-----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, BtutDfGeOqduXTCi+lRrHDuTqofiVtGFkQtoQ3BEI79Qo00hu83IB+afVduvcEsC AYX2LNxJ1vad9B37ZnTN4w== 0000037808-99-000004.txt : 19990705 0000037808-99-000004.hdr.sgml : 19990705 ACCESSION NUMBER: 0000037808-99-000004 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990702 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: SEC FILE NUMBER: 000-08144 FILM NUMBER: 99658770 BUSINESS ADDRESS: STREET 1: ONE FNB BLVD STREET 2: HERMITAGE SQUARE CITY: HERMITAGE STATE: PA ZIP: 16148 BUSINESS PHONE: 7249816000 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 2, 1999 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.) One F.N.B. Blvd., Hermitage, Pennsylvania 16148 ----------------------------------------- ---------- (Address of principal executive offices) (Zip code) (724) 981-6000 ---------------------------------------------------- (Registrant's telephone number, including area code) INFORMATION TO BE INCLUDED IN THE REPORT ITEM 5. OTHER EVENTS On January 13, 1999, F.N.B. Corporation (the Corporation) completed its acquisition of Guaranty Bank & Trust. 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 this merger using the pooling of interests method of accounting. The Corporation is hereby filing with the Securities and Exchange Commission a copy of the Audited Consolidated Financial Statements for the years ended December 31, 1998, 1997 and 1996 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 PricewaterhouseCoopers LLP Exhibit 23.4 Consent of Hacker, Johnson, Cohen & Grieb PA Exhibit 23.5 Consent of Bobbitt, Pittenger & Company, P.A. Exhibit 27.1 Financial Data Schedule for the years ended December 31, 1998, 1997 and 1996 Exhibit 27.2 Financial Data Schedule for the quarterly periods in the year ended December 31, 1998 Exhibit 27.3 Financial Data Schedule for the quarterly periods in the year ended December 31, 1997 Exhibit 99.1 Consolidated Financial Statements for the years ended December 31, 1998, 1997 and 1996 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 Audit of Southwest Banks, Inc. Exhibit 99.3 Report of Independent Auditors Coopers & Lybrand L.L.P. for the 1996 Audit of West Coast Bancorp, Inc. Exhibit 99.4 Report of Independent Auditors Hacker, Johnson, Cohen & Grieb PA for the 1997 and 1996 Audits of Seminole Bank Exhibit 99.5 Report of Independent Auditors Hacker, Johnson, Cohen & Grieb PA for the 1997 and 1996 Audits of Citizens Holding Corporation and Subsidiary Exhibit 99.6 Report of Independent Auditors Bobbitt, Pittenger & company, P.A. for the 1998, 1997 and 1996 Audits of Guaranty Bank & Trust Company 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 2, 1999 EXHIBIT INDEX 23.1 Consent of Ernst & Young LLP 23.2 Consent of Hill, Barth & King, Inc. 23.3 Consent of PricewaterhouseCoopers LLP 23.4 Consent of Hacker, Johnson, Cohen & Grieb PA 23.5 Consent of Bobbitt, Pittenger & Company, P.A. 27.1 Financial Data Schedule for the years ended December 31, 1998, 1997 and 1996 27.2 Financial Data Schedule for the quarterly periods in the year ended December 31, 1998 27.3 Financial Data Schedule for the quarterly periods in the year ended December 31, 1997 99.1 Consolidated Financial Statements for the years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors and Management's Discussion and Analysis 99.2 Report of Independent Auditors Hill, Barth & King, Inc. for the 1996 Audit of Southwest Banks, Inc. 99.3 Report of Independent Auditors Coopers & Lybrand L.L.P. for the 1996 Audit of West Coast Bancorp, Inc. 99.4 Report of Independent Auditors Hacker, Johnson, Cohen & Grieb PA for the 1997 and 1996 Audits of Seminole Bank 99.5 Report of Independent Auditors Hacker, Johnson, Cohen & Grieb PA for the 1997 and 1996 Audits of Citizens Holding Corporation and Subsidiary 99.6 Report of Independent Auditors Bobbitt, Pittenger & Company, P.A. for the 1998, 1997 and 1996 Audits of Guaranty Bank & Trust Company EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Regarding: 1) Registration Statement on Form S-8 relating to F.N.B. Corporation 1990 Stock Option Plan (File #33-78114). 2) Registration Statement on Form S-8 relating to F.N.B. Corporation Restricted Stock Bonus Plan (File #33-78134). 3) Registration Statement on Form S-8 relating to F.N.B. Corporation 1996 Stock Option Plan (File #333-03489). 4) Registration Statement on Form S-8 relating to F.N.B. Corporation Restricted Stock and Incentive Bonus Plan (File #333-03493). 5) Registration Statement on Form S-8 relating to F.N.B. Corporation Directors Compensation Plan (File #333-03495). 6) Registration Statement on Form S-8 relating to F.N.B. Corporation 401(k) Plan (File #333-03503). 7) Post-Effective Amendment No.1 on Form S-8 to Registration Statement on Form S-4 (File #333-01997). 8) Post-Effective Amendment No.1 on Form S-8 to Registration Statement on Form S-4 (File #333-22909). 9) Registration Statement on Form S-3 relating to the F.N.B. Corporation Subordinated Notes and Daily Cash Accounts (File #333-31909). 