FNB FINANCIAL SERVICES CORP, 424B1, 1998-04-16

FNB FINANCIAL SERVICES CORP
424B1, 1998-04-16
NATIONAL COMMERCIAL BANKS

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<PAGE> 1

Filed Pursuant to Rule 424(b)(1)
Registration No. 333-47203

PROSPECTUS
- ----------
780,000 SHARES

(FNB LOGO)

FNB FINANCIAL SERVICES CORPORATION
COMMON STOCK

FNB Financial Services Corporation (the "Company") hereby offers for sale
780,000 shares of the Company's common stock, par value $1.00 per share (the
"Common Stock").

The Common Stock is currently traded on the Nasdaq National Market
("Nasdaq") of The Nasdaq Stock Market under the symbol "FNBF." On April 14,
1998, the last sale price of the Common Stock as reported on Nasdaq was $23.50
per share. See "Price Range of Common Stock."

SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THESE SECURITIES ARE NOT DEPOSITS OR SAVINGS ACCOUNTS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

<TABLE>
<CAPTION>
==========================================================================================================================
PRICE TO PUBLIC UNDERWRITING DISCOUNT(1) PROCEEDS TO COMPANY(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............. $22.50 $1.57 $20.93
- --------------------------------------------------------------------------------------------------------------------------
Total (3).............. $17,550,000 $1,224,600 $16,325,400
==========================================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses estimated at $300,000, all of which are payable by
the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 117,000 additional shares of Common Stock at the price to the public,
less underwriting discount, solely to cover over-allotments, if any. If all
of such shares of Common Stock are purchased, the total price to the public,
underwriting discount and proceeds to the Company will be $20,182,500,
$1,408,290 and $18,774,210, respectively. See "Underwriting."

---------------------

The shares of Common Stock are offered by the Underwriters, subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about April 20, 1998.

INTERSTATE/JOHNSON LANE
CORPORATION

The date of this Prospectus is April 15, 1998
<PAGE> 2

FNB FINANCIAL SERVICES CORPORATION
BANKING OFFICES

[MAP]

---------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THIS OFFERING.
IN ADDITION, IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS ALSO MAY ENGAGE
IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934 (THE "EXCHANGE ACT"). FOR A DESCRIPTION, SEE "UNDERWRITING."
2
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto included or
incorporated by reference in this Prospectus. Except as otherwise specified, all
information in this Prospectus assumes that the Underwriters' over-allotment
option is not exercised and has been adjusted to reflect: (i) a five-for-four
stock split effected as a 25% stock dividend on March 26, 1996 (the "1996 Stock
Split"); and (ii) a four-for-three stock split effected as a 33% stock dividend
on April 30, 1997 and a four-for-three stock split effected as a 33% stock
dividend on September 12, 1997 (the "1997 Stock Splits").

THE COMPANY

FNB Financial Services Corporation (the "Company") is a North Carolina bank
holding company with total assets of $325.2 million, deposits of $272.3 million
and shareholders' equity of $22.5 million, each as of December 31, 1997. The
Company's wholly-owned subsidiary, First National Bank Southeast (the "Bank"),
was chartered in 1918. Historically, the Bank has served the Rockingham County
area of North Carolina through three branches in Reidsville and two in Eden,
North Carolina. In 1995, the Company initiated a strategic growth plan beginning
with the hiring of a new chief executive officer. By the end of 1997, the Bank
increased its number of branches from five to ten by opening new branches in the
Rockingham County towns of Eden, Ruffin and Madison and in the new markets of
Greensboro and Wilmington, North Carolina. As a result of this strategy, between
1995 and 1997, the Company's net interest income, loans and deposits increased
at compound annual growth rates of 23.0%, 43.1% and 32.8%, respectively.

The Bank is community oriented and focuses primarily on offering
commercial, real estate and consumer loans, and deposit and other financial
services to individuals, small to medium-sized businesses and other
organizations in its market areas. The Bank emphasizes its individualized
services and community involvement, while at the same time providing its
customers with the financial sophistication and array of products typically
offered by a larger bank. Management believes that the Bank can compete
successfully with larger banks located within and outside of North Carolina by
retaining its personalized approach and community focus.

Under the leadership of Ernest J. Sewell, who became President and Chief
Executive Officer in January 1995, the Company adopted the following three-part
strategy: (i) increase market share and geographic reach through opportunistic
acquisitions in markets where the mix of economic, operational, cultural and
other factors are favorable; (ii) position the Company to manage its planned
growth by adding experienced personnel and upgrading its internal systems and
procedures; and (iii) generate internal growth at its existing banking offices
by offering new and complementary services and products. To accomplish these
objectives, during the past three years the Company has: (i) increased the
number of its branch offices to ten by opening new offices in Eden, Ruffin,
Madison, Greensboro and Wilmington; (ii) expanded by approximately 46% the
number of its full-time personnel by adding 40 new employees, including four new
vice presidents and four new senior vice presidents; (iii) initiated a
systematic review and revision of its loan administration, loan policy and
credit procedures; and (iv) enhanced its mix of products and services by
broadening the scope of its commercial lending activities, updating and
extending its ATM terminals and network and establishing a department to provide
credit and debit cards to its customers.

The Company plans to continue to pursue these objectives by strengthening
its presence in existing markets and opportunistically reaching into new markets
in North Carolina, Virginia and South Carolina. The Company will seek to hire
qualified personnel to help manage its planned growth and to develop new
products that are uniquely consistent with the Company's service orientation.
The Company also plans, where appropriate, to upgrade its systems and procedures
and refine its ability to offer customers sophisticated services without
sacrificing its personalized approach.

The Company's executive offices are located at 202 South Main Street,
Reidsville, North Carolina 27320, and its telephone number is (336) 342-3346.
Unless the context otherwise requires, the term the "Company" refers to FNB
Financial Services Corporation and its wholly-owned subsidiary, First National
Bank Southeast.

3
<PAGE> 4

THE OFFERING

Common Stock offered.................. 780,000 shares
Common Stock to be outstanding after
the offering.......................... 3,277,681 shares(1)
Nasdaq National Market symbol......... FNBF
Use of Proceeds....................... To support internal growth, to
finance de novo branch expansion, to
finance possible future acquisitions
and for other general corporate
purposes, including upgrading
internal policies, systems and
equipment. See "Use of Proceeds."
- ---------------

(1) Based on 2,497,681 shares of Common Stock outstanding on February 1, 1998.
Does not include 468,018 shares issuable upon the exercise of stock options
outstanding as of February 1, 1998.
---------------------

Information contained or incorporated by reference in this Prospectus
contains "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, which can be identified by the use of
forward looking terminology, such as "may," "will," "expect," "anticipate,"
"estimate," or "continue" or the negative thereof or other variations thereon or
comparable terminology. See "Forward Looking Statements." The matters set forth
under the caption "Risk Factors" in this Prospectus constitute cautionary
statements identifying important factors with respect to such forward looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward looking statements.

4
<PAGE> 5

SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE, RATIO AND OTHER
DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income........................... $ 10,961 $ 8,598 $ 7,250 $ 6,641 $ 6,747
Provision for loan losses..................... 760 415 260 105 190
Non-interest income........................... 1,354 1,252 1,236 927 1,206
Non-interest expense.......................... 7,903(1) 6,004 5,190 5,333 4,788
Net income.................................... 2,477 2,410 2,170 1,592(2) 2,129

BALANCE SHEET DATA:
Assets........................................ $325,151 $209,796 $177,897 $169,231 $153,541
Loans(3)...................................... 228,715 144,585 111,708 79,787 82,449
Allowance for loan losses..................... 2,331 1,638 1,258 1,052 1,174
Deposits...................................... 272,274 179,380 154,400 132,474 134,121
Other borrowings.............................. 28,720 8,650 3,152 21,130 2,591
Shareholders' equity.......................... 22,518 20,386 18,982 14,920 16,153

PER COMMON SHARE DATA(4):
Net income, basic............................. $ 1.00 $ 0.98 $ 0.89 $ 0.65 $ 0.87
Net income, diluted(5)........................ 0.93 0.96 0.88 0.65 0.87
Cash dividends declared....................... 0.39 0.34 0.30 0.27 0.26
Book value.................................... 9.03 8.29 7.78 6.12 6.61
Tangible book value........................... 8.74 7.98 7.78 6.12 6.61

OTHER DATA:
Branch offices................................ 10 6 5 5 5
Full-time employees........................... 127 95 87 90 91

PERFORMANCE RATIOS:
Return on average assets...................... 0.96% 1.23% 1.27% 1.03% 1.42%
Return on average equity...................... 11.86 12.52 12.91 9.76 13.91
Net interest margin (taxable equivalent)...... 4.57 4.84 4.72 4.84 5.09
Dividend payout............................... 39.00 35.17 33.92 41.30 29.55
Efficiency(6)................................. 63.22 58.93 58.16 66.61 56.86

ASSET QUALITY RATIOS:
Allowance for loan losses to period end
loans....................................... 1.02% 1.13% 1.13% 1.32% 1.42%
Allowance for loan losses to period end non-
performing loans(7)......................... 180 299 2,859 670 136
Net charge-offs to average loans.............. 0.04 0.03 0.06 0.28 0.21
Non-performing assets to period end loans and
foreclosed property(7)...................... 0.58 0.40 0.21 0.43 1.63

CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets.............. 8.09% 9.85% 9.80% 10.55% 10.18%
Leverage...................................... 7.02 9.60 10.80 10.11 10.53
Tier 1 risk-based............................. 8.92 13.49 15.80 18.24 17.78
Total risk-based.............................. 9.88 15.10 16.70 19.39 19.03
Average loans to average deposits............. 84.17 76.37 65.64 60.23 64.92
Average loans to average deposits and
borrowings.................................. 79.06 73.81 61.42 58.20 64.15
</TABLE>

- ---------------

(1) Includes approximately $1.4 million of non-interest expense attributable to
the opening of four new branches in 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Includes: (i) a non-recurring expense of approximately $200,000 resulting
from an acquisition terminated by the Company; (ii) a write-down on
mortgages held for sale of approximately $214,000; and (iii) approximately
$129,000 associated with increased equipment expense.
(3) Loans exclusive of unearned income, before allowance for losses.
(4) Gives effect to the 1996 Stock Split and the 1997 Stock Splits.
(5) Assumes the exercise of outstanding options to acquire Common Stock. See
Note 13 to the Company's Consolidated Financial Statements.
(6) Computed by dividing non-interest expense by the sum of taxable equivalent
net interest income and non-interest income.
(7) Non-performing loans and non-performing assets include loans past due 90
days or more that are still accruing interest.

5
<PAGE> 6

RISK FACTORS

In addition to the other information contained or incorporated by reference
in this Prospectus, prospective purchasers should consider the following factors
carefully in evaluating the Company and its business before purchasing the
shares of Common Stock offered hereby. See also "Forward Looking Statements."

MANAGEMENT OF GROWTH

The Company has experienced rapid growth over the past three years. The
growth and expansion of the Company's business have placed, and the Company
believes will continue to place, a strain on its operational, human and
financial resources. In order to manage its growth, the Company must continue to
attract, retain and reward qualified and experienced management, loan and
clerical personnel who possess both the personal affiliations and leadership
traits the Company seeks. In particular, the Company relies on a number of key
executives, including Ernest J. Sewell, its President and Chief Executive
Officer. The Company maintains key man life insurance on Mr. Sewell in the
amount of $1 million. The loss of the services of any key executive could have a
material adverse effect on the Company. Failure to manage growth effectively or
to attract and retain qualified personnel could have a material adverse effect
on the Company's business and could restrain the Company's ability to
successfully implement its business strategy. See "Business -- Strategy" and
"Management."

EXPANSION INTO NEW GEOGRAPHIC MARKETS

In pursuing its growth strategy, the Company may expand its presence into
new geographic markets, including markets outside the State of North Carolina.
When entering new geographic markets, the Company will need to establish, or
have in place, relationships with new or additional well trained local managers
and will be reliant on such managers who have the local affiliations the Company
seeks. Therefore, it will be necessary for the Company to give significant
autonomy to its managers in any new branches. The Company may also be required
to comply with laws and regulations that differ from those currently applicable
to the Company, and may face competitors with greater knowledge of such local
markets. There can be no assurance that the Company will be able to establish
local affiliations, realize management and operating efficiencies or otherwise
establish a presence in these new geographic markets. See
"Business -- Strategy."

POTENTIAL RISKS ASSOCIATED WITH ACQUISITIONS

The Company intends to expand its business through selective de novo branch
openings and possible acquisitions. There can be no assurance that the Company
will be able to consummate, or if consummated, successfully integrate, any
future de novo branch opening or acquisition, and there can be no assurance that
the Company will not incur disruption and unexpected expenses in integrating
such transactions. Although the Company currently has no such agreements or
understandings, either written or oral, in the normal course of business, the
Company evaluates potential transactions that would complement or expand the
Company's business. In doing so, the Company competes with other potential
bidders, many of which have greater financial and operational resources. There
can be no assurance that the Company will be able to successfully negotiate,
finance or integrate any such transactions. Furthermore, the process of
evaluating, negotiating and integrating transactions may divert management time
and resources. There can be no assurance that any given de novo branch opening
or acquisition, when consummated, will not have a material adverse effect on the
Company's business, results of operations or financial condition.

COMPOSITION OF LOAN PORTFOLIO

At December 31, 1997, real estate loans comprised 56.1% of the Company's
total loan portfolio, which includes residential mortgages and construction and
commercial loans secured by real estate. The Company generates a substantial
portion of its real estate mortgage loans in North Carolina. Therefore,
conditions of the real estate markets in North Carolina could strongly influence
the level of the Company's non-performing mortgage loans and the results of
operations and financial condition of the Company. Real estate values and the
demand for mortgages and construction loans are affected by, among other things,
changes in general or

6
<PAGE> 7

local economic conditions, changes in governmental rules or policies, the
availability of loans to potential purchasers and acts of nature. Although the
Company's underwriting standards are intended to protect the Company against
adverse general and local real estate trends, declines in real estate markets
could adversely impact the demand for new real estate loans, the value of the
collateral securing the Company's loans and the business, results of operations
and financial condition of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Lending Activities."

MEMORANDUM OF UNDERSTANDING

On November 13, 1997, the Company and the Office of the Comptroller of the
Currency (the "OCC") entered into a Memorandum of Understanding (the "MOU")
pursuant to which the Company agreed to take certain actions to improve its
infrastructure, primarily necessitated by its rapid growth. In general, the OCC
requested that the Company improve its internal procedures and policies, such as
revising its written loan policy, developing a program to strengthen its loan
administration and taking steps to increase its liquidity commensurate with its
past, and expected future, growth. The Company addressed each of the areas
specified and the OCC has not requested any further action by the Company. As is
customary, the MOU will remain in effect until the next regularly scheduled Bank
examination when the Company expects the MOU to be terminated. An OCC Memorandum
of Understanding is not a formal enforcement procedure recognized by law, but is
an informal mechanism used to monitor compliance by national banks, such as the
Bank, with the OCC's published rules and regulations. An institution's failure
to comply with a Memorandum of Understanding can result in a formal enforcement
proceeding or other remedial action. Management believes that the actions taken
by the Company to address the concerns identified by the OCC in the MOU have not
had a material adverse effect on the business, results of operations or
financial condition of the Company. However, since the MOU has not been formally
terminated, the OCC could request that the Company take additional steps which,
if required, could have a material adverse effect on its business, results of
operations or financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Supervision and
Regulation" and Note 17 to the Company's Consolidated Financial Statements.

COMPETITION WITH OTHER FINANCIAL INSTITUTIONS

Commercial banking in North Carolina is extremely competitive, due in large
part to statewide branching. Currently, many of the Company's competitors in
certain markets are significantly larger and have greater resources than the
Company. The Company encounters significant competition from a number of
sources, including other bank holding companies, commercial banks, thrift
institutions, credit unions and other financial institutions and financial
intermediaries. Among commercial banks, the Bank competes in its market areas
with some of the largest banking organizations in the country. Moreover,
competition is not limited to financial institutions based in North Carolina.
The enactment of federal legislation authorizing nationwide interstate banking
has greatly increased the size and financial resources of some of the Company's
competitors. Consequently, many of the Company's competitors have substantially
higher lending limits due to their greater total capitalization, and many
perform functions for their customers that the Company does not offer. As a
result, the Company is likely to encounter increased competition, especially as
it expands into new markets, that may limit its ability to maintain or increase
its market share or otherwise materially and adversely affect its business,
results of operations and financial condition. See "Business -- Competition."

GOVERNMENTAL POLICIES AND REGULATION

The profitability of the Company depends to a large extent upon its net
interest income, which is the difference between interest income on
interest-earning assets, such as loans and investments, and interest expense on
interest-bearing liabilities, such as deposits and borrowings. The net interest
income of the Company would be adversely affected if changes in market interest
rates caused by governmental fiscal policies or otherwise resulted in the cost
of interest-bearing liabilities increasing faster than the increase in the yield
on the interest-earning assets of the Company. The operating results of the
Company are also affected by credit policies of monetary authorities,
particularly the Federal Reserve Board ("Federal Reserve"). The instruments of
monetary policy employed by the Federal Reserve include open market operations
in

7
<PAGE> 8

U.S. Government securities, changes in the discount rate on bank borrowings and
changes in reserve requirements against bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as the
effect of action by monetary and fiscal authorities, including the Federal
Reserve, no prediction can be made as to possible future changes in interest
rates, deposit levels and loan demand on the results of operations and business
of the Company. In addition, the Company and the Bank are subject to extensive
supervision, regulation and control by several federal and state governmental
agencies, including the Federal Reserve, the OCC and the Federal Deposit
Insurance Corporation (the "FDIC"). Certain recently enacted or proposed
legislation or regulations, and future legislation or regulations, could have an
adverse effect on both the costs of doing business and the competitive factors
facing the financial institutions industry. Although the impact of such
legislation and regulation cannot be predicted, future changes may alter the
structure of and competitive relationships among financial institutions and the
cost of doing business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Supervision and
Regulation."

IMPACT OF TECHNOLOGICAL ADVANCES; UPGRADE TO COMPANY'S INTERNAL SYSTEMS

The banking industry is undergoing, and management believes will continue
to undergo, technological changes with frequent introductions of new
technology-driven products and services. In addition to improving customer
services, the effective use of technology increases efficiency and enables
financial institutions to reduce costs. The Company's future success will
depend, in part, on its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as to enhance efficiencies in the Company's operations.
Management believes that keeping pace with technological advances is important
for the Company, as long as its emphasis on personalized services is not
adversely impacted. As a result, the Company intends to continue to upgrade its
internal systems, both through the efficient use of technology (including
software applications) and by strengthening its policies and procedures. Many of
the Company's competitors will have substantially greater resources than the
Company to invest in technological and infrastructure improvements. There can be
no assurance that the Company will be able to effectively implement new
technology-driven products and services consistent with its emphasis on
individualized attention to its customers' needs. See "Use of Proceeds" and
"Business -- Strategy."

YEAR 2000 COMPLIANCE

As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products,
including the Company's, were designed to accommodate a two-digit year. For
example, "98" is stored on the system and represents 1998 and "00" represents
1900. The Bank primarily utilizes a third-party vendor for processing its
primary banking applications. In addition, the Bank also uses third-party vendor
application software for all ancillary computer applications. The third-party
vendor for the Company's banking applications is in the process of modifying,
upgrading or replacing its computer applications to ensure Year 2000 compliance.
To assist in this effort, the Company has been advised by such vendor that the
vendor has hired the services of a consultant to review the plan and assist such
vendor in achieving Year 2000 compliance by December 31, 1998. In addition the
Company has instituted a Year 2000 compliance program whereby the Bank is
reviewing the Year 2000 issues that may be faced by its other third-party
vendors. Under such program, the Company will examine the need for modifications
or replacement of all non-Year 2000 compliant pieces of software. The Company
does not currently expect that the cost of its Year 2000 compliance program will
be material to its financial condition and expects that it will satisfy such
compliance program without material disruption of its operations. In the event
that the Bank's significant vendors do not successfully and timely achieve Year
2000 compliance, the Bank's business, results of operations or financial
condition could be adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

8
<PAGE> 9

USE OF PROCEEDS

The net proceeds to be received by the Company from this offering will be
approximately $16.3 million ($18.8 million if the Underwriters' over-allotment
option is exercised in full), before the deduction of offering expenses payable
by the Company estimated at $300,000. The Company intends to use the net
proceeds from the sale of the shares of Common Stock offered hereby for general
corporate purposes. Such purposes would include: (i) the contribution of capital
to the Bank to fund the internal growth of earning assets and growth in earning
assets generated by the Bank's de novo branch expansions; (ii) the financing of
possible acquisitions of other financial institutions or their assets and
related liabilities; and (iii) the expansion, upgrade and modification of the
Company's policies, systems, procedures, operations, products and equipment.

Pending such uses, the Company expects that the net proceeds of the
offering will be invested by the Company in a variety of short and
intermediate-term interest-bearing assets, such as obligations of the United
States government and its agencies, and other permitted investments.

