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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)
 [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 OR [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _____________to ___________________  FIRST NATIONAL BANKSHARES OF FLORIDA, INC. 
 Florida
    
    20-0175526(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 2150 Goodlette Road North, Naples, FL 34102   (239) 262-7600   (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) 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 for the past 90 days.
Yes [X]    No [  ] Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Exchange Act.
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. Class
    
    Outstanding at July 31, 2004Common Stock, $0.01 Par Value
    
    47,534,793 shares




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FIRST NATIONAL BANKSHARES OF FLORIDA, INC. AND SUBSIDIARIESFORM 10-Q
June 30, 2004INDEX PAGEPART I - FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    2Consolidated Statements of Income
    
    
    3Consolidated Statements of Cash Flows
    
    
    4Notes to Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosure of Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    29PART II - OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 2. Changes in Securities
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits and Reports on Form 8-K
    
    
    30Signatures
    
    
    32Exhibits
    
    
    33EX-10.1 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND GARY L. TICEEX-10.2 CHANGE OF CONTROL AGREEMENT BETWEEN THE COMPANY AND GARY L. TICEEX-10.3 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND KEVIN C. HALEEX-10.4 CHANGE OF CONTROL AGREEMENT BETWEEN THE COMPANY AND KEVIN C. HALEEX-10.5 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND CC COGHILLEX-10.6 CHANGE OF CONTROL AGREEMENT BETWEEN THE COMPANY AND CC COGHILLEX-10.7 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND GARRETT S. RICHTEREX-10.8 CHANGE OF CONTROL AGREEMENT BETWEEN THE COMPANY AND GARRETT S. RICHTEREX-10.9 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND ROBERT T. REICHERTEX-10.10 CHANGE OF CONTROL AGREEMENT BETWEEN THE COMPANY AND ROBERT T. REICHERTEX-10.11 AMENDED AND RESTATED BASIC RETIREMENT PLANEX-10.12 DIRECTORS' CHANGE OF CONTROL PLANEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32 SECTION 906 CERTIFICATION OF CEO & CFO
  1




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FIRST NATIONAL BANKSHARES OF FLORIDA, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 June 30,
    
    December 31,2004
    
    2003ASSETSCash and due from banks
    
    $
    89,207
    
    
    $
    99,664Interest bearing deposits with banks
    
    
    159
    
    
    
    5,128Federal funds sold
    
    
    854
    
    
    
    866Mortgage loans held for sale
    
    
    12,827
    
    
    
    15,153Securities available for sale
    
    
    879,952
    
    
    
    764,543Securities held to maturity (fair
value of $12,531)
    
    
    
    
    
    
    12,029Loans, net of unearned income of $727 and $774
    
    
    2,677,862
    
    
    
    2,449,382Allowance for loan losses
    
    
    (29,705
    )
    
    
    (28,104
    )NET LOANS
    
    
    2,648,157
    
    
    
    2,421,278Premises and equipment
    
    
    124,698
    
    
    
    120,117Goodwill
    
    
    173,950
    
    
    
    173,729Other assets
    
    
    157,515
    
    
    
    138,629TOTAL ASSETS
    
    $
    4,087,319
    
    
    $
    3,751,136LIABILITIESDeposits:Non-interest bearing
    
    $
    545,882
    
    
    $
    451,837Interest bearing
    
    
    2,431,729
    
    
    
    2,268,152TOTAL DEPOSITS
    
    
    2,977,611
    
    
    
    2,719,989Short-term borrowings
    
    
    388,724
    
    
    
    354,051Long-term debt
    
    
    326,196
    
    
    
    271,000Other liabilities
    
    
    36,385
    
    
    
    40,981TOTAL LIABILITIES
    
    
    3,728,916
    
    
    
    3,386,021STOCKHOLDERS EQUITYCommon stock
 $0.01 par value

 Authorized - 500,000,000 shares
Issued - 47,878,508 and 46,317,300 shares
    
    
    479
    
    
    
    463Additional paid-in capital
    
    
    369,828
    
    
    
    341,615Retained earnings
    
    
    11,174
    
    
    
    21,139Accumulated other comprehensive income
    
    
    (12,195
    )
    
    
    1,898Treasury stock  363,088 shares at cost
    
    
    (6,865
    )
    
    
    Deferred stock compensation
    
    
    (4,018
    )
    
    
    TOTAL STOCKHOLDERS EQUITY
    
    
    358,403
    
    
    
    365,115TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    4,087,319
    
    
    $
    3,751,136
 Note: The Balance Sheet at December 31, 2003 has been derived from the audited
financial statements at that date. See accompanying Notes to Consolidated Financial Statements 2




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FIRST NATIONAL BANKSHARES OF FLORIDA, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003INTEREST INCOMELoans, including fees
    
    $
    36,358
    
    
    $
    35,404
    
    
    $
    71,704
    
    
    $
    68,388Securities:Taxable
    
    
    8,001
    
    
    
    7,328
    
    
    
    15,135
    
    
    
    11,291Nontaxable
    
    
    732
    
    
    
    717
    
    
    
    1,427
    
    
    
    1,499Dividends
    
    
    315
    
    
    
    350
    
    
    
    647
    
    
    
    564Other
    
    
    8
    
    
    
    96
    
    
    
    24
    
    
    
    116TOTAL INTEREST INCOME
    
    
    45,414
    
    
    
    43,895
    
    
    
    88,937
    
    
    
    81,858INTEREST EXPENSEDeposits
    
    
    8,726
    
    
    
    10,201
    
    
    
    17,068
    
    
    
    18,851Short-term borrowings
    
    
    481
    
    
    
    617
    
    
    
    935
    
    
    
    1,149Long-term debt
    
    
    2,638
    
    
    
    1,250
    
    
    
    4,761
    
    
    
    2,047TOTAL INTEREST EXPENSE
    
    
    11,845
    
    
    
    12,068
    
    
    
    22,764
    
    
    
    22,047NET INTEREST INCOME
    
    
    33,569
    
    
    
    31,827
    
    
    
    66,173
    
    
    
    59,811Provision for loan losses
    
    
    875
    
    
    
    1,828
    
    
    
    2,275
    
    
    
    3,560NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    
    
    32,694
    
    
    
    29,999
    
    
    
    63,898
    
    
    
    56,251NON-INTEREST INCOMEService charges
    
    
    4,974
    
    
    
    4,891
    
    
    
    9,872
    
    
    
    8,890Insurance premiums, commissions
and fees
    
    
    8,894
    
    
    
    6,558
    
    
    
    16,574
    
    
    
    12,635Securities commissions and fees
    
    
    1,206
    
    
    
    1,096
    
    
    
    2,322
    
    
    
    1,959Trust
    
    
    855
    
    
    
    681
    
    
    
    1,669
    
    
    
    1,304Gain on sale of securities
    
    
    
    
    
    
    102
    
    
    
    163
    
    
    
    413Gain on sale of mortgage loans
    
    
    766
    
    
    
    2,772
    
    
    
    1,786
    
    
    
    4,698Other
    
    
    1,061
    
    
    
    1,423
    
    
    
    2,080
    
    
    
    2,728TOTAL NON-INTEREST INCOME
    
    
    17,756
    
    
    
    17,523
    
    
    
    34,466
    
    
    
    32,62750,450
    
    
    
    47,522
    
    
    
    98,364
    
    
    
    88,878NON-INTEREST EXPENSESSalaries and employee benefits
    
    
    19,857
    
    
    
    19,154
    
    
    
    39,351
    
    
    
    35,920Net occupancy
    
    
    2,732
    
    
    
    2,694
    
    
    
    5,369
    
    
    
    4,836Equipment
    
    
    2,644
    
    
    
    2,234
    
    
    
    5,375
    
    
    
    4,063Amortization of intangibles
    
    
    345
    
    
    
    305
    
    
    
    690
    
    
    
    583Merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,014Other
    
    
    7,783
    
    
    
    7,145
    
    
    
    15,105
    
    
    
    13,365TOTAL NON-INTEREST EXPENSES
    
    
    33,361
    
    
    
    31,532
    
    
    
    65,890
    
    
    
    59,781INCOME BEFORE INCOME TAXES
    
    
    17,089
    
    
    
    15,990
    
    
    
    32,474
    
    
    
    29,097Income taxes
    
    
    5,798
    
    
    
    5,404
    
    
    
    10,834
    
    
    
    9,792NET INCOME
    
    $
    11,291
    
    
    $
    10,586
    
    
    $
    21,640
    
    
    $
    19,305NET INCOME PER COMMON SHARE*:Basic
    
    $
    .24
    
    
    $
    .22
    
    
    $
    .45
    
    
    $
    .41Diluted
    
    $
    .23
    
    
    $
    .22
    
    
    $
    .44
    
    
    $
    .40CASH DIVIDENDS PER COMMON SHARE*
    
    $
    .07
    
    
    
    N/A
    
    
    $
    .14
    
    
    
    N/A
 *Restated
to reflect the 3 percent stock dividend declared on
April 19, 2004. 



See accompanying Notes to Consolidated Financial Statements 3




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FIRST NATIONAL BANKSHARES OF FLORIDA, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedJune 30,2004
    
    2003OPERATING ACTIVITIESNet income
    
    $
    21,640
    
    
    $
    19,305Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    8,257
    
    
    
    9,663Provision for loan losses
    
    
    2,275
    
    
    
    3,560Deferred taxes
    
    
    (3,204
    )
    
    
    (1,642
    )Net gain on sale of securities
    
    
    (163
    )
    
    
    (413
    )Net gain on sale of mortgage loans
    
    
    (1,786
    )
    
    
    (4,698
    )Proceeds from sale of mortgage loans
    
    
    137,634
    
    
    
    210,892Mortgage loans originated for sale
    
    
    (133,523
    )
    
    
    (210,677
    )Net change in:Interest receivable
    
    
    (399
    )
    
    
    223Interest payable
    
    
    931
    
    
    
    (658
    )Other, net
    
    
    (2,325
    )
    
    
    733Net cash flows from operating activities
    
    
    29,337
    
    
    
    26,288INVESTING ACTIVITIESNet change in:Interest bearing deposits with banks
    
    
    4,969
    
    
    
    243Federal funds sold
    
    
    12
    
    
    
    6,027Loans
    
    
    (229,827
    )
    
    
    (165,233
    )Bank owned life insurance
    
    
    (10,400
    )
    
    
    Securities available for sale:Purchases
    
    
    (239,739
    )
    
    
    (486,426
    )Sales
    
    
    6,790
    
    
    
    321,630Maturities
    
    
    105,777
    
    
    
    189,290Securities held to maturity:Purchases
    
    
    
    
    
    
    Sales
    
    
    
    
    
