-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S3aEsIvebAKVhQFxxuDdPCOFnRh6ZPVt3RSjp/N8QWBYdaCBqWh6yfo105XERMl+ zcpgU4ClNv7u9IHxbPei8Q== 0000037808-97-000012.txt : 19970306 0000037808-97-000012.hdr.sgml : 19970306 ACCESSION NUMBER: 0000037808-97-000012 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970305 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970305 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FNB CORP/PA CENTRAL INDEX KEY: 0000037808 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 251255406 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08144 FILM NUMBER: 97551093 BUSINESS ADDRESS: STREET 1: HERMITAGE SQUARE CITY: HERMITAGE STATE: PA ZIP: 16148 BUSINESS PHONE: 4129816000 MAIL ADDRESS: STREET 1: HERMITAGE SQUARE CITY: HERMITAGE STATE: PA ZIP: 16148 FORMER COMPANY: FORMER CONFORMED NAME: CITIZENS BUDGET CO DATE OF NAME CHANGE: 19750909 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED Date of Report: March 5, 1997 F.N.B. CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 0-8144 25-1255406 --------------- --------- ------------------- (State of Incorporation) (Commission (IRS Employer File Number) Identification No.) Hermitage Square, Hermitage, Pennsylvania 16148 - ------------------------------------------ ------------ (Address of principal executive offices) (Zip code) (412) 981-6000 ---------------------------------------------------- (Registrant's telephone number, including area code) INFORMATION TO BE INCLUDED IN THE REPORT ITEM 5. OTHER EVENTS On January 21, 1997, F.N.B. Corporation (the Corporation) completed its acquisition of Southwest Banks, Inc. Accordingly, the Corporation's Consolidated Financial Statements and Related Management's Discussion and Analysis of Financial Condition and Results of Operations have been provided giving retroactive effect to the merger using the pooling of interests method of accounting. Such supplemental consolidated financial statements will become the historical consolidated financial statements when the Corporation reports first quarter 1997 results. The Corporation is hereby filing with the Securities and Exchange Commission a copy of the Audited Supplemental Consolidated Financial Statements for the year ended December 31, 1995, 1994 and 1993 and Management's Discussion and Analysis. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (c) Exhibits (all filed herewith) Exhibit 23.1 Consent of Ernst & Young LLP Exhibit 23.2 Consent of Hill, Barth & King, Inc. Exhibit 99.1 Audited Supplemental Consolidated Financial Statements for the years ended December 31, 1995, 1994 and 1993 with Report of Independent Auditors and Management's Discussion and Analysis Exhibit 99.2 Report of Independent Auditors Hill, Barth & King, Inc. for the 1995 Audit of Southwest Banks, Inc. Signatures -------------- Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. F.N.B. CORPORATION (Registrant) By:/s/John D. Waters ---------------------------- Name: John D. Waters Title: Vice President and Chief Financial Officer Dated: March 5, 1997 EXHIBIT INDEX 23.1 Consent of Ernst & Young LLP 23.2 Consent of Hill, Barth & King, Inc. 99.1 Audited Supplemental Consolidated Financial Statements for the years ended December 31, 1995, 1994 and 1993 with Report of Independent Auditors and Management's Discussion and Analysis 99.2 Report of Independent Auditors Hill, Barth & King, Inc. for the 1995 Audit of Southwest Banks, Inc. EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Regarding: 1) Registration Statement on Form S-3 relating to the F.N.B. Corporation Subordinated Notes and Daily Cash Accounts (File #33- 61367). 2) Registration Statement on Form S-3 relating to the Dividend Reinvestment Plan (File #33-72532). 3) Registration Statement on Form S-8 relating to the F.N.B. Corporation Voluntary Dividend Reinvestment and Stock Purchase Plan (File #333-00943). 4) Registration Statement on Form S-8 relating to the F.N.B. Corporation 401(k) Plan (File #33-50780) 5) Registration Statement on Form S-8 relating to F.N.B. Corporation 1990 Stock Option Plan (File #33-78114). 6) Registration Statement on Form S-8 relating to F.N.B. Corporation Restricted Stock Bonus Plans (File #33-78134). 7) Post-Effective Amendment No. 1 to the Registration Statement on Form S-3 relating to the F.N.B. Corporation Voluntary Dividend Reinvestment and Stock Purchase Plan (File #33-72532). 8) Registration Statement of Form S-8 relating to F.N.B. Corporation 1996 Stock Option Plan (File #333-03489). 9) Registration Statement of Form S-8 relating to F.N.B. Corporation Restricted Stock and Incentive Bonus Plan (File #333-03493). 10) Registration Statement of Form S-8 relating to F.N.B. Corporation Directors Compensation Plan (File #333-03495). 11) Registration Statement of Form S-8 relating to F.N.B. Corporation 401(k) Plan (File #333-03503). 12) Post-Effective Amendment No.1 on Form S-8 to Registration Statement On Form S-4 (File #333-01997). We consent to the incorporation by reference in the above listed Registration Statements of our report dated February 28, 1997, with respect to the supplemental consolidated financial statements of F.N.B. Corporation and subsidiaries for the year ended December 31, 1995 included in this Current Report on Form 8K dated March 5, 1997. ERNST & YOUNG LLP Pittsburgh, Pennsylvania March 3, 1997 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Current Report of F.N.B. Corporation on Form 8K of our report dated January 19, 1996, except for Note I, as to which the date is February 2, 1996, relating to the financial statements of Southwest Banks, Inc. Which have been incorporated into the Audited Supplemental Consolidated Financial Statements for the years ended December 31, 1995, 1994 and 1993 appearing elsewhere in this Current Report. Hill, Barth & King, Inc. Certified Public Accountants HILL, BARTH & KING, INC. Naples, Florida February 28, 1997 EXHIBIT 99.1 Audited Supplemental Consolidated Financial Statements F.N.B. Corporation Years ended December 31, 1995, 1994 and 1993 with Report of Independent Auditors F.N.B. CORPORATION AND SUBSIDIARIES AUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1995, 1994 and 1993 CONTENTS Report of Independent Auditors.......................................... 1 Audited Supplemental Consolidated Financial Statements Supplemental Consolidated Balance Sheet......................... 2 Supplemental Consolidated Income Statement...................... 3 Supplemental Consolidated Statement of Stockholders' Equity..... 4 Supplemental Consolidated Statement of Cash Flows............... 5 Notes to Supplemental Consolidated Financial Statements......... 6 Supplemental Selected and Quarterly Financial Data...................... 28 Management's Discussion and Analysis of Financial Conditions and Results of Operations............................................... 29 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors F.N.B. Corporation We have audited the supplemental consolidated balance sheets of F.N.B. Corporation (formed as a result of the consolidation of F.N.B. Corporation and Southwest Banks, Inc.) as of December 31, 1995 and 1994 and the related supplemental consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. The supplemental consolidated financial statements give retroactive effect to the merger of F.N.B. Corporation and Southwest Banks, Inc., on January 21, 1997, which has been accounted for using the pooling of interests method as described in the notes to the supplemental consolidated financial statements. These supplemental consolidated financial statements are the responsibility of the management of F.N.B. Corporation. Our responsibility is to express an opinion on these supplemental consolidated financial statements based on our audits. We did not audit the financial statements of Southwest Banks, Inc. which statements reflect total assets constituting 18% for 1995 and 14% for 1994 of the related supplemental consolidated financial statement totals, and which reflect net income constituting approximately 9% of the related supplemental consolidated financial statement totals for the three year period ended December 31, 1995. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Southwest Banks, Inc., is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the supplemental financial statements referred to above present fairly, in all material respects, the consolidated financial position of F.N.B. Corporation at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, after giving retroactive effect to the merger of Southwest Banks, Inc., as described in the notes to the supplemental consolidated financial statements, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP February 28, 1997 F.N.B. CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEET Dollars in thousands, except par values December 31 1995 1994 ---------- ---------- ASSETS Cash and due from banks $ 83,931 $ 75,386 Interest bearing deposits with banks 3,603 2,770 Federal funds sold 54,059 4,016 Loans held for sale 10,154 5,904 Securities available for sale 271,421 138,255 Securities held to maturity (fair value of $160,747 and $276,150) 160,803 288,756 Loans, net of unearned income of $26,867 and $22,339 1,450,992 1,374,088 Allowance for loan losses (23,135) (21,477) ---------- ---------- NET LOANS 1,427,857 1,352,611 Premises and equipment 36,918 33,933 Other assets 42,671 47,762 ---------- ---------- $2,091,417 $1,949,393 ========== ========== LIABILITIES Deposits: Non-interest bearing $ 213,879 $ 194,149 Interest bearing 1,553,061 1,432,501 ---------- ---------- TOTAL DEPOSITS 1,766,940 1,626,650 Other liabilities 29,398 27,728 Short-term borrowings 73,501 86,938 Long-term debt 49,755 55,517 ---------- ---------- TOTAL LIABILITIES 1,919,594 1,796,833 MINORITY INTEREST 540 STOCKHOLDERS' EQUITY Preferred stock - $10 par value Authorized - 20,000,000 shares Outstanding - 451,638 and 456,288 shares Aggregate liquidation value - $11,291 and $11,407 4,516 4,563 Common Stock - $2 par value Authorized - 20,000,000 shares Outstanding - 11,486,061 and 11,033,895 22,971 21,905 Additional paid-in capital 80,362 72,355 Retained earnings 61,496 53,773 Net unrealized securities gains/losses 3,331 (126) Employee Stock Ownership Plan (389) (141) Treasury stock - 22,340 and 18,974 shares at cost (464) (309) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 171,823 152,020 ---------- ---------- $2,091,417 $1,949,393 ========== ========== See accompanying Notes to Supplemental Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED INCOME STATEMENT Dollars in thousands, except per share data Year Ended December 31 1995 1994 1993 --------- --------- --------- INTEREST INCOME Loans, including fees $ 134,580 $ 115,915 $ 108,666 Securities: Taxable 21,647 20,998 25,608 Tax exempt 1,692 1,756 839 Dividends 612 559 572 Other 2,209 1,066 1,013 --------- --------- --------- TOTAL INTEREST INCOME 160,740 140,294 136,698 INTEREST EXPENSE Deposits 61,241 49,687 54,074 Short-term borrowings 5,313 3,978 3,146 Long-term debt 3,258 2,869 2,778 --------- --------- --------- TOTAL INTEREST EXPENSE 69,812 56,534 59,998 NET INTEREST INCOME 90,928 83,760 76,700 Provision for loan losses 6,487 9,055 9,738 --------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 84,441 74,705 66,962 NON-INTEREST INCOME Insurance commissions and fees 4,284 4,195 4,328 Service charges 9,826 7,897 7,261 Trust 1,390 1,504 1,365 Gain on sale of securities 529 1,283 748 Gain (loss) on sale of loans 272 (331) 1,918 Other 1,416 1,276 1,701 --------- --------- --------- TOTAL NON-INTEREST INCOME 17,717 15,824 17,321 --------- --------- --------- 102,158 90,529 84,283 NON-INTEREST EXPENSES Salaries and employee benefits 35,824 32,502 30,866 Net occupancy 5,961 5,209 4,762 Amortization of intangibles 1,246 1,702 2,049 Equipment 4,777 4,662 4,493 Deposit insurance 2,885 4,147 3,908 Promotional 2,991 2,500 2,136 Reinsurance fee 1,738 1,820 1,802 Other 17,468 16,803 17,691 --------- --------- --------- TOTAL NON-INTEREST EXPENSES 72,890 69,345 67,707 --------- --------- --------- INCOME BEFORE INCOME TAXES 29,268 21,184 16,576 Income taxes 9,478 6,989 5,099 --------- --------- --------- NET INCOME $ 19,790 $ 14,195 $ 11,477 ========= ========= ========= NET INCOME PER COMMON SHARE PRIMARY $1.56 $1.14 $ .99 ===== ===== ===== FULLY DILUTED $1.52 $1.13 $ .99 ===== ===== ===== AVERAGE COMMON SHARES OUTSTANDING 11,857,278 11,570,900 10,548,786 ========== ========== ========== See accompanying Notes to Supplemental Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Dollars in thousands, except per share data NET EMPLOYEE ADDITIONAL UNREALIZED STOCK PREFERRED COMMON PAID-IN RETAINED SECURITIES OWNERSHIP TREASURY STOCK STOCK CAPITAL EARNINGS GAINS/LOSSES PLAN STOCK ---------- -------- ---------- ---------- ------------ --------- -------- BALANCE AT JANUARY 1, 1993 $ 4,605 $ 17,666 $ 49,078 $ 46,814 ($40) Net income 11,477 Cash dividends declared: Preferred stock (857) Common stock $.24 per share (FNB) (2,150) Purchase of common stock (1,286) Issuance of common stock 191 860 1,099 Stock dividend 802 5,163 (5,965) Conversion of preferred stock (23) 12 40 ---------- --------- -------- -------- ---------- --------- -------- BALANCE AT DECEMBER 31, 1993 4,582 18,671 55,141 49,319 (227) Cumulative effect of adoption of FAS No. 115 $ 2,122 Net income 14,195 Cash dividends declared: Preferred stock (853) Common stock $.25 per share (FNB) (2,257) Purchase of common stock (1,143) Issuance of common stock 2,338 11,445 3 1,061 Stock dividend 887 5,745 (6,634) Conversion of preferred stock (19) 9 24 Obligation under ESOP plan ($141) Change in net unrealized securities gains/losses (2,248) ---------- -------- -------- --------- ---------- -------- -------- BALANCE AT DECEMBER 31, 1994 4,563 21,905 72,355 53,773 (126) (141) (309) Net income 19,790 Cash dividends declared: Preferred stock (849) Common stock $.35 per share (FNB) (3,151) Purchase of common stock (1,447) Issuance of common stock 51 373 1,292 Stock dividend 930 7,132 (8,067) Conversion of preferred stock (47) 85 502 Obligation under ESOP plan (248) Change in net unrealized securities gains/losses 3,457 ---------- --------- -------- -------- ---------- --------- ------- BALANCE AT DECEMBER 31, 1995 $ 4,516 $ 22,971 $ 80,362 $ 61,496 $ 3,331 ($389) ($464) ========== ========= ======== ======== ========= ========= =======
