Exhibit 13

                                Table of Contents

                                                                          Page
                                                                        -------
Shareholders' Letter..........................................................2
Summary of Selected Financial Data............................................3
Management's Discussion and Analysis.......................................4-18
Independent Auditors' Report.................................................19
Consolidated Balance Sheets..................................................20
Consolidated Statements of Income............................................21
Consolidated Statements of Changes in Shareholders' Equity and
  Comprehensive Income.......................................................22
Consolidated Statements of Cash Flows........................................23
Notes to Consolidated Financial Statements................................24-39
Directors, Officers, and Services............................................40
Corporate Data................................................Inside Back Cover




<PAGE>


                              FNB BANCSHARES, INC.


To our Shareholders:

We are very pleased to report record earnings for 2002, including three
consecutive record setting quarters. We remain focused on efficiency while
maintaining our reputation in the community as a bank with outstanding customer
service. We are proud to be the only locally owned commercial bank in Cherokee
County, which enables us to give back to our community and shareholders as we
grow and become more profitable.

From the beginning, our shareholders have supported our efforts to provide a
local community bank for our area. We are pleased that we were able to share our
success with our shareholders. In 2002, FNB Bancshares, Inc. announced its first
5% stock dividend.

The bank continued to grow tremendously in 2002 as its market share in Cherokee
County continued to increase. We continue to be the fastest growing bank in
Cherokee County, which is a direct result of our employees' dedication to
customer service.

Total assets increased $18,970,086 and ended the year at $70,206,436. Deposits
increased $17,509,858 and were $57,929,049 at year end. We were able to continue
increasing our deposits with local core deposit growth as a result of our local
decision making and personal customer service, which is becoming more rare in
Cherokee county and the banking industry.

Loans increased by $11,693,233 to $51,792,893 at year end. Federal Reserve Bank
rate cuts that began in 2001 have led to increased loan demand in 2002. The
allowance for loan losses was at 1.11% of total loans at December 31, 2002.
Management believes that the loan loss reserve of $575,923 is adequate to
provide coverage for probable losses inherent in the loan portfolio. A third
party consultant continues to review our loans on a quarterly basis.

Profitability increased significantly in 2002 as a result of gained efficiencies
in operations, significant loan growth and increased non-interest income. Net
income for the year ended December 31, 2002 was $532,247 or $0.82 per share. The
tangible book value of our stock increased to $11.02 per share at year end. In
2002, the bank upgraded its technology and, as a result, had a one-time
write-off of $24,734 on disposal of assets no longer useful. In 2001, disposal
of the temporary building in Blacksburg resulted in a fixed asset write - down
of $76,654. Without these one - time charges, income for 2002 increased 85% over
2001. Fee income will continue to be an important aspect in our profitability
growth. In 2002, other operating income was $659,619 and increased 43% over
2001. In 2002, we introduced a new bounce-free checking product for our
customers. In addition, the favorable mortgage rates throughout 2002 resulted in
higher levels of mortgage originations and increased mortgage origination fees.
We are continuing to seek new sources of fee income and opportunities to expand
upon our existing products.

We, the directors and employees of First National Bank of the Carolinas, remain
optimistic about our continued growth and success. We will continue seeking ways
to improve our efficiency and customer service, thus adding value for our
shareholders.

Please join us for the annual Shareholders meeting Tuesday April 22, 2003 at
5:30 p.m. in the lobby of our main office at 217 N. Granard Street in Gaffney,
South Carolina. The directors and employees of First National Bank of the
Carolinas are committed to building a strong community bank and improving
shareholder value. We remain grateful for your continued support in our success.



Bill H. Mason
Chairman of the Board



V. Stephen Moss
President





                                        2
<PAGE>




                             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.

<TABLE>
<CAPTION>

 Year Ended December 31,                               2002        2001          2000          1999           1998
 (Dollars in thousands, except per share data)        ------      ------       -------        ------         ------

 Income Statement Data:
<S>                                                 <C>            <C>           <C>           <C>            <C>
 Interest and dividend income                      $  3,880      $ 3,698       $ 3,485       $ 2,660        $ 2,059
 Interest expense                                     1,079        1,479         1,407           939            755
                                                      -----       -------       ------        -------        ------
Net interest income                                   2,801        2,219         2,078          1,721         1,304
 Provision for loan losses                              186          104           152            140           160
                                                      -----       ------       -------        -------        ------
Net interest income after provision for               2,615        2,115         1,926          1,581         1,144
  loan losses
Other operating income                                  660          460           358            311           193
 Other operating expense                              2,448        2,188         1,846          1,633         1,207
                                                      -----       ------        ------        -------        ------
Income before income taxes                              827          387           438            259           130
 Income tax expense                                     295          139           157             88             3
                                                      -----       ------        ------        -------        ------
Net income                                         $    532      $   248       $   281       $    171      $   127
                                                      -----       ------        ------        -------        ------
 Balance Sheet Data:                                  -----       ------        ------        -------        ------
 Securities available for sale                     $ 5,546       $    -        $     -       $      -       $     -
Securities held to maturity                            800        3,749         3,545          2,349          1,800
 Allowance for loan losses                             576          546           467            429            303
 Net loans                                          51,217       39,553        35,179         27,401         19,952
 Premises and equipment, net                         3,416        3,410         2,598          2,214          1,804
 Total assets                                       70,206       51,236        44,942         35,196         28,035
 Noninterest-bearing deposits                        8,658        7,302         5,044          4,565          3,070
 Interest-bearing deposits                          49,271       33,117        31,741         22,670         18,026
 Total deposits                                     57,929       40,419        36,785         27,235         21,096
 Total liabilities                                  63,077       44,700        38,653         29,188         22,199
 Total shareholders' equity                          7,129        6,537         6,289          6,008          5,837

 Per Share Data: (1)
 Average shares outstanding - basic                647,123      647,123       647,123        647,123        647,123
 Net income - basic                               $   0.82      $  0.38       $  0.43        $  0.26       $   0.20
 Average shares outstanding - diluted              661,023      656,693       647,123        647,123        647,123
 Net income - diluted                             $   0.81      $  0.38       $  0.43        $  0.26       $   0.20
 Tangible book value (period end)                 $  11.02      $ 10.10       $  9.72        $  9.28       $   9.02
</TABLE>


  (1) On April 19, 2002, the Company issued a 5% stock dividend. All share and
 per share data have been retroactively restated to reflect this stock dividend.


                                        3
<PAGE>




                      DESCRIPTION OF THE COMPANY'S BUSINESS

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

There were no significant changes to our business in 2002. In 2001, we made
several changes to our banking franchise. The construction of a new permanent
facility was completed in Blacksburg and was available for business on February
12, 2001. Immediately following the construction of the Blacksburg branch, the
contractors began construction of an additional branch off of Highway 11 in
Gaffney. The construction of this branch was completed on August 30, 2001. We
also began offering brokerage services through Raymond James Company in April
2001.


                              Results of Operations

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




                                        4
<PAGE>



           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

Year ended December 31, 2002, compared with year ended December 31, 2001

Net income for the year ended December 31, 2002 was $532,247 or $0.82 per share
compared to $247,525 or $0.38 per share for the year ended December 31, 2001.
Net interest income increased $582,690 or 26% to $2,801,384 for the year ended
December 31, 2002. Other operating income also increased $199,466 to $659,619
for the year ended December 31, 2002, primarily as a result of fees generated
from mortgage originations and from increased service charges on deposit
accounts as a result of a new product introduced in 2002. Other operating
expenses increased $259,352 or 12% and included expenses associated with the
technology upgrade completed in August 2002 and increased data processing and
other operating expenses as a result of our growth.

Year ended December 31, 2001, compared with year ended December 31, 2000

Net income for the year ended December 31, 2001 was $247,525 or $0.38 per share
compared to $281,164 or $0.43 per share for the year ended December 31, 2000.
Net interest income increased $140,932 or 7% to $2,218,694 for the year ended
December 31, 2001. Other operating income also increased $102,320 to $460,153
for the year ended December 31, 2001, primarily as a result of fees generated
from mortgage originations and from the newly formed brokerage service. Despite
these increases in income, other operating expense increased as well. The other
operating expenses increase of $342,782 included expenses associated with moving
one branch and opening another, and a one-time charge for the write-down of
fixed assets associated with the temporary facility in Blacksburg.

                               Net Interest Income
Net interest income, the difference between interest earned and interest cost,
is the largest component of our earnings and changes in it have the greatest
impact on net income. Variations in the volume and mix of assets and liabilities
and their relative sensitivity to interest rate movements determine changes in
net interest income. Interest rate spread and net interest margin are two
significant elements in analyzing our net interest income. Interest rate spread
is the difference between the yield on average earning assets and the rate on
average interest bearing liabilities. Net interest margin is calculated as net
interest income divided by average earning assets.

Net interest income increased from $2,218,694 for the year ended December 31,
2001 to $2,801,384 for the year ended December 31, 2002. The increase in net
interest income of $582,690 or 26% is due to an increase in average interest
earning assets of approximately $11.0 million (consisting primarily of an
increase in average loans of $10.6 million) offset by a decrease in yield on
earning assets of 143 basis points from 8.67% for the year ended December 31,
2001 to 7.24% for the year ended December 31, 2002. The increase in net interest
income is also a result of the decrease in our cost of interest bearing
liabilities of 179 basis points from 4.23% for the year ended December 31, 2001
to 2.44% for the year ended December 31, 2002. This decrease in cost of funds
more than offset the increase in average interest bearing liabilities of
approximately $9.3 million. Net interest spread and net interest margin were
4.80% and 5.23%, respectively, for the year ended December 31, 2002 as compared
to 4.44% and 5.20%, respectively, for the year ended December 31, 2001. The
increase in net interest margin is related primarily to the 179 basis point
reduction in the average cost of funds resulting from the decreasing interest
rate environment throughout 2001 and 2002. The rate decreases were offset
somewhat by the 143 basis point decrease in the yield on assets during the year
as new loans were funded at market rates and variable rate loans repriced to
market rates.