    
    Maturities
    
    
    770
    
    
    
    2,956Increase in premises and equipment
    
    
    (9,850
    )
    
    
    (15,321
    )Net cash flows from investing activities
    
    
    (371,498
    )
    
    
    (146,834
    )FINANCING ACTIVITIESNet change in:Non-interest bearing deposits, savings and NOW
    
    
    161,090
    
    
    
    154,637Time deposits
    
    
    96,532
    
    
    
    (17,027
    )Short-term borrowings
    
    
    34,673
    
    
    
    (6,610
    )Increase in long-term debt
    
    
    130,774
    
    
    
    Decrease in long-term debt
    
    
    (75,578
    )
    
    
    (13,186
    )Net acquisition of treasury stock
    
    
    (9,287
    )
    
    
    Capital contributions
    
    
    
    
    
    
    17,518Cash dividends paid
    
    
    (6,500
    )
    
    
    (13,160
    )Net cash flows from financing activities
    
    
    331,704
    
    
    
    122,172NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
    
    
    (10,457
    )
    
    
    1,626Cash and due from banks at beginning of period
    
    
    99,664
    
    
    
    117,359CASH AND DUE FROM BANKS AT END OF PERIOD
    
    $
    89,207
    
    
    $
    118,985
 See accompanying Notes to Consolidated Financial Statements 4




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First National Bankshares
of Florida, Inc. and Subsidiaries 
 Notes to Consolidated Financial Statements
 Summary of Significant Accounting Policies Business: First National Bankshares of Florida, Inc. (the Company) was
incorporated under the laws of the state of Florida on August 12, 2003. On
January 1, 2004, the Company was spun-off from F.N.B. Corporation (F.N.B.).
The Company is a diversified financial services company headquartered in
Naples, Florida. The Company owns and operates First National Bank of Florida,
(a community bank); Roger Bouchard Insurance, Inc. (an insurance agency); and
First National Wealth Management Company (a national trust company). The
Company has full-service offices located throughout southwest and central
Florida. The spin-off resulted in the division of certain existing corporate
support functions between the two resulting entities. Corporate expenses
included in the Companys financial results for periods prior to the spin-off
represent an allocation of F.N.B.s corporate expense to the Companys
subsidiaries. This allocation is based on a specific review to identify costs
incurred for the benefit of the subsidiaries of the Company and in managements
judgment results in a reasonable allocation of such costs. The Company was
allocated $5.8 million of overhead costs related to shared administrative and
support functions for the six months ended June 30, 2003. In connection with the spin-off from F.N.B., the Company incurred
approximately $10.5 million in restructuring expenses during the fiscal year
ended December 31, 2003. These expenses consisted of $5.3 million of early
retirement expenses and involuntary separation costs, $4.2 million in
professional fees, and approximately $1.0 million in fixed asset write-off and
other expenses connected with the separation. On June 30, 2004, a liability
associated with the spin-off of approximately $2.6 million remained. This
liability primarily consists of amounts due to terminated employees under
various benefit plans and employment agreements. Continued payments to these
terminated employees will be made in accordance with the terms and provisions
of such benefit plans and employment agreements. The consolidated financial statements for periods prior to the effective
date of the spin-off included herein may not necessarily be indicative of the
results of operations, financial position and cash flows of the Company in the
future or had it operated as a separate, independent company during the periods
presented. Basis of Presentation: The consolidated financial statements include accounts of First National
Bank of Florida, Roger Bouchard Insurance, Inc., and First National Wealth
Management Company, all of which are wholly-owned by the Company. All
significant intercompany balances and transactions have been eliminated. The
financial condition and results of operations of acquisitions accounted for as
a purchase are included in the Companys financial statements from the date the
acquisition is completed. (See the Mergers and Acquisitions section of this
report). Certain prior year amounts have been reclassified to conform with current
year presentation. The reclassification had no impact on total assets,
liabilities, stockholders equity, net income or cash flows. Common Stock Dividend: On April 19, 2004, the Companys Board of Directors declared a 3 percent
common stock dividend payable on July 15, 2004 to shareholders of record as of
June 30, 2004. As a result of the stock dividend, the Company issued 1,383,837
shares of its common stock. The stock dividend increased additional paid in
capital and decreased retained 5




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earnings by $23.9 million, the market value of the shares issued. Per share
data included herein has been adjusted to reflect the stock dividend. Use of Estimates: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Preferred Securities of Unconsolidated Subsidiary Trust: On March 31, 2004, the Company acquired the common stock of First National
Bankshares Statutory Trust II (Issuer Trust), an unconsolidated subsidiary
trust. The Issuer Trust used the proceeds from the issuance of $25 million of
its preferred securities to third-party investors and common stock to acquire a
$25.8 million debenture issued by the Company. This debenture and certain
capitalized costs associated with the issuance of the preferred stock comprise
the Issuer Trusts only assets and the interest payments from the debentures
finance the distributions paid on the preferred securities. The Company
recorded the debenture in Long-term debt and its equity interest in the
business trust in Securities available for sale on the balance sheet. The
debenture and preferred securities bear interest at a floating rate equal to
the 3-month LIBOR plus 279 basis points. The Company has entered into agreements which, taken collectively, fully
and unconditionally guarantee the preferred securities of the Issuer Trust
subject to the terms of the guarantee. FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51, raised questions about whether trust
preferred securities issued by unconsolidated subsidiary trusts could be
treated as Tier 1 capital. On July 2, 2003, the Federal Reserve Board issued a
letter stating that trust preferred securities will continue to be included in
Tier 1 capital until notice is given to the contrary. As such, the debenture
issued to the Issuer Trust currently qualifies as Tier I capital under present
Federal Reserve Board guidelines. New Accounting Standards: In March 2004, the Securities and Exchange Commission (SEC) issued SAB
105, Application of Accounting Principles to Loan Commitments provides
registrants the SECs view on recording the fair value of loan commitments.
Under SAB 105, the fair value of loan commitments that are required to follow
derivative accounting under Statement of Financial Accounting Standard No. 133,
Accounting for Derivative Instruments and Hedging Activities",should not
consider the expected future cash flows related to the associated servicing of
the future loan. The staff believes that incorporating expected future cash
flows related to the associated servicing of the loan essentially results in
the immediate recognition of a servicing asset, which is only appropriate once
the servicing asset has been contractually separated from the underlying loan
by sale or by securitization of the loan with servicing retained. The
provisions of SAB 105 must be applied to loan commitments accounted for as
derivatives that are entered into after March 31, 2004. The Company does not
retain the right to service mortgage loans it originates for resale in the
secondary market and, as such, does not expect the application of this guidance
to have a material impact on its financial condition or results of operations. In December 2003, the Financial Accounting Standards Board (FASB) issued
a revision to FAS 132, Employers Disclosures about Pensions and Other
Post-Retirement Benefits. The revision retains the disclosures required by
the original standard and requires additional disclosures about the assets,
obligations, cash flows and net periodic benefit costs of defined benefit
pension and post-retirement plans. In addition, the revised standard requires
interim period disclosures of the components of 6




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net periodic benefit costs. The required disclosures of the revised standard
are provided in the Retirement Plan footnote. In December 2003, the AICPA issued Statement of Position (SOP) 03-3
Accounting for Certain Loans and Debt Securities Acquired in a Transfer. SOP
03-3 prohibits the carryover of an allowance for loan losses on loans acquired
in a purchase business combination. Increases in expected cash flows to be
collected from the contractual cash flows will be recognized as an adjustment
of the loans yield over its remaining life, while decreases in expected cash
flows will be recognized as an impairment. This accounting guidance will be
effective for loans acquired in fiscal years subsequent to December 15, 2004.
The Company does not anticipate this new accounting standard to have a material
impact on its financial condition or results of operations. Mergers and Acquisitions: On
June 30, 2004, the Company signed a definitive agreement to
acquire First Bradenton Bank (Bradenton), a state-chartered
commercial bank located in Bradenton, Florida. Under the terms of the
definitive agreement, the Company will exchange shares of its common stock for
the outstanding common stock of Bradenton in a tax-free merger of Bradenton with and into First National Bank of
Florida. Based upon
the Companys closing price on June 29, 2004, of $18.91 per share, the
transaction has a total value of approximately $8.3 million, representing 1.7
times Bradentons book value. The merger is scheduled to close in the fourth
quarter of 2004. On March 22, 2004, the Company signed a definitive agreement to acquire
Southern Community Bancorp (Southern), a bank holding
company located in Orlando, Florida. Under the terms of the definitive
agreement, the Company will exchange 1.6686 shares of its common stock for each
share of Southern common stock in a tax-free merger of
Southern with and into the Company. The exchange ratio is
subject to reduction if the average closing price of the Companys common stock
exceeds $19.42 per share over a specified period prior to the merger. In order
to mitigate the dilutive impact of Southerns stock options, the
Company has announced that it may
purchase up to 1.1 million of its own common shares in the open market. The
common share repurchase has been funded through the $25.0 million in trust
preferred securities issued on March 31, 2004. The merger, which is scheduled
to close in the third quarter of 2004, is subject to shareholder and regulatory
approvals. On July 1, 2003, Roger Bouchard Insurance, Inc. completed its acquisition
of Lupfer-Frakes, Inc. (Lupfer) an independent insurance agency located in
Central Florida. Roger Bouchard Insurance, Inc. paid $10.2 million in exchange
for all of the outstanding common stock of Lupfer. The transaction, which was
accounted for as a purchase, resulted in the recognition of $8.5 million in
goodwill and $1.3 million in customer and renewal lists. The value assigned to
the customer and renewal lists will be amortized over a ten-year period.
Lupfers results of operations have been reflected in the Companys results
beginning in the third quarter of 2003. On March 31, 2003, F.N.B. completed its acquisition of Charter Banking
Corp. (Charter), a bank holding company headquartered in Tampa, Florida, with
assets having a fair value of $795.6 million. As a result, Charter became a
wholly-owned subsidiary of F.N.B. The acquisition of Charter allowed F.N.B. to
access the Hillsborough county market and to expand its presence in the
Pinellas county market. Charters only subsidiary was Southern Exchange Bank
(SEB). In exchange for all of the outstanding common stock of Charter, F.N.B.
paid $150.2 million. F.N.B. funded this acquisition through the issuance of
$125.0 million of trust preferred securities and $25.2 million from F.N.Bs
existing lines of credit with several major domestic banks. The transaction,
which was accounted for as a purchase, resulted in the recognition of
approximately $103.0 million in nondeductible goodwill and $1.1 million in core
deposit intangibles. The core deposit intangible will be amortized over a ten
year period. The fair market value assigned to loans, investments, fixed
assets, deposits and long-term debt was $169.8 million, $461.5 million, $40.8
million, $481.5 million and $154.5 million, respectively. The fair market value
of interest earning assets and interest bearing liabilities was based on either
quoted market values or discounting future cash flows using market rates as of
March 31, 2003. These purchase adjustments will be amortized or 7