The Company from time to time reviews potential acquisitions and de novo
branch expansions and may enter into discussions with third parties regarding
such transactions. The Company currently has no agreements or understandings,
written or oral, regarding any such transactions and no portion of the net
proceeds have been allocated for any such purpose.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has traded publicly on Nasdaq under the trading
symbol "FNBF" since May 4, 1995. The table below sets forth the high and low
sale prices for the Company's Common Stock for the periods indicated as reported
by Nasdaq. Such prices are adjusted to reflect the 1996 Stock Split and the 1997
Stock Splits.

<TABLE>
<CAPTION>
SALE PRICE
----------------
HIGH LOW
------ ------
<S> <C> <C>
1996
- ----
First quarter............................................... $11.93 $ 9.00
Second quarter.............................................. 13.92 11.25
Third quarter............................................... 13.50 11.53
Fourth quarter.............................................. 13.22 11.53

1997
- ----
First quarter............................................... $15.19 $11.53
Second quarter.............................................. 25.50 13.78
Third quarter............................................... 28.88 21.38
Fourth quarter.............................................. 28.25 24.75

1998
- ----
First quarter............................................... $26.00 $23.75
Second quarter (through April 14, 1998)..................... 25.00 22.50
</TABLE>

On April 14, 1998, the last sale price reported on Nasdaq for the Common
Stock was $23.50 per share. On February 1, 1998, the Company had 2,497,681
shares of Common Stock outstanding and there were approximately 772 holders of
record of the Common Stock.

9
<PAGE> 10

DIVIDENDS

The Company (or the Bank, prior to December 31, 1984 when the Bank
reorganized into the holding company structure) has paid cash dividends on its
Common Stock in virtually every year since its founding in 1918 and has
increased its dividend annually since 1990. The following table sets forth
information concerning dividends per share declared for the periods indicated.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997(1) 1996(1)
------- -------
<S> <C> <C>
First quarter............................................... $.09 $.08
Second quarter.............................................. .10 .08
Third quarter............................................... .10 .09
Fourth quarter.............................................. .10 .09
---- ----
Total............................................. $.39 $.34
==== ====
</TABLE>

- ---------------

(1) As adjusted to give effect to the 1996 Stock Split and the 1997 Stock
Splits.

Because the Company's principal operations are conducted through the Bank,
it generates cash to pay dividends primarily through dividends paid to it by the
Bank. However, there are certain regulatory restrictions on the Bank's ability
to transfer funds to the Company in the form of cash dividends. See "Business --
Supervision and Regulation." Pursuant to the regulatory restrictions, as of
December 31, 1997, $4.9 million of the Bank's retained earnings were available
for distribution to the Company without prior regulatory approval.

North Carolina corporate law precludes any distribution to shareholders,
including the payment of a dividend, if, after giving effect to the
distribution, the Company would not be able to pay its debts as they become due
in the usual course of business or the Company's total assets would be less than
the sum of its total liabilities plus the amount that would be needed to satisfy
the preferential rights upon dissolution of shareholders whose preferential
rights are superior to those receiving the distribution. The Company has no
shareholders who currently have preferential rights over the holders of the
Common Stock. See "Description of Capital Stock."

Future dividends will be determined by the Company's Board of Directors in
light of circumstances existing from time to time, including the Company's
growth, financial condition and results of operations, the continued existence
of the restrictions described above and other factors that the Company's Board
of Directors considers relevant.

10
<PAGE> 11

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at December 31, 1997, and as adjusted to give effect to the sale by the
Company of the shares of Common Stock offered hereby. This table should be read
in conjunction with the Company's audited consolidated financial statements,
including the notes thereto, elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------
ACTUAL AS ADJUSTED(1)
-------- ---------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C>
LONG-TERM DEBT:
Federal Home Loan Bank of Atlanta ("FHLB") advances(2).... $10,000 $10,000

SHAREHOLDERS' EQUITY:
Preferred Stock, no par value, 10,000,000 shares
authorized, none issued(1)............................. 0 0
Common Stock, $1.00 par value, 3,000,000 shares
authorized, 2,493,680 shares issued and outstanding;
40,000,000 shares authorized, 3,273,680 shares issued
and outstanding, as adjusted (1)(3).................... 2,494 3,274
Paid-in capital........................................... 3,287 18,532
Retained earnings (4)..................................... 16,737 16,737
------- -------
Total shareholders' equity............................. 22,518 38,543
------- -------
Total capitalization................................... $32,518 $48,543
======= =======
CAPITAL RATIOS:
Leverage.................................................. 7.02% 11.62%
Tier 1 risk-based......................................... 8.92 14.65
Total risk-based.......................................... 9.88 15.55
</TABLE>

- ---------------

(1) Gives effect to: (i) the sale by the Company of 780,000 shares of Common
Stock offered hereby at a public offering price per share of $22.50 and the
application of the net proceeds therefrom, after deducting the underwriting
discount and estimated offering expenses payable by the Company; and (ii) an
amendment to the Company's Articles of Incorporation filed on April 14, 1998
to increase its authorized Common Stock to 40,000,000 shares and to
authorize 10,000,000 shares of Preferred Stock. See "Description of Capital
Stock."
(2) Includes only FHLB advances that mature in more than one year. A short-term
FHLB advance to the Bank of $5.0 million bears interest of 5.84% per annum
and matures in less than one year.
(3) Excludes 452,918 shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding at December 31, 1997.
(4) Includes $196,000 in unrealized gains on Available for Sale securities.

11
<PAGE> 12

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data
concerning the Company and is qualified in its entirety by the detailed
information and consolidated financial statements, including notes thereto,
included elsewhere or incorporated by reference herein. The selected data
presented below for and as of the end of each of the years in the five-year
period ended December 31, 1997, are derived from the consolidated financial
statements of the Company, all of which have been audited by Cherry, Bekaert &
Holland, L.L.P., independent auditors. The financial statements as of December
31, 1997 and 1996, and for each of the years in the three-year period ended
December 31, 1997 are included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE, RATIO AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income..................................... $ 21,017 $ 15,360 $ 13,383 $ 11,136 $ 11,633
Interest expense.................................... 10,056 6,762 6,133 4,495 4,886
Net interest income................................. 10,961 8,598 7,250 6,641 6,747
Provision for loan losses........................... 760 415 260 105 190
Net interest income after provision................. 10,201 8,183 6,990 6,536 6,557
Non-interest income................................. 1,354 1,252 1,236 927 1,206
Non-interest expense................................ 7,903(1) 6,004 5,190 5,333 4,788
Income before income taxes.......................... 3,652 3,431 3,036 2,130 2,975
Income tax expense.................................. 1,175 1,021 866 538 846
Net income.......................................... 2,477 2,410 2,170 1,592(2) 2,129

BALANCE SHEET DATA:
Assets.............................................. $325,151 $209,796 $177,897 $169,231 $153,541
Loans(3)............................................ 228,715 144,585 111,708 79,787 82,449
Allowance for loan losses........................... 2,331 1,638 1,258 1,052 1,174
Deposits............................................ 272,274 179,380 154,400 132,474 134,121
Other borrowings.................................... 28,720 8,650 3,152 21,130 2,591
Shareholders' equity................................ 22,518 20,386 18,982 14,920 16,153

PER COMMON SHARE DATA(4):
Net income, basic................................... $ 1.00 $ 0.98 $ 0.89 $ 0.65 $ 0.87
Net income, diluted(5).............................. 0.93 0.96 0.88 0.65 0.87
Cash dividends declared............................. 0.39 0.34 0.30 0.27 0.26
Book value.......................................... 9.03 8.29 7.78 6.12 6.61
Tangible book value................................. 8.74 7.98 7.78 6.12 6.61

OTHER DATA:
Branch offices...................................... 10 6 5 5 5
Full-time employees................................. 127 95 87 90 91

PERFORMANCE RATIOS:
Return on average assets............................ 0.96% 1.23% 1.27% 1.03% 1.42%
Return on average equity............................ 11.86 12.52 12.91 9.76 13.91
Net interest margin (taxable equivalent)............ 4.57 4.84 4.72 4.84 5.09
Dividend payout..................................... 39.00 35.17 33.92 41.30 29.55
Efficiency(6)....................................... 63.22 58.93 58.16 66.61 56.86

ASSET QUALITY RATIOS:
Allowance for loan losses to period end loans....... 1.02% 1.13% 1.13% 1.32% 1.42%
Allowance for loan losses to period end
non-performing loans(7)........................... 180 299 2,859 670 136
Net charge-offs to average loans.................... 0.04 0.03 0.06 0.28 0.21
Non-performing assets to period end loans and
foreclosed property(7)............................ 0.58 0.40 0.21 0.43 1.63

CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets.................... 8.09% 9.85% 9.80% 10.55% 10.18%
Leverage............................................ 7.02 9.60 10.80 10.11 10.53
Tier 1 risk-based................................... 8.92 13.49 15.80 18.24 17.78
Total risk-based.................................... 9.88 15.10 16.70 19.39 19.03
Average loans to average deposits................... 84.17 76.37 65.64 60.23 64.92
Average loans to average deposits and borrowings.... 79.06 73.81 61.42 58.20 64.15
</TABLE>

- ----------

12
<PAGE> 13

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

The following discussion provides information about the major components of
the results of operations and financial condition, liquidity and capital
resources of the Company and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto.

OVERVIEW

During 1997, management of the Company placed particular emphasis on the
Company's strategic financial objectives of balance sheet growth and improved
earnings performance. Efforts which had begun in 1995 to position the Company
for strong growth, both internally and through opportunistic expansion into
existing, new and contiguous markets, accelerated in 1997 with the openings of
the Wilmington, Greensboro, Ruffin and Madison branch offices.

In 1997, the Company aimed to manage balance sheet risk and reduce credit
risk while, at the same time, increase market share and geographic reach. The
Company's steady improvement in earnings performance occurred even though
significant costs were incurred to add experienced personnel and begin
fundamental improvements to the Company's systems, policies and procedures. In
1998, management expects to incur additional costs in these areas, but views
these costs as investments that will contribute to strengthening the Company's
financial performance, as well as support its growth objectives. See "Use of
Proceeds" and "Business -- Strategy."

RESULTS OF OPERATIONS

During 1997, the Company achieved record earnings despite simultaneously
incurring substantial expenses associated with entering new markets. Net income
was approximately $2.5 million, or $1.00 per share, compared to approximately
$2.4 million, or $0.98 per share, in 1996. This increase of 2.8% in net income
occurred despite (i) a 31.6% increase in non-interest expense from $6.0 million
to $7.9 million principally associated with the opening of four new locations
during 1997 and (ii) an increase in the provision for loan losses from $415,000
to $760,000 related to the growth in the loan portfolio. Of the increase in non-
interest expense, approximately $1.4 million was attributable to expenses
associated with opening the new branches. Net income in 1996 represented an
improvement of 11.1% over the prior year. Strong local economic conditions in
the Company's markets, robust loan demand and excellent asset quality experience
have been among the key factors driving the Company's performance.

The Company's primary source of income is net interest income, which is the
difference between (i) interest income and fees derived from earning assets
(primarily loans and investment securities) and (ii) the cost of funds
(primarily deposits and other borrowings) supporting them. Net interest income
represents the gross profit from the lending and investment activities of a
banking organization and is the most significant factor affecting the earnings
of the Company. Net interest income is affected by changes in interest rates,
volume and the mix of these various components. Net interest income on a fully
taxable equivalent basis was $11.1 million which represented a 24.7% increase
over the previous year. In 1996, taxable equivalent net interest income
increased to approximately $8.9 million from approximately $7.7 million in 1995,
an increase of 16.3%. Actual net interest income was 27.5% higher in 1997,
following an 18.6% improvement in 1996. The following table highlights these
areas.

13
<PAGE> 14

AVERAGE BALANCE SHEET AND NET INTEREST INCOME ANALYSIS
FULLY TAXABLE EQUIVALENT BASIS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans, net..................... $185,829 $17,616 9.48% $129,150 $12,092 9.36% $ 94,692 $ 9,067 9.58%
Taxable investment
securities................... 47,669 2,800 5.87 42,214 2,480 5.87 50,859 3,222 6.34
Tax-exempt investment
securities................... 6,135 542 8.83 10,985 995 9.06 13,451 1,284 9.55
Other securities............... 884 63 7.13 756 52 6.88 950 67 7.05
Deposits with FHLB............. 849 47 5.54 485 26 5.36 219 13 5.94
Federal funds sold and
securities purchased under
agreements to resell......... 2,477 133 5.37 1,027 53 5.16 2,815 163 5.79
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total earning
assets.............. 243,843 21,201 8.69 184,617 15,698 8.50 162,986 13,816 8.48
NON-EARNING ASSETS:
Cash and due from banks........ 6,845 5,201 4,417
Premises and equipment......... 6,166 4,042 3,438
Other assets................... 3,302 2,953 1,752
Less: Allowance for loan
loss......................... (1,882) (1,440) (1,104)
-------- -------- --------
Total assets.......... $258,274 $195,373 $171,489
======== ======== ========
INTEREST BEARING LIABILITIES:
Savings and time deposits...... 195,311 9,287 4.75 148,400 6,449 4.35 125,523 5,508 4.39
Federal funds purchased,
borrowed funds and securities
sold under agreements to
repurchase................... 14,270 769 5.39 5,868 313 5.33 9,920 625 6.29
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest bearing
liabilities......... 209,581 10,056 4.80 154,268 6,762 4.38 135,443 6,133 4.53
-------- -------- --------
OTHER LIABILITIES AND
SHAREHOLDERS' EQUITY:
Demand deposits................ 25,474 20,721 18,733
Other liabilities.............. 2,329 1,131 503
Shareholders' equity........... 20,890 19,253 16,810
-------- -------- --------
Total liabilities and
shareholders'
equity.............. $258,274 $195,373 $171,489
======== ======== ========
Net interest income and net
yield on earning assets...... $11,145 4.57% $ 8,936 4.84% $ 7,683 4.72%
======= ==== ======= ==== ======= ====
Interest rate spread........... 3.89% 4.12% 3.95%
==== ==== ====
</TABLE>

Fueling the growth in net interest income in 1997 was a 43.9% increase in
average loans. Average loans outstanding during the year equaled $185.8 million
compared to $129.2 million in 1996, an increase of $56.6 million. This followed
a 36.4% increase in average loans outstanding in 1996. A more aggressive focus
on lending opportunities in the Company's established markets in Rockingham
County, together with the recruitment of experienced, locally-based senior
lenders in the Company's new markets, such as Wilmington and Greensboro, have
generated this loan growth. Also contributing to the increased loan demand has
been a relatively stable interest rate environment, as well as favorable
economic conditions both nationally and in the Company's lending markets. These
factors have resulted in increased economic activity evidenced by the higher
levels of new business formation, expansions by existing businesses and
significant levels of new residential and commercial real estate development.
The average yield on the Company's loan portfolio increased 12 basis points to
9.48% in 1997 compared to 9.36% in 1996. The 1996 average yield fell 22 basis

14
<PAGE> 15

points from 9.58% in 1995. The prime rate which had averaged 8.85% in 1995,
remained at 8.25% in 1996. In 1997, it increased 25 basis points to 8.50% in
March and remained there for the rest of the year. Approximately 62% of the
Company's loan portfolio floats with variable rate indices, such as the prime
rate. When interest rates rise, interest income on this segment of the portfolio
tends to increase. Conversely, interest income from loans generally declines if
interest rates fall and these variable rate loans reprice at lower rates.

Net interest income as a percentage of average earning assets declined 27
basis points in 1997, averaging 4.57% compared to 4.84% in 1996. In 1995, the
net yield on earning assets averaged 4.72%. The decline in 1997 was attributable
to a 42 basis point increase in the cost of interest bearing liabilities. The
average rate on interest bearing liabilities in 1997 was 4.80% compared to 4.38%
in 1996. Although the Company was able to increase average non-interest bearing
demand deposits to $25.5 million in 1997 from $20.7 million in 1996, an increase
of 22.9%, deposit growth was concentrated in the higher cost interest bearing
accounts, primarily certificates of deposit. Average savings and time deposits
in 1997 increased to $195.3 million from $148.4 million in 1996, an increase of
31.6%. Apart from the increase in the average yield on loans in 1997, changes in
the average yields on the other earning assets had a minimal impact on interest
income.

The preceding table summarizes net interest income and average yields and
rates paid for the years indicated on a taxable equivalent basis. The following
table presents the changes in interest income and interest expense attributable
to volume and rate changes between 1997 and 1996, and 1996 and 1995.

VOLUME AND RATE VARIANCE ANALYSIS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE VARIANCE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans, net............ $5,303 $ 221 $5,524 $3,261 $(236) $3,025 $1,307 $ 447 $1,754
Taxable investment
securities.......... 320 0 320 (525) (216) (741) 40 331 371
Tax exempt investment
securities.......... (439) (14) (453) (154) (40) (194) 113 (117) (4)
Other earning
assets.............. 29 3 32 5 (7) (2) 0 13 13
Federal funds sold and
securities purchased
under agreement to
resell.............. 75 5 80 (98) (13) (111) 72 38 110
------ ----- ------ ------ ----- ------ ------ ------ ------
Total interest
income............ 5,288 215 5,503 2,489 (512) 1,977 1,532 712 2,244
------ ----- ------ ------ ----- ------ ------ ------ ------
INTEREST EXPENSE:
Savings and time
deposits............ 2,039 799 2,838 996 (56) 940 322 932 1,254
Federal funds
purchased, borrowed
funds and securities
sold under
agreements to
repurchase.......... 448 8 456 (236) (75) (311) 271 112 383
------ ----- ------ ------ ----- ------ ------ ------ ------
Total interest
expense........... 2,487 807 3,294 760 (131) 629 593 1,044 1,637
------ ----- ------ ------ ----- ------ ------ ------ ------
Inc/(dec) in net
interest income..... $2,801 $(592) $2,209 $1,729 $(381) $1,348 $ 939 $ (332) $ 607
====== ===== ====== ====== ===== ====== ====== ====== ======
</TABLE>

15
<PAGE> 16

NON-INTEREST INCOME AND EXPENSE

Non-interest income of $1.35 million in 1997 was $102,000, or 8.1%, more
than the prior year. Excluding securities gains for each year, non-interest
income increased $371,000, or 39.3%, in 1997 compared to 1996. In 1996,
non-interest income was relatively flat compared to 1995, having increased by
1.3%. Deposit service charges were 20.1% higher in 1997 due principally to
volume. Securities gains were $38,000 in 1997 compared to $307,000 in 1996.
During 1996, the Company restructured its investment portfolio to increase
liquidity and fund growth in loan demand. This presented opportunities to take
gains on the Available for Sale portion of its securities portfolio. While
mortgage lending remains a part of the Company's overall lending program, the
Company is not staffed, nor does it currently intend, to be an aggressive,
volume driven mortgage loan originator. This segment of the market is extremely
competitive and the Company competes with several large companies. The Company
offers a variety of mortgage products on a competitive basis in the markets in
which it operates and generally sells its fixed rate production in the secondary
market.

Non-interest expenses increased $1.9 million, or 31.6%, in 1997 to $7.9
million compared to $6.0 million in 1996. The Company also experienced a
significant increase of 15.7%, or $814,000, in these expenses in 1996 over 1995.
The underlying reason for these increases has been the additional investments,
particularly in adding experienced personnel, which were needed to position the
Company to manage its growth. Personnel costs rose $1.1 million, or 29.7%, in
1997 as the Company hired experienced, senior commercial lenders and branch
personnel to staff the four new locations that were opened in 1997. At December
31, 1997, the Company had approximately 127 full-time and 14 part-time employees
compared to 95 and eight, respectively at December 31, 1996. Also contributing
to the increase in personnel expense for both 1997 and 1996 were salary
increases for existing staff, increased funding for management incentive
programs, higher employment taxes and increased costs associated with the
Company's benefit programs. In 1997, the non-interest expenses associated with
opening new branches equalled approximately $1.4 million, comprised of
approximately $863,000 for personnel, $238,000 for occupancy and equipment and
$320,000 for other expenses.

Similar increases in occupancy and furniture and fixtures expenses occurred
in 1997. Occupancy expense rose $184,000, or 53.3%, in 1997 and furniture and
fixtures expense rose $163,000, or 35.1%. In 1996, the combined increase for
these same items was $89,000 or 12.3% more than 1995. Factors causing the 1997
increase include additional depreciation expense for premises and equipment,
lease expenses, utilities, and general operating expenses associated with the
new branches in Greensboro, Madison, Wilmington and Ruffin, as well as normal
increases in operating the Company's remaining branches. Occupancy and furniture
and fixtures expense in 1996 increased due principally to the addition of a new
main office facility in Eden and the acquisition of a branch in Eden from
another financial institution.

All other non-interest expenses of $2.0 million in 1997 represented an
increase of 30.2% over 1996 and were related to the additional offices opened,
with printing, stationery and supplies, postage, marketing and advertising,
telephone and travel all sharply higher. The efficiency ratio, which measures
non-interest expense as a percentage of net interest income plus non-interest
income, was 63.2% for 1997 versus 58.9% the previous year, with the increase
largely caused by the high level of non-interest expense in 1997.

FINANCIAL CONDITION

The Company's consolidated assets increased 55.0% and 17.9% during 1997 and
1996, respectively. Asset growth occurred primarily in loans and is directly
related to deposit growth, both at existing offices and through new branch
offices. During 1996, the Company completed a branch acquisition in a community
near Eden, North Carolina which included approximately $14.0 million in
deposits. This acquired growth, the internal growth generated with the Company's
existing markets and the anticipated increase in market share for the four new
1997 branches are expected to continue to produce positive results for the
Company.

