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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 March 31, 2005



| ̈ | 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 July 25, 2005: 1,016,376.



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 Operations                      |  | 2   
|           |  | Consolidated Statements of Changes in Shareholders Equity |  | 3   
|           |  | Consolidated Statements of Cash Flows                      |  | 4   
|           |  | Notes to Unaudited Consolidated Financial Statements       |  | 5-6 
|           |  |                                                           
|Item 2.    |  | Managements Discussion and Analysis                       |  | 7-17
|Item 3.    |  | Controls and Procedures                                    |  | 17  
|           |  |                                                           
|PART II    |  | OTHER INFORMATION                                          |  |     
|           |  |                                                           
|Item 6.    |  | Exhibits                                                   |  | 18  
|           |  |                                                           
|SIGNATURES |  |                                                            |  | 19  



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item I. Financial Statements



FIRST NATIONAL BANC, INC. & SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                     |  |                |             |   |                   |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                     |  | March 31, 2005 |             |   | December 31, 2004 |  
|                                                                                                                                     |  | (Unaudited)    |             |   | (Audited)         |  
|ASSETS                                                                                                                               |  |                |             |   |                   |   |             |  
|Cash and due from banks                                                                                                              |  | $              | 5,136,054   |   |                   | $ | 10,668,009  |  
|Federal funds sold                                                                                                                   |  |                | 3,594,000   |   |                   |   | 2,403,000   |  
|                                                                                                                                     |  |                |             |   |                   |   |             |  
|Cash and cash equivalents                                                                                                            |  |                | 8,730,054   |   |                   |   | 13,071,009  |  
|Interest-bearing deposits in other banks                                                                                             |  |                | 534,357     |   |                   |   | 528,401     |  
|Securities available-for-sale                                                                                                        |  |                | 17,848,844  |   |                   |   | 17,578,770  |  
|Loans                                                                                                                                |  |                | 222,397,479 |   |                   |   | 220,311,351 |  
|Less allowance for loan losses                                                                                                       |  |                | (5,159,926  | ) |                   |   | (4,172,000  | )
|                                                                                                                                     |  |                |             |   |                   |   |             |  
|Loans, net                                                                                                                           |  |                | 217,237,553 |   |                   |   | 216,139,351 |  
|Premises and equipment, net                                                                                                          |  |                | 8,205,030   |   |                   |   | 8,242,844   |  
|Foreclosed real estate, net                                                                                                          |  |                | 1,429,556   |   |                   |   | 1,335,390   |  
|Other investments                                                                                                                    |  |                | 1,705,800   |   |                   |   | 1,490,250   |  
|Intangible assets                                                                                                                    |  |                | 2,432,193   |   |                   |   | 2,474,741   |  
|Other assets                                                                                                                         |  |                | 6,143,275   |   |                   |   | 4,774,192   |  
|                                                                                                                                     |  |                |             |   |                   |   |             |  
|Total assets                                                                                                                         |  | $              | 264,266,662 |   |                   | $ | 265,634,948 |  
|                                                                                                                                     |  |                |             |   |                   |   |             |  
|LIABILITIES                                                                                                                          |  |                |             |   |                   |   |             |  
|Deposits:                                                                                                                            |  |                |             |   |                   |   |             |  
|Noninterest-bearing                                                                                                                  |  | $              | 26,589,995  |   |                   | $ | 23,811,209  |  
|Interest-bearing                                                                                                                     |  |                | 206,145,130 |   |                   |   | 205,818,012 |  
|                                                                                                                                     |  |                |             |   |                   |   |             |  
|Total deposits                                                                                                                       |  |                | 232,735,125 |   |                   |   | 229,629,221 |  
|Federal Home Loan Bank advances                                                                                                      |  |                | 8,000,000   |   |                   |   | 10,750,000  |  
|Subordinated debentures                                                                                                              |  |                | 5,155,000   |   |                   |   | 5,155,000   |  
|Other liabilities                                                                                                                    |  |                | 1 684,535   |   |                   |   | 1,960,849   |  
|                                                                                                                                     |  |                |             |   |                   |   |             |  
|Total liabilities                                                                                                                    |  |                | 247,574,660 |   |                   |   | 247,495,070 |  
|                                                                                                                                     |  |                |             |   |                   |   |             |  
|SHAREHOLDERS EQUITY                                                                                                                 |  |                |             |   |                   |   |             |  
|Common stock - par value $.001 per share; 9,000,000 shares authorized; 1,033,802 and 1,033,802 issued in 2005 and 2004,
respectively |  |                | 1,033       |   |                   |   | 1,033       |  
|Preferred stock - par value $.001 per share 1,000,000 shares authorized; none issued                                                 |  |                |            |   |                   |   |            |  
|Additional paid-in capital                                                                                                           |  |                | 16,646,096  |   |                   |   | 16,646,096  |  
|Retained earnings                                                                                                                    |  |                | 1,046,715   |   |                   |   | 2,392,060   |  
|Accumulated other comprehensive loss                                                                                                 |  |                | (170,040    | ) |                   |   | (72,109     | )
|                                                                                                                                     |  |                |             |   |                   |   |             |  
|                                                                                                                                     |  |                | 17,523,804  |   |                   |   | 18,967,080  |  
|Treasury stock, at cost  17,426 shares in 2005                                                                                      |  |                |             |   |                   |   |             |  
|and 17,326 shares in 2004                                                                                                            |  |                | (831,802    | ) |                   |   | (827,202    | )
|                                                                                                                                     |  |                |             |   |                   |   |             |  
|Total shareholders equity                                                                                                           |  |                | 16,692,002  |   |                   |   | 18,139,878  |  
|                                                                                                                                     |  |                |             |   |                   |   |             |  
|Total liabilities and shareholders equity                                                                                           |  | $              | 264,266,662 |   |                   | $ | 265,634,948 |  
|                                                                                                                                     |  |                |             |   |                   |   |             |  



