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FORM 10-Q U.S. SECURITIES AND EXCANGE COMMISSION WASHINGTON, D.C. 20549
    QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2004 1ST NATIONAL BANCSHARES, INC.  Florida
    
    333-60283
    
    06-1522028(Jurisdiction of Organization)
    
    Commission
File Number
    
    I.R.S. Employer
Identification No.
 5817 Manatee Avenue West, Bradenton, Florida
(Address of principal office)
    
    34209
(Zip Code)
 Registrants telephone number, including area code: (941) 794-6969 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934
during the preceding 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 of the past 90 days. Yes [X]     No [   ] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Common stock, par value $.10 per share
    
    3,125,411 shares(class)
    
    Outstanding as of July 30, 2004




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FIRST NATIONAL BANK OF MANATEE
Index to Form 10-Q
For the quarter Ended June 30, 2004 PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets,
June 30, 2004 and December 31, 2003
    
    
    1Condensed Consolidated Statements
of Income for the three and six months ended
June 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of
Cash Flows for the six months ended
June 30, 2004 and June 30, 2003
    
    
    4Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    6Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    10PART II. OTHER INFORMATION.Item 1. Legal Proceedings
    
    
    12Item 2. Changes in Securities and Use of Proceeds
    
    
    12Item 3. Defaults under Senior Securities
    
    
    12Item 4. Submission of Matters to a vote of Security Holders
    
    
    12Item 5. Other Information.
    
    
    12Item 6. Exhibits and Reports on Form 8-K
    
    
    12SIGNATURES
    
    
    13EX-31.1: Section 302 Certification of CEOEX-31.2: Section 302 Certification of CFOEX-32.1: Section 906 Certification of CEOEX-32.2: Section 906 Certification of CFO




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements FIRST NATIONAL BANCSHARES, INC. 
  Assets (000s) June 30
    
    December 312004
    
    2003(Unaudited)
    
    **Cash and Due from Banks
    
    
    8,146
    
    
    
    6,876Int. Bearing Bank Balances
    
    
    10,197
    
    
    
    8,412Fed Funds Sold
    
    
    0
    
    
    
    0Investment Securities
    
    
    51,702
    
    
    
    46,869Unrecognized Security Gains
    
    
    -541
    
    
    
    244Loans
    
    
    226,251
    
    
    
    206,742Less Allowance for Credit Losses
    
    
    -2,266
    
    
    
    -2,067Deferred Loan Fees (earned)
    
    
    -430
    
    
    
    -361Premises and Equipment, Net
    
    
    7,546
    
    
    
    7,737Accrued Interest Receivable
    
    
    1,139
    
    
    
    986Deferred Income Tax Charges
    
    
    0
    
    
    
    74Other R. E. & Assets Owned
    
    
    0
    
    
    
    0Goodwill & Other Intangible Assets
    
    
    1,212
    
    
    
    0Other Assets
    
    
    2,446
    
    
    
    1,720Total Assets
    
    
    305,402
    
    
    
    277,232
 ** Condensed from audited financial




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Liabilities and Stockholders Equity (000s) June 30
    
    December 312004
    
    2003DepositsDemand, non-interest bearing
    
    
    38,588
    
    
    
    32,991Demand, interest bearing
    
    
    40,371
    
    
    
    39,603Time (CDs, MMs, & Savings Accounts)
    
    
    183,375
    
    
    
    160,733TOTAL DEPOSITS
    
    
    262,334
    
    
    
    233,327Repurchase Agreements
    
    
    2,770
    
    
    
    11,301Accrued Interest Payable
    
    
    931
    
    
    
    652Accounts Payable and Other Liabilities
    
    
    824
    
    
    
    437Fed Funds Purchased and Other Borrowings
    
    
    13,900
    
    
    
    9,500TOTAL LIABILITIES
    
    
    280,759
    
    
    
    255,217Stockholders EquityCommon Stock, par value $.10 per share;Authorized 7,500,000 shares;Issued and Outstanding, 3,125,411
    
    
    313
    
    
    
    199Capital Surplus
    
    
    17,963
    
    
    
    16,209Unrecognized Gains & Losses
    
    
    -337
    
    
    