Net interest income increased from $2,077,762 for 2000 to $2,218,694 for 2001.
The increase in net interest income of $140,932 or 7%, is due to an increase in
average interest earning assets of approximately $5.6 million offset by a
decrease in yield on earning assets of 74 basis points from 9.41% for the year
ended December 31, 2000 to 8.67% for the year ended December 31, 2001. The
increase in net interest income is also a result of the decrease in our cost of
interest bearing liabilities of 57 basis points from 4.80% for the year ended
December 31, 2000 to 4.23% for the year ended December 31, 2001. This decrease
in cost of funds more than offset the increase in average interest bearing
liabilities of approximately $5.6 million. Net interest spread and net interest
margin were 4.44% and 5.20% for the year ended December 31, 2001 as compared to
4.61% and 5.61% for the year ended December 31, 2000. The decrease in net
interest margin is related primarily to the 74 basis point reduction in yield on
assets resulting from the decreasing interest rate environment throughout 2001.
The rate decreases were offset somewhat by the 57 basis point decrease in the
cost of funds during the same period.




                                        5
<PAGE>


<TABLE>
<CAPTION>

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

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

Average Balances, Income, Expenses, and Rates

Year ended December 31,                               2002                          2001                          2000
                                            -------------------------     --------------------------    --------------------------
                                             Average   Income/   Yield/    Average   Income/   Yield/   Average   Income/   Yield/
(Dollars in thousands)                       Balance   Expense   Rate      Balance   Expense   Rate     Balance   Expense   Rate

                                            --------- --------- ------    --------- --------- -------   --------- --------- ------
 Assets:
 Earning Assets:
<S>                                          <C>       <C>        <C>     <C>        <C>        <C>    <C>        <C>         <C>
 Securities, taxable                        $  4,355  $    196   4.50%   $  3,572   $   194    5.43%  $  2,164   $   130     6.01%
 Securities, nontaxable                          187         8   4.28          -         -     -             -         -        -
 Securities, non-marketable                      358        19   5.31         320        16    5.00        301        15     4.98
 Federal funds sold and other                  2,160        34   1.57       1,754        78    4.45      2,089       137     6.56
 Loans (1)                                    46,641     3,623   7.77      37,028     3,410    9.21     32,493     3,203     9.86
                                            ---------- --------           --------- -------- --------  --------  --------- --------
 Total earning assets                         53,701     3,880   7.23      42,674     3,698    8.67     37,047     3,485     9.41
                                            ---------- --------           --------- -------- --------  --------  --------- --------
 Cash and due from banks                       1,881                        1,629                        1,589
 Allowance for loan losses                      (585)                        (512)                        (427)
 Premises and equipment                        3,427                        3,065                        2,358
 Other assets                                    530                          682                          690
                                            ----------                    ---------                     --------
 Total assets                               $ 58,954                     $ 47,538                     $ 41,257
                                            =========                     =========                     ========

Liabilities and
Shareholder's equity
 Interest-bearing liabilities:
 Interest-bearing transaction accounts      $  7,240       18    0.25%   $  6,177        47    0.76%  $  5,356       103     1.92%
 Savings                                       9,865      159    1.61       5,964       140    2.35      4,659       155     3.33
 Time deposits                                23,027      796    3.46      20,676     1,210    5.85     17,494     1,044     5.97
                                            ---------- --------         -----------  -------          ---------  --------
 Total interest-bearing deposits              40,132      973    2.42      32,817     1,397    4.26     27,509     1,302     4.73
 Advances from FHLB                            2,581       79    3.06       1,227        49    3.99      1,183        79     6.68
 Securities sold under agreements to
   repurchase and federal funds purchased      1,509       27    1.79         902        33    3.66        638        26     4.08
                                            ---------  --------
Total interest-bearing liabilities            44,222    1,079    2.44      34,946     1,479    4.23     29,330     1,407     4.80
                                            ---------- --------          ----------- --------        ----------  -------
 Noninterest-bearing deposits                  7,708                        6,096                        5,532
 Accrued interest and other liabilities          172                          122                          221
 Shareholders' equity                          6,852                        6,374                        6,174
                                            -----------                   ----------                   ----------
 Total liabilities and shareholders' equity  $58,954                     $ 47,538                     $ 41,257
                                            =========                     =========                    ==========
 Net interest spread                                             4.79%                         4.44%                         4.61%
 Net interest income                                   $ 2,801                       $ 2,219                     $ 2,078
                                                      =========                     =========                    ========
 Net interest margin                                             5.22%                         5.20%                         5.61%

</TABLE>

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

                                        6
<PAGE>


<TABLE>
<CAPTION>

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

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


Analysis of Changes in Net Interest Income

Year Ended December 31,                 2002 Compared with 2001                           2001 Compared with 2000
                                       --------------------------                       --------------------------
                                             Variance Due to                                    Variance Due to
 (Dollars in thousands)            Volume (1)        Rate (1)        Total         Volume (1)       Rate (1)         Total
                                  -----------       ---------      ----------     -----------      ---------        -------
 Earning Assets
<S>                                   <C>                <C>              <C>           <C>               <C>         <C>
 Securities, taxable            $         39       $     (37)       $       2     $        77       $    (13)   $        64
 Securites, nontaxable                     8               -                8               -              -              -
 Securities, non-marketable                2               1                3               1              -              1
 Federal funds sold and other             15             (59)             (44)            (20)           (39)           (59)
 Loans                                   799            (586)             213             427           (220)           207
                                  ------------      ----------     -----------     -------------  -----------       ---------
 Total interest income                   863            (681)             182             485           (272)           213
                                  ------------      ----------     -----------     -------------  -----------       ---------

 Interest-Bearing Liabilities

 Interest-bearing transaction
  accounts                                 7             (36)             (29)             14            (70)           (56)
 Savings                                  73             (53)              20              37            (53)           (16)
 Time deposits                           125            (540)            (415)            187            (20)           167
                                   -----------      ----------     -----------     -------------    -----------       ---------
 Total interest-bearing deposits         205            (629)            (424)            238           (143)            95
 Advances from FHLB                       43             (13)              30               3            (33)           (30)

Securities sold under agreements
to repurchase and federal funds purchase  16             (22)              (6)             10             (3)             7
                                    ----------      ----------     -----------      -------------   ------------      ----------
Total interest expense                   264            (664)            (400)            251           (179)            72
                                    ----------      ----------     ------------     -------------   ------------      ----------

Net interest income            $         599        $     (17)       $    582    $        234        $   (93)     $     141
                                    ==========      ==========     ============    ==============   ============      ==========

</TABLE>

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

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.





                                        7
<PAGE>


<TABLE>
<CAPTION>

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

The following table presents our rate sensitivity at each of the time intervals
indicated as of December 31, 2002. The table may not be indicative of our rate
sensitivity position at other points in time.

Interest Rate Sensitivity Analysis

                                      Less Than                         Seven to
December 31, 2002                       Three         Four to Six        Twelve          One to Five      Over Five
(Dollars in thousands)                  Months           Months          Months            Years            Years          Total
                                       --------         --------         --------         --------         -------        --------
 Assets
 Earning Assets
<S>                                    <C>              <C>              <C>              <C>             <C>            <C>
 Loans                                 $ 21,306         $ 1,135          $ 1,183          $ 21,750        $ 6,419        $ 51,793
 Securities available for sale              -                -                 -             2,842          2,704           5,546
 Securities held to maturity                -               800                -                 -              -             800
 Non-marketable equity securities           358                                                                               358
 Federal funds sold                       3,972              -                 -                 -              -           3,972
                                       --------         ---------        --------         --------         -------       ---------
 Total earning assets                    25,636           1,935            1,183            24,592          9,123          62,469
                                       --------         ---------        --------         --------         -------       ---------

 Liabilities
 Interest-bearing liabilities:
 Interest-bearing deposits (1):
 Demand deposits                          7,327                -               -                 -               -          7,327
 Savings deposits                        17,648                -               -                 -               -         17,648
 Time deposits                            3,739            4,722           7,560             8,275               -         24,296
                                       --------         ---------        --------         ---------         -------      ---------
 Total interest-bearing deposits         28,714            4,722           7,560             8,275               -         49,271
 Advances from Federal Home Loan Bank         -                -           2,000                -            1,000          3,000
 Securities sold under agreements
 to repurchase                            1,951                -               -                -               -           1,951
                                       --------         ---------        --------          --------         -------      ---------
 Total interest-bearing liabilities      30,665            4,722           9,560             8,275           1,000         54,222
                                       --------         ---------        --------          --------         -------      ---------
 Period gap                            $ (5,029)        $ (2,787)       $  (8,377)         $ 16,317         $ 8,123
                                       =========        =========        =========        =========         =======
 Cumulative gap                        $ (5,029)        $ (7,816)       $ (16,193)        $     124         $ 8,247
                                       =========        =========        =========        =========         =======
 Cumulative gap ratio (2)                 (8.05)%         (12.51)%         (25.92)%            0.20%          13.20%
                                       =========        =========        =========        =========         =======
</TABLE>


(1) All savings and interest-bearing transaction accounts are included in the
less than three months category. (2) Ratio of cumulative gap to total earning
assets.

The above table reflects the balances of interest-earning assets and
interest-bearing liabilities at the earlier of their repricing or maturity
dates. Overnight federal funds are reflected at the earliest pricing interval
due to the immediately available nature of the instruments. Debt securities are
reflected at each instrument's ultimate maturity date. Scheduled payment amounts
of fixed rate amortizing loans are reflected at each scheduled payment date.
Scheduled payment amounts of variable rate amortizing loans are reflected at
each scheduled payment date until the loan may be repriced contractually; the
unamortized balance is reflected at that point. Interest-bearing liabilities
with no contractual maturity, such as savings deposits and interest-bearing
transaction accounts, are reflected in the earliest repricing period due to
contractual arrangements which give 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 mature on a daily basis and
are reflected in the earliest pricing period. Advances from Federal Home Loan
Bank are reflected at their contractual maturity date.