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FIRST NATIONAL BANC, INC. & SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited



|                                      |  |                              |            |   |      |   |          
|------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------
|                                      |  | Three Months Ended March 31,
|                                      |  | 2005                         |            |   | 2004
|INTEREST INCOME                       |  |                              |            |   |      |   |          
|Loans, including fees                 |  | $                            | 4,217,652  |   |      | $ | 2,427,094
|Investment securities:                |  |                              |            |   |      |   |          
|Taxable                               |  |                              | 140,290    |   |      |   | 58,419   
|Tax-exempt                            |  |                              | 10,500     |   |      |   | 7,319    
|Other interest                        |  |                              | 28,725     |   |      |   | 8,307    
|                                      |  |                              |            |   |      |   |          
|Total interest income                 |  |                              | 4,397,167  |   |      |   | 2,501,139
|                                      |  |                              |            |   |      |   |          
|INTEREST EXPENSE                      |  |                              |            |   |      |   |          
|Deposits                              |  |                              | 1,264,026  |   |      |   | 574,604  
|Federal Home Loan Bank advances       |  |                              | 128,503    |   |      |   | 155,991  
|Other borrowed funds                  |  |                              | 78,561     |   |      |   | 12,899   
|                                      |  |                              |            |   |      |   |          
|Total interest expense                |  |                              | 1,471,090  |   |      |   | 743,494  
|                                      |  |                              |            |   |      |   |          
|NET INTEREST INCOME                   |  |                              | 2,926,077  |   |      |   | 1,757,645
|PROVISION FOR LOAN LOSSES             |  |                              | 3,067,000  |   |      |   | 125,000  
|                                      |  |                              |            |   |      |   |          
|NET INTEREST INCOME (LOSS) AFTER      |  |                              |            |   |      |   |          
|PROVISION FOR LOAN LOSSES             |  |                              | (140,923   | ) |      |   | 1,632,645
|                                      |  |                              |            |   |      |   |          
|NONINTEREST INCOME                    |  |                              |            |   |      |   |          
|Service charges on deposit accounts   |  |                              | 129,906    |   |      |   | 87,995   
|Mortgage origination fees             |  |                              | 227,179    |   |      |   | 122,358  
|Other service charges and fees        |  |                              | 59,005     |   |      |   | 94,419   
|Other income                          |  |                              | 57,602     |   |      |   | 73,079   
|                                      |  |                              |            |   |      |   |          
|Total noninterest income              |  |                              | 473,692    |   |      |   | 377,851  
|                                      |  |                              |            |   |      |   |          
|NONINTEREST EXPENSES                  |  |                              |            |   |      |   |          
|Salaries and employee benefits        |  |                              | 939,924    |   |      |   | 637,802  
|Net occupancy expense                 |  |                              | 255,080    |   |      |   | 59,196   
|Other expenses                        |  |                              | 1,062,615  |   |      |   | 597,389  
|                                      |  |                              |            |   |      |   |          
|Total noninterest expense             |  |                              | 2,257,619  |   |      |   | 1,294,387
|                                      |  |                              |            |   |      |   |          
|INCOME (LOSS) BEFORE INCOME TAXES     |  |                              | (1,924,850 | ) |      |   | 716,109  
|PROVISION FOR INCOME TAXES (BENEFITS) |  |                              | (782,788   | ) |      |   | 274,481  
|                                      |  |                              |            |   |      |   |          
|NET INCOME (LOSS)                     |  | $                            | (1,142,062 | ) |      | $ | 441,628  
|                                      |  |                              |            |   |      |   |          
|Earnings (loss) per share:            |  |                              |            |   |      |   |          
|Basic                                 |  | $                            | (1.12      | ) |      | $ | 0.62     
|                                      |  |                              |            |   |      |   |          
|Diluted                               |  | $                            | (1.12      | ) |      | $ | 0.61     
|                                      |  |                              |            |   |      |   |          



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FIRST NATIONAL BANC, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

Three Months Ended March 31, 2005 and 2004

Unaudited



|                                                                                |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | ----- |  | ---------------- | ---------- | - | ------------------------------------------ | - | ---------- | ------------- |  | - | -------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                                                |  | Common Stock |  | AdditionalPaid-InCapital |       |  | RetainedEarnings |            |   | AccumulatedOtherComprehensiveIncome (Loss) |   |            | TreasuryStock |  |   | Total    |  
|                                                                                |  | Shares       |  | Amount                   |       |  |                  |            |  
|BALANCE - DECEMBER 31, 2003                                                     |  | 493,216      |  | $                        | 492   |  | $                | 7,113,867  |   |                                            | $ | 4,881,686  |               |  | $ | 11,161   |   |  | $ | (217,110 | ) |  | $ | 11,790,096 |  
|Comprehensive income:                                                           |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|Net income                                                                      |  |              |  |                          |       |  |                  |            |   |                                            |   | 441,628    |               |  |   |          |   |  |   |          |   |  |   | 441,628    |  
|Other comprehensive income:                                                     |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|Net change in unrealized gain on securities available-for-sale, net tax effects |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   | 30,334   |   |  |   |          |   |  |   | 30,334     |  
|                                                                                |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|Total comprehensive income                                                      |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   | 471,962    |  
|                                                                                |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|Exercise of options                                                             |  | 5,599        |  |                          | 6     |  |                  | 189,361    |   |                                            |   |            |               |  |   |          |   |  |   | (132,367 | ) |  |   | 57,000     |  
|                                                                                |  |              |  |                          |       |  |                 
|Purchase of treasury stock (5,654 shares)                                       |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   | (152,736 | ) |  |   | (152,736   | )
|                                                                                |  |              |  |                          |       |  |                 
|Stock issuance in merger                                                        |  | 204,000      |  |                          | 204   |  |                  | 9,179,211  |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   | 9,179,415  |  
|                                                                                |  |              |  |                          |       |  |                 
|Stock dividend effected in form of a stock split                                |  | 325,670      |  |                          | 326   |  |                  | (326       | ) |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|                                                                                |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|BALANCE - March 31, 2004                                                        |  | 1,028,485    |  | $                        | 1,028 |  | $                | 16,482,113 |   |                                            | $ | 5,323,314  |               |  | $ | 41,495   |   |  | $ | (502,213 | ) |  | $ | 21,345,737 |  
|                                                                                |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|BALANCE - DECEMBER 31, 2004                                                     |  | 1,033,802    |  | $                        | 1,033 |  | $                | 16,646,096 |   |                                            | $ | 2,392,060  |               |  | $ | (72,109  | ) |  | $ | (827,202 | ) |  | $ | 18,139,878 |  
|Comprehensive income:                                                           |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|Net income                                                                      |  |              |  |                          |       |  |                  |            |   |                                            |   | (1,142,062 | )             |  |   |          |   |  |   |          |   |  |   | (1,142,062 | )
|Other comprehensive income:                                                     |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|Net change in unrealized gain on securities available-for-sale, net tax effects |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   | (97,931  | ) |  |   |          |   |  |   | (97,931    | )
|                                                                                |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|Total comprehensive loss                                                        |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   | (1,239,993 | )
|                                                                                |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|Cash dividends                                                                  |  |              |  |                          |       |  |                  |            |   |                                            |   | (203,283   | )             |  |   |          |   |  |   |          |   |  |   | (203,283   | )
|                                                                                |  |              |  |                          |       |  |                 
|Purchase of treasury stock (100 shares)                                         |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   | (4,600   | ) |  |   | (4,600     | )
|                                                                                |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  
|BALANCE - March 31, 2005                                                        |  | 1,033,802    |  | $                        | 1,033 |  | $                | 16,646,096 |   |                                            | $ | 1,102,815  |               |  | $ | (170,040 | ) |  | $ | (831,802 | ) |  | $ | 16,692,002 |  
|                                                                                |  |              |  |                          |       |  |                  |            |   |                                            |   |            |               |  |   |          |   |  |   |          |   |  |   |            |  

