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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

Form 10-KSB

(Mark One)

|x | Annual   Report under Section 13 or 15(d) of the Securities Exchange Act of 1934    
|- | ------------------------------------------------------------------------------------
|  | For the fiscal year ended December 31, 2004                                         
|  |                                                                                     
|  | or                                                                                  
|  |                                                                                     
|o | Transition   Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|  | For the transition period from ________ to   ________                               

Commission file no. 000-30523

|First   National Bancshares, Inc.                               
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|                                                                
|(Name of   Small Business Issuer in Its Charter)                
|                                                                
|South Carolina                                                  
|                                                                
|(State or   Other Jurisdiction of Incorporation or Organization)
|                                                                
|                                                                
|215 N. Pine St.                                                 
|Spartanburg, S.C.                                               
|                                                                
|(Address of   Principal Executive Offices)                      
|                                                                
|864-948-9001                                                    
|                                                                
|Issuers Telephone   Number, Including Area Code                

Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act: Common Stock.

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
x

The issuers revenues (total interest income plus noninterest income) for its most recent fiscal year were  $8,283,774.  As of March 1, 2005, 1,802,846 shares of Common Stock were issued and outstanding.

The aggregate market value of the Common Stock held by non-affiliates (shareholders holding less than 5% of an outstanding class of stock, excluding directors and executive officers) of the Company on March 1, 2005 was $28,677,348. This calculation is computed by reference to the closing price of our common stock as reported on the OTC Electronic Bulletin Board on March 1, 2005, of $27.00 per share.

Transitional Small Business Disclosure Format.  (Check one):  Yes
o       No    
x

DOCUMENTS INCORPORATED BY REFERENCE

|Companys 2004 Annual Report                                          | Part II 
|--------------------------------------------------------------------- | --------
|Companys Proxy Statement for the    2005 Annual Shareholders Meeting | Part III

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Part II.

Item 1.     Description of Business

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 those 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 those described below under
Risk Factors.

General

First National Bancshares, Inc. was incorporated on July 14, 1999 in South Carolina for the purpose of operating as a bank holding company pursuant to the Federal Bank Holding Company Act of 1956 and the South Carolina Bank Holding Company Act and to purchase 100% of the issued and outstanding stock of First National Bank of Spartanburg, an association organized under the laws of the United States, to conduct a general banking business in Spartanburg, South Carolina. During 2002, we adopted a resolution changing the banks legal name to First National Bank of the South, which continues to do business in Spartanburg County as First National Bank of Spartanburg.

On November 10, 1999, we commenced our initial public offering and completed the sale of 1,800,000 shares of our common stock at $6.67 per share on February 10, 2000.  The offering raised approximately $11,800,000 net of sales expenses and commissions.  These figures reflect the 3 for 2 stock split distributed on March 1, 2004.

Our directors and executive officers purchased 726,150 shares of common stock at $6.67 per share, for a total of $4,847,000.  Upon purchase of these shares, we issued stock warrants to the organizers to purchase an additional 470,000 shares of common stock for $6.67 per share.  The warrants, which are represented by separate warrant agreements, vest ratably over a five-year period beginning on February 10, 2000 and will be exercisable in whole or in part during the ten-year period following the grant date.

We used $11 million of the proceeds from our initial public offering to capitalize the bank which opened for business on March 27, 2000 in a temporary location at 451 E. St. John St. that was also the headquarters of the holding company.  The bank opened its second full-service banking office at 2680 Reidville Road in Spartanburg on July 14, 2000 and opened its third full-service office at 3090 Boiling Springs Road in Boiling Springs, South Carolina on August 24, 2001.  We completed the construction of our permanent main office at 215 N. Pine St. and moved our headquarters and a full-service banking office to this location on February 5, 2001.

In August 2002, we announced the formation of a strategic alliance with Colonial Trust Company to offer trust and investment management services. Colonial is the oldest private trust company in South Carolina and has offices in Spartanburg and Greenville. On December 19, 2003, we formed FNSC Capital Trust I, a statutory trust, to issue floating rate securities having an aggregate liquidation amount of $3 million to institutional buyers in a private placement of trust preferred securities.  On April 30, 2004, we formed FNSC Statutory Trust II to issue floating rate trust preferred securities having an aggregate liquidation amount of $3 million in a pooled offering.

On March 15, 2004, we announced the formation of a small business lending division based in Greenville, South Carolina. The division operates under the name First National Business Capital.  On October 15, 2004, we opened a loan production office in a temporary location in Mount Pleasant, South Carolina, as we search for a site for a full service office in the Charleston market.

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Risk Factors

Our recent operating results may not be indicative of our future operating results.

We may not be able to sustain our historical rate of growth and may not even be able to grow our business at all.  Because of our relatively small size and short operating history, it will be difficult for us to generate similar earnings growth as we continue to expand and, consequently, our historical results of operations may not necessarily be indicative of our future operations.  Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede our ability to expand our market presence.  If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected because a high percentage of our operating costs are fixed expenses.

Our decisions regarding credit risk and reserves for loan losses may materially and adversely affect our business.

Making loans and other extensions of credit is an essential element of our business.  Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid.  The risk of nonpayment is affected by a number of factors, including:

|                                                                                                                                                                                                                                            |  | the duration   of the credit;                                                                                         
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                            |  | credit risks   of a particular customer;                                                                              
|                                                                                                                                                                                                                                            |  | changes in   economic and industry conditions; and                                                                    
|                                                                                                                                                                                                                                            |  | in the case   of a collateralized loan, risks resulting from uncertainties about the future   value of the collateral.
|We   attempt to maintain an appropriate allowance for loan losses to provide for   potential losses in our loan portfolio.    We periodically determine the amount of the allowance based on   consideration of several factors, including:
|                                                                                                                                                                                                                                            |  | an ongoing   review of the quality, mix, and size of our overall loan portfolio;                                      
|                                                                                                                                                                                                                                            |  | our   historical loan loss experience;                                                                                
|                                                                                                                                                                                                                                            |  | evaluation   of economic conditions;                                                                                  
|                                                                                                                                                                                                                                            |  | regular   reviews of loan delinquencies and loan portfolio quality; and                                               
|                                                                                                                                                                                                                                            |  | the amount   and quality of collateral, including guarantees, securing the loans.                                     

There is no precise method of predicting credit losses; therefore, we face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required.  Additions to the allowance for loan losses would result in a decrease of our net income and possibly our capital.

Lack of seasoning of our loan portfolio may increase the risk of credit defaults in the future.

Due to the rapid growth of our bank over the past several years and our short operating history, a large portion of the loans in our loan portfolio and of our lending relationships are of relatively recent origin.  In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as seasoning.  As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio.  Because our loan portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels.  If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which would adversely affect our results of operations
and financial condition.

An economic downturn, especially one affecting the Spartanburg County area, could reduce our customer base, our level of deposits, and demand for financial products such as loans.

Our success significantly depends upon the growth in population, income levels, deposits, and housing starts in our markets, especially in Spartanburg County and, to a lesser extent, in Greenville County.  If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed.  An economic downturn would likely contribute to the deterioration of the quality of our loan portfolio and reduce our level of deposits, which in turn would hurt our business.  Interest received on loans represented approximately 86% of our interest income for the year ended December 31, 2004.  If an economic downturn occurs in the economy as a whole, or especially in the Spartanburg County area, borrowers may be less likely to repay their loans as scheduled.  Moreover, the value of real estate or other collateral that may
secure our loans could be adversely affected.  Unlike many larger institutions, we are not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies.  An economic downturn could, therefore, result in losses that materially and adversely affect our business.

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Changes in prevailing interest rates may reduce our profitability.

Our results of operations depend in large part upon the level of our net interest income, which is the difference between interest income from interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and other borrowings.  Depending on the terms and maturities of our assets and liabilities, a significant change in interest rates could have a material adverse effect on our profitability.  Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions.  While we intend to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our efforts may not be effective and our financial condition and results of operations could suffer.  After operating in a
historically low interest rate environment, the Federal Reserve raised short-term interest rates five times during 2004.  We anticipate that we will benefit from a rising interest rate environment as our interest rate risk position is asset-sensitive.  However, no assurance can be given that the Federal Reserve will actually continue to raise interest rates or that the results we anticipate will actually occur.

We are dependent on key individuals and the loss of one or more of these key individuals could curtail our growth and adversely affect our prospects.

Jerry L. Calvert, our President and Chief Executive Officer, has extensive and long-standing ties within our primary market area and he has contributed significantly to our growth.  If we lose the services of Mr. Calvert, he would be difficult to replace and our business and development could be materially and adversely affected.  To that end, we have an employment agreement with Mr. Calvert and carry $500,000 of insurance on his life payable to the bank.

Our success also depends, in part, on our continued ability to attract and retain experienced loan originators, as well as other management personnel.  The loss of the services of several of such key personnel could adversely affect our growth strategy and prospects to the extent we are unable to replace such personnel.

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various regulatory agencies.  Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices.  We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability.  Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.

The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission that are now applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices.  We have experienced, and expect to continue to experience, greater compliance costs, including costs related to internal controls, as a result of the Sarbanes-Oxley Act of 2002.

Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations.  To support our continued growth, we may need to raise additional capital.  Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control.  Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us.  If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.  In addition, if we decide to raise additional equity capital, your interest could be diluted.

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We face strong competition for clients, which could prevent us from obtaining clients and may cause us to pay higher interest rates to attract clients.

The banking business is highly competitive, and we experience competition in our market from many other financial institutions.  We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as other super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere.  We compete with these institutions both in attracting deposits and in making loans.  In addition, we have to attract our client base from other existing financial institutions and from new residents.  Many of our competitors are well-established, larger financial institutions.  These institutions offer some services, such as extensive and established branch networks, that we do not
provide.  There is a risk that we will not be able to compete successfully with other financial institutions in our market and that we may have to pay higher interest rates to attract deposits, resulting in reduced profitability.  In addition, competitors that are not depository institutions are generally not subject to the extensive regulations that apply to us.

We will face risks with respect to future expansion and acquisitions or mergers.

We may seek to acquire other financial institutions or parts of those institutions.  We may also expand into new markets, lines of business or offer new products or services.  These activities would involve a number of risks, including:

| |  | the   potential inaccuracy of the estimates and judgments used to evaluate credit,   operations, management and market risks with respect to a target institution;                                                                                                           
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                              
| |  | the time and   costs of evaluating new markets, hiring or retaining experienced local   management and opening new offices, as well as the time lags between these   activities and the generation of sufficient assets and deposits to support   the costs of the expansion;
| |   |                                                                                                                                                                                                                                                                              
| |  | the   incurrence and possible impairment of goodwill associated with an acquisition   and possible adverse effects on our results of operations; and                                                                                                                         
| |   |                                                                                                                                                                                                                                                                              
| |  | the risk of   loss of key employees and customers.                                                                                                                                                                                                                           

Marketing Focus

The bank has positioned itself as a locally-owned and operated bank organized to serve consumers and small-to mid-size businesses and professional concerns.  Because there are few locally owned banks left in Spartanburg, we believe we offer a unique banking alternative for the market by offering a higher level of customer service and a management team more focused on the needs of the community than most of our competitors.  In order to achieve the level of prompt, responsive service that we believe will be necessary to attract customers and to develop our image as a local bank with an individual focus, we are actively leveraging our community-oriented Board of Directors, convenient branch locations and local services and decision making to attract and retain customers.  We are also seeking to replicate this strategy in high-growth markets outside Spartanburg County.

Banking Services

The bank is primarily engaged in the business of accepting demand and time deposits and providing commercial, consumer and mortgage loans to the general public. Deposits of the bank are insured up to $100,000 by the Federal Deposit Insurance Corporation (FDIC).  Other services which the bank offers include safe deposit boxes, bank official checks, travelers checks, and wire transfer capabilities.  The bank activated its website and its remote internet banking product, First National Online, on February 20, 2001 and launched its internet-based commercial cash management product in October of 2001.

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Location and Service Area

Spartanburg County has a growing and dynamic economic environment that supports the bank.  It is South Carolinas fourth most populous county with over 261,780 residents.  The county and surrounding area are home to more than 100 international firms, including BMW, Springs Industries, Michelin Tire Company, Advantica, Milliken & Company, J M Smith Corporation and Spartanburg Regional Medical Center, all of which support a stable business foundation and a skilled labor force.  The presence of companies like these has resulted in Spartanburg County having the highest per capita international investment of any area in the United States.

More than 500 manufacturing firms also call Spartanburg County home.  While the textile industry is still a major component in the industrial community, Spartanburg County has diversified its economy over the last 30 years to include such clusters as automotive and automotive-related industry, food processing and packaging, metalworking and stamping, as well as a wide variety of other industrial segments.

Our primary service area consists of Spartanburg County, South Carolina, with a focus on the ten-mile radius of our main office and our branch offices at 2680 Reidville Road and 3090 Boiling Springs Road in Boiling Springs, South Carolina.  Our main office is located at 215 N. Pine St. in downtown Spartanburg and provides excellent visibility for the bank.

Our anticipated expansion plans include opening additional branches strategically located to extend the market reach of our bank, within our primary service area, as well as to other high-growth markets, while increasing our personal service delivery capabilities to all of our customers.  South Carolina offers one of the countrys most progressive business environments, as well as its most efficient container port.  As a result, approximately 350 European-owned operations are located within the state.  We plan to take advantage of existing contacts and relationships with individuals and companies in the high-market areas where some of these companies are located to more effectively market the services of the bank.

Deposit Services

We offer a full range of deposit services that are typically available in most banks and savings and loan associations, including checking accounts, commercial accounts, savings accounts and time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit.  The transaction accounts and certificates of deposit are tailored to our primary market area at rates competitive to those offered in the Spartanburg area.  In addition, we offer certain retirement account services, such as Individual Retirement Accounts (IRAs).  We solicit these accounts from individuals, businesses, associations, organizations and governmental authorities.

Lending Activities

General.  We emphasize a range of lending services, including real estate, commercial and consumer loans to individuals and small- to medium-sized businesses and professional firms that are located in or conduct a substantial portion of their business in the banks market area.  We intend to originate quality, profitable loans which will benefit the areas economy and promote the growth of the bank.  Management has focused on maintaining a quality loan portfolio and accepting only those credit risks which meet the banks underwriting standards.

Real Estate and Mortgage Loans.  One of the primary components of our loan portfolio is loans secured by first or second mortgages on real estate.  These loans generally consist of commercial real estate loans, construction and development loans and residential real estate loans, including home equity loans.  Interest rates for all categories may be fixed or adjustable and will more likely be fixed for shorter-term loans.  Loan terms generally are limited to five years or less, although payments may be structured on a longer amortization basis.   We generally charge an origination fee for each loan.

Real estate loans are subject to the same general risks as other loans.  The principal economic risk associated with each category of loans, including real estate loans, is the creditworthiness of the banks borrowers.  They are particularly sensitive to fluctuations in the value of real estate, which is generally the underlying security for real estate loans.  Fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively affect a borrowers cash flow, creditworthiness and ability to repay the loan.  Management attempts to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed 80%.  In addition, we typically require personal guarantees of the principal owners
of the property backed with a review of the personal financial statements of the principal owners.

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The underwriting criteria for home equity loans and lines of credit is generally the same as applied by the bank when making a first mortgage loan, as described above, and home equity lines of credit typically expire ten years or less after origination.  The bank currently originates residential real estate loans through a correspondent bank and is, therefore, not subject to interest rate and credit risk on these loans.

Commercial Loans.  We make loans for commercial purposes in various lines of businesses. Commercial loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured or, if they are secured, the value of the security may be difficult to assess and more likely to decrease than real estate.  Equipment loans are typically made for a term of five years or less at fixed or variable rates with the loan fully amortized over the term, secured by the financed equipment and with a loan-to-value ratio of 80% or less.  Working capital loans typically have terms not exceeding one year and are usually secured by accounts receivable, inventory and/or personal guarantees of the principals of the business.  We also make small business loans utilizing government enhancements such as the Small Business Administrations 7(a) program
and 504 program.  These loans are typically partially guaranteed by the government, which may help to reduce our risk.  Government guarantees of SBA loans do not exceed 80% of the loan value and will generally be less.  We usually sell the portion of loans that are secured by the SBA guarantee in the secondary market to provide additional liquidity and to provide a source of non interest income.

As with other categories of loans, the principal economic risk associated with commercial loans is the creditworthiness of the borrower.  The risks associated with commercial loans vary with many economic factors, including the economy in our market areas.  The well-established banks in these areas make proportionately more loans to medium to large-sized businesses than we do.  Many of our commercial loans are made to small- to medium-sized businesses which may be less able to withstand competitive, economic, and financial conditions than larger borrowers.

Consumer Loans.  We make a variety of loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit.  Installment loans typically carry balances of less than $50,000 and are amortized over periods up to 60 months.  Consumer loans may be offered on a single maturity basis where a specific source of repayment is available.  Revolving loan products typically require monthly payments of interest and a portion of the principal.  Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or if they are secured, the value of the security may be difficult to assess and more likely to decrease than real estate.  As with other categories of loans, the principal economic risk associated with consumer loans is the
creditworthiness of the borrower.  The principal competitors for consumer loans are the established banks and financial services companies in the Spartanburg County area.

Underwriting Procedures, Collateral and Risk.  We use our established credit policies and procedures when underwriting each type of loan.  Although there are minor variances in the characteristics and criteria for each loan type which may require additional underwriting procedures, we generally evaluate borrowers using the following defined criteria:

| |  | Character    we determine that the borrower has sound character and integrity by examining   the borrowers history.                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | Capital  we   evaluate the borrowers overall financial strength, as well as the equity   investment in the asset being financed.      
| |  | Collateral    we determine that the collateral is adequate from the standpoint of quality,   marketability, value and income potential.
| |  | Capacity    we evaluate the borrowers ability to service the debt.                                                                    
| |  | Conditions    we underwrite the credit in light of the effects of external factors, such as   economic conditions and industry trends. 

It is our practice to obtain collateral for most loans to help mitigate the risk associated with lending.  We generally limit our loan-to-value ratio to 80%.  We obtain a security interest in real estate for loans secured by real estate, including construction and development loans and other commercial loans.  For commercial loans, we obtain security interests in equipment and other company assets.  For consumer loans used to purchase vehicles, we obtain appropriate title documentation.  For secured loans that are not associated with real estate or for which the mortgaged real estate does not provide an acceptable loan-to-value ratio, we obtain other available collateral, such as stocks and bonds.

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Each type of loan carries a credit risk, which is simply defined as the potential that the borrower will not be willing or able to repay the debt.  While real estate loans have various risks common to all types of loans, certain types of real estate loans have specific risk characteristics that vary according to the collateral type securing the loan and the terms and repayment sources for the loan.  Real estate loans are sensitive to fluctuations in the value of the real estate securing the loan.  Certain types of real estate have specific risk characteristics that vary according to the type of collateral that secures the loan, the terms of the loan, and the repayment sources of the loan.

Commercial real estate loans have risk that the primary source of repayment will be insufficient to service the debt.  Often, this occurs as the result of changes in local economic conditions or in the industry in which the borrower operates which impact cash flow or collateral value.  Construction and development real estate loans generally carry a higher degree of risk than long term financing of existing properties.  These projects are usually dependent on the completion of the project on schedule and within cost estimates and on the timely sale of the property.  Inferior or improper construction techniques, changes in economic conditions during the construction and marketing period and rising interest rates which may slow the sale of the property are all risks unique to this type of loan.  Residential mortgage loans, in contrast to commercial real estate loans, generally have
longer terms and may have fixed or adjustable interest rates.

Consumer loans, other than home equity loan products, are generally considered to have more risk than loans to individuals secured by first or second mortgages on real estate due to dependence on the borrowers employment status as the sole source of repayment.  Agricultural loans carry the risk of crop failure which adversely impacts both the borrowers ability to repay the loan and the value of the collateral.

By following defined underwriting criteria noted above, we can help to reduce these risks.  Additionally, we help to reduce the risk that the underlying collateral may not be sufficient to repay the outstanding balances by using appraisals or taking other steps to determine that the value of the collateral is adequate, and lending amounts based upon lower loan-to-value ratios.  We control risks by limiting the concentration of our loan portfolio in any one type of loan.  A concentration of credit report based upon NACIS code is reviewed on a quarterly basis by our Board of Directors.

