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Securities and Exchange Commission

Washington, D.C. 20549



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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
| | ---------------------------------------------



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



| | From the transition period from  to
| | -----------------------------------



COMMISSION FILE NUMBER: 333-109586



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FIRST NATIONAL BANC, INC.

(Name of Small Business Issuer in Its Charter)



|                         |  |                                     
|------------------------ |  | ------------------------------------
|Georgia                  |  | 58-2249282                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)



2509 Osborne Road

St. Marys, Georgia 31558

(Address of principal executive offices)



(912) 882-3400

(Issuers telephone number)



N/A

(Former name, former address and former fiscal year, if changed since last report)



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



Number of shares outstanding of the issuers sole class of common
equity, as of May 21, 2004: 1,017,143; no par value.



Transitional Small Business Disclosure Format  Yes ̈No  x



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PART I. FINANCIAL INFORMATION



|Item I. | Financial Statements
|------- | --------------------



FIRST NATIONAL BANC, INC. & SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                   |  |                |             |   |                   |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                   |  | March 31, 2004 |             |   | December 31, 2003 |  
|                                                                                                                                   |  | (Unaudited)    |             |   | (Audited)         |  
|ASSETS                                                                                                                             |  |                |             |   |                   |   |             |  
|Cash and due from banks                                                                                                            |  | $              | 11,888,469  |   |                   | $ | 4,797,226   |  
|Federal funds sold                                                                                                                 |  |                | 544,000     |   |                   |   | 4,823,000   |  
|                                                                                                                                   |  |                |             |   |                   |   |             |  
|Cash and cash equivalents                                                                                                          |  |                | 12,432,469  |   |                   |   | 9,620,226   |  
|Interest-bearing deposits in other banks                                                                                           |  |                | 709,833     |   |                   |   | 1,054,206   |  
|Securities available-for-sale                                                                                                      |  |                | 15,213,176  |   |                   |   | 9,045,775   |  
|Loans                                                                                                                              |  |                | 188,195,027 |   |                   |   | 116,879,504 |  
|Less allowance for loan losses                                                                                                     |  |                | (2,683,155  | ) |                   |   | (1,578,058  | )
|                                                                                                                                   |  |                |             |   |                   |   |             |  
|Loans, net                                                                                                                         |  |                | 185,511,872 |   |                   |   | 115,301,446 |  
|Premises and equipment, net                                                                                                        |  |                | 8,364,418   |   |                   |   | 2,889,272   |  
|Foreclosed real estate, net                                                                                                        |  |                | 1,734,079   |   |                   |   | 1,846,823   |  
|Other investments                                                                                                                  |  |                | 1,191,000   |   |                   |   | 776,000     |  
|Intangible assets                                                                                                                  |  |                | 2,591,053   |   |                   |   |             |  
|Other assets                                                                                                                       |  |                | 2,337,462   |   |                   |   | 1,663,840   |  
|                                                                                                                                   |  |                |             |   |                   |   |             |  
|Total assets                                                                                                                       |  | $              | 230,085,362 |   |                   | $ | 142,197,588 |  
|                                                                                                                                   |  |                |             |   |                   |   |             |  
|LIABILITIES                                                                                                                        |  |                |             |   |                   |   |             |  
|Deposits:                                                                                                                          |  |                |             |   |                   |   |             |  
|Noninterest-bearing                                                                                                                |  | $              | 26,433,918  |   |                   | $ | 10,507,006  |  
|Interest-bearing                                                                                                                   |  |                | 159,329,471 |   |                   |   | 102,287,651 |  
|                                                                                                                                   |  |                |             |   |                   |   |             |  
|Total deposits                                                                                                                     |  |                | 185,763,389 |   |                   |   | 112,794,657 |  
|Federal funds purchased                                                                                                            |  |                | 2,304,000   |   |                   |   |             |  
|Securities sold under agreements to repurchase                                                                                     |  |                | 4,488,000   |   |                   |   | 3,597,000   |  
|Federal Home Loan Bank advances                                                                                                    |  |                | 14,500,000  |   |                   |   | 13,000,000  |  
|Other liabilities                                                                                                                  |  |                | 1,684,236   |   |                   |   | 1,015,835   |  
|                                                                                                                                   |  |                |             |   |                   |   |             |  
|Total liabilities                                                                                                                  |  |                | 208,739,625 |   |                   |   | 130,407,492 |  
|                                                                                                                                   |  |                |             |   |                   |   |             |  
|SHAREHOLDERS EQUITY                                                                                                               |  |                |             |   |                   |   |             |  
|Common stock  par value $.001 per share; 9,000,000 shares authorized; 1,027,710 and 492,441 issued in 2004 and 2003,
respectively |  |                | 1,028       |   |                   |   | 492         |  
|Preferred stock  par value $.001 per share 1,000,000 shares authorized; none issued                                               |  |                |             |   |                   |   |             |  
|Additional paid-in capital                                                                                                         |  |                | 16,482,113  |   |                   |   | 7,113,867   |  
|Retained earnings                                                                                                                  |  |                | 5,323,314   |   |                   |   | 4,881,686   |  
|Accumulated other comprehensive income                                                                                             |  |                | 41,495      |   |                   |   | 11,161      |  
|                                                                                                                                   |  |                |             |   |                   |   |             |  
|                                                                                                                                   |  |                | 21,847,950  |   |                   |   | 12,007,206  |  
|Treasury stock, at cost  10,567 shares in 2004 and 4,913 shares in 2003                                                           |  |                | (502,213    | ) |                   |   | (217,110    | )
|                                                                                                                                   |  |                |             |   |                   |   |             |  
|Total shareholders equity                                                                                                         |  |                | 21,345,737  |   |                   |   | 11,790,096  |  
|                                                                                                                                   |  |                |             |   |                   |   |             |  
|Total liabilities and shareholders equity                                                                                         |  | $              | 230,085,362 |   |                   | $ | 142,197,588 |  
|                                                                                                                                   |  |                |             |   |                   |   |             |  



See notes to
consolidated financial statements



1



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FIRST NATIONAL BANC, INC. & SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME

Unaudited



|                                                    |  |                              |           |      |   |          
|--------------------------------------------------- |  | ---------------------------- | --------- | ---- | - | ---------
|                                                    |  | Three Months Ended March 31,
|                                                    |  | 2004                         |           | 2003
|INTEREST INCOME                                     |  |                              |           |      |   |          
|Loans, including fees                               |  | $                            | 2,427,094 |      | $ | 2,040,904
|Investment securities:                              |  |                              |           |      |   |          
|Taxable                                             |  |                              | 58,419    |      |   | 72,181   
|Tax-exempt                                          |  |                              | 7,319     |      |   | 20,275   
|Other interest                                      |  |                              | 8,307     |      |   | 34,197   
|                                                    |  |                              |           |      |   |          
|Total interest income                               |  |                              | 2,501,139 |      |   | 2,167,557
|                                                    |  |                              |           |      |   |          
|INTEREST EXPENSE                                    |  |                              |           |      |   |          
|Deposits                                            |  |                              | 574,604   |      |   | 615,111  
|Federal Home Loan Bank advances                     |  |                              | 155,991   |      |   | 171,987  
|Other borrowed funds                                |  |                              | 12,899    |      |   | 17,907   
|                                                    |  |                              |           |      |   |          
|Total interest expense                              |  |                              | 743,494   |      |   | 805,005  
|                                                    |  |                              |           |      |   |          
|NET INTEREST INCOME                                 |  |                              | 1,757,645 |      |   | 1,362,552
|PROVISION FOR LOAN LOSSES                           |  |                              | 125,000   |      |   | 130,000  
|                                                    |  |                              |           |      |   |          
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |                              | 1,632,645 |      |   | 1,232,552
|                                                    |  |                              |           |      |   |          
|NONINTEREST INCOME                                  |  |                              |           |      |   |          
|Service charges on deposit accounts                 |  |                              | 87,995    |      |   | 87,804   
|Mortgage origination fees                           |  |                              | 122,358   |      |   | 84,071   
|Other service charges and fees                      |  |                              | 94,419    |      |   | 64,223   
|Other income                                        |  |                              | 73,079    |      |   | 81,664   
|                                                    |  |                              |           |      |   |          
|Total noninterest income                            |  |                              | 377,851   |      |   | 317,762  
|                                                    |  |                              |           |      |   |          
|NONINTEREST EXPENSES                                |  |                              |           |      |   |          
|Salaries and employee benefits                      |  |                              | 637,802   |      |   | 561,497  
|Net occupancy expense                               |  |                              | 59,196    |      |   | 31,731   
|Other expenses                                      |  |                              | 597,389   |      |   | 490,736  
|                                                    |  |                              |           |      |   |          
|Total noninterest expense                           |  |                              | 1,294,387 |      |   | 1,083,964
|                                                    |  |                              |           |      |   |          
|INCOME BEFORE INCOME TAXES                          |  |                              | 716,109   |      |   | 466,350  
|PROVISION FOR INCOME TAXES                          |  |                              | 274,481   |      |   | 147,822  
|                                                    |  |                              |           |      |   |          
|NET INCOME                                          |  | $                            | 441,628   |      | $ | 318,528  
|                                                    |  |                              |           |      |   |          
|Earnings per share:                                 |  |                              |           |      |   |          
|Basic                                               |  | $                            | 0.62      |      | $ | 0.44     
|                                                    |  |                              |           |      |   |          
|Diluted                                             |  | $                            | 0.61      |      | $ | 0.44     
|                                                    |  |                              |           |      |   |          



See notes to
consolidated financial statements



2



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FIRST NATIONAL BANC, INC. & SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



Three Months Ended March 31, 2004 and 2003

unaudited



|                                                                                  |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|--------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | ----- |  | ---------------- | ---------- | ------------------------------------------ |  | - | ------------- |  | - | ------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                                                  |  | Common Stock |  | AdditionalPaid-InCapital |       |  | RetainedEarnings |            | AccumulatedOtherComprehensiveIncome (Loss) |  |   | TreasuryStock |  |   | Total   |  
|                                                                                  |  | Shares       |  | Amount                   |       |  |                  |            |                                           
|BALANCE  DECEMBER 31, 2002                                                       |  | 489,279      |  | $                        | 489   |  | $                | 7,071,713  |                                            |  | $ | 3,452,946     |  | $ | 87,131  |   |  | $ | (79,414  | ) |  | $ | 10,532,865 |  
|Comprehensive income:                                                             |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|Net income                                                                        |  |              |  |                          |       |  |                  |            |                                            |  |   | 318,531       |  |   |         |   |  |   |          |   |  |   | 318,531    |  
|Other comprehensive income:                                                       |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|Net change in unrealized (loss) on securities available-for-sale, net tax effects |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   | (21,758 | ) |  |   |          |   |  |   | (21,758    | )
|                                                                                  |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|Total comprehensive income                                                        |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   | 296,773    |  
|                                                                                  |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|Exercise of options                                                               |  | 2,663        |  |                          | 3     |  |                  | 69,997     |                                            |  |   |               |  |   |         |   |  |   | (40,000  | ) |  |   | 30,000     |  
|Reissuance treasury stock (225 shares)                                            |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   | 9,000    |   |  |   | 9,000      |  
|Purchase of treasury stock (3,188 shares)                                         |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   | (101,960 | ) |  |   | (101,960   | )
|                                                                                  |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|BALANCE  MARCH 31, 2003                                                          |  | 491,942      |  | $                        | 492   |  | $                | 7,141,710  |                                            |  | $ | 3,771,477     |  | $ | 65,373  |   |  | $ | (212,374 | ) |  | $ | 10,766,678 |  
|                                                                                  |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|                                                                                  |  |              |  |                          |       |  |                 
|BALANCE  DECEMBER 31, 2003                                                       |  | 492,441      |  | $                        | 492   |  | $                | 7,113,867  |                                            |  | $ | 4,881,686     |  | $ | 11,161  |   |  | $ | (217,110 | ) |  | $ | 11,790,096 |  
|Comprehensive income:                                                             |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|Net income                                                                        |  |              |  |                          |       |  |                  |            |                                            |  |   | 441,628       |  |   |         |   |  |   |          |   |  |   | 441,628    |  
|Other comprehensive income:                                                       |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|Net change in unrealized gain on securities available-for-sale, net tax effects   |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   | 30,334  |   |  |   |          |   |  |   | 30,334     |  
|                                                                                  |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|Total comprehensive income                                                        |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   | 471,962    |  
|                                                                                  |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|Exercise of options                                                               |  | 5,599        |  |                          | 6     |  |                  | 189,361    |                                            |  |   |               |  |   |         |   |  |   | (132,367 | ) |  |   | 57,000     |  
|Purchase of treasury stock (5,654 shares)                                         |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   | (152,736 | ) |  |   | (152,736   | )
|Stock issuance in merger                                                          |  | 204,000      |  |                          | 204   |  |                  | 9,179,211  |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   | 9,179,415  |  
|Stock dividend effected in form of a stock split                                  |  | 325,670      |  |                          | 326   |  |                  | (326       | )                                          |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|                                                                                  |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  
|BALANCE  MARCH 31, 2004                                                          |  | 1,027,710    |  | $                        | 1,028 |  | $                | 16,482,113 |                                            |  | $ | 5,323,314     |  | $ | 41,495  |   |  | $ | (502,213 | ) |  | $ | 21,345,737 |  
|                                                                                  |  |              |  |                          |       |  |                  |            |                                            |  |   |               |  |   |         |   |  |   |          |   |  |   |            |  



3



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FIRST NATIONAL BANC, INC. & SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited



|                                                                                  |  |           |            |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | --------- | ---------- | - | ---- | - | ---------- | -
|                                                                                  |  | March 31, |           
|                                                                                  |  | 2004      |            |   | 2003 |  
|OPERATING ACTIVITIES                                                              |  |           |            |   |      |   |            |  
|Net income                                                                        |  | $         | 441,628    |   |      | $ | 318,528    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |           |            |   |      |   |            |  
|Depreciation                                                                      |  |           | 51,040     |   |      |   | 44,885     |  
|Amortization and accretion, net                                                   |  |           | 14,634     |   |      |   | 24,273     |  
|Provision for loan losses                                                         |  |           | 125,000    |   |      |   | 130,000    |  
|Loss on foreclosed real estate                                                    |  |           | 13,162     |   |      |   | 1,297      |  
|Changes in other assets and other liabilities, net                                |  |           | (638,528   | ) |      |   | (111,086   | )
|                                                                                  |  |           |            |   |      |   |            |  
|                                                                                  |  |           | 6,936      |   |      |   | 407,897    |  
|                                                                                  |  |           |            |   |      |   |            |  
|INVESTING ACTIVITIES                                                              |  |           |            |   |      |   |            |  
|Net decrease in interest-bearing deposits in other banks                          |  |           | 349,516    |   |      |   | 248,975    |  
|Activity in securities available-for-sale:                                        |  |           |            |   |      |   |            |  
|Maturities, prepayments and calls                                                 |  |           | 848,418    |   |      |   | 1,996,306  |  
|Purchases                                                                         |  |           | (2,752,656 | ) |      |   | (4,522,793 | )
|Net increase in loans                                                             |  |           | (7,531,309 | ) |      |   | (7,121,059 | )
|Net cash received in bank acquisition                                             |  |           | 4,510,213  |   |      |   |            |  
|Proceeds from sale of foreclosed real estate                                      |  |           | 110,475    |   |      |   | 30,874     |  
|Purchase of Federal Home Loan Bank stock                                          |  |           | (75,000    | ) |      |   |            |  
|Additions to premises and equipment                                               |  |           | (93,965    | ) |      |   | (6,035     | )
|                                                                                  |  |           |            |   |      |   |            |  
|Net cash used for investing activities                                            |  |           | (4,634,308 | ) |      |   | (9,373,732 | )
|                                                                                  |  |           |            |   |      |   |            |  
|FINANCING ACTIVITIES                                                              |  |           |            |   |      |   |            |  
|Net increase in deposits                                                          |  |           | 4,385,351  |   |      |   | 10,247,285 |  
|Federal Home Loan Bank advances                                                   |  |           | 1,500,000  |   |      |   |            |  
|Net increase in federal funds purchased                                           |  |           | 2,304,000  |   |      |   | 2,153,000  |  
|Net increase (decrease) in securities sold under agreements to repurchase         |  |           | (597,000   | ) |      |   |            |  
|Reissuance of treasury stock                                                      |  |           |            |   |      |   | 9,000      |  
|Purchase of treasury stock                                                        |  |           | (152,736   | ) |      |   | (101,960   | )
|                                                                                  |  |           |            |   |      |   |            |  
|Net cash provided by financing activities                                         |  |           | 7,439,615  |   |      |   | 12,307,325 |  
|                                                                                  |  |           |            |   |      |   |            |  
|Increase (decrease) in cash and cash equivalents                                  |  |           | 2,812,243  |   |      |   | 3,341,490  |  
|Cash and cash equivalents  beginning                                             |  |           | 9,620,226  |   |      |   | 4,623,197  |  
|                                                                                  |  |           |            |   |      |   |            |  
|Cash and cash equivalents  ending                                                |  | $         | 12,432,469 |   |      | $ | 7,964,687  |  
|                                                                                  |  |           |            |   |      |   |            |  



See notes to
consolidated financial statements



4



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FIRST NATIONAL BANC, INC. & SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of presentation



The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with rules and regulations of the Securities and Exchange Commission. The statements do not include all
of the information and footnotes required by generally accepted accounting principles for complete financial statements. All adjustments have been made, which, in the opinion of management, are necessary for a fair presentation of the results for
the interim periods presented. Such adjustments are all of a normal and recurring nature. All significant inter-company accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended March 31,
2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The December 31, 2003 consolidated balance sheet has been derived from the Companys 2003 audited financial statements.



Estimates



The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the
date of the consolidated financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates.



Concentrations of credit risk



The Company makes loans to individuals and businesses in and around Camden County, Georgia and north Florida for various
personal and commercial purposes. The Company has a diversified loan portfolio and the borrowers ability to repay their loans is not dependent upon any specific economic sector.



Investment securities



The Company accounts for investment securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The statement requires investments in equity and debt securities to be classified into three categories:



1. Available for sale: These are securities which are not classified as either held to maturity or as trading securities. These securities are reported at
fair market value which is determined using quoted market prices. Unrealized gains and losses are reported, net of income taxes, as separate components of shareholders equity (accumulated other comprehensive income). Gains or losses on
dispositions of securities are based on the difference between the net proceeds and the adjusted carrying amounts of the securities sold using the specific identification method. Premiums and discounts are amortized into interest income by a method
that approximates a level yield.



5



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2. Held to maturity: These are investment securities which the Company has the ability and intent to hold
until maturity. These securities are stated at cost, adjusted for amortization of premiums and the accretion of discounts. Premiums and discounts are amortized into interest income by a method that approximates a level yield. The Company has no held
to maturity securities.



3. Trading: These are securities
which are bought and held principally for the purpose of selling in the near future. Trading securities are reported at fair market value, and related unrealized gains and losses are recognized in the income statement. The Company has no trading
securities.



Loans, interest and fee income on loans



Loans are stated at the principal balance outstanding.
Unearned discount, unamortized loan fees, and the allowance for possible loan losses are deducted from total loans in the consolidated balance sheet. Interest income is recognized on an accrual basis over the term of the loan based on the principal
amount outstanding.



Loans are generally placed on non-accrual
status when principal or interest becomes ninety days past due, or when payment in full is not anticipated. When a loan is placed on non-accrual status, interest accrued but not received is generally reversed against interest income. If
collectibility is in doubt, cash receipts on non-accrual loans are not recorded as interest income, but are used to reduce principal. Loans are not returned to accrual status until the borrower demonstrates the ability to pay principal and interest.
Loans on non-accrual status as well as real estate acquired through foreclosure or deed taken in lieu of foreclosure are included in non-performing assets.



Allowance for possible loan losses



The provision for possible loan losses charged to operating expenses reflects the amount deemed appropriate by management to establish an adequate reserve
to meet the present estimated loss characteristics of the current loan portfolio. Managements estimate is based on periodic and regular evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past
experience with losses, and prevailing and anticipated economic conditions. Loans which are determined to be uncollectible are charged against the allowance. Provision for possible loan losses and recoveries on loans previously charged off are added
to the allowance.



The Company accounts for impaired loans in
accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan. This standard requires that all lenders value loans at the loans fair value if it is probable that the lender will be unable to collect all amounts due
according to the terms of the loan agreement. Fair value may be determined based upon the present value of expected cash flows, market price of the loan, if available, or value of the underlying collateral. Expected cash flows are required to be
discounted at the loans effective interest rate.



Under
SFAS No. 114, as amended by SFAS No. 118, when the ultimate collectibility of an impaired loans principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the reported principal balance has been reduced to
zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off.



A loan is also considered impaired if its terms are modified in a troubled
debt restructuring. For these accruing impaired loans, cash receipts are typically applied to



6



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principal and interest receivable in accordance with the terms of the restructured loan agreement.
Interest income is recognized on these loans using the accrual method of accounting.



Property and equipment



Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Maintenance and repairs are charged to operations,
while major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in income from operations.



Assets acquired in settlement of loans



Assets acquired in settlement of loans include real estate acquired through
foreclosure or deed taken in lieu of foreclosure, and repossessed assets. These assets are recorded at the lower of the carrying value of the loans or the estimated fair value of the related asset, net of estimated selling costs. The excess carrying
value, if any, is charged to the allowance for possible loan losses upon transfers. If further reduction in value occurs, charges are included in income from operations.



Intangible Assets



Intangible assets include goodwill and core deposit premiums, resulting from the acquisition of First National Bank located in Orange Park, Florida. Core
deposit premiums are amortized over 10 to 15 years using the straight-line or the sum-of-the-years digits method based upon historical studies of core deposits. Goodwill is not amortized but tested annually for impairment or at any time an
event occurs or circumstances change that may trigger a decline in the value of the reporting unit. Examples of such events or circumstances include adverse changes in legal factors, business climate, unanticipated competition, change in regulatory
environment, or loss of key personnel.



