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: March 5, 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 January 21, 1997, F.N.B. Corporation (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 the merger using the
pooling of interests method of accounting. Such supplemental
consolidated financial statements will become the historical
consolidated financial statements when the Corporation reports
first 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
year ended December 31, 1995, 1994 and 1993 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 99.1 Audited Supplemental Consolidated Financial
Statements for the years ended December
31, 1995, 1994 and 1993 with Report of
Independent Auditors and Management's
Discussion and Analysis
Exhibit 99.2 Report of Independent Auditors Hill, Barth
& King, Inc. for the 1995 Audit of
Southwest Banks, 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: March 5, 1997
<PAGE>
EXHIBIT INDEX
23.1 Consent of Ernst & Young LLP
23.2 Consent of Hill, Barth & King, Inc.
99.1 Audited Supplemental Consolidated Financial Statements for the
years ended December 31, 1995, 1994 and 1993 with Report of
Independent Auditors and Management's Discussion and Analysis
99.2 Report of Independent Auditors Hill, Barth & King, Inc. for the
1995 Audit of Southwest Banks, 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 Plans (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 of Form S-8 relating to F.N.B. Corporation
1996 Stock Option Plan (File #333-03489).
9) Registration Statement of Form S-8 relating to F.N.B. Corporation
Restricted Stock and Incentive Bonus Plan (File #333-03493).
10) Registration Statement of Form S-8 relating to F.N.B. Corporation
Directors Compensation Plan (File #333-03495).
11) Registration Statement of 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).
We consent to the incorporation by reference in the above listed
Registration Statements of our report dated February 28, 1997, with respect
to the supplemental consolidated financial statements of F.N.B. Corporation
and subsidiaries for the year ended December 31, 1995 included in this
Current Report on Form 8K dated March 5, 1997.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
March 3, 1997
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Current Report of F.N.B.
Corporation on Form 8K of our report dated January 19, 1996,
except for Note I, as to which the date is February 2, 1996,
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, 1995, 1994 and 1993 appearing elsewhere in this Current Report.
Hill, Barth & King, Inc.
Certified Public Accountants
HILL, BARTH & KING, INC.
Naples, Florida
February 28, 1997
<PAGE>
EXHIBIT 99.1
Audited Supplemental Consolidated Financial Statements
F.N.B. Corporation
Years ended December 31, 1995, 1994 and 1993
with Report of Independent Auditors
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
AUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 and 1993
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 and Quarterly Financial Data...................... 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 (formed as a result of the consolidation of F.N.B. Corporation
and Southwest Banks, Inc.) as of December 31, 1995 and 1994 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, 1995.
The supplemental consolidated financial statements give retroactive effect to
the merger of F.N.B. Corporation and Southwest Banks, Inc., on January 21,
1997, which has 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.
which statements reflect total assets constituting 18% for 1995 and 14% for
1994 of the related supplemental consolidated financial statement totals, and
which reflect net income constituting approximately 9% of the related
supplemental consolidated financial statement totals for the three year
period ended December 31, 1995. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as
it relates to data included for Southwest Banks, Inc., is based solely on the
report 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 report 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, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, after giving retroactive effect to the merger of Southwest
Banks, Inc., as described in the notes to the supplemental consolidated
financial statements, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
February 28, 1997
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
Dollars in thousands, except par values
December 31 1995 1994
---------- ----------
ASSETS
Cash and due from banks $ 83,931 $ 75,386
Interest bearing deposits with banks 3,603 2,770
Federal funds sold 54,059 4,016
Loans held for sale 10,154 5,904
Securities available for sale 271,421 138,255
Securities held to maturity (fair value of
$160,747 and $276,150) 160,803 288,756
Loans, net of unearned income of
$26,867 and $22,339 1,450,992 1,374,088
Allowance for loan losses (23,135) (21,477)
---------- ----------
NET LOANS 1,427,857 1,352,611
Premises and equipment 36,918 33,933
Other assets 42,671 47,762
---------- ----------
$2,091,417 $1,949,393
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 213,879 $ 194,149
Interest bearing 1,553,061 1,432,501
---------- ----------
TOTAL DEPOSITS 1,766,940 1,626,650
Other liabilities 29,398 27,728
Short-term borrowings 73,501 86,938
Long-term debt 49,755 55,517
---------- ----------
TOTAL LIABILITIES 1,919,594 1,796,833
MINORITY INTEREST 540
STOCKHOLDERS' EQUITY
Preferred stock - $10 par value
Authorized - 20,000,000 shares
Outstanding - 451,638 and 456,288 shares
Aggregate liquidation value - $11,291 and $11,407 4,516 4,563
Common Stock - $2 par value
Authorized - 20,000,000 shares
Outstanding - 11,486,061 and 11,033,895 22,971 21,905
Additional paid-in capital 80,362 72,355
Retained earnings 61,496 53,773
Net unrealized securities gains/losses 3,331 (126)
Employee Stock Ownership Plan (389) (141)
Treasury stock - 22,340 and 18,974 shares at cost (464) (309)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 171,823 152,020
---------- ----------
$2,091,417 $1,949,393
========== ==========
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 1995 1994 1993
--------- --------- ---------
INTEREST INCOME
Loans, including fees $ 134,580 $ 115,915 $ 108,666
Securities:
Taxable 21,647 20,998 25,608
Tax exempt 1,692 1,756 839
Dividends 612 559 572
Other 2,209 1,066 1,013
--------- --------- ---------
TOTAL INTEREST INCOME 160,740 140,294 136,698
INTEREST EXPENSE
Deposits 61,241 49,687 54,074
Short-term borrowings 5,313 3,978 3,146
Long-term debt 3,258 2,869 2,778
--------- --------- ---------
TOTAL INTEREST EXPENSE 69,812 56,534 59,998
NET INTEREST INCOME 90,928 83,760 76,700
Provision for loan losses 6,487 9,055 9,738
--------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 84,441 74,705 66,962
NON-INTEREST INCOME
Insurance commissions and fees 4,284 4,195 4,328
Service charges 9,826 7,897 7,261
Trust 1,390 1,504 1,365
Gain on sale of securities 529 1,283 748
Gain (loss) on sale of loans 272 (331) 1,918
Other 1,416 1,276 1,701
--------- --------- ---------
TOTAL NON-INTEREST INCOME 17,717 15,824 17,321
--------- --------- ---------
102,158 90,529 84,283
NON-INTEREST EXPENSES
Salaries and employee benefits 35,824 32,502 30,866
Net occupancy 5,961 5,209 4,762
Amortization of intangibles 1,246 1,702 2,049
Equipment 4,777 4,662 4,493
Deposit insurance 2,885 4,147 3,908
Promotional 2,991 2,500 2,136
Reinsurance fee 1,738 1,820 1,802
Other 17,468 16,803 17,691
--------- --------- ---------
TOTAL NON-INTEREST EXPENSES 72,890 69,345 67,707
--------- --------- ---------
INCOME BEFORE INCOME TAXES 29,268 21,184 16,576
Income taxes 9,478 6,989 5,099
--------- --------- ---------
NET INCOME $ 19,790 $ 14,195 $ 11,477
========= ========= =========
NET INCOME PER COMMON SHARE
PRIMARY $1.56 $1.14 $ .99
===== ===== =====
FULLY DILUTED $1.52 $1.13 $ .99
===== ===== =====
AVERAGE COMMON SHARES
OUTSTANDING 11,857,278 11,570,900 10,548,786
========== ========== ==========
See accompanying Notes to Supplemental Consolidated Financial Statements
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
Dollars in thousands, except per share data
<S> <C> <C> <C> <C> <C> <C> <C>
NET EMPLOYEE
ADDITIONAL UNREALIZED STOCK
PREFERRED COMMON PAID-IN RETAINED SECURITIES OWNERSHIP TREASURY
STOCK STOCK CAPITAL EARNINGS GAINS/LOSSES PLAN STOCK
---------- -------- ---------- ---------- ------------ --------- --------
BALANCE AT JANUARY 1, 1993 $ 4,605 $ 17,666 $ 49,078 $ 46,814 ($40)
Net income 11,477
Cash dividends declared:
Preferred stock (857)
Common stock $.24 per share (FNB) (2,150)
Purchase of common stock (1,286)
Issuance of common stock 191 860 1,099
Stock dividend 802 5,163 (5,965)
Conversion of preferred stock (23) 12 40
---------- --------- -------- -------- ---------- --------- --------
BALANCE AT DECEMBER 31, 1993 4,582 18,671 55,141 49,319 (227)
Cumulative effect of adoption
of FAS No. 115 $ 2,122
Net income 14,195
Cash dividends declared:
Preferred stock (853)
Common stock $.25 per share (FNB) (2,257)
Purchase of common stock (1,143)
Issuance of common stock 2,338 11,445 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 (2,248)
---------- -------- -------- --------- ---------- -------- --------
BALANCE AT DECEMBER 31, 1994 4,563 21,905 72,355 53,773 (126) (141) (309)
Net income 19,790
Cash dividends declared:
Preferred stock (849)
Common stock $.35 per share (FNB) (3,151)
Purchase of common stock (1,447)
Issuance of common stock 51 373 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 3,457
---------- --------- -------- -------- ---------- --------- -------
BALANCE AT DECEMBER 31, 1995 $ 4,516 $ 22,971 $ 80,362 $ 61,496 $ 3,331 ($389) ($464)
========== ========= ======== ======== ========= ========= =======
</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 1995 1994 1993
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 19,790 $ 14,195 $ 11,477
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,667 6,772 7,924
Provision for loan losses 6,487 9,055 9,738