10) Registration Statement on Form S-3 relating to the Voluntary Dividend Reinvestment and Direct Stock Purchase Plan (File #333-46581). 11) Registration Statement on Form S-8 relating to stock options assumed in the acquisition of Mercantile Bank of Southwest Florida (File #333-42333). We consent to the incorporation by reference in the above listed Registration Statements of our report dated June 30, 1999, with respect to the consolidated financial statements of F.N.B. Corporation and subsidiaries as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 included in this Current Report on Form 8-K. /s/ERNST & YOUNG LLP Pittsburgh, Pennsylvania June 30, 1999 EXHIBIT 23.2 CONSENT OF HILL, BARTH & KING, INC., INDEPENDENT AUDITORS We consent to the incorporation by reference in the registration statements of F.N.B. Corporation on Forms S-3 (Registration Nos. 333-31909 and 333- 46581) and Forms S-8 (Registration Nos. 33-78114, 33-78134, 333-03489, 333- 03493, 333-03495, 333-03503, 333-01997, 333-22909 and 333-42333) and to the use in this Current Report of F.N.B. Corporation on Form 8-K of our report dated January 22, 1997, on our audit of the consolidated financial statements of Southwest Banks, Inc. which have been incorporated into the Consolidated Financial Statements for the year ended December 31, 1996, which report is included as an exhibit in F.N.B. Corporation's Current Report on Form 8-K. /s/Hill, Barth & King, Inc. Certified Public Accountants Naples, Florida July 2, 1999 EXHIBIT 23.3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the registration statement of F.N.B. Corporation on Forms S-3 (Registration Nos. 333-31909 and 333-46581) and Forms S-8 (Registration Nos. 33-78114, 33-78134, 333-03489, 333-03493, 333-03495, 333-03503, 333-01997, 333-22909 and 333-42333) of our report dated January 24, 1997 on our audits of the consolidated financial statements of West Coast Bancorp, Inc. for the years ended December 31, 1996 and 1995, which report is included as an exhibit in F.N.B. Corporation's Current Report on Form 8-K. /s/PRICEWATERHOUSECOOPERS LLP June 30, 1999 Tampa, Florida EXHIBIT 23.4 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. 333-31909 and 333-46581) and Forms S-8 (Registration Nos. 33-78114, 33-78134, 333-03489, 333-03493, 333-03495, 333-03503, 333-01997, 333-22909 and 333-42333) of our report dated January 9, 1998 on our audits of the financial statements of Seminole Bank at December 31, 1997 and 1996 and for each of the years in the three- year period ended December 31, 1997 and of our report dated January 9, 1998 except for Note 18, as to which the date is April 6, 1998 on our audits of the financial statements of Citizens Holding Corporation and Subsidiaries at December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997 which reports are included as exhibits in F.N.B. Corporation's Current Report on Form 8-K. /s/HACKER, JOHNSON, COHEN & GRIEB PA Tampa, Florida June 30, 1999 EXHIBIT 23.5 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. 333-31909 and 333-46581) and Forms S-8 (Registration Nos. 33-78114, 33-78134, 333-03489, 333-03493, 333-03495, 333-03503, 333-01997, 333-22909 and 333-42333) of our report dated April 23, 1999 on our audits of the financial statements of Guaranty Bank & Trust Company for the years ended December 31, 1998, 1997 and 1996, which report is included as an exhibit in F.N.B. Corporation's Current Report on Form 8-K. /s/BOBBITT, PITTENGER & COMPANY, P.A. Sarasota, Florida June 30, 1999 EXHIBIT 99.1 Consolidated Financial Statements and Management's Discussion and Analysis F.N.B. Corporation and Subsidiaries Years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS Years ended December 31, 1998, 1997 and 1996 CONTENTS Report of Independent Auditors........................................... 1 Consolidated Financial Statements Consolidated Balance Sheet..................................... 2 Consolidated Income Statement.................................. 3 Consolidated Statement of Stockholders' Equity................. 4 Consolidated Statement of Cash Flows........................... 5 Notes to Consolidated Financial Statements..................... 6 Selected Financial Data................................................. 31 Quarterly Earnings Summary.............................................. 32 Management's Discussion and Analysis of Financial Conditions and Results of Operations............................................... 33 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors F.N.B. Corporation We have audited the consolidated balance sheets of F.N.B. Corporation and subsidiaries (F.N.B. Corporation) as of December 31, 1998 and 1997 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. The consolidated financial statements give retroactive effect to the merger of F.N.B. Corporation and Guaranty Bank & Trust Company on January 13, 1999, which has been accounted for using the pooling of interests method as described in the notes to the consolidated financial statements. These consolidated financial statements are the responsibility of management of F.N.B. Corporation. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of Guaranty Bank & Trust Company, which statements reflect total assets constituting approximately 4% for 1998 and net income constituting approximately 1% for 1998 of the related consolidated financial statement totals. We did not audit the financial statements of Southwest Banks, Inc. and subsidiaries, West Coast Bancorp, Inc. and subsidiary, Seminole Bank, Citizens Holding Corporation and subsidiaries or Guaranty Bank & Trust Company, which statements reflect total assets constituting approximately 11% for 1997 and net income constituting approximately 8% and 12% for 1997 and 1996, respectively, of the related consolidated financial statements totals. 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, West Coast Bancorp, Inc. and subsidiary, Seminole Bank, Citizens Holding Corporation and subsidiaries and Guaranty Bank & Trust Company 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 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 and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of F.N.B. Corporation at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, after giving retroactive effect to the merger of Guaranty Bank & Trust Company, as described in the notes to the consolidated financial statements, in conformity with generally accepted accounting principles. /s/ERNST & YOUNG LLP Pittsburgh, Pennsylvania June 30, 1999 F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET Dollars in thousands, except par values December 31 1998 1997 ---------- ---------- ASSETS Cash and due from banks...................... $ 134,847 $ 112,292 Interest bearing deposits with banks......... 4,192 5,581 Federal funds sold........................... 44,706 46,013 Mortgage loans held for sale................. 15,947 6,536 Securities available for sale................ 455,082 470,118 Securities held to maturity (fair value of $119,522 and $154,624)..................... 118,575 154,241 Loans, net of unearned income of $31,014 and $20,643................................ 2,422,884 2,175,789 Allowance for loan losses.................... (32,308) (31,055) ---------- ---------- NET LOANS.................................. 2,390,576 2,144,734 Premises and equipment....................... 93,584 76,984 Other assets................................. 146,031 78,299 ---------- ---------- $3,403,540 $3,094,798 ========== ========== LIABILITIES Deposits: Non-interest bearing....................... $ 401,272 $ 329,347 Interest bearing........................... 2,449,770 2,255,194 ---------- ---------- TOTAL DEPOSITS........................... 2,851,042 2,584,541 Other liabilities............................ 50,252 41,578 Short-term borrowings........................ 150,981 127,186 Long-term debt............................... 69,492 72,246 ----------- ---------- TOTAL LIABILITIES........................ 3,121,767 2,825,551 STOCKHOLDERS' EQUITY Preferred stock - $10 par value Authorized - 20,000,000 shares Issued - 237,985 and 287,500 shares Aggregate liquidation value - $5,950 and $7,188.......................... 2,380 2,875 Common Stock - $2 par value Authorized - 100,000,000 shares Issued - 19,264,231 and 18,399,920 shares.. 38,529 36,800 Additional paid-in capital................... 161,232 133,375 Retained earnings............................ 76,408 94,452 Accumulated other comprehensive income....... 6,308 5,373 Treasury stock - 109,285 and 113,592 shares at cost............................. (3,084) (3,628) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY............... 281,773 269,247 ---------- ---------- $3,403,540 $3,094,798 ========== ========== See accompanying Notes to Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT Dollars in thousands, except per share data Year Ended December 31 1998 1997 1996 -------- -------- -------- INTEREST INCOME Loans, including fees....................... $205,071 $187,225 $175,409 Securities: Taxable................................... 32,458 29,210 26,925 Nontaxable................................ 2,482 2,442 2,448 Dividends................................. 1,629 1,185 1,113 Other....................................... 4,334 4,997 3,828 -------- -------- -------- TOTAL INTEREST INCOME................... 245,974 225,059 209,723 INTEREST EXPENSE Deposits.................................... 96,657 86,466 79,541 Short-term borrowings....................... 6,813 6,415 4,030 Long-term debt.............................. 4,590 3,746 4,384 -------- -------- -------- TOTAL INTEREST EXPENSE.................. 108,060 96,627 87,955 NET INTEREST INCOME..................... 137,914 128,432 121,768 Provision for loan losses................... 7,572 11,503 10,063 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............. 130,342 116,929 111,705 NON-INTEREST INCOME Insurance commissions and fees.............. 4,067 3,983 4,116 Service charges............................. 