SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Date of Report: July 22, 1997
F.N.B. CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 0-8144 25-1255406
----------------------- ----------- -------------
(State of Incorporation) (Commission (IRS Employer
File Number) Identification No.)
Hermitage Square, Hermitage, Pennsylvania 16148
----------------------------------------- -----------
(Address of principal executive offices) (Zip code)
(412) 981-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS
On April 18, 1997, F.N.B. Corporation (the Corporation)
completed its acquisition of West Coast Bancorp, Inc. On
January 21, 1997, the Corporation completed its acquisition of
Southwest Banks, Inc. Accordingly, the Corporation's
Consolidated Financial Statements and Related Management's
Discussion and Analysis of Financial Condition and Results of
Operations have been provided giving retroactive effect to
these mergers using the pooling of interests method of
accounting. Such supplemental consolidated financial
statements will become the historical consolidated
financial statements when the Corporation reports second
quarter 1997 results. The Corporation is hereby filing with
the Securities and Exchange Commission a copy of the Audited
Supplemental Consolidated Financial Statements for the years
ended December 31, 1996, 1995 and 1994 and Management's
Discussion and Analysis.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(C). Exhibits (all filed herewith)
Exhibit 23.1 Consent of Ernst & Young LLP
Exhibit 23.2 Consent of Hill, Barth & King, Inc.
Exhibit 23.3 Consent of Coopers & Lybrand, L.L.P.
Exhibit 99.1 Audited Supplemental Consolidated
Financial Statements for the years ended
December 31,1996, 1995 and 1994 with
Report of Independent Auditors and
Management's Discussion and Analysis
Exhibit 99.2 Report of Independent Auditors Hill,
Barth & King, Inc. for the 1996, 1995 and
1994 Audits of Southwest Banks, Inc.
Exhibit 99.3 Report of Independent Auditors Coopers &
Lybrand, L.L.P. for the 1996 and 1995
Audits of West Coast Bancorp, Inc.
Exhibit 99.4 Report of Independent Auditors Coopers &
Lybrand, L.L.P. for the 1995 and 1994
Audits of West Coast Bancorp, Inc.
<PAGE>
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 hereunto duly authorized.
F.N.B. CORPORATION
(Registrant)
By: /s/John D. Waters
------------------------------
Name: John D. Waters
Title: Vice President and
Chief Financial Officer
Dated: July 22, 1997
<PAGE>
EXHIBIT INDEX
23.1 Consent of Ernst & Young LLP
23.2 Consent of Hill, Barth & King, Inc.
23.3 Consent of Coopers & Lybrand, L.L.P.
99.1 Audited Supplemental Consolidated Financial Statements for the
years ended December 31, 1996, 1995 and 1994 with Report of
Independent Auditors and Management's Discussion and Analysis
99.2 Report of Independent Auditors Hill, Barth & King, Inc. for the
1996, 1995 and 1994 Audits of Southwest Banks, Inc.
99.3 Report of Independent Auditors Coopers & Lybrand, L.L.P. 1996 and
1995 Audits of West Coast Bancorp, Inc.
99.4 Report of Independent Auditors Coopers & Lybrand, L.L.P. 1995 and
1994 Audits of West Coast Bancorp, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Regarding:
1) Registration Statement on Form S-3 relating to the F.N.B.
Corporation Subordinated Notes and Daily Cash Accounts (File #33-
61367).
2) Registration Statement on Form S-3 relating to the Dividend
Reinvestment Plan (File #33-72532).
3) Registration Statement on Form S-8 relating to the F.N.B.
Corporation Voluntary Dividend Reinvestment and Stock Purchase Plan
(File #333-00943).
4) Registration Statement on Form S-8 relating to the F.N.B.
Corporation 401(k) Plan (File #33-50780)
5) Registration Statement on Form S-8 relating to F.N.B. Corporation
1990 Stock Option Plan (File #33-78114).
6) Registration Statement on Form S-8 relating to F.N.B. Corporation
Restricted Stock Bonus Plan (File #33-78134).
7) Post-Effective Amendment No. 1 to the Registration Statement on
Form S-3 relating to the F.N.B. Corporation Voluntary Dividend
Reinvestment and Stock Purchase Plan (File #33-72532).
8) Registration Statement on Form S-8 relating to F.N.B. Corporation
1996 Stock Option Plan (File #333-03489).
9) Registration Statement on Form S-8 relating to F.N.B. Corporation
Restricted Stock and Incentive Bonus Plan (File #333-03493).
10) Registration Statement on Form S-8 relating to F.N.B. Corporation
Directors Compensation Plan (File #333-03495).
11) Registration Statement on Form S-8 relating to F.N.B. Corporation
401(k) Plan (File #333-03503).
12) Post-Effective Amendment No. 1 on Form S-8 to Registration Statement
on Form S-4 (File #333-01997).
13) Post-Effective Amendment No. 1 on Form S-8 to Registration Statement
on Form S-4 (File #333-22909).
We consent to the incorporation by reference in the above listed
Registration Statements of our report dated July 3, 1997, with respect to the
supplemental consolidated financial statements of F.N.B. Corporation and
subsidiaries as of December 31, 1996 and 1995 and for each of the three years
in the period ended December 31, 1996 included in this Current Report on Form
8-K.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
July 15, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF HILL, BARTH & KING, INC., INDEPENDENT AUDITORS
We consent to the use in this Current Report of F.N.B.
Corporation on Form 8-K of our report dated January 22, 1997,
relating to the financial statements of Southwest Banks, Inc.
which have been incorporated into the Audited Supplemental
Consolidated Financial Statements for the years ended December
31, 1996, 1995 and 1994 appearing elsewhere in this Current Report.
Hill, Barth & King, Inc.
Certified Public Accountants
Naples, Florida
July 15, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of F.N.B. Corporation on Forms S-3 (Registration Nos. 33-61367
and 33-72532) and Forms S-8 (Registration Nos. 333-00943, 33-50780,
33-78114, 33-78134, 333-03489, 333-03493, 333-03495, 333-03503, 333-01997
and 333-22909) of our reports dated January 24, 1997 and January 19,
1996, on our audits of the consolidated financial statements of West
Coast Bancorp, Inc. for the years ended December 31, 1996 and 1995,
and the year ended December 31, 1994, respectively, which reports are
included as exhibits in F.N.B. Corporation's Current Report on Form 8-K.
COOPERS & LYBRAND, L.L.P.
Fort Myers, Florida
July 22, 1997
<PAGE>
EXHIBIT 99.1
Audited Supplemental Consolidated Financial Statements
F.N.B. Corporation and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
with Report of Independent Auditors
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
AUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
CONTENTS
Report of Independent Auditors.............................................1
Audited Supplemental Consolidated Financial Statements
Supplemental Consolidated Balance Sheet......................... 2
Supplemental Consolidated Income Statement...................... 3
Supplemental Consolidated Statement of Stockholders' Equity..... 4
Supplemental Consolidated Statement of Cash Flows............... 5
Notes to Supplemental Consolidated Financial Statements......... 6
Supplemental Selected Financial Data...................................... 27
Supplemental Quarterly Earnings Summary................................... 28
Management's Discussion and Analysis of Financial Conditions and
Results of Operations................................................. 29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
F.N.B. Corporation
We have audited the supplemental consolidated balance sheets of F.N.B.
Corporation and Subsidiaries (F.N.B. Corporation) (formed as a result of the
consolidation of F.N.B. Corporation with Southwest Banks, Inc. and
Subsidiaries and West Coast Bancorp, Inc. and Subsidiary) as of December 31,
1996 and 1995 and the related supplemental consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. The supplemental consolidated financial
statements give retroactive effect to the merger of F.N.B. Corporation and
Southwest Banks, Inc. and Subsidiaries, on January 21, 1997, and West Coast
Bancorp, Inc. and Subsidiary on April 18, 1997 which have been accounted for
using the pooling of interests method as described in the notes to the
supplemental consolidated financial statements. These supplemental
consolidated financial statements are the responsibility of the management of
F.N.B. Corporation. Our responsibility is to express an opinion on these
supplemental consolidated financial statements based on our audits. We did
not audit the financial statements of Southwest Banks, Inc. and Subsidiaries
or West Coast Bancorp, Inc. and Subsidiary which statements reflect total
assets constituting approximately 29% for 1996 and 24% for 1995 of the
related supplemental consolidated financial statement totals, and which
reflect net income constituting approximately 11% of the related supplemental
consolidated financial statement totals for the three year period ended
December 31, 1996. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to
data included for Southwest Banks, Inc. and Subsidiaries and West Coast
Bancorp, Inc. and Subsidiary, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the consolidated financial position of F.N.B. Corporation
at December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, after giving retroactive effect to the mergers of
Southwest Banks, Inc. and Subsidiaries and West Coast Bancorp, Inc. and
Subsidiary, as described in the notes to the supplemental consolidated
financial statements, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
July 3, 1997
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
Dollars in thousands, except par values
December 31 1996 1995
----------- ----------
ASSETS
Cash and due from banks $ 107,476 $ 90,656
Interest bearing deposits with banks 1,334 3,853
Federal funds sold 6,425 57,024
Loans held for sale 9,610 16,020
Securities available for sale 322,068 283,526
Securities held to maturity (fair value of
$173,677 and $174,546) 174,551 174,483
Loans, net of unearned income of $23,763 and $27,258 1,728,132 1,550,190
Allowance for loan losses (27,800) (24,250)
---------- ---------
NET LOANS 1,700,332 1,525,940
Premises and equipment 46,714 40,568
Other assets 49,897 46,455
---------- ----------
$2,418,407 $2,238,525
========== ==========
LIABILITIES
Deposits:
Non-interest bearing 231,264 $ 230,265
Interest bearing 1,782,624 1,665,880
---------- ----------
TOTAL DEPOSITS 2,013,888 1,896,145
Other liabilities 34,825 29,949
Short-term borrowings 112,230 73,501
Long-term debt 58,179 50,784
---------- ---------
TOTAL LIABILITIES 2,219,122 2,050,379
STOCKHOLDERS' EQUITY
Preferred stock - $10 par value
Authorized - 20,000,000 shares
Outstanding - 352,531 and 451,638 shares
Aggregate liquidation value - $8,813 and $11,291 3,525 4,516
Common Stock - $2 par value
Authorized - 100,000,000 shares
Outstanding - 13,305,369 and 12,703,315 26,611 25,406
Additional paid-in capital 101,445 92,142
Retained earnings 66,625 63,690
Net unrealized securities gains 2,566 3,245
Employee Stock Ownership Plan 0 (389)
Treasury stock - 62,723 and 22,340 shares at cost (1,487) (464)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 199,285 188,146
---------- ----------
$2,418,407 $2,238,525
========== ==========
See accompanying Notes to Supplemental Consolidated Financial Statements
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED INCOME STATEMENT
Dollars in thousands, except per share data
Year Ended December 31 1996 1995 1994
---------- ---------- ---------
INTEREST INCOME
Loans, including fees $ 154,962 $ 144,518 $ 123,596
Securities:
Taxable 22,994 22,496 21,702
Tax exempt 2,261 1,939 1,910
Dividends 1,097 928 700
Other 2,269 2,631 1,367
---------- ---------- ---------
TOTAL INTEREST INCOME 183,583 172,512 149,275
INTEREST EXPENSE
Deposits 69,447 66,128 52,988
Short-term borrowings 4,716 5,368 4,038
Long-term debt 3,453 3,258 2,869
---------- ---------- ---------
TOTAL INTEREST EXPENSE 77,616 74,754 59,895
NET INTEREST INCOME 105,967 97,758 89,380
Provision for loan losses 9,791 6,930 9,177
---------- ---------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 96,176 90,828 80,203
NON-INTEREST INCOME
Insurance commissions and fees 4,116 4,284 4,195
Service charges 11,335 10,601 8,551
Trust 1,461 1,390 1,504
Gain (loss) on sale of securities 825 493 1,303
Gain (loss) on sale of loans 691 516 (5)
Other 1,979 1,931 1,560
---------- ---------- ---------
TOTAL NON-INTEREST INCOME 20,407 19,215 17,108
---------- ---------- ---------
116,583 110,043 97,311
NON-INTEREST EXPENSES
Salaries and employee benefits 41,516 38,086 34,518
Net occupancy 6,775 6,660 5,850
Amortization of intangibles 1,047 1,246 1,705
Equipment 6,212 5,572 5,413
Professional service fees 4,363 3,794 3,786
Deposit insurance 970 3,092 4,412
Recapitalization of Savings Association
Insurance Fund 2,752
Promotional 2,568 3,197 2,660
Insurance claims paid 1,707 1,738 1,820
Other 18,901 15,279 14,407
---------- ---------- ---------
