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FORM 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2002

1ST NATIONAL BANCSHARES, INC.
(exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (813) 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   o

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 June 30, 2002

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST NATIONAL BANCSHARES, INC.

Assets (000’s)

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Liabilities and Stockholders’ Equity (000’s)

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FIRST NATIONAL BANCSHARES, INC

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STATEMENTS OF CASH FLOWS

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NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1 — Basis of Financial Reporting

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal and recurring adjustments necessary for fair presentation of such financial statements have been included. For further information, refer to the consolidated financial statements and the notes thereto included in the Bank’s annual report on Form 10-K for the year ended December 31, 2001.

Results for the six month period ended June 30, 2002, 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. In December of 1997, the bank acquired a site at University Blvd. and Lakewood Ranch Blvd. for a future branch. 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, 2002 through June 30, 2002. This discussion and analysis should be read in conjunction with the financial statement summaries of the Holding Company, included elsewhere in this quarterly report.

Results of Operations.

     Earnings in the first half of 2002 were up $512,000 or 68% compared to earnings in the same period last year as direct result of net interest income rising significantly while the bank and corresponding expenses grew only modestly. Operating expenses increased by $180,000. While employee expenses rose, occupancy and other expenses fell. The major component of the Bank’s decreased occupancy expense was the elimination of the lease on the bank’s main office as a result of the purchase of that property in January of this year. The Bank’s contribution of $189,000 to loan loss reserve was $119,000 higher than last year and due to significantly stronger loan growth.

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

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exceed rate-sensitive liabilities, and negative when rate-sensitive liabilities exceed rate sensitive assets. Net interest income is also affected by changes in interest rates earned and paid, and by changes in the volume of interest-earning assets and interest-bearing liabilities. To the extent possible, the Bank follows a strategy intended to insulate the Bank’s interest rate spread from adverse changes in interest rates by maintaining spreads through the adjustability of its earning assets and interest-bearing liabilities. On June 30, 2002, the Bank’s loan portfolio had a high ratio of repriceability within one year.

     The Bank had excellent growth in its loan portfolio outstandings when compared to last year. This strongly contributed to in increased net interest income. Falling interest rates and widening margins in the second half of 2001 and early 2002 also contributed to increased net interest margins. Net interest income for six months in 2002 was $4,403,000 compared to $3,389,000 in 2001.

Interest Earning Assets. Real estate related loans at June 30, 2002, 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 stabile but began to fall in the second half of the year and this drop in rates continued into 2001 and leveled off there. This interest rate decline allowed the Bank to significantly reprice its deposits and widen its margins. As rates have stabilized this year, margins have leveled off in the second quarter. If rates stay at their present level, the Bank may see some narrowing of margins as loans continue to reprice.

     The Bank’s investment portfolio is concentrated primarily in U.S. Government agencies and corporations. About 15% of the Bank’s investment portfolio re-prices in one year. The Bank’s Available-for-Sale portfolio has a market value of about $1,010,000 greater than book value.

Non-interest Earning Assets. Non-interest earning assets accounted for 7% of total assets on June 30, 2002, and primarily consisted of cash and due from banks, equipment and branches, and accrued interest receivable.

Funding Sources. The primary source of funds for the Bank’s lending and investment activities is deposits. At June 30, 2002 the Bank’s total deposits were $162.3 million plus $16.9 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 16% of its deposits in NOW Accounts and 69% of its deposits in Savings, MMA’s and CD deposits. Despite a high concentration of certificates of deposit, the Bank does not anticipate the maturity of such certificates to affect the Bank’s liquidity, as management believes that the high concentration was primarily due to customer relationships and not higher than market rates. The Bank is not in the practice of paying above market rates on deposits.

Non-interest Income. The Bank’s non-interest income for the six month period ended June 30, 2002 and was $842,000 including $419,000 from its Trust Department and Investment Sales areas. Periodic security transactions generate investment gains or losses and are primarily a result of tax

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management considerations and liquidity requirements. The bank had no security gains in 2002. The other significant items of non-interest income represented service charges on deposit accounts and merchant credit card account income.