                                        8
<PAGE>



           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

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 2002, we
provided $186,000 for loan losses, increasing the balance to $575,923 on
December 31, 2002 after deducting current year net charge-offs. The reserve for
loan losses was approximately 1.11% and 1.36% of total loans on December 31,
2002 and 2001, respectively. The decrease in the allowance as a percentage of
gross loans as of December 31, 2002 is due principally to charge-offs of loans
in 2002 which had previously been assigned a specific reserve in the allowance
model in 2001. Net charge-offs in 2002 related to these loans were $157,964. At
December 31, 2001, these loans totaled $235,889 and had a specific reserve of
$71,417. In addition, the growth in our loan portfolio was primarily in the real
estate segment for which our allowance model calculates a lower reserve
allocation.

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 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.



                                        9
<PAGE>



           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                             Other Operating Income
Other operating income for the year ended December 31, 2002 was $659,619
compared to $460,153 for the year ended December 31, 2001. The most significant
portion of other operating income was from service charges on deposit accounts
which totaled $409,809 in 2002 compared to $231,093 in 2001. The increase of
$178,716 is a result of the introduction of a new overdraft privilege product in
May 2002. Mortgage origination fees increased $20,944 or 27% to $99,734 for the
year ended December 31, 2002 as a result of the continued favorable interest
rate environment. We began offering brokerage services through Raymond James in
February 2001. Fees earned from this service totaled $46,748 for the year ended
December 31, 2002, a decrease of $12,402 compared to fees earned in 2001 of
$59,150. The decrease in fees from the brokerage service is due to volatile
market conditions during 2002. Other service charges, commissions and fees were
$103,328 and $91,120 for the years ended December 31, 2002 and 2001,
respectively.


Other operating income for the year ended December 31, 2001 was $460,153
compared to $357,833 for the year ended December 31, 2000. The most significant
portion of other operating income was service charges on deposit accounts which
totaled $231,093 compared to $246,757 in 2000. Mortgage origination fees
increased $56,201, or 249% to $78,790 for the year ended December 31, 2001. The
increase was a result of home mortgage refinancings resulting from the
significant decline in the overall interest rate environment in 2001. In
addition, we began offering brokerage services through Raymond James in February
2001. Fees earned from this service totaled $59,150 for the year ended December
31, 2001.

                            Other Operating Expenses
Other operating expenses were $2,447,685 for the year ended December 31, 2002
compared to $2,188,333 for the year ended December 31, 2001. This was comprised
primarily of salaries and employee benefits totaling $1,194,451 for the year
ended December 31, 2002 compared to $1,078,970 for the year ended December 31,
2001. The increase in salaries was partially due to the full year of salaries
for the employees hired as a result of opening the additional branch on August
30, 2001 on Highway 11 in Gaffney. All other operating expenses increased as
well as a result of our continued growth and expenses associated with opening
the Highway 11 branch in 2001. Other expenses also included a one-time charge of
$24,734 for the write-down on disposal of fixed assets relating to the
technology upgrade completed in August, 2002.

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

                                  Income Taxes

For the years ended December 31, 2002 and 2001, we recorded income tax expense
in the amounts of $295,071 and $138,989, respectively. This resulted in an
effective tax rate of 35.7% and 36% for the years ended December 31, 2002 and
2001, respectively. The decrease in the effective income tax rate is due to
non-taxable interest income on investment securities. For the year ended
December 31, 2000, we recorded income tax expense in the amount of $157,380,
resulting in an effective tax rate of 36%.




                                       10
<PAGE>


<TABLE>
<CAPTION>

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations


                                Capital Resources
Our total capital was increased by 2002 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. Our total capital was increased in 2001 by net income of
$247,525.

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
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


(Dollars in thousands)                                                                    The Bank        The Company
                                                                                        ------------      ------------
 Tier 1 capital

<S>                                                                                         <C>               <C>
 Common shareholders' equity                                                            $ 5,688,949       $ 7,129,209
 Less: unrealized gains on securities available for sale, net of taxes                      (60,819)          (60,819)
                                                                                        ------------      ------------
 Total Tier 1 capital                                                                     5,628,130         7,068,390
 Tier 2 capital
 Allowable allowance for loan losses                                                        575,923           575,923
                                                                                        ------------      ------------
 Total qualifying capital                                                               $ 6,204,053       $ 7,644,313
                                                                                         ============      ===========

 Risk-adjusted total assets                                                              $55,379,348      $ 55,378,517
                                                                                         ============     ============
  (including off-balance sheet exposures)

 Total average assets                                                                    $58,953,993      $ 58,953,441
                                                                                         ============     ============

 Risk-based capital ratios:
 Tier 1 risk-based capital ratio                                                               10.16%            12.76%
 Total risk-based capital ratio                                                                11.20%            13.80%
 Tier 1 leverage ratio                                                                          9.55%            11.99%
</TABLE>




                                    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.





                                       11
<PAGE>







           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

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


                              Investment Portfolio
The following tables summarize the carrying value of investment securities and
weighted-average yields of those securities at December 31, 2002 and 2001.
<TABLE>
<CAPTION>
Investment Securities Portfolio Composition

Available for Sale
December 31,                                       2002                       2001
                                           ---------------------      ----------------------
(Dollars in thousands)                     Amortized  Estimated        Amortized  Estimated
                                             Cost     Fair Value         Cost     Fair Value
                                           ---------- ----------      ----------------------

<S>                                          <C>          <C>             <C>        <C>
 U.S. Government Agencies                  $  1,800     $ 1,816         $   -      $      -
 Mortgage-backed Securities                   3,401       3,466             -             -
 Municipal Securities                           251         264             -             -
                                           ---------- ----------      ----------  ----------
                                           $ 5,452      $ 5,546         $ -        $      -
                                           ========== ==========      ==========  ==========

</TABLE>



<TABLE>
<CAPTION>


Held to Maturity                                   2002                        2001
December 31,                               ---------------------      ----------------------
                                           Amortized  Estimated        Amortized  Estimated
(Dollars in thousands)                       Cost     Fair Value         Cost     Fair Value
                                           ---------- ----------      ----------- ----------
<S>                                            <C>         <C>               <C>         <C>
U.S. Government Agencies                   $     800   $     811         $ 3,749     $ 3,780
Non-marketable equity securities                 358         358             358         358
                                           ---------- ----------      ----------- ----------

                                           $   1,158   $   1,169         $ 4,107     $ 4,138
                                           =========  ==========      =========== ==========



</TABLE>



                                       12
<PAGE>


<TABLE>
<CAPTION>

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations


Investment Securities Portfolio Maturity Distribution and Yields
 December 31, 2002
                                                      -------------------
(Dollars in thousands)                                 Amortized
                                                         Cost        Yield
                                                      ------------  --------
U.S. Government agencies due:
<S>                                                 <C>                <C>
Within one year                                     $         800      4.55 %
After one year but within five years                        1,800      3.51
                                                      -----------
                                                            2,600
Mortgage-backed securities due:
After one year but within five years                        1,025      3.82
After five years but within ten years                       2,376      4.55
                                                      -----------
                                                            3,401
Municipal securities due:
After five years but within ten years                         251      4.44
                                                      -----------
                                                              251

                                                    $       6,252      4.12 %
                                                      ===========
</TABLE>

                                 Loan Portfolio
                             Credit Risk Management
Credit risk entails both general risk, which is inherent in the process of
lending, and risk that is specific to individual borrowers. The management of
credit risk involves both the process of loan underwriting and loan
administration. 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.




                                       13
<PAGE>


<TABLE>
<CAPTION>
           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations


                               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 2002.

Total loans outstanding were $51,792,893 and $40,099,660 at December 31, 2002
and 2001, 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 89% and 99% at December 31, 2002 and 2001,
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, 2002 and 2001.


Loan Portfolio Composition

December 31,                                             2002                           2001
                                               --------------------------      ---------------------------
                                                              Percent of                     Percent of
(Dollars in thousands)                           Amount          Total           Amount         Total
                                               ----------    ------------     ----------    -------------
<S>                                             <C>               <C>               <C>           <C>
Commercial and industrial                     $    6,798          13.13 %        $  7,597       18.94 %
Real estate
 Construction                                   4,155              8.02             2,165        5.40
 Mortgage                                      35,007             67.59            23,927       59.67
Consumer and other                              5,833             11.26             6,411       15.99
                                               --------      ------------         ---------   ----------
  Total loans                                  51,793            100.00 %          40,100      100.00  %
                                             =========       ============         =========   ==========
 Allowance for loan losses                       (576)                               (546)
                                              --------                            ---------
 Net loans                                   $ 51,217                            $ 39,554
                                              =========                           =========

</TABLE>





Our loan portfolio is comprised largely of real estate mortgage loans. Real
estate mortgage loans increased $11,080,506 or 46% to $35,007,437 at December
31, 2002 due to the favorable interest rate environment and loan demand in our
service area. At December 31, 2002 real estate mortgage loans represented 67.59%
of the total loan portfolio compared to 59.67% at December 31, 2001.

We also have a significant amount of commercial and industrial loans. Commercial
and industrial loans decreased $799,490 or 11% to $6,797,575 at December 31,
2002. Commercial and industrial loans comprised 13.13% and 18.94% of the total
loan portfolio at December 31, 2002 and 2001, respectively.