TOTAL NON-INTEREST EXPENSES 86,811 78,664 74,571
---------- ---------- ---------
INCOME BEFORE INCOME TAXES 29,772 31,379 22,740
Income taxes 9,893 10,300 7,550
--------- ---------- ---------
NET INCOME $ 19,879 $ 21,079 $ 15,190
========= ========= ========
NET INCOME PER COMMON SHARE
PRIMARY $1.35 $1.45 $1.06
===== ===== =====
FULLY DILUTED $1.32 $1.41 $1.05
===== ===== =====
AVERAGE COMMON SHARES OUTSTANDING 14,074,691 13,942,592 13,503,229
========== ========== ==========
See accompanying Notes to Supplemental Consolidated Financial Statements
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Dollars in thousands, except per share data
<TABLE>
<CAPTION>
Net Employee
Additional Unrealized Stock
Preferred Common Paid-In Retained Securities Ownership Treasury
Stock Stock Capital Earnings Gains/Losses Plan Stock
--------- -------- --------- -------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY
1, 1994 $ 4,582 $ 21,103 $ 66,946 $ 49,873 ($227)
Cumulative effect of
adoption of FAS No.115 $ 2,176
Net income 15,190
Cash dividends declared:
Preferred stock (853)
Common stock $.23 per share
(FNB) and $.17 per share
(West Coast) (2,563)
Purchase of common stock (1,143)
Issuance (retirement) of
common stock 2,339 11,449 3 1,061
Stock dividend 887 5,745 (6,634)
Conversion of preferred
stock (19) 9 24
Obligation under ESOP plan ($141)
Change in net unrealized
securities gains/losses (2,711)
-------- -------- --------- -------- ------------ --------- ------
BALANCE AT
DECEMBER 31, 1994 4,563 24,338 84,164 55,016 (535) (141) (309)
Net income 21,079
Cash dividends declared:
Preferred stock (849)
Common stock $.33 per
share (FNB) and $.20
per share (West Coast) (3,489)
Purchase of common
stock (1,447)
Issuance (retirement) of
common stock 53 344 1,292
Stock dividend 930 7,132 (8,067)
Conversion of preferred
stock (47) 85 502
Obligation under ESOP
plan (248)
Change in net unrealized
securities gains/losses 3,780
-------- ------ ------- ------- ----------- ------- --------BALANCE AT
DECEMBER 31, 1995 4,516 25,406 92,142 63,690 3,245 (389) (464)
Net income 19,879
Cash dividends declared:
Preferred stock (766)
Common stock $.60
per share (FNB) and
$.23 per share (West
Coast) (6,123)
Purchase of common
stock (3,421)
Issuance (retirement) of
common stock (54) (484) 2,398
Stock dividend 860 9,195 (10,055)
Conversion of preferred
stock (991) 399 592
Obligation under
ESOP plan 389
Change in net unrealized
securities gains/losses (679)
-------- ------- -------- ------- ---------- -------- --------
BALANCE AT
DECEMBER 31, 1996 $ 3,525 $26,611 $101,445 $66,625 $ 2,566 $ 0 ($1,487)
======== ======= ======== ======= ========== ======== ========
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
Dollars in thousands
Year Ended December 31 1996 1995 1994
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 19,879 $ 21,079 $ 15,190
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,022 6,374 7,169
Provision for loan losses 9,791 6,930 9,177
Provision for valuation allowance on
other real estate owned 664 100 31
Deferred taxes (1,753) (704) (1,601)
Gain on securities available for sale (825) (493) (1,303)
(Gain) loss on sale of loans (691) (516) 5
Gain on sale of premises and equipment (243)
Proceeds from sale of loans 53,359 54,385 65,700
Loans originated for sale (46,258) (58,872) (98,353)
Net change in:
Interest receivable 1,355 (1,690) (1,276)
Interest payable 642 1,866 1,276
Other, net 6,207 5,838 7,248
-------- -------- -------
Net cash flows from operating activities 48,392 34,054 3,263
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks 2,519 (833) 3,322
Federal funds sold 50,599 (39,608) 14,305
Loans (189,703) (97,630)(117,706)
Purchase of securities available for sale (183,824) (129,320)(106,002)
Purchase of securities held to maturity (41,862) (45,264) (41,036)
Proceeds from sale of securities
available for sale 39,208 7,555 14,661
Proceeds from maturity of securities
available for sale 105,848 86,961 97,090
Proceeds from maturity of securities
held to maturity 41,678 76,474 69,327
Increase in premises and equipment (11,453) (7,054) (11,186)
-------- -------- -------
Net cash flows from investing activities (186,990) (148,719) (77,225)
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits 999 21,135 11,829
Interest bearing deposits 116,744 126,292 22,363
Short-term borrowings 38,729 (13,437) 17,533
Increase in long-term debt 32,899 9,274 36,312
Decrease in long-term debt (25,504) (15,104) (15,226)
Proceeds from the sale and issuance of stock 1,861 1,689 14,867
Purchase of treasury stock (3,421) (1,447) (1,143)
Cash dividends paid (6,889) (4,343) (3,419)
-------- -------- -------
Net cash flows from financing activities 155,418 124,059 83,116
-------- -------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 16,820 9,394 9,154
Cash and Cash Equivalents At Beginning Of Year 90,656 81,262 72,108
--------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $107,476 $ 90,656 $ 81,262
======== ======== ========
See accompanying Notes to Supplemental Consolidated Financial Statements
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The supplemental consolidated financial statements give retroactive effect
to the mergers of Southwest Banks, Inc. (Southwest) and West Coast Bancorp,
Inc. (West Coast) with and into F.N.B. Corporation (the Corporation). The
mergers which were consummated on January 21, 1997 and April 18, 1997
resulted in the Corporation issuing a total of 2,851,907 and 1,197,128 shares
of Common Stock, respectively. These transactions have been accounted for on
a pooling-of-interests basis, and such financial statements are presented as
if the mergers had been consummated for all the periods presented. As
required by generally accepted accounting principles, the combined
consolidated financial statements will become the historical consolidated
financial statements upon issuance of consolidated financial statements for
the quarter ended June 30, 1997.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business:
The Corporation is a bank holding company headquartered in Hermitage,
Pennsylvania. It operates 7 banks through 64 offices and a consumer finance
company through 35 offices in Pennsylvania, Ohio, Florida and New York.
Basis of Presentation:
The supplemental consolidated financial statements include the accounts of
the Corporation and its subsidiaries, including Southwest and West Coast.
All significant intercompany balances and transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Securities:
Debt securities are classified as held to maturity when management has the
positive intent and ability to hold securities to maturity. Securities held
to maturity are carried at amortized cost.
Debt securities not classified as held to maturity and marketable equity
securities are classified as available for sale. Securities available for
sale are carried at fair value with net unrealized securities gains (losses)
reported separately as a component of stockholders' equity, net of tax.
Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are recorded as
net securities gains (losses). The adjusted cost of specific securities sold
is used to compute gains or losses on sales.
Presently, the Corporation has no intention of establishing a trading
securities classification.
<PAGE>
Loans Held for Sale:
Loans held for sale are recorded at the lower of aggregate cost or market
value. Gain or loss on the sale of loans is included in non-interest income.
In May of 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (FAS) No. 122, "Accounting for Mortgage
Servicing Rights," an amendment of FAS No. 65. This Statement, which was
adopted in 1996 on a prospective basis, allows entities originating mortgage
loans for sale to recognize as an asset rights to service these loans.
Additionally, the Corporation must periodically assess its capitalized
mortgage servicing rights for impairment based on the fair value of those
rights. The impact of this Statement did not have a material impact on the
Corporation's results of operations or financial position.
Loans and the Allowance for Loan Losses:
Loans that management has the intent and ability to hold for the
foreseeable future, until maturity or payoff are reported at their
outstanding principal adjusted for any charge-offs and any deferred fees or
costs on originated loans.
Interest income on loans is accrued on the principal amount outstanding.
It is the Corporation's 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, unpaid interest credited to income in
the current year is reversed and unpaid interest accrued in prior years is
charged against the allowance for loan losses. 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. Loan origination fees and related costs are
deferred and recognized over the life of the loans as an adjustment of yield.
The allowance for loan losses is based on management's evaluation of
potential losses in the loan portfolio, which includes an assessment of past
experience, current and estimated future economic conditions, known and
inherent risks in the loan portfolio, the estimated value of underlying
collateral and industry standards. Additions are made to the allowance
through periodic provisions charged to income and recovery of principal on
loans previously charged off. Losses of principal are charged to the
allowance when the loss actually occurs or when a determination is made that
a loss is probable.
<PAGE>
On January 1, 1995, the Corporation adopted FAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by FAS No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
These standards require that impaired loans be identified and measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, or at the loan's observable market price or at the
fair value of the collateral if the loan is collateral dependent. If the
recorded investment in the loan exceeds the measure of fair value, a
valuation allowance is established as a component of the allowance for loan
losses. Impaired loans consist of non-homogeneous loans, which based on the
evaluation of current information and events, management has determined that
it is probable that the Corporation will not be able to collect all amounts
due according to the contractual terms of the loan agreement. The
Corporation evaluates all commercial and commercial real estate loans which
have been classified for regulatory reporting purposes, including non-accrual
and restructured loans, in determining impaired loans. The adoption of these
accounting standards had no material impact on the Corporation's financial
position or results of operations.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed generally on the straight-line method.
Other Real Estate Owned:
Assets acquired in settlement of indebtedness are included in other assets
at the lower of fair value minus estimated costs to sell or at the carrying
amount of the indebtedness. Subsequent write-downs and net direct operating
expenses attributable to such assets are included in other expenses.
Amortization of Intangibles:
Core deposit intangibles are being amortized on accelerated methods over
various lives ranging from 10-17 years.
Accounting for Postretirement Benefits Other than Pensions:
The Corporation recognizes the projected future cost of providing
postretirement benefits, such as health care and life insurance, as an
expense as employees render service.
Income Taxes:
Income taxes are computed utilizing the liability method. Under this
method deferred taxes are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Per Share Amounts:
Earnings and cash dividends per share have been adjusted for common stock
dividends, including the stock dividend issued on April 23, 1997.
Primary earnings per common share is calculated by dividing net income,
adjusted for preferred stock dividends declared, by the sum of the weighted
average number of shares of common stock outstanding and the number of shares
of common stock which would be issued assuming the exercise of stock options
and warrants during each period.
<PAGE>
Fully diluted earnings per common share is calculated by dividing net
income, adjusted for minority interest, by the weighted average number of
shares of common stock outstanding, assuming conversion of outstanding
convertible preferred stock from the beginning of the year or date of
issuance and the exercise of stock options and warrants. Such adjustments to
net income and the weighted average number of shares of common stock
outstanding are made only when such adjustments dilute earnings per common
share.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 (FAS No. 128), "Earnings per Share," which is required to be adopted
on December 31, 1997. At that time, the Corporation will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating earnings per
share, the dilutive effect of stock options will be excluded. The impact of
FAS No. 128 on the calculations of primary and fully diluted earnings per
share is immaterial for the three years in the period ended December 31,
1996.
