##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-QSB



---



|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the Quarterly Period Ended March 31, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------



For the Transition Period from
 to



Commission file number 0-24113



---



Liberty National Bancshares, Inc.

(Exact name of registrant as specified in its charter)



---



|                         |  |                                     
|------------------------ |  | ------------------------------------
|Georgia                  |  | 58-2292563                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)



P.O. Box 82030

Conyers, Georgia 30013

(Address of principal executive offices)



770-785-7880

(Telephone Number, including Area Code)



State the number of shares outstanding of each of the

issuers classes of common equity, as of the latest practicable date:



---



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



As of May 12, 2004 there were 1,523,399 shares of the Registrants
common stock, par value $.50 per share, outstanding.



Transitional Small Business Disclosure Format.    YES ̈NO  x



---



---

##### Table of Contents

LIBERTY NATIONAL BANCSHARES, INC. AND SUBSIDIARY



INDEX



|           |  |                                                                                                                |  |         
|---------- |  | -------------------------------------------------------------------------------------------------------------- |  | --------
|           |  |                                                                                                                |  | Page No.
|           |  |                                                                                                               
|PART I     |  | FINANCIAL INFORMATION                                                                                          |  |         
|           |  |                                                                                                               
|Item 1.    |  | Financial Statements                                                                                           |  |         
|           |  |                                                                                                               
|           |  | Consolidated Balance Sheet (Unaudited) at March 31, 2004                                                       |  | 3       
|           |  |                                                                                                               
|           |  | Consolidated Statements of Earnings (Unaudited) for the Three Months Ended March 31, 2004 and 2003             |  | 4       
|           |  |                                                                                                               
|           |  | Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2004 and 2003           |  | 5       
|           |  |                                                                                                               
|           |  | Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2004 and 2003 |  | 6       
|           |  |                                                                                                               
|           |  | Notes to Consolidated Financial Statements (Unaudited)                                                         |  | 7       
|           |  |                                                                                                               
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 9       
|           |  |                                                                                                               
|Item 3.    |  | Controls and Procedures                                                                                        |  | 12      
|           |  |                                                                                                               
|PART II.   |  | OTHER INFORMATION                                                                                              |  |         
|           |  |                                                                                                               
|Item 1.    |  | Legal Proceedings                                                                                              |  | 13      
|           |  |                                                                                                               
|Item 2.    |  | Changes in Securities and Repurchases of Equity Securities                                                     |  | 13      
|           |  |                                                                                                               
|Item 3.    |  | Defaults Upon Senior Securities                                                                                |  | 13      
|           |  |                                                                                                               
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                            |  | 13      
|           |  |                                                                                                               
|Item 5.    |  | Other Information                                                                                              |  | 13      
|           |  |                                                                                                               
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                               |  | 13      
|           | 
|SIGNATURES |  | 14                                                                                                            
|           | 
|Exhibits   |  |                                                                                                               



2



---

##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



LIBERTY NATIONAL BANCSHARES, INC. AND SUBSIDIARY



Consolidated Balance Sheet



March 31, 2004

(Unaudited)