    153Retained Earnings
    
    
    6,704
    
    
    
    5,454Net Stockholders Equity
    
    
    24,643
    
    
    
    22,015Total Liabilities and Stockholders Equity
    
    
    305,402
    
    
    
    277,232




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FIRST NATIONAL BANCSHARES, INC 
 Statement of Income (unaudited)
For the Period January 1 through June 30 (000s) 6 months
    
    6 months
    
    3 months
    
    3 months2004
    
    2003
    
    2004
    
    2003Interest Income:Interest Bearing Bank Balances
    
    
    44
    
    
    
    72
    
    
    
    29
    
    
    
    36Fed Funds Sold
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Investment Securities:Taxable
    
    
    732
    
    
    
    618
    
    
    
    339
    
    
    
    320Exempt from Federal Taxes
    
    
    169
    
    
    
    186
    
    
    
    84
    
    
    
    94Loan Interest
    
    
    6,331
    
    
    
    5,197
    
    
    
    3215
    
    
    
    2,566Loan Fees
    
    
    154
    
    
    
    131
    
    
    
    84
    
    
    
    86Total Interest Income
    
    
    7,430
    
    
    
    6,204
    
    
    
    3,751
    
    
    
    3,102Interest Expense
    
    
    1,996
    
    
    
    1,558
    
    
    
    1018
    
    
    
    768Net Interest Income
    
    
    5,434
    
    
    
    4,646
    
    
    
    2,733
    
    
    
    2,334Provision for Credit Losses
    
    
    200
    
    
    
    64
    
    
    
    70
    
    
    
    18Net Interest Income After Credit Loss Provision
    
    
    5,234
    
    
    
    4,582
    
    
    
    2,663
    
    
    
    2,316Other Operating Income:Service Charges on Accounts
    
    
    193
    
    
    
    232
    
    
    
    95
    
    
    
    109Investment Security Gains
    
    
    0
    
    
    
    83
    
    
    
    0
    
    
    
    29Trust Fees & Investment Sales Commissions
    
    
    755
    
    
    
    449
    
    
    
    410
    
    
    
    245Other Income
    
    
    192
    
    
    
    247
    
    
    
    93
    
    
    
    127Total Other Operating Income
    
    
    1,140
    
    
    
    1,011
    
    
    
    598
    
    
    
    510Other Operating Expenses:Salaries & Employee Benefits
    
    
    2,621
    
    
    
    2,235
    
    
    
    1319
    
    
    
    1,143Occupancy & FF&E
    
    
    683
    
    
    
    595
    
    
    
    354
    
    
    
    309Other Expenses
    
    
    968
    
    
    
    897
    
    
    
    512
    
    
    
    468Total Other Operating Expenses
    
    
    4,272
    
    
    
    3,727
    
    
    
    2,185
    
    
    
    1,920Profit Before Tax
    
    
    2,102
    
    
    
    1,866
    
    
    
    1,076
    
    
    
    906Estimated State and Federal Income Taxes
    
    
    744
    
    
    
    645
    
    
    
    383
    
    
    
    308Profit After Tax
    
    
    1,358
    
    
    
    1,221
    
    
    
    693
    
    
    
    598




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FIRST NATIONAL BANCSHARES, INC EARNINGS PER SHARE For the Period January 1 through June 30 6 months
    
    6 months
    
    3 months
    
    3 months2004
    
    2003
    
    2004
    
    2003Profit After Tax
    
    $
    1,358,000
    
    
    $
    1,221,000
    
    
    $
    693,000
    
    
    $
    598,000Average Shares Outstanding
    
    
    3,110,806
    
    
    
    2,981,464
    
    
    
    3,096,201
    
    
    
    2,981,464Earnings per Share  Basic
    
    $
    0.44
    
    
    $
    0.41
    
    
    $
    0.22
    
    
    $
    0.20Average Shares Outstanding Fully diluted
    
    
    3,320,286
    
    
    
    3,167,269
    
    
    
    3,316,340
    
    
    
    3,163,449Earnings per Share Fully Diluted
    
    $
    0.41
    
    
    $
    0.39
    
    
    $
    0.21
    
    
    $
    0.19
  1.
    