See accompanying Notes to Supplemental Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS Dollars in thousands Year Ended December 31 1995 1994 1993 -------- -------- -------- OPERATING ACTIVITIES Net income $ 19,790 $ 14,195 $ 11,477 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,667 6,772 7,924 Provision for loan losses 6,487 9,055 9,738 Deferred taxes (570) (1,672) (1,648) Gain on securities available for sale (529) (1,283) (748) (Gain) loss on sale of loans (272) 331 (1,918) Proceeds from sale of loans 21,085 47,020 81,492 Net change in: Interest receivable (1,327) (1,154) 1,890 Interest payable 1,837 1,339 (1,236) Loans held for sale (25,063) (79,823) (56,851) Other, net 5,547 7,585 849 -------- -------- -------- Net cash flows from operating activities 32,652 2,365 50,969 INVESTING ACTIVITIES Net change in: Interest bearing deposits with banks (833) 3,322 5,288 Federal funds sold (50,043) 22,055 (4,772) Loans (83,262)(105,301)(125,782) Purchase of securities available for sale (121,797) (89,042) (19,918) Purchase of securities held to maturity (41,010) (41,036)(126,829) Proceeds from sale of securities available for sale 7,047 13,406 40,170 Proceeds from maturity of securities available for sale 79,306 83,551 53,531 Proceeds from maturity of securities held to maturity 76,234 69,159 121,629 Increase in premises and equipment (7,104) (10,612) (3,274) -------- -------- -------- Net cash flows from investing activities (141,462) (54,498) (59,957) FINANCING ACTIVITIES Net change in: Non-interest bearing deposits 19,730 10,922 16,888 Interest bearing deposits 120,560 (380) (12,763) Short-term borrowings (13,437) 17,533 (1,418) Increase in long-term debt 8,274 35,312 45,713 Decrease in long-term debt (14,036) (14,092) (32,754) Proceeds from the sale and issuance of stock 1,716 14,862 2,216 Purchase of treasury stock (1,447) (1,143) (1,286) Cash dividends paid (4,005) (3,113) (3,008) -------- -------- -------- Net cash flows from financing activities 117,355 59,901 13,588 -------- -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 8,545 7,768 4,600 Cash and Cash Equivalents At Beginning Of Year 75,386 67,618 63,018 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 83,931 $ 75,386 $ 67,618 ======== ======== ======== See accompanying Notes to Supplemental Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS The supplemental consolidated financial statements give retroactive effect to the merger of a subsidiary of F.N.B. Corporation (the Corporation) with and into Southwest Banks, Inc. (Southwest). The merger which was consummated on January 21, 1997 resulted in the Corporation issuing a total of 2,851,907 shares of Common Stock. This transaction has been accounted for on a pooling-of-interests basis, and such financial statements are presented as if the merger had been consummated for all the periods presented. As required by generally accepted accounting principles, the supplemental consolidated financial statements will become the historical consolidated financial statements upon issuance of consolidated financial statements for the quarter ended March 31, 1997. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The supplemental consolidated financial statements include the accounts of the Corporation and its subsidiaries, including Southwest. All significant intercompany balances and transactions have been eliminated. Business: The Corporation is a bank holding company headquartered in Hermitage, Pennsylvania. It operates 7 banks through 68 offices and a consumer finance company through 34 offices in Pennsylvania, Ohio, New York and Florida. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Securities: Debt securities are classified as held to maturity when management has the positive intent and ability to hold securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity and marketable equity securities are classified as available for sale. Securities available for sale are carried at fair value with net unrealized securities gains (losses) reported separately as a component of stockholders' equity, net of tax. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net securities gains (losses). The adjusted cost of specific securities sold is used to compute gains or losses on sales. Presently, the Corporation has no intention of establishing a trading securities classification. Loans Held for Sale: Loans held for sale are recorded at the lower of aggregate cost or market value. Gain or loss on the sale of loans is included within non-interest income. In May of 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FAS) No. 122, "Accounting for Mortgage Servicing Rights," an amendment of FAS No. 65. This Statement, which was adopted in 1996 on a prospective basis, allows entities originating mortgage loans for sale to recognize as an asset rights to service these loans. Additionally, the Corporation must periodically assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. The impact of this Statement did not have a material impact on the Corporation's results of operations or financial position. Loans and the Allowance for Loan Losses: Loans that management has the intent and ability to hold for the foreseeable future, until maturity or payoff are reported at their outstanding principal adjusted for any charge-offs and any deferred fees or costs on originated loans. Interest income on loans is accrued on the principal amount outstanding. Generally, except for consumer installment loans, it is the Corporation's policy to discontinue interest accruals when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in the prior year is charged against the allowance for loan losses. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest has been paid, or the loan becomes both well secured and in the process of collection. Consumer installment loans are generally charged off against the allowance for loan losses upon reaching 90 to 180 days past due, depending on the installment loan type. Loan origination fees and related costs are deferred and recognized over the life of the loans as an adjustment of yield. The allowance for loan losses is based on management's evaluation of potential losses in the loan portfolio, which includes an assessment of past experience, current and estimated future economic conditions, known and inherent risks in the loan portfolio, the estimated value of underlying collateral and industry standards. Additions are made to the allowance through periodic provisions charged to income and recovery of principal on loans previously charged off. Losses of principal are charged to the allowance when the loss actually occurs or when a determination is made that a loss is probable. On January 1, 1995, the Corporation adopted FAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by FAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." These standards require that impaired loans be identified and measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. Impaired loans consist of non-homogeneous loans, which based on management's evaluation of current information and events, has determined that it is probable that the Corporation will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Corporation evaluates all commercial and commercial real estate loans which have been classified for regulatory reporting purposes, including nonaccrual and restructured loans, in determining impaired loans. The adoption of these accounting standards had no material impact on the Corporation's financial position or results of operations. Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed generally on the straight-line method. Other Real Estate Owned: Assets acquired in settlement of indebtedness are included in other assets at the lower of fair value minus estimated costs to sell or at the carrying amount of the indebtedness. Subsequent write-downs and net direct operating expenses attributable to such assets are included in other expenses. Amortization of Intangibles: Core deposit intangibles are being amortized on accelerated methods over various lives ranging from 10-17 years. Accounting for Postretirement Benefits Other than Pensions: The Corporation recognizes the projected future cost of providing postretirement benefits, such as health care and life insurance, as an expense as employees render service. Income Taxes: Income taxes are computed utilizing the liability method. Under this method deferred taxes are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Per Share Amounts: Earnings and cash dividends per share have been adjusted for common stock dividends, including the stock dividend issued on April 24, 1996. Primary earnings per common share is calculated by dividing net income, adjusted for preferred stock dividends declared, by the sum of the weighted average number of shares of common stock outstanding and the number of shares of common stock which would be issued assuming the exercise of stock options and warrants during each period. Fully diluted earnings per common share is calculated by dividing net income, adjusted for minority interest, by the weighted average number of shares of common stock outstanding, assuming conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance and the exercise of stock options and warrants. Such adjustments to net income and the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per common share. Cash Equivalents: The Corporation considers cash and due from banks as cash and cash equivalents. New Accounting Standards: FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which became effective for the Corporation in 1996, requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the asset's carrying amount. Adoption of this Statement did not have a material effect on the financial position or results of the Corporation. FAS No. 123, "Accounting for Stock-Based Compensation," which becomes effective for the Corporation in 1996, defines a fair value based method of accounting for stock-based employee compensation plans. Under the fair value based method, compensation cost is measured at the grant date based upon the value of the award and is recognized over the service period. However, FAS No. 123 also allows an entity to continue to measure compensation costs for its plans as prescribed in APB Opinion No. 25 "Accounting for Stock Issued to Employees." The Corporation will continue its accounting in accordance with APB Opinion No. 25. FAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," establishes new standards for determining whether a transfer constitutes a sale and, if so, the determination of the resulting gain or loss. These standards are based on the consistent application of a financial components approach that focuses on control. Under this approach, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. Provisions of this Statement are effective for certain transactions entered into in 1997 and 1998. The Corporation does not anticipate this Standard will have a material effect on the Corporation's financial position or results of operations. MERGER, ACQUISITION AND DIVESTITURE On November 15, 1996, the Corporation signed a definitive merger agreement with West Coast Bancorp, Inc. (West Coast), a bank holding company headquartered in Cape Coral, Florida with assets of approximately $174 million. The merger agreement calls for an exchange of .794 share of the Corporation's common stock for each share of West Coast common stock. Approximately 1.2 million shares of the Corporation's common stock are expected to be issued in conjunction with the merger. In connection with the merger agreement, West Coast granted the Corporation an option to purchase up to 19.9% of its common stock exercisable only if certain conditions are met. The exchange ratio, number of shares under option and the price of the options are all subject to possible adjustment. The transaction will be accounted for as a pooling of interests and is expected to close during the second quarter of 1997, subject to approval by certain regulatory authorities and West Coast's shareholders. On November 6, 1996, the Corporation announced an arrangement with Sun Bancorp, Inc. (Sun), a bank holding company headquartered in Selinsgrove, Pennsylvania, with assets of approximately $355 million. Under the agreement, Sun will receive 100% of the ownership of Bucktail Bank and Trust Company, a subsidiary of the Corporation, having total assets of approximately $118 million. The Corporation will receive Sun stock worth approximately $17.5 million, which represents a 13.8% ownership of Sun. SECURITIES The amortized cost of securities and their approximate fair values are as follows: Securities available for sale (in thousands): GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1995 COST GAINS LOSSES VALUE --------- --------- ---------- ---------- U.S. Treasury and other U.S. Government agencies and corporations $ 233,800 $ 1,726 $ (69) $ 235,457 Mortgage-backed securities of U.S. Government agencies 18,036 175 18,211 Other debt securities 2,000 (5) 1,995 --------- --------- ---------- --------- TOTAL DEBT SECURITIES 253,836 1,901 (74) 255,663 Equity securities 12,448 3,341 (31) 15,758 --------- --------- ---------- --------- $ 266,284 $ 5,242 $ (105) $ 271,421 ========= ========= ========== =========