Deferred taxes (570) (1,672) (1,648)
Gain on securities available for sale (529) (1,283) (748)
(Gain) loss on sale of loans (272) 331 (1,918)
Proceeds from sale of loans 21,085 47,020 81,492
Net change in:
Interest receivable (1,327) (1,154) 1,890
Interest payable 1,837 1,339 (1,236)
Loans held for sale (25,063) (79,823) (56,851)
Other, net 5,547 7,585 849
-------- -------- --------
Net cash flows from operating activities 32,652 2,365 50,969
INVESTING ACTIVITIES
Net change in:
Interest bearing deposits with banks (833) 3,322 5,288
Federal funds sold (50,043) 22,055 (4,772)
Loans (83,262)(105,301)(125,782)
Purchase of securities available for sale (121,797) (89,042) (19,918)
Purchase of securities held to maturity (41,010) (41,036)(126,829)
Proceeds from sale of securities available for
sale 7,047 13,406 40,170
Proceeds from maturity of securities available
for sale 79,306 83,551 53,531
Proceeds from maturity of securities held to
maturity 76,234 69,159 121,629
Increase in premises and equipment (7,104) (10,612) (3,274)
-------- -------- --------
Net cash flows from investing activities (141,462) (54,498) (59,957)
FINANCING ACTIVITIES
Net change in:
Non-interest bearing deposits 19,730 10,922 16,888
Interest bearing deposits 120,560 (380) (12,763)
Short-term borrowings (13,437) 17,533 (1,418)
Increase in long-term debt 8,274 35,312 45,713
Decrease in long-term debt (14,036) (14,092) (32,754)
Proceeds from the sale and issuance of stock 1,716 14,862 2,216
Purchase of treasury stock (1,447) (1,143) (1,286)
Cash dividends paid (4,005) (3,113) (3,008)
-------- -------- --------
Net cash flows from financing activities 117,355 59,901 13,588
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,545 7,768 4,600
Cash and Cash Equivalents At Beginning Of Year 75,386 67,618 63,018
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 83,931 $ 75,386 $ 67,618
======== ======== ========
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 merger of a subsidiary of F.N.B. Corporation (the Corporation) with
and into Southwest Banks, Inc. (Southwest). The merger which was consummated
on January 21, 1997 resulted in the Corporation issuing a total of 2,851,907
shares of Common Stock. This transaction has been accounted for on a
pooling-of-interests basis, and such financial statements are presented as if
the merger had been consummated for all the periods presented. As required
by generally accepted accounting principles, the supplemental consolidated
financial statements will become the historical consolidated financial
statements upon issuance of consolidated financial statements for the quarter
ended March 31, 1997.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The supplemental consolidated financial statements include the accounts of
the Corporation and its subsidiaries, including Southwest. All significant
intercompany balances and transactions have been eliminated.
Business:
The Corporation is a bank holding company headquartered in Hermitage,
Pennsylvania. It operates 7 banks through 68 offices and a consumer finance
company through 34 offices in Pennsylvania, Ohio, New York and Florida.
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 within 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.
Generally, except for consumer installment loans, 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 the prior year 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
management's evaluation of current information and events, 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 nonaccrual
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 24, 1996.
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.
Cash Equivalents:
The Corporation considers cash and due from banks as cash and cash
equivalents.
New Accounting Standards:
FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which became effective for the
Corporation in 1996, requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the asset's carrying amount. Adoption of this Statement did not have a
material effect on the financial position or results of the Corporation.
FAS No. 123, "Accounting for Stock-Based Compensation," which becomes
effective for the Corporation in 1996, defines a fair value based method of
accounting for stock-based employee compensation plans. Under the fair value
based method, compensation cost is measured at the grant date based upon the
value of the award and is recognized over the service period. However, FAS
No. 123 also allows an entity to continue to measure compensation costs for
its plans as prescribed in APB Opinion No. 25 "Accounting for Stock Issued to
Employees." The Corporation will continue its accounting in accordance with
APB Opinion No. 25.
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 November 15, 1996, the Corporation signed a definitive merger agreement
with West Coast Bancorp, Inc. (West Coast), a bank holding company
headquartered in Cape Coral, Florida with assets of approximately $174
million. The merger agreement calls for an exchange of .794 share of the
Corporation's common stock for each share of West Coast common stock.
Approximately 1.2 million shares of the Corporation's common stock are
expected to be issued in conjunction with the merger.
<PAGE>
In connection with the merger agreement, West Coast granted the Corporation
an option to purchase up to 19.9% of its common stock exercisable only if
certain conditions are met. The exchange ratio, number of shares under
option and the price of the options are all subject to possible adjustment.
The transaction will be accounted for as a pooling of interests and is
expected to close during the second quarter of 1997, subject to approval by
certain regulatory authorities and West Coast's shareholders.
On November 6, 1996, the Corporation announced an arrangement with Sun
Bancorp, Inc. (Sun), a bank holding company headquartered in Selinsgrove,
Pennsylvania, with assets of approximately $355 million. Under the
agreement, Sun will receive 100% of the ownership of Bucktail Bank and Trust
Company, a subsidiary of the Corporation, having total assets of
approximately $118 million. The Corporation will receive Sun stock worth
approximately $17.5 million, which represents a 13.8% ownership of Sun.
SECURITIES
The amortized cost of securities and their approximate fair values are as
follows:
<TABLE>
Securities available for sale (in thousands):
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 1995 COST GAINS LOSSES VALUE
--------- --------- ---------- ----------
U.S. Treasury and other U.S. Government
agencies and corporations $ 233,800 $ 1,726 $ (69) $ 235,457
Mortgage-backed securities of
U.S. Government agencies 18,036 175 18,211
Other debt securities 2,000 (5) 1,995
--------- --------- ---------- ---------
TOTAL DEBT SECURITIES 253,836 1,901 (74) 255,663
Equity securities 12,448 3,341 (31) 15,758
--------- --------- ---------- ---------
$ 266,284 $ 5,242 $ (105) $ 271,421
========= ========= ========== =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 1994 COST GAINS LOSSES VALUE
--------- --------- ---------- --------
U.S. Treasury and other U.S. Government
agencies and corporations $ 123,582 $ (2,279) $ 121,303
Mortgage-backed securities of
U.S. Government agencies 675 (46) 629
Other debt securities 1,000 (11) 989
--------- --------- --------- ---------
TOTAL DEBT SECURITIES 125,257 (2,336) 122,921
Equity securities 13,213 $ 2,202 (81) 15,334
--------- --------- --------- ---------
$ 138,470 $ 2,202 $ (2,417) $ 138,255
========= ========= ========== =========
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 1993 COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
U.S. Treasury and other U.S. Government
agencies and corporations $ 121,171 $ 1,071 $ (5) $ 122,237
Mortgage-backed securities of
U.S. Government agencies 567 12 579
Other debt securities 16 16
--------- ---------- ---------- ---------
TOTAL DEBT SECURITIES 121,754 1,083 (5) 122,832
Equity securities 4,065 2,240 (81) 6,224
--------- ---------- ---------- ---------
$ 125,819 $ 3,323 $ (86) $ 129,056
========= ========== ========= =========
</TABLE>
<TABLE>
Securities held to maturity (in thousands):
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 1995 COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
U.S. Treasury and other U.S. Government
agencies and corporations $ 15,223 $ 108 $ (37) $ 15,294
States of the U.S. and political
subdivisions 40,969 126 (274) 40,821
Mortgage-backed securities of
U.S. Government agencies 104,555 447 (421) 104,581
Other debt securities 56 (5) 51
--------- --------- --------- ---------
$ 160,803 $ 681 $ (737) $ 160,747
========= ========= ========= =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 1994 COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
U.S. Treasury and other U.S. Government
agencies and corporations $ 163,388 $ (4,621) $ 158,767
States of the U.S. and political
subdivisions 42,019 $ 64 (2,992) 39,091
Mortgage-backed securities of
U.S. Government agencies 83,288 3 (5,052) 78,239
Other debt securities 61 (8) 53
--------- ---------- ---------- ---------
$ 288,756 $ 67 $ (12,673) $ 276,150
========= ========== ========== =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
December 31, 1993 COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
U.S. Treasury and other U.S. Government
agencies and corporations $ 195,521 $ 2,454 $ (57) $ 197,918
States of the U.S. and political
subdivisions 40,047 372 (323) 40,096
Mortgage-backed securities of
U.S. Government agencies 93,523 1,304 (43) 94,784
Other debt securities 597 25 622
--------- --------- ---------- ---------
TOTAL DEBT SECURITIES 329,688 4,155 (423) 333,420
Equity securities 6,591 6,591
--------- --------- ---------- ---------
$ 336,279 $ 4,155 $ (423) $ 340,011
========= ========= ========== =========
</TABLE>
<PAGE>
On December 21, 1995, the Corporation transferred $92.0 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
$92.3 million, and the unrealized gain, net of taxes, of $161,000 was
recorded as an increase to stockholders' equity.
