-----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, AwIU1F02X+Gi0UcoEJU1cNWc++Z7tEq2D1LCsViFe+nEIJcA5JHHbpH50SDG03qR ageHmDrT5G2cx2yuAfUIBg== 0000037808-97-000038.txt : 19970723 0000037808-97-000038.hdr.sgml : 19970723 ACCESSION NUMBER: 0000037808-97-000038 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970722 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970722 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: 97643858 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: July 22, 1997 F.N.B. CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 0-8144 25-1255406 ----------------------- ----------- ------------- (State of Incorporation) (Commission (IRS Employer File Number) Identification No.) Hermitage Square, Hermitage, Pennsylvania 16148 ----------------------------------------- ----------- (Address of principal executive offices) (Zip code) (412) 981-6000 ---------------------------------------------------- (Registrant's telephone number, including area code) INFORMATION TO BE INCLUDED IN THE REPORT ITEM 5. OTHER EVENTS On April 18, 1997, F.N.B. Corporation (the Corporation) completed its acquisition of West Coast Bancorp, Inc. On January 21, 1997, the Corporation completed its acquisition of Southwest Banks, Inc. Accordingly, the Corporation's Consolidated Financial Statements and Related Management's Discussion and Analysis of Financial Condition and Results of Operations have been provided giving retroactive effect to these mergers using the pooling of interests method of accounting. Such supplemental consolidated financial statements will become the historical consolidated financial statements when the Corporation reports second quarter 1997 results. The Corporation is hereby filing with the Securities and Exchange Commission a copy of the Audited Supplemental Consolidated Financial Statements for the years ended December 31, 1996, 1995 and 1994 and Management's Discussion and Analysis. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (C). Exhibits (all filed herewith) Exhibit 23.1 Consent of Ernst & Young LLP Exhibit 23.2 Consent of Hill, Barth & King, Inc. Exhibit 23.3 Consent of Coopers & Lybrand, L.L.P. Exhibit 99.1 Audited Supplemental Consolidated Financial Statements for the years ended December 31,1996, 1995 and 1994 with Report of Independent Auditors and Management's Discussion and Analysis Exhibit 99.2 Report of Independent Auditors Hill, Barth & King, Inc. for the 1996, 1995 and 1994 Audits of Southwest Banks, Inc. Exhibit 99.3 Report of Independent Auditors Coopers & Lybrand, L.L.P. for the 1996 and 1995 Audits of West Coast Bancorp, Inc. Exhibit 99.4 Report of Independent Auditors Coopers & Lybrand, L.L.P. for the 1995 and 1994 Audits of West Coast Bancorp, Inc. Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. F.N.B. CORPORATION (Registrant) By: /s/John D. Waters ------------------------------ Name: John D. Waters Title: Vice President and Chief Financial Officer Dated: July 22, 1997 EXHIBIT INDEX 23.1 Consent of Ernst & Young LLP 23.2 Consent of Hill, Barth & King, Inc. 23.3 Consent of Coopers & Lybrand, L.L.P. 99.1 Audited Supplemental Consolidated Financial Statements for the years ended December 31, 1996, 1995 and 1994 with Report of Independent Auditors and Management's Discussion and Analysis 99.2 Report of Independent Auditors Hill, Barth & King, Inc. for the 1996, 1995 and 1994 Audits of Southwest Banks, Inc. 99.3 Report of Independent Auditors Coopers & Lybrand, L.L.P. 1996 and 1995 Audits of West Coast Bancorp, Inc. 99.4 Report of Independent Auditors Coopers & Lybrand, L.L.P. 1995 and 1994 Audits of West Coast Bancorp, Inc. EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Regarding: 1) Registration Statement on Form S-3 relating to the F.N.B. Corporation Subordinated Notes and Daily Cash Accounts (File #33- 61367). 2) Registration Statement on Form S-3 relating to the Dividend Reinvestment Plan (File #33-72532). 3) Registration Statement on Form S-8 relating to the F.N.B. Corporation Voluntary Dividend Reinvestment and Stock Purchase Plan (File #333-00943). 4) Registration Statement on Form S-8 relating to the F.N.B. Corporation 401(k) Plan (File #33-50780) 5) Registration Statement on Form S-8 relating to F.N.B. Corporation 1990 Stock Option Plan (File #33-78114). 6) Registration Statement on Form S-8 relating to F.N.B. Corporation Restricted Stock Bonus Plan (File #33-78134). 7) Post-Effective Amendment No. 1 to the Registration Statement on Form S-3 relating to the F.N.B. Corporation Voluntary Dividend Reinvestment and Stock Purchase Plan (File #33-72532). 8) Registration Statement on Form S-8 relating to F.N.B. Corporation 1996 Stock Option Plan (File #333-03489). 9) Registration Statement on Form S-8 relating to F.N.B. Corporation Restricted Stock and Incentive Bonus Plan (File #333-03493). 10) Registration Statement on Form S-8 relating to F.N.B. Corporation Directors Compensation Plan (File #333-03495). 11) Registration Statement on Form S-8 relating to F.N.B. Corporation 401(k) Plan (File #333-03503). 12) Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File #333-01997). 13) Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File #333-22909). We consent to the incorporation by reference in the above listed Registration Statements of our report dated July 3, 1997, with respect to the supplemental consolidated financial statements of F.N.B. Corporation and subsidiaries as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 included in this Current Report on Form 8-K. ERNST & YOUNG LLP Pittsburgh, Pennsylvania July 15, 1997 EXHIBIT 23.2 CONSENT OF HILL, BARTH & KING, INC., INDEPENDENT AUDITORS We consent to the use in this Current Report of F.N.B. Corporation on Form 8-K of our report dated January 22, 1997, relating to the financial statements of Southwest Banks, Inc. which have been incorporated into the Audited Supplemental Consolidated Financial Statements for the years ended December 31, 1996, 1995 and 1994 appearing elsewhere in this Current Report. Hill, Barth & King, Inc. Certified Public Accountants Naples, Florida July 15, 1997 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of F.N.B. Corporation on Forms S-3 (Registration Nos. 33-61367 and 33-72532) and Forms S-8 (Registration Nos. 333-00943, 33-50780, 33-78114, 33-78134, 333-03489, 333-03493, 333-03495, 333-03503, 333-01997 and 333-22909) of our reports dated January 24, 1997 and January 19, 1996, on our audits of the consolidated financial statements of West Coast Bancorp, Inc. for the years ended December 31, 1996 and 1995, and the year ended December 31, 1994, respectively, which reports are included as exhibits in F.N.B. Corporation's Current Report on Form 8-K. COOPERS & LYBRAND, L.L.P. Fort Myers, Florida July 22, 1997 EXHIBIT 99.1 Audited Supplemental Consolidated Financial Statements F.N.B. Corporation and Subsidiaries Years ended December 31, 1996, 1995 and 1994 with Report of Independent Auditors F.N.B. CORPORATION AND SUBSIDIARIES AUDITED SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1996, 1995 and 1994 CONTENTS Report of Independent Auditors.............................................1 Audited Supplemental Consolidated Financial Statements Supplemental Consolidated Balance Sheet......................... 2 Supplemental Consolidated Income Statement...................... 3 Supplemental Consolidated Statement of Stockholders' Equity..... 4 Supplemental Consolidated Statement of Cash Flows............... 5 Notes to Supplemental Consolidated Financial Statements......... 6 Supplemental Selected Financial Data...................................... 27 Supplemental Quarterly Earnings Summary................................... 28 Management's Discussion and Analysis of Financial Conditions and Results of Operations................................................. 29 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors F.N.B. Corporation We have audited the supplemental consolidated balance sheets of F.N.B. Corporation and Subsidiaries (F.N.B. Corporation) (formed as a result of the consolidation of F.N.B. Corporation with Southwest Banks, Inc. and Subsidiaries and West Coast Bancorp, Inc. and Subsidiary) as of December 31, 1996 and 1995 and the related supplemental consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. The supplemental consolidated financial statements give retroactive effect to the merger of F.N.B. Corporation and Southwest Banks, Inc. and Subsidiaries, on January 21, 1997, and West Coast Bancorp, Inc. and Subsidiary on April 18, 1997 which have been accounted for using the pooling of interests method as described in the notes to the supplemental consolidated financial statements. These supplemental consolidated financial statements are the responsibility of the management of F.N.B. Corporation. Our responsibility is to express an opinion on these supplemental consolidated financial statements based on our audits. We did not audit the financial statements of Southwest Banks, Inc. and Subsidiaries or West Coast Bancorp, Inc. and Subsidiary which statements reflect total assets constituting approximately 29% for 1996 and 24% for 1995 of the related supplemental consolidated financial statement totals, and which reflect net income constituting approximately 11% of the related supplemental consolidated financial statement totals for the three year period ended December 31, 1996. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Southwest Banks, Inc. and Subsidiaries and West Coast Bancorp, Inc. and Subsidiary, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the supplemental financial statements referred to above present fairly, in all material respects, the consolidated financial position of F.N.B. Corporation at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, after giving retroactive effect to the mergers of Southwest Banks, Inc. and Subsidiaries and West Coast Bancorp, Inc. and Subsidiary, as described in the notes to the supplemental consolidated financial statements, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP July 3, 1997 F.N.B. CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEET Dollars in thousands, except par values December 31 1996 1995 ----------- ---------- ASSETS Cash and due from banks $ 107,476 $ 90,656 Interest bearing deposits with banks 1,334 3,853 Federal funds sold 6,425 57,024 Loans held for sale 9,610 16,020 Securities available for sale 322,068 283,526 Securities held to maturity (fair value of $173,677 and $174,546) 174,551 174,483 Loans, net of unearned income of $23,763 and $27,258 1,728,132 1,550,190 Allowance for loan losses (27,800) (24,250) ---------- --------- NET LOANS 1,700,332 1,525,940 Premises and equipment 46,714 40,568 Other assets 49,897 46,455 ---------- ---------- $2,418,407 $2,238,525 ========== ========== LIABILITIES Deposits: Non-interest bearing 231,264 $ 230,265 Interest bearing 1,782,624 1,665,880 ---------- ---------- TOTAL DEPOSITS 2,013,888 1,896,145 Other liabilities 34,825 29,949 Short-term borrowings 112,230 73,501 Long-term debt 58,179 50,784 ---------- --------- TOTAL LIABILITIES 2,219,122 2,050,379 STOCKHOLDERS' EQUITY Preferred stock - $10 par value Authorized - 20,000,000 shares Outstanding - 352,531 and 451,638 shares Aggregate liquidation value - $8,813 and $11,291 3,525 4,516 Common Stock - $2 par value Authorized - 100,000,000 shares Outstanding - 13,305,369 and 12,703,315 26,611 25,406 Additional paid-in capital 101,445 92,142 Retained earnings 66,625 63,690 Net unrealized securities gains 2,566 3,245 Employee Stock Ownership Plan 0 (389) Treasury stock - 62,723 and 22,340 shares at cost (1,487) (464) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 199,285 188,146 ---------- ---------- $2,418,407 $2,238,525 ========== ========== See accompanying Notes to Supplemental Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED INCOME STATEMENT Dollars in thousands, except per share data Year Ended December 31 1996 1995 1994 ---------- ---------- --------- INTEREST INCOME Loans, including fees $ 154,962 $ 144,518 $ 123,596 Securities: Taxable 22,994 22,496 21,702 Tax exempt 2,261 1,939 1,910 Dividends 1,097 928 700 Other 2,269 2,631 1,367 ---------- ---------- --------- TOTAL INTEREST INCOME 183,583 172,512 149,275 INTEREST EXPENSE Deposits 69,447 66,128 52,988 Short-term borrowings 4,716 5,368 4,038 Long-term debt 3,453 3,258 2,869 ---------- ---------- --------- TOTAL INTEREST EXPENSE 77,616 74,754 59,895 NET INTEREST INCOME 105,967 97,758 89,380 Provision for loan losses 9,791 6,930 9,177 ---------- ---------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 96,176 90,828 80,203 NON-INTEREST