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FORM 10-Q

U.S. SECURITIES AND EXCANGE COMMISSION

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

1^ST 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 June 30, 2003

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PART I. FINANCIAL INFORMATION

     Item 1. Financial Statements

FIRST NATIONAL BANCSHARES, INC.
Consolidated Balance Sheet

Assets (000’s)

** Condensed from audited financial

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Liabilities and Stockholders’ Equity (000’s)

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FIRST NATIONAL BANCSHARES, INC

Statement of Income (unaudited)
For the Period January 1 through June 30 (000’s)

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COMPREHENSIVE INCOME
(unaudited) (000’s)
For the Period January 1 through June 30

Under FASB Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” the Company is required to report a measure of all changes in equity, not only reflecting net income but certain other changes as well. At September 30, 2002 and 2001, comprehensive income was as follows:

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STATEMENTS OF CASH FLOWS
(unaudited) (000’s)
For the Period January 1 through June 30 (000’s)

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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, 2002.

Results for the six month period ended June 30, 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 Bank has periodically opened additional branches in Manatee County and now has five full service locations. The bank also opened a Trust Department in March of 1995. Earlier this year, the Bank also opened a loan production office in downtown Sarasota. The Bank, as a local independent bank, follows a philosophy of developing its equity and deposit base and focusing its lending activities within its community. The Bank’s underlying lending policy has been and is anticipated to continue being directed toward better-than-normal credit risks.

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

     The following discussion and analysis is based on the Holding Company’s financial condition and results of operations for the period from January 1, 2003 through June 30, 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 half of 2003 were down $42,000 or 3% compared to earnings in the same period last year as direct result of operating expenses rising faster than net interest income. This is directly related to increased staffing in the loan production area in an effort to grow the loan portfolio going forward. As a result, operating expenses increased by $416,000 with about half of that coming from increased employee expenses. The Bank’s contribution of $64,000 to loan loss reserve was $125,000 lower than last year and due to slower loan growth.

     Second quarter earnings mirrored the year to date earnings, with 2003 quarterly earnings at $598,000 compared to $659,000 in the second quarter of 2002. Operating expenses increased $236,000 in the second quarter of 2003 when compared to 2002. Again, the major component of this was increased salary expense in the loan production area.

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

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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, 2003, the Bank’s loan portfolio had a high ratio of repriceability within one year.

     The Bank had modest growth in its loan portfolio outstandings when compared to last year. This contributed to in increased net interest income. Falling interest rates and widening margins in the second half of 2002 and early 2003 also contributed to increased net interest margins. Net interest income for six months in 2003 was up by $54,000 compared to 2002 while second quarter net interest income in 2003 was down by $17,000 when compared to 2002.

Interest Earning Assets. Real estate related loans at June 30, 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 2001 and leveled off there. This interest rate decline allowed the Bank to significantly reprice its deposits and widen its margins. Rates continued to fall in 2002 and the first quarter of 2003. The bank maintained its margins during the first quarter but saw some narrowing of margins in the second quarter as rates leveled out and loan repricing began to catch up with the faster deposit repricing.

     The Bank’s investment portfolio is concentrated primarily in U.S. Government agencies and corporations. About 13% of the Bank’s investment portfolio re-prices in one year. The Bank’s Available-for-Sale portfolio has a market value of about $941,000 greater than book value.

Non-interest Earning Assets. Non-interest earning assets accounted for 7% of total assets on June 30, 2003, 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, 2003 the Bank’s total deposits were $186.5 million plus $18.4 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 17% of its deposits in NOW Accounts and 66% 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, 2003 was $1,011,000 including $449,000 from its Trust Department and Investment Sales areas. These are up from $842,000 and $419,000 last year. For the second quarter, non-interest income was $510,000, up from $435,000 last year.

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     Periodic security transactions generate investment gains or losses and are primarily a result of tax management considerations and liquidity requirements. The bank had no security gains in the first half or 2002 but had $83,000 in gains in the first half of 2003 of which $29,000 occurred in the second quarter.

     The other significant items of non-interest income represented service charges on deposit accounts and merchant credit card account income.

Non-interest Expense. The Bank’s non-interest expense for the six month period ended June 30, 2003 was $3,727,000 including $2,235,000 of salaries and employee benefits. The Bank’s occupancy and equipment expenses for the period ended June 30, 2003 were $595,000. Non-interest expense was up from $3,311,000 in 2002. The increase in expense is primarily due to growth in the loan production area of the bank. Non-interest expense was also up proportionally in the second quarter rising from $1,684,000 in 2002 to $1,920,000 in 2003.

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 $64,000 was charged to operating expenses for the six month period ended June 30, 2003. The Bank had net charge offs during this period of $42,000. This compares to an expense of $189,000 in 2002 after net charge-offs of $65,000. The Bank has a total of $1,726,000 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 two residential real estate loans on non-accrual at June 30, 2003 totaling $68,000. Where appropriate, the Bank makes specific reserves for future losses on non-performing loans. The Bank has no specific reserves established at June 30, 2003.

     The bank also had no other real estate owned at June 30, 2003.

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Capital Resources. In the normal course of business, the capital position of the Bank is reviewed by management and regulatory authorities. The Comptroller of the Currency has specified guidelines for purposes of evaluating a bank’s capital adequacy. Currently, banks must maintain a minimum primary capital ratio of capital-to-assets of 4%. Primary capital includes the Bank’s stockholders’ equity, subordinated debt, and the allowance for credit losses. At June 30, 2003, the Bank’s Tier 1 Capital Leverage Ratio was approximately 8.95%. In 1991, the Comptroller began evaluating banks’ capital on a risk basis i.e. more capital will be required for commercial loans than for residential real estate loan and even less will be required for government bonds. The Comptroller will require a minimum of an 8% capital ratio under this risk based method. Currently the Bank has a Tier 1 Risk- Based Capital Ratio of 12.15 %.

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

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

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Quantitative and Qualitative Disclosure About Market Risk

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

     Marketable investment securities, particularly those of shorter maturities, are a principal source of asset liquidity. Securities maturing, expected to be called, and amortization within one year or less amounted to $12,706,000 at June 30, 2003 representing 27% of the investment securities portfolio.

     The Bank moderates its liquidity needs by maintaining short term borrowing lines with several regional banks. At June 30, 2003, the Bank had lines of credit established with other banking institutions totaling $36,000,000 of which $32,000,000 was unused.

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

     Maturities of time certificates of deposit of $100,000 or more, outstanding at June 30, 2003, 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 March 31, 2003. For the first year, interest-sensitive assets exceed liabilities by $16,885,000. 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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     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

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2003, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2003, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

     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

31.1		Section 302 Certification of CEO
31.2		Section 302 Certification of CFO
32.1		Certification of CEO pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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32.2

Certification of CFO pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.