The Company's commercial loan portfolio has grown significantly over the
past two years. Loans secured by real estate equaled $128.3 million, or 56.1% of
the loan portfolio at December 31, 1997, compared to $88.0 million, or 60.9%, at
December 31, 1996. The tables below provide a five year analysis of the loan
portfolio by major loan type. Management believes the Company is not dependent
on any single customer or group of

16
<PAGE> 17

customers concentrated in a particular industry, the loss of whose deposits or
whose insolvency would have a material adverse effect on operations.

LOAN PORTFOLIO COMPOSITION

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE:
Commercial................ $ 51,022 22.3% $ 30,516 21.1% $ 27,208 24.4% $15,037 18.8% $13,611 16.5%
Residential............... 58,238 25.5 44,109 30.5 36,438 32.6 30,060 37.7 31,026 37.6
Construction and
development............. 19,083 8.3 13,407 9.3 4,531 4.1 681 0.9 1,927 2.4
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total real estate......... 128,343 56.1 88,032 60.9 68,177 61.1 45,778 57.4 46,564 56.5
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
COMMERCIAL, FINANCIAL AND
AGRICULTURAL............ 54,294 23.7 25,175 17.4 18,248 16.3 11,272 14.1 10,916 13.2
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
CONSUMER:
Direct.................... 23,237 10.2 16,766 11.6 15,247 13.6 12,619 15.8 15,130 18.4
Home equity............... 19,740 8.6 13,516 9.3 9,579 8.6 9,708 12.2 9,413 11.4
Revolving................. 3,101 1.4 1,096 0.8 457 0.4 410 0.5 426 0.5
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total consumer............ 46,078 20.2 31,378 21.7 25,283 22.6 22,737 28.5 24,969 30.3
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total............ $228,715 100.0% $144,585 100.0% $111,708 100.0% $79,787 100.0% $82,449 100.0%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------
RATE STRUCTURE FOR LOANS
MATURITY MATURING OVER ONE YEAR
----------------------------------------- ---------------------------
ONE OVER ONE OVER PREDETERMINED FLOATING OR
YEAR OR YEAR TO FIVE INTEREST ADJUSTABLE
LESS FIVE YEARS YEARS TOTAL RATE RATE
------- ---------- ------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural....................... $26,340 $22,006 $ 5,948 $ 54,294 $ 7,689 $20,265
Real estate -- construction.......... 15,031 3,889 163 19,083 0 4,052
Real estate -- mortgage.............. 13,649 44,303 51,308 109,260 52,494 43,117
Consumer............................. 10,584 24,775 10,719 46,078 15,787 19,707
------- ------- ------- -------- ------- -------
$65,604 $94,973 $68,138 $228,715 $75,970 $87,141
======= ======= ======= ======== ======= =======
</TABLE>

The Company's entire securities portfolio has been categorized as Available
for Sale. While the Company has no plans to liquidate a significant amount of
any securities, the securities Available for Sale may be used for liquidity
purposes should management deem it to be in the best interests of the Company.
Due to declines in interest rates, and in order to maintain liquidity, the
majority of the securities purchased have been relatively short-term. United
States government agency securities continue to represent the majority of the
portfolio. At December 31, 1997, securities increased by $26.1 million, or
49.8%, over the prior year, ending the year at $78.7 million compared to $52.6
million at December 31, 1996. As a percentage of total assets, securities were
24.2% in 1997 compared to 25.1% in 1996.

17
<PAGE> 18

The following tables present the composition of the securities portfolio
for the last three years as well as information about cost, fair value and
weighted average yield.

INVESTMENT SECURITIES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR TO YEARS TO AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS WEIGHTED
-------------- --------------- -------------- -------------- AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL YIELD
------ ----- ------- ----- ------ ----- ------ ----- ------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury............... $ 0 -- $ 3,074 5.98% $ 0 -- $ 0 -- $ 3,074 5.98%
U.S. government agency...... 2,001 5.63% 64,979 6.02 2,017 5.89% 0 -- 68,997 6.01
State and municipal
obligations(1)............ 101 12.50 1,057 11.51 3,065 8.49 $ 730 7.85% 4,953 9.11
Other....................... 0 -- 0 -- 0 -- 1,392 7.08 1,392 7.08
------ ----- ------- ----- ------ ----- ------ ----- ------- -----
Total investment
securities(1).... $2,102 5.96 $69,110 6.10 $5,082 7.46 $2,122 7.34 $78,416 6.22
====== ======= ====== ====== =======
</TABLE>

- ---------------

(1) Yields stated on a tax equivalent basis.

As interest rates reflected a flattening of the yield curve during 1996,
customers shortened the terms of their deposits. This allows depositors to react
more quickly to rising interest rates. The marketplace for deposits is extremely
competitive from both traditional financial institutions, such as banks, as well
as other more non-traditional and less regulated financial intermediaries such
as brokerage houses and mutual funds. The Company seeks to attract and retain
retail customers through competitive products and quality service. In the
commercial area, management is focused on building long-lasting relationships
that will foster deposit growth. In addition, the Company offers a broad range
of products including a commercial sweep account. This funding source increased
to $9.6 million at December 31, 1997, up from $5.7 million at December 31, 1996.

Growth in retail deposits was marked by significant increases in
certificates of deposit, with maturities of one year or less up 73.7% to $139.6
million and maturities of more than one year up 72.1% to $48.4 million. Given
its customers' reluctance to lock into current rates for an extended period, the
Company has recently joined an electronic network which allows it to post
interest rates and attract deposits nationally. The Company's early competitive
focus has been in certificates of deposit with a maturity of one year or more,
to achieve a greater balance in its overall certificates of deposit portfolio.

Another funding source the Company employed during 1997 was the FHLB. The
Company has a $40.0 million line of credit and had drawn down $15.0 million at
December 31, 1997. Management believes that this is a cost effective and prudent
funding source as it is able to structure the borrowings to meet its asset and
liability, as well as liquidity, needs.

18
<PAGE> 19

ASSET QUALITY

Management considers the Company's asset quality to be of primary
importance. The allowance for loan losses, which is utilized to absorb actual
losses in the loan portfolio, is maintained at a level sufficient to provide for
estimated potential charge-offs of non-collectible loans. The loan portfolio is
analyzed periodically in an effort to identify potential problems before they
actually occur. The Company's allowance for loan losses is also analyzed
quarterly by management. This analysis includes a methodology that segments the
loan portfolio by selected loan types and considers the current status of the
portfolio, historical charge-off experience, current levels of delinquent,
impaired and non-performing loans, as well as economic and inherent risk
factors. The provision for loan losses represents a charge against income in an
amount necessary to maintain the allowance at an appropriate level. The monthly
provision for loan losses may fluctuate based on the results of this analysis.
The following table depicts the allocation of the allowance for loan losses at
December 31, 1997, 1996, 1995, 1994, and 1993. The allocation is based on
management's grading of the loan portfolio with the remaining portion allocated
to the general category, although the entire allowance is available to be used
for write-offs in any category.

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
% OF % OF % OF % OF % OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
$ CATEGORY $ CATEGORY $ CATEGORY $ CATEGORY $ CATEGORY
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT END OF PERIOD
APPLICABLE TO:
Commercial.................... $1,190 24% $ 826 17% $ 512 16% $ 546 14% $ 611 13%
Real estate -- construction... 8 8 13 9 9 4 0 1 1 2
Real estate -- mortgage....... 154 48 151 52 131 57 50 57 51 55
Consumer...................... 298 20 386 22 320 23 224 28 164 30
General....................... 681 0 262 0 286 0 232 0 347 0
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total allocation...... $2,331 100% $1,638 100% $1,258 100% $1,052 100% $1,174 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>

The 1997 provision of $760,000 compares with $415,000 in 1996 and $260,000
in 1995, which represented an 83.1% increase in 1997 and a two year increase of
192.3%. The Company has continued to increase the dollar level of the reserve
due to the growth in loans despite the fact that asset quality indicators such
as net charge-offs and non-performing loans remain at very low levels. Net
charge-offs were $67,000 in 1997, or .04% of average loans outstanding, compared
with $35,000 in 1996 and $54,000 in 1995. The following table contains a five
year analysis of the allowance for loan losses including the amount of
charge-offs and recoveries by loan type. At December 31, 1997, the allowance for
loan losses as a percent of year-end loans was 1.02% compared to 1.13% at
year-end for both 1996 and 1995.

19
<PAGE> 20

SUMMARY OF ALLOWANCE

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period.................. $1,638 $1,258 $1,052 $1,174 $1,161

CHARGE-OFFS:
Commercial.................................... 16 0 0 0 28
Real estate -- construction................... 0 0 0 0 0
Real estate -- mortgage....................... 13 0 0 15 0
Consumer...................................... 131 89 128 332 214
------ ------ ------ ------ ------
160 89 128 347 242
RECOVERIES:
Commercial.................................... 10 0 2 52 5
Real estate -- construction................... 0 0 0 0 0
Real estate -- mortgage....................... 0 0 0 0 0
Consumer...................................... 83 54 72 68 60
------ ------ ------ ------ ------
93 54 74 120 65
Net charge-offs............................... 67 35 54 227 177
------ ------ ------ ------ ------
Provision charged to operations............... 760 415 260 105 190
------ ------ ------ ------ ------
Balance, end of period........................ $2,331 $1,638 $1,258 $1,052 $1,174
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans..... 0.04% 0.03% 0.06% 0.28% 0.21%
====== ====== ====== ====== ======
Ratio of allowance to year-end loans.......... 1.02% 1.13% 1.13% 1.32% 1.42%
====== ====== ====== ====== ======
</TABLE>

Non-performing assets include non-accrual loans, accruing loans
contractually past due 90 days or more, restructured loans, other real estate,
and other real estate under contract for sale. Loans are placed on non-accrual
when management has concerns relating to the ability to collect the loan
principal and interest, and generally when such loans are 90 days or more past
due. While non-performing assets represent potential losses to the Company,
management does not anticipate any aggregate material losses since most loans
are believed to be adequately secured. Management believes the allowance for
loan losses is sufficient to absorb known risks in the portfolio. No assurance
can be given that economic conditions will not adversely affect borrowers and
result in increased losses. The following table summarizes non-performing assets
by type for each of the last five years. Other than the amounts listed, there
were no other loans that (i) represent or result from trends or uncertainties
which management reasonably expects will materially impact future operating
results, liquidity or capital resources or (ii) represent material credits about
which management has information that causes them to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.

SCHEDULE OF NON-PERFORMING ASSETS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual(1)...................................... $1,263 $547 $ 44 $154 $634
Past due 90 days or more and still accruing
interest.......................................... 29 0 0 3 231
Other real estate................................... 31 48 192 191 240
Renegotiated troubled debt.......................... 0 0 0 0 243
</TABLE>

- ---------------

(1) If non-performing loans outstanding at December 31, 1997 had been performing
in accordance with their terms, $90,202 more in interest income would have
been recorded in 1997. Actual interest income recorded on such loans in 1997
was $30,022.

20
<PAGE> 21

CAPITAL RESOURCES

Banks and bank holding companies, as regulated institutions, must meet
required levels of capital. The OCC and the Federal Reserve, the primary
regulators for the Bank and the Company, respectively, have adopted minimum
capital regulations or guidelines that categorize components and the level of
risk associated with various types of assets. Financial institutions are
expected to maintain a level of capital commensurate with the risk profile
assigned to its assets in accordance with the guidelines. As shown in the
following table, in 1996, the Company and the Bank both maintained capital
levels exceeding the minimum levels for "well capitalized" banks and bank
holding companies, and in 1997, for "adequately capitalized" banks and bank
holding companies. See "Capitalization" and "Business -- Supervision and
Regulation."

REGULATORY CAPITAL

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
-------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Total capital to risk weighted assets
Consolidated........................... $23,938 9.88% $21,868 15.10% $19,773 16.70%
Bank................................... 23,248 9.59 21,442 14.80 19,439 25.20
Tier 1 capital to risk weighted assets
Consolidated........................... 21,607 8.92 19,464 13.40 18,515 15.80
Bank................................... 20,917 8.63 19,039 13.10 18,180 23.60
Tier 1 capital to average assets
Consolidated........................... 21,607 7.02 19,464 9.60 18,515 10.80
Bank................................... 20,917 6.79 19,039 9.40 18,180 10.40
</TABLE>

INTEREST RATE SENSITIVITY AND LIQUIDITY MANAGEMENT

A primary objective of interest rate sensitivity management is to ensure
the stability and quality of the Company's primary earning component, net
interest income. This process involves monitoring the Company's balance sheet in
order to determine the potential impact that changes in the interest rate
environment would have on net interest income. Rate sensitive assets and
liabilities have interest rates which are subject to change within a specific
time period, due to either maturity or contractual agreements which allow the
instruments to reprice prior to maturity. Interest rate sensitivity management
seeks to ensure that both assets and liabilities react to changes in interest
rates within a similar time period, thereby minimizing the risk to net interest
income.

INTEREST SENSITIVITY ANALYSIS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------
TOTAL TOTAL OVER
1-90 DAYS 91-180 DAYS 181-365 DAYS ONE YEAR ONE YEAR TOTAL
--------- ----------- ------------ -------- ---------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans, net of non-accruals...... $134,281 $ 5,389 $ 15,104 $154,774 $ 72,679 $227,452
Taxable investment securities... 5,750 7,000 12,365 25,115 46,957 72,072
Tax exempt investment
securities.................... 0 100 0 100 4,853 4,953
Other investment securities..... 1,392 0 0 1,392 0 1,392
Due from FHLB................... 242 0 0 242 0 242
Federal funds sold.............. 0 0 0 0 0 0
-------- --------- -------- -------- -------- --------
Total interest earning
assets.............. 141,665 12,489 27,469 181,623 124,489 306,111
-------- --------- -------- -------- -------- --------
</TABLE>

21
<PAGE> 22

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------
TOTAL TOTAL OVER
1-90 DAYS 91-180 DAYS 181-365 DAYS ONE YEAR ONE YEAR TOTAL
--------- ----------- ------------ -------- ---------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST BEARING LIABILITIES:
Savings/NOW/MMI................. 10,555 0 0 10,555 42,218 52,773
Other time deposits............. 57,483 28,661 57,281 143,425 44,612 188,037
Overnight borrowings............ 13,720 0 0 13,720 0 13,720
Other borrowings................ 0 0 5,000 5,000 10,000 15,000
-------- --------- -------- -------- -------- --------
Total interest bearing
liabilities......... 81,758 28,661 62,281 172,700 96,830 269,530
-------- --------- -------- -------- -------- --------
Interest sensitivity gap........ $ 59,907 $ (16,172) $(34,812) $ 8,923
======== ========= ======== ========
Ratio of interest sensitive
assets to interest sensitive
liabilities................... 1.73 0.44 0.44 1.05
</TABLE>

The measurement of the Company's interest rate sensitivity, or "gap," is a
technique traditionally used in asset/liability management. The interest
sensitivity gap is the difference between repricing assets and repricing
liabilities for a particular time period. The preceding table indicates a ratio
of rate sensitive assets to rate sensitive liabilities within one year at
December 31, 1997 of 105%. This ratio indicates that net interest income would
decline in a falling interest rate environment, since a greater amount of assets
than liabilities would reprice more rapidly over the one year period. Included
in rate sensitive liabilities are certain deposit accounts (savings, NOW and
MMI) that are subject to immediate withdrawal and repricing, yet have no stated
maturity. These balances are presented in the category that management believes
best identifies their actual repricing patterns. This analysis assumes 20% of
these deposits reprice within one year and the remaining 80% reprice after one
year. The schedule also includes $34.1 million of securities which are callable
within the one year sensitivity time period. While these securities have
contractual maturities beyond one year, management believes these securities
will be called on the specified dates based upon the difference in the coupon
rate of the securities and the current level of interest rates. Furthermore, the
overall risk to net interest income is further mitigated by the Company's
increased level of variable rate loans. These are loans with a contractual
interest rate tied to an index, such as the prime rate. A portion of these loans
may reprice on multiple occasions during a one year period due to changes in the
underlying rate index. Approximately 62% of the total loan portfolio have
variable rates, and reprice in accordance with the underlying rate index subject
to terms of individual note agreements.

In addition to the traditional gap analysis, the Company also utilizes a
computer based interest rate risk simulation model. This comprehensive model
includes rate sensitivity gap analysis, rate shock net interest margin analysis,
and asset/liability term and rate analysis. The Company uses this model to
monitor interest rate risk on a quarterly basis and to detect trends that may
affect the overall net interest income for the Company. This simulation
incorporates the dynamics of balance sheet and interest rate changes and
reflects the related effect on net interest income. As a result, this analysis
more accurately projects the risk to net interest income over the upcoming
twelve month period. The Company has a policy establishing the maximum allowable
risk to net interest income caused by changes in interest rates. The modeling
results indicate that the Company is within the established parameters of the
interest rate risk policy.

Liquidity management refers to the ability to meet day-to-day cash flow
requirements based primarily on activity in loan and deposit accounts of the
Company's customers. Deposit withdrawals, loan funding, and general corporate
activity create a need for liquidity for the Company. Liquidity is derived from
sources such as deposit growth, maturity/calls/sales of investment securities,
principal and interest payment on loans, access to borrowed funds or lines of
credit, and profits.

The Company's primary source of funds has been derived from increased
deposit and sweep account balances. Liquidity is further enhanced by a $40.0
million line of credit with the FHLB collateralized by FHLB stock and qualifying
one to four family residential mortgage loans. There are unsecured overnight
borrowing lines available through several financial institutions. The Company
also has the ability to access the

22
<PAGE> 23

certificate of deposit market on a national basis. Access to this market will
complement local market activity and focus on longer term deposits. The Company
is able to survey and monitor interest rates in both the local and national
deposit markets, which assists in developing rational pricing for all deposit
products. Internal liquidity analysis indicates the Company is well positioned
to fund earning assets in the twelve month period analyzed.

Interest rate risk management and liquidity management are both a part of
the Company's overall asset/ liability management process. The primary oversight
of asset/liability management rests with the Company's Asset and Liability
Committee, which is comprised of senior management and members of the Bank's
Board of Directors. The committee meets on a regular basis to review the asset
liability management activities of the Company and monitor compliance with
established policies. A member of the Board of Directors chairs the committee
and reports on its activities to the full Board.

OTHER MATTERS

On November 13, 1997, the Company and the OCC entered into the MOU under
which the Company agreed to take certain actions to improve its infrastructure,
primarily necessitated by its rapid growth. In February 1998, the OCC informed
the Company that no further action was being requested and the Company believes
that it is in compliance with the MOU. See "Risk Factors -- Memorandum of
Understanding," "Business -- Supervision and Regulation" and Note 17 to the
Company's Consolidated Financial Statements.

A critical issue affecting companies that rely extensively on electronic
data processing systems, such as the Company, is the Year 2000 issue. This issue
deals with the Company's ability to process year-date data accurately beyond the
year 1999. The Year 2000 issue has been a well publicized, but nevertheless
continually evolving issue. The Company is dependent upon electronic data
processing for nearly all of its major activities. During 1997, the Company
formed an internal task force chaired by the Senior Vice President, Operations
to address the Year 2000 issue, conduct a comprehensive review of the Company's
systems and ensure that the Company takes any necessary measures. See "Risk
Factors -- Year 2000 Compliance."

NEW ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," which establishes standards for computing and presenting earnings
per share. This new accounting standard applies to entities with publicly held
common stock or potential common stock, such as the Company. SFAS No. 128
simplifies the standards for computing earnings per share previously found in
other accounting standards, requires dual presentation of basic and diluted
earnings per share on the face of the income statement for entities with complex
capital structures such as the Company, and requires a reconciliation of the
numerator and denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share computation. The
Company adopted this new accounting standard at December 31, 1997 and restated
all prior period earnings per share data presented.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The comprehensive income and related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of unrealized gains or losses on
securities available for sale is expected to be disclosed as an additional
component of the Company's income under the requirements of SFAS No. 130. This
statement is effective for fiscal years beginning after December 15, 1997.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about segments of their business on their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds assets and reports revenues, and its major
customers. This statement is effective for fiscal years beginning after December
15, 1997.

23
<PAGE> 24

In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises employers'
disclosures about pension and other post-retirement benefit plans. The statement
does not change the measurement or recognition of those plans, but requires
additional information on changes in benefits obligations and fair values of
plan assets, and eliminates certain disclosures previously required by SFAS Nos.
87, 88 and 106. This statement is effective for fiscal years beginning after
December 15, 1997.

EFFECTS OF INFLATION

Inflation affects financial institutions in ways that are different from
most commercial and industrial companies, which have significant investments in
fixed assets and inventories. The effect of inflation on interest rates can
materially impact bank operations, which rely on net interest margins as a major
source of earnings. Non-interest expenses, such as salaries and wages, occupancy
and equipment cost are also negatively impacted by inflation.