INCOME Insurance commissions and fees 4,116 4,284 4,195 Service charges 11,335 10,601 8,551 Trust 1,461 1,390 1,504 Gain (loss) on sale of securities 825 493 1,303 Gain (loss) on sale of loans 691 516 (5) Other 1,979 1,931 1,560 ---------- ---------- --------- TOTAL NON-INTEREST INCOME 20,407 19,215 17,108 ---------- ---------- --------- 116,583 110,043 97,311 NON-INTEREST EXPENSES Salaries and employee benefits 41,516 38,086 34,518 Net occupancy 6,775 6,660 5,850 Amortization of intangibles 1,047 1,246 1,705 Equipment 6,212 5,572 5,413 Professional service fees 4,363 3,794 3,786 Deposit insurance 970 3,092 4,412 Recapitalization of Savings Association Insurance Fund 2,752 Promotional 2,568 3,197 2,660 Insurance claims paid 1,707 1,738 1,820 Other 18,901 15,279 14,407 ---------- ---------- --------- TOTAL NON-INTEREST EXPENSES 86,811 78,664 74,571 ---------- ---------- --------- INCOME BEFORE INCOME TAXES 29,772 31,379 22,740 Income taxes 9,893 10,300 7,550 --------- ---------- --------- NET INCOME $ 19,879 $ 21,079 $ 15,190 ========= ========= ======== NET INCOME PER COMMON SHARE PRIMARY $1.35 $1.45 $1.06 ===== ===== ===== FULLY DILUTED $1.32 $1.41 $1.05 ===== ===== ===== AVERAGE COMMON SHARES OUTSTANDING 14,074,691 13,942,592 13,503,229 ========== ========== ========== See accompanying Notes to Supplemental Consolidated Financial Statements 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, 1994 $ 4,582 $ 21,103 $ 66,946 $ 49,873 ($227) Cumulative effect of adoption of FAS No.115 $ 2,176 Net income 15,190 Cash dividends declared: Preferred stock (853) Common stock $.23 per share (FNB) and $.17 per share (West Coast) (2,563) Purchase of common stock (1,143) Issuance (retirement) of common stock 2,339 11,449 3 1,061 Stock dividend 887 5,745 (6,634) Conversion of preferred stock (19) 9 24 Obligation under ESOP plan ($141) Change in net unrealized securities gains/losses (2,711) -------- -------- --------- -------- ------------ --------- ------ BALANCE AT DECEMBER 31, 1994 4,563 24,338 84,164 55,016 (535) (141) (309) Net income 21,079 Cash dividends declared: Preferred stock (849) Common stock $.33 per share (FNB) and $.20 per share (West Coast) (3,489) Purchase of common stock (1,447) Issuance (retirement) of common stock 53 344 1,292 Stock dividend 930 7,132 (8,067) Conversion of preferred stock (47) 85 502 Obligation under ESOP plan (248) Change in net unrealized securities gains/losses 3,780 -------- ------ ------- ------- ----------- ------- --------BALANCE AT DECEMBER 31, 1995 4,516 25,406 92,142 63,690 3,245 (389) (464) Net income 19,879 Cash dividends declared: Preferred stock (766) Common stock $.60 per share (FNB) and $.23 per share (West Coast) (6,123) Purchase of common stock (3,421) Issuance (retirement) of common stock (54) (484) 2,398 Stock dividend 860 9,195 (10,055) Conversion of preferred stock (991) 399 592 Obligation under ESOP plan 389 Change in net unrealized securities gains/losses (679) -------- ------- -------- ------- ---------- -------- -------- BALANCE AT DECEMBER 31, 1996 $ 3,525 $26,611 $101,445 $66,625 $ 2,566 $ 0 ($1,487) ======== ======= ======== ======= ========== ======== ========
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 1996 1995 1994 -------- -------- -------- OPERATING ACTIVITIES Net income $ 19,879 $ 21,079 $ 15,190 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,022 6,374 7,169 Provision for loan losses 9,791 6,930 9,177 Provision for valuation allowance on other real estate owned 664 100 31 Deferred taxes (1,753) (704) (1,601) Gain on securities available for sale (825) (493) (1,303) (Gain) loss on sale of loans (691) (516) 5 Gain on sale of premises and equipment (243) Proceeds from sale of loans 53,359 54,385 65,700 Loans originated for sale (46,258) (58,872) (98,353) Net change in: Interest receivable 1,355 (1,690) (1,276) Interest payable 642 1,866 1,276 Other, net 6,207 5,838 7,248 -------- -------- ------- Net cash flows from operating activities 48,392 34,054 3,263 INVESTING ACTIVITIES Net change in: Interest bearing deposits with banks 2,519 (833) 3,322 Federal funds sold 50,599 (39,608) 14,305 Loans (189,703) (97,630)(117,706) Purchase of securities available for sale (183,824) (129,320)(106,002) Purchase of securities held to maturity (41,862) (45,264) (41,036) Proceeds from sale of securities available for sale 39,208 7,555 14,661 Proceeds from maturity of securities available for sale 105,848 86,961 97,090 Proceeds from maturity of securities held to maturity 41,678 76,474 69,327 Increase in premises and equipment (11,453) (7,054) (11,186) -------- -------- ------- Net cash flows from investing activities (186,990) (148,719) (77,225) FINANCING ACTIVITIES Net change in: Non-interest bearing deposits 999 21,135 11,829 Interest bearing deposits 116,744 126,292 22,363 Short-term borrowings 38,729 (13,437) 17,533 Increase in long-term debt 32,899 9,274 36,312 Decrease in long-term debt (25,504) (15,104) (15,226) Proceeds from the sale and issuance of stock 1,861 1,689 14,867 Purchase of treasury stock (3,421) (1,447) (1,143) Cash dividends paid (6,889) (4,343) (3,419) -------- -------- ------- Net cash flows from financing activities 155,418 124,059 83,116 -------- -------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 16,820 9,394 9,154 Cash and Cash Equivalents At Beginning Of Year 90,656 81,262 72,108 --------- -------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $107,476 $ 90,656 $ 81,262 ======== ======== ======== See accompanying Notes to Supplemental Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS The supplemental consolidated financial statements give retroactive effect to the mergers of Southwest Banks, Inc. (Southwest) and West Coast Bancorp, Inc. (West Coast) with and into F.N.B. Corporation (the Corporation). The mergers which were consummated on January 21, 1997 and April 18, 1997 resulted in the Corporation issuing a total of 2,851,907 and 1,197,128 shares of Common Stock, respectively. These transactions have been accounted for on a pooling-of-interests basis, and such financial statements are presented as if the mergers had been consummated for all the periods presented. As required by generally accepted accounting principles, the combined consolidated financial statements will become the historical consolidated financial statements upon issuance of consolidated financial statements for the quarter ended June 30, 1997. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business: The Corporation is a bank holding company headquartered in Hermitage, Pennsylvania. It operates 7 banks through 64 offices and a consumer finance company through 35 offices in Pennsylvania, Ohio, Florida and New York. Basis of Presentation: The supplemental consolidated financial statements include the accounts of the Corporation and its subsidiaries, including Southwest and West Coast. All significant intercompany balances and transactions have been eliminated. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Securities: Debt securities are classified as held to maturity when management has the positive intent and ability to hold securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity and marketable equity securities are classified as available for sale. Securities available for sale are carried at fair value with net unrealized securities gains (losses) reported separately as a component of stockholders' equity, net of tax. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net securities gains (losses). The adjusted cost of specific securities sold is used to compute gains or losses on sales. Presently, the Corporation has no intention of establishing a trading securities classification. Loans Held for Sale: Loans held for sale are recorded at the lower of aggregate cost or market value. Gain or loss on the sale of loans is included in non-interest income. In May of 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FAS) No. 122, "Accounting for Mortgage Servicing Rights," an amendment of FAS No. 65. This Statement, which was adopted in 1996 on a prospective basis, allows entities originating mortgage loans for sale to recognize as an asset rights to service these loans. Additionally, the Corporation must periodically assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. The impact of this Statement did not have a material impact on the Corporation's results of operations or financial position. Loans and the Allowance for Loan Losses: Loans that management has the intent and ability to hold for the foreseeable future, until maturity or payoff are reported at their outstanding principal adjusted for any charge-offs and any deferred fees or costs on originated loans. Interest income on loans is accrued on the principal amount outstanding. It is the Corporation's policy to discontinue interest accruals when principal or interest is due and has remained unpaid for 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan losses. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest has been paid, or the loan becomes both well secured and in the process of collection. Consumer installment loans are generally charged off against the allowance for loan losses upon reaching 90 to 180 days past due, depending on the installment loan type. Loan origination fees and related costs are deferred and recognized over the life of the loans as an adjustment of yield. The allowance for loan losses is based on management's evaluation of potential losses in the loan portfolio, which includes an assessment of past experience, current and estimated future economic conditions, known and inherent risks in the loan portfolio, the estimated value of underlying collateral and industry standards. Additions are made to the allowance through periodic provisions charged to income and recovery of principal on loans previously charged off. Losses of principal are charged to the allowance when the loss actually occurs or when a determination is made that a loss is probable. On January 1, 1995, the Corporation adopted FAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by FAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." These standards require that impaired loans be identified and measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, a valuation allowance is established as a component of the allowance for loan losses. Impaired loans consist of non-homogeneous loans, which based on the evaluation of current information and events, management has determined that it is probable that the Corporation will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Corporation evaluates all commercial and commercial real estate loans which have been classified for regulatory reporting purposes, including non-accrual and restructured loans, in determining impaired loans. The adoption of these accounting standards had no material impact on the Corporation's financial position or results of operations. Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed generally on the straight-line method. Other Real Estate Owned: Assets acquired in settlement of indebtedness are included in other assets at the lower of fair value minus estimated costs to sell or at the carrying amount of the indebtedness. Subsequent write-downs and net direct operating expenses attributable to such assets are included in other expenses. Amortization of Intangibles: Core deposit intangibles are being amortized on accelerated methods over various lives ranging from 10-17 years. Accounting for Postretirement Benefits Other than Pensions: The Corporation recognizes the projected future cost of providing postretirement benefits, such as health care and life insurance, as an expense as employees render service. Income Taxes: Income taxes are computed utilizing the liability method. Under this method deferred taxes are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Per Share Amounts: Earnings and cash dividends per share have been adjusted for common stock dividends, including the stock dividend issued on April 23, 1997. Primary earnings per common share is calculated by dividing net income, adjusted for preferred stock dividends declared, by the sum of the weighted average number of shares of common stock outstanding and the number of shares of common stock which would be issued assuming the exercise of stock options and warrants during each period. Fully diluted earnings per common share is calculated by dividing net income, adjusted for minority interest, by the weighted average number of shares of common stock outstanding, assuming conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance and the exercise of stock options and warrants. Such adjustments to net income and the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per common share. In February 1997, the Financial Accounting Standards Board issued Statement No. 128 (FAS No. 128), "Earnings per Share," which is required to be adopted on December 31, 1997. At that time, the Corporation will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating earnings per share, the dilutive effect of stock options will be excluded. The impact of FAS No. 128 on the calculations of primary and fully diluted earnings per share is immaterial for the three years in the period ended December 31, 1996. Cash Equivalents: The Corporation considers cash and due from banks as cash and cash equivalents. New Accounting Standards: FAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," establishes new standards for determining whether a transfer constitutes a sale and, if so, the determination of the resulting gain or loss. These standards are based on the consistent application of a financial components approach that focuses on control. Under this approach, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. Provisions of this Statement are effective for certain transactions entered into in 1997 and 1998. The Corporation does not anticipate this Standard will have a material effect on the Corporation's financial position or results of operations. MERGER, ACQUISITION AND DIVESTITURE On June 30, 1997, the Corporation completed the sale of its subsidiary, Bucktail Bank and Trust Company (Bucktail), to Sun Bancorp, Inc. (Sun), a bank holding company headquartered in Selinsgrove, Pennsylvania. Under the sales agreement, Sun issued 565,384 shares of Sun's common stock in exchange for 100% ownership of Bucktail. The sale resulted in the Corporation recognizing an $8.0 million pre-tax gain and attaining a 14.4% ownership interest in Sun. SECURITIES The amortized cost of securities and their approximate fair values are as follows: Securities available for sale (in thousands): GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE December 31, 1996 --------- ---------- ---------- -------- U.S. Treasury and other U.S. Government agencies and corporations $ 261,235 $ 403 $ (806) $260,832 Mortgage-backed securities of U.S. Government agencies 40,642 620 (173) 41,089 Other debt securities 2,000 (16) 1,984 --------- ---------- --------- -------- TOTAL DEBT SECURITIES 303,877 1,023 (995) 303,905 Equity securities 14,235 3,942 (14) 18,163 --------- ---------- --------- -------- $ 318,112 $ 4,965 (1,009) 322,068 ========= ========== ========= ======== GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE December 31, 1995 --------- ---------- ---------- -------- U.S. Treasury and other U.S. Government agencies and corporations $ 241,667 $ 1,748 $ (137) $243,278 Mortgage-backed securities of U.S. Government agencies 22,505 184 (87) 22,602 Other debt securities 2,000 (5) 1,995 --------- ---------- --------- -------- TOTAL DEBT SECURITIES 266,172 1,932 (229) 267,875 Equity securities 12,347 3,304 15,651 --------- ---------- --------- -------- $ 278,519 $ 5,236 $ (229) $283,526 ========= ========== ========= ========= GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE December 31, 1994 --------- ---------- ---------- ------- U.S. Treasury and other U.S. Government agencies and corporations $ 126,227 $(2,420) $123,807 Mortgage-backed securities of U.S. Government agencies 5,300 $ 3 (529) 4,774 Other debt securities 1,000 (11) 989 ---------- --------- -------- -------- TOTAL DEBT SECURITIES 132,527 3 (2,960) 129,570 Equity securities 13,213 2,202 (81) 15,334 ---------- --------- -------- -------- $ 145,740 $ 2,205 $(3,041) $144,904 ========== ========= ======== ======== Securities held to maturity (in thousands): GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE December 31, 1996 --------- ---------- ---------- ------- U.S. Treasury and other U.S. Government agencies and corporations $ 15,388 $ 57 $ (22) $15,423 States of the U.S. and political subdivisions 55,569 147 (438) 55,278 Mortgage-backed securities of U.S. Government agencies 103,551 98 (712) 102,937 Other debt securities 43 (4) 39 ---------- ---------- --------- -------- $ 174,551 $ 302 (1,176) $173,677 ========== ========== ========= ======== GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE December 31, 1995 --------- ---------- ---------- ------- U.S. Treasury and other U.S. Government agencies and corporations $ 22,367 $ 170 $ (37) $ 22,500 States of the U.S. and political subdivisions 47,505 197 (288) 47,414 Mortgage-backed securities of U.S. Government agencies 104,555 447 (421) 104,581 Other debt securities 56 (5) 51 --------- ---------- --------- -------- $ 174,483 $ 814 $ (751) $174,546 ========= ========== ========= ======== GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE December 31, 1994 --------- ----------- ---------- ------- U.S. Treasury and other U.S. Government agencies and corporations $ 175,913 $ 1 $ (4,989) $170,925 States of the U.S. and political subdivisions 44,805 67 (3,095) 41,777 Mortgage-backed securities of U.S. Government agencies 83,288 3 (5,052) 78,239 Other debt securities 61 (8) 53 ---------- ---------- --------- -------- $ 304,067 $ 71 $(13,144) $290,994 ========== ========== ========= ======== In December of 1995, the Corporation transferred $97.5 million of debt securities from the held to maturity category to the available for sale category in accordance with the implementation guidance issued on FAS No. 115. At the time of transfer, the market value of the securities totaled $97.8 million, and the unrealized gain, net of taxes, of $118,000 was recorded as an increase to stockholders' equity. At December 31, 1996 and 1995, respectively, securities with a carrying value of $135.9 million and $119.2 million were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $63.9 million and $40.5 million at December 31, 1996 and 1995, respectively, were pledged as collateral for other borrowings. As of December 31, 1996, the Corporation had not entered into any off-balance sheet derivative transactions. As of December 31, 1996, the amortized cost and fair value of securities, by contractual maturities, were as follows (in thousands): HELD TO MATURITY AVAILABLE FOR SALE ---------------------- ------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE December 31, 1996 ---------- --------- --------- -------- Due in one year or less $ 12,269 $ 12,276 $ 120,114 $120,304 Due from one to five years 46,926 46,594 124,915 124,393 Due from five to ten years 11,386 11,447 17,499 17,412 Due after ten years 419 423 707 707 ---------- --------- --------- -------- 71,000 70,740 263,235 262,816 Mortgage-backed securities of U.S. Government Agencies 103,551 102,937 40,642 41,089 Equity Securities 14,235 18,163 ---------- --------- --------- -------- $ 174,551 $ 173,677 $ 318,112 $ 322,068 ========== ========= ========= ======== Maturities may differ from contractual terms because borrowers may have the right to call or prepay obligations with or without penalties. Periodic payments are received on mortgage-backed securities based on the payment patterns of the underlying collateral. Proceeds from sales of securities available for sale during 1996, 1995 and 1994 were $39.2 million, $7.5 million and $14.7 million, respectively. Gross gains and gross losses were realized on those sales as follows (in thousands): 1996 1995 1994 ------ ------ ------ Gross gains $ 880 $ 530 $1,351 Gross losses 55 37 48 ------ ------- ------ $ 825 $ 493 $1,303 ====== ======= ====== LOANS Following is a summary of loans (in thousands): December 31 1996 1995 ---------- ---------- Real estate: Residential $ 682,600 $ 610,880 Commercial 421,057 380,571 Construction 41,661 36,264 Installment loans to individuals 395,628 383,457 Commercial, financial and agricultural 189,411 161,239 Lease financing 21,538 5,037 Unearned income (23,763) (27,258) ---------- -------- $1,728,132 $1,550,190 ---------- -------- Certain directors and executive officers of the Corporation and its significant subsidiaries, as well as associates of such persons, were loan customers during 1996. Such loans were made in the ordinary course of business under normal credit terms and do not represent more than a normal risk of collection. Following is a summary of the amount of loans in which the aggregate of the loans to any such persons exceeded $60,000 during the year (in thousands): Total loans at December 31, 1995 $ 29,184 New loans 43,308 Repayments (39,144) Other (2,408) --------- Total loans at December 31, 1996 $ 30,940 ========= Other represents the net change in loan balances resulting from changes in related parties during the year. NON-PERFORMING ASSETS Following is a summary of non-performing assets (in thousands): December 31 1996 1995 1994 -------- -------- -------- Non-accrual loans $ 9,571 $ 9,506 $ 11,244 Restructured loans 2,146 3,075 3,157 -------- -------- -------- TOTAL NON-PERFORMING LOANS 11,717 12,581 14,401 Other real estate owned 7,039 4,783 4,822 -------- -------- -------- TOTAL NON-PERFORMING ASSETS $ 18,756 $ 17,364 $ 19,223 ======== ======== ======== For the years ended December 31, 1996, 1995 and 1994, income recognized on non-accrual and restructured loans was $763,000, $684,000 and $676,000, respectively. Income that would have been recognized during 1996, 1995 and 1994 on such loans if they were in accordance with their original terms was $1.4 million, $1.3 million and $1.8 million, respectively. Loans past due 90 days or more were $3.0 million, $3.9 million and $2.8 million at December 31, 1996, 1995 and 1994, respectively. Following is a summary of information pertaining to loans considered to be impaired under FAS 114 (in thousands): At of For the Year Ended December 31 1996 1995 -------- -------- Impaired loans with an allocated allowance $ 4,494 $ 7,507 Impaired loans without an allocated allowance 5,298 7,575 -------- -------- Total impaired loans $ 9,792 $15,082 ======== ======== Allocated allowance on impaired loans $ 1,451 $ 1,473 ======== ======== Portion of impaired loans on non-accrual $ 4,751 $ 5,652 ======== ======== Average impaired loans $12,437 $18,119 ======== ======== Income recognized on impaired loans $ 735 $ 1,101 ======== ======== ALLOWANCE FOR LOAN LOSSES Following is an analysis of changes in the allowance for loan losses (in thousands): Year Ended December 31 1996 1995 1994 -------- -------- -------- Balance at beginning of year $ 24,250 $ 22,268 $ 17,995 Charge-offs (7,760) (6,831) (6,755) Recoveries 1,519 1,883 1,851 -------- -------- -------- NET CHARGE-OFFS (6,241) (4,948) (4,904) Provision for loan losses 9,791 6,930 9,177 -------- -------- -------- Balance at end of year $ 27,800 $ 24,250 $ 22,268 ======== ======== ======== PREMISES AND EQUIPMENT Following is a summary of premises and equipment (in thousands): December 31 1996 1995 -------- -------- Land $ 8,977 $ 7,968 Premises 43,346 35,757 Equipment 31,038 29,077 -------- -------- 83,361 72,802 Accumulated depreciation (36,647) (32,234) -------- -------- $ 46,714 $40,568 ======== ======== Depreciation expense was $5.3 million for 1996, $4.5 million for 1995 and $4.3 million for 1994. The Corporation is in the process of constructing a new multi-story building in Hermitage, as well as three new branches in Erie and a new branch in Collier County, Florida. Construction, equipment and furnishing costs are projected to be approximately $13.2 million, of which $5.3 million has been funded as of December 31, 1996. The Corporation has operating leases extending to 2044 for certain land, office locations and equipment. Leases that expire are generally expected to be renewed or replaced by other leases. Rental expense was $2.6 million for 1996, $2.7 million for 1995 and $2.1 million for 1994. Total minimum rental commitments under such leases were $22.0 million at December 31, 1996. Following is a summary of future minimum lease payments for years following December 31, 1996 (in thousands): 1997 $1,762 1998 1,504 1999 996 2000 757 2001 647 Later years 16,289 DEPOSITS Following is a summary of deposits (in thousands): December 31 1996 1995 ---------- ---------- Non-interest bearing $ 231,264 $ 230,265 Savings and NOW 851,156 755,708 Certificates of deposit and other time deposits 931,468 910,172 ---------- ---------- $2,013,888 $1,896,145 ========== ========== Following is a summary of the scheduled maturities of time deposits for each of the five years following December 31, 1996 (in thousands): 1997 $622,703 1998 167,204 1999 59,625 2000 63,170 2001 17,620 Later years 1,146 Time deposits of $100,000 or more were $173.8 