Loan Approval and Review.  Our loan approval policies provide for various levels of officer lending authority.  When the amount of aggregate loans to a single borrower exceeds an individual officers lending authority, the loan request is considered and approved by an officer with a higher lending limit, the management loan committee or the directors loan committee.  We do not make any loans to any of our directors or executive officers unless the loan is approved by the Board of Directors of the bank and is made on terms not more favorable to such person than would be available to a person not affiliated with the bank.  We adhere to Federal National Mortgage Association and Federal Home Loan Mortgage Corporation guidelines in our residential mortgage loan review process, but may choose to alter this policy in the future.  We currently originate our residential
mortgage loans through a correspondent bank.

Lending Limits.  Our lending activities are subject to a variety of lending limits imposed by federal law.  In general, we are subject to a legal limit on loans to a single borrower equal to 15% of the banks total lending capital and unimpaired surplus.  Different limits may apply in certain circumstances based on the type of loan or the nature of the borrower, including the borrowers relationship to the bank.  These limits increase or decrease as our capital increases or decreases.

Based upon the regulatory capital level of the bank at December 31, 2004 of $21.3 million, we had a legal lending limit of approximately $3.2 million.  We actively engage in selling participations in our loans to other financial institutions in order to more adequately meet all of the lending needs of loan customers requiring aggregate extensions of credit above these limits.  We compete for real estate loans with a number of competitors that are well-established in our market areas and have substantially greater resources and lending limits.  As a result, we occasionally must charge a lower interest rate to attract borrowers.

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Other Banking Services

We offer other banking services including drive-up ATMs, safe deposit boxes, travelers checks, direct deposit, U.S. Savings Bonds and banking by telephone.  We activated our website and First National Online, our internet banking product, on February 20, 2001.  In addition, we introduced our internet-based commercial cash management product in October of 2001.

We are associated with the Cirrus and Pulse ATM networks, which may be used by our customers throughout the country.  We also offer merchant banking and credit card services through a correspondent bank.

Although our bank does not have trust powers, we implemented a strategic alliance with Colonial Trust Co. on August 15, 2002 to provide our consumer and commercial customers access to a wide variety of services provided by Colonial Trust Co. including trust, professional portfolio management, individual financial and retirement planning and corporate retirement planning services

Market Share

As of June 30, 2004, total deposits in our primary service area were $2.72 billion, which represented an 8.27% deposit growth rate from 2003.  Our market share as of this date was 6.55%, an increase of 17% over our market share in 2003 of 5.61%.  We plan to continue to grow our deposit base as we follow our strategic plan for expansion.  Of course, we cannot be sure that these deposit growth rates will continue or that we will accomplish this objective.

SUPERVISION AND REGULATION

Both the company and the bank are subject to extensive state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight of virtually all aspects of our operations.  These laws and regulations are generally intended to protect depositors, not shareholders.  The following summary is qualified by reference to the statutory and regulatory provisions discussed.  Changes in applicable laws or regulations may have a material effect on our business and prospects.

Beginning with the enactment of the Financial Institutions Reform Recovery and Enforcement Act in 1989 and followed by the FDIC Improvement Act in 1991 and the Gramm-Leach-Bliley Act in 1999, numerous additional regulatory requirements have been placed on the banking industry in the past several years and additional changes have been proposed.  Our operations may be affected by legislative changes and the policies of various regulatory authorities.  We cannot predict the effect that fiscal or monetary policies, economic control or new federal or state legislation may have on our business and earnings in the future.

The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on our operations.  It is intended only to briefly summarize some material provisions.

USA PATRIOT Act of 2002

In October 2002, the USA PATRIOT Act of 2002 was enacted in response to the terrorist attacks in New York, Pennsylvania, and Washington D.C. that occurred on September 11, 2001.  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 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 who may be involved in terrorism or money laundering.

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Check 21

On October 28, 2003, President Bush signed into law the Check Clearing for the 21st Century Act, also known as Check 21.  The new law, which became effective October 28, 2004, gives a substitute check, such as a digital image of a check and copies made from that image, the same legal standing as the original paper check.  Some of the major provisions include:

| |  | allowing   check truncation without making it mandatory;                                                                                                                                                                               
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | demanding   that every financial institution communicate to accountholders in writing a   description of its substitute check processing program and their rights under   the law;                                                     
| |  | legalizing   substitutions for and replacements of paper checks without agreement from   consumers;                                                                                                                                    
| |  | retaining in   place the previously mandated electronic collection and return of checks between   financial institutions only when individual agreements are in place;                                                                 
| |  | requiring   that when accountholders request verification, financial institutions produce   the original check (or a copy that accurately represents the original) and   demonstrate that the account debit was accurate and valid; and
| |  | requiring   recrediting of funds to an individuals account on the next business day   after a consumer proves that the financial institution has erred.                                                                               

This new legislation will likely affect bank capital spending as many financial institutions assess whether technological or operational changes are necessary to stay competitive and take advantage of the new opportunities presented by Check 21.

First National Bancshares, Inc.

We own 100% of the outstanding capital stock of the bank and, therefore, we are considered to be a bank holding company under the Federal Bank Holding Company Act of 1956 and the South Carolina Banking and Branching Efficiency Act.

The Bank Holding Company Act.  Under the Bank Holding Company Act, we are subject to periodic examination by the Federal Reserve and are required to file periodic reports of our operations and any additional information that the Federal Reserve may require.  Our activities at the bank and holding company levels are limited to:

|                                                                                                                                                                                                         |  | banking and   managing or controlling banks;                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                         |  | furnishing   services to or performing services for our subsidiaries; and                                                                                                                                                                                      
|                                                                                                                                                                                                         |  | engaging in   other activities that the Federal Reserve determines to be so closely related   to banking and managing or controlling banks as to be a proper incident   thereto.                                                                               
|                                                                                                                                                                                                        
|Investments, Control, and Activities.  With certain limited exceptions, the Bank   Holding Company Act requires every bank holding company to obtain the prior approval   of the Federal Reserve before:
|                                                                                                                                                                                                         |   |                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                         |  | acquiring   substantially all the assets of any bank;                                                                                                                                                                                                          
|                                                                                                                                                                                                         |  | acquiring   direct or indirect ownership or control of any voting shares of any bank if   after the acquisition it would own or control more than 5% of the voting   shares of such bank (unless it already owns or controls the majority of such   shares); or
|                                                                                                                                                                                                         |  | merging or   consolidating with another bank holding company.                                                                                                                                                                                                  

In addition, and subject to certain exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with regulations promulgated thereunder, require Federal Reserve approval prior to any person or company acquiring control of a bank holding company.  Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company.  Control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities and either the company has registered securities under Section 12 of the Securities Exchange Act of 1934 or no other person owns a greater percentage of that class of voting securities immediately after the transaction.  Our common stock is registered under the Securities
Exchange Act of 1934.  The regulations provide a procedure for rebutting control when ownership of any class of voting securities is below 25%.

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Under the Bank Holding Company Act, a bank holding company is generally prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in nonbanking activities unless the Federal Reserve Board, by order or regulation, has found those activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.  Some of the activities that the Federal Reserve Board has determined by regulation to be proper incidents to the business of a bank holding company include:

| |  | making or   servicing loans and certain types of leases;                                                   
| | - | -----------------------------------------------------------------------------------------------------------
| |  | engaging in   certain insurance and discount brokerage activities;                                         
| |  | performing   certain data processing services;                                                             
| |  | acting in   certain circumstances as a fiduciary, investment or financial adviser;                         
| |  | owning   savings associations; and                                                                         
| |  | making   investments in certain corporations or projects designed primarily to promote   community welfare.

The Federal Reserve Board imposes certain capital requirements on the company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of qualifying capital to risk-weighted assets.  These requirements are described below under First National Bank of the South - Capital Regulations.  Subject to our capital requirements and certain other restrictions, we are able to borrow money to make a capital contribution to the bank, and these loans may be repaid from dividends paid from the bank to the company.  Our ability to pay dividends will be subject to regulatory restrictions as described below in First National Bank of the South  Dividends.  We are also able to raise capital for contribution to the bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and
state securities laws.

Source of Strength; Cross-Guarantee.  In accordance with Federal Reserve Board policy, we are expected to act as a source of financial strength to the bank and to commit resources to support the bank in circumstances in which we might not otherwise do so.  Under the Bank Holding Company Act, the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary, other than a nonbank subsidiary of a bank, upon the Federal Reserve Boards determination that such activity or control constitutes a serious risk to the financial soundness or stability of any depository institution subsidiary of the bank holding company.  Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiaries if the agency determines that divestiture may
aid the depository institutions financial condition.

The Gramm-Leach-Bliley Act.  The Gramm-Leach-Bliley Act was signed into law on November 12, 1999.  Among other things, the Act repealed the restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act.  The Act also permits bank holding companies that become financial holding companies to engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking and insurance company portfolio investment activities.  The Act also authorizes activities that are complementary to financial activities.  We have not elected to become a financial holding company.

The Act is intended, in part, to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis.  Nevertheless, the Act may have the result of increasing the amount of competition that we face from larger institutions and other types of companies.  In fact, it is not possible to predict the full effect that the Act will have on us.

South Carolina State Regulation. As a South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on sale or merger and to regulation by the South Carolina Board of Financial Institutions.  We are not required to obtain the approval of the Board prior to acquiring the capital stock of a national bank, but we must notify them at least 15 days prior to doing so.  We must receive the Boards approval prior to engaging in the acquisition of a South Carolina state chartered bank or another South Carolina bank holding company.

First National Bank of the South

The bank operates as a national banking association incorporated under the laws of the United States and subject to examination by the Office of the Comptroller of the Currency.  The bank operates as First National Bank of Spartanburg in Spartanburg County.  The banks small business lending division operates under the name First National Business Capital.  Deposits in the bank are insured by the Federal Deposit Insurance Corporation (FDIC) up to a maximum amount, which is generally $100,000 per depositor subject to the aggregation rule.

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The Office of the Comptroller of the Currency and the FDIC regulate or monitor virtually all areas of the banks operations, including

| |  | security   devices and procedures;                                                    
| | - | --------------------------------------------------------------------------------------
| |  | adequacy of   capitalization and loss reserves;                                       
| |  | loans;                                                                                
| |  | investments;                                                                          
| |  | borrowings;                                                                           
| |  | deposits;                                                                             
| |  | mergers;                                                                              
| |  | issuances of   securities;                                                            
| |  | payment of   dividends;                                                               
| |  | interest   rates payable on deposits;                                                 
| |  | interest   rates or fees chargeable on loans;                                         
| |  | establishment   of branches;                                                          
| |  | corporate   reorganizations;                                                          
| |  | maintenance   of books and records; and                                               
| |  | adequacy of   staff training to carry on safe lending and deposit gathering practices.

The Office of the Comptroller of the Currency requires the bank to maintain specified capital ratios and imposes limitations on the banks aggregate investment in real estate, bank premises and furniture and fixtures.  The Office of the Comptroller of the Currency also requires the bank to prepare annual reports on the banks financial condition and to conduct an annual audit of its financial affairs in compliance with its minimum standards and procedures.

Under the FDIC Improvement Act, all insured institutions must undergo regular on-site examinations by their appropriate banking agency.  The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate.  Insured institutions are required to submit annual reports to the FDIC, their federal regulatory agency and state supervisor, when applicable.  The FDIC Improvement Act directs the FDIC to develop a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution.  The FDIC Improvement Act also requires the federal banking
regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to the following:

| |  | internal   controls;                    
| | - | ----------------------------------------
| |  | information   systems and audit systems;
| |  | loan   documentation;                   
| |  | credit   underwriting;                  
| |  | interest   rate risk exposure; and      
| |  | asset   quality.                        

National banks and their holding companies which have been chartered or registered or have undergone a change in control within the past two years or which have been deemed by the Office of the Comptroller of the Currency or the Federal Reserve Board to be troubled institutions must give the Office of the Comptroller of the Currency or the Federal Reserve Board 30 days prior notice of the appointment of any senior executive officer or director.  Within the 30 day period, the Office of the Comptroller of the Currency or the Federal Reserve Board, as the case may be, may approve or disapprove any such appointment.

Deposit Insurance.The FDIC has adopted a risk-based assessment system for determining an insured depository institutions insurance assessment rate.  The system takes into account the risks attributable to different categories and concentrations of assets and liabilities.  An institution is placed into one of three capital categories:  (1) well capitalized; (2) adequately capitalized or (3) undercapitalized.  The FDIC also assigns an institution to one of three supervisory subgroups, based on the FDICs determination of the institutions financial condition and the risk posed to the deposit insurance funds.  Assessments range from 0 to 27 cents per $100 of deposits, depending on the institutions capital group and supervisory subgroup.  In addition, the FDIC imposes assessments to help pay off the $780 million in annual interest
payments on the $8 billion Financing Corporation bonds issued in the late 1980s as part of the government rescue of the thrift industry.  Our FDIC assessment rate is currently 1A or .000036 per million of insured deposits, but may change in the future.  The FDIC may increase or decrease the assessment rate schedule on a semiannual basis.  An increase in the BIF assessment rate could have a material adverse effect on our earnings, depending on the amount of the increase.

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The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Transactions with Affiliates and Insiders.The bank is subject to the provisions of Section 23A of the Federal Reserve Act, which places limits on the amount of loans or extensions of credit to, or investments in or certain other transactions with affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates.  The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of the banks capital and surplus and, as to all affiliates combined, to 20% of the banks capital and surplus.  Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements.  Compliance is also required with certain provisions designed to avoid the taking of low quality assets.

The bank also is subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.  The bank is subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders and their related interests.  Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

The Federal Reserve Board has recently issued Regulation W which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions.  Regulation W incorporates the exemption from the affiliate transaction rules but expands the exemption to cover the purchase of any type of loan or extension of credit from an affiliate.  In addition, under Regulation W:

| |  | a bank and   its subsidiaries may not purchase a low-quality asset from an affiliate;                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | covered   transactions and other specified transactions between a bank or its   subsidiaries and an affiliate must be on terms and conditions that are   consistent with safe and sound banking practices; and                                              
| |  | with some   exceptions, each loan or extension of credit by a bank to an affiliate must   be secured by collateral with a market value ranging from 100% to 130%,   depending on the type of collateral, of the amount of the loan or extension   of credit.

Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat these subsidiaries as affiliates.  Concurrently with the adoption of Regulation W, the Federal Reserve Board has proposed a regulation which would further limit the amount of loans that could be purchased by a bank from an affiliate to not more than 100% of the banks capital and surplus.  This regulation has not yet been adopted.

Dividends.A national bank may not pay dividends from its capital.  All dividends must be paid out of undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts.  In addition, a national bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of the banks net profits of the preceding two consecutive half-year periods (in the case of an annual dividend).  The approval of the Office 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 total of its net profits for that year, combined with its retained net profits for the preceding two years, less any required transfers to surplus.

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Branching.National banks are required by the National Bank Act to adhere to branch office banking laws applicable to state banks in the states in which they are located.  Under current South Carolina law, the bank may open branch offices throughout South Carolina with the prior approval of the Office of the Comptroller of the Currency.  In addition, with prior regulatory approval, the bank is able to acquire existing banking operations in South Carolina.  Furthermore, federal legislation permits interstate branching, including out-of-state acquisitions by bank holding companies, interstate branching by banks if allowed by state law and interstate merging by banks.  South Carolina law, with limited exceptions, currently permits branching across state lines through interstate mergers.

Community Reinvestment Act.The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the FDIC or the Office of the Comptroller of the Currency, shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate income neighborhoods.  These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility.  Failure to adequately meet these criteria could impose additional requirements and limitations on our bank.

The Gramm-Leach-Bliley Act.Under the Gramm-Leach-Bliley Act, subject to certain conditions imposed by their respective banking regulators, national and state-chartered banks are permitted to form financial subsidiaries that may conduct financial or incidental activities, thereby permitting bank subsidiaries to engage in certain activities that previously were impermissible.  The Gramm-Leach-Bliley Act imposes several safeguards and restrictions on financial subsidiaries, including that the parent banks equity investment in the financial subsidiary be deducted from the banks assets and tangible equity for purposes of calculating the banks capital adequacy.  In addition, the Gramm-Leach-Bliley Act imposes new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks
and nonbank affiliates.

The Gramm-Leach-Bliley Act also contains provisions regarding consumer privacy.  These provisions require financial institutions to disclose their policy for collecting and protecting confidential information.  Customers generally may prevent financial institutions from sharing personal financial information with nonaffiliated third parties except for third parties that market an institutions own products and services.  Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to the consumer.

Other Regulations.Interest and other charges collected or contracted for by the bank are subject to state usury laws and federal laws concerning interest rates.  The banks loan operations are also subject to federal laws applicable to credit transactions, such as:

|                                                          |  | the federal   Truth-In-Lending Act, governing disclosures of credit terms to consumer   borrowers;                                                                                                                                                                                                                            
|--------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                          |  | the Home   Mortgage Disclosure Act of 1975, requiring financial institutions to provide   information to enable the public and public officials to determine whether a   financial institution is fulfilling its obligation to help meet the housing   needs of the community it serves;                                      
|                                                          |  | the Equal   Credit Opportunity Act, prohibiting discrimination on the basis of race,   creed or other prohibited factors in extending credit;                                                                                                                                                                                 
|                                                          |  | the Fair   Credit Reporting Act of 1978, governing the use and provision of information   to credit reporting agencies;                                                                                                                                                                                                       
|                                                          |  | the Fair   Debt Collection Act, governing the manner in which consumer debts may be   collected by collection agencies; and                                                                                                                                                                                                   
|                                                          |  | the rules   and regulations of the various federal agencies charged with the   responsibility of implementing such federal laws.                                                                                                                                                                                              
|                                                         
|The deposit   operations of the bank also are subject to:
|                                                          |   |                                                                                                                                                                                                                                                                                                                               
|                                                          |  | the Right to   Financial Privacy Act, which imposes a duty to maintain confidentiality of   consumer financial records and prescribes procedures for complying with   administrative subpoenas of financial records; and                                                                                                      
|                                                          |  | the   Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve   Board to implement that Act, which governs automatic deposits to and withdrawals   from deposit accounts and customers rights and liabilities arising from the   use of automated teller machines and other electronic banking services.

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Capital Regulations.The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and account for off-balance sheet items.  The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios in excess of the minimums.  We have not received any notice indicating that either First National Bancshares, Inc. or First National Bank of the South is subject to higher capital requirements.  The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based
total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital.  Tier 1 capital includes common shareholders equity, qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and the allowance for loan and lease losses.  Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock and general reserves for loan and lease losses up to 1.25% of risk-weighted assets.

Under these guidelines, banks and bank holding companies assets are given risk-weights of 0%, 20%, 50% or 100%.  In addition, certain off-balance sheet items are given credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight applies.  These computations result in the total risk-weighted assets.  Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property and, under certain circumstances, residential construction loans, both of which carry a 50% rating.  Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% rating, and direct obligations of or obligations guaranteed by the United States Treasury or United States Government agencies, which have a 0% rating.

The federal bank regulatory authorities also have implemented a leverage ratio, which is equal to Tier 1 capital as a percentage of average total assets less intangibles, to be used as a supplement to the risk-based guidelines.  The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base.  The minimum required leverage ratio for top-rated institutions is 3%, but most institutions are required to maintain an additional cushion of at least 100 to 200 basis points.

The FDIC Improvement Act established a new capital-based regulatory scheme designed to promote early intervention for troubled banks, which requires the FDIC to choose the least expensive resolution of bank failures.  The new capital-based regulatory framework contains five categories of compliance with regulatory capital requirements, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.  To qualify as a well capitalized institution, a bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6% and a total risk-based capital ratio of no less than 10%, and the bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level.  Currently, we
qualify as well capitalized.

Under the FDIC Improvement Act regulations, the applicable agency can treat an institution as if it were in the next lower category if the agency determines (after notice and an opportunity for hearing) that the institution is in an unsafe or unsound condition or is engaging in an unsafe or unsound practice.  The degree of regulatory scrutiny of a financial institution increases, and the permissible activities of the institution decrease, as it moves downward through the capital categories.  Institutions that fall into one of the three undercapitalized categories may be required to do some or all of the following:

| |  | submit a   capital restoration plan;                                  
| | - | ----------------------------------------------------------------------
| |  | raise   additional capital;                                           
| |  | restrict   their growth, deposit interest rates, and other activities;
| |  | improve   their management;                                           
| |  | eliminate   management fees; or                                       
| |  | divest themselves   of all or a part of their operations.             

