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FORM 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934

FIRST NATIONAL BANCSHARES, INC.

Registrant’s telephone number, including area code: (941) 794-6969

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements of the past 90 days.

Yes   X    No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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FIRST NATIONAL BANK OF MANATEE
Index to Form 10-Q
For the quarter Ended March 31, 2003

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PART I. FINANCIAL INFORMATION

         Item 1. Financial Statements

FIRST NATIONAL BANCSHARES, INC.
Consolidated Balance Sheet

Assets (000’s)

(1) Condensed from audited financial statements

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Liabilities and Stockholders’ Equity (000’s)

(1) Condensed from audited financial statements

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STATEMENT OF INCOME
Year to Date
($000’s)

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STATEMENTS OF CASH FLOWS
Year to Date
(000’s)

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(2) NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1 - Basis of Financial Reporting

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments necessary for fair presentation of such financial statements have been included. For further information, refer to the consolidated financial statements and the notes thereto included in the Bank’s annual report on Form 10-K for the year ended December 31, 2002.

Results for the three month period ended March 31, 2003, may not necessarily be indicative of those to be expected for the entire year.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview.

     1^st National Bank & Trust (formerly First National Bank of Manatee) (the Bank) commenced operations on July 18, 1986. The Bank’s activities since inception have consisted of accepting deposits, originating a variety of loans. The Bank’s first branch was opened on Anna Maria Island (5 miles west of the main office) in October, 1994. The second branch was opened in May of 1996 on State Road 64 (5 miles east of the main office). In January of 1997, the bank opened its third branch on State Road 70 (8 miles southeast of the main office). The Bank opened its latest Branch in Ellenton at the corner of US 301 and Old Tampa Road. The bank also opened a Trust Department in March of 1995. The Bank, as a local independent bank, follows a philosophy of developing its equity and deposit base and focusing its lending activities within its community. The Bank’s underlying lending policy has been and is anticipated to continue being directed toward better-than-normal credit risks.

     On January 1, 1999 the Bank was merged into First National Bancshares, Inc., a Florida corporation (the Holding Company). The Holding Company was formed specifically for the purpose of having the Bank merged into it. At the time of the merger, the Holding Company had assets of $128,000 and a net worth of ($55,000). The Holding Company is now a one bank holding company with no other subsidiaries than the Bank. Therefore, there are no significant adjustments from the financial information of the Bank to the consolidated financial information for the Holding Company.

     The following discussion and analysis is based on the Holding Company’s financial condition and results of operations for the period from January 1, 2003 through March 31, 2003. This discussion and analysis should be read in conjunction with the financial statement summaries of the Holding Company, included elsewhere in this quarterly report.

Results of Operations.

     Earnings in the first quarter of 2003 were up $19,000 or 3% compared to earnings in the same period last year as direct result of net interest income increasing 6% after loan loss provision while fee income increased 23% and corresponding expenses grew only 10%. The major component of the increased overhead was salary expense due to increased cost of benefits and added personnel to support. The Bank’s contribution of $46,000 to loan loss reserve was $54,000 lower than last year. Modest loan growth in the first quarter abated the addition of contributions to loan loss reserve as high as last year.

Net Interest Income. The major component of the Bank’s earning capacity is net interest income, which represents the difference or spread between interest income on earning assets and interest bearing liabilities, primarily deposits. The spread is considered positive when rate-sensitive assets exceed rate-sensitive liabilities, and negative when rate-sensitive liabilities exceed rate sensitive assets. Net interest income is also affected by changes in interest rates earned and paid, and by changes in the volume of interest-earning assets and interest-bearing liabilities. To the extent possible, the Bank follows a strategy intended to insulate the Bank’s interest rate spread from adverse changes in interest rates by maintaining spreads through the adjustability of its earning assets and interest-bearing liabilities. On March 31, 2003, the Bank’s

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loan portfolio had a high ratio of repriceability within one year.

     Historically low interest rates have accelerated the number of loans paying off to due to refinancing. As a result, the Bank has had only modest growth in its loan portfolio despite strong loan activity. Consequently, the increased net interest income has come from decreased cost of funds. Net interest income for three months in 2003 was $2,312,000 compared to $2,241,000 in 2002.