16,581 13,658 12,873 Trust....................................... 2,792 2,707 2,478 Gain on sale of securities.................. 1,384 1,287 790 Gain on sale of loans....................... 3,316 1,730 961 Other....................................... 5,270 4,114 2,680 -------- -------- -------- TOTAL NON-INTEREST INCOME............... 33,410 27,479 23,898 -------- -------- -------- 163,752 144,408 135,603 NON-INTEREST EXPENSES Salaries and employee benefits.............. 60,256 54,171 49,654 Net occupancy............................... 8,569 8,168 7,896 Amortization of intangibles................. 1,321 1,584 1,047 Equipment................................... 8,962 8,020 7,327 Deposit insurance........................... 1,037 887 1,130 Recapitalization of Savings Association Insurance Fund................ 3,176 Merger related.............................. 5,541 2,385 2,081 Promotional................................. 2,499 2,730 3,032 Insurance claims paid....................... 2,275 1,867 1,707 Other....................................... 24,676 23,509 25,068 -------- -------- -------- TOTAL NON-INTEREST EXPENSES............. 115,136 103,321 102,118 -------- -------- -------- INCOME BEFORE INCOME TAXES.............. 48,616 41,087 33,485 Income taxes................................ 16,418 13,013 11,207 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEMS....... 32,198 28,074 22,278 Gain on sale of subsidiary and branches, net of tax of $4,743...................... 8,809 -------- -------- -------- NET INCOME.............................. $ 32,198 $ 36,883 $ 22,278 ======== ======== ======== EARNINGS PER COMMON SHARE BEFORE EXTRAORDINARY ITEMS Basic................................... $1.58 $1.42 $1.11 ===== ===== ===== Diluted................................. $1.51 $1.35 $1.08 ===== ===== ===== EARNINGS PER COMMON SHARE Basic................................... $1.58 $1.87 $1.11 ===== ===== ===== Diluted................................. $1.51 $1.78 $1.08 ===== ===== ===== See accompanying Notes to Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Dollars in thousands, except per share data
ACCUMULATED OTHER EMPLOYEE COMPRE- ADDITIONAL COMPRE- STOCK HENSIVE PREFERRED COMMON PAID-IN RETAINED HENSIVE OWNERSHIP TREASURY INCOME STOCK STOCK CAPITAL EARNINGS INCOME PLAN STOCK ------- ------- ------- -------- -------- ------ ----- -------- BALANCE AT JANUARY 1, 1996........... $4,516 $32,480 $105,584 $ 75,293 $3,394 $(389) $ (464) Net income........................... $22,278 22,278 Change in accumulated other comprehensive income............... (796) (796) ------- ------ Comprehensive income................. $21,482 ======= Cash dividends declared: Preferred stock.................... (766) Common stock $.60 per share........ (6,160) Purchase of common stock............. (3,421) Issuance (retirement) of common stock....................... (44) (438) 2,398 Stock dividend....................... 1,016 9,711 (10,727) Conversion of preferred stock........ (991) 399 592 Obligation under ESOP plan........... 389 ------ ------- -------- -------- ------ ----- -------- BALANCE AT DECEMBER 31, 1996......... 3,525 33,851 115,449 79,918 2,598 0 (1,487) Net income........................... $36,883 36,883 Change in accumulated other comprehensive income............... 2,775 2,775 ------- Comprehensive income................. $39,658 ======= Cash dividends declared: Preferred stock.................... (588) Common stock $.63 per share........ (9,036) Purchase of common stock............. (7,688) Issuance of common stock............. 91 228 (496) 5,547 Issuance of common stock for acquisition.................... 1,260 2,240 4,177 Stock dividend....................... 1,332 15,074 (16,406) Conversion of preferred stock........ (650) 266 384 ------ ------- -------- -------- ------ ----- --------- BALANCE AT DECEMBER 31, 1997......... 2,875 36,800 133,375 94,452 5,373 0 (3,628) Net income........................... $32,198 32,198 Change in accumulated other comprehensive income............... 935 935 ------- Comprehensive income................. $33,133 ======= Cash dividends declared: Preferred stock.................... (492) Common stock $.71 per share........ (12,273) Purchase of common stock............. (16,989) Issuance (retirement) of common stock....................... (17) (329) (8,040) 17,533 Stock dividend....................... 1,528 27,909 (29,437) Conversion of preferred stock........ (495) 218 277 ------ ------- -------- -------- ------ ----- ------- BALANCE AT DECEMBER 31, 1998......... $2,380 $38,529 $161,232 $ 76,408 $6,308 $ 0 $(3,084) ====== ======= ======== ======== ====== ===== =======
