<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 [No Fee Required]
Commission File No. 0-18505
SOUTHWEST BANKS, INC.
(Exact name of registrant as specified in its charter)
STATE OF FLORIDA (State or IRS No. 65-0083473 (I.R.S.
other jurisdiction of Employer Identification No.)
incorporation or organization)
------------------------
900 GOODLETTE ROAD, NORTH
NAPLES, FLORIDA 33940
(941) 262-7600
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to section 12(b) of the Exchange Act: None
Securities registered pursuant to section 12(g) of the Exchange Act: Common
Stock, $.10 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant on February 29, 1996 was $24,188,405. As of
such date no organized trading market existed for the common stock of the
registrant. The aggregate market value is based upon the book value of the
common stock of the registrant at December 31, 1995. Solely for the purposes
of this response, executive officers, directors and beneficial owners of more
than five percent of the Company's common stock are considered the affiliates
of the Company at that date.
The number of shares outstanding of the issuer's common stock, as of February
29, 1996: 3,654,089 shares of $.10 par value common stock.
- --------------------------------------------------------------------------------
================================================================================
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held in 1996 is incorporated by reference in answer to Part
III of this report.
<PAGE> 3
PART I
ITEM 1. BUSINESS
Southwest Banks, Inc. (the "Company") is a registered bank holding company
under the Federal Bank Holding Company Act of 1956, as amended, and owns 100%
of the outstanding capital stock of the First National Bank of Naples and Cape
Coral National Bank ("Banks"). The Company was incorporated under the laws of
the State of Florida on November 15, 1988 as a mechanism to enhance the Banks'
ability to serve their customers' requirements for financial services. The
holding company structure provides flexibility for expansion of the Company's
banking business through acquisition of other financial institutions and
provision of additional banking-related services which the traditional
commercial bank may not provide under present laws.
The Banks are full service commercial banks, without trust powers. The
Banks offer a full range of interest bearing and non-interest bearing accounts,
including commercial and retail checking accounts, negotiable order of
withdrawal ("NOW") accounts, public funds accounts, money market accounts,
individual retirement accounts, regular interest bearing statement savings
accounts, certificates of deposit, daily repurchase agreements, business
accounts (offering account analysis on all commercial relationships),
commercial loans, real estate loans and consumer direct/indirect installment
loans. In addition, the Banks provide such consumer services as discount
brokerage, notary services, photocopying, signature guarantees, incoming and
outgoing collections, postage stamps, travelers checks, U.S. Bonds, food
coupons, cashiers checks, money orders, wire transfer services, coupon
collection, foreign exchange, utility bill payments and credit references.
Moreover, safe deposit boxes, custodial services, ACH processing and account
reconciliation, overdraft checking, commercial account analysis, night
depository service, courier service and automatic teller services are
available.
MARKET AREA AND COMPETITION
According to the U.S. Census Bureau, the Southwest Florida area has been
one of the fastest growing areas in the country over the past decade.
Competition among financial institutions in the Banks' market areas is intense,
with other financial institutions having far greater financial resources than
those available to the Company.
The primary service area for the Banks encompasses the Naples and Cape
Coral, Florida metropolitan areas. There are 91 banking offices and 12 offices
of savings and loan associations within the primary service areas of the Banks.
Most of these offices are branches of or are affiliated with major holding
companies in North Carolina, Georgia, Alabama and other areas of Florida.
The Bank competes with existing area financial institutions other than
commercial banks and savings and loan associations, including insurance
companies, consumer finance companies, brokerage houses, credit unions and
other business entities which have recently been invading the traditional
banking markets. Due to the rapid growth of Southwest Florida, it is
anticipated that additional competition will continue from new entrants to the
market.
I-1
<PAGE> 4
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
The following is a presentation of the average consolidated balance sheets
of the Company as of December 31, 1995, 1994 and 1993. This presentation
includes all major categories of interest-earning assets and interest-bearing
liabilities:
AVERAGE CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
ASSETS
Cash and Due from Banks . . . . . . . . . . . . . . . . . $ 17,851,997 $ 11,431,446 $ 6,457,726
------------ ------------ ------------
Interest-Earning Deposits . . . . . . . . . . . . . . . . 646,575 - 0 - 202,740
Taxable Securities . . . . . . . . . . . . . . . . . . . 55,846,699 43,453,831 34,825,054
Tax Free Securities . . . . . . . . . . . . . . . . . . 6,759,647 6,270,008 1,484,760
Federal Funds Sold . . . . . . . . . . . . . . . . . . . 14,259,153 2,630,022 3,010,592
Net Loans . . . . . . . . . . . . . . . . . . . . . . . . 216,325,673 151,176,783 109,376,527
------------ ------------ ------------
Total Earning Assets . . . . . . . . . . . . . . . . . . 293,837,747 203,530,644 148,899,673
Other Assets . . . . . . . . . . . . . . . . . . . . . . 17,217,035 9,276,601 5,442,256
------------ ------------ ------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . $328,906,779 $224,238,691 $160,799,655
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non Interest-Bearing Deposits . . . . . . . . . . . . . . $ 35,615,561 $ 23,964,098 $ 15,588,514
Savings Deposits . . . . . . . . . . . . . . . . . . . . 22,685,871 18,486,785 15,552,702
Other Deposits . . . . . . . . . . . . . . . . . . . . . 202,094,553 138,843,044 111,807,902
Other Liabilities . . . . . . . . . . . . . . . . . . . . 2,516,230 1,261,188 1,148,017
Other Borrowings . . . . . . . . . . . . . . . . . . . . 37,215,007 17,576,162 4,340,114
------------ ------------ ------------
Total Liabilities . . . . . . . . . . . . . . . . 300,127,222 200,131,277 148,437,249
------------ ------------ ------------
Common Stock . . . . . . . . . . . . . . . . . . . . . . 349,764 312,682 194,736
Capital Surplus . . . . . . . . . . . . . . . . . . . . . 27,876,172 23,033,777 11,755,663
Retained Earnings (Deficit) . . . . . . . . . . . . . . . 930,140 863,723 412,007
Unrealized Gain (Loss) on Available-for Sale-Securities . (108,688) (102,768) -0-
Employee Stock Ownership Plan Obligation . . . . . . . . (267,831) - 0 - -0-
------------ ------------ ------------
Total Stockholders' Equity . . . . . . . . . . . . 28,779,557 24,107,414 12,362,406
------------ ------------ ------------
Total Liabilities and Stockholders' Equity . . . . . . . $328,906,779 $224,238,691 $160,799,655
============ ============ ============
</TABLE>
I-2
<PAGE> 5
The following is a presentation of an analysis of the net interest
earnings of the Company for the years ended December 31, 1995, 1994 and 1993
with respect to each major category of interest-earning asset and each major
category of interest-bearing liability:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------
ASSETS AVERAGE AMOUNT INTEREST EARNED AVERAGE YIELD NET YIELD
-------------- --------------- ------------- ---------
<S> <C> <C> <C> <C>
Interest-Earning Deposits . . . . . . . $ 646,575 $ 43,646 6.75%
Securities . . . . . . . . . . . . . . 62,606,346 3,693,915 5.90%
Federal Funds Sold . . . . . . . . . . 14,259,143 834,821 5.85%
Net Loans . . . . . . . . . . . . . . . 216,325,673 20,811,977 9.62%
------------ -----------
Total Earning Assets . . . . . . . . $293,837,737 $25,384,359 8.64% 4.64%
============ ===========
LIABILITIES AVERAGE AMOUNT INTEREST PAID AVERAGE RATE PAID
-------------- ------------- -----------------
Savings Deposits . . . . . . . . . . . $ 22,685,871 $ 658,576 2.90%
Other Deposits . . . . . . . . . . . . 202,094,553 8,993,899 4.45%
Short-Term Borrowings . . . . . . . . . 37,215,007 2,103,576 5.65%
------------ -----------
Total Interest-Bearing Liabilities . $261,995,431 $11,756,051 4.49%
============ ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------
ASSETS AVERAGE AMOUNT INTEREST EARNED AVERAGE YIELD NET YIELD
-------------- --------------- ------------- ---------
<S> <C> <C> <C> <C>
Securities . . . . . . . . . . . . . . $ 49,723,839 $ 2,616,202 5.26%
Federal Funds Sold . . . . . . . . . . 2,630,022 94,456 3.59%
Net Loans . . . . . . . . . . . . . . . 151,176,783 12,704,458 8.40%
------------ -----------
Total Earning Assets . . . . . . . . $203,530,644 $15,415,116 7.57% 4.47%
============ ===========
LIABILITIES AVERAGE AMOUNT INTEREST PAID AVERAGE RATE PAID
-------------- ------------- -----------------
Savings Deposits . . . . . . . . . . . $ 18,486,785 $ 503,492 2.72%
Other Deposits . . . . . . . . . . . . 138,843,044 4,932,616 3.55%
Short-Term Borrowings . . . . . . . . . 17,576,162 870,339 4.95%
------------ -----------
Total Interest-Bearing Liabilities . $174,905,991 $ 6,306,447 3.60%
============ ===========
</TABLE>
I-3
<PAGE> 6
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------
ASSETS AVERAGE AMOUNT INTEREST EARNED AVERAGE YIELD NET YIELD
-------------- --------------- ------------- ---------
<S> <C> <C> <C> <C>
Interest-Earning Deposits . . . . . . . $ 202,740 $ 8,093 3.99%
Securities . . . . . . . . . . . . . . 36,309,814 1,937,345 5.34%
Federal Funds Sold . . . . . . . . . . 3,010,592 88,920 2.95%
Net Loans . . . . . . . . . . . . . . . 109,376,527 9,151,743 8.37%
----------- -----------
Total Earning Assets . . . . . . . . $148,899,673 $11,186,101 7.51% 4.38%
============ ===========
LIABILITIES AVERAGE AMOUNT INTEREST PAID AVERAGE RATE PAID
-------------- ------------- -----------------
Savings Deposits . . . . . . . . . . . $ 15,552,702 $ 436,533 2.81%
Other Deposits . . . . . . . . . . . . 111,807,902 4,086,724 3.66%
Short-Term Borrowings . . . . . . . . . 4,340,108 135,852 3.13%
------------ -----------
Total Interest-Bearing Liabilities . $131,700,712 $ 4,659,109 3.54%
============ ===========
</TABLE>
For purposes of these analyses, non-accruing loans are included in the
average balances and tax exempt income is not reflected on a tax equivalent
basis. Loan fees included in interest earned are not material to the
presentation.
I-4
<PAGE> 7
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The effect of changes in average balances (volume) and rates on interest
income, interest expense and net interest income, for the periods indicated, is
shown below. The effect of a change in average balance has been determined by
applying the average rate in the earlier period to the change in average
balance in the later period, as compared with the earlier period. The effect
of a change in the average rate has been determined by applying the average
balance in the earlier period to the change in the average rate in the later
period, as compared with the earlier period. Changes resulting from average
balance/rate variances are included in changes resulting from volume.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 COMPARED TO 1994
INCREASE (DECREASE) DUE TO
----------------------------------
VOLUME RATE CHANGE
------ ---- ------
<S> <C> <C> <C>
Interest earned on:
Interest earning deposits . . . $ 43,646 $ - 0 - $ 43,646
Investment securities . . . . . 677,620 400,093 1,077,713
Federal funds sold . . . . . . 417,485 322,880 740,365
Net loans . . . . . . . . . . . 5,472,507 2,635,012 8,107,519
----------- ----------- -----------
Total interest income . . . . . 6,611,258 3,357,985 9,969,243
----------- ----------- -----------
Interest paid on:
Savings deposits . . . . . . . 114,215 40,869 155,084
Other deposits . . . . . . . . 2,245,429 1,815,854 4,061,283
Borrowings . . . . . . . . . . 972,123 261,114 1,233,237
----------- ----------- -----------
Total interest expense . . . . 3,331,767 2,117,837 5,449,604
----------- ----------- -----------
Change in
Net interest income . . . . . . $ 3,279,491 $ 1,240,148 $ 4,519,639
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 COMPARED TO 1993
INCREASE (DECREASE) DUE TO
----------------------------------
VOLUME RATE CHANGE
------ ---- ------
<S> <C> <C> <C>
Interest earned on:
Interest earning deposits . . . $ (8,093) $ - 0 - $ (8,093)
Investment securities . . . . . 716,309 (37,452) 678,857
Federal funds sold . . . . . . (11,227) 16,763 5,536
Net loans . . . . . . . . . . . 3,498,681 54,034 3,552,715
---------- --------- ----------
Total interest income . . . . . 4,195,670 33,345 4,229,015
---------- --------- ----------
Interest paid on:
Savings deposits . . . . . . . 82,448 (15,489) 66,959
Other deposits . . . . . . . . 989,486 (143,594) 845,892
Borrowings . . . . . . . . . . 411,641 322,846 734,487
---------- --------- ----------
Total interest expense . . . . 1,483,575 163,763 1,647,338
---------- --------- ----------
Change in
Net interest income . . . . . . $2,712,095 $(130,418) $2,581,677
========== ========= ==========
</TABLE>
I-5
<PAGE> 8
LOAN PORTFOLIO
The Company engages, through the Banks, in a full complement of lending
activities, including commercial, consumer/installment and real estate loans.
The Company's commercial lending is directed principally towards
businesses whose demands for funds fall within each Bank's legal lending limits
and which are potential deposit customers. This category of loans includes
loans made to individual, partnership or corporate borrowers, and obtained for
a variety of business purposes. Particular emphasis is placed on loans to
small and medium-sized businesses. A majority of the commercial loans are
collateralized by real estate mortgages. The Company's real estate loans
consist of residential and commercial first mortgage loans, second mortgage
financing and construction loans.
The Company's direct consumer loans primarily consist of installment
loans to individuals for personal, family and household purposes, including
automobile loans to individuals and pre-approved lines of credit. This
category of loans also includes loans secured by second mortgages on the
residences of borrowers for a variety of purposes including home improvements,
education and other personal expenditures. Beginning in January 1992, the
Company began issuing indirect consumer loans to individuals under agreements
with local auto retailers (the "agreements" stipulate liability on the part of
the dealer and the Company regarding collection of payments and repossession of
collateral on non-performing loans) for the purchase of automobiles. These
loans, categorized as installment, are made under the same credit criteria as
are direct consumer loans although the credit contract is among the buyer,
seller and the Banks, as assignee.
The Company has a correspondent relationship with the First National
Bank of Pennsylvania, Hermitage, Pennsylvania ("First National"), whereby the
Company solicits the sale and purchase of loan participations. Peter
Mortensen, a director of the Company, is Chairman of the Board of First
National and is Chairman of the Board, President and minority stockholder of
First National's parent holding company. Participations purchased from First
National are entered into using the same underwriting criteria that would be
applied if the Company had originated the loan. This would include credit and
collateral analyses and maintenance of a complete credit file on each purchased
participation that is identical to the credit files maintained by the Company
on its own customers.