At December 31, 1995 and 1994, respectively, securities with a carrying
value of $119.2 million and $118.1 million were pledged to secure public
deposits, trust deposits and for other purposes as required by law.
Securities with a carrying value of $40.8 million and $27.1 million at
December 31, 1995 and 1994, respectively, were pledged as collateral for
other borrowings.
FAS No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments," established disclosures about derivatives
and other financial instruments. Derivatives are various instruments used to
construct a transaction that is derived from and reflects the underlying
value of assets, other instruments or various indices. The primary purpose
of derivatives, which include such items as forward contracts, interest swap
contracts, options and futures, is to transfer price risk associated with the
fluctuations in asset values rather than to borrow or lend funds. As of
December 31, 1995, the Corporation had not entered into any such
transactions.
As of December 31, 1995, 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
December 31, 1995 COST VALUE COST VALUE
--------- ---------- --------- ---------
Due in one year or less $ 11,706 $ 11,743 $ 109,205 $ 109,467
Due from one to five years 137,611 137,423 121,675 122,764
Due from five to ten years 11,476 11,574 14,997 15,435
Due after ten years 10 7 5,959 6,002
--------- --------- --------- ---------
160,803 160,747 251,836 253,668
Other securities 14,448 17,753
--------- --------- --------- ---------
$ 160,803 $ 160,747 $ 266,284 $ 271,421
========= ========= ========= =========
For purposes of the maturity table, mortgage-backed securities have been
allocated over maturity groupings based on management's estimate of the
payment tendencies of the underlying collateral.
Proceeds from sales of debt and equity securities during 1995, 1994 and
1993 were $7.0 million, $13.4 million and $40.2 million, respectively. Gross
gains and gross losses were realized on those sales as follows (in
thousands):
1995 1994 1993
---- ---- ----
Gross gains $530 $1,331 $960
Gross losses 1 48 212
---- ------ ----
$529 $1,283 $748
==== ====== ====
<PAGE>
LOANS
Following is a summary of loans (in thousands):
December 31 1995 1994
---------- ----------
Commercial, financial and agricultural $ 151,157 $ 184,472
Real estate - construction 22,047 37,985
Real estate - mortgage 925,644 807,354
Installment loans to individuals 379,011 366,616
Unearned income (26,867) (22,339)
--------- ---------
1,450,992 1,374,088
--------- ---------
Loans held for sale:
Real estate - mortgage 7,919 5,071
Installment loans to individuals 2,235 833
--------- ---------
10,154 5,904
--------- ---------
$1,461,146 $1,379,992
========== ==========
During 1995, the Corporation converted its data processing system. The new
system allows for the separate classification of commercial real estate
loans. The 1995 balances reflect commercial real estate loans within the
real estate - mortgage category. Such loans were previously classified
within the commercial, financial and agricultural category.
During 1994, the Corporation reclassified $119.9 million of residential
mortgages and indirect installment loans from the held for sale category into
its permanent loan portfolio. This action was taken to more clearly reflect
management's intent relative to portfolio lending activities by specifically
defining certain loan originations that would be sold in the secondary
market. At the time of this reclassification, the book value of those loans
closely approximated their market value.
Certain directors and executive officers of the Corporation and its
significant subsidiaries, as well as associates of such persons, were loan
customers during 1995. 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, 1994 $ 31,126
New loans 11,515
Repayments (15,275)
Other 933
---------
Total loans at December 31, 1995 $ 28,299
=========
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 1995 1994 1993
-------- -------- --------
Non-accrual loans $ 6,622 $ 9,926 $ 10,262
Restructured loans 3,075 3,157 3,236
-------- -------- --------
TOTAL NON-PERFORMING LOANS 9,697 13,083 13,498
Other real estate owned 3,251 3,675 3,016
-------- -------- --------
TOTAL NON-PERFORMING ASSETS $ 12,948 $ 16,758 $ 16,514
======== ======== ========
For the years ended December 31, 1995, 1994 and 1993, income recognized on
non-accrual and restructured loans was $590,000, $636,000 and $671,000,
respectively. Income that would have been recognized during 1995, 1994 and
1993 on such loans if they were in accordance with their original terms was
$1.1 million, $1.7 million and $1.7 million, respectively. Loans past due 90
days or more were $3.9 million, $2.6 million and $3.4 million at December 31,
1995, 1994 and 1993, respectively.
At December 31, 1995, the recorded investment in loans that are considered
to be impaired under FAS No. 114 was $10.7 million (of which $2.8 million
were on a non-accrual basis). Included in this amount is $3.7 million of
impaired loans that as a result of write-downs did not have an allocated
allowance for credit losses. The allocated allowance on the remaining $7.0
million of impaired loans totaled $1.1 million at December 31, 1995. The
average recorded investment in impaired loans during the year ended December
31, 1995 was approximately $13.7 million. For the year ended December 31,
1995, the Corporation recognized interest income on those impaired loans of
$917,000 which did not include any interest income recognized using the cash
basis method of income recognition.
ALLOWANCE FOR LOAN LOSSES
Following is an analysis of changes in the allowance for loan losses (in
thousands):
Year Ended December 31 1995 1994 1993
-------- -------- --------
Balance at beginning of year $ 21,477 $ 17,182 $ 15,428
Loss reserves transferred (893)
Charge-offs (6,664) (6,569) (8,479)
Recoveries 1,835 1,809 1,388
-------- -------- --------
NET CHARGE-OFFS (4,829) (4,760) (7,091)
Provision for loan losses 6,487 9,055 9,738
-------- -------- --------
Balance at end of year $ 23,135 $ 21,477 $ 17,182
======== ======== ========
PREMISES AND EQUIPMENT
Following is a summary of premises and equipment (in thousands):
December 31 1995 1994
-------- --------
Land $ 6,509 $ 5,560
Premises 33,870 31,893
Equipment 27,090 23,380
-------- --------
67,469 60,833
Accumulated depreciation (30,551) (26,900)
-------- --------
$ 36,918 $ 33,933
======== ========
<PAGE>
Depreciation expense was $4.1 million for 1995, $3.9 million for 1994 and
$3.6 million for 1993. 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.
The Corporation has operating leases extending to 2016 for certain land,
office locations and equipment. Leases that expire are generally expected to
be renewed or replaced by other leases. Rental expense was $2.5 million for
1995, $1.9 million for 1994 and $1.5 million for 1993. Total minimum rental
commitments under such leases were $13.6 million at December 31, 1995.
Following is a summary of future minimum lease payments for years following
December 31, 1995 (in thousands):
1996 $1,615
1997 1,521
1998 1,339
1999 855
2000 560
Later years 7,727
DEPOSITS
Following is a summary of deposits (in thousands):
December 31 1995 1994
---------- ----------
Non-interest bearing $ 213,879 $ 194,149
Savings and NOW 710,675 729,276
Certificates of deposit and
other time deposits 842,386 703,225
---------- ----------
$1,766,940 $1,626,650
========== ===========
Following is a summary of time deposits of $100,000 or more by remaining
maturities (in thousands):
CERTIFICATES OTHER TIME
December 31, 1995 OF DEPOSIT DEPOSITS TOTAL
------------ ------------ ------------
Three months or less $36,811 $ 3,250 $ 40,061
Three to six months 28,812 2,879 31,691
Six to twelve months 29,098 4,345 33,443
Over twelve months 20,491 15,979 36,470
--------- --------- ----------
$115,212 $26,453 $141,665
========= ========= ==========
SHORT-TERM BORROWINGS
Following is a summary of short-term borrowings (in thousands):
December 31 1995 1994
-------- --------
Securities sold under repurchase agreements $ 21,267 $ 13,396
Other short-term borrowings 4,872 25,457
Subordinated notes 47,362 48,085
-------- --------
$ 73,501 $ 86,938
======== ========
<PAGE>
Credit facilities amounting to $25.0 million at December 31, 1995 and
December 31, 1994 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 $22.0 million at December 31, 1995 and $21.0 million at December 31, 1994.
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, 1995.
LONG-TERM DEBT
Following is a summary of long-term debt (in thousands):
December 31 1995 1994
-------- --------
Real estate mortgages payable $ 284 $ 452
Federal Home Loan Bank advances 12,077 18,612
Subordinated notes 37,394 36,453
-------- --------
$ 49,755 $ 55,517
======== ========
The Federal Home Loan Bank advances are secured by residential real estate
loans and are scheduled to mature in various amounts annually from 1996
through the year 1999. Interest rates paid on these advances range from
5.79% to 5.84%.
Subordinated notes are unsecured and subordinated to other indebtedness of
the Corporation. The subordinated notes are scheduled to mature in various
amounts annually from 1996 through the year 2005. At December 31, 1995,
$29.5 million of long-term subordinated debt is redeemable prior to
maturity. Of this total, $27.2 million is redeemable by the holder 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 7.85% at December 31, 1995 and 8.02%
at December 31, 1994.