Cash Equivalents:
The Corporation considers cash and due from banks as cash and cash
equivalents.
New Accounting Standards:
FAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," establishes new standards for determining
whether a transfer constitutes a sale and, if so, the determination of the
resulting gain or loss. These standards are based on the consistent
application of a financial components approach that focuses on control.
Under this approach, an entity recognizes the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. Provisions of this Statement are effective for certain
transactions entered into in 1997 and 1998. The Corporation does not
anticipate this Standard will have a material effect on the Corporation's
financial position or results of operations.
MERGER, ACQUISITION AND DIVESTITURE
On June 30, 1997, the Corporation completed the sale of its subsidiary,
Bucktail Bank and Trust Company (Bucktail), to Sun Bancorp, Inc. (Sun), a
bank holding company headquartered in Selinsgrove, Pennsylvania. Under the
sales agreement, Sun issued 565,384 shares of Sun's common stock in exchange
for 100% ownership of Bucktail. The sale resulted in the Corporation
recognizing an $8.0 million pre-tax gain and attaining a 14.4% ownership
interest in Sun.
<PAGE>
SECURITIES
The amortized cost of securities and their approximate fair values are as
follows:
Securities available for sale (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
December 31, 1996 --------- ---------- ---------- --------
U.S. Treasury and other
U.S. Government agencies
and corporations $ 261,235 $ 403 $ (806) $260,832
Mortgage-backed securities of
U.S. Government agencies 40,642 620 (173) 41,089
Other debt securities 2,000 (16) 1,984
--------- ---------- --------- --------
TOTAL DEBT SECURITIES 303,877 1,023 (995) 303,905
Equity securities 14,235 3,942 (14) 18,163
--------- ---------- --------- --------
$ 318,112 $ 4,965 (1,009) 322,068
========= ========== ========= ========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
December 31, 1995 --------- ---------- ---------- --------
U.S. Treasury and other
U.S. Government agencies
and corporations $ 241,667 $ 1,748 $ (137) $243,278
Mortgage-backed securities of
U.S. Government agencies 22,505 184 (87) 22,602
Other debt securities 2,000 (5) 1,995
--------- ---------- --------- --------
TOTAL DEBT SECURITIES 266,172 1,932 (229) 267,875
Equity securities 12,347 3,304 15,651
--------- ---------- --------- --------
$ 278,519 $ 5,236 $ (229) $283,526
========= ========== ========= =========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
December 31, 1994 --------- ---------- ---------- -------
U.S. Treasury and other
U.S. Government agencies
and corporations $ 126,227 $(2,420) $123,807
Mortgage-backed securities of
U.S. Government agencies 5,300 $ 3 (529) 4,774
Other debt securities 1,000 (11) 989
---------- --------- -------- --------
TOTAL DEBT SECURITIES 132,527 3 (2,960) 129,570
Equity securities 13,213 2,202 (81) 15,334
---------- --------- -------- --------
$ 145,740 $ 2,205 $(3,041) $144,904
========== ========= ======== ========
Securities held to maturity (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
December 31, 1996 --------- ---------- ---------- -------
U.S. Treasury and other
U.S. Government
agencies and corporations $ 15,388 $ 57 $ (22) $15,423
States of the U.S. and political
subdivisions 55,569 147 (438) 55,278
Mortgage-backed securities of
U.S. Government agencies 103,551 98 (712) 102,937
Other debt securities 43 (4) 39
---------- ---------- --------- --------
$ 174,551 $ 302 (1,176) $173,677
========== ========== ========= ========
<PAGE>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
December 31, 1995 --------- ---------- ---------- -------
U.S. Treasury and other
U.S. Government agencies
and corporations $ 22,367 $ 170 $ (37) $ 22,500
States of the U.S. and political
subdivisions 47,505 197 (288) 47,414
Mortgage-backed securities of
U.S. Government agencies 104,555 447 (421) 104,581
Other debt securities 56 (5) 51
--------- ---------- --------- --------
$ 174,483 $ 814 $ (751) $174,546
========= ========== ========= ========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
December 31, 1994 --------- ----------- ---------- -------
U.S. Treasury and
other U.S. Government
agencies and corporations $ 175,913 $ 1 $ (4,989) $170,925
States of the U.S. and political
subdivisions 44,805 67 (3,095) 41,777
Mortgage-backed securities of
U.S. Government agencies 83,288 3 (5,052) 78,239
Other debt securities 61 (8) 53
---------- ---------- --------- --------
$ 304,067 $ 71 $(13,144) $290,994
========== ========== ========= ========
In December of 1995, the Corporation transferred $97.5 million of debt
securities from the held to maturity category to the available for sale
category in accordance with the implementation guidance issued on FAS No.
115. At the time of transfer, the market value of the securities totaled
$97.8 million, and the unrealized gain, net of taxes, of $118,000 was
recorded as an increase to stockholders' equity.
At December 31, 1996 and 1995, respectively, securities with a carrying
value of $135.9 million and $119.2 million were pledged to secure public
deposits, trust deposits and for other purposes as required by law.
Securities with a carrying value of $63.9 million and $40.5 million at
December 31, 1996 and 1995, respectively, were pledged as collateral for
other borrowings.
As of December 31, 1996, the Corporation had not entered into any
off-balance sheet derivative transactions.
As of December 31, 1996, the amortized cost and fair value of securities,
by contractual maturities, were as follows (in thousands):
HELD TO MATURITY AVAILABLE FOR SALE
---------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
December 31, 1996 ---------- --------- --------- --------
Due in one year or less $ 12,269 $ 12,276 $ 120,114 $120,304
Due from one to five years 46,926 46,594 124,915 124,393
Due from five to ten years 11,386 11,447 17,499 17,412
Due after ten years 419 423 707 707
---------- --------- --------- --------
71,000 70,740 263,235 262,816
Mortgage-backed securities of
U.S. Government Agencies 103,551 102,937 40,642 41,089
Equity Securities 14,235 18,163
---------- --------- --------- --------
$ 174,551 $ 173,677 $ 318,112 $ 322,068
========== ========= ========= ========
<PAGE>
Maturities may differ from contractual terms because borrowers may have the
right to call or prepay obligations with or without penalties. Periodic
payments are received on mortgage-backed securities based on the payment
patterns of the underlying collateral.
Proceeds from sales of securities available for sale during 1996, 1995 and
1994 were $39.2 million, $7.5 million and $14.7 million, respectively. Gross
gains and gross losses were realized on those sales as follows (in
thousands):
1996 1995 1994
------ ------ ------
Gross gains $ 880 $ 530 $1,351
Gross losses 55 37 48
------ ------- ------
$ 825 $ 493 $1,303
====== ======= ======
LOANS
Following is a summary of loans (in thousands):
December 31 1996 1995
---------- ----------
Real estate:
Residential $ 682,600 $ 610,880
Commercial 421,057 380,571
Construction 41,661 36,264
Installment loans to individuals 395,628 383,457
Commercial, financial and agricultural 189,411 161,239
Lease financing 21,538 5,037
Unearned income (23,763) (27,258)
---------- --------
$1,728,132 $1,550,190
---------- --------
Certain directors and executive officers of the Corporation and its
significant subsidiaries, as well as associates of such persons, were loan
customers during 1996. Such loans were made in the ordinary course of
business under normal credit terms and do not represent more than a normal
risk of collection. Following is a summary of the amount of loans in which
the aggregate of the loans to any such persons exceeded $60,000 during the
year (in thousands):
Total loans at December 31, 1995 $ 29,184
New loans 43,308
Repayments (39,144)
Other (2,408)
---------
Total loans at December 31, 1996 $ 30,940
=========
Other represents the net change in loan balances resulting from changes in
related parties during the year.
<PAGE>
NON-PERFORMING ASSETS
Following is a summary of non-performing assets (in thousands):
December 31 1996 1995 1994
-------- -------- --------
Non-accrual loans $ 9,571 $ 9,506 $ 11,244
Restructured loans 2,146 3,075 3,157
-------- -------- --------
TOTAL NON-PERFORMING LOANS 11,717 12,581 14,401
Other real estate owned 7,039 4,783 4,822
-------- -------- --------
TOTAL NON-PERFORMING ASSETS $ 18,756 $ 17,364 $ 19,223
======== ======== ========
For the years ended December 31, 1996, 1995 and 1994, income recognized on
non-accrual and restructured loans was $763,000, $684,000 and $676,000,
respectively. Income that would have been recognized during 1996, 1995 and
1994 on such loans if they were in accordance with their original terms was
$1.4 million, $1.3 million and $1.8 million, respectively. Loans past due 90
days or more were $3.0 million, $3.9 million and $2.8 million at December 31,
1996, 1995 and 1994, respectively.
Following is a summary of information pertaining to loans considered to be
impaired under FAS 114 (in thousands):
At of For the Year Ended December 31 1996 1995
-------- --------
Impaired loans with an allocated allowance $ 4,494 $ 7,507
Impaired loans without an allocated allowance 5,298 7,575
-------- --------
Total impaired loans $ 9,792 $15,082
======== ========
Allocated allowance on impaired loans $ 1,451 $ 1,473
======== ========
Portion of impaired loans on non-accrual $ 4,751 $ 5,652
======== ========
Average impaired loans $12,437 $18,119
======== ========
Income recognized on impaired loans $ 735 $ 1,101
======== ========
ALLOWANCE FOR LOAN LOSSES
Following is an analysis of changes in the allowance for loan losses (in
thousands):
Year Ended December 31 1996 1995 1994
-------- -------- --------
Balance at beginning of year $ 24,250 $ 22,268 $ 17,995
Charge-offs (7,760) (6,831) (6,755)
Recoveries 1,519 1,883 1,851
-------- -------- --------
NET CHARGE-OFFS (6,241) (4,948) (4,904)
Provision for loan losses 9,791 6,930 9,177
-------- -------- --------
Balance at end of year $ 27,800 $ 24,250 $ 22,268
======== ======== ========
PREMISES AND EQUIPMENT
Following is a summary of premises and equipment (in thousands):
December 31 1996 1995
-------- --------
Land $ 8,977 $ 7,968
Premises 43,346 35,757
Equipment 31,038 29,077
-------- --------
83,361 72,802
Accumulated depreciation (36,647) (32,234)
-------- --------
$ 46,714 $40,568
======== ========
<PAGE>
Depreciation expense was $5.3 million for 1996, $4.5 million for 1995 and
$4.3 million for 1994. The Corporation is in the process of constructing a
new multi-story building in Hermitage, as well as three new branches in Erie
and a new branch in Collier County, Florida. Construction, equipment and
furnishing costs are projected to be approximately $13.2 million, of which
$5.3 million has been funded as of December 31, 1996.
The Corporation has operating leases extending to 2044 for certain land,
office locations and equipment. Leases that expire are generally expected to
be renewed or replaced by other leases. Rental expense was $2.6 million for
1996, $2.7 million for 1995 and $2.1 million for 1994. Total minimum rental
commitments under such leases were $22.0 million at December 31, 1996.