I-6
<PAGE> 9
The following is a presentation of an analysis of maturities of loans as
of December 31, 1995:
<TABLE>
<CAPTION>
DUE IN DUE IN DUE AFTER
TYPE OF LOAN 1 YEAR OR LESS 1 TO 5 YEARS 5 YEARS TOTAL
------------ -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural . . . . . . . $32,843,770 $ 56,733,541 $10,951,774 $100,529,085
Real estate . . . . . . . . . 5,206,987 11,745,970 40,387,615 57,340,572
Installment loans . . . . . . 1,501,996 54,309,069 674,878 56,485,943
Lines of credit . . . . . . . 12,770,162 5,517,726 5,865,577 24,153,465
----------- ------------ ----------- ------------
Total . . . . . . . . . . $52,322,915 $128,306,306 $57,879,844 $238,509,065
=========== ============ =========== ============
</TABLE>
The Company does not presently have, nor intends to implement, a rollover
policy with respect to its loan portfolio. All loans are recorded according to
original terms, and demand loans, overdrafts and loans having no stated
repayment terms or maturity are reported as due in one year or less.
At December 31, 1995, the amount of loans due after one year with
predetermined interest rates totalled approximately $88,425,000 while the
amount of loans due after one year with floating interest rates totalled
approximately $65,899,000.
The following table presents various categories of loans contained in the
Company's loan portfolio and the total amount of all loans at December 31, 1991
through 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------
TYPE OF LOAN 1995 1994 1993 1992 1991
- ------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial and financial . . . $100,529,085 $ 69,099,015 $ 45,642,458 $ 34,396,890 $ 28,630,533
Real estate . . . . . . . . . . 57,340,572 30,549,065 30,549,065 25,478,557 22,370,203
Installment loans . . . . . . . 56,485,943 48,688,611 33,872,749 22,638,771 3,329,984
Lines of credit . . . . . . . . 24,153,465 20,734,649 16,605,165 11,746,447 8,953,775
------------ ------------ ------------ ------------ ------------
Subtotal . . . . . . . . . 238,509,065 186,006,407 126,669,437 94,260,665 63,284,495
Less deferred loan fees
and unearned income . . . 257,549 317,269 198,202 223,995 205,934
Allowance for
possible loan losses . . 1,585,285 1,182,157 742,489 691,436 528,428
------------ ------------ ------------ ------------ ------------
Net loans . . . . . . . . . . . $236,666,231 $184,506,981 $125,728,746 $ 93,345,235 $ 62,550,133
============ ============ ============ ============ ============
</TABLE>
I-7
<PAGE> 10
Accrual of interest is discontinued on a loan when management of the Bank
determines, after consideration of economic and business factors affecting
collection efforts, that collection of interest is doubtful.
Amounts pertaining to non-accruing loans, accruing loans which were
contractually past due 90 days or more as to principal or interest payments,
and loans which would represent troubled debt restructurings at December 31 of
each of the years 1991 through 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
TYPE OF LOAN 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accruing Loans . . . . . . . . . $1,017,489 $ - 0 - $ - 0 - $ 521,282 $ 68,445
Accruing Loans less than or equal
to 90 days past due . . . . . . . . $ 63,006 $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Troubled Debt Restructurings . . . . $ - 0 - $ - 0 - $ - 0 - $ - 0 - $ - 0 -
</TABLE>
Non-accruing loans at December 31, 1995 consisted of two commercial real
estate loans aggregating $258,701 and three residential mortgage loans
totalling $758,788. With respect to the loans accounted for on a non-accrual
basis at December 31, 1995, the gross interest income that would have been
recorded in the period then ended if the loan had been current in accordance
with its original terms and outstanding throughout the period or since
origination amounted to $74,538 and the amount of interest income on such loans
that was included in net income for the year ended December 31, 1995 amounted
to $49,591.
At December 31, 1995, there were no potential problem loans, except as
discussed above, where known information about possible credit problems of the
borrower caused management to have serious doubts as to the ability of such
borrower to comply with the present loan repayment terms and which may result
in such loans being placed on a non-accrual basis.
I-8
<PAGE> 11
SUMMARY OF LOAN LOSS EXPERIENCE
An analysis of the Company's allowance for possible loan losses and loan
loss experience (charge-offs) is furnished in the following table for the years
ended December 31, 1991 through 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
TYPE OF LOAN 1995 1994 1993 1992 1991
- ------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of period. $1,182,157 $ 742,489 $ 691,436 $528,428 $ 442,190
---------- ---------- --------- -------- ---------
Charge-offs:
Installment . . . . . . . . . (354,548) (174,411) (66,472) (83,122) (24,566)
Commercial . . . . . . . . . (125,210) (66,312) (130,169) (89,584) (90,960)
Credit Cards . . . . . . . . (27,763) (17,259) (7,485) - (1,066)
Mortgage . . . . . . . . . . (20,664) - - (18,833) (10,312)
---------- ---------- --------- -------- ---------
Total Charge-Offs: . . (528,185) (257,982) (204,126) (191,539) (126,904)
Recoveries:
Installment . . . . . . . . . 96,313 33,415 12,392 14,397 4,207
Commercial . . . . . . . . . - 59,160 2,610 - -
Credit Cards . . . . . . . . - 75 177 3,763 125
Mortgage . . . . . . . . . . - - - 387 -
---------- ---------- --------- -------- ---------
Total Recoveries: . . . 96,313 92,650 15,179 18,547 4,332
---------- ---------- --------- -------- ---------
Net Charge-offs . . . . . . . . (431,872) (165,332) (188,947) (172,992) -
Provision for losses charged
to operations . . . . . . . . 835,000 605,000 240,000 336,000 208,810
---------- ---------- --------- -------- ---------
Balance at end of period . . . $1,585,285 $1,182,157 $ 742,489 $691,436 $ 528,428
========== ========== ========= ======== =========
Asset Quality Ratios:
Net charge-offs during the
period to average loans
outstanding during the
period . . . . . . . . . . . 0.18% 0.11% 0.17% 0.23% 0.23%
Allowance for loan losses
to total loans . . . . . . . 0.67% 0.64% 0.59% 0.73% 0.83%
Allowance for loan losses to
non-performing assets . . . . 103.86% 241.10% 565.04% 132.63% 539.21%
Non-performing loans to total
loans . . . . . . . . . . . . 0.43% 0.22% 0.00% 0.55% 0.11%
Non-performing assets to total
assets . . . . . . . . . . . 0.39% 0.19% 0.07% 0.36% 0.08%
</TABLE>
I-9
<PAGE> 12
At December 31, 1991 through 1995 the allowance for possible loan losses
was allocated as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------- ------------------------ -------------------------------
% OF LOANS IN % OF LOANS IN % OF LOANS IN
EACH CATEGORY EACH CATEGORY EACH CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Commercial and
financial . . $ 836,866 52.8% $ 580,374 37.1% $ 295,287 36.0%
Real estate . . 118,445 7.5% 88,798 25.6% 24,025 24.1%
Installment . . 346,329 21.8% 347,164 26.2% 371,931 26.8%
Lines of
credit . . . . 283,645 17.9% 165,821 11.1% 51,246 13.1%
---------- ----- ---------- ----- --------- -----
Total . . . . $1,585,285 100.0% $1,182,157 100.0% $ 742,489 100.0%
========== ===== ========== ===== ========= =====
1992 1991
------------------------- --------------------------
% OF LOANS IN % OF LOANS IN
EACH CATEGORY EACH CATEGORY
TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS
------ ----- ------ -----
<S> <C> <C> <C> <C>
Commercial and
financial . . $355,622 36.5% $ 306,359 50.5%
Real estate . . 29,144 27.0% 81,102 32.0%
Installment . . 261,939 24.0% 6,660 3.3%
Lines of
credit . . . . 44,731 12.5% 134,307 14.2%
-------- ----- --------- ----
Total . . . . $691,436 100.0% $ 528,428 100.0%
======== ===== ========= =====
</TABLE>
Although the allowance for loan losses was determined by category of loans,
the entire allowance is available to absorb losses from any category.
The allowance for loan losses is established based upon management's
evaluation of the potential losses in its loan portfolio. In analyzing the
adequacy of the allowance, management considers its review as well as the
results of independent internal and external credit reviews, changes in the
composition and volume of the loan portfolio, levels of non-performing and
charged-off loans and local and national economic conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Provision/Allowance for Loan Losses" for a discussion of
management's analysis of the loan portfolio with respect to the establishment
of the allowance.
I-10
<PAGE> 13
INVESTMENTS
The Company invests primarily in obligations of the United States or
obligations guaranteed as to principal and interest by the United States, other
taxable securities and in certain obligations of states and municipalities.
The Banks enter into Federal Funds transactions with their principal
correspondent banks, and primarily act as a net seller of such funds. The sale
of Federal Funds amounts to a short-term loan from the Banks to another bank.
The following table presents, at December 31, 1995, 1994 and 1993, the book
value of the Company's investments:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
INVESTMENT CATEGORY 1995 1994 1993
- ------------------- ---- ---- ----
<S> <C> <C> <C>
Obligations of U.S. Treasury
and other U.S. Government
agencies . . . . . . . . . . . . . . . . . . $ 62,490,920 $ 40,293,618 $ 32,686,816
State and political
subdivisions . . . . . . . . . . . . . . . 6,939,567 6,685,003 3,711,879
Other securities . . . . . . . . . . . . . . . 4,805,240 4,531,376 847,475
------------ ------------ ------------
Total . . . . . . . . . . . . . . . . . $ 74,235,727 $ 51,509,997 $ 37,246,170
============ ============ ============
</TABLE>
The following table indicates the respective maturities and weighted
average yields of securities held for investment as of December 31, 1995:
<TABLE>
<CAPTION>
AMOUNT WEIGHTED AVERAGE YIELD
-------- -----------------------
<S> <C> <C>
Obligations of U.S. Treasury and
other U.S. Government agencies:
0 - 1 Yr . . . . . . . . . . . . . . . . . . . . . $13,280,442 . . . . . . . . . . . . . . 5.86%
1 - 5 Yrs . . . . . . . . . . . . . . . . . . . . . 23,193,775 . . . . . . . . . . . . . . 6.38%
5 - 10 Yrs . . . . . . . . . . . . . . . . . . . . 26,016,703 . . . . . . . . . . . . . . 6.63%
State & political subdivisions:
1 - 5 Yrs . . . . . . . . . . . . . . . . . . . . . 2,630,744 . . . . . . . . . . . . . . 6.27%
5 - 10 Yrs . . . . . . . . . . . . . . . . . . . . 4,308,823 . . . . . . . . . . . . . . 6.86%
Other securities:
1 - 5 Yrs . . . . . . . . . . . . . . . . . . . . . 2,000,000 . . . . . . . . . . . . . . 5.83%
No stated maturity . . . . . . . . . . . . . . . . 2,805,240 . . . . . . . . . . . . . . 7.02%
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . $74,235,727 . . . . . . . . . . . . . . 6.41%
===========
</TABLE>
The weighted average yields for tax exempt securities are computed on a tax
equivalent basis.
I-11
<PAGE> 14
DEPOSITS
The Banks offer a full range of interest bearing and non-interest bearing
accounts, including commercial and retail checking accounts, negotiable order
of withdrawal ("NOW") accounts, public funds accounts, money market accounts
with limited transactions and a weekly variable interest rate, individual
retirement accounts, including Keogh plans with stated maturities, regular
interest bearing statement savings accounts and certificates of deposit with
fixed and variable rates and a range of maturity date options. The sources of
deposits are residents, businesses and employees of businesses within the
Banks' market areas, obtained through the personal solicitation of the Banks'
officers and directors, direct mail solicitation and advertisements published
in the local media. The Banks pay competitive interest rates on time and
savings deposits. In addition, the Banks have implemented a service charge fee
schedule competitive with other financial institutions in the Banks' market
areas, covering such matters as maintenance fees on checking accounts, per item
processing fees on checking accounts, returned check charges and the like.
The following table presents, for the years ended December 31, 1995, 1994
and 1993, the average amount of and average rate paid on each of the following
deposit categories:
<TABLE>
<CAPTION>
DEPOSIT CATEGORY AVERAGE AMOUNT AVERAGE RATE PAID
- ---------------- ------------------------------------------- -----------------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Non interest-bearing
demand deposits . . $ 35,615,561 $23,964,098 $15,588,514 N/A N/A N/A
Interest-bearing
demand deposits . . $ 108,823,477 $75,337,645 $45,614,466 3.40% 3.00% 2.53%
Savings deposits . . $ 22,685,871 $18,486,785 $15,552,702 2.90% 2.72% 2.81%
Time deposits . . . . $ 93,271,076 $63,505,399 $66,193,436 5.67% 4.22% 4.43%
</TABLE>
The following table indicates amounts outstanding of time certificates of
deposit of $100,000 or more and respective maturities as of December 31, 1995:
<TABLE>
<CAPTION>
TIME CERTIFICATES
OF DEPOSIT
--------------------
<S> <C>
3 months or less . . . . . . . . . . . . . . . . . . . . . . $ 6,874,462
4 - 6 months . . . . . . . . . . . . . . . . . . . . . . . . 7,754,577
7 - 12 months . . . . . . . . . . . . . . . . . . . . . . . . 11,800,698
Over 12 months . . . . . . . . . . . . . . . . . . . . . . . 1,778,092
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . $28,207,829
===========
</TABLE>
I-12
<PAGE> 15
RETURN ON EQUITY AND ASSETS
Returns on average consolidated assets and average consolidated equity for
the years ended December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Return on Average Assets . . . . . . . . . . . . . . . . 0.52% 0.29% 0.63%
Return on Average Equity . . . . . . . . . . . . . . . . 5.93% 2.70% 8.13%
Average Equity to Average Assets Ratio . . . . . . . . . 8.77% 10.75% 7.69%
</TABLE>
SHORT-TERM BORROWINGS
The Banks enter into various arrangements with customers to sell securities
under agreements to repurchase ("Repurchase Agreements"). The Repurchase
Agreements have been accounted for as short-term borrowings with the obligation
to repurchase the securities reflected as a non-deposit interest-bearing
liability. Amounts pertaining to Repurchase Agreements are as follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Balance at End of Year . . . . . . . . . $18,276,769 4.51% $11,378,411 4.98%
Maximum Outstanding During the Year . . . . $30,486,820 -- $15,908,712 --
Average Balance for the Year . . . . . . . . $25,336,826 5.42% $10,711,829 4.90%
</TABLE>
The Banks also borrow advances from the Federal Home Loan Bank (FHLB) under
terms generally ranging from 30 days to one year. These advances are secured
by residential mortgages carried in the Banks' portfolios. Amounts pertaining
to FHLB advances for 1995 are as follows:
<TABLE>
<CAPTION>
Amount WEIGHTED AVERAGE RATE
---------------------- ---------------------
<S> <C> <C>
Balance at End of Year . . . . . . . . . $10,000,000 5.90%
Maximum Outstanding During the Year . . . . $12,000,000 --
Average Balance for the Year . . . . . . . . $11,551,825 6.15%
</TABLE>
For the years ended December 31, 1995, 1994 and 1993, the Company had no
other category of borrowings for which the average balances outstanding during
the year amounted to 30% or more of stockholders' equity.
I-13
<PAGE> 16
ASSET/LIABILITY MANAGEMENT
It is the objective of the Company to manage assets and liabilities to
provide a satisfactory, consistent level of profitability within the framework
of established cash, loan, investment, borrowing and capital policies. Certain
of the officers of the Banks are responsible for monitoring policies and
procedures that are designed to ensure acceptable composition of the
asset/liability mix, stability and leverage of all sources of funds while
adhering to prudent banking practices. It is the overall philosophy of
management to support asset growth primarily through growth of core deposits,
which include deposits of all categories made by individuals, partnerships and
corporations. Management of the Company seeks to invest the largest portion of
its assets in commercial, consumer and real estate loans.
