; 2002$5,451,438) |                                            |            | 8,260,213 
|                                               |                                                                                                   | Securities held to maturity (estimated fair value:
2002$810,500)                |                                            |            |          
|                                               |                                                                                                   | Non-marketable equity securities                                                 |                                            |            | 419,161   
|                                               |                                                                                                   |                                                                                  |                                            |            |           
|                                               |                                                                                                   |                                                                                  | Total investment securities                |            |           
|                                               |                                                                                                   |                                                                                  |                                            |            |           
|                                               | Loans receivable:                                                                                 |                                                                                  |                                            | 58,217,594 |           
|                                               |                                                                                                   | Less allowance for loan losses                                                   |                                            |            | (672,622  
|                                               |                                                                                                   |                                                                                  |                                            |            |           
|                                               |                                                                                                   |                                                                                  | Loans, net                                 |            |           
|                                               | Premises and equipment, net                                                                       |                                                                                  |                                            | 3,144,436  |           
|                                               | Accrued interest receivable                                                                       |                                                                                  |                                            | 286,640    |           
|                                               | Real estate owned                                                                                 |                                                                                  |                                            |           |           
|                                               | Other assets                                                                                      |                                                                                  |                                            | 157,906    |           
|                                               |                                                                                                   |                                                                                  |                                            |            |           
|                                               |                                                                                                   |                                                                                  | Total assets                               |            | $         
|                                               |                                                                                                   |                                                                                  |                                            |            |           
|Liabilities:                                   |                                                                                                   |                                                                                  |                                            |            |           
|                                               | Deposits:                                                                                         |                                                                                  |                                            |            |           
|                                               |                                                                                                   | Noninterest-bearing transaction accounts                                         |                                            | $          | 14,443,720
|                                               |                                                                                                   | Interest-bearing transaction accounts                                            |                                            |            | 8,372,641 
|                                               |                                                                                                   | Savings                                                                          |                                            |            | 17,147,582
|                                               |                                                                                                   | Time deposits $100,000 and over                                                  |                                            |            | 6,826,139 
|                                               |                                                                                                   | Other time deposits                                                              |                                            |            | 17,329,071
|                                               |                                                                                                   |                                                                                  |                                            |            |           
|                                               |                                                                                                   |                                                                                  | Total deposits                             |            |           
|                                               | Securities sold under agreements to repurchase                                                    |                                                                                  |                                            | 2,551,763  |           
|                                               | Advances from the Federal Home Loan Bank                                                          |                                                                                  |                                            | 2,000,000  |           
|                                               | Accrued interest payable                                                                          |                                                                                  |                                            | 36,164     |           
|                                               | Other liabilities                                                                                 |                                                                                  |                                            | 162,630    |           
|                                               |                                                                                                   |                                                                                  |                                            |            |           
|                                               |                                                                                                   |                                                                                  | Total liabilities                          |            |           
|                                               |                                                                                                   |                                                                                  |                                            |            |           
|Commitments and contingencies (Notes 5 and 17) |                                                                                                   |                                                                                  |                                            |            |           
|Shareholders' Equity:                          |                                                                                                   |                                                                                  |                                            |            |           
|                                               | Preferred stock, $.01 par value, 10,000,000 shares authorized and unissued                        |                                                                                  |                                            |           |           
|                                               | Common stock, $.01 par value, 10,000,000 shares authorized; 679,279 shares issued and outstanding |                                                                                  |                                            | 6,793      |           
|                                               | Capital surplus                                                                                   |                                                                                  |                                            | 6,831,760  |           
|                                               | Retained earnings                                                                                 |                                                                                  |                                            | 814,582    |           
|                                               | Accumulated other comprehensive income                                                            |                                                                                  |                                            | 29,848     |           
|                                               |                                                                                                   |                                                                                  |                                            |            |           
|                                               |                                                                                                   |                                                                                  | Total shareholders' equity                 |            |           
|                                               |                                                                                                   |                                                                                  |                                            |            |           
|                                               |                                                                                                   |                                                                                  | Total liabilities and shareholders' equity |            | $         
|                                               |                                                                                                   |                                                                                  |                                            |            |           

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

32

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FNB BANCSHARES, INC.
Consolidated Statements of Income
For the years ended December 31, 2003 and 2002

|                                                    |                                                | 2003                             |           | 2002     
|--------------------------------------------------- | ---------------------------------------------- | -------------------------------- | --------- | ---------
|Interest and dividend income:                       |                                                |                                  |           |          
|                                                    | Loans, including fees                          |                                  | $         | 3,696,793
|                                                    | Investment securities:                         |                                  |           |          
|                                                    |                                                | Taxable                          |           |          
|                                                    |                                                | Nontaxable                       |           |          
|                                                    |                                                | Non-marketable equity securities |           |          
|                                                    | Federal funds sold                             |                                  |           | 41,455   
|                                                    | Other                                          |                                  |           | 1,802    
|                                                    |                                                |                                  |           |          
|                                                    |                                                | Total                            |           |          
|                                                    |                                                |                                  |           |          
|Interest expense:                                   |                                                |                                  |           |          
|                                                    | Deposits                                       |                                  |           | 926,081  
|                                                    | Securities sold under agreements to repurchase |                                  |           | 16,151   
|                                                    | Advances from the Federal Home Loan Bank       |                                  |           | 94,352   
|                                                    | Federal funds purchased                        |                                  |           | 100      
|                                                    |                                                |                                  |           |          
|                                                    |                                                | Total                            |           |          
|                                                    |                                                |                                  |           |          
|Net interest income                                 |                                                |                                  | 3,061,451 |          
|Provision for loan losses                           |                                                |                                  | 185,000   |          
|                                                    |                                                |                                  |           |          
|Net interest income after provision for loan losses |                                                |                                  | 2,876,451 |          
|                                                    |                                                |                                  |           |          
|Other operating income:                             |                                                |                                  |           |          
|                                                    | Service charges on deposit accounts            |                                  |           | 493,998  
|                                                    | Mortgage origination fees                      |                                  |           | 97,062   
|                                                    | Brokerage service fees                         |                                  |           | 92,951   
|                                                    | Other service charges, commissions, and fees   |                                  |           | 149,207  
|                                                    |                                                |                                  |           |          
|                                                    |                                                | Total                            |           |          
|                                                    |                                                |                                  |           |          
|Other operating expenses:                           |                                                |                                  |           |          
|                                                    | Salaries and benefits                          |                                  |           | 1,238,873
|                                                    | Occupancy expense                              |                                  |           | 193,439  
|                                                    | Furniture and equipment                        |                                  |           | 279,762  
|                                                    | Write-down on disposal of assets               |                                  |           |         
|                                                    | Office supplies                                |                                  |           | 53,754   
|                                                    | Data processing                                |                                  |           | 254,348  
|                                                    | Other operating expenses                       |                                  |           | 788,835  
|                                                    |                                                |                                  |           |          
|                                                    |                                                | Total                            |           |          
|                                                    |                                                |                                  |           |          
|Income before income taxes                          |                                                |                                  | 900,658   |          
|Income tax expense                                  |                                                |                                  | 325,253   |          
|                                                    |                                                |                                  |           |          
|Net income                                          |                                                | $                                | 575,405   |          
|                                                    |                                                |                                  |           |          
|Per Share                                           |                                                |                                  |           |          
|                                                    | Average shares outstandingbasic               |                                  |           | 679,279  
|                                                    | Net incomebasic                               |                                  | $         | 0.85     
|                                                    | Average shares outstandingdiluted             |                                  |           | 719,415  
|                                                    | Net incomediluted                             |                                  | $         | 0.80     