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accreted in future periods over the estimated lives of the interest earning
assets and interest bearing liabilities. Current third party independent
appraisals were used to value the land and buildings included in fixed assets.
Merger related costs totaling $1.2 million were incurred in connection with
this acquisition, which was related to employment obligations. Charter was
merged into F.N.B. Corporation on August 22, 2003. SEBs results of operations have been reflected in the Companys results
since the acquisition date of March 31, 2003. Southern Exchange Bank was merged
into First National Bank of Florida on October 10, 2003 as part of an internal
reorganization. Subsequent Event: On August 1, 2004, the Company signed a definitive agreement and plan of
merger which provides for the acquisition of the Company by Fifth Third Bancorp
(Fifth Third), an Ohio-based bank holding company. Under the terms of the
merger agreement, which has been approved by both companies board of
directors, each outstanding share of the Companys common stock will be
exchanged for 0.5065 shares of Fifth Third common stock in a tax-free
reorganization under the Internal Revenue Code. The merger, which is expected
to close during the first quarter of 2005, is subject to approval by
shareholders of the Company, receipt of banking regulatory approvals and
satisfaction of certain other conditions. Securities The amortized cost and fair value of securities are as follows (in
thousands): Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedSecurities available for sale:
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueJune 30, 2004U.S. Treasury and other U.S.
Government agencies and
corporations
    
    $
    155,832
    
    
    $
    1,047
    
    
    $
    (2,824
    )
    
    $
    154,055Mortgage-backed securities of
U.S. Government agencies
    
    
    377,780
    
    
    
    622
    
    
    
    (8,958
    )
    
    
    369,444Other mortgage-backed securities
    
    
    229,759
    
    
    
    576
    
    
    
    (6,896
    )
    
    
    223,439States of the U.S. and political
subdivisions
    
    
    81,175
    
    
    
    581
    
    
    
    (1,196
    )
    
    
    80,560Other debt securities
    
    
    25,555
    
    
    
    505
    
    
    
    (406
    )
    
    
    25,654Total Debt Securities
    
    
    870,101
    
    
    
    3,331
    
    
    
    (20,280
    )
    
    
    853,152Equity securities
    
    
    26,794
    
    
    
    12
    
    
    
    (6
    )
    
    
    26,800$
    896,895
    
    
    $
    3,343
    
    
    $
    (20,286
    )
    
    $
    879,952
 Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    Fair ValueDecember 31, 2003U.S. Treasury and other U.S.
Government agencies and
corporations
    
    $
    135,550
    
    
    $
    2,083
    
    
    $
    (300
    )
    
    $
    137,333Mortgage-backed securities of
U.S. Government agencies
    
    
    359,425
    
    
    
    2,518
    
    
    
    (2,256
    )
    
    
    359,687Other mortgage-backed securities
    
    
    156,359
    
    
    
    1,129
    
    
    
    (1,775
    )
    
    
    155,713States of the U.S. and political
Subdivisions
    
    
    65,184
    
    
    
    2,370
    
    
    
    (4
    )
    
    
    67,550Other debt securities
    
    
    19,636
    
    
    
    851
    
    
    
    
    
    
    
    20,487Total Debt Securities
    
    
    736,154
    
    
    
    8,951
    
    
    
    (4,335
    )
    
    
    740,770Equity securities
    
    
    23,768
    
    
    
    13
    
    
    
    (8
    )
    
    
    23,773$
    759,922
    
    
    $
    8,964
    
    
    $
    (4,343
    )
    
    $
    764,543
 8




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##### Table of Contents



Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedSecurities held to maturity:
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueDecember 31, 2003Mortgage-backed securities of U.S.
Government agencies
    
    
    691
    
    
    
    15
    
    
    
    
    
    
    
    706States of the U.S. and political
subdivisions
    
    
    11,338
    
    
    
    492
    
    
    
    (5
    )
    
    
    11,825$
    12,029
    
    
    $
    507
    
    
    $
    (5
    )
    
    $
    12,531
 The Company transferred all securities held to maturity into securities
available for sale during the second quarter of 2004 in order to improve
operational efficiency and enhance the management of its asset/liability
management position. At the time of the transfer, the securities transferred
had an amortized cost of $11.3 million and a net unrealized gain of $262
thousand. At June 30, 2004 and December 31, 2003, securities with a carrying value
of $192.1 million, and $161.9 million, respectively, were pledged to secure
public deposits, trust deposits and for other purposes as required by law.
Securities with a carrying value of $345.7 million, and $270.6 million at June
30, 2004 and December 31, 2003, respectively, were pledged as collateral for
short-term borrowings. The age of gross unrealized losses and fair value of available for sale
securities by investment category as of June 30, 2004 were as follows: Less than 12 months
    
    Greater than 12 months
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealizedvalue
    
    losses
    
    value
    
    losses
    
    value
    
    lossesU.S. Treasury and other U.S.
government agencies and
corporations
    
    $
    107,811
    
    
    $
    (2,824
    )
    
    $
    
    
    
    $
    
    
    
    $
    107,811
    
    
    $
    (2,824
    )Mortgage-backed securities of
U.S. government agencies
    
    
    326,872
    
    
    
    (8,958
    )
    
    
    
    
    
    
    
    
    
    
    326,872
    
    
    
    (8,958
    )Other mortgage-backed securities
    
    
    190,736
    
    
    
    (6,896
    )
    
    
    
    
    
    
    
    
    
    
    190,736
    
    
    
    (6,896
    )State of the U.S. and political
subdivisions
    
    
    17,648
    
    
    
    (1,196
    )
    
    
    
    
    
    
    
    
    
    
    17,648
    
    
    
    (1,196
    )Other debt securities
    
    
    7,374
    
    
    
    (406
    )
    
    
    
    
    
    
    
    
    
    
    7,374
    
    
    
    (406
    )Equity securities
    
    
    55
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    (6
    )Total
    
    $
    650,496
    
    
    $
    (20,286
    )
    
    $
    
    
    
    $
    
    
    
    $
    650,496
    
    
    $
    (20,286
    )
 The Company does not believe unrealized losses, individually or in the
aggregate, as of June 30, 2004 represent an other-than-temporary impairment.
The unrealized losses are primarily a result of changes in interest rates and
will not prohibit the Company from receiving its contractual interest and
principal payments. The Company has the ability and intent to hold these
securities for a period necessary to recover the amortized cost. 9




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##### Table of Contents



Loans Following is a summary of loans (in thousands): December 31,June 30, 2004
    
    2003Real Estate:Residential
    
    $
    879,819
    
    
    $
    810,790Commercial
    
    
    1,139,781
    
    
    
    1,017,291Construction
    
    
    359,398
    
    
    
    311,266Installment loans to individuals
    
    
    75,117
    
    
    
    77,660Commercial, financial and agricultural
    
    
    222,296
    
    
    
    227,117Lease financing
    
    
    2,178
    
    
    
    6,032Unearned income
    
    
    (727
    )
    
    
    (774
    )$
    2,677,862
    
    
    $
    2,449,382
 The loan portfolio consists principally of loans to individuals and small-
and medium-sized businesses within the Companys primary market area of
southwest and central Florida. As of June 30, 2004 and December 31, 2003, no concentrations of loans
exceeding 10% of total loans existed which were not disclosed as a separate
category of loans. Non-Performing Assets Following is a summary of non-performing assets (in thousands): June 30, 2004
    
    December 31, 2003Non-accrual loans
    
    $
    4,332
    
    
    $
    5,521Restructured loans
    
    
    
    
    
    
    Total Non-Performing Loans
    
    
    4,332
    
    
    
    5,521Other real estate owned
    
    
    440
    
    
    
    Total Non-Performing Assets
    
    $
    4,772
    
    
    $
    5,521
 Loans past due 90 days or more, on which interest accruals continue, were
$364,000, and $163,000, at June 30, 2004 and December 31, 2003, respectively. Allowance for Loan Losses Following is an analysis of changes in the allowance for loan losses (in
thousands): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Balance at beginning of
year
    
    $
    29,141
    
    
    $
    24,573
    
    
    $
    28,104
    
    
    $
    21,421Addition from acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,506Charge-offs
    
    
    (612
    )
    
    
    (1,137
    )
    
    
    (1,206
    )
    
    
    (2,475
    )Recoveries
    
    
    301
    
    
    
    482
    
    
    
    532
    
    
    
    734Net Charge-offs
    
    
    (311
    )
    
    
    (655
    )
    
    
    (674
    )
    
    
    (1,741
    )Provision for loan losses
    
    
    875
    
    
    
    1,828
    
    
    
    2,275
    
    
    
    3,560Balance at end of period
    
    $
    29,705
    
    
    $
    25,746
    
    
    $
    29,705
    
    
    $
    25,746
 10




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##### Table of Contents



Deposits Following is a summary of deposits (in thousands): June 30, 2004
    
    December 31, 2003Non-interest bearing
    
    $
    545,882
    
    
    $
    451,837Interest bearing checking
    
    
    533,522
    
    
    
    503,064Savings
    
    
    880,264
    
    
    
    843,677Certificates of deposit and other
time deposits
    
    
    1,017,943
    
    
    $
    921,411$
    2,977,611
    
    
    $
    2,719,989
 Time deposits of $100,000 or more were $486.4 million and $415.8 million
at June 30, 2004 and December 31, 2003. Short-Term Borrowings Following is a summary of short-term borrowings (in thousands): June 30, 2004
    
    December 31, 2003Securities sold under repurchase agreements
    
    $
    315,524
    
    
    $
    248,051Federal funds purchased
    
    
    43,200
    
    
    
    86,000Federal Home Loan Bank advances
    
    
    30,000
    
    
    
    20,000$
    388,724
    
    
    $
    354,051
 Long-Term Debt Following is a summary of long-term debt (in thousands): June 30, 2004
    
    December 31, 2003Federal Home Loan Bank advances
    
    $
    241,403
    
    
    $
    211,944Subordinated debentures
    
    
    84,012
    
    
    
    58,238Other long-term debt
    
    
    781
    
    
    
    818$
    326,196
    
    
    $
    271,000
 First National Bank of Florida has available credit with the Federal Home
Loan Bank of $609.5 million, of which $271.4 million or 44.5% was used as of
June 30, 2004. These advances are secured by residential real estate loans and
Federal Home Loan Bank Stock. Commitments, Credit Risk and Contingencies The Company has commitments to extend credit and standby letters of credit
which involve certain elements of credit risk in excess of the amount stated in
the consolidated balance sheet. The Companys exposure to credit loss in the
event of non-performance by the customer is represented by the contractual
amount of those instruments. Consistent credit policies are used by the
Company for both on- and off-balance sheet items. 11