The Banks' asset/liability mix is monitored on a daily basis and a
quarterly report reflecting interest-sensitive assets and interest-sensitive
liabilities is prepared and presented to the Banks' Boards of Directors. The
objective of this policy is to control interest-sensitive assets and
liabilities so as to minimize the impact of substantial movements in interest
rates on the Banks' earnings.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - INTEREST SENSITIVITY," (Page 26) for an analysis of
rate sensitive assets and liabilities.
CORRESPONDENT BANKING
Correspondent banking involves the provision of services by one bank to
another bank which cannot provide that service for itself from an economic or
practical standpoint. The Banks are required to purchase correspondent
services offered by larger banks, including check collections, purchase of
Federal Funds, security safekeeping, investment services, coin and currency
supplies, overline and liquidity loan participations and sales of loans to or
participations with correspondent banks.
The Banks sell loan participations to correspondent banks with respect to
loans which exceed the Banks' respective lending limits. Management of each
Bank has established a correspondent relationship with the Independent Bankers
Bank of Florida, Orlando, Florida, Central Bank of the South, Birmingham,
Alabama and NationsBank, Tampa, Florida. In addition, First National Bank of
Naples sells and purchases loan participations with First National Bank of
Pennsylvania, Hermitage, Pennsylvania, of which Peter Mortensen, a director of
the Company, is the Chairman of the Board.
EMPLOYEES
The Company presently employs 175 persons full-time and 25 persons
part-time, including 48 officers. The Company will hire additional persons as
needed on a full-time and part-time basis, including additional tellers and
customer service representatives.
MONETARY POLICIES
The results of operations of the Company are affected by credit policies of
monetary authorities, particularly the Federal Reserve Board. The instruments
of monetary policy employed by the Federal Reserve Board include open market
operations in U.S. Government securities, changes in the discount rate on
member bank borrowings, changes in reserve requirements against member bank
deposits and limitations on interest rates which member banks may pay on time
and savings deposits. In view of changing conditions in the national economy
and in the money markets, as well as the effect of action by monetary and
fiscal authorities, including the Federal Reserve Board, no prediction can be
made as to possible future changes in interest rates, deposit levels, loan
demand or the business and earnings of the Company.
I-14
<PAGE> 17
SUPERVISION AND REGULATION
The Company and the Bank operate in a highly regulated environment, and
their business activities are governed by statute, regulation and
administrative policies. The business activities of the Company and the Bank
are closely supervised by a number of federal regulatory agencies, including
the Federal Reserve Board, the Comptroller of the Currency (the "Comptroller")
and the Federal Deposit Insurance Corporation ("FDIC"). The Company is
regulated by the Federal Reserve Board under the federal Bank Holding Company
Act of 1956, as amended, which requires every bank holding company to obtain
the prior approval of the Federal Reserve Board before acquiring more than 5%
of the voting shares of any bank or all or substantially all of the assets of a
bank, and before merging or consolidating with another bank holding company.
The Federal Reserve Board (pursuant to regulation and published policy
statements) has maintained that a bank holding company must serve as a source
of financial strength to its subsidiary banks. In adhering to the Federal
Reserve Board policy the Company may be required to provide financial support
to a subsidiary bank at a time when, absent such Federal Reserve Board policy,
the Company may not deem it advisable to provide such assistance.
Under the Riegel-Neal Interstate Banking and Branching Efficiency Act of
1994, the existing restrictions on interstate acquisitions of banks by bank
holding companies have been repealed, such that any bank holding company
located in Florida is able to acquire a bank located in any other state, and a
bank holding company located outside Florida can acquire any Florida-based
bank, in either case subject to certain deposit percentage and other
restrictions. The legislation also provides that, unless an individual state
elects beforehand either (i) to accelerate the effective date, or (ii) to
prohibit out-of-state banks from operating interstate branches within its
territory, on or after June 1, 1997, adequately capitalized and managed bank
holding companies will be able to consolidate their multistate bank operations
into a single bank subsidiary and to branch interstate through acquisitions.
De novo branching by an out-of-state bank would be permitted only if it is
expressly permitted by the laws of the host state. The authority of a bank to
establish and operate branches within a state will continue to be subject to
applicable state branching laws.
A bank holding company is generally prohibited from acquiring control of
any company which is not a bank and from engaging in any business other than
the business of banking or managing and controlling banks. However, there are
certain activities which have been identified by the Federal Reserve Board to
be so closely related to banking as to be a proper incident thereto and thus
permissible for bank holding companies, including the following activities:
acting as investment or financial advisor to subsidiaries and certain outside
companies; leasing personal and real property or acting as a broker with
respect thereto; providing management consulting advice to nonaffiliated banks
and nonbank depository institutions; operating collection agencies and credit
bureaus; acting as a futures commission merchant; providing data processing and
data transmission services; acting as an insurance agent or underwriter with
respect to limited types of insurance; performing real estate appraisals;
arranging commercial real estate equity financing; providing securities
brokerage services; and underwriting and dealing in obligations of the United
States, the states and their political subdivisions. In determining whether an
activity is so closely related to banking as to be permissible for bank holding
companies, the Federal Reserve Board is required to consider whether the
performance of such activities by a bank holding company or its subsidiaries
can reasonably be expected to produce such benefits to the public as greater
convenience, increased competition or gains in efficiency that outweigh such
possible adverse effects as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices.
Generally, bank holding companies are required to obtain prior approval of the
Federal Reserve Board to engage in any new activity not previously approved by
the Federal Reserve Board.
As national banks, the Banks are subject to the supervision of the
Comptroller and, to a limited extent, the FDIC and the Federal Reserve Board.
With respect to expansion, the Banks may establish branch offices anywhere
within the State of Florida. The Banks are also subject to the Florida banking
and usury laws restricting the amount of interest which it may charge in making
loans or other extensions of credit. In addition, the Banks, as subsidiaries
of the Company, are subject to restrictions under federal law in dealing with
the Company and other affiliates, if any. These restrictions apply to
extensions of credit to an affiliate, investments in the securities of an
affiliate and the purchase of assets from an affiliate.
Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital
and surplus to any person. In addition, a national bank may grant loans and
extensions of credit to a single person up to 10% of its unimpaired capital and
surplus, provided that the transactions are fully secured by readily marketable
collateral having a market value determined by reliable and continuously
available price quotations. This 10% limitation is separate from, and in
addition to, the 15% limitation for unsecured loans. Loans and extensions of
credit may exceed the general lending limit
I-15
<PAGE> 18
if they qualify under one of several exceptions. Such exceptions include
certain loans or extensions of credit arising from the discount of commercial
or business paper, the purchase of bankers' acceptances, loans secured by
documents of title, loans secured by U.S. obligations and loans to or
guaranteed by the federal government.
The Banks' loan operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-in-Lending Act
governing disclosures of credit terms to consumer borrowers, the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit, the Fair Credit Reporting Act governing
the manner in which consumer debts may be collected by collection agencies, and
the rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws. The deposit operations of
the Banks are also subject to the Electronic Funds Transfer Act and Regulation
E issued by the Federal Reserve to implement that act, which govern automatic
deposits to and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking services.
The Banks are also subject to the provisions of the Community Reinvestment
Act of 1977, which requires the appropriate federal regulator, in connection
with its regular examination of a bank, to assess the bank's record in meeting
the credit needs of the community serviced by the bank, including low- and
moderate-income neighborhoods. The regulator's assessment of a bank's record
is made available to the public. Further, such assessment is required of any
bank that has applied, among other things, to establish a new branch office
that will accept deposits, to relocate an existing office, or to merge or
consolidate with, or acquire the assets of or assume the liabilities of, a
federally-regulated financial institution.
Both the Company and the Banks are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the Comptroller. In
1989, both the Federal Reserve Board and the Comptroller issued new risk-based
capital guidelines for bank holding companies and banks which make regulatory
capital requirements more sensitive to differences in risk profiles of various
banking organizations. The capital adequacy guidelines issued by the Federal
Reserve Board are applied to bank holding companies on a consolidated basis
with the banks owned by the holding company. The Comptroller's risk capital
guidelines apply directly to national banks regardless of whether they are a
subsidiary of a bank holding company. Both agencies' requirements (which are
substantially similar), provide that banking organizations must have capital
equivalent to 8% of risk weighted assets. The risk weights assigned to assets
are based primarily on credit risks. Depending upon the riskiness of a
particular asset, it is assigned to a risk category. For example, securities
with an unconditional guarantee by the United States government are assigned to
the lowest risk category. A risk weight of 50% is assigned to loans secured by
owner-occupied one to four family residential mortgages. The aggregate amount
of assets assigned to each risk category is multiplied by the risk weight
assigned to that category to determine the weighted values, which are added
together to determine total risk-weighted assets. At December 31, 1995, the
Company's total risk-based capital and tier-one ratios were 11.92% and 11.31%,
respectively. Both the Federal Reserve Board and the Comptroller have also
implemented new minimum capital leverage ratios to be used in tandem with the
risk-based guidelines in assessing the overall capital adequacy of banks and
bank holding companies. Under these rules, banking institutions are required
to maintain a ratio of 3% "Tier 1" capital to total assets (net of goodwill).
Tier 1 capital includes common stockholders equity, noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries. At December 31, 1995, the Company's leverage ratio was 8.13%.
Both the risk-based capital guidelines and the leverage ratio are minimum
requirements, applicable only to top-rated banking institutions. Institutions
operating at or near these levels are expected to have well-diversified risk,
excellent asset quality, high liquidity, good earnings and in general, have to
be considered strong banking organizations, rated composite 1 under the CAMEL
rating system for banks or the BOPEC rating system for bank holding companies.
Institutions with lower ratings and institutions with high levels of risk or
experiencing or anticipating significant growth are expected to maintain ratios
100 to 200 basis points above the stated minimums.
The Comptroller amended the risk-based capital guidelines applicable to
national banks in an effort to clarify certain questions of interpretation and
implementation, specifically with regard to the treatment of purchased mortgage
servicing rights ("PMSRs") and other intangible assets. The Comptroller's
guidelines provide that intangible assets are generally deducted from Tier 1
capital in calculating a bank's risk-based capital ratio. However, certain
intangible assets which meet specified criteria ("qualifying intangibles") such
as PMSRs are retained as a part of Tier 1 capital. The Comptroller currently
maintains that only PMSRs and purchased credit card relationships meet the
criteria to be considered qualifying intangibles. The Comptroller's guidelines
formerly provided that the amount of such qualifying intangibles that may be
included in Tier 1 capital was strictly limited to a maximum of 25% of total
Tier 1 capital. The Comptroller has amended its guidelines to increase the
limitation of such qualifying intangibles from 25% to 50% of Tier 1 capital and
further to permit the inclusion of purchased credit card relationships as a
qualifying intangible asset.
I-16
<PAGE> 19
In addition, the Comptroller has adopted rules which clarify treatment of
asset sales with recourse not reported on a bank's balance sheet. Among assets
affected are mortgages sold with recourse under Fannie Mae, Freddie Mac and
Farmer Mac programs. The new rules clarify that even though those transactions
are treated as asset sales for bank Call Report purposes, those assets will
still be subject to a capital charge under the risk-based capital guidelines.
The Comptroller, the Federal Reserve Board and the FDIC recently adopted
final regulations revising their risk-based capital guidelines to further
ensure that the guidelines take adequate account of interest rate risk.
Interest rate risk is the adverse effect that changes in market interest rates
may have on a bank's financial condition and is inherent to the business
business of banking. Under the new regulations, when evaluating a bank's
capital adequacy, the agencies capital standards now explicitly include a
bank's exposure to declines in the economic value of its capital due to changes
in interest rates. The exposure of a bank's economic value generally
represents the change in the present value of its assets, less the change in
the value of its liabilities, plus the change in the value of its interest rate
off-balance sheet contracts. Concurrently, the banking agencies have proposed
a measurement process to identify banks that have high interest rate risk
exposures. Under the proposed measurement process, the agencies would employ a
supervisory model that focuses on the sensitivity of a bank's economic value to
changes in interest rate risk as well as various other quantitative factors to
determine the adequacy of an individual bank's capital for interest rate risk.
After gaining experience with the proposed supervisory measurement and
assessment process, the agencies intend to propose further regulations to
establish an explicit risk-based capital charge for interest rate risk.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"Act"), enacted on December 19, 1991, provides for a number of reforms relating
to the safety and soundness of the deposit insurance system, supervision of
domestic and foreign depository institutions and improvement of accounting
standards. One aspect of the Act involves the development of a regulatory
monitoring system requiring prompt action on the part of banking regulators
with regard to certain classes of undercapitalized institutions. While the Act
does not change any of the minimum capital requirements, it directs each of the
federal banking agencies to issue regulations implementing the monitoring plan.
The Act creates five "capital categories" ("well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized") which are defined in the Act and which will be
used to determine the severity of corrective action the appropriate regulator
may take in the event an institution reaches a given level of
undercapitalization. For example, an institution which becomes
"undercapitalized" must submit a capital restoration plan to the appropriate
regulator outlining the steps it will take to become adequately capitalized.
Upon approving the plan, the regulator will monitor the institution's
compliance. Before a capital restoration plan will be approved, any entity
controlling a bank (i.e., holding companies) must guarantee compliance with the
plan until the institution has been adequately capitalized for four consecutive
calendar quarters. The liability of the holding company is limited to the
lesser of five percent of the institution's total assets or the amount which is
necessary to bring the institution into compliance with all capital standards.
In addition, "undercapitalized" institutions will be restricted from paying
management fees, dividends and other capital distributions, will be subject to
certain asset growth restrictions and will be required to obtain prior approval
from the appropriate regulator to open new branches or expand into new lines of
business.
As an institution drops to lower capital levels, the extent of action to be
taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and ultimately providing for
the appointment of a receiver for certain institutions deemed to be critically
undercapitalized.
The Act also provides that banks will have to meet new safety and soundness
standards. In order to comply with the Act, the Federal Reserve Board, the
Comptroller and the FDIC have adopted regulations defining operational and
managerial standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees and
benefits.
Both the capital standards and the safety and soundness standards which the
Act seeks to implement are designed to bolster and protect the deposit
insurance fund.
I-17
<PAGE> 20
In response to the directive issued under the Act, the regulators have
proposed regulations which, among other things, prescribe the capital
thresholds for each of the five capital categories established under the Act.
The following table reflects the proposed capital thresholds:
<TABLE>
<CAPTION>
TOTAL TIER 1 TIER 1
RISK-BASED RISK-BASED LEVERAGE
CAPITAL RATIO CAPITAL RATIO RATIO
------------- ------------- ----------
<S> <C> <C> <C>
Well capitalized (1) . . . . . . . . . . . . . . . . . 10% 6% 5%
Adequately capitalized (1) . . . . . . . . . . . . . . 8% 4% 4% (2)
Undercapitalized (4) . . . . . . . . . . . . . . . . . < 8% < 4% < 4% (3)
Significantly undercapitalized (4) . . . . . . . . . . < 6% < 3% < 3%
Critically undercapitalized . . . . . . . . . . . . . . - - < 2%
- ---------------------------------
</TABLE>
(1) An institution must meet all three minimums.