The Company tests for
impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). Potential impairment of goodwill exists when the carrying amount of a reporting unit exceeds its implied fair value. The fair value
for each reporting unit is computed using one or a combination of the following three methods: income, market value, or cost method. The income method uses a discounted cash flow analysis to determine fair value by considering a reporting
units capital structure and applying a risk-adjusted discount rate to forecast earnings based on a capital asset pricing model. The market value method uses recent transaction analysis or publicly traded comparable analysis for similar assets
and liabilities to determine fair value. The cost method assumes the net assets of a recent business combination accounted for under the purchase method of accounting will be recorded at fair value if no event or circumstance has occurred triggering
a decline in the value. To the extent a reporting units carrying amount exceeds its fair value, an indication exists that the reporting units goodwill may be impaired, and a second step of impairment testing will be performed. In the
second step, the implied fair value of the reporting units goodwill is determined by allocating the reporting units fair value to all of its assets (recognized and unrecognized) and liabilities as if the reporting unit had been acquired
in a business combination at the date of the impairment test. If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written down to its implied fair value. The loss recognized is limited
to the carrying amount of goodwill.



7



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Once an impairment loss is recognized, future increases in fair value will not result in the reversal of
previously recognized losses.



As of March 31, 2004, the
Company had unamortized goodwill in the amount of $1,463,053 and unamortized identifiable core deposit intangible assets in the amount of $1,128,000.



Income taxes



The financial statements have been prepared on the accrual basis. When income and expenses are recognized in different periods for financial reporting
purposes versus for purposes of computing income taxes currently payable, deferred taxes are provided on such temporary differences. The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes.
Under SFAS No. 109, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax return. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.



Advertising and public relations expense



Advertising, promotional, and other business development costs are generally expensed as incurred. External costs incurred in producing media advertising
are expensed the first time the advertising takes place. External costs relating to direct mailings are expensed in the period in which the direct mailings are sent.



Net income per share



Net income per common share is computed on the basis of the weighted average number of common shares outstanding in accordance with SFAS No. 128
Earnings Per Share. The treasury stock method is used to compute the effect of stock options on the weighted average number of common shares outstanding for diluted earnings per share. On April 1, 2004, the Company issued a forty-six
percent stock dividend per share and share amounts have been retroactively restated to reflect the stock dividend declared.



Statement of cash flows



For purposes of reporting cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption Cash and cash
equivalents. Cash and cash equivalents have an original maturity of three months or less.



Risks and uncertainties



In the normal course of its business the Company encounters two significant types of risks: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different times, or on different bases, than its interest-earning
assets. Credit risk is the risk of default on the Companys loan and investment securities portfolios that results from a borrowers inability or unwillingness to make contractually required payments. Market risk reflects changes in the
value of collateral underlying loans receivable and the valuation of real estate held by the Company.



8



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The Company is subject to the regulations of various governmental agencies. These regulations can and do
change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating
restrictions from the regulators judgments based on information available to them at the time of their examination.



Reclassifications



Certain prior year amounts have been reclassified to conform with the current presentation. These reclassifications have no effect on previously reported
shareholders equity or net income.



Recently Issued
Accounting Standards



The following is a summary of recent
authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by the Company:



In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting
policies of the effects of an entitys accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS No. 148 does not amend SFAS No. 123
to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25. The provisions of SFAS No. 148 were effective for annual financial statements for fiscal years ending after December 15, 2002, and for
financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148 and continues to account for its stock-based compensation using the
intrinsic value method of APB Opinion No. 25.



In April 2003,
the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other
contracts and loan commitments that relate to the origination of mortgage loans held for sale, and for hedging activities under SFAS No. 133. SFAS No. 149 was generally effective for contracts entered into or modified after June 30, 2003. The
adoption of SFAS No. 149 did not have any impact on the financial condition or operating results of the Company.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS



9



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No. 150 was generally effective for financial instruments entered into or modified after May 31, 2003,
and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have any impact on the financial condition or operating results of the Company.



In November 2002, the FASB issued FASB Interpretation (FIN) No.
45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for
the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements related to guarantees and warranties. The initial recognition requirements of FIN No. 45 were effective for guarantees issued or modified
after December 31, 2002. The disclosure requirements were effective for financial statements for periods ending after December 15, 2002. The adoption of FIN No. 45 did not have any impact on the Companys financial position or results of
operations.



In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entitys activities
or entitled to receive a majority of the entitys residual returns, or both. FIN No. 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable
interest. FIN No. 46 provides guidance for determining whether an entity qualifies as a variable interest entity by considering, among other considerations, whether the entity lacks sufficient equity or its equity holders lack adequate
decision-making ability. The consolidation requirements of FIN No. 46 applied immediately to variable interest entities created after January 31, 2003. The consolidation requirements applied to existing entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure requirements applied to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN No. 46 did not have
any impact on the Companys financial position or results of operations.



In November 2003, the Emerging Issues Task Force (EITF) reached a consensus that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as
available-for-sale or held-to-maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. Accordingly the EITF issued EITF No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This issue addresses the meaning of other-than-temporary impairment and its application to investments classified as either available for sale or held to
maturity under SFAS No. 115 and provides guidance on quantitative and qualitative disclosures. EITF No. 03-1 was effective for fiscal years ending after December 15, 2003. Adopting the disclosure provisions of EITF No. 03-1 did not have any effect
on the Companys financial position or results of operations.



Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements
upon adoption.



10



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NOTE 2 EARNINGS PER SHARE



Basic and diluted earnings per share have been computed based upon net income presented in the accompanying consolidated
statements of income divided by the weighted average number of common shares outstanding or assumed outstanding after giving retroactive effect for a 46% stock dividend to shareholders of record on April 1, 2004 as summarized below. Diluted earnings
per share reflect the dilute effect of additional shares of common stock that could be issued upon the exercise of outstanding stock options.



|                                                                                                          |  |                              |  |        
|--------------------------------------------------------------------------------------------------------- |  | ---------------------------- |  | -------
|                                                                                                          |  | Three Months Ended March 31,
|                                                                                                          |  | 2004                         |  | 2003   
|Weighted average number of common shares used in basic earnings per share                                 |  | 716,951                      |  | 716,320
|Effect of dilutive securities:                                                                            |  |                              |  |        
|Stock options                                                                                             |  | 8,101                        |  | 10,464 
|                                                                                                          |  |                              |  |        
|Weighted average number of common and dilutive potential common shares used in diluted earnings per share |  | 725,052                      |  | 726,784
|                                                                                                          |  |                              |  |        



NOTE 3 MERGER



Effective March 31, 2004, the Company consummated its acquisition of First
National Bank located in Orange Park, Florida (First National Bank). Under the terms of the merger, the Company issued 204,000 shares of its common stock in exchange for 100% of the outstanding common stock of First National Bank. The exchange ratio
for the transaction was 0.68 shares of First National Bank common stock for each issued and outstanding share of the Companys common stock in the merger.



The acquisition was accounted for under the purchase method in accordance with SFAS 141, Business Combinations and was intended to qualify as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code. In accordance with SFAS 141, the purchase price has been allocated to the assets and liabilities assumed based on the estimated fair values at the date of acquisition. The
estimated fair values of the purchased assets and liabilities at the date of the transaction were determined from a study prepared by Kraft Bros, Esstman, Patton & Harrell, PLLC of Nashville, Tennessee and their affiliate Centennial Valuation
Group, LLC, also of Nashville, Tennessee. The excess of purchase price over the estimated fair values of net assets acquired has been recorded as goodwill. The allocation of the purchase price, including related acquisition costs, to the assets and
acquired and liabilities assumed is presented in note 4.



The
following pro forma consolidated results of operations have been prepared as if the acquisition of First National Bank had occurred at January 1, 2003. The pro forma information is not necessarily indicative of the results of operations that would
have been achieved had the merger been completed at the beginning of the applicable periods presented, nor is it intended to be a projection of future results.