                                       14
<PAGE>



<TABLE>
<CAPTION>

         Management's Discussion and Analysis of Financial Condition and
                              Results of Operations

Maturities and Sensitivity of Loans to Changes in Interest Rates:

The following table summarizes the loan maturity distribution, by type, at
December 31, 2002 and related interest rate characteristics:
[Over One
December 31, 2002                                             One Year or    Year Through      Over Five
(Dollars in thousands)                                           Less         Five Years         Years           Total
                                                              -----------     ----------        --------        ---------
<S>                                                              <C>             <C>             <C>             <C>
Commercial and industrial                                        $ 2,496         $ 1,995         $ 2,307         $ 6,798
 Real estate - construction                                        2,414             784             957           4,155
 Real estate - mortgage                                            5,239           5,456          24,312          35,007
 Consumer and other                                                1,196           2,606           2,031           5,833
                                                              -----------     ----------        --------        ---------
                                                                $ 11,345        $ 10,841        $ 29,607        $ 51,793
                                                              -----------       ---------       ---------       ---------

 Loans maturing after one year with:
 Fixed interest rates                                                                                           $ 28,169
 Floating interest rates                                                                                          12,279
                                                                                                                ---------
                                                                                                                $ 40,448
                                                                                                                =========
</TABLE>

<TABLE>
<CAPTION>
                                  Risk Elements
At December 31, 2002, there was one restructured loan with a balance of $160,085
which was also past due 90 days or more and still accruing interest, and loans
totaling $229,510 were in nonaccrual status. At December 31, 2001, there were no
loans past due 90 days or more and still accruing interest, and loans totaling
$279,231 were in nonaccrual status.

Summary of Loan Loss Experience

(Dollars in thousands)                                                                               2002            2001
                                                                                                  ----------       ---------
<S>                                                                                              <C>               <C>
 Total loans outstanding at end of year                                                          $    51,793       $  40,100
                                                                                                  ==========       =========
 Average loans outstanding                                                                       $    46,641       $  37,028
                                                                                                  ==========       =========

 Balance, beginning of year                                                                            $ 546           $ 467
 Loans charged off                                                                                      (181)            (59)
 Recoveries on loans previously charged off                                                               25              34
                                                                                                  ----------       ---------
 Net charge-offs                                                                                        (156)             15
                                                                                                  ----------       ---------
 Provision charged to operations                                                                         186             104
                                                                                                  ----------       ---------
 Balance, end of year                                                                            $       576       $     546
                                                                                                  ==========       =========

 Ratios:
 Allowance for loan losses to average loans                                                            1.23%           1.47%
 Allowance for loan losses to period end loans                                                         1.11%           1.36%
</TABLE>



Management has allocated the majority of its allowance for loan losses to real
estate and commercial loans at December 31, 2002, 2001 and 2000.

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.



                                       15
<PAGE>




<TABLE>
<CAPTION>

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                            Risk Elements (continued)

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

Impaired loans are 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 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, 2002, 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 $47,840,226 and $38,913,264 during 2002 and 2001,
respectively. The increase in deposits was attributable to an increased presence
in our bank's market areas. All types of deposits increased in 2002. The most
significant increase was in savings accounts, which includes money market
accounts. Savings accounts increased $11,557,192 or 189% from $6,090,582 at
December 31, 2001 to $17,647,774 at December 31, 2002. This increase is due to
the desire of depositors to hold deposits in liquid accounts as the overall
interest rate environment was unfavorable in 2002.

Certificates of deposit over $100,000 totaled $6,347,568 and $4,958,558 at
December 31, 2002 and 2001, respectively. Of this total, scheduled maturities at
December 31, 2002 were as follows: three months or less - $744,722; over three
months through six months - $765,169; over six months through twelve months -
$2,001,723; and greater than twelve months - $2,835,954.

The following table summarizes the bank's deposits at December 31, 2002 and
2001.

December 31,                                                           2002                            2001
(Dollars in thousands)                                      ------------------------------  --------------------------------
                                                                           Percent of                        Percent of
                                                               Amount       Deposits            Amount         Deposits
                                                             ------------  ----------         -------------   -----------

<S>                                                          <C>             <C>              <C>               <C>
Noninterest-bearing demand                                   $     8,658     14.95 %          $    7,302        18.07 %
Interest-bearing transaction accounts                              7,327     12.65                 6,152        15.22
Savings                                                           17,648     30.46                 6,091        15.07
Certificates of deposit                                           24,296     41.94                20,874        51.64
                                                             ------------  ----------         -------------   -----------

Total deposits                                                  $ 57,929    100.00 %          $   40,419       100.00 %
                                                             ===========   ==========         =============   ===========


</TABLE>


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 $51,581,481 and $35,460,633 at December
31, 2002 and 2001, respectively.




                                       15
<PAGE>



           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                    Advances From The Federal Home Loan Bank

Advances from the Federal Home Loan Bank totaled $3,000,000 at December 31,
2002. Advances consisted of a $2,000,000 fixed rate advance bearing an interest
rate of 2.93% and is scheduled to mature November 7, 2003. The $1,000,000
advance bears a fixed rate of 3.90% and is scheduled to mature on July 16, 2012.
Advances averaged $2,580,821 during 2002 as compared to $1,227,397 in 2001.

                              Short-Term Borrowings

At December 31, 2002 and 2001, we had short term borrowings which consisted of
securities sold under agreements to repurchase of $1,951,169 and $1,125,204,
respectively. We entered into a repurchase agreement with a local electric
cooperative which generally matures on a one-day basis. The maximum amount
outstanding at any month-end for the repurchase agreement was $8,267,140 and
$2,247,924, during 2002 and 2001, respectively. The average interest rate paid
on the repurchase agreement was 2.20% and 3.67% during 2002 and 2001,
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.

                                                     2002            2001
                                                  ---------       ----------
Return on average assets                              0.90%           0.52%

Return on average equity                              7.77%           3.89%

Equity to assets ratio                               11.62%          13.41%




                    Accounting and Financial Reporting Issues


In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). A liability for
a cost associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period in which the liability is
incurred, except for certain qualifying employee termination benefits. This
statement will be effective for exit or disposal activities initiated by us
after December 31, 2002. We do not expect the impact of this statement to be
material to our consolidated financial statements.


In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for financial statements for fiscal years
ending after December 15, 2002. Early application of the disclosure provisions
is encouraged. We continue to account for its stock-based compensation in
accordance with APB 25 and have adopted the disclosure provisions of Statement
148 effective for all periods presented herein.






                                       16
<PAGE>



           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                           Forward Looking Information

This Annual 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:

o        the effects of future economic conditions;
o        governmental monetary and fiscal policies, as well as legislative and
         regulatory changes;
o        changes in interest rates and their effect on the level and composition
         of deposits, loan demand, and the values of loan collateral, securities
         and other interest-sensitive assets and liabilities;
o        our ability to control costs, expenses, and loan delinquency rates;
         and
o        the effects of competition from other commercial banks, thrifts,
         mortgage banking firms, consumer finance companies, credit unions,
         securities brokerage firms, insurance companies, money market and other
         mutual funds and other financial institutions operating in our market
         area and elsewhere, including institutions operating regionally,
         nationally, and internationally, together with such competitors
         offering banking products and services by mail, telephone, computer and
         the Internet.


                                Regulatory Issues


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


                          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.


                                       17
<PAGE>





                          INDEPENDENT AUDITORS' REPORT





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


We have audited the accompanying consolidated balance sheet of FNB Bancshares,
Inc., and subsidiary as of December 31, 2002 and the related consolidated
statements of income, changes in shareholders' equity and comprehensive income
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
financial statements of FNB Bancshares, Inc., and subsidiary as of December 31,
2001 and for the years ended December 31, 2001 and 2000 were audited by other
auditors whose report dated January 17, 2002 expressed an unqualified opinion on
those statements.

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

In our opinion, the 2002 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, 2002 and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.





By:  /s/ Dixon Odom PLLC
------------------------------------
Dixon Odom PLLC
Sanford, North Carolina
February 20, 2003





                                       18
<PAGE>



                              FNB BANCSHARES, INC.
The accompanying notes are an integral part of the consolidated financial
statements.


<TABLE>
<CAPTION>

                           Consolidated Balance Sheets
                           December 31, 2002 and 2001

                                                                                             2002              2001
                                                                                          ----------        ----------
 Assets:
Cash and cash equivalents:
<S>                                                                                           <C>               <C>
 Cash and due from banks                                                                 $ 4,409,643       $ 2,769,532
 Federal funds sold                                                                        3,972,000           738,000
                                                                                           ----------       ----------
 Total cash and cash equivalents                                                           8,381,643         3,507,532
                                                                                           ----------       ----------
 Investment securities:
 Securities available for sale (amortized cost:                                            5,546,468                 -
  2002 - $5,451,438)
 Securities held to maturity (estimated fair value:                                          799,854         3,749,464
  2002 - $810,500; 2001 - $3,780,078)
 Non-marketable equity securities                                                            358,311           358,311
                                                                                          ------------      -----------
 Total investment securities                                                               6,704,633         4,107,775
                                                                                          ------------      -----------
 Loans receivable:                                                                        51,792,893        40,099,660
 Less allowance for loan losses                                                             (575,923)         (546,376)
                                                                                          ------------      -----------
 Loans, net                                                                               51,216,970        39,553,284
 Premises and equipment, net                                                               3,416,316         3,409,580
 Accrued interest receivable                                                                 281,245           312,075
 Real estate owned                                                                            55,000            81,050
 Other assets                                                                                150,629           265,054
                                                                                        --------------    -------------
 Total assets                                                                           $ 70,206,436      $ 51,236,350
                                                                                        =============     =============