Scheduled annual maturities for all of the long-term debt for each of the
five years following December 31, 1995 are as follows (in thousands):
1996 $27,948
1997 5,320
1998 2,278
1999 898
2000 959
Later years 12,352
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.
<PAGE>
Following is a summary of off-balance sheet credit risk information (in
thousands):
December 31 1995 1994
-------- --------
Off-balance sheet credit risk:
Commitments to extend credit $215,471 $173,406
Standby letters of credit 11,450 15,777
At December 31, 1995, funding of approximately 70% 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 4.9 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 at any time
after 50% of the 49,512 shares issued are no longer outstanding. During
1995, 450 shares of Series A Preferred were converted to 617 shares of common
stock. At December 31, 1995, 31,148 shares of common stock were reserved by
the Corporation for the conversion of the remaining 24,838 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 $12.83 per share. The Corporation
has the right to redeem the Series B Preferred for cash on or after May 15,
1996, as set forth in the prospectus relating to the offering of Series B
Preferred dated May 8, 1992. During 1995, 4,200 shares of Series B Preferred
were converted to 8,179 shares of common stock. At December 31, 1995,
831,362 shares of common stock were reserved by the Corporation for the
conversion of the remaining 426,800 outstanding shares.
<PAGE>
Series A Preferred of First County was issued in connection with the
initial capitalization of First County Bank, and recognized as minority
interest. The Corporation required the conversion of the outstanding shares
during the first quarter of 1995. This conversion resulted in the
Corporation issuing an additional 33,676 shares of common stock.
STOCK INCENTIVE PLANS
The Corporation has a restricted stock bonus plan which provides for the
issuance of up to 352,800 shares of common stock to key employees of the
Corporation. All shares of stock awarded under the plan vest in equal
installments over a five year period on each anniversary of the date of
grant. 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 1995, the Corporation awarded
2,901 shares, 20% of which become vested in January 1996.
The Corporation has a stock option plan (Option Plan) which provides for
the issuance of up to 860,722 stock options and stock appreciation rights to
key employees of the Corporation. 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.
At December 31, 1995, options for 215,293 of common stock were exercisable
at prices ranging from $6.90 to $13.61 per share.
Activity in the Option Plan during the past three years was as follows:
1995 1994 1993
-------- -------- --------
Outstanding, beginning of year 545,015 434,733 204,100
Granted during the year 108,010 128,560 235,686
Exercised during the year
(at prices ranging
from $6.60 to $13.61
per share) (2,754) (3,574)
Forfeited during the year (13,583) (14,704) (5,053)
------- ------- -------
Ending balance 636,688 545,015 434,733
======= ======= =======
The Corporation has granted warrants to purchase one share of common stock
(at an exercise price of $6.90 per share). Such warrants are exercisable and
will expire on June 19, 2001. The Corporation has reserved 93,397 shares of
common stock for issuance in connection with these warrants.
RETIREMENT PLANS
Certain of the Corporation's subsidiaries participate in defined benefit
retirement plans covering substantially all of their employees. The expense
associated with these was $1.7 million in 1995, $1.6 million in 1994 and
$931,000 in 1993.
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.
<PAGE>
Following is the estimated funded status (in thousands):
<TABLE>
<S> <C> <C>
December 31 1995 1994
------------------------- --------------------------------
PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
-------- ------------- -------- -------------
Actuarial present value of:
Vested benefit obligation $ 13,406 $ 2,439 $ 10,282 $ 1,236
======== ======== ======== =======
Accumulated benefit obligation $ 13,625 $ 3,169 $ 10,506 $ 1,629
======== ======== ======== =======
Projected benefit obligation for services
rendered to date $(17,114) $ (3,720) $(12,909) $(1,972)
Plan assets at fair value,
primarily U.S. Government
securities and common stocks 17,881 14,673
-------- -------- -------- -------
Plan assets in excess of or (less than) projected
benefit obligation 767 (3,720) 1,764 (1,972)
Unrecognized net (gain) loss 21 (33) (1,313) (434)
Unrecognized net obligation 58 63
Unrecognized prior service cost 162 2,185 179 1,484
Additional liability (707)
-------- -------- -------- -------
Prepaid (accrued) pension costs $ 1,008 $ (1,568) $ 693 $(1,629)
======== ======== ======== =======
The pension expense for the defined benefit plans included the following
components (in thousands):
Year Ended December 31 1995 1994 1993
------- ------- -------
Service costs - benefits earned during the period $ 854 $ 1,072 $ 771
Interest cost on projected benefit obligation 1,375 1,237 815
Actual return on plan assets (3,014) 330 (757)
Net amortization 2,115 (1,293) (212)
------- ------- -------
Net pension expense $ 1,330 $ 1,346 $ 617
======= ======= =======
Assumptions as of December 31 1995 1994 1993
------- ------- -------
Weighted average discount rate 7.0% 8.5% 7.3%
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, 1995 and 1994, respectively, plan assets include $745,000
and $519,000 of the Corporation's common stock and $193,000 and $172,000 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 up to a maximum of 6 percent of the employee's salary. The
401(k) pension expense amounted to $340,000 in 1995, $297,000 in 1994 and
$314,000 in 1993.
<PAGE>
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 $298,335 in 1995, $188,777
in 1994 and $133,548 in 1993 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.
The amounts recognized in the Corporation's consolidated financial
statements are as follows (in thousands):
Year Ended December 31 1995 1994
-------- --------
Accumulated postretirement benefit obligation:
Current retirees $ 186 $ 247
Fully eligible actives 50 83
Other actives 594 702
-------- --------
Total Accumulated Postretirement
Benefit Obligation 830 1,032
Unrecognized net transition obligation (760) (809)
Unrecognized net gain 255 19
Unrecognized prior service cost (9) (22)
-------- --------
Accrued postretirement benefit
liability $ 316 $ 220
======= =======
Net periodic postretirement benefit cost included the following components
(in thousands):
Year Ended December 31 1995 1994 1993
------- ------- -------
Service cost $ 60 $ 75 $ 69
Interest cost 68 73 58
Amortization of transition obligation 38 49 50
------- ------- -------
Net periodic postretirement benefit cost $ 166 $ 197 $ 177
======= ======= =======
A 7.50 % annual rate of increase in the per capita costs of covered health
care benefits is assumed for 1996, gradually decreasing to 4.75 % 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, 1995 by $74,000 and increase the aggregate of
the service and interest cost component of net periodic postretirement
benefit cost for 1995 by $15,000. A discount rate of 7.00 % was used to
determine the accumulated postretirement benefit obligation.
<PAGE>
INCOME TAXES
Income tax expense consists of the following (in thousands):
Year Ended December 31 1995 1994 1993
------- ------- -------
Current income taxes:
Federal taxes $ 9,767 $ 8,406 $ 6,372
State taxes 281 256 375
------- ------- -------
10,048 8,662 6,747
Deferred income taxes:
Federal taxes (572) (1,646) (1,656)
State taxes 2 (27) 8
------- ------- -------
$ 9,478 $ 6,989 $ 5,099
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below (in thousands):
December 31 1995 1994
------- -------
Deferred tax assets:
Allowance for loan losses $ 7,205 $ 6,707
Deferred compensation 234 213
Loan fees 236 450
Other 2,799 2,366
------- -------
TOTAL GROSS DEFERRED TAX ASSETS 10,474 9,736
------- -------
Deferred tax liabilities:
Depreciation (930) (968)
Dealer reserve participation (957) (957)
Unrealized gains on securities
available for sale (1,806) 89
Securitization of indirect
automobile loans (291) (237)
Leasing (285) (48)
Other (2,033) (1,921)
------- -------
TOTAL GROSS DEFERRED TAX
LIABILITIES (6,302) (4,042)
------- -------
4,172 5,694
Less valuation allowance 197
------- -------
NET DEFERRED TAX ASSETS $ 4,172 $ 5,497
======= =======
The valuation allowance for deferred taxes was related to state tax
benefits.
Following is a reconciliation between tax expense using federal statutory
rates and actual tax expense (in thousands):
Year Ended December 31 1995 1994 1993
---------- ---------- ----------
Federal statutory tax 35.0% 35.0% 35.0%
Effect of nontaxable interest
and dividend income (4.4) (6.3) (6.2)
State taxes .6 .7 1.5
Goodwill .5 .7
Other items .7 2.9 .5
----- ----- -----
Actual effective taxes 32.4% 33.0% 30.8%
====== ====== ======
Included in loan income is interest on tax-free loans of $2.4 million, $2.5
million and $2.6 million for 1995, 1994 and 1993, respectively. The related
income tax expense on securities gains amounting to $185,000, $449,000 and
$262,000 for 1995, 1994 and 1993, respectively, is included in income taxes.
<PAGE>
CASH FLOW INFORMATION
Following is a summary of supplemental cash flow information (in
thousands):
Year Ended December 31 1995 1994 1993
---------- ---------- ----------
Cash paid during year for:
Interest $ 67,975 $ 55,195 $ 61,234
Income taxes 9,898 7,888 6,191
Non-cash Investing and
Financing Activities:
Acquisition of real estate in
settlement of loans $ 2,436 $ 3,286 $ 2,655
Loans granted in the sale of
other real estate 321 1,267 4,704
Transfers and reclassifications
of investment securities to
securities available for sale 91,982 17,257
Loans reclassified from held
for sale 119,858
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.
