# Exhibit 13

2003 Annual Report of the
Company

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[Insert
company logo]

FIRST NATIONAL
BANCSHARES, INC.

# 2003 Annual Report

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[Insert Management Team
Ad]

OUR MISSION

Our
mission is to be the premier bank in our markets that exceeds the expectations of our
customers, employees, stockholders and the community and to provide quality, competitive
financial products and services with a team of friendly, well-trained professionals.

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[Insert horizontal
bancshares logo]

LETTER TO SHAREHOLDERS

March 22, 2004

Dear Fellow Shareholders:

On behalf of our board of directors,
we are pleased to report your companys 2003 financial results. We are excited to
report that 2003s pre-tax earnings grew to $1,341,617, an increase of 125% over
2002s results. This comparison is more relevant than net income since 2002s
operating results did not include income tax expense due to the utilization of prior year
net tax loss carryforwards.

Net income for the year ending
December 31, 2003, was $915,726, an increase of 53.9% compared to net income of $595,129
for the year ending December 31, 2002. Net income per diluted share for 2003 was $.45 per
share or an increase of 50% over $.30 per diluted share for 2002. Net income for the
fourth quarter ending December 31, 2003, was $283,466, or $.14 per diluted share, compared
to $241,503 or $.12 per diluted share for the same period last year.

As of December 31, 2003, total assets
were $180.6 million compared with $139.2 million on December 31, 2002, an increase of
29.7%. Loans grew to a year-end total of $130.4 million, an increase of 40% over total
loans on December 31, 2002 of $93.1 million. Deposits were $154.7 million on December 31,
2003, compared to $119.7 million on December 31, 2002, or an increase of 29.2%.

During 2003, we generated record loan
volume while maintaining excellent credit quality. We surpassed many of our competitors in
deposit market share during the year and improved operating efficiency by leveraging our
investments in personnel and infrastructure to generate increases in net interest income
and non-interest income. We commend our team of banking professionals for achieving these
results while maintaining a superior level of personal customer service.

1

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We successfully closed the sale of $3
million in trust preferred securities in December 2003. The proceeds from the issuance
give us additional capital needed to continue growing without diluting the ownership of
our existing shareholder base.

On January 20, 2004, our board of
directors approved a 3 for 2 split of the 1,201,900 shares of First National common stock
outstanding to be distributed on or about March 1, 2004.

The stock is being split in
recognition of the banks solid growth and the stocks strong price performance.
Our desire is to make the stock more attractively priced and available to a wider range of
potential investors. This decision reflects the confidence of the Board of Directors in
First Nationals future prospects.

As we enter 2004, we remain focused
on achieving our strategic objectives in all areas. We thank you for your support and
please continue to call on us for all of your banking needs.

[Insert growth chart.pdf]

[Insert picture Jerry & Norman]

[Insert Stacked Bancshares logo]

| |  |                       |                     
| |  | --------------------- | --------------------
| |  | /s/ Norman F. Pulliam | /s/ Jerry L. Calvert
| |  | Norman F. Pulliam     | Jerry L. Calvert    
| |  | Chairman of the Board | President and CEO   

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bancshares logo]

# FINANCIAL HIGHLIGHTS

The information presented below should be read in conjunction with the consolidated financial
statements, the notes thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations contained elsewhere in this report.
The shares outstanding and per share amounts have been restated to reflect the 3 for 2 stock split
payable March 1, 2004.

|                                                                  | 2003 | 2002 | % Change
|----------------------------------------------------------------- | ---- | ---- | --------
|Loans                                                             |      |      | $       
|Deposits                                                          |      |      | $       
|Total Assets                                                      |      |      | $       
|Shareholders' Equity                                              |      |      | $       
|                                                                  |      |     
|Loan Loss Allowance                                               |      |      | $       
|Loan Loss Allowance to Total Loans                                |      |      |         
|Loan to Deposit Ratio                                             |      |      |         
|Net charge-offs to average loans                                  |      |      |         
|Non-performing assets to total assets                             |      |      |         
|                                                                  |      |     
|Equity/Assets                                                     |      |      |         
|Book Value per Share                                              |      |      | $       
|Closing Stock Price at Yearend (adjusted for 3 for 2 stock split) |      |      | $       
|Price/Book Value                                                  |      |      |         
|Weighted Average Shares Outstanding                               |      |     
|Basic                                                             |      |      |         
|Diluted                                                           |      |      |         
|                                                                  |      |     
|Net Income for the Year                                           |      |      | $       
|Net Income per Share for the Year                                 |      |     
|Basic                                                             |      |      | $       
|Diluted                                                           |      |      | $       
|Net Interest Income for the Year                                  |      |      | $       
|Noninterest Income for the Year                                   |      |      | $       
|Net Interest Margin for Year                                      |      |      |         
|                                                                  |      |     
|Total Risk-Based Capital Ratio                                    |      |      |         
|Tier 1 Risk-Based Capital Ratio                                   |      |      |         
|Tier 1 Capital Leverage Ratio                                     |      |      |         
|                                                                  |      |     
|Average Equity                                                    |      |      | $       
|Return on Equity                                                  |      |      |         
|Average Assets                                                    |      |      | $       
|Return on Assets                                                  |      |      |         

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FIRST NATIONAL
BANCSHARES, INC.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

DISCUSSION OF
FORWARD-LOOKING STATEMENTS

This
Report contains statements which constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934.
These statements are based on many assumptions and estimates and are not guarantees of
future performance. Our actual results may differ materially from those projected in any
forward-looking statements, as they will depend on many factors about which we are unsure,
including many factors which are beyond our control. The words may,
would, could, will, expect,
anticipate, believe, intend, plan, and
estimate, as well as similar expressions, are meant to identify such
forward-looking statements. Potential risks and uncertainties include, but are not limited
to:

| | o | significant increases in competitive pressure in the banking and financial services industries;
| | - | -----------------------------------------------------------------------------------------------

| | o | changes in the interest rate environment which could reduce anticipated or actual margins;
| | - | ------------------------------------------------------------------------------------------

| | o | changes in political conditions or the legislative or regulatory environment;
| | - | -----------------------------------------------------------------------------

| | o | general economic conditions, either nationally or regionally and especially in primary
service area, becoming less favorable than expected resulting in, among other things, a
deterioration in credit quality;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | changes occurring in business conditions and inflation;
| | - | -------------------------------------------------------

| | o | changes in technology;
| | - | ----------------------

| | o | changes in monetary and tax policies;
| | - | -------------------------------------

| | o | the level of allowance for loan loss;
| | - | -------------------------------------

| | o | the rate of delinquencies and amounts of charge-offs;
| | - | -----------------------------------------------------

| | o | the rates of loan growth;
| | - | -------------------------

| | o | adverse changes in asset quality and resulting credit risk-related losses and expenses;
| | - | ---------------------------------------------------------------------------------------

| | o | loss of consumer confidence and economic disruptions resulting from terrorist activities;
| | - | -----------------------------------------------------------------------------------------

| | o | changes in the securities markets; and
| | - | --------------------------------------

| | o | other risks and uncertainties detailed from time to time in our filings with the
Securities and Exchange Commission.
| | - | --------------------------------------------------------------------------------------------------------------------

INTRODUCTION

The
following discussion describes our results of operations for 2003 as compared to 2002 and
also analyzes our financial condition as of December 31, 2003 as compared to December 31,
2002. Like most financial institutions, we derive most of our income from interest we
receive on our loans and investments. Our primary source of funds for making these loans
and investments is our deposits, on which we pay interest. Consequently, one of the key
measures of our success is our amount of net interest income, or the difference between
the income on our interest-earning assets, such as loans and investments, and the expense
on our interest-bearing liabilities, such as deposits and borrowings. Another key measure
is the spread between the yield we earn on these interest-earning assets and the rate we
pay on our interest-bearing liabilities.

We
have included a number of tables to assist in our description of these measures. For
example, the Average Balances, Income and Expenses, and Rates table shows the
average balance during 2003, 2002 and 2001 of each category of our assets and liabilities,
as well as the yield we earned or the rate we paid with respect to each category. A review
of this table shows that our loans typically provide higher interest yields than do other
types of interest earning assets, which is why we intend to channel a substantial
percentage of our earning assets into our loan portfolio. Similarly, the Rate/Volume
Analysis table helps demonstrate the impact of

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changing interest rates and changing
volume of assets and liabilities during the years shown. We also track the sensitivity of
our various categories of assets and liabilities to changes in interest rates, and we have
included an Interest Rate Sensitivity table to help explain these changes.
Finally, we have included a number of tables that provide detail about our investment
securities, our loans, and our deposits and other borrowings.

Of
course, there are risks inherent in all loans, so we maintain an allowance for loan losses
to absorb probable losses on existing loans that may become uncollectible. We establish
and maintain this allowance by charging a provision for loan losses against our operating
earnings. We have included a detailed discussion of this process, as well as several
tables describing our allowance for loan losses and the allocation of this allowance among
our various categories of loans.

In
addition to earning interest on our loans and investments, we earn income through fees and
other expenses we charge to our customers. We describe the various components of this
noninterest income, as well as our noninterest expenses, in the following discussion.

The
following discussion and analysis also identifies significant factors that have affected
our financial position and operating results during the periods included in the
accompanying financial statements. We encourage you to read this discussion and analysis
in conjunction with the financial statements and the related notes and the other
statistical information also included in this report.

OVERVIEW

Our
earnings were $915,726 in 2003 compared with $595,129 in 2002, an increase of 53.9%. On a
pre-tax basis, our earnings increased by 125% to $1,341,617 in 2003 as compared to
$595,129 in 2002. This comparison is more relevant than net income as no income tax
expense was recorded in 2002 due to the utilization of prior year net tax loss
carryforwards in 2002.

Our
return on assets of 0.58% for 2003 remained fairly consistent with 2002s ratio of
0.56%. We were able to maintain this level although our net interest margin declined
during 2003 to 3.05% from 3.49% in 2002. We were able to accomplish this result primarily
due to a decrease in the efficiency ratio to 68.7% during 2003 from 76.9% in 2002. Our
return on equity increased by 44% to 7.68% from 5.33% in 2002 as we continued to leverage
our capital. We completed the sale of trust preferred securities during December 2003
which will allow us to continue to execute our strategic plan for growth and expansion for
at least the next nine to twelve months while remaining well-capitalized.

On
January 22, 2004, we announced that our board of directors had approved a 3 for 2 stock
split of our common shares outstanding payable on March 1, 2004. Fractional shares were
paid based on a price of $15.00 per share which was the closing stock price on the record
date of February 16, 2004 of $22.49 adjusted for the split. After the split, 1,802,846
shares of our common stock were outstanding.

GENERAL

First
National Bancshares, Inc. was organized on July 14, 1999, and our initial principal
activities were related to our organization, conducting our initial public offering, and
pursuing regulatory approvals from the Office of the Comptroller of the Currency, the
FDIC, and the Federal Reserve Board to open our wholly-owned subsidiary, First National
Bank of Spartanburg. We completed our initial public offering on February 10, 2000 and
received all final regulatory approvals in the first quarter of 2000 after which the bank
opened for business on March 27, 2000 at a temporary banking location. Our bank opened its
Westside office on July 14, 2000, its permanent main office at 215 N. Pine Street on
February 5, 2001 and its Boiling Springs office on August 24, 2001. In August 2002, we
began offering trust and investment management services through Colonial Trust Company,
the oldest private trust company in South Carolina.

The
following discussion should be read in conjunction with the Financial Highlights on page 3
of this annual report and the consolidated financial statements and accompanying notes
beginning on page 18 of this annual report.

CRITICAL ACCOUNTING POLICY

We
have adopted various accounting policies which govern the application of accounting
principles generally accepted in the United States in the preparation of our financial
statements. Our significant accounting policies are described in the footnotes to the

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consolidated financial statements at
December 31, 2003 as filed on our annual report on Form 10-KSB and included in the annual
report.

Certain
accounting policies involve significant judgments and assumptions by us which have a
material impact on the carrying value of certain assets and liabilities. We consider these
accounting policies to be critical accounting policies. The judgments and assumptions we
use are based on historical experience and other factors, which we believe to be
reasonable under the circumstances. Because of the nature of the judgments and assumptions
we make, actual results could differ from these judgments and estimates which could have a
material impact on the carrying values of our assets and liabilities and our results of
operations.

We
believe the allowance for loan losses is a critical accounting policy that requires the
most significant judgments and estimates used in the preparation of our consolidated
financial statements. We have developed policies and procedures for evaluating the overall
quality of our credit portfolio and the timely identification of potential credit
problems. 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. We have established an allowance for loan losses through a provision for loan
losses charged to expense on our statement of operations. Refer to Provision and
Allowance for Loan Losses and Note 1 to the consolidated financial statements for a
detailed description of our estimation process and methodology related to the allowance
for loan losses.