million and $159.4 million at December 31, 1996 and 1995, respectively. Following is a summary of these time deposits by remaining maturity at December 31, 1996(in thousands): CERTIFICATES OTHER TIME OF DEPOSIT DEPOSITS TOTAL December 31, 1996 ------------ ------------ ------------ Three months or less $53,980 $ 4,151 $ 58,131 Three to six months 34,013 2,496 36,509 Six to twelve months 33,058 4,986 38,044 Over twelve months 22,588 18,523 41,111 --------- -------- ------- $143,639 $30,156 $173,795 ========= ======== ======= SHORT-TERM BORROWINGS Following is a summary of short-term borrowings (in thousands): December 31 1996 1995 -------- -------- Securities sold under repurchase agreements $ 35,471 $ 21,267 Federal funds purchased 20,052 Other short-term borrowings 1,506 4,872 Subordinated notes 55,201 47,362 -------- -------- $112,230 $ 73,501 ======== ======== Credit facilities amounting to $25.0 million at December 31, 1996 and December 31, 1995 were maintained with various banks with rates which are at or below prime rate. The facilities and their terms are periodically reviewed by the banks and are generally subject to withdrawal at their discretion. The amount of these credit facilities which were unused amounted to $25.0 million at December 31, 1996 and $22.0 million at December 31, 1995. In addition, certain subsidiaries have lines of credit with the Federal Home Loan Bank, which if used would require collateralization. No amounts were used as of December 31, 1996. LONG-TERM DEBT Following is a summary of long-term debt (in thousands): December 31 1996 1995 -------- -------- Real estate mortgages payable $ 147 $ 284 Federal Home Loan Bank advances 24,042 13,106 Subordinated notes 33,990 37,394 -------- -------- $ 58,179 $ 50,784 ======== ========= The Federal Home Loan Bank advances are secured by residential real estate loans and Federal Home Loan Bank Stock and are scheduled to mature in various amounts annually from 1997 through 1999. Interest rates paid on these advances range from 5.10% to 5.38%. Subordinated notes are unsecured and subordinated to other indebtedness of the Corporation. The subordinated notes are scheduled to mature in various amounts annually from 1997 through the year 2006. At December 31, 1996, $24.0 million of long-term subordinated debt is redeemable prior to maturity at a discount equal to three months of interest. The issuer may require the holder to give 30 days prior written notice. No sinking fund is required and none has been established to retire the debt. The weighted average interest rate on long-term subordinated debt was 7.69% at December 31, 1996 and 7.79% at December 31, 1995. Scheduled annual maturities for all of the long-term debt for each of the five years following December 31, 1996 are as follows (in thousands): 1997 $24,284 1998 4,607 1999 12,042 2000 1,932 2001 963 Later years 14,351 COMMITMENTS AND CREDIT RISK The Corporation has commitments to extend credit and standby letters of credit which involve certain elements of credit risk in excess of the amount stated in the consolidated balance sheet. The Corporation's exposure to credit loss in the event of non-performance by the customer is represented by the contractual amount of those instruments. Consistent credit policies are used by the Corporation for both on- and off-balance sheet items. Following is a summary of off-balance sheet credit risk information (in thousands): December 31 1996 1995 -------- -------- Commitments to extend credit $278,310 $226,459 Standby letters of credit 14,059 11,638 At December 31, 1996, funding of approximately 75% of the commitments to extend credit is dependent on the financial condition of the customer. The Corporation has the ability to withdraw such commitments at its discretion. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Based on management's credit evaluation of the customer, collateral may be deemed necessary. Collateral requirements vary and may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Corporation which may require payment at a future date. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. STOCKHOLDERS' EQUITY Series A - Cumulative Convertible Preferred Stock (Series A Preferred) was created for the purpose of acquiring Reeves Bank. Holders of Series A Preferred are entitled to 5.4 votes for each share held. The holders do not have cumulative voting rights in the election of directors. Dividends are cumulative from the date of issue and are payable at $.42 per share each quarter. Series A Preferred is convertible at the option of the holder into shares of the Corporation's common stock having a market value of $25.00 at time of conversion. The Corporation has the right to require the conversion of the balance of all outstanding shares at the conversion rate. During 1996, 1,250 shares of Series A Preferred were converted to 1,336 shares of common stock. At December 31, 1996, 27,101 shares of common stock were reserved by the Corporation for the conversion of the remaining 23,588 outstanding shares. Series B - Cumulative Convertible Preferred Stock (Series B Preferred) was issued during 1992 for the purpose of raising capital for the Erie acquisition. Holders of Series B Preferred have no voting rights. Dividends are cumulative from the date of issue and are payable at $.46875 per share each quarter. Series B Preferred has a stated value of $25.00 per share and is convertible at the option of the holder at any time into shares of the Corporation's common stock at a price of $11.64 per share. The Corporation has the right to require the redemption of the balance of all outstanding shares at the conversion rate. During 1996, 97,857 shares of Series B Preferred were converted to 197,792 shares of common stock. At December 31, 1996, 706,424 shares of common stock were reserved by the Corporation for the conversion of the remaining 328,943 outstanding shares. STOCK INCENTIVE PLANS The Corporation has available up to 913,962 shares of common stock to be issued under the restricted stock and incentive bonus and restricted stock bonus plans to key employees of the Corporation. All shares of stock awarded under these plans vest in equal installments over a five year period on each anniversary of the date of grant. At December 31, 1996, 2,102 shares were vested under these plans. Participants have full voting rights on all shares regardless of vesting unless forfeited. The shares of stock awarded under the plan are held in the participants name and are enrolled in the Voluntary Dividend Reinvestment and Stock Purchase Plan. During 1996, the Corporation awarded 1,470 shares, 20% of which become vested in January 1997. The Corporation has available up to 2,036,464 shares of common stock to be issued under stock option plans to key employees of the Corporation. The options vest in equal installments over a five-year period. The options are granted at a price equal to the fair market value at the date of the grant and are exercisable within ten years from the date of the grant. The Corporation has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related interpretations in accounting for its employee stock options. Under APB No. 25, because the exercise price of the Corporation's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FAS No. 123, "Accounting for Stock-Based Compensation." FAS No. 123 also requires that the pro forma information be determined using the fair value method as if the Corporation had accounted for its employee stock options granted subsequent to December 31, 1994. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1996 and 1995: risk-free interest rates of 5.63% and 7.65%, respectively; dividend yield of 3.00%; volatility factor of the expected market price of the Corporation's common stock of .19%; and a weighted average expected life of the option of 7.5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferrable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Corporation's employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period of five years. Because FAS No. 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1997. Following is the pro forma information (in thousands, except per share data): Year Ended December 31 1996 1995 ---------- ---------- Pro forma net income $ 19,718 $ 21,017 ======== ======== Pro forma net income per common share: Primary $1.34 $1.44 ===== ===== Fully diluted $1.31 $1.41 ===== ===== At December 31, 1996, options for 333,693 of common stock were exercisable at prices ranging from $6.57 to $17.15 per share. Activity in the Option Plan during the past three years was as follows: 1996 1995 1994 ------- ------- ------- Outstanding, beginning of year 699,929 593,756 468,420 Granted during the year 177,447 126,026 145,529 Exercised during the year (at prices ranging from $6.57 to $17.15 per share) (7,085) (4,320) (3,753) Forfeited during the year (6,600) (15,533) (16,440) ------- ------- ------- Ending balance 863,691 699,929 593,756 ======= ======= ======= The Corporation has granted warrants to purchase one share of common stock (at an exercise price of $6.57 or $10.57 per share). Such warrants are exercisable and will expire on June 19, 2001 or December 17, 2003. The Corporation has reserved 209,865 shares of common stock for issuance in connection with these warrants. RETIREMENT PLANS Certain of the Corporation's subsidiaries have defined benefit retirement plans covering substantially all of their employees. The expense associated with these plans was $2.0 million in 1996, $1.7 million in 1995 and $1.6 million in 1994. The defined benefit plans provide benefits based on years of credited service and compensation (as defined), subject to ERISA limitations. Contributions to the tax-qualified plans are made in amounts not less than the minimum-required contribution under ERISA nor more than the maximum-deductible contribution under the Internal Revenue Code. Following is the estimated funded status (in thousands):
December 31 1996 1995 ------------------------------------------------- Plans Whose Plans Whose Plans Whose Plans Whose Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Accumulated Benefits Benefits Exceed Assets Benefits Exceed Assets ------------- ------------- ------------- ------------- Actuarial present value of: Vested benefit obligation $ 13,841 $ 2,770 $ 13,406 $2,439 ======== ======== ======== ====== Accumulated benefit obligation $ 14,150 $ 3,635 $ 13,625 $3,169 ======== ======== ======== ====== Projected benefit obligation for services rendered to date $(17,472) $ (4,160) $(17,114) $(3,720) Plan assets at fair value, primarily U.S.Government securities and common stocks 20,238 17,881 -------- --------- -------- ------- Plan assets in excess of or (less than) projected benefit obligation 2,766 (4,160) 767 (3,720) Unrecognized net (gain) loss (1,832) (63) 21 (33) Unrecognized net obligation 52 58 Unrecognized prior service cost 146 1,911 162 2,158 -------- --------- -------- -------- Prepaid (accrued) pension costs $ 1,132 $(2,312) $ 1,008 $ (1,568) ======== ========= ======== ========