11



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|                              |  |                              |           |      |   |          
|----------------------------- |  | ---------------------------- | --------- | ---- | - | ---------
|                              |  | Three Months Ended March 31,
|                              |  | 2004                         |           | 2003
|Net interest income           |  | $                            | 2,594,635 |      | $ | 1,982,938
|Net income                    |  |                              | 671,423   |      |   | 444,742  
|Net interest income per share |  |                              |           |      |   |          
|Basic                         |  | $                            | 2.55      |      | $ | 1.95     
|Diluted                       |  | $                            | 2.52      |      | $ | 1.93     
|Earnings per share:           |  |                              |           |      |   |          
|Basic                         |  | $                            | 0.66      |      | $ | 0.44     
|Diluted                       |  | $                            | 0.65      |      | $ | 0.43     



NOTE 1 SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION



Cash paid during
the period for:



|             |  |      |         |      |   |        
|------------ |  | ---- | ------- | ---- | - | -------
|             |  | 2004 |         | 2003
|Income taxes |  | $    | 180,000 |      | $ | 124,137
|Interest     |  |      | 807,202 |      |   | 883,837





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Supplemental schedule of noncash investing and financing activities:



Acquisition of First National Bank Orange Park Florida:



|                                                      |  |   |           
|----------------------------------------------------- |  | - | ----------
|Assets Acquired:                                      |  |   |           
|Cash                                                  |  | $ | 4,082,355 
|Federal funds sold                                    |  |   | 544,000   
|Investment securities                                 |  |   | 4,236,979 
|Loans, net                                            |  |   | 62,804,117
|Premises and equipment                                |  |   | 5,432,221 
|Other investments                                     |  |   | 340,000   
|Goodwill                                              |  |   | 1,463,053 
|Core deposit intangibles                              |  |   | 1,128,000 
|Other assets                                          |  |   | 653,452   
|                                                      |  |   |           
|Total Assets                                          |  |   | 80,684,177
|                                                      |  |   |           
|Liabilities Assumed:                                  |  |   |           
|Deposits                                              |  |   | 68,583,381
|Securities sold under agreement to repurchase         |  |   | 1,488,000 
|Other liabilities                                     |  |   | 1,317,239 
|                                                      |  |   |           
|Total Liabilities                                     |  |   | 71,388,620
|                                                      |  |   |           
|Issuance of stock in merger                           |  |   | 9,179,415 
|                                                      |  |   |           
|Direct out-of-pocket costs of acquisition             |  |   | 116,142   
|                                                      |  |   |           
|Net cash and cash equivalents received in acquisition |  | $ | 4,510,213 
|                                                      |  |   |           



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|Item  2. | Managements Discussion and Analysis of Financial Condition
|-------- | -----------------------------------------------------------



This discussion is intended to assist in understanding the consolidated financial condition and results of operations of First National Banc, Inc. (the
Company). The information should be reviewed in conjunction with the consolidated financial statements and the related notes contained elsewhere in this report and in the Companys 2003 Annual Report on Form 10-KSB.



Overview



The Company was formed in 1996 to act as a holding company for First National Bank, St. Marys, Georgia, a national banking association that
was organized in 1988, in order to broaden First National Bank of St. Marys ability to serve its customers needs for financial services. The holding company structure was adopted to enable First National Bank of St. Marys to expand its
business through the acquisition of other financial institutions and to respond to new or additional banking-related services opportunities to which a bank might not be permitted to respond.



First National Bank of St. Marys offers a full range of interest bearing and non-interest
bearing accounts, including commercial and retail checking accounts, money market accounts, individual retirement accounts, regular interest bearing statement savings accounts, certificates of deposit, commercial loans, real estate loans and
consumer/installment loans. The bank operates two branches in Kingsland, Georgia in addition to its main office in St. Marys, Georgia.



In June 1999, the Company formed First National Insurance Agency, Inc., a full service insurance agency offering personal and commercial insurance products through major
carriers. First National Insurance Agency operates out of First National Bank of St. Marys main office in St. Marys, Georgia.



On March 31, 2004, the Company acquired First National Bank located in Orange Park, Florida, which is now a subsidiary of the Company. First National Bank was originally
chartered in November 1999 and its market area consists of the communities in and surrounding Clay County, Florida. The Company expects the acquisition to create a banking organization with an increased regional scope while recognizing revenue
enhancements and cost synergies. For more information on the acquisition see Note 3 of the unaudited consolidated financial statements included in this report and the Companys Form S-4 Registration Statement filed on February 11, 2004.



Since the acquisition of First National Bank occurred on March 31, 2004, the
acquired banks net income is not reflected in the Companys net income through the first quarter of 2004. However, the acquired banks assets are presented in the Companys consolidated balance sheet at March 31, 2004.



Critical Accounting Policies



The Company has adopted various accounting policies, which govern the application of
accounting principles generally accepted in the United States of America in the preparation of the Companys financial statements. The significant accounting policies of the Company are described in Note 1 to the unaudited consolidated
financial statements included herein.



Certain accounting policies involve
significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting policies. The judgments and
assumptions used by management are based on historical experience and other factors which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ
from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.



14



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The Company believes the allowance for loan losses and valuation of intangible assets are critical accounting policies
that require the most significant judgments and estimates used in preparation of its consolidated financial statements. Refer to the sections Loan Portfolio and Asset Quality in this report and the section Intangible
Assets in Note 1 to the unaudited consolidated financial statements included herein for a detailed description of the Companys estimation process and methodology related to the allowance for loan losses and intangible assets.



Results Of Operations



Overview



The Companys net income was $441,628 for the first quarter of 2004, compared to $318,528 for the first quarter of 2003, an increase of
38.6%. Basic earnings per share was $0.62 for the first quarter of 2004 compared to $0.44 for the first quarter of 2003.



The Companys return on average assets was 0.95% (annualized) for the three months ended March 31, 2004, compared to 1.02% (annualized) for the three months ended
March 31, 2003. Excluding the assets resulting from the acquisition of First National Bank, the Companys annualized return on average assets was 1.21% for the three months ended March 31, 2004. The Companys return on average equity for
the three months ended March 31, 2004 was 10.66% (annualized) compared to 11.98% (annualized) for the three months ended March 31, 2003. Excluding the equity resulting from the acquisition of First National Bank, the Companys annualized return
on average equity was 15.06% for the three months ended March 31, 2004.



Net
Interest Income



Net interest income is the difference between the
interest and fees earned on loans, securities, and other interest-earning assets (interest income) and the interest paid on deposits and borrowed funds (interest expense).



Net interest income was $1,757,645 for the quarter ended March 31, 2004, an increase of $395,093 (29.0%) over net interest income of
$1,362,552 for the quarter ended March 31, 2003. This increase was primarily the result of additional interest income generated by the growth in the Companys loan portfolio. The Companys interest expense continued to decline due to the
prolonged period of low interest rates. Average interest-earning assets were $161,609,173 for the quarter ended March 31, 2004 compared to $122,382,792 at December 31, 2003 and $115,288,205 at March 31, 2003, an increase of $39,226,381 (32.1%) and
$46,320,968 (40.2%), respectively. Loans are the highest yielding component of interest-earning assets. The annualized yield on loans for the three months ended March 31, 2004 and 2003 was 6.19% and 7.52%, respectively. The decrease is due to the
fact that the interest income from the loans acquired as a result of acquisition of First National Bank located in Orange Park, Florida were not included in the calculation of the yield. Annualized interest margin for the three months ended March
31, 2004 and 2003 was 4.20% and 4.31%, respectively. The decrease in net interest margin was the result of the prolonged period of low interest rates. New loans added in this low interest rate environment have served to reduce the net interest
margin. Total loans, net of the allowance for loan losses, were $185,511,872 at March 31, 2004 compared to $115,301,446 at December 31, 2003 and $100,511,673 at March 31, 2003, an increase of $70,210,426 (60.9%) and $85,000,199 (84.6%),
respectively.