|
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FIRST NATIONAL BANC, INC. & SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited



|                                                                                  |  |                              |            |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                  |  | Three Months Ended March 31, |           
|                                                                                  |  | 2005                         |            |   | 2004 |  
|OPERATING ACTIVITIES                                                              |  |                              |            |   |      |   |            |  
|Net income (loss)                                                                 |  | $                            | (1,142,062 | ) |      | $ | 441,628    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                              |            |   |      |   |            |  
|Depreciation                                                                      |  |                              | 105,034    |   |      |   | 51,040     |  
|Amortization and accretion, net                                                   |  |                              | 69,540     |   |      |   | 14,634     |  
|Provision for loan losses                                                         |  |                              | 3,067,000  |   |      |   | 125,000    |  
|Loss on foreclosed real estate                                                    |  |                              |           |   |      |   | 13,162     |  
|Changes in other assets and other liabilities, net                                |  |                              | (1,955,113 | ) |      |   | (638,528   | )
|                                                                                  |  |                              |            |   |      |   |            |  
|                                                                                  |  |                              | 144,399    |   |      |   | 6,936      |  
|                                                                                  |  |                              |            |   |      |   |            |  
|INVESTING ACTIVITIES                                                              |  |                              |            |   |      |   |            |  
|Net decrease in interest-bearing deposits in other banks                          |  |                              | (5,956     | ) |      |   | 349,516    |  
|Activity in securities available-for-sale:                                        |  |                              |            |   |      |   |            |  
|                                                                                  |  |                             
|Maturities, prepayments and calls                                                 |  |                              | 1,192,597  |   |      |   | 848,418    |  
|Purchases                                                                         |  |                              | (1,587,594 | ) |      |   | (2,752,656 | )
|Net increase in loans                                                             |  |                              | (4,165,202 | ) |      |   | (7,531,309 | )
|Net cash received in bank acquisition                                             |  |                              |           |   |      |   | 4,510,213  |  
|Proceeds from sale of foreclosed real estate                                      |  |                              |           |   |      |   | 110,475    |  
|Purchase of Federal Home Loan Bank stock                                          |  |                              |           |   |      |   | (75,000    | )
|Additions to premises and equipment                                               |  |                              | (67 220    | ) |      |   | (93,965    | )
|                                                                                  |  |                              |            |   |      |   |            |  
|Net cash used for investing activities                                            |  |                              | (4,633,375 | ) |      |   | (4,634,308 | )
|                                                                                  |  |                              |            |   |      |   |            |  
|FINANCING ACTIVITIES                                                              |  |                              |            |   |      |   |            |  
|Net increase in deposits                                                          |  |                              | 3,105,904  |   |      |   | 4,385,351  |  
|Federal Home Loan Bank advances                                                   |  |                              | (2,750,000 | ) |      |   | 1,500,000  |  
|Net increase in federal funds purchased                                           |  |                              |           |   |      |   | 2,304,000  |  
|Net increase (decrease) in securities sold under                                  |  |                              |            |   |      |   |            |  
|agreements to repurchase                                                          |  |                              |           |   |      |   | (597,000   | )
|Dividends Paid                                                                    |  |                              | (203,283   | ) |      |   |            |  
|Purchase of treasury stock                                                        |  |                              | (4,600     | ) |      |   | (152,736   | )
|                                                                                  |  |                              |            |   |      |   |            |  
|Net cash provided by financing activities                                         |  |                              | 148,021    |   |      |   | 7,439,615  |  
|                                                                                  |  |                              |            |   |      |   |            |  
|Increase (decrease ) in cash and cash equivalents                                 |  |                              | (4,340,955 | ) |      |   | 2,812,243  |  
|                                                                                  |  |                             
|Cash and cash equivalents - beginning                                             |  |                              | 13,071,009 |   |      |   | 9,620,226  |  
|                                                                                  |  |                              |            |   |      |   |            |  
|Cash and cash equivalents - ending                                                |  | $                            | 8,730,054  |   |      | $ | 12,432,469 |  
|                                                                                  |  |                              |            |   |      |   |            |  



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FIRST NATIONAL BANC, INC. & SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of presentation



The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with rules and regulations of the Securities and Exchange Commission. The statements do not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. All adjustments have been made which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Such adjustments are all of a normal and
recurring nature. All significant inter-company accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2005. The December 31, 2004 consolidated balance sheet has been derived from the Companys 2004 audited financial statements.



Critical accounting policies



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



Recently Issued Accounting Standards



No
recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by us have occurred during the quarter ending March 31, 2005.



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.



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NOTE 2. EARNINGS PER SHARE



Basic and diluted earnings per share have been computed based upon net income presented in the accompanying consolidated
statements of income divided by the weighted average number of common shares outstanding 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. At March 31, 2005, there were 17,499 potential common shares that were antidilutive and were therefore not included in the calculation.



|                                                                                                          |  |                             |  |        
|--------------------------------------------------------------------------------------------------------- |  | --------------------------- |  | -------
|                                                                                                          |  | Three Months EndedMarch 31,
|                                                                                                          |  | 2005                        |  | 2004   
|Weighted average number of common shares used in basic earnings per share                                 |  | 1,016,420                   |  | 716,951
|Effect of dilutive securities:                                                                            |  |                             |  |        
|Stock options                                                                                             |  |                            |  | 8,101  
|                                                                                                          |  |                             |  |        
|Weighted average number of common and dilutive potential common shares used in diluted earnings per share |  | 1,016,420                   |  | 725,052
|                                                                                                          |  |                             |  |        



NOTE 3. MERGER WITH ABC BANCORP



On June 30, 2005, the Company and ABC Bancorp
(ABC) entered into a definitive Agreement and Plan of Merger (the Merger Agreement), pursuant to which, among other things, the Company will merge with and into ABC. Refer to Merger Agreement with ABC Bancorp
under Item 2 of Part I of this Form 10-QSB.