 Liabilities:
 Deposits:
 Noninterest-bearing transaction accounts                                               $  8,658,167      $  7,302,392
 Interest-bearing transaction accounts                                                     7,327,123         6,152,178
 Savings                                                                                  17,647,774         6,090,582
 Time deposits $100,000 and over                                                           6,347,568         4,958,558
 Other time deposits                                                                      17,948,417        15,915,481
                                                                                        -------------      -----------
 Total deposits                                                                           57,929,049        40,419,191
 Securities sold under agreements to repurchase                                            1,951,169         1,125,204
 Advances from the Federal Home Loan Bank                                                  3,000,000         3,000,000
 Accrued interest payable                                                                     47,997            60,597
 Other liabilities                                                                           149,012            94,847
                                                                                        -------------      -----------
 Total liabilities                                                                        63,077,227        44,699,839
                                                                                        -------------      -----------
 Commitments and contingencies (Notes 4 and 16)
 Shareholders' Equity:
 Preferred stock, $.01 par value, 10,000,000 shares authorized                                      -                -
  and unissued
 Common stock, $.01 par value, 10,000,000 shares authorized;                                   6,471             6,163
  647,123 shares issued and outstanding
 Capital surplus                                                                           6,450,645         6,112,318
 Retained earnings                                                                           611,274           418,030
 Accumulated other comprehensive income                                                       60,819                 -
                                                                                         ------------      -----------
 Total shareholders' equity                                                                7,129,209         6,536,511
                                                                                         ------------      -----------
 Total liabilities and shareholders' equity                                             $ 70,206,436      $ 51,236,350
                                                                                        =============     ============

</TABLE>

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



                                       19
<PAGE>




                        Consolidated Statements of Income
              For the years ended December 31, 2002, 2001, and 2000
<TABLE>
<CAPTION>

                                                                           2002             2001           2000
                                                                        ------------     -----------    -----------
Interest and dividend income:
<S>                                                                         <C>             <C>            <C>
Loans, including fees                                                    $ 3,622,513     $ 3,409,651    $ 3,203,076
Investment securities:
Taxable                                                                      195,531         193,538        129,766
Nontaxable                                                                     8,351               -              -
Non-marketable equity securities                                              19,168          16,375         14,802
Federal funds sold                                                            33,187          77,985        136,803
Other                                                                          1,383             590            200
                                                                        ------------     ------------   -----------
Total                                                                      3,880,133       3,698,139      3,484,647
                                                                        ------------     ------------   -----------
Interest expense:
Deposits                                                                     972,498       1,397,364      1,302,050
Securities sold under agreements to repurchase                                27,283          32,718         25,006
Advances from the Federal Home Loan Bank                                      78,850          48,942         79,027
Federal funds purchased                                                          118             421            802
                                                                         ------------     ------------   -----------
Total                                                                      1,078,749       1,479,445      1,406,885
                                                                         ------------     ------------   -----------
Net interest income                                                        2,801,384       2,218,694      2,077,762
Provision for loan losses                                                    186,000         104,000        151,500
                                                                         ------------     ------------   -----------
Net interest income after provision for loan losses                        2,615,384       2,114,694      1,926,262
                                                                         ------------     ------------   -----------
Other operating income:
Service charges on deposit accounts                                          409,809         231,093        246,757
Mortgage origination fees                                                     99,734          78,790         22,589
Brokerage service fees                                                        46,748          59,150              -
Other service charges, commissions, and fees                                 103,328          91,120         88,487
                                                                         ------------     ------------   -----------
Total                                                                        659,619         460,153        357,833
                                                                         ------------     ------------   -----------
Other operating expenses:
Salaries and benefits                                                      1,194,451       1,078,970        905,586
Occupancy expense                                                            189,244         146,765        145,094
Furniture and equipment                                                      223,265         211,315        157,592
Write-down on disposal of assets                                              24,734          76,654              -
Office supplies                                                               61,765          55,588         44,361
Data processing                                                              212,335         171,363        150,322
Other operating expenses                                                     541,891         447,678        442,596
                                                                          ------------     ------------   -----------
Total                                                                      2,447,685       2,188,333      1,845,551
                                                                          ------------     ------------   -----------
Income before income taxes                                                   827,318         386,514        438,544
Income tax expense                                                           295,071         138,989        157,380
                                                                          ------------     ------------   -----------
Net income                                                                 $ 532,247       $ 247,525      $ 281,164
                                                                          ============     ============   ===========
Per Share
Average shares outstanding - basic                                           647,123         647,123        647,123
Net income - basic                                                            $ 0.82          $ 0.38         $ 0.43
Average shares outstanding - diluted                                         661,023         656,693        647,123
Net income - diluted                                                          $ 0.81          $ 0.38         $ 0.43

</TABLE>

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



                                       20
<PAGE>




  Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
          Income For the years ended December 31, 2002, 2001, and 2000

<TABLE>
<CAPTION>
                                                                                                Accumulated
                                            Common Stock                           Retained       Other
                                         ------------------          Capital       Earnings    Comprehensive
                                        Shares        Amount         Surplus       (Deficit)      Income         Total
                                       --------      --------      ----------      ---------    ------------    ---------
<S>                <C> <C>                  <C>          <C>          <C>             <C>           <C>            <C>
 Balance, December 31, 1999             616,338      $  6,163     $ 6,112,318     $ (110,659)   $         -    $ 6,007,822

 Net income                                                                          281,164                       281,164
                                       --------      --------      ----------      ----------   ------------    ----------
 Balance, December 31, 2000             616,338         6,163       6,112,318        170,505                     6,288,986

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

 Balance, December 31, 2001             616,338         6,163       6,112,318        418,030                     6,536,511
Comprehensive income:
 Net income                                                                          532,247                       532,247
 Net unrealized gains on
 securities available for sale
 (net of tax effect of $34,211)                                                                      60,819         60,819
                                                                                                                ----------
 Total comprehensive income                                                                                        593,066
                                                                                                                ----------
 Issuance of 5% common stock
  dividend                               30,785           308         338,327       (338,635)                            -
 Cash in lieu of fractional shares                                                      (368)                        (368)
                                        --------      --------      ---------     -----------
 Balance, December 31, 2002             647,123      $  6,471     $ 6,450,645      $ 611,274     $   60,819    $ 7,129,209
                                        ========       ========    ============     ==========    =========    ===========

</TABLE>






                                       21
<PAGE>




                      Consolidated Statements of Cash Flows
              For the years ended December 31, 2002, 2001, and 2000
<TABLE>
<CAPTION>

                                                                               2002            2001            2000
 Cash flows from operating activities:                                       --------        --------        --------
<S>                                                                             <C>             <C>            <C>
 Net income                                                                 $ 532,247       $ 247,525      $ 281,164
 Adjustments to reconcile net income to net cash
  provided by operating activities:
 Provision for loan losses                                                    186,000         104,000        151,500
 Depreciation and amortization expense                                        249,611         219,500        175,916
 Amortization (accretion) of premiums/discounts
 on investment securities                                                       4,674          (2,004)          (326)
 Write-down on disposal of assets                                              24,734          76,654              -
 Loss on sale of real estate owned                                              7,483          19,054         21,935
 Deferred income taxes                                                         32,352         (16,830)        10,033
 (Increase) decrease in interest receivable                                    30,830           5,196       (109,595)
 Increase (decrease) in interest payable                                      (12,600)        (15,035)        25,887
 (Increase) decrease in other assets                                           47,862          64,283        674,622
 Increase (decrease) in other liabilities                                      54,165         (58,304)        (3,693)
                                                                            ----------       ---------     ----------
 Net cash provided by operating activities                                  1,157,358         644,039      1,227,443
                                                                            ----------       ---------     ----------

 Cash flows from investing activities:
 Purchases of securities held to maturity                                    (699,465)     (5,802,730)    (1,495,078)
 Maturities of securities held to maturity                                  3,650,000       5,600,000        300,000
 Purchase of securities available for sale                                 (5,718,718)              -              -
 Principal repayments on securites available for sale                         261,681               -              -
 Purchase of nonmarketable equity securities                                        -         (50,000)       (92,161)
 Net increase in loans                                                    (11,936,619)     (4,557,582)    (8,633,079)
 Proceeds from sale of real estate owned                                      105,500          23,856        535,009
 Purchases of premises and equipment                                         (281,081)     (1,108,198)      (559,640)
                                                                             ---------     -----------      ---------
 Net cash used in investing activities                                    (14,618,702)     (5,894,654)    (9,944,949)
                                                                          ------------     -----------    -----------

 Cash flows from financing activities:
 Net increase in deposits                                                  17,509,858       3,633,974      9,550,253
 Net increase (decrease) in securities sold under agreements
 to repurchase                                                                825,965         486,216       (107,193)
 Increase in advances from the Federal Home Loan Bank                               -       2,000,000              -
 Cash in lieu of fractional shares                                               (368)             -              -
                                                                                 -----             --             -
 Net cash provided by financing activities                                 18,335,455       6,120,190      9,443,060
                                                                          -----------      ----------     ----------

 Net increase in cash and cash equivalents                                  4,874,111         869,575        725,554

 Cash and cash equivalents, beginning of period                             3,507,532       2,637,957      1,912,403
                                                                          ------------     -----------    ----------

 Cash and cash equivalents, end of period                                 $ 8,381,643     $ 3,507,532    $ 2,637,957
                                                                          ===========      ===========    ==========

 Supplemental disclosure of cash flow data:
 Cash paid during the year for interest                                    $1,091,349      $1,494,480     $1,380,998
 Cash paid during the year for taxes                                       $  160,737      $  144,600     $  168,692
 Supplemental disclosure of non-cash investing activity:
 Change in unrealized gain on securities available for sale,
 net of income taxes                                                       $   60,819      $        -     $        -
 Real estate acquired through foreclosure                                  $   86,933      $   36,536     $  146,596
</TABLE>





                                       22
<PAGE>




                              FNB BANCSHARES, INC.
                   Notes to Consolidated Financial Statements




NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Management's Estimates - The preparation of financial statements in conformity
with 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 additions to the allowances may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowances for 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
borrower's ability to honor the terms of their loans is dependent on business
and economic conditions in Cherokee County and surrounding areas. Management
does not believe credit risk is associated with obligations of the United
States, its agencies or corporations. The Bank places its deposits and
correspondent accounts with and sells federal funds to high credit quality
financial institutions. By policy, time deposits are limited to amounts insured
by the FDIC. Management believes credit risk associated with these financial
instruments is not significant.