See accompanying Notes to Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Dollars in thousands Year Ended December 31 1998 1997 1996 --------- --------- --------- OPERATING ACTIVITIES Net income........................... $ 32,198 $ 36,883 $ 22,278 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.... 9,073 8,329 7,200 Provision for loan losses........ 7,572 11,503 10,063 Provision for valuation allowance on other real estate owned...... 540 664 Deferred taxes................... (4,220) (1,247) (2,193) Gain on securities available for sale............................ (1,384) (1,287) (790) Gain on sale of loans............ (3,316) (1,730) (961) Extraordinary gains on sales of subsidiary and branches, net of tax............................. (8,809) Proceeds from sale of loans...... 89,484 115,998 72,459 Loans originated for sale........ (95,579) (110,382) (64,694) Net change in: Interest receivable............ 82 (2,693) 1,248 Interest payable............... 684 1,783 432 Other, net....................... (56,624) 4,148 5,128 --------- --------- --------- Net cash flows from operating activities....... (22,030) 53,036 50,834 INVESTING ACTIVITIES Net change in: Interest bearing deposits with banks............................. 1,389 (2,311) 3,097 Federal funds sold................. 1,307 (3,294) 49,705 Loans.............................. (253,960) (210,262) (216,347) Securities available for sale: Purchases.......................... (218,145) (273,522) (200,816) Sales.............................. 16,334 44,753 45,468 Maturities......................... 219,863 148,684 114,147 Securities held to maturity: Purchases.......................... (36,960) (16,028) (55,822) Maturities......................... 72,722 67,158 55,185 Increase in premises and equipment... (24,844) (19,511) (14,000) Net cash received (paid) for mergers, acquisitions and divestiture....... 48,625 (50,362) --------- --------- --------- Net cash flows from investing activities....... (173,669) (314,695) (219,383) FINANCING ACTIVITIES Net change in: Non-interest bearing deposits, savings and NOW................... 203,031 133,824 111,727 Time deposits...................... 14,789 114,449 32,829 Short-term borrowings.............. 23,795 (1,802) 40,711 Increase in long-term debt........... 16,838 44,010 32,899 Decrease in long-term debt........... (19,592) (29,862) (25,504) Net acquisition of treasury stock.... (7,842) (2,319) (1,504) Cash dividends paid.................. (12,765) (9,624) (6,926) --------- --------- --------- Net cash flows from financing activities....... 218,254 248,676 184,232 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 22,555 (12,983) 15,683 Cash and cash equivalents at beginning of year.................. 112,292 125,275 109,592 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR........................ $ 134,847 $ 112,292 $ 125,275 ========= ========= ========= See accompanying Notes to Consolidated Financial Statements F.N.B. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS: The Corporation is a bank holding company headquartered in Hermitage, Pennsylvania with administrative offices in Naples, Florida. It operates 9 community banks through 88 offices and a consumer finance company through 34 offices in Pennsylvania, Florida, Ohio and New York. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to the prior years' financial statements to conform to the current year's presentation. 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 other comprehensive income. 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. MORTGAGE LOANS HELD FOR SALE: Mortgage 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. LOANS AND THE ALLOWANCE FOR LOAN LOSSES: Loans 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, all unpaid interest is reversed. While on non-accrual, contractual interest payments are applied against principal until the loan is restored to accrual status. 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 future economic conditions, known and inherent risks in the loan portfolio, the estimated value of underlying collateral and changes in the composition of the loan portfolio. 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. Impaired loans are 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. 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: Goodwill is being amortized over 15 years on the straight-line method and core deposit intangibles are being amortized on accelerated methods over various lives ranging from 7-17 years. The Corporation periodically evaluates its goodwill and core deposit intangibles for impairment. 