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



This discussion is intended to assist in understanding the consolidated financial condition and results of operations of First National Banc, Inc. (the
Company). The information should be reviewed in conjunction with the consolidated financial statements and the related notes contained elsewhere in this report and in the Companys Annual Report on Form 10-KSB for the year ended
December 31, 2004.



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.



Current Regulatory
Proceedings



During the most recent examination of First
National Bank of St. Marys, performed in early 2005 by the banks primary regulator, the Office of the Comptroller of the Currency (OCC), the overall condition of the bank was rated unsatisfactory. In addition the bank was
designated as troubled condition as defined under Section 914 of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. This rating and designation are primarily the result of unsound lending practices of David Moffat,
the former President of the Company and First National Bank of St. Marys. Mr. Moffat resigned all positions with the Company and its affiliates on March 21, 2005.



The examination findings resulted in an increased charge to the Companys provision for loan losses of approximately
$7.2 million in the consolidated financial statements for the year ended December 31, 2004 and the charge-off of additional loans against the allowance of approximately $6.0 million in the consolidated financial statements. During the first quarter
of 2005, additional loans of approximately $2.1 million were charged-off against the allowance in the consolidated financial statements. The significant loan losses had a negative impact on asset quality, capital adequacy, earnings and liquidity. As
a result of the negative impact to capital adequacy and earnings, the bank no longer met the requirement to be well capitalized and is now considered adequately capitalized. Management believes the consolidated financial statements at and for the
first quarter ended March 31, 2005 reflect the financial impact of the unsound lending practices. Decisions by the OCC could, however, result in additional charges to the consolidated financial statements.



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The bank expects the OCC to take formal administrative action with respect to these matters during the
third quarter of 2005, which could result in regulatory sanctions against First National Bank of St. Marys and its directors, including the assessment of civil money penalties.



The Federal Deposit Insurance Corporation (FDIC) has also limited the ability of First National Bank of St.
Marys to solicit new brokered deposits. The FDIC has granted First National Bank of St. Marys a waiver which allows the renewal or rollover of brokered deposits in an amount not to exceed $62.1 million. The waiver will expire in October of 2005.
Upon expiration, First National Bank of St. Marys will be required to request an extension for an additional 6-month period. In addition, the Federal Home Loan Bank of Atlanta has disallowed any additional advances by First National Bank of St.
Marys.



Primarily as a result of the reduction in capital
resulting from the charges to the loan loss allowance described above, the Federal Reserve Bank of Atlanta has rated the overall condition of the Company as less than satisfactory, and required the Companys board of directors to adopt
resolutions restricting the Companys activities without the Federal Reserve Banks approval. These activities include payment of dividends, repurchase of common stock, and the incurrence of any additional indebtedness.



All of the restrictions described above have limited the growth of the First
National Bank of St. Marys, and growth could continue to be restricted in the future.



Merger Agreement with ABC Bancorp



On June 30,
2005, the Company and ABC Bancorp (ABC) entered into a definitive Agreement and Plan of Merger (the Merger Agreement), pursuant to which, among other things, the Company will merge with and into ABC.



As a result of the Merger, each share of the common stock of the Company that
is outstanding at the effective time of the Merger will be converted into the right to receive a pro rata share of merger consideration equal to $34.00 multiplied by the sum of (i) the number of shares of the Company common stock outstanding as of
June 30, 2005 and (ii) the number of shares of the Company common stock issued after such date but prior to the effective time of the Merger pursuant to the exercise of outstanding stock options (the Merger Consideration).



Holders of the Companys common stock may elect to receive their pro
rata share of the Merger Consideration in cash (the Cash Consideration), shares of the common stock of ABC (the Stock Consideration) or a combination of Cash Consideration and Stock Consideration; provided, however, that the
number of shares of the Companys common stock for which Cash Consideration is paid must be between 35% and 60% of the total number of shares of the Companys common stock converted. The number of shares of ABC common stock to which
holders of the Companys common stock will be entitled as Stock Consideration will be determined based upon the average of the daily closing price per share of ABC common stock for each of the twenty consecutive trading days ending on (and
including) the trading day that occurs two trading days prior to (and not including) the closing date of the Merger (the Average Market Price). If the Average Market Price as so calculated is greater than $20.00, then the Average Market
Price will be deemed to be $20.00. If the Average Market Price as so calculated is less than $14.00, then the Board of Directors of the Company may terminate the Merger Agreement unless ABC agrees to issue additional shares of ABC common stock
and/or pay additional cash to holders of the Companys common stock, such that, as a result thereof, the Companys common stockholders would receive Merger Consideration having an aggregate value equal to the value such holders would have
received if the Average Market Price were equal to $14.00.



The
Merger is intended to constitute a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. The consummation of the Merger is subject to (i) the approval of the Board of Governors of the Federal Reserve and the Georgia
Department of Banking and Finance, (ii) the approval of the shareholders of the Company and (iii) the satisfaction or waiver of other customary closing conditions.



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In connection with the execution of the Merger Agreement, certain shareholders of the Company, including
each member of the Board of Directors of the Company, who own in the aggregate more than a majority of the issued and outstanding shares of the Companys common stock, executed and delivered to ABC a Shareholder Voting Agreement that included
an irrevocable proxy pursuant to which, among other things, each such shareholder agreed to vote his or her shares of the Companys common stock in favor of the Merger.



The foregoing description of certain terms of the Merger Agreement is qualified in its entirety by reference to the Merger
Agreement, a copy of which is filed as an exhibit to the Companys Form 10-KSB for the year ended December 31, 2004.



Critical Accounting Policies



The Company has adopted various accounting policies which govern the application of accounting principles generally accepted in the United States of
America in the preparation of the Companys financial statements. The significant accounting policies of the Company are described in Note 1 to the unaudited consolidated financial statements included herein and in the Companys Form
10-KSB for the year ended December 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, Asset Quality, and Intangible Assets in this report related
to the allowance for loan losses and intangible assets.



