##### Table of Contents

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Securities and Exchange Commission

Washington, D.C. 20549



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FORM 10-QSB



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



For the quarterly period ended June 30, 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)



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|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, $0.001 par value per share, as of August 14, 2004: 1,016,345.



Transitional Small Business Disclosure
Format    Yes ̈No  x



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##### Table of Contents

FIRST NATIONAL BANC, INC.



FORM 10-QSB



INDEX



|           |  |                                                            |  |     
|---------- |  | ---------------------------------------------------------- |  | ----
|           |  |                                                            |  | Page
|PART I     |  | FINANCIAL INFORMATION                                      |  |     
|           |  |                                                           
|Item 1.    |  | Financial Statements:                                      |  |     
|           |  |                                                           
|           |  | Consolidated Balance Sheets                                |  | 1   
|           |  | Consolidated Statements of Income                          |  | 2   
|           |  | Consolidated Statements of Changes in Shareholders Equity |  | 3   
|           |  | Consolidated Statements of Cash Flows                      |  | 4   
|           |  | Notes to Unaudited Consolidated Financial Statements       |  | 5-8 
|           |  |                                                           
|Item 2.    |  | Managements Discussion and Analysis                       |  | 9-17
|Item 3.    |  | Controls and Procedures                                    |  | 17  
|           |  |                                                           
|PART II    |  | OTHER INFORMATION                                          |  |     
|           |  |                                                           
|Item 6.    |  | Exhibits and Reports on Form 8-K                           |  | 18  
|           |  |                                                           
|SIGNATURES |  |                                                            |  | 19  



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements



FIRST NATIONAL BANC, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                   |  |                           |             |   |                            |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | -------------------------- | - | ----------- | -
|                                                                                                                                   |  | June 30, 2004 (Unaudited) |             |   | December 31,2003 (Audited) |  
|                                                                                                                                   | 
|ASSETS                                                                                                                             |  |                           |             |   |                            |   |             |  
|Cash and due from banks                                                                                                            |  | $                         | 5,665,362   |   |                            | $ | 4,797,226   |  
|Federal funds sold                                                                                                                 |  |                           | 700,000     |   |                            |   | 4,823,000   |  
|                                                                                                                                   |  |                           |             |   |                            |   |             |  
|Cash and cash equivalents                                                                                                          |  |                           | 6,365,362   |   |                            |   | 9,620,226   |  
|Interest-bearing deposits in other banks                                                                                           |  |                           | 715,027     |   |                            |   | 1,054,206   |  
|Securities available-for-sale                                                                                                      |  |                           | 15,834,082  |   |                            |   | 9,045,775   |  
|                                                                                                                                   |  |                          
|Loans                                                                                                                              |  |                           | 197,295,811 |   |                            |   | 116,879,504 |  
|Less allowance for loan losses                                                                                                     |  |                           | (2,733,551  | ) |                            |   | (1,578,058  | )
|                                                                                                                                   |  |                           |             |   |                            |   |             |  
|Loans, net                                                                                                                         |  |                           | 194,562,260 |   |                            |   | 115,301,446 |  
|Premises and equipment, net                                                                                                        |  |                           | 8,372,764   |   |                            |   | 2,889,272   |  
|Foreclosed real estate, net                                                                                                        |  |                           | 1,734,079   |   |                            |   | 1,846,823   |  
|Other investments                                                                                                                  |  |                           | 1,207,000   |   |                            |   | 776,000     |  
|Intangible assets                                                                                                                  |  |                           | 2,575,283   |   |                            |   |            |  
|Other assets                                                                                                                       |  |                           | 2,177,172   |   |                            |   | 1,663,840   |  
|                                                                                                                                   |  |                           |             |   |                            |   |             |  
|Total assets                                                                                                                       |  | $                         | 233,543,029 |   |                            | $ | 142,197,588 |  
|                                                                                                                                   |  |                           |             |   |                            |   |             |  
|LIABILITIES                                                                                                                        |  |                           |             |   |                            |   |             |  
|Deposits:                                                                                                                          |  |                           |             |   |                            |   |             |  
|Noninterest-bearing                                                                                                                |  | $                         | 24,352,060  |   |                            | $ | 10,507,006  |  
|Interest-bearing                                                                                                                   |  |                           | 161,967,376 |   |                            |   | 102,287,651 |  
|                                                                                                                                   |  |                           |             |   |                            |   |             |  
|Total deposits                                                                                                                     |  |                           | 186,319,436 |   |                            |   | 112,794,657 |  
|                                                                                                                                   |  |                          
|Federal funds purchased                                                                                                            |  |                           | 3,025,000   |   |                            |   |            |  
|Securities sold under agreements to repurchase                                                                                     |  |                           | 2,837,000   |   |                            |   | 3,597,000   |  
|Federal Home Loan Bank advances                                                                                                    |  |                           | 12,500,000  |   |                            |   | 13,000,000  |  
|Subordinated debentures                                                                                                            |  |                           | 5,155,000   |   |                            |   |            |  
|Other liabilities                                                                                                                  |  |                           | 2,054,150   |   |                            |   | 1,015,835   |  
|                                                                                                                                   |  |                           |             |   |                            |   |             |  
|Total liabilities                                                                                                                  |  |                           | 211,890,586 |   |                            |   | 130,407,492 |  
|                                                                                                                                   |  |                           |             |   |                            |   |             |  
|SHAREHOLDERS EQUITY                                                                                                               |  |                           |             |   |                            |   |             |  
|Common stock - par value $.001 per share; 9,000,000 shares authorized; 1,032,590 and 492,441 issued in 2004 and 2003,
respectively |  |                           | 1,032       |   |                            |   | 492         |  
|Preferred stock - par value $.001 per share 1,000,000 shares authorized; none issued                                               |  |                           |            |   |                            |   |            |  
|Additional paid-in capital                                                                                                         |  |                           | 16,646,097  |   |                            |   | 7,113,867   |  
|Retained earnings                                                                                                                  |  |                           | 5,893,567   |   |                            |   | 4,881,686   |  
|Accumulated other comprehensive income                                                                                             |  |                           | (111,027    | ) |                            |   | 11,161      |  
|                                                                                                                                   |  |                           |             |   |                            |   |             |  
|                                                                                                                                   |  |                           | 22,429,669  |   |                            |   | 12,007,206  |  
|Treasury stock, at cost - 16,245 shares in 2004 and 4,913 shares in 2003                                                           |  |                           | (777,226    | ) |                            |   | (217,110    | )
|                                                                                                                                   |  |                           |             |   |                            |   |             |  
|Total shareholders equity                                                                                                         |  |                           | 21,652,443  |   |                            |   | 11,790,096  |  
|                                                                                                                                   |  |                           |             |   |                            |   |             |  
|Total liabilities and shareholders equity                                                                                         |  | $                         | 233,543,029 |   |                            | $ | 142,197,588 |  
|                                                                                                                                   |  |                           |             |   |                            |   |             |  