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

33

---

FNB BANCSHARES, INC.
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
For the years ended December 31, 2003 and 2002

|                                                        |                                                                                       | Common Stock |  |   |       |  |   | Accumulated
Other
Comprehensive
Income (Loss) |  |   |         
|------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------ |  | - | ----- |  | - | --------------------------------------------- |  | - | --------
|
|
|Balance, December 31, 2001                              |                                                                                       | 616,338      |  | $ | 6,163 |  | $ | 6,112,318                                     |  | $ | 418,030 
|Comprehensive income:                                   |                                                                                       |              |  |   |       |  |   |                                               |  |   |         
|                                                        | Net income                                                                            |              |  |   |       |  |   |                                               |  |   |         
|                                                        | Net unrealized gains on securities available for sale (net of tax effect of $34,211)  |              |  |   |       |  |   |                                               |  |   |         
|                                                        |                                                                                       |              |  |   |       |  |   |                                               |  |   |         
|Total comprehensive income                              |                                                                                       |              |  |   |       |  |   |                                               |  |   |         
|                                                        |                                                                                       |              |  |   |       |  |   |                                               |  |   |         
|Issuance of 5% common stock dividend                    |                                                                                       | 30,785       |  |   | 308   |  |   | 338,327                                       |  |   | (338,635
|Cash in lieu of fractional shares                       |                                                                                       |              |  |   |       |  |   |                                               |  |   | (368    
|                                                        |                                                                                       |              |  |   |       |  |   |                                               |  |   |         
|Balance, December 31, 2002                              |                                                                                       | 647,123      |  |   | 6,471 |  |   | 6,450,645                                     |  |   | 611,274 
|Comprehensive income:                                   |                                                                                       |              |  |   |       |  |   |                                               |  |   |         
|                                                        | Net income                                                                            |              |  |   |       |  |   |                                               |  |   |         
|                                                        | Net unrealized losses on securities available for sale (net of tax effect of $16,681) |              |  |   |       |  |   |                                               |  |   |         
|                                                        |                                                                                       |              |  |   |       |  |   |                                               |  |   |         
|Total comprehensive income                              |                                                                                       |              |  |   |       |  |   |                                               |  |   |         
|                                                        |                                                                                       |              |  |   |       |  |   |                                               |  |   |         
|Effect of accelerated vesting of employee stock options |                                                                                       |              |  |   |       |  |   | 11,643                                        |  |   |         
|Issuance of 5% common stock dividend                    |                                                                                       | 32,156       |  |   | 322   |  |   | 369,472                                       |  |   | (369,794
|Cash in lieu of fractional shares                       |                                                                                       |              |  |   |       |  |   |                                               |  |   | (2,303  
|                                                        |                                                                                       |              |  |   |       |  |   |                                               |  |   |         
|Balance, December 31, 2003                              |                                                                                       | 679,279      |  | $ | 6,793 |  | $ | 6,831,760                                     |  | $ | 814,582 
|                                                        |                                                                                       |              |  |   |       |  |   |                                               |  |   |         

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

34

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FNB BANCSHARES, INC.
Consolidated Statements of Cash Flows
For the years ended December 31, 2003 and 2002

|                                                        |                                                                                   | 2003                                                                   |                                           | 2002        |        
|------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ----------------------------------------- | ----------- | -------
|Cash flows from operating activities:                   |                                                                                   |                                                                        |                                           |             |        
|                                                        | Net income                                                                        |                                                                        | $                                         | 575,405     |        
|                                                        | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                        |                                           |             |        
|                                                        |                                                                                   | Provision for loan losses                                              |                                           |             | 185,000
|                                                        |                                                                                   | Depreciation and amortization expense                                  |                                           |             | 281,204
|                                                        |                                                                                   | Amortization of premiums on investment securities                      |                                           |             | 90,390 
|                                                        |                                                                                   | Compensation expense for accelerated vesting of employee stock options |                                           |             | 11,643 
|                                                        |                                                                                   | Write-down on disposal of assets                                       |                                           |             |       
|                                                        |                                                                                   | Loss on sale of real estate owned                                      |                                           |             | 8,716  
|                                                        |                                                                                   | Deferred income taxes                                                  |                                           |             | (19,231
|                                                        |                                                                                   | (Increase) decrease in interest receivable                             |                                           |             | (5,395 
|                                                        |                                                                                   | Decrease in interest payable                                           |                                           |             | (11,833
|                                                        |                                                                                   | Decrease in other assets                                               |                                           |             | 28,635 
|                                                        |                                                                                   | Increase in other liabilities                                          |                                           |             | 13,618 
|                                                        |                                                                                   |                                                                        |                                           |             |        
|                                                        |                                                                                   |                                                                        | Net cash provided by operating activities |             |        
|                                                        |                                                                                   |                                                                        |                                           |             |        
|Cash flows from investing activities:                   |                                                                                   |                                                                        |                                           |             |        
|                                                        | Purchases of securities held to maturity                                          |                                                                        |                                           |            |        
|                                                        | Maturities of securities held to maturity                                         |                                                                        |                                           | 800,000     |        
|                                                        | Purchase of securities available for sale                                         |                                                                        |                                           | (24,139,588 | )      
|                                                        | Maturities of securities available for sale                                       |                                                                        |                                           | 18,525,000  |        
|                                                        | Principal repayments on securites available for sale                              |                                                                        |                                           | 2,762,655   |        
|                                                        | Purchase of nonmarketable equity securities                                       |                                                                        |                                           | (60,850     | )      
|                                                        | Net increase in loans                                                             |                                                                        |                                           | (6,513,002  | )      
|                                                        | Proceeds from sale of real estate owned                                           |                                                                        |                                           | 46,284      |        
|                                                        | Purchases of premises and equipment                                               |                                                                        |                                           | (9,324      | )      
|                                                        |                                                                                   |                                                                        |                                           |             |        
|                                                        |                                                                                   |                                                                        | Net cash used in investing activities     |             |        
|                                                        |                                                                                   |                                                                        |                                           |             |        
|Cash flows from financing activities:                   |                                                                                   |                                                                        |                                           |             |        
|                                                        | Net increase in deposits                                                          |                                                                        |                                           | 6,190,104   |        
|                                                        | Net increase in securities sold under agreements to repurchase                    |                                                                        |                                           | 600,594     |        
|                                                        | Decrease in advances from the Federal Home Loan Bank                              |                                                                        |                                           | (1,000,000  | )      
|                                                        | Cash in lieu of fractional shares                                                 |                                                                        |                                           | (2,303      | )      
|                                                        |                                                                                   |                                                                        |                                           |             |        
|                                                        |                                                                                   |                                                                        | Net cash provided by financing activities |             |        
|                                                        |                                                                                   |                                                                        |                                           |             |        
|Net increase in cash and cash equivalents               |                                                                                   |                                                                        | (1,642,278                                | )           |        
|Cash and cash equivalents, beginning of year            |                                                                                   |                                                                        | 8,381,643                                 |             |        
|                                                        |                                                                                   |                                                                        |                                           |             |        
|Cash and cash equivalents, end of year                  |                                                                                   | $                                                                      | 6,739,365                                 |             | $      
|                                                        |                                                                                   |                                                                        |                                           |             |        
|Supplemental disclosure of cash flow data:              |                                                                                   |                                                                        |                                           |             |        
|                                                        | Cash paid during the year for interest                                            |                                                                        | $                                         | 1,048,517   |        
|                                                        | Cash paid during the year for taxes                                               |                                                                        | $                                         | 371,776     |        
|Supplemental disclosure of non-cash investing activity: |                                                                                   |                                                                        |                                           |             |        
|                                                        | Change in unrealized gain on securities available for sale, net of income taxes   |                                                                        | $                                         | (30,971     | )      
|                                                        | Real estate acquired through foreclosure                                          |                                                                        | $                                         |            |        

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

35

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NOTE 1ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Management's EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America 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 loan losses, including valuation allowances for impaired
loans, and the valuation of real estate owned. In connection with the determination of the allowances loan for losses and real estate owned, management obtains independent appraisals for significant
properties.

While
management uses available information to recognize losses on loans and real estate owned, future adjustments 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 loan losses and real estate owned. Such agencies may
require the Company to recognize adjustments 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 loan losses and real estate owned may change materially in the near term.