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These capital guidelines can affect us in several ways.  If we grow at a rapid pace, our capital may be depleted too quickly, and a capital infusion from our holding company may be necessary which could impact our ability to pay dividends.  Our capital levels currently are adequate; however, rapid growth, poor loan portfolio performance, poor earnings performance or a combination of these factors could change our capital position in a relatively short period of time.  If we fail to meet these capital requirements, our bank would be required to develop and file a plan with the Office of the Comptroller of the Currency describing the means and a schedule for achieving the minimum capital requirements.  In addition, our bank would generally not receive regulatory approval of any application that requires the consideration of capital adequacy, such as a branch or merger application, unless
our bank could demonstrate a reasonable plan to meet the capital requirement within a reasonable period of time.  A bank that is not well capitalized is also subject to certain limitations relating to so-called brokered deposits.  Bank holding companies controlling financial institutions can be called upon to boost the institutions capital and to partially guarantee the institutions performance under their capital restoration plans.

Enforcement Powers.The Financial Institutions Reform Recovery and Enforcement Act expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain institution-affiliated parties.  Institution-affiliated parties primarily include management, employees and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institutions affairs.  These practices can include the failure of an institution to timely file required reports, the filing of false or misleading information or the submission of inaccurate reports.  Civil penalties may be as high as $1,000,000 a day for such violations.  Criminal penalties for some financial institution crimes have been
increased to twenty years.  In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties.  Possible enforcement actions include the termination of deposit insurance.  Furthermore, banking agencies power to issue cease-and-desist orders were expanded.  Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss.  A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts or take other actions as determined by the ordering agency to be appropriate.

Effect of Governmental Monetary Policies.Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies.  The Federal Reserve Banks monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession.  The monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits.  It is not possible to predict the nature or impact of future changes in
monetary and fiscal policies.

Proposed Legislation and Regulatory Action.  New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nations financial institutions.  We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

Location and Service Area

We conduct a general commercial and retail banking business, emphasizing the needs of individuals and small- to medium-sized businesses.  We operate our banking business through our bank, First National Bank of Spartanburg.  Our main office is located at 215 N. Pine Street in Spartanburg, South Carolina.  We also operate two additional branch offices in Spartanburg County.  We primarily serve Spartanburg, South Carolina and the surrounding area.  We also have loan production offices located in Greenville and Mount Pleasant, South Carolina.

Competition

The banking business is highly competitive.  We compete with other commercial banks, savings and loan associations, credit unions and money market mutual funds operating in the Spartanburg County area and our other market areas.  As of June 30, 2004, there were 15 depository institutions operating in Spartanburg County.  Some of these competitors have been in business for a long time and have already established their customer base and name recognition.  We believe that our community bank focus, with our emphasis on service to small businesses, individuals and professional concerns, gives us an advantage in the market.  Nevertheless, a number of these competitors have greater financial and personnel resources than we may have.   Most of them offer services such as extensive and established branch networks that we do not currently provide.   In addition,
competitors that are not depository institutions are generally not subject to the extensive regulations that apply to our bank.  As a result of these competitive factors, we may have to pay higher rates of interest to attract deposits.

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Employees

As of March 1, 2005, we had 56 employees, of which 45 were full time.  These employees provide the majority of their services to our bank.

Item 2.     Description of Property

Since February 5, 2001, the principal place of business of both the company and the bank has been located at 215 N. Pine Street, Spartanburg, South Carolina 29302, one block north of the intersection of Main Street and Pine Street in downtown Spartanburg.  We own the approximately 2.0 acre site and the 15,000 square foot building with four drive-through banking stations and an automated teller machine.  We had previously operated our headquarters and a full-service branch in a temporary facility across the street from our new main office facility at 451 E. St. John Street, Spartanburg, South Carolina 29302 since the bank opened for business on March 27, 2000.

We opened a 3,500 square foot branch office on July 14, 2000 on the west side of Spartanburg on a one-acre outparcel of the Oak Grove Shopping Center at 2680 Reidville Road, Spartanburg, South Carolina 29301.  The branch has four drive-through banking stations and an automated teller machine.  We have a 20 year lease on the land and constructed the building at this location for approximately $611,000.  Furniture, fixtures and equipment for the branch cost approximately $217,000.

We opened a 3,000 square foot branch office on August 25, 2001 at 3090 Boiling Springs Road in northern Spartanburg County in Boiling Springs, South Carolina 29316 on a plot of land which was purchased for approximately $370,000.  The facility was constructed at a cost of approximately $500,000.  The branch has four drive-through banking stations and an automated teller machine.   Furniture, fixtures and equipment for the branch cost approximately $198,000.

We opened a loan production office on March 15, 2004 at 1204-A E. Washington Street in Greenville, South Carolina under a short-term operating lease.  We also opened a loan production office on October 15, 2004 at 1002 Anna Knapp Boulevard, Suite 2 in Mount Pleasant, South Carolina under a short-term operating lease.

We intend to continue to follow our strategy of growth and expansion and may contract to open offices at additional sites in the next several years of operation.

Item 3.     Legal Proceedings.

There are no material legal proceedings.

Item 4.     Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

Part II.

Item 5.     Market for Common Equity and Related Stockholder Matters.

Our stock is quoted under the symbol FNSC on the OTC Bulletin Board.  Trading and quotations of the common stock have been limited and sporadic.  The ranges of prices known to management at which shares of stock have been traded during 2004 are $12.34 to $26.90.  As of March 1, 2005, there were 379 shareholders of record.

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Our ability to pay cash dividends is dependent upon receiving cash in the form of dividends from the our bank.  However, certain restrictions exist regarding the ability of the bank to transfer funds to the company in the form of cash dividends.  All dividends must be paid out of undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts.  In addition, a national bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of the banks net profits of the preceding two consecutive half-year periods (in the case of an annual dividend).  The approval of the Office 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 total of its net
profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus.

All of our outstanding shares of common stock are entitled to share equally in dividends from funds legally available therefore, when, as and if declared by the Board of Directors.  To date, we have not paid cash dividends on our common stock.  We currently intend to retain earnings to support operations and finance expansion and, therefore, we do not anticipate paying cash dividends in the foreseeable future.

The following is a summary of the bid prices for our common stock reported by the OTC Bulletin Board for the periods indicated:

|                 |  | 2004 |       | 2003 |  
|---------------- |  | ---- | ----- | ---- | -
|                 |  |      |       |      |  
|                 |  | High |       | Low  |  
|                 |  |      |       |      |  
|First   Quarter  |  | $    | 17.00 |      | $
|Second   Quarter |  |      | 21.50 |      |  
|Third   Quarter  |  |      | 24.00 |      |  
|Fourth   Quarter |  |      | 26.90 |      |  

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.  Prices have been adjusted to reflect the 3 for 2 stock split distributed March 1, 2004.

Item 6.     Managements Discussion and Analysis of Results of Operation

In response to this Item, the information contained on pages 3 through 16 of our Annual Report to Shareholders for the year ended December 31, 2004 is incorporated herein by reference.

18

---



Item 7.     Financial Statements

In response to this Item, the information contained on pages 17 through 38 of our Annual Report to Shareholders for the year ended December 31, 2004 is incorporated herein by reference.

Item 8a.     Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of December 31, 2004.  There have been no significant changes in our internal controls over financial reporting during the fourth fiscal quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.  There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Item8b.     Other Information

None.

Part III.

Item 9.     Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

In response to this Item, the information contained on page 13 of our Proxy Statement for the 2005 Annual Meeting of Shareholders to be held on April 19, 2005 is incorporated herein by reference.

Item 10.     Executive Compensation

In response to this Item, the information contained on pages 5 through 7 of our Proxy Statement for the Annual Meeting of Shareholders to be held on April 19, 2005 is incorporated herein by reference.

Item 11.     Executive Security Ownership of Certain Beneficial Owners and Management

In response to this Item, the information contained on pages 9 through 10 of our Proxy Statement for the Annual Meeting of Shareholders to be held on April 19, 2005 is incorporated herein by reference.

19

---



The following table sets forth equity compensation plan information at December 31, 2004.

Equity Compensation Plan Information

|Plan Category                                                    |  | Number of   securities   to be issued   upon exercise of   outstanding options,   warrants and rights (a) |         | Weighted-average   exercise price of   outstanding options,   warrants and rights (b) |   | Number of   securities   remaining available for   future issuance under   equity compensation   plans (c)   (excluding securities    reflected in column(a)) | 
|---------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                                 |  |                                                                                                           |         |                                                                                       |   |                                                                                                                                                               | 
|Equity   compensation plans approved by security holders (1)     |  |                                                                                                           | 168,750 |                                                                                       | $ | 7.32                                                                                                                                                          | 
|Equity   compensation plans not approved by security holders (2) |  |                                                                                                           | 470,000 |                                                                                       | $ | 6.67                                                                                                                                                          | 
|Total                                                            |  |                                                                                                           | 638,750 |                                                                                       | $ | 6.84                                                                                                                                                          | 



|(1) | We have the   right to increase the number of shares of common stock available under the   2000 First National Bancshares, Inc. Stock Incentive Plan each time we issue   additional shares so that it continues to equal 15% of our total outstanding   shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(2) | Each of our   organizers has received, for no additional consideration, a warrant to   purchase two shares of common stock for $6.67 per share (adjusted for 3 for 2   stock split distributed on March 1, 2004) for every three shares purchased   during our initial public offering.    The warrants are represented by separate warrant agreements.  One-fifth of the warrants vest on each of   the first five anniversaries of the completion of the offering and they are   exercisable in whole or in part during the ten-year period following that   date.  The warrants may not be   assigned, transferred, pledged or hypothecated in any way.  The shares issued pursuant to the exercise   of such warrants are transferable, subject to compliance with applicable   securities laws.  If the Office of the   Comptroller of the Currency or the FDIC issues a capital directive or other   order requiring the bank to obtain additional capital, the warrants will be
forfeited if not immediately exercised.



Item 12.Certain Relationships and Related Transactions

In response to this Item, the information contained on page 13 of our Proxy Statement for the Annual Meeting of Shareholders to be held on April 19, 2005 is incorporated herein by reference.

Item 13.Exhibits

|     | The following   documents are filed as part of this report:                                                                                                                                                                                                                      
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                  
|3.1. | Articles of   Incorporation (incorporated by reference to Exhibit 3.1 of the Registration   Statement on Form SB-2, File No. 333-70589).                                                                                                                                         
|     |                                                                                                                                                                                                                                                                                  
|3.2. | Bylaws   (incorporated by reference to Exhibit 3.2 of the Registration Statement on   Form SB-2, File No. 333-70589).                                                                                                                                                            
|     |                                                                                                                                                                                                                                                                                  
|4.1. | See Exhibits   3.1 and 3.2 for provisions in First National Bancsharess Articles of   Incorporation and Bylaws defining the rights of holders of the common stock   (incorporated by reference to Exhibit 4.1 of the Registration Statement on   Form SB-2, File No. 333-70589).
|     |                                                                                                                                                                                                                                                                                  
|4.2. | Form of   certificate of common stock (incorporated by reference to Exhibit 4.2 of the   Registration Statement on Form SB-2, File No. 333-70589).                                                                                                                               

20

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|10.1. | Employment   Agreement dated July 20, 1999 between First National Bancshares and Jerry   Calvert (incorporated by reference to Exhibit 10.1 of the Registration   Statement on Form SB-2, File No. 333-70589).                            
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                           
|10.2. | Form of   Stock Warrant Agreement (incorporated by reference to Exhibit 10.2 of the   Registration Statement on Form SB-2, File No. 333-70589).                                                                                           
|      |                                                                                                                                                                                                                                           
|10.3  | Lease   Agreement dated July 12, 1999 between First National Bancshares, Inc. and Oak   Grove Associates, LLC (incorporated by reference to Exhibit 10.5 of the   Registration Statement on Form SB-2, File No. 333-70589).               
|      |                                                                                                                                                                                                                                           
|10.4  | Employment   Agreement dated January 31, 2005 between First National Bancshares, Inc.,   First National Bank of the South and Kitty B. Payne (incorporated by   reference to Exhibit 10.1 of the Form 8-K filed on February 4, 2005).*    
|      |                                                                                                                                                                                                                                           
|10.5  | Employment   Agreement dated January 31, 2005 between First National Bancshares, Inc.,   First National Bank of the South and David H. Zabriskie (incorporated by   reference to Exhibit 10.3 of the Form 8-K filed on February 4, 2005).*
|      |                                                                                                                                                                                                                                           
|10.6  | Employment   Agreement dated January 31, 2005 between First National Bancshares, Inc.,   First National Bank of the South and Robert Murdoch (incorporated by   reference to Exhibit 10.2 of the Form 8-K filed on February 4, 2005).*    
|      |                                                                                                                                                                                                                                           
|10.7  | First   National Bancshares, Inc. 2000 Stock Incentive Plan and Form of Agreement   (incorporated by reference to Exhibit 10.3 in the 10-KSB filed on March 30,   2004).*                                                                 
|      |                                                                                                                                                                                                                                           
|13    | Company 2004   Annual Report.                                                                                                                                                                                                             
|      |                                                                                                                                                                                                                                           
|21    | Subsidiaries   of the Company.                                                                                                                                                                                                            
|      |                                                                                                                                                                                                                                           
|31.1  | Rule   13a-14(a) Certification of the Chief Executive Officer.                                                                                                                                                                            
|      |                                                                                                                                                                                                                                           
|31.2  | Rule   13a-14(a) Certification of the Chief Financial Officer.                                                                                                                                                                            
|      |                                                                                                                                                                                                                                           
|32    | Section 1350   Certifications.                                                                                                                                                                                                            

---

*Management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report on Form 10-KSB.

The exhibits listed above will be furnished to any security holder free of charge upon written request to Ms. Kitty B. Payne, Chief Financial Officer, First National Bancshares, Inc., Post Office Box 3508, Spartanburg, South Carolina 29304.

Item 14.Principal Accountant Fees and Services

In response to this Item, the information contained on pages 12 through 13 of our Proxy Statement for the Annual Meeting of Shareholders to be held on April 19, 2005 is incorporated herein by reference.

21

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act), the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                      | FIRST NATIONAL BANCSHARES,   INC.
|--------------------- | ---------------------------------
|                      |                                  
|                      |                                  
|Date:  March 30, 2005 | By:                              
|                      |                                  
|                      |                                  

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jerry L. Calvert and Norman F. Pulliam as the true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-KSB, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Act of 1933, this report has been signed by the

following in the capacities and on the dates indicated.

|Signature                        |  | Title                     |  | Date            
|-------------------------------- |  | ------------------------- |  | ----------------
|                                 |  |                           |  |                 
|                                 |  |                           |  |                 
|/s/ C. DAN ADAMS                 |  | Director                  |  | March 30,   2005
|                                 |  |                           |  |                 
|C. Dan Adams                     |  |                           |  |                 
|                                 |  |                           |  |                 
|                                 |  |                           |  |                 
|/s/ MELLNEE G. BUCHHEIT          |  | Director                  |  | March 30,   2005
|                                 |  |                           |  |                 
|Mellnee G.   Buchheit            |  |                           |  |                 
|                                 |  |                           |  |                 
|                                 |  |                           |  |                 
|/s/ JERRY L. CALVERT             |  | Director,                 |  | March 30,   2005
|                                 |  | President,                |  |                 
|Jerry L.   Calvert               |  | Chief   Executive Officer |  |                 
|                                 |  |                           |  |                 
|                                 |  |                           |  |                 
|/s/ MARTHA CLOUD CHAPMAN         |  | Director                  |  | March 30,   2005
|                                 |  |                           |  |                 
|Martha Cloud   Chapman           |  |                           |  |                 
|                                 |  |                           |  |                 
|                                 |  |                           |  |                 
|/s/ W. RUSSEL FLOYD, JR.         |  | Director                  |  | March 30,   2005
|                                 |  |                           |  |                 
|W. Russel   Floyd, Jr.           |  |                           |  |                 
|                                 |  |                           |  |                 
|                                 |  |                           |  |                 
|/s/ C. TYRONE GILMORE, SR.       |  | Director                  |  | March 30,   2005
|                                 |  |                           |  |                 
|C. Tyrone   Gilmore, Sr.         |  |                           |  |                 
|                                 |  |                           |  |                 
|                                 |  |                           |  |                 
|/s/ GAINES W. HAMMOND,   Jr., MD |  | Director                  |  | March 30,   2005
|                                 |  |                           |  |                 
|Gaines W.   Hammond, Jr., M.D.   |  |                           |  |                 

22

---



|/s/ BENJAMIN R. HINES       |  | Director                             |  | March 30,   2005
|--------------------------- |  | ------------------------------------ |  | ----------------
|                            |  |                                      |  |                 
|Benjamin R.   Hines         |  |                                      |  |                 
|                            |  |                                      |  |                 
|                            |  |                                      |  |                 
|/s/ WILLIAM A. HUDSON       |  | Director                             |  | March 30,   2005
|                            |  |                                      |  |                 
|William A.   Hudson         |  |                                      |  |                 
|                            |  |                                      |  |                 
|                            |  |                                      |  |                 
|/s/ KITTY B. PAYNE          |  | Chief   Financial Officer,           |  | March 30,   2005
|                            |  | Principal   Financial and Accounting |  |                 
|Kitty B.   Payne            |  | Officer                              |  |                 
|                            |  |                                      |  |                 
|                            |  |                                      |  |                 
|                            |  |                                      |  |                 
|/s/ NORMAN F. PULLIAM       |  | Director,   Chairman                 |  | March 30,   2005
|                            |  | of the Board                         |  |                 
|Norman F.   Pulliam         |  |                                      |  |                 
|                            |  |                                      |  |                 
|                            |  |                                      |  |                 
|/s/ PETER E. WEISMAN        |  | Director                             |  | March 30,   2005
|                            |  |                                      |  |                 
|Peter E.   Weisman          |  |                                      |  |                 
|                            |  |                                      |  |                 
|                            |  |                                      |  |                 
|/s/ DONALD B. WILDMAN       |  | Director                             |  | March 30,   2005
|                            |  |                                      |  |                 
|Donald B.   Wildman         |  |                                      |  |                 
|                            |  |                                      |  |                 
|                            |  |                                      |  |                 
|/s/ COLEMAN L. YOUNG,   JR. |  | Director                             |  | March 30,   2005
|                            |  |                                      |  |                 
|Coleman L.   Young, Jr.     |  |                                      |  |                 

23

---



INDEX TO EXHIBITS

|Exhibit   Number |  | Description                                                                                                                                                                                                                                                                      
|---------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                 |  |                                                                                                                                                                                                                                                                                  
|3.1.             |  | Articles of   Incorporation (incorporated by reference to Exhibit 3.1 of the Registration   Statement on Form SB-2, File No. 333-70589).                                                                                                                                         
|                 |  |                                                                                                                                                                                                                                                                                  
|3.2.             |  | Bylaws   (incorporated by reference to Exhibit 3.2 of the Registration Statement on   Form SB-2, File No. 333-70589).                                                                                                                                                            
|                 |  |                                                                                                                                                                                                                                                                                  
|4.1.             |  | See Exhibits   3.1 and 3.2 for provisions in First National Bancsharess Articles of   Incorporation and Bylaws defining the rights of holders of the common stock   (incorporated by reference to Exhibit 4.1 of the Registration Statement on   Form SB-2, File No. 333-70589).
|                 |  |                                                                                                                                                                                                                                                                                  
|4.2.             |  | Form of   certificate of common stock (incorporated by reference to Exhibit 4.2 of the   Registration Statement on Form SB-2, File No. 333-70589).                                                                                                                               
|                 |  |                                                                                                                                                                                                                                                                                  
|10.1             |  | Employment   Agreement dated July 20, 1999 between First National Bancshares and Jerry   Calvert (incorporated by reference to Exhibit 10.1 of the Registration   Statement on Form SB-2, File No. 333-70589).                                                                   
|                 |  |                                                                                                                                                                                                                                                                                  
|10.1.1           |  | Form of   Stock Warrant Agreement (incorporated by reference to Exhibit 10.2 of the   Registration Statement on Form SB-2, File No. 333-70589).                                                                                                                                  
|                 |  |                                                                                                                                                                                                                                                                                  
|10.1.2           |  | Lease   Agreement dated July 12, 1999 between First National Bancshares, Inc. and Oak   Grove Associates, LLC (incorporated by reference to Exhibit 10.5 of the Registration   Statement on Form SB-2, File No. 333-70589).                                                      
|                 |  |                                                                                                                                                                                                                                                                                  
|10.2             |  | Employment   Agreement dated January 31, 2005 between First National Bancshares, Inc.,   First National Bank of the South and Kitty B. Payne (incorporated by   reference to Exhibit 10.1 of the Form 8-K filed on February 4, 2005).*                                           
|                 |  |                                                                                                                                                                                                                                                                                  
|10.5             |  | Employment   Agreement dated January 31, 2005 between First National Bancshares, Inc.,   First National Bank of the South and David H. Zabriskie (incorporated by   reference to Exhibit 10.3 of the Form 8-K filed on February 4, 2005).*                                       
|                 |  |                                                                                                                                                                                                                                                                                  
|10.6             |  | Employment   Agreement dated January 31, 2005 between First National Bancshares, Inc.,   First National Bank of the South and Robert Murdoch (incorporated by   reference to Exhibit 10.2 of the Form 8-K filed on February 4, 2005).*                                           
|                 |  |                                                                                                                                                                                                                                                                                  
|10.7             |  | First   National Bancshares, Inc. 2000 Stock Incentive Plan and Form of Agreement   (incorporated by reference to Exhibit 10.3 in the 10-KSB filed on March 30,   2004).*                                                                                                        
|                 |  |                                                                                                                                                                                                                                                                                  
|13               |  | Company 2004   Annual Report.                                                                                                                                                                                                                                                    
|                 |  |                                                                                                                                                                                                                                                                                  
|21               |  | Subsidiaries   of the Company.                                                                                                                                                                                                                                                   
|                 |  |                                                                                                                                                                                                                                                                                  
|31.1             |  | Rule   13a-14(a) Certification of the Chief Executive Officer.                                                                                                                                                                                                                   
|                 |  |                                                                                                                                                                                                                                                                                  
|31.2             |  | Rule   13a-14(a) Certification of the Chief Financial Officer.                                                                                                                                                                                                                   
|                 |  |                                                                                                                                                                                                                                                                                  
|32               |  | Section 1350   Certifications.                                                                                                                                                                                                                                                   

|                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------------------------------
|*Management   contract or compensatory plan or arrangement required to be filed as an   exhibit to this annual report on Form 10-KSB.