See notes to consolidated financial
statements



1



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##### Table of Contents

FIRST NATIONAL BANC, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Unaudited



|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|--------------------------------------------------- |  | --------------------------- | --------- | ------------------------- | ---- | - | --------- |  | - | --------- | - |  | - | ---------
|                                                    |  | Three Months Ended June 30, |           | Six Months Ended June 30,
|                                                    |  | 2004                        |           |                           | 2003 |   | 2004      |  |   | 2003     
|INTEREST INCOME                                     |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Loans, including fees                               |  | $                           | 3,703,907 |                           |      | $ | 2,043,870 |  | $ | 6,131,001 |   |  | $ | 4,084,774
|Investment securities:                              |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Taxable                                             |  |                             | 80,069    |                           |      |   | 41,326    |  |   | 138,488   |   |  |   | 113,507  
|Tax-exempt                                          |  |                             | 13,681    |                           |      |   | 30,411    |  |   | 21,000    |   |  |   | 50,686   
|Other interest                                      |  |                             | 13,828    |                           |      |   | 82,611    |  |   | 22,135    |   |  |   | 116,808  
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Total interest income                               |  |                             | 3,811,485 |                           |      |   | 2,198,218 |  |   | 6,312,624 |   |  |   | 4,365,775
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|INTEREST EXPENSE                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Deposits                                            |  |                             | 835,523   |                           |      |   | 611,705   |  |   | 1,410,127 |   |  |   | 1,226,816
|Federal Home Loan Bank advances                     |  |                             | 122,147   |                           |      |   | 173,900   |  |   | 278,138   |   |  |   | 345,887  
|Other borrowed funds                                |  |                             | 55,842    |                           |      |   | 17,043    |  |   | 68,741    |   |  |   | 34,950   
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Total interest expense                              |  |                             | 1,013,512 |                           |      |   | 802,648   |  |   | 1,757,006 |   |  |   | 1,607,653
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|NET INTEREST INCOME                                 |  |                             | 2,797,973 |                           |      |   | 1,395,570 |  |   | 4,555,618 |   |  |   | 2,758,122
|                                                    |  |                             |           |                          
|PROVISION FOR LOAN LOSSES                           |  |                             | 140,658   |                           |      |   | 39,916    |  |   | 265,658   |   |  |   | 169,916  
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |  |                             | 2,657,315 |                           |      |   | 1,355,654 |  |   | 4,289,960 |   |  |   | 2,588,206
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|NONINTEREST INCOME                                  |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Service charges on deposit accounts                 |  |                             | 124,038   |                           |      |   | 81,574    |  |   | 212,033   |   |  |   | 169,378  
|Mortgage origination fees                           |  |                             | 123,033   |                           |      |   | 109,243   |  |   | 245,391   |   |  |   | 193,314  
|Other service charges and fees                      |  |                             | 265,188   |                           |      |   | 126,616   |  |   | 359,607   |   |  |   | 190,839  
|Other income                                        |  |                             | 75,523    |                           |      |   | 76,772    |  |   | 147,177   |   |  |   | 158,436  
|Loss on sale of securities                          |  |                             | (26,075   | )                         |      |   |          |  |   | (26,075   | ) |  |   |         
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Total noninterest income                            |  |                             | 561,707   |                           |      |   | 394,205   |  |   | 938,133   |   |  |   | 711,967  
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|NONINTEREST EXPENSES                                |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Salaries and employee benefits                      |  |                             | 962,039   |                           |      |   | 575,005   |  |   | 1,599,841 |   |  |   | 1,136,502
|Net occupancy expense                               |  |                             | 148,090   |                           |      |   | 57,960    |  |   | 205,861   |   |  |   | 89,691   
|Other expenses                                      |  |                             | 963,668   |                           |      |   | 486,899   |  |   | 1,561,057 |   |  |   | 977,635  
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Total noninterest expense                           |  |                             | 2,073,797 |                           |      |   | 1,119,864 |  |   | 3,366,759 |   |  |   | 2,203,828
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|INCOME BEFORE INCOME TAXES                          |  |                             | 1,145,225 |                           |      |   | 629,995   |  |   | 1,861,334 |   |  |   | 1,096,345
|PROVISION FOR INCOME TAXES                          |  |                             | 455,756   |                           |      |   | 272,339   |  |   | 730,237   |   |  |   | 420,161  
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|NET INCOME                                          |  | $                           | 689,469   |                           |      | $ | 357,656   |  | $ | 1,131,097 |   |  | $ | 676,184  
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Earnings per share:                                 |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Basic                                               |  | $                           | 0.68      |                           |      | $ | 0.50      |  | $ | 1.30      |   |  | $ | 0.94     
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          
|Diluted                                             |  | $                           | 0.67      |                           |      | $ | 0.49      |  | $ | 1.29      |   |  | $ | 0.92     
|                                                    |  |                             |           |                           |      |   |           |  |   |           |   |  |   |          