INCOME STATEMENT REVIEW

Net Interest Income 
        Net
interest income, the largest component of our income, was $4,570,470 for the period ending
December 31, 2003, compared to $3,535,724 in 2002 or an increase of 29.3%, primarily as a
result of the continued increase in our earning assets during 2003.

The
level of net interest income is determined by balances of earning assets and successfully
managing the net interest margin. Changes in interest rates paid on assets and
liabilities, the rate of growth of the asset and liability base, the ratio of
interest-earning assets to interest-bearing liabilities and management of the balance
sheets interest rate sensitivity all factor into changes in net interest income.

Interest
income for the year 2003 of $7,596,329 included $6,351,326 on loans; $1,116,971 on
investments and $128,032 on federal funds sold and other earning assets. Interest income
for 2002 of $6,010,857 consisted of $5,196,237 on loans; $629,457 in investments and
$185,163 on federal funds sold and other earning assets. Other earning assets include
interest-bearing bank balances and investments in FRB and FHLB stock.

Interest
expense for 2003 was $3,025,859 and included $2,868,582 on deposit accounts; $152,907 on
FHLB advances and $4,370 on trust preferred securities issued by our wholly-owned
subsidiary, FNSC Capital Trust I, on December 19, 2003. Interest expense was $2,475,133
for the period ended December 31, 2002 and included $65,688 related to FHLB advances. The
remainder of interest expense for the period of $2,409,445 was related to deposit
accounts.

On
December 19, 2003, we completed the sale of $3 million in trust preferred securities. The
securities have a 30-year maturity with a five-year call at our option and pay interest
quarterly at a floating rate that began at 4.08 percent. We used the net proceeds of $2.9
million to fund loan demand.

The
following table sets forth, for the years ending December 31, 2003, 2002, and 2001,
information related to our average balance sheet and average yields on assets and average
costs of liabilities. We derived these yields by dividing income or expense by the average
balance of the corresponding assets or liabilities. We derived average balances from the
daily balances throughout the periods indicated.

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# Average Balances, Income and Expenses, and Rates (in $000's)
Year Ended December 31,

|                             | 2003 | 2002 | 2001
|---------------------------- | ---- | ---- | ----
|
|
|
|
|Federal funds sold and other |      |      | $   
|Investment securities        |      |      |     
|Loans                        |      |      |     
|                             |      |      |     
|Total earning assets         |      |      |     
|                             |      |      |     
|NOW accounts                 |      |      |     
|Savings & money market       |      |      |     
|Time deposits                |      |      |     
|FHLB Advances                |      |      |     
|Trust preferred securities   |      |      |     
|                             |      |      |     
|Total interest-bearing       |      |     
|liabilities                  |      |      | $   
|                             |      |      |     
|Net interest spread          |      |      |     
|Net interest income/margin   |      |      |     

Our
net interest spread was 2.79% for the year ending December 31, 2003, as compared to 3.07%
for the year ending December 31, 2002. The net interest spread is the difference between
the yield we earn on our interest-earning assets and the rate we pay on our
interest-bearing liabilities.

Our
consolidated net interest margin for the year ending December 31, 2003, was 3.05% as
compared to 3.49% for the year ending December 31, 2002. The net interest margin is
calculated as net interest income divided by year-to-date average earning assets. During
2003, earning assets averaged $149.8 million as compared to $101.3 million in 2002.

The
decrease in our net interest spread and our net interest margin from 2002 to 2003 was
principally due to the faster decline in average yields on earning assets relative to the
repricing of our average interest-bearing liabilities following the cut in the federal
funds rate in mid-2003. The relative decrease in our average loans as a percentage of
average earning assets from 2002 to 2003 and the increase in tax-exempt securities also
contributed to the decrease in our net interest margin.

In
pricing deposits, we consider our liquidity needs, the direction and levels of interest
rates and local market conditions. During our initial years of operation, higher rates
were paid initially to attract deposits. During 2002 and 2003, we began to utilize other
sources of funds, particularly FHLB borrowings, to fund the demand to originate loans.

Rate/Volume Analysis

Net
interest income can be analyzed in terms of the impact of changing rates and changing
volume. The following table sets forth the effect which the varying levels of earning
assets and interest-bearing liabilities and the applicable rates have had on changes in
net interest income for the periods presented.

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|                                   | Year Ended | Year Ended
|---------------------------------- | ---------- | ----------
|
|
|
|
|
|EARNING ASSETS                     |            |           
|Federal funds sold and other       |            |           
|Investment securities              |            |           
|Loans                              |            |           
|                                   |            |           
|Total earning assets               |            |           
|                                   |            |           
|INTEREST-BEARING LIABILITIES       |            |           
|Deposits                           |            |           
|FHLB Advances                      |            |           
|Trust preferred securities         |            |           
|                                   |            |           
|Total interest-bearing liabilities |            |           
|                                   |            |           
|Net interest income                |            |           
|                                   |            |           

Provision for Loan Losses
        Included
in the net income for each of the periods ending December 31, 2003 and 2002, is a non-cash
expense of $518,821 and $417,980, respectively, related to the provision for loan losses.
The loan loss reserve was $1,630,488 and $1,163,977 as of December 31, 2003 and 2002,
respectively or 1.25% of gross loans in both years. 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
which 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. For the years ending December 31,
2003 and 2002, we reported net charge-offs of $52,310 and $54,306, respectively.

Noninterest Income and
Expenses        Noninterest
income in 2003 was $1,377,349, an increase of 63.5% over noninterest income of $842,316 in
2002. This increase was primarily due to increases in service charges on deposit accounts
and additional loan fees received on the origination of mortgage loans, primarily due to
significant mortgage refinancing activity during 2003. The majority of the increased fee
income from service charges on deposit accounts has been earned from the new Automatic
Overdraft Privilege service. The service provides virtually automatic protection to
qualified retail customers against overdraft of their checking account up to certain
limits and has been available to customers since April 15, 2002.

Other
noninterest income increased by $290,633 to $299,424 during 2003, primarily due to
earnings on bank-owned life insurance contracts purchased in May 2003. The increase also
includes a $93,000 gain on the sale of the guaranteed portion of an SBA loan recognized
during March 2003.

Noninterest
expense was $4,087,381 for 2003 as compared to $3,364,931 in 2002, an increase of 21.5%.
The majority of the increased expenditures reflects the cost of salaries and professional
fees to support and execute our strategic plan.

The
most significant item included in noninterest expenses is salaries and employee benefits
which totaled $2,138,475 in 2003 as compared to $1,738,679 in 2002 or an increase of
23.0%. Occupancy and equipment expense increased to $545,864 in 2003 from $489,625 in 2002
or an increase of 11.5%.

Public
relations expense increased by 10.5% to $254,110 for 2003 as compared to $229,982 in 2002,
primarily due to increased community relations expenditures and expansion of print and
television media advertising as a result of the increasing customer base. Professional
fees increased from $157,180 in 2002 to $200,043 in 2003, primarily due to fees paid for
general consulting services related to the development and execution of our strategic
plan.

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Included
in the line item other expenses which increased $102,491 or 29.6% between 2003
and 2002 are charges for insurance premiums; postage, printing and stationery expense; and
various customer-related expenses. A majority of these items are related directly to the
normal operations of our bank and are related to the increase in assets, the higher level
of transaction volume and the higher number of customer accounts in 2003. In addition, we
began paying fees to our outside directors beginning January 1, 2003.

Although
we recognize the importance of controlling noninterest expenses to improve profitability,
we are also committed to retaining our team of well-trained officers and staff,
maintaining a technically superior operations function and pursuing a professional
marketing program.

BALANCE SHEET REVIEW

General         As
of December 31, 2003, we had total assets of $180,570,014 or an increase of 29.7% over
total assets of $139,223,904 on December 31, 2002. Assets on December 31, 2003 and 2002
consisted of cash and due from banks of $3,003,015 and $8,097,022, respectively; federal
funds sold and interest-bearing bank balances of $3,691,405 and $12,515,723, respectively;
securities available for sale of $36,173,822 and $20,559,645, respectively; premises and
equipment, net of $4,380,454 and $4,499,646, respectively; loans, net of unearned income,
of $130,420,985 and $93,106,483, respectively and other assets of $4,530,821 and
$1,609,362, respectively. We decreased the level of federal funds sold in order to fund
loan growth during 2003. In addition, we purchased $2.5 million in bank owned life
insurance contracts recorded as other assets during 2003.

Our
liabilities on December 31, 2003 and 2002 were $168,341,518 and $127,679,778, respectively
and consisted of deposits of $154,733,021 and $119,718,680, respectively and other
liabilities of $4,108,497 and $961,098, respectively. Liabilities on December 31, 2003 and
2002, also included $9,500,000 and $7,000,000 in FHLB advances, respectively. During
December 2003, we issued $3 million in trust preferred securities recorded as other
liabilities.

Shareholders
equity on December 31, 2003 was $12,228,496 as compared to shareholders equity on
December 31, 2002, of $11,544,126, primarily due to the net income earned during 2003.

Investments         On
December 31, 2003, the investment securities portfolio represented approximately 21.1% of
our earning assets at $36,173,822 as compared to $20,559,645 or 16.2% of earning assets on
December 31, 2002. We were invested in U.S. Government agency securities, mortgage-backed
securities and municipal securities with a fair value of $36,173,822 and an amortized cost
of $36,217,524, for an unrealized loss of $43,702.

Contractual
maturities and yields on our investments (all available for sale) on December 31, 2003,
are shown in the following table (dollars in thousands). Expected maturities may differ
from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties. Yields on municipal securities
are presented on a tax equivalent basis.

|                           | After one |  | After five |       | Over ten |  |      |  
|-------------------------- | --------- |  | ---------- | ----- | -------- |  | ---- | -
|
|
|
|U.S. Government agencies   |           |  | $          | 2,001 |          |  | 3.68 | %
|Mortgage-backed securities |           |  |            | 1,487 |          |  | 2.27 | %
|Municipal securities       |           |  |            | -     |          |  | -    |  
|                           |           |  |            |       |          |  |      |  
|Total                      |           |  | $          | 3,488 |          |  | 3.07 | %

On
December 31, 2003, short-term overnight investments in federal funds sold and
interest-bearing bank balances comprised 2.2% of total earning assets of $3,691,405 as
compared to $12,515,723 or 9.9% of total earning assets on December 31, 2002. As the bank
grows, the shift from overnight investments into the loan portfolio, primarily, and into
the investment securities portfolio, secondarily, is expected to continue.

9

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Loans         Since
loans typically provide higher interest yields than do other types of interest earning
assets, it is our intent to channel a substantial percentage of our earning assets into
the loan portfolio. Average loans for the years ending December 31, 2003 and 2002, were
$112.8 million and $78.9 million, respectively. Total loans outstanding at December 31,
2003 and 2002 were $130,420,985 and $93,106,483, respectively, before the allowance for
loan losses.

The
following table summarizes the composition of the loan portfolio on December 31:

|                                     | 2003 | 2002
|------------------------------------ | ---- | ----
|
|
|Commercial and industrial            |      |     
|Commercial secured by real estate    |      |     
|Real estate-residential mortgages    |      |     
|Installment and other consumer loans |      |     
|Unearned income                      |      |     
|                                     |      |     
|Total loans, net of unearned income  |      |     
|                                     |      |     
|Less-allowance for loan losses       |      |     
|                                     |      |     
|Total loans, net                     |      |     
|                                     |      |     

The principal
component of our loan portfolio at year-end 2003 and 2002 was loans secured by real estate
mortgages. As the loan portfolio grows, the current mix of loans may change over time.
Management attempts to maintain a relatively diversified loan portfolio to help reduce the
risk inherent in concentration of collateral.

Provision and Allowance
for Loan Losses        The
allowance represents an amount which we believe will be adequate to absorb probable losses
on existing loans that may become uncollectible. Our judgment in determining the adequacy
of the allowance is based on evaluations of the collectibility of loans, including
consideration of factors such as the balance of impaired loans; the quality, mix and size
of our overall loan portfolio; economic conditions that may affect the borrowers
ability to repay; the amount and quality of collateral securing the loans; our historical
loan loss experience and a review of specific problem loans. We adjust the amount of the
allowance periodically based on changing circumstances as a component of the provision for
loan losses. We charge recognized losses against the allowance and add subsequent
recoveries back to the allowance.

We
do not allocate the allowance for loan losses to specific categories of loans but evaluate
the adequacy on an overall portfolio basis utilizing our credit grading system which we
apply to each loan. We combine our estimates of the reserves needed for each component of
the portfolio, including loans analyzed on a pool basis and loans analyzed individually.
The allowance is divided into two portions: (1) an amount for specific allocations on
significant individual credits and (2) a general reserve amount.