|                                                                                                   |  |   |            
|-------------------------------------------------------------------------------------------------- |  | - | -----------
|Assets                                                                                             |  |   |            
|Cash and due from banks                                                                            |  | $ | 6,022,278  
|Federal funds sold                                                                                 |  |   | 12,671,000 
|                                                                                                   |  |   |            
|Cash and cash equivalents                                                                          |  |   | 18,693,278 
|                                                                                                   | 
|Investment securities available for sale                                                           |  |   | 14,565,258 
|Other investments                                                                                  |  |   | 426,518    
|Loans, net of allowance for loan losses of $1,787,612                                              |  |   | 139,989,141
|Premises and equipment, net                                                                        |  |   | 4,829,459  
|Accrued interest receivable                                                                        |  |   | 679,571    
|Other assets                                                                                       |  |   | 467,452    
|                                                                                                   |  |   |            
|Total assets                                                                                       |  | $ | 179,650,677
|                                                                                                   |  |   |            
|Liabilities and Stockholders Equity                                                               |  |   |            
|Deposits:                                                                                          |  |   |            
|Noninterest-bearing demand                                                                         |  | $ | 27,474,031 
|Interest-bearing demand and money market                                                           |  |   | 45,728,117 
|Savings                                                                                            |  |   | 4,136,587  
|Time deposits of $100,000 or more                                                                  |  |   | 20,684,829 
|Other time deposits                                                                                |  |   | 64,249,839 
|                                                                                                   |  |   |            
|Total deposits                                                                                     |  |   | 162,273,403
|                                                                                                   | 
|Accrued interest payable                                                                           |  |   | 141,842    
|Other liabilities                                                                                  |  |   | 284,981    
|FHLB advances                                                                                      |  |   | 2,500,000  
|Other borrowings                                                                                   |  |   | 2,900,000  
|                                                                                                   |  |   |            
|Total liabilities                                                                                  |  |   | 168,100,226
|                                                                                                   |  |   |            
|Stockholders equity:                                                                              |  |   |            
|Common stock, $.50 par value; 10,000,000 shares authorized 1,474,399 shares issued and outstanding |  |   | 737,200    
|Additional paid-in capital                                                                         |  |   | 7,004,088  
|Retained earnings                                                                                  |  |   | 3,659,431  
|Accumulated other comprehensive income                                                             |  |   | 149,732    
|                                                                                                   |  |   |            
|Total stockholders equity                                                                         |  |   | 11,550,451 
|                                                                                                   |  |   |            
|Total liabilities and stockholders equity                                                         |  | $ | 179,650,677
|                                                                                                   |  |   |            



See
accompanying notes to unaudited consolidated financial statements.



3



---

##### Table of Contents

LIBERTY NATIONAL BANCSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Earnings



For the Three Months Ended March 31, 2004 and 2003



(Unaudited)



|                                                    |  |      |           |      |          
|--------------------------------------------------- |  | ---- | --------- | ---- | ---------
|                                                    |  | 2004 |           | 2003
|Interest and dividend income:                       |  |      |           |      |          
|Loans, including fees                               |  | $    | 2,170,444 |      | 1,840,702
|Investment securities:                              |  |      |           |      |          
|Taxable                                             |  |      | 95,394    |      | 116,738  
|Non-taxable                                         |  |      | 13,085    |      | 22,936   
|Federal funds sold                                  |  |      | 6,900     |      | 6,404    
|                                                    |  |      |           |      |          
|Total interest income                               |  |      | 2,285,823 |      | 1,986,780
|                                                    |  |      |           |      |          
|Interest expense:                                   |  |      |           |      |          
|Deposits                                            |  |      | 656,611   |      | 628,370  
|Federal Home Loan Bank advances                     |  |      | 42,656    |      | 42,416   
|Other borrowings                                    |  |      | 19,668    |      | 7,500    
|Federal funds purchased                             |  |      | 253       |      | 3,629    
|                                                    |  |      |           |      |          
|Total interest expense                              |  |      | 719,188   |      | 681,915  
|                                                    |  |      |           |      |          
|Net interest income                                 |  |      | 1,566,635 |      | 1,304,865
|Provision for loan losses                           |  |      | 93,942    |      | 113,362  
|                                                    |  |      |           |      |          
|Net interest income after provision for loan losses |  |      | 1,472,693 |      | 1,191,503
|                                                    |  |      |           |      |          
|Other income:                                       |  |      |           |      |          
|Service charges on deposit accounts                 |  |      | 301,824   |      | 278,875  
|Other income                                        |  |      | 163,071   |      | 123,392  
|                                                    |  |      |           |      |          
|Total other income                                  |  |      | 464,895   |      | 402,267  
|                                                    |  |      |           |      |          
|Other expenses:                                     |  |      |           |      |          
|Salaries and employee benefits                      |  |      | 667,063   |      | 549,559  
|Net occupancy and equipment expense                 |  |      | 180,855   |      | 150,269  
|Professional and other outside services             |  |      | 197,855   |      | 155,332  
|Other                                               |  |      | 183,679   |      | 195,952  
|                                                    |  |      |           |      |          
|Total other expenses                                |  |      | 1,229,452 |      | 1,051,112
|                                                    |  |      |           |      |          
|Earnings before income tax expense                  |  |      | 708,136   |      | 542,658  
|Income tax expense                                  |  |      | 256,583   |      | 184,948  
|                                                    |  |      |           |      |          
|Net earnings                                        |  | $    | 451,553   |      | 357,710  
|                                                    |  |      |           |      |          
|Basic earnings per share                            |  | $    | .31       |      | .25      
|                                                    |  |      |           |      |          
|Diluted earnings per share                          |  | $    | .28       |      | .23      
|                                                    |  |      |           |      |          