See notes to consolidated financial
statements



2



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##### Table of Contents

FIRST NATIONAL BANC, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

Six Months Ended June 30, 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                                                                        |  |              |  |                          |       |  |                  |            |   |                                            |   | 676,184   |               |  |   |          |   |  |   |          |   |  |   | 676,184    |  
|Other comprehensive income:                                                       |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   |            |  
|Net change in unrealized (loss) on securities available-for-sale, net tax effects |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   | (8,818   | ) |  |   |          |   |  |   | (8,818     | )
|                                                                                  |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   |            |  
|Total comprehensive income                                                        |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   | 667,366    |  
|                                                                                  |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   |            |  
|Exercise of options                                                               |  | 3,162        |  |                          | 3     |  |                  | 87,799     |   |                                            |   |           |               |  |   |          |   |  |   | (52,802  | ) |  |   | 35,000     |  
|Reissuance treasury stock (300 shares)                                            |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   | 12,375   |   |  |   | 12,375     |  
|Purchase of treasury stock (4,488 shares)                                         |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   | (148,929 | ) |  |   | (148,929   | )
|                                                                                  |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   |            |  
|BALANCE - JUNE 30, 2003                                                           |  | 492,441      |  | $                        | 492   |  | $                | 7,159,512  |   |                                            | $ | 4,129,130 |               |  | $ | 78,313   |   |  | $ | (268,770 | ) |  | $ | 11,098,677 |  
|                                                                                  |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   |            |  
|BALANCE - DECEMBER 31, 2003                                                       |  | 492,441      |  | $                        | 492   |  | $                | 7,113,867  |   |                                            | $ | 4,881,686 |               |  | $ | 11,161   |   |  | $ | (217,110 | ) |  | $ | 11,790,096 |  
|Comprehensive income:                                                             |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   |            |  
|Net income                                                                        |  |              |  |                          |       |  |                  |            |   |                                            |   | 1,131,097 |               |  |   |          |   |  |   |          |   |  |   | 1,131,097  |  
|Other comprehensive income:                                                       |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   |            |  
|Net change in unrealized gain on securities available-for-sale, net tax effects   |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   | (122,188 | ) |  |   |          |   |  |   | (122,188   | )
|                                                                                  |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   |            |  
|Total comprehensive income                                                        |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   | 1,008,909  |  
|                                                                                  |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   |            |  
|Exercise of options                                                               |  | 10,775       |  |                          | 11    |  |                  | 353,344    |   |                                            |   |           |               |  |   |          |   |  |   | (132,367 | ) |  |   | 220,988    |  
|Cash dividends                                                                    |  |              |  |                          |       |  |                  |            |   |                                            |   | (119,216  | )             |  |   |          |   |  |   |          |   |  |   | (119,216   | )
|Purchase of treasury stock (11,332 shares)                                        |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   | (427,749 | ) |  |   | (427,749   | )
|Stock issuance in merger                                                          |  | 204,000      |  |                          | 204   |  |                  | 9,179,211  |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   | 9,179,415  |  
|Stock dividend effected in form of a stock split                                  |  | 325,374      |  |                          | 325   |  |                  | (325       | ) |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   |            |  
|                                                                                  |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   |            |  
|BALANCE - JUNE 30, 2004                                                           |  | 1,032,590    |  | $                        | 1,032 |  | $                | 16,646,097 |   |                                            | $ | 5,893,567 |               |  | $ | (111,027 | ) |  | $ | (777,226 | ) |  | $ | 21,652,443 |  
|                                                                                  |  |              |  |                          |       |  |                  |            |   |                                            |   |           |               |  |   |          |   |  |   |          |   |  |   |            |  