24

---



Exhibit 13

2004 Annual Report of the Company

---



Exhibit 21

Subsidiaries of the Company

First National Bank of the South FNSC Capital Trust I FNSC Capital Trust II

---



Exhibit 31.1

Rule 13a-14(a) Certification of the Chief Executive Officer

I, Jerry L. Calvert, president and chief executive officer, certify that:

|1. | I have   reviewed this annual report on Form 10-KSB of First National Bancshares, Inc.                                                                                                                                                                                                                                                                                                                 
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|2. | Based on my   knowledge, this annual report does not contain any untrue statement of a   material fact or omit to state a material fact necessary to make the   statements made, in light of the circumstances under which such statements   were made, not misleading with respect to the period covered by this report;                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|3. | Based on my   knowledge, the financial statements, and other financial information included   in this report, fairly present in all material respects the financial   condition, results of operations and cash flows of the small business issuer   as of, and for, the periods presented in this report;                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|4. | The small   business issuers other certifying officers and I are responsible for   establishing and maintaining disclosure controls and procedures (as defined   in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer   and have:                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|   | a)  Designed   such disclosure controls and procedures, or caused such disclosure controls   and procedures to be designed under our supervision, to ensure that material   information relating to the small business issuer, including its consolidated   subsidiaries, is made known to us by others within those entities,   particularly during the period in which this report is being prepared;
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|   | b)  Evaluated   the effectiveness of the small business issuers disclosure controls and   procedures and presented in this report our conclusions about the   effectiveness of the disclosure controls and procedures as of the end of the   period covered by this report based on such evaluation; and                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|   | c)  Disclosed   in this report any change in the small business issuers internal control   over financial reporting that occurred during the small business issuers   fourth fiscal quarter that has materially affected, or is reasonably likely   to materially affect, the small business issuers internal control over   financial reporting; and                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|5. | The small   business issuers other certifying officers and I have disclosed, based on   our most recent evaluation of internal control over financial reporting, to   the small business issuers auditors and the audit committee of the small   business issuers board of directors (or persons performing the equivalent   functions):                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|   | a)  All   significant deficiencies and material weaknesses in the design or operation   of internal controls over financial reporting which are reasonably likely to   adversely affect the small business issuers ability to record, process,   summarize and report financial information; and                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|   | b)  Any   fraud, whether or not material, that involves management or other employees   who have a significant role in the small business issuers internal control   over financial reporting.                                                                                                                                                                                                        

|Date:  March   29, 2005 | By: | /s/ JERRY L. CALVERT                   
|----------------------- | --- | ---------------------------------------
|                        |     |                                        
|                        |     | Jerry L.   Calvert                     
|                        |     | President   and Chief Executive Officer

---



Exhibit 31.2

Rule 13a-14(a) Certification of the Chief Financial Officer

I, Kitty B. Payne, chief financial officer, certify that:

|1. | I have   reviewed this annual report on Form 10-KSB of First National Bancshares, Inc.                                                                                                                                                                                                                                                                                                                 
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|2. | Based on my   knowledge, this annual report does not contain any untrue statement of a   material fact or omit to state a material fact necessary to make the   statements made, in light of the circumstances under which such statements   were made, not misleading with respect to the period covered by this report;                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|3. | Based on my   knowledge, the financial statements, and other financial information included   in this report, fairly present in all material respects the financial   condition, results of operations and cash flows of the small business issuer   as of, and for, the periods presented in this report;                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|4. | The small   business issuers other certifying officers and I are responsible for   establishing and maintaining disclosure controls and procedures (as defined   in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer   and have:                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|   | a)  Designed   such disclosure controls and procedures, or caused such disclosure controls   and procedures to be designed under our supervision, to ensure that material   information relating to the small business issuer, including its consolidated   subsidiaries, is made known to us by others within those entities,   particularly during the period in which this report is being prepared;
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|   | b)  Evaluated   the effectiveness of the small business issuers disclosure controls and   procedures and presented in this report our conclusions about the   effectiveness of the disclosure controls and procedures as of the end of the   period covered by this report based on such evaluation; and                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|   | c)  Disclosed   in this report any change in the small business issuers internal control   over financial reporting that occurred during the small business issuers   fourth fiscal quarter that has materially affected, or is reasonably likely   to materially affect, the small business issuers internal control over   financial reporting; and                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|5. | The small   business issuers other certifying officers and I have disclosed, based on   our most recent evaluation of internal control over financial reporting, to   the small business issuers auditors and the audit committee of the small   business issuers board of directors (or persons performing the equivalent   functions):                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|   | a)  All   significant deficiencies and material weaknesses in the design or operation   of internal controls over financial reporting which are reasonably likely to   adversely affect the small business issuers ability to record, process,   summarize and report financial information; and                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|   | b)  Any   fraud, whether or not material, that involves management or other employees   who have a significant role in the small business issuers internal control   over financial reporting.                                                                                                                                                                                                        

|Date:  March   29, 2005 | By: | /s/ KITTY B. PAYNE       
|----------------------- | --- | -------------------------
|                        |     |                          
|                        |     | Kitty B.   Payne         
|                        |     | Chief   Financial Officer

---



Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, the Chief Executive Officer and the Chief Financial Officer of First National Bancshares, Inc. (the Company), each certify that, to his knowledge on the date of this certification:

| | 1. | The annual   report of the Company for the period ended December 31, 2004 as filed with   the Securities and Exchange Commission on this date (the Report) fully   complies with the requirements of Section 13(a) or 15(d) of the Securities   Exchange Act of 1934; and
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                            
| | 2. | The   information contained in the Report fairly presents, in all material   respects, the financial condition and result of operations of the Company.                                                                                                                    

|Date:  March   29, 2005 | By: | /s/ JERRY L. CALVERT                   
|----------------------- | --- | ---------------------------------------
|                        |     |                                        
|                        |     | Jerry L.   Calvert                     
|                        |     | President   and Chief Executive Officer
|                        |     |                                        
|Date:  March   29, 2005 | By: | /s/ KITTY B. PAYNE                     
|                        |     |                                        
|                        |     | Kitty B.   Payne                       
|                        |     | Chief   Financial Officer              

---



Message

---



Message

---



Message

LETTER TO SHAREHOLDERS

March 29, 2005

Dear Fellow Shareholders:

On behalf of our board of directors, we are pleased to report your companys 2004 financial results.  During 2004, our net income grew to $1,815,177, an increase of 98.2% over 2003s net income of $915,726.  Net income per diluted share for 2004 was $0.83 or an increase of 84.4% over $0.45 per diluted share for 2003.

Net income for the fourth quarter ended December 31, 2004 was $663,621 or $0.29 per diluted share, compared to $283,466 or $0.14 per diluted share for the same period last year.

Loans grew to a year-end total of $188.5 million, an increase of 44.5% over total loans as of December 31, 2003 of $130.4 million.  Total assets were $236.3 million as of December 31, 2004 compared with $180.7 million as of December 31, 2003, an increase of 30.8%.  Deposits were $191.8 million as of December 31, 2004, compared to $154.7 million as of December 31, 2003, or an increase of 24%.

During 2004, we doubled our earnings to $1.8 million and grew our assets in excess of 30% over 2003, surpassing our goals in these areas.  Many factors contributed to these and other outstanding achievements during 2004 including consistent strong loan growth along with outstanding credit quality, steady improvement in our net interest margin and continued improvement in the efficiency of our operations.  In addition, our Greenville and Mount Pleasant loan production offices each posted impressive results after less than one year of operations.

We are fortunate to have an outstanding group of employees and directors to lead us to these impressive results.  We plan to further expand our customer base during 2005 from our position as the bank with the fifth largest deposit market share in Spartanburg County.

We are focused on attaining our goal of 35% growth in assets for 2005 as we follow our strategic plan for further expansion.  We thank you for your support and involvement.  Please continue to call on us for all of your banking needs.

Message

|/s/ JERRY L. CALVERT |  | /s/ NORMAN PULLIAM | 
|-------------------- |  | ------------------ | 
|                     |  |                    | 
|Jerry L. Calvert     |  | Norman Pulliam     | 
|President & CEO      |  | Chairman           | 

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Message

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, closing stock price and per share amounts for 2003 have been restated to reflect the 3 for 2 stock split distributed on March 1, 2004.

|                                        |  | As of or   for the year ended   December 31, |            
|--------------------------------------- |  | -------------------------------------------- | -----------
|                                        |  |                                              |            
|                                        |  | 2004                                         |            
|                                        |  |                                              |            
|Loans                                   |  | $                                            | 188,507,593
|Deposits                                |  | $                                            | 191,811,128
|Total Assets                            |  | $                                            | 236,343,900
|Shareholders Equity                    |  | $                                            | 13,911,447 
|Loan Loss Allowance                     |  | $                                            | 2,258,526  
|Loan Loss Allowance to   Total Loans    |  |                                              | 1.20       
|Loan to Deposit Ratio                   |  |                                              | 98.28      
|Net charge-offs to average   loans      |  |                                              | 0.03       
|Non-performing assets to   total assets |  |                                              | 0.02       
|Equity/Assets                           |  |                                              | 5.89       
|Book Value per Share                    |  | $                                            | 7.72       
|Closing Stock Price                     |  | $                                            | 26.50      
|Price/Book Value                        |  |                                              | 337        
|Weighted Average Shares   Outstanding   |  |                                              |            
|Basic                                   |  |                                              | 1,802,846  
|Diluted                                 |  |                                              | 2,191,698  
|Net Income                              |  | $                                            | 1,815,177  
|Net Income per Share                    |  |                                              |            
|Basic                                   |  | $                                            | 1.01       
|Diluted                                 |  | $                                            | 0.83       
|Net Interest Income                     |  | $                                            | 6,512,553  
|Noninterest Income                      |  | $                                            | 1,771,221  
|Efficiency Ratio                        |  |                                              | 59.94      
|Net Interest Margin                     |  |                                              | 3.26       
|Total Risk-Based Capital   Ratio        |  |                                              | 12.21      
|Tier 1 Risk-Based Capital   Ratio       |  |                                              | 10.04      
|Tier 1 Capital Leverage   Ratio         |  |                                              | 7.90       
|Average Equity                          |  | $                                            | 13,085,696 
|Return on Average Equity                |  |                                              | 13.87      
|Average Assets                          |  | $                                            | 208,155,209
|Return on Average Assets                |  |                                              | 0.87       

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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 those described under the
heading Risk Factors in our 10-KSB for the year ended December 31, 2004.

INTRODUCTION

The following discussion describes our results of operations for 2004 as compared to 2003 and also analyzes our financial condition as of December 31, 2004 as compared to December 31, 2003.  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 2004, 2003 and 2002 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 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.

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 $1,815,177 in 2004 compared with $915,726 in 2003, an increase of 98.2%. Our 2004 net interest income and noninterest income posted increases of 42.5% and 28.6%, respectively, over 2003.

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Our return on average assets of 0.87% for 2004 was a 50.0% increase over the result of 0.58% for 2003. We were able to accomplish this result due to an increase in the net interest margin from 3.05% in 2003 to 3.26% in 2004, an increase in loans as a percentage of earning assets from 76% as of December 31, 2003 to 83% as of December 31, 2004 and a decrease in the efficiency ratio to 59.9% during 2004 from 68.7% in 2003.

Our return on average equity increased by 81% to 13.87% from 7.68% in 2003 as we continued to leverage our capital and obtained additional regulatory capital from the issuance of trust preferred securities which are classified as debt for financial reporting purposes.  These sales of trust preferred securities were completed during April 2004 and December 2003 and allow us to continue to execute our strategic plan for growth and expansion while remaining well-capitalized for at least the next nine to twelve months.

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 an alliance with Colonial Trust Company, the oldest private trust company in South Carolina. In October 2002, we changed the legal name of our bank to First National Bank of the South. We continue to do business in Spartanburg County as First National Bank of Spartanburg.  On March 15, 2004, we opened a loan production office at 1204-A East Washington Street in Greenville as First National Business Capital to originate small business loans under the U. S. Small Business Administration (SBA)s various loan programs.  On October 15, 2004, we opened an additional loan production office in a temporary location in Mt. Pleasant, South Carolina as we search for a site for a full-service office in the Charleston market.

The following discussion should be read in conjunction with the Financial Highlights on page 2 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 consolidated financial statements at December 31, 2004 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 $6,512,553 for the year ended December 31, 2004, compared to $4,570,470 in 2003 or an increase of 42.5%, primarily as a result of the continued increase in our earning assets during 2004.  The increase also occurred due to the impact on our net interest income from the five increases in the prime rate during 2004 since our interest rate risk position is asset-sensitive.

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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 2004 of $10,424,042 included $8,925,785 on loans; $1,419,896 on investments and $78,361 on federal funds sold and other earning assets. Interest income for 2003 of $7,596,455 consisted of $6,351,326 on loans; $1,116,971 in investments and $128,158 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 2004 was $3,911,489 and included $3,397,121 on deposit accounts; $268,704 on FHLB advances, $235,919 on junior subordinated debentures issued to our holding company by our unconsolidated trust subsidiaries and $9,745 on federal funds purchased.  Interest expense was $3,025,985 for the period ended December 31, 2003 and included $2,868,582 on deposit accounts, $152,907 on FHLB advances and $4,496 on junior subordinated debentures issued to our holding company by our unconsolidated trust subsidiaries.

During 2004 and 2003, we executed trust preferred securities transactions through our unconsolidated trust subsidiaries to raise total net proceeds of $5.9 million to fund loan demand and raise additional regulatory capital to support our growth. On December 19, 2003, we received $2.9 million in net proceeds from the sale of trust preferred securities in a private placement.  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. On April 30, 2004, we received $3 million in net proceeds from the sale of trust preferred securities in a pooled offering.  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 3.88 percent.

The following table sets forth, for the years ended December 31, information related to our average balance sheet and average yields on assets and average costs of liabilities.  We derived average balances from the daily balances throughout the periods indicated.  We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities.  Average loans are stated net of unearned income and include nonaccrual loans.  Interest income recognized on nonaccrual loans has been included in interest income.

|                                       |  | Average   Balances, Income and Expenses and Rates (in $000s)   Year Ended December 31, |        
|-------------------------------------- |  | --------------------------------------------------------------------------------------- | -------
|                                       |  |                                                                                         |        
|                                       |  | 2004                                                                                    |        
|                                       |  |                                                                                         |        
|                                       |  | Average   Balance                                                                       |        
|                                       |  |                                                                                         |        
|Federal funds sold and   other         |  | $                                                                                       | 3,387  
|Investment securities                  |  |                                                                                         | 35,352 
|Loans                                  |  |                                                                                         | 160,914
|                                       |  |                                                                                         |        
|Total   earning assets                 |  |                                                                                         | 199,653
|                                       |  |                                                                                         |        
|NOW accounts                           |  |                                                                                         | 19,026 
|Savings & money market                 |  |                                                                                         | 18,926 
|Time deposits                          |  |                                                                                         | 121,434
|FHLB Advances                          |  |                                                                                         | 13,657 
|Junior subordinated   debentures       |  |                                                                                         | 5,155  
|Federal funds purchased                |  |                                                                                         | 549    
|                                       |  |                                                                                         |        
|Total interest-bearing   liabilities   |  | $                                                                                       | 178,747
|                                       |  |                                                                                         |        
|Net interest spread                    |  |                                                                                         |        
|Net interest income/margin             |  |                                                                                         |        
|Non-interest bearing demand   deposits |  | $                                                                                       | 15,696 

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Our net interest spread was 3.03% for the year ended December 31, 2004, as compared to 2.79% for the year ended December 31, 2003.  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 ended December 31, 2004, was 3.26% as compared to 3.05% for the year ended December 31, 2003.  The net interest margin is calculated as net interest income divided by year-to-date average earning assets.  During 2004, earning assets averaged $199.6 million as compared to $149.8 million in 2003.

The increase in our net interest spread and our net interest margin from 2004 to 2003 was principally due to the faster increase in average yields on earning assets relative to the repricing of our average interest-bearing liabilities following the five increases in the federal prime rate during 2004.  The relative increase in our average loans as a percentage of average earning assets from 2003 to 2004 also contributed to the increase 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 in 2000 and 2001, higher rates were paid initially to attract deposits.  During 2002, we began utilizing other funding sources in addition to deposits which bear interest at lower rates than time deposits, 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 (dollars in thousands).

|                                     |  | Year Ended   December 31, 2004 |       | Year Ended   December 31, 2003 |  
|------------------------------------ |  | ------------------------------ | ----- | ------------------------------ | -
|                                     |  |                                |       |                                |  
|                                     |  | Volume                         |       | Rate                           |  
|                                     |  |                                |       |                                |  
|EARNING ASSETS                       |  |                                |       |                                |  
|Federal funds sold and   other       |  | $                              | (129  | )                              | $
|Investment securities                |  |                                | 296   |                                |  
|Loans                                |  |                                | 2,675 |                                |  
|                                     |  |                                |       |                                |  
|Total   earning assets               |  | $                              | 2,842 |                                | $
|INTEREST-BEARING   LIABILITIES       |  |                                |       |                                |  
|Deposits                             |  | $                              | 985   |                                |  
|FHLB Advances                        |  |                                | 95    |                                |  
|Federal funds purchased              |  |                                | 10    |                                |  
|Junior subordinated   debentures     |  |                                | 231   |                                |  
|                                     |  |                                |       |                                |  
|Total   interest-bearing liabilities |  | $                              | 1,321 |                                | $
|Net interest income                  |  | $                              | 1,521 |                                | $
|                                     |  |                                |       |                                |  

Provision for Loan Losses          Included in the net income for each of the periods ending December 31, 2004 and 2003, is a non-cash expense of $679,427 and $518,821 respectively, related to the provision for loan losses. The loan loss reserve was $2,258,526 and $1,630,488 as of December 31, 2004 and 2003, respectively, or 1.20% and 1.25% of gross loans, respectively. 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 ended December 31, 2004 and 2003, we reported net charge-offs of $51,389 and $52,310, respectively.  For further information, see the discussion in the Balance Sheet Review below under the heading Provision and Allowance for Loan Losses.