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

Investment SecuritiesInvestment securities are accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") 115, "Accounting for Certain Investments in Debt and Equity Securities". At the time of purchase, investment securities are classified by management into three categories as follows:
(1) Investments held to maturity: securities which the Company has the positive intent and ability to hold to maturity, which are reported at amortized cost; (2) Trading securities:
securities that are bought and held principally for the purpose of selling them in the near future, which are reported at fair value with unrealized gains and losses included in earnings; and
(3) Investments available for sale: securities that may be sold under certain conditions, which are reported at fair value, with unrealized gains and losses excluded from earnings and reported
as a separate component of shareholders' equity, net of income taxes. The amortization of premiums and accretion of discounts on investment securities are recorded as adjustments to interest income.
Gains or losses on sales of investment securities are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. Fair value of
securities is determined using quoted market

36

---

prices.
Unrealized losses on securities, reflecting a decline in value or impairment judged by the Company to be other than temporary, are charged to income in the consolidated statements of income.

Non-marketable Equity SecuritiesNonmarketable equity securities include the Company's investment in the stock of
the Federal Home Loan Bank, the Federal Reserve Bank, and Community Financial Services, Inc. These stocks are recorded at cost have no quoted market value and no ready market exists. Investment
in Federal Home Loan Bank stock is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to secure the borrowings. There were $2,000,000 and $3,000,000 in outstanding
advances at December 31, 2003 and 2002, respectively. At December 31, 2003 and 2002, the investment in Federal Home Loan Bank stock was $200,000 and $150,000, respectively. Investment in
Federal Reserve Bank stock is required by law of every national bank. The investment in Federal Reserve Bank Stock was $143,300 and $132,450 at December 31, 2003 and 2003, respectively. The
investment in Community Financial Services, Inc. was $75,861 at December 31, 2003 and 2002.

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

LoansLoans are stated at their unpaid principal balance. Interest income is computed using the 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 contractually 90 days past due as to principal or interest, interest income is generally
discontinued unless the estimated net realizable value of the collateral exceeds the principal balance and accrued interest. When interest accruals are discontinued, income earned but not collected is
reversed. Amounts received on non-accrual loans generally are applied against principal prior to the recognition of any interest income.

Allowance for Loan LossesAn allowance for loan losses is maintained at a level deemed appropriate by management to provide
adequately for known and inherent losses in the loan portfolio. Additions to the allowance are based upon a continuing review of past loan loss experience, current 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 against the allowance and subsequent recoveries
of loans previously charged-off are added to the allowance.

Loans
are considered to be impaired when, in management's judgment, the collection of all amounts of principal and interest is not probable in accordance with the terms of the loan
agreement. The Company accounts for impaired loans in accordance with SFAS 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS 118 in the areas of disclosure
requirements and methods of recognizing income. SFAS 114 requires that impaired loans be measured using fair value, which is determined based upon the present value of expected cash flows
discounted at the loan's effective interest rate, the market price of the loan, if available, or the value of the underlying collateral. All cash receipts on impaired loans are applied to principal
until such time as the principal is brought current, and thereafter according to the contractual terms of the agreement. After principal has been satisfied, future cash receipts are applied to
interest income, to the extent that any interest has been foregone.

A
loan is also considered impaired if its terms are modified in a troubled debt restructuring. For these accruing impaired loans, cash receipts are typically applied to principal and
interest receivable in accordance with the terms of the restructured loan agreement. Interest income is recognized on these

37

---

loans
using the accrual method of accounting, provided they are performing in accordance with their restructured terms.

Premises and EquipmentPremises and equipment are stated at cost, less accumulated depreciation. The provision for
depreciation is computed by the straight-line method, based on the following estimated useful lives: buildings40 years; furniture and equipment5 to
10 years. Maintenance and repairs are charged to operating expenses as incurred. The costs of major renewals and improvements are capitalized.

Retirement PlanThe Company has a contributory 401(k) plan which covers substantially all employees. Under the plan,
participants are permitted to make discretionary contributions up to 15% of annual compensation. At its discretion, the Company can make matching contributions of $.50 per $1.00 up to 6% of the
participants' annual compensation. Expenses charged to earnings in 2003 and 2002 for the plan were $18,689 and $8,188, respectively.

Income TaxesThe Company accounts for income taxes in accordance with SFAS No. 109. Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

Stock Compensation PlansThe Company applies APB Opinion No. 25 and related interpretations in accounting for stock
options. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's stock options been determined based on the fair value at the grant dates consistent with the
method of SFAS 123, as amended by SFAS 148, the Company's net income and earnings per share for the years ended December 31, 2003 and 2002 would have been reduced to the pro forma
amounts indicated below:

|                            |                                                                            | 2003 |   | 2002   
|--------------------------- | -------------------------------------------------------------------------- | ---- | - | -------
|Net income:                 |                                                                            |      |   |        
|                            | As reported                                                                |      | $ | 575,405
|                            | Less: Stock-based compensation expense using
fair value method, net of tax |      |   | 40,120 
|                            |                                                                            |      |   |        
|                            | Pro forma                                                                  |      |   | 535,285
|Basic earnings per share:   |                                                                            |      |   |        
|                            | As reported                                                                |      | $ | 0.85   
|                            | Pro forma                                                                  |      |   | 0.79   
|Diluted earnings per share: |                                                                            |      |   |        
|                            | As reported                                                                |      | $ | 0.80   
|                            | Pro forma                                                                  |      |   | 0.74   

Per Share DataEarnings per share ("EPS") are computed in accordance with SFAS 128, "Earnings per Share."
SFAS 128 requires companies to report basic and diluted EPS. Basic EPS includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could occur if the Company's dilutive stock options were exercised. Weighted average share and
per share data have been restated to reflect the 5% stock dividend issued April 25, 2003.

Comprehensive IncomeSFAS No. 130, "Reporting Comprehensive Income," establishes standards for the reporting and
presentation of comprehensive income and its components in a full set of

38

---

financial
statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the statements of changes in shareholders' equity and
comprehensive income. The statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. The
Company's only component of accumulated other comprehensive income is net unrealized gains on securities available for sale.

Segment InformationSFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", requires
selected segment information of operating segments based on a
management approach. An operating segment is defined as any component of a company that engages in business activities from which it may earn revenues and incur expenses. The management approach is
based on the way that management organizes the segments within the company for making operating decisions and assessing performance. The Company operates as one business segment.

Statements of Cash FlowsFor purposes of reporting cash flows in the financial statements, the Company considers certain
investments purchased with an original 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.

Recent Accounting PronouncementsIn April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 improves financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative,
clarifies when a derivative contains a financing component, amends the definition of an "underlying" to conform it to language used in FIN 45 and amends certain other existing pronouncements. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, with some exceptions,
all provisions of SFAS No. 149 should be applied prospectively. The adoption of SFAS No. 149 did not have a material impact on the consolidated financial statements.

In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes
standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified by the Company after May 31, 2003, and is
effective at the beginning of the first interim period beginning after June 15, 2003. However, the FASB has deferred indefinitely the classification and measurement provisions as they related
to certain mandatorily redeemable noncontrolling interests. The adoption of SFAS No. 150 did not have a material impact on the consolidated financial statements.

In
November 2003, the Emerging Issues Task Force (EITF) reached a partial consensus on Issue 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. Issue 03-1 requires certain quantitative and qualitative disclosures for investments subject to SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The
Company adopted the partial consensus on Issue 03-1 during 2003 and has provided the new disclosures in Note 4. The EITF is expected to continue deliberating other aspects of Issue
03-1, including when to recognize other-than-temporary impairment.

ReclassificationsCertain captions and amounts in the 2002 financial statements were reclassified to conform with the 2003
presentation. These reclassifications had no effect on net income or shareholders' equity as previously reported.

39

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NOTE 2PENDING MERGER

On November 5, 2003, the Company entered into a definitive merger agreement with American Community Bancshares, Inc. ("American Community") of
Charlotte, North Carolina. Shareholders of the Company as of the close of the merger will be entitled to receive a combination of cash and American Community common stock which, at the time the merger
was announced, had a value of $20.50 per share of the Company's common stock. The merger, which is subject to regulatory and shareholder approval of both companies, is expected to be completed in
April, 2004. Expenses charged to earnings in 2003 related to consummating this merger agreement were $186,580 and are included in other operating expenses in the Consolidated Statements of Income.

