UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2004

OR

For the transition period from _____________to ___________________

FIRST NATIONAL BANKSHARES OF FLORIDA, INC.

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.

FIRST NATIONAL BANKSHARES OF FLORIDA, INC. AND SUBSIDIARIES
FORM 10-Q
June 30, 2004
INDEX

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FIRST NATIONAL BANKSHARES OF FLORIDA, INC. AND SUBSIDIARIES

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

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FIRST NATIONAL BANKSHARES OF FLORIDA, INC. AND SUBSIDIARIES

*Restated to reflect the 3 percent stock dividend declared on April 19, 2004.
See accompanying Notes to Consolidated Financial Statements

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FIRST NATIONAL BANKSHARES OF FLORIDA, INC. AND SUBSIDIARIES

See accompanying Notes to Consolidated Financial Statements

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First National Bankshares of Florida, Inc. and Subsidiaries

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

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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

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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

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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):

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     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:

     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.

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Loans

     Following is a summary of loans (in thousands):

     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):

     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):

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Deposits

     Following is a summary of deposits (in thousands):

     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):

Long-Term Debt

     Following is a summary of long-term debt (in thousands):

   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.

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     Following is a summary of off-balance sheet credit risk information (in thousands):

     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):

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Cash Flow Information

     Following is a summary of supplemental cash flow information (in thousands):

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:

     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

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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).

     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):

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Comprehensive Income

     The components of comprehensive income, net of related tax, are as follows (in thousands):

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).

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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.

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     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):

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