We
analyze individual loans within the portfolio and make allocations to the allowance based
on each individual loans specific factors and other circumstances that affect the
collectibility of the credit. Significant individual credits classified as doubtful or
substandard/special mention within our credit grading system require both individual
analysis and specific allocation. Loans in the substandard category are characterized by
deterioration in quality exhibited by any number of well-defined weaknesses requiring
corrective action such as declining or negative earnings trends and declining or
inadequate liquidity. Loans in the doubtful category exhibit the same weaknesses found in
the substandard loan; but, the weaknesses are more pronounced. However, these loans are
not yet rated as loss because certain events may occur which could salvage the debt such
as injection of capital, alternative financing or liquidation of assets.

We
calculate our general reserve based on a percentage allocation for each of the categories
of the following unclassified loan types: real estate, commercial, consumer and mortgage.
We apply general loss factors to each category and may adjust these percentages given
consideration of local economic conditions, exposure to concentrations that may exist in
the portfolio, changes in trends of past due loans, problem loans and charge-offs and
anticipated loan growth. The general estimate is then added to the specific allocations
made to determine the amount of the total allowance for loan losses.

Due
to our limited operating history, the provision for loan losses has been made primarily as
a result of managements assessment of general loan loss risk. Our evaluation is
inherently subjective as it requires estimates that are susceptible to significant change.
In addition, various regulatory agencies review our allowance for loan losses through
their periodic examinations, and they may require us to record additions to the allowance
for loan losses based on their judgment about information available to them at the time of
their examinations. Our losses will undoubtedly vary from our estimates, and there is a
possibility that charge-offs in future periods will exceed the allowance for loan losses
as estimated at any point in time.

On
December 31, 2003 and 2002, the allowance for loan losses was $1,630,488 and $1,163,977,
respectively, or 1.25% of

10

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outstanding  loans,  net  of  unearned  income,  of  $130,420,985  and  $93,106,483,
respectively.  The following table sets forth the changes in the allowance for loan losses
          during the years ended December 31, 2003 and 2002. Loans charged off during 2003
          and 2002 were 0.05% and 0.07% of average loans outstanding for each respective
          year.

|                                           | 2003 | 2002
|------------------------------------------ | ---- | ----
|
|Balance, beginning of period               |      |     
|Provision charged to operations            |      |     
|Loans charged off                          |      |     
|Commercial, financial and agricultural     |      |     
|Real estate - construction                 |      |     
|Installment loans to individuals           |      |     
|                                           |      |     
|Total charge-offs                          |      |     
|Recoveries on loans previously charged off |      |     
|                                           |      |     
|Balance, end of period                     |      |     
|                                           |      |     

We
had loans totaling $257,470 on nonaccrual status on December 31, 2003. On December 31,
2002, we had no loans on nonaccrual status. Generally, a loan is placed on nonaccrual
status when it becomes 90 days past due as to principal or interest, or when management
believes, after considering economic and business conditions and collection efforts, that
the borrowers financial condition is such that collection of the loan is doubtful. A
payment of interest on a loan that is classified as nonaccrual is recognized as income
when received.

There
were no other loans past due in excess of 90 days on December 31, 2003 or 2002. There was
no other real estate owned on December 31, 2003 or 2002.

Maturities and Sensitivity of Loans to Changes in Interest Rates
        The
information in the following table is based on the contractual maturities of individual
loans, including loans which may be subject to renewal at their contractual maturity.
Renewal of such loans is subject to review and credit approval, as well as modification of
terms upon their maturity. Actual repayments of loans may differ from maturities reflected
below because borrowers have the right to prepay obligations with or without prepayment
penalties.

The
following table summarizes the loan maturity distribution, by type, and related interest
rate characteristics on December 31, 2003 (dollars in thousands):

|                                    |  | After one but |   |       
|----------------------------------- |  | ------------- | - | ------
|
|
|
|Commercial                          |  |               | $ | 46,005
|Real estate - construction          |  |               |   | 8,444 
|Real estate - mortgage              |  |               |   | 21,611
|Consumer and other                  |  |               |   | 1,391 
|                                    |  |               |   |       
|Total loans                         |  |               | $ | 77,451
|Unearned income, net                |  |               |   |       
|                                    |  |              
|Total loans, net of unearned income |  |               |   |       
|                                    |  |               |   |       
|Loans maturing after one year with: |  |              
|Fixed interest rates                |  |               |   |       
|                                    |  |               |   |       
|Floating interest rates             |  |               |   |       
|                                    |  |               |   |       

Deposits and Other
Interest-Bearing Liabilities        Our
primary source of funds for loans and investments is our deposits. Average total deposits
for the years ended December 31, 2003 and 2002 were $136.4 million and $92.6 million,
respectively, and average interest-bearing deposits were $124.3 million and $83.8 million,
respectively.

National
and local market trends over the past several years suggest that consumers have moved an
increasing percentage of discretionary savings funds into investments such as annuities
and stock and fixed income mutual funds. Management believes that conditions in the past
three years have been favorable for deposit growth and that factors such as the low
returns on investments

11

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and mutual funds may have increased
traditional deposit inflows during these periods.

The
following is a table of deposits by category on December 31 (dollars in thousands):

|                                  | 2003 | 2002
|--------------------------------- | ---- | ----
|
|
|Demand deposit accounts           |      |     
|NOW accounts                      |      |     
|Money market and savings accounts |      |     
|Time deposits less than $100,000  |      |     
|Time deposits of $100,000 or more |      |     
|                                  |      |     
|Total deposits                    |      |     
|                                  |      |     

Core
deposits, which exclude time deposits of $100,000 or more, provide a relatively stable
funding source for our loan portfolio and other earning assets. Our core deposits were
$111.7 million and $94.2 million on December 31, 2003 and 2002, respectively. Our
loan-to-deposit ratio was 84.29% and 77.7% at year-end 2003 and 2002, respectively.

The
maturity distribution of our time deposits of $100,000 or more on December 31, 2003 and
2002 is as follows:

|                               | 2003 | 2002
|------------------------------ | ---- | ----
|
|
|Three months or less           |      |     
|Over three through six months  |      |     
|Over six through twelve months |      |     
|Over one year                  |      |     
|                               |      |     
|Total                          |      |     
|                               |      |     

Short-Term Borrowings        As
of December 31, 2003 and 2002, we had no outstanding balances under short-term borrowings.
We had short-term lines of credit with correspondent banks to purchase unsecured federal
funds totaling $ 5.35 million at December 31, 2003. The interest rate on any borrowings
under these lines would be the prevailing market rate for federal funds purchased.

Trust Preferred Securities        During
December 2003, we issued $3 million in trust preferred securities through our wholly-owned
subsidiary, FNSC Capital Trust I. The securities have a 30 year final maturity, are
callable at the option of the issuer after five years and require quarterly interest
payments at a floating rate which began at 4.08 percent.

FHLB Advances        We
also have the ability to borrow up to 15% of our total assets from the Federal Home Loan
Bank of Atlanta as of December 31, 2003. Borrowings under this arrangement can be made
with various terms and repayment schedules and with fixed or variable rates of interest.
The borrowings under this arrangement are available by pledging collateral and may require
additional purchases of stock in the FHLB. Qualifying securities available for sale with a
market value of $18,373,000 and $8,347,000 were pledged as collateral for advances
outstanding of $9.5 million and $7 million on December 31, 2003 and 2002, respectively.

The
weighted-average interest rate on FHLB advances outstanding at December 31, 2003 and 2002
was 1.71% and 1.72%, respectively. At December 31, 2003, advances totaling $7.5 million
were subject to call features at the option of the FHLB with call dates ranging from
January 2004 to July 2012. Call provisions are more likely to be exercised by the FHLB
when rates rise. Scheduled maturities of FHLB advances subsequent to December 31, 2003,
are $2,000,000 in 2004, and $5,000,000 in 2012 and $2,500,000 in 2013.

CAPITAL RESOURCES

Total
shareholders equity amounted to $12,228,496 and $11,544,126 on December 31, 2003 and
2002, respectively. The increase between 2002 and 2003 resulted from the net income earned
during 2003, net of the decrease in the unrealized gain on

12

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securities available for sale during
2003 to a net unrealized loss of $28,844 on December 31, 2003.

The
following table shows the return on average assets (net income divided by average total
assets), return on average equity (net income divided by average equity), and equity to
assets ratio (average equity divided by average total assets) for 2003 and 2002.

| |  | 2003 | 2002                    
| |  | ---- | ------------------------
|
| |  |      | Return on average assets
| |  |      | Return on average equity
| |  |      | Equity to assets ratio  

The
Federal Reserve Board and bank regulatory agencies require bank holding companies and
financial institutions to maintain capital at adequate levels based on a percentage of
assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%.
The Federal Reserve guidelines also contain an exemption from the capital requirements for
bank holding companies with less than $150 million in consolidated assets. We exceeded
$150 million in assets during 2003 and became subject to these guidelines during the year.

Under
the capital adequacy guidelines, capital is classified into two tiers. These guidelines
require an institution to maintain a certain level of Tier 1 and Tier 2 capital to
risk-weighted assets. Tier 1 capital consists of common stockholders equity,
excluding the unrealized gain or loss on securities available for sale, minus certain
intangible assets plus trust preferred securities up to 25% of Tier 1 capital with the
excess being treated as Tier 2 capital. In determining the amount of risk-weighted assets,
all assets, including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100% based on the risks believed inherent in the type of asset. Tier 2
capital consists of Tier 1 capital plus the general reserve for loan losses subject to
certain limitations. The bank is also required to maintain capital at a minimum level
based on total average assets, which is known as the Tier 1 leverage ratio.

On
December 19, 2003, FNSC Capital Trust I, (the Trust) a subsidiary of our bank
holding company, was formed to issue $3 million in floating rate trust securities. Under
the provisions of FASB Interpretation No. 46 (FIN 46), we were allowed to
consolidate the Trust in our consolidated financial statements as of December 31, 2003.
However, FIN 46 requires us to deconsolidate the Trust from our consolidated financial
statements during 2004.

Currently,
the trust preferred securities satisfy the criteria of the Federal Reserve Board
authorizing the use of such instruments as Tier 1 capital for bank holding companies.
However, as a result of this change in the accounting treatment for statutory trusts, the
Federal Reserve is reconsidering the capital treatment of the trust preferred securities.
We believe that the likely results of this process will be: (1) in light of the estimated
$70 billion or more of trust preferred securities outstanding, existing trust preferred
securities will be grandfathered, either permanently or with a phase out over several
years, (2) new trust preferred securities issues will be treated as Tier 1 capital, but
only as a type of Tier 2 capital, with the exact amounts includable as various Tier 2
categories to be determined, and (3) new trust preferred issues for smaller institutions
or holding companies that are not internationally active may be granted Tier 1 status on a
case-by-case basis using more rigorous financial analysis by the Federal Reserve and
limited to a maximum of 15% or less of Tier 1 capital. If we are not able to include the
trust preferred securities as Tier 1 capital for our bank holding company, we would be
more likely to redeem the trust preferred securties or dissolve the trust.

We
are both subject to various regulatory capital requirements administered by the federal
banking agencies. Under these capital guidelines, we must maintain a minimum total
risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, we must
maintain a minimum Tier 1 leverage ratio of at least 4%. To be considered
well-capitalized, we must maintain total risk-based capital of at least 10%,
Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

The
following table sets forth the companys and the banks various capital ratios
as of December 31, 2003 and 2002. On December 31, 2003 and 2002, we both were in
compliance with each of the applicable regulatory capital requirements and were considered
to be well capitalized at the bank level.

|                          | 2003 | 2002
|------------------------- | ---- | ----
|
|
|
|
|Total risk-based capital  |      |     
|Tier 1 risk-based capital |      |     
|Leverage capital          |      |     

13

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Despite
anticipated asset growth, we expect our capital ratios to continue to be adequate for the
next nine to twelve months. However, no assurances can be given in this regard, as rapid
growth, deterioration in loan quality, and losses, or a combination of these factors,
could change our capital position in a relatively short period of time. As of December 31,
2003, there were no significant firm commitments outstanding for capital expenditures.

EFFECT OF INFLATION AND
CHANGING PRICES

The
effect of relative purchasing power over time due to inflation has not been taken into
effect in our financial statements. Rather, the statements have been prepared on an
historical cost basis in accordance with generally accepted accounting principles.

Unlike
most industrial companies, the assets and liabilities of financial institutions such as
our company and bank are primarily monetary in nature. Therefore, the effect of changes in
interest rates will have a more significant impact on our performance than will the effect
of changing prices and inflation in general. In addition, interest rates may generally
increase as the rate of inflation increases, although not necessarily in the same
magnitude. As discussed previously, we seek to mange the relationships between interest
sensitive assets and liabilities in order to protect against wide rate fluctuations,
including those resulting from inflation.