NOTE 3CASH AND DUE FROM BANKS

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

NOTE 4INVESTMENT SECURITIES

The amortized costs and estimated market values of securities available for sale at December 31, 2003 and 2002 were:

|                             |  | Amortized
Cost |           | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |  | Estimated
Fair
Value
|---------------------------- |  | -------------- | --------- | ---------------------- | - | ----------------------- |  | --------------------
|December 31, 2003            |  |                |           |                        |   |                         |  |                     
|U.S. government agencies     |  | $              | 1,800,037 |                        | $ | 3,438                   |  | $                   
|Mortgage-backed securities   |  |                | 5,300,618 |                        |   | 48,712                  |  |                     
|Municipal securities         |  |                | 1,108,841 |                        |   | 16,141                  |  |                     
|Marketable equity securities |  |                | 3,339     |                        |   | 1,390                   |  |                     
|                             |  |                |           |                        |   |                         |  |                     
|                             |  | $              | 8,212,835 |                        | $ | 69,681                  |  | $                   
|                             |  |                |           |                        |   |                         |  |                     
|December 31, 2002            |  |                |           |                        |   |                         |  |                     
|U.S. government agencies     |  | $              | 1,799,616 |                        | $ | 16,558                  |  | $                   
|Mortgage-backed securities   |  |                | 3,400,990 |                        |   | 66,920                  |  |                     
|Municipal securities         |  |                | 250,832   |                        |   | 13,001                  |  |                     
|                             |  |                |           |                        |   |                         |  |                     
|                             |  | $              | 5,451,438 |                        | $ | 96,479                  |  | $                   
|                             |  |                |           |                        |   |                         |  |                     

The
following is a summary of maturities of debt securities available for sale as of December 31, 2003. 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.

Debt Securities
Available for SaleAmortized
Cost

Estimated
Fair ValueDue after one year but within five years

$
2,904,293

$
2,908,019Due after five years but within 10 years


3,977,233


4,024,711Due after 10 years


1,327,970


1,322,754$
8,209,496

$
8,255,484


40

---

The amortized costs and estimated market values of securities held to maturity at December 31, 2002 were:

|                         |  | Amortized
Cost |         | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |  | Estimated
Fair
Value
|------------------------ |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | --------------------
|December 31, 2002        |  |                |         |                        |   |                         |  |                     
|U.S. government agencies |  | $              | 799,854 |                        | $ | 10,646                  |  | $                   
|                         |  |                |         |                        |   |                         |  |                     

The
following is a summary of unrealized losses on investment securities as of December 31, 2003 and 2002. These unrealized losses on investment securities are a result of
volatility in the market during 2003 and relate to four mortgage-backed securities issued by FHLMC or FNMA and three general obligation, insured municipal securities. All unrealized losses on
investment securities are considered by management not to be other-than-temporary given the credit ratings on these investment securities and the short duration of the
unrealized loss.

2003
Less Than 12 MonthsEstimated
Fair Value

Unrealized
LossMortgage-backed securities

$
2,808,055

$
18,414Municipal securities


870,376


3,889$
3,678,431

$
22,303


The
Company had no sales of investment securities during the years ended December 31, 2003 or 2002.

At
December 31, 2003 and 2002, investment securities with a amortized cost of $7,042,287 and $6,023,721, respectively, and a fair value of $7,090,384 and $6,122,663, respectively,
were pledged as collateral to secure public deposits and for other purposes as required and permitted by law.

NOTE 5LOANS

Major classifications of loans receivable as of December 31, 2003 and 2002 are summarized as follows:

December 31,2003

2002Commercial, financial, and agricultural

$
8,062,380

$
6,797,575Real estateconstruction


5,898,171


4,154,989Real estateother


38,851,670


35,007,437Consumer and other


5,405,373


5,832,892Total loans

$
58,217,594

$
51,792,893


At
December 31, 2003 and 2002, management has determined that no impairment of loans existed that would have a material effect on the Company's financial statements.

As
of December 31, 2003 and 2002, the Company had loans on non-accrual totaling $152,620 and $229,510, respectively. The additional amount of gross income that would
have been recorded during 2003 and 2002 if these loans had performed as agreed would have been $2,703 and $10,339, respectively. The Company recognized $10,355 of interest income on
non-accrual loans in 2003. The Company did not recognize any interest income on non-accrual loans in 2002. The Company had one restructured loan in the amount of $150,935 and
$160,085 at December 31, 2003 and 2002, respectively.

41

---

The
Company recognized $9,438 and $8,460 in interest income on this loan during 2003 and 2002, respectively.

Activity
in the allowance for loan losses for the years ended December 31, 2003 and 2002 is summarized below:

2003

2002Balance, beginning of year

$
575,923

$
546,376Provision for loan losses


185,000


186,000Recoveries on loans previously charged off


13,354


24,474Loans charged off


(101,655
)

(180,927
)Balance, end of year

$
672,622

$
575,923


The
Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial
instruments consist of commitments to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the
contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments.

The
following table summarizes the Company's off-balance-sheet financial instruments whose contract amounts represent credit risk as of December 31, 2003 and 2002:

2003

2002Commitments to extend credit

$
10,654,854

$
8,587,595


NOTE 6PREMISES AND EQUIPMENT

Premises
and equipment consisted of the following at December 31, 2003 and 2002:

2003

2002Land

$
436,037

$
436,037Building and land improvements


2,620,117


2,618,488Furniture and equipment


1,074,824


1,066,229Construction in progress





900Total


4,130,978


4,121,654Less accumulated depreciation


986,542


705,338Premises and equipment, net

$
3,144,436

$
3,416,316


42

---

NOTE 7DEPOSITS

At December 31, 2003, the scheduled maturities of time deposits are as follows:

Maturing In

Amount2004

$
15,777,7172005


5,648,6182006


1,431,4882007


1,216,1602008


81,227Total

$
24,155,210


NOTE 8ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank consist of a $1,000,000 fixed rate advance bearing an interest rate of 3.90% scheduled to mature July 16, 2012 and
a $1,000,000 fixed rate advance bearing an interest rate of 2.00% scheduled to mature October 3, 2005.

As
collateral, the Company has pledged first mortgage loans on one to four family residences totaling $8,005,876 at December 31, 2003. In addition, the Company's Federal Home Loan
Bank stock is pledged to secure the borrowings.

NOTE 9SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

At December 31, 2003 and 2002, the Bank had arrangements to sell securities under agreements to repurchase from a local electric cooperative. Under the
terms of the arrangement, the Bank may borrow at mutually agreed-upon rates for one to seven day periods. Either party may cancel the arrangement without penalty. Information concerning
securities sold under agreements to repurchase for the years ended December 31, 2003 and 2002 is summarized as follows:

2003

2002Average balance during the year

$
1,230,235

$
1,505,524Average interest rate during the year


1.18
%

2.20
%Maximum month-end balance during the year

$
2,551,763

$
8,267,140


As
of December 31, 2003 and 2002, the amortized costs and estimated fair values of the securities underlying the agreements were $2,970,229 and $2,971,039 and $3,454,519 and
$3,480,134, respectively.

NOTE 10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, 2003 and 2002, the Company had related party loans
totaling $1,287,513, and $847,048, respectively. During 2003, $877,007 of new loans were made to related parties and repayments totaled $436,542.

43

---

NOTE 11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.

NOTE 12INCOME TAXES

Income tax expense for the years ended December 31, 2003 and 2002 is summarized as follows:

2003

2002Currently payable:Federal

$
318,591

$
241,095State


25,893


21,624Total current


344,484


262,719Change in deferred income taxes:Federal


(19,231
)

28,571State





3,781Total deferred


(19,231
)

32,352Income tax expense

$
325,253

$
295,071


The
gross amounts of deferred tax assets and deferred tax liabilities as of December 31, 2003 and 2002 are as follows:

December 31,2003

2002Deferred tax assets:Allowance for loan losses

$
194,312

$
187,761Other


699


4,677Total deferred tax assets


195,011


192,438Deferred tax liabilities:Accummulated depreciation


20,682


37,340Net unrealized gains on securities available for sale


17,530


34,211Total deferred tax liabilities


38,212


71,551Net deferred tax assets

$
156,799

$
120,887


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, 2003
will be realized and, accordingly, has not established a valuation allowance. The net deferred tax asset is included in other assets on the consolidated balance sheets. A portion of the change in the
net deferred tax asset relates to the unrealized gains and losses on securities available for sale. The related current period deferred tax benefit of $16,681 has been recorded directly to
shareholders' equity in 2003.