<PAGE>
Capital ratios as of December 31, 1995 for the Corporation and its
significant subsidiary, First National Bank of Pennsylvania, are as follows
(dollars in thousands):
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------- -------- -------
CORPORATION:
Total Capital $193,755 13.5% $114,706 8.0% $143,382 10.0%
(to risk-weighted assets)
Tier 1 Capital 167,364 11.7 57,353 4.0 86,029 6.0
(to risk-weighted assets)
Tier 1 Capital 167,364 8.2 81,770 4.0 102,212 5.0
(to average assets)
FIRST NATIONAL BANK OF
PENNSYLVANIA:
Total Capital $ 74,806 11.8% $ 50,910 8.0% $ 63,637 10.0%
(to risk-weighted assets)
Tier 1 Capital 66,813 10.5 25,455 4.0 38,182 6.0
(to risk-weighted assets)
Tier 1 Capital 66,813 7.5 35,652 4.0 44,565 5.0
(to average assets)
As of December 31, 1995, 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.
The Corporation's banking subsidiaries were required to maintain aggregate
reserves amounting to $22.8 million at December 31, 1995 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, 1995, the subsidiaries had $23.6 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 $19.2 million at December 31, 1995.
<PAGE>
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
consolidated financial statements.
BALANCE SHEET (IN THOUSANDS):
December 31 1995 1994
-------- --------
ASSETS
Cash $ 16 $ 13
Short-term investments 2,928 2,722
Advances to subsidiaries 76,849 70,742
Receivables 4,761 3,087
Securities available for sale 6,720 5,608
Investment in bank subsidiaries 151,528 141,391
Investment in non-bank subsidiaries 20,869 19,691
-------- --------
$263,671 $243,254
======== ========
LIABILITIES
Other liabilities $ 4,092 $ 2,695
Short-term borrowings 50,362 52,085
Long-term debt 37,394 36,454
-------- --------
TOTAL LIABILITIES 91,848 91,234
-------- --------
STOCKHOLDERS' EQUITY 171,823 152,020
-------- --------
TOTAL $263,671 $243,254
======== ========
INCOME STATEMENT (IN THOUSANDS)
Year Ended December 31 1995 1994 1993
-------- -------- --------
INCOME
Dividend income from subsidiaries:
Bank $ 8,942 $ 6,849 $ 6,478
Non-bank 3,706 3,596 2,902
------- ------- -------
12,648 10,445 9,380
Gain on sale of securities 512 1,287 403
Interest income 4,924 4,062 193
Other income 206 190 189
------- ------- -------
TOTAL INCOME 18,290 15,984 10,165
------- ------- -------
EXPENSES
Interest expense 5,972 5,465 1,967
Service fees 609 559 461
Other expenses 1,297 1,239 620
------- ------- -------
TOTAL EXPENSES 7,878 7,263 3,048
------- ------- -------
INCOME BEFORE TAXES AND
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 10,412 8,721 7,117
Income tax credit 700 430 846
------- ------- -------
11,112 9,151 7,963
------- ------- -------
Equity in undistributed income
of subsidiaries:
Bank 7,679 4,876 1,001
Non-bank 999 168 2,513
------- ------- -------
8,678 5,044 3,514
------- ------- -------
NET INCOME $19,790 $14,195 $11,477
======= ======= =======
<PAGE>
STATEMENT OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31 1995 1994 1993
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 19,790 $ 14,195 $ 11,477
Adjustments to reconcile net
income to net cash provided
by operating activities:
Gain on sale of securities (512) (1,287) (403)
Undistributed earnings
of subsidiaries (8,678) (5,044) (3,514)
Other, net (882) (1,417) (1,760)
-------- -------- --------
Net cash flows from
operating activities 9,718 6,447 5,800
INVESTING ACTIVITIES
Purchase of securities (383) (400) (283)
Proceeds from sale of securities 922 2,346 975
Advances from (to) subsidiaries (6,107) (4,779) 688
Investment in subsidiaries 372 (16,579) (1,046)
-------- -------- --------
Net cash flows from
investing activities (5,196) (19,412) 334
FINANCING ACTIVITIES
Net decrease in due to
non-bank subsidiary (4,295) (3,020)
Net decrease in short-term
borrowings (1,723) (1,210) (1,000)
Decrease in long-term debt (5,334) (7,400) (35)
Increase in long-term debt 6,274 15,275
Purchase of common stock (1,447) (1,143) (1,286)
Sale of common stock 1,716 14,862 2,216
Cash dividends paid (4,005) (3,113) (3,008)
-------- -------- --------
Net cash flows from
financing activities (4,519) 12,976 (6,133)
-------- -------- --------
NET INCREASE IN CASH 3 11 1
Cash at beginning of year 13 2 1
-------- -------- --------
CASH AT END OF YEAR $ 16 $ 13 $ 2
======== ======== ========
CASH PAID
Interest $ 5,009 $ 4,433 $ 1,908
Income taxes 39 295
Subordinated notes, included within short-term borrowings and long-term
debt, are unsecured and subordinated to other indebtedness of the
Corporation. At December 31, 1995, $74.6 million principal amount of such
notes is 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 6.63% at December 31, 1995 and 6.40%
at December 31, 1994. The subordinated notes are scheduled to mature in
various amounts annually from 1996 through the year 2005.
<PAGE>
Following is a summary of the combined aggregate scheduled annual
maturities for each year following December 31, 1995 (in thousands):
1996 $63,139
1997 5,222
1998 2,254
1999 874
2000 943
Later years 12,324
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 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.
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 borrowing funds in the market.
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.
<PAGE>
The estimated fair values of the Corporation's financial instruments are as
follows (in thousands):
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
FINANCIAL ASSETS
Cash and short-term investments $ 141,593 $ 141,593 $ 82,172 $ 82,172
Securities available for sale 271,421 271,421 138,255 138,255
Securities held to maturity 160,803 160,747 288,756 276,150
Net loans 1,438,011 1,443,757 1,358,515 1,339,969
FINANCIAL LIABILITIES
Deposits $1,766,940 $1,772,185 $1,626,650 $1,622,359
Short-term borrowings 73,501 73,501 86,938 86,938
Long-term debt 49,755 49,514 55,517 54,864
<PAGE>
F.N.B. CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL SELECTED AND QUARTERLY FINANCIAL DATA
SELECTED SUPPLEMENTAL FINANCIAL DATA (Dollars in thousands, except per share
data)
YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
Total interest income $ 160,740 $ 140,294 $ 136,698 $ 134,857 $ 131,100
Total interest expense 69,812 56,534 59,998 66,726 76,699
Net interest income 90,928 83,760 76,700 68,131 54,401
Provision for loan losses 6,487 9,055 9,738 15,443 5,608
Total non-interest income 17,717 15,824 17,321 14,100 11,380
Total non-interest
expenses 72,890 69,345 67,707 56,301 46,248
Net income 19,790 14,195 11,477 7,492 10,332
AT YEAR-END
Total assets $2,091,417 $1,949,393 $1,867,785 $1,844,123 $1,465,747
Deposits 1,766,940 1,626,650 1,616,109 1,611,984 1,257,422
Net loans 1,438,011 1,358,515 1,231,605 1,136,226 1,051,222
Long-term debt 49,755 55,517 31,297 32,823 18,520
Preferred stock 4,516 4,563 4,582 4,605 292
Total stockholders'
equity 171,823 152,020 127,255 118,081 99,608
PER COMMON SHARE
Net income
Primary $ 1.56 $ 1.14 $ .99 $.68 $1.03
Fully diluted 1.52 1.13 .99 .68 1.02
Cash dividends (FNB) .35 .25 .24 .23 .21
Book value 13.50 11.89 10.94 10.14 9.87
RATIOS
Return on average assets .98% .74% .62% .46% .73%
Return on average equity 12.06 9.72 9.26 6.70 10.80
Dividends payout ratio 17.30 17.39 21.21 29.41 19.42
Average equity to
average assets 8.12 7.62 6.70 6.85 6.83
SUPPLEMENTAL QUARTERLY EARNINGS SUMMARY (Dollars in thousands, except per
share data)
QUARTER ENDED 1995 MAR. 31 JUNE 30 SEPT 30 DEC. 31
--------- --------- --------- ---------
Total interest income $37,985 $39,951 $41,449 $41,355
Total interest expense 16,045 17,559 18,280 17,928
Net interest income 21,940 22,392 23,169 23,427
Provision for loan losses 1,691 1,558 1,561 1,677
Total non-interest income 3,943 4,938 4,235 4,601
Total non-interest
expenses 18,123 18,779 17,954 18,034
Net income 4,138 4,664 5,357 5,631
PER COMMON SHARE
Net income
Primary $.34 $.37 $.43 $.43
Fully-diluted .33 .36 .41 .42
Cash dividends (FNB) .06 .07 .10 .12
QUARTER ENDED 1994 MAR. 31 JUNE 30 SEPT 30 DEC. 31
--------- --------- --------- ---------
Total interest income $33,662 $34,550 $35,414 $36,668
Total interest expense 13,638 13,674 14,336 14,886
Net interest income 20,024 20,876 21,078 21,782
Provision for loan losses 2,761 2,235 1,959 2,100
Total non-interest income 3,953 3,957 3,576 4,338
Total non-interest
expenses 16,743 17,458 16,932 18,212
Net income 3,064 3,474 3,769 3,888
PER COMMON SHARE
Net income
Primary $.27 $.27 $.30 $.30
Fully-diluted .27 .27 .29 .29
Cash dividends (FNB) .06 .06 .06 .07
<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 merger of Southwest
Banks, Inc.(Southwest) 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. This financial review is presented as if the
merger had been consummated for all periods presented.