Loans held by the Company for investment are primarily funded
through deposits, Federal Home Loan Bank Advances, repurchase agreements, and federal funds agreements with correspondent financial institutions. At March 31, 2004, loans represented 91.3% of interest-earning assets compared to 88.0% at December 31,
2003, and 85.9% at March 31, 2003. Investments in securities available for sale at March 31, 2004



15



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were $15,213,176, an increase of $6,167,401 (68.2%) from $9,045,775 at December 31, 2003. Average interest-bearing
deposits for the three months ended March 31, 2004 were $149,753,061. The Companys annualized cost of funds for the three months ended March 31, 2004 and 2003 was 1.99% and 2.95%, respectively. The decrease is due to the fact that the interest
expense from the deposits acquired as a result of acquisition of First National Bank located in Orange Park, Florida were not included in the calculation of the cost of funds. The Companys Federal Home Loan Bank advances were $14,500,000 at
March 31, 2004, an increase of $1,500,000 (11.5%) from the December 31, 2003 balance of $13,000,000. The Companys repurchase agreements were $4,488,000 at March 31, 2004, an increase of $891,000 (24.8%) from the December 31, 2003 balance of
$3,597,000. The Companys balance of federal funds purchased was $2,304,000 at March 31, 2004, which represents an increase of $2,304,000 from the Companys December 31, 2003 balance of $0.



Interest Income



Interest income for the three months ended March 31, 2004 was $2,501,139, an increase of
$333,582 (15.4%) from $2,167,557 for the three months ended March 31, 2003. The increase in interest income primarily resulted from an increase in interest and fees on loans. The increase in interest and fees on loans resulted from the Banks
increased investment in the loan portfolio. Interest income and fees on loans was $2,427,094 for the three months ended March 31, 2004, an increase of $386,190 (18.9%) from $2,040,904 for the three months ended March 31, 2003. The Company has
maintained an increasing level of interest income and fees on loans for the three months ended March 31, 2004 compared to the three months ended March 31, 2003 in a declining rate environment primarily as a result of increasing the Banks
investment in loans. The Companys opportunity to increase the volume of loans is primarily attributable to the Companys growth in the Camden County, Georgia and north Florida market areas.



Interest Expense



Interest expense for the three months ended March 31, 2004 was $743,494, a decrease of
$61,511 (7.6%) from $805,005 for the three months ended March 31, 2003. While the Company has experienced a significant increase in interest-bearing deposits from March 31, 2003 to March 31, 2004, interest expense on these deposits has decreased due
to the lower rate environment in which these funds were obtained.



Noninterest Income



Noninterest income for the
three months ended March 31, 2004 was $377,851, an increase of $60,089 (18.9%) from $317,762 for the three months ended March 31, 2003. Mortgage origination fees were $122,358 for the three months ended March 31, 2004, an increase of $38,287 (45.5%)
from $84,071 for the three months ended March 31, 2003. The increase in mortgage origination fees is attributable to the continued favorable level of 15- and 30-year mortgage rates. The Company expects mortgage origination fees to continue with the
establishment of the mortgage origination office in Fort Lauderdale, Florida. Other service charges and fees were $94,419 for the three months ended March 31, 2004, an increase of $30,196 (47.0%) from $64,223 for the three months ended March 31,
2003. The increase is due primarily to a higher level of service charges assessed to a large commercial deposit relationship.



Noninterest Expense



Noninterest expense for the three months ended March 31, 2004 was $1,294,387, an increase of $210,423 (16.3%) from $1,083,964 for the three months ended March 31, 2003. Salary and employee benefit costs were $637,802
for the three months ended March 31, 2004, an increase of $76,305 (13.6%) from $561,497 for the three months ended March 31, 2003. Occupancy expenses were $59,196 for the three months ended March 31, 2004, an increase of $27,465 (86.6%) from $31,731
for the three months ended March 31, 2003. These increases are primarily the result of the Company hiring additional personnel and



16



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the costs associated with opening and operating a mortgage origination office in Fort Lauderdale, Florida. Other expenses
were $597,389 for the three months ended March 31, 2004, an increase of $106,653 (21.7%) from $490,736 for the three months ended March 31, 2003. The increases in other expenses were primarily the result of a loss on the sale of a foreclosed
property and other expenses related to the Companys other real estate owned. Increased employee training and development costs in order to support the growth in operations also contributed to the rise in other expenses.



Income Taxes



The Company recorded income tax expense of $274,481 for the three months ended March 31, 2004, resulting from the net income before taxes of
$716,109 for the quarter.



Review Of Financial Condition



Overview



Total consolidated assets at March 31, 2004 were $230,085,362, an increase of $87,887,774 (61.8%) from December 31, 2003 total consolidated
assets of $142,197,588, and an increase of $98,875,483 (75.4%) from March 31, 2003 total consolidated assets of $131,209,879. Interest-earning assets were $203,169,881 at March 31, 2004 compared to $131,000,427 at December 31, 2003 and $117,040,336
at March 31, 2003, an increase of $72,169,454 (55.1%) and $86,129,545 (73.6%), respectively. Total loans, net of the allowance for loan losses, were $185,511,872 at March 31, 2004 compared to $115,301,446 at December 31, 2003 and $100,511,673 at
March 31, 2003, an increase of $70,210,426 (60.9%) and $85,000,199 (84.6%), respectively.



The Companys growth in assets from March 31, 2003 and December 31, 2003 to March 31, 2004 is primarily the result of the acquisition of First National Bank located in Orange Park, Florida. The growth was also
the result of the Companys continued loan growth.



Management
continuously monitors the financial condition of the Company 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
is discussed in detail below.



Loan Portfolio



At March 31, 2004, the Companys loan portfolio was $188,195,027, an increase of
$71,315,523 compared to $116,879,504 at December 31, 2003. The increase was primarily the result of the acquisition of First National Bank located in Orange Park, Florida. The acquired banks loan portfolio was $63,719,744 at March 31, 2004.
The addition of the loans from the acquired bank did not significantly change the Companys overall combination of loans in each loan category. The following table presents various categories of loans contained in the Companys loan
portfolio at the dates indicated:



17



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|             |  |                   |  |                                                 |   |  |                      |  |                                                 |  
|------------ |  | ----------------- |  | ----------------------------------------------- | - |  | -------------------- |  | ----------------------------------------------- | -
|Type of Loan |  | At March 31, 2003 |  | Percent ofloans in each category to total loans |   |  | At December 31, 2003 |  | Percent ofloans in each category to total loans |  
|Real Estate  |  |                   |  |                                                 |   |  |                      |  |                                                 |  
|Construction |  | 38,968,507        |  | 20.7                                            | % |  | 23,999,305           |  | 20.5                                            | %
|Mortgage     |  | 119,180,011       |  | 63.3                                            | % |  | 71,962,843           |  | 61.6                                            | %
|             |  |                   |  |                                                 |   |  |                      |  |                                                 |  
|Total        |  | 158,148,518       |  | 84.0                                            | % |  | 95,962,148           |  | 82.1                                            | %
|Commercial   |  | 19,319,099        |  | 10.3                                            | % |  | 12,312,173           |  | 10.5                                            | %
|Consumer     |  | 10,727,410        |  | 5.7                                             | % |  | 8,401,947            |  | 7.2                                             | %
|Other        |  | 252,243           |  | 0.1                                             | % |  | 203,236              |  | 0.2                                             | %
|             |  |                   |  |                                                 |   |  |                      |  |                                                 |  
|Total        |  | 188,195,027       |  | 100.0                                           | % |  | 116,879,504          |  | 100.0                                           | %
|             |  |                   |  |                                                 |   |  |                      |  |                                                 |  