44

---

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

2003

2002Tax expense at statutory rate

$
306,224

$
281,288State income tax, net of federal income tax benefit


17,089


16,767Other, net


1,940


(2,984
)$
325,253

$
295,071


NOTE 13OTHER EXPENSES

Other expenses for the years ended December 31, 2003 and 2002 are summarized as follows:

2003

2002Correspondent bank fees

$
48,520

$
44,728Printing and postage


55,294


46,021Advertising and promotion


47,804


67,254Legal and accounting


74,500


72,650Telephone expenses


21,011


26,520Director fees


67,050


22,800Merger related expenses


186,580


Other


288,076


261,918Total

$
788,835

$
541,891


NOTE 14STOCK-BASED COMPENSATION

The Company has an Incentive Stock Option Plan (Stock Plan) that provides for the granting of options to purchase up to 168,075 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 incentive stock option may not be greater than ten years from the date of grant. Options
granted become exercisable at a rate of 20% per year on the first five anniversaries of the date of grant. Options that expire unexercised or are canceled become available for issuance. At
December 31, 2003 and 2002, there were 32,007 options available for grant.

All
outstanding options and option activity have been retroactively restated to reflect the effects of the 5% stock dividend issued April 25, 2003.

The
fair value of options granted is estimated as of the date granted using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in
2002: dividend yield of 0 percent; expected volatility of 0 percent; risk-free interest rate of 3.69%; and an expected life of 10 years for all option grants. There
were no options granted in 2003. The weighted-average fair value of options, calculated using the Black-Scholes option-pricing model, granted during 2002 was $3.22.

45

---

A
summary of the status of the Company's stock option plan as of December 31, 2003 and 2002 and changes during the years ended on those dates is presented below:

2003

2002Options

Weighted
Average
Exercise
Price

Options

Weighted
Average
Exercise
PriceOutstanding at beginning of year

136,068

$
9.17

131,343

$
9.07Granted






15,750


10.00Exercised









Cancelled






(11,025
)

9.07Outstanding at end of year

136,068

$
9.17

136,068

$
9.17


Options
exercisable at December 31, 2003 and 2002 were 120,095 and 101,828, respectively. On December 16, 2003, 1,985 non-vested stock options were modified to
accelerate vesting as of January 16, 2004. Resulting compensation costs charged to earnings in 2003 were $11,643.

At
December 31, 2003, the outstanding stock options had a weighted average remaining life of 4.68 years, and exercisable stock options had a weighted average remaining life
of 4.22 years.

NOTE 15UNUSED LINES OF CREDIT

As of December 31, 2003, the Bank had unused lines of credit to purchase federal funds from unrelated banks totaling $2,000,000. These lines of credit are
available on a one to fourteen-day basis for general corporate purposes. In addition, the Bank has a line of credit with Federal Home Loan Bank of fifteen percent of the total assets of
the Bank or $11,480,000 at December 31, 2003. As discussed in Note 8, as of December 31, 2003, the Bank had borrowed $2,000,000 on this line of credit.

NOTE 16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 Bank and Federal Funds SoldThe carrying amount is a reasonable estimate of fair value. Federal funds sold
are for a term of one day, and the carrying amount approximates the fair value.

Investment SecuritiesThe fair values of investment securities are based on quoted market prices.

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

DepositsThe fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the
reporting date. The fair values of time deposits are estimated using a

46

---

discounted
cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.

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

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

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

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

The
carrying values and estimated fair values of the Company's financial instruments at December 31, 2003 and 2002 are as follows:

2003

2002Carrying
Amount

Estimated
Fair Value

Carrying
Amount

Estimated
Fair ValueFinancial Assets:Cash and due from banks

$
2,784,365

$
2,784,365

$
4,409,643

$
4,409,643Federal funds sold


3,955,000


3,955,000


3,972,000


3,972,000Securities available for sale


8,260,213


8,260,213


5,546,468


5,546,468Securities held to maturity








799,854


810,500Loans


57,544,972


58,654,642


51,216,970


52,862,425Accrued interest receivable


286,640


286,640


281,245


281,245Financial Liabilities:Demand deposit, interest- bearing transaction, and savings accounts

$
39,963,943

$
39,963,943

$
33,633,064

$
33,633,064Time deposits


24,155,210


24,502,926


24,295,985


24,657,385Advances from the Federal Home Loan Bank


2,000,000


2,026,535


3,000,000


3,083,134Securities sold under agreements to repurchase


2,551,763


2,551,763


1,951,169


1,951,169Accrued interest payable


36,164


36,164


47,997


47,997


Notional
Amount

Estimated
Fair Value

Notional
Amount

Estimated
Fair ValueOff-Balance-Sheet Financial Instruments:Commitments to extend credit

$
10,654,854

$
10,654,854

$
8,587,595

$
8,587,595


47

---

NOTE 17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, 2003, management and
legal counsel are not aware of any pending or threatened litigation or unasserted claims or assessments that could result in losses, if any, that would be material to the financial statements.

NOTE 18EARNINGS PER SHARE

Net income per sharebasic is computed by dividing net income by the weighted average number of common shares outstanding. Net income per
sharediluted is computed by dividing net income by the weighted average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Dilutive
common share equivalents include common shares issuable upon exercise of outstanding stock options. All average share and per share data have been retroactively restated to reflect the 5% stock
dividend in 2003.

2003

2002Net income per sharebasic computation:Net income available to common shareholders

$
575,405

$
532,247Average common shares outstandingbasic


679,279


679,279Net income per sharebasic

$
0.85

$
0.78Net income per sharediluted computation:Net income available to common shareholders

$
575,405

$
532,247Average common shares outstandingbasic


679,279


679,279Incremental shares from assumed conversions:Stock options


40,136


14,580Average common shares outstandingdiluted


719,415


693,859Net income per sharediluted

$
0.80

$
0.77


NOTE 19REGULATORY MATTERS

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

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

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

48

---

As
of December 31, 2003, 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, 2003 and 2002.

|                  |                                          | Actual |   | For Capital
Adequacy Purposes |  | To Be Well-
Capitalized Under
Prompt Corrective
Action Provisions |  
|----------------- | ---------------------------------------- | ------ | - | ----------------------------- |  | ----------------------------------------------------------------- | -
|
|December 31, 2003 |                                          |        |   |                               |  |                                                                   |  
|                  | Total capital (to risk-weighted assets)  |        | $ | 6,887,798                     |  | 10.92                                                             | %
|                  | Tier 1 capital (to risk-weighted assets) |        |   | 6,215,176                     |  | 9.86                                                              | %
|                  | Tier 1 capital (to average assets)       |        |   | 6,215,176                     |  | 8.46                                                              | %
|December 31, 2002 |                                          |        |   |                               |  |                                                                   |  
|                  | Total capital (to risk-weighted assets)  |        | $ | 6,204,052                     |  | 11.20                                                             | %
|                  | Tier 1 capital (to risk-weighted assets) |        |   | 5,628,130                     |  | 10.16                                                             | %
|                  | Tier 1 capital (to average assets)       |        |   | 5,628,130                     |  | 9.55                                                              | %

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.