See notes to consolidated financial
statements



3



---

##### Table of Contents

FIRST NATIONAL BANC, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited



|                                                                                  |  |                           |             |   |      |   |             |  
|--------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                  |  | Six Months Ended June 30, |            
|                                                                                  |  | 2004                      |             |   | 2003 |  
|OPERATING ACTIVITIES                                                              |  |                           |             |   |      |   |             |  
|Net income                                                                        |  | $                         | 1,131,097   |   |      | $ | 676,184     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |             |   |      |   |             |  
|Depreciation                                                                      |  |                           | 164,459     |   |      |   | 89,471      |  
|Amortization and accretion, net                                                   |  |                           | 90,591      |   |      |   | 64,193      |  
|Loss on sale of securities                                                        |  |                           | 26,075      |   |      |   |            |  
|Provision for loan losses                                                         |  |                           | 265,658     |   |      |   | 169,916     |  
|Loss on foreclosed real estate                                                    |  |                           | 13,162      |   |      |   | 10,722      |  
|Changes in other assets and other liabilities, net                                |  |                           | 27,041      |   |      |   | 38,718      |  
|                                                                                  |  |                           |             |   |      |   |             |  
|Net cash provided by operating activities                                         |  |                           | 1,718,083   |   |      |   | 1,049,204   |  
|                                                                                  |  |                           |             |   |      |   |             |  
|INVESTING ACTIVITIES                                                              |  |                           |             |   |      |   |             |  
|Net decrease in interest-bearing deposits in other banks                          |  |                           | 349,516     |   |      |   | 242,875     |  
|Activity in securities available-for-sale:                                        |  |                           |             |   |      |   |             |  
|Maturities, prepayments and calls                                                 |  |                           | 2,193,295   |   |      |   | 6,599,742   |  
|Sales                                                                             |  |                           | 2,063,438   |   |      |   |            |  
|Purchases                                                                         |  |                           | (7,074,719  | ) |      |   | (6,729,050  | )
|Net increase in loans                                                             |  |                           | (16,722,355 | ) |      |   | (11,196,646 | )
|Net cash received in bank acquisition                                             |  |                           | 4,475,712   |   |      |   |            |  
|Proceeds from sale of foreclosed real estate                                      |  |                           | 110,475     |   |      |   | 49,440      |  
|Purchase of Federal Home Loan Bank stock                                          |  |                           | (195,000    | ) |      |   | (38,436     | )
|Proceeds from sale of Federal Home Loan Bank stock                                |  |                           | 259,000     |   |      |   |            |  
|Purchase of trust preferred securities                                            |  |                           | (155,000    | ) |      |   |            |  
|Additions to premises and equipment                                               |  |                           | (215,730    | ) |      |   | (18,644     | )
|                                                                                  |  |                           |             |   |      |   |             |  
|Net cash used for investing activities                                            |  |                           | (14,911,368 | ) |      |   | (11,090,719 | )
|                                                                                  |  |                           |             |   |      |   |             |  
|FINANCING ACTIVITIES                                                              |  |                           |             |   |      |   |             |  
|Net increase in deposits                                                          |  |                           | 4,941,398   |   |      |   | 12,077,471  |  
|Net decrease in Federal Home Loan Bank advances                                   |  |                           | (500,000    | ) |      |   |            |  
|Net increase in federal funds purchased                                           |  |                           | 3,025,000   |   |      |   | 333,000     |  
|Net decrease in securities sold under agreements to repurchase                    |  |                           | (2,248,000  | ) |      |   | (487,000    | )
|Proceeds from issuance of subordinated debentures                                 |  |                           | 5,155,000   |   |      |   |            |  
|Cash dividends paid                                                               |  |                           | (119,216    | ) |      |   |            |  
|Exercise of stock options                                                         |  |                           | 111,988     |   |      |   |            |  
|Reissuance of treasury stock                                                      |  |                           |            |   |      |   | 12,375      |  
|Purchase of treasury stock                                                        |  |                           | (427,749    | ) |      |   | (148,929    | )
|                                                                                  |  |                           |             |   |      |   |             |  
|Net cash provided by financing activities                                         |  |                           | 9,938,421   |   |      |   | 11,786,917  |  
|                                                                                  |  |                           |             |   |      |   |             |  
|Increase (decrease) in cash and cash equivalents                                  |  |                           | (3,254,864  | ) |      |   | 1,745,402   |  
|                                                                                  |  |                          
|Cash and cash equivalents - beginning                                             |  |                           | 9,620,226   |   |      |   | 4,623,197   |  
|                                                                                  |  |                           |             |   |      |   |             |  
|Cash and cash equivalents - ending                                                |  | $                         | 6,365,362   |   |      | $ | 6,368,599   |  
|                                                                                  |  |                           |             |   |      |   |             |  



See notes to consolidated financial
statements



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##### Table of Contents

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 and six months ended June 30, 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.



Critical accounting
policies



A summary of significant accounting policies is included in the
Companys Form 10-QSB for the quarterly period ended March 31, 2004 filed with the Securities and Exchange Commission.



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.



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



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##### Table of Contents

As of June 30, 2004, the Company had unamortized goodwill in the amount of $1,497,554 and unamortized identifiable core
deposit intangible assets in the amount of $1,077,729.



Recently Issued
Accounting Standards



Accounting standards which have been issued or
proposed by the Financial Accounting Standards Board that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.



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 dilutive effect of additional shares of common stock that could be issued upon the exercise of outstanding stock options.





|                                                                                                          |  |                            |  |                          |  |         |  |        
|--------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | ------------------------ |  | ------- |  | -------
|                                                                                                          |  | Three Months EndedJune 30, |  | Six Months EndedJune 30,
|                                                                                                          |  | 2004                       |  | 2003                     |  | 2004    |  | 2003   
|Weighted average number of common shares used in basic earnings per share                                 |  | 1,016,656                  |  | 715,796                  |  | 866,803 |  | 715,988
|                                                                                                          |  |                            |  |                         
|Effect of dilutive securities:                                                                            |  |                            |  |                          |  |         |  |        
|                                                                                                          |  |                            |  |                         
|Stock options                                                                                             |  | 10,698                     |  | 15,819                   |  | 10,698  |  | 15,819 
|                                                                                                          |  |                            |  |                          |  |         |  |        
|Weighted average number of common and dilutive potential common shares used in diluted earnings per share |  | 1,027,354                  |  | 731,615                  |  | 877,501 |  | 731,807
|                                                                                                          |  |                            |  |                          |  |         |  |        



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. Each issued and outstanding
share of common stock of First National Bank was converted into 0.68 shares of common stock of the Company at the effective time of 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.