Results Of Operations



Overview



For the three months ended March 31, 2005, the Companys net loss was
$1.1 million, compared to net income of $442,000 for the three months ended March 31, 2004. For the three months ended March 31, 2005, the Companys basic loss per share was ($1.12) compared to $0.62 for the three months ended March 31, 2004.



The decrease in net income for the three-month period ended
March 31, 2005 as compared to the same period in 2004 was primarily due to loan losses charged-off against the allowance in the consolidated financial statements described under the caption Current Regulatory Proceedings in Item 2 of
Part I of this Form 10-QSB.



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 $2.9 million for the three months ended March 31, 2005, an increase of $1.2 million (66.5%) over net interest income of $1.8
million for the three months ended March 31, 2004. Of this $1.2 million increase, approximately $851,000 of the increase was due to the net interest income



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generated by the earning assets and interest bearing liabilities acquired as a result of the business combination with
First National Bank of Orange Park, and approximately $349,000 of the increase was due to continued business growth since the acquisition. Average interest-earning assets grew to $242.6 million for the three months ended March 31, 2005, an increase
of $76.5 million, or 46.1%, as compared to the average of $166.1 million for the three months ended March 31, 2004. Of this $76.5 million increase, approximately $68.1 million was due to the interest earning assets acquired as a result of the
business combination with First National Bank of Orange Park, and approximately $8.4 million was due to continued business growth since the acquisition. Average interest-bearing liabilities grew to $220.5 million for the three months ended March 31,
2005, an increase of $70.8 million, or 47.3%, as compared to the average of $149.8 million for the three months ended March 31, 2004. Of this $70.8 million increase, approximately $55.6 million was due to the interest bearing liabilities acquired as
a result of the business combination with First National Bank of Orange Park, and approximately $15.2 million was due to continued business growth since the acquisition. Loans are the highest yielding component of interest-earning assets. The
annualized yield on loans for the three months ended March 31, 2005 and 2004 was 7.73% and 6.45%, respectively. The increase in the yield on loans is primarily due to the effect of the increasing interest rate environment on the Companys loan
portfolio. In addition, the annualized yield on loans for the three months ended March 31, 2004 did not include the acquired banks loan interest and fees for the first quarter. Annualized net interest margin for the three months ended March
31, 2005 and 2004 was 4.89% and 4.29%, respectively. The Companys asset sensitive balance sheet position has resulted in an increasing net interest margin in the current rising interest rate environment since rate sensitive assets continue to
reprice at a faster rate than rate sensitive liabilities.



Interest
Income



Interest income for the three months
ended March 31, 2005 was $4.4 million, an increase of $1.9 million (75.8%) from $2.5 million for the three months ended March 31, 2004. Of this $1.9 million increase, $1.2 million of the increase was due to the additional interest income generated
by the earning assets acquired as a result of the business combination with First National Bank of Orange Park, and approximately $700,000 of the increase was due to additional interest and fees generated by continued growth in the earning assets of
the Company since the acquisition. In addition, the Company maintained an increasing level of interest income on loans as a result of increasing the volume of loans and through the repricing of the Companys rate sensitive loans in an
increasing interest rate environment.



Interest Expense



Interest expense for the three months ended March 31,
2005 was $1.5 million, an increase of $728,000 (97.9%) from $743,000 for the three months ended March 31, 2004. Of this $728,000 increase, $307,000 of the increase was due to the additional interest expense generated by the interest-bearing
liabilities acquired as a result of the business combination with First National Bank of Orange Park, and approximately $421,000 of the increase was due to additional interest expense generated by continued growth in the companys
interest-bearing liabilities such as money market accounts. In addition, the increasing interest rate environment has also contributed to the increase in interest expense.



Noninterest Income



Noninterest income for the three months ended March 31, 2005 was $474,000, an increase of $96,000 (25.4%) from $378,000 for the three months ended March
31, 2004. The increase in mortgage origination fees and noninterest income from the acquired bank served to offset decreases in the First National Bank of St. Marys service charges on deposit accounts and other service charges and fees.
Mortgage origination fees for the three months ended March 31, 2005 were $227,000, an increase of $105,000 (85.7%) from $122,000 for the three months ended March 31, 2004. First National Bank of Orange Park generated $19,000 in mortgage origination
fees and $68,000 in noninterest income through March 31, 2005. First National Bank of St. Marys service charges on deposit accounts and other service charges and fees through March 31, 2005 were $121,000, a decrease of $62,000 (33.8%) from
$182,000 for the three months ended March 31, 2005. The decrease was primarily due to a lower level of overdraft and administrative fees.



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Noninterest Expense



Noninterest expense for the three months ended March 31, 2005 was $2.3 million, an increase of $963,000 (74.4%) from $1.3 million for the three months
ended March 31, 2004. Of this $963,000 increase, $609,000 of the increase was due to the noninterest expenses of First National Bank of Orange Park, and $354,000 was due to additional noninterest expenses generated by the Company. Salary and
employee benefit costs were $940,000 for the three months ended March 31, 2005, an increase of $302,000 (47.4%) from $638,000 for the three months ended March 31, 2004. Of this $302,000 increase, $240,000 was the salary and employee benefit costs of
First National Bank of Orange Park, and $62,000 was due to additional salary and employee benefit costs generated by the Company. Occupancy expenses were $255,000 for the three months ended March 31, 2005, an increase of $196,000 (330.9%) from
$59,000 for the three months ended March 31, 2004. Of this $196,000 increase, $100,000 was due to occupancy expenses of First National Bank of Orange Park and $96,000 was due to additional noninterest expense generated by the Company primarily due
to increased expense on leased office space.



Provision for Loan Losses



Included in the statement of income for the periods ended
March 31, 2005 and 2004 is a non-cash expense related to the provision for loan losses of $3.1 million and $125,000 respectively. The allowance for loan losses was $5.2 million and $4.2 million as of March 31, 2005 and December 31, 2004,
respectively. The allowance for loan losses as a percentage of gross loans was 2.32% at March 31, 2005 and 1.89% at December 31, 2004. The loan portfolio is periodically reviewed to evaluate the outstanding loans and to measure both the performance
of the portfolio and the adequacy of the allowance for loan losses. Managements judgment as to the adequacy of the allowance is based upon a number of assumptions about future events that it believes to be reasonable, but which may or may not
be accurate. Because of the inherent uncertainty of assumptions made during the evaluation process, there can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additional allocations will not be
required.