RESULTS OF OPERATIONS
Net income increased 39.4% from $14.2 million in 1994 to $19.8 million in
1995. Primary earnings per share was $1.56 and $1.14 for 1995 and 1994,
while fully diluted earnings per share was $1.52 and $1.13, respectively, for
those same periods. The key factors to the increase were improved credit
quality, which allowed for lower loan loss provisions, an increase in
interest earning assets and continuing efforts to reduce non-interest
expense. These factors are further detailed in the discussion which follows.
The Corporation's asset quality has improved steadily as indicated by
several key credit ratios. At December 31, 1995 non-performing assets
decreased to .62% of total assets compared to .84% at December 31, 1994. The
allowance for loan losses improved to 1.58% of total loans compared to 1.56%
a year ago. The ratio of net charge-offs to average loans outstanding
decreased in 1995 to .34% compared to a 1994 ratio of .36%.
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 .98% for 1995 compared to .74% for 1994, while the Corporation's return
on average equity was 12.06% for 1995 compared to 9.72% for 1994.
<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>
<TABLE>
<S> <C> <C> <C>
Year Ended December 31, 1995 1994 1993
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- ---------- -------- ---------- ---------- -------- ---------- ---------- --------
ASSETS
Interest earning assets:
Interest bearing
deposits with banks $ 4,620 $ 296 6.41% $ 6,267 $ 221 3.53% $ 8,734 $ 173 1.98%
Federal funds sold 33,103 1,957 5.91 22,217 845 3.80 26,418 848 3.21
Taxable investment
securities (1) 377,638 21,604 5.72 401,328 20,998 5.23 461,619 25,600 5.55
Non-taxable investment
securities 263,993 6,348 2.40 242,662 5,370 2.21 214,421 5,114 2.39
Loans (2)(3) 1,419,746 135,830 9.57 1,305,226 117,233 8.98 1,204,567 109,968 9.13
---------- ------- ------- ---------- ------- ---------- -------
Total interest
earning assets 1,890,942 162,835 8.61 1,790,947 142,525 7.96 1,731,795 138,420 7.99
---------- ------- ------- ---------- ------- ---------- -------
Cash and due from banks 71,031 65,444 56,696
Allowance for loan losses (22,577) (20,289) (17,387)
Premises and equipment 35,603 30,467 27,682
Other assets 45,502 48,858 51,259
---------- ---------- ----------
$2,020,489 $1,915,427 $1,849,745
========== ========== ==========
LIABILITIES
Interest bearing liabilities:
Deposits:
Interest bearing
demand $ 263,993 6,348 2.40 $ 242,662 5,370 2.21 $ 214,421 5,114 2.39
Savings 439,977 11,076 2.52 513,942 12,676 2.47 527,186 15,054 2.86
Other time 792,769 43,817 5.53 684,067 31,641 4.62 699,865 33,905 4.84
Short-term borrowings 92,987 5,313 5.71 82,747 3,978 4.81 68,669 3,147 4.58
Long-term debt 39,856 3,258 8.18 33,000 2,869 8.69 31,484 2,778 8.82
---------- -------- ---------- -------- ---------- ---------
Total interest bearing
liabilities 1,692,582 69,812 4.28 1,556,418 56,534 3.63 1,541,625 59,998 3.89
-------- -------- ---------
Non-interest bearing
demand deposits 195,226 182,998 158,041
Other liabilities 31,650 29,558 25,654
---------- ---------- ----------
1,856,458 1,768,974 1,725,320
---------- ---------- ----------
MINORITY INTEREST 528 505
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock 4,555 4,576 4,600
Common stock 22,355 20,897 18,332
Additional paid-in capital 78,647 67,992 53,607
Retained earnings 57,165 51,368 47,489
Net unrealized
securities gains 2,082 1,383
Treasury stock (505) (291) (108)
Employee stock ownership
plan obligation (268)
---------- ---------- ----------
Total stockholders'
equity 164,031 145,925 123,920
---------- ---------- ----------
$2,020,489 $1,915,427 $1,849,745
========== ========== ==========
Excess of interest
earning assets over
interest bearing
liabilities $ 261,360 $ 234,529 $ 189,870
========== ========== ==========
Net interest income $ 93,023 $ 85,991 $ 78,422
======== ======== ========
Net interest spread 4.33% 4.33% 4.10%
===== ===== =====
Net interest margin (4) 4.92% 4.80% 4.53%
===== ===== =====
</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 $93.0
million in 1995 versus $86.0 million in 1994. Net interest income consisted
of interest income of $162.8 million and interest expense of $69.8 million in
1995, compared to $142.5 million and $56.5 million for each, respectively, in
1994. Net interest income as a percentage of average earning assets
(commonly referred to as the margin) rose to 4.92% in 1995 compared to 4.80%
in 1994.
Interest income on loans increased 15.9% from $117.2 million in 1994 to
$135.8 million in 1995. This increase is the result of greater loan demand
and higher interest rates throughout most of 1995 as compared to 1994.
Average loans increased 8.8% from 1994. Interest on federal funds sold
increased 131.6% to $2.0 million in 1995. This increase is the result of the
rising market interest rates and an increase in the level of federal funds
held by the Corporation.
Interest expense on deposits increased 23.3% to $61.2 million in 1995, due
to an increase in interest on time deposits from $31.6 million in 1994 to
$43.8 million in 1995. This is primarily the result of the increasing market
interest rate environment and the shift in the deposit mix from transaction
and savings accounts into higher paying certificate accounts.
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, 1995 1994
---------------------- ----------------------
VOLUME RATE NET VOLUME RATE NET
------ ------- ------- ------ ------- -------
INTEREST INCOME
Interest bearing deposits
with banks $ (36) $ 111 $ 75 $ (27) $ 75 $ 48
Federal funds sold 521 591 112 (159) 156 (3)
Investment securities (1,075) 1,601 526 (1,869) (1,336) (3,205)
Loans 10,634 7,963 18,597 9,043 (1,778) 7,265
------- ------- ------- ------- -------- -------
10,044 10,266 20,310 6,988 (2,883) 4,105
------- ------- ------- ------- -------- ------
INTEREST EXPENSE
Deposits:
Interest bearing 494 484 978 598 (342) 256
Savings (1,605) 5 (1,600) (372) (2,006) (2,378)
Other time 5,477 6,699 12,176 (775) (1,489) (2,264)
Short-term borrowings 531 804 1,335 667 164 831
Long-term debt 542 (153) 389 131 (40) 91
------- ------- ------- ------- -------- ------
5,439 7,839 13,278 249 (3,713) (3,464)
------- ------- ------- ------- -------- ------
NET CHANGE $ 4,605 $ 2,427 $ 7,032 $ 6,739 $ 830 $ 7,569
======= ======= ======= ======= ======== =======
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 relevant to the collectibility of the
existing portfolio. The provision for loan losses decreased 28.4% to $6.5
million in 1995. The decrease in the provision for loan losses is a direct
result of the continuing improvement in asset quality at the Corporation.
(See "Non-Performing Loans and Allowance for Loan Losses" discussion).
NON-INTEREST INCOME
Total non-interest income increased 12.0% from $15.8 million in 1994 to
$17.7 million in 1995. This increase was attributable to increases in
service charges and gains on the sale of loans, offset by a decrease in gains
on the sale of securities.
Service charges increased 24.4% from $7.9 million in 1994 to $9.8 million
in 1995. Revenue was recognized as a result of certain increases in and
expansion of retail fees charged to customers, as well as increases in both
total loans and total deposits.
Gains on the sale of loans increased $603,000 in 1995 over that of 1994, as
1994 was negatively impacted by a $200,000 adjustment to the amortization of
excess servicing on securitized loans. The remaining difference reflects
rapidly rising rates in 1994 which made it difficult to sell at or above par
value and more stable rates in 1995 which allowed sales at a premium in many
cases.
Gains on the sale of securities decreased 58.7% due to a reduction in the
sale of securities during 1995. The market value on the securities available
for sale increased in 1995, contributing to an increase in net unrealized
gains to $3.3 million.
NON-INTEREST EXPENSES
Total non-interest expense increased from $69.3 million in 1994 to $72.9
million in 1995. The 5.1% increase is primarily attributable to increases in
salaries and employee benefits and net occupancy offset by a reduction in
premiums charged for deposit insurance.
Salaries and personnel expense increased 10.2% in 1995. This increase is
due to the growth in the Corporations' Florida affiliates which required the
opening of a new branch as well as an increase in full time equivalent
employees. In addition, the meeting of various corporate wide financial and
productivity goals resulted in a $1.0 million increase in incentive
compensation.