Noninterest Income and Expenses          Noninterest income in 2004 was $1,771,221, an increase of 28.6% over noninterest income of $1,377,349 in 2003. This increase was primarily due to increases in gains recognized on the sale of the guaranteed portion of SBA loans and gains on the sale of investment securities, net of the decrease in loan fees received on the origination of mortgage loans, primarily due to reduction in mortgage refinancing activity during 2004 over 2003.

Other noninterest income increased by $39,925 to $168,903 during 2004, primarily due to an increase in loan service charges and fees as a result of our record loan production during 2004.

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Noninterest expense was $4,965,692 for 2004 as compared to $4,087,381 in 2003, an increase of 21.5%.   The majority of the increased expenditures reflects the cost of salaries and other variable expenses that have increased to support our growth.

The most significant item included in noninterest expenses is salaries and employee benefits which totaled $2,782,828 in 2004 as compared to $2,138,475 in 2003 or an increase of 30.1%.   Occupancy and equipment expense increased to $562,078 in 2004 from $545,864 in 2003 or an increase of 3.0%.  Each of these items increased due to our growth in assets during 2004 from all offices including the small business loan production office opened in March 2004 and the Mt. Pleasant loan production office opened in October 2004.

Public relations expense increased by 21.1% to $307,746 for 2004 as compared to $254,110 in 2003, primarily due to increased community relations expenditures and continued expansion of print and television media advertising as a result of the increasing customer base. Professional fees increased from $200,043 in 2003 to $230,599 in 2004, or an increase of 15.3%.

Included in the line item other expenses which increased $118,428 or 26.4% between 2004 and 2003 are charges for insurance premiums; postage, printing and stationery expense; and various customer-related expenses including referral fees paid on SBA loans.  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 2004.

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, 2004, we had total assets of $236,343,900 or an increase of 30.8% over total assets of $180,663,140 on December 31, 2003.  Assets on December 31, 2004 and 2003 consisted of cash and due from banks of $2,404,124 and $3,003,015, respectively; federal funds sold and interest-bearing bank balances of $879,841 and $3,691,405 respectively; securities available for sale of $36,164,898 and $36,173,822, respectively; premises and equipment, net of $4,274,240 and $4,380,454, respectively; loans, net of unearned income, of $188,507,593 and $130,420,985, respectively; and other assets of $6,371,730 and $4,623,947, respectively.  We decreased the level of federal funds sold in order to fund loan growth during 2004. In addition, we purchased $930,400 in FHLB stock recorded as other assets during 2004 to support the increased level of FHLB advances as of December 31, 2004 over
2003.

Our liabilities on December 31, 2004 and 2003 were $222,432,453 and $168,434,644, respectively and consisted of deposits of $191,811,128 and $154,733,021, respectively and other liabilities of $7,542,754 and $4,201,623, respectively. Liabilities on December 31, 2004 and 2003 also included $23,078,571 and $9,500,000 in FHLB advances, respectively.  During April 2004, our holding company issued $3,086,000 in junior subordinated debentures to an unconsolidated trust subsidiary. The trust subsidiary issued a corresponding amount of trust preferred securities of which $3 million was sold to outside investors.  Our holding company purchased the remaining $93,000 as common security ownership in the trust subsidiary.

Shareholders equity on December 31, 2004 was $13,911,447 as compared to shareholders equity on December 31, 2003 of $12,228,496, primarily due to the net income earned during 2004.

Investments          On December 31, 2004, the investment securities portfolio represented approximately 15.9% of our earning assets at $36,164,898 as compared to $36,173,822 or 21.1% of earning assets on December 31, 2003.  We were invested in U.S. Government agency securities, mortgage-backed securities and municipal securities with a fair value of $36,164,898 and an amortized cost of $36,422,337, for an unrealized loss of $257,439 as of December 31, 2004.

The amortized cost and fair value of securities available for sale as of December 31 consisted of the following:

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|                           |  | 2004             |            | 2003         |   | 2002             | 
|-------------------------- |  | ---------------- | ---------- | ------------ | - | ---------------- | 
|                           |  |                  |            |              |   |                  | 
|                           |  | Amortized   Cost |            | Fair   Value |   | Amortized   Cost | 
|                           |  |                  |            |              |   |                  | 
|U.S. Government agencies   |  | $                | 6,500,000  |              | $ | 6,353,289        | 
|Mortgage-backed securities |  |                  | 23,998,480 |              |   | 23,870,348       | 
|Municipal securities       |  |                  | 5,923,857  |              |   | 5,941,261        | 
|                           |  |                  |            |              |   |                  | 
|Total                      |  | $                | 36,422,337 |              | $ | 36,164,898       | 
|                           |  |                  |            |              |   |                  | 

We also maintain certain equity investments required by law which are included in the consolidated balance sheets as other assets. The carrying amounts of these investments as of December 31 consisted of the following:

|                               |  | 2004 |           | 2003 |   | 2002    | 
|------------------------------ |  | ---- | --------- | ---- | - | ------- | 
|                               |  |      |           |      |   |         | 
|Federal Reserve Bank stock     |  | $    | 329,850   |      | $ | 329,850 | 
|Federal Home Loan Bank   stock |  |      | 1,405,400 |      |   | 475,000 | 

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.

Fair value and yields on our investments (all available for sale) on December 31, 2004 are shown in the following table (dollars in thousands) based on contractural maturity dates. 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.

|                           |  | 2004                                |      
|-------------------------- |  | ----------------------------------- | -----
|                           |  |                                     |      
|                           |  | After one   but within   five years |      
|                           |  |                                     |      
|U.S. Government agencies   |  | $                                   | 991  
|Mortgage-backed securities |  |                                     | 948  
|Municipal securities       |  |                                     |     
|                           |  |                                     |      
|Total                      |  | $                                   | 1,939

On December 31, 2004, short-term overnight investments in federal funds sold and interest-bearing bank balances comprised less than 1% of total earning assets at $879,841 as compared to $3,691,405 or 2.2% of total earning assets on December 31, 2003. The decrease in short-term overnight investments from 2003 to 2004 occurred primarily due to our desire to shift assets away from overnight investments into the loan portfolio, primarily, and the investment securities portfolio, secondarily, as we continue to grow.

Loans

Since loans typically provide higher interest yields than do other types of interest earning assets, it is our intent to direct a substantial percentage of our earning assets into the loan portfolio.  Average loans for the years ended December 31, 2004 and 2003 were $160.9 million and $112.8 million, respectively.  Total loans outstanding as of December 31, 2004 and 2003 were $188,507,593 and $130,420,985, respectively, before the allowance for loan losses.

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

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|                                       |  | 2004   |             | 2003         |  | 2002   |   
|-------------------------------------- |  | ------ | ----------- | ------------ |  | ------ | --
|                                       |  |        |             |              |  |        |   
|                                       |  | Amount |             | % of   Total |  | Amount |   
|                                       |  |        |             |              |  |        |   
|Commercial and industrial              |  | $      | 20,255,042  |              |  | 19.07  | % 
|Commercial secured by real   estate    |  |        | 104,339,105 |              |  | 44.18  | % 
|Real estate--residential   mortgages   |  |        | 59,322,241  |              |  | 32.84  | % 
|Installment and other   consumer loans |  |        | 4,977,122   |              |  | 4.10   | % 
|Unearned income                        |  |        | (385,917    | )            |  | (.19   | )%
|                                       |  |        |             |              |  |        |   
|Total   loans, net of unearned income  |  | $      | 188,507,593 |              |  | 100    | % 
|Less--allowance for loan   losses      |  |        | (2,258,526  | )            |  |        |   
|                                       |  |        |             |              |  |        |   
|Total   loans, net                     |  | $      | 186,249,067 |              |  |        |   
|                                       |  |        |             |              |  |        |   

|                                       |  | 2001   |            | 2000         |  |        |    |              |            |   | 
|-------------------------------------- |  | ------ | ---------- | ------------ |  | ------ | -- | ------------ | ---------- | - | 
|                                       |  |        |            |              |  |        |    |              |            |   | 
|                                       |  | Amount |            | % of   Total |  | Amount |    | % of   Total |            |   | 
|                                       |  |        |            |              |  |        |    |              |            |   | 
|Commercial and industrial              |  | $      | 10,095,665 |              |  | 15.81  | %  | $            | 8,033,469  |   | 
|Commercial secured by real   estate    |  |        | 38,344,136 |              |  | 60.04  | %  |              | 22,017,360 |   | 
|Real estate--residential   mortgages   |  |        | 11,832,317 |              |  | 18.53  | %  |              | 5,251,227  |   | 
|Installment and other   consumer loans |  |        | 3,713,501  |              |  | 5.81   | %  |              | 2,453,250  |   | 
|Unearned income                        |  |        | (116,668   | )            |  | (.19   | )% |              | (85,152    | ) | 
|                                       |  |        |            |              |  |        |    |              |            |   | 
|Total   loans, net of unearned income  |  | $      | 63,868,951 |              |  | 100    | %  | $            | 37,670,154 |   | 
|Less--allowance for loan   losses      |  |        | (800,303   | )            |  |        |    |              | (470,893   | ) | 
|                                       |  |        |            |              |  |        |    |              |            |   | 
|Total   loans, net                     |  | $      | 63,068,648 |              |  |        |    | $            | 37,199,261 |   | 
|                                       |  |        |            |              |  |        |    |              |            |   | 

The principal component of our loan portfolio for all periods presented 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 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.

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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, 2004 and 2003, the allowance for loan losses was $2,258,526 and $1,630,488, respectively, or 1.20% and 1.25% of outstanding loans, net of unearned income, of $188,507,593 and $130,420,985, respectively.  The following table sets forth the changes in the allowance for loan losses for each of the years in the five-year period ended December 31, 2004.

|                                                        |  | 2004 |           | 2003 |   | 2002      |   | 2001 |           | 2000 |  
|------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | - | ---- | --------- | ---- | -
|                                                        |  |      |           |      |   |           |   |      |           |      |  
|Balance, beginning of   period                          |  | $    | 1,630,488 |      | $ | 1,163,977 |   | $    | 800,303   |      | $
|Provision charged to   operations                       |  |      | 679,427   |      |   | 518,821   |   |      | 417,980   |      |  
|Loans charged off                                       |  |      |           |      |   |           |   |      |           |      |  
|Commercial,   financial and agricultural                |  |      | (10,492   | )    |   | (36,996   | ) |      | (33,809   | )    |  
|Real   estate - construction                            |  |      |          |      |   |          |   |      | (8,310    | )    |  
|Installment   loans to individuals                      |  |      | (43,056   | )    |   | (15,884   | ) |      | (12,187   | )    |  
|                                                        |  |      |           |      |   |           |   |      |           |      |  
|Total   charge-offs                                     |  |      | (53,548   | )    |   | (52,880   | ) |      | (54,306   | )    |  
|Recoveries on loans   previously charged off            |  |      | 2,159     |      |   | 570       |   |      |          |      |  
|                                                        |  |      |           |      |   |           |   |      |           |      |  
|Balance, end of period                                  |  | $    | 2,258,526 |      | $ | 1,630,488 |   | $    | 1,163,977 |      | $
|                                                        |  |      |           |      |   |           |   |      |           |      |  
|Allowance to loans, year   end                          |  |      | 1.20      | %    |   | 1.25      | % |      | 1.25      | %    |  
|                                                        |  |      |           |      |   |           |   |      |           |      |  
|Net charge-offs to average   loans                      |  |      | 0.03      | %    |   | 0.05      | % |      | 0.07      | %    |  
|                                                        |  |      |           |      |   |           |   |      |           |      |  
|Non-accrual loans                                       |  | $    | 48,643    |      | $ | 257,470   |   |      |          |      | $
|                                                        |  |      |           |      |   |           |   |      |           |      |  
|Past due loans in excess of   90 days on accrual status |  |      |          |      |   |          |   |      |          |      |  
|                                                        |  |      |           |      |   |           |   |      |           |      |  
|Other Real Estate Owned                                 |  |      |          |      |   |          |   |      |          |      |  
|                                                        |  |      |           |      |   |           |   |      |           |      |  

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.

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, 2004 (dollars in thousands):

|                                      |  | One year   or less |        | After one   but   within five years |   | After five   years |  | Total |       
|------------------------------------- |  | ------------------ | ------ | ----------------------------------- | - | ------------------ |  | ----- | ------
|                                      |  |                    |        |                                     |   |                    |  |       |       
|Commercial                            |  | $                  | 18,380 |                                     | $ | 4,087              |  | $     | 227   
|Real estate  construction            |  |                    | 9,186  |                                     |   | 11,627             |  |       | 274   
|Real estate - mortgage                |  |                    | 24,168 |                                     |   | 91,167             |  |       | 24,866
|Consumer and other                    |  |                    | 1,941  |                                     |   | 2,408              |  |       | 562   
|                                      |  |                    |        |                                     |   |                    |  |       |       
|Total loans                           |  | $                  | 53,675 |                                     | $ | 109,289            |  | $     | 25,929
|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, 2004 and 2003 were $175.0 million and $136.4 million, respectively, and average interest-bearing deposits were $159.4 million and $124.3 million, respectively.

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National and local market trends over the past several years suggest that consumers have moved an increasing percentage of discretionary savings funds from 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 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):

|                                    |  | 2004   |         | 2003       |  | 2002   |  
|----------------------------------- |  | ------ | ------- | ---------- |  | ------ | -
|                                    |  |        |         |            |  |        |  
|                                    |  | Amount |         | Percentage |  | Amount |  
|                                    |  |        |         |            |  |        |  
|Demand deposit accounts             |  | $      | 15,695  |            |  | 8.62   | %
|NOW accounts                        |  |        | 18,760  |            |  | 11.76  | %
|Money market and savings   accounts |  |        | 26,309  |            |  | 9.89   | %
|Time deposits less than   $100,000  |  |        | 72,157  |            |  | 41.94  | %
|Time deposits of $100,000   or more |  |        | 58,890  |            |  | 27.79  | %
|                                    |  |        |         |            |  |        |  
|Total deposits                      |  | $      | 191,811 |            |  | 100.00 | %
|                                    |  |        |         |            |  |        |  

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 $132.9 million and $111.7 million on December 31, 2004 and 2003, respectively.  Our loan-to-deposit ratio was 98.3% and 84.3% at year-end 2004 and 2003, respectively.

The maturity distribution of our time deposits of $100,000 or more is as follows on December 31 (dollars in thousands):

|                                 |  | 2004 |       
|-------------------------------- |  | ---- | ------
|                                 |  |      |       
|Three months or less             |  | $    | 19,700
|Over three through six   months  |  |      | 11,968
|Over six through twelve   months |  |      | 16,806
|Over one year                    |  |      | 10,416
|                                 |  |      |       
|Total                            |  | $    | 58,890
|                                 |  |      |       

The maturity ranges shown in the table above reflect contractual maturities and do not factor in repricing of time deposits.

Short-Term Borrowings          As of December 31, 2004 and 2003, 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 $19.0 million and $5.35 million, respectively.  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 and April 2004, we issued $6 million in trust preferred securities through our unconsolidated trust subsidiaries, FNSC Capital Trust I and FNSC Statutory Trust II, respectively. 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 and 3.88 percent, respectively.  The trusts invested the proceeds of the $6 million sale of the trust preferred securities to outside investors,  in addition to the $186,000 we used to purchase the common securities of the trusts, in $6,186,000 of junior subordinated debentures issued by our holding company. We invested the net proceeds of $6 million after purchase of the common securities in our bank subsidiary to fund loan demand.

FHLB Advances          We also had the ability to borrow up to 20% of our total assets from the Federal Home Loan Bank of Atlanta (FHLB) as of December 31, 2004 and 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 loans held by the bank and collateralized by 1-4 family residences with a market value of $28,479,000 were pledged as collateral for advances outstanding of $23,078,571 at December 31, 2004. Qualifying securities available for sale with a market value of $18,373,000 were pledged as collateral for advances outstanding of  $9.5 million on December 31, 2003.

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The weighted-average interest rate on FHLB advances outstanding as of December 31, 2004 and 2003 was 2.68% and  1.71%, respectively.  As of  December 31, 2004, advances totaling $8.3 million were subject to call features at the option of the FHLB with call dates ranging from June 2005 to March 2008.  Call provisions are more likely to be exercised by the FHLB when rates rise.  Scheduled maturities of FHLB advances subsequent to December 31, 2004, are $5,850,000 in 2006, $2,500,000 in 2007, $4,300,000 in 2009, $2,928,571 in 2011, $5,000,000 in 2012 and $2,500,000 in 2013.

CAPITAL RESOURCES

Total shareholders equity amounted to $13,911,447 and $12,228,496 on December 31, 2004 and 2003, respectively.  The increase between 2003 and 2004 resulted from the net income earned during 2004, net of the increase in the unrealized loss on securities available for sale during 2004 to a net unrealized loss of $169,910 as of December 31, 2004.

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 the years ended December 31:

|                         |  | 2004 |       | 2003 |  | 2002 |  
|------------------------ |  | ---- | ----- | ---- |  | ---- | -
|                         |  |      |       |      |  |      |  
|Return on average assets |  |      | 0.87  | %    |  | 0.58 | %
|Return on average equity |  |      | 13.87 | %    |  | 7.68 | %
|Equity to assets ratio   |  |      | 5.89  | %    |  | 6.77 | %

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 that 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,  a subsidiary of our bank holding company, was formed to issue $3 million in floating rate trust preferred securities. On April 30, 2004, FNSC Statutory Trust II, was formed to issue $3 million in floating rate trust preferred securities.  Under the provisions of FASB Interpretation No. 46 (FIN 46), we were required to deconsolidate these entities from our consolidated financial statements as of December 31, 2004.  The trust preferred securities qualify as Tier 1 capital up to 25% or less of Tier 1 capital with the excess includable as Tier 2 capital.

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 the years ended December 31. We both were in compliance with each of the applicable regulatory capital requirements and were considered to be well capitalized at the bank level for each period reported.

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|                          |  | 2004          |       | 2003       | 
|------------------------- |  | ------------- | ----- | ---------- | 
|                          |  |               |       |            | 
|                          |  | The   company |       | The   bank | 
|                          |  |               |       |            | 
|Total risk-based capital  |  |               | 12.21 | %          | 
|Tier 1 risk-based capital |  |               | 10.04 | %          | 
|Leverage capital          |  |               | 7.90  | %          | 

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, 2004, there were no significant firm commitments outstanding for capital expenditures.

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. We distributed a 3 for 2 stock split on March 1, 2004.

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, 2004 and 2003, we had issued commitments to extend credit of $47.9 million and $32.6 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 $605,278 and $75,000 on December 31, 2004 and 2003.  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.

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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, 2004 and 2003, our liquid assets, consisting of cash and due from banks, interest-bearing bank balances and federal funds sold, amounted to $3,283,965 and $6,694,420 representing 1.4 % and 3.7% of total assets, respectively.  Investment securities provide a secondary source of liquidity net of amounts pledged for deposits. 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 which totaled  $19.0 million at December 31, 2004.  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, 2004.  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.