OFF-BALANCE SHEET RISK

Through
the operations of our bank, we have made contractual commitments to extend credit with
off-balance sheet risk in the ordinary course of our business activities to meet the
financing needs of customers. These commitments are legally binding agreements to lend
money at predetermined interest rates for a specified period of time and generally have
fixed expiration dates or other termination clauses. We use the same credit and collateral
policies in making these commitments as we do for on-balance sheet instruments.

We
evaluate each customers creditworthiness on a case-by-case basis and obtain
collateral, if necessary, based on our credit evaluation of the borrower. In addition to
commitments to extend credit, we also issue standby letters of credit which are assurances
to a third party that they will not suffer a loss if our customer fails to meet its
contractual obligation to the third party. The credit risk involved in the underwriting of
letters of credit is essentially the same as that involved in extending loan facilities to
customers.

As
of December 31, 2003 and 2002, we had issued commitments to extend credit of $32.6 million
and $25.1 million, respectively through various types of commercial and consumer lending
arrangements, of which the majority are at variable rates of interest. Standby letters of
credit totaled $75,000 and $61,000 on December 31, 2003 and 2002. Past experience
indicates that many of these commitments to extend credit will expire unused. However, we
believe that we have adequate sources of liquidity to fund commitments that may be drawn
upon by borrowers.

Except
as disclosed in this report, we are not involved in off-balance sheet contractual
relationships, unconsolidated related entities that have off-balance sheet arrangements or
transactions that could result in liquidity needs or other commitments or could
significantly impact earnings.

LIQUIDITY

Liquidity
management involves monitoring our sources and uses of funds in order to meet our
day-to-day cash flow requirements while maximizing profits. Liquidity represents the
ability of a company to convert assets into cash or cash equivalents without significant
loss and to raise additional funds by increasing liabilities. Liquidity management is made
more complicated because different balance sheet components are subject to varying degrees
of management control. For example, the timing of maturities of the investment portfolio
is fairly predictable and subject to a high degree of control at the time the investment
decisions are made. However, net deposit inflows and outflows are far less predictable and
are not subject to nearly the same degree of control.

As
of December 31, 2003 and 2002, our liquid assets, consisting of cash and due from banks,
interest-bearing bank balances and federal funds sold, amounted to $6,694,420 and
$20,612,745, representing 3.7% and 14.8% of total assets, respectively. Investment
securities on December 31, 2003 and 2002, amounted to $36,173,822 and $20,559,645,
representing 20.03% and 14.77% of total assets, respectively; these securities provide a
secondary source of liquidity since they can be converted into cash in a

14

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timely manner. Our ability to
maintain and expand our deposit base and borrowing capabilities also serves as a source of
liquidity.

We
plan to meet our future cash needs through the liquidation of temporary investments,
maturities of loans and investment securities, and generation of deposits. In addition,
the bank maintains federal funds purchased lines of credit with correspondent banks in the
amount of $5.35 million. The bank is also a member of the Federal Home Loan Bank of
Atlanta from which application for borrowings can be made for leverage purposes, if so
desired. Management believes that its existing stable base of core deposits along with
continued growth in this deposit base will enable us to meet successfully our long term
liquidity needs.

INTEREST RATE SENSITIVITY

Asset/liability
management is the process by which we monitor and control the mix and maturities of our
assets and liabilities. The essential purposes of asset/liability management are to ensure
adequate liquidity and to maintain an appropriate balance between interest sensitive
assets and liabilities to minimize potentially adverse impacts on earnings from changes in
market interest rates. The banks asset/liability management committee
(ALCO) monitors and considers methods of managing exposure to interest rate
risk. The ALCO consists of members of the board of directors and senior management of the
bank and meets quarterly. The ALCO is charged with the responsibility to maintain the
level of interest rate sensitivity of the banks interest sensitive assets and
liabilities within Board-approved limits.

The
following table presents our rate sensitivity at each of the time intervals indicated as
of December 31, 2003. The table may not be indicative of our rate sensitivity position at
other points in time. In addition, the tables maturity distribution may differ from
the contractual maturities of the earning assets and interest bearing liabilities
presented due to consideration of prepayment speeds under various interest rate change
scenarios in the application of the interest rate sensitivity methods described above.

|                                   | Within | After three but | After one but | After  |  
|---------------------------------- | ------ | --------------- | ------------- | ------ | -
|
|
|
|
|Interest-earning assets:           |        |                 |               |        |  
|Federal funds sold and other       |        |                 | $             | 3,157  |  
|Investment securities              |        |                 |               | 5,777  |  
|Loans                              |        |                 |               | 82,747 |  
|                                   |        |                 |               |        |  
|Total earning assets               |        |                 | $             | 91,681 |  
|Interest-bearing liabilities:      |        |                
|NOW accounts                       |        |                 | $             | 10,278 |  
|Money market & savings             |        |                 |               | 11,171 |  
|Time deposits                      |        |                 |               | 56,450 |  
|Other borrowings                   |        |                 |               | -      |  
|                                   |        |                 |               |        |  
|Total interest-bearing liabilities |        |                 | $             | 77,899 |  
|Period gap                         |        |                 | $             | 13,782 |  
|Cumulative gap                     |        |                 | $             | 13,782 |  
|Ratio of cumulative gap to         |        |                
|total earning assets               |        |                 |               | 8.09   | %

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ACCOUNTING, REPORTING AND
REGULATORY MATTERS

Recently Issued
Accounting Standards         In
December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-based CompensationTransition and Disclosure, an
amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure provisions of SFAS No. 123 and Accounting Pronouncement Board
(APB) Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of the effects of an
entitys accounting policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure provisions of SFAS
No. 148 are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value method of
SFAS No. 123 or the intrinsic value method of APB Opinion No. 25. The provisions
of SFAS No. 148 are effective for annual financial statements for fiscal years ending
after December 15, 2002, and for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. We adopted SFAS No.
123 using the prospective method of SFAS No. 148 during 2003. The adoption did not have a
material impact on our financial condition or operating results.

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

In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances.) Many of those instruments were previously classified as
equity. SFAS No. 150 is generally effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did
not have a material impact on our financial condition or operating results.

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

In
January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities. FIN No. 46 requires a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority of the
entitys residual returns, or both. FIN No. 46 also requires disclosures about
variable interest entities that a company is not required to consolidate, but in which it
has a significant variable interest. FIN No. 46 provides guidance for determining whether
an entity qualifies as a variable interest entity by considering, among other
considerations, whether the entity lacks sufficient equity or its equity holders lack
adequate decision-making ability. The consolidation requirements of FIN No. 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to existing entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure requirements apply in
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. We have elected to adopt FIN No. 46, which
allows us to consolidate the Trust as of December 31, 2003. However, since we are a small
business issuer that reports under SEC Regulation S-B, we may delay deconsolidation until
December 31, 2004. The adoption of FIN No. 46 did not have a material effect on our
financial position or results of operations.

16

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

Regulatory Matters
        In
October 2001, the USA PATRIOT Act of 2001 was enacted in response to the terrorist attacks
in New York, Pennsylvania and Washington, D.C. which occurred on September 11, 2001. On
May 9, 2003, the United States Department of Treasury, the Financial Crimes Enforcement
Network and the federal financial regulators announced final regulations implementing
customer identification and verification requirements under Section 326 of the USA PATRIOT
Act. The regulations require that financial institutions develop a Customer Identification
Program (CIP) by October 1, 2003 that implements reasonable procedures to: (1) collect
identifying information about customers opening an account; (2) verify that the customers
are who they say they are; (3) maintain records of the information used to verify their
identity; and (4) determine whether the customer appears on any list of suspected
terrorists or terrorist organizations. The PATRIOT Act is intended to strengthen U.S. law
enforcements and the intelligence communities abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the PATRIOT Act on
financial institutions of all kinds is significant and wide ranging. The PATRIOT Act
contains sweeping anti-money laundering and financial transparency laws and imposes
various regulations, including standards for verifying client identification at account
opening, and rules to promote cooperation among financial institutions, regulators and law
enforcement entities in identifying parties that may be involved in terrorism or money
laundering.

On
October 28, 2003, President Bush signed into law the Check Clearing Act for the 21st
century, Check 21". Check 21 removes legal barriers to check truncation by
providing a framework that grants an Image Replacement Document (IRD) the same
legal authority as the original check. Check 21 does not mandate that banks accept
electronic images. Check 21 does, however, mandate that banks accept IRDs if presented for
payment. Check 21 will become effective twelve months from signing on October 28, 2004.
The Federal Reserve is charged with writing the regulations for Check 21.

MARKET RISK

Market
risk is the risk of loss from adverse changes in market prices and rates which principally
arises from interest rate risk inherent in our lending, investing, deposit gathering and
borrowing activities. Other types of market risks, such as foreign currency exchange rate
risk and commodity price risk, do not normally arise in the normal course of our business.
Management actively monitors and manages its interest rate risk exposure.

The
principal interest rate risk monitoring technique we employ is the measurement of our
interest sensitivity gap, which is the positive or negative dollar difference
between assets and liabilities that are subject to interest rate repricing within a given
period of time. Interest rate sensitivity can be managed by repricing assets or
liabilities, selling securities available-for-sale, replacing an asset or liability at
maturity, or adjusting the interest rate during the life of an asset or liability.
Managing the amount of assets and liabilities repricing in this same time interval helps
to hedge the risk and minimize the impact on net interest income of rising or falling
interest rates. We generally would benefit from increasing market rates of interest when
we have an asset-sensitive gap position and generally would benefit from decreasing market
rates of interest when we are liability-sensitive.

On
December 31, 2003, we were liability sensitive over the one-year time frame. However, our
gap analysis is not a precise indicator of our interest sensitivity position. The analysis
presents only a static view of the timing of maturities and repricing opportunities,
without taking into consideration that changes in interest rates do not affect all assets
and liabilities equally. For example, rates paid on a substantial portion of core deposits
may change contractually within a relatively short time frame, but those rates are viewed
by management as significantly less interest-sensitive than market-based rates such as
those paid on non-core deposits. Net interest income may be impacted by other significant
factors in a given interest rate environment, including changes in the volume and mix of
earning assets and interest-bearing liabilities. As a result, we continue to believe that
our interest rate risk position is asset sensitive.

17

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Independent
Auditors Report

To the Board of Directors
and Shareholders ofFirst National Bancshares, Inc. and SubsidiariesSpartanburg, South
Carolina

We have audited the accompanying
consolidated balance sheets of First National Bancshares, Inc. and Subsidiaries (the
Company) as of December 31, 2003 and 2002, and the related consolidated
statements of operations, changes in shareholders equity and comprehensive income,
and cash flows for the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The consolidated
statements of operations, changes in shareholders equity and comprehensive income,
and cash flows of First National Bancshares, Inc. for the year ended December 31, 2001
were audited by other auditors whose report dated January 23, 2002, expressed an
unqualified opinion on those statements.

We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of the First National Bancshares, Inc. and Subsidiaries as of December
31, 2003 and 2002, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the United
States of America.

As discussed in Note 1 to the
consolidated financial statements, the Company changed the manner in which it accounts for
stock-based compensation as of January 1, 2003.

Greenville, South Carolina
February 20, 2004

/s/ Elliott Davis LLCElliott Davis LLC

18

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# FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance
Sheets

December 31, 2003 and
2002

|                                                      | 2003 | 2002
|----------------------------------------------------- | ---- | ----
|Assets                                                |      |     
|Cash and due from banks                               |      |     
|Interest-bearing bank balances                        |      |     
|Federal funds sold                                    |      |     
|Securities available for sale                         |      |     
|Loans, net of allowance for loan losses of            |      |     
|and $1,163,977, respectively                          |      |     
|Premises and equipment, net                           |      |     
|Other                                                 |      |     
|                                                      |      |     
|Total assets                                          |      |     
|                                                      |      |     
|Liabilities and Shareholders' Equity                  |      |     
|                                                      |      |     
|Liabilities:                                          |      |     
|Deposits                                              |      |     
|Noninterest-bearing                                   |      |     
|Interest-bearing                                      |      |     
|                                                      |      |     
|Total deposits                                        |      |     
|                                                      |      |     
|FHLB advances                                         |      |     
|Debt associated with trust preferred securities       |      |     
|Accrued expenses and other liabilities                |      |     
|                                                      |      |     
|Total liabilities                                     |      |     
|                                                      |      |     
|Commitments and contingencies-Note 16 and 17          |      |     
|                                                      |      |     
|Shareholders' equity:                                 |      |     
|Preferred stock, par value $.01 per share, 10,000,000 |      |     
|shares authorized, no shares issued or outstanding    |      |     
|Common stock, par value $.01 per share, 10,000,000    |      |     
|shares authorized 1,802,850 and 1,802,100 shares      |      |     
|issued and outstanding, respectively                  |      |     
|Additional paid-in capital                            |      |     
|Retained earnings (deficit)                           |      |     
|Accumulated other comprehensive income (loss)         |      |     
|                                                      |      |     
|Total shareholders' equity                            |      |     
|                                                      |      |     
|Total liabilities and shareholders' equity            |      |     
|                                                      |      |     

The
accompanying notes are an integral part of these consolidated financial statements.