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 5 percent stock dividend declared on April 26, 1999. Basic 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. Diluted earnings per common share is calculated by dividing net income by the weighted average number of shares of common stock outstanding, assuming conversion of outstanding convertible preferred stock from the beginning of the year or date of issuance and the exercise of stock options and warrants. Such adjustments to net income and the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per common share. CASH EQUIVALENTS: The Corporation considers cash and due from banks as cash and cash equivalents. NEW ACCOUNTING STANDARDS: Financial Accounting Standards Statement (FAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," requires all derivatives to be recorded on the balance sheet at fair value and establishes standard accounting methodologies for hedging activities. The standard will result in the recognition of offsetting changes in value or cash flows of both the hedge and the hedged item in earnings in the same period. The statement is effective for the Corporation's fiscal year ending December 31, 2001. Because the Corporation has not entered into any derivative transactions, the adoption of this statement will have no impact on the financial statements. FAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Entity," amends FAS No. 65 allowing mortgage backed securities or other retained interests arising from the securitization of mortgage loans to be classified based on the mortgage banking entities ability and intent to sell or hold those securities. Previously these securities had to be held within a trading account. This statement is effective for the Corporation's fiscal year ending December 31, 1999. American Institute of Certified Public Accountants Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," requires capitalization of certain costs incurred during an internal use software development project. The SOP is effective for the Corporation's fiscal year ending December 31, 1999. Application of this SOP is not expected to have a material effect on the Corporation's financial position or results of operations. MERGERS, ACQUISITIONS AND DIVESTITURES On January 13, 1999, the Corporation completed its affiliation with Guaranty Bank & Trust (Guaranty), a community bank headquartered in Venice, Florida with assets of $152.8 million. Under the terms of the merger agreement, each outstanding share of Guaranty's common stock was converted into 1.536 shares of the Corporation's common stock. A total of 1,250,994 shares of the Corporation's common stock were issued. The transaction was accounted for as a pooling-of-interests. On February 12, 1999, Guaranty was merged into an existing subsidiary of the Corporation, West Coast Bank, to form West Coast Guaranty Bank, N.A. Following is an unaudited summary of pro forma information, which represents a combination of the results of operations of the Corporation and Guaranty (in thousands, except per share data): Year Ended December 31, 1998 F.N.B. GUARANTY -------- -------- Net interest income......................... $132,600 $5,313 Net income.................................. 31,872 326 On October 24, 1998, First National Bank of Pennsylvania (FNBPA) purchased three Lawrence County branches. This purchase added $48.7 million in deposits. As a result of the transaction, FNBPA recognized $5.1 million and $1.8 million in goodwill and core deposit intangibles, respectively. On August 31, 1998, the Corporation completed its affiliation with Citizens Holding Corporation, headquartered in Clearwater, Florida, with assets totaling $135.0 million. Under the terms of the merger agreement, each outstanding share of Citizens' common stock was converted into 1.743 shares of the Corporation's common stock. A total of 1,012,325 shares of the Corporation's common stock were issued. Citizens' principal asset, Citizens Bank and Trust, was merged into an existing subsidiary of the Corporation, First National Bank of Florida (FNB Florida), formerly Indian Rocks National Bank, in Clearwater, Florida. Results for prior years are restated to reflect this acquisition as a pooling-of-interests. On May 29, 1998, the Corporation completed its affiliation with Seminole Bank, headquartered in Seminole, Florida, with assets totaling $92.2 million. Under the terms of the merger agreement, each outstanding share of Seminole's common stock was converted into 1.530 shares of the Corporation's common stock. A total of 855,450 shares of the Corporation's common stock were issued. Seminole was merged into an existing subsidiary of the Corporation, FNB Florida, in Clearwater, Florida. Results for prior years are restated to reflect this acquisition as a pooling-of-interests. On January 20, 1998, the Corporation completed its affiliation with West Coast Bank (West Coast), headquartered in Sarasota, Florida, with assets totaling $107.4 million. Under the terms of the merger agreement, each outstanding share of West Coast's common stock was converted into 1.0 share of the Corporation's common stock. A total of 585,263 shares of the Corporation's common stock were issued. Results for prior years have been restated to reflect this acquisition as a pooling-of-interests. The following table sets forth separate company financial information for the year ended December 31, 1997. The F.N.B. Corporation results exclude the effects of any mergers which occurred subsequent to December 31, 1997 (in thousands): Year Ended December 31, 1997 F.N.B. CITIZENS SEMINOLE WEST COAST -------- -------- -------- ---------- Net interest income............ $111,030 $4,800 $3,771 $4,013 Net income..................... 