24
<PAGE> 25

BUSINESS

GENERAL

FNB Financial Services Corporation (the "Company") is a North Carolina bank
holding company with total assets of $325.2 million, deposits of $272.3 million
and shareholders' equity of $22.5 million, each as of December 31, 1997. The
Company's wholly-owned subsidiary, First National Bank Southeast (the "Bank"),
was chartered in 1918. Historically, the Bank has served the Rockingham County
area of North Carolina through three branches in Reidsville and two in Eden,
North Carolina. In 1995, the Company initiated a strategic growth plan beginning
with the hiring of a new chief executive officer. By the end of 1997, the Bank
increased its number of branches from five to ten by closing a branch in Eden
and opening new branches in the Rockingham County towns of Eden, Ruffin and
Madison and in the new markets of Greensboro and Wilmington, North Carolina. As
a result of this strategy, between 1995 and 1997, the Company's net interest
income, loans and deposits increased at compound annual growth rates of 23.0%,
43.1% and 32.8%, respectively.

STRATEGY

Expand Banking Operations. Throughout most of its 80-year history, the
Company's banking activities were centered in Reidsville, North Carolina,
located in Rockingham County in the north central part of the State. Beginning
in 1995, however, the Company initiated a growth strategy to further penetrate
markets in which it has an existing market share and expand into and develop new
and contiguous markets, such as Wilmington and Greensboro. Management selects
its target markets based on a number of factors, including market size and
growth potential, banking relationships developed by members of management
during their careers and the ability to integrate the targeted market into the
Company's unique, community oriented culture.

25
<PAGE> 26

The Company's expansion strategy, both within and outside of its existing
markets, involves three key elements: (i) install high quality, well trained
management to serve the market; (ii) ascertain that the market is underserved by
financial institutions whose primary focus is to cater to the individualized
needs of customers; and (iii) find reasonably priced facilities. Management
believes that it has been successful in implementing these strategic elements in
its expansion program to date.

In 1997, the Bank opened new branches in Wilmington, Greensboro, Ruffin and
Madison, North Carolina. The Wilmington branch represented the Company's first
foray outside of the north central part of North Carolina and at December 31,
1997, after ten months of operations, held deposits and loans totaling $35.3
million and $59.5 million, respectively. A major factor contributing to this
growth was the ability of existing loan officers to capitalize on prior
relationships. The Greensboro, Ruffin and Madison branches expand the Bank's
services in the Triad -- Rockingham County area. Ruffin and Madison are each
located in Rockingham County, and Greensboro is in Guilford County, just south
of Rockingham County. At December 31, 1997, after less than a full year in
operation, the aggregate deposits and loans at these three branches were $39.4
million and $23.5 million, respectively. These figures do not necessarily
represent the rate of loan and deposit growth that may be achieved at these
branch locations in the future.

Seize Market Expansion Opportunities. The Company intends to capitalize on
opportunities to enter new and contiguous markets which it believes are
underserved as a result of banking consolidation and in which the Company's
community oriented philosophy and culture would flourish. The Company believes
that there is value to be added by providing the opportunity for greater
personalized banking relationships than exist with larger commercial banks in
its markets, although the Company also recognizes the need to carefully analyze
markets that are already well served by numerous institutions. The Company will
continue to distinguish itself by emphasizing high quality, sophisticated
services in a hometown environment.

Establish a Platform for Future Growth. The Company seeks to position
itself to manage its future expected growth in two fundamental ways: (i)
attract, retain and reward experienced personnel who are committed both to
conducting business in a friendly and personable manner and to the communities
in which they work and live; and (ii) continue a program to upgrade, modify and
expand its internal systems, procedures, equipment and software designed to
improve marketing and operating efficiencies. The Company will also continue to
analyze technological developments in the banking industry for opportunities to
improve or augment its services and products, although management will endeavor
to maintain the Company's personalized approach even as pressures to succumb to
technological advances mount.

Maintain a Friendly Environment for Employees and Customers. The Company
has instituted various programs to instill high morale among its employees which
the Company believes translates into exceptional customer service. For example,
in the "Tell on Your Buddy" program, employees are encouraged to share with
senior managers good ideas and thoughts put into practice by fellow employees
and, in the process, make themselves eligible for a significant reward. The
Company also holds lively weekly sales meetings to elicit ideas about products
and services to emphasize. The Company believes that the overall effect of these
programs is to improve morale, customer service and financial performance.

26
<PAGE> 27

MARKET AREAS

For operational purposes, the Company groups its markets into two regions,
the Triad region and the Wilmington region. The Company's deposit market share
in Reidsville as of June 30, 1997, the most recent date for which data are
available, was 32.6%, which ranked first among banks, credit unions and thrift
institutions, and in all of Rockingham County equaled 20.5% as of the same date,
which ranked first. The following table summarizes the banking offices, deposits
and market share for the Company's offices, categorized by city.

<TABLE>
<CAPTION>
DEPOSITS AT DECEMBER 31,
------------------------
REGION/CITY 1997 1996
- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C>
TRIAD REGION:
Reidsville(1)............................................... $152,221 $145,377
Eden(1)..................................................... 45,305 34,003
Madison..................................................... 14,611 Not open
Ruffin...................................................... 5,014 Not open
Greensboro.................................................. 19,822 Not open
-------- --------
Subtotal.......................................... 236,973 179,380
-------- --------
WILMINGTON REGION:
Wilmington.................................................. 35,301 Not open
-------- --------
Total............................................. $272,274 $179,380
======== ========
</TABLE>

- ---------------

(1) Includes three banking offices.

The following is a summary description of the Triad and Wilmington market
areas.

Triad -- Rockingham County. Rockingham County was formed in 1785 and is
located in the north central area of North Carolina. It has a land area of 568
square miles and a population of 87,672. Surrounding counties are Guilford to
the south, Caswell to the east and Stokes County to the west. The county is
bordered on the north by the Commonwealth of Virginia. Piedmont Triad
International Airport is located 20 miles away and Norfolk Southern has two rail
connection lines in the county. The county, which consists of several community
oriented towns, provides a full range of municipal services and extends
financial support to certain boards, agencies, and commissions to assist its
efforts to serve its citizens. Rockingham County's economy remained strong
through 1996 (the most recent year for which data are available) with average
unemployment of 4.6%. During 1996 industrial and commercial activity for
Rockingham County created $47.0 million in new investments that created 343
jobs.

Triad -- Greensboro. Greensboro has a diverse economy attributable to a
blend of trade, manufacturing and service businesses. Local industry is
characterized by the production of a wide range of products, including textiles,
apparel, tobacco, machinery and electronics equipment. The area has access to
major domestic and international markets from Interstate Highways 40 and 85 and
the Piedmont Triad International Airport. Entrepreneur magazine recently ranked
the Triad area as fourth in a list of the top 20 cities in which to establish a
small business. According to the U.S. Department of Commerce, the Triad area
recorded export sales of $3.6 billion in 1996 and is ranked 37th nationally in
that category.

Wilmington. Wilmington is the county seat and the industrial center of New
Hanover County and its recent rate of growth has been topped by only one other
city in North Carolina. The total population of New Hanover County is
approximately 125,000 and it is served by Interstate Highway 40 and U.S.
Highways 17 and 74. The area is serviced by national and regional airlines
through facilities at the New Hanover International Airport in New Hanover
County. The New Hanover County area has experienced extensive industrial
development and service/trade sector growth over the past 20 years. The
Wilmington area industries produce fiber optic cables for the communications
industry, aircraft engine parts, pharmaceuticals, nuclear fuel components and
various textile products. The New Hanover County area economy has become broadly

27
<PAGE> 28

diversified and has developed into a major resort area, a busy sea port (one of
North Carolina's only two deep water ports), a light manufacturing center, a
chemical manufacturing center and the distribution hub of southeastern North
Carolina.

LENDING ACTIVITIES

General. The Bank offers a broad array of lending services, including real
estate, commercial and consumer loans, to individuals and small to medium-sized
businesses and other organizations that are located in or conduct a substantial
portion of their business in the Bank's market areas. The Bank's total loans at
December 31, 1997 were $228.7 million, or 74.3% of total earning assets. The
Bank also makes secured construction loans to home builders and residential
mortgagees, which are often secured by first and second real estate mortgages.
At December 31, 1997, the Bank had no large loan concentrations (exceeding ten
percent of its portfolio) in any particular industry.

Loan Composition. The following table sets forth, at the dates indicated,
the composition of the Bank's loan portfolio and the related percentage
composition.

<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE:
Commercial.................................. $ 51,022 22.3% $ 30,516 21.1% $ 27,208 24.4%
Residential................................. 58,238 25.5 44,109 30.5 36,438 32.6
Construction and development................ 19,083 8.3 13,407 9.3 4,531 4.1
-------- ----- -------- ----- -------- -----
Total real estate................. 128,343 56.1 88,032 60.9 68,177 61.1
-------- ----- -------- ----- -------- -----
COMMERCIAL, FINANCIAL AND AGRICULTURAL...... 54,294 23.7 25,175 17.4 18,248 16.3
-------- ----- -------- ----- -------- -----
CONSUMER:
Direct...................................... 23,237 10.2 16,766 11.6 15,247 13.6
Home equity................................. 19,740 8.6 13,516 9.3 9,579 8.6
Revolving................................... 3,101 1.4 1,096 0.8 457 0.4
-------- ----- -------- ----- -------- -----
Total consumer.................... 46,078 20.2 31,378 21.7 25,283 22.6
-------- ----- -------- ----- -------- -----
Total............................. $228,715 100.0% $144,585 100.0% $111,708 100.0%
======== ===== ======== ===== ======== =====
</TABLE>

Real Estate Loans. Loans secured by real estate for a variety of purposes
constituted $128.3 million, or 56.1%, of the Bank's total loans at December 31,
1997. The Bank held at December 31, 1997 real estate loans of various sizes
ranging up to $2.9 million, secured by office buildings, retail establishments,
warehouses, motels, restaurants and other types of property. Loan terms are
typically limited to five years, although the installment payments may be
structured generally on a 15-year amortization basis. Interest rates may be
fixed or adjustable, based on market conditions, and the Bank generally charges
an origination fee. Management has attempted to reduce credit risk in the real
estate portfolio by emphasizing loans on owner occupied office and retail
buildings where the loan to value ratio, established by independent appraisals,
does not exceed 80% and net project cash flow available for debt service equals
120% of the debt service requirement. The Bank also often requires personal
guarantees of the principal owners of the property and obtains personal
financial statements of the principal owners in such cases. The Bank experienced
no net loan losses on commercial real estate loans during 1997 and 1996.

The Bank originates residential loans for its portfolio on single and
multi-family properties, both owner occupied and non-owner occupied, and at
December 31, 1997 it held $58.2 million of such loans. Loan terms are typically
limited to five years, with payments through the date of maturity generally
based on a 15 or 30 year amortization schedule. Rates may be fixed or variable,
and the Bank typically charges an origination fee. The Bank attempts to minimize
credit risk by requiring a loan to value ratio of 80% or less. The Bank has
experienced minimal loan losses on residential real estate over the past ten
years.

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<PAGE> 29

The Bank also originates residential loans for sale into the secondary
market. Through its mortgage banking division, the Bank originates both fixed
and variable rate residential mortgage loans for sale with servicing released.
The Bank is able to generate loan origination fees, typically ranging from 1.0%
to 1.5% of the loan balance which are recognized in income when the loan is
sold. During 1997 and 1996, the Bank earned loan origination fees of $81,000 and
$32,000, respectively. At December 31, 1997, the Bank held none of such loans
for sale, and during 1997 the Bank sold an aggregate of $5.6 million of such
loans. The Bank sells these loans on a non-recourse basis.

The Bank's current strategy is for the majority of construction and
development loans on commercial and residential projects to be in the range of
$0.3 million to $2.5 million, not to exceed $2.5 million. At December 31, 1997
and 1996, the Bank held $19.1 million and $13.4 million, respectively, of such
loans. To reduce credit risk associated with such loans, the Bank limits its
lending to projects involving small commercial centers that have strong anchor
tenants and are otherwise substantially pre-leased, or residential projects that
are either presold or are being built by the proposed occupant. The leases on
commercial projects must generally result in a loan to capitalized lease value
of no greater than 75% and a net cash flow to debt service ratio of at least
120%. The Bank historically has required a personal guarantee from the developer
or builder. Loan terms are typically 12 to 15 months on a commercial project and
nine months on a residential project, although the Bank occasionally will make a
"mini-permanent" loan for purposes of construction and development up to a three
to five year term. Rates are typically variable and the Bank typically charges
an origination fee. During 1997 and 1996, the Bank experienced no net loan
losses on these types of loans.

Commercial Loans. The Bank makes loans for commercial purposes in various
lines of businesses. At December 31, 1997, the Bank held $54.3 million of
commercial loans, or 23.7% of its total loan portfolio. Equipment loans are
typically made on terms up to five years at fixed or variable rates, with the
financed equipment pledged as collateral to the Bank. The Bank attempts to
reduce its credit risk on these loans by limiting the loan to value ratio to
80%. Working capital loans are made on terms typically not exceeding one year.
These loans may be secured or unsecured, but the Bank attempts to limit its
credit risk by requiring the borrower to demonstrate the capacity to produce net
cash flow available for debt service of 125% to 150% of debt service
requirements. During 1997, the Bank experienced net loan losses on commercial
loans of $6,000 and in 1996 had no such net loan losses.

Consumer Loans. The Bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment and
term loans originated directly by the Bank, home equity revolving lines of
credit, and unsecured revolving lines of credit. The home equity loans and
certain of the direct loans are secured by the borrower's residence, but the
Bank attempts to underwrite the credit independent of the collateral value. At
December 31, 1997, the Bank held $43.8 million of consumer loans, including home
equity revolving lines of credit. During 1997 and 1996, respectively, the Bank
experienced net consumer loan losses of $29,000 and $35,000.

Credit Card Loans. In 1996, the Bank began offering credit card loans to
individuals and businesses who meet the Bank's underwriting standards with
respect to income, credit rating, established residence and employment. Credit
card loans are subject to seasonal fluctuations based on consumer spending
habits, with the outstanding balances of such loans rising at the end of each
calendar year. At December 31, 1997, credit card loans equaled approximately
$2.3 million, or approximately 1.0% of the Bank's total loan portfolio. Net
losses on credit card loans equaled $19,000 in 1997 and $0 in 1996.

Loan Approval and Review. The Bank's loan approval policies provide for
various levels of officer lending authority. When the aggregate outstanding
loans to a single borrower exceeds that individual officer's lending authority,
the loan request must be considered and approved by an officer with a higher
lending limit. Branch loan officers typically have lending limits up to
$100,000; loans in excess of that limit must be approved by the city executive.
If the lending request exceeds the city executive's lending limit, which is
$500,000, the loan must be submitted to and approved by the appropriate senior
credit officer. The senior credit officer has authority to approve a loan up to
$750,000. All loans in excess of $750,000 must be approved by the President and
Chief Executive Officer, who may approve loans of up to $2.5 million.

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<PAGE> 30

The Bank has a continuous loan review procedure involving multiple officers
of the Bank which is designed to promote early identification of credit quality
problems through its credit management committee. All loan officers are charged
with the responsibility of reviewing no less than annually all credit
relationships in excess of $100,000 in their respective portfolios. All new
relationships, that is, those not more than 60 days old, in excess of $100,000
are reviewed by a credit management committee comprised of loan officers and
senior management every two weeks. Loan officers also review all criticized and
classified assets in their portfolio quarterly with the senior loan officers of
the Bank. The officers are responsible for implementing, where appropriate,
approved action plans with respect to such criticized and classified assets
designed to improve the Bank's credit position for an early resolution of the
problem loan. As part of its overall strategy to improve policies and
procedures, the Bank has also engaged a third party consultant to review its
loan portfolio, the first examination of which is expected to occur in 1998.

The Bank's credit review system supplements the Bank's loan rating system,
pursuant to which the Bank may place the loan on its criticized asset list or
may classify the loan in one of various other classification categories. A
specified minimum percentage of loans in each adverse asset classification
category, based on the historical loss experience in the Bank in each such
category, is used to determine the adequacy of the Bank's allowance for loan and
lease losses quarterly. These credits are also individually reviewed by senior
credit officers of the Bank to determine whether a greater allowance allocation
is justified due to the facts and circumstances of a particular adversely
classified loan. For more information on the Bank's allowance for loan and lease
losses, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

Outsourcing of Certain Operational Functions. The Company has agreements
with third parties to provide a variety of specialized functions to the Bank in
connection with its lending operations. In each of these relationships, the Bank
benefits from the service provider's expertise and economies of scale while
retaining the flexibility to take advantage of changes in available technology
without impacting customer service.

DEPOSITS

The Bank offers a variety of deposit programs to individuals and to small
and medium-sized businesses and other organizations at interest rates generally
competitive with local market conditions. The following table sets forth the mix
of depository accounts at the Bank as a percentage of total deposits at the
dates indicated.

<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Non-interest bearing demand................................. 11.6% 12.2% 12.5%
Savings/NOW/MMI............................................. 19.4 27.3 28.8
Certificates of deposits.................................... 69.0 60.5 58.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

The Bank accepts deposits at its ten banking offices, eight of which have
automated teller machines. The Bank's memberships in the "HONOR", "CIRRUS" and
"PLUS" networks allow customers access to their depository accounts from
regional ATM facilities. The Bank charges a fee of $1.50 per transaction for the
use of its ATM facilities by those who are not depositors with the Bank. The
Bank also operates two free-standing ATM's. See "Properties." The Bank controls
deposit flows primarily through the pricing of such deposits and to a certain
extent through promotional activities, such as its "Prestige" and "Priority"
accounts for deposits of $25,000 and $75,000, respectively, and the "FNB Club"
which extends special privileges and sponsors group excursions to sites and
performances of interest to account holders over the age of 55. The Bank also
offers as a convenience to come to a customer's home or place of business to
pick-up a non-cash deposit the customer wishes to make. At December 31, 1997,
the Bank had $59.7 million in certificates of deposit of $100,000 or more. In
January 1998, the Bank joined an electronic network which allows it to post
interest rates and attract certificates of deposit nationally. The investors are
generally credit unions or commercial banks (no brokers

30
<PAGE> 31

funds are accepted) and amounts are typically just under $100,000, to assure
FDIC insurance coverage. Deposit rates are set weekly by senior management of
the Bank. Management believes that the rates it offers are competitive with
those offered by other institutions in the Bank's market areas.

INVESTMENT SERVICES

The Bank offers the services of an investment advisor employed by American
Express Financial Advisors who splits his time among seven of the Bank's
branches and is available to depositors, as well as those who are not account
holders in the Bank. This advisor offers mutual fund services, tax and estate
planning and other financial services and the Bank receives a commission based
on the advisor's sales. The Bank benefits by attracting customers to its
branches who may not otherwise have reason to transact business there and by
earning additional fees. In 1997, the Bank earned fees in the amount of $23,000
from commissions generated from these services.

MARKETING

The Bank currently markets its services through advertising campaigns and
in printed material, such as newspapers, magazines and direct mailings, as well
as through promotional items, such as caps, pens, pencils and shirts. The Bank's
officers are also heavily involved in local civic affairs and philanthropic
organizations in order to focus customers on products and services on a personal
level. The Bank occasionally sponsors community events and holds grand opening
ceremonies for its new branches to which local dignitaries are invited to speak
and participate in the festivities. Since the Company does not have a
fully-staffed marketing department, the Bank's marketing, advertising and public
relations campaigns focus on the following two components:

- Value. Among other things, the Bank offers attractive rates for its
financial products, including its certificates of deposit and checking
accounts. This pricing structure has been successful in attracting
depositors who are motivated by the Bank's rates, as well as by the
variety of individualized services the Bank promotes and offers.

- Convenience and Service. All personnel of the Bank aim toward serving
the individual needs of the Bank's customers. For example, senior
personnel are accessible on very short notice, even after normal banking
hours, by way of pagers and other means. In addition, all employees are
eligible to earn incentive compensation for sales and cross-sales to
customers.

Management intends to continue to market the Bank's services through a
combination of advertising campaigns, public relations activities and local
affiliations. In most of its markets, the Bank has established advisory boards,
comprised of local community leaders, to promote the Bank. While the key
messages of value, convenience, service and reliability will continue to play a
major role in the Bank's marketing and public relations efforts, management may
also focus on targeted groups, such as professionals, in addition to small to
medium-sized local businesses.

A vital part of the Bank's marketing plan is the execution of a public
relations strategy. Many traditional public relations methods will be used in
promoting Bank services. Management intends to pursue media coverage, including
general press, industry periodicals and other media covering banking and
finance, consumer issues and special interests. Press releases, quarterly
shareholder reports, media alerts and presentations will announce new banking
services as they are added.

COMPETITION

Commercial banking in North Carolina is extremely competitive, due in large
part to statewide branching. Currently, many of the Bank's competitors are
significantly larger and have greater resources than the Bank. The Bank
continues to encounter significant competition from a number of sources,
including bank holding companies, commercial banks, thrift institutions, credit
unions, and other financial institutions and financial intermediaries. Among
commercial banks, the Bank competes in its market areas with some of the largest
banking organizations in the State, several of which have as many as 200 to 300
branches in North Carolina. Competition with the Bank is not limited to
financial institutions based in North Carolina. The

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<PAGE> 32

enactment of federal legislation authorizing nationwide interstate banking has
greatly increased the size and financial resources of some of the Bank's
competitors. Consequently, many of the Bank's competitors have substantially
higher lending limits due to their greater total capitalization, and many
perform functions for their customers, such as trust services that the Bank does
not offer. As a result of the interstate banking legislation, the Bank's market
is open to future penetration by banks located in other states provided the
other state allows acquisitions of its banking institutions by North Carolina
banking institutions, thereby increasing competition. To date, there is
interstate branching among banks in North Carolina, Virginia, South Carolina and
Tennessee.