    Adjusted for stock dividends paid on September 30, 2003 and a stock split
on June 30,2004. COMPREHENSIVE INCOME
(unaudited) (000s)
For the Period January 1 through June 30 Under FASB Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, the Company is required to report a measure of all
changes in equity, not only reflecting net income but certain other changes as
well. At June 30, 2004 and 2003, comprehensive income was as follows: 6 months
    
    6 months
    
    3 months
    
    3 months2004
    
    2003
    
    2004
    
    2003Profit After Tax
    
    
    1,358
    
    
    
    1,221
    
    
    
    693
    
    
    
    598Unrealized Securities Gains Net of Taxes
    
    
    -490
    
    
    
    28
    
    
    
    -811
    
    
    
    92Comprehensive Income
    
    
    868
    
    
    
    1,249
    
    
    
    -118
    
    
    
    690




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STATEMENTS OF CASH FLOWS (unaudited) (000s)
 2004
    
    2003Operating activitiesNet Income
    
    
    1,358
    
    
    
    1,221Adjustments to reconcile net income to cash provided by operating activities:Depreciation & leasehold amortization
    
    
    256
    
    
    
    257Allowance for loan losses (net of charge offs)
    
    
    199
    
    
    
    22Decrease (increase) in accrued interest receivable
    
    
    -153
    
    
    
    86Increase (decrease) in accrued interest payable
    
    
    279
    
    
    
    875Increase (decrease) in accounts payable and other liabilities
    
    
    388
    
    
    
    -258Decrease (increase) in other assets
    
    
    -76
    
    
    
    -300Net cash provided by operating activities
    
    
    2,251
    
    
    
    1,903Investing activitiesProceeds from sales and maturities ofInvestment securities net of purchases
    
    
    -4,833
    
    
    
    -8,118Loans originated, net of principal collections
    
    
    -19,509
    
    
    
    -7,369Capital expenditures
    
    
    -65
    
    
    
    0Proceeds from sale of other R. E. and assets owned
    
    
    0
    
    
    
    -18Increase (decrease) in overnight funds purchased
    
    
    0
    
    
    
    0Decrease (increase) in federal funds and overnight funds sold
    
    
    -1,785
    
    
    
    4,991Net cash provided (used) by investing activities
    
    
    -26,192
    
    
    
    -10,514Financing activitiesNet increase (decrease) in demand deposits
    
    
    6,365
    
    
    
    7,182Net increase (decrease) time deposits
    
    
    22,642
    
    
    
    -1,169Increase (decrease) in term borrowings
    
    
    4,400
    
    
    
    -500Increase (decrease) in securities sold under agreements to repurchase
    
    
    -8,531
    
    
    
    2,571Dividends paid
    
    
    0
    
    
    
    0Proceeds from issuance of common stock
    
    
    335
    
    
    
    277Retirement of common stock
    
    
    0
    
    
    
    0Net cash (used) provided by financing activities
    
    
    25,211
    
    
    
    8,361Net increase in cash and due from banks
    
    
    1,270
    
    
    
    -250Cash and due from banks at beginning of year
    
    
    6,876
    
    
    
    7,995Cash and due from banks at end of quarter
    
    
    8,146
    
    
    
    7,745Schedule of non-cash investing activitiesLoans transferred to other real estate owned
    
    $
    0
    
    
    $
    0




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NOTES TO CONDENSED FINANCIAL STATEMENTS Note 1  Basis of Financial Reporting The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with instructions to Form 10-Q and do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all normal and recurring adjustments necessary for fair presentation of such
financial statements have been included. For further information, refer to the
consolidated financial statements and the notes thereto included in the Banks
annual report on Form 10-K for the year ended December 31, 2003. Results for the six month period ended June 30, 2004, may not necessarily be
indicative of those to be expected for the entire year. Note 2 In March, 2004 the Company
merged with The Trust Company of Florida (Trust
Company) effective February 29, 2004. The accompanying condensed financial
statements included earlier in this 10Q include the results of operations of
Trust Company since that date. The total purchase price was $2,453,000
including $1,027,000 in cash and $1,426,000 in common stock. In addition,
acquisition expenses were approximately $83,000. The following table summarizes
the estimated values of the assets acquired and liabilities assumed at the date
of acquisition. ($000s)Current assets
    