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##### Table of Contents



|                               |  |                             |           |                           |   |           |  |      |           |  |   |          
|------------------------------ |  | --------------------------- | --------- | ------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                               |  | Three Months Ended June 30, |           | Six Months Ended June 30,
|                               |  | 2004                        |           | 2003                      |   | 2004      |  | 2003
|Net interest income            |  | $                           | 2,797,973 |                           | $ | 2,058,993 |  | $    | 5,392,608 |  | $ | 4,041,931
|Net income                     |  |                             | 689,469   |                           |   | 516,075   |  |      | 1,345,436 |  |   | 1,014,551
|Net interest income per share: |  |                             |           |                           |   |           |  |      |           |  |   |          
|Basic                          |  | $                           | 2.75      |                           | $ | 2.03      |  | $    | 6.15      |  | $ | 3.98     
|Diluted                        |  |                             | 2.72      |                           |   | 1.99      |  |      | 6.07      |  |   | 3.91     
|Earnings per share:            |  |                             |           |                           |   |           |  |      |           |  |   |          
|Basic                          |  | $                           | 0.68      |                           | $ | 0.51      |  | $    | 1.53      |  | $ | 1.00     
|Diluted                        |  |                             | 0.67      |                           |   | 0.50      |  |      | 1.51      |  |   | 0.98     



NOTE 4. SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION



Cash paid during the period for:



|             |  |                           |           |      |   |          
|------------ |  | ------------------------- | --------- | ---- | - | ---------
|             |  | Six Months Ended June 30,
|             |  | 2004                      |           | 2003
|Income taxes |  | $                         | 692,370   |      | $ | 518,137  
|Interest     |  | $                         | 1,801,667 |      | $ | 1,698,824



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##### Table of Contents

Supplemental schedule of noncash investing and financing activities:



Acquisition of First National Bank Orange Park Florida:



|                                                      |  |                  |           
|----------------------------------------------------- |  | ---------------- | ----------
|                                                      |  | At June 30, 2004
|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                                              |  |                  | 1,497,554 
|Core deposit intangibles                              |  |                  | 1,128,000 
|Other assets                                          |  |                  | 653,452   
|                                                      |  |                  |           
|Total Assets                                          |  | $                | 80,718,678
|                                                      |  |                  |           
|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             |  |                  | 150,643   
|                                                      |  |                  |           
|Net cash and cash equivalents received in acquisition |  | $                | 4,475,712 
|                                                      |  |                  |           



NOTE 5. SUBORDINATED DEBT TO
NONCONSOLIDATED SUBSIDIARY



During the second quarter 2004, the Company
formed First National Banc Statutory Trust I (the Trust), a subsidiary whose sole purpose was to issue $5,000,000 principal amount of Trust Preferred Securities at a rate per annum equal to the 3-Month LIBOR plus 2.80% through a pool
sponsored by a national brokerage firm. The Trust Preferred Securities have a maturity of 30 years and are redeemable at the Companys option on any quarterly interest payment date after five years. There are certain circumstances (as described
in the Trust agreement) in which the securities may be redeemed within the first five years at the Companys option. The Companys liability to the nonconsolidated Trust is recorded as a liability of $5,155,000 million and an investment of
$155,000 on the consolidated balance sheet. The proceeds from the offering were used to fund the expected capital needs of the Companys bank subsidiaries.



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##### Table of Contents

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 Annual Report on Form 10-KSB for the year ended December 31, 2003.



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 the banks ability to serve its customers needs for financial services. The holding company structure enables the organization 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.



Since the acquisition of First National
Bank occurred on March 31, 2004, the acquired banks second quarter net income is reflected in the Companys net income through June 30, 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 and in the Companys Form 10-QSB for the
quarterly period ended March 31, 2004.



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.



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.



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##### Table of Contents

Results Of Operations



Overview



For the six months ended June 30, 2004, the Companys net income was $1,131,097, compared to $676,184 for the six months ended June 30, 2003, an increase of 67.3%. For the six months ended June 30, 2004, the
Companys basic earnings per share was $1.30 compared to $0.94 for the six months ended June 30, 2003. The Companys return on average equity for the six months ended June 30, 2004 was 13.53% (annualized) compared to 12.52% (annualized)
for the six months ended June 30, 2003.



The Companys net income was
$689,469 for the second quarter of 2004, compared to $357,656 for the second quarter of 2003, an increase of 92.8%. Basic earnings per share was $0.68 for the second quarter of 2004 compared to $0.50 for the second quarter of 2003.



The increase in net income for the three and six-month periods ended June 30, 2004 as
compared to the same periods in 2003 was primarily due to the increase in earnings assets resulting from the acquisition of First National Bank in Orange Park, Florida on 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
$4,555,618 for the six months ended June 30, 2004, an increase of $1,797,496 (65.2%) over net interest income of $2,758,122 for the six months ended June 30, 2003. This increase was primarily the result of additional interest income generated by the
growth in the Companys interest earning assets as a result of the bank acquisition at the end of the first quarter. Average interest-earning assets grew to $173,173,703 for the six months ended June 30, 2004, an increase of $57,835,240, or
50.1%, as compared to the average of $115,338,463 for the six months ended June 30, 2003. Average interest-bearing liabilities grew to $152,184,514 for the six months ended June 30, 2004, an increase of $50,706,789, or 50.0%, as compared to the
average of $101,477,725 for the six months ended June 30, 2003. Loans are the highest yielding component of interest-earning assets. The annualized yield on loans for the six months ended June 30, 2004 and 2003 was 7.81% and 8.08%, respectively. The
decrease in the yield on loans is primarily due to the fact that the first quarter interest income from the loans acquired as a result of the acquisition were not included in the calculation of the yield. Annualized net interest margin for the six
months ended June 30, 2004 and 2003 was 5.26% and 4.78%, respectively. The prolonged period of low interest rates has reduced interest expense while strong loan demand has resulted in additional loan fees, which has served to increase the interest
margin.