49

---



NOTE 20FNB BANCSHARES, INC. (PARENT COMPANY ONLY)

Balance Sheets
December 31, 2003 and 2002

2003

2002Assets:Cash

$
1,438,789

$
1,441,092Investment in banking subsidiary


6,245,026


5,688,949Total assets

$
7,683,815

$
7,130,041LiabilitiesOther liabilities

$
832

$
832Shareholders' equity:Common stock

$
6,793

$
6,471Capital surplus


6,831,760


6,450,645Retained earnings


814,582


611,274Accumulated other comprehensive income


29,848


60,819Total shareholders' equity


7,682,983


7,129,209Total liabilities and shareholders' equity

$
7,683,815

$
7,130,041


Statements of Income
for the years ended December 31, 2003 and 2002

2003

2002Equity in undistributed earnings of banking subsidiary

$
575,405

$
532,247Net income

$
575,405

$
532,247


50

---

Statements of Cash Flows
for the years ended December 31, 2003 and 2002

2003

2002Cash flows from operating activities:Net income

$
575,405

$
532,247Adjustments to reconcile net income to net cash provided by operating activities:Decrease in other assets





196Increase in other liabilities





832Equity in undistributed earnings of banking subsidiary


(575,405
)

(532,247
)Net cash provided by operating activities





1,028Cash flows from financing activities:Cash in lieu of fractional shares


(2,303
)

(368
)Increase (decrease) in cash


(2,303
)

660Cash and cash equivalents, beginning of period


1,441,092


1,440,432Cash and cash equivalents, ending of period

$
1,438,789

$
1,441,092Supplemental disclosure of non-cash investing activityChanged in unrealized gain on securites available for sale, net of income taxes

$
(30,971
)
$
60,819


Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On October 29, 2002, the Company dismissed the firm of Tourville, Simpson & Caskey, L.L.P. and replaced them with Dixon Hughes PLLC as the auditors
of the Company effective as of that date. The decision to change accountants was recommended and approved by the audit committee with authorization by the board of directors of the Company. In early
2004, Dixon Odom changed its name to Dixon Hughes PLLC following its acquisition of the accounting firm Crisp Hughes Evans LLP.

The
reports of Tourville, Simpson & Caskey on the Company's financial statements for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope, or accounting principles.

In
connection with the audits of the Company's financial statements for the fiscal year ended December 31, 2000, 2001, and in the subsequent interim period, there were no
disagreements with Tourville, Simpson & Caskey on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to
the satisfaction of Tourville, Simpson & Caskey, would have caused Tourville, Simpson & Caskey to make reference to the matter in their report. During the fiscal year ended
December 31, 2000, 2001, and in the subsequent interim period, there were no "reportable events" to describe as specified in Item 304(a)(1)(iv)(B) of Regulation S-B.

On
October 29, 2002, the Company engaged Dixon Hughes PLLC as its independent auditors for the fiscal year ending December 31, 2002, to audit the Company's financial
statements. During the Company's most recent fiscal year and the subsequent interim period preceding the engagement of Dixon Hughes PLLC, the Company did not consult Dixon Hughes PLLC on any matter
requiring disclosure under Item 304(a)(2) of Regulation S-B.

51

---

Item 8A. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of December 31, 2003. There were no
significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of our evaluation.

The
design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

Set forth below is information about each of our other directors and each of our executive officers. Each director is also an organizer and a director of the
First National Bank of the Carolinas.

Kimberly D. Barrs, 30, who has been our company's and our bank's chief financial officer since January 2002, is a native of South
Carolina. She is a graduate of Bob Jones University with a Bachelors of Science degree in Accounting. Before she joined us, Ms. Barrs was employed with KPMG LLP in Greenville, South Carolina
from 1994 to January 2002 as a senior assurance manager where she worked extensively with community banks in the Carolinas.

Dr. Richard D. Gardner, 53, who has been a Class II director since 1996, is a native of Tennessee and practices orthopaedic
surgery with Carolina Orthopaedic Specialists where he has served since 2003. He previously practiced at the Carolina Sports Medicine and Orthopaedic Clinic in Gaffney from 1992 through 2003. A
retired Army Lieutenant Colonel, Dr. Gardner is a member of the Gaffney Chamber of Commerce. He is the immediate past chair for the South Carolina Medical Association's Medical Aspects of
Sports Committee.

Barry L. Hamrick, 58, who has been a Class I director since 1996, is a resident of Cherokee County and has served as president of
Hamrick's, Inc., a family owned business comprised of garment manufacturing
and retail clothing stores since 1968. He is a member of the Cherokee County Community Foundation Board and is a former member of the Limestone College Board of Trustees and the NationsBank Advisory
Board.

Haskell D. Mallory, 60, who has been a Class III director since 1996, is a native of Spartanburg, South Carolina and has been in
the manufacturing business since 1974. From 1987 to 2001, Mr. Mallory was co-owner of Weavetec, Inc., a manufacturer of woven textiles for home and industry.
Mr. Mallory is currently retired from the manufacturing industry. Mr. Mallory served six years in the U.S. Army as a chief warrant officer and helicopter pilot.

Bill H. Mason, 60, who has been a Class III director since 1996, is a native of Tennessee. Mr. Mason founded Bill Mason
Enterprises, which owns and operates a group of McDonald's Restaurants in Cherokee, Union, and Spartanburg Counties, South Carolina, in 1989. Prior to starting his own business, Mr. Mason
worked 27 years for American Telephone and Telegraph Company.

V. Stephen Moss, 53, who has been a Class III director and the president and chief executive officer of our company and our bank
since 1995, is a native of Cherokee County. Mr. Moss began his banking career with Southern Bank & Trust, the predecessor to First Union National Bank, in 1972. Before joining us in
1995, Mr. Moss served as First Union National Bank's Cherokee County executive officer and senior lender over the upstate community banking area. He graduated from Clemson University

52

---

with
a Bachelor's degree in Political Science, as well as from the South Carolina Bankers School and the School of Banking of the South at Louisiana State University. He has also completed the First
Union National Bank Commercial Lending School and the First Union Consumer Academy. He has taught the course "Money & Banking" at Limestone College.

Harold D. Pennington, Jr., 36, who has been a Class I director since 1996, is a native of Blacksburg, South Carolina. He graduated
with honors from Clemson University in 1989 with a Bachelor of Science degree in Mechanical Engineering. An entrepreneur since 1990, he is vice president and co-owner of
Weavetec, Inc. He is the son of Harold D. Pennington, Sr.

Harold D. Pennington, Sr., 61, who has been a Class II director since 1996, is a native of Blacksburg, South Carolina. He graduated
from Clemson University in 1965 with a Bachelor of Science degree in Textile Management. A business owner since 1987, he is president and co-owner of Weavetec, Inc. He was a member
of the Blacksburg Housing Authority Board for approximately five years, and served in the South Carolina Guard for six years. He is the father of Harold D. Pennington, Jr.

Heyward W. Porter, 78, who has been a Class II director since 1996, was born and raised in Blacksburg, South Carolina.
Mr. Porter founded Porter's Electric Motor Service in 1948 and currently serves as its president. He served as an advisory board member of Bank of Gaffney and SCN Bank (now Wachovia) for
14 years and served as mayor of Blacksburg, South Carolina from 1964 to 1966. He formerly served as an advisory board member for both the Salvation Army and Boys Club of Cherokee County. He is
a former member of the Cherokee Sertoma Club and is a Shriner.



Although none of the members of our audit committee qualify as "financial experts" as defined in the SEC rules, each of Messrs. Pennington, Sr., Mallory,
and Porter has made valuable contributions to the company and its shareholders as members of the audit committee. The board has determined that each member is fully qualified to monitor the
performance of management, the public disclosures by the company of its financial condition and performance, our internal accounting operations, and our independent auditors.



As required by Section 16(a) of the Securities Exchange Act of 1934, our directors and executive officers and certain other individuals are required to
report periodically their ownership of our common stock and any changes in ownership to the SEC. Based on a review of Forms 3, 4, and 5 and any representations made to us, it appears that the
Statement of Changes in Beneficial Ownership on Form 4 for these persons were filed in a timely fashion during 2003.



We have adopted a Code of Ethics that is designed to ensure that our directors, executive officers and employees meet the highest standards of ethical conduct.
The Code of Ethics requires that our directors, executive officers and employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and
ethical manner and otherwise act with integrity and in our best interest. Under the terms of the Code of Ethics, directors, executive officers and employees are required to report any conduct that
they believe in good faith to be an actual or apparent violation of the Code of Ethics.