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##### Table of Contents



Following is a summary of off-balance sheet credit risk information (in
thousands): June 30, 2004
    
    December 31, 2003Commitments to extend credit
    
    $
    925,527
    
    
    $
    717,079Standby letters of credit
    
    
    29,374
    
    
    
    34,842
 At June 30, 2004, funding of approximately 72% of the commitments to
extend credit is dependent on the financial condition of the customer. The
Company has the ability to withdraw such commitments at its discretion.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Based on managements credit
evaluation of the customer, collateral may be deemed necessary. Collateral
requirements vary and may include accounts receivable, inventory, property,
plant and equipment and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the
Company which may require payment at a future date. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loans to customers. Earnings Per Share Basic earnings per share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted earnings per common share is calculated by dividing net income by
the weighted average number of shares of common stock outstanding, assuming the
exercise of stock options and warrants. Such adjustments to the weighted
average number of shares of common stock are made only when such adjustments
dilute earnings per share. On the date of spin-off, F.N.B. stock options held by employees of the
Company were converted into stock options of the Company. Since the stock
options were converted after year end, it is not possible to estimate the
dilutive impact to the Company for periods prior to the distribution. The
conversion of the stock options provided the employees with a benefit similar
to that provided by the F.N.B. options. Therefore, the dilutive effect of the
stock options on the Companys prior periods weighted average shares
outstanding is assumed by applying the exchange ratio to the dilutive effect of
such stock options of F.N.B. In addition, F.N.B. had convertible preferred
stock outstanding until the preferred stock was redeemed in exchange for F.N.B.
common stock during the second quarter of 2003. As such, the dilutive effect
of F.N.B.s preferred stock on the Companys prior periods weighted average
shares outstanding is assumed by applying the exchange ratio to the dilutive
effect of such securities of F.N.B. The following tables set forth the computation of basic and diluted
earnings per share (in thousands, except share data): Three Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30,2004
    
    2003
    
    2004
    
    2003BasicNet income
    
    $
    11,291
    
    
    $
    10,586
    
    
    $
    21,640
    
    
    $
    19,305Average common shares
outstanding
    
    
    47,648,095
    
    
    
    47,450,845
    
    
    
    47,671,120
    
    
    
    47,436,211Earnings per share
    
    $
    .24
    
    
    $
    .22
    
    
    $
    .45
    
    
    $
    .41
 12




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30,2004
    
    2003
    
    2004
    
    2003DilutedEarnings applicable to
diluted earnings per share
    
    $
    11,291
    
    
    $
    10,586
    
    
    $
    21,640
    
    
    $
    19,305Average common shares outstanding
    
    
    47,648,095
    
    
    
    47,450,845
    
    
    
    47,671,120
    
    
    
    47,436,211Series A convertible
preferred stock
    
    
    
    
    
    
    16,207
    
    
    
    
    
    
    
    16,207Series B convertible
preferred stock
    
    
    
    
    
    
    2,272
    
    
    
    
    
    
    
    131,454Net effect of dilutive stock
options based on the treasury stock
method
    
    
    1,365,197
    
    
    
    826,896
    
    
    
    1,308,220
    
    
    
    713,33049,013,292
    
    
    
    48,296,220
    
    
    
    48,979,340
    
    
    
    48,297,202Earnings per share
    
    $
    .23
    
    
    $
    .22
    
    
    $
    .44
    
    
    $
    .40
 Cash Flow Information Following is a summary of supplemental cash flow information (in thousands): Six Months EndedJune 30,2004
    
    2003Cash paid for:Interest
    
    $
    21,833
    
    
    $
    22,705Income taxes
    
    
    11,043
    
    
    
    4,982Noncash Investing and Financing Activities:Acquisition of real estate in settlement of loans
    
    $
    440
    
    
    $
    339Transfer of securities from held to maturity to
available for sale
    
    
    11,269
    
    
    
    
 Stock-Based Compensation Under the Companys Amended and Restated 2003 Incentive Plan, the
Company has the ability to issue stock (subject to certain restrictions as
determined by the board of directors), stock options or stock appreciation
rights to its employees. The following table summarizes information about the
non-qualified stock options granted during the second quarter of 2004: Options granted
    
    
    1,217,080Weighted average
exercise price
    
    $
    16.89-18.58Vesting period
    
    6 months
 The exercise price of the stock options granted during the second quarter
of 2004 was equal to or exceeded the market price of the underlying stock on
the date of grant. Therefore, no compensation expense is recognized in
accordance with APB Opinion 25, Accounting for Stock Issued to Employees. Effective on the date of the spin-off, all outstanding F.N.B. options held
by the Companys employees were converted to options to purchase the Companys
common stock. No compensation expense was recognized as a result of the
conversion. The following table 13




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##### Table of Contents



shows pro-forma net income and earnings per share assuming the Companys stock
options had been expensed for the three and six months period ended June 30,
2004 based on the fair value of the options along with significant assumptions
used in the Black-Scholes option pricing model (dollars in thousands, except
per share data). Three Months
    
    Six MonthsJune 30, 2004
    
    Ended
    
    EndedNet income (as reported)
    
    $
    11,291
    
    
    $
    21,640Stock-based
compensation expense included in net income, net of tax
    
    
    217
    
    
    
    245Stock-based
compensation expense if the fair value method had been applied to all
awards, net of tax
    
    
    (2,034
    )
    
    
    (2,561
    )Pro forma net income
    
    
    9,474
    
    
    
    19,324Earnings per share:Basic (as reported)
    
    $
    .24
    
    
    $
    .45Basic pro forma
    
    
    .20
    
    
    
    .41Diluted (as reported)
    
    $
    .23
    
    
    $
    .44Diluted pro forma
    
    
    .19
    
    
    
    .40Assumptions:Risk-free interest rate
    
    
    
    
    
    
    4.05
    %Dividend yield
    
    
    
    
    
    
    1.59
    %Expected stock price volatility
    
    
    
    
    
    
    .24
    %Expected life (years)
    
    
    
    
    
    
    7.06Fair value of options granted
    
    
    
    
    
    $
    5.56
 During the first half of 2004, the Company issued 230,595 shares of
restricted stock with a weighted average fair value of $16.89. The restricted
stock is subject to vesting upon continued employment with the Company or the
Company attaining certain performance criteria as established by the board of
directors. The unvested portion of the Companys restricted stock is shown on
the balance sheet under the caption Deferred stock compensation and amortized
to expense over the vesting period. Retirement Plan The plan expense for the non-qualified benefit plan included the following
components (in thousands): Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Service costs
    
    $
    203
    
    
    $
    215
    
    
    $
    424
    
    
    $
    430Interest cost
    
    
    171
    
    
    
    170
    
    
    
    369
    
    
    
    341Net amortization
    
    
    101
    
    
    
    114
    
    
    
    235
    
    
    
    228Net benefit expense
    
    $
    475
    
    
    $
    499
    
    
    $
    1,028
    
    
    $
    999
 Assumptions as ofJune 30,2004
    
    2003Weighted average
discount rate
    
    
    6.0
    %
    
    
    6.8
    %Rates of increase
in compensation
levels
    
    
    4.0
    %
    
    
    4.0
    %
 14




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##### Table of Contents



Comprehensive Income The components of comprehensive income, net of related tax, are as follows
(in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    11,291
    
    
    $
    10,586
    
    
    $
    21,640
    
    
    $
    19,305Other comprehensive income (loss):Unrealized holding gains (losses)
arising during the period
    
    
    (18,527
    )
    
    
    5,520
    
    
    
    (13,925
    )
    
    
    7,589Reclassification adjustment for
gains (losses) included in
net income
    
    
    
    
    
    
    (436
    )
    
    
    (168
    )
    
    
    (268
    )Other comprehensive income (loss)
    
    
    (18,527
    )
    
    
    5,084
    
    
    
    (14,093
    )
    
    
    7,321Comprehensive income (loss)
    
    $
    (7,236
    )
    
    $
    15,670
    
    
    $
    7,547
    
    
    $
    26,626
 Business Segments The Company operates in three reportable segments: a community bank, an
insurance agency and a wealth management company. The Companys community bank
offers services traditionally offered by full-service commercial banks,
including commercial and individual demand and time deposit accounts and
commercial, mortgage and individual installment loans. The Companys wealth
management subsidiary offers trust services as well as various alternative
investment products, including mutual funds and annuities. The Companys
insurance agency is a full-service insurance agency offering all lines of
commercial and personal insurance through major carriers. Other items shown
represent the parent company and eliminations which are necessary for purposes
of reconciling to the consolidated amounts. The following tables provide
financial information for these segments (in thousands). 15




---



##### Table of Contents



At or for the three months
    
    Community
    
    Insurance
    
    Wealthended June 30, 2004
    
    Bank
    
    Agency
    
    Management
    
    Other
    
    ConsolidatedInterest income
    
    $
    45,418
    
    
    $
    33
    
    
    $
    3
    
    
    $
    (40
    )
    
    $
    45,414Interest expense
    
    
    11,182
    
    
    
    57
    
    
    
    1
    
    
    
    605
    
    
    
    11,845Provision for loan loss
    
    
    875
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    875Non-interest income
    
    
    6,623
    
    
    
    8,968
    
    
    
    2,118
    
    
    
    47
    
    
    
    17,756Non-interest expense
    
    
    24,520
    
    
    
    6,555
    
    
    
    1,676
    
    
    
    610
    
    
    
    33,361Intangible amortization
    
    
    252
    
    
    
    92
    
    
    
    1
    
    
    
    
    
    
    
    345Income tax expense
    
    
    5,121
    
    
    
    943
    
    
    
    176
    
    
    
    (442
    )
    
    
    5,798Net income (loss)
    
    
    10,343
    
    
    
    1,446
    
    
    
    268
    
    
    
    (766
    )
    
    
    11,291Total assets
    
    
    4,051,710
    
    
    
    36,156
    
    
    
    2,850
    
    
    
    (3,397
    )
    
    
    4,087,319Goodwill
    
    
    155,319
    
    
    
    18,631
    
    
    
    
    
    
    
    
    
    
    
    173,950
 At or for the three months
    
    Community
    
    Insurance
    
    Wealthended June 30, 2003
    
    Bank
    
    Agency
    
    Management
    
    Other
    
    ConsolidatedInterest income
    
    
    43,829
    
    
    
    75
    
    
    
    
    
    
    
    (9
    )
    
    
    43,895Interest expense
    
    
    12,061
    
    
    