33,123 1,052 1,146 879 During 1997, the Corporation affiliated with First National Bank of Naples, Naples, Florida, Cape Coral National Bank, Cape Coral, Florida, West Coast Bancorp, Inc. (WCBI), Cape Coral, Florida and First National Bank of Florida, Clearwater, Florida. These affiliations added assets and deposits of $790.7 million and $658.2 million, respectively, and were accounted for as poolings- of-interests. The Corporation also acquired Mercantile Bank of Southwest Florida (Mercantile), located in Naples, Florida. Mercantile was merged into First National Bank of Naples and added assets and deposits of $121.7 million and $108.2 million, respectively. The Corporation paid $13.6 million and accounted for the acquisition under the purchase method. During 1997, the Corporation disposed of its subsidiary, Bucktail Bank and Trust Company (Bucktail), in exchange for 565,384 shares of Sun Bancorp, Inc. (Sun), a bank holding company headquartered in Selinsgrove, Pennsylvania. At December 31, 1998, the Corporation's investment in Sun is accounted for using the equity method and had a market value totaling $27.6 million and a carrying value totaling $21.0 million. The Corporation recognized equity earnings from Sun totaling $1.3 million for the year ended December 31, 1998. At December 31, 1998, Sun had total assets of $623.6 million and recognized net income of $8.7 million for the year then ended. The Corporation also sold three branches of its subsidiary Metropolitan National Bank in 1997. These sales resulted in the Corporation recognizing $8.8 million in after-tax extraordinary gains. The Corporation regularly evaluates the potential acquisition of, and holds discussions with, various potential acquisition candidates and as a general rule the Corporation publicly announces such acquisitions only after a definitive merger agreement has been reached. SECURITIES The amortized cost and fair value of securities are as follows (in thousands): Securities available for sale: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1998 COST GAINS LOSSES VALUE --------- ---------- ---------- -------- U.S. Treasury and other U.S. Government agencies and corporations............... $256,740 $ 2,004 $ (168) $258,576 Mortgage-backed securities of U.S. Government agencies... 163,351 1,218 (99) 164,470 States of the U.S. and political subdivisions..... 3,202 38 (101) 3,139 Other debt securities........ 1,000 1,000 -------- ------- ------- -------- TOTAL DEBT SECURITIES.... 424,293 3,260 (368) 427,185 Equity securities............ 21,053 6,949 (105) 27,897 -------- ------- ------- -------- $445,346 $10,209 $ (473) $455,082 ======== ======= ======= ======== GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1997 COST GAINS LOSSES VALUE --------- ---------- ---------- -------- U.S. Treasury and other U.S. Government agencies and corporations........... $314,752 $ 1,058 $ (260) $315,550 Mortgage-backed securities of U.S. Government agencies... 121,311 501 (147) 121,665 States of the U.S. and political subdivisions..... 1,486 51 1,537 Other debt securities........ 5,031 107 5,138 -------- ------ ------- -------- TOTAL DEBT SECURITIES.... 442,580 1,717 (407) 443,890 Equity securities............ 19,240 7,002 (14) 26,228 -------- ------ ------- -------- $461,820 $8,719 $ (421) $470,118 ======== ====== ======= ======== GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1996 COST GAINS LOSSES VALUE --------- ---------- ---------- -------- U.S. Treasury and other U.S. Government agencies and corporations........... $288,414 $ 522 $ (855) $288,081 Mortgage-backed securities of U.S. Government agencies... 45,170 644 (176) 45,638 Other debt securities........ 2,000 (16) 1,984 -------- ------ ------- -------- TOTAL DEBT SECURITIES.... 335,584 1,166 (1,047) 335,703 Equity securities............ 15,642 3,942 (14) 19,570 -------- ------ ------- -------- $351,226 $5,108 $(1,061) $355,273 ======== ====== ======= ======== Securities held to maturity: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1998 COST GAINS LOSSES VALUE --------- ---------- ---------- -------- U.S. Treasury and other U.S. Government agencies and corporations........... $ 29,882 $ 117 $ (43) $ 29,956 Mortgage-backed securities of U.S. Government agencies... 33,909 118 (28) 33,999 States of the U.S. and political subdivisions..... 54,237 795 (18) 55,014 Other debt securities........ 547 9 (3) 553 -------- ------ ------- --------- $118,575 $1,039 $ (92) $119,522 ======== ====== ======= ======== GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1997 COST GAINS LOSSES VALUE --------- ---------- ---------- --------- U.S. Treasury and other U.S. Government agencies and corporations........... $ 34,339 $ 149 $ (48) $ 34,440 Mortgage-backed securities of U.S. Government agencies... 64,371 122 (231) 64,262 States of the U.S. and political subdivisions..... 54,678 430 (41) 55,067 Other debt securities........ 