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|                                                  |  | Within   three   months  |         | After   three but   Within twelve   Months |   | After one   but   Within five   Years |   | After   Five   Years |         | Total |  
|------------------------------------------------- |  | ------------------------ | ------- | ------------------------------------------ | - | ------------------------------------- | - | -------------------- | ------- | ----- | -
|                                                  |  |                          |         |                                            |   |                                       |   |                      |         |       |  
|                                                  |  | (Dollars   in Thousands) |        
|Interest-earning assets:                          |  |                          |         |                                            |   |                                       |   |                      |         |       |  
|Federal   funds sold and other                    |  | $                        | 880     |                                            | $ |                                      |   | $                    |        |       | $
|Investment   securities                           |  |                          | 5,829   |                                            |   | 5,982                                 |   |                      | 5,462   |       |  
|Loans                                             |  |                          | 159,498 |                                            |   | 6,020                                 |   |                      | 16,775  |       |  
|                                                  |  |                          |         |                                            |   |                                       |   |                      |         |       |  
|Total earning assets                              |  | $                        | 166,207 |                                            | $ | 12,002                                |   | $                    | 22,237  |       | $
|Interest-bearing   liabilities:                   |  |                          |         |                                            |   |                                       |   |                      |         |       |  
|NOW   accounts                                    |  | $                        | 12,184  |                                            | $ |                                      |   | $                    | 6,576   |       | $
|Money   market & savings                          |  |                          | 16,439  |                                            |   |                                      |   |                      | 9,870   |       |  
|Time   deposits                                   |  |                          | 86,274  |                                            |   | 28,785                                |   |                      | 15,988  |       |  
|Other   borrowings                                |  |                          |        |                                            |   | 12,250                                |   |                      | 10,829  |       |  
|                                                  |  |                          |         |                                            |   |                                       |   |                      |         |       |  
|Total interest-bearing   liabilities              |  | $                        | 114,897 |                                            | $ | 41,035                                |   | $                    | 43,263  |       | $
|Period gap                                        |  | $                        | 51,310  |                                            | $ | (29,033                               | ) | $                    | (21,026 | )     | $
|Cumulative gap                                    |  | $                        | 51,310  |                                            | $ | 22,277                                |   | $                    | 1,251   |       | $
|Ratio of cumulative gap to   total earning assets |  |                          | 22.75   | %                                          |   | 9.88                                  | % |                      | 0.55    | %     |  

ACCOUNTING, REPORTING AND REGULATORY MATTERS

Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)).  SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its financial statements.  In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based payment arrangements.  SFAS No. 123(R) is effective beginning as of the first interim or annual reporting period beginning after December 15, 2005.  The adoption of SFAS No. 123(R) is not expected to have a material impact on the Companys financial position or results of operations.

On March 9, 2004, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105).  SAB 105 provides recognition guidance for entities that issue loan commitments that are required to be accounted for as derivative instruments.  SAB 105 indicates that the expected future cash flows related to the associated servicing of the loan and any other internally-developed intangible assets should not be considered when recognizing a loan commitment at inception or through its life.  SAB 105 also discusses disclosure requirements for loan commitments and is effective for loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004.  We currently do not include the associated servicing of the loan when recognizing loan commitments at inception and
throughout its life.  The adoption of SAB 105 did not have a material effect on our financial position or results of operations.

In November 2003, the Emerging Issues Task Force (EITF) reached a consensus that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available for sale or held to maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which other-than-temporary impairment has not been recognized.  Accordingly, the EITF issued EITF No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This issue addresses the meaning of other-than-temporary impairment and its application to investments classified as either available for sale or held to maturity under SFAS No. 115 and provides guidance on quantitative and qualitative disclosures.  The disclosure requirements of EITF No. 03-1 are effective for annual financial statements for fiscal
years ending after June 15, 2004.  The effective date for the measurement and recognition guidance of EITF No. 03-1 has been delayed.

15

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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 requires us to consolidate our trust subsidiaries in our financial statements as of December 31, 2004. The adoption of FIN No. 46 did not have a material effect on our financial position or results of operations.

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

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, 2004, we were  asset 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.

16

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors First National Bancshares, Inc. and SubsidiarySpartanburg, South Carolina

We have audited the accompanying consolidated balance sheets of First National Bancshares, Inc. and Subsidiary(the Company) as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders equity and comprehensive income, and cash flows for each of the years in the three year period ended December 31, 2004.  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.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).   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 First National Bancshares, Inc. and Subsidiary as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.



|                                            | /s/ ELLIOT DAVIS LLC
|------------------------------------------- | --------------------
|                                            |                     
|Greenville, South Carolina January 28, 2005 |                     

17

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FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2004 and 2003

|                                                                                                                                              |  | 2004 |             | 2003 |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | -
|                                                                                                                                              |  |      |             |      |  
|Assets                                                                                                                                        |  |      |             |      |  
|Cash and due from banks                                                                                                                       |  | $    | 2,404,124   |      | $
|Interest-bearing bank   balances                                                                                                              |  |      | 33,841      |      |  
|Federal funds sold                                                                                                                            |  |      | 846,000     |      |  
|Securities available for   sale                                                                                                               |  |      | 36,164,898  |      |  
|Loans, net of allowance   for loan losses of $2,258,526 and $1,630,488, respectively                                                          |  |      | 186,249,067 |      |  
|Premises and equipment,   net                                                                                                                 |  |      | 4,274,240   |      |  
|Other                                                                                                                                         |  |      | 6,371,730   |      |  
|                                                                                                                                              |  |      |             |      |  
|Total   assets                                                                                                                                |  | $    | 236,343,900 |      | $
|                                                                                                                                              |  |      |             |      |  
|Liabilities and Shareholders Equity                                                                                                          |  |      |             |      |  
|Liabilities:                                                                                                                                  |  |      |             |      |  
|Deposits                                                                                                                                      |  |      |             |      |  
|Noninterest-bearing                                                                                                                           |  | $    | 15,695,134  |      | $
|Interest-bearing                                                                                                                              |  |      | 176,115,994 |      |  
|                                                                                                                                              |  |      |             |      |  
|Total   deposits                                                                                                                              |  |      | 191,811,128 |      |  
|                                                                                                                                              |  |      |             |      |  
|FHLB   advances                                                                                                                               |  |      | 23,078,571  |      |  
|Junior   subordinated debentures                                                                                                              |  |      | 6,186,000   |      |  
|Accrued   expenses and other liabilities                                                                                                      |  |      | 1,356,754   |      |  
|                                                                                                                                              |  |      |             |      |  
|Total   liabilities                                                                                                                           |  |      | 222,432,453 |      |  
|                                                                                                                                              |  |      |             |      |  
|Commitments and   contingenciesNotes 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; 1,802,846 and   1,802,850 shares issued and outstanding, respectively |  |      | 18,028      |      |  
|Additional   paid-in capital                                                                                                                  |  |      | 11,818,623  |      |  
|Retained   earnings                                                                                                                           |  |      | 2,244,706   |      |  
|Accumulated   other comprehensive loss                                                                                                        |  |      | (169,910    | )    |  
|                                                                                                                                              |  |      |             |      |  
|Total   shareholders equity                                                                                                                  |  |      | 13,911,447  |      |  
|                                                                                                                                              |  |      |             |      |  
|Total   liabilities and shareholders equity                                                                                                  |  | $    | 236,343,900 |      | $
|                                                                                                                                              |  |      |             |      |  

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

18

---



FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Income

For the Years Ended December 31, 2004, 2003 and 2002

|                                                      |  | 2004 |            | 2003 |   | 2002      | 
|----------------------------------------------------- |  | ---- | ---------- | ---- | - | --------- | 
|                                                      |  |      |            |      |   |           | 
|Interest income:                                      |  |      |            |      |   |           | 
|Loans                                                 |  | $    | 8,925,785  |      | $ | 6,351,326 | 
|Taxable   securities                                  |  |      | 1,189,750  |      |   | 973,726   | 
|Nontaxable   securities                               |  |      | 230,146    |      |   | 143,245   | 
|Federal   funds sold and other                        |  |      | 78,361     |      |   | 128,158   | 
|                                                      |  |      |            |      |   |           | 
|Total   interest income                               |  |      | 10,424,042 |      |   | 7,596,455 | 
|                                                      |  |      |            |      |   |           | 
|Interest expense:                                     |  |      |            |      |   |           | 
|Deposits                                              |  |      | 3,397,121  |      |   | 2,868,582 | 
|Junior   subordinated debentures                      |  |      | 235,919    |      |   | 4,496     | 
|FHLB   advances                                       |  |      | 268,704    |      |   | 152,907   | 
|Federal   funds purchased                             |  |      | 9,745      |      |   |          | 
|                                                      |  |      |            |      |   |           | 
|Total   interest expense                              |  |      | 3,911,489  |      |   | 3,025,985 | 
|                                                      |  |      |            |      |   |           | 
|Net interest income                                   |  |      | 6,512,553  |      |   | 4,570,470 | 
|Provision for loan losses                             |  |      | 679,427    |      |   | 518,821   | 
|                                                      |  |      |            |      |   |           | 
|Net interest income after   provision for loan losses |  |      | 5,833,126  |      |   | 4,051,649 | 
|                                                      |  |      |            |      |   |           | 
|Noninterest income:                                   |  |      |            |      |   |           | 
|Service   charges and fees on deposit accounts        |  |      | 865,705    |      |   | 846,364   | 
|Gain   on sale of loans                               |  |      | 347,858    |      |   | 92,403    | 
|Gain   on sale of investment securities               |  |      | 160,220    |      |   |          | 
|Earnings   on bank-owned life insurance contracts     |  |      | 125,407    |      |   | 78,043    | 
|Mortgage   loan fees from correspondent bank          |  |      | 103,128    |      |   | 231,561   | 
|Other                                                 |  |      | 168,903    |      |   | 128,978   | 
|                                                      |  |      |            |      |   |           | 
|Total   noninterest income                            |  |      | 1,771,221  |      |   | 1,377,349 | 
|                                                      |  |      |            |      |   |           | 
|Noninterest expense:                                  |  |      |            |      |   |           | 
|Salaries   and employee benefits                      |  |      | 2,782,828  |      |   | 2,138,475 | 
|Professional   fees                                   |  |      | 230,599    |      |   | 200,043   | 
|Data   processing                                     |  |      | 377,593    |      |   | 368,297   | 
|Public   relations                                    |  |      | 307,746    |      |   | 254,110   | 
|Occupancy   and equipment expense                     |  |      | 562,078    |      |   | 545,864   | 
|Telephone   and supplies                              |  |      | 137,320    |      |   | 131,492   | 
|Other                                                 |  |      | 567,528    |      |   | 449,100   | 
|                                                      |  |      |            |      |   |           | 
|Total   noninterest expense                           |  |      | 4,965,692  |      |   | 4,087,381 | 
|                                                      |  |      |            |      |   |           | 
|Net income before income   taxes                      |  |      | 2,638,655  |      |   | 1,341,617 | 
|Provision for income taxes                            |  |      | 823,478    |      |   | 425,891   | 
|                                                      |  |      |            |      |   |           | 
|Net   income                                          |  | $    | 1,815,177  |      | $ | 915,726   | 
|                                                      |  |      |            |      |   |           | 
|Net income per share                                  |  |      |            |      |   |           | 
|Basic                                                 |  | $    | 1.01       |      | $ | .51       | 
|                                                      |  |      |            |      |   |           | 
|Diluted                                               |  | $    | .83        |      | $ | .45       | 
|                                                      |  |      |            |      |   |           | 
|Weighted   average shares outstanding                 |  |      |            |      |   |           | 
|Basic                                                 |  |      | 1,802,846  |      |   | 1,802,814 | 
|Diluted                                               |  |      | 2,191,698  |      |   | 2,024,345 | 

All share amounts for 2003 and 2002 have been retroactively restated to reflect the 3 for 2 stock split distributed on March 1, 2004.

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

19

---



FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income

For the Years Ended December 31, 2004, 2003 and 2002

|                                                                                                            |  | Common Stock |           | Additional   Paid-In   Capital |   | Retained   Earnings   (Deficit) |  | Accumulated    Other    Comprehensive    Income/(Loss) |            | Total    Shareholders    Equity |  
|----------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ------------------------------ | - | ------------------------------- |  | ------------------------------------------------------ | ---------- | -------------------------------- | -
|                                                                                                            |  |              |           |                                |   |                                 | 
|                                                                                                            |  | Shares       |           | Amount                         |   |                                 |  |                                                        |           
|                                                                                                            |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|Balance, December 31, 2001                                                                                  |  |              | 1,800,000 |                                | $ | 18,000                          |  | $                                                      | 11,785,311 |                                  | $
|Proceeds from exercise of   employee stock options                                                          |  |              | 2,100     |                                |   | 21                              |  |                                                        | 15,365     |                                  |  
|Comprehensive income:                                                                                       |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|Net   income                                                                                                |  |              |          |                                |   |                                |  |                                                        |           |                                  |  
|Change   in net unrealized gains on securities available for sale, net of income tax   of $103,251          |  |              |          |                                |   |                                |  |                                                        |           |                                  |  
|                                                                                                            |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|Total   comprehensive income                                                                                |  |              |          |                                |   |                                |  |                                                        |           |                                  |  
|                                                                                                            |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|Balance, December 31, 2002                                                                                  |  |              | 1,802,100 |                                | $ | 18,021                          |  | $                                                      | 11,800,676 |                                  | $
|                                                                                                            |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|Proceeds from exercise of   employee stock options                                                          |  |              | 750       |                                |   | 7                               |  |                                                        | 6,107      |                                  |  
|Grant of employee stock   options                                                                           |  |              |          |                                |   |                                |  |                                                        | 3,000      |                                  |  
|Comprehensive income:                                                                                       |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|Net   income                                                                                                |  |              |          |                                |   |                                |  |                                                        |           |                                  |  
|Change   in net unrealized gains (losses) on securities available for sale, net of   income tax of $138,987 |  |              |          |                                |   |                                |  |                                                        |           |                                  |  
|                                                                                                            |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|Total   comprehensive income                                                                                |  |              |          |                                |   |                                |  |                                                        |           |                                  |  
|                                                                                                            |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|Balance, December 31, 2003                                                                                  |  |              | 1,802,850 |                                | $ | 18,028                          |  | $                                                      | 11,809,783 |                                  | $
|                                                                                                            |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|Cash in lieu of fractional   shares                                                                         |  |              | (4        | )                              |   |                                |  |                                                        | (60        | )                                |  
|Grant of employee stock   options                                                                           |  |              |          |                                |   |                                |  |                                                        | 8,900      |                                  |  
|Comprehensive income:                                                                                       |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|Net   income                                                                                                |  |              |          |                                |   |                                |  |                                                        |           |                                  |  
|Change   in net unrealized losses on securities available for sale, net of income tax   of $127,145         |  |              |          |                                |   |                                |  |                                                        |           |                                  |  
|Reclassification   adjustment for gains included in net income, net of income tax of $54,474                |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|                                                                                                            |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|Total   comprehensive income                                                                                |  |              |          |                                |   |                                |  |                                                        |           |                                  |  
|                                                                                                            |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  
|Balance, December 31, 2004                                                                                  |  |              | 1,802,846 |                                | $ | 18,028                          |  | $                                                      | 11,818,623 |                                  | $
|                                                                                                            |  |              |           |                                |   |                                 |  |                                                        |            |                                  |  

All share amounts for 2003 and 2002 have been retroactively restated to reflect the 3 for 2 stock split distributed on March 1, 2004.

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

20

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FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2004, 2003 and 2002

|                                                                                    |  | 2004 |             | 2003 |   | 2002        |  
|----------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                    |  |      |             |      |   |             |  
|Cash flows from operating   activities:                                             |  |      |             |      |   |             |  
|Net   income                                                                        |  | $    | 1,815,177   |      | $ | 915,726     |  
|Adjustments   to reconcile net income to net cash provided by operating activities: |  |      |             |      |   |             |  
|Provision   for loan losses                                                         |  |      | 679,427     |      |   | 518,821     |  
|Provision   for deferred income tax expense (benefit)                               |  |      | (95,402     | )    |   | 53          |  
|Depreciation                                                                        |  |      | 245,077     |      |   | 239,939     |  
|Premium   amortization, net                                                         |  |      | 103,164     |      |   | 172,371     |  
|Earnings   on bank owned life insurance, net                                        |  |      | (111,870    | )    |   | (72,527     | )
|Gain   on sale of securities available for sale                                     |  |      | (160,220    | )    |   |            |  
|Gain   on sale of loans                                                             |  |      | (347,858    | )    |   | (92,403     | )
|Compensation   expense for employee stock options                                   |  |      | 8,900       |      |   | 3,000       |  
|Changes   in deferred and accrued amounts:                                          |  |      |             |      |   |             |  
|Prepaid   expenses and other assets                                                 |  |      | (211,028    | )    |   | (196,518    | )
|Accrued   expenses and other liabilities                                            |  |      | 70,847      |      |   | 271,529     |  
|                                                                                    |  |      |             |      |   |             |  
|Net   cash provided by operating activities                                         |  |      | 1,996,214   |      |   | 1,759,991   |  
|                                                                                    |  |      |             |      |   |             |  
|Cash flows from investing   activities:                                             |  |      |             |      |   |             |  
|Proceeds   from maturities/prepayment of securities available for sale              |  |      | 8,670,603   |      |   | 16,357,353  |  
|Proceeds   from sale of foreclosed property                                         |  |      |            |      |   |            |  
|Proceeds   from sale of securities available for sale                               |  |      | 14,375,047  |      |   |            |  
|Proceeds   from sale of guaranteed portion of SBA loans                             |  |      | 3,354,375   |      |   | 1,110,894   |  
|Purchases   of securities available for sale                                        |  |      | (23,193,409 | )    |   | (32,523,358 | )
|Loan   originations, net of principal collections                                   |  |      | (61,200,640 | )    |   | (38,398,062 | )
|Investment   in common securities of Trusts                                         |  |      | (93,000     | )    |   | (93,000     | )
|Purchase   of bank-owned life insurance contracts                                   |  |      |            |      |   | (2,500,000  | )
|Net   purchases of premises and equipment                                           |  |      | (138,863    | )    |   | (120,747    | )
|Redemption   of FHLB and other stock                                                |  |      | 305,300     |      |   |            |  
|Purchase   of FHLB and other stock                                                  |  |      | (1,235,700  | )    |   | (124,850    | )
|                                                                                    |  |      |             |      |   |             |  
|Net   cash used by investing activities                                             |  |      | (59,156,287 | )    |   | (56,291,770 | )
|                                                                                    |  |      |             |      |   |             |  
|Cash flows from financing   activities:                                             |  |      |             |      |   |             |  
|Proceeds   from issuance of subordinated debentures                                 |  |      | 3,093,000   |      |   | 3,093,000   |  
|Cash   paid in lieu of fractional shares                                            |  |      | (60         | )    |   |            |  
|Increase   in FHLB advances                                                         |  |      | 36,730,000  |      |   | 4,500,000   |  
|Repayment   of FHLB advances                                                        |  |      | (23,151,429 | )    |   | (2,000,000  | )
|Proceeds   from exercise of employee stock options                                  |  |      |            |      |   | 6,114       |  
|Net   increase in deposits                                                          |  |      | 37,078,107  |      |   | 35,014,340  |  
|                                                                                    |  |      |             |      |   |             |  
|Net   cash provided by financing activities                                         |  |      | 53,749,618  |      |   | 40,613,454  |  
|                                                                                    |  |      |             |      |   |             |  
|Net   increase (decrease) in cash and cash equivalents                              |  |      | (3,410,455  | )    |   | (13,918,325 | )
|Cash and cash equivalents   at beginning of year                                    |  |      | 6,694,420   |      |   | 20,612,745  |  
|                                                                                    |  |      |             |      |   |             |  
|Cash and cash equivalents,   end of year                                            |  | $    | 3,283,965   |      | $ | 6,694,420   |  
|                                                                                    |  |      |             |      |   |             |  

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

21

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FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

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 of America   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.  The Bank opened two   additional full service branches in Spartanburg in 2000 and 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 Bank also began doing business in March 2004 through a small   business lending division based in Greenville, South Carolina under the name   First National Business Capital.  A   second loan production office was opened in October 2004 in Mount Pleasant,   South Carolina.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | On December 19, 2003, the   Company formed FNSC Capital Trust I, 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.  On April 30, 2004, the company formed FNSC Capital Trust II, a   Connecticut Statutory Trust (collectively with FNSC Capital Trust I (the   Trusts)), in order to issue an additional $3 million through a pooled   offering of trust preferred securities.    In accordance with the provisions of Financial Accounting Standards   Board (FASB) Interpretation No. 46 (revised), the Company deconsolidated the   Trusts during 2004 with retroactive restatement to 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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 726,150 shares of common stock at $6.67 per share, for a total   of $4,841,000. Upon purchase of these shares, the Company issued stock   warrants to the organizers to purchase 470,000 shares of common stock for   $6.67 per share. The remaining 1,073,850 shares were sold in the public   offering. These amounts reflect the 3 for 2 stock split distributed on March   1, 2004. The Company used $11 million of the proceeds to capitalize the Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Principles   of Consolidation   - The consolidated financial statements include the accounts of the Company   and the Bank. All significant intercompany balances and transactions have   been eliminated in consolidation. The accounting and reporting policies of   the Company conform to accounting    principles generally accepted in the United States of America and to   general practices in the banking industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Cash and Cash Equivalents -In accordance with the provisions of   Statement of Financial Accounting Standards (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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

22

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

| | Investment   SecuritiesInvestment   securities are accounted or in accordance with SFAS No. 115, Accounting for   Certain Investments in Debt and Equity 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 income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 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.                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The Bank also originates   loans to small businesses under the United States Small Business   Administration (SBA) loan programs.    These loans are solicited from the Companys market areas and are   generally underwritten in the same manner as conventional loans generated for   the Banks portfolio.  The portion of   loans that are secured by the guaranty of the SBA is usually sold in the   secondary market to provide additional liquidity and to provide a source of   noninterest income.  Deferred gains on   the sale of the guaranteed portion of SBA loans are amortized over the lives   of the underlying loans using the interest method.  Excess servicing is recognized as an asset and is amortized in   proportion to and over the period of the estimated net servicing income and   is subject to periodic assessment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 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 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.                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

23

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

| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Off-Balance Sheet Commitments  The Bank enters into off-balance sheet   financial instruments consisting of legally binding commitments to extend   credit and letters of credit.  Such   financial instruments are recorded in the financial statements when they are   funded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 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 year presentation.  These reclassifications have no effect on   previously reported shareholders equity or net income. Share and per share   data have been restated for the 3 for 2 stock split distributed on March 1,   2004 discussed below under Net Income (Loss) Per Share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 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 continue to be
accounted for under the intrinsic value method, and the pro forma impact of
accounting for those awards at fair value continue to be disclosed. The Company
recognized $8,900 and $3,000 of compensation expense during 2004 and 2003,
respectively, as a result of the adoption of this standard.                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 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.   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 and earnings per share in the following table for the years ended   December 31, as if the fair value based
method of accounting had been   applied.  