    13
    
    
    
    3
    
    
    
    (9
    )
    
    
    12,068Provision for loan loss
    
    
    1,828
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,828Non-interest income
    
    
    8,963
    
    
    
    6,781
    
    
    
    1,779
    
    
    
    
    
    
    
    17,523Non-interest expense
    
    
    24,603
    
    
    
    5,174
    
    
    
    1,755
    
    
    
    
    
    
    
    31,532Intangible amortization
    
    
    252
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    305Income tax expense
    
    
    4,721
    
    
    
    663
    
    
    
    20
    
    
    
    
    
    
    
    5,404Net income (loss)
    
    
    9,579
    
    
    
    1,006
    
    
    
    1
    
    
    
    
    
    
    
    10,586Total assets
    
    
    3,638,336
    
    
    
    28,001
    
    
    
    2,382
    
    
    
    
    
    
    
    3,668,719Goodwill
    
    
    156,679
    
    
    
    10,865
    
    
    
    
    
    
    
    
    
    
    
    167,544
 At or for the six months
    
    Community
    
    Insurance
    
    Wealthended June 30, 2004
    
    Bank
    
    Agency
    
    Management
    
    Other
    
    ConsolidatedInterest income
    
    $
    88,945
    
    
    $
    84
    
    
    $
    3
    
    
    $
    (95
    )
    
    $
    88,937Interest expense
    
    
    21,654
    
    
    
    131
    
    
    
    2
    
    
    
    977
    
    
    
    22,764Provision for loan loss
    
    
    2,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,275Non-interest income
    
    
    13,651
    
    
    
    16,898
    
    
    
    4,082
    
    
    
    (165
    )
    
    
    34,466Non-interest expense
    
    
    49,171
    
    
    
    12,838
    
    
    
    3,262
    
    
    
    619
    
    
    
    65,890Intangible amortization
    
    
    504
    
    
    
    184
    
    
    
    2
    
    
    
    
    
    
    
    690Income tax expense
    
    
    9,614
    
    
    
    1,589
    
    
    
    325
    
    
    
    (694
    )
    
    
    10,834Net income (loss)
    
    
    19,882
    
    
    
    2,424
    
    
    
    496
    
    
    
    (1,162
    )
    
    
    21,640Total assets
    
    
    4,051,710
    
    
    
    36,156
    
    
    
    2,850
    
    
    
    (3,397
    )
    
    
    4,087,319Goodwill
    
    
    155,319
    
    
    
    18,631
    
    
    
    
    
    
    
    
    
    
    
    173,950
 At or for the six months
    
    Community
    
    Insurance
    
    Wealthended June 30, 2003
    
    Bank
    
    Agency
    
    Management
    
    Other
    
    ConsolidatedInterest income
    
    
    81,760
    
    
    
    114
    
    
    
    
    
    
    
    (16
    )
    
    
    81,858Interest expense
    
    
    22,032
    
    
    
    26
    
    
    
    5
    
    
    
    (16
    )
    
    
    22,047Provision for loan loss
    
    
    3,560
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,560Non-interest income
    
    
    16,268
    
    
    
    13,091
    
    
    
    3,268
    
    
    
    
    
    
    
    32,627Non-interest expense
    
    
    46,144
    
    
    
    10,245
    
    
    
    3,392
    
    
    
    
    
    
    
    59,781Intangible amortization
    
    
    477
    
    
    
    105
    
    
    
    1
    
    
    
    
    
    
    
    583Merger expenses
    
    
    1,014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,014Income tax expense
    
    
    8,657
    
    
    
    1,168
    
    
    
    (33
    )
    
    
    
    
    
    
    9,792Net income (loss)
    
    
    17,635
    
    
    
    1,766
    
    
    
    (96
    )
    
    
    
    
    
    
    19,305Total assets
    
    
    3,638,336
    
    
    
    28,001
    
    
    
    2,382
    
    
    
    
    
    
    
    3,668,719Goodwill
    
    
    156,679
    
    
    
    10,865
    
    
    
    
    
    
    
    
    
    
    
    167,544
 16




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##### Table of Contents



PART I. 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion in conjunction with our
consolidated financial statements and the notes thereto included in this Form
10-Q. This discussion contains forward-looking statements. Please see
Cautionary Statement Regarding Forward-Looking Statements for a discussion of
the uncertainties, risks and assumptions associated with these statements. Separation from F.N.B. Corporation We were incorporated under the laws of the State of Florida on August 12,
2003 as a wholly owned subsidiary of F.N.B. Corporation (F.N.B.). On January
1, 2004, we became an independent public company through a tax-free spin-off
from F.N.B., with F.N.B. having no continuing ownership interest in us. The
consolidated financial statements for periods presented prior to the effective
date of the spin-off reflect the historical financial position, results of
operations, and cash flows of the businesses transferred to us from F.N.B.
prior to the distribution. However, this financial information is not
necessarily indicative of what our results of operations or financial position
would have been had we operated as an independent company during the periods
presented. In
connection with the separation from F.N.B., we incurred
approximately $10.5 million in restructuring expenses during the fiscal year
ended December 31, 2003. These expenses consisted of $5.3 million of early
retirement expenses and involuntary separation costs, $4.2 million in
professional fees, and approximately $1.0 million in fixed asset write-off and
other expenses connected with the separation. On June 30, 2004, a liability
associated with the separation of approximately $2.6 million remained. This
liability primarily consists of amounts due to terminated employees under
various benefit plans and employment agreements. Continued payments to these
terminated employees will be made in accordance with the terms and provisions
of such benefit plans and employment agreements. Critical Accounting Policies Our significant accounting policies are described in the Notes to
Consolidated Financial Statements under Summary of Significant Accounting
Policies in our 2003 Annual Report on Form 10-K filed with the Securities and
Exchange Commission. Certain policies inherently have a greater reliance on the
use of underlying factors, such as estimates, assumptions and judgments.
Changes in these underlying factors have a greater possibility of producing
results that could be materially different than originally reported and could
have a material impact on our future financial condition and results of
operations. Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 Results of Operations Net income was $21.6 million for the first six months of 2004 compared to
net income of $19.3 million for the first six months of 2003. Basic earnings
per share were $.45 and $.41 for the first six months of 2004 and 2003,
respectively. Diluted earnings per share were $.44 and $.40 for the first six
months of 2004 and 2003, respectively. Common comparative ratios for results of
operations include the return on average assets and the return on average
equity. Our annualized return on average assets was 1.11% for the first six months of
2004 compared to 1.20% for the first six months of 2003, while our
annualized return on
average equity was 11.73% and 11.00% for the same respective periods. Results
of operations for the six months ended June 30, 2004 includes Lupfer-Frakes
Insurance, Inc. (Lupfer), which was acquired on July 1, 2003. 17




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##### Table of Contents



Diluted earnings per share for the six months ended June 30, 2003 were
reduced $.01 per share due to after-tax merger expense of $659,000. The following table provides information regarding the average balances
and yields
and rates on interest earning assets and interest bearing liabilities (dollars in thousands): 18




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##### Table of Contents



Six Months Ended June 30,2004
    
    2003Interest
    
    
    
    
    
    
    
    
    
    InterestAverage
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    RateInterest earning assets:Interest bearing deposits
with banks
    
    $
    1,296
    
    
    $
    7
    
    
    
    1.09
    %
    
    $
    794
    
    
    $
    4
    
    
    
    1.02
    %Federal funds sold
    
    
    3,678
    
    
    
    17
    
    
    
    .93
    
    
    
    18,507
    
    
    
    112
    
    
    
    1.22Taxable investment
securities (1)
    
    
    762,241
    
    
    
    15,782
    
    
    
    4.16
    
    
    
    572,001
    
    
    
    11,855
    
    
    
    4.18Non-taxable investment
securities (2)
    
    
    79,179
    
    
    
    2,195
    
    
    
    5.57
    
    
    
    80,191
    
    
    
    2,633
    
    
    
    6.62Loans (3)
    
    
    2,568,910
    
    
    
    71,704
    
    
    
    5.61
    
    
    
    2,152,861
    
    
    
    68,388
    
    
    
    6.41Total interest earning
assets
    
    
    3,415,304
    
    
    
    89,705
    
    
    
    5.28
    
    
    
    2,824,354
    
    
    
    82,992
    
    
    
    5.93Cash and due from banks
    
    
    92,534
    
    
    
    
    
    
    
    
    
    
    
    100,606Allowance for loan losses
    
    
    (29,430
    )
    
    
    
    
    
    
    
    
    
    
    (23,710
    )Premises and equipment
    
    
    122,858
    
    
    
    
    
    
    
    
    
    
    
    95,533Other assets
    
    
    318,356
    
    
    
    
    
    
    
    
    
    
    
    245,116$
    3,919,622
    
    
    
    
    
    
    
    
    
    
    $
    3,241,899LiabilitiesInterest bearing
liabilities:Deposits:Interest bearing demand
    
    $
    529,116
    
    
    
    1,115
    
    
    
    .42
    
    
    $
    435,590
    
    
    
    1,322
    
    
    
    .61Savings
    
    
    852,586
    
    
    
    3,873
    
    
    
    .91
    
    
    
    814,304
    
    
    
    5,952
    
    
    
    1.47Other time
    
    
    997,924
    
    
    
    12,080
    
    
    
    2.43
    
    
    
    807,725
    
    
    
    11,577
    
    
    
    2.89Short-term borrowings
    
    
    313,096
    
    
    
    935
    
    
    
    .60
    
    
    
    255,822
    
    
    
    1,149
    
    
    
    .91Long-term debt
    
    
    314,291
    
    
    
    4,761
    
    
    
    3.05
    
    
    
    127,348
    
    
    
    2,047
    
    
    
    3.24Total interest bearing
liabilities
    
    
    3,007,013
    
    
    
    22,764
    
    
    
    1.52
    
    
    
    2,440,789
    
    
    
    22,047
    
    
    
    1.82Non-interest bearing
demand
    
    
    505,495
    
    
    
    
    
    
    
    
    
    
    
    411,827Other liabilities
    
    
    36,263
    
    
    
    
    
    
    
    
    
    
    
    35,4643,548,771
    
    
    
    
    
    
    
    
    
    
    
    2,888,080Stockholders equity
    
    
    370,851
    
    
    
    
    
    
    
    
    
    
    
    353,819$
    3,919,622
    
    
    
    
    
    
    
    
    
    
    $
    3,241,899Excess of interest
earning assets over
interest bearing
liabilities
    
    $
    408,291
    
    
    
    
    
    
    
    
    
    
    $
    383,565Net interest income
    
    
    
    
    
    $
    66,941
    
    
    
    
    
    
    
    
    