19

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FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements
of Operations

For the Years Ended
December 31, 2003, 2002 and 2001

|                                                                         | 2003 | 2002 | 2001
|------------------------------------------------------------------------ | ---- | ---- | ----
|Interest income:                                                         |      |      |     
|Loans                                                                    |      |      | $   
|Taxable securities                                                       |      |      |     
|Nontaxable securities                                                    |      |      |     
|Federal funds sold and other                                             |      |      |     
|                                                                         |      |      |     
|Total interest income                                                    |      |      |     
|                                                                         |      |      |     
|Interest expense:                                                        |      |     
|Trust preferred securities                                               |      |      |     
|FHLB advances                                                            |      |      |     
|Deposits                                                                 |      |      |     
|                                                                         |      |      |     
|Total interest expense                                                   |      |      |     
|                                                                         |      |      |     
|Net interest income:                                                     |      |      |     
|                                                                         |      |     
|Provision for loan losses                                                |      |      |     
|                                                                         |      |      |     
|Net interest income after provision for loan losses                      |      |      |     
|                                                                         |      |      |     
|Noninterest income:                                                      |      |     
|Mortgage loan fees from correspondent bank                               |      |      |     
|Service charges and fees on deposit accounts                             |      |      |     
|Gain on sale of loans                                                    |      |      |     
|Other                                                                    |      |      |     
|                                                                         |      |      |     
|Total noninterest income                                                 |      |      |     
|Noninterest expense:                                                     |      |     
|Salaries and employee benefits                                           |      |      |     
|Professional fees                                                        |      |      |     
|Data processing                                                          |      |      |     
|Public relations                                                         |      |      |     
|Occupancy and equipment                                                  |      |      |     
|Telephone and supplies                                                   |      |      |     
|Other                                                                    |      |      |     
|                                                                         |      |      |     
|Total noninterest expense                                                |      |      |     
|                                                                         |      |      |     
|Net income (loss) before income taxes                                    |      |      |     
|                                                                         |      |     
|Provision (benefit) for income taxes                                     |      |      |     
|                                                                         |      |      |     
|Net income (loss)                                                        |      |      | $   
|                                                                         |      |      |     
|Net income (loss) per share - adjusted for 3 for 2 stock split           |      |     
|Basic                                                                    |      |      |     
|Diluted                                                                  |      |      |     
|Weighted average shares outstanding - adjusted for 3 for 2  stock  split |      |     
|Basic                                                                    |      |      |     
|Diluted                                                                  |      |      |     

The
accompanying notes are an integral part of these consolidated financial statements.

20

---

FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIESConsolidated Statements of Changes in Shareholders'
Equity and Comprehensive IncomeFor the Years Ended
December 31, 2003, 2002 and 2001

|                                        |  |  |  |           | Accumulated |  
|--------------------------------------- |  |  |  | --------- | ----------- | -
|
|
|
|
|Balance, December 31, 2000              |  |  |  | 1,800,000 |             | $
|Comprehensive income:                   |  | 
|Net loss                                |  |  |  | -         |             |  
|Change in net unrealized gains          |  | 
|on securities available for sale,       |  | 
|net of tax of $18,338                   |  |  |  | -         |             |  
|                                        |  |  |  |           |             |  
|Total comprehensive                     |  | 
|income (loss)                           |  |  |  | -         |             |  
|                                        |  |  |  |           |             |  
|Balance, December 31, 2001              |  |  |  | 1,800,000 |             | $
|                                        |  |  |  |           |             |  
|Proceeds from exercise of               |  | 
|employee stock options                  |  |  |  | 2,100     |             |  
|Comprehensive income:                   |  | 
|Net income                              |  |  |  | -         |             |  
|Change in net unrealized gains          |  | 
|on securities available for sale,       |  | 
|net of tax of $103,251                  |  |  |  | -         |             |  
|                                        |  |  |  |           |             |  
|Total comprehensive                     |  | 
|income                                  |  |  |  | -         |             |  
|                                        |  |  |  |           |             |  
|Balance, December 31, 2002              |  |  |  | 1,802,100 |             | $
|                                        |  |  |  |           |             |  
|Proceeds from exercise of               |  | 
|employee stock options                  |  |  |  | 750       |             |  
|Grant of employee stock options         |  |  |  | -         |             |  
|Comprehensive income:                   |  | 
|Net income                              |  |  |  | -         |             |  
|Change in net unrealized gains (losses) |  | 
|on securities available for sale,       |  | 
|net of tax of $138,987                  |  |  |  | -         |             |  
|                                        |  |  |  |           |             |  
|Total comprehensive                     |  | 
|income                                  |  |  |  | -         |             |  
|                                        |  |  |  |           |             |  
|Balance, December 31, 2003              |  |  |  | 1,802,850 |             | $
|                                        |  |  |  |           |             |  

All
share amounts have been retroactively restated to reflect the 3 for 2 stock split payable
March 1, 2004.

The
accompanying notes are an integral part of these consolidated financial statements.

21

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FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements
of Cash Flows

For the Years Ended
December 31, 2003, 2002 and 2001

|                                                       | 2003 | 2002 | 2001
|------------------------------------------------------ | ---- | ---- | ----
|
|Cash flows from operating activities:                  |      |      |     
|Net income (loss)                                      |      |      | $   
|Adjustments to reconcile net income (loss) to net cash |      |     
|provided by operating activities:                      |      |     
|Provision for loan losses                              |      |      |     
|Provision for deferred income tax expense (benefit)    |      |      |     
|Depreciation                                           |      |      |     
|Premium amortization (discount accretion), net         |      |      |     
|Changes in deferred and accrued amounts:               |      |     
|Prepaid expenses and other assets                      |      |      |     
|Accrued expenses and other liabilities                 |      |      |     
|                                                       |      |      |     
|Net cash provided by operating activities              |      |      |     
|                                                       |      |      |     
|Cash flows from investing activities:                  |      |     
|Proceeds from maturity/prepayment of securities        |      |     
|available for sale                                     |      |      |     
|Proceeds from sale of foreclosed property              |      |      |     
|Proceeds from sale of securities available for sale    |      |      |     
|Purchases of securities available for sale             |      |      |     
|Loan originations, net of principal collections        |      |      |     
|Purchase of bank-owned life insurance                  |      |      |     
|Net purchases of premises and equipment                |      |      |     
|Purchase of FHLB and other stock                       |      |      |     
|                                                       |      |      |     
|Net cash used by investing activities                  |      |      |     
|                                                       |      |      |     
|Cash flows from financing activities:                  |      |     
|Proceeds from trust preferred securities               |      |      |     
|Proceeds from exercise of employee stock options       |      |      |     
|Increase in FHLB advances                              |      |      |     
|Repayment of FHLB advances                             |      |      |     
|Grant of employee stock options                        |      |      |     
|Net increase in deposits                               |      |      |     
|                                                       |      |      |     
|Net cash provided by financing activities              |      |      |     
|                                                       |      |      |     
|Net increase (decrease) in cash and cash equivalents   |      |      |     
|Cash and cash equivalents at beginning of year         |      |      |     
|                                                       |      |      |     
|Cash and cash equivalents, end of year                 |      |      | $   
|                                                       |      |      |     

The
accompanying notes are an integral part of these consolidated financial statements.

22

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# FIRST NATIONAL
BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated
Financial Statements

December 31, 2003 and 2002

# Note 1  Summary of
Significant Accounting Policies and Activities

| | Business Activity and Organization First National Bancshares, Inc. (the Company)
was incorporated on July 14, 1999 under the laws of the state of South Carolina for the
purpose of operating as a bank holding company pursuant to the federal Bank Holding
Company Act of 1956, as amended, and to purchase 100% of the capital stock of First
National Bank of Spartanburg (the Bank). The Bank was organized as a national
bank under the laws of the United States with the purpose of becoming a new bank to be
located in Spartanburg County, South Carolina. The Bank began doing business on March 27,
2000 and provides full personal and commercial banking services to customers and is
subject to regulation by the Federal Deposit Insurance Corporation and the Office of the
Comptroller of the Currency. During 2002, the Company adopted a resolution changing the
legal name of the Bank to First National Bank of the South. The Bank continues to do
business in Spartanburg County as First National Bank of Spartanburg. On December 19,
2003, the Company formed FNSC Capital Trust I (the Trust), a statutory trust,
for the purpose of issuing and selling floating rate securities having an aggregate
liquidation amount of $3 million (the Capital Securities) to institutional
buyers in a private placement of trust preferred securities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company offered its common stock for sale to the public under an initial public offering
which began on November 10, 1999. The offering raised approximately $11,800,000, net of
underwriting discounts and commissions and offering expenses, and was completed on
February 10, 2000. The directors and executive officers of the Company purchased 484,100
shares of common stock at $10 per share, for a total of $4,841,000. Upon purchase of these
shares, the Company issued stock warrants to the organizers to purchase 313,333 shares of
common stock for $10 per share. The remaining 715,900 shares were sold in the public
offering. These figures do not reflect the 3 for 2 stock split payable March 1, 2004. The
Company used $11 million of the proceeds to capitalize the Bank. During the first quarter
of 2000, the Company obtained all regulatory approvals to operate and opened the Bank for
business on March 27, 2000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Principles of ConsolidationThe consolidated financial statements include the accounts of the
Company, the Trust and the Bank. All significant intercompany balances and transactions
have been eliminated in consolidation. The accounting and reporting policies of the
Company conform to U.S. generally accepted accounting principles and to general practices
in the banking industry.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Concentrations of Credit Risk The Company, through the Bank, makes loans to individuals and
small-to mid-sized businesses for various personal and commercial purposes primarily in
Spartanburg County, South Carolina. The Company has a diversified loan portfolio and the
Companys loan portfolio is not dependent on any specific economic segment. The
Company regularly monitors its credit concentrations based on loan purpose, industry and
customer base. As of December 31, 2003, there were no material concentrations of credit
risk within the Companys loan portfolio.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | Use of EstimatesThe consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America
(GAAP) which requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements. In addition, they affect the reported amounts of income
and expense during the reporting period. Actual results could differ from these estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SecuritiesManagement classifies securities at the time of purchase into one of three
categories as follows: (1) Securities Held to Maturity: securities which the Company has
the positive intent and ability to hold to maturity, which are reported at amortized cost;
(2) Trading Securities: securities that are bought and held principally for the purpose of
selling them in the near future, which are reported at fair value with unrealized gains
and losses included in earnings; and (3) Securities Available for Sale: securities that
may be sold under certain conditions, which are reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
shareholders equity as accumulated other comprehensive income. The amortization of
premiums and accretion of discounts on investment securities are recorded as adjustments
to interest income. Gains or losses on sales of investment securities are based on the net
proceeds and the adjusted carrying amount of the securities sold, using the specific
identification method. Unrealized losses on securities, reflecting a decline in value or
impairment judged by the Company to be other than temporary, are charged to earnings in
the consolidated statements of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loans and Interest IncomeLoans of the Bank are carried at principal amounts, reduced by
an allowance for loan losses. The Bank recognizes interest income daily based on the
principal amount outstanding using the simple interest method. The accrual of interest is
generally discontinued on loans of the Bank which become 90 days past due as to principal
or interest or when management believes, after considering economic and business
conditions and collection efforts, that the borrowers financial condition is such
that collection of interest is doubtful. Management may elect to continue accrual of
interest when the estimated net realizable value of collateral is sufficient to cover the
principal balances and accrued interest and the loan is in the process of collection.
Amounts received on nonaccrual loans generally are applied against principal prior to the
recognition of any interest income. Generally, loans are restored to accrual status when
the obligation is brought current, has performed in accordance with the contractual terms
for a reasonable period of time and the ultimate collectibility of the total contractual
principal and interest is no longer in doubt.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impairment of Loans Loans are considered to be impaired when, in managements judgment,
the collection of all amounts of principal and interest is not probable in accordance with
the terms of the loan agreement. The Company accounts for impaired loans in accordance
with the terms of Statement of Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118
in the areas of disclosure requirements and methods of recognizing income. SFAS No. 114
requires that impaired loans be recorded at fair value, which is determined based upon the
present value of expected cash flows discounted at the loans effective interest
rate, the market price of the loan, if available, or the value of the underlying
collateral. All cash receipts on impaired loans are applied to principal until such time
as the principal is brought current. After principal has been satisfied, future cash
receipts are applied to interest income, to the extent that any interest has been
foregone. The Bank determines which loans are impaired through a loan review process.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | Allowance for Loan Losses The allowance for loan losses is established through a provision
for loan losses charged to operations and reflects an amount that, in managements
opinion, is adequate to absorb inherent losses in the existing portfolio. Additions to the
allowance are based on managements evaluation of the loan portfolio under current
economic conditions, past loan loss experience, and such other factors which, in
managements judgment, deserve recognition in estimating loan losses.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loans are charged off when, in the opinion of management, they are deemed to be uncollectible.
Recognized losses are charged against the allowance and subsequent recoveries are added to
the allowance. Management believes that the allowance is adequate. While management uses
the best information available to make evaluations, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the assumptions used in
making the evaluations. The allowance for loan losses is subject to periodic evaluation by
various regulatory authorities and may be subject to adjustments based upon information
that is available to them at the time of their examination.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loan FeesLoan origination fees and direct costs of loan originations are deferred and
recognized as an adjustment of yield by the interest method based on the contractual terms
of the loan. Loan commitment fees are deferred and recognized as an adjustment of yield
over the related loans life, or if the commitment expires unexercised, recognized in
income upon expiration.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Premises and EquipmentLand is carried at cost. Premises and equipment are stated at cost
less accumulated depreciation and amortization, computed principally by the straight line
method over the estimated useful lives of the assets as follows: building, 40 years;
furniture and fixtures, 7 to 10 years; and computer hardware and software, 3 to 5 years.
Amortization of leasehold improvements is recorded using the straight-line method over the
lesser of the estimated useful life of the asset or the term of the operating lease.
Additions to premises and equipment and major replacements and betterments are added at
cost. Maintenance, repairs and minor replacements are included in operating expense. When
assets are retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in income.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income TaxesIncome taxes are accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using the enacted rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Valuation allowances
are established to reduce deferred tax assets if it is determined to be more likely
than not that all or some portion of the potential deferred tax asset will not be
realized.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reclassifications  Certain prior year amounts have been reclassified to conform with the current
presentation. These reclassifications have no effect on previously reported
shareholders equity or net income as previously reported. Share and per share data
have been restated for the 3 for 2 stock split discussed below under Net Income
(Loss) Per Share.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | Stock Compensation Plans In the fourth quarter of 2003, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, in accordance with the prospective
transition method prescribed in SFAS No. 148 Accounting for Stock Based Compensation
 ̄ Transition and Disclosure. The fair value based method has been applied
prospectively to awards granted subsequent to December 31, 2002. Awards granted in years
prior to 2003 will continue to be accounted for under the intrinsic value method, and the
pro forma impact of accounting for those awards at fair value will continue to be
disclosed. The Company recognized $3,000 of compensation expense during 2003 as a result
of the adoption of this method.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Historially, and through September 30, 2003, the Company applied the intrinsic value method prescribed
in Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, to account for the Companys stock option plan. All
stock options granted under stock compensation plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. Therefore, no
stock-based compensation was reflected in net income (loss). Stock options and warrants
issued under the Companys stock option plan and warrant agreements have no intrinsic
value at the grant date, and under APB Opinion No. 25, no compensation cost was recognized
for them. Because SFAS No. 123 was adopted prospectively, the Company will continue to
provide pro forma disclosures of net income (loss) and income (loss) per share in the
following table, as if the fair value based method of accounting had been applied. All
amounts have been adjusted for the 3 for 2 stock split. See Note 14 for additional
information regarding the Companys stock-based compensation plans.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | For the years ended December 31,
| |  | --------------------------------
|
|
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 
| |  |                                 