Non-interest Expense. The Bank’s non-interest expense for the six month period ended June 30, 2002 was $3,311,000 including $2,010,000 of salaries and employee benefits. The Bank’s occupancy and equipment expenses for the period ended June 30, 2002 were $557,000. Non-interest expense was up from $3,031,000 in 2001. The increase in expense is primarily due to growth in the employee base and increased payments into the Employee Incentive Plan due to the increased profits of the bank.

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 $189,000 was charged to operating expenses for the six month period ended June 30, 2002. The Bank had net charge offs during this period of $65,000. The Bank has a total of $1,670,000 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 real loan on non-accrual at June 30, 2002 totaling $1,350,000. Where appropriate, the Bank makes specific reserves for future losses on non-performing loans. The Bank has no specific reserves established at June 30, 2002.

     The bank also had no other real estate owned at June 30,2002.

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

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primary capital ratio of capital-to-assets of 4%. Primary capital includes the Bank’s stockholders’ equity, subordinated debt, and the allowance for credit losses. At June 30, 2002, the Bank’s primary capital ratio was approximately 9.5%. In 1991, the Comptroller began evaluating banks’ capital on a risk basis i.e. more capital will be required for commercial loans than for residential real estate loan and even less will be required for government bonds. The Comptroller will require a minimum of an 8% capital ratio under this risk based method. Currently the Bank has a risk based capital ratio in excess of 12.9 %.

Liquidity. Management of the Bank continually evaluates its liquidity position. Management believes that the Bank’s investment portfolio, when combined with interest bearing bank balances and Fed Funds sold, provides adequate liquidity to meet the Bank’s needs. As noted in “Funding Sources” above, management believes that the high concentration of time deposits is primarily due to customer relationships and not to higher-than-market rates and, thus, do not present any unusual liquidity risk. In addition, the bank has established borrowing lines with correspondent banks, and with the Federal Home Loan Bank to cover liquidity needs.

Impact of Inflation and Changing Prices. Unlike most industrial companies, virtually all of the Bank’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Bank’s performance than do the effects of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services, since such prices are affected by inflation. In the current interest rate environment, liquidity and the maturity structure of a financial institution’s assets and liabilities are also critical to 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 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 $4,517,000 at June 30, 2002 representing 12% of the investment securities portfolio.

     The Bank moderates its liquidity needs by maintaining short term borrowing lines with several regional banks. At June 30, 2002, the Bank had lines of credit established with other banking institutions totaling $25,400,000.

     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 of $100,000 or more, outstanding at June 30, 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 June 30, 200. For the first year, interest-sensitive assets exceed liabilities by $3,496,000. Over the following two years, liabilities re-price faster than assets. The excess of interest-bearing liabilities over interest-earning assets for the one-to-three year period is primarily related to the longer maturities of CD’s and NOW and MMA accounts that are regarded as much less rate sensitive.

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As of June 30
(thousands of dollars)

     The primary interest sensitive assets and liabilities in the one-year maturity range are loans and time deposits. Trying to minimize this gap while maintaining earnings is a continual challenge in a changing interest rate environment and one of the objectives of the Bank’s asset/liability management strategy.

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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

	a)	Plan of acquisition, reorganization, arrangement, liquidation, or succession. — None
	b)	Articles of incorporation and by-laws.
		1)		A copy of the Amended and Restated Articles of Incorporation of the Registrant is included as Exhibit 3.A to the Registration Statement.
		2)		A copy of the Bylaws of the Registrant is included as Exhibit 3.B to this Registration Statement.
	c)	Instruments defining the rights of securities holders, including indentures.
		None
	d)	Published report regarding matters submitted to vote of security holders.
		None

		FIRST NATIONAL BANCSHARES, INC.
		/s/ Glen W. Fausset 08/08/2001
		Glen W. Fausset President and Director