The management of the Bank believes banks compete in the following areas:
convenience of location, interest rates for deposits and loans, types of
accounts and services offered, and quality of the personnel providing services.
In its early years, the Bank sought to attract depositors and borrowers
primarily through offering competitive interest rates for both loans and
deposits. More recently, the Bank has determined to compete primarily through
the quality of its services, experience of its personnel and community oriented
approach. The Bank also relies on the personal contacts of its officers and
directors to attract depositors and borrowers in its target market of small to
medium-sized businesses. In addition to its central Board of Directors, the Bank
has established local advisory boards in most of the communities served to
promote contacts in the business communities.

PROPERTIES

The Company leases or owns ten banking offices, as shown in the following
table:

<TABLE>
<CAPTION>
LOCATION OWNED OR LEASED ATM(1) YEAR OPENED/PURCHASED
- -------- --------------------- ------ ---------------------
<S> <C> <C> <C>
202 South Main Street
Reidsville, North Carolina.......... Owned(2) X 1918(3)
1646 Freeway Drive
Reidsville, North Carolina.......... Owned X 1972
202 Turner Drive
Reidsville, North Carolina.......... Owned X 1989
203 East Meadow Road
Eden, North Carolina................ Leased (expires 2001) X 1987
801 South Van Buren Road
Eden, North Carolina................ Owned(4) X 1996
151 North Fieldcrest Road
Eden, North Carolina................ Leased (expires 2008) 1996
605 North Highway Street
Madison, North Carolina............. Owned X 1997
9570 U.S. 29 Business
Ruffin, North Carolina.............. Leased (expires 2004) 1997
2132 New Garden Road
Greensboro, North Carolina.......... Owned X 1997
704 South College Road
Wilmington, North Carolina.......... Leased (expires 2002) X 1997
</TABLE>

- ---------------

(1) Two additional remote ATM's are located in Reidsville, North Carolina
pursuant to leases that expire in 1998 and 2001, respectively. Each of the
ATM's situated at a banking office is a drive-up ATM.
(2) Consists of 27,000 square feet in a two story building and includes the
Company's executive offices.
(3) Original office opened in different location in 1918. Current office opened
in 1980.
(4) Serves as the main banking office in Eden. In 1996, the Bank also closed an
office located in Eden upon the expiration of the lease for such office.

32
<PAGE> 33

EMPLOYEES

As of December 31, 1997, the Company had approximately 127 full-time and 14
part-time employees. None of the employees of the Company are represented by any
collective bargaining unit. The Company considers its relations with its
employees to be good.

LEGAL PROCEEDINGS

In the ordinary course of operations, the Company is a party to various
legal proceedings. In the opinion of management, there is no proceeding pending,
or to the knowledge of management threatened, in which an adverse decision could
result in a material adverse change in the business or results of operations of
the Company.

SUPERVISION AND REGULATION

As a bank holding company, the Company is subject to the supervision,
examination and reporting requirements contained in the Bank Holding Company Act
of 1956 (the "BHCA") and the regulations of the Federal Reserve. The Company's
subsidiary is organized as a national banking association and is subject to the
supervision, examination and reporting requirements of the OCC. The following
discussion sets forth certain of the material elements of the regulatory
framework applicable to bank holding companies and their subsidiaries and
provides certain specific information relevant to the Company. This regulatory
framework is intended primarily for the protection of depositors and the federal
deposit insurance funds and not for the protection of security holders. To the
extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions. A change in applicable statutes,
regulations or regulatory policy may have a material effect on the business of
the Company.

General. As a bank holding company, the Company is subject to the
supervision, examination and reporting requirements contained in the BHCA and
the regulations of the Federal Reserve. The Bank is organized as a national
banking association and is subject to the supervision, examination and reporting
requirements of the OCC.

Under the BHCA, bank holding companies may not directly or indirectly
acquire the ownership or control of more than five percent of the voting shares
or substantially all of the assets of any company, including a bank, without the
prior approval of, or a waiver of the requirement for such approval by, the
Board of Governors of the Federal Reserve.

In addition, the Company's activities, and those of companies which it
controls or in which it holds more than five percent of the voting stock, are
limited to banking or managing or controlling banks or furnishing services to or
performing services for its subsidiaries, or any other activity which the
Federal Reserve determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In determining whether a
particular activity is permissible, the Federal Reserve must consider whether
the performance of such an activity can reasonably be expected to produce
benefits to the public, such as greater convenience, increased competition or
gains in efficiency that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. For example, banking, operating a thrift
institution, acquiring or servicing loans, leasing personal property, conducting
discount securities brokerage activities, performing certain data processing
services, acting as agent or broker in selling credit life insurance and certain
other types of insurance in connection with credit transactions and certain
insurance underwriting activities have all been determined by the Federal
Reserve to be permissible activities.

The Federal Reserve has the authority to prevent the continuance or
development of unsafe or unsound banking practices or other violations of law
and to take certain remedial action. In particular, the Federal Reserve has the
power to order a holding company or its subsidiaries to terminate any activity
or terminate its ownership or control of any subsidiary, despite prior approval
of such activity or such ownership or control, when it has reasonable cause to
believe that continuation of such activity or such ownership or control

33
<PAGE> 34

constitutes a serious risk to the financial safety, soundness or stability of
any bank subsidiary of that bank holding company.

The Company is also subject to the North Carolina Bank Holding Company Act
of 1984 ("NCBHCA"). This statute prohibits bank holding companies from acquiring
or controlling certain non-bank banking institutions (for example, institutions
which accept deposits but do not make commercial loans) which have offices in
North Carolina. As required by the NCBHCA, the Company, by virtue of its
ownership of the Bank, has registered as a bank holding company with the
Commissioner of Banks of the State of North Carolina.

The earnings of the Company are affected by the legislative and
governmental actions of various regulatory authorities, including the Federal
Reserve Board, the OCC and the FDIC. In addition, there are numerous
governmental requirements and regulations that affect the activities of the
Company.

On November 13, 1997, the Company and the OCC entered into the MOU. The
MOU, which was signed by all of the Company's directors, arose out of the OCC's
regular examination of the Company in 1997. The actions that the OCC requested
the Company to take were, generally, in the nature of improving the Company's
internal procedures and policies, such as revising its written loan policy,
developing a program to strengthen its loan administration and taking steps to
increase its liquidity commensurate with its past, and expected future, growth.
Following the Company's implementation of the recommendations set forth in the
MOU, in February 1998 the OCC informed the Company that no further action was
being requested and the Company believes that it is in compliance with the
provisions of the MOU. See "Risk Factors -- Memorandum of Understanding,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 17 to the Company's Consolidated Financial Statements.

Payment of Dividends. The Company is a legal entity separate and distinct
from the Bank. A major portion of the Company's revenues result from amounts
paid as dividends to the Company by the Bank. The prior approval of the OCC is
required for the payment of any dividend by a national bank if the total of all
dividends declared by the board of directors of such bank in any calendar year
will exceed the sum of such bank's net profits for that year and its retained
net profits for the preceding two calendar years, less any required transfers to
surplus. Furthermore, unless and until a bank's surplus fund is equal to its
common capital, no dividend may be declared until the bank has carried to its
surplus fund not less than one-tenth of its net profits for the preceding
half-year (in the case of quarterly or semiannual dividends), or at least
one-tenth of its net profits for the preceding two consecutive half-years (in
the case of annual dividends). Federal law also prohibits any national bank from
paying dividends which would be greater than such bank's undivided profits after
deducting statutory bad debt in excess of such bank's allowance for loan losses.

Under the foregoing dividend restrictions, as of December 31, 1997, the
Bank, without obtaining affirmative governmental approvals, could pay aggregate
dividends of $4.9 million to the Company.

In addition, the Company and the Bank are subject to various general
regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain adequate capital above regulatory minimums.
The appropriate federal regulatory authority has the power to determine, under
certain circumstances relating to the financial condition of a national bank or
bank holding company, that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment thereof. The OCC (the appropriate
agency with respect to the Bank) has indicated that paying dividends that
deplete a bank's capital base to an inadequate level would be an unsound and
unsafe banking practice. The OCC, the FDIC and the Federal Reserve have each
indicated that banking organizations should generally pay dividends only out of
current operating earnings.

Borrowings. There are also various legal restrictions on the extent to
which the Company can borrow or otherwise obtain credit from the Bank. In
general, these restrictions require that any such extensions of credit must be
secured by designated amounts of specified collateral and are limited, as to the
Company, to ten percent of the Bank's capital stock and surplus.

Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's stockholders, pro

34
<PAGE> 35

rata and, to the extent necessary, if any such assessment is not paid by any
stockholder after three months notice, to sell the stock of such stockholder to
make good the deficiency.

Under Federal Reserve policy, the Company is expected to act as a source of
financial strength to the Bank and to commit resources to support such
subsidiary. This support may be required at times when, absent such Federal
Reserve policy, the Company may not find itself willing or able to provide it.

Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.

Capital Adequacy. The Federal Reserve, the FDIC and the OCC have adopted
substantially similar risk-based and leverage capital guidelines for United
States banking organizations. Under these risk-based capital standards, the
minimum consolidated ratio of total capital to risk-weighted assets (including
certain off-balance sheet activities, such as standby letters of credit) is 8%.
At least half of the total capital is to be composed of common stockholders'
equity, retained earnings, a limited amount of qualifying perpetual preferred
stock and minority interests in the equity accounts of consolidated
subsidiaries, less goodwill and certain intangibles ("Tier I Capital" and,
together with Tier 2 Capital, "Total Capital"). The remainder of Total Capital
may consist of mandatory convertible debt securities and a limited amount of
subordinated debt, qualifying preferred stock and loan loss allowance ("Tier 2
Capital"). At December 31, 1997, the Company's Tier I and Total Capital ratios
were 8.92% and 9.88%, respectively.

In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of Tier I Capital to adjusted average quarterly assets less
certain amounts ("Leverage Ratio") equal to three percent for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a Leverage Ratio of between four percent and five percent. The
Company's Leverage Ratio at December 31, 1997, was 7.02%. The guidelines also
provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "tangible Tier I Leverage Ratio" (deducting all
intangibles) in evaluating proposals for expansion or new activity. The Federal
Reserve has not advised the Company of any specific minimum Leverage Ratio or
tangible Tier I Leverage Ratio applicable to it.

The Bank is subject to similar capital requirements adopted by the OCC or
the FDIC. The Bank had a Leverage Ratio of 6.79% as of December 31, 1997. The
federal banking agencies have not advised the Bank of any specific minimum
Leverage Ratio applicable to it.

Prompt Corrective Action. The Federal Deposit Insurance Act, as amended
(the "FDIA"), among other things, requires the federal banking agencies to take
"prompt corrective action" in respect of depository institutions that do not
meet minimum capital requirements. The FDIA establishes five capital tiers:
"well capitalized"; "adequately capitalized"; "undercapitalized"; "significantly
undercapitalized"; and "critically undercapitalized". A depository institution's
capital tier will depend upon how its capital levels compare to various relevant
capital measures and certain other factors, as established by regulation.

The federal bank regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels applicable to FDIC-insured
banks. The relevant capital measures are the Total Capital Ratio, Tier I Capital
Ratio and the Leverage Ratio. Under the regulations, a FDIC-insured bank will be
(i) "well capitalized" if it has a Total Capital Ratio of ten percent or
greater, a Tier I Capital Ratio of six percent or greater and a Leverage Ratio
of five percent or greater and is not subject to any order or written directive
by the OCC to meet and maintain a specific capital level for any capital
measure; (ii) "adequately capitalized" if it has a Total Capital Ratio of eight
percent or greater, a Tier I Capital Ratio of four percent or greater and a
Leverage Ratio of four percent or greater (three percent in certain
circumstances) and is not

35
<PAGE> 36

"well capitalized"; (iii) "undercapitalized" if it has a Total Capital Ratio of
less than eight percent, a Tier I Capital Ratio of less than four percent or a
Leverage Ratio of less than four percent (three percent in certain
circumstances); (iv) "significantly undercapitalized" if it has a Total Capital
Ratio of less than six percent, a Tier I Capital Ratio of less than three
percent or a Leverage Ratio of less than three percent; and (v) "critically
undercapitalized" if its tangible equity is equal to or less than two percent of
average quarterly tangible assets. An institution may be downgraded to, or
deemed to be in, a capital category that is lower than is indicated by its
capital ratios if it is determined to be in an unsafe or unsound condition or if
it receives an unsatisfactory examination rating with respect to certain
matters. As of December 31, 1997, the Company's subsidiary bank had capital
levels that qualifies it as being "adequately capitalized" under such
regulations.

The FDIA generally prohibits an FDIC-insured depository institution from
making any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be "undercapitalized." "Undercapitalized" depository institutions are
subject to growth limitations and are required to submit a capital restoration
plan. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of: (i) an amount equal to five percent
of the depository institution's total assets at the time it became
"undercapitalized"; and (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
applicable with respect to such institution as of the time it fails to comply
with the plan. If a depository institution fails to submit an acceptable plan,
it is treated as if it is "significantly undercapitalized."

"Significantly undercapitalized" insured depository institutions may be
subject to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become "adequately capitalized," requirements to
reduce total assets, and cessation of receipt of deposits from correspondent
banks. "Critically undercapitalized" institutions are subject to the appointment
of a receiver or conservator. A bank that is not "well capitalized" is subject
to certain limitations relating to so-called "brokered" deposits.

Depositor Preference Statute. Under federal law, deposits and certain
claims for administrative expenses and employee compensation against an insured
depository institution would be afforded a priority over other general unsecured
claims against such an institution, including federal funds and letters of
credit, in the "liquidation or other resolution" of such an institution by any
receiver.

Interstate Banking and Branching Legislation. The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "IBBEA") permits interstate
acquisitions of banks and bank holding companies without geographic limitation,
subject to any state requirement that the bank has been organized for a minimum
period of time, not to exceed five years, and the requirement that the bank
holding company, prior to, or following the proposed acquisition, controls no
more than ten percent of the total amount of deposits of insured depository
institutions in the U.S. and no more than 30% of such deposits in any state (or
such lesser or greater amount set by state law).

In addition, the IBBEA permits a bank to merge with a bank in another state
as long as neither of the states has opted out of interstate branching prior to
May 31, 1997. The state of North Carolina has "opted in" to such legislation,
effective June 22, 1995. In addition, a bank may establish and operate a de novo
branch in a state in which the bank does not maintain a branch if that state
expressly permits de novo interstate branching. As a result of North Carolina's
opt-in law, North Carolina law permits unrestricted interstate de novo
branching.

FDIC Insurance Assessments. Effective January 1, 1996, the FDIC reduced
the insurance premiums it currently charges on bank deposits insured by the Bank
Insurance Fund ("BIF") to the statutory minimum of $2,000 for "well capitalized"
banks.

Effects of Governmental Policies. The earnings and business of the Company
and the Bank are and will be affected by the policies of various regulatory
authorities of the United States, especially the Federal

36
<PAGE> 37

Reserve. The Federal Reserve, among other things, regulates the supply of credit
and deals with general economic conditions within the United States. The
instruments of monetary policy employed by the Federal Reserve for those
purposes influence in various ways the overall level of investments, loans,
other extensions of credit and deposits, and the interest rates paid on
liabilities and received on assets.

37
<PAGE> 38

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Willard B. Apple, Jr................... 67 Chairman of the Board of Directors of
the Company and the Bank
Elton H. Trent, Jr.(1)................. 65 Vice Chairman of the Board of Directors
of the Company and the Bank
Ernest J. Sewell....................... 57 President, Chief Executive Officer and
Director of the Company and the Bank
Charles A. Britt(1)(2)................. 48 Director of the Company and the Bank
Barry Z. Dodson(2)..................... 49 Director of the Company and the Bank
O. Eddie Green(2)...................... 63 Director of the Company and the Bank
Joseph H. Kinnarney(1)................. 44 Director of the Company and the Bank
Clifton G. Payne....................... 66 Director of the Company and the Bank
Kenan C. Wright(1)(2).................. 45 Director of the Company and the Bank
Robert F. Albright..................... 62 Senior Vice President, Secretary and
Chief Financial Officer of the Company
and the Bank and Treasurer of the
Company
Richard L. Powell...................... 46 Senior Vice President, Support Services
of the Company and the Bank and
Assistant Secretary of the Company
Howard E. Campbell..................... 51 Senior Vice President of the Bank
C. Melvin Gantt........................ 60 Senior Vice President, Area Manager, of
the Bank
Deborah S. Pryor....................... 45 Senior Vice President, Operations, of
the Bank
Arnold F. Robertson.................... 54 Senior Vice President, Sales Manager
and Marketing, of the Bank
Kenneth B. Yates....................... 40 Senior Vice President, Loan
Administration and Loan Review, of the
Bank
</TABLE>

- ------------------

(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

Willard B. Apple, Jr., a former mayor of Reidsville, North Carolina, has
been Chairman of the Board of Directors of the Company and the Bank since 1993.
He also served as President and Chief Executive Officer of the Company from its
incorporation in 1984 until 1993 and the Bank from 1969 until 1993. Mr. Apple
also acted as interim Chief Executive Officer of the Company and the Bank from
August 1994 to January 1995. Mr. Apple is a former member of the Board of
Directors of the Federal Reserve Bank of Richmond and is a Life Member of the
Reidsville Jaycees. He has also served and currently serves on the boards of
various charitable and civic organizations located in the Rockingham County
area.

Elton H. Trent, Jr. joined the Board of Directors of the Bank in 1969 and
has been the Vice Chairman of the Board of Directors of the Bank since 1984 and
the Company since 1994. Mr. Trent is a former councilman of the City of
Reidsville and is now retired.

Ernest J. Sewell is the President, Chief Executive Officer and a Director
of the Company and the Bank. He assumed his current position on January 26, 1995
after the resignation of Willard B. Apple, Jr. from those positions on that
date. Prior to joining the Company and the Bank, Mr. Sewell served as Senior
Vice President of Branch Banking and Trust Company, with 26 years of previous
banking experience. Mr. Sewell is a member of the Board of Trustees of Annie
Penn Memorial Hospital, Reidsville, North Carolina, and is Chairman of its

38
<PAGE> 39

Investment Committee. He also serves on the boards of various charitable
organizations and is Vice Chairman of the Rockingham County Airport Authority.

Charles A. Britt joined the Board of Directors of the Company and the Bank
in 1986 and has been the owner of Carolina Apothecary, Inc. since January 1993.
Mr. Britt has a degree in pharmacy, which he earned in 1972 from the University
of North Carolina.

Barry Z. Dodson joined the Board of Directors of the Company and the Bank
in 1997 and is a self-employed Certified Public Accountant. He is the owner of
Barry Dodson CPA, an accounting firm with offices located in Madison and
Reidsville, North Carolina.

O. Eddie Green joined the Board of Directors of the Bank in 1970 and the
Board of Directors of the Company in 1984 and has been the Division Manager of
Chandler Concrete Co., Inc., providers of ready-mixed concrete located in
Reidsville, North Carolina, since 1991. Mr. Green obtained his degree in Civil
Engineering from N.C. State University in 1956.

Joseph H. Kinnarney joined the Board of Directors of the Company and the
Board of Directors of the Bank in 1988 and has been the President of Reidsville
Veterinary Hospital, Inc. since 1988. In 1976, Mr. Kinnarney earned a Masters
degree from the University of Kentucky in Animal Science and a Doctorate of
Veterinary Medicine from Cornell University in 1980.

Clifton G. Payne joined the Board of Directors of the Bank in 1976 and the
Board of Directors of the Company in 1984 and has been retired from the practice
of medicine since 1991. Dr. Payne earned his M.D. degree from the University of
North Carolina in 1956.

Kenan C. Wright joined the Board of Directors of the Company and the Board
of Directors of the Bank in 1990 and has been the President of The Wright Co. of
N.C. Inc., a general contractor located in Eden, North Carolina, since 1990.

Robert F. Albright joined the Bank in 1980 as Vice President with 23 years
of prior banking experience, and was elected Senior Vice President and Secretary
of the Company and the Bank in 1985.

Richard L. Powell joined the Bank in 1986 as Assistant Vice President and
was promoted to Vice President in 1988 and to Senior Vice President in 1993.

Howard E. Campbell joined the Bank in November 1997 as a Senior Vice
President. From 1986 to 1995, Mr. Campbell was a Vice President at Branch
Banking and Trust Company, when he became a partner in North State Financial
Management Corp., an investment advisory firm. He was with The Fidelity Bank,
headquartered in Fuquay-Varina, North Carolina as a Vice President during
September and October 1997.

C. Melvin Gantt joined the Bank in 1968, was promoted to Assistant Vice
President in 1975, to Vice President in 1978 and to Senior Vice President in
1987.

Deborah S. Pryor joined the Bank in 1971, was promoted to Assistant Vice
President in 1988, to Vice President in 1991 and to Senior Vice President in
1995.