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1994 COST GAINS LOSSES VALUE --------- --------- ---------- -------- U.S. Treasury and other U.S. Government agencies and corporations $ 123,582 $ (2,279) $ 121,303 Mortgage-backed securities of U.S. Government agencies 675 (46) 629 Other debt securities 1,000 (11) 989 --------- --------- --------- --------- TOTAL DEBT SECURITIES 125,257 (2,336) 122,921 Equity securities 13,213 $ 2,202 (81) 15,334 --------- --------- --------- --------- $ 138,470 $ 2,202 $ (2,417) $ 138,255 ========= ========= ========== =========
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1993 COST GAINS LOSSES VALUE --------- ---------- ---------- --------- U.S. Treasury and other U.S. Government agencies and corporations $ 121,171 $ 1,071 $ (5) $ 122,237 Mortgage-backed securities of U.S. Government agencies 567 12 579 Other debt securities 16 16 --------- ---------- ---------- --------- TOTAL DEBT SECURITIES 121,754 1,083 (5) 122,832 Equity securities 4,065 2,240 (81) 6,224 --------- ---------- ---------- --------- $ 125,819 $ 3,323 $ (86) $ 129,056 ========= ========== ========= =========
Securities held to maturity (in thousands): GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1995 COST GAINS LOSSES VALUE --------- ---------- ---------- --------- U.S. Treasury and other U.S. Government agencies and corporations $ 15,223 $ 108 $ (37) $ 15,294 States of the U.S. and political subdivisions 40,969 126 (274) 40,821 Mortgage-backed securities of U.S. Government agencies 104,555 447 (421) 104,581 Other debt securities 56 (5) 51 --------- --------- --------- --------- $ 160,803 $ 681 $ (737) $ 160,747 ========= ========= ========= =========
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1994 COST GAINS LOSSES VALUE --------- ---------- ---------- --------- U.S. Treasury and other U.S. Government agencies and corporations $ 163,388 $ (4,621) $ 158,767 States of the U.S. and political subdivisions 42,019 $ 64 (2,992) 39,091 Mortgage-backed securities of U.S. Government agencies 83,288 3 (5,052) 78,239 Other debt securities 61 (8) 53 --------- ---------- ---------- --------- $ 288,756 $ 67 $ (12,673) $ 276,150 ========= ========== ========== =========
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1993 COST GAINS LOSSES VALUE --------- ---------- ---------- --------- U.S. Treasury and other U.S. Government agencies and corporations $ 195,521 $ 2,454 $ (57) $ 197,918 States of the U.S. and political subdivisions 40,047 372 (323) 40,096 Mortgage-backed securities of U.S. Government agencies 93,523 1,304 (43) 94,784 Other debt securities 597 25 622 --------- --------- ---------- --------- TOTAL DEBT SECURITIES 329,688 4,155 (423) 333,420 Equity securities 6,591 6,591 --------- --------- ---------- --------- $ 336,279 $ 4,155 $ (423) $ 340,011 ========= ========= ========== =========
On December 21, 1995, the Corporation transferred $92.0 million of debt securities from the held to maturity category to the available for sale category in accordance with the implementation guidance issued on FAS No. 115. At the time of transfer, the market value of the securities totaled $92.3 million, and the unrealized gain, net of taxes, of $161,000 was recorded as an increase to stockholders' equity. At December 31, 1995 and 1994, respectively, securities with a carrying value of $119.2 million and $118.1 million were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $40.8 million and $27.1 million at December 31, 1995 and 1994, respectively, were pledged as collateral for other borrowings. FAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," established disclosures about derivatives and other financial instruments. Derivatives are various instruments used to construct a transaction that is derived from and reflects the underlying value of assets, other instruments or various indices. The primary purpose of derivatives, which include such items as forward contracts, interest swap contracts, options and futures, is to transfer price risk associated with the fluctuations in asset values rather than to borrow or lend funds. As of December 31, 1995, the Corporation had not entered into any such transactions. As of December 31, 1995, the amortized cost and fair value of securities, by contractual maturities, were as follows (in thousands): HELD TO MATURITY AVAILABLE FOR SALE ------------------- ------------------- AMORTIZED FAIR AMORTIZED FAIR December 31, 1995 COST VALUE COST VALUE --------- ---------- --------- --------- Due in one year or less $ 11,706 $ 11,743 $ 109,205 $ 109,467 Due from one to five years 137,611 137,423 121,675 122,764 Due from five to ten years 11,476 11,574 14,997 15,435 Due after ten years 10 7 5,959 6,002 --------- --------- --------- --------- 160,803 160,747 251,836 253,668 Other securities 14,448 17,753 --------- --------- --------- --------- $ 160,803 $ 160,747 $ 266,284 $ 271,421 ========= ========= ========= ========= For purposes of the maturity table, mortgage-backed securities have been allocated over maturity groupings based on management's estimate of the payment tendencies of the underlying collateral. Proceeds from sales of debt and equity securities during 1995, 1994 and 1993 were $7.0 million, $13.4 million and $40.2 million, respectively. Gross gains and gross losses were realized on those sales as follows (in thousands): 1995 1994 1993 ---- ---- ---- Gross gains $530 $1,331 $960 Gross losses 1 48 212 ---- ------ ---- $529 $1,283 $748 ==== ====== ==== LOANS Following is a summary of loans (in thousands): December 31 1995 1994 ---------- ---------- Commercial, financial and agricultural $ 151,157 $ 184,472 Real estate - construction 22,047 37,985 Real estate - mortgage 925,644 807,354 Installment loans to individuals 379,011 366,616 Unearned income (26,867) (22,339) --------- --------- 1,450,992 1,374,088 --------- --------- Loans held for sale: Real estate - mortgage 7,919 5,071 Installment loans to individuals 2,235 833 --------- --------- 10,154 5,904 --------- --------- $1,461,146 $1,379,992 ========== ========== During 1995, the Corporation converted its data processing system. The new system allows for the separate classification of commercial real estate loans. The 1995 balances reflect commercial real estate loans within the real estate - mortgage category. Such loans were previously classified within the commercial, financial and agricultural category. During 1994, the Corporation reclassified $119.9 million of residential mortgages and indirect installment loans from the held for sale category into its permanent loan portfolio. This action was taken to more clearly reflect management's intent relative to portfolio lending activities by specifically defining certain loan originations that would be sold in the secondary market. At the time of this reclassification, the book value of those loans closely approximated their market value. Certain directors and executive officers of the Corporation and its significant subsidiaries, as well as associates of such persons, were loan customers during 1995. Such loans were made in the ordinary course of business under normal credit terms and do not represent more than a normal risk of collection. Following is a summary of the amount of loans in which the aggregate of the loans to any such persons exceeded $60,000 during the year (in thousands): Total loans at December 31, 1994 $ 31,126 New loans 11,515 Repayments (15,275) Other 933 --------- Total loans at December 31, 1995 $ 28,299 ========= Other represents the net change in loan balances resulting from changes in related parties during the year. NON-PERFORMING ASSETS Following is a summary of non-performing assets (in thousands): December 31 1995 1994 1993 -------- -------- -------- Non-accrual loans $ 6,622 $ 9,926 $ 10,262 Restructured loans 3,075 3,157 3,236 -------- -------- -------- TOTAL NON-PERFORMING LOANS 9,697 13,083 13,498 Other real estate owned 3,251 3,675 3,016 -------- -------- -------- TOTAL NON-PERFORMING ASSETS $ 12,948 $ 16,758 $ 16,514 ======== ======== ======== For the years ended December 31, 1995, 1994 and 1993, income recognized on non-accrual and restructured loans was $590,000, $636,000 and $671,000, respectively. Income that would have been recognized during 1995, 1994 and 1993 on such loans if they were in accordance with their original terms was $1.1 million, $1.7 million and $1.7 million, respectively. Loans past due 90 days or more were $3.9 million, $2.6 million and $3.4 million at December 31, 1995, 1994 and 1993, respectively. At December 31, 1995, the recorded investment in loans that are considered to be impaired under FAS No. 114 was $10.7 million (of which $2.8 million were on a non-accrual basis). Included in this amount is $3.7 million of impaired loans that as a result of write-downs did not have an allocated allowance for credit losses. The allocated allowance on the remaining $7.0 million of impaired loans totaled $1.1 million at December 31, 1995. The average recorded investment in impaired loans during the year ended December 31, 1995 was approximately $13.7 million. For the year ended December 31, 1995, the Corporation recognized interest income on those impaired loans of $917,000 which did not include any interest income recognized using the cash basis method of income recognition. ALLOWANCE FOR LOAN LOSSES Following is an analysis of changes in the allowance for loan losses (in thousands): Year Ended December 31 1995 1994 1993 -------- -------- -------- Balance at beginning of year $ 21,477 $ 17,182 $ 15,428 Loss reserves transferred (893) Charge-offs (6,664) (6,569) (8,479) Recoveries 1,835 1,809 1,388 -------- -------- -------- NET CHARGE-OFFS (4,829) (4,760) (7,091) Provision for loan losses 6,487 9,055 9,738 -------- -------- -------- Balance at end of year $ 23,135 $ 21,477 $ 17,182 ======== ======== ======== PREMISES AND EQUIPMENT Following is a summary of premises and equipment (in thousands): December 31 1995 1994 -------- -------- Land $ 6,509 $ 5,560 Premises 33,870 31,893 Equipment 27,090 23,380 -------- -------- 67,469 60,833 Accumulated depreciation (30,551) (26,900) -------- -------- $ 36,918 $ 33,933 ======== ======== Depreciation expense was $4.1 million for 1995, $3.9 million for 1994 and $3.6 million for 1993. The Corporation is in the process of constructing a new multi-story building in Hermitage, as well as three new branches in Erie and a new branch in Collier County, Florida. Construction, equipment and furnishing costs are projected to be approximately $13.2 million. The Corporation has operating leases extending to 2016 for certain land, office locations and equipment. Leases that expire are generally expected to be renewed or replaced by other leases. Rental expense was $2.5 million for 1995, $1.9 million for 1994 and $1.5 million for 1993. Total minimum rental commitments under such leases were $13.6 million at December 31, 1995. Following is a summary of future minimum lease payments for years following December 31, 1995 (in thousands): 1996 $1,615 1997 1,521 1998 1,339 1999 855 2000 560 Later years 7,727 DEPOSITS Following is a summary of deposits (in thousands): December 31 1995 1994 ---------- ---------- Non-interest