First National Bank of St. Marys recorded net
charge-offs of $2.1 million for the three months ended March 31, 2005 compared to net recoveries of $53,000 for the three months ended March 31, 2004. The provision for loan losses and the amount of charge-offs were significantly increased as of the
end of the first quarter of 2005 due to loans that were identified during First National Bank of St. Marys regularly scheduled bank examination conducted by the Office of the Comptroller of the Currency (OCC) which began on March
7, 2005. Management engaged an outside consultant to perform additional review and analysis in order to confirm the findings of the OCC. The provision for loan losses was then increased based on the findings of both the OCC, the outside consultant,
and managements assessment of the ultimate collectibility of certain loans in the portfolio resulting from the individual circumstances of the borrowers involved. The increase in charge-offs and the subsequent provision for loan losses were
due to documentation and collateral deficiencies, and other weaknesses in the loans identified during the examination. First National Bank of Orange Park made provisions for loan losses of $17,000 for the three months ended March 31, 2005, and it
did not make any provisions for loan losses for the three months ended March 31, 2004. First National Bank of Orange Park did not record any net charge-offs for the three months ended March 31, 2005, nor did the bank record any net charge-offs for
the three months ended March 31, 2004.



Income Taxes



The Company recorded an income tax benefit of $783,000 for the three months
ended March 31, 2005 resulting from the net loss before taxes of $1.9 million. The decrease in net income before taxes for the three-month period ended March 31, 2005 as compared to the same period in 2004 was primarily due to loan losses
charged-off against the allowance in the consolidated financial statements described under the caption Current Regulatory Proceedings in Item 2 of Part I of this Form 10-QSB.



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Review Of Financial Condition



Overview



Total consolidated assets at March 31, 2005 were $264.3 million, a decrease of $1.4 million (0.5%) from December 31, 2004 total consolidated assets of
$265.6 million. Interest-earning assets increased to $239.2 million at March 31, 2005, from $236.6 million at December 31, 2004, an increase of $2.6 million, or 1.1%. Total loans, net of the allowance for loan losses, increased to $217.2 million at
March 31, 2005, from $216.1 million at December 31, 2004, an increase of $1.1 million, or 0.5%.



The Companys reduction in assets from December 31, 2004 to March 31, 2005 is primarily the result of a decrease in cash and due from correspondent
banks. Cash and due from correspondent banks at March 31, 2005 was $5.1 million, a decrease of $5.5 million (51.9%) from December 31, 2004 cash and due from correspondent banks of $10.7 million. The decrease in cash was primarily the result of an
increase in loans due to a continued level of strong loan demand.



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 March 31, 2005, loans
represented 90.8% of interest-earning assets compared to 91.3% at December 31, 2004. Investments in securities available for sale at March 31, 2005 were $17.8 million, an increase of $270,000 (1.5%) from $17.6 million at December 31, 2004. The
Companys Federal Home Loan Bank advances were $8.0 million at March 31, 2005, a decrease of $2.8 million (25.6%) from the December 31, 2004 balance of $10.8 million. The Company did not have any repurchase agreements at March 31, 2005 or
December 31, 2004. The Company did not have any federal funds purchased at March 31, 2005 or December 31, 2004.



Loan Portfolio



At March 31, 2005, the Companys loan portfolio was $217.2 million, an increase of $1.1 million (0.5%) compared to $216.1 million at December 31,
2004. The increase was primarily the result of an increased volume of loans at First National Bank of Orange Park. First National Bank of Orange Parks net loans at March 31, 2005 were $78.6 million, an increase of $3.9 million (5.2%) from
$74.7 million at December 31, 2004. The increased volume of loans at First National Bank of Orange Park served to offset the reduced volume of loans at First National Bank of St. Marys primarily due to $2.1 million in loan losses charged-off against
the allowance in the consolidated financial statements described under the caption Current Regulatory Proceedings in Item 2 of Part I of this Form 10-QSB. First National Bank of St. Marys net loans at March 31, 2005 were $38.7
million, a decrease of $2.8 million (2.0%) from $141.5 million at December 31, 2004. The following table presents various categories of loans contained in the Companys loan portfolio at the dates indicated:



|             |  |                        |         |                                              |       |   |                     |   |                                              |  |       |  
|------------ |  | ---------------------- | ------- | -------------------------------------------- | ----- | - | ------------------- | - | -------------------------------------------- |  | ----- | -
|Type of Loan |  | At March 31, 2005      |         | Percent ofloans ineachcategory tototal loans |       |   | At December31, 2004 |   | Percent ofloans ineachcategory tototal loans | 
|             |  | (dollars in thousands) |        
|Real Estate  |  |                        |         |                                              |       |   |                     |   |                                              |  |       |  
|Construction |  | $                      | 39,196  |                                              | 17.6  | % |                     | $ | 36,933                                       |  | 16.8  | %
|Mortgage     |  |                        | 151,940 |                                              | 68.3  | % |                     |   | 156,088                                      |  | 70.8  | %
|             |  |                        |         |                                              |       |   |                     |   |                                              |  |       |  
|Total        |  |                        | 191,136 |                                              | 85.9  | % |                     |   | 193,021                                      |  | 87.6  | %
|Commercial   |  |                        | 20,020  |                                              | 9.0   | % |                     |   | 15,017                                       |  | 6.8   | %
|Consumer     |  |                        | 11,241  |                                              | 5.1   | % |                     |   | 12,273                                       |  | 5.6   | %
|             |  |                        |         |                                              |       |   |                     |   |                                              |  |       |  
|Total        |  | $                      | 222,397 |                                              | 100.0 | % |                     | $ | 220,311                                      |  | 100.0 | %
|             |  |                        |         |                                              |       |   |                     |   |                                              |  |       |  