Arnold F. Robertson joined the Bank in 1969, was promoted to Assistant Vice
President in 1975, to Vice President in 1980 and to Senior Vice President in
1988.

Kenneth B. Yates joined the Bank in 1982 as General Auditor, was promoted
to Vice President in 1988 and to Senior Vice President in 1995.

The Board of Directors of the Company is divided into three classes as
nearly equal in number as possible, Class I, Class II and Class III. Each year
the shareholders elect the members of one of the three classes to a three year
term of office. Messrs. Apple, Green and Payne serve in the class whose term
expires in 1998; Messrs. Lambeth, Kinnarney, Trent and Wright serve in the class
whose term expires in 1999; and Messrs. Sewell, Britt and Dodson serve in the
class whose term expires in 2000. Mr. Lambeth reached the Company's mandatory
retirement age of 70 on December 20, 1997, and, accordingly, was unable to serve
his full term and has retired. Accordingly, Mr. Lambeth's retirement has created
a vacancy on the Board which, in addition to a vacancy created by a previous
retirement of another director, the Company does not currently
39
<PAGE> 40

plan to fill. A majority of the directors then in office are permitted to fill a
vacancy resulting from a retirement at any time and assign the new director to
any class as long as the members in each class are as close in number as
possible. The terms of Messrs. Apple, Green and Payne will expire at the 1998
annual meeting of shareholders; accordingly, they have been nominated to serve
new three-year terms ending in 2001 and such nominations will be submitted to
the Company's shareholders for approval at the 1998 annual meeting of
shareholders.

The Company has an Audit Committee and a Compensation Committee, but does
not have a standing Nominating Committee. The members of the Audit Committee are
Messrs. Green, Britt, Dodson and Wright. The Audit Committee reviews the reports
and oversees the actions of the Internal Audit Department. The Audit Committee
also reviews recommendations from the independent auditor. The members of the
Compensation Committee are Messrs. Britt, Kinnarney, Trent, Jr. and Wright. The
Compensation Committee reviews and recommends executive salary and benefit
programs.

40
<PAGE> 41

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding shares of the
Company's Common Stock held beneficially as of February 1, 1998, and as adjusted
to reflect the offering, (i) by each director and (ii) by all directors and
executive officers of the Company as a group. Except as otherwise indicated, the
persons or entities listed below have sole voting and investment power with
respect to all shares of Common Stock owned by them, except to the extent such
power may be shared with a spouse. There are no known holders of more than five
percent of the Common Stock.

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)
---------------------------- ----------------------------
PERCENT OF PERCENT OF
NAME SHARES OWNED(2) CLASS SHARES OWNED(2) CLASS
- ---- --------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Willard B. Apple, Jr.(3)..................... 29,313 1.2% 29,313 *
Elton H. Trent, Jr.(4)....................... 50,056 2.0 50,056 1.5%
Ernest J. Sewell(5).......................... 41,789 1.7 41,789 1.3%
Charles A. Britt(6).......................... 16,850 * 16,850 *
Barry Z. Dodson(7)........................... 6,578 * 6,578 *
O. Eddie Green(8)............................ 31,209 1.3 31,209 1.0%
Joseph H. Kinnarney.......................... 16,978 * 16,978 *
Clifton G. Payne(9).......................... 61,328 2.5 61,328 1.9%
Kenan C. Wright.............................. 9,700 * 9,700 *
All directors and executive officers as a
group (16 persons)......................... 335,638 12.7 335,638 10.7%
</TABLE>

- ---------------

* Less than one percent
(1) Based upon 2,497,681 shares of Common Stock outstanding on February 1, 1998,
and 3,277,681 shares of Common Stock outstanding immediately after the
offering. The securities "beneficially owned" by an individual are
determined in accordance with the definition of "beneficial ownership" set
forth in the regulations of the Securities and Exchange Commission (the
"Commission"). Accordingly, they may include securities owned by or for,
among others, the spouse and/or minor children of the individual and any
other relative who has the same home as such individual, as well as other
securities as to which the individual has or shares voting or investment
power or has the right to acquire under outstanding stock options within 60
days of February 1, 1998. Beneficial ownership may be disclaimed as to
certain of the securities.
(2) Each director who is not an officer of the Company (other than Willard B.
Apple, Jr. and Barry Z. Dodson) has the right to acquire 5,726 shares of
Common Stock under presently exercisable stock options. Mr. Apple has the
right to acquire 20,290 shares. Mr. Dodson has the right to acquire 1,111
shares. All directors and executive officers as a group have the right to
acquire 140,224 shares of Common Stock under stock options exercisable
currently or within 60 days of February 1, 1998. These shares are shown as
beneficially owned.
(3) Includes 221 shares owned by spouse.
(4) Includes 120 shares owned by spouse.
(5) Includes 3,133 shares owned by spouse and 18,666 shares which Mr. Sewell has
the right to acquire under stock options currently exercisable or
exercisable within 60 days of February 1, 1998.
(6) Includes 332 shares owned by spouse.
(7) Includes 3,619 shares owned by spouse and children.
(8) Includes 3,650 shares owned by spouse and child.
(9) Includes 345 shares owned by spouse.

41
<PAGE> 42

DESCRIPTION OF CAPITAL STOCK

The following summary of certain provisions of the Company's Amended and
Restated Articles of Incorporation (the "Articles") and the Company's Bylaws, as
amended (the "Bylaws") does not purport to be complete and is qualified in its
entirety by reference to such instruments.

At the Company's 1998 Annual Meeting of Shareholders held on April 14,
1998, the shareholders of the Company approved an amendment to the Articles to
increase the aggregate number of shares of Common Stock which the Company is
authorized to issue from 3,000,000 shares to 40,000,000 shares and to authorize
the issuance of up to 10,000,000 shares of Preferred Stock. Since, without such
amendment the Company would not have had a sufficient number of authorized
shares to issue in this offering, such approval was a necessary condition to
effect the offering.

AUTHORIZED CAPITAL

The Company is currently authorized to issue 40,000,000 shares of Common
Stock of which, as of February 1, 1998, 2,497,681 shares were issued and
outstanding and held of record by 772 persons, and 488,701 shares were reserved
for issuance under the Company's various equity compensation plans. After giving
effect to this offering, there will be 3,277,681 shares of Common Stock issued
and outstanding and 618,701 shares reserved for issuance under the Company's
various equity compensation plans.

Each shareholder is entitled to one vote per share of Common Stock on all
matters submitted to a vote of shareholders and is not entitled to cumulate
voting rights in the election of directors. Each share of Common Stock is
entitled to share equally in dividends from sources legally available therefor
when, as, and if declared by the Board of Directors. Upon liquidation or
dissolution of the Company, whether voluntary or involuntary, each share of
Common Stock is entitled to share equally in the assets of the Company available
for distribution to the shareholders of the Company's Common Stock. No
conversion rights, or redemption or sinking fund provisions, are applicable to
the Common Stock. The holders of Common Stock do not have any preemptive right
to purchase any stock or other securities of the Company. The Board of Directors
is authorized to issue without shareholder action additional shares of Common
Stock within the limits authorized by the Articles. All outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby will be, upon
issuance, validly issued, fully paid and non-assessable.

In addition, the Company is authorized to issue up to 10,000,000 shares of
Preferred Stock. The shares of Preferred Stock could be issued by the Company
without shareholder approval from time to time in one or more classes or series.
The Board of Directors is authorized to determine and fix the characteristics or
features of the shares of each such class or series, including without
limitation: the designation of each class or series; the number of shares of
each class or series; the dividend rate or amount, if any; the dates at which
dividends, if declared, would be payable, and the dates from which dividends
would be cumulative, if at all; the redemption price or prices or the terms and
conditions of redemption, if any; the amounts payable and the priorities of
shares, if any, upon liquidation, dissolution, or winding up of the Company; the
rights and preferences, if any, over or otherwise in relation to other classes
or series of capital stock of the Company and among classes and series of
Preferred Stock as to dividends and amounts payable upon liquidation,
dissolution or winding up of the Company; the conversion and exchange rights, if
any; voting rights, if any, the number of votes per share, and the number of
votes, if any, in excess of a majority required for specified corporate action;
and any other preferences, relative rights, or limitations that may be
determined by the Board of Directors.

The existence of authorized but unissued shares of Common Stock and the
authorized but unissued shares of Preferred Stock could have the effect of
discouraging unsolicited takeover attempts. Such shares could be issued to a
purchaser who might cooperate with the Board of Directors in opposing an attempt
by a third party to gain control of the Company. The Board of Directors could
issue shares of Preferred Stock that may, depending on the terms of the class or
series as determined by the Board, make more difficult or discourage an attempt
to obtain control of the Company through a merger, tender offer, proxy contest
or other means. Such a provision may have an adverse impact on a shareholder who
may want to participate in certain transactions which are opposed by the Board
of Directors and may benefit management.

42
<PAGE> 43

CERTAIN ARTICLES AND BYLAW PROVISIONS HAVING POTENTIAL ANTI-TAKEOVER EFFECTS

General. A number of provisions of the Articles and Bylaws address matters
of corporate governance and the rights of shareholders. The following summary of
such provisions is not intended to be complete and is qualified in all respects
by the Articles and Bylaws. Certain of these provisions may delay or prevent
takeover attempts not first approved by the Board of Directors (including
takeovers which certain shareholders may deem to be in their best interests.)
These provisions also could delay or frustrate the removal of incumbent
directors or the assumption of control by shareholders. In addition, certain of
the laws applicable to the Company may have the effect of preventing,
discouraging or delaying a change in control in the Company. All references to
the Articles are to the Company's Articles in effect as of the date of this
Prospectus.

Classification of the Board of Directors. The Articles provide that the
Board of Directors of the Company is divided into three classes, Class I, Class
II and Class III, which shall be as nearly equal in number as possible. Each
director shall serve for a term ending on the date of the third annual meeting
of shareholders following the annual meeting at which the director was elected.
A director elected to fill a vacancy shall serve for the remainder of their
present term of office of the class to which he was elected. As a result of the
classification of the Board of Directors, approximately one-third of the members
of the Board of Directors will be elected each year, and, two annual meetings
will be required for the Company's shareholders to change a majority of the
members constituting the Board of Directors.

Removal of Directors; Filling Vacancies. The Bylaws provide that (i) the
shareholders may remove one or more of the directors with or without cause; (ii)
a director may be removed by the shareholders only if the number of votes cast
for the removal exceeds the number of votes cast against the removal; and (iii)
a director may not be removed by the shareholders at a meeting unless the notice
of the meeting states that the purpose, or one of the purposes, of the meeting
is removal of the director. In addition, vacancies occurring in the Board of
Directors may be filled by a majority of the remaining directors, even though
less than a quorum, or by the sole remaining director; but a vacancy created by
an increase in the authorized number of directors shall be filled only by
election at an annual meeting or at a special meeting of the shareholders called
for that purpose. The shareholders may elect a director at any time to fill any
vacancy not filled by the directors.

Amendment of Bylaws. Subject to certain restrictions described below,
either a majority of the Board of Directors or the shareholders of the Company
may amend the Bylaws. A majority of the Board of Directors may amend the Bylaws
and adopt new Bylaws except that the Board of Directors has no power to adopt a
bylaw: (i) requiring more than a majority of the voting shares for a quorum at a
meeting of shareholders or more than a majority of the votes cast to constitute
action by the shareholders, except where higher percentages are required by law;
(ii) providing for the management of the Company otherwise than by the Board of
Directors or its Executive or other committees; (iii) increasing or decreasing
the number of directors authorized by the Bylaws; or (iv) classifying and
staggering the election of directors. In addition, a bylaw adopted or amended by
the shareholders may not be altered or repealed by the Board of Directors.
Generally, the shareholders of the Company may adopt, amend, or repeal the
Bylaws in accordance with the North Carolina General Statutes.

Preferred Stock. The issuance of shares of Preferred Stock with special
voting rights, liquidation preferences, redemption privileges or conversion
rights could delay, defer or prevent a change in control of the Company. The
Company has no present intention to issue any Preferred Stock.

Supermajority Vote Requirement. The Articles generally provide that the
Company cannot consolidate with, or merge with or into, any other corporation or
convey to any corporation or other person or otherwise dispose of all or
substantially all of the assets or dispose of by any means all or substantially
all of the stock or assets of any major subsidiary of the Company, unless such
consolidation, merger, conveyance or disposition is approved (a) by the
affirmative vote of not less than 75% of the aggregate voting power of the
outstanding stock entitled to vote thereon, and (b) by the affirmative vote of
not less than 75% of the aggregate voting power of the outstanding stock
entitled to vote thereon, which shall include the affirmative vote of at least
50% of the voting power of the outstanding stock of shareholders entitled to
vote thereon, other than Controlling Shareholders (as defined below), (i) if the
shareholder entitled to vote thereon is a person who, including affiliates of
such person, is the beneficial owner (as defined in the Securities Exchange Act
of 1934, as
43
<PAGE> 44

amended and the rules thereunder) of more than 20% of the voting power of the
Company (a "Controlling Shareholder"), and (ii) if, prior to the acquisition of
20% of the voting power of the Company by a shareholder, the Board of Directors
of the Company had not unanimously approved such consolidation, merger,
conveyance or disposition. For purposes of determining whether a person is a
Controlling Shareholder, shares held, voted, or otherwise controlled by a person
as a trustee, plan administrator, officer of the Company, or otherwise pursuant
to an employee benefit plan of the Company or of an affiliate of the Company
shall not be deemed to be beneficially owned by such person. When there is a
Controlling Shareholder, this super-majority rule requirement can be amended
only by the affirmative vote of the voting power of the Company then required to
approve a consolidation, merger, conveyance or disposition.

In addition, the North Carolina Shareholder Protection Act (the
"Shareholder Protection Act"), which is applicable to the Company, is designed
to prevent the abuses that sometimes occur during hostile takeovers. The
Shareholder Protection Act generally requires that, unless certain "fair price"
and procedural requirements are satisfied, the affirmative vote of the holders
of 95% of the outstanding shares of the Company's Common Stock (excluding shares
owned by an "Interested Shareholder") is required to approve certain business
combination transactions with another entity that is the beneficial owner of
more than 20% of the Company's voting shares or which is an affiliate of the
Company and previously has been a 20% beneficial owner.

In order to satisfy the "fair price" provisions, the price paid for any
shares in the second phase of an acquisition must be at least equal to the
highest of: (i) the highest per share price ever paid by anyone who is a part of
the acquiror; (ii) a price that exceeds the market price when the second phase
of the acquisition is announced by the same percentage as the highest price paid
by the acquiror exceeds the market price immediately before the acquisition
began; or (iii) a price computed by multiplying the Company's annual earnings
per share by the price/earnings multiple, if any, of the acquiror.

In addition, the procedural provisions require that: (i) the Company's
Board of Directors must maintain representation by continuing directors
proportionate to shares held by persons unaffiliated with the acquiror; (ii)
there must be no reduction in dividends except as approved by a unanimous vote
of directors; (iii) the acquiror must not acquire any additional shares of the
Company after the transaction in which it acquired its 20% interest; (iv) the
acquiror must not receive the benefit, directly or indirectly, except
proportionately with other shareholders, of any loans, advances, guarantees, or
financial assistance from the Company prior to consumption of the business
transaction; (v) the acquiror must not, prior to consummation of the business
transaction, make a major change in the Company's business or equity capital
structure unless by unanimous vote of the directors; and (vi) the acquiror must
distribute to the shareholders a proxy statement responsive to the requirements
of applicable federal securities laws, which must contain any recommendations by
the continuing directors and can include a fairness opinion from an independent
investment banking firm regarding the transaction.

The cumulative effect of the "supermajority" provision in the Articles
together with the Shareholder Protection Act combine to make it more difficult
to effect a merger, tender offer or proxy contest involving the Company, or an
acquisition of control of the Company by the holder of a large block of the
Company's Common Stock. This is the case even where the proposed action or
transaction may be favorable to, or in the best interests of, the Company's
shareholders.

Special Meetings of Shareholders. The Bylaws provide that special meetings
of shareholders may be called only by the President, Secretary or Board of
Directors of the Company, or by any shareholder pursuant to the written request
of the holders of not less than 10% of all the shares entitled to vote at the
meeting. As a result, this provision would prevent shareholders owning less than
10% of the voting power of the outstanding Common Stock from compelling
shareholder consideration of any proposal (such as a proposal for a merger or
business combination) over the opposition of the Company's Board of Directors.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is the Bank.

44
<PAGE> 45

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom Interstate/Johnson Lane Corporation is acting
as representative (the "Representative"), have severally agreed to purchase from
the Company, and the Company has agreed to sell to the Underwriters, the
respective number of shares of Common Stock set forth opposite each
Underwriter's name below:

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Interstate/Johnson Lane Corporation......................... 540,000
J.C. Bradford & Co. ........................................ 60,000
The Robinson-Humphrey Company, LLC.......................... 60,000
Scott & Stringfellow Inc. .................................. 60,000
Wheat First Securities, Inc. ............................... 60,000
--------
780,000
========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain legal matters by counsel and to
various other conditions customary in a firm commitment underwritten public
offering. The nature of the Underwriters' obligations is such that it is
committed to purchase and pay for all shares of Common Stock offered hereby if
any are purchased.

The Underwriters propose to offer the shares of Common Stock being
purchased directly to the public at the public offering price set forth on the
cover page of this Prospectus and to certain securities dealers at such price
less a concession not in excess of $.92 per share of Common Stock. The
Underwriters may allow, and such selected dealers may reallow, a concession not
in excess of $.10 per share to certain other brokers and dealers. After the
initial public offering, the offering price and other selling terms may be
changed.

The Company has granted a 30-day option to the Underwriters to purchase up
to a maximum of 117,000 additional shares of Common Stock to cover
over-allotments, if any, at the same public offering price, less the
underwriting discount. To the extent that the Underwriters exercise this option,
the Underwriters have agreed, subject to certain conditions, to purchase such
additional shares in approximately the same proportion as set forth in the above
table. The Underwriters may purchase such shares only to cover over-allotments
made in connection with this offering.

The Underwriters do not intend to sell shares of Common Stock to any
account over which they exercise discretionary authority.

The Company and its executive officers and directors have agreed that they
will not sell, contract to sell, or otherwise dispose of any shares of Common
Stock or any securities convertible into or exchangeable for any shares of
Common Stock for a period of 120 days after the date of the commencement of the
offering without the prior written consent of the Underwriters. The Underwriters
may from time to time be a customer of, engage in transactions with, and perform
services for the Company or the Bank in the ordinary course of business.

The Company has agreed to indemnify the Underwriters against, and to
contribute to certain losses arising out of, certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities Act"),
or to contribute payments that the Underwriters may be required to make in
respect thereof.

During and after the offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions, "passive" market making (see below) and purchases
to cover syndicate short positions created in connection with the offering. The
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the Common Stock sold
in the offering for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock which may be higher than the price that might
otherwise prevail in the open market. These transactions may be effected

45
<PAGE> 46

on the Nasdaq National Market or otherwise, and these activities, if commenced,
may be discontinued at any time.

As permitted by Rule 103 of Regulation M under the Exchange Act,
Underwriters or prospective Underwriters that are market makers ("passive market
makers") in the Common Stock may make bids for or purchases of Common Stock in
the Nasdaq National Market until such time, if any, when a stabilizing bid for
such securities has been made.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan,
L.L.P., Raleigh, North Carolina. Certain legal matters related to this offering
will be passed upon for the Underwriters by Moore & Van Allen, PLLC, Raleigh,
North Carolina.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the years in the three-year period ended December
31, 1997, have been included herein and in the registration statement of which
this Prospectus is a part in reliance upon the report of Cherry, Bekaert &
Holland, L.L.P., independent auditors, included herein, and upon the authority
of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files reports, proxy statements and other
information with the Commission. Reports, proxy statements and other information
filed by the Company may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the Commission's Regional
Offices located at 7 World Trade Center, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such materials also may be obtained from the web site that the
Commission maintains at http://www.sec.gov. Quotations relating to the Company's
Common Stock appear on the Nasdaq National Market and such reports and other
information concerning the Company also can be inspected and copied at the
offices of The Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C.
20006-1506.

The Company has filed with the Commission a registration statement on Form
S-2 (together with all amendments and exhibits, referred to as the "Initial
Registration Statement") under the Securities Act and a registration statement
on Form S-2 under Rule 462(b) under the Securities Act (the "462(b) Registration
Statement" and together with the Initial Registration Statement, the
"Registration Statements"). This Prospectus does not contain all of the
information set forth in the Registration Statements, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statements.

46
<PAGE> 47

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed with the Commission (File No. 340-13086)
pursuant to the Exchange Act are incorporated herein by reference:

1. The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997;

2. The information under the caption "Executive Compensation" on pages
6 through 9 of the Company's definitive proxy statement with respect to its
1998 Annual Meeting of Shareholders filed with the Commission on March 13,
1998; and

3. All other reports filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act since the end of the fiscal year covered by the
Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1997.

The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any and all of the
documents which are incorporated herein by reference, other than exhibits to
such information (unless such exhibits are specifically incorporated by
reference into such documents). Requests should be directed to the Company, 202
South Main Street, Reidsville, North Carolina 27320, Attention: Corporate
Secretary, telephone (336) 342-3346.

Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified shall not be deemed to
constitute a part of this Prospectus except as so modified, and any statement so
superseded shall not be deemed to constitute part of this Prospectus.

FORWARD LOOKING STATEMENTS

Information set forth in this Prospectus under the captions "Summary,"
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business" contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which statements represent the
Company's judgment concerning the future and are subject to risks and
uncertainties that could cause the Company's actual operating results and
financial position to differ materially. Such forward looking statements can be
identified by the use of forward looking terminology, such as "may," "will,"
"expect," "anticipate," "estimate," or "continue" or the negative thereof or
other variations thereof or comparable terminology.

The Company cautions that any such forward looking statements are further
qualified by important factors that could cause the Company's actual operating
results to differ materially from those in the forward looking statements,
including without limitation, the effects of future economic conditions,
governmental fiscal and monetary policies, legislative and regulatory changes,
the risks of changes in interest rates on the level and composition of deposits,
the effects of competition from other financial institutions, the failure of
assumptions underlying the establishment of the allowance for possible loan
losses, the low trading volume of the Common Stock, other considerations
described in connection with specific forward looking statements, factors set
forth in this Prospectus under the caption "Risk Factors" and other cautionary
elements specified in documents incorporated by reference in this Prospectus.

47
<PAGE> 48

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-3
Consolidated Statements of Income for the three years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 1997, 1996 and
1995...................................................... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997, 1996 and 1995.................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 49

INDEPENDENT AUDITORS' REPORT

The Board of Directors
FNB Financial Services Corporation and Subsidiary
Reidsville, North Carolina

We have audited the accompanying consolidated balance sheets of FNB
Financial Services Corporation and Subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
FNB Financial Services Corporation and Subsidiary as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.

CHERRY, BEKAERT & HOLLAND, L.L.P.

Reidsville, North Carolina
February 10, 1998

F-2
<PAGE> 50

FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 9,612 $ 6,467
Investment securities:
Available for sale (cost of $77,024 in 1997 and $51,674 in
1996).................................................. 77,346 51,929
Other (market value of $1,392 in 1997 and $643 in 1996)... 1,392 643
Loans, net of allowance for credit losses of $2,331 in 1997
and $1,638 in 1996........................................ 226,384 142,947
Property and equipment, net................................. 6,490 4,686
Accrued income and other assets............................. 3,927 3,124
-------- --------
Total assets...................................... $325,151 $209,796
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing....................................... $ 31,464 $ 21,914
Interest-bearing.......................................... 240,810 157,466
-------- --------
Total deposits.................................... 272,274 179,380
Federal funds purchased and securities sold under agreements
to repurchase............................................. 13,720 8,650
Other borrowings............................................ 15,000 --
Accrued expenses and other liabilities...................... 1,639 1,380
-------- --------
Total liabilities................................. 302,633 189,410
-------- --------
Commitments and contingent liabilities
Shareholders' equity
Common stock, $1.00 par value;
Authorized -- 3,000,000 shares; Outstanding --
2,493,680 in 1997 and 1,383,105 in 1996................... 2,494 1,383
Paid-in capital........................................... 3,287 2,728
Retained earnings......................................... 16,541 16,119
-------- --------
22,322 20,230
Net unrealized appreciation on securities available for
sale................................................... 196 156
-------- --------
Total shareholders' equity........................ 22,518 20,386
-------- --------
Total liabilities and shareholders' equity........ $325,151 $209,796
======== ========
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE> 51

FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C>
Interest income
Loans................................................ $ 17,616 $ 12,092 $ 9,067
Federal funds sold................................... 133 53 163
Investment securities:
Taxable........................................... 2,800 2,480 3,222
Tax exempt........................................ 358 657 851
Other................................................ 110 78 80
---------- ---------- ----------
Total interest income........................ 21,017 15,360 13,383
---------- ---------- ----------
Interest expense
Deposits............................................. 9,287 6,449 5,508
Federal funds purchased and other borrowings......... 769 313 625
---------- ---------- ----------
Total interest expense....................... 10,056 6,762 6,133
---------- ---------- ----------
Net interest income.................................... 10,961 8,598 7,250
Provision for credit losses............................ 760 415 260
---------- ---------- ----------
Net interest income after provision for credit
losses............................................... 10,201 8,183 6,990
---------- ---------- ----------
Other income
Service charges on deposit accounts.................. 896 746 694
Other service charges and fees....................... 381 183 243
Net gain on sales of loans........................... 39 16 211
Net gain on securities available for sale............ 38 307 88
---------- ---------- ----------
Total other operating income................. 1,354 1,252 1,236
---------- ---------- ----------
Other expenses
Salaries and employee benefits....................... 4,709 3,630 3,082
Occupancy expense.................................... 529 345 297
Furniture and equipment expense...................... 628 465 424
Insurance expense, including FDIC assessment......... 62 35 187
Marketing expense.................................... 154 97 110
Printing and supply expenses......................... 251 205 160
Other expenses....................................... 1,570 1,227 930
---------- ---------- ----------
Total other expenses......................... 7,903 6,004 5,190
---------- ---------- ----------
Income before income taxes............................. 3,652 3,431 3,036
Income tax expense..................................... 1,175 1,021 866
---------- ---------- ----------
Net income............................................. $ 2,477 $ 2,410 $ 2,170
========== ========== ==========
Net income per share of common stock................... $ 1.00 $ 0.98 $ 0.89
========== ========== ==========
Net income per share of common stock -- assuming
dilution............................................. $ 0.93 $ 0.96 $ 0.88
========== ========== ==========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 52

FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Common stock
Balance at beginning of year............................ $ 1,383 $ 1,098 $ 1,097
Stock split effected in the form of a stock dividend.... 1,082 275 --
Exercise of stock options............................... 11 7 --
Dividend reinvestment plan.............................. 6 3 --
Employee 401(k) plan.................................... 12 -- --
Employee stock awards................................... -- -- 1
------- ------- -------
Balance at end of year.................................. 2,494 1,383 1,098
------- ------- -------
Paid-in capital
Balance at beginning of year............................ 2,728 2,580 2,562
Dividend reinvestment plan.............................. 156 60 --
Exercise of stock options............................... 92 84 --
Employee 401(k) plan.................................... 308 -- --
Employee stock awards................................... 3 4 18
------- ------- -------
Balance at end of year.................................. 3,287 2,728 2,580
------- ------- -------
Retained earnings
Balance at beginning of year............................ 16,119 14,837 13,403
Net income.............................................. 2,477 2,410 2,170
Cash paid for fractional shares......................... (14) (5) --
Cash dividends paid ($.39 per share in 1997, $.34 in
1996, and $.30 in 1995).............................. (959) (848) (736)
Stock split effected in the form of a stock dividend.... (1,082) (275) --
------- ------- -------
Balance at end of year.................................. 16,541 16,119 14,837
------- ------- -------
Net unrealized appreciation (depreciation) on available
for sale securities, net of tax effect
Balance at beginning of year............................ 156 467 (2,142)
Net change.............................................. 40 (311) 2,609
------- ------- -------
Balance at end of year.................................. 196 156 467
------- ------- -------
Total shareholders' equity...................... $22,518 $20,386 $18,982
======= ======= =======
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 53

FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received......................................... $ 19,247 $ 14,685 $ 13,335
Fees and commission received.............................. 1,951 1,627 1,209
Interest paid............................................. (9,499) (6,660) (6,162)
Noninterest expense paid.................................. (6,749) (5,264) (4,365)
Income taxes paid......................................... (1,538) (1,493) (983)
Proceeds from mortgage loans.............................. 3,963 3,122 2,685
-------- -------- --------
Net cash provided by operating activities.......... 7,375 6,017 5,719
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale...... 55,427 43,707 44,183
Proceeds from maturities of securities available for
sale.................................................... 17,617 7,887 14,474
Purchases of securities................................... (99,330) (47,933) (34,858)
Capital expenditures...................................... (2,291) (1,532) (303)
Sales of assets........................................... 269 -- --
(Increase) decrease in other real estate owned............ 3 158 (1)
Net (increase) decrease in loans.......................... (88,505) (36,268) (34,132)
-------- -------- --------
Net cash used in investing activities.............. (116,810) (33,981) (10,637)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand, savings and interest checking
accounts................................................ 12,381 4,217 3,013
Net increase in time deposits............................. 80,514 20,764 18,914
Net increase in borrowed funds............................ 15,000 -- --
Net increase in federal funds purchased................... 5,070 5,498 2,022
Repayments of proceeds from long-term debt................ -- -- (20,000)
Purchase of fractional shares............................. (14) (5) --
Proceeds from issuance of common stock.................... 588 158 --
Dividends paid............................................ (959) (848) (736)
-------- -------- --------
Net cash provided by financing activities.......... 112,580 29,784 3,213
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 3,145 1,820 (1,705)
Cash and cash equivalents, beginning of year................ 6,467 4,647 6,352
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 9,612 $ 6,467 $ 4,647
======== ======== ========
Supplemental disclosure of non-cash transactions
Non-cash transfers from loans to other real estate........ $ 107 $ 24 $ 135
======== ======== ========
Change in unrealized appreciation (depreciation) of
securities available for sale (net of tax effect of $25,
($199) and $1,669)...................................... $ 40 $ (311) $ 2,609
======== ======== ========
Employee stock awards..................................... $ 3 $ 4 $ 19
======== ======== ========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net income................................................ $ 2,477 $ 2,410 $ 2,170
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for credit losses........................... 760 415 260
Depreciation.......................................... 474 376 346
Accretion and amortization............................ 282 288 324
Gain on sale of securities available for sale......... (38) (307) (88)
(Gain) loss on sale of mortgage loans................. (39) (16) (211)
Provision for loss on other real estate............... -- -- 64
Proceeds from mortgage loans.......................... 3,963 3,122 2,685
(Gain) loss on other assets........................... 39 84 --
Deferred tax (benefit) provision...................... (338) (384) (122)
(Increase) decrease in accrued income and other
assets............................................... (803) (631) (257)
Increase (decrease) in accrued expenses and other
liabilities.......................................... 598 660 548
-------- -------- --------
Net cash provided by operating activities.......... $ 7,375 $ 6,017 $ 5,719
======== ======== ========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 54

FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying consolidated financial statements include the accounts of
FNB Financial Services Corporation (the Company) and its wholly-owned
subsidiary, First National Bank Southeast (the Bank). All significant
intercompany balances and transactions have been eliminated in consolidation.

Nature of operations

The Bank provides a variety of financial services to individual and
corporate customers through its ten full-service branches in Reidsville,
Madison, Eden, Ruffin, Greensboro, and Wilmington, North Carolina. A majority of
the Bank's customers are located in Rockingham, Guilford, and New Hanover
Counties. The Bank's primary deposit products are interest-bearing checking
accounts, certificates of deposit and individual retirement accounts. Its
primary lending products are commercial, real estate, and consumer loans.

Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and their 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 credit losses on loans. A
majority of the Bank's loan portfolio consists of loans in the Rockingham,
Guilford, and New Hanover County areas. The local economies of these areas
depend heavily on the industrial, agricultural, and service sectors.
Accordingly, the ultimate collectibility of a large portion of the Bank's loan
portfolio would be affected by changes in local economic conditions.

Cash and cash equivalents

For the purpose of presentation in the statement of cash flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
caption cash and due from banks.

Investment Securities

The Company classifies its investment securities at time of purchase into
three categories as follows:

-- held-to-maturity -- reported at amortized cost,

-- trading securities -- reported at fair value with unrealized gains
and losses included in earnings, or

-- securities available-for-sale -- reported at fair value with
unrealized gains and losses reported as a separate component of
shareholders' equity (net of tax effect).

Other securities, which are carried at cost, include stock in the Federal
Reserve Bank and the Federal Home Loan Bank of Atlanta ("FHLB").

Gains and losses on sales of securities are recognized when realized on a
specific identification basis. Premiums and discounts are amortized into
interest income using the level yield method.

F-7
<PAGE> 55
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Loans

Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on impaired loans is discontinued
when, in management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.

Mortgage loans held for sale are valued at the lower of cost or market as
determined by outstanding commitments from investors or current investor yield
requirements, calculated on the aggregate loan basis.

Allowance for credit losses

The allowance for credit losses is maintained at a level believed adequate
by management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based upon reviews of
individual credits, past loan loss experience, current economic conditions,
volume, growth and composition of the loan portfolio, and other relevant risk
factors. Losses are charged and recoveries are credited to the allowance for
credit losses at the time the loss or recovery is incurred.

While management uses the best available information to evaluate the
adequacy of the allowance for credit losses, future additions to the allowance
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 Bank's allowance for credit losses on loans and
foreclosed real estate. Such agencies may require the Bank to recognize changes
to the allowance based on their judgements about information available to them
at the time of their examination.

Other real estate

Other real estate, acquired through partial or total satisfaction of loans,
is carried at the lower of cost or fair market value, less estimated costs to
sell, which becomes the property's new basis. At the date of acquisition, losses
are charged to the allowance for loan losses, subsequent write downs are charged
to expense in the period they are incurred.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and
amortization. The provision for depreciation and amortization is computed
principally by the straight-line method over the estimated useful lives of the
assets.

Expenditures for maintenance and repairs are charged to operations, and the
expenditures for major replacements and betterments are added to the property
and equipment accounts. The cost and accumulated depreciation of the property
and equipment retired or sold are eliminated from the property accounts at the
time of retirement or sale and the resulting gain or loss is reflected in
current operations.

Income taxes

Provisions for income taxes are based on taxes payable or refundable for
the current year (after exclusion of non-taxable income such as interest on
state and municipal securities) and deferred taxes on temporary differences
between the tax bases of assets and liabilities and their reported amounts in
financial statements at currently enacted income tax rates applicable to the
period in which the deferred tax asset and liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.

F-8
<PAGE> 56
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net income per share

At December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128 "Earnings per Share". SFAS No. 128 requires
disclosure of two earnings per share amounts: Net income per share of common
stock and net income per share of common stock -- assuming dilution. Net income
per share of common stock is computed by dividing net income available to common
shareholders by the weighted average number of shares of common stock
outstanding during each year. Net income per share of common stock -- assuming
dilution is computed by dividing net income plus any adjustments to net income
related to issuance of dilutive potential common shares by the weighted average
number of shares of common stock outstanding during each year plus the number of
dilutive potential common shares. All earnings per share amounts have been
restated in order to comply with the new accounting standard.

Loan origination fees and costs

Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield on the related loan.

Sales of mortgage loans

Gains and losses on the sale of loans are accounted for by imputing gain or
loss on those sales where a yield rate guaranteed to the buyer is more or less
than the contract interest rate being collected. Such gains or losses are
recognized in the financial statements during the year of sale. The Bank
continues to service certain loans that have been sold. Such loan balances are
not included in the accompanying consolidated balance sheets.

Pension costs

Pension costs are charged to salaries and employee benefits expense.

Off balance sheet financial instruments

In the ordinary course of business the Bank enters into off balance sheet
financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, commercial letters of credit and standby letters
of credit. Such financial instruments are recorded in the financial statements
when they are funded or related fees are incurred or received.

Reclassification

Certain items for 1995 and 1996 have been reclassified to conform with the
1997 presentation. Such reclassifications had no effect on net income or
shareholders' equity as previously reported.

NOTE 2 -- RESTRICTION ON CASH AND DUE FROM BANKS

The Bank maintains average reserve balances with the Federal Reserve Bank.
The average amounts of these reserve balances for the years ended December 31,
1997 and 1996 were $362,000 and $625,000, respectively.

F-9
<PAGE> 57
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 -- INVESTMENT SECURITIES

Investment securities consists of the following:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1997
Available for sale:
U.S. treasury notes.......................... $ 3,074 $ 18 $ -- $ 3,092
U.S. government agency securities............ 68,997 75 99 68,973
State and municipal obligations.............. 4,953 328 -- 5,281
------- ---- ---- -------
77,024 421 99 77,346
------- ---- ---- -------
Other securities............................... 1,392 -- -- 1,392
------- ---- ---- -------
Total investment securities.......... $78,416 $421 $ 99 $78,738
======= ==== ==== =======
December 31, 1996
Available for sale:
U.S. treasury notes.......................... $13,075 $ 4 $ 3 $13,076
U.S. government agency securities............ 24,126 -- 21 24,105
Mortgage-backed securities................... 7,780 14 139 7,655
State and municipal obligations.............. 6,693 400 -- 7,093
------- ---- ---- -------
51,674 418 163 51,929
------- ---- ---- -------
Other securities............................... 643 -- -- 643
------- ---- ---- -------
Total investment securities.......... $52,317 $418 $163 $52,572
======= ==== ==== =======
</TABLE>

The amortized cost and estimated market value of debt securities at
December 31, 1997, by contractual maturities, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.

<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
------------------------------
AMORTIZED ESTIMATED
COST MARKET VALUE
----------- --------------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less..................................... $ 2,102 $ 2,103
Due after one through five years............................ 69,110 69,198
Due after five through ten years............................ 5,082 5,280
Due after ten years......................................... 730 765
------- -------
$77,024 $77,346
======= =======
</TABLE>

Proceeds from the sale of investment securities available for sale, gross
realized gains, gross realized losses, and the related income taxes on net
realized gains were as follows:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales.................................... $55,427 $43,707 $44,183
Gross realized gains................................... 226 376 163
Gross realized losses.................................. 188 69 75
Applicable income tax on net realized gains............ 15 120 34
</TABLE>

F-10
<PAGE> 58
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1997 and 1996, investment securities with a carrying value
of approximately $24,195,000 and $14,442,000 respectively, were pledged as
collateral to secure public deposits and for other purposes.

NOTE 4 -- LOANS

Major classifications of loans are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Commercial, financial and agricultural...................... $ 54,294 $ 25,175
Consumer.................................................... 46,078 31,378
Real estate:
Residential mortgage...................................... 58,238 44,109
Commercial mortgage....................................... 51,022 30,516
Construction.............................................. 19,083 13,407
-------- --------
Total............................................. $228,715 $144,585
======== ========
</TABLE>

At December 31, 1997 and 1996, the recorded investment in loans that were
considered impaired was approximately $1,250,000 and $0, respectively. The
related allowance for loan losses on these impaired loans was approximately
$188,000 and $0, respectively. The average recorded investment in impaired loans
for the years ended December 31, 1997 and 1996 was approximately $625,000 and
$0, respectively. Loans on nonaccrual status, not considered impaired, amounted
to approximately $12,000 at December 31, 1997 and $547,000 at December 31, 1996.

Mortgage loans serviced for the Federal Home Loan Mortgage Corporation are
not included in the accompanying consolidated balance sheets. The unpaid
principal balances of those loans at December 31, 1997, 1996 and 1995 were
$18,816,000, $14,852,000 and $14,491,000, respectively.

Certain 1-4 family residential mortgage loans are held as collateral under
a blanket floating lien to secure a portion of the Bank's borrowings (see Note
8).

NOTE 5 -- ALLOWANCE FOR CREDIT LOSSES

Changes in the allowance for credit losses for the three years ended
December 31 were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................. $1,638 $1,258 $1,052
Provision for credit losses.............................. 760 415 260
Recoveries............................................... 93 54 74
Losses charged off....................................... (160) (89) (128)
------ ------ ------
Balance at end of year................................... $2,331 $1,638 $1,258
====== ====== ======
</TABLE>

F-11
<PAGE> 59
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- PROPERTY AND EQUIPMENT

Properties and equipment are summarized as follows:

<TABLE>
<CAPTION>
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Land........................................................ $1,202 $ 870
Building and leasehold improvements......................... 4,724 3,690
Equipment................................................... 4,405 3,544
Construction in progress.................................... 28 39
------ ------
10,359 8,143
Less accumulated depreciation and amortization.............. 3,869 3,457
------ ------
$6,490 $4,686
====== ======
</TABLE>

NOTE 7 -- DEPOSITS

The aggregate amount of jumbo CDs, each with a minimum denomination of
$100,000, was approximately $59,700,000 and $21,200,000 in 1997 and 1996,
respectively.

At December 31, 1997 the scheduled maturities of CDs and IRAs are as
follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998........................................................ $139,632
1999........................................................ 31,705
2000........................................................ 11,954
2001........................................................ 3,613
2002........................................................ 483
Thereafter.................................................. 650
--------
$188,037
========
</TABLE>

NOTE 8 -- FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER REPURCHASE AGREEMENTS,
AND OTHER BORROWINGS

The following is a schedule of federal funds purchased, securities sold
under repurchase agreements, and FHLB borrowings:

<TABLE>
<CAPTION>
INTEREST MAXIMUM
BALANCE RATE AVERAGE OUTSTANDING
AS OF AS OF AVERAGE INTEREST AT ANY
DECEMBER 31 DECEMBER 31 BALANCE RATE MONTH-END
----------- ----------- ------- -------- -----------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C>
1997
Federal funds purchased and securities sold
under agreements to repurchase........... $13,720 5.31% $ 9,749 5.18% $15,455
FHLB borrowings............................ 15,000 5.74 4,521 5.83 15,000
------- ------- -------
Total................................. $28,720 $14,270 $30,455
======= ======= =======
1996
Federal funds purchased and securities sold
under agreements to repurchase........... $ 8,650 5.73 $ 5,415 5.79 $ 8,650
FHLB borrowings............................ -- -- 452 5.61 5,000
------- ------- -------
Total.................................... $ 8,650 $ 5,867 $13,650
======= ======= =======
</TABLE>

F-12
<PAGE> 60
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1997, the Bank had a $40 million line of credit with the
FHLB under which $15 million was outstanding. This line of credit is secured
with FHLB stock and a blanket floating lien on qualifying 1-4 family residential
mortgage loans. The outstanding amounts consist of $5 million maturing in 1998
and $10 million maturing in 2002. The borrowing maturing in 2002 has a one-time
call feature in 1999 whereby if called, the interest rate converts to a floating
rate based on the three month LIBOR.