bearing $ 213,879 $ 194,149 Savings and NOW 710,675 729,276 Certificates of deposit and other time deposits 842,386 703,225 ---------- ---------- $1,766,940 $1,626,650 ========== =========== Following is a summary of time deposits of $100,000 or more by remaining maturities (in thousands): CERTIFICATES OTHER TIME December 31, 1995 OF DEPOSIT DEPOSITS TOTAL ------------ ------------ ------------ Three months or less $36,811 $ 3,250 $ 40,061 Three to six months 28,812 2,879 31,691 Six to twelve months 29,098 4,345 33,443 Over twelve months 20,491 15,979 36,470 --------- --------- ---------- $115,212 $26,453 $141,665 ========= ========= ========== SHORT-TERM BORROWINGS Following is a summary of short-term borrowings (in thousands): December 31 1995 1994 -------- -------- Securities sold under repurchase agreements $ 21,267 $ 13,396 Other short-term borrowings 4,872 25,457 Subordinated notes 47,362 48,085 -------- -------- $ 73,501 $ 86,938 ======== ======== Credit facilities amounting to $25.0 million at December 31, 1995 and December 31, 1994 were maintained with various banks with rates which are at or below prime rate. The facilities and their terms are periodically reviewed by the banks and are generally subject to withdrawal at their discretion. The amount of these credit facilities which were unused amounted to $22.0 million at December 31, 1995 and $21.0 million at December 31, 1994. In addition, certain subsidiaries have lines of credit with the Federal Home Loan Bank, which if used would require collateralization. No amounts were used as of December 31, 1995. LONG-TERM DEBT Following is a summary of long-term debt (in thousands): December 31 1995 1994 -------- -------- Real estate mortgages payable $ 284 $ 452 Federal Home Loan Bank advances 12,077 18,612 Subordinated notes 37,394 36,453 -------- -------- $ 49,755 $ 55,517 ======== ======== The Federal Home Loan Bank advances are secured by residential real estate loans and are scheduled to mature in various amounts annually from 1996 through the year 1999. Interest rates paid on these advances range from 5.79% to 5.84%. Subordinated notes are unsecured and subordinated to other indebtedness of the Corporation. The subordinated notes are scheduled to mature in various amounts annually from 1996 through the year 2005. At December 31, 1995, $29.5 million of long-term subordinated debt is redeemable prior to maturity. Of this total, $27.2 million is redeemable by the holder at a discount equal to three months of interest. The issuer may require the holder to give 30 days prior written notice. No sinking fund is required and none has been established to retire the debt. The weighted average interest rate on long-term subordinated debt was 7.85% at December 31, 1995 and 8.02% at December 31, 1994. Scheduled annual maturities for all of the long-term debt for each of the five years following December 31, 1995 are as follows (in thousands): 1996 $27,948 1997 5,320 1998 2,278 1999 898 2000 959 Later years 12,352 COMMITMENTS AND CREDIT RISK The Corporation has commitments to extend credit and standby letters of credit which involve certain elements of credit risk in excess of the amount stated in the consolidated balance sheet. The Corporation's exposure to credit loss in the event of non-performance by the customer is represented by the contractual amount of those instruments. Consistent credit policies are used by the Corporation for both on- and off-balance sheet items. Following is a summary of off-balance sheet credit risk information (in thousands): December 31 1995 1994 -------- -------- Off-balance sheet credit risk: Commitments to extend credit $215,471 $173,406 Standby letters of credit 11,450 15,777 At December 31, 1995, funding of approximately 70% of the commitments to extend credit is dependent on the financial condition of the customer. The Corporation has the ability to withdraw such commitments at its discretion. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Based on management's credit evaluation of the customer, collateral may be deemed necessary. Collateral requirements vary and may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Corporation which may require payment at a future date. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. STOCKHOLDERS' EQUITY Series A - Cumulative Convertible Preferred Stock (Series A Preferred) was created for the purpose of acquiring Reeves Bank. Holders of Series A Preferred are entitled to 4.9 votes for each share held. The holders do not have cumulative voting rights in the election of directors. Dividends are cumulative from the date of issue and are payable at $.42 per share each quarter. Series A Preferred is convertible at the option of the holder into shares of the Corporation's common stock having a market value of $25.00 at time of conversion. The Corporation has the right to require the conversion of the balance of all outstanding shares at the conversion rate at any time after 50% of the 49,512 shares issued are no longer outstanding. During 1995, 450 shares of Series A Preferred were converted to 617 shares of common stock. At December 31, 1995, 31,148 shares of common stock were reserved by the Corporation for the conversion of the remaining 24,838 outstanding shares. Series B - Cumulative Convertible Preferred Stock (Series B Preferred) was issued during 1992 for the purpose of raising capital for the Erie acquisition. Holders of Series B Preferred have no voting rights. Dividends are cumulative from the date of issue and are payable at $.46875 per share each quarter. Series B Preferred has a stated value of $25.00 per share and is convertible at the option of the holder at any time into shares of the Corporation's common stock at a price of $12.83 per share. The Corporation has the right to redeem the Series B Preferred for cash on or after May 15, 1996, as set forth in the prospectus relating to the offering of Series B Preferred dated May 8, 1992. During 1995, 4,200 shares of Series B Preferred were converted to 8,179 shares of common stock. At December 31, 1995, 831,362 shares of common stock were reserved by the Corporation for the conversion of the remaining 426,800 outstanding shares. Series A Preferred of First County was issued in connection with the initial capitalization of First County Bank, and recognized as minority interest. The Corporation required the conversion of the outstanding shares during the first quarter of 1995. This conversion resulted in the Corporation issuing an additional 33,676 shares of common stock. STOCK INCENTIVE PLANS The Corporation has a restricted stock bonus plan which provides for the issuance of up to 352,800 shares of common stock to key employees of the Corporation. All shares of stock awarded under the plan vest in equal installments over a five year period on each anniversary of the date of grant. Participants have full voting rights on all shares regardless of vesting unless forfeited. The shares of stock awarded under the plan are held in the participants name and are enrolled in the Voluntary Dividend Reinvestment and Stock Purchase Plan. During 1995, the Corporation awarded 2,901 shares, 20% of which become vested in January 1996. The Corporation has a stock option plan (Option Plan) which provides for the issuance of up to 860,722 stock options and stock appreciation rights to key employees of the Corporation. The options are granted at a price equal to the fair market value at the date of the grant and are exercisable within ten years from the date of the grant. At December 31, 1995, options for 215,293 of common stock were exercisable at prices ranging from $6.90 to $13.61 per share. Activity in the Option Plan during the past three years was as follows: 1995 1994 1993 -------- -------- -------- Outstanding, beginning of year 545,015 434,733 204,100 Granted during the year 108,010 128,560 235,686 Exercised during the year (at prices ranging from $6.60 to $13.61 per share) (2,754) (3,574) Forfeited during the year (13,583) (14,704) (5,053) ------- ------- ------- Ending balance 636,688 545,015 434,733 ======= ======= ======= The Corporation has granted warrants to purchase one share of common stock (at an exercise price of $6.90 per share). Such warrants are exercisable and will expire on June 19, 2001. The Corporation has reserved 93,397 shares of common stock for issuance in connection with these warrants. RETIREMENT PLANS Certain of the Corporation's subsidiaries participate in defined benefit retirement plans covering substantially all of their employees. The expense associated with these was $1.7 million in 1995, $1.6 million in 1994 and $931,000 in 1993. The defined benefit plans provide benefits based on years of credited service and compensation (as defined), subject to ERISA limitations. Contributions to the tax-qualified plans are made in amounts not less than the minimum-required contribution under ERISA nor more than the maximum- deductible contribution under the Internal Revenue Code. Following is the estimated funded status (in thousands): December 31 1995 1994 ------------------------- -------------------------------- PLANS WHOSE PLANS WHOSE PLANS WHOSE PLANS WHOSE ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS ACCUMULATED BENEFITS BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS -------- ------------- -------- ------------- Actuarial present value of: Vested benefit obligation $ 13,406 $ 2,439 $ 10,282 $ 1,236 ======== ======== ======== ======= Accumulated benefit obligation $ 13,625 $ 3,169 $ 10,506 $ 1,629 ======== ======== ======== ======= Projected benefit obligation for services rendered to date $(17,114) $ (3,720) $(12,909) $(1,972) Plan assets at fair value, primarily U.S. Government securities and common stocks 17,881 14,673 -------- -------- -------- ------- Plan assets in excess of or (less than) projected benefit obligation 767 (3,720) 1,764 (1,972) Unrecognized net (gain) loss 21 (33) (1,313) (434) Unrecognized net obligation 58 63 Unrecognized prior service cost 162 2,185 179 1,484 Additional liability (707) -------- -------- -------- ------- Prepaid (accrued) pension costs $ 1,008 $ (1,568) $ 693 $(1,629) ======== ======== ======== ======= The pension expense for the defined benefit plans included the following components (in thousands): Year Ended December 31 1995 1994 1993 ------- ------- ------- Service costs - benefits earned during the period $ 854 $ 1,072 $ 771 Interest cost on projected benefit obligation 1,375 1,237 815 Actual return on plan assets (3,014) 330 (757) Net amortization 2,115 (1,293) (212) ------- ------- ------- Net pension expense $ 1,330 $ 1,346 $ 617 ======= ======= ======= Assumptions as of December 31 1995 1994 1993 ------- ------- ------- Weighted average discount rate 7.0% 8.5% 7.3% Rates of increase in compensation levels 4.0% 4.0% 4.0% Expected long-term rate of return on assets 8.0% 8.0% 8.0% At December 31, 1995 and 1994, respectively, plan assets include $745,000 and $519,000 of the Corporation's common stock and $193,000 and $172,000 of the Corporation's subordinated debt. Certain subsidiaries of the Corporation participate in a qualified 401(k) defined contribution plan for the full-time employees of the subsidiary. A percentage of employees' contributions to the plan are matched by the Corporation up to a maximum of 6 percent of the employee's salary. The 401(k) pension expense amounted to $340,000 in 1995, $297,000 in 1994 and $314,000 in 1993. The remaining subsidiaries of the Corporation participate in a Salary Savings ESOP Plan, under which eligible employees may contribute a percentage of their salary. The Corporation matches 50 percent of an eligible employee's contribution on the first 6 percent that the employee defers, and may make a discretionary contribution payable either in cash or the Corporation's common stock based upon the Corporation's profitability and approval of the Board of Directors. Employees are generally eligible to participate upon completing one year of service and having attained age 21. Employer contributions become 20 percent vested when an employee has completed two years of service, and vest at a rate of 20 percent per year thereafter. The Corporation recognized expense of $298,335 in 1995, $188,777 in 1994 and $133,548 in 1993 related to the Salary Savings ESOP Plan. POSTRETIREMENT PLANS In addition to the Corporation's retirement plans, the Corporation has various unfunded postretirement plans which provide medical benefits and life insurance benefits to its retirees. The postretirement health care plans vary, the most stringent of which are contributory and contain other cost- sharing features such as deductibles and co-insurance. The life insurance plans are noncontributory. The amounts recognized in the Corporation's consolidated financial statements are as follows (in thousands): Year Ended December 31 1995 1994 -------- -------- Accumulated postretirement benefit obligation: Current retirees $ 186 $ 247 Fully eligible actives 50 83 Other actives 594 702 -------- -------- Total Accumulated Postretirement Benefit Obligation 830 1,032 Unrecognized net transition obligation (760) (809) Unrecognized net gain 255 19 Unrecognized prior service cost (9) (22) -------- -------- Accrued postretirement benefit liability $ 316 $ 220 ======= ======= Net periodic postretirement benefit cost included the following components (in thousands): Year Ended December 31 1995 1994 1993 ------- ------- ------- Service cost $ 60 $ 75 $ 69 Interest cost 68 73 58 Amortization of transition obligation 38 49 50 ------- ------- ------- Net periodic postretirement benefit cost $ 166 $ 197 $ 177 ======= ======= ======= A 7.50 % annual rate of increase in the per capita costs of covered health care benefits is assumed for 1996, gradually decreasing to 4.75 % by the year 2001. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $74,000 and increase the aggregate of the service and interest cost component of net periodic postretirement benefit cost for 1995 by $15,000. A discount rate of 7.00 % was used to determine the accumulated postretirement benefit obligation. INCOME TAXES Income tax expense consists of the following (in thousands): Year Ended December 31 1995 1994 1993 ------- ------- ------- Current income taxes: Federal taxes $ 9,767 $ 8,406 $ 6,372 State taxes 281 256 375 ------- ------- ------- 10,048 8,662 6,747 Deferred income taxes: Federal taxes (572) (1,646) (1,656) State taxes 2 (27) 8 ------- ------- ------- $ 9,478 $ 6,989 $ 5,099 ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands): December 31 1995 1994 ------- ------- Deferred tax assets: Allowance for loan losses $ 7,205 $ 6,707 Deferred compensation 234 213 Loan fees 236 450 Other 2,799 2,366 ------- ------- TOTAL GROSS DEFERRED TAX ASSETS 10,474 9,736 ------- ------- Deferred tax liabilities: Depreciation (930) (968) Dealer reserve participation (957) (957) Unrealized gains on securities available for sale (1,806) 89 Securitization of indirect automobile loans (291) (237) Leasing (285) (48) Other (2,033) (1,921) ------- ------- TOTAL GROSS DEFERRED TAX LIABILITIES (6,302) (4,042) ------- ------- 4,172 5,694 Less valuation allowance 197 ------- ------- NET DEFERRED TAX ASSETS $ 4,172 $ 5,497 ======= ======= The valuation allowance for deferred taxes was related to state tax benefits. Following is a reconciliation between tax expense using federal statutory rates and actual tax expense (in thousands): Year Ended December 31 1995 1994 1993 ---------- ---------- ---------- Federal statutory tax 35.0% 35.0% 35.0% Effect of nontaxable interest and dividend income (4.4) (6.3) (6.2) State taxes .6 .7 1.5 Goodwill .5 .7 Other items .7 2.9 .5 ----- ----- ----- Actual effective taxes 32.4% 33.0% 30.8% ====== ====== ====== Included in loan income is interest on tax-free loans of $2.4 million, $2.5 million and $2.6 million for 1995, 1994 and 1993, respectively. The related income tax expense on securities gains amounting to $185,000, $449,000 and $262,000 for 1995, 1994 and 1993, respectively, is included in income taxes. CASH FLOW INFORMATION Following is a summary of supplemental cash flow information (in thousands): Year Ended December 31 1995 1994 1993 ---------- ---------- ---------- Cash paid during year for: Interest $ 67,975 $ 55,195 $ 61,234 Income taxes 9,898 7,888 6,191 Non-cash Investing and Financing Activities: Acquisition of real estate in settlement of loans $ 2,436 $ 3,286 $ 2,655 Loans granted in the sale of other real estate 321 1,267 4,704 Transfers and reclassifications of investment securities to securities available for sale 91,982 17,257 Loans reclassified from held for sale 119,858 REGULATORY MATTERS The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and banking subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulators to ensure capital adequacy require the Corporation and its banking subsidiaries to maintain minimum amounts and ratios of total and tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of tier 1 capital to average assets (as defined). Management believes, as of December 31, 1996, that the Corporation and each of its banking subsidiaries meet all capital adequacy requirements to which they are subject. Capital ratios as of December 31, 1995 for the Corporation and its significant subsidiary, First National Bank of Pennsylvania, are as follows (dollars in thousands): TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------- ----------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ------- -------- ------- -------- ------- CORPORATION: Total Capital $193,755 13.5% $114,706 8.0% $143,382 10.0% (to risk-weighted assets) Tier 1 Capital 167,364 11.7 57,353 4.0 86,029 6.0 (to risk-weighted assets) Tier 1 Capital 167,364 8.2 81,770 4.0 102,212 5.0 (to average assets) FIRST NATIONAL BANK OF PENNSYLVANIA: Total Capital $ 74,806 11.8% $ 50,910 8.0% $ 63,637 10.0% (to risk-weighted assets) Tier 1 Capital 66,813 10.5 25,455 4.0 38,182 6.0 (to risk-weighted assets) Tier 1 Capital 66,813 7.5 35,652 4.0 44,565 5.0 (to average assets) As of December 31, 1995, the Corporation and each of its banking subsidiaries have been categorized by the various regulators as "well capitalized" under the regulatory framework for prompt corrective action. The Corporation's banking subsidiaries were required to maintain aggregate reserves amounting to $22.8 million at December 31, 1995 to satisfy federal regulatory requirements. The Corporation also maintains deposits for various services such as check clearing. Certain limitations exist under applicable law and regulations by regulatory agencies regarding dividend payments to a parent by its subsidiaries. As of December 31, 1995, the subsidiaries had $23.6 million of retained earnings available for distribution as dividends without prior regulatory approval. Under current Federal Reserve regulations, the Corporation's banking subsidiaries are limited in the amount they may lend to non-bank affiliates, including the Corporation. Such loans must be secured by specified collateral. In addition, any such loans to a single non-bank affiliate may not exceed 10% of any banking subsidiary's capital and surplus and the aggregate of loans to all such affiliates may not exceed 20%. The maximum amount that may be borrowed by the parent company under these provisions approximated $19.2 million at December 31, 1995. PARENT COMPANY FINANCIAL STATEMENTS Below is condensed financial information of F.N.B. Corporation (parent company only). In this information, the parent's investments in subsidiaries are stated at cost plus equity in undistributed earnings of subsidiaries since acquisition. This information should be read in conjunction with the consolidated financial statements. BALANCE SHEET (IN THOUSANDS): December 31 1995 1994 -------- -------- ASSETS Cash $ 16 $ 13 Short-term investments 2,928 2,722 Advances to subsidiaries 76,849 70,742 Receivables 4,761 3,087 Securities available for sale 6,720 5,608 Investment in bank subsidiaries 151,528 141,391 Investment in non-bank subsidiaries 20,869 19,691 -------- -------- $263,671 $243,254 ======== ======== LIABILITIES Other liabilities $ 4,092 $ 2,695 Short-term borrowings 50,362 52,085 Long-term debt 37,394 36,454 -------- -------- TOTAL LIABILITIES 91,848 91,234 -------- -------- STOCKHOLDERS' EQUITY 171,823 152,020 -------- -------- TOTAL $263,671 $243,254 ======== ======== INCOME STATEMENT (IN THOUSANDS) Year Ended December 31 1995 1994 1993 -------- -------- -------- INCOME Dividend income from subsidiaries: Bank $ 8,942 $ 6,849 $ 6,478 Non-bank 3,706 3,596 2,902 ------- ------- ------- 12,648 10,445 9,380 Gain on sale of securities 512 1,287 403 Interest income 4,924 4,062 193 Other income 206 190 189 ------- ------- ------- TOTAL INCOME 18,290 15,984 10,165 ------- ------- ------- EXPENSES Interest expense 5,972 5,465 1,967 Service fees 609 559 461 Other expenses 1,297 1,239 620 ------- ------- ------- TOTAL EXPENSES 7,878 7,263 3,048 ------- ------- ------- INCOME BEFORE TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 10,412 8,721 7,117 Income tax credit 700 430 846 ------- ------- ------- 11,112 9,151 7,963 ------- ------- ------- Equity in undistributed income of subsidiaries: Bank 7,679 4,876 1,001 Non-bank 999 168 2,513 ------- ------- ------- 8,678 5,044 3,514 ------- ------- ------- NET INCOME $19,790 $14,195 $11,477 ======= ======= ======= STATEMENT OF CASH FLOWS (IN THOUSANDS) Year Ended December 31 1995 1994 1993 -------- -------- -------- OPERATING ACTIVITIES Net income $ 19,790 $ 14,195 $ 11,477 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of securities (512) (1,287) (403) Undistributed earnings of subsidiaries (8,678) (5,044) (3,514) Other, net (882) (1,417) (1,760) -------- -------- -------- Net cash flows from operating activities 9,718 6,447 5,800 INVESTING ACTIVITIES Purchase of securities (383) (400) (283) Proceeds from sale of securities 922 2,346 975 Advances from (to) subsidiaries (6,107) (4,779) 688 Investment in subsidiaries 372 (16,579) (1,046) -------- -------- -------- Net cash flows from investing activities (5,196) (19,412) 334 FINANCING ACTIVITIES Net decrease in due to non-bank subsidiary (4,295) (3,020) Net decrease in short-term borrowings (1,723) (1,210) (1,000) Decrease in long-term debt (5,334) (7,400) (35) Increase in long-term debt 6,274 15,275 Purchase of common stock (1,447) (1,143) (1,286) Sale of common stock 1,716 14,862 2,216 Cash dividends paid (4,005) (3,113) (3,008) -------- -------- -------- Net cash flows from financing activities (4,519) 12,976 (6,133) -------- -------- -------- NET INCREASE IN CASH 3 11 1 Cash at beginning of year 13 2 1 -------- -------- -------- CASH AT END OF YEAR $ 16 $ 13 $ 2 ======== ======== ======== CASH PAID Interest $ 5,009 $ 4,433 $ 1,908 Income taxes 39 295 Subordinated notes, included within short-term borrowings and long-term debt, are unsecured and subordinated to other indebtedness of the Corporation. At December 31, 1995, $74.6 million principal amount of such notes is redeemable prior to maturity by the holder at a discount equal to one month of interest on short-term notes or three months of interest on long-term notes. The issuer may require the holder to give 30 days prior written notice. No sinking fund has been established to retire the notes. The weighted average interest rate was 6.63% at December 31, 1995 and 6.40% at December 31, 1994. The subordinated notes are scheduled to mature in various amounts annually from 1996 through the year 2005. Following is a summary of the combined aggregate scheduled annual maturities for each year following December 31, 1995 (in thousands): 1996 $63,139 1997 5,222 1998 2,254 1999 874 2000 943 Later years 12,324 FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Due from Banks: For these short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities: For both securities available for sale and securities held to maturity, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans: The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits: The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity deposits is estimated by discounting future cash flows using rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefits that result from low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. Short-Term Borrowings: The carrying amounts for short-term borrowings approximate fair value for amounts that mature in 90 days or less. The fair value of subordinated notes is estimated by discounting future cash flows using rates currently offered. Long-Term Debt: The fair value of long-term debt is estimated by discounting future cash flows based on the market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities. The estimated fair values of the Corporation's financial instruments are as follows (in thousands): 1995 1994 ---------------------- ---------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- FINANCIAL ASSETS Cash and short-term investments $ 141,593 $ 141,593 $ 82,172 $ 82,172 Securities available for sale 271,421 271,421 138,255 138,255 Securities held to maturity 160,803 160,747 288,756 276,150 Net loans 1,438,011 1,443,757 1,358,515 1,339,969 FINANCIAL LIABILITIES Deposits $1,766,940 $1,772,185 $1,626,650 $1,622,359 Short-term borrowings 73,501 73,501 86,938 86,938 Long-term debt 49,755 49,514 55,517 54,864 F.N.B. CORPORATION AND SUBSIDIARIES SUPPLEMENTAL SELECTED AND QUARTERLY FINANCIAL DATA SELECTED SUPPLEMENTAL FINANCIAL DATA (Dollars in thousands, except per share data) YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- Total interest income $ 160,740 $ 140,294 $ 136,698 $ 134,857 $ 131,100 Total interest expense 69,812 56,534 59,998 66,726 76,699 Net interest income 90,928 83,760 76,700 68,131 54,401 Provision for loan losses 6,487 9,055 9,738 15,443 5,608 Total non-interest income 17,717 15,824 17,321 14,100 11,380 Total non-interest expenses 72,890 69,345 67,707 56,301 