See
accompanying notes to unaudited consolidated financial statements.



4



---

##### Table of Contents

LIBERTY NATIONAL BANCSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Cash Flows



For the Three Months Ended March 31, 2004 and 2003



(Unaudited)



|                                                                                          |  |      |             |   |      |            |  
|----------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | ---------- | -
|                                                                                          |  | 2004 |             |   | 2003 |           
|Cash flows from operating activities:                                                     |  |      |             |   |      |            |  
|Net earnings                                                                              |  | $    | 451,553     |   |      | 357,710    |  
|Adjustments to reconcile net earnings to net cash provided by operating activities:       |  |      |             |   |      |            |  
|Net depreciation, amortization and accretion                                              |  |      | 104,877     |   |      | 85,703     |  
|Gain on sale of other real estate owned                                                   |  |      | (18,770     | ) |      |           |  
|Provision for loan losses                                                                 |  |      | 93,942      |   |      | 113,362    |  
|Net change in other assets and other liabilities                                          |  |      | (42,631     | ) |      | 127,029    |  
|                                                                                          |  |      |             |   |      |            |  
|Net cash provided by operating activities                                                 |  |      | 588,971     |   |      | 683,804    |  
|                                                                                          |  |      |             |   |      |            |  
|Cash flows from investing activities:                                                     |  |      |             |   |      |            |  
|Purchases of investment securities available for sale                                     |  |      | (2,998,750  | ) |      | 500,000    |  
|Maturities and paydowns of investment securities available for sale                       |  |      | 1,118,310   |   |      | 104,794    |  
|Proceeds from sales of other real estate owned                                            |  |      | 252,144     |   |      |           |  
|Loans originated, net of principal repayments                                             |  |      | (11,320,054 | ) |      | (9,017,743 | )
|Purchases of premises and equipment                                                       |  |      | (46,880     | ) |      | (513,623   | )
|                                                                                          |  |      |             |   |      |            |  
|Net cash used by investing activities                                                     |  |      | (12,995,230 | ) |      | (8,926,572 | )
|                                                                                          |  |      |             |   |      |            |  
|Cash flows from financing activities:                                                     |  |      |             |   |      |            |  
|Change in deposits                                                                        |  |      | 21,692,902  |   |      | 13,031,819 |  
|Proceeds from private placement offering, net of offering costs of $12,685                |  |      |            |   |      | 431,315    |  
|Proceeds from other borrowings                                                            |  |      | 400,000     |   |      |           |  
|Proceeds from exercise of stock options                                                   |  |      |            |   |      | 26,329     |  
|                                                                                          |  |      |             |   |      |            |  
|Net cash provided (used) by financing activities                                          |  |      | 22,092,902  |   |      | 13,489,463 |  
|                                                                                          |  |      |             |   |      |            |  
|Net change in cash and cash equivalents                                                   |  |      | 9,686,643   |   |      | 5,246,695  |  
|                                                                                          |  |     
|Cash and cash equivalents, beginning of period                                            |  |      | 9,006,635   |   |      | 6,677,093  |  
|                                                                                          |  |      |             |   |      |            |  
|Cash and cash equivalents, end of period                                                  |  | $    | 18,693,278  |   |      | 11,923,788 |  
|                                                                                          |  |      |             |   |      |            |  
|Supplemental disclosure of cash flow information:                                         |  |      |             |   |      |            |  
|Cash paid for interest expense                                                            |  | $    | 685,424     |   |      | 652,346    |  
|Income taxes paid                                                                         |  | $    | 40,177      |   |      | 103,197    |  
|Change in unrealized gains/losses on investment securities available for sale, net of tax |  | $    | 4,914       |   |      | 33,644     |  



See
accompanying notes to unaudited consolidated financial statements.