    
    $
    60,945Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.76
    %
    
    
    
    
    
    
    
    
    
    
    4.11
    %Net interest margin (4)
    
    
    
    
    
    
    
    
    
    
    3.94
    %
    
    
    
    
    
    
    
    
    
    
    4.35
    %
 19




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##### Table of Contents



(1)
    
    The average balances and yields earned on securities are based on
historical cost.  (2)
    
    The amounts are reflected on a fully taxable equivalent basis using the
federal statutory tax rate of 35%, adjusted for certain federal tax
preferences.  (3)
    
    Average balances include non-accrual loans. Loans consist of average
total loans less average unearned income. The amount of loan fees
included in interest income on loans is immaterial.  (4)
    
    Net interest margin is calculated by dividing the difference between
total interest earned and total interest paid by total interest earning
assets. Net Interest Income Net interest income, our primary source of earnings, is the amount by
which interest and fees generated by interest earning assets, primarily loans
and securities, exceed interest expense on deposits and borrowed funds. Net
interest income, on a fully taxable equivalent basis, totaled $66.9 million for
the first six months of 2004, an increase of 9.8% as compared to $61.0 million
for the same period 2003. Interest income grew $6.7 million to $89.7 million
for the first six months of 2004 compared to $83.0 million for same period in
2003 as we increased our interest earning assets by $591.0 million. The yield
on interest earning assets decreased 65 basis points due to repricing of our
interest earning assets and a focus on originating variable and adjustable rate
commercial and consumer loans, which were priced lower than existing portfolio
yields. Interest expense increased 3.3% to $22.8 million for the first six
months of 2004 compared to $22.0 million for the same period in 2003 as
interest bearing liabilities grew $566.2 million, or 23%. The impact on interest
expense caused by the increase in interest bearing liabilities was mitigated by our
ability to effectively manage the interest rate paid. The cost of
funds decreased from 1.82% during the six months ended June 30,
2003 to 1.52% during the six months ended June 30, 2004. Net interest margin
decreased from 4.35% for the six months ended June 30, 2003 to 3.94% for the
six months ended June 30, 2004. The impact of future rate changes on our net
interest income is discussed further under the Liquidity and Interest Rate
Sensitivity caption below. The following table sets forth certain information regarding changes in
net interest income attributable to changes in the volumes of interest earning
assets and interest bearing liabilities and changes in the rates for the six
months ended June 30, 2004 as compared to the six months ended June 30, 2003
(in thousands): Volume
    
    Rate
    
    NetInterest incomeInterest bearing deposits with banks
    
    $
    3
    
    
    $
    
    
    
    $
    3Federal funds sold
    
    
    (73
    )
    
    
    (22
    )
    
    
    (95
    )Securities:Taxable
    
    
    3,984
    
    
    
    (57
    )
    
    
    3,927Non-taxable
    
    
    (32
    )
    
    
    (406
    )
    
    
    (438
    )Loans
    
    
    9,362
    
    
    
    (6,046
    )
    
    
    3,316Net change
    
    $
    13,244
    
    
    $
    (6,531
    )
    
    $
    6,713Interest expenseDeposits:Interest bearing demand
    
    $
    459
    
    
    $
    (666
    )
    
    $
    (207
    )Savings
    
    
    293
    
    
    
    (2,372
    )
    
    
    (2,079
    )Other time
    
    
    1,552
    
    
    
    (1,049
    )
    
    
    503Short-term borrowings
    
    
    410
    
    
    
    (624
    )
    
    
    (214
    )Long-term debt
    
    
    2,827
    
    
    
    (113
    )
    
    
    2,7145,541
    
    
    
    (4,824
    )
    
    
    717Net change
    
    $
    7,703
    
    
    $
    (1,707
    )
    
    $
    5,996
 20




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##### Table of Contents



The amount of change not solely due to rate or volume changes was
allocated between the change due to rate and the change due to volume based on
the net size of the rate and volume changes. For the first six months of 2004, interest income on loans increased 4.8%
from $68.4 million to $71.7 million as average loans increased by $416.0
million. Interest income on investment securities increased $3.5 million to
$18.0 million for the first six months of 2004 as the average balance of
investment securities increased $189.2 million to $841.4 million. Interest expense on deposits decreased $1.8 million to $17.1 million for
the first six months of 2004 despite a $322.0 million increase in average
interest bearing deposits. The decrease in interest expense on deposits was
accomplished by a 41 basis point reduction of the rate paid on these deposits.
We continued to successfully generate non-interest-bearing deposits as such
deposits increased by $93.7 million to $505.5 million for the first six months
of 2004 as compared to the same period in 2003. Interest expense on short-term
borrowings decreased by $214,000 as the interest rate paid on these borrowings
decreased by 31 basis points for the first six months of 2004 as compared to
the first six month of 2003. Interest expense on long-term debt increased $2.7
million for the six months ended June 30, 2004 primarily from a $186.9 million
increase in average long-term debt as the rate paid on these liabilities
decreased 19 basis points. The increase in average long-term debt is a result
of additional FHLB borrowings and borrowings obtained in connection with the
separation from F.N.B. Non-Interest Income Total non-interest income increased 5.6% from $32.6 million for the first
six months of 2003 to $34.5 million for the same period in 2004. Service
charges on deposit accounts increased 11.0% to $9.9 million during the first
six months of 2004 from $8.9 million for the same period in 2003. Income from
wealth management services increased $728,000, or 22.3%, to $4.0 million for the
first six months of 2004 compared to $3.3 million for the same period in 2003.
Insurance commissions and fees increased 31.2% to $16.6 million for the first
six months of 2004 compared to $12.6 million for the same period in 2003. The
Lupfer acquisition contributed insurance commissions and fees of $3.2 million
in the first six months of 2004. Gains on the sale of mortgage loans for the
first six months of 2004 decreased 62.0% to $1.8 million as compared to $4.7
million for the same period in 2003. The gains on the sale of mortgage loans
generated in 2003 were a direct result of homeowner refinancing to fixed-rate
products driven by mortgage interest rates declining to historical levels. As
mortgage rates increase, we do not anticipate the level of gains experienced in
2003 to continue. Non-Interest Expense Total non-interest expense increased $6.1 million to $65.9 million for the
first six months in 2004 compared to $59.8 million for the same period in 2003.
We recorded merger costs associated with SEB of $1.0 million in 2003, which
were related to employment obligations. For the first six months of 2004,
salary and employee benefits increased $3.4 million from $35.9 million for the
same period in 2003 to $39.3 million in 2004. The increase is due to increased
health care costs and the acquisitions of SEB and Lupfer in 2003. Other
non-interest expenses totaled $15.1 million for 2004, a $1.7 million increase
from 2003. Income Taxes Our income tax expense was $10.8 million for the first six months of 2004
compared to $9.8 million for the same period in 2003. The 2004 effective tax
rate of 33.4% was lower than the 35.0% federal statutory tax rate due to the
tax benefits resulting from tax-free interest and dividend income. 21




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##### Table of Contents



Second Quarter of 2004 as Compared to Second Quarter of 2003 Results of Operations Net income was $11.3 million, or $.23 per diluted share, for the second
quarter of 2004 compared to net income of $10.6 million, or $.22 per diluted
share, for the second quarter of 2003. Basic earnings per share were $.24 and
$.22 for the three months ended June 30, 2004 and 2003, respectively. Common
comparative ratios for results of operations include the return on average
assets and the return on average equity. Our annualized return on average assets and
annualized return on average equity were 1.13% and 12.28%, respectively, for the second
quarter of 2004 compared to 1.15% and 9.85% for the same period in 2003.
Results of operations for the three months ended June 30, 2004 include
Lupfer-Frakes Insurance, Inc. (Lupfer), which was acquired on July 1, 2003. Net Interest Income Net interest income, on a fully taxable
equivalent basis, totaled $34.0
million for the second quarter of 2004, representing a 4.9% increase over the
second quarter of 2003. Interest income, on a fully taxable equivalent basis,
grew $1.3 million to $45.8 million for the second quarter of 2004 compared to
$44.5 million for same period in 2003 as we increased our interest earning
assets by $344.9 million. Interest expense decreased $223,000 to $11.8 million
for the second quarter of 2004 compared to $12.1 million for the same period in
2003 as interest bearing liabilities grew $325.6 million. Net interest margin
decreased from 4.10% for the three months ended June 30, 2003 to 3.88% for the
same period in 2004. For the second quarter of 2004, interest income on loans increased 2.7%
from $35.4 million to $36.4 million as average loans increased by $353.0
million. Interest income on investment securities increased 7.8% to $9.4
million for the second quarter of 2004 as the average balance of investment
securities increased $14.4 million to $884.3 million. Interest expense on deposits decreased $1.5 million to $8.7 million for
the second quarter of 2004 despite a $110.6 million increase in average
interest bearing deposits. We continued to successfully generate
non-interest-bearing deposits as the average such deposits increased by $90.5
million, or 20.3%, to $553.6 million for the second quarter of 2004 as compared
to the same period in 2003. Interest expense on long-term debt increased $1.4
million to $2.6 million for the second quarter of 2004 due to a $135.7 million
increase in average long-term debt. Non-Interest Income Non-interest income increased 1.3% during the second quarter of 2004 to
$17.8 million compared to $17.5 million for the same period of 2003. Income
from wealth management services increased 16.0%, to $2.1 million, for the second
quarter of 2004 compared to $1.8 million for the same period in 2003.
Insurance commissions and fees increased 35.6% to $8.9 million for the second
quarter of 2004 from $6.6 million for the same period in 2003. The Lupfer
acquisition contributed insurance commissions and fees of $1.7 million during
the second quarter of 2004. Gains on the sale of loans and securities
decreased $2.0 million during this same period. Non-Interest Expense Non-interest expenses increased $1.9 million during the second quarter of
2004 to $33.4 million compared to $31.5 million for the same period of 2003.
The acquisition of Lupfer represented $1.4 million of this increase. Income Taxes Our income tax expense was $5.8 million for the second quarter of 2004
compared to $5.4 million for the same period in 2003. The effective tax rate
for the three months 22