Interest Earning Assets. Real estate related loans at March 31, 2003, accounted for a majority of the bank’s loan portfolio. Most of the mortgages are variable rate loans and are adjustable each one to five years. Thus, volatile interest rates can result in the real estate loans lagging market conditions. In 2000, rates were initially stable but began to fall in the second half of the year and this drop in rates continued into early 2001. However, in the second quarter of 2001, as rates began to stabilize, the Bank was able to widen its margins throughout the remainder of the year. The Bank benefited from this in 2002 and the first quarter of 2003.

     The Bank’s investment portfolio is concentrated primarily in U.S. Government agencies and corporations. The Bank’s Available-for-Sale portfolio has a market value of about $860,000 above book value.

Non-interest Earning Assets. Non-interest earning assets accounted for 7.5% of total assets on March 31, 2003, and primarily consisted of cash and due from banks, branches and equipment, and accrued interest receivable.

Funding Sources. The primary source of funds for the Bank’s lending and investment activities is deposits. At March 31, 2003 the Bank’s total deposits were $182.6 million plus $16.0 million in repurchase agreements. The Bank’s deposits are highly concentrated in interest-bearing accounts, which is typical for the Bank’s market area. The Bank has 18% of its deposits in NOW Accounts and 68% of its deposits in Savings, MMA’s and CD deposits. In 2001, the bank was successful in shifting more deposits into NOW accounts and repurchase agreements and out of certificates of deposit. This improvement in deposit mix was sustained in 2002. This was a significant part of the bank’s improved net interest margin over the last several years.

Non-interest Income. The Bank’s non-interest income for the three month period ended March 31, 2003 was $501,000 including $204,000 from its Trust and Financial Services area. Periodic security transactions generate investment gains or losses and are primarily a result of tax management considerations and liquidity requirements. The bank had security gains of $54,000 in the first quarter of 2003. The other significant items of non-interest income represented service charges on deposit accounts and merchant credit card account income.

Non-interest Expense. The Bank’s non-interest expense for the three month period ended March 31, 2003 was $1,807,000 including $1,092,000 of salaries and employee benefits. The Bank’s occupancy and equipment expenses for the period ended March 31, 2003 were $286,000. Non-interest expense was up from $1,627,000 in 2002. The increase in expense is primarily due to expansion of staff to sustain the bank’s growth going forward.

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Allowance for Credit Losses. The allowance for credit losses is established through a provision for credit losses charged to expenses. Loans are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans and commitments to extend credit based on evaluations of the collectability and prior loan loss experience of loans and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay.

     An allowance for loan loss expense of $46,000 was charged to operating expenses for the three month period ended March 31, 2003. The Bank had net charge offs during this period of $20,000. The Bank has a total of $1,730,000 reserved for future loan losses.

     Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full, timely collection of interest or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income unless it is adequately secured. Income on such loans is then recognized only to the extent that cash is received and the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. The bank had one residential non-accrual loan for $61,000 at March 31, 2003. Where appropriate, the Bank makes specific reserves for future losses on non-performing loans. The Bank has no specific reserves established at March 31, 2003.

     The bank also had no other real estate owned (OREO) at March 31,2003.

Capital Resources. In the normal course of business, the capital position of the Bank is reviewed by management and regulatory authorities. The Comptroller of the Currency has specified guidelines for purposes of evaluating a bank’s capital adequacy. Currently, banks must maintain a minimum Tier I capital ratio of capital-to-assets of 5% to be considered well capitalized. For 1st National Bank & Trust, Tier I Capital includes only the Bank’s stockholders’ equity. At March 31, 2003, the Bank’s Tier I Capital leverage ratio was approximately 8.9%. In 1991, the Comptroller began evaluating banks’ capital on a risk basis i.e. more capital will be required for commercial loans than for residential real estate loan and even less will be required for government bonds. The Comptroller will require a minimum of an 8% capital ratio under this risk based method and 10% to be considered well capitalized. Currently the Bank has a total risk based capital ratio in excess of 13.6 %.