Following is a summary of future minimum lease payments for years following
December 31, 1996 (in thousands):
1997 $1,762
1998 1,504
1999 996
2000 757
2001 647
Later years 16,289
DEPOSITS
Following is a summary of deposits (in thousands):
December 31 1996 1995
---------- ----------
Non-interest bearing $ 231,264 $ 230,265
Savings and NOW 851,156 755,708
Certificates of deposit and
other time deposits 931,468 910,172
---------- ----------
$2,013,888 $1,896,145
========== ==========
Following is a summary of the scheduled maturities of time deposits for
each of the five years following December 31, 1996 (in thousands):
1997 $622,703
1998 167,204
1999 59,625
2000 63,170
2001 17,620
Later years 1,146
Time deposits of $100,000 or more were $173.8 million and $159.4 million at
December 31, 1996 and 1995, respectively. Following is a summary of these
time deposits by remaining maturity at December 31, 1996(in thousands):
CERTIFICATES OTHER TIME
OF DEPOSIT DEPOSITS TOTAL
December 31, 1996 ------------ ------------ ------------
Three months or less $53,980 $ 4,151 $ 58,131
Three to six months 34,013 2,496 36,509
Six to twelve months 33,058 4,986 38,044
Over twelve months 22,588 18,523 41,111
--------- -------- -------
$143,639 $30,156 $173,795
========= ======== =======
<PAGE>
SHORT-TERM BORROWINGS
Following is a summary of short-term borrowings (in thousands):
December 31 1996 1995
-------- --------
Securities sold under repurchase agreements $ 35,471 $ 21,267
Federal funds purchased 20,052
Other short-term borrowings 1,506 4,872
Subordinated notes 55,201 47,362
-------- --------
$112,230 $ 73,501
======== ========
Credit facilities amounting to $25.0 million at December 31, 1996 and
December 31, 1995 were maintained with various banks with rates which are at
or below prime rate. The facilities and their terms are periodically
reviewed by the banks and are generally subject to withdrawal at their
discretion. The amount of these credit facilities which were unused amounted
to $25.0 million at December 31, 1996 and $22.0 million at December 31, 1995.
In addition, certain subsidiaries have lines of credit with the Federal
Home Loan Bank, which if used would require collateralization. No amounts
were used as of December 31, 1996.
LONG-TERM DEBT
Following is a summary of long-term debt (in thousands):
December 31 1996 1995
-------- --------
Real estate mortgages payable $ 147 $ 284
Federal Home Loan Bank advances 24,042 13,106
Subordinated notes 33,990 37,394
-------- --------
$ 58,179 $ 50,784
======== =========
The Federal Home Loan Bank advances are secured by residential real estate
loans and Federal Home Loan Bank Stock and are scheduled to mature in various
amounts annually from 1997 through 1999. Interest rates paid on these
advances range from 5.10% to 5.38%.
Subordinated notes are unsecured and subordinated to other indebtedness of
the Corporation. The subordinated notes are scheduled to mature in various
amounts annually from 1997 through the year 2006. At December 31, 1996,
$24.0 million of long-term subordinated debt is redeemable prior to maturity
at a discount equal to three months of interest. The issuer may require the
holder to give 30 days prior written notice. No sinking fund is required and
none has been established to retire the debt. The weighted average interest
rate on long-term subordinated debt was 7.69% at December 31, 1996 and 7.79%
at December 31, 1995.
Scheduled annual maturities for all of the long-term debt for each of the
five years following December 31, 1996 are as follows (in thousands):
1997 $24,284
1998 4,607
1999 12,042
2000 1,932
2001 963
Later years 14,351
<PAGE>
COMMITMENTS AND CREDIT RISK
The Corporation 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 Corporation'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 Corporation for both on- and off-balance sheet items.
Following is a summary of off-balance sheet credit risk information (in
thousands):
December 31 1996 1995
-------- --------
Commitments to extend credit $278,310 $226,459
Standby letters of credit 14,059 11,638
At December 31, 1996, funding of approximately 75% of the commitments to
extend credit is dependent on the financial condition of the customer. The
Corporation 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
Corporation 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.
STOCKHOLDERS' EQUITY
Series A - Cumulative Convertible Preferred Stock (Series A Preferred) was
created for the purpose of acquiring Reeves Bank. Holders of Series A
Preferred are entitled to 5.4 votes for each share held. The holders do not
have cumulative voting rights in the election of directors. Dividends are
cumulative from the date of issue and are payable at $.42 per share each
quarter. Series A Preferred is convertible at the option of the holder into
shares of the Corporation's common stock having a market value of $25.00 at
time of conversion. The Corporation has the right to require the conversion
of the balance of all outstanding shares at the conversion rate. During
1996, 1,250 shares of Series A Preferred were converted to 1,336 shares of
common stock. At December 31, 1996, 27,101 shares of common stock were
reserved by the Corporation for the conversion of the remaining 23,588
outstanding shares.
Series B - Cumulative Convertible Preferred Stock (Series B Preferred) was
issued during 1992 for the purpose of raising capital for the Erie
acquisition. Holders of Series B Preferred have no voting rights. Dividends
are cumulative from the date of issue and are payable at $.46875 per share
each quarter. Series B Preferred has a stated value of $25.00 per share and
is convertible at the option of the holder at any time into shares of the
Corporation's common stock at a price of $11.64 per share. The Corporation
has the right to require the redemption of the balance of all outstanding
shares at the conversion rate. During 1996, 97,857 shares of Series B
Preferred were converted to 197,792 shares of common stock. At December 31,
1996, 706,424 shares of common stock were reserved by the Corporation for the
conversion of the remaining 328,943 outstanding shares.
<PAGE>
STOCK INCENTIVE PLANS
The Corporation has available up to 913,962 shares of common stock to be
issued under the restricted stock and incentive bonus and restricted stock
bonus plans to key employees of the Corporation. All shares of stock awarded
under these plans vest in equal installments over a five year period on each
anniversary of the date of grant. At December 31, 1996, 2,102 shares were
vested under these plans. Participants have full voting rights on all shares
regardless of vesting unless forfeited. The shares of stock awarded under
the plan are held in the participants name and are enrolled in the Voluntary
Dividend Reinvestment and Stock Purchase Plan. During 1996, the Corporation
awarded 1,470 shares, 20% of which become vested in January 1997.
The Corporation has available up to 2,036,464 shares of common stock to be
issued under stock option plans to key employees of the Corporation. The
options vest in equal installments over a five-year period. The options are
granted at a price equal to the fair market value at the date of the grant
and are exercisable within ten years from the date of the grant. The
Corporation has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25), and related
interpretations in accounting for its employee stock options. Under APB No.
25, because the exercise price of the Corporation's stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FAS No. 123, "Accounting for Stock-Based Compensation." FAS No.
123 also requires that the pro forma information be determined using the fair
value method as if the Corporation had accounted for its employee stock
options granted subsequent to December 31, 1994. The fair value for these
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 1996 and
1995: risk-free interest rates of 5.63% and 7.65%, respectively; dividend
yield of 3.00%; volatility factor of the expected market price of the
Corporation's common stock of .19%; and a weighted average expected life of
the option of 7.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferrable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Corporation's employee stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period of five
years. Because FAS No. 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected until
1997.
Following is the pro forma information (in thousands, except per share
data):
Year Ended December 31 1996 1995
---------- ----------
Pro forma net income $ 19,718 $ 21,017
======== ========
Pro forma net income per common share:
Primary $1.34 $1.44
===== =====
Fully diluted $1.31 $1.41
===== =====
<PAGE>
At December 31, 1996, options for 333,693 of common stock were exercisable
at prices ranging from $6.57 to $17.15 per share.
Activity in the Option Plan during the past three years was as follows:
1996 1995 1994
------- ------- -------
Outstanding, beginning of year 699,929 593,756 468,420
Granted during the year 177,447 126,026 145,529
Exercised during the year (at prices
ranging from $6.57 to $17.15
per share) (7,085) (4,320) (3,753)
Forfeited during the year (6,600) (15,533) (16,440)
------- ------- -------
Ending balance 863,691 699,929 593,756
======= ======= =======
The Corporation has granted warrants to purchase one share of common stock
(at an exercise price of $6.57 or $10.57 per share). Such warrants are
exercisable and will expire on June 19, 2001 or December 17, 2003. The
Corporation has reserved 209,865 shares of common stock for issuance in
connection with these warrants.
RETIREMENT PLANS
Certain of the Corporation's subsidiaries have defined benefit retirement
plans covering substantially all of their employees. The expense associated
with these plans was $2.0 million in 1996, $1.7 million in 1995 and $1.6
million in 1994.
The defined benefit plans provide benefits based on years of credited
service and compensation (as defined), subject to ERISA limitations.
Contributions to the tax-qualified plans are made in amounts not less than
the minimum-required contribution under ERISA nor more than the
maximum-deductible contribution under the Internal Revenue Code.
Following is the estimated funded status (in thousands):
<TABLE>
<CAPTION>
December 31 1996 1995
-------------------------------------------------
Plans Whose Plans Whose Plans Whose Plans Whose
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 13,841 $ 2,770 $ 13,406 $2,439
======== ======== ======== ======
Accumulated benefit obligation $ 14,150 $ 3,635 $ 13,625 $3,169
======== ======== ======== ======
Projected benefit obligation
for services rendered to date $(17,472) $ (4,160) $(17,114) $(3,720)
Plan assets at fair value,
primarily U.S.Government
securities and common stocks 20,238 17,881
-------- --------- -------- -------
Plan assets in excess of or (less
than) projected benefit obligation 2,766 (4,160) 767 (3,720)
Unrecognized net (gain) loss (1,832) (63) 21 (33)
Unrecognized net obligation 52 58
Unrecognized prior service cost 146 1,911 162 2,158
-------- --------- -------- --------
Prepaid (accrued) pension costs $ 1,132 $(2,312) $ 1,008 $ (1,568)
======== ========= ======== ========
</TABLE>
<PAGE>
The pension expense for the defined benefit plans included the following
components (in thousands):
Year Ended December 31 1996 1995 1994
------- ------- ------
Service costs - benefits earned
during the period $ 1,244 $ 854 $1,072
Interest cost on projected benefit
obligation 1,525 1,375 1,237
Actual return on plan assets (2,026) (3,014) 330
Net amortization 894 2,115 (1,293)
------- ------- ------
Net pension expense $ 1,637 $ 1,330 $1,346
======= ======= ======
Assumptions as of December 31 1996 1995 1994
------- ------- ------
Weighted average discount rate 7.5% 7.0% 8.5%
Rates of increase in compensation levels 4.0% 4.0% 4.0%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
At December 31, 1996 and 1995, respectively, plan assets include $965,000
and $745,000 of the Corporation's common stock and $184,000 and $193,000 of
the Corporation's subordinated debt.
Certain subsidiaries of the Corporation participate in a qualified 401(k)
defined contribution plan for the full-time employees of the subsidiary. A
percentage of employees' contributions to the plan are matched by the
Corporation. The Corporation's contribution expense amounted to $404,000 in
1996, $380,000 in 1995 and $327,000 in 1994.
The remaining subsidiaries of the Corporation participate in a Salary
Savings ESOP Plan, under which eligible employees may contribute a percentage
of their salary. The Corporation matches 50 percent of an eligible
employee's contribution on the first 6 percent that the employee defers, and
may make a discretionary contribution payable either in cash or the
Corporation's common stock based upon the Corporation's profitability and
approval of the Board of Directors. Employees are generally eligible to
participate upon completing one year of service and having attained age 21.
Employer contributions become 20 percent vested when an employee has
completed two years of service, and vest at a rate of 20 percent per year
thereafter. The Corporation recognized expense of $384,000 in 1996, $298,000
in 1995 and $189,000 in 1994 related to the Salary Savings ESOP Plan.
POSTRETIREMENT PLANS
In addition to the Corporation's retirement plans, the Corporation has
various unfunded postretirement plans which provide medical benefits and life
insurance benefits to its retirees. The postretirement health care plans
vary, the most stringent of which are contributory and contain other
cost-sharing features such as deductibles and co-insurance. The life
insurance plans are noncontributory.