The pension expense for the defined benefit plans included the following components (in thousands): Year Ended December 31 1996 1995 1994 ------- ------- ------ Service costs - benefits earned during the period $ 1,244 $ 854 $1,072 Interest cost on projected benefit obligation 1,525 1,375 1,237 Actual return on plan assets (2,026) (3,014) 330 Net amortization 894 2,115 (1,293) ------- ------- ------ Net pension expense $ 1,637 $ 1,330 $1,346 ======= ======= ====== Assumptions as of December 31 1996 1995 1994 ------- ------- ------ Weighted average discount rate 7.5% 7.0% 8.5% Rates of increase in compensation levels 4.0% 4.0% 4.0% Expected long-term rate of return on assets 8.0% 8.0% 8.0% At December 31, 1996 and 1995, respectively, plan assets include $965,000 and $745,000 of the Corporation's common stock and $184,000 and $193,000 of the Corporation's subordinated debt. Certain subsidiaries of the Corporation participate in a qualified 401(k) defined contribution plan for the full-time employees of the subsidiary. A percentage of employees' contributions to the plan are matched by the Corporation. The Corporation's contribution expense amounted to $404,000 in 1996, $380,000 in 1995 and $327,000 in 1994. The remaining subsidiaries of the Corporation participate in a Salary Savings ESOP Plan, under which eligible employees may contribute a percentage of their salary. The Corporation matches 50 percent of an eligible employee's contribution on the first 6 percent that the employee defers, and may make a discretionary contribution payable either in cash or the Corporation's common stock based upon the Corporation's profitability and approval of the Board of Directors. Employees are generally eligible to participate upon completing one year of service and having attained age 21. Employer contributions become 20 percent vested when an employee has completed two years of service, and vest at a rate of 20 percent per year thereafter. The Corporation recognized expense of $384,000 in 1996, $298,000 in 1995 and $189,000 in 1994 related to the Salary Savings ESOP Plan. POSTRETIREMENT PLANS In addition to the Corporation's retirement plans, the Corporation has various unfunded postretirement plans which provide medical benefits and life insurance benefits to its retirees. The postretirement health care plans vary, the most stringent of which are contributory and contain other cost-sharing features such as deductibles and co-insurance. The life insurance plans are noncontributory. The amounts recognized in the Corporation's consolidated financial statements are as follows (in thousands): Year Ended December 31 1996 1995 -------- -------- Accumulated postretirement benefit obligation: Current retirees $ 79 $ 186 Fully eligible actives 49 50 Other actives 688 594 ------- ------- Total Accumulated Postretirement Benefit Obligation 816 830 Unrecognized net transition obligation (612) (760) Unrecognized net gain 233 255 Unrecognized prior service cost (7) (9) ------- ------- Accrued postretirement benefit liability $ 430 $ 316 ======= ======= Net periodic postretirement benefit cost included the following components (in thousands): Year Ended December 31 1996 1995 1994 ------- ------- ------- Service cost $ 66 $ 60 $ 75 Interest cost 54 68 73 Amortization of transition obligation 30 38 49 ------- ------- ------- Net periodic postretirement benefit cost $ 150 $ 166 $ 197 ======= ======= ======= A 6.50 % annual rate of increase in the per capita costs of covered health care benefits is assumed for 1997, gradually decreasing to 5.25 % by the year 2001. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by $77,000 and increase the aggregate of the service and interest cost component of net periodic postretirement benefit cost for 1996 by $14,000. A discount rate of 7.50 % was used to determine the accumulated postretirement benefit obligation. RECAPITALIZATION OF SAVINGS ASSOCIATION INSURANCE FUND On September 30, 1996, the Deposit Insurance Funds Act of 1996 was signed into law and included a provision to recapitalize the Savings Association Insurance Fund (SAIF). The legislation required a one-time assessment on all deposits insured by the SAIF, including those held be chartered commercial banks as a result of previous acquisitions. The one-time assessment paid by the Corporation totaled $2.8 million, or $.19 per share. The legislation also included provisions that will result in a reduction in future annual deposit insurance costs. INCOME TAXES Income tax expense consists of the following (in thousands): Year Ended December 31 1996 1995 1994 ------- ------- ------- Current income taxes: Federal taxes $11,339 $10,572 $ 8,849 State taxes 308 428 302 ------- ------- ------- 11,647 11,000 9,151 Deferred income taxes: Federal taxes (1,648) (688) (1,586) State taxes (106) (12) (15) ------- ------- ------- $ 9,893 $10,300 $ 7,550 ======= ======= ======= The tax effects of temporary differences that give rise to deferred tax assets liabilities are presented below (in thousands): December 31 1996 1995 ------- -------- Deferred tax assets: Allowance for loan losses $ 8,609 $ 7,535 Deferred compensation 936 860 Deferred benefits 634 386 Loan fees 247 236 Other 1,061 603 ------- ------- TOTAL GROSS DEFERRED TAX ASSETS 11,487 9,620 ------- ------- Deferred tax liabilities: Depreciation (752) (930) Dealer reserve participation (957) Unrealized gains on securities available for sale (2,112) (2,117) Leasing (1,915) (285) Other (719) (1,100) ------- ------- TOTAL GROSS DEFERRED TAX LIABILITIES (5,498) (5,389) ------- ------- NET DEFERRED TAX ASSETS $ 5,989 $ 4,231 ======= ======= Following is a reconciliation between tax expense using federal statutory tax and actual effective tax: Year Ended December 31 1996 1995 1994 ------ ------ ------ Federal statutory tax 35.0% 35.0% 35.0% Effect of nontaxable interest and dividend income (4.5) (4.3) (6.0) State taxes .6 .8 .8 Goodwill .3 .4 .6 Merger related costs 2.4 Other items (.6) .9 2.8 ------ ------ ------ Actual effective taxes 33.2% 32.8% 33.2% ====== ====== ====== Included in loan income is interest on tax-free loans of $2.1 million, $2.4 million and $2.5 million for 1996, 1995 and 1994, respectively. The related income tax expense on securities gains amounting to $289,000, $173,000 and $456,000 for 1996, 1995 and 1994, respectively, is included in income taxes. CASH FLOW INFORMATION Following is a summary of supplemental cash flow information (in thousands): Year Ended December 31 1996 1995 1994 -------- -------- -------- Cash paid during year for: Interest $ 76,974 $ 72,888 $ 58,619 Income taxes 9,601 10,706 8,334 Non-cash Investing and Financing Activities: Acquisition of real estate in settlement of loans $ 6,319 $ 3,187 $ 3,749 Loans granted in the sale of other real estate 319 321 1,267 Transfers and reclassifications of investment securities to securities available for sale 97,483 17,257 Loans reclassified from held for sale 119,858 REGULATORY MATTERS The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and banking subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulators to ensure capital adequacy require the Corporation and its banking subsidiaries to maintain minimum amounts and ratios of total and tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of tier 1 capital to average assets (as defined). Management believes, as of December 31, 1996, that the Corporation and each of its banking subsidiaries meet all capital adequacy requirements to which they are subject. Capital ratios as of December 31, 1996 for the Corporation and its significant subsidiary, First National Bank of Pennsylvania, are as follows (dollars in thousands):
To Be well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------- ----------------- ------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO --------- ----- --------- ------- --------- -------- F.N.B. CORPORATION: Total Capital $225,762 13.0% $139,242 8.0% $174,053 10.0% (to risk- weighted assets) Tier 1 Capital 194,753 11.2 69,621 4.0 104,432 6.0 (to risk- weighted assets) Tier 1 Capital 194,753 8.2 95,529 4.0 119,411 5.0 (to average assets) FIRST NATIONAL BANK OF PENNSYLVANIA: Total Capital $ 88,259 12.0% $ 58,668 8.0% $ 73,335 10.0% (to risk- weighted assets) Tier 1 Capital 79,059 10.8 29,334 4.0 44,001 6.0 (to risk- weighted assets) Tier 1 Capital 79,059 7.8 50,904 4.0 50,904 5.0 (to average assets)
As of December 31, 1996, the Corporation and each of its banking subsidiaries have been categorized by the various regulators as "well capitalized" under the regulatory framework for prompt corrective action. The Corporation's banking subsidiaries were required to maintain aggregate reserves amounting to $20.0 million at December 31, 1996 to satisfy federal regulatory requirements. The Corporation also maintains deposits for various services such as check clearing. Certain limitations exist under applicable law and regulations by regulatory agencies regarding dividend payments to a parent by its subsidiaries. As of December 31, 1996, the subsidiaries had $26.3 million of retained earnings available for distribution as dividends without prior regulatory approval. Under current Federal Reserve regulations, the Corporation's banking subsidiaries are limited in the amount they may lend to non-bank affiliates, including the Corporation. Such loans must be secured by specified collateral. In addition, any such loans to a single non-bank affiliate may not exceed 10% of any banking subsidiary's capital and surplus and the aggregate of loans to all such affiliates may not exceed 20%. The maximum amount that may be borrowed by the parent company under these provisions approximated $36.0 million at December 31, 1996. PARENT COMPANY FINANCIAL STATEMENTS Below is condensed financial information of F.N.B. Corporation (parent company only). In this information, the parent's investments in subsidiaries are stated at cost plus equity in undistributed earnings of subsidiaries since acquisition. This information should be read in conjunction with the supplemental consolidated financial statements. BALANCE SHEET (IN THOUSANDS): December 31 1996 1995 --------- --------- ASSETS Cash $ 19 $ 16 Short-term investments 4,457 2,928 Advances to subsidiaries 81,099 76,849 Receivables 5,162 4,761 Securities available for sale 7,191 6,720 Investment in bank subsidiaries 180,048 167,851 Investment in non-bank subsidiaries 14,715 20,869 -------- -------- $292,691 $279,994 ======== ======== LIABILITIES Other liabilities $ 4,215 $ 4,092 Short-term borrowings 55,201 50,362 Long-term debt 33,990 37,394 -------- -------- TOTAL LIABILITIES 93,406 91,848 -------- -------- STOCKHOLDERS' EQUITY 199,285 188,146 -------- -------- TOTAL $292,691 $279,994 ======== ======== INCOME STATEMENT (IN THOUSANDS) Year Ended December 31 1996 1995 1994 ------- ------- -------- INCOME Dividend income from subsidiaries: Bank $11,778 $ 8,942 $ 6,849 Non-bank 2,501 3,706 3,596 ------- ------- ------- 14,279 12,648 10,445 Gain on sale of securities 850 512 1,287 Interest income 5,394 4,924 4,062 Other income 254 206 190 ------- ------- ------- TOTAL INCOME 20,777 18,290 15,984 ------- ------- ------- EXPENSES Interest expense 5,920 5,972 5,465 Service fees 617 609 559 Other expenses 2,076 1,297 1,239 ------- ------- ------- TOTAL EXPENSES 8,613 7,878 7,263 ------- ------- ------- INCOME BEFORE TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 12,164 10,412 8,721 Income tax credit 618 700 430 ------- ------- ------- 12,782 11,112 9,151 ------- ------- ------- Equity in undistributed income of subsidiaries: Bank 6,064 8,968 5,871 Non-bank 1,033 999 168 ------- ------- ------- 7,097 9,967 6,039 ------- ------- ------- NET INCOME $19,879 $21,079 $15,190 ======= ======= ======= STATEMENT OF CASH FLOWS (IN THOUSANDS) Year Ended December 31 1996 1995 1994 -------- --------- --------- OPERATING ACTIVITIES Net income $ 19,879 $ 21,079 $ 15,190 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of securities (850) (512) (1,287) Undistributed earnings of subsidiaries (7,097) (9,967) (6,039) Other, net (2,030) (882) (1,417) -------- -------- -------- Net cash flows from operating activities 9,902 9,718 6,447 INVESTING ACTIVITIES Purchase of securities (235) (383) (400) Proceeds from sale of securities 1,244 922 2,346 Advances from (to) subsidiaries (4,250) (6,107) (4,779) Investment in subsidiaries 356 737 (16,278) -------- ------- ------- Net cash flows from investing activities (2,885) (4,831) (19,111) FINANCING ACTIVITIES Net decrease in due to non-bank subsidiary (4,295) Net decrease in short-term borrowings 4,839 (1,723) (1,210) Decrease in long-term debt (12,303) (5,334) (7,400) Increase in long-term debt 8,899 6,274 15,275 Purchase of common stock (3,421) (1,447) (1,143) Sale of common stock 1,861 1,689 14,867 Cash dividends paid (6,889) (4,343) (3,419) ------- ------ ------- Net cash flows from financing activities (7,014) (4,884) 12,675 ------- ------ ------- NET INCREASE IN CASH 3 3 11 Cash at beginning of year 16 13 2 ------- ------ ------- CASH AT END OF YEAR $ 19 $ 16 $ 13 ======= ====== ======= CASH PAID Interest $ 6,251 $ 5,009 $ 4,433 Income taxes 39 Subordinated notes, included within short-term borrowings and long-term debt, are unsecured and subordinated to other indebtedness of the Corporation. At December 31, 1996, $79.1 million principal amount of such notes was redeemable prior to maturity by the holder at a discount equal to one month of interest on short-term notes or three months of interest on long-term notes. The issuer may require the holder to give 30 days prior written notice. No sinking fund has been established to retire the notes. The weighted average interest rate was 6.25% at December 31, 1996 and 6.63% at December 31, 1995. The subordinated notes are scheduled to mature in various amounts annually from 1997 through the year 2006. Following is a summary of the combined aggregate scheduled annual maturities for each year following December 31, 1996 (in thousands): 1997 $64,387 1998 4,583 1999 3,018 2000 1,917 2001 948 Later years 14,338 FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Due from Banks: For these short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities: For both securities available for sale and securities held to maturity, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans: The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of adjustable rate loans approximate the carrying amount, as these loans reprice periodically at current market rates. Deposits: The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity deposits is estimated by discounting future cash flows using rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefits that result from low-cost funding provided by the deposit liabilities compared to the cost of alternate sources of funds. Short-Term Borrowings: The carrying amounts for short-term borrowings approximate fair value for amounts that mature in 90 days or less. The fair value of subordinated notes is estimated by discounting future cash flows using rates currently offered. Long-Term Debt: The fair value of long-term debt is estimated by discounting future cash flows based on the market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities. The estimated fair values of the Corporation's financial instruments are as follows (in thousands): 1996 1995 --------------------- ---------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- FINANCIAL ASSETS Cash and short-term investments $ 115,235 $ 115,235 $ 151,533 $ 151,533 Securities available for sale 322,068 322,068 283,526 283,526 Securities held to maturity 174,551 173,677 174,483 174,546 Net loans 1,709,942 1,736,612 1,525,940 1,548,873 FINANCIAL LIABILITIES Deposits $2,013,888 $2,020,398 $1,896,145 $1,901,764 Short-term borrowings 112,230 112,230 73,501 73,501 Long-term debt 58,179 58,901 50,784 50,504 F.N.B. CORPORATION AND SUBSIDIARIES SUPPLEMENTAL SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31 * 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Total interest income 183,583 $ 172,512 $ 149,275 $ 144,251 $ 141,844 Total interest expense 77,616 74,754 59,895 62,858 69,798 Net interest income 105,967 97,758 89,380 81,393 72,046 Provision for loan losses 9,791 6,930 9,177 9,863 15,796 Total non-interest income 20,407 19,215 17,108 18,488 15,197 Total non-interest expenses 86,811 78,664 74,571 72,216 59,832 Net income 19,879 21,079 15,190 12,219 8,310 Net income, excluding non-recurring items 23,746 AT YEAR-END Total assets $2,418,407 $2,238,525 $2,087,816 $1,982,920 $1,935,643 Deposits 2,013,888 1,896,145 1,748,718 1,714,527 1,694,527 Net loans 1,700,332 1,525,940 1,437,809 1,209,018 1,156,577 Long-term debt 58,179 50,784 56,614 32,528 33,198 Preferred stock 3,525 4,516 4,563 4,582 4,605 Total stockholders' equity 199,285 188,146 167,096 142,277 125,869 PER COMMON SHARE * Net income Primary $ 1.35 $ 1.45 $ 1.06 $ .93 $ .68 Fully diluted 1.32 1.41 1.05 .93 .68 Net income, excluding non- recurring items Primary 1.62 Fully diluted 1.58 Cash dividends (FNB) .60 .33 .24 .23 .21 Cash dividends (West Coast) .23 .20 .17 .08 Book value 13.70 12.65 11.42 10.45 9.82 RATIOS * Return on average assets .86% .98% .75% .63% .49% Return on average assets, excluding non-recurring items 1.03 Return on average equity 10.19 11.85 9.53 9.00 6.97 Return on average equity, excluding non-recurring items 12.17 Dividends payout ratio 32.04 17.25 17.88 20.27 25.96 Average equity to average assets 8.47 8.23 7.83 7.00 7.03 * Non-recurring items include a one-time assessment of $1.8 million legislated by Congress to recapitalize the Savings Association Insurance Fund and merger related costs of approximately $2.1 million, each on an after-tax basis. F.N.B. CORPORATION AND SUBSIDIARIES SUPPLEMENTAL QUARTERLY EARNINGS SUMMARY (Dollars in thousands, except per share data) QUARTER ENDED 1996 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 --------- --------- ---------- --------- Total interest income $45,146 $45,474 $45,789 $47,174 Total interest expense 19,299 18,973 19,298 20,046 Net interest income 25,847 26,501 26,491 27,128 Provision for loan losses 1,727 1,940 1,850 4,274 Total non-interest income 5,128 5,001 5,430 4,848 Total non-interest expenses 20,436 20,503 23,313 22,559 Net income 6,076 6,158 4,675 2,970 Net income, excluding non-recurring items 6,602 4,910 PER COMMON SHARE Net income Primary $.42 $.42 $.32 $.20 Fully-diluted .41 .41 .31 .19 Net income, excluding non-recurring items Primary .46 .32 Fully-diluted .44 .32 Cash dividends (FNB) .15 .15 .15 .15 Cash dividends (West Coast) .05 .06 .06 .06 QUARTER ENDED 1995 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 --------- --------- ---------- --------- Total interest income $40,667 $42,840 $44,538 $44,467 Total interest expense 17,150 18,752 19,589 19,263 Net interest income 23,517 24,088 24,949 25,204 Provision for loan losses 1,749 1,637 1,668 1,876 Total non-interest income 4,240 5,215 4,643 5,117 Total non-interest expenses 19,423 20,148 19,365 19,728 Net income 4,466 4,994 5,770 5,850 PER COMMON SHARE Net income Primary $.31 $.34 $.40 $.40 Fully-diluted .30 .33 .39 .39 Cash dividends (FNB) .06 .06 .09 .12 Cash dividends (West Coast) .05 .05 .05 .05 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial review summarizes the combined financial condition and results of operations giving retroactive effect to the mergers of Southwest Banks, Inc.(Southwest) and West Coast Bancorp, Inc. (West Coast) with and into F.N.B. Corporation (the Corporation), and is intended to be read in conjunction with the Supplemental Consolidated Financial Statements and accompanying Notes to those statements. The merger of the Corporation and Southwest was consummated on January 21, 1997, and has been accounted for on a pooling-of-interests basis. The Corporation issued 2,851,907 shares of common stock in exchange for all of the outstanding common stock of Southwest. The merger of the Corporation and West Coast was consummated on April 18,1997, and has been accounted for on a pooling-of-interests basis. The Corporation issued 1,197,128 shares of common stock in exchange for all of the outstanding common stock of West Coast. This financial review is presented as if the mergers had been consummated for all periods presented. RESULTS OF OPERATIONS Net income decreased 5.7% from $21.1 million in 1995 to $19.9 million in 1996. Primary earnings per share was $1.35 and $1.45 for 1996 and 1995, while fully diluted earnings per share were $1.32 and $1.41, respectively, for those same periods. These results include a special one-time assessment to recapitalize the Savings Association Insurance Fund (SAIF) of $2.8 million and merger related costs of $2.1 million. Excluding these items, net income would have been $23.7 million, a 12.3% increase over 1995, and primary and fully diluted earnings per share would have been $1.62 and $1.58, respectively. Net interest income increased by 8.4% as net average interest earning assets increased by $19.2 million. These factors are further detailed in the discussion which follows. Common comparative ratios for results of operations include the return on average assets and the return on average equity. The Corporation's return on average assets was .86% for 1996 compared to .98% for 1995, while the Corporation's return on average equity was 10.19% for 1996 compared to 11.72% for 1995. Excluding the SAIF assessment and merger related costs, the Corporation had a return on average assets of 1.03% and a return on average equity of 12.09%. 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, 1996 1995 1994 -------------------------- ------------------------ ------------------------ AVERAGE YIELD AVERAGE YIELD AVERAGE YIELD BALANCE INTEREST /RATE BALANCE INTEREST /RATE BALANCE INTEREST /RATE ASSETS -------------------------- ------------------------ ------------------------ Interest earning assets: Interest bearing deposits with banks $ 5,379 $ 294 5.47% $ 4,971 $ 313 6.30% $ 6,796 $ 245 3.61% Federal funds sold 37,795 1,975 5.23 39,901 2,318 5.81 28,374 1,122 3.95 Taxable investment securities (1) 387,955 22,994 5.93 397,699 22,496 5.66 418,348 21,702 5.19 Non-taxable investment securities 68,068 4,198 6.17 57,806 3,711 6.42 57,104 3,524 6.17 Loans (2)(3) 1,651,321 156,265 9.46 1,519,084 145,920 9.61 1,390,620 125,053 8.99 --------- -------- --------- -------- --------- -------- Total interest earning assets 2,150,518 185,726 8.64 2,019,461 174,758 8.65 1,901,242 151,646 7.98 --------- -------- --------- ------- --------- ------- Cash and due from banks 80,133 75,574 69,753 Allowance for loan losses (25,239) (23,523) (21,091) Premises and equipment 43,380 39,364 34,339 Other assets 55,388 49,093 51,121 ---------- ---------- ---------- $2,304,180 $2,159,969 $2,035,364 ========== ========== ========== LIABILITIES Interest bearing liabilities: Deposits: Interest bearing demand $ 324,525 6,149 1.89 $ 280,613 6,762 2.41 $ 256,025 5,647 2.21 Savings 475,136 13,273 2.79 468,128 11,965 2.56 546,856 13,605 2.49 Other time 915,514 50,025 5.46 857,124 47,401 5.53 728,614 33,736 4.63 Short-term borrowings 86,514 3,785 4.38 94,049 5,368 5.71 84,032 4,038 4.81 Long-term debt 49,977 4,384 8.77 39,856 3,258 8.17 33,000 2,869 8.69 ---------- ------- --------- ------ -------- ------ Total interest bearing liabilities 1,851,666 77,616 4.19 1,739,770 74,754 4.30 1,648,527 59,895 3.63 Non-interest bearing demand deposits 216,497 210,070 196,891 Other liabilities 40,908 32,259 30,071 --------- --------- --------- 2,109,071 1,982,099 1,875,489 --------- --------- --------- MINORITY INTEREST 528 --------- STOCKHOLDERS' EQUITY 195,109 177,870 159,347 ---------- ---------- ---------- $2,304,180 $2,159,969 $2,035,364 ========== ========== ========== Excess of interest earning assets over interest bearing liabilities $ 298,852 $ 279,691 $ 252,715 ========== ========== ========== Net interest income $108,110 $100,004 $ 91,751 ======== ======== ======== Net interest spread 4.45% 4.35% 4.35% ===== ===== ===== Net interest margin (4) 5.03% 4.95% 4.83% ===== ===== =====
(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 $108.1 million in 1996 versus $100.0 million in 1995. Net interest income consisted of interest income of $185.7 million and interest expense of $77.6 million in 1996, compared to $174.8 million and $74.8 million for each, respectively, in 1995. Net interest income as a percentage of average earning assets (commonly referred to as the margin) rose to 5.03% in 1996 compared to 4.95% in 1995. Interest income on loans increased 7.1% from $145.9 million in 1995 to $156.3 million in 1996. This increase is the result loan growth. Average loans increased 8.7% from 1995. Interest expense on deposits increased slightly to $69.4 million in 1996. This increase was attributable to increases in all deposit categories with the largest percentage increases occurring within interest bearing demand and other time deposits. The Corporation monitors interest rate sensitivity by measuring the impact that future changes in interest rates will have on net interest income. Through its asset/liability management and pricing policies, management has strived to optimize net interest income while reducing the effects of changes in interest rates. (See "Liquidity and Interest Rate Sensitivity" discussion). The following table sets forth certain information regarding changes in net interest income attributable to changes in the volumes of interest earning assets and interest bearing liabilities and changes in the rates for the periods indicated (in thousands): Year Ended December 31, 1996 1995 -------------------------- -------------------------- VOLUME RATE NET VOLUME RATE NET ------- -------- -------- -------- --------- ------- INTEREST INCOME Interest bearing deposits with banks $ 33 $ (52) $ (19) $ (38) $ 106 $ 68 Federal funds sold (119) (224) (343) 554 642 1,196 Securities 30 955 985 (961) 1,942 981 Loans 12,606 (2,261) 10,345 11,947 8,920 20,867 ------- -------- -------- -------- --------- ------- 12,550 (1,582) 10,968 11,502 11,610 23,112 ------- -------- ------- -------- --------- ------- INTEREST EXPENSE Deposits: Interest bearing 1,617 (2,230) (613) 574 541 1,115 Savings 186 1,122 1,308 (2,038) 398 (1,640) Other time 3,223 (599) 2,624 6,501 7,164 13,665 Short-term borrowings (405) (1,178) (1,583) 518 812 1,330 Long-term debt 873 253 1,126 546 (157) 389 ------- ------- -------- ------- --------- -------- 5,494 (2,632) 2,862 6,101 8,758 14,859 ------- ------- -------- ------- --------- -------- NET CHANGE $ 7,056 $ 1,050 $ 8,106 $ 5,401 $ 2,852 $ 8,253 ======= ======= ======== ======= ========= ======== The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the absolute relative size of the rate and volume changes. PROVISION FOR LOAN LOSSES The provision for loan losses charged