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 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.






                                       23
<PAGE>





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

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
$3,000,000 in outstanding advances at December 31, 2002. At December 31, 2002
and 2001, the investment in Federal Home Loan Bank stock was $150,000.
Investment in Federal Reserve Bank stock is required by law of every national
bank. The investment in Federal Reserve Bank Stock was $132,450 at December 31,
2002 and 2001. The investment in Community Financial Services, Inc. was $75,861
at December 31, 2002 and 2001.

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 simple interest method and is recorded in the period earned.

When serious doubt exists as to the collectibility of a loan or when a loan
becomes 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 loans using
the accrual method of accounting, provided they are performing in accordance
with their restructured terms.





                                       24
<PAGE>



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

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 $.25 per $1.00 up to 6% of the
participants' annual compensation. Expenses charged to earnings in 2002, 2001,
and 2000 for the plan were $8,188, $8,275, and $7,769, 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 - In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No.
148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 is effective for financial
statements for fiscal years ending after December 15, 2002. Early application of
the disclosure provisions is encouraged. The Company continues to account for
its stock-based compensation in accordance with Accounting Principles Bulletin
("APB") Opinion No. 25 and has adopted the disclosure provisions of Statement
148 effective for all periods presented herein.

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, the
Company's net income and earnings per share for the years ended December 31,
2002, 2001, and 2000 would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
                                                                            2002            2001            2000
                                                                         ----------      ----------      ----------
 Net income:
<S>                                                                      <C>             <C>             <C>
 As reported                                                             $ 532,247       $ 247,525       $ 281,164
 Less:  Stock-based compensation expense
using fair value method                                                     37,717          58,125          58,643
                                                                         ----------      ----------      ----------
 Pro forma                                                                 494,530         189,400         222,521

 Basic earnings per share:
 As reported                                                             $    0.82       $    0.38       $    0.43
 Pro forma                                                                    0.76            0.29            0.34

 Diluted earnings per share:
 As reported                                                             $    0.81       $    0.38       $    0.43
 Pro forma                                                                    0.76            0.29            0.34
</TABLE>





                                       25
<PAGE>




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 19, 2002.

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 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 October 2001, the FASB issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No.144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of APB No. 30, "Reporting the
Results of Operations -- Reporting the effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently occurring Events and
Transactions," for the disposal of a segment of business (as previously defined
in that Opinion). SFAS No. 144 improves financial reporting by requiring that
one accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and by broadening the
presentation of discontinued operations to include more disposed transactions.
This Statement is effective for fiscal years beginning after December 15, 2001.
The Company adopted this statement as of January 1, 2002 with no impact on its
consolidated financial statements.

Reclassifications - Certain captions and amounts in the 2001 and 2000 financial
statements were reclassified to conform with the 2002 presentation.



                                       26
<PAGE>




NOTE 2 - CASH AND DUE FROM BANKS

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


NOTE 3 - INVESTMENT SECURITIES

The amortized costs and estimated market values of securities available for sale
at December 31, 2002 were:
<TABLE>
<CAPTION>

                                                                            Gross          Gross
                                                           Amortized      Unrealized      Unrealized      Estimated
                                                             Cost            Gains          Losses        Fair Value
December 31, 2002                                        -----------     ------------    -----------    ------------
<S>                                                        <C>               <C>              <C>              <C>
 U.S. government agencies                                  1,799,616         16,558               -        1,816,174
 Mortgage -backed securities                               3,400,990         66,920          (1,449)       3,466,461
 Municipal securities                                        250,832         13,001               -          263,833
                                                         ------------    ------------    -----------    ------------
                                                         $ 5,451,438       $ 96,479        $ (1,449)   $  5,546,468
                                                         ============    ============    ===========    ============

</TABLE>


The following is a summary of maturities of securities available for sale as of
December 31, 2002. The amortized cost and estimated fair values are based on the
contractual maturity dates. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalty.
<TABLE>
<CAPTION>
                                                                                                  Securities
                                                                                              Available for Sale
                                                                                      --------------------------------
                                                                                            Amortized   Estimated
                                                                                              Cost      Fair Value
                                                                                      ---------------- ---------------
<S>                                                                                          <C>             <C>
 Due after one year but within five years                                               $   2,824,716   $   2,842,674
 Due after five years but within 10 years                                                   2,626,722       2,703,794
                                                                                      ---------------- ---------------
                                                                                        $   5,451,438   $   5,546,468
                                                                                      ================= ==============

</TABLE>


The amortized costs and estimated market values of securities held to maturity
at December 31, 2002 and 2001 were:

<TABLE>
<CAPTION>

                                                             Gross          Gross
                                                           Amortized     Unrealized      Unrealized       Estimated
                                                             Cost          Gains          Losses          Fair Value
                                                          -----------     --------       ----------      -----------
December 31, 2002
<S>                                                        <C>            <C>              <C>            <C>
 U.S. government agencies                                 $   799,854    $   10,646       $       -      $   810,500
                                                          ===========     =========      ==========      ===========

 December 31, 2001
 U.S. government agencies                                 $ 3,749,464    $   35,536       $ (4,922)      $ 3,780,078
                                                         ============     ==========     =========       ===========

</TABLE>






                                       27
<PAGE>





NOTE 3 - INVESTMENT SECURITIES (continued)
------------------------------

The following is a summary of maturities of securities held to maturity as of
December 31, 2002. The amortized cost and estimated fair values are based on the
contractual maturity dates. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalty.
<TABLE>
<CAPTION>

                                                                                                 Securities
                                                                                              Held to Maturity
                                                                                      -----------------------------
                                                                                         Amortized     Estimated
                                                                                           Cost        Fair Value
                                                                                      -------------  --------------
<S>                                                                                         <C>              <C>
 Due within one year                                                                $      799,854   $     810,500
                                                                                     ============== ===============


</TABLE>

The Company had no sales of investment securities during the years ended
December 31, 2002, 2001 or 2000.

At December 31, 2002 and 2001, investment securities with a amortized cost of
$6,023,721 and $3,599,464, respectively, and a fair value of $6,122,663 and
$3,632,188, respectively, were pledged as collateral to secure public deposits
and for other purposes as required and permitted by law.


NOTE 4 - LOANS

Major classifications of loans receivable as of December 31, 2002 and 2001 are
summarized as follows:
<TABLE>
<CAPTION>

                                                                                                December 31,
                                                                                       ------------------------------
                                                                                           2002              2001
                                                                                       ------------      ------------
<S>                                                                                          <C>             <C>
 Commercial, financial, and agricultural                                               $  6,797,575    $  7,597,065
 Real estate - construction                                                               4,154,989       2,165,128
 Real estate - other                                                                     35,007,437      23,926,931
 Consumer and other                                                                       5,832,892       6,410,536
                                                                                       -------------     ------------

     Total gross loans                                                                 $ 51,792,893    $ 40,099,660
                                                                                       =============     ============

</TABLE>

At December 31, 2002 and 2001, 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, 2002 and 2001, the Company had loans on non-accrual totaling
$229,510 and $279,231, respectively. The additional amount of gross income that
would have been recorded during 2002 and 2001 if these loans had performed as
agreed would have been $10,339 and $7,579, respectively. The Company did not
recognize any interest income on non-accrual loans in 2002 or 2001. The Company
had one restructured loan in the amount of $160,085 at December 31, 2002. The
Company recognized $8,460 in interest income on this loan during 2002. The
Company did not have any restructured loans in 2001.






                                       28
<PAGE>





NOTE 4 - LOANS (continued)
--------------

Activity in the allowance for loan losses for the years ended December 31, 2002,
2001, and 2000 is summarized below:
<TABLE>
<CAPTION>

                                                                             2002           2001           2000
                                                                          ---------      ---------     -----------
<S>                                                                          <C>             <C>             <C>
 Balance, beginning of year                                              $ 546,376       $ 466,835       $ 429,049
 Provision for loan losses                                                 186,000         104,000         151,500
 Recoveries on loans previously charged off                                 24,474          34,618           9,712
 Loans charged off                                                        (180,927)        (59,077)       (123,426)
                                                                          ---------      ----------    ------------

 Balance, end of year                                                    $ 575,923       $ 546,376       $ 466,835
                                                                          ==========     ===========   ============

</TABLE>

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

The following table summarizes the Company's off-balance-sheet financial
instruments whose contract amounts represent credit risk as of December 31, 2002
and 2001:
<TABLE>
<CAPTION>

                                                                                         2002            2001
                                                                                     -----------      ----------
<S>                                                                                     <C>              <C>
 Commitments to extend credit                                                     $    8,587,595   $   8,412,920
</TABLE>


NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following at December 31, 2002 and 2001:
<TABLE>
<CAPTION>

                                                                                         2002           2001
                                                                                      ----------      ---------
<S>                                                                                      <C>             <C>
 Land                                                                               $    436,037    $   436,037
 Building and land improvements                                                        2,618,488      2,618,488
 Furniture and equipment                                                               1,066,229      1,043,625
 Construction in progress                                                                    900          3,896
                                                                                      ----------      ----------
 Total                                                                                 4,121,654      4,102,046
 Less accumulated depreciation                                                           705,338        692,466
                                                                                      ----------      ----------

 Premises and equipment, net                                                        $  3,416,316    $ 3,409,580
                                                                                      ============   ===========
</TABLE>






                                       29
<PAGE>






NOTE 6 - DEPOSITS

At December 31, 2002, the scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>

Maturing In                                                                                              Amount
-----------                                                                                            -----------
 <S>                                                                                                       <C>
 2003                                                                                                 $ 16,021,029
 2004                                                                                                    1,967,593
 2005                                                                                                    4,619,051
 2006                                                                                                      567,037
 2007                                                                                                    1,121,275
                                                                                                       ------------

 Total                                                                                                $ 24,295,985
                                                                                                       ============
</TABLE>



NOTE 7 - 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% and a $2,000,000 fixed rate advance
bearing an interest rate of 2.93%. The $1,000,000 advance is scheduled to mature
on July 16, 2012 and the $2,000,000 advance is scheduled to mature November 7,
2003.