5



---

##### Table of Contents

LIBERTY NATIONAL BANCSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Comprehensive Income



For the Three Months Ended March 31, 2004 and 2003



(Unaudited)



|                                                                                                                                                       |  |      |         |      |        
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | ---- | -------
|                                                                                                                                                       |  | 2004 |         | 2003
|Net earnings                                                                                                                                           |  | $    | 451,553 |      | 357,710
|Other comprehensive income consisting of:                                                                                                              |  |      |         |      |        
|Unrealized holding gains (losses) on investment securities available for sale arising during the period, net of income taxes of $(2,531) and
$(17,331) |  |      | 4,914   |      | 33,644 
|                                                                                                                                                       |  |      |         |      |        
|Total comprehensive income                                                                                                                             |  | $    | 456,467 |      | 391,354
|                                                                                                                                                       |  |      |         |      |        



See
accompanying notes to unaudited consolidated financial statements.



6



---

##### Table of Contents

LIBERTY NATIONAL BANCSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



March 31, 2004



(Unaudited)



|(1) | Basis of Presentation
|--- | ---------------------



The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-QSB. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2004, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. For further information, refer to the financial statements and footnotes included in the Companys annual report on Form 10-KSB for the year ended December 31, 2003.



Reclassifications of certain amounts in the 2003 consolidated financial
statements have been made to conform with the financial statement presentation for 2004. The reclassifications have no effect on net earnings or shareholders equity as previously reported.



|(2) | Earnings Per Share
|--- | ------------------



Basic net earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted net earnings per share
include the effects of potential common shares outstanding during the period. The average market price during the period is used to compute equivalent shares. The reconciliation of the amounts used in the computation of both basic earnings per share
and diluted earnings per share for the three-month periods ended March 31, 2004 and 2003, is as follows:



|                                     |  |             |         |                          |           |                |   |    
|------------------------------------ |  | ----------- | ------- | ------------------------ | --------- | -------------- | - | ---
|                                     |  | NetEarnings |         | AverageSharesOutstanding |           | PerShareAmount
|For the period ended March 31, 2004: |  |             |         |                          |           |                |   |    
|Net earnings  basic                 |  | $           | 451,553 |                          | 1,474,399 |                | $ | .31
|                                     |  |             |         |                          |           |                |   |    
|Effect of dilutive stock options     |  |             |        |                          | 119,479   |                |   |    
|                                     |  |             |         |                          |           |                |   |    
|Net earnings  diluted               |  | $           | 451,553 |                          | 1,593,878 |                | $ | .28
|                                     |  |             |         |                          |           |                |   |    
|For the period ended March 31, 2003: |  |             |         |                          |           |                |   |    
|Net earnings  basic                 |  | $           | 357,710 |                          | 1,435,349 |                | $ | .25
|                                     |  |             |         |                          |           |                |   |    
|Effect of dilutive stock options     |  |             |        |                          | 106,014   |                |   |    
|                                     |  |             |         |                          |           |                |   |    
|Net earnings  diluted               |  | $           | 357,710 |                          | 1,541,363 |                | $ | .23
|                                     |  |             |         |                          |           |                |   |    



7



---

##### Table of Contents

|(3) | Stock Based Compensation
|--- | ------------------------



Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, encourages, but does not
require, entities to compute fair value of options at the date of grant and to recognize such costs as compensation expense immediately if there is no vesting period or ratably over the vesting period of the options. The Company has chosen not to
adopt the cost recognition principles of this statement and accounts for stock options under Accounting Principles Board Opinion No. 25 and its related interpretations. Had compensation costs been determined based upon the fair value of the options
at the time of the grant dates consistent with the method of SFAS No. 123, net earnings would have reflected the pro forma amounts in the following table:



|                                                                                                                      |  |                                      |         |   |      |          |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ---- | -------- | -
|                                                                                                                      |  | For the Three Months Ended:March 31, |        
|                                                                                                                      |  | 2004                                 |         |   | 2003 |         
|Net earnings, as reported                                                                                             |  | $                                    | 451,553 |   |      | 357,710  |  
|Pro forma stock-based compensation cost adjustments associated with new grants and forfeitures, net of tax            |  |                                      | (3,831  | ) |      | (2,590   | )
|                                                                                                                      |  |                                      |         |   |      |          |  
|Pro forma net earnings                                                                                                |  | $                                    | 447,722 |   |      | (355,120 | )
|                                                                                                                      |  |                                      |         |   |      |          |  
|Basic earnings per share, as reported                                                                                 |  | $                                    | .31     |   |      | .25      |  
|Pro forma stock-based compensation cost adjustments associated with new grants and forfeitures, net of tax, per share |  |                                      |        |   |      |         |  
|                                                                                                                      |  |                                      |         |   |      |          |  
|Basic pro forma earnings, per share                                                                                   |  | $                                    | .31     |   |      | .25      |  
|                                                                                                                      |  |                                      |         |   |      |          |  
|Diluted earnings per share, as reported                                                                               |  | $                                    | .28     |   |      | .23      |  
|Pro forma stock-based compensation cost adjustments associated with new grants and forfeitures, net of tax, per share |  |                                      |        |   |      |         |  
|                                                                                                                      |  |                                      |         |   |      |          |  
|Diluted pro forma earnings, per share                                                                                 |  | $                                    | .28     |   |      | .23      |  
|                                                                                                                      |  |                                      |         |   |      |          |  



|(4) | Note Payable
|--- | ------------



In March 2002, the Company entered into a credit facility with a correspondent bank that provided for borrowings of up to $2,500,000. During March of
2004, the facility was renegotiated to allow borrowings of up to $4,500,000. The credit facility bears interest at the prime interest rate less 1⁄2%, is payable quarterly and matures on March 24, 2006. At maturity, the Company has the option to
amortize the balance over ten years. Borrowings under the facility are collateralized by the stock of the Bank. The Company is subject to certain covenants that include minimum tangible capital levels and capital ratios, return on asset ratios,
non-performing asset limits, and allowance for loan loss levels. At March 31, 2004, outstanding borrowings under this credit facility were $2,900,000, with an interest rate of 3.50%.



|(5) | Subsequent Event
|--- | ----------------



Subsequent to March 31, 2004, 49,000 shares under option were exercised by certain directors and those exercises yielded proceeds of $275,500.



8



---

##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Liberty National Bancshares, Inc. (the Company) was incorporated as under the laws of the State of Georgia in February 1997 to operate as a
bank holding company pursuant to the Federal Bank Holding Company Act of 1956, as amended. The Company is a one-bank holding company that owns all of the issued and outstanding stock of Liberty National Bank (the Bank), which conducts
business in Rockdale and Newton Counties, Georgia.



The Bank is
a full-service financial institution that offers a wide range of commercial and retail banking products and services. The bank has three branches, two in Conyers, Georgia and one in Covington, Georgia.



Critical Accounting Policy



The accounting and financial reporting policies of the Company and the Bank
conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The Company has determined that its policy regarding the determination of its allowance for loan losses is a
critical accounting policy in that it requires significant judgments and involves complex estimates and the application of the policy has a significant impact on the Companys financial statements.



The allowance for loan losses is an estimate of the losses that may be
sustained in the Banks portfolio. The allowance is based on two basic principles of accounting: (1) Statement of Financial Accounting Standards (SFAS) No. 5 Accounting for Contingencies, which requires that losses be
accrued when they are probable of occurring and estimable, and (2) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present
value of future cash flows or values that are observable in the secondary market and the loan balance. The use of these values is inherently subjective and the Banks actual losses could be greater or less than the estimates.



The Banks allowance for loan losses has two basic components: (1)
specific loss estimates for individually classified and impaired loans, and (2) general loss estimates on loans for which no impairment has been identified and large groups of smaller balance homogeneous loans. Specific loss estimates on individual
loans include subjective evaluations related to secondary sources of repayment for the loan which are principally collateral liquidation. The general loss allocations use historical loss ratio experience which may not be indicative of the actual
losses present in the loan portfolio at a given point in time.