to operations is a direct result of management's analysis of the adequacy of the allowance for loan losses which takes into consideration factors, including qualitative factors, relevant to the collectibility of the existing portfolio. The provision for loan losses increased 41.2% to $9.8 million in 1996. This increase resulted from applying a consistent allowance for loan loss policy and methodology for evaluating the adequacy of the allowance across all affiliates, including Southwest and West Coast. (See "Non-Performing Loans and Allowance for Loan Losses" discussion). NON-INTEREST INCOME Total non-interest income increased 6.2% from $19.2 million in 1995 to $20.4 million in 1996. This increase was attributable to increases in service charges and gains on the sale securities. Service charges increased 6.9% from $10.6 million in 1995 to $11.3 million in 1996. Revenue was recognized as a result of increases in the level of deposits. Net gains on the sale of securities increased 67.3% due to a higher level of equity security sales in 1996. NON-INTEREST EXPENSES Total non-interest expense increased from $78.7 million in 1995 to $86.8 million in 1996. The increase is primarily attributable to a one-time assessment of $2.8 million to recapitalize the SAIF and merger-related expenses of $2.1 million. In addition, salaries and employee benefits increased by $3.5 million. Salaries and personnel expense increased 9.1% in 1996. This increase was due to expansion in the Corporation's retail network and increases for incentive compensation, as well as normal annual salary adjustments. The Corporation's incentive compensation plans allow for additional compensation to be paid to employees based on the Corporation achieving various financial and productivity goals. On September 30, 1996, the President of the United States signed into law the Deposit Insurance Funds Act of 1996 to recapitalize the SAIF. The legislation included a one-time assessment on all deposits insured by the SAIF, including those held by chartered commercial banks as a result of previous acquisitions. The Corporation was required to pay a one-time assessment of $2.8 million. The legislation also included provisions that will result in a reduction in future annual deposit insurance. Other non-interest expenses increased to $23.3 million in 1996. Included in this total was $2.1 million of expenses related to the affiliation with Southwest and West Coast. These expenses were primarily legal and investment banking costs associated with the structuring and completion of both mergers. INCOME TAXES The Corporation recognized income tax expense of $9.9 million for 1996 compared to $10.3 million for 1995. The 1996 effective tax rate of 33% was lower than the 35% federal statutory tax rate due to the tax benefits resulting from tax-exempt instruments and excludable dividend income. Additional information relating to income taxes is furnished in the Notes to Supplemental Financial Statements. LIQUIDITY AND INTEREST RATE SENSITIVITY The Corporation monitors its liquidity position on an ongoing basis to assure that it is able to meet the need for funds at all times. Given the monetary nature of its assets and liabilities and the significant source of liquidity provided by its securities portfolio, the Corporation generally has sufficient sources of funds available as needed to meet its routine, operational cash needs. Securities due to mature within one year, which will provide a source of short-term liquidity, amounted to $134.3 million or 27.0% of the investment portfolio. Additionally, the Corporation has external sources of funds available should it desire to use them. These include approved lines of credit with several major domestic banks, of which $25.0 million was unused at the end of 1996. To further meet its liquidity needs, the Corporation also has access to the Federal Home Loan Bank and the Federal Reserve Bank, as well as other uncommitted funding sources. Through the review of gap analyses and simulation modeling, management continually monitors the Corporation's exposure to changing interest rates. Management attempts to mitigate repricing mismatches through asset and liability pricing and matched maturity funding. Interest rate sensitivity measures the impact that future changes in interest rates will have on net interest income. The cumulative gap reflects a point-in-time net position of assets and liabilities repricing in specified time periods. The gap is one measurement of risk inherent in a balance sheet as it relates to changes in interest rates and their effect on net interest income. The gap analysis which follows is based on a combination of asset and liability amortizations, maturities and repricing opportunities. Non-maturity deposit balances have been allocated to various repricing intervals to estimate their true behavior and characteristics. The cumulative gap reflects the net position of assets and liabilities repricing in specified time periods. Based on the cumulative one year gap in this table and assuming no restructuring or modifications to asset/liability composition, a rise in interest rates would result in a minimal reduction in net interest income. Following is the gap analysis as of December 31, 1996 (dollars in thousands): WITHIN 4-12 1-5 OVER 3 MONTHS MONTHS YEARS 5 YEARS TOTAL --------- --------- -------- --------- ---------- INTEREST EARNING ASSETS Interest bearing deposits with banks $ 1,234 $ 100 $ 1,334 Federal funds sold 6,425 6,425 Securities 45,457 88,842 $ 317,609 $ 44,711 496,619 Loans, net of unearned income 421,966 366,571 661,550 287,655 1,737,742 --------- --------- --------- --------- ---------- 475,082 455,513 979,159 332,366 2,242,120 Other assets 176,287 176,287 --------- --------- --------- --------- ---------- $ 475,082 $ 455,513 $ 979,159 $ 508,653 $2,418,407 ========= ========= ========= ========= ========== INTEREST BEARING LIABILITIES Deposits: Interest checking $ 15,792 $ 45,820 $ 227,994 $ 3,894 $293,500 Savings 8,585 135,384 352,166 1,521 557,656 Time deposits 219,347 402,546 308,429 1,146 931,468 Short-term borrowings 71,995 16,767 23,468 112,230 Long-term debt 7,727 25,528 10,559 14,365 58,719 --------- --------- --------- --------- --------- 383,446 626,045 922,616 20,926 1,953,033 Other liabilities 266,089 266,089 Stockholders' equity 199,285 199,285 ---------- --------- --------- --------- ---------- $ 383,446 $ 626,045 $ 922,616 $ 486,300 $2,418,407 ========== ========= ========= ========= ========== PERIOD GAP $ 91,636 $(170,532) $ 56,543 $ 22,353 ========= ========= ========= ========= CUMULATIVE GAP $ 91,636 $ (78,896) $ (22,353) ========= ========= ========= RATE SENSITIVE ASSETS/RATE SENSITIVE LIABILITIES (CUMULATIVE) 1.24 .92 .99 1.15 ========= ========= ========= ========= CUMULATIVE GAP AS A PERCENT OF TOTAL ASSETS 3.8% (3.3)% (0.9)% ========= ========= ========= FINANCIAL CONDITION LOAN PORTFOLIO Following is a summary of loans (dollars in thousands): December 31 1996 1995 1994 1993 1992 ---------- ---------- --------- ---------- ---------- Real estate: Residential $ 682,600 $ 610,880 $ 551,285 $ 486,233 $ 399,489 Commercial 421,057 380,571 316,992 254,154 297,094 Construction 41,661 36,264 50,383 29,913 28,118 Installment loans to individuals 395,628 383,457 371,442 279,769 266,916 Commercial, financial and agricultural 189,411 161,239 192,652 199,638 203,566 Lease financing 21,538 5,037 Earned income (23,763) (27,258) (22,677) (22,694) (22,318) ----------- --------- --------- ---------- ---------- $1,728,132 $1,550,190 $1,460,077 $1,227,013 $1,172,865 =========== ========== =========== ========= ========== The Corporation strives to minimize credit losses by utilizing credit approval standards, diversifying its loan portfolio by industry and borrower conducting ongoing review and management of the loan portfolio. The ratio of loans to deposits at the end of 1996 was 85.8%, up from a ratio of 81.8% at the end of 1995. The increase in the ratio was a result of loan growth of 11.5%, exceeding a 6.2% increase in deposits. During 1996 and 1995 the Corporation sold $38.5 million and $49.7 million, respectively, in fixed rate residential mortgages to the Federal National Mortgage Association (FNMA). These sales allowed the Corporation to avoid the potential interest rate risk of those fixed rate loans in a rising rate environment. Additionally, it created liquidity for the Corporation to continue to offer credit availability to the markets it serves. All of the mortgages were sold with the servicing retained by the Corporation. In 1996, total installment loans to individuals and lease financing increased 7.4% to $417.2 million. The installment loan portfolio was comprised of $235.6 million in direct loans, $128.3 million in indirect loans and $31.7 million in sub-prime motor vehicle loans. The overall growth reflects a continuation of strong demand for indirect automobile loans and leases. The commercial loan portfolio consists principally of loans to small- and medium-sized businesses within the Corporation's primary market area of western Pennsylvania, eastern Ohio and southwest Florida. The Corporation generally avoids making significant loans to any single borrower in order to minimize credit risk. As of December 31, 1996, 1995 and 1994, no concentrations of loans exceeding 10% of total loans existed which were not disclosed as a separate category of loans. Following is a summary of the maturity distribution of certain loan categories based on remaining scheduled repayments of principal (in thousands): WITHIN ONE TO AFTER FIVE ONE YEAR FIVE YEARS YEARS TOTAL --------- ---------- ---------- -------- DECEMBER 31, 1996 Commercial, financial and agricultural $ 100,966 $ 75,729 $ 12,716 $ 189,411 Real Estate - construction 27,652 11,979 2,030 41,661 --------- --------- --------- -------- Total loans (excluding Real estate - mortgage and Installment loans to individuals) $ 128,618 $ 87,708 $ 14,746 $ 231,072 ========= ========= ========= ======== The total amount of loans due after one year includes $35.6 million with floating or adjustable rates of interest and $66.9 million had fixed rates of interest. NON-PERFORMING LOANS Non-performing loans include non-accrual loans and restructured loans. Non-accrual loans represent loans on which interest accruals have been discontinued. Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Following is a summary of non-performing loans (dollars in thousands): December 31 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Non-accrual loans $ 9,571 $ 9,506 $11,244 $11,055 $10,238 Restructured loans 2,146 3,075 3,157 3,236 1,388 ------- ------- ------- ------- ------- $11,717 $12,581 $14,401 $14,291 $11,626 ======= ======= ======= ======= ======= Non-performing loans as a percentage of total loans .68% .81% .99% 1.16% .99% Following is a table showing the amounts of contractual interest income and actual interest income recorded on non-accrual and restructured loans (in thousands): Year Ended December 31 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Gross interest income that would have been recorded if the loans had been current and in accordance with their original terms $1,414 $1,298 $1,791 $1,827 $1,705 Interest income included in income on the loans 763 685 676 708 998 Following is a summary of loans 90 days or more past due, on which interest accruals continue (dollars in thousands): December 31 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ Loans 90 days or more past due $2,936 $3,872 $2,753 $3,512 $4,437 Loans 90 days or more past due as a percentage of total loans .17% .25% .19 .29% .39% ALLOWANCE FOR LOAN LOSSES Management's analysis of the allowance for loan losses includes the evaluation of the loan portfolio based on internally generated loan review reports and the historical loss experience of the remaining balances of the various homogeneous loan pools which comprise the loan portfolio. Specific factors which are evaluated include the previous loan loss experience with the customer, the status of past due interest and principal payments on the loan, the collateral position of the loan, the quality of financial information supplied by the borrower and the general financial condition of the borrower. Historical loss experience on the remaining portfolio segments is considered in conjunction with the current status of economic conditions, loan loss trends, delinquency and non-accrual trends, credit administration and concentrations of credit risk. Following is a summary of changes in the allowance for loan losses (dollars in thousands): Year Ended December 31 1996 1995 1994 