Net interest income was $2,797,973 for the three months ended June 30,
2004, an increase of $1,402,403 (100.5%) over net interest income of $1,395,570 for the three months ended June 30, 2003. The increase was primarily the result of the acquisition of First National Bank and a decline in the Companys cost of
funds due to the prolonged period of low interest rates. The Companys annualized cost of funds was 2.23% for three months ended June 30, 2004, a decrease of 83 basis points from 3.06% for the three months ended June 30, 2003. The annualized
yield on interest earning assets was 7.27% for the three months ended June 30, 2004, a decrease of 15 basis points from 7.42% for the three months ended June 30, 2003. The Companys use of loan pricing guidelines and floors on variable rate
loans has slowed the decrease in yield on interest earning assets.



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##### Table of Contents

Interest Income



Interest income for the six months ended June 30, 2004 was $6,312,624, an increase of $1,946,849 (44.6%) from $4,365,775 for the six months
ended June 30, 2003. The increase in interest income was primarily due to an increase in interest and fees on loans generated from a larger loan portfolio resulting from the bank acquisition at the end of the first quarter as well as growth due to
strong loan demand.



Interest income for the three months ended June 30, 2004
was $3,811,485, an increase of $1,613,267 (73.4%) from $2,198,218 for the three months ended June 30, 2003. The Company continued to increase interest income primarily through the acquisition of First National Bank and by maintaining an increasing
level of interest income and fees on loans for the three months ended June 30, 2004 compared to the three months ended June, 2003 in a declining rate environment as a result of increasing the Banks volume of 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 six months ended June 30, 2004 was $1,757,006, an increase of $149,353 (9.3%) from $1,607,653 for the six months ended June 30, 2003. While the
Company has experienced a significant increase in interest-bearing deposits from June 30, 2003 to June 2004, the cost of funds on these deposits has decreased due to the lower rate environment in which these funds were obtained.



Interest expense for the three months ended June 30, 2004 was $1,013,512, an increase of
$210,864 (26.3%) from $802,648 for the three months ended June 30, 2003. The increase in interest expense is primarily the result of additional interest bearing liabilities that were assumed in the acquisition of First National Bank. Due to the
prolonged period of low interest rates, the Companys annualized cost of funds for the three months ended June 30, 2004 decreased by 82 basis points to 2.23% from 3.05% from the three months ended June 30, 2003. The Companys use of other
borrowed funds increased with the addition of $5,155,000 in subordinated debentures resulting from an issue of trust preferred stock on April 20, 2004. As a result, interest expense on other borrowed funds for the three months ended June 30, 2004
was $55,842, an increase of $38,799 (227.7%) from $17,043 for the three months ended June 30, 2003.



Noninterest Income



Noninterest income for the six months ended June 30, 2004 was $938,133, an increase of $226,166 (31.8%) from $711,967 for the six months ended June 30, 2003. The increase is primarily the result of the inclusion of noninterest income from
the acquired bank during the second quarter of 2004.



Noninterest income for
the three months ended June 30, 2004 was $561,707, an increase of $167,502 (42.5%) from $394,205 for the three months ended June 30, 2003. The increase in noninterest income is primarily the result of the inclusion of second quarter noninterest
income from the acquired bank and an increase in other service charges and fees. Other service charges and fees were $265,188 for the three months ended June 30, 2004, an increase of $138,572 (109.4%) from $126,616 for the three months ended June
30, 2003. Other service charges increased due to an increase in commitment fees on letters of credit and service charges assessed to a large commercial deposit relationship. Loss on sale of securities was $26,075 for the three months ended June 30,
2004 compared to $0 for the three months ended June 30, 2003. This resulted from management restructuring segments of the investment portfolio in order to achieve interest rate risk objectives.



Noninterest Expense



Noninterest expense for the six months ended June 30, 2004 was $3,366,759, an increase of $1,162,931 (52.8%) from $2,203,828 for the six
months ended June 30, 2003. The increase is primarily the result of the inclusion of noninterest expense from the acquired bank during the second quarter of 2004.



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##### Table of Contents

Noninterest expense for the three months ended June 30, 2004 was $2,073,797, an increase of $953,933 (85.2%) from
$1,119,864 for the three months ended June 30, 2003. Salary and employee benefit costs were $962,039 for the three months ended June 30, 2004, an increase of $387,034 (67.3%) from $575,005 for the three months ended June 30, 2003. The increase is
primarily the result of the inclusion of the second quarter salary and employee benefit costs of the acquired bank as well as the additional staff operating from the mortgage origination office in Fort Lauderdale, Florida that was opened during the
first quarter of 2004. Occupancy expenses were $148,090 for the three months ended June 30, 2004, an increase of $90,130 (155.5%) from $57,960 for the three months ended June 30, 2003. Other expenses were $963,668 for the three months ended June 30,
2004, an increase of $476,769 (97.9%) from $486,899 for the three months ended June 30, 2003. These increases are primarily the result of the addition of the acquired banks second quarter occupancy and other expenses as well as the additional
costs associated with the operation of the mortgage origination office in Fort Lauderdale, Florida.



Income Taxes



The Company recorded
income tax expense of $730,237 for the six months ended June 30, 2004 resulting from the net income before taxes of $1,861,334, an increase of $310,076 (73.8%) from $420,161 resulting from the net income before taxes of $1,096,345 incurred for the
six months ended June 30, 2003. The increase was primarily the result of additional taxable income resulting from the inclusion of the acquired banks second quarter earnings and expenses.



The Company recorded income tax expense of $455,756 for the three months ended June 30, 2004,
resulting from the net income before taxes of $1,145,225 for the quarter, an increase of $183,417 (67.3%) as compared to the three months ended June 30, 2003.



Review Of Financial Condition



Overview



Total consolidated assets at June 30, 2004 were $233,543,029, an increase of $91,345,441 (64.2%) from December 31, 2003 total consolidated assets of $142,197,588. Interest-earning assets increased to $214,544,920 at
June 30, 2004, from $131,802,485 at December 31, 2003, an increase of $82,742,435, or 62.8%. Total loans, net of the allowance for loan losses, increased to $194,562,260 at June 30, 2004, from $115,301,446 at December 31, 2003, an increase of
$79,260,814, or 68.7%.