As collateral, the Company has pledged first mortgage loans on one to four
family residences totaling $9,086,063 at December 31, 2002. In addition, the
Company's Federal Home Loan Bank stock is pledged to secure the borrowings.


NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

At December 31, 2002 and 2001, 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, 2002 and 2001 is summarized as follows:
<TABLE>
<CAPTION>

                                                                                        2002           2001
                                                                                      ----------      ----------
<S>                                                                                      <C>            <C>
 Average balance during the year                                                    $   1,505,524  $     891,057

 Average interest rate during the year                                                      2.20%          3.67%

 Maximum month-end balance during the year                                          $   8,267,140  $   2,247,924

</TABLE>


As of December 31, 2002 and 2001, the amortized costs and estimated fair values
of the securities underlying the agreements were $3,454,519 and $3,480,134 and
$1,549,732 and $1,500,000, respectively.

NOTE 9 - RELATED PARTY TRANSACTIONS

Certain parties (principally certain directors and executive officers of the
Company, their immediate families and business interests) were loan customers of
and had other transactions in the normal course of business with the Company.
Related party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility. As of December 31, 2002 and 2001, the Company had related
party loans totaling $847,048, and $432,128, respectively. During 2002,
$1,053,016 of new loans were made to related parties and repayments totaled
$638,096.





                                       30
<PAGE>





NOTE 10 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES

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

NOTE 11 - INCOME TAXES

Income tax expense for the years ended December 31, 2002, 2001, and 2000 is
summarized as follows:
<TABLE>
<CAPTION>

                                                                          2002            2001            2000
                                                                        ---------      ----------      -----------
Currently payable:
<S>                                                                        <C>               <C>             <C>
Federal                                                               $    241,095      $  142,746      $  135,006
State                                                                       21,624          13,073          12,341
                                                                      -------------     -----------     ------------
Total current                                                              262,719         155,819         147,347
                                                                      -------------     -----------     ------------
Change in deferred income taxes:
Federal                                                                     28,571         (14,697)          9,020
State                                                                        3,781          (2,133)          1,013
                                                                      -------------     -----------     ------------
Total deferred                                                              32,352         (16,830)         10,033
                                                                      -------------     -----------     ------------

Income tax expense                                                     $   295,071      $  138,989      $  157,380
                                                                      =============     ===========     ============
</TABLE>


The gross amounts of deferred tax assets and deferred tax liabilities as of
December 31, 2002 and 2001 are as follows:
<TABLE>
<CAPTION>

                                                                                                December 31,
                                                                                     -----------------------------------
                                                                                           2002            2001
                                                                                     ----------------  -----------------
 Deferred tax assets:
<S>                                                                                         <C>             <C>
 Allowance for loan losses                                                           $     187,761   $     186,674
 Net operating loss carryforward                                                                 -             696
 Other real estate owned                                                                         -           8,126
 Other                                                                                       4,677           2,918
                                                                                      -------------  -----------------
 Total deferred tax assets                                                                 192,438         198,414
 Deferred tax liabilities:
 Accummulated depreciation                                                                  37,340          10,964
 Net unrealized gains on securities available for sale                                      34,211               -
                                                                                      -------------  -----------------
 Total deferred tax liabilities                                                             71,551          10,964
                                                                                      -------------  -----------------
 Net deferred tax assets                                                             $     120,887   $     187,450
                                                                                     ==============  =================
</TABLE>


Deferred tax assets represent the future tax benefit of future
deductible differences and, if it is more likely than not that a tax asset will
not be realized, a valuation allowance is required to reduce the recorded
deferred tax assets to net realizable value. Management has determined that it
is more likely than not that the entire deferred tax asset at December 31, 2002
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 expense of $34,211 has been recorded directly to
shareholders' equity in 2002.





                                       31
<PAGE>





NOTE 11 - INCOME TAXES (continued)
----------------------

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

                                                                            2002             2001              2000
                                                                       ---------------  ---------------  ----------------
<S>                                                                           <C>              <C>              <C>
 Tax expense at statutory rate                                         $     281,288    $      131,415   $       149,105
 State income tax, net of federal income tax benefit                          16,767             8,628             9,155
 Other, net                                                                   (2,984)           (1,054)             (880)
                                                                       ---------------  ---------------  ----------------

                                                                       $     295,071    $      138,989   $        157,380
                                                                       ==============   ===============  ================

</TABLE>

NOTE 12 - OTHER EXPENSES

Other expenses for the years ended December 31, 2002, 2001, and 2000 are
summarized as follows:
<TABLE>
<CAPTION>

                                                                            2002            2001            2000
                                                                         -----------      ---------       ---------
<S>                                                                          <C>             <C>             <C>
Correspondent bank fees                                                      44,728          38,541          32,739
Printing and postage                                                         46,021          35,675          28,599
Advertising and promotion                                                    67,254          36,461          39,204
Legal and accounting                                                         72,650          58,019          46,824
Telephone expenses                                                           26,520          26,641          22,865
Other                                                                       284,718         252,341         272,365
                                                                         -----------      ----------      ----------

Total                                                                     $ 541,891       $ 447,678       $ 442,596
                                                                         ===========      ==========      ==========

</TABLE>


NOTE 13 - STOCK-BASED COMPENSATION

The Company has an Incentive Stock Option Plan (Stock Plan) that provides for
the granting of options to purchase up to 160,072 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, 2002
and 2001, there were 30,484 and 34,984 options available for grant,
respectively.

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

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 and 2000: dividend yield of 0 percent;
expected volatility of 0 percent; risk-free interest rates of 3.69% and 6.55%
for 2002 and 2000, respectively; and an expected life of 10 years for all option
grants. There were no options granted in 2001.

The weighted-average fair value of options, calculated using the Black-Scholes
option-pricing model, granted during 2002 and 2000 was $3.22 and $4.75,
respectively.





                                       32
<PAGE>





NOTE 13 - STOCK-BASED COMPENSATION (continued)
----------------------------------

A summary of the status of the Company's stock option plan as of December 31,
2002, 2001, and 2000 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>

                                                   2002                       2001                      2000
                                        ---------------------       -------------------     -----------------------
                                                     Weighted                  Weighted                   Weighted
                                                     Average                    Average                    Average
                                                     Exercise                  Exercise                   Exercise
                                        Options       Price          Options     Price        Options       Price
                                        --------    ----------      ---------  ---------     ----------   ---------
<S>                                       <C>          <C>              <C>      <C>             <C>        <C>
 Outstanding                             125,088    $    9.52        125,088  $    9.52       116,688    $    9.52
  at beginning of year
 Granted                                  15,000        10.50              -          -         8,400         9.52
 Exercised                                     -            -              -          -             -            -
 Cancelled                               (10,500)        9.52              -          -             -            -
                                        --------    -----------     ---------- ---------     ----------   ----------

 Outstanding                             129,588    $    9.63        125,088  $     9.52       125,088    $   9.52
  at ending of year                     ========                    ==========               ==========

</TABLE>


Options exercisable at December 31, 2002, 2001, and 2000 were 96,979, 89,090,
and 64,072, respectively.

At December 31, 2002, the outstanding stock options had a weighted average
remaining life of 5.71 years and a remaining life of 5.00 years for those stock
options that were exercisable.


NOTE 14 - UNUSED LINES OF CREDIT

As of December 31, 2002, the Bank had unused lines of credit to purchase federal
funds from unrelated banks totaling $1,800,000. 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 $10,524,000 at December 31, 2002. As
of December 31, 2002, the Bank had borrowed $3,000,000 on this line of credit.


NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Cash and Due from 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.






                                       33
<PAGE>



NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
---------------------------------------------

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

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

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

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

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

The carrying values and estimated fair values of the Company's financial
instruments at December 31, 2002 and 2001 are as follows:
<TABLE>
<CAPTION>
                                                                     2002                           2001
                                                           ---------------------------    ----------------------------
                                                            Carrying       Estimated       Carrying      Estimated
                                                             Amount       Fair Value        Amount       Fair Value
                                                           ----------    -------------    ------------   -------------
Financial Assets:
<S>                                                           <C>             <C>             <C>            <C>
 Cash and due from banks                                   $ 4,409,643     $ 4,409,643     $2,769,532     $2,769,532
 Federal funds sold                                          3,972,000       3,972,000        738,000        738,000
 Securities available for sale                               5,546,468       5,546,468
 Securities held to maturity                                   799,854         810,500      3,749,464      3,780,078
 Loans                                                      51,216,970      52,862,425     39,553,284     39,966,849
 Accrued interest receivable                                   281,245         281,245        312,075        312,075

 Financial Liabilities:
 Demand deposit, interest-bearing                         $ 33,633,064    $ 33,633,064    $19,545,152    $19,545,152
  transaction, and savings accounts
 Time deposits                                              24,295,985      24,657,385     20,874,039     21,011,133
 Advances from the Federal Home Loan Bank                    3,000,000       3,083,134      3,000,000      2,985,660
 Securities sold under agreements to repurchase              1,951,169       1,951,169      1,125,204      1,125,204
 Accrued interest payable                                       47,997          47,997         60,597         60,597

                                                             Notional       Estimated       Notional      Estimated
                                                              Amount        Fair Value       Amount       Fair Value
                                                           -----------    -------------   ----------     ------------
Off-Balance-Sheet Financial Instruments:
 Commitments to extend credit                              $ 8,587,595     $ 8,587,595     $8,412,920     $8,412,920

</TABLE>





                                       34
<PAGE>





NOTE 16 - COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company may, from time to time, become a
party to legal claims and disputes. At December 31, 2002, management and legal
counsel are not aware of any pending or threatened litigation or unasserted
claims or assessments that could result in losses, if any, that would be
material to the financial statements.