(2) 3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.
(3) Less than 3% for composite 1-rated institutions, subject to appropriate
federal banking agency guidelines.
(4) An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
As national banks, the Banks are subject to examination and review by the
Comptroller. This examination is typically completed on-site at least annually
and is subject to off-site review at call. The Banks submit to the Comptroller
quarterly reports of condition, as well as such additional reports as may be
required by the national banking laws.
Prior to May 1, 1995, the State of Florida had a regional interstate
banking statute which authorizesd bank holding companies whose operations are
principally conducted in certain southeastern states to acquire banks and bank
holding companies located in Florida under certain conditions. Such
southeastern states included the States of Alabama, Arkansas, Georgia,
Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Tennessee,
Virginia, West Virginia and the District of Columbia. Such legislation has had
the effect of increasing competition among financial institutions in the Bank's
market area and in the State of Florida generally. The legislature has
recently amended this regional reciprocal interstate banking statute to
eliminate its regional nature. The new statute, which became effective on May
1, 1995, allows bank holding companies located throughout the United States to
acquire banks and bank holding companies located in Florida under certain
conditions.
As a bank holding company, the Company is required to file with the Federal
Reserve Board an annual report of its operations at the end of each fiscal year
and such additional information as the Federal Reserve Board may require
pursuant to the Act. The Federal Reserve Board may also make examinations of
the Company and any subsidiaries.
The scope of regulation and permissible activities of the Company and the
Bank is subject to change by future federal and state legislation.
ITEM 2. PROPERTIES
The Company conducts its banking operations through six banking offices,
five of which are located in the Naples, Florida metropolitan area and one in
the Cape Coral, Florida metropolitan area. The Company owns five of these
offices, including the underlying land. The sixth office, which serves as the
main office of First National Bank of Naples, is leased from a partnership in
which two of the organizers of the Company, including one Director of the
Company, are partners. The term of the lease is ten years, expiring in 1998,
with renewal options for six additional five-year terms.
The Company also owns a 21,000 square foot commercial office building which
houses its operations center. The Company is currently utilizing approximately
18,000 square feet of the facility and leases the remaining 3,000 square feet
to third parties under lease agreements which expire in 1998.
In addition, the Company owns a future branch site in the Naples, Florida
metropolitan area, which is scheduled for development in 1996.
I-18
<PAGE> 21
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
either of the Banks is a party or of which any of their properties are subject;
nor are there material proceedings known to the Company to be contemplated by
any governmental authority; nor are there material proceedings known to the
Company, pending or contemplated, in which any director, officer or affiliate
or any principal security holder of the Company, or any associate of any of the
foregoing, is a party or has an interest adverse to the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter ended December 31, 1995
to a vote of security holders of the Company.
I-19
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since the Company's inception, there has been no established public trading
market for the Company's Common Stock. As of December 31, 1995, the
approximate number of holders of record of the Company's Common Stock was
1,140.
To date, the Company has not paid any cash dividends on its Common Stock.
However, in May of each of the last three years, the Company paid a 2% stock
dividend to shareholders. It is the present policy of the Board of Directors
of the Company to reinvest earnings for such period of time as is necessary to
ensure the success of the operations of the Company and of the Bank. There are
no current plans to initiate payment of cash dividends, and future dividend
policy will depend on the Company's earnings, capital requirements, financial
condition and other factors considered relevant by the Board of Directors of
the Company.
The Company's subsidiary Banks are restricted in their ability to pay
dividends under the national banking laws and by regulations of the
Comptroller. Pursuant to 12 U.S.C. Section 56, a national bank may not pay
dividends from its capital. All dividends must be paid out of undivided
profits, subject to other applicable provisions of law. Payments of dividends
out of undivided profits is further limited by 12 U.S.C. Section 60(a), which
prohibits a bank from declaring a dividend on its shares of common stock until
its surplus equals its stated capital, unless there has been transferred to
surplus not less than 1/10 of the Bank's net income of the preceding two
consecutive half-year periods (in the case of an annual dividend). Pursuant to
12 U.S.C. Section 60(b), the approval of the Comptroller is required if the
total of all dividends declared by the Bank in any calendar year exceeds the
total of its net income for that year combined with its retained net income for
the preceding two years, less any required transfers to surplus.
In December, 1990, the Comptroller promulgated regulations concerning the
level of allowable dividend payments by national banks. The intended effect of
the regulations is to make the calculation of national banks' dividend-paying
capacity consistent with generally accepted accounting principles (GAAP). In
this regard, the allowance for loan and lease losses will not be considered an
element of either "undivided profits then on hand" or "net profits." Further,
a national bank may be able to use a portion of its capital surplus account as
"undivided profits then on hand," depending on the composition of that account.
In addition, the regulations clarify that dividends on preferred stock are not
subject to the limitations of 12 U.S.C. Section 56, while explicitly making
such dividends subject to the constraints of 12 U.S.C. Section 60. The
regulations do not diminish or impair a well-capitalized bank's ability to make
cash payments to its shareholders in the form of a return of capital.
At December 31, 1995, First National Bank of Naples had retained earnings
of $3,928,132, thus making it eligible at the present time to pay dividends to
the Company. Cape Coral National Bank had a deficit of $220,453 at December
31, 1995 and, accordingly, may not pay dividends to the Company.
II-1
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company presented below as of and for
the years ended December 31, 1995, 1994, 1993, 1992 and 1991, have been derived
from consolidated financial statements of the Company. The selected financial
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated
financial statements and notes thereto.
<TABLE>
<CAPTION>
AT AND FOR
THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Total interest income............. $ 25,384,359 $ 15,415,116 $ 11,186,101 $ 9,031,978 $ 6,981,715
Total interest expense............ 11,756,051 6,306,447 4,659,109 4,192,737 3,946,822
------------ ------------ ------------ ------------ ------------
Net interest income............... 13,628,308 9,108,669 6,526,992 4,839,241 3,034,893
Provision for loan losses ........ 835,000 605,000 240,000 336,000 208,810
Non-interest income .............. 2,708,471 1,442,689 1,295,941 661,050 487,716
Non-interest expense ............. 12,939,804 9,053,823 5,978,051 4,433,724 2,986,928
------------ ------------ ------------ ------------ ------------
Net income (loss) before
extraordinary items............. 1,706,535 650,323 1,005,230 452,952 206,871
Net income (loss)................. 1,706,535 650,323 1,005,230 721,580 326,871
Net income (loss) per share
before extraordinary items(1)... .44 .19 .47 .27 .16
Extraordinary item - Tax
benefit of NOL carry-forward(1)... -- -- -- .16 .09
Net income (loss) per share(1).... .44 .19 .47 .43 .25
Weighted average number of
shares outstanding(1) .......... 3,884,789 3,401,704 2,148,049 1,657,000 1,326,510
CONSOLIDATED BALANCE
SHEET DATA:
Total assets...................... $386,461,791 $264,613,897 $178,454,328 $146,107,851 $ 87,382,222
Total deposits.................... 324,830,614 201,245,235 157,370,112 132,037,198 79,195,981
Stockholders' equity.............. 29,943,903 27,710,310 12,981,854 10,994,809 6,702,787
CAPITAL RATIOS:
Tier 1 capital.................... 11.31% 14.59% 10.34% 11.60% 11.50%
Total risk-based capital.......... 11.92% 15.20% 10.93% 12.26% 12.41%
Leverage ratio.................... 8.13% 10.60% 7.53% 8.01% 7.67%
ASSET QUALITY RATIOS:
Allowance for loan losses to
total loans..................... 0.67% 0.64% 0.59% 0.73% 0.83%
Allowance for loan losses to
non-performing assets........... 103.86% 241.10% 565.04% 132.63% 539.21%
Non-performing loans to
total loans .................... 0.43% 0.22% -- 0.55% 0.11%
Non-performing assets to
total assets.................... 0.39% 0.19% 0.07% 0.36% 0.08%
</TABLE>
- --------------------------------
(1) Retroactively restated to reflect the effect of a 2% stock dividend
effected in May, 1995.
II-2
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Details regarding the Company's financial performance are presented in the
following discussion, which should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Report.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
FINANCIAL CONDITION
For the year ended December 31, 1995, the Company experienced growth in
assets, loans and deposits. Total assets were $386,461,791, an increase of
$121,847,894 or 46%, compared to $264,613,897 at fiscal year end 1994. The
increase was recognized primarily in net loans which increased $52.2 million,
or 28%, while investments increased by $23.2 million, or 46%. Total earning
assets increased $108,169,636 for a total of $343,625,957 at December 31, 1995.
Funding the increase in earning assets was a comparable increase in
interest-bearing liabilities. Interest-bearing liabilities in the form of
interest-bearing deposits and short-term borrowings increased 50% or
$102,193,273 since December 31, 1994, while non-interest-bearing demand
accounts increased $15.6 million.
RESULTS OF OPERATIONS
Interest income increased $9,969,243 or 65%, in 1995 compared to 1994 while
average earning assets increased by 37%. Average yields on average earning
assets were 8.64% for 1995 as compared to 7.57% in 1994. The increase in yield
arises from the impact on market rates of Federal Reserve rate increases
imposed during 1994 and into 1995 on the maturity, reinvesting and repricing
characteristics of the Company's earning assets.
Interest expense increased $5,449,604 or 86%, in 1995 as compared to 1994
while average interest-bearing liabilities increased 50%. The average rate
paid on interest-bearing liabilities increased from 3.60% in 1994 to 4.49% in
1995, consistent with the change in yields on earning assets.
Net interest income increased $4,519,639 or 50%, in 1995 as compared to
1994. The net interest margin increased to 4.64% in 1995 from 4.47% in 1994,
due to the ability of the Company's interest sensitive assets to outpace the
repricing of its interest sensitive liabilities in a rising market rate
environment.
Non-interest income for 1995, exclusive of gains on the sale of securities,
increased $1,253,185 or 87%, as compared to 1994. The increase resulted
primarily from the growth in deposit activity and the expansion of fee
generating services.
Total non-interest expense increased $3,885,981 or 43%, for 1995 compared
to 1994, salaries and benefits expense representing the area of greatest
change. Full-time equivalent employees increased from 161 at December 31, 1994
to 185 at December 31, 1995 in response to the Company's growth in assets, and
the opening of a new branch office of First National Bank of Naples.
Meanwhile, average assets per full-time equivalent employees improved from
$1,644,000 at December 31, 1994 to $2,089,000 at December 31, 1995, due
primarily to the growth of Cape Coral National Bank to $59.5 million in assets
since its opening in December, 1994.
The provision for possible loan losses for 1995 increased by $230,000 or
38% over that provided for in 1994. While management believes that the credit
quality of the portfolio has not diminished, due to the increase in the
Company's lending limits and the resultant increasing size of individual
credits being extended, a proportionate increase in the allowance for loan
losses is warranted.
II-3
<PAGE> 25
LOAN PORTFOLIO
Management believes that general economic conditions in the Company's
operating area, including the real estate market, continue to be healthy due to
the growth in the area's population and demand for property and services.
Accordingly, the demand for consumer and commercial loans continued in 1995 as
net loans increased $52.2 million or 28% to $236,666,231 at December 31, 1995.
At December 31, 1995, commercial loans represented 42% of total loans as
compared to 37% in 1994, real estate loans decreased from 26% of total loans in
1994 to 24% of total loans in 1995, lines of credit decreased from 11% of total
loans in 1994 to 10% of total loans in 1995, and installment loans represented
24% of total loans in 1995 compared to 26% of total loans in 1994. Commercial
seasonal lending activity is focused on short-term working capital loans and
commercial real estate term loans. The Company generally does not seek to
purchase or participate in loans of other institutions due to the adequacy of
demand in its operating area.
Non-performing loans included non-accruing loans totalling $1,017,489 at
December 31, 1995. Interest income on non-accrual loans is recognized on a
cash basis. During 1995, the gross amount of interest income that would have
been recorded on non-accrual loans at December 31, 1995, if all such loans had
been accruing interest at the original contractual rate, was $74,538. Interest
payments recorded in 1995 as interest income for all such non-performing loans
was $49,591. There were no loans which would represent troubled debt
restructurings at December 31, 1995.
DEPOSITS
Total deposits increased $123,585,379 or 61%, to $324,830,614 at December
31, 1995. The change was realized primarily in interest bearing deposits,
which increased $108 million while non-interest bearing deposits increased
$15.6 million. At December 31, 1995, time deposits represented 36% of total
deposits as compared to 31% of total deposits in 1994. Other interest bearing
deposits represented 50% of total deposits at December 31, 1995, down from 54%
of total deposits in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
FINANCIAL CONDITION
For the year ended December 31, 1994, the Company experienced growth in
assets, loans and deposits. Total assets were $264,613,897, an increase of
$86,159,569, or 48%, compared to $178,454,328 at fiscal year end 1993. The
increase was recognized primarily in net loans which increased $58.8 million,
or 47%, while investments increased by $13.7 million, or 37%. Total earning
assets increased $70,069,405 for a total of $235,456,321 at December 31, 1994.
Funding the increase in earning assets was a comparable increase in
interest-bearing liabilities. Interest-bearing liabilities in the form of
interest-bearing deposits and short-term borrowings increased 42% or
$60,799,769 since December 31, 1993, while non-interest-bearing demand accounts
increased $10.2 million. The Company also raised $14.6 million in equity
capital during 1994 through an offering of its common stock.
RESULTS OF OPERATIONS
Interest income increased $4,229,015, or 38%, in 1994 compared to 1993
while average earning assets increased by 37%. Average yields on average
earning assets were 7.57% for 1994 as compared to 7.51% in 1993. While Federal
Reserve rate increases impacted market rates during the year, the maturity,
reinvesting and repricing characteristics of the Company's earning assets kept
yields only marginally higher than in 1993.
Interest expense increased $1,647,338, or 35%, in 1994 as compared to 1993
while average interest-bearing liabilities increased 33%. The average rate
paid on interest-bearing liabilities increased from 3.53% in 1993 to 3.60% in
1994, consistent with the change in yields on earning assets.
II-4
<PAGE> 26
Net interest income increased $2,581,677, or 39%, in 1994 as compared to
1993. The net interest margin increased to 4.47% in 1994 from 4.38% in 1993,
due to the ability of the Company's interest sensitive assets to outpace the
repricing of its interest sensitive liabilities in a rising market rate
environment.
Non-interest income for 1994 increased $445,522, or 45%, as compared to
1993, after excluding gains recognized in 1993 on the sale of investment
securities and loans of $300,774. The increase resulted primarily from the
growth in deposit and fee generating activity.
Total non-interest expense increased $3,075,772, or 51%, for 1994 compared
to 1993. Salaries and benefits expense represented the area of greatest
change. Full-time equivalent employees increased from 93 at December 31, 1993
to 161 at December 31, 1994 in response to the Company's growth in assets, and
the opening of two new branch offices of First National Bank of Naples. In
addition, non-interest expenses relating to the organization of Cape Coral
National Bank, which commenced business on December 7, 1994, aggregated
approximately $369,000 for the year.