While the basic methodology of the Banks loan loss allowance estimation process has not changed, management continuously re-evaluates the use of historical loss factors, national and local economic trends, credit concentrations and
other relevant factors in determining the adequacy of the allowance for loan loss.



This estimation process associated with the allowance for loan losses can have significant effects in the estimated loan loss expense of a given period. Generally, the allowance for loan losses increases as the
outstanding balance of loans increase or the level of classified or impaired loans increases. Loans or portions of loans that are deemed uncollectible are charged against and reduce the allowance.



Financial Condition



Management continuously monitors the financial condition of the Bank in
order to protect depositors, increase retained earnings and protect current and future earnings. Further discussion of significant items affecting the Companys financial condition are discussed in detail below.



9



---

##### Table of Contents

Total assets increased by $22,507,385 from $157,143,292 at December 31, 2003 to $179,650,677 at March 31,
2004. Net loans increased by $11,221,906 from $128,767,235 at December 31, 2003 to $139,989,141 at March 31, 2004. Federal Funds sold increased by $9,500,000 from $3,171,000 at December 31, 2003 to $12,671,000 at March 31, 2004. Investment
securities available for sale increased $1,862,589 from $12,702,669 at December 31, 2003 to $14,565,258 at March 31, 2004.



Deposits increased by $21,692,902 from $140,580,501 at December 31, 2003 to $162,273,403 at March 31, 2004. Noninterest-bearing deposits increased by
$2,114,571 from $25,359,460 at December 31, 2003 to $27,474,031 at March 31, 2004. Interest-bearing demand deposits and money market accounts increased by $4,570,074 to $45,728,117 at March 31, 2004. Certificates of deposits and IRAs increased
$14,875,602 from $70,059,066 at December 31, 2003 to $84,934,668 at March 31, 2004, primarily due to managements decision to gather deposits through rate or pricing tactics in order to fund loan demand. It is managements opinion that the
Bank maintains competitive deposit rates while exercising prudent strategies in competing with local financial institutions.



The Banks net loans to deposit ratio decreased from 91.6% at December 31, 2003 to 86.3% at March 31, 2004. Approximately 52.3% of the Banks
deposits were in the form of IRAs and certificates of deposit at March 31, 2004. At December 31, 2003, IRAs and certificates of deposit were 49.8% of total deposits.



Asset Quality



A major key to long-term earnings growth is the maintenance of a high-quality loan portfolio. The Banks directive in this regard is carried out
through its policies and procedures for extending credit to the Banks customers. The goal and result of these policies and procedures is to provide a sound basis for new credit extensions and an early recognition of problem assets to allow the
most flexibility in their timely disposition.



Additions to the
allowance for loan losses will be made periodically to maintain the allowance at an appropriate level based upon managements analysis of potential risk in the loan portfolio. The amount of the loan loss provision is determined by an evaluation
of the level of loans outstanding, the level of non-performing loans, historical loan loss experience, delinquency trends, the amount of actual losses charged to the allowance in a given period, lending staff experience and assessment of present and
anticipated economic conditions.



At December 31, 2003, the
allowance for loan losses amounted to $1,699,162. At March 31, 2004, the allowance was $1,787,612. The allowance for loan losses, as a percentage of total gross loans, decreased from 1.30% at December 31, 2003 to 1.26% of total gross loans at March
31, 2004. The Bank had no loans 90 or more days past due, no nonaccrual loans, and no other real estate owned at March 31, 2004. Management considers the allowance for loan losses to be adequate and sufficient to absorb possible future losses;
however, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional provisions will not be required.