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Deposits



At March 31, 2005, the Companys deposits were $232.7 million, an increase of $3.1 million compared to $229.6 million at December 31, 2004. The
increase in total deposits was primarily the result of an increase in the volume of noninterest-bearing deposits. The Companys noninterest-bearing deposits at March 31, 2005 were $26.6 million, an increase of $2.8 million (11.7%) from $23.8
million at December 31, 2004. The following table presents the Companys various categories of deposits at the dates indicated:



|                                          |  |                   |         |                                                     |       |   |                     |   |                                                     |  |       |  
|----------------------------------------- |  | ----------------- | ------- | --------------------------------------------------- | ----- | - | ------------------- | - | --------------------------------------------------- |  | ----- | -
|Deposit Category (dollars in
thousands)   |  | At March 31, 2005 |         | Percent ofdeposits in eachcategory tototal deposits |       |   | At December31, 2004 |   | Percent ofDeposits in eachcategory tototal deposits | 
|Non-interest bearing demand deposits      |  | $                 | 26,590  |                                                     | 11.4  | % |                     | $ | 23,811                                              |  | 10.4  | %
|NOW                                       |  |                   | 21,502  |                                                     | 9.2   | % |                     |   | 27,571                                              |  | 12.0  | %
|Money market                              |  |                   | 58,897  |                                                     | 25.3  | % |                     |   | 53,581                                              |  | 23.3  | %
|Savings                                   |  |                   | 5,557   |                                                     | 2.4   | % |                     |   | 5,978                                               |  | 2.6   | %
|Certificates of deposit, $100,000 or more |  |                   | 73,346  |                                                     | 31.5  | % |                     |   | 75,521                                              |  | 32.9  | %
|Other time deposits                       |  |                   | 46,843  |                                                     | 20.1  | % |                     |   | 43,167                                              |  | 18.8  | %
|                                          |  |                   |         |                                                     |       |   |                     |   |                                                     |  |       |  
|Total                                     |  | $                 | 232,735 |                                                     | 100.0 | % |                     | $ | 229,629                                             |  | 100.0 | %
|                                          |  |                   |         |                                                     |       |   |                     |   |                                                     |  |       |  



Brokered deposits
represented $87.6 million (37.6% of total deposits) as of March 31, 2005 as compared to $89.4 million (39.0% of total deposits) at December 31, 2004. Both subsidiary banks have utilized these types of deposits at times when it is profitable to do so
and this option is exercised when deemed prudent by management. Due to the significant negative impact that the loan losses, described under the caption Current Regulatory Proceedings in Item 2 of Part I of this Form 10-QSB, had on asset
quality, capital adequacy, earnings and liquidity, the FDIC has limited the ability of First National Bank of St. Marys to solicit new brokered deposits. The FDIC has granted First National Bank of St. Marys a waiver which allows the renewal or
rollover of brokered deposits in an amount not to exceed $62.1 million. At March 31, 2005, First National Bank of St. Marys had $62.6 million in brokered deposits. The waiver will expire in October of 2005. Upon expiration, First National Bank of
St. Marys will be required to request an extension for an additional 6-month period. The Company anticipates being able to either renew or replace these deposits when they mature, although, no assurance can be given that the Company will be able to
replace these deposits with the same terms or rates. The restrictions described above have limited the growth of the First National Bank of St. Marys, and growth could continue to be restricted in the future.



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. As a result of the regulatory examination of First National Bank of St. Marys during early
2005, the Federal Home Loan Bank discontinued the ability of the First National Bank of St. Marys to utilize its unused borrowing capacity of $23.6 million due to the significant negative impact that the banks recent loan losses had on asset
quality, capital adequacy, earnings and liquidity. First National Bank of Orange Parks unused borrowing capacity available from the Federal Home Loan Bank at March 31, 2005 was $18.7 million. At March 31, 2005, the Company had $8.0 million in
advances from the Federal Home Loan Bank compared to $10.8 million at December 31, 2004. The weighted average interest rate on the Companys outstanding advances at March 31, 2005 was 5.38%.



The Company has utilized securities sold under agreements to repurchase,
which are classified as secured borrowings and generally mature within 90 days from the transaction date. The Company may be required to provide additional collateral based on the fair value of the underlying securities. At March 31, 2005, the
Company did not have any agreements to repurchase.



At March
31, 2005, the Companys subsidiary banks had an aggregate of six unused Federal funds purchased lines of credit from correspondent banking institutions totaling $10.0 million.



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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, any portion that
exceeds the 25% of capital limitation qualifies as Tier 2, or supplementary capital of the Company. At March 31, 2005, all of the debentures qualified as Tier 1 capital of the Company.



Intangible Assets



At March 31, 2005, the Company had $2.4 million in intangible assets resulting from the acquisition of First National Bank of Orange Park. The Company had
$2.5 million in intangible assets at December 31, 2004. Goodwill of $1.5 million and a core deposit intangible of $935,000 represented the balance of the intangible assets at March 31, 2005.



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.



Non-performing assets were $7.7 million at March 31, 2005, an increase of $2.0 million, or 36.1%, compared to $5.6 million at December 31, 2004. The
increase in non-performing assets was the result of loans identified during the regulatory examination of First National Bank of St. Marys during early 2005. The composition of non-performing assets for each date is shown below.



|                                 |  |                        |       |                  |   |      
|-------------------------------- |  | ---------------------- | ----- | ---------------- | - | -----
|                                 |  | March 31,2005          |       | December 31,2004
|                                 |  | (dollars in thousands)
|Non-accrual loans                |  | $                      | 6,236 |                  | $ | 4,296
|OREO, net of valuation allowance |  |                        | 1,430 |                  |   | 1,335
|                                 |  |                        |       |                  |   |      
|                                 |  | $                      | 7,666 |                  | $ | 5,631
|                                 |  |                        |       |                  |   |      



The ratio of
non-performing assets to net loans and other real estate was 3.51% at March 31, 2005 and 2.59% at December 31, 2004. Reduction and disposition of non-performing assets is a management priority.



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##### Table of Contents

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 provision for loan losses and the amount of
charge-offs were significantly increased as of the end of the first quarter of 2005 due to loans that were identified during First National Bank of St. Marys regularly scheduled bank examination conducted by the OCC which began on March 7,
2005. Management engaged an outside consultant to perform additional review and analysis in order to confirm the findings of the OCC. The provision for loan losses was then increased based on the findings of both the OCC, the outside consultant, and
managements assessment of the ultimate collectibility of certain loans in the portfolio resulting from the individual circumstances of the borrowers involved. 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 $3.1 million during the three months ended March 31, 2005. The ratio of allowance for loan losses to total gross loans was 2.32% at March 31, 2005 and 1.89% at December 31, 2004. 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.