The provision for possible loan losses for 1994 increased by $365,000 over
that provided for in 1993. While management believes that the credit quality
of the portfolio has not diminished, due to the increase in the Company's
lending limits and the resultant increasing size of individual credits being
extended, a proportionate increase in the allowance for loan losses was
warranted.
LOAN PORTFOLIO
The Company experienced significant demand for consumer and commercial
loans continued in 1994 as net loans increased $58,778,235, or 47%, to
$184,506,981 at December 31, 1994. At December 31, 1994, commercial loans
represented 37% of total loans as compared to 36% in 1993, real estate loans
increased from 24% of total loans in 1993 to 26% of total loans in 1994, lines
of credit decreased from 13% of total loans in 1993 to 11% of total loans in
1994, and installment loans represented 26% of total loans in 1994 compared to
27% of total loans in 1993.
Non-performing loans included two non-accruing loans totalling $414,571 at
December 31, 1994. Interest income on non-accrual loans is recognized on a
cash basis. During 1994, the gross amount of interest income that would have
been recorded on non-accrual loans at December 31, 1994, if all such loans had
been accruing interest at the original contractual rate, was $22,888. Interest
payments recorded in 1993 as interest income for all such non-performing loans
was $14,838. There were no loans which would represent troubled debt
restructurings at December 31, 1994.
DEPOSITS
Total deposits increased $43,875,123, or 28%, to $201,245,235 at December
31, 1994. The change was realized primarily in interest bearing deposits,
which increased $33.6 million while non-interest bearing deposits increased
$10.2 million. At December 31, 1994, time deposits represented 31% of total
deposits as compared to 42% of total deposits in 1993. The decrease in
percentage from 1993 is due to consumer desire for liquid accounts. Other
interest bearing deposits represented 54% of total deposits at December 31,
1994, up from 45% of total deposits in 1993.
CAPITAL RESOURCES AND LIQUIDITY
Management of the Company has developed a strategic initiative which
provides for the expansion of its banking operations into new markets, as well
as continued expansion in its existing markets through additional branch
openings. In this regard, certain initial outlays are required to fund the
opening of each facility, including the investment in premises and equipment,
staffing and promotional activities. While it is anticipated that interest
income will increase commensurate with interest expense upon the attraction of
deposits, non-interest expenses will generally be disproportionately higher
until such time as the volume of deposits and associated net interest income is
sufficient to cover these costs.
II-5
<PAGE> 27
Management's philosophy in each instance of expansion is to attract deposit
relationships through the offering of competitive rates, terms and service
convenience, including the promotion of higher than market rate long-term time
deposits. As it is the Company's philosophy to consider the investment
portfolio principally as a source of liquidity, deposit growth, except to the
extent necessary to maintain such liquidity, is generally utilized to fund the
higher yielding loan portfolio, particularly commercial and consumer lending.
In addition, it is management's practice to maintain the Company's "well
capitalized" status under regulatory guidelines and plans its expansion
activities in order to continue to maintain this status.
Consistent with the objective of operating a sound financial organization,
the Company maintains high capital ratios. Regulatory agencies including the
Office of the Comptroller of the Currency and the Federal Reserve Bank have
approved guidelines for a risk-based capital framework that makes capital
requirements more sensitive to the risks germane to each individual
institution. The guidelines require that total capital of 8% be held against
total risk-adjusted assets.
At December 31, 1995, the Company's Tier 1 capital ratio was 11.31%, total
risk-based capital ratio was 11.92% and the leverage ratio was 8.13%. These
compare to 14.59%, 15.20% and 10.60%, respectively, at December 31, 1994. The
decreases result from the impact of asset growth during the year.
The Company's ability to satisfy demands for credit, deposit withdrawals
and other corporate needs depends on its level of liquidity. The Company
utilizes several means to manage its liquidity. Traditionally, increases in
deposits are sufficient to provide adequate levels of liquidity; however, if
needed, the Company has approved extensions of credit available from
correspondent banks, sources for loan sales and primarily short-term
investments that could be liquidated if necessary. While the Company has not
had a need to utilize these sources of liquidity, it continues to maintain
their availability on a contingent basis. Management is not aware of any known
trends, demands, events, commitments or uncertainties that either will result
or are reasonably likely to result in a material effect on the Company's
liquidity, capital resources or operations and is not aware of any current
recommendations by any regulatory authority which, if implemented, would have
any such effect.
During fiscal 1995, cash flow from operating activities was $4,031,695,
compared to $918,774 in fiscal 1994, representing an increase of $3,112,921.
The increase was due in part to increased net income of $1,056,212. Charges
for depreciation and amortization increased $588,785, reflecting the impact of
adding two banking facilities and the Company's operations facility since the
third quarter of 1994. Cash flow was also provided from net increases in other
non-cash charges and credits of $261,631 and a net decrease in other assets,
liabilities and accruals of 1,206,293.
Cash provided from financing activities for fiscal 1995 was $118.0 million,
an increase of $32.4 million from 1994. Deposit growth in 1995 increased $79.7
million while other borrowings decreased $5.8 million, a reduction in volume of
$33.0 million from 1994. Net proceeds from the issuance of common stock,
principally to fund the Company's annual contribution to its KSOP, were $0.2
million in 1995. The Company raised $14.6 million in 1994 as a result of a
public offering of its shares.
Cash used in investing activities for fiscal 1995 was $80.1 million or a
decrease of $1.5 million from 1994. This decrease is principally due to the
increase in deposit growth in 1995 as discussed above, net of an increase in
cash and cash equivalents of $41.9 million for the year. The decrease in cash
used in investing activities consisted of a decrease in loan growth of $6.5
million, an increase in the net cash flows directed to investments of $8.6
million and a reduction in expenditures for premises and equipment of $3.6
million.
II-6
<PAGE> 28
INTEREST SENSITIVITY
The following is a combined maturity and repricing analysis of
rate-sensitive assets and liabilities as of December 31, 1995.
<TABLE>
<CAPTION>
0 - 90 91-180 181-365 1 - 2 3 - 5 5 +
DAYS DAYS DAYS YEARS YEARS YEARS TOTAL
---- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal Funds Sold . . . . . . . . $ 31,724 $ 0 $ 0 $ 0 $ 0 $ 0 $ 31,724
Investment Securities . . . . . . 6,338 2,009 5,271 17,388 11,443 31,787 74,236
Interest-Bearing Deposits . . . . 1,000 0 0 0 0 0 1,000
Loans . . . . . . . . . . . . . . 35,377 23,715 41,463 34,286 54,047 49,621 238,509
--------- --------- ---------- --------- --------- ------- --------
Total Interest-Earning
Assets . . . . . . . . . . . 74,439 25,724 46,734 51,674 65,490 81,408 345,469
--------- --------- ---------- --------- --------- ------- --------
INTEREST-BEARING LIABILITIES:
Gold T-Bill NOW Accounts . . . . . . 72,404 0 0 0 0 0 72,404
Money Market Accounts . . . . . . . . 4,040 0 0 0 0 16,160 20,200
Other NOW Accounts . . . . . . . . . 43,265 0 0 0 0 0 43,265
Savings Deposits . . . . . . . . . . 25,309 0 0 0 0 0 25,309
Time Deposits . . . . . . . . . . . . 37,509 35,914 26,812 16,749 490 0 117,474
Other Borrowings . . . . . . . . . . 23,277 0 5,000 0 0 0 28,277
--------- --------- ---------- --------- --------- ------- --------
Total Interest-Bearing
Liabilities . . . . . . . . . 205,804 35,914 31,812 16,749 490 16,160 306,929
--------- --------- ---------- --------- --------- ------- -------
Excess (Deficiency) of Rate
Sensitive Assets Less Rate
Sensitive Liabilities . . . . $(131,365) $ (10,190) $ 14,922 $ 34,925 $ 65,000 $65,248 $ 38,540
========= ========= ========== ========= ========= ======= ========
Excess (Deficiency) as a
Percentage of Earning
Assets . . . . . . . . . . . . -38.03% -2.95% 4.32% 10.11% 18.82% 18.89% 11.16%
========= ========= ========== ========= ========= ======= ========
Cumulative Excess
(Deficiency) . . . . . . . . . $(131,365) $(141,555) $ (126,633) $ (91,708) $ (26,708) $38,540
========= ========= ========== ========= ========= =======
Cumulative Excess (Deficiency)
as a Percentage of Earning
Assets . . . . . . . . . . . . -38.03% -40.97% -36.66% -26.55% -7.73% 11.16%
========= ========= ========== ========= ========= =======
</TABLE>
The objective of interest-sensitivity management is to minimize the risk
associated with the effect of interest rate changes on net interest margins
while maintaining net interest income at acceptable levels. Managing this risk
involves monthly monitoring of the interest-sensitive assets relative to
interest-sensitive liabilities over specific time intervals. All assets and
liabilities are evaluated as maturing at the earlier of repricing date or
contractual maturity date. While liabilities without specific terms such as
NOW and savings accounts are generally considered core deposits for liquidity
purposes, they are deemed to reprice immediately for purposes of interest rate
sensitivity analysis. Other deposit instruments are evaluated based upon
historical trend or rate index. Specifically, the rate paid on the Company's
"Gold T-Bill" account is indexed to the 13 week Treasury auction and deemed to
reprice immediately. Money Market rates are subjectively set by management.
Management considers 20% of total money market accounts to have a one day
maturity based upon historical volatility. At December 31, 1995, the Company
had $147 million in interest-sensitive assets compared to $276 million in
interest-sensitive liabilities (of which $141 million are considered core
deposits) that will mature or reprice within a year.
II-7
<PAGE> 29
A negative gap position is indicative of a bank which has a greater
amount of interest-sensitive liabilities repricing (or maturing) than it does
interest-sensitive assets, in a given time interval. In this instance, the
impact on net interest income would be positive in a declining rate environment
and negative if rates were rising. Conversely, a positive gap position
represents a greater amount of interest-sensitive assets repricing (or
maturing). Thus, an increase in rates would positively impact net interest
income as the yield on earning assets would increase prior to the increase in
the cost of interest-bearing liabilities. The impact on net interest income
described above is general, as other factors would additionally maximize or
minimize the effect. For example, a change in the prime interest rate could
effect an immediate change to rates on prime related assets, whereas a
liability which reprices according to changes in Treasury rates might (1) lag
in the timing of the change and (2) change rates in an amount less than the
change in the prime interest rate.
Management believes that the current and future balance sheet structure
of interest-sensitive assets and liabilities does not represent a material risk
to earnings or liquidity in the event of a change in market rates.
PENDING MERGER TRANSACTION
In February, 1996, the Company entered into an Agreement and Plan of
Merger with F.N.B. Corporation ("FNB"), Hermitage, Pennsylvania, which provides
for the merger of the Company into FNB. Upon effectiveness of the merger, the
Company's shareholders will become entitled to receive .78 shares of FNB common
stock in exchange for each share of common stock of the Company then held by
them. In connection with this agreement, the Company has granted FNB an option
to purchase 727,163 shares of the Company's common stock for $15 per share,
which becomes exercisable upon the occurrence of certain events, as defined.
The merger agreement and the transactions contemplated in that agreement
are subject to the approval of a majority of the outstanding shares of the
Company (excluding those shares held by FNB and its affiliates), entitled to
vote at a special meeting of shareholders, as well as the receipt of certain
regulatory consents.
The proposed merger is expected to be treated as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code and shall be
treated as a pooling-of-interests for accounting purposes. At December 31,
1995, FNB has total assets of approximately $1.7 billion.