As
a mechanism to encourage compliance with the Code of Ethics, we have adopted a policy regarding our method of receiving, retaining and treating complaints received regarding
accounting, internal accounting controls or auditing matters. This policy ensures that employees may submit concerns in good faith regarding questionable accounting or auditing matters in a
confidential and anonymous manner without fear of dismissal or retaliation of any kind. The Code of Ethics is available without charge upon request to our Chief Financial Officer, Kimberly Barrs, at
217 North Granard Street, Gaffney, South Carolina 29341.

53

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Item 10. Executive Compensation



The following table shows the cash compensation earned by our chief executive officer and president for the years ended December 31, 2001 through 2003.
None of our other executive officers earned total annual compensation, including salary and bonus, in excess of $100,000 in 2003.

Summary Compensation Table

|                                                      |  |                |  | Annual Compensation1 |                         | 
|----------------------------------------------------- |  | -------------- |  | -------------------- | ----------------------- | 
|
|
|V. Stephen Moss
President and Chief
Executive Officer |  | 2003
2002
2001 |  | $$$                  | 107,739
104,374
101,750 | 

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Employment Agreements

V. Stephen Moss.We have entered into an employment agreement with Steve Moss pursuant to which Mr. Moss serves as the
president, the chief executive officer, and a director of both our company and our subsidiary bank. Under the employment agreement, Mr. Moss's salary increased from $101,750 to $104,750 in
May 2002 and from $104,750 to $107,750 in October 2002, plus his yearly medical insurance premium. Mr. Moss is also eligible to participate in any management incentive program or
any long-term equity incentive program we adopt and is eligible for grants of stock options and other awards thereunder. In addition, on each anniversary of the opening date of the bank,
Mr. Moss will be eligible to receive a cash bonus equal to 5% of the net pre-tax income of our bank (determined in accordance with generally accepted accounting principles) if the
bank achieves certain performance levels established by the board of directors from time to time. Mr. Moss has also been granted an option to purchase 35,536 shares of common stock under the
employment agreement, and may be granted additional options. The options vest over a five-year
period and have a term of ten years. Additionally, Mr. Moss participates in our retirement, welfare and other benefit programs and is entitled to a life insurance policy, an accident liability
policy and reimbursement for automobile expenses, club dues, and travel and business expenses.

The
employment agreement provides for an initial term of five years, which may be extended each year for an additional year so that the remaining term shall continue to be five years.

If
we terminate Mr. Moss' employment without cause or if Mr. Moss' employment is terminated due to a sale, merger or dissolution of our company or our bank, we will be
obligated to continue his salary and bonus for the first twelve months thereafter plus one-half of his salary and bonus for the second twelve months thereafter. Furthermore, we must remove
any restrictions on outstanding incentive awards so that all such awards vest immediately and the company must continue to provide his life insurance and medical benefits until he reaches the age of
65.

In
addition, the employment agreement provides that following termination of his employment and for a period of twelve months thereafter, Mr. Moss may not (i) be employed
in the banking business as a director, officer at the vice-president level or higher, or organizer or promoter of, or provide executive management services to, any financial institution
within Cherokee County, (ii) solicit any of our major customers for the purpose of providing financial services, or (iii) solicit our employees for employment.

54

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Our
merger agreement with American Community provides that Mr. Moss will terminate his existing employment agreement with the Company. Mr. Moss has agreed to enter into a
new employment agreement with First National Bank of the Carolinas on the closing date of the merger that will have a three-year term at an initial annual salary of $125,000. Under the new
employment agreement, Mr. Moss will be entitled to receive normal and customary employee benefits associated with his position. The new employment agreement provides that Mr. Moss may
not "compete" (as such term is defined in the employment agreement) with American Community for a period of two years following the termination of the employment agreement. In addition, the new
employment agreement provides that Mr. Moss will be entitled to terminate the employment agreement and receive a one-time payment equal to 1.5 times his "base amount" in the event
that a "termination event" occurs within 24 months of a "change in control," as defined in the employment agreement. Please see the Registration on Form S-4 for additional
information.



Pursuant to the FNB Bancshares, Inc. 1997 Stock Incentive Plan, as amended in 1998 by our board of directors and shareholders, we may grant options for up
to 168,075 shares to our officers, directors, and employees. There were no new grants of stock options made to the named executive officer.

Aggregated Option Exercise and Year-end Option Values

All outstanding options and option activity have been retroactively restated to reflect the effects of the 5% stock dividends issued April 25, 2003 and
April 19, 2002.

|                |  | Number of Unexercised Securities
Underlying Options
at Fiscal year End (#) |  | Value of Unexercised In-the-Money
Options at Fiscal Year End ($)(1)
|--------------- |  | -------------------------------------------------------------------------- |  | -------------------------------------------------------------------
|
|
|V. Stephen Moss |  | 35,170                                                                     |  | 366                                                                

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Director Compensation

The company and the bank paid directors' fees of $600 for each monthly meeting in 2003 including a $700 fee for the chairman's attendance at each monthly meeting.

55

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Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The following table shows how much common stock in the company is owned by our directors, certain executive officers, and owners of more than 5% of the
outstanding common stock, as of March 15, 2004.

Name

Number of Shares
Owned(1)

Right to
Acquire(2)

% of Beneficial
Ownership(3)Kimberly Barrs



10,500

1.50
%Richard Gardner

27,563

9,187

5.25
%Barry Hamrick

27,563

11,025

5.50
%Haskell Mallory

33,075

11,025

6.29
%Bill Mason

22,271

7,423

4.26
%V. Stephen Moss

5,512

35,537

5.66
%Harold Pennington, Jr.

31,973

10,290

6.03
%Harold Pennington, Sr.

35,280

11,025

6.60
%Heyward Porter

16,538

5,512

3.17
%Executive officers and directors as a group (9 persons)

199,775

111,524

38.82
%


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The
following table sets forth equity compensation plan information at December 31, 2003.

Equity Compensation Plan Information

|Plan Category                                          |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights |  | Weighted-average exercise price of
outstanding options,
warrants and rights |      | Number of securities remaining available for future issuance under equity compensation plans
(excluding securities
reflected in column(a))
|------------------------------------------------------ |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------
|
|Equity compensation plans approved by security holders |  | 136,068                                                                                     |  | $                                                                           | 9.17 |                                                                                                                                           

Item 12. Certain Relationships and Related Transactions

We enter into banking and other transactions in the ordinary course of business with our directors and officers and their affiliates. It is our policy that these
transactions be on substantially the same terms (including price, or interest rates and collateral) as those prevailing at the time for comparable transactions with unrelated parties. We do not expect
these transactions to involve more than the normal risk of collectibility nor present other unfavorable features us. Loans to individual directors and officers must also comply with our bank's lending
policies and statutory lending limits, and directors with a personal interest in any loan application are excluded from the consideration of the loan application. We intend for all of our transactions
with our affiliates to be on terms no less favorable to us than could be obtained from an unaffiliated third party and to be approved by a majority of disinterested directors.

56

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Item 13. Exhibits, List and Reports on Form 8-K