The Companys growth in assets from December 31,
2003 to June 30, 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. Significant items affecting the Companys financial condition are discussed in detail below.



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 June 30, 2004, loans represented 92.0% of interest-earning assets compared to 88.7% at December 31, 2003. Investments in securities available for sale at June 30, 2004 were
$15,834,082, an increase of $6,688,307 (75.0%) from $9,045,775 at December 31, 2003. The Companys Federal Home Loan Bank advances were $12,500,000 at June 30, 2004, a decrease of $500,000 (3.8%) from the December 31, 2003 balance of
$13,000,000. The Companys repurchase agreements were $2,837,000 at June 30, 2004, a decrease of $760,000 (21.1%) from the December 31, 2003 balance of $3,597,000. The Companys balance of federal funds purchased was $3,025,000 at June 30,
2004 and was $0 at December 31, 2003.



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##### Table of Contents

Loan Portfolio



At June 30, 2004, the Companys loan portfolio was $197,295,811, an increase of $80,416,307 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 $66,642,053 at June 30, 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:



|             |  |                  |  |                                               |   |  |                     |  |                                               |  
|------------ |  | ---------------- |  | --------------------------------------------- | - |  | ------------------- |  | --------------------------------------------- | -
|Type of Loan |  | At June 30, 2004 |  | Percent ofloans in eachcategory tototal loans |   |  | At December 31,2003 |  | Percent ofloans in eachcategory tototal loans |  
|Real Estate  |  |                  |  |                                               |   |  |                     |  |                                               |  
|Construction |  | 37,882,955       |  | 19.2                                          | % |  | 23,999,305          |  | 20.5                                          | %
|Mortgage     |  | 127,251,378      |  | 64.5                                          | % |  | 71,962,843          |  | 61.6                                          | %
|             |  |                  |  |                                               |   |  |                     |  |                                               |  
|Total        |  | 165,134,333      |  | 83.7                                          | % |  | 95,962,148          |  | 82.1                                          | %
|Commercial   |  | 20,901,648       |  | 10.6                                          | % |  | 12,312,173          |  | 10.5                                          | %
|Consumer     |  | 10,914,836       |  | 5.5                                           | % |  | 8,401,947           |  | 7.2                                           | %
|Other        |  | 344,994          |  | 0.2                                           | % |  | 203,236             |  | 0.2                                           | %
|             |  |                  |  |                                               |   |  |                     |  |                                               |  
|Total        |  | 197,295,811      |  | 100.0                                         | % |  | 116,879,504         |  | 100.0                                         | %
|             |  |                  |  |                                               |   |  |                     |  |                                               |  



Deposits



At June 30, 2004, the Companys deposits were $186,319,436, an increase of $73,524,779
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 $68,272,673 at June 30, 2004. The Companys
combined money market accounts increased significantly by $23,267,293 to $25,677,000 at June 30, 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 June 30, 2004 |  | Percent ofdeposits in eachcategory tototal deposits |   |  | At December 31,2003 |  | Percent ofDeposits in eachcategory tototal deposits |  
|Non-interest bearing demand deposits      |  | 24,352,060       |  | 13.1                                                | % |  | 10,507,006          |  | 9.3                                                 | %
|NOW                                       |  | 18,796,466       |  | 10.1                                                | % |  | 20,088,872          |  | 17.8                                                | %
|Money market                              |  | 25,677,000       |  | 13.8                                                | % |  | 2,409,707           |  | 2.1                                                 | %
|Savings                                   |  | 5,820,318        |  | 3.1                                                 | % |  | 4,169,538           |  | 3.7                                                 | %
|Certificates of deposit, $100,000 or more |  | 63,067,811       |  | 33.8                                                | % |  | 35,764,807          |  | 31.7                                                | %
|Other time deposits                       |  | 48,605,781       |  | 26.1                                                | % |  | 39,854,727          |  | 35.4                                                | %
|                                          |  |                  |  |                                                     |   |  |                     |  |                                                     |  
|Total                                     |  | 186,319,436      |  | 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 June 30, 2004, the Company had $12,500,000 in advances from
the Federal Home Loan Bank compared to $13,000,000 at



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December 31, 2003. During the second quarter, the Company elected to increase its utilization of certificates of deposit
of $100,000 or more in order to extend its liabilities in the low interest rate environment in anticipation of future interest rate increases. The Company then used a portion of the funding in order to decrease Federal Home Loan Bank advances by
$500,000. The weighted average interest rate on the Companys outstanding advances at June 30, 2004 was 4.05%.



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 June 30, 2004, the Company had an agreement to repurchase in the amount of $2,837,000 compared to $3,597,000 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 the Companys
agreement to repurchase was 1.24%.



Subordinated Debentures



During the second quarter 2004, the Company formed First National Banc Statutory Trust I
(the Trust), a subsidiary whose sole purpose was to issue $5,000,000 principal amount of Trust Preferred Securities at a rate per annum equal to the 3-Month LIBOR plus 2.80% through a pool sponsored by a national brokerage firm. The
Trust Preferred Securities have a maturity of 30 years and are redeemable at the Companys option on any quarterly interest payment date after five years. There are certain circumstances (as described in the Trust agreement) in which the
securities may be redeemed within the first five years at the Companys option. The Companys liability to the nonconsolidated Trust is recorded as a liability of $5,155,000 and an other investment of $155,000 on the consolidated balance
sheet. The proceeds from the offering were used to fund the expected capital needs of the Companys bank subsidiaries.