Federal funds purchased represent unsecured overnight borrowings from other
financial institutions by the Bank. Securities sold under agreement to
repurchase represent short-term borrowings by the Bank with overnight maturities
collateralized by securities of the United States government or its agencies.

NOTE 9 -- INCOME TAXES

The components of income tax expense are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense
Federal............................................. $1,448 $1,212 $ 787
State............................................... 149 193 201
------ ------ -----
Total current............................... 1,597 1,405 988
------ ------ -----
Deferred tax expense (benefit)
Federal............................................. (341) (308) (98)
State............................................... (81) (76) (24)
------ ------ -----
Total deferred.............................. (422) (384) (122)
------ ------ -----
Total income tax expense.................... $1,175 $1,021 $ 866
====== ====== =====
</TABLE>

The sources of deferred tax assets and liabilities and the tax effect of
each are as follows:

<TABLE>
<CAPTION>
1997 1996
------ ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses............................... $ 754 $484
Non-qualified deferred compensation plans................. 391 255
------ ----
Total............................................. 1,145 739
------ ----
Deferred tax liabilities:
Depreciable basis of property and equipment............... 271 248
Net unrealized gain on securities available for sale...... 125 99
Other..................................................... 8 28
------ ----
Total............................................. 404 375
------ ----
Net deferred tax assets (liabilities)....................... $ 741 $364
====== ====
</TABLE>

There is no valuation allowance for deferred tax assets as management
believes that realization of the deferred tax assets is more likely than not
based upon the Bank's history of taxable income and estimates of future taxable
income.

F-13
<PAGE> 61
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision for federal income taxes is less than that computed by
applying the federal statutory rate of 34% as indicated in the following
analysis:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax based on statutory rates......................... $1,242 $1,166 $1,032
Increase (decrease) resulting from:
Effect of tax-exempt income........................ (104) (199) (255)
State income taxes, net of federal benefit......... 111 122 120
Other, net......................................... (74) (68) (31)
------ ------ ------
$1,175 $1,021 $ 866
====== ====== ======
</TABLE>

NOTE 10 -- LEASE COMMITMENTS

The minimum annual lease commitments under noncancelable operating leases
in effect at December 31, 1997 are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ --------------
(IN
THOUSANDS)
<S> <C>
1998........................................................ $143
1999........................................................ 138
2000........................................................ 138
2001........................................................ 133
2002........................................................ 46
Thereafter.................................................. 205
----
$803
====
</TABLE>

Rental expense was $131,000 in 1997, $71,000 in 1996, and $38,000 in 1995.

NOTE 11 -- RELATED PARTY TRANSACTIONS

The Bank had loans outstanding to principal officers and directors and
their affiliated companies of approximately $3,424,000 and $3,382,000 at
December 31, 1997 and 1996, respectively. During 1997, additions to such loans
were $1,378,000 and repayments were $1,336,000. Such loans were made
substantially on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other borrowers
and do not involve more than the normal risks of collectibility.

NOTE 12 -- SHAREHOLDERS' EQUITY

Stock Splits

In March, 1996, the Company paid a five-for-four split of the common stock
in the form of a 25% stock dividend. As a result, $275,000 ($1 for each share
issued pursuant to the stock split) was transferred from retained earnings to
the common stock account. Cash was paid in lieu of fractional shares.

In April and September, 1997, the Company paid a four-for-three split of
the common stock in the form of a 33 1/3% stock dividend. As a result, $462,000
and $620,000 ($1 for each share issued pursuant to the split) was transferred
from retained earnings to the common stock account for the April split and the
September split, respectively. Cash was paid in lieu of fractional shares for
both splits.

All per share data in the financial statements has been adjusted to reflect
these three splits.

F-14
<PAGE> 62
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock grants

During 1997, 1996, and 1995, stock grants to employees amounted to 75, 85,
and 1,130 common shares, respectively.

Stock option plans

In 1996, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 123, "Accounting for Stock-Based Compensation." Under SFAS No. 123,
the Company has elected to continue using the measurement prescribed in
Accounting Principles Board (APB) Opinion No. 25, and accordingly, SFAS No. 123
has no effect on the Company's financial position or results of operations.

The Company has issued stock under both incentive and non-qualified stock
options. The Company granted stock options under previously approved plans in
1997, 1996, 1995, 1992, and 1989 which authorize the granting of options with
respect to shares of the Company's common stock.

The following is a summary of stock option activity and related information
for the years ended December 31:

<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------- -------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding --
Beginning of
year............... 384,864 $10.66 164,101 $ 6.99 111,177 $ 6.83
Granted............ 90,330 23.11 233,942 12.80 52,924 7.20
Exercised.......... (13,001) 7.99 (13,179) 12.24 -- --
Forfeited.......... (9,275) 12.03 -- -- -- --
------- -------- --------
Outstanding -- End of
year............... 452,918 $13.25 384,864 $10.66 164,101 $ 6.99
======= ======== ========
Exercisable -- End of
year............... 155,378 $ 9.21 72,718 $ 6.90 48,544 $ 6.86
Weighted average fair
value of options
granted during the
year............... $ 6.73 $ 6.66 $ 3.65
</TABLE>

The following is a summary of information concerning outstanding and
exercisable options at December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- --------------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$6.75-12.52 205,884 7.19 $ 9.06 116,202 $ 8.01
12.94-25.25 247,034 9.46 17.27 39,176 12.94
------- -------
452,918 155,378
======= =======
</TABLE>

Because the Company has adopted the disclosure-only provisions of SFAS No.
123, no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date of the awards consistent with the provisions of

F-15
<PAGE> 63
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SFAS No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings -- as reported.................. $2,477,000 $2,410,000 $2,170,000
Net earnings -- pro forma.................... 2,068,000 2,153,000 2,145,000
Earnings per share -- as reported............ 1.00 0.98 0.89
Earnings per share -- pro forma.............. 0.84 0.88 0.88
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1996 and 1995: dividend yield of 3.20%,
expected volatility of 34.0%, risk-free interest rates of 5.70% for 1997, 6.20%
for 1996 and 5.40% for 1995, and expected lives of 4 years for 1997 and 1996
options and 5 years for 1995 options.

These plans provide that shares granted come from the Company's authorized
but unissued or reacquired common stock. The price of the options granted
pursuant to these plans will not be less than 100 percent of the fair market
value of the shares on the date of grant. The options granted in 1989, 1992, and
1995 vest ratably over a five year period, and the options granted in 1996 and
1997 vest ratably over a four year period; however, no option will be
exercisable after ten years from the date granted.

NOTE 13 -- NET INCOME PER SHARE

The following is a reconciliation of the numerator and denominator of net
income per share of common stock and net income per share of common
stock -- assuming dilution as required by SFAS No. 128:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
WEIGHTED
AVERAGE
INCOME COMMON SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ---------------- ---------
<S> <C> <C> <C>
Net income per share of common stock:
Income available to common shareholders..... $2,477,000 2,472,760 $1.00
=====
Effect of Dilutive Securities:
Stock options............................... -- 182,717
---------- ---------
Net income per share of common stock -- assuming
dilution:
Income available to common shareholders and
assumed conversion........................ $2,477,000 2,655,477 $0.93
========== ========= =====
</TABLE>

F-16
<PAGE> 64
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------
WEIGHTED
AVERAGE
INCOME COMMON SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net income per share of common stock:
Income available to common shareholders...... $2,410,000 2,453,529 $0.98
=====
Effect of Dilutive Securities:
Stock options................................ -- 57,730
---------- ---------
Net income per share of common stock -- assuming
dilution:
Income available to common shareholders and
assumed conversion......................... $2,410,000 2,511,259 $0.96
========== ========= =====
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------
WEIGHTED
AVERAGE
INCOME COMMON SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
Net income per share of common stock:
Income available to common shareholders...... $2,170,000 2,436,825 $0.89
=====
Effect of Dilutive Securities:
Stock options................................ -- 24,615
---------- ---------
Net income per share of common stock -- assuming
dilution:
Income available to common shareholders and
assumed conversion......................... $2,170,000 2,461,440 $0.88
========== ========= =====
</TABLE>

NOTE 14 -- FNB FINANCIAL SERVICES CORPORATION (PARENT COMPANY)

The parent company's principal asset is its investment in its subsidiary,
the Bank. The significant source of income of the parent company is dividends
received from its subsidiary.

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED BALANCE SHEETS
ASSETS
Cash and due from banks................................... $ 653 $ 374 $ 316
Securities................................................ 12 13 12
Investment in wholly-owned subsidiary..................... 21,829 19,960 18,647
Other assets.............................................. -- 39 7
------- ------- -------
$22,494 $20,386 $18,982
======= ======= =======
Shareholders' equity...................................... $22,494 $20,386 $18,982
======= ======= =======
</TABLE>

F-17
<PAGE> 65
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME
Dividends from subsidiary................................... $ 698 $ 835 $ 731
Amortization and other expenses............................. (74) (74) (18)
------- ------- -------
Income before tax benefit................................... 624 761 713
Income tax benefit.......................................... 25 25 6
------- ------- -------
Income before equity in undistributed net income of
subsidiary................................................ 649 786 719
Equity in undistributed net income of subsidiary............ 1,828 1,624 1,451
------- ------- -------
Net income.................................................. $ 2,477 $ 2,410 $ 2,170
======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Dividends received from subsidiary........................ $ 698 $ 835 $ 731
Cash paid for franchise tax, registration cost,
acquisition cost and other............................. (74) (74) (18)
Sales of assets........................................... 12 -- --
Loss on asset sales....................................... 2 -- --
Refundable income taxes................................... 25 6 71
------- ------- -------
Net cash provided by operating activities.............. 663 767 784
------- ------- -------
CASH USED IN INVESTING ACTIVITIES
Purchase of real estate................................... -- (14) --
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid, net of DRIP............................... (797) (785) (736)
Proceeds from Employee 401(k)............................. 320 -- --
Proceeds from employee stock awards....................... 4 4 19
Exercise of stock options................................. 103 91 --
Purchase of fractional shares............................. (14) (5) --
------- ------- -------
Net cash used in financing activities.................. (384) (695) (717)
------- ------- -------
Net increase (decrease) in cash............................. 279 58 67
Cash at beginning of year................................... 374 316 249
------- ------- -------
Cash at end of year......................................... $ 653 $ 374 $ 316
======= ======= =======
RECONCILIATION OF NET INCOME TO CASH PROVIDED BY OPERATING
ACTIVITIES
Net income.................................................. $ 2,477 $ 2,410 $ 2,170
Adjustments to reconcile net income to net cash provided
by operating activities
(Increase) decrease in other assets.................... 14 (19) 64
Equity in undistributed net income of subsidiary....... (1,828) (1,624) (1,450)
------- ------- -------
Net cash provided by operating activities................... $ 663 $ 767 $ 784
======= ======= =======
</TABLE>

NOTE 15 -- COMMITMENTS AND CONTINGENT LIABILITIES

The Bank's consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest rate risk and
liquidity risk. These commitments and contingent liabilities are commitments to
extend credit and standby letters of credit.

F-18
<PAGE> 66
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the Bank's commitments and contingent liabilities at December
31, are as follows:

<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNT
--------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit................................ $42,250 $27,272
Standby letters of credit................................... 13 216
------- -------
$42,263 $27,488
======= =======
</TABLE>

The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.

NOTE 16 -- EMPLOYEE BENEFIT PLANS

The Company's non-contributory defined benefit pension plan covers
substantially all of its employees. The plan calls for benefits to be paid to
eligible employees at retirement based primarily upon years of service with the
Company and a percentage of qualifying compensation during final years of
employment. Contributions to the plan are based upon the projected unit credit
actuarial funding method and comply with the funding requirements of the
Employee Retirement Income Security Act. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future. Plan assets consists primarily of cash and cash
equivalents, U. S. government securities, and common stocks.

<TABLE>
<CAPTION>
1997 1996
---- -----
<S> <C> <C>
Net pension cost includes the following components (in
thousands):
Service cost of the current period........................ $ 99 $ 60
Interest cost on the projected benefit obligation......... 177 158
Expected return on assets held in the plan................ (153) (148)
Net amortization of prior service......................... 11 11
---- -----
Pension expense........................................... $134 $ 81
==== =====
</TABLE>

The following sets forth the funded status of the plan and the amounts
shown in the accompanying balance sheet at December 31:

<TABLE>
<CAPTION>
1997 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $2,276,728 in 1997 and $1,439,658 in 1996........... $2,310 $2,116
Effect of anticipated future compensation levels.......... 451 293
------ ------
Projected benefit obligation.............................. 2,761 2,409
Fair value of assets held in the plan..................... 2,412 2,289
------ ------
Plan assets less than projected benefit obligation........ (349) (120)
Unrecognized prior service cost being recognized over 15
years.................................................. 121 132
Net unrecognized loss (gain) from past experience
different from that assumed and effects of changes in
assumption............................................. 106 (82)
------ ------
Pension liability......................................... $ (122) $ (70)
====== ======
</TABLE>

F-19
<PAGE> 67
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The weighted average discount rate used to measure the projected benefit
obligation is 7.00% for 1997 and 1996, the rate of increase in future
compensation levels is 5.00% for 1997 and 1996, and the expected long-term rate
of return on assets is 7.00% for 1997 and 1996. The Company uses the
straight-line method of amortization for prior service cost and unrecognized
gains and losses.

In 1994 the Company adopted a Supplemental Executive Retirement Plan
("SERP"). The SERP allows the Company to supplement the level for certain
executives' retirement income over that which is obtainable through the
tax-qualified retirement plan sponsored by the Bank. Contributions to the SERP
totaled $63,000 for 1997 and $44,000 for 1996.

The Bank also has a contributory 401(k) savings plan covering substantially
all employees. The plan allows eligible employees to contribute up to a fixed
percentage of their compensation, with the Bank matching a portion of each
employee's contribution. The Bank's contributions were $58,000, $49,000, and
$45,000 for 1997, 1996 and 1995, respectively.

A deferred compensation plan allows the directors and certain senior
officers of the Company and the Bank to defer the compensation they earn for
performance of their appointed duties for the Company and the Bank. Each
director elects annually to either receive that year's compensation currently or
to defer receipt until his death, disability or retirement as a director. Each
officer elects annually to either receive that year's compensation currently or
to defer receipt of a portion of his compensation until his death, disability or
retirement as an officer. The total liability for deferred compensation under
the plan was $304,000 and $207,000 at December 31, 1997 and 1996, respectively.

NOTE 17 -- REGULATORY MATTERS

On November 13, 1997, the Company and the Office of the Comptroller of the
Currency (the "OCC") entered into a Memorandum of Understanding ("MOU"), under
which the Company agreed to take certain actions to improve its infrastructure,
primarily necessitated by its rapid growth. In general, the OCC requested that
the Company improve its internal procedures and policies, such as revising its
written loan policy, developing a program to strengthen its loan administration,
and taking steps to increase its liquidity commensurate with its past, and
expected future, growth. In February 1998, the OCC informed the Company that no
further action was being requested and the Company believes that it is in
compliance with the MOU. Management believes that the actions taken by the
Company to address the concerns identified by the OCC in the MOU have not had a
material adverse effect on the business, results of operations, or financial
condition of the Company. While the Company expects the MOU to be terminated
after its next OCC examination, there is no assurance that the OCC will not in
the interim recommend supplemental actions to be taken by the Company.

The Bank, as a National Bank, is subject to the dividend restrictions set
forth by the OCC. Under such restrictions, the Bank may not, without the prior
approval of the OCC, declare dividends in excess of sum of the current year's
earnings (as defined) plus the retained earnings (as defined) from the prior two
years. The dividends, as of December 31, 1997 that the bank could declare
without the approval of the OCC, amounted to approximately $4,902,000.

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 possible 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 weighting, and other factors.

F-20
<PAGE> 68
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.

The most recent notification from the OCC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table. Since
that notification, the Bank has continued to experience asset growth. As a
result, at December 31, 1997, the Bank's ratio of total capital to risk weighted
assets was 9.6%, which places it into the adequately capitalized classification.

The Bank's actual capital amounts and ratios are also presented in the
table.

<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Total Capital (To Risk Weighted Assets)
Consolidated.......................... $23,938 9.9% $19,380 >8.0% $ N/A
-
Subsidiary Bank....................... 23,248 9.6% 19,386 >8.0% 24,233 >10.0%
Tier I Capital (To Risk Weighted Assets) - -
Consolidated.......................... 21,607 8.9% 9,690 >4.0% N/A
-
Subsidiary Bank....................... 20,917 8.6% 9,693 >4.0% 14,540 > 6.0%
Tier I Capital (To Average Assets) - -
Consolidated.......................... 21,607 7.0% 10,319 >4.0% N/A
-
Subsidiary Bank....................... 20,917 6.8% 12,344 >4.0% 15,430 > 5.0%
December 31, 1996: - -
Total Capital (To Risk Weighted Assets)
Consolidated.......................... 21,868 15.1% 11,609 >8.0% N/A
-
Subsidiary Bank....................... 21,442 14.8% 11,628 >8.0% 14,535 >10.0%
Tier I Capital (To Risk Weighted Assets) - -
Consolidated.......................... 19,464 13.4% 5,805 >4.0% N/A
-
Subsidiary Bank....................... 19,039 13.1% 5,814 >4.0% 8,721 > 6.0%
Tier I Capital (To Average Assets) - -
Consolidated.......................... 19,464 9.6% 8,087 >4.0% N/A
-
Subsidiary Bank....................... $19,039 9.4% $ 8,086 >4.0% $10,108 > 5.0%
- -
</TABLE>

NOTE 18 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
for each class of financial instruments.

Cash and cash equivalents. For cash on hand and amounts due from banks the
carrying value is considered to be a reasonable estimate of fair value.

Investment securities. The fair value of investment securities is based on
quoted market prices, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities. The
fair value of equity investments in the restricted stock of the Federal Reserve
and Federal Home Loan Bank equals the carrying value.

F-21
<PAGE> 69
FNB FINANCIAL SERVICES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Loans. The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
The fair value of residential mortgage loans held for sale is based on quoted
market prices and the fair value of variable rate loans with frequent repricing
and negligible credit risk approximates book value.

Deposits. The fair value of noninterest-bearing demand deposits and NOW,
savings and money market deposits is the amount payable on demand at the
reporting date. The fair value of time deposits is estimated using the rates
currently offered for deposits of similar remaining maturities.

Other interest-bearing liabilities. The carrying value of federal funds
purchased and retail repurchase agreements is considered to be a reasonable
estimate of fair value.

Commitments. The fair value of commitments to extend credit is considered
to approximate carrying value, since the large majority of these commitments
would result in loans that have variable rates and/or relatively short terms to
maturity. For other commitments, generally of a short-term nature, the carrying
value is considered to be a reasonable estimate of fair value. The various
commitment items were disclosed in Note 14.

The estimated fair values of financial instruments are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
- ----------------------------------------------
Cash and cash equivalents..................... $ 9,612 $ 9,612 $ 6,467 $ 6,467
Investment securities
Available for sale.......................... 77,346 77,346 51,929 51,929
Other equity securities..................... 1,392 1,392 643 643
Loans......................................... 228,715 227,998 144,585 144,267
FINANCIAL LIABILITIES:
- ----------------------------------------------
Deposits...................................... 272,274 269,068 179,380 179,630
Federal funds purchased and retail repurchase
agreements.................................. 13,720 13,720 8,650 8,650
</TABLE>

The fair value estimates are made at a specific point in time based on
relevant market and other information about the financial instruments. Because
no market exists for a significant portion of the Company's financial
instruments, fair value estimates are current economic conditions, risk
characteristics of various financial instruments, and such other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgement and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in the estimates.

NOTE 19 -- BRANCH ACQUISITION

During March, 1996, the Bank completed its purchase of a branch located in
Eden, North Carolina from another financial institution. The principal amounts
acquired included deposits of approximately $14,000,000, loans of approximately
$2,500,000 and net cash of approximately $11,500,000. The acquisition was
accounted for using the purchase method of accounting.

F-22
<PAGE> 70

======================================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

---------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 9
Price Range of Common Stock........... 9
Dividends............................. 10
Capitalization........................ 11
Selected Consolidated Financial
Data................................ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 25
Management............................ 38
Principal Shareholders................ 41
Description of Capital Stock.......... 42
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 46
Available Information................. 46
Incorporation of Certain Documents by
Reference........................... 47
Forward Looking Statements............ 47
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

======================================================
======================================================

780,000 SHARES

(FNB LOGO)

FNB FINANCIAL
SERVICES CORPORATION
COMMON STOCK
---------------
PROSPECTUS
---------------
Interstate/Johnson Lane
Corporation
APRIL 15, 1998

======================================================