PROPOSED EXPENDITURES
The Company holds 0.84 acres of land to serve as a branch site at
Pelican Bay in Collier County, Florida. Expenditures necessary to convert the
site to a branch bank are estimated to be approximately $1.5 million, which is
scheduled for completion in 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements set forth on Page F-1
included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
II-8
<PAGE> 30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report ..................................................................... F-2
Consolidated Balance Sheets, December 31, 1995, 1994, 1993 ....................................... F-3
Consolidated Statements of Operations, Years Ended December 31, 1995, 1994, 1993 ................. F-4
Consolidated Statements of Stockholders' Equity, Years Ended December 31, 1995, 1994, 1993 ....... F-5
Consolidated Statements of Cash Flows, Years Ended December 31, 1995, 1994, 1993 ................. F-6-7
Notes to Consolidated Financial Statements, Years Ended December 31, 1995, 1994, 1993 ............ F-8-27
</TABLE>
F-1
<PAGE> 31
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
Independent Auditors' Report
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
F-2
<PAGE> 32
CONSOLIDATED BALANCE SHEETS
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 25,135,628 $ 14,934,854
Federal funds sold 31,724,000 0
------------- -------------
TOTAL CASH AND CASH EQUIVALENTS 56,859,628 14,934,854
------------- -------------
Securities available for sale - NOTE B 50,401,563 20,149,743
Securities held to maturity (fair value of
$23,946,120 and $29,315,823, respectively) - NOTE B 23,834,164 30,799,597
Loans - NOTE C 238,509,066 186,006,407
Less:
Allowance for loan losses - NOTE C (1,585,285) (1,182,157)
Unearned income and deferred loan fees (257,550) (317,269)
------------- -------------
NET LOANS 236,666,231 184,506,981
------------- -------------
Premises and equipment - NOTE D 14,413,940 10,951,413
Accrued interest receivable 2,594,888 1,664,948
Other assets 1,691,377 1,606,361
------------- -------------
$ 386,461,791 $ 264,613,897
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits - NOTE E $ 324,830,614 $ 201,245,235
Federal funds purchased and securities
sold under agreements to repurchase - NOTE F 18,276,769 17,572,942
Other borrowings - NOTE F 10,000,000 16,500,000
Accrued interest payable 1,714,022 563,056
Accrued expenses and other liabilities 1,307,593 881,702
------------- -------------
TOTAL LIABILITIES 356,128,998 236,762,935
------------- -------------
Commitments and contingencies - NOTE H
Employee Stock Ownership Plan obligation - NOTE J 388,890 140,652
Stockholders' Equity - NOTE L:
Preferred stock, par value $.10 per share - 100,000
shares authorized, -0- shares issued and outstanding 0 0
Common stock, par value $.10 per share - 25,000,000
shares authorized, 3,654,089 and 3,560,556 shares
issued and outstanding, respectively 365,409 356,056
Capital surplus 28,322,888 27,193,122
Retained earnings 1,462,295 651,465
Unrealized increase (decrease) in fair value on
securities available for sale (net of applicable
income taxes) 182,201 (349,681)
Employee Stock Ownership Plan obligation - NOTE J (388,890) (140,652)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 29,943,903 27,710,310
------------- -------------
$ 386,461,791 $ 264,613,897
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 33
CONSOLIDATED STATEMENTS OF OPERATIONS
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $20,811,978 $12,704,458 $ 9,151,743
Interest on federal funds sold 834,820 94,456 88,920
Interest on securities and other 3,737,561 2,616,202 1,945,438
----------- ----------- -----------
TOTAL INTEREST INCOME 25,384,359 15,415,116 11,186,101
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 9,652,475 5,436,108 4,524,257
Interest on other borrowings 2,103,576 870,339 134,852
----------- ----------- -----------
TOTAL INTEREST EXPENSE 11,756,051 6,306,447 4,659,109
----------- ----------- -----------
NET INTEREST INCOME 13,628,308 9,108,669 6,526,992
Provision for loan losses 835,000 605,000 240,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 12,793,308 8,503,669 6,286,992
----------- ----------- -----------
OTHER INCOME
Service charges, commissions and fees 2,681,594 1,440,689 995,167
Net gain on sale of securities 14,597 2,000 234,085
Gain on sale of loans 0 0 66,689
Gain on sale of assets 12,280 0 0
----------- ----------- -----------
TOTAL OTHER INCOME 2,708,471 1,442,689 1,295,941
----------- ----------- -----------
15,501,779 9,946,358 7,582,933
----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits - NOTE J 6,716,083 4,813,925 3,006,030
Net occupancy expenses for premises 1,040,532 672,559 496,720
Equipment rental, depreciation and
maintenance 1,438,910 824,372 604,004
General operating - NOTE O 3,744,279 2,742,967 1,871,297
----------- ----------- -----------
TOTAL OTHER EXPENSES 12,939,804 9,053,823 5,978,051
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,561,975 892,535 1,604,882
INCOME TAXES - NOTE G 855,440 242,212 599,652
----------- ----------- -----------
NET INCOME $ 1,706,535 $ 650,323 $ 1,005,230
=========== =========== ===========
EARNINGS PER SHARE $ .44 $ .19 $ .47
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,884,789 3,401,704 2,148,049
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 34
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED
STOCK SURPLUS EARNINGS
-------- ----------- -----------
<S> <C> <C> <C>
Balance December 31,
1992 $182,711 $10,806,396 $ 5,702
Common stock issued,
net of offering costs
of $873 12,289 969,926 0
Stock dividend 3,895 307,705 (312,000)
Net income 0 0 1,005,230
-------- ----------- -----------
Balance December 31,
1993 198,895 12,084,027 698,932
Common stock issued,
net of offering costs
of $442,992
150,000 14,407,008 0
Common stock issued,
pursuant to options
exercised 208 13,770 0
Stock dividend 6,953 688,317 (697,790)
Unrealized decrease in
fair value on
securities available 0 0 0
for sale
Obligation under ESOP
Plan 0 0 0
Net income 0 0 650,323
Balance December 31, -------- ----------- -----------
1994 356,056 27,193,122 651,465
Common stock issued,
pursuant to options
exercised 112 9,110 0
Common stock issued, to
ESOP, net of offering
costs of $6,233 2,115 236,958 0
Stock dividend 7,126 883,698 (895,705)
Unrealized increase in
fair value on
securities available
for sale 0 0 0
Obligation under ESOP
Plan 0 0 0
Net income 0 0 1,706,535
Balance December 31, -------- ----------- -----------
l995 $365,409 $28,322,888 $l, 462,295
======== =========== ===========
<CAPTION>
UNREALIZED
INCREASE
(DECREASE)
IN FAIR
VALUE ON
SECURITIES OBLIGATION TOTAL
AVAILABLE UNDER STOCKHOLDERS'
FOR SALE ESOP PLAN EQUITY
---------- ---------- ------------
<S> <C> <C> <C>
Balance December 31,
1992 $ 0 $ 0 $ 10,994,809
Common stock issued,
net of offering costs
of $873 0 0 982,215
Stock dividend 0 0 (400)
Net income 0 0 1,005,230
--------- ---------- ------------
Balance December 31,
1993 0 0 12,981,854
Common stock issued,
net of offering costs
of $442,992 0 0 14,557,008
Common stock issued,
pursuant to options
exercised 0 0 13,978
Stock dividend 0 0 (2,520)
Unrealized decrease in
fair value on
securities available
for sale (349,681) 0 (349,681)
Obligation under ESOP
Plan 0 (140,652) (140,652)
Net income 0 0 650,323
--------- ---------- ------------
Balance December 31,
1994 (349,681) (140,652) 27,710,310
Common stock issued,
pursuant to options
exercised 0 0 9,222
Common stock issued, to
ESOP, net of offering
costs of $6,233 0 0 239,073
Stock dividend 0 0 (4,881)
Unrealized increase in
fair value on
securities available
for sale 531,882 0 531,882
Obligation under ESOP
Plan 0 (248,238) (248,238)
Net income 0 0 1,706,535
--------- ---------- -----------
Balance December 31,
l995 $ 182,201 $ (388,890) $29,943,903
========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,706,535 $ 650,323 $ 1,005,230
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,407,052 818,267 568,824
Deferred income taxes (76,557) (347,257) (16,382)
Accretion of deferred loan fees and discounts (444,370) (230,178) (332,698)
Provision for loan losses 835,000 605,000 240,000
Gain on sale of securities, net (14,597) (2,000) (234,085)
Gain on sale of loans, net 0 0 (66,689)
Gain on sale of assets (12,280) 0 0
(Increase) decrease in accrued interest
receivable (929,940) (684,508) 12,813
Increase in other assets (16,005) (136,872) (407,132)
Increase in accrued interest
payable 1,150,966 187,372 5,535
Increase in accrued expenses
and other liabilities 425,891 58,627 302,390
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,031,695 918,774 1,077,806
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan participations purchased (3,225,828) (2,528,290) 0
Proceeds from sales of loan participations 448,845 4,316,951 10,057,677
Net increase in loans (49,862,196) (60,941,718) (41,502,941)
Purchases of securities held to maturity (2,393,179) (13,691,626) (22,254,706)
Proceeds from maturing of securities held to
maturity and principal collections 9,447,911 8,094,545 25,869,164
Purchases of securities available for sale (55,765,656) (11,847,420) 0
Proceeds from maturing of securities available
for sale and principal collections 21,655,550 2,391,650 0
Proceeds from sale of securities available
for sale 4,404,766 1,002,000 0
Purchases of premises and equipment (4,849,754) (8,445,041) (885,970)
Proceeds from maturing interest-earning
deposits 0 0 1,000,000
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (80,139,541) (81,648,949) (27,716,776)
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 36
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C> <C>
Net increase in deposits $ 123,585,379 $ 43,875,123 $ 25,332,914
Increase (decrease) in other borrowings (6,500,000) 19,795,000 3,000,000
Net increase in securities sold under
agreement to repurchase 703,827 7,374,339 1,718,593
Proceeds from sale of common stock 248,295 14,570,986 982,215
Payment of dividends (4,881) (2,520) (400)
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 118,032,620 85,612,928 31,033,322
------------- ------------- -------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 41,924,774 4,882,753 4,394,352
CASH AND CASH EQUIVALENTS
Beginning of year 14,934,854 10,052,101 5,657,749
------------- ------------- -------------
End of year $ 56,859,628 $ 14,934,854 $ 10052,101
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 10,605,085 $ 6,129,951 $ 4,653,574
============= ============= =============
Income taxes 949,500 $ 569,500 $ 379,000
============= ============= =============
Noncash Transactions:
Property acquired in repossessions and
foreclosures $ 581,241 $ 75,884 $ 120,405
============= ============= =============
Unrealized increase (decrease) in fair
value on securities available for sale $ 852,786 $ (560,657) $ 0
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Consolidation:
The consolidated financial statements of Southwest Banks, Inc. (the
Company) include the accounts of the Company and its wholly-owned subsidiaries,
First National Bank of Naples and Cape Coral National Bank (the Banks). All
significant intercompany balances and transactions have been eliminated.
Nature of Operations:
The Banks operate under national bank charters and provide full banking
services. As national banks, they are subject to regulation of the Office of
the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
The area served by the Banks is the Southwest region of Florida and services
are provided at 6 branch offices.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications:
The consolidated financial statements for 1993 and 1994 have been
reclassified to conform with the presentation for 1995. Such reclassifications
had no effect on net results of operations.
Cash and Cash Equivalents:
Cash, demand balances due from banks and federal funds sold are
considered cash and cash equivalents for cash flow reporting purposes.
Generally, federal funds are sold for one-day periods.
Investment Securities:
Management determines the appropriate classification of securities at
the time of purchase. These investments in securities are classified in two
categories and accounted for as follows:
On January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires that securities available for sale
be carried at fair value, based upon market or broker quotations. Such
appreciation or decline in value, net of deferred taxes, is reported in a
separate component of stockholders' equity until realized. Deferred income
taxes are provided on any unrealized appreciation or decline in value. There
was no cumulative effect of this accounting change.
Gains and losses on the sale of securities available for sale are
determined using the specific identification method.
- - Securities Held to Maturity:
Securities held to maturity are carried at amortized cost. Premiums and
discounts on debt securities held to maturity are amortized to expense and
accrued to income over the life of the securities using the interest method.
These securities are classified as held to maturity based on management's
intent and the banks' ability to hold such securities to maturity.
F-8
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interest Income on Loans:
Interest on loans is credited to operations daily based upon the
principal amount outstanding. Unearned income on loans is credited to
operations based on the interest method. Wherever doubt exists as to the
collectibility of loans, the loans are placed on nonaccrual status and interest
income is recorded as payments are received.
Allowance for Loan Losses:
The allowance for loan losses is established through a provision for
loan losses charged to expense based on management's evaluation of the
potential losses in its loan portfolio. Such evaluation, which includes a
review of all loans for which full collectibility may not be reasonably
assured, considers, among other matters, historical loss experience, net
realizable value of collateral, current economic conditions and trends, and
such other factors as in management's judgment deserve recognition. Many of
these factors involve a significant degree of estimation, are beyond
management's control or are subject to changes which may be unforeseen.
Although management believes the allowance is adequate to absorb losses on
existing loans that may become uncollectible, the ultimate losses may vary
significantly from the current estimates.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This statement generally requires all creditors to
account for impaired loans, except those loans that are accounted for at fair
value or at the lower of cost or fair value, at the present value of expected
future cash flows discounted at the loan's effective interest rate. In October
1994, the FASB issued SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures." This statement amends SFAS No.
114 to allow a creditor to use existing methods for recognizing interest income
on an impaired loan. SFAS No. 118 does not change the provisions in SFAS No.
114 that requires a creditor to me&sure impairment based on the present value
of expected future cash flows discounted at the loan's effective interest rate,
or at the market price of the loan, or the fair value of the collateral if the
loan is collateral dependent. The implementation of SFAS No. 114 and SFAS No.
118 during fiscal year 1995 did not have a material impact on the Company's
consolidated financial position or results of operations.
Other Real Estate:
Other real estate, acquired through partial or total satisfaction of
loans, is carried at the lower of cost or fair market value. At the date of
acquisition, losses are charged to the allowance for loan losses, and
subsequent write downs are charged to expense in the period they are incurred.
Loan Origination Fees and Costs:
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the related loan.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method over the
estimated useful lives of the depreciable assets.
F-9
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes:
Provisions for income taxes are based on taxes payable or refundable
for the current year and deferred taxes on temporary differences between the
amount of taxable income and pretax financial income and between the tax bases
of assets and liabilities and their reported amounts in the consolidated
financial statements. Deferred tax assets and liabilities are included in the
consolidated financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and liabilities are
expected to be realized or settled.
The Company and the Banks file a consolidated tax return.
Fair Value of Financial Instruments:
In December l99l, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
About Fair Value of Financial Instruments". SFAS No. 107 requires disclosure of
the fair value of financial instruments, both assets and liabilities recognized
and not recognized in the balance sheets, for which it is practical to estimate
fair value. Management has adopted SFAS No. 107 during fiscal 1995 (see Note
N).
Earnings Per Share of Common Stock:
Earnings per share are based on the weighted average number of shares
outstanding during the year plus, where applicable, common stock equivalents
attributable to stock options and warrants.
F-l0
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE B - SECURITIES
Investment securities shown in the consolidated balance sheets of the
Company at December 31 were as follows:
<TABLE>
<CAPTION> GROSS UNREALIZED
Available for sale securities: AMORTIZED ------------------------- FAIR
December 31, 1995: COST GAINS LOSSES VALUE
----------- ------------------------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed securities of
U.S. Government agencies $17,673,278 $169,533 $ 0 $17,842,811
U.S. Treasury securities 6,987,083 95,363 1,796 7,080,650
Other U.S. Government agencies 20,643,832 78,628 13,375 20,709,085
Other securities 4,133,091 6,600 42,824 4,096,867
Federal Reserve Bank Stock 672,150 0 0 672,150
----------- -------- ---------- -----------
Total $50,109,434 $350,124 $ 57,995 $50,401,563
=========== ======== ========== ===========
December 31, 1994:
Mortgage-backed securities of
U.S. Government agencies $ 216,111 $ 0 $ 13,701 $ 202,410
U.S. Treasury securities 7,991,889 0 109,239 7,882,650
Other U.S. Government agencies 7,971,024 0 344,646 7,626,378
Other securities 3,919,176 0 93,071 3,826,105
Federal Reserve Bank Stock 612,200 0 0 612,200
----------- -------- ---------- -----------
Total $20,710,400 $ 0 $ 560,657 $20,149,743
=========== ======== ========== ===========
Held to maturity securities:
December 31, 1995:
Mortgage-backed securities of
U.S. Government agencies $ 1,671,403 $ 23,439 $ 0 $ 1,694,842
U.S. Treasury securities 5,266,147 9,123 17,020 5,258,250
Other U.S. Government agencies 9,957,047 98,387 20,174 10,035,260
State and political
subdivisions 6,939,567 56,184 37,983 6,957,768
----------- -------- ---------- -----------
Total $23,834,164 $187,133 $ 75,177 $23,946,120
=========== ======== ========== ===========
December 31, 1994:
Mortgage-backed securities of
U.S. Government agencies $ 1,823,382 $ 2,662 $ 82,964 $ 1,743,080
U.S. Treasury securities 9,310,991 0 223,541 9,087,450
Other U.S. Government agencies 12,980,221 0 514,072 12,466,149
State and political
subdivisions 6,685,003 1,381 667,240 6,019,144
----------- -------- ---------- -----------
Total $30,799,597 $ 4,043 $1,487,817 $29,315,823
=========== ======== ========== ===========
</TABLE>
F-11
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE B - SECURITIES (CONTINUED)
Gross gains realized from the sale of investments during the year ended
December 31, 1995 were $14,597, $2,000 for 1994 and $234,085 for 1993. The
applicable equivalent income tax on these net gains was $5,493 for 1995, $753
for 1994 and $88,086 for 1993.
Actual maturities of securities held to maturity and available for sale
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. As of
December 31, 1995, the amortized cost and fair value of investment securities,
by contractual maturities, were as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
------------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 8,340,733 $ 8,355,474 $ 5,003,121 $ 5,009,860
Due from one to
five years 7,646,099 7,635,957 19,344,751 19,537,159
Due from five to
ten years 7,847,332 7,954,689 14,997,396 15,083,530
Due after ten years 0 0 5,958,925 6,001,997
----------- ----------- ----------- -----------
23,834,164 23,946,120 45,304,193 45,632,546
Other securities 0 0 4,133,091 4,096,867
Federal Reserve Bank 0 0 672,150 672,150
----------- ----------- ----------- -----------
Total $23,834,164 $23,946,120 $50,109,434 $50,401,563
=========== =========== =========== ===========
</TABLE>
Securities with an amortized cost and fair value of $10,105,566 and
$10,160,427, respectively, at December 31, 1995, were pledged to secure public
deposits. Securities with an amortized cost and fair value of $40,095,418 and
$40,830,120, respectively, at December 31, 1995, were pledged as collateral for
other borrowings (see Note F).