<PAGE>
The amounts recognized in the Corporation's consolidated financial
statements are as follows (in thousands):
Year Ended December 31 1996 1995
-------- --------
Accumulated postretirement benefit obligation:
Current retirees $ 79 $ 186
Fully eligible actives 49 50
Other actives 688 594
------- -------
Total Accumulated Postretirement
Benefit Obligation 816 830
Unrecognized net transition obligation (612) (760)
Unrecognized net gain 233 255
Unrecognized prior service cost (7) (9)
------- -------
Accrued postretirement benefit liability $ 430 $ 316
======= =======
Net periodic postretirement benefit cost included the following components
(in thousands):
Year Ended December 31 1996 1995 1994
------- ------- -------
Service cost $ 66 $ 60 $ 75
Interest cost 54 68 73
Amortization of transition obligation 30 38 49
------- ------- -------
Net periodic postretirement benefit cost $ 150 $ 166 $ 197
======= ======= =======
A 6.50 % annual rate of increase in the per capita costs of covered health
care benefits is assumed for 1997, gradually decreasing to 5.25 % by the year
2001. Increasing the assumed health care cost trend rates by one percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1996 by $77,000 and increase the aggregate of
the service and interest cost component of net periodic postretirement
benefit cost for 1996 by $14,000. A discount rate of 7.50 % was used to
determine the accumulated postretirement benefit obligation.
RECAPITALIZATION OF SAVINGS ASSOCIATION INSURANCE FUND
On September 30, 1996, the Deposit Insurance Funds Act of 1996 was signed
into law and included a provision to recapitalize the Savings Association
Insurance Fund (SAIF). The legislation required a one-time assessment on all
deposits insured by the SAIF, including those held be chartered commercial
banks as a result of previous acquisitions. The one-time assessment paid by
the Corporation totaled $2.8 million, or $.19 per share. The legislation
also included provisions that will result in a reduction in future annual
deposit insurance costs.
INCOME TAXES
Income tax expense consists of the following (in thousands):
Year Ended December 31 1996 1995 1994
------- ------- -------
Current income taxes:
Federal taxes $11,339 $10,572 $ 8,849
State taxes 308 428 302
------- ------- -------
11,647 11,000 9,151
Deferred income taxes:
Federal taxes (1,648) (688) (1,586)
State taxes (106) (12) (15)
------- ------- -------
$ 9,893 $10,300 $ 7,550
======= ======= =======
<PAGE>
The tax effects of temporary differences that give rise to deferred tax
assets liabilities are presented below (in thousands):
December 31 1996 1995
------- --------
Deferred tax assets:
Allowance for loan losses $ 8,609 $ 7,535
Deferred compensation 936 860
Deferred benefits 634 386
Loan fees 247 236
Other 1,061 603
------- -------
TOTAL GROSS DEFERRED TAX ASSETS 11,487 9,620
------- -------
Deferred tax liabilities:
Depreciation (752) (930)
Dealer reserve participation (957)
Unrealized gains on securities available
for sale (2,112) (2,117)
Leasing (1,915) (285)
Other (719) (1,100)
------- -------
TOTAL GROSS DEFERRED TAX LIABILITIES (5,498) (5,389)
------- -------
NET DEFERRED TAX ASSETS $ 5,989 $ 4,231
======= =======
Following is a reconciliation between tax expense using federal statutory
tax and actual effective tax:
Year Ended December 31 1996 1995 1994
------ ------ ------
Federal statutory tax 35.0% 35.0% 35.0%
Effect of nontaxable interest and
dividend income (4.5) (4.3) (6.0)
State taxes .6 .8 .8
Goodwill .3 .4 .6
Merger related costs 2.4
Other items (.6) .9 2.8
------ ------ ------
Actual effective taxes 33.2% 32.8% 33.2%
====== ====== ======
Included in loan income is interest on tax-free loans of $2.1 million, $2.4
million and $2.5 million for 1996, 1995 and 1994, respectively. The related
income tax expense on securities gains amounting to $289,000, $173,000 and
$456,000 for 1996, 1995 and 1994, respectively, is included in income taxes.
CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information (in
thousands):
Year Ended December 31 1996 1995 1994
-------- -------- --------
Cash paid during year for:
Interest $ 76,974 $ 72,888 $ 58,619
Income taxes 9,601 10,706 8,334
Non-cash Investing and
Financing Activities:
Acquisition of real estate in
settlement of loans $ 6,319 $ 3,187 $ 3,749
Loans granted in the sale of
other real estate 319 321 1,267
Transfers and reclassifications of
investment securities to securities
available for sale 97,483 17,257
Loans reclassified from held for sale 119,858
<PAGE>
REGULATORY MATTERS
The Corporation and its banking subsidiaries are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Corporation's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and its banking
subsidiaries must meet specific capital guidelines that involve quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Corporation's and
banking subsidiaries' capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulators to ensure capital adequacy
require the Corporation and its banking subsidiaries to maintain minimum
amounts and ratios of total and tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and of tier 1 capital to
average assets (as defined). Management believes, as of December 31, 1996,
that the Corporation and each of its banking subsidiaries meet all capital
adequacy requirements to which they are subject.
Capital ratios as of December 31, 1996 for the Corporation and its
significant subsidiary, First National Bank of Pennsylvania, are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
To Be well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----- --------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
F.N.B. CORPORATION:
Total Capital $225,762 13.0% $139,242 8.0% $174,053 10.0%
(to risk-
weighted assets)
Tier 1 Capital 194,753 11.2 69,621 4.0 104,432 6.0
(to risk-
weighted assets)
Tier 1 Capital 194,753 8.2 95,529 4.0 119,411 5.0
(to average assets)
FIRST NATIONAL BANK OF
PENNSYLVANIA:
Total Capital $ 88,259 12.0% $ 58,668 8.0% $ 73,335 10.0%
(to risk-
weighted assets)
Tier 1 Capital 79,059 10.8 29,334 4.0 44,001 6.0
(to risk-
weighted assets)
Tier 1 Capital 79,059 7.8 50,904 4.0 50,904 5.0
(to average assets)
</TABLE>
As of December 31, 1996, the Corporation and each of its banking
subsidiaries have been categorized by the various regulators as "well
capitalized" under the regulatory framework for prompt corrective action.
<PAGE>
The Corporation's banking subsidiaries were required to maintain aggregate
reserves amounting to $20.0 million at December 31, 1996 to satisfy federal
regulatory requirements. The Corporation also maintains deposits for various
services such as check clearing.
Certain limitations exist under applicable law and regulations by
regulatory agencies regarding dividend payments to a parent by its
subsidiaries. As of December 31, 1996, the subsidiaries had $26.3 million of
retained earnings available for distribution as dividends without prior
regulatory approval.
Under current Federal Reserve regulations, the Corporation's banking
subsidiaries are limited in the amount they may lend to non-bank affiliates,
including the Corporation. Such loans must be secured by specified
collateral. In addition, any such loans to a single non-bank affiliate may
not exceed 10% of any banking subsidiary's capital and surplus and the
aggregate of loans to all such affiliates may not exceed 20%. The maximum
amount that may be borrowed by the parent company under these provisions
approximated $36.0 million at December 31, 1996.
PARENT COMPANY FINANCIAL STATEMENTS
Below is condensed financial information of F.N.B. Corporation (parent
company only). In this information, the parent's investments in subsidiaries
are stated at cost plus equity in undistributed earnings of subsidiaries
since acquisition. This information should be read in conjunction with the
supplemental consolidated financial statements.
BALANCE SHEET (IN THOUSANDS):
December 31 1996 1995
--------- ---------
ASSETS
Cash $ 19 $ 16
Short-term investments 4,457 2,928
Advances to subsidiaries 81,099 76,849
Receivables 5,162 4,761
Securities available for sale 7,191 6,720
Investment in bank subsidiaries 180,048 167,851
Investment in non-bank subsidiaries 14,715 20,869
-------- --------
$292,691 $279,994
======== ========
LIABILITIES
Other liabilities $ 4,215 $ 4,092
Short-term borrowings 55,201 50,362
Long-term debt 33,990 37,394
-------- --------
TOTAL LIABILITIES 93,406 91,848
-------- --------
STOCKHOLDERS' EQUITY 199,285 188,146
-------- --------
TOTAL $292,691 $279,994
======== ========
<PAGE>
INCOME STATEMENT (IN THOUSANDS)
Year Ended December 31 1996 1995 1994
------- ------- --------
INCOME
Dividend income from subsidiaries:
Bank $11,778 $ 8,942 $ 6,849
Non-bank 2,501 3,706 3,596
------- ------- -------
14,279 12,648 10,445
Gain on sale of securities 850 512 1,287
Interest income 5,394 4,924 4,062
Other income 254 206 190
------- ------- -------
TOTAL INCOME 20,777 18,290 15,984
------- ------- -------
EXPENSES
Interest expense 5,920 5,972 5,465
Service fees 617 609 559
Other expenses 2,076 1,297 1,239
------- ------- -------
TOTAL EXPENSES 8,613 7,878 7,263
------- ------- -------
INCOME BEFORE TAXES AND
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 12,164 10,412 8,721
Income tax credit 618 700 430
------- ------- -------
12,782 11,112 9,151
------- ------- -------
Equity in undistributed income
of subsidiaries:
Bank 6,064 8,968 5,871
Non-bank 1,033 999 168
------- ------- -------
7,097 9,967 6,039
------- ------- -------
NET INCOME $19,879 $21,079 $15,190
======= ======= =======
<PAGE>
STATEMENT OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31 1996 1995 1994
-------- --------- ---------
OPERATING ACTIVITIES
Net income $ 19,879 $ 21,079 $ 15,190
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of securities (850) (512) (1,287)
Undistributed earnings of subsidiaries (7,097) (9,967) (6,039)
Other, net (2,030) (882) (1,417)
-------- -------- --------
Net cash flows from operating
activities 9,902 9,718 6,447
INVESTING ACTIVITIES
Purchase of securities (235) (383) (400)
Proceeds from sale of securities 1,244 922 2,346
Advances from (to) subsidiaries (4,250) (6,107) (4,779)
Investment in subsidiaries 356 737 (16,278)
-------- ------- -------
Net cash flows from investing
activities (2,885) (4,831) (19,111)
FINANCING ACTIVITIES
Net decrease in due to non-bank subsidiary (4,295)
Net decrease in short-term borrowings 4,839 (1,723) (1,210)
Decrease in long-term debt (12,303) (5,334) (7,400)
Increase in long-term debt 8,899 6,274 15,275
Purchase of common stock (3,421) (1,447) (1,143)
Sale of common stock 1,861 1,689 14,867
Cash dividends paid (6,889) (4,343) (3,419)
------- ------ -------
Net cash flows from financing activities (7,014) (4,884) 12,675
------- ------ -------
NET INCREASE IN CASH 3 3 11
Cash at beginning of year 16 13 2
------- ------ -------
CASH AT END OF YEAR $ 19 $ 16 $ 13
======= ====== =======
CASH PAID
Interest $ 6,251 $ 5,009 $ 4,433
Income taxes 39
Subordinated notes, included within short-term borrowings and long-term
debt, are unsecured and subordinated to other indebtedness of the
Corporation. At December 31, 1996, $79.1 million principal amount of such
notes was redeemable prior to maturity by the holder at a discount equal to
one month of interest on short-term notes or three months of interest on
long-term notes. The issuer may require the holder to give 30 days prior
written notice. No sinking fund has been established to retire the notes.
The weighted average interest rate was 6.25% at December 31, 1996 and 6.63%
at December 31, 1995. The subordinated notes are scheduled to mature in
various amounts annually from 1997 through the year 2006.
Following is a summary of the combined aggregate scheduled annual
maturities for each year following December 31, 1996 (in thousands):
1997 $64,387
1998 4,583
1999 3,018
2000 1,917
2001 948
Later years 14,338
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Due from Banks:
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Securities:
For both securities available for sale and securities held to maturity,
fair value equals quoted market price, if available. If a quoted market
price is not available, fair value is estimated using quoted market prices
for similar securities.
Loans:
The fair value of fixed rate loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
The fair value of adjustable rate loans approximate the carrying amount, as
these loans reprice periodically at current market rates.
Deposits:
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date. The
fair value of fixed-maturity deposits is estimated by discounting future cash
flows using rates currently offered for deposits of similar remaining
maturities. The fair value estimates do not include the benefits that result
from low-cost funding provided by the deposit liabilities compared to the
cost of alternate sources of funds.