Through March 31, 2005, First National Bank of St. Marys and
First National Bank of Orange Park recorded net charge-offs of $2.1 million and $0, respectively and provisions to the loan loss reserve of $3.1 million and $17,000, respectively. The additional net charge-offs recorded by First National Bank of St.
Marys are primarily the result of unsound lending practices by the former President of the bank. The additional provisions to the loan loss reserve were based on continued concern for unknown risk due to the unsound lending practices by the former
President of the bank.



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. However, the Federal Home Loan Bank has discontinued the
ability of First National Bank of St. Marys to utilize its unused borrowing capacity and the FDIC has limited the banks ability to solicit new brokered deposits as a result of the regulatory exam of First National Bank of St. Marys during
early 2005. The Companys subsidiary banks actively manage the levels, types and maturities of earning assets in relation to the sources available to fund current and future needs to ensure that adequate funding will be available at all times.



Management is committed to maintaining capital at a level
sufficient to protect depositors, provide for reasonable growth, and fully comply with all regulatory requirements. Managements strategy to achieve this goal is to retain sufficient earnings while providing a reasonable return on equity.
Federal banking regulations establish certain capital adequacy standards required to be maintained by banks. These regulations set minimum requirements for risk-based capital of 4% for core capital (Tier I), 8% for total risk-based
capital and 4% for the leverage ratio. At March 31, 2005, the Company and the its bank subsidiaries were in compliance with each of the applicable regulatory capital requirements. The Company and First National Bank of St. Marys were considered to
be adequately capitalized. First National Bank of Orange Park was considered to be well capitalized at March 31, 2005. The Company and its subsidiary banks actual capital amounts and ratios as of March 31, 2005 are
presented in the following table:



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##### Table of Contents

|                                           |  |                        |        |       |                              |   |        |                                                                 |        |  |      |        |  |       |        |  |       |  
|------------------------------------------ |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------ | --------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                           |  | Actual                 |        |       | For CapitalAdequacy Purposes |   |        | To Be Well Capitalized Under Prompt CorrectiveAction Provisions |       
|                                           |  | Amount                 |        | Ratio |                              |   | Amount |                                                                 | Ratio  |  |      | Amount |  | Ratio |       
|                                           |  | (dollars in thousands) |       
|March 31, 2005                             |  |                        |        |       |                              |   |        |                                                                 |        |  |      |        |  |       |        |  |       |  
|Total Capital ( to Risk Weighted Assets )  |  |                        |        |       |                              |   |        |                                                                 |        |  |      |        |  |       |        |  |       |  
|Consolidated                               |  | $                      | 22,090 |       | 9.61                         | % |        | $                                                               | 18,384 |  | 8.00 | %      |  | $     | 22,979 |  | 10.00 | %
|First National Bank - St. Marys            |  | $                      | 11,362 |       | 8.02                         | % |        | $                                                               | 11,330 |  | 8.00 | %      |  | $     | 14,163 |  | 10.00 | %
|First National Bank - Orange Park          |  | $                      | 9,806  |       | 11.18                        | % |        | $                                                               | 7,018  |  | 8.00 | %      |  | $     | 8,773  |  | 10.00 | %
|Tier 1 Capital ( to Risk Weighted Assets ) |  |                        |        |       |                              |   |        |                                                                 |        |  |      |        |  |       |        |  |       |  
|Consolidated                               |  | $                      | 19,187 |       | 8.35                         | % |        | $                                                               | 9,192  |  | 4.00 | %      |  | $     | 13,788 |  | 6.00  | %
|First National Bank - St. Marys            |  | $                      | 9,562  |       | 6.75                         | % |        | $                                                               | 5,665  |  | 4.00 | %      |  | $     | 8,498  |  | 6.00  | %
|First National Bank - Orange Park          |  | $                      | 8,705  |       | 9.92                         | % |        | $                                                               | 3,509  |  | 4.00 | %      |  | $     | 5,264  |  | 6.00  | %
|Tier 1 Capital ( to Average Assets )       |  |                        |        |       |                              |   |        |                                                                 |        |  |      |        |  |       |        |  |       |  
|Consolidated                               |  | $                      | 19,187 |       | 7.35                         | % |        | $                                                               | 10,441 |  | 4.00 | %      |  | $     | 13,051 |  | 5.00  | %
|First National Bank - St. Marys            |  | $                      | 9,562  |       | 5.47                         | % |        | $                                                               | 6,988  |  | 4.00 | %      |  | $     | 8,735  |  | 5.00  | %
|First National Bank - Orange Park          |  | $                      | 8,705  |       | 9.43                         | % |        | $                                                               | 3,693  |  | 4.00 | %      |  | $     | 4,616  |  | 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 March 31, 2005, commitments
to extend credit totaled $38.7 million and represented the unfunded portion of equity, working capital and general lines of credit. At March 31, 2005, the Company had $432,000 in credit card commitments and $1.5 million 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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##### Table of Contents

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 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 on a quarterly basis. Management, including the principal executive and financial officers, evaluated the effectiveness of the
design and operation of disclosure controls and procedures as of March 31, 2005 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. As a result of the issues described under the caption Current Regulatory Proceedings in Item 2 of Part I of this Form 10-QSB, the Company is currently in the process of strengthening the loan review process by
engaging an outside consultant to perform a quarterly loan review. The Company is also currently in the process of strengthening the internal audit program by engaging an outside consultant to perform a quarterly comprehensive internal audit. In
addition, Audit Committee meetings are now scheduled on a monthly, rather than quarterly, basis. The loan committee structure has been modified in order to review a greater volume of loans, and a stringent level of documentation requirements and
procedures must followed prior to the presentation of a credit to the committee.



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##### Table of Contents

PART II. OTHER INFORMATION



Item 6. Exhibits



The following exhibits are
filed with this Report:



|            |  |   |  |                                                                                                                                                                                                                               
|----------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |   |  | Description                                                                                                                                                                                                                   
|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 Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.                                                                                                                               
|            |  |  
|32.1        |  | - |  | Certifications Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.                                                                                                                                                         

|
|



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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 3, 2005 |  | By:                       |  | /s/ Roscoe H. Mullis                
|                     |  |                           |  | Roscoe H. Mullis                    
|                     |  |                           |  | Chairman and Chief Executive Officer
|                     |  |                           |  | (principal executive officer)       
|                     |  |                          
|Date: August 3, 2005 |  | By:                       |  | /s/Yong M. Kim                      
|                     |  |                           |  | Yong M. Kim                         
|                     |  |                           |  | Chief Financial 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 Financial 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.                                        



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