F-12
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE C - LOANS
The composition of loans at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Commercial $100,529,085 $ 69,099,015
Real estate 57,340,573 47,484,132
Lines of credit 24,072,934 20,734,649
Installment 56,566,474 48,688,611
------------ ------------
Total $238,509,066 $186,006,407
============ ============
</TABLE>
The majority of the Company's lending activities are conducted
principally with customers located in the Southwest Florida region. Commercial
loans are primarily extended to small and mid-sized corporate borrowers in
service and manufacturing related industries.
At December 31, 1995, the Company's commercial and lines of credit loan
portfolios, aggregating approximately $124,602,000 were secured as follows:
$94,282,067 by real estate; $1,853,464 by deposit accounts; $12,590,361 by
furniture, equipment and other plant assets; $3,383,922 by assignments, letters
of credit and repurchase agreements; $2,804,975 by boats, mobile homes,
aircrafts and automobiles; $5,707,029 by marketable securities; and $3,980,182
was unsecured.
Nonperforming loans have not been separately classified because such
loans are not material compared to total loans and nonaccrued interest is not
material in relation to net income.
The activity in the allowance for loan losses for each of the three
years in the period ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning
of year $ 1,182,157 $ 742,489 $ 691,436
Provision charged to
operations 835,000 605,000 240,000
Charge-offs (528,185) (257,982) (204,126)
Recoveries 96,313 92,650 15,179
----------- ----------- -----------
Balance at end of year $ 1,585,285 $ 1,182,157 $ 742,489
=========== =========== ===========
</TABLE>
F-13
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Land and land improvements $ 4,087,745 $ 3,145,304
Building 6,101,053 4,100,505
Motor vehicles 40,193 68,012
Leasehold improvements 1,012,846 994,810
Furniture, fixtures and equipment 3,514,861 2,564,592
EDP equipment and software 2,484,350 1,958,960
Construction in progress 467,814 355,542
----------- -----------
17,708,862 13,187,725
Less accumulated depreciation 3,294,922 2,236,312
----------- -----------
Total $14,413,940 $10,951,413
=========== ===========
</TABLE>
Depreciation expense was $1,378,233, $803,292 and $540,132 for the years
ended December 31, 1995, 1994 and 1993, respectively.
NOTE E - DEPOSITS
Deposits at December 31, 1995 and 1994 are comprised of the following:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Interest-bearing:
Money market $ 20,199,150 $ 14,805,783
Negotiable order of withdrawal accounts 115,669,393 75,676,368
Savings 25,309,178 18,581,816
Certificates of deposit:
Less than $100,000 87,723,807 42,461,318
$100,000 or more 29,750,411 19,137,209
------------ ------------
278,651,939 170,662,494
Demand (non-interest-bearing) 46,178,675 30,582,741
------------ ------------
Total $324,830,614 $201,245,235
============ ============
</TABLE>
F-14
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE E - DEPOSITS (CONTINUED)
The maturities on certificates of deposit of $100,000 or more as of
December 31, 1995 are as follows:
<TABLE>
<S> <C>
Three months or less $ 6,874,462
Over three months to six months 7,754,577
Over six months to twelve months 13,343,280
Over twelve months 1,778,092
-----------
Total $29,750,411
===========
</TABLE>
Included in interest expense is $1,323,125, $913,358 and $734,465 for
1995, 1994 and 1993, respectively, which relates to interest on certificates of
deposit greater than $100,000.
NOTE F - SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE AND OTHER BORROWINGS
The securities sold under agreement to repurchase (the repurchase
agreement) represent investment securities with a book value of $37,259,101, at
December 31, 1995. The repurchase agreement has been accounted for as a
financing and the obligation to repurchase the securities sold is reflected as a
liability in the consolidated balance sheets. The repurchase agreements were
transacted with various Bank customers and the securities underlying the
agreement, with a market value of $37,347,128, were retained in the custodial
account of the Banks. Interest is payable monthly at varying rates (average rate
of 4.78% at December 31, 1995) tied to the daily Federal Funds or the 13-week
U.S. Treasury Bill rates. These agreements immediately terminate upon written
notice by either party. Securities sold under agreement to repurchase averaged
$25,336,826 and $10,771,829 during 1995 and 1994, respectively, and the weighted
average interest was 5.42% and 4.90% during 1995 and 1994, respectively. The
maximum amount outstanding at any month end under such agreement during 1995 and
1994 was $30,486,820 and $15,908,712, respectively.
The other borrowings consist of adjustable rate loans from the Federal
Home Loan Bank with interest rates ranging from 5.79% to 5.84% at December 31,
1995. The loans are collateralized by mortgage loans held in the Bank's
portfolio. Below is a schedule of maturities on other borrowings for years
following December 31, 1995:
1996 $10,000,000
===========
F-15
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE G - INCOME TAXES
The provision for income taxes (credit) is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31: 1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current $ 874,840 $ 553,817 $ 583,575
Deferred (79,111) (320,912) (14,828)
--------- --------- ---------
795,729 232,905 568,747
--------- --------- ---------
State:
Current 57,157 35,652 32,459
Deferred 2,554 (26,345) (1,554)
--------- --------- ---------
59,711 9,307 30,905
--------- --------- ---------
Total taxes $ 855,440 $ 242,212 $ 599,652
========= ========= =========
</TABLE>
Following is a reconciliation between tax expense using federal
statutory rates and actual taxes:
<TABLE>
<CAPTION>
1995 1994 1993
------------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Federal statutory tax $ 896,691 35.0% $ 312,387 35.0% $ 561,709 35.0%
Tax exempt income (83,978) (3.3) (73,647) (8.3)
State taxes net of federal
benefit 39,409 1.6 6,143 .7 20,397 1.3
Other 3,318 .1 (2,671) (.3) 17,546 1.1
--------- ---- --------- ---- --------- ----
Actual taxes $ 855,440 33.4% $ 242,212 2.1% $ 599,652 37.4%
========= ==== ========= ==== ========= ====
</TABLE>
The significant temporary differences that give rise to deferred tax
assets and deferred tax liabilities which are included in other assets are as
follows at December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 445,096 $ 351,741
Deferred loan origination fees and costs 90,839 111,902
Other deductions deferred for income taxes 112,866 138,250
--------- ---------
Total gross deferred tax assets 648,801 601,893
Deferred tax liabilities:
Depreciation (33,211) (62,860)
--------- ---------
Net deferred tax assets $ 615,590 $ 539,033
========= =========
</TABLE>
F-16
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company and the Banks have entered into operating lease agreements
for a commercial building expiring in 1999 and land underlying its operations
center with two partnerships in which three of the directors of the Company are
partners. Rent expense was $304,609 for 1995, $225,391 for 1994 and $195,192
for 1993.
Future minimum rental commitments as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Year ending -
<S> <C>
December 31, 1996 $ 280,901
December 31, 1997 280,901
December 31, 1998 280,901
December 31, 1999 199,058
December 31, 2000 84,478
Thereafter 5,468,340
----------
Total minimum payments required $6,594,579
==========
</TABLE>
The Company and the Banks have entered into employment agreements
expiring in 1999 with seven senior officers providing for annual compensation
aggregating approximately $701,500.
The Federal Reserve Bank requires banks to maintain certain average
reserve balances in the form of vault cash or funds on deposit with the Federal
Reserve Bank. At December 31, 1995, the Bank had on deposit approximately
$5,643,255 at the Federal Reserve Bank to satisfy its required average reserve
balance.
NOTE I - SUBSEQUENT EVENT
On February 2, 1996, the company entered into an Agreement and Plan of
Merger (Agreement) with FNB Corporation (FNB). The Agreement calls for each
outstanding share of the Company's common stock to be converted into and
exchanged for 0.78 shares of FNB common stock, subject to possible adjustment in
certain circumstances as described in the Agreement. Each outstanding stock
option or stock purchase warrant granted by the Company will be converted into
an option or warrant to purchase shares of FNB common stock, adjusting the
number of shares subject to such option or warrant and the exercise price
thereof based on the exchange ratio. The consummation of this transaction is
subject to approval by the stockholders of the Company, securities law
clearances and regulatory approvals. The merger is anticipated to be accounted
for as a pooling of interests. The Company anticipates closing on the merger to
take place in early 1997.
F-17
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE J - RETIREMENT PLAN
The Company maintains a Salary Savings ESOP Plan (the Plan) to which
eligible employees may contribute from 1% to 13.5% of their pay. The Company
contributes to the Plan 50% of an eligible employee's deferral on the first 6%
that the eligible employee defers, and may make discretionary contributions in
excess of that amount based on the Company's profitability and approval of the
board of directors. Employees are generally eligible to participate who have
completed at least one year of service and have attained age 21. Employee
contributions are 100% vested as amounts are credited to the employee's
account. Company contributions become 20% vested when an employee has completed
two years of service, and vest at a rate of 20% per year thereafter, fully
vesting when an employee has completed six years of service. The Company made
contributions to the Plan of $298,335 in 1995, $188,777 in 1994 and $133,548 in
1993.
The company is required, under federal income tax regulations, to grant
a put option to each ESOP participant who may receive a distribution of common
stock from the ESOP if the stock is not readily tradeable by the distributee on
an established market. The put option is a right to demand that the sponsor
redeem shares of employer stock held by the participant for which there is no
market for an established cash price.
At December 31, 1995, the ESOP plan held 33,182 shares of Company
common stock.
NOTE K - RELATED PARTY TRANSACTIONS
The Banks have granted loans to executive officers and directors of the
Banks and the Company and to associates of such executive officers and
directors. Such loans were made in the ordinary course of business under normal
credit terms and do not represent more than the normal risk of collection. The
activity for these loans for 1995 is as follows:
<TABLE>
<S> <C>
Total loans at December 31, 1994 $ 5,642,982
New loans 279,905
Repayments (1,667.030)
-----------
Total loans at December 31, 1995 $ 4,255,857
===========
</TABLE>
The Banks also have accepted deposits from employees, officers and
directors of the Banks and the Company and from associates of such officers and
directors. The deposits were accepted on substantially the same terms as those
of other depositors. Such deposits amounted to approximately $3,294,000 and
$2,126,000 at December 31, 1995 and 1994, respectively.
F-18
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE K - RELATED PARTY TRANSACTIONS (CONTINUED)
The banks have entered into a correspondent relationship to purchase
loan participations from and sell loan participations to another bank located
in the state of Pennsylvania (the Pennsylvania Bank). The Chairman of the Board
of the Pennsylvania Bank is a stockholder and member of the board of directors
of the Company. In addition, the Pennsylvania Bank holds 172,621 shares of
common stock of the Company. The Banks purchased $2,000,000, $147,500 and $-0-
in loan participations from the Pennsylvania Bank during the years ended
December 31, 1995, 1994 and 1993, respectively, and the Banks sold $-0-,
$1,750,000 and $10,057,677 in loan participations to the Pennsylvania Bank
during the years ended December 31, 1995, 1994 and 1993, respectively. All
purchases and sales of loan participations were at the market value of the
loans at date of sale and were without recourse. At December 31, 1995, the
unpaid balances of the loan participations purchased and sold were
approximately $1,927,467 and $14,391,377, respectively.
NOTE L - STOCKHOLDERS' EQUITY
The Company granted a 2% stock dividend in May 1995.
The Company has adopted an incentive stock option plan for certain of
its employees and has authorized and reserved 527,340 shares of common stock
for issuance under this plan. Transactions related to this stock option plan
are as follows:
<TABLE>
<CAPTION>
OPTIONS OPTION PRICE
OUTSTANDING PER SHARE
----------- ------------
<S> <C> <C>
Balance December 31, 1992 158,119 $5.65-$7.54
Granted 198,715 $7.54-$9.61
-------
Balance December 31, 1993 356,834 $5.65-$9.61
Granted 80,274 $9.61-$12.00
Exercised (2,121) $6.60
Forfeited (8,387) $7.54
-------
Balance December 31, 1994 426,600 $5.65-$12.01
Granted 30,920 $12.01-$14.00
Exercised (1,142) $7.54-$12.01
Forfeited (3,448) $12.01
-------
Balance December 31, 1995 452,930
=======
</TABLE>
At December 31, 1995, options for 168,423 shares were exercisable at an
average price per share of $7.96.
F-19
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE L - STOCXHOLDERS' EQUITY (CONTINUED)
In connection with its initial offering of common stock, the Company
granted to certain organizers of the Company warrants to purchase one share of
common stock (at an exercise price of $5.65 per share) for each four shares
purchased by such organizers in this offering. Such warrants became exercisable
two years after the Banks commenced operations with an exercise period of ten
years thereafter. The Company has reserved 123,854 shares of common stock for
issuance in connection with these warrants.
Under risk-based capital guidelines issued by the Federal Reserve Bank
and the OCC, total capital is defined as core (tier-one) capital and
supplementary (tier-two) capital. The Company's tier-one capital consists
primarily of stockholders' equity while tier-two capital consists of a portion
of the allowance for loan losses. The definition of assets includes items on
and off the balance sheet with each item being assigned a "risk-weight" for
determination of total assets.
The guidelines require that total capital of 8% be held against total
risk-adjusted assets, at least of which 4% must be tier-one capital. In
addition, a minimum leverage ratio of 4% tier-one capital to total assets is
required. The following schedule presents the Bank's regulatory capital ratios
as of December 31:
<TABLE>
<CAPTION>
1995
------------
<S> <C>
Tier I capital:
Stockholders' equity $ 29,762,000
Tier II capital:
Allowable allowance for loan losses 1,585,000
------------
Total Tier II capital $ 31,347,000
============
Risk weighted assets $263,040,000
============
Risk based capital ratios:
Tier I 11.31%
Total risk based (Tier II) 11.92%
Leverage 8.13%
</TABLE>
The earnings per share of common stock for 1994, 1993 and 1992 have
been retroactively adjusted to reflect the effect of a 2% stock dividend issued
in May 1995.
The approval of the Comptroller of the Currency is required for
national banks to pay dividends in excess of earnings retained in the current
year plus retained net profits for the preceding two years. As of December 31,
1995, approximately $3,700,146 of undistributed earnings was available for
distribution to the Company as dividends without prior regulatory approval.
F-20
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE M - OFF-BALANCE SHEET RISK
In the normal course of business, the Banks utilize various financial
instruments with off-balance sheet risk to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. The credit risks associated with financial
instruments are generally managed in conjunction with the Banks' balance sheet
activities and are subject to normal credit policies, financial controls and
risk limiting and monitoring procedures.
Credit losses are incurred when one of the parties fails to perform in
accordance with the terms of the contract. The Banks' exposure to off-balance
sheet credit risk is represented by the contractual amount of the commitments
to extend credit and standby letters of credit. At December 31, 1995 and 1994,
the Banks had commitments of approximately $43,040,000 and $24,202,000 for
undisbursed portions of loans in process and unused portions of lines of
credit. Commitments under standby letters of credit aggregated approximately
$2,150,000 and $1,504,000 at December 31, 1995 and 1994, respectively.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
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. The Banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Banks upon extension of credit, is based
on management's credit evaluation of the counterparty. Collateral held varies
but may include compensating balances, accounts receivable, inventory,
property, plant and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Banks to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing and similar
transactions. Most guarantees expire within one year. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. Collateral supporting these commitments
for which collateral is deemed necessary is maintained by the Banks.