NOTE 17 - EARNINGS PER SHARE

Net income per share - basic is computed by dividing net income by the weighted
average number of common shares outstanding. Net income per share - diluted is
computed by dividing net income by the weighted average number of common shares
outstanding and dilutive common share equivalents using the treasury stock
method. Dilutive common share equivalents include common shares issuable upon
exercise of outstanding stock options. All average share and per share data
have been retroactively restated to reflect the 5% stock dividend in 2002.
<TABLE>
<CAPTION>

                                                                        2002            2001            2000
                                                                    -----------      -----------    --------------
 Net income per share - basic computation:

<S>                                                                   <C>              <C>             <C>
 Net income available to common shareholders                        $  532,247       $  247,525      $     281,164
                                                                   ============      ============   ==============

 Average common shares outstanding - basic                             647,123          647,123            647,123
                                                                   ============      ============   ==============

 Net income per share - basic                                       $     0.82             0.38               0.43
                                                                   ============      ============   ==============

 Net income per share - diluted computation:

 Net income available to common shareholders                        $  532,247       $  247,525      $     281,164
                                                                   ============      ============   ==============

 Average common shares outstanding - basic                             647,123          647,123            647,123

 Incremental shares from assumed conversions:
   Stock options                                                        13,900            9,570                  -
                                                                   ------------      -------------  --------------

 Average common shares outstanding - diluted                           661,023          656,693            647,123
                                                                   ------------      -------------  --------------

 Net income per share - diluted                                     $     0.81             0.38               0.43
                                                                   ============      =============  ==============

</TABLE>

Since the option exercise price was greater than the average market price of a
common share during 2000, options outstanding of 125,088 at the end of 2000 were
not included in the above diluted computation.



                                       35
<PAGE>





NOTE 18 - REGULATORY MATTERS

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

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

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

As of December 31, 2002, 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, 2002 and 2001.
<TABLE>
<CAPTION>
                                                                                                         To Be Well-
                                                                                                      Capitalized Under
                                                                            For Capital               Prompt Corrective
                                                      Actual             Adequacy Purposes            Action Provisions
                                                --------------------   -----------------------    ------------------------
                                                 Amount       Ratio     Amount       Ratio         Amount          Ratio
                                                --------    --------   --------   ------------    --------      ----------
December 31, 2002
<S>                                               <C>             <C>     <C>             <C>        <C>              <C>
 Total capital (to risk-weighted assets)       $6,204,052      11.20%  $4,430,400      8.00%      $5,538,000       10.00%
 Tier 1 capital (to risk-weighted assets)       5,628,130      10.16%   2,215,200      4.00%       3,322,800        6.00%
 Tier 1 capital (to average assets)             5,628,130       9.55%   2,565,200      4.00%       3,206,500        5.00%

 December 31, 2001
 Total capital (to risk-weighted assets)       $5,626,270      13.26%  $3,394,480      8.00%      $4,243,100       10.00%
 Tier 1 capital (to risk-weighted assets)       5,095,883      12.01%   1,697,240      4.00%       2,545,860        6.00%
 Tier 1 capital (to average assets)             5,095,883      10.44%   1,952,720      4.00%       2,440,900        5.00%
</TABLE>

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






                                       36
<PAGE>





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

                                 Balance Sheets
                           December 31, 2002 and 2001
<TABLE>
<CAPTION>

                                                                                           2002            2001
                                                                                      --------------    -----------
 Assets:
<S>                                                                                         <C>             <C>
 Cash                                                                                  $   1,441,092   $  1,440,432
 Investment in banking subsidiary                                                          5,688,949      5,095,883
 Other assets                                                                                      -            196
                                                                                      ---------------  -------------

 Total assets                                                                          $   7,130,041   $   6,536,511
                                                                                      ===============  =============

 Liabilities
 Other liabilities                                                                     $         832   $           -

 Shareholders' equity:
 Common stock                                                                          $       6,471   $       6,163
 Capital surplus                                                                           6,450,645       6,112,318
 Retained earnings                                                                           611,274         418,030
 Accumulated other comprehensive income                                                       60,819               -
                                                                                      ---------------- -------------
 Total shareholders' equity                                                                7,129,209       6,536,511
                                                                                      ---------------- -------------
 Total liabilities and shareholders' equity                                            $   7,130,041   $   6,536,511
                                                                                      =============== ==============

</TABLE>



                              Statements of Income
              for the years ended December 31, 2002, 2001, and 2000


<TABLE>
<CAPTION>

                                                                             2002            2001            2000
                                                                          -----------      ----------      ----------
<S>                                                                           <C>             <C>             <C>
 Income                                                                    $        -      $        -      $        -

 Expenses                                                                           -           3,021           3,625
                                                                          -----------      ----------      -----------

 Income before income taxes and equity in                                           -          (3,021)         (3,625)
  undistributed earnings of banking subsidiary

 Income tax benefit                                                                 -           1,236           1,236

 Equity in undistributed earnings of banking subsidiary                       532,247         249,310         283,553
                                                                       ---------------     -----------     -----------

 Net income                                                             $     532,247  $      247,525  $      281,164
                                                                       ===============     ===========     ===========

</TABLE>


                                       37
<PAGE>




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

                            Statements of Cash Flows
              for the years ended December 31, 2002, 2001, and 2000

<TABLE>
<CAPTION>


                                                                           2002              2001             2000
                                                                       ---------------    --------------   ------------
Cash flows from operating activities:
<S>                                                                         <C>              <C>               <C>
 Net income                                                              $    532,247     $      247,525    $   281,164
 Adjustments to reconcile net income to net cash provided
  by operating activities:
 Decrease in other assets                                                         196              5,017          4,856
 Increase (decrease) in other liabilities                                         832                  -         (1,255)
 Equity in undistributed earnings of banking subsidiary                      (532,247)          (249,310)      (283,553)
                                                                       ---------------    ---------------  -------------
 Net cash provided by operating activities                                      1,028              3,232          1,212
                                                                       ---------------    ---------------  -------------

 Cash flows from financing activities:
 Cash in lieu of fractional shares                                               (368)                  -              -
                                                                       ---------------    ---------------  -------------

 Increase in cash                                                                 660              3,232          1,212

 Cash and cash equivalents, beginning of period                             1,440,432          1,437,200      1,435,988
                                                                       --------------     ---------------  -------------

 Cash and cash equivalents, ending of period                            $   1,441,092     $    1,440,432   $  1,437,200
                                                                       ===============    ===============  ==============

 Supplemental disclosure of non-cash investing activity
 Changed in unrealized gain on securites available for sale,
 net of income taxes                                                    $      60,819     $            -   $          -
</TABLE>



                                       38
<PAGE>



                              FNB BANCSHARES, INC.


                               BOARD OF DIRECTORS

Dr. Richard D. Gardner, Orthopedic Surgeon at
Carolina Sports Medicine and Orthopedic Clinic

Barry L. Hamrick, President of Hamrick's Inc.

Haskell D. Mallory, Retired from textile industry

Bill H. Mason, Founder and Owner of Bill Mason
Enterprises (McDonald's Franchisee)

V. Stephen Moss, President and Chief Executive Officer of
FNB Bancshares, Inc. and First National Bank of the Carolinas

Harold D. Pennington, Jr., Vice-President and Co-owner of Weavetec, Inc.

Harold D. Pennington, Sr., President and Co-owner of Weavetec, Inc.

Heyward W. Porter, Founder and President of Porter's Electric Motor Service


                                 SENIOR OFFICERS
                                 ---------------

             V. Stephen Moss, President and Chief Executive Officer

                      Thomas W. Hale, Chief Credit Officer

                       Kim Barrs, Chief Financial Officer



                                    OFFICERS
                                   ----------
              Danny Ham, Vice President, Blacksburg City Executive

                  Mike Grubbs, Vice President, Consumer Banker

            Tina Gainey, Assistant Vice President, Operations Officer

                    Charlayne Davis, Loan Operations Officer



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


                                      39
<PAGE>








                                 CORPORATE DATA
ANNUAL MEETING:
The Annual  Meeting of  Shareholders  of FNB  Bancshares,  Inc. will be held at
5:30 p.m. on April 22, 2003 at our offices at 217 North Granard Street,
Gaffney, South Carolina.

CORPORATE OFFICE:                    GENERAL COUNSEL:

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

STOCK TRANSFER DEPARTMENT:           INDEPENDENT AUDITORS:
First Citizens Bank                  Dixon Odom PLLC
P.O. Box 29                          P.O. Box 70
Columbia, South Carolina 29202       Sanford, N.C.  27331

STOCK INFORMATION:
The Common Stock of FNB  Bancshares,  Inc. is not listed on any exchange.
However,  the Company's stock trades under the symbol "FNBC" on the OTC
Bulletin  Board.  Market makers of the Company's  stock include ASG  Securities,
Inc.,  Baird,  Patrick & Co.,  Inc.,  Hill Thompson Magid,  L.P.,  Schwab
Capital Markets L.P., and Monroe  Securities,  Inc. The latest trades of which
the Company is aware were at $10.90 per share.  As of December 31, 2002, there
were 531 shareholders of record.

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

The following table sets forth the high and low sales prices as quoted on the
OTC Bulletin Board during the periods indicated.

<TABLE>
<CAPTION>
                                      2002                                   2001
                            High                Low                High                Low
<S>                          <C>                 <C>                <C>                 <C>
First Quarter              $ 12.61             $ 9.76              $ 9.52              $ 9.52
Second Quarter               13.00              10.47                9.52                6.90
Third Quarter                11.25              10.50               14.28                9.52
Fourth Quarter               11.00              10.51               11.90                9.76

</TABLE>

                                   FORM 10-KSB

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

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



                                       40
<PAGE>