46,248 Net income 19,790 14,195 11,477 7,492 10,332 AT YEAR-END Total assets $2,091,417 $1,949,393 $1,867,785 $1,844,123 $1,465,747 Deposits 1,766,940 1,626,650 1,616,109 1,611,984 1,257,422 Net loans 1,438,011 1,358,515 1,231,605 1,136,226 1,051,222 Long-term debt 49,755 55,517 31,297 32,823 18,520 Preferred stock 4,516 4,563 4,582 4,605 292 Total stockholders' equity 171,823 152,020 127,255 118,081 99,608 PER COMMON SHARE Net income Primary $ 1.56 $ 1.14 $ .99 $.68 $1.03 Fully diluted 1.52 1.13 .99 .68 1.02 Cash dividends (FNB) .35 .25 .24 .23 .21 Book value 13.50 11.89 10.94 10.14 9.87 RATIOS Return on average assets .98% .74% .62% .46% .73% Return on average equity 12.06 9.72 9.26 6.70 10.80 Dividends payout ratio 17.30 17.39 21.21 29.41 19.42 Average equity to average assets 8.12 7.62 6.70 6.85 6.83 SUPPLEMENTAL QUARTERLY EARNINGS SUMMARY (Dollars in thousands, except per share data) QUARTER ENDED 1995 MAR. 31 JUNE 30 SEPT 30 DEC. 31 --------- --------- --------- --------- Total interest income $37,985 $39,951 $41,449 $41,355 Total interest expense 16,045 17,559 18,280 17,928 Net interest income 21,940 22,392 23,169 23,427 Provision for loan losses 1,691 1,558 1,561 1,677 Total non-interest income 3,943 4,938 4,235 4,601 Total non-interest expenses 18,123 18,779 17,954 18,034 Net income 4,138 4,664 5,357 5,631 PER COMMON SHARE Net income Primary $.34 $.37 $.43 $.43 Fully-diluted .33 .36 .41 .42 Cash dividends (FNB) .06 .07 .10 .12 QUARTER ENDED 1994 MAR. 31 JUNE 30 SEPT 30 DEC. 31 --------- --------- --------- --------- Total interest income $33,662 $34,550 $35,414 $36,668 Total interest expense 13,638 13,674 14,336 14,886 Net interest income 20,024 20,876 21,078 21,782 Provision for loan losses 2,761 2,235 1,959 2,100 Total non-interest income 3,953 3,957 3,576 4,338 Total non-interest expenses 16,743 17,458 16,932 18,212 Net income 3,064 3,474 3,769 3,888 PER COMMON SHARE Net income Primary $.27 $.27 $.30 $.30 Fully-diluted .27 .27 .29 .29 Cash dividends (FNB) .06 .06 .06 .07 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial review summarizes the combined financial condition and results of operations giving retroactive effect to the merger of Southwest Banks, Inc.(Southwest) with and into F.N.B. Corporation (the Corporation), and is intended to be read in conjunction with the Supplemental Consolidated Financial Statements and accompanying Notes to those statements. The merger of the Corporation and Southwest was consummated on January 21, 1997, and has been accounted for on a pooling-of-interests basis. The Corporation issued 2,851,907 shares of common stock in exchange for all of the outstanding common stock of Southwest. This financial review is presented as if the merger had been consummated for all periods presented. RESULTS OF OPERATIONS Net income increased 39.4% from $14.2 million in 1994 to $19.8 million in 1995. Primary earnings per share was $1.56 and $1.14 for 1995 and 1994, while fully diluted earnings per share was $1.52 and $1.13, respectively, for those same periods. The key factors to the increase were improved credit quality, which allowed for lower loan loss provisions, an increase in interest earning assets and continuing efforts to reduce non-interest expense. These factors are further detailed in the discussion which follows. The Corporation's asset quality has improved steadily as indicated by several key credit ratios. At December 31, 1995 non-performing assets decreased to .62% of total assets compared to .84% at December 31, 1994. The allowance for loan losses improved to 1.58% of total loans compared to 1.56% a year ago. The ratio of net charge-offs to average loans outstanding decreased in 1995 to .34% compared to a 1994 ratio of .36%. Common comparative ratios for results of operations include the return on average assets and the return on average equity. The Corporation's return on average assets was .98% for 1995 compared to .74% for 1994, while the Corporation's return on average equity was 12.06% for 1995 compared to 9.72% for 1994. NET INTEREST INCOME The following table provides information regarding the average balances and yields and rates on interest earning assets and interest bearing liabilities (dollars in thousands):
Year Ended December 31, 1995 1994 1993 ------------------------------ ------------------------------ ------------------------------ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ASSETS Interest earning assets: Interest bearing deposits with banks $ 4,620 $ 296 6.41% $ 6,267 $ 221 3.53% $ 8,734 $ 173 1.98% Federal funds sold 33,103 1,957 5.91 22,217 845 3.80 26,418 848 3.21 Taxable investment securities (1) 377,638 21,604 5.72 401,328 20,998 5.23 461,619 25,600 5.55 Non-taxable investment securities 263,993 6,348 2.40 242,662 5,370 2.21 214,421 5,114 2.39 Loans (2)(3) 1,419,746 135,830 9.57 1,305,226 117,233 8.98 1,204,567 109,968 9.13 ---------- ------- ------- ---------- ------- ---------- ------- Total interest earning assets 1,890,942 162,835 8.61 1,790,947 142,525 7.96 1,731,795 138,420 7.99 ---------- ------- ------- ---------- ------- ---------- ------- Cash and due from banks 71,031 65,444 56,696 Allowance for loan losses (22,577) (20,289) (17,387) Premises and equipment 35,603 30,467 27,682 Other assets 45,502 48,858 51,259 ---------- ---------- ---------- $2,020,489 $1,915,427 $1,849,745 ========== ========== ========== LIABILITIES Interest bearing liabilities: Deposits: Interest bearing demand $ 263,993 6,348 2.40 $ 242,662 5,370 2.21 $ 214,421 5,114 2.39 Savings 439,977 11,076 2.52 513,942 12,676 2.47 527,186 15,054 2.86 Other time 792,769 43,817 5.53 684,067 31,641 4.62 699,865 33,905 4.84 Short-term borrowings 92,987 5,313 5.71 82,747 3,978 4.81 68,669 3,147 4.58 Long-term debt 39,856 3,258 8.18 33,000 2,869 8.69 31,484 2,778 8.82 ---------- -------- ---------- -------- ---------- --------- Total interest bearing liabilities 1,692,582 69,812 4.28 1,556,418 56,534 3.63 1,541,625 59,998 3.89 -------- -------- --------- Non-interest bearing demand deposits 195,226 182,998 158,041 Other liabilities 31,650 29,558 25,654 ---------- ---------- ---------- 1,856,458 1,768,974 1,725,320 ---------- ---------- ---------- MINORITY INTEREST 528 505 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock 4,555 4,576 4,600 Common stock 22,355 20,897 18,332 Additional paid-in capital 78,647 67,992 53,607 Retained earnings 57,165 51,368 47,489 Net unrealized securities gains 2,082 1,383 Treasury stock (505) (291) (108) Employee stock ownership plan obligation (268) ---------- ---------- ---------- Total stockholders' equity 164,031 145,925 123,920 ---------- ---------- ---------- $2,020,489 $1,915,427 $1,849,745 ========== ========== ========== Excess of interest earning assets over interest bearing liabilities $ 261,360 $ 234,529 $ 189,870 ========== ========== ========== Net interest income $ 93,023 $ 85,991 $ 78,422 ======== ======== ======== Net interest spread 4.33% 4.33% 4.10% ===== ===== ===== Net interest margin (4) 4.92% 4.80% 4.53% ===== ===== =====
(1) The average balances and yields earned on securities are based on historical cost. (2) The amounts are reflected on a fully taxable equivalent basis using the federal statutory tax rate of 35%, adjusted for certain federal tax preferences. (3) Average outstanding includes non-accrual loans. Loans consist of average total loans less average unearned income. The amount of loan fees included in interest income on loans is immaterial. (4) Net interest margin is calculated by dividing the difference between total interest earned and total interest paid by total interest earning assets. Net interest income, the Corporation's primary source of earnings, is the amount by which interest and fees generated by earning assets, primarily loans and securities, exceed interest expense on deposits and borrowed funds. Net interest income, on a fully taxable equivalent basis, totaled $93.0 million in 1995 versus $86.0 million in 1994. Net interest income consisted of interest income of $162.8 million and interest expense of $69.8 million in 1995, compared to $142.5 million and $56.5 million for each, respectively, in 1994. Net interest income as a percentage of average earning assets (commonly referred to as the margin) rose to 4.92% in 1995 compared to 4.80% in 1994. Interest income on loans increased 15.9% from $117.2 million in 1994 to $135.8 million in 1995. This increase is the result of greater loan demand and higher interest rates throughout most of 1995 as compared to 1994. Average loans increased 8.8% from 1994. Interest on federal funds sold increased 131.6% to $2.0 million in 1995. This increase is the result of the rising market interest rates and an increase in the level of federal funds held by the Corporation. Interest expense on deposits increased 23.3% to $61.2 million in 1995, due to an increase in interest on time deposits from $31.6 million in 1994 to $43.8 million in 1995. This is primarily the result of the increasing market interest rate environment and the shift in the deposit mix from transaction and savings accounts into higher paying certificate accounts. The Corporation monitors interest rate sensitivity by measuring the impact that future changes in interest rates will have on net interest income. Through its asset/liability management and pricing policies, management has strived to optimize net interest income while reducing the effects of changes in interest rates. (See "Liquidity and Interest Rate Sensitivity" discussion). The following table sets forth certain information regarding changes in net interest income attributable to changes in the volumes of interest earning assets and interest bearing liabilities and changes in the rates for the periods indicated (in thousands): Year Ended December 31, 1995 1994 ---------------------- ---------------------- VOLUME RATE NET VOLUME RATE NET ------ ------- ------- ------ ------- ------- INTEREST INCOME Interest bearing deposits with banks $ (36) $ 111 $ 75 $ (27) $ 75 $ 48 Federal funds sold 521 591 112 (159) 156 (3) Investment securities (1,075) 1,601 526 (1,869) (1,336) (3,205) Loans 10,634 7,963 18,597 9,043 (1,778) 7,265 ------- ------- ------- ------- -------- ------- 10,044 10,266 20,310 6,988 (2,883) 4,105 ------- ------- ------- ------- -------- ------ INTEREST EXPENSE Deposits: Interest bearing 494 484 978 598 (342) 256 Savings (1,605) 5 (1,600) (372) (2,006) (2,378) Other time 5,477 6,699 12,176 (775) (1,489) (2,264) Short-term borrowings 531 804 1,335 667 164 831 Long-term debt 542 (153) 389 131 (40) 91 ------- ------- ------- ------- -------- ------ 5,439 7,839 13,278 249 (3,713) (3,464) ------- ------- ------- ------- -------- ------ NET CHANGE $ 4,605 $ 2,427 $ 7,032 $ 6,739 $ 830 $ 7,569 ======= ======= ======= ======= ======== ======= The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the absolute relative size of the rate and volume changes. PROVISION FOR LOAN LOSSES The provision for loan losses charged to operations is a direct result of management's analysis of the adequacy of the allowance for loan losses which takes into consideration factors relevant to the collectibility of the existing portfolio. The provision for loan losses decreased 28.4% to $6.5 million in 1995. The decrease in the provision for loan losses is a direct result of the continuing improvement in asset quality at the Corporation. (See "Non-Performing Loans and Allowance for Loan Losses" discussion). NON-INTEREST INCOME Total non-interest income increased 12.0% from $15.8 million in 1994 to $17.7 million in 1995. This increase was attributable to increases in service charges and gains on the sale of loans, offset by a decrease in gains on the sale of securities. Service charges increased 24.4% from $7.9 million in 1994 to $9.8 million in 1995. Revenue was recognized as a result of certain increases in and expansion of retail fees charged to customers, as well as increases in both total loans and total deposits. Gains on the sale of loans increased $603,000 in 1995 over that of 1994, as 1994 was negatively impacted by a $200,000 adjustment to the amortization of excess servicing on securitized loans. The remaining difference reflects rapidly rising rates in 1994 which made it difficult to sell at or above par value and more stable rates in 1995 which allowed sales at a premium in many cases. Gains on the sale of securities decreased 58.7% due to a reduction in the sale of securities during 1995. The market value on the securities available for sale increased in 1995, contributing to an increase in net unrealized gains to $3.3 million. NON-INTEREST EXPENSES Total non-interest expense increased from $69.3 million in 1994 to $72.9 million in 1995. The 5.1% increase is primarily attributable to increases in salaries and employee benefits and net occupancy offset by a reduction in premiums charged for deposit insurance. Salaries and personnel expense increased 10.2% in 1995. This increase is due to the growth in the