|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                                                                         
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1, File No. 333-1546)                                                                                                                                                                                                                    
|3.2            |  | Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1, File No. 333-1546)                                                                                                                                                                                                                                       
|4.1            |  | Provisions in the Company's Articles of Incorporation and Bylaws defining the rights of holders of the Company's Common Stock (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-1, File No.
333-1546)                                                                                                                               
|10.1           |  | Option Agreement dated October 20, 1995, between James L. Moss, as seller, and FNB Bancshares, Inc., as purchaser, for the Blacksburg office property (incorporated by reference to Exhibit 10.1 of the Registration
Statement on Form S-1, File No. 333-1546)                                                                                                      
|10.2           |  | Option Agreement dated December 31, 1995, between William K. Brumbach, Jr., Linwood B. Brumbach, Evelyn B. Sanles and Patricia Brumbach Clary, as sellers, and FNB Bancshares, Inc., as purchaser, for the secondary parcel
for the Gaffney Office property (incorporated by reference to Exhibit 10.2 of the Registration Statement on Form S-1, File No. 333-1546)
|10.3           |  | Option Agreement dated January 10, 1996, between Wylie L. Hamrick and Catherine H. Beattie, as sellers, and FNB Bancshares, Inc., as purchaser, for the primary parcel for the Gaffney Office property (incorporated by
reference to Exhibit 10.3 of the Registration Statement on Form S-1, File No. 333-1546)                                                     
|10.4           |  | Line of Credit Note dated September 27, 1995, by The Company to The Bankers Bank (incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-1, File No. 333-1546)                                                                                                                                                                           
|10.5.          |  | Employment Agreement dated January 17, 1996, between the Company and V. Stephen Moss (incorporated by reference to Exhibit 10.5 of the Registration Statement on Form S-1, File No. 333-1546)                                                                                                                                                                       
|10.6.          |  | Escrow Agreement dated March 8, 1996, between The Company and The Bankers Bank (incorporated by reference to Exhibit 10.6 of the Registration Statement on Form S-1, File No. 333-1546)                                                                                                                                                                             
|10.8           |  | Stock Option Plan dated as of March 25, 1997 (incorporated by reference to Exhibit 10.7 of the Annual Report on Form 10-KSB filed by the Company for the year ended December 31, 1996)                                                                                                                                                                              
|10.9           |  | Agreement and Plan of Merger By and Between American Community Bancshares, Inc., American Community Bank, FNB Bancshares, Inc., and First National Bank of the Carolinas, dated November 5, 2003 (incorporated by reference
to Exhibit 99.2 of the Form 8-K filed on November 6, 2003)                                                                              
|21.1           |  | Subsidiaries of the Company                                                                                                                                                                                                                                                                                                                                         
|24             |  | Power of Attorney (Contained on signature page hereof)                                                                                                                                                                                                                                                                                                              
|31.1           |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                             
|31.2           |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                             
|32             |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is not "filed" for purposes of Section 18 of the Securities Exchange Act of
1934 but is instead furnished as provided by applicable rules of the Securities and Exchange Commission.                                  

---

57

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The
Company filed a Form 8-K on October 22, 2003 to disclose the issuance of a press release announcing its financial results for the first quarter ended
September 30, 2003.

The
Company filed a Form 8-K on November 6, 2003 to disclose that American Community Bancshares, Inc. entered into a definitive agreement to acquire FNB
Bancshares, Inc., the parent holding company for First National Bank of the Carolinas.

Item 14. Principal Accountant Fees and Services



The aggregate fees billed for professional services rendered by the independent auditors during the company's 2003 and 2002 fiscal years for review of the
company's annual financial statements and those financial statements included in the company's quarterly reports filed on SEC Form 10-QSB totaled approximately $26,835 and $23,600,
respectively.



The aggregate fees billed for professional services rendered by the independent auditors during the company's 2003 and 2002 fiscal years for procedures pertaining
to mortgage collateral verification and due diligence assistance related to the pending merger totaled approximately $16,291 and $0, respectively.



The aggregate fees billed for professional services rendered by the independent auditors during the company's 2003 and 2002 fiscal years for review of and
assistance with the preparation of the company's tax returns totaled approximately $3,400 and $0, respectively.



We did not engage the independent auditors to provide, and the independent auditors did not bill for, any other professional services during the company's 2003 or
2002 fiscal years.



Under the provisions of its charter, the audit committee recommends to the board the appointment of the independent auditors for the next fiscal year, reviews and
approves the auditor's audit plans, and reviews with the independent auditors the results of the audit and management's responses. The audit committee has adopted pre-approval policies and
procedures for audit and non-audit services. The pre-approval process requires all services to be performed by our independent auditor to be approved in advance, regardless of
amount. These services may include audit services, audit related services, tax services and other services.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                     |  | FNB BANCSHARES, INC.
|-------------------- |  | --------------------
|Date: March 26, 2004 |  | By:                 

KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints V. Stephen Moss, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent
full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

In
accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

|Signature                                             |  | Title                                                               |  | Date          
|----------------------------------------------------- |  | ------------------------------------------------------------------- |  | --------------
|                                                      |  |                                                                     |  |               
|/s/RICHARD D. GARDNERRichard D. Gardner               |  | Director                                                            |  | March 26, 2004
|/s/BARRY HAMRICKBarry Hamrick                         |  | Director                                                            |  | March 26, 2004
|/s/HASKELL D. MALLORYHaskell D. Mallory               |  | Director                                                            |  | March 26, 2004
|/s/BILL MASONBill Mason                               |  | Director                                                            |  | March 26, 2004
|/s/V. STEPHEN MOSSV. Stephen Moss                     |  | Director; President and Chief Executive Officer                     |  | March 26, 2004
|/s/HAROLD D. PENNINGTON, JR.Harold D. Pennington, Jr. |  | Director                                                            |  | March 26, 2004
|/s/HAROLD D. PENNINGTON, SR.Harold D. Pennington, Sr. |  | Director                                                            |  | March 26, 2004
|/s/HEYWARD W. PORTERHeyward W. Porter                 |  | Director                                                            |  | March 26, 2004
|/s/KIMBERLY D. BARRSKimberly D. Barrs                 |  | Chief Financial Officer, Principal Accounting and Financial Officer |  | March 26, 2004

59

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INDEX TO EXHIBITS

|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                                                                         
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1, File No. 333-1546)                                                                                                                                                                                                                    
|3.2            |  | Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1, File No. 333-1546)                                                                                                                                                                                                                                       
|4.1            |  | Provisions in the Company's Articles of Incorporation and Bylaws defining the rights of holders of the Company's Common Stock (incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-1, File No.
333-1546)                                                                                                                               
|10.1           |  | Option Agreement dated October 20, 1995, between James L. Moss, as seller, and FNB Bancshares, Inc., as purchaser, for the Blacksburg office property (incorporated by reference to Exhibit 10.1 of the Registration
Statement on Form S-1, File No. 333-1546)                                                                                                      
|10.2           |  | Option Agreement dated December 31, 1995, between William K. Brumbach, Jr., Linwood B. Brumbach, Evelyn B. Sanles and Patricia Brumbach Clary, as sellers, and FNB Bancshares, Inc., as purchaser, for the secondary parcel
for the Gaffney Office property (incorporated by reference to Exhibit 10.2 of the Registration Statement on Form S-1, File No. 333-1546)
|10.3           |  | Option Agreement dated January 10, 1996, between Wylie L. Hamrick and Catherine H. Beattie, as sellers, and FNB Bancshares, Inc., as purchaser, for the primary parcel for the Gaffney Office property (incorporated by
reference to Exhibit 10.3 of the Registration Statement on Form S-1, File No. 333-1546)                                                     
|10.4           |  | Line of Credit Note dated September 27, 1995, by The Company to The Bankers Bank (incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-1, File No. 333-1546)                                                                                                                                                                           
|10.5.          |  | Employment Agreement dated January 17, 1996, between the Company and V. Stephen Moss (incorporated by reference to Exhibit 10.5 of the Registration Statement on Form S-1, File No. 333-1546)                                                                                                                                                                       
|10.6.          |  | Escrow Agreement dated March 8, 1996, between The Company and The Bankers Bank (incorporated by reference to Exhibit 10.6 of the Registration Statement on Form S-1, File No. 333-1546)                                                                                                                                                                             
|10.8           |  | Stock Option Plan dated as of March 25, 1997 (incorporated by reference to Exhibit 10.7 of the Annual Report on Form 10-KSB filed by the Company for the year ended December 31, 1996)                                                                                                                                                                              
|10.9           |  | Agreement and Plan of Merger By and Between American Community Bancshares, Inc., American Community Bank, FNB Bancshares, Inc., and First National Bank of the Carolinas, dated November 5, 2003 (incorporated by reference
to Exhibit 99.2 of the Form 8-K filed on November 6, 2003)                                                                              
|21.1           |  | Subsidiaries of the Company                                                                                                                                                                                                                                                                                                                                         
|24             |  | Power of Attorney (Contained on signature page hereof)                                                                                                                                                                                                                                                                                                              
|31.1           |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                             
|31.2           |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                             
|32             |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is not "filed" for purposes of Section 18 of the Securities Exchange Act of
1934 but is instead furnished as provided by applicable rules of the Securities and Exchange Commission.                                  

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