Deposits



At March 31, 2004, the Companys deposits were $185,763,389, an increase of $72,968,732
compared to $112,794,657 at December 31, 2003. The increase was primarily the result of the acquisition of First National Bank located in Orange Park, Florida. The acquired banks deposits were $68,583,382 at March 31, 2004. The Companys
combined money market accounts increased significantly by $20,486,247 to $22,895,954 at March 31, 2004 from $2,409,707 at December 31, 2003 primarily due to the addition of the acquired banks money market balances. The following table presents
the Companys various categories of deposits at the dates indicated:



|                                          |  |                   |  |                                                       |   |  |                      |  |                                                       |  
|----------------------------------------- |  | ----------------- |  | ----------------------------------------------------- | - |  | -------------------- |  | ----------------------------------------------------- | -
|Deposit Category                          |  | At March 31, 2003 |  | Percent ofdeposits in each category to total deposits |   |  | At December 31, 2003 |  | Percent ofdeposits in each category to total deposits |  
|Non-interest bearing demand deposits      |  | 26,433,918        |  | 14.2                                                  | % |  | 10,507,006           |  | 9.3                                                   | %
|NOW                                       |  | 24,537,329        |  | 13.2                                                  | % |  | 20,088,872           |  | 17.8                                                  | %
|Money market                              |  | 22,895,954        |  | 12.3                                                  | % |  | 2,409,707            |  | 2.1                                                   | %
|Savings                                   |  | 5,559,429         |  | 3.0                                                   | % |  | 4,169,538            |  | 3.7                                                   | %
|Certificates of deposit, $100,000 or more |  | 56,609,169        |  | 30.5                                                  | % |  | 35,764,807           |  | 31.7                                                  | %
|Other time deposits                       |  | 49,727,590        |  | 26.8                                                  | % |  | 39,854,727           |  | 35.3                                                  | %
|                                          |  |                   |  |                                                       |   |  |                      |  |                                                       |  
|Total                                     |  | 185,763,389       |  | 100.0                                                 | % |  | 112,794,657          |  | 100.0                                                 | %
|                                          |  |                   |  |                                                       |   |  |                      |  |                                                       |  



Other Borrowings



The Company has agreements for advances with the Federal Home Loan Bank. These advances are
secured by a blanket floating lien agreement, which provides a security interest in all unencumbered first mortgage residential loans, and by investments in Federal Home Loan Bank stock. At March 31, 2004, the Company had $14,500,000 in advances
from the Federal Home Loan Bank compared to $13,000,000 at December 31, 2003. The additional advance was used to partially fund growth in the loan portfolio. The weighted average interest rate on the Companys outstanding advances at March 31,
2004 was 3.53%.



The Company also utilizes securities sold under agreements to
repurchase, which are classified as secured borrowings which generally mature within 90 days from the transaction date. The Company may be required to provide additional collateral based on the fair value of the underlying securities. At March 31,
2004, the Company had an agreement to repurchase in the amount of $4,488,000 compared to $3,597,000



18



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at December 31, 2003. The agreements to repurchase are partially secured by mortgage-backed securities, and a portion of
the reduction reflects principal repayments received on the underlying securities. The interest rate on each banks agreement to repurchase was 1.24%.



Intangible Assets



At March 31, 2004, the Company had $2,591,053 in intangible assets resulting from the acquisition of First National Bank located in Orange Park, Florida. The Company did not have any intangible assets at December 31,
2003. Goodwill of $1,463,053 and a core deposit of $1,128,000 represented the balance of the intangible assets at March 31, 2004. For more information on the acquisition see Note 3 and Note 4 of the unaudited consolidated financial statements.



Asset Quality



A major key to long-term earnings growth is the maintenance of a high-quality loan
portfolio. The Company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.



Non-performing assets were $1,973,913 at March 31, 2004, compared to $2,043,269 at December 31, 2003 and $2,058,201 at March 31, 2003. The composition of non-performing
assets for each date is shown below.



|                                 |  |                |           |                   |   |          
|-------------------------------- |  | -------------- | --------- | ----------------- | - | ---------
|                                 |  | March 31, 2004 |           | December 31, 2003
|Non-accrual loans                |  | $              | 239,833   |                   | $ | 196,446  
|OREO, net of valuation allowance |  |                | 1,734,080 |                   |   | 1,846,823
|                                 |  |                |           |                   |   |          
|                                 |  | $              | 1,973,913 |                   | $ | 2,043,269
|                                 |  |                |           |                   |   |          



The ratio of non-performing assets to
net loans and other real estate was 1.05% at March 31, 2004 and 1.74% at December 31, 2003.



Reduction and disposition of non-performing assets is a management priority.



Allowance for Loan Losses



Additions to
the allowance for loan losses are 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 allowance and related provision is
determined by an evaluation of historical loan losses, loan concentrations, including geographic and industry concentrations, policy and staff considerations, collateral values, economic factors including current and anticipated conditions, volume
of the loan portfolio, delinquency trends and peer comparisons. The allowance provides for probable losses that have been identified with individual loan relationships and for probable losses that are believed to be inherent in the loan portfolio
that have yet not been identified. From the previously described analysis, management determined that the allowance for loan losses should be increased through a provision for loan losses of $125,000 during the quarter ended March 31, 2004. The
ratio of allowance for loan losses to total gross loans was 1.43% at March 31, 2004 and 1.35% at December 31, 2003. Management considers the current allowance for loan losses appropriate based upon its analysis of the potential risk in



19



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the portfolio; 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 Capital Resources



Liquidity is the ability of an organization to meet
its financial commitments and obligations on a timely basis. These commitments and obligations include credit needs of customers, withdrawals by depositors, and payment of operating expenses and dividends. The Company does not anticipate any events
which would require liquidity beyond that which is available through deposit growth, Federal Home Loan Bank advances, repurchase agreements, federal funds lines, or investment portfolio maturities. The Companys subsidiary banks actively manage
the levels, types and maturities of earning assets in relation to the sources available to fund current and future needs to ensure that adequate funding will be available at all times.



Management is committed to maintaining capital at a level sufficient to protect depositors, provide for reasonable growth, and fully comply
with all regulatory requirements. Managements strategy to achieve this goal is to retain sufficient earnings while providing a reasonable return on equity. Federal banking regulations establish certain capital adequacy standards required to be
maintained by banks. These regulations set minimum requirements for risk-based capital of 4% for core capital (Tier I), 8% for total risk-based capital and 4% for the leverage ratio. The Company and its subsidiary banks actual
capital amounts and ratios as of March 31, 2004 are presented in the following table:



|                                           |  |        |            |       |                               |   |        |                                                                 |            |  |      |        |  |       |            |  |       |  
|------------------------------------------ |  | ------ | ---------- | ----- | ----------------------------- | - | ------ | --------------------------------------------------------------- | ---------- |  | ---- | ------ |  | ----- | ---------- |  | ----- | -
|March 31, 2004                             |  | Actual |            |       | For Capital Adequacy Purposes |   |        | To Be Well Capitalized Under PromptCorrective Action Provisions |           
|                                           |  | Amount |            | Ratio |                               |   | Amount |                                                                 | Ratio      |  |      | Amount |  | Ratio |           
|Total Capital ( to Risk Weighted Assets )  |  |        |            |       |                               |   |        |                                                                 |            |  |      |        |  |       |            |  |       |  
|Consolidated                               |  | $      | 21,857,185 |       | 11.56                         | % |        | $                                                               | 15,126,261 |  | 8.00 | %      |  | $     | 18,907,826 |  | 10.00 | %
|First National Bank  St. Marys            |  | $      | 13,046,134 |       | 10.87                         | % |        | $                                                               | 9,586,621  |  | 8.00 | %      |  | $     | 11,983,276 |  | 10.00 | %
|First National Bank  Orange Park          |  | $      | 8,309,307  |       | 10.65                         | % |        | $                                                               | 5,514,750  |  | 8.00 | %      |  | $     | 6,893,438  |  | 10.00 | %
|Tier 1 Capital ( to Risk Weighted Assets ) |  |        |            |       |                               |   |        |                                                                 |            |  |      |        |  |       |            |  |       |  
|Consolidated                               |  | $      | 19,489,762 |       | 10.31                         | % |        | $                                                               | 7,563,130  |  | 4.00 | %      |  | $     | 11,344,695 |  | 6.00  | %
|First National Bank  St. Marys            |  | $      | 11,542,534 |       | 9.62                          | % |        | $                                                               | 4,793,310  |  | 4.00 | %      |  | $     | 7,189,966  |  | 6.00  | %
|First National Bank  Orange Park          |  | $      | 7,465,332  |       | 9.40                          | % |        | $                                                               | 2,757,375  |  | 4.00 | %      |  | $     | 4,136,063  |  | 6.00  | %
|Tier 1 Capital ( to Average Assets )       |  |        |            |       |                               |   |        |                                                                 |            |  |      |        |  |       |            |  |       |  
|Consolidated                               |  | $      | 19,489,762 |       | 10.47                         | % |        | $                                                               | 7,445,945  |  | 4.00 | %      |  | $     | 9,307,432  |  | 5.00  | %
|First National Bank  St. Marys            |  | $      | 11,542,534 |       | 8.34                          | % |        | $                                                               | 5,535,988  |  | 4.00 | %      |  | $     | 6,919,984  |  | 5.00  | %
|First National Bank  Orange Park          |  | $      | 7,465,332  |       | 9.86                          | % |        | $                                                               | 3,028,532  |  | 4.00 | %      |  | $     | 3,785,665  |  | 5.00  | %



Off-Balance Sheet Arrangements



In the ordinary course of business, the Company is a party to various
contractual commitments not reflected on its balance sheet. These instruments represent unfunded commitments, not outstanding balances. Therefore, the risk associated with these financial instruments is referred to as off-balance sheet
risk. Financial instruments with off-balance sheet risk include (i) commitments to extend credit, (ii) credit card commitments, and (iii) standby letters of credit. All of the commitments involve elements of credit and interest rate risk not
reflected on the balance sheet. The Companys subsidiary banks use the same credit and collateral policies in making these commitments as they do for on-balance sheet instruments.



20



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Commitments to extend credit are legally binding agreements to lend money to a customer as long as there is no violation
of any material condition established in the contract. All of the Companys commitments have predetermined variable or fixed interest rates and fixed expiration dates. At March 31, 2004, commitments to extend credit totaled $24,452,163 and
represented the unfunded portion of equity, working capital and general lines of credit. At March 31, 2004, the Company had $417,076 in credit card commitments and $1,478,137 in outstanding standby letters of credit.



Past experience indicates that many of these commitments to extend credit will expire unused.
However, as described in Liquidity and Capital Resources above, management believes that the Company has adequate sources of liquidity from deposit growth, Federal Home Loan Bank Advances, federal funds lines and investment maturities to
meet these obligations should the need arise. The Company is not involved in any other off-balance sheet contractual relationships or transactions which could result in liquidity needs or significantly impact earnings nor does the Company have
unconsolidated related entities.



Impact of Inflation



The assets and liabilities of financial institutions are primarily monetary in nature.
Therefore, interest rates have a more significant effect on the Companys performance than do the effects of changes in the general rate of inflation and changing prices. In addition, interest rates do not necessarily move in the same direction
or in the same magnitude as the prices of goods and services. The Company seeks to manage the relationships between interest-sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those which may
result from inflation.



Cautionary Note Regarding Forward-Looking Statements



The Company may, from time to time, make written or oral forward-looking
statements, including statements contained in the Companys filings with the Securities and Exchange Commission (the Commission) and its reports to stockholders. Such forward-looking statements are made based on managements
belief as well as assumptions made by, and information currently available to, management pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995.



The Companys actual results may differ materially from the results anticipated in these
forward-looking statements due to a variety of factors, including governmental, monetary and fiscal policies, deposit levels, loan demand, loan collateral values, securities portfolio values and interest rate risk management; the effects of
competition in the banking business from other commercial banks, savings and loan associations, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market mutual funds and other
financial institutions operating in the Companys market area and elsewhere, including institutions operating through the Internet; changes in government regulations relating to the banking industry, including regulations relating to branching
and acquisitions; failure of assumptions underlying the establishment of reserves for loan losses, including the value of collateral underlying delinquent loans, and other factors. The Company cautions that such factors are not exclusive. The
Company does not undertake to update any forward-looking statements that may be made from time to time by, or on behalf of, the Company.



|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



21



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principal executive and financial officers have concluded that these controls and procedures are operating effectively.
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.



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.



PART II. OTHER INFORMATION



|Item  6. | Exhibits and Reports on Form 8-K
|-------- | --------------------------------



| | (a) | Exhibits.
| | --- | ---------



|     |  |                                                                                                                                                                                                                                      
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|3.1  |  |   Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 of Amendment No. 1 to the     Companys Registration
Statement on Form S-4, Registration No. 333-109586, filed 12/23/03 (Form S-4/A)).
|     | 
|3.2  |  |   Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the S-4/A.                                                                                                                                              
|     | 
|31.1 |  |   Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.                                                                                                                                   
|     | 
|31.2 |  |   Certification of President and Chief Operating Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.                                                                                                                     
|     | 
|32.1 |  |   Certifications Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.                                                                                                                                                             



| | (b) | Reports on Form 8-K. None.
| | --- | --------------------------





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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.



|      |  |              |  |                           |  |     |  |                                                                                    
|----- |  | ------------ |  | ------------------------- |  | --- |  | -----------------------------------------------------------------------------------
|      |  |              |  | FIRST NATIONAL BANC, INC.
|      |  |              |  |                          
|Date: |  | May 24, 2004 |  |                           |  | By: |  | /s/    Roscoe H. Mullis                                                            
|      |  |              |  |                           |  |     |  |                                                                                    
|      |  |              |  |                           |  |     |  | Roscoe H. Mullis Chairman and Chief Executive Officer
(principal executive officer)



|      |  |              |  |  |  |     |  |                                                                                                   
|----- |  | ------------ |  |  |  | --- |  | --------------------------------------------------------------------------------------------------
|      |  |              |  | 
|      |  |              |  | 
|Date: |  | May 24, 2004 |  |  |  | By: |  | /s/    David G. Moffat                                                                            
|      |  |              |  |  |  |     |  |                                                                                                   
|      |  |              |  |  |  |     |  | David G. Moffat President and Chief Operating Officer
(principal financial and accounting officer)



23



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EXHIBIT INDEX



|             |  |                                                                                                              
|------------ |  | -------------------------------------------------------------------------------------------------------------
|Exhibit No.  |  | Description of Exhibit                                                                                       
|             | 
|Exhibit 31.1 |  | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.              
|             | 
|Exhibit 31.2 |  | Certification of President and Chief Operating Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
|             | 
|Exhibit 32.1 |  | Certifications Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.