Corporations' Florida affiliates which required the opening of a new branch as well as an increase in full time equivalent employees. In addition, the meeting of various corporate wide financial and productivity goals resulted in a $1.0 million increase in incentive compensation. Deposit insurance decreased 30.4% in 1995. This is the result of the Federal Deposit Insurance Corporation (FDIC) voting to lower the insurance premiums for banks, now that the Bank Insurance Fund (BIF) has been funded to the required level. Conversely, based on Financial Institutions Reform, Recovery and Enforcement Act of 1989 requirements, the Savings Association Insurance Fund (SAIF) was under-funded at December 31, 1995 and therefore, deposit premiums on SAIF insured deposits did not change. On September 30, 1996, Congress enacted into law the Deposit Insurance Fund Act of 1996, which provided among other items, a provision to re-capitalize SAIF. The legislation included a one-time assessment based on all deposits insured by the SAIF, including those held by chartered commercial banks as a result of previous mergers. The Corporation was required to pay a one-time assessment of $2.8 million. The legislation also included a provision that will result in a modest reduction in future annual deposit insurance. INCOME TAXES The Corporation recognized income tax expense of $9.5 million for 1995 compared to $7.0 million for 1994 primarily due to the fact that the Corporation had more taxable income in 1995. The 1995 effective tax rate of 32.4% was below the 35% federal statutory tax rate due to the tax benefits resulting from tax-exempt securities income and excludable dividend income. A complete analysis of income taxes is furnished in the Notes to Supplemental Financial Statements. LIQUIDITY AND INTEREST RATE SENSITIVITY The Corporation monitors its liquidity position on an ongoing basis to assure that it is able to meet the need for funds at all times. Given the monetary nature of its assets and liabilities and the significant source of liquidity provided by its securities portfolio, the Corporation generally has sufficient sources of funds available as needed to meet its routine, operational cash needs. Securities due to mature within one year, which will provide a source of short-term liquidity, amounted to $121.2 million or 28.0% of the investment portfolio. In addition to normal liquidity provided from operations, the Corporation has external sources of funds available should it desire to use them. These include approved lines of credit with several major domestic banks, of which all were unused at the end of 1995. To further meet its liquidity needs, the Corporation also has access to the Federal Home Loan Bank and other uncommitted funding sources. Interest rate sensitivity measures the impact that future changes in interest rates will have on net interest income. The cumulative gap reflects a point-in-time net position of assets and liabilities repricing in specified time periods. The gap is one measurement of risk inherent in a balance sheet as it relates to changes in interest rates and their effect on net interest income. The gap analysis which follows is based on a combination of asset and liability amortizations, maturities and repricing opportunities. Non-maturity deposit balances have been allocated to various repricing intervals to more accurately depict their true behavior and characteristics. This allocation was done in accordance with FDIC guidance. Based on the cumulative one year gap in this table and assuming no restructuring or modifications to asset/liability composition, a rise in interest rates would have a negative impact on net interest income. Gap analyses alone do not accurately measure the magnitude of changes in net interest income since changes in interest rates do not affect all categories of assets and liabilities equally or simultaneously. Recognizing that traditional gap analyses do not measure dynamically the exposure to interest rate changes, the Corporation also relies on simulation modeling to measure the effect of upward and downward interest rate changes on net interest income. Through the review of gap analyses and simulation modeling, management continually monitors the Corporation's exposure to changing interest rates. Management attempts to mitigate repricing mismatches through asset and liability pricing and matched maturity funding. Following is the gap analysis as of December 31, 1995 (dollars in thousands): WITHIN 4-12 1-5 OVER 3 MONTHS MONTHS YEARS 5 YEARS TOTAL --------- --------- --------- --------- ------- INTEREST EARNING ASSETS Interest bearing deposits with banks $ 3,503 $ 100 $ 3,603 Federal funds sold 54,059 54,059 Investment securities 31,943 96,073 $ 257,385 $ 46,823 432,224 Loans, net of unearned income 305,473 317,634 548,575 289,464 1,461,146 --------- --------- --------- -------- ---------- $ 394,978 413,807 805,960 336,287 1,951,032 Other assets 140,385 140,385 --------- --------- --------- -------- ---------- $ 394,978 $ 413,807 $ 805,960 $ 476,672 $2,091,417 ========= ========= ========= ========= ========== INTEREST BEARING LIABILITIES Deposits: Interest checking $ 13,755 $ 41,266 $ 220,089 $ 16,160 $ 291,270 Savings 41,941 125,822 251,642 419,405 Time deposits 179,542 371,979 288,513 2,352 842,386 Short-term borrowings 40,553 15,983 16,965 73,501 Long-term debt 5,819 22,130 8,544 13,262 49,755 --------- --------- --------- --------- ---------- 281,610 577,180 785,753 31,774 1,676,317 Other liabilities 243,277 243,277 Stockholders' equity 171,823 171,823 --------- --------- --------- --------- ---------- $ 281,610 $ 577,180 $ 785,753 $ 446,874 $2,091,417 ========= ========= ========= ========= ========== PERIOD GAP $ 113,368 $(163,373) $ 20,207 $ 29,798 ========= ========= ========= ========= CUMULATIVE GAP $ 113,368 $ (50,005) $ (29,798) ========= ========= ========= RATE SENSITIVE ASSETS/RATE SENSITIVE LIABILITIES (CUMULATIVE) 1.40 .94 .98 1.16 ========= ========= ========= ========= CUMULATIVE GAP AS A PERCENT OF TOTAL ASSETS 5.4% (2.4)% (1.4)% ========= ========= ========= Following is a summary of the maturity distribution of certain loan categories based on remaining scheduled repayments of principal (in thousands): WITHIN ONE TO AFTER ONE YEAR FIVE YEARS FIVE-YEARS TOTAL ---------- ---------- ---------- --------- DECEMBER 31, 1995 Commercial, financial and agricultural $92,331 $42,014 $16,812 $151,157 Real Estate - construction 16,456 3,260 2,331 22,047 ------- ------- ------- -------- Total loans (excluding Real estate - mortgage and Installment loans to individuals) $108,787 $45,274 $19,143 $173,204 ======== ======= ======= ======== The total amount of loans due after one year includes $19.0 million with floating or adjustable rates of interest and $45.4 million had fixed rates of interest. FINANCIAL CONDITION LOAN PORTFOLIO Following is a summary of loans (dollars in thousands): December 31 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Commercial, financial and agricultural $ 151,157 $ 184,472 $ 189,362 $ 193,235 $ 185,072 Real estate-construction 22,047 37,985 25,841 24,645 23,917 Real estate-mortgage 925,644 807,354 684,420 651,915 605,173 Installment loans to individuals 379,011 366,616 275,563 263,904 275,183 Unearned income (26,867) (22,339) (22,377) (22,073) (25,665) --------- -------- -------- --------- --------- 1,450,992 1,374,088 1,152,809 1,111,626 1,063,680 Loans held for sale: Real estate-mortgage 7,919 5,071 68,175 3,116 Installment loans to individuals 2,235 833 27,803 36,011 ---------- ---------- --------- --------- --------- 10,154 5,904 95,978 39,127 ---------- ---------- --------- --------- --------- $1,461,146 $1,379,992 $1,248,787 $1,150,753 $1,063,680 ========== ========== ========== ========== ========== The Corporation's lending philosophy is to minimize credit losses by utilizing credit approval standards, diversifying its loan portfolio by industry and borrower conducting ongoing review and management of the loan portfolio. Loans increased 5.9% from 1994. The ratio of loans to deposits at the end of 1995 was 82.7%, down slightly from a ratio of 84.8% at the end of 1994. During 1995, the Corporation converted its data processing system. The new system allows for the separate classification of commercial real estate loans. The 1995 balances reflect commercial real estate loans within the real estate - mortgage category. Such loans were previously classified within the commercial, financial and agricultural category. During 1995 the Corporation sold $16.1 million in fixed rate residential mortgages to the Federal National Mortgage Association (FNMA). The sales allowed the Corporation to avoid the potential interest rate risk of those fixed rate loans in a rising rate environment. Additionally, it created liquidity for the Corporation to continue to offer credit availability to the market it serves. All of the mortgages were sold with the servicing retained by the Corporation. In May of 1995, the Financial Accounting Standards Board issued FAS No. 122, "accounting for Mortgage Servicing Rights," an amendment of FAS No. 65. This Statement, which was adopted during the first quarter of 1996, allows entities which originate mortgage loans for sale to recognize as separate assets rights to service these loans. Implementations of this Statement did not have a material effect on the Corporation's results of operations or financial position. In 1995, total installment loans to individuals increased 3.4% to $379.0 million. The growth reflects a continuation of strong demand for indirect automobile loans as well as revolving lines of credit. Through its consumer finance subsidiary, the Corporation has initiated a non-prime used motor vehicle program, purchasing loans form various dealers in its market area. These non-prime loans totaled $24.9 million at December 31, 1995. The commercial loan portfolio consists principally of loans to small- and medium-sized businesses within the Corporation's primary market area of western Pennsylvania and eastern Ohio. The Corporation generally avoids making significant loans to any single borrower in order to minimize credit risk. During 1994, the Corporation reclassified $119.9 million of residential mortgages and indirect installment loans from the held for sale category into its permanent loan portfolio. This action was taken to more clearly reflect management's intent relative to portfolio lending activities by specifically defining certain loan originations that would be sold in the secondary market. At the time of this reclassification, the book value of those loans approximated their market value. As of December 31, 1995, 1994 and 1993, no concentrations of loans exceeding 10% of total loans existed which were not disclosed as a separate category of loans. NON-PERFORMING LOANS Non-performing loans include non-accrual loans and restructured loans. Non-accrual loans represent loans on which interest accruals have been discontinued. Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Following is a summary of non-performing loans (dollars in thousands): December 31 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- Non-accrual loans $ 6,622 $ 9,926 $10,262 $ 9,179 $15,085 Restructured loans 3,075 3,157 3,236 1,388 1,448 ------- ------- ------- ------- ------- $ 9,697 $13,083 $13,498 $10,567 $16,533 ======= ======= ======= ======= ======= Non-performing loans as a percentage of total loans .66% .95% 1.08% .92% 1.55% Following is a table showing the amounts of contractual interest income and actual interest income recorded on non-accrual and restructured loans (in thousands): Year Ended December 31 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ Gross interest income that would have been recorded if the non-performing loans had been current and in accordance with their original terms $1,113 $1,682 $1,738 $1,555 $1,724 Interest income included in income on the non-performing loans 590 636 671 883 940 Following is a summary of loans 90 days or more past due, on which interest accruals continue (dollars in thousands): December 31 1995 1994 1993 1992 1991 ---------- ---------- ----------- ----------- ------- Loans 90 days or more past due $ 3,848 $ 2,621 $ 3,422 $ 4,254 $ 7,433 Loans 90 days or more past due as a percentage of total loans .26% .19% .27% .37% .70% As of December 31, 1995, management is not aware of any other loans where there are serious doubts as to the ability of such borrowers to comply with the present repayment terms. ALLOWANCE FOR LOAN LOSSES Management's analysis of the allowance for loan losses includes the evaluation of the loan portfolio based on internally generated loan review reports and the historical loss experience of the remaining balances of the various homogeneous loan pools which comprise the loan portfolio. Specific factors which are evaluated include the previous loan loss experience with the customer, the status of past due interest and