Deposit insurance decreased 30.4% in 1995. This is the result of the
Federal Deposit Insurance Corporation (FDIC) voting to lower the insurance
premiums for banks, now that the Bank Insurance Fund (BIF) has been funded to
the required level. Conversely, based on Financial Institutions Reform,
Recovery and Enforcement Act of 1989 requirements, the Savings Association
Insurance Fund (SAIF) was under-funded at December 31, 1995 and therefore,
deposit premiums on SAIF insured deposits did not change. On September 30,
1996, Congress enacted into law the Deposit Insurance Fund Act of 1996, which
provided among other items, a provision to re-capitalize SAIF. The
legislation included a one-time assessment based on all deposits insured by
the SAIF, including those held by chartered commercial banks as a result of
previous mergers. The Corporation was required to pay a one-time assessment
of $2.8 million. The legislation also included a provision that will result
in a modest reduction in future annual deposit insurance.
INCOME TAXES
The Corporation recognized income tax expense of $9.5 million for 1995
compared to $7.0 million for 1994 primarily due to the fact that the
Corporation had more taxable income in 1995. The 1995 effective tax rate of
32.4% was below the 35% federal statutory tax rate due to the tax benefits
resulting from tax-exempt securities income and excludable dividend income.
A complete analysis of 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 $121.2 million or 28.0%
of the investment portfolio.
In addition to normal liquidity provided from operations, 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
all were unused at the end of 1995. To further meet its liquidity needs, the
Corporation also has access to the Federal Home Loan Bank and other
uncommitted funding sources.
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 more accurately depict their true behavior and characteristics.
This allocation was done in accordance with FDIC guidance. 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
have a negative impact on net interest income.
Gap analyses alone do not accurately measure the magnitude of changes in
net interest income since changes in interest rates do not affect all
categories of assets and liabilities equally or simultaneously. Recognizing
that traditional gap analyses do not measure dynamically the exposure to
interest rate changes, the Corporation also relies on simulation modeling to
measure the effect of upward and downward interest rate changes on net
interest income.
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.
<PAGE>
Following is the gap analysis as of December 31, 1995 (dollars in
thousands):
WITHIN 4-12 1-5 OVER
3 MONTHS MONTHS YEARS 5 YEARS TOTAL
--------- --------- --------- --------- -------
INTEREST EARNING ASSETS
Interest bearing deposits
with banks $ 3,503 $ 100 $ 3,603
Federal funds sold 54,059 54,059
Investment securities 31,943 96,073 $ 257,385 $ 46,823 432,224
Loans, net of unearned
income 305,473 317,634 548,575 289,464 1,461,146
--------- --------- --------- -------- ----------
$ 394,978 413,807 805,960 336,287 1,951,032
Other assets 140,385 140,385
--------- --------- --------- -------- ----------
$ 394,978 $ 413,807 $ 805,960 $ 476,672 $2,091,417
========= ========= ========= ========= ==========
INTEREST BEARING LIABILITIES
Deposits:
Interest checking $ 13,755 $ 41,266 $ 220,089 $ 16,160 $ 291,270
Savings 41,941 125,822 251,642 419,405
Time deposits 179,542 371,979 288,513 2,352 842,386
Short-term borrowings 40,553 15,983 16,965 73,501
Long-term debt 5,819 22,130 8,544 13,262 49,755
--------- --------- --------- --------- ----------
281,610 577,180 785,753 31,774 1,676,317
Other liabilities 243,277 243,277
Stockholders' equity 171,823 171,823
--------- --------- --------- --------- ----------
$ 281,610 $ 577,180 $ 785,753 $ 446,874 $2,091,417
========= ========= ========= ========= ==========
PERIOD GAP $ 113,368 $(163,373) $ 20,207 $ 29,798
========= ========= ========= =========
CUMULATIVE GAP $ 113,368 $ (50,005) $ (29,798)
========= ========= =========
RATE SENSITIVE ASSETS/RATE
SENSITIVE LIABILITIES
(CUMULATIVE) 1.40 .94 .98 1.16
========= ========= ========= =========
CUMULATIVE GAP AS A PERCENT OF
TOTAL ASSETS 5.4% (2.4)% (1.4)%
========= ========= =========
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
ONE YEAR FIVE YEARS FIVE-YEARS TOTAL
---------- ---------- ---------- ---------
DECEMBER 31, 1995
Commercial, financial
and agricultural $92,331 $42,014 $16,812 $151,157
Real Estate - construction 16,456 3,260 2,331 22,047
------- ------- ------- --------
Total loans (excluding
Real estate - mortgage and
Installment loans to
individuals) $108,787 $45,274 $19,143 $173,204
======== ======= ======= ========
The total amount of loans due after one year includes $19.0 million with
floating or adjustable rates of interest and $45.4 million had fixed rates of
interest.
<PAGE>
FINANCIAL CONDITION
LOAN PORTFOLIO
Following is a summary of loans (dollars in thousands):
December 31 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Commercial, financial
and agricultural $ 151,157 $ 184,472 $ 189,362 $ 193,235 $ 185,072
Real estate-construction 22,047 37,985 25,841 24,645 23,917
Real estate-mortgage 925,644 807,354 684,420 651,915 605,173
Installment loans to
individuals 379,011 366,616 275,563 263,904 275,183
Unearned income (26,867) (22,339) (22,377) (22,073)
(25,665)
--------- -------- -------- --------- ---------
1,450,992 1,374,088 1,152,809 1,111,626 1,063,680
Loans held for sale:
Real estate-mortgage 7,919 5,071 68,175 3,116
Installment loans to
individuals 2,235 833 27,803 36,011
---------- ---------- --------- --------- ---------
10,154 5,904 95,978 39,127
---------- ---------- --------- --------- ---------
$1,461,146 $1,379,992 $1,248,787 $1,150,753 $1,063,680
========== ========== ========== ========== ==========
The Corporation's lending philosophy is 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.
Loans increased 5.9% from 1994. The ratio of loans to deposits at the end
of 1995 was 82.7%, down slightly from a ratio of 84.8% at the end of 1994.
During 1995, the Corporation converted its data processing system. The new
system allows for the separate classification of commercial real estate
loans. The 1995 balances reflect commercial real estate loans within the
real estate - mortgage category. Such loans were previously classified
within the commercial, financial and agricultural category.
During 1995 the Corporation sold $16.1 million in fixed rate residential
mortgages to the Federal National Mortgage Association (FNMA). The 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
market it serves. All of the mortgages were sold with the servicing retained
by the Corporation.
In May of 1995, the Financial Accounting Standards Board issued FAS No.
122, "accounting for Mortgage Servicing Rights," an amendment of FAS No. 65.
This Statement, which was adopted during the first quarter of 1996, allows
entities which originate mortgage loans for sale to recognize as separate
assets rights to service these loans. Implementations of this Statement did
not have a material effect on the Corporation's results of operations or
financial position.
In 1995, total installment loans to individuals increased 3.4% to $379.0
million. The growth reflects a continuation of strong demand for indirect
automobile loans as well as revolving lines of credit. Through its consumer
finance subsidiary, the Corporation has initiated a non-prime used motor
vehicle program, purchasing loans form various dealers in its market area.
These non-prime loans totaled $24.9 million at December 31, 1995.
<PAGE>
The commercial loan portfolio consists principally of loans to small- and
medium-sized businesses within the Corporation's primary market area of
western Pennsylvania and eastern Ohio. The Corporation generally avoids
making significant loans to any single borrower in order to minimize credit
risk.
During 1994, the Corporation reclassified $119.9 million of residential
mortgages and indirect installment loans from the held for sale category into
its permanent loan portfolio. This action was taken to more clearly reflect
management's intent relative to portfolio lending activities by specifically
defining certain loan originations that would be sold in the secondary
market. At the time of this reclassification, the book value of those loans
approximated their market value.
As of December 31, 1995, 1994 and 1993, no concentrations of loans
exceeding 10% of total loans existed which were not disclosed as a separate
category of loans.
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 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Non-accrual loans $ 6,622 $ 9,926 $10,262 $ 9,179 $15,085
Restructured loans 3,075 3,157 3,236 1,388 1,448
------- ------- ------- ------- -------
$ 9,697 $13,083 $13,498 $10,567 $16,533
======= ======= ======= ======= =======
Non-performing loans as a
percentage of total loans
.66% .95% 1.08% .92% 1.55%
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 1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Gross interest income that
would have been recorded
if the non-performing
loans had been current
and in accordance with
their original terms $1,113 $1,682 $1,738 $1,555 $1,724
Interest income included
in income on the
non-performing loans 590 636 671 883 940
Following is a summary of loans 90 days or more past due, on which interest
accruals continue (dollars in thousands):
December 31 1995 1994 1993 1992 1991
---------- ---------- ----------- ----------- -------
Loans 90 days or more
past due $ 3,848 $ 2,621 $ 3,422 $ 4,254 $ 7,433
Loans 90 days or more
past due as a percentage
of total loans .26% .19% .27% .37% .70%
As of December 31, 1995, management is not aware of any other loans where
there are serious doubts as to the ability of such borrowers to comply with
the present repayment terms.