1993 1992 ------- ------- ------- ------ ------ Balance at beginning of year $24,250 $22,268 $17,995 $16,288 $13,289 Addition arising in purchase transactions 376 Loss reserves transferred on loans sold (893) (685) Charge-offs: Real estate - mortgage (421) (604) (1,454) (591) (2,192) Installment loans to individuals (5,939) (5,407) (3,817) (3,975) (4,059) Commercial, financial and agricultural (1,400) (820) (1,484) (4,090) (7,205) ------- ------- ------ ------- ------ (7,760) (6,831) (6,755) (8,656) (13,456) ------- ------- ------ ------- ------- Recoveries: Real estate - mortgage 128 189 98 173 209 Installment loans to individuals 1,047 1,124 964 781 716 Commercial, financial and agricultural 344 570 789 439 43 ------- ------ ------ ------ ------- 1,519 1,883 1,851 1,393 968 ------- ------ ------ ------ ------- Net charge-offs (6,241) (4,948) (4,904) (7,263) (12,488) Provision for loan losses 9,791 6,930 9,177 9,863 15,796 ------- ------- ------ ------ ------- Balance at end of year $27,800 $24,250 $22,268 $17,995 $16,288 ======= ======= ======= ======= ======= Net charge-offs as a percent of average loans, net of unearned income .38% .33% .35% .57% 1.11% Allowance for loan losses as a percent of total loans, net of unearned income 1.61 1.56 1.53 1.47 1.39 Allowance for loan losses as a percent of non-performing loans 237.26 192.75 154.63 125.92 140.10 Consistent with the growth in installment loans to individuals, the Corporation has experienced an increase in charge-offs. Installment loans to individuals are generally charged off no later than a predetermined number of days past due on a contractual basis or earlier in the event of bankruptcy. During 1996, charge-offs increased to $5.9 million from $5.4 million in 1995, resulting in an increase in the provision for loan losses from $6.9 million in 1995 to $9.8 million in 1996, and a higher allocation of the allowance for loan losses to installment loans, as the allowance for loan losses represented 1.73% of total installment loans at December 31, 1996, as compared to 1.57% at December 31, 1995. The Corporation has allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within each of the categories of loans shown in the table below. The allocation of the allowance should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Furthermore, the portion allocated to each loan category is not the sole amount available for future losses within such categories since the total allowance is a general allowance applicable to the entire portfolio. Following shows the allocation of the allowance for loan losses (in thousands):
% OF % OF % OF % OF % OF LOANS LOANS LOANS LOANS LOANS IN EACH IN EACH IN EACH IN EACH IN EACH CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL Year Ended 1996 LOANS 1995 LOANS 1994 LOANS 1993 LOANS 1992 LOANS December 31 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Commercial, financial and agricultural $ 6,682 35% $ 5,360 35% $ 7,946 35% $ 6,967 37% $ 6,252 43% Real estate - construction 105 2 75 2 186 3 489 2 481 2 Real estate - mortgage 3,121 40 3,284 40 3,554 38 2,849 40 2,692 34 Installment loans to individuals 7,367 23 6,383 23 5,047 24 4,541 21 4,298 21 Unallocated portion 10,525 8,648 5,535 3,149 2,565 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- $ 27,800 100% $ 24,250 100% $ 22,268 100% $ 17,995 100% $ 16,288 100% ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
INVESTMENT ACTIVITY Investment activities serve to enhance overall yield on earning assets while supporting interest rate sensitivity and liquidity positions. Securities purchased with the intent and ability to retain until maturity are categorized as securities held to maturity and carried at amortized cost. All other securities are categorized as securities available for sale and must be marked to market. Under the guidelines of FAS No. 115, institutions that sell securities out of the securities held to maturity portfolio risk being forced to mark to market the remaining securities in the portfolio since they have not demonstrated their intent to hold these securities to maturity. The Financial Accounting Standards Board (FASB) approved an amnesty period during which institutions had the opportunity to redesignate securities under FAS 115. The Corporation took advantage of this opportunity to reclass $97.5 million of securities held to maturity to securities available for sale. This movement allows the Corporation greater flexibility in managing its portfolio to take advantage of market conditions and provided an opportunity to better manage interest rate risk. The relatively short average maturity of all securities provides a source of liquidity to the Corporation and reduces the overall market risk of the portfolio. During 1996, securities available for sale increased 13.6% while securities held to maturity remained consistent with December 31, 1995. The following table indicates the respective maturities and weighted-average yields of investment securities as of December 31, 1996 (in thousands): Weighted Amount Average Yield --------- --------------- Obligations of U.S. Treasury and Other U.S. Government agencies: Maturing within one year $ 126,768 6.01% Maturing after one year within five years 129,382 5.92% Maturing after five years within ten years 19,363 7.01% Maturing after ten years 707 2.10% State & political subdivisions: Maturing within one year 4,796 4.73% Maturing after one year within five years 40,945 5.65% Maturing after five years within ten years 9,391 5.13% Maturing after ten years 437 4.86% Other securities: Maturing within one year 1,004 5.76% Maturing after one year within five years 1,003 6.04% Maturing after five years within ten years 5 5.50% Maturing after ten years 15 3.71% Mortgage-backed securities 144,640 6.02% No stated maturity 18,163 6.13% --------- ------ TOTAL $ 496,619 5.97% ========= ====== The weighted average yields for tax exempt securities are computed on a tax equivalent basis. DEPOSITS AND SHORT-TERM BORROWINGS As a commercial bank holding company, the Corporation's primary source of funds is its deposits. Those deposits are provided by businesses and individuals located within the markets served by the Corporation's subsidiaries. Total deposits increased 6.2% to $2.0 billion in 1996. The majority of this increase was due to a 12.6% increase in savings and NOW accounts. Additionally, time deposits increased 2.3% to $931.5 million. Short-term borrowings, made up of repurchase agreements, federal funds purchased, notes payable and subordinated notes increased 52.7% in 1996 to $112.2 million. The primary reason for this increase was a higher level of federal funds purchased in 1996 and an increase of $14.2 million in securities sold under repurchase agreements. Subordinated notes are the largest component of short-term borrowings. At December 31, 1996, subordinated notes represented 49.2% of total short-term borrowings. Following is a summary of selected financial information on short-term subordinated notes (dollars in thousands): December 31 1996 1995 1994 -------- -------- -------- Balance at end of year $ 55,201 $ 47,362 $ 48,085 Maximum month end balance 57,073 47,675 56,126 Average balance during the year 54,252 45,912 52,830 Weighted average interest rates: At end of year 5.35% 5.69% 5.21% During the year 5.57 5.54 5.06 CAPITAL RESOURCES The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. The Corporation seeks to maintain a strong capital base to support its growth and expansion activities, to provide stability to current operations and to promote public confidence. The capital management function is an ongoing process. Central to this process is internal equity generation accomplished by earnings retention. During 1996, retained earnings increased $11.8 million as a result of earnings retention versus $17.2 million in 1995. Total cash dividends declared represented 34.7% of net income for 1996 compared to 20.6% for 1995. Book value per share was $13.63 at December 31, 1996, compared to $12.82 at December 31, 1995. 1995 VERSUS 1994 The Corporation's net income was $21.1 million for 1995 versus $15.2 million for 1994. Primary earnings per share were $1.45 and $1.06 for 1995 and 1994, while fully diluted earnings were $1.41 and $1.05, respectively, for those same periods. The key factors attributing to the increase were increased credit quality, which allowed for lower loan loss provisions, and an increase in higher yielding assets. The Corporation's asset quality improved steadily from 1994 to 1995, as indicated by several key credit ratios. At December 31, 1995, non-performing assets decreased to .78% of total assets compared to .92% at December 31, 1994. The allowance for loan losses increased to 1.56% of total loans compared to 1.53% a year earlier. The ratio of net charge-offs to average loans outstanding decreased to .33% in 1995 from a ratio of .35% in 1994. Increases in both the return on average equity from 9.45% in 1994 to 11.72% in 1995 and the return on average assets from .74% in 1994 to .98% in 1995 reflect the improved performance of the Corporation. Net interest income, on a fully taxable equivalent basis, increased from $91.8 million in 1994 to $100.0 million in 1995, an increase of 9.0%. Net margin rose to 4.95% from 4.83% in 1994. Average loans increased 9.2% from 1994, contributing to the improvement in net interest income. The provision for loan losses was $6.9 million and represented a decrease of 24.5% from 1994, when a provision of $9.2 million was charged to operations. The decrease in the provision was a direct result of improvement in asset quality. Non-interest income increased 12.3% from $17.1 million in 1994 to $19.2 million in 1995. This increase was attributable to increases in service charges and gains on sale of loans, offset by a decrease in gains on the sale of securities. Service charges increased 24.0% from $8.6 million in 1994 to $10.6 million in 1995. Revenue was recognized as a result of an increase in total deposits. Net gain on the sale of loans increased $521,000 in 1995. Net gain on the sale of securities decreased $810,000 due to fewer security sales during 1995. Total non-interest expenses increased from $74.6 million in 1994 to $78.7 million in 1995. Salaries and personnel expense increased 10.3% in 1995, primarily due to an increase in employment levels in Florida resulting from the opening of three new branch offices. Deposit insurance decreased $1.3 million in 1995. This was the result of the FDIC lowering the insurance premiums for banks, since the Bank Insurance Fund had been funded to the required level. Conversely, the SAIF was still under-funded and those premiums were not reduced. Income tax expense increased 36.4% to $10.3 million for 1995 as a result of the Corporation generating more taxable income. The 1995 effective tax rate of 33% was below the 35% statutory tax rate due to the tax benefits resulting from income on tax-exempt instruments and excludable dividend income. EXHIBIT 99.2 INDEPENDENT AUDITORS' REPORT January 22, 1997 Board of Directors and Stockholders of Southwest Banks, Inc. Naples, Florida We have audited the accompanying consolidated balance sheets of Southwest Banks, Inc. and its subsidiaries, First National Bank of Naples and Cape Coral National Bank (collectively, the Company), as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southwest Banks, Inc. and its subsidiaries as of December 31, 1996 and 1995 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. HILL, BARTH & KING, INC. NAPLES, FLORIDA EXHIBIT 99.3 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders West Coast Bancorp, Inc. and Subsidiary Cape Coral, Florida We have audited the accompanying consolidated balance sheets of West Coast Bancorp, Inc. and Subsidiary at December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of West Coast Bancorp, Inc. and Subsidiary at December 31, 1996 and 1995, and the consolidated statements of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND, L.L.P. FORT MYERS, FLORIDA January 24, 1997 EXHIBIT 99.4 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders West Coast Bancorp, Inc. and Subsidiary Cape Coral, Florida We have audited the accompanying consolidated balance sheets of West Coast Bancorp, Inc. and Subsidiary at December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of West Coast Bancorp, Inc. and Subsidiary at December 31, 1995 and 1994, and the consolidated statements of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," as of January 1, 1995. COOPERS & LYBRAND, L.L.P. FORT MYERS, FLORIDA January 19, 1996 -----END PRIVACY-ENHANCED MESSAGE-----