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##### Table of Contents



ended June 30, 2004 was 33.9%. Our effective tax rate was lower than the
35.0% federal statutory tax rate due to the tax benefits resulting from
tax-free interest and dividend income. Liquidity and Interest Rate Sensitivity Our goal in liquidity management is to meet the cash flow requirements of
depositors and borrowers as well as our operating cash needs, with
cost-effective funding. Liquidity is centrally managed on a daily basis by
treasury personnel. In addition, our Corporate Asset/Liability Committee
(ALCO), which includes members of executive management, reviews liquidity on a
periodic basis and approves significant changes in strategies which affect
balance sheet or cash flow positions. Our board of directors has established
an Asset/Liability Policy in order to achieve and maintain earnings performance
consistent with long-term goals while maintaining acceptable levels of interest
rate risk, a well-capitalized balance sheet and adequate levels of liquidity.
This policy designates the ALCO as the body responsible for meeting this
objective. Liquidity sources from assets include payments from loans and investments
as well as the ability to sell loans and investment securities. Liquidity
sources from liabilities are generated through growth in deposits and, to a
lesser extent, the use of wholesale sources which include federal funds
purchased, repurchase agreements and public deposits. In addition, our banking
subsidiary has the ability to borrow from the Federal Home Loan Bank (FHLB).
FHLB advances are a competitively priced and reliable source of funds. As of
June 30, 2004, outstanding advances were $271.4 million, or 6.6% of total
assets, while FHLB availability was $609.5 million, or 14.9% of total assets. The principal source of cash for the parent company is dividends from its
subsidiaries. The parent company has availability to borrow up to $75.0
million through unsecured lines of credit with several major domestic banks.
These lines, which were unused as of June 30, 2004, provide the parent company
a liquid source of short-term funding. The ALCO regularly monitors various liquidity ratios and forecasts of cash
position. Management believes that we have sufficient liquidity available to
meet our normal operating and contingency funding cash needs. Our financial performance is at risk from interest rate fluctuations. This
interest rate risk arises due to differences between the amount of interest
earning assets and interest bearing liabilities subject to repricing over a
period of time, the difference between the change in various interest rates and
the embedded options in certain financial instruments. We utilize an
asset/liability model to measure the impact of our balance sheet strategies. We
use net interest income simulations, gap analysis and the economic value of
equity to measure interest rate risk. The following gap analysis measures our interest rate risk by comparing
the difference between the amount of interest earning assets and interest
bearing liabilities subject to repricing over a period of time. The ratio of
rate sensitive assets to rate sensitive liabilities maturing over a
one-year
period was 1.16 at June 30, 2004, as compared to 1.56 at June 30, 2003. A ratio
of more than one indicates a higher level of repricing assets over repricing
liabilities, assuming the current interest rate environment. 23




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##### Table of Contents



Following is the gap analysis as of June 30, 2004 (dollars in thousands): Within
    
    4-12
    
    1-5
    
    Over3 Months
    
    Months
    
    Years
    
    5 years
    
    TotalInterest earning assetsInterest bearing
deposits with banks
    
    $
    159
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    159Federal funds sold
    
    
    854
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    854Securities
    
    
    26,510
    
    
    
    80,159
    
    
    
    313,595
    
    
    
    459,688
    
    
    
    879,952Loans, net of
unearned income
    
    
    1,031,766
    
    
    
    584,388
    
    
    
    858,778
    
    
    
    186,052
    
    
    
    2,660,984$
    1,059,289
    
    
    $
    664,547
    
    
    $
    1,172,373
    
    
    $
    645,740
    
    
    $
    3,541,949Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    545,370
    
    
    
    545,370Total
    
    $
    1,059,289
    
    
    $
    664,547
    
    
    $
    1,172,373
    
    
    $
    1,191,110
    
    
    $
    4,087,319Interest bearing liabilitiesDeposits:Interest checking
    
    $
    237,257
    
    
    $
    
    
    
    $
    
    
    
    $
    296,265
    
    
    $
    533,522Savings
    
    
    191,855
    
    
    
    
    
    
    
    

    
    
    
    688,409
    
    
    
    880,264Time deposits
    
    
    135,477
    
    
    
    439,221
    
    
    
    422,547
    
    
    
    20,698
    
    
    
    1,017,943Borrowings
    
    
    454,674
    
    
    
    30,045
    
    
    
    200,201
    
    
    
    30,000
    
    
    
    714,920$
    1,019,263
    
    
    $
    469,266
    
    
    $
    622,748
    
    
    $
    1,035,372
    
    
    $
    3,146,649Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    582,267
    
    
    
    582,267Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    358,403
    
    
    
    358,403Total
    
    $
    1,019,263
    
    
    $
    469,266
    
    
    $
    622,748
    
    
    $
    1,976,042
    
    
    $
    4,087,319Period Gap
    
    $
    40,026
    
    
    $
    195,281
    
    
    $
    549,625
    
    
    
    ($784,932
    )Cumulative Gap
    
    $
    40,026
    
    
    $
    235,307
    
    
    $
    784,932Cumulative Gap as
a Percent of
Total Assets
    
    
    .98
    %
    
    
    5.76
    %
    
    
    19.20
    %Rate Sensitive Assets/
Rate Sensitive
Liabilities
(Cumulative)
    
    
    1.04
    
    
    
    1.16
    
    
    
    1.37
    
    
    
    1.13
 Net interest income simulations measure the short-term earnings exposure
from changes in market rates of interest in a more rigorous and explicit
fashion. Our current financial position is combined with assumptions regarding
future business to calculate net interest income under varying hypothetical
rate scenarios. The economic value of equity (EVE) measures our long-term
earnings exposure from changes in market rates of interest. EVE is defined as
the present value of assets minus the present value of liabilities at a point
in time. A decrease in EVE due to a specified rate change indicates a decline
in the long-term earnings capacity of the balance sheet assuming that the rate
change remains in effect over the life of the current balance sheet. 24




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##### Table of Contents



The following table presents an analysis of the potential sensitivity of our
annual net interest income and EVE to sudden and sustained changes in market
rates: December 31,June 30, 2004
    
    2003Net interest income change (12
months):- 100 basis points
    
    
    (2.2
    )%
    
    
    (7.1
    )%+ 200 basis points
    
    
    1.1
    %
    
    
    4.4
    %Economic value of equity:- 100 basis points
    
    
    3.7
    %
    
    
    (6.4
    )%+ 200 basis points
    
    
    (0.1
    )%
    
    
    .4
    %
 The preceding balance sheet structure as of June 30, 2004 indicates we are
well positioned to realize improvement in earnings from increasing rates. Loan
growth has been concentrated in the form of variable products while funding has
been medium term, fixed. This posture will allow positive positioning in a
rising rate environment without a materially negative impact in the near term.
The risk of declining rates, particularly with the quarter end move in short
term rates, appears remote. The preceding measures assume no change in asset/liability compositions.
Thus, the measures do not reflect actions the ALCO may undertake in response to
such changes in interest rates. The computation of the prospective effects of hypothetical interest
changes requires numerous assumptions regarding characteristics of new business
and the behavior of existing positions. These business assumptions are based
upon our experience, business plans and published industry experience. Key
assumptions employed in the model include asset prepayment speeds, the relative
price sensitivity of certain assets and liabilities and the expected life of
non-maturity deposits. Because these assumptions are inherently uncertain,
actual results will differ from simulated results. Changes in the interest rate environment can cause significant
fluctuations in the market value of mortgage loans originated for resale in the
secondary market. We utilize forward loan commitments on mortgage loans to
offset the risk of decreases in the market values of the loans as a result of
increases in interest rates. At June 30, 2004 and December 31, 2003, we had
$5.7 million and $5.2 million in forward sales agreements, respectively. Lending Activity Following is a summary of loans (dollars in thousands): June 30, 2004
    
    December 31, 2003Real Estate:Residential
    
    $
    879,819
    
    
    $
    810,790Commercial
    
    
    1,139,781
    
    
    
    1,017,291Construction
    
    
    359,398
    
    
    
    311,266Installment loans to individuals
    
    
    75,117
    
    
    
    77,660Commercial, financial and agricultural
    
    
    222,296
    
    
    
    227,117Lease financing
    
    
    2,178
    
    
    
    6,032Unearned income
    
    
    (727
    )
    
    
    (774
    )$
    2,677,862
    
    
    $
    2,449,382
 25




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##### Table of Contents



We strive to minimize credit losses by utilizing credit approval
standards, diversifying our loan portfolio by industry and borrower, and
conducting ongoing review and management of the loan portfolio. Our loan portfolio is well-diversified with a significant portion of the
portfolio being made up of loans secured by real estate. Residential,
commercial and construction loans secured by real estate accounted for 88.9% of
the loan portfolio at June 30, 2004. The loan portfolio consists principally of loans to individuals and small-
and medium-sized businesses within our primary market area of southwest and
central Florida. With the forecasted growth in our primary market over the
upcoming years, we anticipate organic growth in our loan portfolio to continue
at historical levels. As of June 30, 2004, no concentrations of loans exceeding 10% of total
loans existed which were not disclosed as a separate category of loans. Non-Performing Assets Non-performing assets include non-performing loans and other real estate
owned. Non-performing loans include non-accrual loans and restructured loans.
Non-accrual loans represent loans on which interest accruals have been
discontinued. It is our policy to discontinue interest accruals when principal
or interest is due and has remained unpaid for 90 days or more unless the loan
is both well secured and in the process of collection. When a loan is placed
on non-accrual status, all unpaid interest is reversed. Payments on
non-accrual loans are generally applied to either principal or interest or
both, depending on managements evaluation of collectibility. Non-accrual loans
may not be restored to accrual status until all delinquent principal and
interest has been paid or the loan becomes both well secured and in the process
of collection. Consumer installment loans are generally charged off against
the allowance for loan losses upon reaching 90 to 180 days past due, depending
on the installment loan type. Restructured loans are loans in which the
borrower has been granted a concession on the interest rate or the original
repayment terms due to financial distress. Non-performing loans are closely monitored on an ongoing basis as part of
our loan review and work-out process. The potential risk of loss on these
loans is evaluated by comparing the loan balance to the fair value of any
underlying collateral or the present value of projected future cash flows.
Losses are recognized where appropriate. Following is a summary of non-performing assets (in thousands): December 31,June 30, 2004
    
    2003Non-accrual loans
    
    $
    4,332
    
    
    $
    5,521Restructured loans
    
    
    
    
    
    
    Total Non-Performing Loans
    
    
    4,332
    
    
    
    5,521Other real estate owned
    
    
    440
    
    
    
    Total Non-Performing Assets
    
    $
    4,772
    
    
    $
    5,521
 Loans past due 90 days or more, on which interest accruals continue, were
$364,000 and $163,000 at June 30, 2004 and December 31, 2003, respectively. All
loans as to which information exists about possible credit problems that
would cause us to have serious doubts about the borrowers ability to comply
with the current terms of the loan have been reflected within the table
summarizing non-performing loans and loans past due 90 days or more. 26