    $
    1,294Furniture and equipment
    
    
    72Goodwill and customer relationships
    
    
    1,212Total assets acquired
    
    
    2,578Current liabilities assumed
    
    
    (42
    )Net assets acquired
    
    
    2,536
 Pro forma information includes the Trust Company information as if the merger had been completed as of
January 1, 2003 June 30
    
    June 302004
    
    2003Net interest income
    
    
    5,434
    
    
    
    4,646Total other operating income
    
    
    1,239
    
    
    
    1,289Net Income
    
    
    1,305
    
    
    
    1,066Basic earnings per share
    
    
    0.42
    
    
    
    0.36Fully diluted earnings per share
    
    
    0.39
    
    
    
    0.34




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##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of
Operations. Overview. 1st National Bank & Trust (formerly First National Bank of Manatee) (the
Bank) commenced operations on July 18, 1986. The Banks activities since
inception have consisted of accepting deposits, originating a variety of loans.
The Banks first branch was opened on Anna Maria Island (5 miles west of the
main office) in October, 1994. The Bank has periodically opened additional
branches in Manatee County and now has five full service locations. The bank
also opened a Trust Department in March of 1995. Earlier this year, the Bank
also opened a loan production office in downtown Sarasota. The Bank, as a
local independent bank, follows a philosophy of developing its equity and
deposit base and focusing its lending activities within its community. The
Banks underlying lending policy has been and is anticipated to continue being
directed toward better-than-normal credit risks. On January 1, 1999 the Bank was merged into First National Bancshares,
Inc., a Florida corporation (the Holding Company). The Holding Company was
formed specifically for the purpose of having the Bank merged into it. The
Holding Company is now a one bank holding company with no other subsidiaries
than the Bank. Therefore, there are no significant adjustments from the
financial information of the Bank to the consolidated financial information for
the Holding Company. The following discussion and analysis is based on the Holding Companys
financial condition and results of operations for the period from January 1,
2004 through June 30, 2004. This discussion and analysis should be read in
conjunction with the financial statement summaries of the Holding Company,
included elsewhere in this quarterly report. Results of Operations. Earnings in the first half of 2004 were up $137,000 or 11% compared to
earnings in the same period last year as direct result of net interest income
rising faster than operating expenses. This is directly related to loan growth
and level expenses when adjusted for the trust company merger in the first
quarter. Net interest income increased by $788,000 before increased loan loss
reserve expense of $136,000, funded exclusively to cover loan growth. Operating
expenses were up $545,000 due largely to the acquisition of Trust Company of
Florida and taking over its operations and increased salaries of the bank to
support growth. The Trust Company overhead was offset by an increase in Trust
and Investment sales revenues of $306,000. The Trust Company merger was in
March, 2004 and therefore is included in the earnings and expense statement for
four months. Second quarter earnings mirrored the year to date earnings, with 2004
quarterly earnings at $693,000 compared to $598,000 in the second quarter of
2003. Operating expenses increased $265,000 in the second quarter of 2004 when
compared to 2003. Again, the major component of this was increased salary
expense associated with the Trust Company operations and increased staffing to
support growth. This was offset by increased Trust and Investment Sales income
of $165,000 and increased net interest income of $399,000.