Short-Term Borrowings:
The carrying amounts for short-term borrowings approximate fair value for
amounts that mature in 90 days or less. The fair value of subordinated notes
is estimated by discounting future cash flows using rates currently offered.
Long-Term Debt:
The fair value of long-term debt is estimated by discounting future cash
flows based on the market prices for the same or similar issues or on the
current rates offered to the Corporation for debt of the same remaining
maturities.
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
1996 1995
--------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
FINANCIAL ASSETS
Cash and short-term
investments $ 115,235 $ 115,235 $ 151,533 $ 151,533
Securities available
for sale 322,068 322,068 283,526 283,526
Securities held to maturity 174,551 173,677 174,483 174,546
Net loans 1,709,942 1,736,612 1,525,940 1,548,873
FINANCIAL LIABILITIES
Deposits $2,013,888 $2,020,398 $1,896,145 $1,901,764
Short-term borrowings 112,230 112,230 73,501 73,501
Long-term debt 58,179 58,901 50,784 50,504
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
YEAR ENDED DECEMBER 31 * 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Total interest income 183,583 $ 172,512 $ 149,275 $ 144,251 $ 141,844
Total interest expense 77,616 74,754 59,895 62,858 69,798
Net interest income 105,967 97,758 89,380 81,393 72,046
Provision for loan losses 9,791 6,930 9,177 9,863 15,796
Total non-interest income 20,407 19,215 17,108 18,488 15,197
Total non-interest
expenses 86,811 78,664 74,571 72,216 59,832
Net income 19,879 21,079 15,190 12,219 8,310
Net income, excluding
non-recurring items 23,746
AT YEAR-END
Total assets $2,418,407 $2,238,525 $2,087,816 $1,982,920 $1,935,643
Deposits 2,013,888 1,896,145 1,748,718 1,714,527 1,694,527
Net loans 1,700,332 1,525,940 1,437,809 1,209,018 1,156,577
Long-term debt 58,179 50,784 56,614 32,528 33,198
Preferred stock 3,525 4,516 4,563 4,582 4,605
Total stockholders'
equity 199,285 188,146 167,096 142,277 125,869
PER COMMON SHARE *
Net income
Primary $ 1.35 $ 1.45 $ 1.06 $ .93 $ .68
Fully diluted 1.32 1.41 1.05 .93 .68
Net income, excluding non-
recurring items
Primary 1.62
Fully diluted 1.58
Cash dividends (FNB) .60 .33 .24 .23 .21
Cash dividends (West Coast) .23 .20 .17 .08
Book value 13.70 12.65 11.42 10.45 9.82
RATIOS *
Return on average assets .86% .98% .75% .63% .49%
Return on average assets,
excluding non-recurring
items 1.03
Return on average equity 10.19 11.85 9.53 9.00 6.97
Return on average equity,
excluding non-recurring
items 12.17
Dividends payout ratio 32.04 17.25 17.88 20.27 25.96
Average equity to
average assets 8.47 8.23 7.83 7.00 7.03
* Non-recurring items include a one-time assessment of $1.8 million legislated
by Congress to recapitalize the Savings Association Insurance Fund and merger
related costs of approximately $2.1 million, each on an after-tax basis.
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL QUARTERLY EARNINGS SUMMARY (Dollars in thousands, except per
share data)
QUARTER ENDED 1996 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- ---------- ---------
Total interest income $45,146 $45,474 $45,789 $47,174
Total interest expense 19,299 18,973 19,298 20,046
Net interest income 25,847 26,501 26,491 27,128
Provision for loan losses 1,727 1,940 1,850 4,274
Total non-interest income 5,128 5,001 5,430 4,848
Total non-interest expenses 20,436 20,503 23,313 22,559
Net income 6,076 6,158 4,675 2,970
Net income, excluding
non-recurring items 6,602 4,910
PER COMMON SHARE
Net income
Primary $.42 $.42 $.32 $.20
Fully-diluted .41 .41 .31 .19
Net income, excluding
non-recurring items
Primary .46 .32
Fully-diluted .44 .32
Cash dividends (FNB) .15 .15 .15 .15
Cash dividends (West Coast) .05 .06 .06 .06
QUARTER ENDED 1995 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- ---------- ---------
Total interest income $40,667 $42,840 $44,538 $44,467
Total interest expense 17,150 18,752 19,589 19,263
Net interest income 23,517 24,088 24,949 25,204
Provision for loan losses 1,749 1,637 1,668 1,876
Total non-interest income 4,240 5,215 4,643 5,117
Total non-interest expenses 19,423 20,148 19,365 19,728
Net income 4,466 4,994 5,770 5,850
PER COMMON SHARE
Net income
Primary $.31 $.34 $.40 $.40
Fully-diluted .30 .33 .39 .39
Cash dividends (FNB) .06 .06 .09 .12
Cash dividends (West Coast) .05 .05 .05 .05
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This financial review summarizes the combined financial condition and
results of operations giving retroactive effect to the mergers of Southwest
Banks, Inc.(Southwest) and West Coast Bancorp, Inc. (West Coast) with and
into F.N.B. Corporation (the Corporation), and is intended to be read in
conjunction with the Supplemental Consolidated Financial Statements and
accompanying Notes to those statements. The merger of the Corporation and
Southwest was consummated on January 21, 1997, and has been accounted for on
a pooling-of-interests basis. The Corporation issued 2,851,907 shares of
common stock in exchange for all of the outstanding common stock of
Southwest. The merger of the Corporation and West Coast was consummated on
April 18,1997, and has been accounted for on a pooling-of-interests basis.
The Corporation issued 1,197,128 shares of common stock in exchange for all
of the outstanding common stock of West Coast. This financial review is
presented as if the mergers had been consummated for all periods presented.
RESULTS OF OPERATIONS
Net income decreased 5.7% from $21.1 million in 1995 to $19.9 million in
1996. Primary earnings per share was $1.35 and $1.45 for 1996 and 1995,
while fully diluted earnings per share were $1.32 and $1.41, respectively,
for those same periods. These results include a special one-time assessment
to recapitalize the Savings Association Insurance Fund (SAIF) of $2.8 million
and merger related costs of $2.1 million. Excluding these items, net income
would have been $23.7 million, a 12.3% increase over 1995, and primary and
fully diluted earnings per share would have been $1.62 and $1.58,
respectively. Net interest income increased by 8.4% as net average interest
earning assets increased by $19.2 million. These factors are further
detailed in the discussion which follows.
Common comparative ratios for results of operations include the return on
average assets and the return on average equity. The Corporation's return on
average assets was .86% for 1996 compared to .98% for 1995, while the
Corporation's return on average equity was 10.19% for 1996 compared to 11.72%
for 1995. Excluding the SAIF assessment and merger related costs, the
Corporation had a return on average assets of 1.03% and a return on average
equity of 12.09%.
<PAGE>
NET INTEREST INCOME
The following table provides information regarding the average balances and
yields and rates on interest earning assets and interest bearing liabilities
(dollars in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31, 1996 1995 1994
-------------------------- ------------------------ ------------------------
AVERAGE YIELD AVERAGE YIELD AVERAGE YIELD
BALANCE INTEREST /RATE BALANCE INTEREST /RATE BALANCE INTEREST /RATE
ASSETS -------------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning
assets:
Interest bearing
deposits with
banks $ 5,379 $ 294 5.47% $ 4,971 $ 313 6.30% $ 6,796 $ 245 3.61%
Federal
funds
sold 37,795 1,975 5.23 39,901 2,318 5.81 28,374 1,122 3.95
Taxable
investment
securities (1) 387,955 22,994 5.93 397,699 22,496 5.66 418,348 21,702 5.19
Non-taxable
investment
securities 68,068 4,198 6.17 57,806 3,711 6.42 57,104 3,524 6.17
Loans (2)(3) 1,651,321 156,265 9.46 1,519,084 145,920 9.61 1,390,620 125,053 8.99
--------- -------- --------- -------- --------- --------
Total
interest
earning
assets 2,150,518 185,726 8.64 2,019,461 174,758 8.65 1,901,242 151,646 7.98
--------- -------- --------- ------- --------- -------
Cash and
due from
banks 80,133 75,574 69,753
Allowance
for loan
losses (25,239) (23,523) (21,091)
Premises and
equipment 43,380 39,364 34,339
Other assets 55,388 49,093 51,121
---------- ---------- ----------
$2,304,180 $2,159,969 $2,035,364
========== ========== ==========
LIABILITIES
Interest bearing
liabilities:
Deposits:
Interest
bearing
demand $ 324,525 6,149 1.89 $ 280,613 6,762 2.41 $ 256,025 5,647 2.21
Savings 475,136 13,273 2.79 468,128 11,965 2.56 546,856 13,605 2.49
Other time 915,514 50,025 5.46 857,124 47,401 5.53 728,614 33,736 4.63
Short-term
borrowings 86,514 3,785 4.38 94,049 5,368 5.71 84,032 4,038 4.81
Long-term
debt 49,977 4,384 8.77 39,856 3,258 8.17 33,000 2,869 8.69
---------- ------- --------- ------ -------- ------
Total
interest
bearing
liabilities 1,851,666 77,616 4.19 1,739,770 74,754 4.30 1,648,527 59,895 3.63
Non-interest
bearing
demand
deposits 216,497 210,070 196,891
Other
liabilities 40,908 32,259 30,071
--------- --------- ---------
2,109,071 1,982,099 1,875,489
--------- --------- ---------
MINORITY
INTEREST 528
---------
STOCKHOLDERS'
EQUITY 195,109 177,870 159,347
---------- ---------- ----------
$2,304,180 $2,159,969 $2,035,364
========== ========== ==========
Excess of
interest
earning
assets
over
interest
bearing
liabilities $ 298,852 $ 279,691 $ 252,715
========== ========== ==========
Net interest
income $108,110 $100,004 $ 91,751
======== ======== ========
Net interest
spread 4.45% 4.35% 4.35%
===== ===== =====
Net interest
margin (4) 5.03% 4.95% 4.83%
===== ===== =====
</TABLE>
(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 outstanding includes 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.
<PAGE>
Net interest income, the Corporation's primary source of earnings, is the
amount by which interest and fees generated by earning assets, primarily
loans and securities, exceed interest expense on deposits and borrowed funds.
Net interest income, on a fully taxable equivalent basis, totaled $108.1
million in 1996 versus $100.0 million in 1995. Net interest income consisted
of interest income of $185.7 million and interest expense of $77.6 million in
1996, compared to $174.8 million and $74.8 million for each, respectively, in
1995. Net interest income as a percentage of average earning assets
(commonly referred to as the margin) rose to 5.03% in 1996 compared to 4.95%
in 1995.
Interest income on loans increased 7.1% from $145.9 million in 1995 to
$156.3 million in 1996. This increase is the result loan growth. Average
loans increased 8.7% from 1995.
Interest expense on deposits increased slightly to $69.4 million in 1996.
This increase was attributable to increases in all deposit categories with
the largest percentage increases occurring within interest bearing demand and
other time deposits.
The Corporation monitors interest rate sensitivity by measuring the impact
that future changes in interest rates will have on net interest income.
Through its asset/liability management and pricing policies, management has
strived to optimize net interest income while reducing the effects of changes
in interest rates. (See "Liquidity and Interest Rate Sensitivity"
discussion).