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##### Table of Contents



Allowance and Provision for Loan Losses The allowance for loan losses consists of an allocated and an unallocated
component. Managements analysis of the allocated portion of the allowance for
loan losses includes the evaluation of the loan portfolio based upon our
internal loan grading system, evaluation of portfolio industry concentrations
and the historical loss experience of the remaining balances of the various
homogeneous loan pools which comprise the loan portfolio. Specific factors
used in the internal loan grading system include the previous loan loss
experience with the customer, the status of past due interest and principal
payments on the loan, the collateral position and residual value of the loan,
the quality of financial information supplied by the borrower and the general
financial condition of the borrower. The unallocated portion of the allowance is determined based on
managements assessment of historical loss on the remaining portfolio segments
in conjunction with the current status of economic conditions, loan loss
trends, delinquency and non-accrual trends, credit administration, portfolio
growth, concentrations of credit risk and other factors, including regulatory
guidance. This determination inherently involves a higher degree of
uncertainty, considers current risk factors that may not have yet manifested
themselves in our historical loss factors used to determine the allocated
component of the allowance, and recognizes that knowledge of the portfolio may
be incomplete. The provision for loan losses charged to operations in each period
presented is a direct result of managements assessment of the adequacy of the
allowance for loan losses at the end of each period. Factors considered in
managements assessment include growth in the loan portfolio, changes in the
composition of the loan portfolio, concentrations of credit risk, current
trends in net charge-offs, trends in non-performing loans and current economic
conditions in the markets in which we operate. The provision for loan losses
was $2.3 million for the first six months of 2004 compared with $3.6 million
for the same period in 2003. The provision for loan losses totaled $875,000 for
the second quarter of 2004, as compared to $1.8 million for the second quarter
of 2003. Factors considered in the level of the provision during 2004 included
the decrease in non accrual loans, the level of loans charged-off, increased
loan concentrations, primarily in commercial real estate loans and the results of our ongoing evaluation
of our commercial loan portfolio. Charge-offs reflect the realization of losses in the portfolio that were
recognized previously through provisions for credit losses. For the six months
ended June 30, 2004, charge-offs, net of any subsequent recovery, totaled
$674,000 compared to $1.7 million for the same period in 2003. Capital Resources Capital management is a continuous process. We and our subsidiaries are
subject to various regulatory capital requirements administered by the federal
banking agencies.
The assessment of capital adequacy depends on a number of factors such as asset
quality, liquidity, earnings performance, changing competitive conditions and
economic forces. We seek to maintain a strong capital base to support our
growth and expansion activities, to provide stability to current operations and
to promote public confidence. Stockholders equity
increased through earnings retention by $15.1
million since December 31, 2003. This increase was offset by a $14.1 million
decrease in accumulated other comprehensive income due to a decline in the fair
market value of our investment security portfolio. Shareholders equity was
further reduced by a $6.9 million increase in treasury stock due to our planned
repurchase of common shares for the Southern Community Bancorp acquisition and
our employee benefit plans. As a result, book value per share declined to
$7.54 at June 30, 2004, compared to $7.65 at December 31, 2003. We have $67.0 million in debentures to an unconsolidated subsidiary trust
which qualifies as Tier 1 capital under present Federal Reserve Board
guidelines. In addition, 27




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##### Table of Contents



our banking subsidiary has borrowed $17.0 million under a $20.0 million
subordinated loan commitment with a correspondent bank, which
qualifies as Tier 2 capital. Following are the capital ratios as of June 30, 2004 for the Company and
our banking subsidiary, First National Bank of Florida (dollars in
thousands): Well Capitalized
    
    Minimum CapitalActual
    
    Requirements
    
    RequirementsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal Capital
(to risk-weighted
assets):Consolidated
    
    $
    297,229
    
    
    
    10.5
    %
    
    $
    284,221
    
    
    
    10.0
    %
    
    $
    227,376
    
    
    
    8.0
    %First National Bank
    
    
    284,415
    
    
    
    10.1
    
    
    
    282,917
    
    
    
    10.0
    
    
    
    226,333
    
    
    
    8.0Tier 1 Capital
(to risk-weighted
assets):Consolidated
    
    
    250,524
    
    
    
    8.8
    
    
    
    170,532
    
    
    
    6.0
    
    
    
    113,688
    
    
    
    4.0First National Bank
    
    
    237,710
    
    
    
    8.4
    
    
    
    169,750
    
    
    
    6.0
    
    
    
    113,167
    
    
    
    4.0Tier 1 Capital
(to average
assets):Consolidated
    
    
    250,524
    
    
    
    6.5
    
    
    
    192,407
    
    
    
    5.0
    
    
    
    153,925
    
    
    
    4.0First National Bank
    
    
    237,710
    
    
    
    6.2
    
    
    
    191,518
    
    
    
    5.0
    
    
    
    153,215
    
    
    
    4.0
 Important Note Regarding Forward-Looking Statements Certain statements
in this Form 10-Q are forward-looking within the
meaning of the Private Securities Litigation Reform Act of 1995, which
statements generally can be identified by the use of forward-looking
terminology, such as may, will, expect, estimate, anticipate,
believe, target, plan, project, or continue or the negatives thereof
or other variations thereon or similar terminology, and are made on the basis
of managements plans and current analyses of the Company, its business and
the industry as a whole. These forward-looking statements are subject to risks
and uncertainties, including, but not limited to, economic conditions,
competition, interest rate sensitivity and exposure to regulatory and
legislative changes. The above factors in some cases have affected, and in the
future could affect, our financial performance and could cause
actual results to differ materially from those expressed or implied in such
forward-looking statements. We do not undertake to publicly
update or revise our forward-looking statements even if experience or future
changes make it clear that any projected results expressed or implied therein
will not be realized. 28




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosure of Market Risk The information called for by this item is provided under the caption
Liquidity and Interest Rate Sensitivity under Item 2  Managements
Discussion and Analysis of Financial Condition and Results of
Operations and incorporated herein by reference. 
 ITEM 4. Controls and Procedures An evaluation was performed during the quarter ended June 30, 2004 under
the supervision and with the participation of management,
including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management,
including the CEO and CFO, concluded that our
disclosure controls and procedures were effective as of June 30,
2004. There have been no significant changes in our internal
controls over financial reporting since the date of the evaluation. 
 PART II 
 Item 1. Legal Proceedings Our subsidiaries are subject to routine claims and lawsuits incidental to
our business. We do not believe that the ultimate liability arising out of
these claims and lawsuits will have a material adverse effect on our business. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities The following table provides information regarding our repurchases of
shares of our common stock during the three months ended June 30, 2004: Shares
    
    Maximum SharesPurchased as
    
    that may yet toPart of
    
    be PurchasedShares
    
    
    
    
    
    Publicly
    
    Under PubliclyPurchased
    
    Average Price
    
    Announced
    
    AnnouncedPeriod
    
    (2)
    
    Paid Per Share
    
    Programs (1)
    
    Program (1)April
    
    
    120,200
    
    
    $
    17.75
    
    
    
    51,609
    
    
    
    1,048,391May
    
    
    373,300
    
    
    
    18.95
    
    
    
    285,895
    
    
    
    762,496June
    
    
    95,400
    
    
    
    19.08
    
    
    
    25,583
    
    
    
    736,913
  (1)
    
    On March 22, 2004, we announced a plan to repurchase up to 1.1
million shares of our common stock. These shares will be repurchased to
offset the dilutive impact of stock options to be assumed by us in
connection with our planned acquisition of Southern Community Bancorp,
which is expected to be completed during the third quarter of 2004.(2)
    
    Purchased in open market transactions. 
 Item 3. Defaults Upon Senior Securities Not applicable 29




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of shareholders of First National Bankshares
of Florida, Inc. was held April 19, 2004. Proxies were solicited
pursuant to Section 14(a) of the Securities and Exchange Act of 1934
and there was no solicitation in opposition to the Corporations
solicitations. All of the Corporations nominees for directors as listed in the
proxy statement were elected with the following vote: Votes
    
    VotesFor
    
    WithheldG. Scott Baton, II
    
    
    35,698,044
    
    
    
    1,568,747David A. Straz, Jr.
    
    
    33,661,550
    
    
    
    3,605,241Lee Roy Selmon
    
    
    36,161,151
    
    
    
    1,105,640
 The
term of office of each of the following directors continued after the
2004 Annual Meeting: Alan C. Bomstein, Charles T. Cricks, James S.
Lindsay, Edward J. Mace and Gary L. Tice. 
 Item 5. Other Information


 directors The Secretary of the Corporation must receive written notice of
any proposal submitted by a shareholder of the Corporation for
consideration at the Annual Meeting of Shareholders on or prior to
the date which is 120 days prior to the date on which the Corporation
first mailed its proxy materials for the prior years Annual Meeting
of Shareholders. Accordingly, any shareholder proposal must be
submitted to the Corporation by November 19, 2004 to be considered at
the 2005 Annual Meeting of Shareholders. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits  2.1
    
    Agreement and Plan of Merger by and between the Company and
Southern Community Bancorp (incorporated by reference to the Form 8-K
filed by the Company on March 26, 2004).2.2
    
    Agreement and Plan of Merger by and between the Company and
Fifth Third Bancorp (incorporated by reference to the Form 8-K filed
by the Company on August 3, 2004).10.1
    
    Employment Agreement between the Company and Gary L. Tice.10.2
    
    Change of Control Agreement between the Company and Gary
L. Tice.10.3
    
    Employment Agreement between the Company and Kevin C.
Hale.10.4
    
    Change of Control Agreement between the Company and Kevin
C. Hale.10.5
    
    Employment Agreement between the Company and C.C. Coghill.10.6
    
    Change of Control Agreement between the Company and C.C.
Coghill.10.7
    
    Employment Agreement between the Company and Garrett S.
Richter.10.8
    
    Change of Control Agreement between the Company
and Garrett S. Richter.10.9
    
    Employment Agreement between the Company and Robert T.
Reichert.10.10
    
    Change of Control Agreement between the Company
and Robert T. Reichert.10.11
    
    Amended and Restated Basic Retirement Plan.10.12
    
    Directors Change of Control Plan.31.1
    
    Certification of Chief Executive Officer pursuant to
Section 302 of
the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to
Section 302 of
the Sarbanes-Oxley Act of 2002.32
    
    Certification pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. 30




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##### Table of Contents



(b)
    
    Reports on Form 8-KThe Corporation filed the following reports on Form 8-K
during the second quarter of 2004:April 15, 2004  The Company reported the issuance of its earnings
release for the first quarter of 2004. 31




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##### Table of Contents



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. First National Bankshares of Florida, Inc.(Registrant)Dated: August 9, 2004
    
    /s/ Gary L. TiceGary L. TicePresident and Chief Executive Officer(Principal Executive Officer)Dated: August 9, 2004
    
    /s/ Robert T. ReichertRobert T. ReichertSenior Vice President,Chief Financial Officer andTreasurer(Principal Financial and Accounting Officer)
 32