| | The weighted average fair value per share of options granted in the years presented amounted
to $1.12, $1.07 and $1.27, respectively. The fair value of each option grant was estimated
on the date of grant using the Black-Scholes option pricing model with the following
assumptions used for grants: expected volatility of 6.0% for all years presented,
risk-free interest rate of 1.25%, 1.50% and 2.70% for each year presented, respectively,
and expected lives of the options of seven years in all years presented. There were no
cash dividends in any years presented.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net Income (Loss) Per ShareBasic net income (loss) per share represents income
available to common stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted net income (loss) per share reflects additional
common shares that would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate solely to
outstanding stock options and stock warrants and are determined using the treasury stock
method.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | For the year ended December 31, 2003, the effect of dilutive securities (options and warrants)
resulted in an incremental 221,531 shares outstanding compared to an incremental 154,190
shares outstanding for the year ended December 31, 2002. For the year ended December 31,
2001, all stock options outstanding were anti-dilutive due to the net loss sustained
during this period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On January 20, 2004 the Companys board of directors approved a 3 for 2 stock split of
the Companys outstanding stock. The split was distributed on March 1, 2004. The
number of outstanding shares increased from 1,201,900 to 1,802,850.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Comprehensive IncomeAccounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the equity section of the balance sheet, such items,
along with net income, are components of comprehensive income.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recently Issued Accounting StandardsIn December 2002, the Financial Accounting Standards
Board (FASB) issued SFAS No. 148, Accounting for Stock-based
CompensationTransition and Disclosure, an amendment of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions
of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting,
to require disclosure in the summary of significant accounting policies of the effects of
an entitys accounting policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure provisions of SFAS
No. 148 are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value method of
SFAS No. 123 or the intrinsic value method of APB Opinion No. 25. The provisions
of SFAS No. 148 are effective for annual financial statements for fiscal years ending
after December 15, 2002, and for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. The Company adopted
SFAS No. 123 using the prospective method of SFAS No. 148 during 2003. The adoption did
not have a material impact on the financial condition or operating results of the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | liabilities and equity. It requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances.) Many of those instruments were
previously classified as equity. SFAS No. 150 is generally effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is effective
at the beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have a material impact on the financial condition or
operating results of the Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The Company has elected to adopt FIN No. 46, which allows the Company to consolidate the Trust
as of December 31, 2003. However, small business issuers that report under SEC Regulation
S-B may delay deconsolidation until December 31, 2004. The adoption of FIN No. 46 did not
have a material effect on the Companys financial position or results of operations.
For more details on the Trust, refer to Note 13  Debt Associated with Trust
Preferred Securities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 2  Statement
of Cash Flows

| | In accordance with the provisions of SFAS No. 95, Statement of Cash Flows, the
Company considers cash and cash equivalents to be those amounts included in the balance
sheet captions Cash and due from banks, Interest-bearing bank
balances and Federal funds sold. These accounts totaled $6,694,420 and
$20,612,745 at December 31, 2003 and 2002, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | The following summarizes supplemental cash flow data for the years ended December 31:
| | -------------------------------------------------------------------------------------

| |  | 2003 | 2002                                         | 2001
| |  | ---- | -------------------------------------------- | ----
| |  |      | Interest paid                                |     
| |  |      | Cash paid for income taxes                   |     
| |  |      | Change in fair value of securities available |     
| |  |      | for sale, net of income tax                  |     

| | Noncash investing activities during the year ended December 31, 2001 also included $177,652 of
premises additions included in accrued expenses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

# Note 3  Restrictions on Cash
and due from Banks

| | The Bank is required to maintain average reserve balances, net of vault cash, with the Federal
Reserve Bank based upon a percentage of deposits. The amount of the required reserve
balance at December 31, 2003 and 2002 was $5,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 4  Securities

| | The amortized cost, fair value and gross unrealized holding gains and losses of securities
available for sale at December 31, 2003 and 2002, consisted of the following:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 2003
| |  | ----
|
|
|
| |  |     
| |  |     
| |  |     
| |  |     
| |  |     
| |  |     
| |  |     
| |  |     
| |  |     

| | At December 31, 2003, the Company held no securities which had been in a continuous
unrealized loss position for 12 months or more, or an other than temporary position. The
Company believes that the deterioration in value is attributable to changes in market
interest rates and not in credit quality and considers these losses to be temporary.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| |  | 2002
| |  | ----
|
|
|
| |  |     
| |  |     
| |  |     
| |  |     
| |  |     
| |  |     
| |  |     
| |  |     
| |  |     

| | At December 31, 2003 and 2002, securities with a carrying value of approximately $ 31,800,000
and $11,749,000, respectively, were pledged to secure public deposits and for other
purposes required or permitted by law, including as collateral for FHLB advances
outstanding.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The amortized cost and estimated fair value of investment securities available for sale at
December 31, 2003, by contractual maturity, are shown in the following table. Expected
maturities may differ from contractual maturities because issuers may have the right to
call or repay obligations with or without prepayment penalties. Fair value of securities
was determined using quoted market prices.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Amortized | Fair                                      
| |  | --------- | ------------------------------------------
|
|
| |  |           | Due after one year, through five years    
| |  |           | Due after five years, through ten years   
| |  |           | Due after ten years, through fifteen years
| |  |           | Due after fifteen years                   
| |  |           |                                           
| |  |           |                                           
| |  |           | Mortgage-backed securities                
| |  |           |                                           
| |  |           |                                           
| |  |           |                                           

# Note 5  Investments
Required by Law

| | The Bank, as a member of the Federal Reserve Bank (FRB) and the Federal Home Loan
Bank of Atlanta (FHLB), is required to own capital stock in these
organizations. The Banks equity investments required by law are included in the
accompanying consolidated balance sheets in Other assets. The amount of stock
owned is based on the Banks capital levels in the case of the FRB and totaled
$329,850 and $330,000 at December 31, 2003 and 2002 respectively. The amount of FHLB stock
owned is determined based on the Banks balances of residential mortgages and
advances from the FHLB and totaled $475,000 and $350,000 at December 31, 2003 and
2002, respectively. No ready market exists for these stocks and they have no quoted market
value. However, redemption of these stocks has historically been at par value.
Accordingly, the carrying amounts are deemed to be a reasonable estimate of fair value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

# Note 6  Loans

| | A summary of loans by classification at December 31 is as follows:
| | ------------------------------------------------------------------

| |  | 2003 | 2002                                
| |  | ---- | ------------------------------------
|
| |  |      | Commercial and industrial           
| |  |      | Commercial secured by real estate   
| |  |      | Real estate--residential mortgages  
| |  |      | Installment and other consumer loans
| |  |      | Unearned income                     
| |  |      |                                     
| |  |      | Total loans, net of unearned income 
| |  |     
| |  |      | Less--allowance for loan losses     
| |  |      |                                     
| |  |      | Total loans, net                    
| |  |      |                                     

| | Approximately $94,970,000 of the loans were variable interest rate loans at December 31, 2003. The
remaining portfolio was fixed interest rate loans.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | At December 31, 2003, $257,470 in loans were on nonaccrual. Foregone interest income on these
nonaccrual loans and other nonaccrual loans charged off during 2003 was approximately
$15,000 in 2003. There were no loans on nonaccrual at December 31, 2002. One loan totaling
$48,000 was on non-accrual at December 31, 2001. Foregone interest income on the
nonaccrual loan was approximately $4,000 during 2001. There were no loans contractually
past due in excess of 90 days at December 31, 2003 or 2002. There were no foreclosed loans
or other real estate owned at December 31, 2003 or 2002. There were no impaired loans at
December 31, 2003 or 2002.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes in the allowance for loan losses for the years ended December 31 were as follows:
| | -----------------------------------------------------------------------------------------

| |  | 2003 | 2002                            | 2001
| |  | ---- | ------------------------------- | ----
|
| |  |      | Balance, beginning of year      |     
| |  |      | Provision charged to operations |     
| |  |      | Loans charged off               |     
| |  |      | Recoveries on loans previously  |     
| |  |      | charged off                     |     
| |  |      |                                 |     
| |  |      | Balance, end of year            |     
| |  |      |                                 |     

| | Directors, executive officers and associates of such persons are customers of and have transactions
with the Bank in the ordinary course of business. Included in such transactions are
outstanding loans and commitments, all of which are made under substantially the same
credit terms, including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the normal
risk of collectibility.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