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
periods indicated (in thousands):
Year Ended December 31, 1996 1995
-------------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
------- -------- -------- -------- --------- -------
INTEREST INCOME
Interest bearing deposits
with banks $ 33 $ (52) $ (19) $ (38) $ 106 $ 68
Federal funds sold (119) (224) (343) 554 642 1,196
Securities 30 955 985 (961) 1,942 981
Loans 12,606 (2,261) 10,345 11,947 8,920 20,867
------- -------- -------- -------- --------- -------
12,550 (1,582) 10,968 11,502 11,610 23,112
------- -------- ------- -------- --------- -------
INTEREST EXPENSE
Deposits:
Interest bearing 1,617 (2,230) (613) 574 541 1,115
Savings 186 1,122 1,308 (2,038) 398 (1,640)
Other time 3,223 (599) 2,624 6,501 7,164 13,665
Short-term borrowings (405) (1,178) (1,583) 518 812 1,330
Long-term debt 873 253 1,126 546 (157) 389
------- ------- -------- ------- --------- --------
5,494 (2,632) 2,862 6,101 8,758 14,859
------- ------- -------- ------- --------- --------
NET CHANGE $ 7,056 $ 1,050 $ 8,106 $ 5,401 $ 2,852 $ 8,253
======= ======= ======== ======= ========= ========
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
absolute relative size of the rate and volume changes.
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to operations is a direct result of
management's analysis of the adequacy of the allowance for loan losses which
takes into consideration factors, including qualitative factors, relevant to
the collectibility of the existing portfolio. The provision for loan losses
increased 41.2% to $9.8 million in 1996. This increase resulted from
applying a consistent allowance for loan loss policy and methodology for
evaluating the adequacy of the allowance across all affiliates, including
Southwest and West Coast. (See "Non-Performing Loans and Allowance for Loan
Losses" discussion).
NON-INTEREST INCOME
Total non-interest income increased 6.2% from $19.2 million in 1995 to
$20.4 million in 1996. This increase was attributable to increases in
service charges and gains on the sale securities.
Service charges increased 6.9% from $10.6 million in 1995 to $11.3 million
in 1996. Revenue was recognized as a result of increases in the level of
deposits.
Net gains on the sale of securities increased 67.3% due to a higher level
of equity security sales in 1996.
NON-INTEREST EXPENSES
Total non-interest expense increased from $78.7 million in 1995 to $86.8
million in 1996. The increase is primarily attributable to a one-time
assessment of $2.8 million to recapitalize the SAIF and merger-related
expenses of $2.1 million. In addition, salaries and employee benefits
increased by $3.5 million.
Salaries and personnel expense increased 9.1% in 1996. This increase was
due to expansion in the Corporation's retail network and increases for
incentive compensation, as well as normal annual salary adjustments. The
Corporation's incentive compensation plans allow for additional compensation
to be paid to employees based on the Corporation achieving various financial
and productivity goals.
On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 to recapitalize the SAIF. The
legislation included a one-time assessment on all deposits insured by the
SAIF, including those held by chartered commercial banks as a result of
previous acquisitions. The Corporation was required to pay a one-time
assessment of $2.8 million. The legislation also included provisions that
will result in a reduction in future annual deposit insurance.
Other non-interest expenses increased to $23.3 million in 1996. Included
in this total was $2.1 million of expenses related to the affiliation with
Southwest and West Coast. These expenses were primarily legal and investment
banking costs associated with the structuring and completion of both mergers.
INCOME TAXES
The Corporation recognized income tax expense of $9.9 million for 1996
compared to $10.3 million for 1995. The 1996 effective tax rate of 33% was
lower than the 35% federal statutory tax rate due to the tax benefits
resulting from tax-exempt instruments and excludable dividend income.
Additional information relating to income taxes is furnished in the Notes to
Supplemental Financial Statements.
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Corporation monitors its liquidity position on an ongoing basis to
assure that it is able to meet the need for funds at all times. Given the
monetary nature of its assets and liabilities and the significant source of
liquidity provided by its securities portfolio, the Corporation generally has
sufficient sources of funds available as needed to meet its routine,
operational cash needs. Securities due to mature within one year, which will
provide a source of short-term liquidity, amounted to $134.3 million or 27.0%
of the investment portfolio.
Additionally, the Corporation has external sources of funds available
should it desire to use them. These include approved lines of credit with
several major domestic banks, of which $25.0 million was unused at the end of
1996. To further meet its liquidity needs, the Corporation also has access
to the Federal Home Loan Bank and the Federal Reserve Bank, as well as other
uncommitted funding sources.
Through the review of gap analyses and simulation modeling, management
continually monitors the Corporation's exposure to changing interest rates.
Management attempts to mitigate repricing mismatches through asset and
liability pricing and matched maturity funding.
Interest rate sensitivity measures the impact that future changes in
interest rates will have on net interest income. The cumulative gap reflects
a point-in-time net position of assets and liabilities repricing in specified
time periods. The gap is one measurement of risk inherent in a balance sheet
as it relates to changes in interest rates and their effect on net interest
income.
The gap analysis which follows is based on a combination of asset and
liability amortizations, maturities and repricing opportunities.
Non-maturity deposit balances have been allocated to various repricing
intervals to estimate their true behavior and characteristics. The
cumulative gap reflects the net position of assets and liabilities repricing
in specified time periods. Based on the cumulative one year gap in this
table and assuming no restructuring or modifications to asset/liability
composition, a rise in interest rates would result in a minimal reduction in
net interest income.
<PAGE>
Following is the gap analysis as of December 31, 1996 (dollars in
thousands):
WITHIN 4-12 1-5 OVER
3 MONTHS MONTHS YEARS 5 YEARS TOTAL
--------- --------- -------- --------- ----------
INTEREST EARNING ASSETS
Interest bearing deposits
with banks $ 1,234 $ 100 $ 1,334
Federal funds sold 6,425 6,425
Securities 45,457 88,842 $ 317,609 $ 44,711 496,619
Loans, net of
unearned income 421,966 366,571 661,550 287,655 1,737,742
--------- --------- --------- --------- ----------
475,082 455,513 979,159 332,366 2,242,120
Other assets 176,287 176,287
--------- --------- --------- --------- ----------
$ 475,082 $ 455,513 $ 979,159 $ 508,653 $2,418,407
========= ========= ========= ========= ==========
INTEREST BEARING LIABILITIES
Deposits:
Interest checking $ 15,792 $ 45,820 $ 227,994 $ 3,894 $293,500
Savings 8,585 135,384 352,166 1,521 557,656
Time deposits 219,347 402,546 308,429 1,146 931,468
Short-term borrowings 71,995 16,767 23,468 112,230
Long-term debt 7,727 25,528 10,559 14,365 58,719
--------- --------- --------- --------- ---------
383,446 626,045 922,616 20,926 1,953,033
Other liabilities 266,089 266,089
Stockholders' equity 199,285 199,285
---------- --------- --------- --------- ----------
$ 383,446 $ 626,045 $ 922,616 $ 486,300 $2,418,407
========== ========= ========= ========= ==========
PERIOD GAP $ 91,636 $(170,532) $ 56,543 $ 22,353
========= ========= ========= =========
CUMULATIVE GAP $ 91,636 $ (78,896) $ (22,353)
========= ========= =========
RATE SENSITIVE ASSETS/RATE
SENSITIVE LIABILITIES
(CUMULATIVE) 1.24 .92 .99 1.15
========= ========= ========= =========
CUMULATIVE GAP AS A PERCENT OF
TOTAL ASSETS 3.8% (3.3)% (0.9)%
========= ========= =========
<PAGE>
FINANCIAL CONDITION
LOAN PORTFOLIO
Following is a summary of loans (dollars in thousands):
December 31 1996 1995 1994 1993 1992
---------- ---------- --------- ---------- ----------
Real estate:
Residential $ 682,600 $ 610,880 $ 551,285 $ 486,233 $ 399,489
Commercial 421,057 380,571 316,992 254,154 297,094
Construction 41,661 36,264 50,383 29,913 28,118
Installment loans to
individuals 395,628 383,457 371,442 279,769 266,916
Commercial, financial
and agricultural 189,411 161,239 192,652 199,638 203,566
Lease financing 21,538 5,037
Earned income (23,763) (27,258) (22,677) (22,694) (22,318)
----------- --------- --------- ---------- ----------
$1,728,132 $1,550,190 $1,460,077 $1,227,013 $1,172,865
=========== ========== =========== ========= ==========
The Corporation strives to minimize credit losses by utilizing credit
approval standards, diversifying its loan portfolio by industry and borrower
conducting ongoing review and management of the loan portfolio.
The ratio of loans to deposits at the end of 1996 was 85.8%, up from a
ratio of 81.8% at the end of 1995. The increase in the ratio was a result of
loan growth of 11.5%, exceeding a 6.2% increase in deposits.
During 1996 and 1995 the Corporation sold $38.5 million and $49.7 million,
respectively, in fixed rate residential mortgages to the Federal National
Mortgage Association (FNMA). These sales allowed the Corporation to avoid
the potential interest rate risk of those fixed rate loans in a rising rate
environment. Additionally, it created liquidity for the Corporation to
continue to offer credit availability to the markets it serves. All of the
mortgages were sold with the servicing retained by the Corporation.
In 1996, total installment loans to individuals and lease financing
increased 7.4% to $417.2 million. The installment loan portfolio was
comprised of $235.6 million in direct loans, $128.3 million in indirect loans
and $31.7 million in sub-prime motor vehicle loans. The overall growth
reflects a continuation of strong demand for indirect automobile loans and
leases.
The commercial loan portfolio consists principally of loans to small- and
medium-sized businesses within the Corporation's primary market area of
western Pennsylvania, eastern Ohio and southwest Florida. The Corporation
generally avoids making significant loans to any single borrower in order to
minimize credit risk.
As of December 31, 1996, 1995 and 1994, no concentrations of loans
exceeding 10% of total loans existed which were not disclosed as a separate
category of loans.
<PAGE>
Following is a summary of the maturity distribution of certain loan
categories based on remaining scheduled repayments of principal (in
thousands):
WITHIN ONE TO AFTER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
--------- ---------- ---------- --------
DECEMBER 31, 1996
Commercial, financial and
agricultural $ 100,966 $ 75,729 $ 12,716 $ 189,411
Real Estate - construction 27,652 11,979 2,030 41,661
--------- --------- --------- --------
Total loans (excluding Real
estate - mortgage and
Installment loans to
individuals) $ 128,618 $ 87,708 $ 14,746 $ 231,072
========= ========= ========= ========
The total amount of loans due after one year includes $35.6 million with
floating or adjustable rates of interest and $66.9 million had fixed rates of
interest.
NON-PERFORMING LOANS
Non-performing loans include non-accrual loans and restructured loans.
Non-accrual loans represent loans on which interest accruals have been
discontinued. 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.
Following is a summary of non-performing loans (dollars in thousands):
December 31 1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Non-accrual loans $ 9,571 $ 9,506 $11,244 $11,055 $10,238
Restructured loans 2,146 3,075 3,157 3,236 1,388
------- ------- ------- ------- -------
$11,717 $12,581 $14,401 $14,291 $11,626
======= ======= ======= ======= =======
Non-performing loans
as a percentage of
total loans .68% .81% .99% 1.16% .99%
Following is a table showing the amounts of contractual interest income and
actual interest income recorded on non-accrual and restructured loans (in
thousands):
Year Ended December 31 1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Gross interest income that
would have been recorded
if the loans had been
current and in accordance
with their original
terms $1,414 $1,298 $1,791 $1,827 $1,705
Interest income included
in income on the loans 763 685 676 708 998
Following is a summary of loans 90 days or more past due, on which interest
accruals continue (dollars in thousands):
December 31 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Loans 90 days or more
past due $2,936 $3,872 $2,753 $3,512 $4,437
Loans 90 days or more past
due as a percentage of
total loans .17% .25% .19 .29% .39%
ALLOWANCE FOR LOAN LOSSES
Management's analysis of the allowance for loan losses includes the
evaluation of the loan portfolio based on internally generated loan review
reports and the historical loss experience of the remaining balances of the
various homogeneous loan pools which comprise the loan portfolio. Specific
factors which are evaluated include the previous loan loss experience with
the customer, the status of past due interest and principal payments on the
loan, the collateral position of the loan, the quality of financial
information supplied by the borrower and the general financial condition of
the borrower. Historical loss experience on the remaining portfolio segments
is considered in conjunction with the current status of economic conditions,
loan loss trends, delinquency and non-accrual trends, credit administration
and concentrations of credit risk.