F-21
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE N - FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the company disclose estimated fair values for its financial
instruments. The market value of securities, as presented in Note D, are based
primarily upon quoted market prices. For substantially all other financial
instruments, the fair values are management's estimates of the values at which
the instruments could be exchanged in a transaction between willing parties. In
accordance with SFAS No. 107, the fair values are based on estimates using
present value and other valuation techniques in instances where quoted prices
are not available. These techniques are significantly affected by the
assumptions used, including discount rates and estimates cannot be
substantiated by comparison to independent markets and, further, may not be
realizable in an immediate settlement of the instruments. SFAS No. 107 also
excludes certain items from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent, and should not be
construed to represent, the underlying value of the company.
The following table presents the estimates of fair value of financial
instruments as of December 31, 1995:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
------------ ------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 56,859,628 $ 56,859,628
Securities available for sale 50,401,563 50,401,563
Securities held to maturity 23,834,164 23,946,120
Net loans 236,666,231 240,626,038
Financial liabilities:
Deposits 324,830,614 325,507,100
Short-term borrowings 28,276,769 28,276,769
Off-Balance Sheet Credit Risk:
Commitments to extend credit 43,040,000 43,040,000
Standby letters of credit 2,150,000 2,150,000
</TABLE>
F-22
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE N - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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 short-term investments: For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Securities: For both securities available for sale and investment
securities, 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 alternate sources of funds.
Short-term borrowings: The carrying amounts for short-term borrowings
approximate fair value for amounts that mature in 90 days or less. The fair
value of subordinated notes is estimated by discounting future cash flows using
rates currently offered.
Off-balance sheet credit risk: The fair value of commitments is
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the customer. For fixed-rate loan commitments, fair value
also considers the difference between current levels of interest rates and the
committed rates. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting date.
F-23
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE N - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair value estimates are presented for on-balance sheet financial
instruments without attempting to estimate the value of the bank's long-term
relationships with depositors and the benefit that results from low-cost
funding provided by deposit liabilities. In addition, significant assets which
are not considered financial instruments and are, therefore, not a part of the
fair value estimates include office properties and equipment.
NOTE O - GENERAL OPERATING EXPENSES
The following amounts comprise general operating expenses for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Stationery and supplies $ 518,420 $ 391,148 $ 225,204
Telephone 180,274 136,053 78,874
Professional fees 734,462 431,320 398,371
Media costs and public
relations 685,983 446,511 271,532
Professional dues 70,466 47,613 35,200
Insurance 358,159 427,868 333,238
Amortization of
organization costs 7,546 14,975 28,692
Automobile 48,663 51,629 39,974
Other 1,140,306 795,850 460,212
---------- ---------- ----------
Total $3.744,279 $2,742.967 $1,871,297
========== ========== ==========
</TABLE>
F-24
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE P - CONDENSED FINANCIAL INFORMATION
The condensed financial information of Southwest Banks, Inc. (parent
company only) as of December 31, 1995 and 1994 and for each of the three years
in the period ended December 31, 1995, is as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Assets:
Investment in and indebtedness of
subsidiaries, at equity $ 29,357,744 $ 26,922,383
Securities available for sale 205,000 0
Premises and equipment 553,049 793,895
Other assets 397.394 244,005
------------ ------------
$ 30,513,187 $ 27,960,283
============ ============
Liabilities:
Accrued expenses and other liabilities $ 180,394 $ 109,321
Employee Stock Ownership Plan obligation 388,890 140,652
Stockholders' equity:
Preferred stock 0 0
Common stock 365,409 356,056
Capital surplus 28,322,888 27,193,122
Retained earnings 1,462,295 651,465
Unrealized increase (decrease) in fair value
on securities available for sale (net of
applicable income taxes) 182,201 (349,681)
Employee Stock Ownership Plan obligation (388,890) (140,652)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 29,943,903 27,710.310
-------------- ------------
$ 30,513,187 $ 27,960,283
============= ============
</TABLE>
F-25
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE P - CONDENSED FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Income:
Interest on indebtedness of First
National Bank of Naples $ 105,371 $ 237,188 $ 22,245
Management and other fees
from subsidiaries 2,038,689 939,938 440,000
Interest on investment securities
and other 3,959 372 0
----------- ----------- -----------
TOTAL INCOME 2,148,019 1,177,498 462,245
----------- ----------- -----------
Expenses:
Salaries and employee benefits 1,549,231 930,931 172,375
Equipment rental, depreciation and maintenance 239,824 206,269 192,070
General operating 358,964 156,773 169,886
----------- ----------- -----------
TOTAL EXPENSES 2,148,019 1.293,973 534,331
LOSS FROM OPERATIONS BEFORE EQUITY IN ----------- ----------- -----------
UNDISTRIBUTED NET INCOME OF
SUBSIDIARIES 0 (116,475) (72,086)
Equity in undistributed earnings of
subsidiaries 1,706,535 722,968 1,050,190
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,706,535 606,493 978,104
Income tax credit 0 43,830 27,126
----------- ----------- -----------
NET INCOME 1,706,535 650,323 1,005,230
Retained earnings:
Beginning of year 651,465 698,932 5,702
----------- ----------- -----------
2,358,000 1,349,255 1,010,932
Stock dividend declared 895,705 697,790 312,000
----------- ----------- -----------
End of year $ 1,462,295 $ 651,465 $ 698.932
=========== =========== ===========
</TABLE>
F-26
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
December 31, 1995, 1994 and 1993
NOTE P - CONDENSED FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,706,535 $ 650,323 $ 1,005,230
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of premises and
equipment 139,331 98,991 125,972
(Increase) decrease in other assets (153,389) 239,420 (76,673)
Increase in accrued expenses
and other liabilities 319,311 7,595 231,544
Equity in undistributed earnings
of subsidiary banks (1,706.535) (722,968) (1,050,190)
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 305,253 273.361 235,883
------------ ------------ ------------
Cash flows from investing activities:
Investment in subsidiary banks (55,182) (14,158,497) (1,108,520)
Purchases of premises and equipment (493,485) (683.330) (109,178)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (548.667) (14,841,827) (1,217,698)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sale of common stock 248,295 14,570,986 982,215
Payment of dividends (4.881) (2,520) (400)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 243,414 14.568,466 981,815
------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 0 0 0
Cash and cash equivalents:
Beginning of year 0 0 0
------------ ------------ -----------
End of year $ 0 $ 0 $ 0
============ ============ ===========
</TABLE>
F-27
<PAGE> 57
PART III
The information required by Part III of Form 10-K is, pursuant to
General Instruction (G) (3) of Form 10-K, incorporated by reference from the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
relating to the Company's annual meeting of shareholders to be held in April
1996 (The "Proxy Statement"). The Company, will, within 120 days of the end of
its fiscal year, file with the Securities and Exchange Commission a definitive
proxy statement pursuant to Regulation 14A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth in the Proxy
Statement under the headings, "Election of Directors" and "Compliance with
Section 16 of the Securities Exchange Act of 1934," which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in the Proxy
Statement under the headings, "Executive Compensation" and "Compensation
Committee Report on Executive Compensation," which information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in the Proxy
Statement under the headings, "Security Ownership of Certain Beneficial Owners
and Management" and "Ownership of Equity Securities as of March 15, 1996,"
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in the Proxy
Statement under the heading, "Certain Transactions," which information is
incorporated herein by reference.
III-1
<PAGE> 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, are hereby incorporated by reference from, (i) a
Registration Statement on Form S-18 under the Securities Act of 1933 for the
Registrant, Registration No. 33-26257-A ("S-18"), (ii) the Annual Reports on
Form 10-K for the years ended December 31, 1994, 1993, 1992, 1991, 1990 and
1989, (iii) a Registration Statement on Form S-1 under the Securities Act of
1933 for the Registrant, Registration No. 33- 45343 ("S-1"), (iv) a
Registration Statement on Form S-2 under the Securities Act of 1933 for the
Registrant, Registration No. 33-73912 ("S-2"), (v) the Quarterly Reports on
Form 10-Q for the quarters ended June 30, 1991, June 30, 1994 and September 30,
1994, or (vi) the Current Report on Form 8-K dated February 2, 1996 ("2/96
8-K").
Exhibit No. Description of Exhibit
- ----------- ----------------------
* 3.1 - Articles of Incorporation dated November 15, 1988 (S-18,
Exh. 3.1)
* 3.1.2 - Articles of Amendment dated December 14, 1988 (filed
December 19, 1988 (S-18, Exh. 3.2)
* 3.1.3 - Articles of Amendment filed April 30, 1991 (6/30/91 10-Q,
Exh. 3.1)
* 3.2 - By-Laws adopted November 28, 1988 (S-18, Exh. 3.3)
* 3.4 - Amendment to By-Laws dated December 21, 1992 (1992 10-K,
Exh. 3.4)
* 10.1 - Lease dated June 3, 1988 between Finaco (an organizational
partnership) and The Castle Partnership for the lease of a
building located at 900 Goodlette Road North, Naples, Florida
(S-18, Exh. 10-4)*
* 10.2 - Incentive Stock Option Plan of Registrant, adopted by
directors of Registrant on November 28, 1988 (S-18, Exh. 10.6)
* 10.3 - 401(k) Plan of the Registrant adopted May 7, 1990 (1990
10-K, Exh. 10.6)
* 10.4 - Real Estate Contract between Columbo Enterprises, Inc. and
James S. Lindsay, Trustee (S-1, Exh. 10.7)
* 10.5 - KSOP Salary Savings Plan of the Registrant adopted March 15,
1993 (1992 10-K, Exh. 10.7)
* 10.6 - Loan Purchase Agreement dated December 24, 1992 among First
National Bank of Naples and First National Bank of
Pennsylvania (1992 10-K, Exh. 10.9)
* 10.7 - Sale Agreement dated August 17, 1993 between Oleum
Corporation and First National Bank of Naples regarding
purchase of propertyat The Moorings, Naples, Florida (S-2,
Exh. 10.11)
* 10.8 - Sales Contract dated December 16, 1993 between SouthTrust
Bank of Southwest Florida, N.A. and the Registrant regarding
purchase of property on Golden Gate Parkway, Naples, Florida
(S-2, Exh. 10.12)
* 10.9 - Sales Contract dated December 16, 1993 between SouthTrust
Bank of Southwest Florida, N.A. and the Registrant regarding
purchase of property on Radio Road, Naples, Florida (S-2, Exh.
10.13)
IV-1
<PAGE> 59
* 10.10 - Employment Agreement dated June 17, 1994 among Registrant
and Gary L. Tice (6/30/94 10-Q, Exh. 3.1)
* 10.11 - Employment Agreement dated June 20, 1994 among Registrant,
First National Bank of Naples, and Garrett S. Richter (9/30/94
10-Q, Exh. 10.1)
* 10.12 - Employment Agreement dated June 20, 1994 among Registrant,
First National Bank of Naples, and C.C. Coghill (9/30/94
10-Q, Exh. 10.2)
* 10.13 - Employment Agreement dated June 20, 1994 among Registrant,
First National Bank of Naples, and David H. Schaeffer (9/30/94
10-Q, Exh. 10.3)
* 10.14 - Sales Contract dated August 31, 1994 between Commons III
Investment Partnership and First National Bank of Naples
regarding purchase of commercial office building
* 10.15 - Agreement and Plan of Merger, dated February 2, 1996, by and
among F.N.B. Corporation, Lambda Corporation and Southwest
Banks, Inc. (2/96 8-K, Exh. 2.1)
* 10.16 - Stock Option Agreement, dated February 2, 1996, between
Southwest Banks, Inc. and F.N.B. Corporation as grantee (2/96
8-K, Exh. 4.1)
21.1 - Subsidiaries of the Registrant
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1995.
IV-2
<PAGE> 60
SIGNATURES
Pursuant to the requirements of the Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SOUTHWEST BANKS, INC.
Date: March 18, 1996 By: /s/ Gary L. Tice
-------------------- -------------------------------------
Gary L. Tice, Chairman of the Board,
President and Chief Executive Officer
Date: March 18, 1996 By: /s/ Lewis S. Albert
-------------------- -------------------------------------
Lewis S. Albert, Senior Vice
President and Chief Financial
Officer (principal financial and
accounting officer)
Pursuant to the requirements of the Securities Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gary L. Tice Chairman of the Board, President March 18, 1996
- -------------------------------------------- and Chief Executive Officer -------------------
Gary L. Tice
/s/ David W. Gomer Director March 18, 1996
- -------------------------------------------- -------------------
David W. Gomer
/s/ James S. Lindsay Director March 18, 1996
- -------------------------------------------- -------------------
James S. Lindsay
/s/ Edward J. Mace Director March 18, 1996
- -------------------------------------------- -------------------
Edward J. Mace
/s/ Peter Mortensen Director March 18, 1996
- -------------------------------------------- -------------------
Peter Mortensen
/s/ Richard C. Myers Director March 18, 1996
- -------------------------------------------- -------------------
Richard C. Myers
/s/ Garrett S. Richter Director March 18, 1996
- -------------------------------------------- -------------------
Garrett S. Richter
/s/ Larry A. Wynn Director March 18, 1996
- -------------------------------------------- -------------------
Larry A. Wynn
</TABLE>
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
INDEX DESCRIPTION OF EXHIBIT PAGE NO.
- ------- ---------------------- ----------
<S> <C> <C>
21.1 Subsidiaries of the Registrant
27 Financial Data Schedule (for SEC use only) ______
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. First National Bank of Naples, Naples, Florida
2. Cape Coral National Bank, Cape Coral, Florida
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTREACTED FROM THE
FINANCIAL STATEMENTS OF SOUTHWEST BANKS, INC. FOR THE YEAR ENDED DECEMBER 31,
1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFEERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 24,135,628
<INT-BEARING-DEPOSITS> 1,000,000
<FED-FUNDS-SOLD> 31,724,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,401,563
<INVESTMENTS-CARRYING> 23,834,164
<INVESTMENTS-MARKET> 23,946,120
<LOANS> 238,509,066
<ALLOWANCE> 1,585,285
<TOTAL-ASSETS> 386,461,791
<DEPOSITS> 324,830,614
<SHORT-TERM> 28,276,769
<LIABILITIES-OTHER> 3,410,505
<LONG-TERM> 0
0
0
<COMMON> 365,409
<OTHER-SE> 29,578,494
<TOTAL-LIABILITIES-AND-EQUITY> 386,461,791
<INTEREST-LOAN> 20,811,978
<INTEREST-INVEST> 3,737,561
<INTEREST-OTHER> 834,820
<INTEREST-TOTAL> 25,384,359
<INTEREST-DEPOSIT> 9,652,475
<INTEREST-EXPENSE> 11,756,051
<INTEREST-INCOME-NET> 13,628,308
<LOAN-LOSSES> 835,000
<SECURITIES-GAINS> 14,597
<EXPENSE-OTHER> 12,939,804
<INCOME-PRETAX> 2,561,975
<INCOME-PRE-EXTRAORDINARY> 1,706,535
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,706,535
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
<YIELD-ACTUAL> 4.64
<LOANS-NON> 1,017,489
<LOANS-PAST> 63,006
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,182,157
<CHARGE-OFFS> 528,185
<RECOVERIES> 96,313
<ALLOWANCE-CLOSE> 1,585,285
<ALLOWANCE-DOMESTIC> 1,585,285
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