31

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | The aggregate dollar amount of these outstanding loans was approximately $7.33 million and
$5.56 million at December 31, 2003 and 2002, respectively. During 2003, new loans and
advances on these lines of credit totaled approximately $5.14 million and payments on
these loans and lines totaled approximately $3.37 million. At December 31, 2003, there
were commitments to extend additional credit to related parties in the amount of
approximately $4.09 million.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under current Federal Reserve regulations, the Bank is limited to the amount it may loan to the
Company. Loans made by the Bank may not exceed 10% and loans to all affiliates may not
exceed 20% of the Banks capital, surplus and undivided profits, after adding back
the allowance for loan losses. There were no loans outstanding between the Bank and the
Company at December 31, 2003 or 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 7  Premises
and Equipment

| | A summary of premises and equipment at December 31 is as follows:
| | -----------------------------------------------------------------

| |  | 2003 | 2002                             
| |  | ---- | ---------------------------------
|
| |  |      | Land                             
| |  |      | Building and improvements        
| |  |      | Furniture, fixtures and equipment
| |  |      | Construction in progress         
| |  |      |                                  
| |  |      |                                  
| |  |      | Accumulated depreciation         
| |  |      |                                  
| |  |      |                                  
| |  |      |                                  

| | Depreciation expense charged to operations totaled $239,939, $233,449 and $181,247 in 2003, 2002, and
2001, respectively.
| | -------------------------------------------------------------------------------------------------------------------------

| | The Bank entered into a long-term land lease during 2000, which has an initial term of 20
years and various renewal options under substantially the same terms with certain rate
escalations. Rent expense charged to operations totaled $48,000 for each of the years
ended December 31, 2003, 2002 and 2001. The annual minimum rental commitments under the
terms of the Companys noncancellable lease at December 31, 2003 are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

# Note 8  Deposits

| | The aggregate amount of time deposits with a minimum denomination of $100,000 is approximately
$43,005,000 and $25,472,000 at December 31, 2003 and 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

32

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | The scheduled maturities of time deposits at December 31 are as follows:
| | ------------------------------------------------------------------------

| |  | 2003 | 2002                        
| |  | ---- | ----------------------------
|
| |  |      | One year or less            
| |  |      | From one year to three years
| |  |      | After three years           
| |  |      |                             
| |  |      | Total                       
| |  |      |                             

# Note 9  Lines of
Credit

| | At December 31, 2003, the Bank had short-term lines of credit with correspondent banks to
purchase unsecured federal funds totaling $5,350,000. The interest rate on any borrowings
under these lines would be the prevailing market rate for federal funds purchased.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 10  FHLB
Advances

| | The Bank has the ability to borrow up to 15% of its total assets from the FHLB as of December
31, 2003. Borrowings under this arrangement can be made with various terms and repayment
schedules and with fixed or variable rates of interest. The borrowings under this
arrangement are available by pledging collateral and may require additional purchases of
stock in the FHLB. Qualifying securities available for sale with a market value of
$18,373,022 were pledged as collateral for advances outstanding of $9,500,000 at December
31, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At December 31, 2003, fixed rate FHLB advances outstanding ranged from $2,000,000 to
$5,000,000 with initial maturities of one to ten years and rates of 1.16% to 2.92%. The
weighted-average interest rate on FHLB advances outstanding at December 31, 2003 and 2002
was 1.71% and 1.72%, respectively. At December 31, 2003, advances totaling $7.5 million
were subject to call features at the option of the FHLB with call dates ranging from
January 2004 to July 2012. Call provisions are more likely to be exercised by the FHLB
when rates rise. Scheduled maturities of FHLB advances subsequent to December 31, 2003 are
$2,000,000 in 2004, $5,000,000 in 2012 and $2,500,000 in 2013.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 11  Income
Taxes

| | The following is a summary of the items, which caused recorded income taxes to differ from
taxes computed using the statutory tax rate for the periods ending December 31:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 2003 | 2002                                    | 2001
| |  | ---- | --------------------------------------- | ----
|
| |  |      | Income tax expense at federal statutory |     
| |  |      | rate of 34%                             |     
| |  |      | Change in valuation allowance           |     
| |  |      | State income tax, net of federal effect |     
| |  |      | Tax-exempt securities income            |     
| |  |      | Other, net                              |     
| |  |      |                                         |     
| |  |      | Income tax (benefit) expense            |     
| |  |      |                                         |     

33

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | The provision for income taxes for the years ended December 31 are as follows:
| | ------------------------------------------------------------------------------

| |  | 2003 | 2002                      
| |  | ---- | --------------------------
|
| |  |      | Current:                  
| |  |      | Federal                   
| |  |      | State                     
| |  |      |                           
| |  |      |                           
| |  |      |                           
| |  |      | Deferred:                 
| |  |      | Federal                   
| |  |      | State                     
| |  |      |                           
| |  |      |                           
| |  |      |                           
| |  |      | Provision for income taxes
| |  |      |                           

| | The Company had no currently taxable income for the year ending December 31, 2001. The 2001
tax benefit of $24,000 consisted entirely of deferred benefit with no current impact.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
components of the deferred tax assets and liabilities at December 31 are as follows:
| | ----------------------------------------------------------------------------------------

| |  | 2003 | 2002                                            
| |  | ---- | ------------------------------------------------
|
| |  |      | Deferred tax liability:                         
| |  |      | Net deferred loan costs                         
| |  |      | Prepaid expenses deducted currently for tax     
| |  |      | Tax depreciation in excess of book              
| |  |      | Unrealized gain on securities available for sale
| |  |      |                                                 
| |  |      | Total deferred tax liability                    
| |  |      |                                                 
| |  |      | Deferred tax asset:                             
| |  |      | Allowance for loan losses                       
| |  |      | Deferred organizational and start-up costs      
| |  |      | Unrealized loss on securities available for sale
| |  |      |                                                 
| |  |      | Deferred tax asset before valuation             
| |  |      | allowance                                       
| |  |      | Valuation allowance                             
| |  |      |                                                 
| |  |      | Net deferred tax asset                          
| |  |      |                                                 

| | The net deferred tax asset is included in Other assets in the accompanying
consolidated balance sheets.
| | ---------------------------------------------------------------------------------------------------------

| | The Company has not recorded a valuation allowance for the net deferred tax asset as the
realization of this asset is determined to be more likely than not based on the
Companys ability to generate future taxable income during the periods in which
temporary differences become deductible.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A portion of the change in the net deferred tax asset relates to the change in the tax
effect of the unrealized gain (loss) on securities available for sale of $138,988. The
remainder of the change in the net deferred tax asset is due to the current period
deferred tax expense of $53.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

# Note 12  Regulatory
Capital Requirements and Dividend Restrictions

| | The Company (on a consolidated basis) and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a material effect on the financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Companys and the
Banks capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company and the Bank are required to maintain minimum amounts and ratios of total
risk-based capital, Tier 1 capital, and Tier 1 leverage capital (as defined in the
regulations) as set forth in the table following. Management believes, as of
December 31, 2003 that the Company and the Bank meet all capital adequacy
requirements to which they are subject. At December 31, 2003, the Bank is categorized as
well capitalized under the regulatory framework for prompt corrective action.
There are no current conditions or events that management believes would change the
Companys or the Banks category.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The following table presents the Companys and the Banks actual capital amounts and
ratios at December 31, 2003 and 2002 as well as the minimum calculated amounts for each
regulatory-defined category.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       |  |  |   |            | Minimum to be
|-------------------------------------- |  |  | - | ---------- | -------------
|
|
|
|
|
|As of December 31, 2003                |  |  |   |            |              
|The Company                            |  | 
|Total capital to risk-weighted assets  |  |  | $ | 16,659,000 |              
|Tier 1 capital to risk-weighted assets |  |  | $ | 15,029,000 |              
|Tier 1 capital to average assets       |  |  | $ | 15,029,000 |              
|                                       |  | 
|The Bank                               |  | 
|Total capital to risk-weighted assets  |  |  | $ | 15,854,000 |              
|Tier 1 capital to risk-weighted assets |  |  | $ | 14,224,000 |              
|Tier 1 capital to average assets       |  |  | $ | 14,224,000 |              
|                                       |  | 
|As of December 31, 2002                |  | 
|The Company                            |  | 
|Total capital to risk-weighted assets  |  |  | $ | 12,351,000 |              
|Tier 1 capital to risk-weighted assets |  |  | $ | 11,187,000 |              
|Tier 1 capital to average assets       |  |  | $ | 11,187,000 |              
|                                       |  | 
|The Bank                               |  | 
|Total capital to risk-weighted assets  |  |  | $ | 11,327,000 |              
|Tier 1 capital to risk-weighted assets |  |  | $ | 10,163,000 |              
|Tier 1 capital to average assets       |  |  | $ | 10,163,000 |              

35

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | The
ability of the Company to pay cash dividends is dependent upon receiving cash in the form
of dividends from the Bank. The dividends that may be paid by the Bank to the Company are
subject to legal limitations and regulatory capital requirements. The approval of the
Comptroller of the Currency is required if the total of all dividends declared by a
national bank in any calendar year exceeds the Banks net profits (as defined by the
Comptroller) for that year combined with its retained net profits (as defined by the
Comptroller) for the two preceding calendar years. As of December 31, 2003, no cash
dividends have been declared or paid by the Bank.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 13  Debt
Associated with Trust Preferred Securities

| | On December 19, 2003, FNSC Capital Trust I (the Trust), a statutory trust formed
by the Company, issued and sold floating rate securities having an aggregate liquidation
amount of $3 million (the Capital Securities) to institutional buyers in a
private placement of trust preferred securities. The Capital Securities generated gross
proceeds of $3 million. The Trust invested these proceeds in an equivalent amount of
junior subordinated debentures of the Company, and the Company contributed the proceeds to
the Bank for general corporate purposes. Issuance costs from the December 19, 2003 sale
totaled $104,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The junior subordinated debentures are unsecured obligations of the Company and are
subordinate and junior in right of payment to all present and future senior indebtedness
of the Company. The Company has entered into a guarantee, which together with its
obligations under the junior subordinated debentures and the declaration of trust
governing the Trust provides a full and unconditional guarantee of the Capital Securities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Capital Securities accrue and pay distributions quarterly at a rate per annum equal to
90-day LIBOR plus 292 basis points. At December 31, 2003, the distribution rate on the
Capital Securities was 4.08%. The distributions payable on the Capital Securities are
cumulative and payable quarterly in arrears. The Company has the right, subject to events
of default, to defer payments of interest on the Capital Securities for a period not to
exceed 20 consecutive quarters. The Company has no current intention to exercise its right
to defer payment of interest on the Capital Securities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Capital Securities are mandatorily redeemable upon maturity on December 19, 2033. The
Company has the right to redeem the Capital Securities in whole or in part, on or after
December 19, 2008. If the Capital Securities are redeemed on or after December 19, 2008,
the redemption price will be 100% of the principal amount plus accrued and unpaid
interest. In addition, the Company may redeem the Capital Securities in whole (but not in
part) at any time within 90 days following the occurrence of a tax event, an investment
company event, or a capital treatment event at a special redemption price (as defined in
the indenture). The Company has elected to adopt FASB Interpretation No. 46 (FIN
46) which allows the Company to consolidate the Trust as of December 31, 2003 due to
the existence of appropriate call options in the Capital Securities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | On October 31, 2003, the FASB proposed a modification and interpretation of FIN 46.
Evaluation of the impact of FIN 46 and SFAS No. 150, (SFAS 150),
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, on the treatment of debt associated with trust preferred
securities resulted in the issuance of Revised Amendment to FIN 46 (FIN 46r).
Generally, electing to apply FIN 46r would require that the Trust be deconsolidated as of
December 31, 2003. However, the Company has not elected FIN 46r, and the SEC has indicated
that small business issuers that report under SEC Regulation S-B may delay deconsolidation
until December 31, 2004. The Company currently consolidated the Trust, which issued the
Companys trust preferred securities, in its consolidated financial statements as of
December 31, 2003 and reported the related debt instruments, referred to as debt
associated with trust preferred securities, as a liability on its consolidated balance
sheet.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 14  Stock
Compensation Plans

| | Effective March 6, 2000, the Company adopted the First National Bancshares, Inc. 2000 Stock
Incentive Plan (the Plan). Under the Plan, options are periodically granted to
employees and directors by the Personnel Committee at a price not less than the fair
market value of the shares at the date of grant. Options granted are exercisable for a
period of ten years from the date of grant and become exercisable at a rate of 20% each
year on the first five anniversaries of the date of grant. The Plan authorizes the
granting of stock options up to a maximum of 180,000 shares of common stock. At
December 31, 2003, 63,100 option shares were available to be granted under the Plan.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Upon consummation of the initial public offering, the organizers were issued stock warrants to
purchase 313,333 shares of common stock for $10 per share. These warrants vest ratably
over a five year period beginning February 10, 2000, and will be exercisable in whole or
in part during the ten year period following that date. The information presented in the
two preceding paragraphs has not been restated for the 3 for 2 stock split payable March
1, 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The following is a summary of the activity under the plans for the years ended
December 31, adjusted for the 3 for 2 stock split payable March 1, 2004:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | 2003 | 2002 | 2001
|------------------------- | ---- | ---- | ----
|
|
|
|
|
|
|Outstanding, beginning of |      |      |     
|period                    |      |     
|Granted                   |      |      |     
|Forfeited                 |      |      |     
|Exercised                 |      |      |     
|                          |      |      |     
|Outstanding, December 31  |      |      |     
|                          |      |      |     
|Exercisable, December 31  |      |      |     
|                          |      |      |     