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Net Interest Income. The major component of the Banks earning capacity is net
interest income, which represents the difference or spread between interest
income on earning assets and interest bearing liabilities, primarily deposits.
The spread is considered positive when rate-sensitive assets exceed
rate-sensitive liabilities, and negative when rate-sensitive liabilities exceed
rate sensitive assets. Net interest income is also affected by changes in
interest rates earned and paid, and by changes in the volume of
interest-earning assets and interest-bearing liabilities. To the extent
possible, the Bank follows a strategy intended to insulate the Banks interest
rate spread from adverse changes in interest rates by maintaining spreads
through the adjustability of its earning assets and interest-bearing
liabilities. On June 30, 2004, the Banks loan portfolio had a high ratio of
repriceability within one year. The Bank had good growth in its loan portfolio outstandings when compared
to last year, up 36% over last year and 9% over year end. This contributed to
an increased in net interest income offset by increased Loan Loss Reserve
contributions to support the growth. Net interest income for six months in
2004 was up by $788,000 compared to 2003 while second quarter net interest
income in 2004 was up by $399,000 when compared to 2003. Interest Earning Assets. Real estate related loans at June 30, 2004,
accounted for a majority of the banks loan portfolio. Most of the mortgages
are variable rate loans and are adjustable each one to five years. Thus,
volatile interest rates can result in the real estate loans lagging market
conditions. In 2000, rates were initially stable but began to fall in the
second half of the year and this drop in rates continued into 2001 and leveled
off there. This interest rate decline allowed the Bank to significantly
reprice its deposits and widen its margins. Rates continued to fall in 2002
and 2003. The bank maintained its margins during the first quarter but saw
some narrowing of margins in the second quarter as rates leveled out and loan
repricing began to catch up with the faster deposit repricing. As rates
continued to be stable in the second half of 2003, the banks margins continued
to narrow moderately, however, the banks growth more than offset the narrower
margins. The Banks investment portfolio is concentrated primarily in U.S.
Government agencies and corporations. About 12% of the Banks investment
portfolio re-prices in one year. The Banks Available-for-Sale portfolio has a
market value of about $541,000 below book value due to recent increases in open
market bond rates. Non-interest Earning Assets. Non-interest earning assets accounted for 7% of
total assets on June 30, 2004, and primarily consisted of cash and due from
banks, equipment and branches, accrued interest receivable and intangibles that
resulted from the Trust Company of Florida merger. Funding Sources. The primary source of funds for the Banks lending and
investment activities is deposits. At June 30, 2004 the Banks total deposits
were $262.3 million plus $2.8 million in repurchase agreements. The Banks
deposits are highly concentrated in interest-bearing accounts, which is typical
for the Banks market area. The Bank has 15% of its deposits in NOW Accounts
and 70% of its deposits in Savings, MMAs and CD deposits. Despite a high
concentration of certificates of deposit, the Bank does not anticipate the
maturity of such certificates to affect the Banks liquidity, as management
believes that the high concentration was primarily due to customer
relationships and




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not higher than market rates. The Bank is not in the practice of paying above
market rates on deposits. Non-interest Income. The Banks non-interest income for the six month period
ended June 30, 2004 was $1,140,000 including $755,000 from its Trust Department
and Investment Sales areas.
These are up from $1,011,000 and $449,000 last year. For the second quarter,
non-interest income was $598,000, up from $510,000 last year. Periodic security transactions generate investment gains or losses and are
primarily a result of tax management considerations and liquidity requirements.
The bank had no security gains in the first half or 2004 but had $83,000 in
gains in the first half of 2003 of which $29,000 occurred in the second
quarter. The other significant items of non-interest income represented service
charges on deposit accounts and merchant credit card account income. Non-interest Expense. The Banks non-interest expense for the six month period
ended June 30, 2004 was $4,272,000 including $2,621,000 of salaries and
employee benefits and occupancy and equipment expense of $683,000.
Non-interest expense was up from $3,727,000 in 2003. The increase in expense
is primarily due to new overhead associated with the operations of the newly
acquired Trust Company of Florida and the growth of the bank. Non-interest
expense was also up proportionally in the second quarter rising from $1,920,000
in 2003 to $2,185,000 in 2004. Allowance for Credit Losses. The allowance for credit losses is established
through a provision for credit losses charged to expenses. Loans are charged
against the allowance for credit losses when management believes that the
collectability of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb losses inherent in existing
loans and commitments to extend credit based on evaluations of the
collectability and prior loan loss experience of loans and commitments to
extend credit. The evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may
affect the borrowers ability to pay. An allowance for loan loss expense of $200,000 was charged to operating
expenses for the six month period ended June 30, 2004. The Bank had net charge
offs during this period of $1,000. This compares to an expense of $64,000 in
2003 after net charge-offs of $42,000. The Bank has a total of $2,266,000
reserved for future loan losses. The expense is 2004 has been almost
exclusively to support loan growth, while in 2003, only 34% of the expense was
to cover growth. Loans on which the accrual of interest has been discontinued are
designated as non-accrual loans. Accrual of interest on loans is discontinued
either when reasonable doubt exists as to the full, timely collection of
interest or when a loan becomes contractually past due by 90 days or more with
respect to interest or principal. When a loan is placed on non-accrual status,
all interest previously accrued but not collected is reversed against current
period interest income unless it is adequately secured. Income on such loans
is then recognized only to the extent that cash is received and the