The debentures qualify as Tier 1, or core capital of the Company, subject to a 25% of capital limitation under risk-based capital guidelines developed by the Federal
Reserve Board. Under the regulatory capital guidelines, the portion that exceeds the 25% of capital limitation qualifies as Tier 2, or supplementary capital of the Company. At June 30, 2004, $4,888,654 of the debentures qualified as Tier 1 capital
and $111,346 qualified as Tier 2 capital of the Company.



Intangible Assets



At June 30, 2004, the Company had $2,575,283 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 $1,497,554 and a core deposit of $1,077,729 represented the balance of the
intangible assets at June 30, 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 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.



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Non-performing assets were $2,076,988 at June 30, 2004, an increase of $33,719, or 1.7%, compared to $2,043,269 at
December 31, 2003. The composition of non-performing assets for each date is shown below.



|                                 |  |              |           |                   |   |          
|-------------------------------- |  | ------------ | --------- | ----------------- | - | ---------
|                                 |  | June 30,2004 |           | December 31, 2003
|Non-accrual loans                |  | $            | 342,909   |                   | $ | 196,446  
|OREO, net of valuation allowance |  |              | 1,734,079 |                   |   | 1,846,823
|                                 |  |              |           |                   |   |          
|                                 |  | $            | 2,076,988 |                   | $ | 2,043,269
|                                 |  |              |           |                   |   |          



The ratio of non-performing assets to
net loans and other real estate was 1.06% at June 30, 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 $265,658 during the six months ended June 30, 2004. The
ratio of allowance for loan losses to total gross loans was 1.39% at June 30, 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 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.



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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 June 30, 2004 are presented in the following table:



|                                           |  |        |            |       |                              |   |        |                                                                |            |  |      |        |  |       |            |  |       |  
|------------------------------------------ |  | ------ | ---------- | ----- | ---------------------------- | - | ------ | -------------------------------------------------------------- | ---------- |  | ---- | ------ |  | ----- | ---------- |  | ----- | -
|                                           |  | Actual |            |       | For CapitalAdequacy Purposes |   |        | To Be Well CapitalizedUnder Prompt CorrectiveAction Provisions |           
|                                           |  | Amount |            | Ratio |                              |   | Amount |                                                                | Ratio      |  |      | Amount |  | Ratio |           
|March 31, 2004                             |  |        |            |       |                              |   |        |                                                                |            |  |      |        |  |       |            |  |       |  
|Total Capital ( to Risk Weighted Assets )  |  |        |            |       |                              |   |        |                                                                |            |  |      |        |  |       |            |  |       |  
|Consolidated                               |  | $      | 27,051,479 |       | 13.56                        | % |        | $                                                              | 15,960,993 |  | 8.00 | %      |  | $     | 19,951,241 |  | 10.00 | %
|First National Bank - St. Marys            |  | $      | 17,379,546 |       | 13.88                        | % |        | $                                                              | 10,014,949 |  | 8.00 | %      |  | $     | 12,518,686 |  | 10.00 | %
|First National Bank - Orange Park          |  | $      | 9,126,205  |       | 12.70                        | % |        | $                                                              | 5,748,843  |  | 8.00 | %      |  | $     | 7,186,054  |  | 10.00 | %
|Tier 1 Capital ( to Risk Weighted Assets ) |  |        |            |       |                              |   |        |                                                                |            |  |      |        |  |       |            |  |       |  
|Consolidated                               |  | $      | 24,443,269 |       | 12.25                        | % |        | $                                                              | 7,980,496  |  | 4.00 | %      |  | $     | 11,970,745 |  | 6.00  | %
|First National Bank - St. Marys            |  | $      | 15,811,558 |       | 12.63                        | % |        | $                                                              | 5,007,474  |  | 4.00 | %      |  | $     | 7,511,211  |  | 6.00  | %
|First National Bank - Orange Park          |  | $      | 8,227,747  |       | 11.45                        | % |        | $                                                              | 2,874,421  |  | 4.00 | %      |  | $     | 4,311,632  |  | 6.00  | %
|Tier 1 Capital ( to Average Assets )       |  |        |            |       |                              |   |        |                                                                |            |  |      |        |  |       |            |  |       |  
|Consolidated                               |  | $      | 24,443,269 |       | 10.54                        | % |        | $                                                              | 9,279,082  |  | 4.00 | %      |  | $     | 11,598,853 |  | 5.00  | %
|First National Bank - St. Marys            |  | $      | 15,811,558 |       | 10.60                        | % |        | $                                                              | 5,967,354  |  | 4.00 | %      |  | $     | 7,459,193  |  | 5.00  | %
|First National Bank - Orange Park          |  | $      | 8,227,747  |       | 10.21                        | % |        | $                                                              | 3,224,554  |  | 4.00 | %      |  | $     | 4,030,692  |  | 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.



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 June 30, 2004, commitments to extend credit totaled $18,965,062 and represented the
unfunded portion of equity, working capital and general lines of credit. At June 30, 2004, the Company had $460,318 in credit card commitments and $1,949,437 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.



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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 June 30, 2004 and, based on their evaluation, the Companys 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.



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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: August 16, 2004 |  | By: |  | /s/ Roscoe H. Mullis                        
|                      |  |     |  | Roscoe H. Mullis                            
|                      |  |     |  | Chairman and Chief Executive Officer        
|                      |  |     |  | (principal executive officer)               
|                      |  |    
|Date: August 16, 2004 |  | By: |  | /s/ David G. Moffat                         
|                      |  |     |  | David G. Moffat                             
|                      |  |     |  | President and Chief Operating Officer       
|                      |  |     |  | (principal financial and accounting officer)



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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.