24

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

|Pro Forma Disclosure for Net Income and Earnings per Share    (dollars, except per share, in thousands) |  | 2004 |       | 2003 |   | 2002 | 
|------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ---- | 
|                                                                                                        |  |      |       |      |   |      | 
|Net income  as reported                                                                                |  | $    | 1,815 |      | $ | 916  | 
|Net income  pro forma                                                                                  |  |      | 1,565 |      |   | 654  | 
|Basic earnings per share                                                                                |  |      |       |      |   |      | 
|As   reported                                                                                           |  |      | 1.01  |      |   | .51  | 
|Pro   forma                                                                                             |  |      | .87   |      |   | .36  | 
|Diluted earnings per share                                                                              |  |      |       |      |   |      | 
|As   reported                                                                                           |  |      | .83   |      |   | .45  | 
|Pro   forma                                                                                             |  |      | .71   |      |   | .32  | 

| | All 2003 and 2002 amounts   have been adjusted for the 3 for 2 stock split distributed on March 1, 2004.  See Note 14 for additional   information regarding the Companys stock-based compensation plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The weighted average fair   value per share of options granted in the years presented amounted to $3.02,   $1.12, and $1.07, 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 2.25%, 1.25% and 1.50%   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 Per Share   - Basic net income per share represents income available to common stockholders   divided by the weighted-average number of common shares outstanding during   the period. Diluted net income 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. The net income available to common stockholders was also   increased and expense recorded upon the grant of employee options under the   fair value method.  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.                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | For the year ended   December 31, 2004, the effect of dilutive securities (options and warrants)   resulted in an incremental 388,852 shares outstanding compared to an   incremental 221,531 and 154,190 shares outstanding for the years ended   December 31, 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | On   January 20, 2004, the Companys board of directors approved a 3 for 2 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   1,802,846.  All share amounts for 2003   and 2002 have been restated to reflect the split.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 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 - On December 2004, the FASB issued SFAS   No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)).  SFAS No. 123(R) will require companies to   measure all employee stock-based compensation awards using a fair value   method and record such expense in its financial statements.  In addition, the adoption of SFAS No.   123(R) requires additional accounting and disclosure related to the income   tax and cash flow effects resulting from share-based payment   arrangements.  SFAS No. 123(R) is   effective beginning as of the first interim or annual reporting period   beginning after December 15, 2005.    The adoption of SFAS No. 123(R) is not expected to have a material   impact on the Companys financial position or results of operations.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In November 2003, the   Emerging Issues Task Force (EITF) reached a consensus that certain   quantitative and qualitative disclosures should be required for debt and   marketable equity securities classified as available for sale or held to   maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance   sheet date but for which other-than-temporary impairment has not been   recognized.  Accordingly, the EITF   issued EITF No. 03-1,                                                                                                                                                                                                                                                                                                                                                

25

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

| | The Meaning of   Other-Than-Temporary Impairment and Its Application to Certain Investments.   This issue addresses the meaning of other-than-temporary impairment and its   application to investments classified as either available for sale or held to   maturity under SFAS No. 115 and provides guidance on quantitative and   qualitative disclosures.  The   disclosure requirements of EITF No. 03-1 are effective for annual financial   statements for fiscal years ending after June 15, 2004.  The effective date for the measurement and   recognition guidance of EITF No. 03-1 has been delayed.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 2 - Statement of Cash Flows

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

|                                                                              |  | 2004 |           | 2003 |   | 2002      |  
|----------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                                                              |  |      |           |      |   |           |  
|Interest paid                                                                 |  | $    | 3,813,293 |      | $ | 3,017,778 |  
|Cash paid for income taxes                                                    |  |      | 1,075,025 |      |   | 215,849   |  
|Change in fair value of   securities available  for sale, net of   income tax |  |      | (141,066  | )    |   | (240,470  | )

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 which is reported in Cash and due from banks on the   accompanying consolidated balance sheets at December 31, 2004 was $244,000   compared to $5,000 for both December 31, 2003 and 2002.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 4  Investment Securities

| | The amortized cost, fair   value and gross unrealized holding gains and losses of securities available   for sale at December 31, 2004 and 2003, consisted of the following:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 |  | 2004              |           
|-------------------------------- |  | ----------------- | ----------
|                                 |  |                   |           
|                                 |  | Amortized    Cost |           
|                                 |  |                   |           
|Securities   available for sale: |  |                   |           
|U.S.   Agency obligations        |  | $                 | 6,500,000 
|Mortgage-backed                  |  |                   | 23,998,480
|Municipal                        |  |                   | 5,923,857 
|                                 |  |                   |           
|Total                            |  | $                 | 36,422,337
|                                 |  |                   |           

|                                 |  | 2003             |           
|-------------------------------- |  | ---------------- | ----------
|                                 |  |                  |           
|                                 |  | Amortized   Cost |           
|                                 |  |                  |           
|Securities   available for sale: |  |                  |           
|U.S.   Agency obligations        |  | $                | 9,956,593 
|Mortgage-backed                  |  |                  | 20,333,627
|Municipal                        |  |                  | 5,927,304 
|                                 |  |                  |           
|Total                            |  | $                | 36,217,524
|                                 |  |                  |           

26

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

| | At December 31, 2004 and   2003, securities with a carrying value of approximately $19,400,000 and   $31,800,000 respectively, were pledged to secure public deposits and for   other purposes required or permitted by law, including as collateral for FHLB   advances outstanding.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                      
| | The following table shows   gross unrealized losses and fair value, aggregated by investment category,   and length of time that individual securities have been in a continuous   unrealized loss position at December 31, 2004.                                                    

|                               |  | Less than 12 Months |            | 12 Months or More   |   | Total        |  
|------------------------------ |  | ------------------- | ---------- | ------------------- | - | ------------ | -
|                               |  |                     |            |                     |   |              |  
|                               |  | Fair   value        |            | Unrealized   losses |   | Fair   value |  
|                               |  |                     |            |                     |   |              |  
|Securities available for sale: |  |                     |            |                     |   |              |  
|U.S.   Agency obligations      |  | $                   | 1,485,215  |                     | $ | (14,785      | )
|Mortgage-backed                |  |                     | 15,838,154 |                     |   | (142,290     | )
|Municipal                      |  |                     | 828,356    |                     |   | (13,088      | )
|                               |  |                     |            |                     |   |              |  
|Total                          |  | $                   | 18,151,725 |                     | $ | (170,163     | )
|                               |  |                     |            |                     |   |              |  

| | At December 31, 2004, ten   individual securities were in a continuous loss position for twelve months or   more.  The Company has the ability and   intent to hold these securities until such time as the value recovers or the   securities mature.  The Company   believes, based on industry analyst reports and the credit ratings of the   securities, that the deterioration in value is attributable to changes in   market interest rates and not in the credit quality of the issuer and   therefore, these losses are not considered other-than-temporary.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The amortized cost and   estimated fair value of investment securities available for sale at December   31, 2004 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   Cost |            | Fair Value |  
|----------------------------------------- |  | ---------------- | ---------- | ---------- | -
|                                          |  |                  |            |            |  
|Due after one year,   through five years  |  | $                | 1,000,000  |            | $
|Due after five years,   through ten years |  |                  | 7,379,307  |            |  
|Due after fifteen years                   |  |                  | 4,044,550  |            |  
|                                          |  |                  |            |            |  
|Subtotal                                  |  |                  | 12,423,857 |            |  
|Mortgage-backed securities                |  |                  | 23,998,480 |            |  
|                                          |  |                  |            |            |  
|Total                                     |  | $                | 36,422,337 |            | $
|                                          |  |                  |            |            |  

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 FRB stock owned   is based on the Banks capital levels and totaled $329,850 at December 31,   2004 and 2003, 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 $1,405,400 and $475,000 at December 31, 2004 and 2003,   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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

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

Note 6  Loans

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

|                                       |  | 2004 |             | 2003 |  
|-------------------------------------- |  | ---- | ----------- | ---- | -
|                                       |  |      |             |      |  
|Commercial and industrial              |  | $    | 20,255,042  |      | $
|Commercial secured by real   estate    |  |      | 104,339,105 |      |  
|Real estate--residential   mortgages   |  |      | 59,322,241  |      |  
|Installment and other   consumer loans |  |      | 4,977,122   |      |  
|Unearned income                        |  |      | (385,917    | )    |  
|                                       |  |      |             |      |  
|Total   loans, net of unearned income  |  |      | 188,507,593 |      |  
|Less--allowance for loan   losses      |  |      | (2,258,526  | )    |  
|                                       |  |      |             |      |  
|Total   loans, net                     |  | $    | 186,249,067 |      | $
|                                       |  |      |             |      |  

| | Approximately $142,839,000   of the loans were variable interest rate loans at December 31, 2004. The   remaining portfolio was comprised of fixed interest rate loans.                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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, 2004, there were no   material concentrations of credit risk within the Companys loan portfolio.                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | At December 31, 2004 and   2003, $48,643 and $257,470 in loans were on nonaccrual status, respectively.   Foregone interest income on these nonaccrual loans and other nonaccrual loans   charged off during the year was approximately $1,800 and $15,000 in 2004 and   2003, respectively. There were no loans on nonaccrual status at December 31,   2002.  There were no loans contractually   past due in excess of 90 days at December 31, 2004 or 2003. There were no   foreclosed loans or other real estate owned at December 31, 2004 or 2003.   There were no impaired loans at December 31, 2004 or 2003.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Qualifying loans held by   the bank and collateralized by 1-4 family residences with a market value of   $28,479,000 were pledged as collateral for FHLB advances outstanding of   $23,078,571 at December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Changes in the allowance   for loan losses for the years ended December 31 were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                             |  | 2004 |           | 2003 |   | 2002      |  
|-------------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                             |  |      |           |      |   |           |  
|Balance, beginning of year                   |  | $    | 1,630,488 |      | $ | 1,163,977 |  
|Provision charged to   operations            |  |      | 679,427   |      |   | 518,821   |  
|Loans charged off                            |  |      | (53,548   | )    |   | (52,880   | )
|Recoveries on loans   previously charged off |  |      | 2,159     |      |   | 570       |  
|                                             |  |      |           |      |   |           |  
|Balance, end of year                         |  | $    | 2,258,526 |      | $ | 1,630,488 |  
|                                             |  |      |           |      |   |           |  

| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The aggregate dollar   amount of these outstanding loans was approximately $10.29 million and $7.33   million at December 31, 2004 and 2003, respectively.  During 2004, new loans and advances on   these lines of credit totaled approximately $4.63 million and payments on   these loans and lines totaled approximately $1.67 million. At                                                                                                                                                       

28

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

| | December 31, 2004, there   were commitments to extend additional credit to related parties in the amount   of approximately $1 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, 2004 or 2003.

Note 7 - Premises and Equipment

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

|                                    |  | 2004 |           | 2003 |  
|----------------------------------- |  | ---- | --------- | ---- | -
|                                    |  |      |           |      |  
|Land                                |  | $    | 975,854   |      | $
|Building and improvements           |  |      | 2,885,057 |      |  
|Furniture, fixtures and   equipment |  |      | 1,325,097 |      |  
|Construction in progress            |  |      |          |      |  
|                                    |  |      |           |      |  
|Subtotal                            |  |      | 5,186,008 |      |  
|Accumulated depreciation            |  |      | 911,768   |      |  
|                                    |  |      |           |      |  
|Total                               |  | $    | 4,274,240 |      | $
|                                    |  |      |           |      |  

| | Depreciation expense   charged to operations totaled $245,077, $239,939 and $233,449 in 2004, 2003,   and 2002, respectively.                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The Bank entered into a   long-term land operating 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, 2004, 2003 and 2002. The annual   minimum rental commitments under the terms of the Companys noncancellable   lease at December 31, 2004 are as follows:

|2005       |  | $ | 50,917  | 
|---------- |  | - | ------- | 
|2006       |  |   | 53,000  | 
|2007       |  |   | 53,000  | 
|2008       |  |   | 53,000  | 
|2009       |  |   | 53,000  | 
|Thereafter |  |   | 660,033 | 
|           |  |   |         | 
|Total      |  | $ | 922,950 | 
|           |  |   |         | 

| | In addition, the Bank   currently has short-term operating leases for its loan production offices in   Mount Pleasant and Greenville, South Carolina.  Monthly rent for these two offices totals $2,950.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 8  Deposits

| | The aggregate amount of   time deposits with a minimum denomination of $100,000 was approximately   $58,891,000 and $43,005,000 at December 31, 2004 and 2003, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                             
| | The scheduled maturities   of time deposits at December 31 are as follows:                                                                                                  

|                               |  | 2004 |             | 2003 |  
|------------------------------ |  | ---- | ----------- | ---- | -
|                               |  |      |             |      |  
|One year or less               |  | $    | 115,059,906 |      | $
|From one year to three   years |  |      | 10,485,454  |      |  
|After three years              |  |      | 5,502,000   |      |  
|                               |  |      |             |      |  
|Total                          |  | $    | 131,047,360 |      | $
|                               |  |      |             |      |  

29

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

Note 9 - Lines of Credit

| | At December 31, 2004, the   Bank had short-term lines of credit with correspondent banks to purchase   unsecured federal funds totaling $19,000,000.  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 20% of its total assets from the FHLB as of December 31,   2004, limited to qualifying collateral. 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 loans held by the bank   and collateralized by 1-4 family residences with a market value of   $28,479,000 were pledged as collateral for advances outstanding of   $23,078,571 at December 31, 2004.                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | At December 31, 2004,   fixed rate FHLB advances outstanding ranged from $1,000,000 to $3,000,000   with initial maturities of two to seven years and rates of 2.82% to   4.01%.  At December 31, 2004, advances   totaling $8.3 million were subject to call features at the option of the FHLB   with call dates ranging from June 2005 to March 2008 and current rates of   2.01% to 2.92%. Call provisions are more likely to be exercised by the FHLB   when rates rise.  Advances totaling   $9,750,000 at December 31, 2004 were at variable rates based on three month   LIBOR and were priced from 2.13% to 2.52% as of year end, depending on the   reset date.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Scheduled maturities of   FHLB advances subsequent to December 31, 2004 are $5,850,000 in 2006,   $2,500,000 in 2007, $4,300,000 in 2009, $2,928,571 in 2011, $5,000,000 in   2012 and $2,500,000 in 2013.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The weighted-average   interest on FHLB advances outstanding as of December 31, 2004 and 2003 was   2.68% and 1.71%, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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 ended December 31:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                      |  | 2004 |         | 2003 |   | 2002    |  
|----------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                                                      |  |      |         |      |   |         |  
|Income tax expense at   federal statutory rate of 34% |  | $    | 897,143 |      | $ | 456,150 |  
|Change in valuation   allowance                       |  |      |        |      |   |        |  
|State income tax, net of   federal effect             |  |      | 62,214  |      |   | 27,914  |  
|Tax-exempt securities   income                        |  |      | (70,425 | )    |   | (43,833 | )
|Bank-owned life insurance   earnings                  |  |      | (42,638 | )    |   | (26,535 | )
|Other, net                                            |  |      | (22,816 | )    |   | 12,195  |  
|                                                      |  |      |         |      |   |         |  
|Income tax expense                                    |  | $    | 823,478 |      | $ | 425,891 |  
|                                                      |  |      |         |      |   |         |  

The provision for income taxes for the years ended December 31 is as follows:

|                           |  | 2004 |         | 2003 |   | 2002    |  
|-------------------------- |  | ---- | ------- | ---- | - | ------- | -
|                           |  |      |         |      |   |         |  
|Current:                   |  | $    | 827,316 |      | $ | 398,844 |  
|Federal                    |  |      | 91,564  |      |   | 26,994  |  
|                           |  |      |         |      |   |         |  
|State                      |  |      | 918,880 |      |   | 425,838 |  
|                           |  |      |         |      |   |         |  
|Deferred:                  |  |      | (98,102 | )    |   | (15,247 | )
|Federal                    |  |      | 2,700   |      |   | 15,300  |  
|                           |  |      |         |      |   |         |  
|State                      |  |      | (95,402 | )    |   | 53      |  
|                           |  |      |         |      |   |         |  
|Provision for income taxes |  | $    | 823,478 |      | $ | 425,891 |  
|                           |  |      |         |      |   |         |  

30

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

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

|                                                   |  | 2004 |         | 2003 |  
|-------------------------------------------------- |  | ---- | ------- | ---- | -
|                                                   |  |      |         |      |  
|Deferred tax liability:                            |  |      |         |      |  
|Net   deferred loan costs                          |  | $    | 36,100  |      | $
|Prepaid   expenses deducted currently for tax      |  |      | 29,560  |      |  
|Tax   depreciation in excess of book               |  |      | 147,880 |      |  
|Loan   servicing rights                            |  |      | 47,722  |      |  
|                                                   |  |      |         |      |  
|Total   deferred tax liability                     |  |      | 261,262 |      |  
|                                                   |  |      |         |      |  
|Deferred tax asset:                                |  |      |         |      |  
|Allowance   for loan losses                        |  |      | 561,451 |      |  
|Deferred   organizational and start-up costs       |  |      | 6,638   |      |  
|Unrealized   loss on securities available for sale |  |      | 87,529  |      |  
|Deferred   gain on sale of loans                   |  |      | 35,277  |      |  
|                                                   |  |      |         |      |  
|Deferred   tax asset before valuation allowance    |  |      | 690,895 |      |  
|                                                   |  |      |         |      |  
|Valuation   allowance                              |  |      |        |      |  
|                                                   |  |      |         |      |  
|Net   deferred tax asset                           |  | $    | 429,633 |      | $
|                                                   |  |      |         |      |  

| | 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 management   believes 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 loss on securities available for sale of $72,670.  The remainder of the change in the net   deferred tax asset is due to the current period deferred tax benefit of   $95,402.                           