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future collection of principal is probable. Interest accruals are resumed
on such loans only when they are brought fully current with respect to interest
and principal and when in the judgment of management, the loans are estimated
to be fully collectible as to both principal and interest. The bank had one
residential real estate loans on non-accrual at June 30, 2004 totaling $55,000
that was less than 30 days past due. In addition, the bank had one commercial
mortgage $1,307,000 on non-accrual that was not past due at month-end. Where
appropriate, the Bank makes specific reserves for future losses on
non-performing loans. The Bank has no specific reserves established at June
30, 2004. The bank also had no other real estate owned at June 30,2004. Capital Resources. In the normal course of business, the capital position of
the Bank is reviewed by management and regulatory authorities. The Comptroller
of the Currency has specified guidelines for purposes of evaluating a banks
capital adequacy. Currently, banks must maintain a minimum primary capital
ratio of capital-to-assets of 4%. Primary capital includes the Banks
stockholders equity, subordinated debt, and the allowance for credit losses.
At June 30, 2004, the Banks Tier 1 Capital Leverage Ratio was approximately
7.76%. In 1991, the Comptroller began evaluating banks capital on a risk
basis i.e. more capital will be required for commercial loans than for
residential real estate loan and even less will be required for government
bonds. The Comptroller will require a minimum of an 8% capital ratio under
this risk based method. Currently the Bank has a Tier 1 Risk- Based Capital
Ratio of 8.88 % and a Total Risk Based Capital Ratio of 9.75% Liquidity. Management of the Bank continually evaluates its liquidity
position. Management believes that the Banks investment portfolio, when
combined with interest bearing bank balances and Fed Funds sold, provides
adequate liquidity to meet the Banks needs. As noted in Funding Sources
above, management believes that the high concentration of time deposits is
primarily due to customer relationships and not to higher-than-market rates
and, thus, do not present any unusual liquidity risk. In addition, the bank has
established borrowing lines with correspondent banks, and with the Federal Home
Loan Bank to cover liquidity needs. Impact of Inflation and Changing Prices. Unlike most industrial companies,
virtually all of the Banks assets and liabilities are monetary in nature. As
a result, interest rates have a more significant impact on the Banks
performance than do the effects of inflation. Interest rates do not
necessarily move in the same direction or with the same magnitude as the prices
of goods and services, since such prices are affected by inflation. In the
current interest rate environment, liquidity and the maturity structure of a
financial institutions assets and liabilities are also critical to maintaining
an acceptable performance level.




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Quantitative and Qualitative Disclosure About Market Risk The Bank periodically performs asset/liability analysis to assess the
Banks sensitivity to changing market conditions. The primary function of
asset/liability management is to assure adequate liquidity and maintain an
appropriate balance between interest-sensitive earning assets and
interest-bearing liabilities. Liquidity management involves the ability to meet
the cash flow requirements of customers who may be either depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs. Interest rate sensitivity management
seeks to avoid fluctuating net interest margins and to enhance consistent
growth of net interest income through periods of changing interest rates. Marketable investment securities, particularly those of shorter
maturities, are a principal source of asset liquidity. Securities maturing,
expected to be called, and amortization within one year or less amounted to
$5,943,000 at June 30, 2004 representing 12% of the investment securities
portfolio. The Bank moderates its liquidity needs by maintaining short term borrowing
lines with several regional banks. At June 30, 2004, the Bank had lines of
credit established with other banking institutions totaling $105,000,000 of
which $91,100,000 was unused. Brokered deposits are deposit instruments, such as certificates of
deposit, bank investment contracts and certain municipal investment contracts
that are issued through brokers who then offer and/or sell these deposit
instruments to one or more investors. The Bank does not currently purchase or
sell brokered deposits. Maturities of time certificates of deposit of $100,000 or more,
outstanding at June 30, 2004, are summarized as follows: (thousands of dollars)3 months or less
    