Following is a summary of changes in the allowance for loan losses (dollars
in thousands):
Year Ended December 31 1996 1995 1994 1993 1992
------- ------- ------- ------ ------
Balance at beginning of year $24,250 $22,268 $17,995 $16,288 $13,289
Addition arising in purchase
transactions 376
Loss reserves transferred on
loans sold (893) (685)
Charge-offs:
Real estate - mortgage (421) (604) (1,454) (591) (2,192)
Installment loans to individuals (5,939) (5,407) (3,817) (3,975) (4,059)
Commercial, financial and
agricultural (1,400) (820) (1,484) (4,090) (7,205)
------- ------- ------ ------- ------
(7,760) (6,831) (6,755) (8,656) (13,456)
------- ------- ------ ------- -------
Recoveries:
Real estate - mortgage 128 189 98 173 209
Installment loans to individuals 1,047 1,124 964 781 716
Commercial, financial and
agricultural 344 570 789 439 43
------- ------ ------ ------ -------
1,519 1,883 1,851 1,393 968
------- ------ ------ ------ -------
Net charge-offs (6,241) (4,948) (4,904) (7,263) (12,488)
Provision for loan losses 9,791 6,930 9,177 9,863 15,796
------- ------- ------ ------ -------
Balance at end of year $27,800 $24,250 $22,268 $17,995 $16,288
======= ======= ======= ======= =======
Net charge-offs as a percent of
average loans, net of unearned
income .38% .33% .35% .57% 1.11%
Allowance for loan losses as a
percent of total loans, net
of unearned income 1.61 1.56 1.53 1.47 1.39
Allowance for loan losses as a
percent of non-performing loans 237.26 192.75 154.63 125.92 140.10
<PAGE>
Consistent with the growth in installment loans to individuals, the
Corporation has experienced an increase in charge-offs. Installment loans to
individuals are generally charged off no later than a predetermined number of
days past due on a contractual basis or earlier in the event of bankruptcy.
During 1996, charge-offs increased to $5.9 million from $5.4 million in 1995,
resulting in an increase in the provision for loan losses from $6.9 million
in 1995 to $9.8 million in 1996, and a higher allocation of the allowance for
loan losses to installment loans, as the allowance for loan losses
represented 1.73% of total installment loans at December 31, 1996, as
compared to 1.57% at December 31, 1995.
The Corporation has allocated the allowance according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred within each of the categories of loans shown in the table below.
The allocation of the allowance should not be interpreted as an indication
that loan losses in future years will occur in the same proportions or that
the allocation indicates future loan loss trends. Furthermore, the portion
allocated to each loan category is not the sole amount available for future
losses within such categories since the total allowance is a general
allowance applicable to the entire portfolio.
Following shows the allocation of the allowance for loan losses (in
thousands):
<TABLE>
<CAPTION>
% OF % OF % OF % OF % OF
LOANS LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
Year Ended 1996 LOANS 1995 LOANS 1994 LOANS 1993 LOANS 1992 LOANS
December 31 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial
and
agricultural $ 6,682 35% $ 5,360 35% $ 7,946 35% $ 6,967 37% $ 6,252 43%
Real
estate
- construction 105 2 75 2 186 3 489 2 481 2
Real
estate
- mortgage 3,121 40 3,284 40 3,554 38 2,849 40 2,692 34
Installment
loans to
individuals 7,367 23 6,383 23 5,047 24 4,541 21 4,298 21
Unallocated
portion 10,525 8,648 5,535 3,149 2,565
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
$ 27,800 100% $ 24,250 100% $ 22,268 100% $ 17,995 100% $ 16,288 100%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
INVESTMENT ACTIVITY
Investment activities serve to enhance overall yield on earning assets
while supporting interest rate sensitivity and liquidity positions.
Securities purchased with the intent and ability to retain until maturity are
categorized as securities held to maturity and carried at amortized cost.
All other securities are categorized as securities available for sale and
must be marked to market.
Under the guidelines of FAS No. 115, institutions that sell securities out
of the securities held to maturity portfolio risk being forced to mark to
market the remaining securities in the portfolio since they have not
demonstrated their intent to hold these securities to maturity. The
Financial Accounting Standards Board (FASB) approved an amnesty period during
which institutions had the opportunity to redesignate securities under FAS
115. The Corporation took advantage of this opportunity to reclass $97.5
million of securities held to maturity to securities available for sale.
This movement allows the Corporation greater flexibility in managing its
portfolio to take advantage of market conditions and provided an opportunity
to better manage interest rate risk.
The relatively short average maturity of all securities provides a source
of liquidity to the Corporation and reduces the overall market risk of the
portfolio.
During 1996, securities available for sale increased 13.6% while securities
held to maturity remained consistent with December 31, 1995.
The following table indicates the respective maturities and weighted-average
yields of investment securities as of December 31, 1996 (in thousands):
Weighted
Amount Average Yield
--------- ---------------
Obligations of U.S. Treasury and
Other U.S. Government agencies:
Maturing within one year $ 126,768 6.01%
Maturing after one year within five years 129,382 5.92%
Maturing after five years within ten years 19,363 7.01%
Maturing after ten years 707 2.10%
State & political subdivisions:
Maturing within one year 4,796 4.73%
Maturing after one year within five years 40,945 5.65%
Maturing after five years within ten years 9,391 5.13%
Maturing after ten years 437 4.86%
Other securities:
Maturing within one year 1,004 5.76%
Maturing after one year within five years 1,003 6.04%
Maturing after five years within ten years 5 5.50%
Maturing after ten years 15 3.71%
Mortgage-backed securities 144,640 6.02%
No stated maturity 18,163 6.13%
--------- ------
TOTAL $ 496,619 5.97%
========= ======
The weighted average yields for tax exempt securities are computed on a tax
equivalent basis.
DEPOSITS AND SHORT-TERM BORROWINGS
As a commercial bank holding company, the Corporation's primary source of
funds is its deposits. Those deposits are provided by businesses and
individuals located within the markets served by the Corporation's
subsidiaries.
Total deposits increased 6.2% to $2.0 billion in 1996. The majority of
this increase was due to a 12.6% increase in savings and NOW accounts.
Additionally, time deposits increased 2.3% to $931.5 million.
Short-term borrowings, made up of repurchase agreements, federal funds
purchased, notes payable and subordinated notes increased 52.7% in 1996 to
$112.2 million. The primary reason for this increase was a higher level of
federal funds purchased in 1996 and an increase of $14.2 million in
securities sold under repurchase agreements.
<PAGE>
Subordinated notes are the largest component of short-term borrowings. At
December 31, 1996, subordinated notes represented 49.2% of total short-term
borrowings. Following is a summary of selected financial information on
short-term subordinated notes (dollars in thousands):
December 31 1996 1995 1994
-------- -------- --------
Balance at end of year $ 55,201 $ 47,362 $ 48,085
Maximum month end balance 57,073 47,675 56,126
Average balance during the year 54,252 45,912 52,830
Weighted average interest rates:
At end of year 5.35% 5.69% 5.21%
During the year 5.57 5.54 5.06
CAPITAL RESOURCES
The assessment of capital adequacy depends on a number of factors such as
asset quality, liquidity, earnings performance, changing competitive
conditions and economic forces. The Corporation seeks to maintain a strong
capital base to support its growth and expansion activities, to provide
stability to current operations and to promote public confidence.
The capital management function is an ongoing process. Central to this
process is internal equity generation accomplished by earnings retention.
During 1996, retained earnings increased $11.8 million as a result of
earnings retention versus $17.2 million in 1995. Total cash dividends
declared represented 34.7% of net income for 1996 compared to 20.6% for 1995.
Book value per share was $13.63 at December 31, 1996, compared to $12.82 at
December 31, 1995.
<PAGE>
1995 VERSUS 1994
The Corporation's net income was $21.1 million for 1995 versus $15.2
million for 1994. Primary earnings per share were $1.45 and $1.06 for 1995
and 1994, while fully diluted earnings were $1.41 and $1.05, respectively,
for those same periods. The key factors attributing to the increase were
increased credit quality, which allowed for lower loan loss provisions, and
an increase in higher yielding assets. The Corporation's asset quality
improved steadily from 1994 to 1995, as indicated by several key credit
ratios. At December 31, 1995, non-performing assets decreased to .78% of
total assets compared to .92% at December 31, 1994. The allowance for loan
losses increased to 1.56% of total loans compared to 1.53% a year earlier.
The ratio of net charge-offs to average loans outstanding decreased to .33%
in 1995 from a ratio of .35% in 1994. Increases in both the return on
average equity from 9.45% in 1994 to 11.72% in 1995 and the return on average
assets from .74% in 1994 to .98% in 1995 reflect the improved performance of
the Corporation.
Net interest income, on a fully taxable equivalent basis, increased from
$91.8 million in 1994 to $100.0 million in 1995, an increase of 9.0%. Net
margin rose to 4.95% from 4.83% in 1994. Average loans increased 9.2% from
1994, contributing to the improvement in net interest income.
The provision for loan losses was $6.9 million and represented a decrease
of 24.5% from 1994, when a provision of $9.2 million was charged to
operations. The decrease in the provision was a direct result of improvement
in asset quality.
Non-interest income increased 12.3% from $17.1 million in 1994 to $19.2
million in 1995. This increase was attributable to increases in service
charges and gains on sale of loans, offset by a decrease in gains on the sale
of securities. Service charges increased 24.0% from $8.6 million in 1994 to
$10.6 million in 1995. Revenue was recognized as a result of an increase in
total deposits. Net gain on the sale of loans increased $521,000 in 1995.
Net gain on the sale of securities decreased $810,000 due to fewer security
sales during 1995.
Total non-interest expenses increased from $74.6 million in 1994 to $78.7
million in 1995. Salaries and personnel expense increased 10.3% in 1995,
primarily due to an increase in employment levels in Florida resulting from
the opening of three new branch offices. Deposit insurance decreased $1.3
million in 1995. This was the result of the FDIC lowering the insurance
premiums for banks, since the Bank Insurance Fund had been funded to the
required level. Conversely, the SAIF was still under-funded and those
premiums were not reduced.
Income tax expense increased 36.4% to $10.3 million for 1995 as a result of
the Corporation generating more taxable income. The 1995 effective tax rate
of 33% was below the 35% statutory tax rate due to the tax benefits resulting
from income on tax-exempt instruments and excludable dividend income.
<PAGE>
EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
January 22, 1997
Board of Directors and Stockholders
of Southwest Banks, Inc.
Naples, Florida
We have audited the accompanying consolidated balance sheets of Southwest
Banks, Inc. and its subsidiaries, First National Bank of Naples and Cape
Coral National Bank (collectively, the Company), as of December 31, 1996 and
1995 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Southwest Banks, Inc. and its subsidiaries as of December 31, 1996 and
1995 and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
HILL, BARTH & KING, INC.
NAPLES, FLORIDA
<PAGE>
EXHIBIT 99.3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
West Coast Bancorp, Inc. and Subsidiary
Cape Coral, Florida
We have audited the accompanying consolidated balance sheets of West Coast
Bancorp, Inc. and Subsidiary at December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of West Coast
Bancorp, Inc. and Subsidiary at December 31, 1996 and 1995, and the
consolidated statements of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
FORT MYERS, FLORIDA
January 24, 1997
<PAGE>
EXHIBIT 99.4
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
West Coast Bancorp, Inc. and Subsidiary
Cape Coral, Florida
We have audited the accompanying consolidated balance sheets of West Coast
Bancorp, Inc. and Subsidiary at December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of West Coast
Bancorp, Inc. and Subsidiary at December 31, 1995 and 1994, and the
consolidated statements of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," as of January 1, 1995.
COOPERS & LYBRAND, L.L.P.
FORT MYERS, FLORIDA
January 19, 1996