<PAGE>
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 and off balance sheet risk.
Following is a summary of changes in the allowance for loan losses (dollars
in thousands):
Year Ended December 31 1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Balance at beginning of year $21,477 $17,182 $15,428 $12,458 $10,582
Addition arising in purchase
transactions 376 1,197
Loss reserves transferred on
loans sold (893) (685) (408)
Charge-offs:
Real estate - mortgage (560) (1,454) (549) (2,189) (1,113)
Installment loans to
individuals (5,331) (3,796) (3,999) (4,020) (2,647)
Commercial, financial and
agricultural (773) (1,319) (3,999) (6,918) (1,674)
------- ------- ------- ------- -------
(6,664) (6,569) (8,479) (13,127) (5,434)
Recoveries:
Real estate - mortgage 189 98 173 209 196
Installment loans to
individuals 1,105 963 782 712 611
Commercial, financial and
agricultural 541 748 433 42 106
------- ------- ------- ------- -------
Net charge-offs (4,829) (4,760) (7,091) (12,164) (4,521)
Provision for loan losses 6,487 9,055 9,738 15,443 5,608
------- ------- ------- ------- -------
Balance at end of year $23,135 $21,477 $17,182 $15,428 $12,458
======= ======= ======= ======= =======
Net charge-offs as a percent of
average loans, net of unearned
income .34% .36% .59% 1.11% .45%
Allowance for loan losses as a
percent of total loans, net
of unearned income 1.58% 1.56% 1.38% 1.34% 1.17%
Allowance for loan losses as a
percent of non-performing
loans 238.57% 164.16% 127.29% 146.00% 75.35%
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 1995, charge-offs increased from $3.8 million to $5.3 million while
delinquencies increased from 2.2% at December 31, 1994 to 5.1% 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.
<PAGE>
Following shows the allocation of the allowance for loan losses (in
thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
% OF % OF % OF % OF % OF
Year Ended December 31 1995 LOANS 1994 LOANS 1993 LOANS 1992 LOANS 1991 LOANS
------- ------ ------- ------ ------- ------ ------- ------ ------- -------
Commercial, financial and
agricultural $ 5,377 10.4% $ 7,506 13.4% $ 6,715 16.4% $ 5,988 17.4% $ 3,827 17.4%
Real estate - construction 55 1.5 178 2.8 458 2.2 455 2.2 45 2.2
Real estate - mortgage 3,153 63.8 3,447 58.7 2,464 59.4 2,290 58.6 3,070 56.9
Installment loans to
individuals 6,358 26.1 5,036 26.7 4,529 23.9 4,287 23.7 4,197 25.9
Unallocated portion 8,192 (1.8) 5,310 (1.6) 3,016 (1.9) 2,408 (1.9) 1,319 (2.4)
------ ---- ------- ---- ------- ---- ------ ---- ------ ----
$23,135 100.0 $21,477 100.0 $17,182 100.0 $15,428 100.0 $12,458 100.0
======= ======= ======= ======= =======
</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 approved an amnesty period in 1995 which institutions
had the opportunity to redesignate securities under FAS 115. The FASB
provided that securities may be reclassified from mid-November to December
31, 1995. During this period, the Corporation took advantage of this
opportunity to reclass $92.0 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.
Excluding the effect of the reclassification, securities available for sale
increased 29.7% while securities held to maturity decreased 12.5% due to
maturing securities being used to fund loan demand.
The following table indicates the respective maturities and weighted-
average yields of investment securities as of December 31, 1995 (in
thousands):
Weighted
Amount Average Yield
--------- -------------
Obligations of U.S. Treasury and
Other U.S. Government agencies:
Maturing within one year $ 119,815 5.61%
Maturing after one year within five years 225,872 6.09%
Maturing after five years
but within ten years 27,723 6.57%
State & political subdivisions:
Maturing within one year 1,275 10.78%
Maturing after one year within five years 33,121 5.79%
Maturing after five years
but within ten years 6,573 6.85%
Other securities:
Maturing within one year 12 5.44%
Maturing after one year within five years 2,024 5.83%
Maturing after five years
but within ten years 10 5.50%
Maturing after ten years 10 2.80%
No stated maturity 5,789 6.01%
TOTAL --------- -------------
$ 432,224 5.98%
========= =============
The weighted average yields for tax exempt securities are computed on a tax
equivalent basis.
<PAGE>
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 subsidiary
banks and savings institution.
At both December 31, 1995 and 1994, total deposits were $1.8 billion and
$1.6 billion, respectively. The majority of this growth was within
certificates of deposit and other time deposits which increased by $139.2
million. The increase in time deposits was a direct result of the higher
interest rate environment. Customers chose to invest their money in higher-
yielding certificates rather than lower-yielding transaction and savings
accounts.
Short-term borrowings, made up of repurchase agreements, federal funds
purchased, notes payable and subordinated notes decreased 15.5% in 1995 to
$83.5 million. The primary reason for this decrease was a lower level of
federal funds purchased in 1995. As deposit growth was sufficient to fund
loan demand.
Subordinated notes are the largest component of short-term borrowings. At
December 31, 1995, subordinated notes represented 64.4% of total short-term
borrowings. Following is a summary of selected financial information on
short-term subordinated notes (dollars in thousands):
December 31 1995 1994 1993
-------- -------- --------
Balance at end of year $ 47,362 $ 48,085 $ 50,295
Maximum month end balance 47,675 56,126 50,295
Average balance during
the year 45,912 52,830 45,341
Weighted average interest rates:
At end of year 5.69% 5.21% 5.07%
During the year 5.54 5.06 5.09
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 1995, retained earnings increased $15.8 million as a result of
earnings retention versus $11.1 million in 1994. Total cash dividends
declared represented 20.21% of net income for 1995 compared to 21.91% for
1994. Book value per share was $14.00 at December 31, 1995, compared to
$12.34 at December 31, 1994.
<PAGE>
1994 VERSUS 1993
The Corporation's net income was $14.2 million for 1994 versus $11.5
million for 1993. Primary earnings per share were $1.14 and $.99 for 1994
and 1993, respectively. This improved performance was primarily a result of
an increase in net interest income and the Corporation's continued focus on
expense control. Increases in both the return on average equity from 9.26%
in 1993 to 9.72% in 1994 and the return on average assets from .62% in 1993
to .74% in 1994 reflect the improved performance of the Corporation.
Net interest income, on a fully taxable equivalent basis, increased from
$78.4 million in 1993 to $86.0 million in 1994, an increase of 9.7%. Net
margin rose to 4.80% from 4.53% in 1993. Average loans increased by $100.7
million in 1994, which contributed to the improvement in interest income,
while the cost of funds declined from 3.89% to 3.63% due to lower interest
rates during the first part of 1994.
The provision for loan losses was $9.1 million and represented a decrease
of 7.0% from 1993, when a provision of $9.7 million was charged to
operations. The decrease in the provision was a direct result of improvement
in asset quality.
Non-interest income decreased 8.6%. Total non-interest income decreased
from $17.3 million in 1993 to $15.8 million in 1994, primarily the result of
a $1.5 million gain realized from an indirect automobile loan securitization
completed in June of 1993. Offsetting this gain was an increase in service
charges from $7.3 million in 1993 to $7.9 million in 1994, as a result of
certain new retail fees charged to customers. In addition, the gain on sale
of securities increased 71.5% to $1.3 million in 1994 as the Corporation took
advantage of certain market conditions and sold various equity securities
during the year.
Non-interest expense rose from $67.7 million in 1993 to $69.3 million in
1994. Personnel expense increased from $30.9 million in 1993 to $32.5
million in 1994. Increases of $712,000 in pension expense and $366,000 for
incentive compensation as well as normal annual salary adjustments accounted
for the majority of the increase. In addition, continued expansion in the
Florida market resulted in the opening of two branches and an increase of 68
full-time equivalent employees. The amortization of intangibles decreased
16.9% to $1.7 million in 1994 compared to $2.0 million in 1993. The expense
in 1993 was higher due to a full-year effect of a 1992 acquisition. Other
non-interest expense also decreased in 1994 due to a number of items.
Expenses relating to problem loan work-outs and foreclosed real estate
decreased as a result of the marked improvement in credit quality. Also
included in 1993 expenses were costs associated with the Corporation's
efforts to consolidate the data processing and certain other operational
functions of its subsidiaries. Promotional expenses rose to $2.5 million in
1994 compared to $2.1 million in 1993, representing an increase of 17.0%.
This increase was the result of management's increased efforts to market its
personal banking services and expansion within the Florida market.
Income tax expenses increased 37.1% to $7.0 million for 1994 as a result of
the Corporation generating more taxable income. The 1994 effective tax rate
of 33.0% was below the 35% statutory tax rate due to the tax benefits
resulting from tax-exempt securities income and excludable dividend income.
<PAGE>
EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
January 19, 1996, except for Note I,
as to which the date is February 2, 1996
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, 1995 and
1994 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1995. 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, 1995 and
1994 and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the company
changed its method of accounting for debt and equity securities effective
January 1, 1994.
Hill, Barth & King, Inc.
Certified Public Accountants
Naples, Florida