    $
    4,450Over 3 through 12 months
    
    
    12,256Over 12 through 36 months
    
    
    13,778Over 36 months
    
    
    208Total
    
    $
    30,692
 Interest rate sensitivity varies with different types of interest earning
assets and interest-bearing liabilities. Overnight federal funds, on which
rates change daily, and loans, which are tied to the prime rate, differ
considerably from long-term investment securities and fixed-rate loans.
Similarly, time deposits over $100,000 and money market accounts are much more
interest rate sensitive than passbook savings accounts. The shorter term
interest rate sensitivities are key to measuring the interest sensitivity gap,
or excess interest-sensitive earning assets over interest-bearing liabilities. The following table shows the interest sensitivity gaps for four different
time intervals as of June 30, 2004. For the first year, interest-sensitive
assets exceed liabilities by $28,327,000. Over the following two years,
liabilities re-price faster than assets. The excess of interest-bearing
liabilities over interest-earning assets for the one-to-three year period is
primarily related to the longer maturities of CDs and NOW and MMA accounts
that are regarded as much less rate sensitive.




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##### Table of Contents



As of June 30
(thousands of dollars) 0-90
    
    91-365
    
    1-3
    
    3-5
    
    Over 5Days
    
    Days
    
    Years
    
    Years
    
    YearsInterest-Sensitive Assets
    
    $
    59,154
    
    
    $
    63,481
    
    
    $
    87,107
    
    
    $
    49,285
    
    
    $
    15,736Interest-Sensitive Liabilities
    
    $
    55,646
    
    
    $
    35,154
    
    
    $
    141,303
    
    
    $
    5,530
    
    
    $
    Interest-Sensitive Gap
    
    $
    3,508
    
    
    $
    28,327
    
    
    $
    (54,196
    )
    
    $
    43,755
    
    
    $
    15,736Cumulative Gap
    
    $
    3,508
    
    
    $
    31,835
    
    
    $
    (22,361
    )
    
    $
    21,394
    
    
    $
    37,130
 The primary interest sensitive assets and liabilities in the one-year
maturity range are loans and time deposits. Trying to minimize this gap while
maintaining earnings is a continual challenge in a changing interest rate
environment and one of the objectives of the Banks asset/liability management
strategy.




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##### Table of Contents



Part II. Other Information 
 Item 1: Legal Proceedings Against the Bank  None. 
 Item 2: Changes in Securities and Use of Proceeds  None 
 Items 3: Defaults under Senior Securities  None 
 Item 4: Submission of Matters to a vote of Security Holders  None. 
 Item 5: Other Information  None Item 6: Controls and Procedures 
 Item 7: Exhibits and Reports on Form 8-K Exhibits  a)
    
    Plan of acquisition, reorganization, arrangement,
liquidation, or succession.  Noneb)
    
    Articles of incorporation and by-laws.  1)
    
    A copy of the Amended and Restated
Articles of Incorporation of the Registrant is included
as Exhibit 3.A to the Registration Statement.2)
    
    A copy of the Bylaws of the
Registrant is included as Exhibit 3.B to this
Registration Statement.  c)
    
    Instruments defining the rights of securities
holders, including indentures.Noned)
    
    Published report regarding matters submitted to
vote of security holders.None  31.1
    
    Section 302 Certification of CEO31.2
    
    Section 302 Certification of CFO32.1
    
    Certification of CEO pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of CFO pursuant to 18 U.S.C. section 1350, as enacted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002. FIRST NATIONAL BANCSHARES, INC.August 2, 2004/s/ Glen W. Fausset

Glen W. FaussetPresident and Director




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##### Table of Contents



Item 6. Controls and Procedures. The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures as of
June 30, 2004, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures were effective as of June
30, 2004, in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in
the Companys periodic SEC filings. There was no change in the Companys internal control over financial reporting
that occurred during the Companys fiscal quarter ended June 30, 2004, that has
materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.