37

---

|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | The following table summarizes information about stock options and warrants outstanding under
the stock-based option plans at December 31, 2003:
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Outstanding | Exercisable    
| |  | ----------- | ---------------
|
|
|
|
|
|
| |  |             | $        6.67  
| |  |             | $ 7.00 - $ 7.20
| |  |             | $ 8.70 - $ 9.00
| |  |             | $ 9.50 - $12.50
| |  |             |                
| |  |             | $ 6.67 - $12.50
| |  |             |                

# Note 15  Employee
Benefit Plan

| | The Company maintains an employee benefit plan for all eligible employees of the Company and
the Bank under the provisions of Internal Revenue Code Section 401(k). The First National
Retirement Savings Plan (the Savings Plan) allows for employee contributions
and, upon annual approval of the Board of Directors, the Company matches 50% of employee
contributions up to a maximum of six percent of annual compensation. The 50% match
represents an increase over 25% match in 2002 and 2001. A total of $29,932, $12,000 and
$9,914 was charged to operations in 2003, 2002, and 2001 respectively, for the
Companys matching contribution. Employees are immediately vested in their
contributions to the Savings Plan and become fully vested in the employer matching
contribution after five years of service.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 16 
Commitments and Contingencies

| | The Company has entered into an employment agreement with its President and Chief Executive
Officer that includes an annually renewable three-year compensation term, annual bonus,
incentive program, stock option plan and a one-year non-compete agreement upon
termination. See Note 7 for specifics on the Companys land lease.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In the normal course of business, the Company and the Bank are periodically subject to
various pending or threatened lawsuits in which claims for monetary damages may be
asserted. At December 31, 2003, the Company and the Bank were not involved with any
litigation matters.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 17  Financial
Instruments with Off-Balance Sheet Risk

| | The Company is party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit and involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet. The Companys exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual amounts of those
instruments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

38

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|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | The Company uses the same credit and collateral policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Company evaluates each
customers creditworthiness on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Company upon extension of credit is based on
managements credit evaluation. Commitments to extend credit are agreements to lend
to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash
requirements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At December 31, 2003, the Companys commitments to extend additional credit totaled
approximately $32.6 million, the majority of which are at variable rates of interest and
expire within one year. Included in the Companys total commitments are standby
letters of credit. Letters of credit are commitments issued by the Company to guarantee
the performance of a customer to a third party and totaled $75,000 at December 31, 2003.
The credit risk involved in the underwriting of letters of credit is essentially the same
as that involved in extending loan facilities to customers.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 18  Fair Value
of Financial Instruments

| | SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information, whether or not recognized in the statement of
financial position, when it is practicable to estimate fair value. SFAS No. 107 defines a
financial instrument as cash, evidence of an ownership interest in an entity, or
contractual obligations which require the exchange of cash or other financial instruments.
Certain items which are specifically excluded from the disclosure requirements, including
the Companys common stock, premises and equipment and other assets and liabilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair value approximates book value for the following financial instruments due to the
short-term nature of the instrument: cash and due from banks, interest-bearing deposits in
banks, federal funds sold, federal funds purchased, repurchase agreements, short-term FHLB
advances, and other short-term borrowings. Fair value of investment securities is
estimated based on quoted market prices where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable instruments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair value for variable rate loans that reprice frequently and for loans that mature in less
than one year is based on the carrying value, reduced by an estimate of credit losses
inherent in the portfolio. Fair value of fixed rate real estate, consumer, commercial and
other loans maturing after one year is based on the discounted present value of the
estimated future cash flows, reduced by an estimate of credit losses inherent in the
portfolio. Discount rates used in these computations approximate the rates currently
offered for similar loans of comparable terms and credit quality.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair value for demand deposit accounts and variable rate interest-bearing accounts with no
fixed maturity date is equal to the carrying value. Certificate of deposit accounts
maturing during 2003 are valued at their carrying value. Certificate of deposit accounts
maturing after 2003 are estimated by discounting cash flows from expected maturities using
current interest rates on similar instruments. Fair value for long-term FHLB advances is
based on discounted cash flows using the current market rate. The Trusts fair value
approximates its carrying amount as it closed on December 19, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39

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|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

| | The
estimated fair market value of commitments to extend credit and standby letters of credit
are equal to their carrying value as the majority of these off-balance sheet instruments
have relatively short terms to maturity and are written with variable rates of interest.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has used managements best estimate of fair values based on the above
assumptions. Thus, the fair values presented may not be the amounts, which could be
realized in an immediate sale or settlement of the instrument. In addition, any income tax
or other expense which would be incurred in an actual sale or settlement are not taken
into consideration in the fair value presented.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The estimated fair values of the Companys financial instruments at December 31 are as
follows:
| | -----------------------------------------------------------------------------------------------

| |  | 2003 | 2002                          
| |  | ---- | ------------------------------
|
|
|
|
|
| |  |      | Financial assets:             
| |  |      | Cash and due from banks       
| |  |      | Interest-bearing bank balances
| |  |      | Federal funds sold            
| |  |      | Securities available for sale 
| |  |      | Loans, net                    
| |  |      | Financial liabilities:        
| |  |      | Deposits                      
| |  |      | FHLB advances                 
| |  |      | Trust preferred securities    

# Note 19  Parent
Company Financial Information

| | The
following is condensed financial information of First National Bancshares, Inc. (parent
company only) at December 31, 2003 and 2002 and for each of the years in the three year
period ending December 31, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

40

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|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

# First National
Bancshares, Inc. Condensed Balance Sheets

|                                      | 2003 | 2002
|------------------------------------- | ---- | ----
|
|Assets:                               |      |     
|Cash                                  |      |     
|Investment in bank subsidiary         |      |     
|Investment in Trust                   |      |     
|Other assets                          |      |     
|                                      |      |     
|Total                                 |      |     
|                                      |      |     
|Liabilities and shareholders' equity: |      |     
|Junior subordinated debentures        |      |     
|Accruals and other liabilities        |      |     
|Shareholders' equity                  |      |     
|                                      |      |     
|Total                                 |      |     
|                                      |      |     

# First National Bancshares,
Inc. Condensed Statements of Income

|                                      | 2003 | 2002 | 2001
|------------------------------------- | ---- | ---- | ----
|
|Interest income                       |      |      | $   
|Interest expense                      |      |      |     
|                                      |      |      |     
|Net interest income                   |      |      |     
|                                      |      |     
|Salaries                              |      |      |     
|Professional fees                     |      |      |     
|Shareholder relations                 |      |      |     
|Other                                 |      |      |     
|                                      |      |      |     
|Noninterest expense                   |      |      |     
|                                      |      |     
|Equity in undistributed net income    |      |     
|(loss) of bank subsidiary             |      |      |     
|                                      |      |      |     
|Net income (loss) before income taxes |      |      |     
|Income taxes                          |      |      |     
|                                      |      |      |     
|Net income (loss)                     |      |      | $   
|                                      |      |      |     

41

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|                                |                                                      
|------------------------------- | -----------------------------------------------------
|FIRST NATIONAL BANCSHARES, INC. |                                                      
|AND SUBSIDIARIES                | Notes to Consolidated Financial Statements, Continued

# First National Bancshares,
Inc. Condensed Statements of Cash Flows

|                                                     | 2003 | 2002 | 2001
|---------------------------------------------------- | ---- | ---- | ----
|
|Operating activities:                                |      |      |     
|Net income (loss)                                    |      |      | $   
|Adjustments to reconcile net income (loss) to net    |      |     
|cash provided by (used for) operating activities:    |      |     
|Equity in undistributed net (income) loss of bank    |      |     
|subsidiary                                           |      |      |     
|Increase in other assets                             |      |      |     
|Increase (decrease) in other liabilities             |      |      |     
|                                                     |      |      |     
|Net cash provided by (used for) operating activities |      |      |     
|                                                     |      |      |     
|Investing activities:                                |      |     
|Increase (decrease) in due to bank subsidiary        |      |      |     
|Investment in Trust                                  |      |      |     
|Capital contribution to bank subsidiary              |      |      |     
|                                                     |      |      |     
|Net cash provided (used) by investing activities     |      |      |     
|                                                     |      |      |     
|Financing activities:                                |      |     
|Proceeds from exercise of employee stock options     |      |      |     
|Proceeds from junior subordinated debentures         |      |      |     
|Grant of employee stock options                      |      |      |     
|                                                     |      |      |     
|Net cash provided by financing activities            |      |      |     
|                                                     |      |      |     
|Net increase (decrease) in cash and cash equivalents |      |      |     
|                                                     |      |     
|Cash, beginning of year                              |      |      |     
|                                                     |      |      |     
|Cash, end of year                                    |      |      | $   
|                                                     |      |      |     

For a complete discussion of the
junior subordinated debentures and the related trust preferred securities, see Note 13
 Debt Associated with Trust Preferred Securities.

42

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# [Insert horizontal
bancshares logo]

# BOARD OF DIRECTORS

# Chairman Norman F. Pulliam 
Chairman, Pulliam Investment Company ********************************

| | 
| | 
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| | 
| | 
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# ***************************************************************

# [Insert horizontal bos
logo] EXECUTIVE OFFICERS Jerry L. Calvert President and Chief
Executive Officer Robert W. Murdoch, Jr. Senior Vice President
& Retail Banking Manager Kitty B. Payne Senior Vice President &
Chief Financial Officer David H. Zabriskie Senior Vice President
& Chief Lending Officer

43

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# SHAREHOLDER INFORMATION

Market for Common Stock

First
National Bancshares, Inc. common stock is traded on the OTC Bulletin Board under the
symbol FNSC. As of March 1, 2004, there were 392 shareholders of record. The number of
shareholders of record does not reflect the number of persons or entities who hold the
stock in nominee or street name through various brokerage firms.

All
of our currently issued and outstanding common stock was issued in our initial public
offering on November 10, 1999. The price per share in the initial public offering was
$10.00 per share. There is currently not a well-established public trading market in the
common stock, and trading and quotations of the common stock have been limited and
sporadic. Because there has not been an established market for our common stock, we may
not be aware of all prices at which the common stock has been traded. Based on information
available to us from a limited number of sellers and purchasers of our common stock, we
believe transactions in the common stock, on a per share basis, ranged from $14.25 to
$19.00 during 2003. There is no assurance that these prices reflect the market value of
our common stock.

The
following is a summary of the bid prices for our common stock reported by the OTC Bulletin
Board for the periods indicated. The prices shown reflect historical activity and have not
been adjusted to reflect the 3 for 2 stock split payable March 1, 2004.

| |  | 2003 | 2002          
| |  | ---- | --------------
|
|
| |  |      | First Quarter 
| |  |      | Second Quarter
| |  |      | Third Quarter 
| |  |      | Fourth Quarter

The
prices listed above are quotations, which reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.

Since
our inception, we have not paid cash dividends on our common stock. Our ability to pay
cash dividends is dependent on receiving cash in the form of dividends from our bank.
However, certain restrictions exist regarding the ability of our bank to transfer funds to
us in the form of cash dividends. All dividends are subject to prior approval of the
Office of the Comptroller of the Currency and are payable only from the undivided profits
of our bank.

|                                      |  | 
|------------------------------------- |  | 
|Registered Market Makers              |  | 
|                                      |  | 
|Scott & Stringfellow, Inc.            |  | 
|Hill, Thompson, Magid & Company, Inc. |  | 
|Monroe Securities, Inc.               |  | 
|FIG Partners, LLC                     |  | 
|Pershing Trading Company, LP          |  | 

Annual Meeting

The
Annual Meeting of Shareholders will be held at 5:30 PM on Tuesday, April 20, 2004 at our
main offices at 215 N. Pine Street, Spartanburg, SC 29302. All shareholders of record as
of March 1, 2004 are eligible to attend and vote.

Financial Information

We
will furnish upon request, free of charge, copies of our Annual Report to the SEC on Form
10-KSB by contacting Ms. Kitty B. Payne, First National Bancshares, Inc., P.O. Box 3508,
Spartanburg, SC 29304.

General CounselNelson, Mullins, Riley
& Scarborough, L.L.P. 104 South Main Street, Suite 900Greenville, South Carolina  29601

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# [Insert picture Boiling Springs]

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|Boiling Springs Office           | 
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|[Insert picture Main Office]     | 
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|Main Office                      | 
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Trust Services
& Investment Management Provided by Colonial Trust Company

# [Insert Colonial Trust
Logo]