Liquidity. Management of the Bank continually evaluates its liquidity position. Management believes that the Bank’s investment portfolio, when combined with interest bearing bank balances and Fed Funds sold, provides adequate liquidity to meet the Bank’s needs. Management believes that the bank’s time deposits are concentrated in instruments that are primarily due to customer relationships and not to higher-than-market rates and, thus, do not present any unusual liquidity risk. In addition, the bank has established

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borrowing lines with correspondent banks, and with the Federal Home Loan Bank to cover liquidity needs.

Impact of Inflation and Changing Prices. Unlike most industrial companies, virtually all of the Bank’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Bank’s performance than do the effects of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services, since such prices are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of a financial institution’s assets and liabilities are also critical to the maintenance of acceptable performance levels.

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Quantitative and Qualitative Disclosure About Market Risk

     The Bank periodically performs asset/liability analysis to assess the Bank’s sensitivity to changing market conditions. The following information is extracted from the Bank’s 10-K which was filed with the Securities and Exchange Commission (SEC) effective December 31, 2002.

     The primary function of asset/liability management is to assure adequate liquidity and maintain an appropriate balance between interest-sensitive earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.

     Marketable investment securities, particularly those of shorter maturities, are a principal source of asset liquidity. Securities maturing or expected to be called within one year or less amounted to $13,227,000 at December 31, 2002 representing 39% of the investment securities portfolio, an increase from the 2001 amount of $3,200,000. This is due to the Bank making an effort to shorten its average bond maturity while rates are low. Shortening the maturity of the portfolio will have the effect of not locking in investment rates while rates are low.

     The Bank moderates its liquidity needs by maintaining short term borrowing lines with several regional banks. At year-end, the Bank had lines of credit established with other banking institutions totaling $36,375,000.

     Brokered deposits are deposit instruments, such as certificates of deposit, bank investment contracts and certain municipal investment contracts that are issued through brokers who then offer and/or sell these deposit instruments to one or more investors. The Bank does not currently purchase or sell brokered deposits.

     Maturities of time certificates of deposit and other time deposits of $100,000 or more, outstanding at December 31, 2002, are summarized as follows:

     Interest rate sensitivity varies with different types of interest earning assets and interest-bearing liabilities. Overnight federal funds, on which rates change daily, and loans, which are tied to the prime rate, differ considerably from long-term investment securities and fixed-rate loans. Similarly, time deposits over $100,000 and money market accounts are much more interest rate sensitive than passbook savings accounts. The shorter term interest rate sensitivities are key to measuring the interest sensitivity gap, or excess interest-sensitive earning assets over interest-bearing liabilities.

     The following table shows the interest sensitivity gaps for four different time intervals as of December 31, 2002. For the first year, interest-sensitive assets exceed liabilities by $26,319,000. Over the

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following two years, liabilities re-price faster than assets. The excess of interest-bearing liabilities over interest-earning assets for the one-to-three year period is primarily related to the longer maturities of CD’s and NOW and MMA accounts that are regarded as much less rate sensitive.

     The primary interest sensitive assets and liabilities in the one-year maturity range are loans and time deposits. Trying to minimize this gap while maintaining earnings is a continual challenge in a changing interest rate environment and one of the objectives of the Bank’s asset/liability management strategy. Management has adopted a philosophy of balancing assets and liabilities over a three-year period, which it has accomplished. Management feels that the rate rewards of being balanced over a three-year period more than offset the risk of being modestly unbalanced over the short term.

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Part II. Other Information

Item 1: Legal Proceedings Against the Bank - None.

Item 2: Changes in Securities and Use of Proceeds - None

Items 3: Defaults under Senior Securities - None

Item 4: Submission of Matters to a vote of Security Holders – None.

Item 5: Other Information - None

Item 6: Exhibits and Reports on Form 8-K

            Exhibits

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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CERTIFICATION

I, Francis I. duPont, III, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of First National Bancshares, Inc.;

2.    Based on my knowledge, this quarterly 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 quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)    Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)    Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)    All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.    The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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CERTIFICATION

I, Glen W. Fausset, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of First National Bancshares, Inc.;

2.    Based on my knowledge, this quarterly 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 quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)    Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)    Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)    All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.    The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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