Liquidity and Sources of Capital



Liquidity is the Banks ability to meet all deposit withdrawals immediately, while also providing for the credit needs of customers. The financial
statements as of March 31, 2004 evidence a satisfactory liquidity position as total cash and cash equivalents amounted to approximately $18.7 million, representing 10.4% of total assets. Investment securities amounted to $14.6 million, representing
8.1% of total assets as of March 31, 2004. Investment securities provide a secondary source of liquidity for the Bank since they can be converted into cash in a timely manner. The Banks ability to maintain and expand its deposit base and
borrowing capabilities is an additional source of liquidity. The Bank maintains federal funds lines totaling $8,600,000 with four regional banks to support short-term liquidity. The Bank is a member of the Federal Home Loan Bank and is eligible to
apply for term advances. Management closely monitors and maintains appropriate levels of interest-earning assets and interest-bearing liabilities so that maturities of assets are such that adequate funds are provided to meet customer withdrawals and
loan demands.



10



---

##### Table of Contents

Management is committed to maintaining capital at a level sufficient to protect depositors, provide for
reasonable growth, and fully comply with all regulatory requirements.



The table below illustrates the Banks and the Companys regulatory capital ratios at March 31, 2004:



|                               |  |               |   |  |                              |  
|------------------------------ |  | ------------- | - |  | ---------------------------- | -
|                               |  | March 31,2004 |   |  | Minimumregulatoryrequirement |  
|Consolidated                   |  |               |   |  |                              |  
|Tier 1 Capital                 |  | 7.38          | % |  | 4.0                          | %
|Tier 2 Capital                 |  | 1.15          | % |  |                             |  
|                               |  |               |   |  |                              |  
|Total risk-based capital ratio |  | 8.53          | % |  | 8.0                          | %
|                               |  |               |   |  |                              |  
|Leverage ratio                 |  | 7.05          | % |  | 4.0                          | %
|                               |  |               |   |  |                              |  
|Bank                           |  |               |   |  |                              |  
|Tier 1 Capital                 |  | 8.98          | % |  | 4.0                          | %
|Tier 2 Capital                 |  | 1.16          | % |  |                             |  
|                               |  |               |   |  |                              |  
|Total risk-based capital ratio |  | 10.14         | % |  | 8.0                          | %
|                               |  |               |   |  |                              |  
|Leverage ratio                 |  | 8.59          | % |  | 4.0                          | %
|                               |  |               |   |  |                              |  



The Company and the
Bank currently meet the regulatory criteria to be classified as well capitalized under applicable banking regulations.



Off-Balance Sheet Arrangements



In the ordinary course of business, the Bank may enter into off-balance sheet financial instruments which are not reflected in the financial statements.
These instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when funds are disbursed or the instruments become payable.



Following is an analysis of significant off-balance sheet financial
instruments at March 31, 2004 and December 31, 2003.



|                             |  |                   |            |                     |   |           
|---------------------------- |  | ----------------- | ---------- | ------------------- | - | ----------
|                             |  | At March 31, 2004 |            | At December 31,2003
|                             |  | (In thousands)   
|Commitments to extend credit |  | $                 | 27,295,000 |                     | $ | 31,125,000
|Standby letters of credit    |  |                   | 326,000    |                     |   | 350,000   
|                             |  |                   |            |                     |   |           
|                             |  | $                 | 27,621,000 |                     | $ | 31,475,000
|                             |  |                   |            |                     |   |           



Results Of Operations



Net earnings for the three-month period ended March 31,
2004 amounted to $451,553, or $.28 per diluted share, compared to $357,710, or $.23 per diluted share, for the three-month period ended March 31, 2003.



Net interest income represents the difference between interest earned on interest-bearing assets and interest paid on interest-bearing liabilities. Net
interest income increased by $261,770, or 20.1%, from $1,304,865 for the three months ended March 31, 2003 to $1,566,635 for the three months ended March 31, 2004. Net yield on interest-earning assets decreased to 4.12% for the first quarter of
2004, compared to 4.49% for the first quarter of 2003. Increased loan volume has offset a decline in the interest margin that has resulted from the declining general interest rate environment. The higher loan volume has been funded primarily through
an increase in all deposit categories.



Other income for the
three-month period ended March 31, 2004 amounted to $464,895, compared to $402,267 for the same period in 2003, a 15.6% increase. Of this increase, $27,800 related to an increase in mortgage origination fees, and $22,949 was associated with income
on deposit accounts.