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 following table.  Management believes, as of December 31, 2004, that the   Company and the Bank meet all capital adequacy requirements to which they are   subject. At December 31, 2004, 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.                                                                                                                                                                                                                                                                                                                                                 

31

---



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

| | The following table presents   the Companys and the Banks actual capital amounts and ratios at December   31, 2004 and 2003 as well as the minimum calculated amounts for each   regulatory-defined category.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         |  | Actual |            | For   Capital Adequacy Purposes |  | Minimum to be    Categorized as Well
Capitalized Under    Prompt Corrective Action Provisions |  
|---------------------------------------- |  | ------ | ---------- | ------------------------------- |  | --------------------------------------------------------------------------------------------- | -
|                                         |  |        |            |                                 |  |                                                                                               |  
|                                         |  | Amount |            | Ratio                           |  | Amount                                                                                        |  
|                                         |  |        |            |                                 |  |                                                                                               |  
|As of   December 31, 2004                |  |        |            |                                 |  |                                                                                               |  
|The   Company                            |  |        |            |                                 |  |                                                                                               |  
|Total   capital to risk-weighted assets  |  | $      | 21,919,000 |                                 |  | 12.21                                                                                         | %
|Tier   1 capital to risk-weighted assets |  | $      | 18,018,000 |                                 |  | 10.04                                                                                         | %
|Tier   1 capital to average assets       |  | $      | 18,018,000 |                                 |  | 7.90                                                                                          | %
|The   Bank                               |  |        |            |                                 |  |                                                                                               |  
|Total   capital to risk-weighted assets  |  | $      | 21,290,000 |                                 |  | 11.83                                                                                         | %
|Tier   1 capital to risk-weighted assets |  | $      | 19,031,000 |                                 |  | 10.57                                                                                         | %
|Tier   1 capital to average assets       |  | $      | 19,031,000 |                                 |  | 8.34                                                                                          | %
|As of   December 31, 2003                |  |        |            |                                 |  |                                                                                               |  
|The   Company                            |  |        |            |                                 |  |                                                                                               |  
|Total   capital to risk-weighted assets  |  | $      | 16,659,000 |                                 |  | 12.91                                                                                         | %
|Tier   1 capital to risk-weighted assets |  | $      | 15,029,000 |                                 |  | 11.64                                                                                         | %
|Tier   1 capital to average assets       |  | $      | 15,029,000 |                                 |  | 8.65                                                                                          | %
|The   Bank                               |  |        |            |                                 |  |                                                                                               |  
|Total   capital to risk-weighted assets  |  | $      | 15,854,000 |                                 |  | 12.28                                                                                         | %
|Tier   1 capital to risk-weighted assets |  | $      | 14,224,000 |                                 |  | 11.02                                                                                         | %
|Tier   1 capital to average assets       |  | $      | 14,224,000 |                                 |  | 8.20                                                                                          | %

| | 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, 2004, no cash dividends have   been declared or paid by the Bank.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 13  Junior Subordinated Debentures

| | The Company issued trust   preferred securities totaling $6 million through its statutory trust   subsidiaries, FNSC Capital Trust I and FNSC Statutory Trust II, during 2003   and 2004.  On December 19, 2003, FNSC   Capital Trust I issued and sold floating rate trust preferred securities having   an aggregate liquidation amount of $3 million to institutional buyers in a   private placement of trust preferred securities.  On April 30, 2004, FNSC Statutory Trust II (collectively with   FNSC Capital Trust I (the Trusts)),    issued an additional $3 million through a pooled offering of trust   preferred securities. The Trusts also issued common securities having an   aggregate liquidation amount of 3% of the total capital of the Trusts, or   $186,000, to the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The 2003 and 2004 trust   preferred securities issues accrue and pay cumulative distributions quarterly   in arrears at a rate per annum equal to 90-day LIBOR plus 292 basis points   and 90-day LIBOR plus 270 basis points, respectively.  The Company has the right, subject to   events of default, to defer payments of interest on the trust preferred   securities for a period not to exceed 20 consecutive quarters from the date   of issuance. The Company has no current intention to exercise this   right.  At December 31, 2004, the   distribution rates on the 2003 and 2004 issuances were 5.48% and 5.20%,   respectively.                                                                                                                                                         

32

---



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

| | The 2003 and 2004 trust   preferred securities issues are mandatorily redeemable upon maturity on   December 19, 2033 and April 30, 2039, respectively. The Company has the right   to redeem them in whole or in part, on or after December 19, 2008 and at any   time commencing in 2009, respectively. If they are redeemed on or after these   dates, the redemption price will be 100% of the principal amount plus accrued   and unpaid interest. In addition, the Company may redeem either issuance 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 Trusts invested the   gross proceeds of $6 million from the issuance of the trust preferred   securities and $186,000 from the issuance of the common securities in an   equivalent amount of floating rate junior subordinated debentures of the   Company or $6,186,000.  The Company   contributed the net proceeds from the issuance of the subordinated debentures   of $6 million after purchase of the common securities for $186,000 to the   Bank for general corporate purposes. Issuance costs from the 2003 and 2004   transactions totaled $104,000 and $15,000, respectively.                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 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 guarantees, which together with its   obligations under the junior subordinated debentures and the declaration of   trusts governing the Trusts, provides full and unconditional guarantees of   the trust preferred securities.                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The common securities   owned by the Company rank equal to the trust preferred securities in priority   of payment.  The common securities   generally have sole voting power on matters to be voted upon by the holders   of the Trusts securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | On October 31, 2003, the   FASB proposed a modification and interpretation of FASB Interpretation No. 46   (FIN 46r) which requires the Company to deconsolidate the Trusts from its   financial statements.  As a small   business issuer reporting under Regulation S-B, the Company was allowed to   delay deconsolidation until December 31, 2004. Accordingly, the junior   subordinated debentures and the common securities are presented in the   Companys financial statements as liabilities and other assets, respectively,   as of December 31, 2004. All prior periods have been restated retroactively   to reflect the deconsolidation.  The   trust preferred securities are a part of the financial statements of the   Trusts and they are not reflected in the Companys financial statements due   to the adoption of FIN 46r.

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 270,000 shares of common stock. As of December 31, 2004,   98,400 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 470,000 shares of common stock for $6.67 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.                                                                                                                                                                                                                                                                                                                                                                            

33

---



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

| | The following is a summary   of the activity under the plans for the years ended December 31:
| | ---------------------------------------------------------------------------------------------

|                                   |  | 2004   |         | 2003                                         |   | 2002   | 
|---------------------------------- |  | ------ | ------- | -------------------------------------------- | - | ------ | 
|                                   |  |        |         |                                              |   |        | 
|                                   |  | Shares |         | Weighted    Average
Exercise Price Per Share |   | Shares | 
|                                   |  |        |         |                                              |   |        | 
|Outstanding, beginning of   period |  |        | 642,500 |                                              | $ | 6.82   | 
|Granted                            |  |        | 16,250  |                                              |   | 19.25  | 
|Forfeited                          |  |        | (20,000 | )                                            |   | 16.20  | 
|Exercised                          |  |        |        |                                              |   |       | 
|                                   |  |        |         |                                              |   |        | 
|Outstanding,   December 31         |  |        | 638,750 |                                              |   | 6.84   | 
|                                   |  |        |         |                                              |   |        | 
|Exercisable,   December 31         |  |        | 495,249 |                                              |   | 6.69   | 
|                                   |  |        |         |                                              |   |        | 

| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table   summarizes information about stock options and warrants outstanding under the   stock-based option plans at December 31, 2004:

|                           |  | Outstanding        |         | Exercisable                                       | 
|-------------------------- |  | ------------------ | ------- | ------------------------------------------------- | 
|                           |  |                    |         |                                                   | 
|Range of   Exercise Prices |  | Number
Outstanding |         | Weighted    Average    Remaining
Contractual
Life | 
|                           |  |                    |         |                                                   | 
|$ 6.67                     |  |                    | 611,000 |                                                   | 
|$ 7.00 - $ 7.20            |  |                    | 7,500   |                                                   | 
|$ 8.70 - $ 9.00            |  |                    | 750     |                                                   | 
|$ 9.50 - $12.50            |  |                    | 8,250   |                                                   | 
|$16.00  $19.75            |  |                    | 11,250  |                                                   | 
|                           |  |                    |         |                                                   | 
|$ 6.67 - $12.50            |  |                    | 638,750 |                                                   | 
|                           |  |                    |         |                                                   | 

| | The above information has   been restated for the 3 for 2 stock split distributed on March 1, 2004.
| | ---------------------------------------------------------------------------------------------------

Note 15  Employee Benefit Plans

| | 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 the 25%   match in 2002. A total of $37,000, $29,932 and $12,000 were charged to   operations in 2004, 2003, and 2002, 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | On May 31, 2004, the   Company adopted an Employee Stock Ownership Plan (ESOP) for the exclusive   benefit of employee participants.    Employees become vested in their account balances after seven years of   service.  The Board of Directors   approved a $12,000 discretionary contribution paid to the ESOP for the year   ended December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | During 2004, the Company   also adopted a formal incentive compensation plan, the First National   Incentive Plan (the FNIP) for members of its management team. Approximately   $380,000 was accrued in 2004 and paid in January 2005 based on achievement of   individual and corporate performance goals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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

Note 16  Commitments and Contingencies

| | On September 10, 2004, the   Company entered into a new 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. After December 31, 2004, the Company   entered into employment agreements with each of its three Executive Vice   Presidents that include an annually renewing two-year compensation term and   one-year non-compete agreements upon termination.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 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, 2004, the Company and the Bank were not involved   with any litigation matters.                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | See Note 7 for specifics   on the Companys lease commitments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Note 17  Financial Instruments with Off-Balance Sheet Risk

| | The Company is a 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.                                                                                                                                                                
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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, 2004, the   Companys commitments to extend additional credit totaled approximately $47.9   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 $605,278   at December 31, 2004. 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                                                                                                                                                                                                                                                                                                                                                                                       

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

| | 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 2005 are valued at their carrying value. Certificate of   deposit accounts maturing after 2005 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.  Fair   value for the floating rate junior subordinated debentures is based on the   carrying value.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                 |  | 2004              |             | 2003                 |  
|-------------------------------- |  | ----------------- | ----------- | -------------------- | -
|                                 |  |                   |             |                      |  
|                                 |  | Carrying   Amount |             | Estimated
Fair Value |  
|                                 |  |                   |             |                      |  
|Financial assets:                |  |                   |             |                      |  
|Cash   and due from banks        |  | $                 | 2,404,124   |                      | $
|Interest-bearing   bank balances |  |                   | 33,841      |                      |  
|Federal   funds sold             |  |                   | 846,000     |                      |  
|Securities   available for sale  |  |                   | 36,164,898  |                      |  
|Loans,   net                     |  |                   | 186,249,067 |                      |  
|Financial liabilities:           |  |                   |             |                      |  
|Deposits                         |  | $                 | 191,811,128 |                      | $
|FHLB   advances                  |  |                   | 23,078,571  |                      |  
|Junior   subordinated debentures |  |                   | 6,186,000   |                      |  

Note 19  Parent Company Financial Information

| | The following is condensed   financial information of First National Bancshares, Inc. (parent company   only) at December 31, 2004 and 2003 and for each of the years in the three   year period ended December 31, 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

First National Bancshares, Inc.

Condensed Balance Sheets

|                                        |  | 2004 |            | 2003 |  
|--------------------------------------- |  | ---- | ---------- | ---- | -
|                                        |  |      |            |      |  
|Assets:                                 |  |      |            |      |  
|Cash                                    |  | $    | 459,657    |      | $
|Investment   in bank subsidiary         |  |      | 19,269,052 |      |  
|Investment   in Trust subsidiaries      |  |      | 186,000    |      |  
|Other   assets                          |  |      | 182,738    |      |  
|                                        |  |      |            |      |  
|Total                                   |  | $    | 20,097,447 |      | $
|                                        |  |      |            |      |  
|Liabilities and   shareholders equity: |  |      |            |      |  
|Junior   subordinated debentures        |  | $    | 6,186,000  |      | $
|Accruals   and other liabilities        |  |      |           |      |  
|Shareholders   equity                  |  |      | 13,911,447 |      |  
|                                        |  |      |            |      |  
|Total                                   |  | $    | 20,097,447 |      | $
|                                        |  |      |            |      |  

First National Bancshares, Inc.

Condensed Statements of Income

|                                                        |  | 2004 |           | 2003 |   | 2002    | 
|------------------------------------------------------- |  | ---- | --------- | ---- | - | ------- | 
|                                                        |  |      |           |      |   |         | 
|Interest income                                         |  | $    | 11,315    |      | $ | 8,743   | 
|Interest expense on junior   subordinated debentures    |  |      | 235,919   |      |   | 4,496   | 
|                                                        |  |      |           |      |   |         | 
|Net   interest income/(expense)                         |  |      | (224,604  | )    |   | 4,247   | 
|Professional fees                                       |  |      | 8,961     |      |   | 7,452   | 
|Shareholder relations                                   |  |      | 31,771    |      |   | 20,884  | 
|Other                                                   |  |      | 688       |      |   | 52      | 
|                                                        |  |      |           |      |   |         | 
|Noninterest   expense                                   |  |      | 41,420    |      |   | 28,388  | 
|Equity in undistributed   net income of bank subsidiary |  |      | 1,990,540 |      |   | 939,867 | 
|                                                        |  |      |           |      |   |         | 
|Net income before income   taxes                        |  |      | 1,724,516 |      |   | 915,726 | 
|Income tax benefit                                      |  |      | (90,661   | )    |   |        | 
|                                                        |  |      |           |      |   |         | 
|Net   income                                            |  | $    | 1,815,177 |      | $ | 915,726 | 
|                                                        |  |      |           |      |   |         | 

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

First National Bancshares, Inc.

Condensed Statements of Cash Flows

|                                                                                    |  | 2004 |            | 2003 |   | 2002       |  
|----------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                                                    |  |      |            |      |   |            |  
|Operating activities:                                                               |  |      |            |      |   |            |  
|Net   income                                                                        |  | $    | 1,815,177  |      | $ | 915,726    |  
|Adjustments   to reconcile net income to net  cash   used for operating activities: |  |      |            |      |   |            |  
|Equity   in undistributed net income of bank subsidiary                             |  |      | (1,990,540 | )    |   | (939,867   | )
|Compensation   expense for employee stock options                                   |  |      | 8,900      |      |   | 3,000      |  
|Increase   in other assets                                                          |  |      | (7,236     | )    |   | (100,800   | )
|Increase   (decrease) in other liabilities                                          |  |      | (5,446     | )    |   | 17,489     |  
|Increase   in intercompany receivable                                               |  |      | (90,661    | )    |   |           |  
|                                                                                    |  |      |            |      |   |            |  
|Net   cash used for operating activities                                            |  |      | (269,806   | )    |   | (104,452   | )
|                                                                                    |  |      |            |      |   |            |  
|Investing activities:                                                               |  |      |            |      |   |            |  
|Investment   in common securities of Trusts                                         |  |      | (93,000    | )    |   | (93,000    | )
|Capital   contribution to bank subsidiary                                           |  |      | (2,997,000 | )    |   | (3,203,000 | )
|                                                                                    |  |      |            |      |   |            |  
|Net   cash used for investing activities                                            |  |      | (3,090,000 | )    |   | (3,296,000 | )
|                                                                                    |  |      |            |      |   |            |  
|Financing activities:                                                               |  |      |            |      |   |            |  
|Proceeds   from exercise of employee stock options                                  |  |      |           |      |   | 6,114      |  
|Cash   paid in lieu of fractional shares                                            |  |      | (60        | )    |   |           |  
|Proceeds   from junior subordinated debentures                                      |  |      | 3,093,000  |      |   | 3,093,000  |  
|                                                                                    |  |      |            |      |   |            |  
|Net   cash provided by financing activities                                         |  |      | 3,092,940  |      |   | 3,099,114  |  
|                                                                                    |  |      |            |      |   |            |  
|Net decrease in cash and   cash equivalents                                         |  |      | (266,866   | )    |   | (301,338   | )
|Cash, beginning of year                                                             |  |      | 726,523    |      |   | 1,027,861  |  
|                                                                                    |  |      |            |      |   |            |  
|Cash, end of year                                                                   |  | $    | 459,657    |      | $ | 726,523    |  
|                                                                                    |  |      |            |      |   |            |  

For a complete discussion of the junior subordinated debentures, common securities and the related trust preferred securities, see Note 13  Junior Subordinated Debentures.

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BOARD OF DIRECTORS

Message

Standing: Donald B. Wildman, Dr. Gaines W. Hammond, Jr., Jerry L. Calvert,  Mellnee G. Buchheit, Dr. C. Tyrone Gilmore, Sr., Peter E. Weisman, C. Dan Adams, Benjamin R. HinesSeated: W. Russel Floyd, Jr., William A. Hudson, Norman F. Pulliam, Martha C. Chapman, Coleman L. Young, Jr.

****************************************************************************************************************

EXECUTIVE OFFICERS

|Message  Standing:Robert   W. Murdoch, Jr.Executive Vice President & Retail Banking   ManagerDavid   H. ZabriskieExecutive Vice President & Chief Lending Officer  Seated:Kitty B. PayneExecutive Vice President & Chief Financial OfficerJerry L. CalvertPresident & Chief Executive Officer | LEADERSHIP TEAMFoster Alexander
AVP,   Manager, Boiling Springs BranchLouie   Blanton
SVP,   Commercial Banking & Business Development
John   BickleyVP, Manager, First National   Business CapitalDavid BowdishVP, Operations ManagerVan ClarkVP, Human Resource ManagerRenee Cothran
VP, City   ExecutiveShany EzellAVP, Mortgage Loan OfficerRudy GillMarket President, Mount   PleasantPamela GilliamAVP, Loan Operations   ManagerSusan GustafsonDeposit Services OfficerBob HayesManager, Reidville Road   BranchDawn KunakExecutive Assistant
Fred   MooreSVP, Risk ManagementJanetta RiffenburgAVP, Compliance OfficerErika ShoolbredMarketing & Public   Relations Coordinator
Phyllis   ShropshierOperations CoordinatorMarilyn SmithAVP, Manager, Main BranchAngela WillinghamBranch Coordinator
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|SUPPORT STAFF                             
|------------------------------------------
|                                          
|Kerry   Blanton,Loan Operations           
|Lisa   Horton,Loan Processor              
|Sue Waters,Loan Processor                 
|Tara   Kallam,Deposit Operations          
|Alice   Popiel,Accounts Payable Specialist

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Message

SHAREHOLDER INFORMATION

Stock ListingFirst National Bancshares, Inc. common stock is quoted on the OTC Bulletin Board under the symbol FNSC. As of March 1, 2005, there were 379 shareholders of record. This number does not reflect the number of persons or entities who hold the stock in nominee or street name through various brokerage firms.

Shareholder ServicesShareholders seeking information regarding stock transfers, lost certificates, dividends and address changes should contact our Transfer Agent:

First Citizens Bank Corporate Trust Division PO Box 29522Raleigh, NC 27626-0522 (877) 685-0576

|Market Makers                       
|------------------------------------
|Scott & Stringfellow,   Inc.        
|FIG Partners, LLC                   
|Archipelago Trading   Services, Inc.
|Hill Thompson Magid &   Co., Inc.   

Annual MeetingThe Annual Meeting of Shareholders will be held at 5:30 p.m. on Tuesday, April 19, 2005 at our main office at 215 North Pine Street, Spartanburg, SC 29302. All shareholders of record as of March 1, 2005 are eligible to attend and vote.

Financial InformationWe will furnish, upon request, free of charge, copies of our Annual Report to the SEC on Form 10-KSB by contacting:

Kitty B. Payne First National Bancshares, Inc. PO Box 3508 Spartanburg, SC 29302 (864) 948-9001

General CounselNelson Mullins Riley & Scarborough, LLP 999 Peachtree Street, NE / Suite 1400 Atlanta, Georgia 30309

Independent Public Accounting FirmElliott Davis, LLC  200 East Broad Street Greenville, SC 29601

The following is a summary of the bid prices for our common stock reported by the OTC Bulletin Board:

|               |  | 2004 |       | 2003 |  
|-------------- |  | ---- | ----- | ---- | -
|               |  |      |       |      |  
|               |  | High |       | Low  |  
|               |  |      |       |      |  
|First Quarter  |  | $    | 17.00 |      | $
|Second Quarter |  |      | 21.50 |      |  
|Third Quarter  |  |      | 24.00 |      |  
|Fourth Quarter |  |      | 26.50 |      |  

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. The prices shown reflect historical activity and amounts prior to the 3 for 2 stock split distributed on March 1, 2004 have been adjusted accordingly.

|Growth Since
Opening on March 27, 2000 |                                                                                      | Asset Growth Projected in 2005
|-------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------
|Message                                | As of 12/31/04Assets: $236.3 millionDeposits: $191.8 million   Loans: $188.5 million | Message                       

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