principal payments on the loan, the collateral position of the loan, the quality of financial information supplied by the borrower and the general financial condition of the borrower. Historical loss experience on the remaining portfolio segments is considered in conjunction with the current status of economic conditions, loan loss trends, delinquency and non-accrual trends, credit administration and concentrations of credit and off balance sheet risk. Following is a summary of changes in the allowance for loan losses (dollars in thousands): Year Ended December 31 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- Balance at beginning of year $21,477 $17,182 $15,428 $12,458 $10,582 Addition arising in purchase transactions 376 1,197 Loss reserves transferred on loans sold (893) (685) (408) Charge-offs: Real estate - mortgage (560) (1,454) (549) (2,189) (1,113) Installment loans to individuals (5,331) (3,796) (3,999) (4,020) (2,647) Commercial, financial and agricultural (773) (1,319) (3,999) (6,918) (1,674) ------- ------- ------- ------- ------- (6,664) (6,569) (8,479) (13,127) (5,434) Recoveries: Real estate - mortgage 189 98 173 209 196 Installment loans to individuals 1,105 963 782 712 611 Commercial, financial and agricultural 541 748 433 42 106 ------- ------- ------- ------- ------- Net charge-offs (4,829) (4,760) (7,091) (12,164) (4,521) Provision for loan losses 6,487 9,055 9,738 15,443 5,608 ------- ------- ------- ------- ------- Balance at end of year $23,135 $21,477 $17,182 $15,428 $12,458 ======= ======= ======= ======= ======= Net charge-offs as a percent of average loans, net of unearned income .34% .36% .59% 1.11% .45% Allowance for loan losses as a percent of total loans, net of unearned income 1.58% 1.56% 1.38% 1.34% 1.17% Allowance for loan losses as a percent of non-performing loans 238.57% 164.16% 127.29% 146.00% 75.35% Consistent with the growth in installment loans to individuals, the Corporation has experienced an increase in charge-offs. Installment loans to individuals are generally charged off no later than a predetermined number of days past due on a contractual basis or earlier in the event of bankruptcy. During 1995, charge-offs increased from $3.8 million to $5.3 million while delinquencies increased from 2.2% at December 31, 1994 to 5.1% at December 31, 1995. The Corporation has allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within each of the categories of loans shown in the table below. The allocation of the allowance should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Furthermore, the portion allocated to each loan category is not the sole amount available for future losses within such categories since the total allowance is a general allowance applicable to the entire portfolio. Following shows the allocation of the allowance for loan losses (in thousands): % OF % OF % OF % OF % OF Year Ended December 31 1995 LOANS 1994 LOANS 1993 LOANS 1992 LOANS 1991 LOANS ------- ------ ------- ------ ------- ------ ------- ------ ------- ------- Commercial, financial and agricultural $ 5,377 10.4% $ 7,506 13.4% $ 6,715 16.4% $ 5,988 17.4% $ 3,827 17.4% Real estate - construction 55 1.5 178 2.8 458 2.2 455 2.2 45 2.2 Real estate - mortgage 3,153 63.8 3,447 58.7 2,464 59.4 2,290 58.6 3,070 56.9 Installment loans to individuals 6,358 26.1 5,036 26.7 4,529 23.9 4,287 23.7 4,197 25.9 Unallocated portion 8,192 (1.8) 5,310 (1.6) 3,016 (1.9) 2,408 (1.9) 1,319 (2.4) ------ ---- ------- ---- ------- ---- ------ ---- ------ ---- $23,135 100.0 $21,477 100.0 $17,182 100.0 $15,428 100.0 $12,458 100.0 ======= ======= ======= ======= =======
INVESTMENT ACTIVITY Investment activities serve to enhance overall yield on earning assets while supporting interest rate sensitivity and liquidity positions. Securities purchased with the intent and ability to retain until maturity are categorized as securities held to maturity and carried at amortized cost. All other securities are categorized as securities available for sale and must be marked to market. Under the guidelines of FAS No. 115, institutions that sell securities out of the securities held to maturity portfolio risk being forced to mark to market the remaining securities in the portfolio since they have not demonstrated their intent to hold these securities to maturity. The Financial Accounting Standards Board (FASB) approved an amnesty period during which institutions had the opportunity to redesignate securities under FAS 115. The Corporation approved an amnesty period in 1995 which institutions had the opportunity to redesignate securities under FAS 115. The FASB provided that securities may be reclassified from mid-November to December 31, 1995. During this period, the Corporation took advantage of this opportunity to reclass $92.0 million of securities held to maturity to securities available for sale. This movement allows the Corporation greater flexibility in managing its portfolio to take advantage of market conditions and provided an opportunity to better manage interest rate risk. The relatively short average maturity of all securities provides a source of liquidity to the Corporation and reduces the overall market risk of the portfolio. Excluding the effect of the reclassification, securities available for sale increased 29.7% while securities held to maturity decreased 12.5% due to maturing securities being used to fund loan demand. The following table indicates the respective maturities and weighted- average yields of investment securities as of December 31, 1995 (in thousands): Weighted Amount Average Yield --------- ------------- Obligations of U.S. Treasury and Other U.S. Government agencies: Maturing within one year $ 119,815 5.61% Maturing after one year within five years 225,872 6.09% Maturing after five years but within ten years 27,723 6.57% State & political subdivisions: Maturing within one year 1,275 10.78% Maturing after one year within five years 33,121 5.79% Maturing after five years but within ten years 6,573 6.85% Other securities: Maturing within one year 12 5.44% Maturing after one year within five years 2,024 5.83% Maturing after five years but within ten years 10 5.50% Maturing after ten years 10 2.80% No stated maturity 5,789 6.01% TOTAL --------- ------------- $ 432,224 5.98% ========= ============= The weighted average yields for tax exempt securities are computed on a tax equivalent basis. DEPOSITS AND SHORT-TERM BORROWINGS As a commercial bank holding company, the Corporation's primary source of funds is its deposits. Those deposits are provided by businesses and individuals located within the markets served by the Corporation's subsidiary banks and savings institution. At both December 31, 1995 and 1994, total deposits were $1.8 billion and $1.6 billion, respectively. The majority of this growth was within certificates of deposit and other time deposits which increased by $139.2 million. The increase in time deposits was a direct result of the higher interest rate environment. Customers chose to invest their money in higher- yielding certificates rather than lower-yielding transaction and savings accounts. Short-term borrowings, made up of repurchase agreements, federal funds purchased, notes payable and subordinated notes decreased 15.5% in 1995 to $83.5 million. The primary reason for this decrease was a lower level of federal funds purchased in 1995. As deposit growth was sufficient to fund loan demand. Subordinated notes are the largest component of short-term borrowings. At December 31, 1995, subordinated notes represented 64.4% of total short-term borrowings. Following is a summary of selected financial information on short-term subordinated notes (dollars in thousands): December 31 1995 1994 1993 -------- -------- -------- Balance at end of year $ 47,362 $ 48,085 $ 50,295 Maximum month end balance 47,675 56,126 50,295 Average balance during the year 45,912 52,830 45,341 Weighted average interest rates: At end of year 5.69% 5.21% 5.07% During the year 5.54 5.06 5.09 CAPITAL RESOURCES The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. The Corporation seeks to maintain a strong capital base to support its growth and expansion activities, to provide stability to current operations and to promote public confidence. The capital management function is an ongoing process. Central to this process is internal equity generation accomplished by earnings retention. During 1995, retained earnings increased $15.8 million as a result of earnings retention versus $11.1 million in 1994. Total cash dividends declared represented 20.21% of net income for 1995 compared to 21.91% for 1994. Book value per share was $14.00 at December 31, 1995, compared to $12.34 at December 31, 1994. 1994 VERSUS 1993 The Corporation's net income was $14.2 million for 1994 versus $11.5 million for 1993. Primary earnings per share were $1.14 and $.99 for 1994 and 1993, respectively. This improved performance was primarily a result of an increase in net interest income and the Corporation's continued focus on expense control. Increases in both the return on average equity from 9.26% in 1993 to 9.72% in 1994 and the return on average assets from .62% in 1993 to .74% in 1994 reflect the improved performance of the Corporation. Net interest income, on a fully taxable equivalent basis, increased from $78.4 million in 1993 to $86.0 million in 1994, an increase of 9.7%. Net margin rose to 4.80% from 4.53% in 1993. Average loans increased by $100.7 million in 1994, which contributed to the improvement in interest income, while the cost of funds declined from 3.89% to 3.63% due to lower interest rates during the first part of 1994. The provision for loan losses was $9.1 million and represented a decrease of 7.0% from 1993, when a provision of $9.7 million was charged to operations. The decrease in the provision was a direct result of improvement in asset quality. Non-interest income decreased 8.6%. Total non-interest income decreased from $17.3 million in 1993 to $15.8 million in 1994, primarily the result of a $1.5 million gain realized from an indirect automobile loan securitization completed in June of 1993. Offsetting this gain was an increase in service charges from $7.3 million in 1993 to $7.9 million in 1994, as a result of certain new retail fees charged to customers. In addition, the gain on sale of securities increased 71.5% to $1.3 million in 1994 as the Corporation took advantage of certain market conditions and sold various equity securities during the year. Non-interest expense rose from $67.7 million in 1993 to $69.3 million in 1994. Personnel expense increased from $30.9 million in 1993 to $32.5 million in 1994. Increases of $712,000 in pension expense and $366,000 for incentive compensation as well as normal annual salary adjustments accounted for the majority of the increase. In addition, continued expansion in the Florida market resulted in the opening of two branches and an increase of 68 full-time equivalent employees. The amortization of intangibles decreased 16.9% to $1.7 million in 1994 compared to $2.0 million in 1993. The expense in 1993 was higher due to a full-year effect of a 1992 acquisition. Other non-interest expense also decreased in 1994 due to a number of items. Expenses relating to problem loan work-outs and foreclosed real estate decreased as a result of the marked improvement in credit quality. Also included in 1993 expenses were costs associated with the Corporation's efforts to consolidate the data processing and certain other operational functions of its subsidiaries. Promotional expenses rose to $2.5 million in 1994 compared to $2.1 million in 1993, representing an increase of 17.0%. This increase was the result of management's increased efforts to market its personal banking services and expansion within the Florida market. Income tax expenses increased 37.1% to $7.0 million for 1994 as a result of the Corporation generating more taxable income. The 1994 effective tax rate of 33.0% was below the 35% statutory tax rate due to the tax benefits resulting from tax-exempt securities income and excludable dividend income. EXHIBIT 99.2 INDEPENDENT AUDITORS' REPORT January 19, 1996, except for Note I, as to which the date is February 2, 1996 Board of Directors and Stockholders of Southwest Banks, Inc. Naples, Florida We have audited the accompanying consolidated balance sheets of Southwest Banks, Inc. and its subsidiaries, First National Bank of Naples and Cape Coral National Bank (collectively, the Company), as of December 31, 1995 and 1994 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southwest Banks, Inc. and its subsidiaries as of December 31, 1995 and 1994 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note A to the consolidated financial statements, the company changed its method of accounting for debt and equity securities effective January 1, 1994. Hill, Barth & King, Inc. Certified Public Accountants Naples, Florida -----END PRIVACY-ENHANCED MESSAGE-----