Operating expenses for the three-month
period ended March 31, 2004 amounted to $1,229,452, compared to $1,051,112 for the same period in 2003, an increase of $178,340, or 17.0%. This increase resulted primarily from volume-related changes associated with the 8.7% increase in loans and
the 15.4% increase in deposits during the first quarter of 2004. Occupancy expense increased $30,586 due to the new Covington branch. Professional and outside services increased $42,523, or 27.4%, due primarily to a $21,258 increase in outsourced
data processing expense related to generally higher processing volumes.



The Company is not aware of any current recommendation by the regulatory authorities which, if they were to be implemented, would have a material effect on the Companys liquidity, capital resources, or results of operations. The most
current regulatory examination was as of February 2004.



Income
tax expense expressed as a percentage of earnings before taxes increased to 36% due primarily to a decrease in tax exempt income relative to earnings before income taxes.



11



---

##### Table of Contents

Forward-Looking Statements



This report may contain forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve
risks and uncertainties. Although the Company believes the assumptions underlying the forward-looking statements contained in the discussion are reasonable, any of the assumptions could be inaccurate, and therefore, no assurance can be made that any
of the forward-looking statements included in this discussion will be accurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: economic conditions (both
generally and in the markets where the Company operates); competition from other providers of financial services offered by the Company; government regulation and legislation; changes in interest rates; and material unforeseen changes in the
financial stability and liquidity of the Companys credit customers; all of which are difficult to predict and which may be beyond the control of the Company. The Company undertakes no obligation to revise forward-looking statements to reflect
events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.



Item 3. Controls and Procedures



Management has developed and implemented a policy and procedures for reviewing disclosure controls and procedures and internal controls over financial reporting on a quarterly basis. Management, including the principal executive and
financial officers, evaluated the effectiveness of the design and operation of disclosure controls and procedures as of March 31, 2004 and, based on their evaluation, the Companys principal executive and financial officers have concluded that
these controls and procedures are operating effectively. There were no significant changes in the Companys internal control over financial reporting during the Companys last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting. Management noted no significant deficiencies in the design or operation of the Companys internal control over financial reporting and the Companys
auditors were so advised.



Disclosure controls and procedures
are the Companys controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed
by Company in the reports that it files under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.



12



---

##### Table of Contents

Part II. Other Information



Item 1. Legal Proceedings



Not
applicable.



Item 2. Change in Securities and Repurchases of Equity Securities



Not applicable.



Item 3. Defaults Upon Senior Securities



Not applicable.



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



Not applicable.



Item 5. Other Information



Not
applicable.



Item 6. Exhibits and Reports on Form 8-K



| | a) | Exhibits. The following exhibits are filed with this report or incorporated herein by reference:
| | -- | ------------------------------------------------------------------------------------------------



|     |  |   |  |                                                                                                                                                                                            
|---- |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | - |  | Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of the Companys Registration Statement on Form SB-2 (File No. 333-24435)
(SB-2))
|     |  |  
|3.2  |  | - |  | Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the SB-2)                                                                                                               
|     |  |  
|31.1 |  | - |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                         
|     |  |  
|31.2 |  | - |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                         
|     |  |  
|32   |  | - |  | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                      



| | b) | Reports on Form 8-K. The Company furnished a Current Report on Form 8-K on January 23, 2004 relating to its issuance of a press release announcing its financial results for
the three months and year ended December 31, 2003.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



---

##### Table of Contents

LIBERTY NATIONAL BANCSHARES, INC.



SIGNATURES



In accordance with the requirements
of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.



|                   |  |                                   |  |                                             
|------------------ |  | --------------------------------- |  | --------------------------------------------
|                   |  | LIBERTY NATIONAL BANCSHARES, INC.
|                   |  |                                  
|Date: May 12, 2004 |  | By:                               |  | /s/ William L. Daniel                       
|                   |  |                                   |  | William L. Daniel, President                
|                   |  |                                   |  | (Principal Executive Officer)               
|                   |  |                                  
|Date: May 12, 2004 |  | By:                               |  | /s/ Jesse R. Cheatham                       
|                   |  |                                   |  | Jesse R. Cheatham, Chief Financial Officer  
|                   |  |                                   |  | (Principal Financial and Accounting Officer)



14