853 6 (4) 855 -------- ------ ------- -------- $154,241 $ 707 $ (324) $154,624 ======== ====== ======= ======== GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR December 31, 1996 COST GAINS LOSSES VALUE --------- ---------- ---------- --------- U.S. Treasury and other U.S. Government agencies and corporations........... $ 35,784 $ 106 $ (133) $ 35,757 Mortgage-backed securities of U.S. Government agencies... 113,275 142 (785) 112,632 States of the U.S. and political subdivisions..... 59,514 205 (443) 59,276 Other debt securities........ 1,188 5 (5) 1,188 -------- ------ ------- -------- $209,761 $ 458 $(1,366) $208,853 ======== ====== ======= ======== At December 31, 1998 and 1997, respectively, securities with a carrying value of $138.2 million and $157.4 million were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $156.6 million and $137.1 million at December 31, 1998 and 1997, respectively, were pledged as collateral for other borrowings. As of December 31, 1998, the Corporation had not entered into any off- balance sheet derivative transactions. As of December 31, 1998, the amortized cost and fair value of securities, by contractual maturities, were as follows (in thousands): HELD TO MATURITY AVAILABLE FOR SALE ------------------ -------------------- AMORTIZED FAIR AMORTIZED FAIR December 31, 1998 COST VALUE COST VALUE -------- -------- -------- ------- Due in one year or less....... $ 14,232 $ 14,294 $ 41,094 $ 41,283 Due from one to five years.... 48,486 48,900 165,790 167,296 Due from five to ten years.... 20,012 20,333 51,072 51,214 Due after ten years........... 1,936 1,996 2,986 2,922 -------- -------- -------- -------- 84,666 85,523 260,942 262,715 Mortgage-backed securities of U.S. Government Agencies.... 33,909 33,999 163,351 164,470 Equity securities............ 21,053 27,897 -------- -------- -------- -------- $118,575 $119,522 $445,346 $455,082 ======== ======== ======== ======== 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 1998, 1997 and 1996 were $14.3 million, $44.8 million and $45.5 million, respectively. Gross gains and gross losses were realized on those sales as follows (in thousands): 1998 1997 1996 ------ ------ ------ Gross gains.......................... $1,404 $1,400 $ 887 Gross losses......................... (20) (113) (97) ------ ------ ------ $1,384 $1,287 $ 790 ====== ====== ====== LOANS Following is a summary of loans (in thousands): December 31 1998 1997 ---------- ---------- Real estate: Residential....................... $ 994,157 $ 949,716 Commercial........................ 632,304 542,251 Construction...................... 103,672 70,093 Installment loans to individuals... 292,418 301,911 Commercial, financial and agricultural..................... 299,081 272,609 Lease financing.................... 132,266 59,852 Unearned income.................... (31,014) (20,643) ---------- ---------- $2,422,884 $2,175,789 ========== ========== The loan portfolio consists principally of loans to small- and medium-sized businesses within the Corporation's primary market area of western Pennsylvania, southwest Florida and eastern Ohio. As of December 31, 1998, no concentrations of loans exceeding 10% of total loans existed which were not disclosed as a separate category of loans. Certain directors and executive officers of the Corporation and its significant subsidiaries, as well as associates of such persons, were loan customers during 1998. 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, 1997...... $ 32,558 New loans............................. 28,601 Repayments............................ (24,246) Other................................. 370 -------- Total loans at December 31, 1998...... $ 37,283 ======== 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 1998 1997 -------- -------- Non-accrual loans........................ $ 12,250 $ 8,365 Restructured loans....................... 1,770 1,345 -------- -------- TOTAL NON-PERFORMING LOANS............. 14,020 9,710 Other real estate owned.................. 1,370 4,207 -------- -------- TOTAL NON-PERFORMING ASSETS............ $ 15,390 $ 13,917 ======== ======== For the years ended December 31, 1998, 1997 and 1996, income recognized on non-accrual and restructured loans was $863,000, $477,000 and $798,000, respectively. Income that would have been recognized during 1998, 1997 and 1996 on such loans if they were in accordance with their original terms was $1.6 million, $1.1 million and $1.5 million, respectively. Loans past due 90 days or more were $2.9 million, $3.2 million and $3.1 million at December 31, 1998, 1997 and 1996, respectively. Following is a summary of information pertaining to loans considered to be impaired (in thousands): At of For the Year Ended December 31 1998 1997 1996 ------- ------- ------- Impaired loans with an allocated allowance..... $ 3,366 $ 1,341 $ 5,063 Impaired loans without an allocated allowance.. 4,998 5,605 ------- ------- ------- Total impaired loans........................ $ 8,364 $ 1,341 $10,668 ======= ======= ======= Allocated allowance on impaired loans.......... 1,099 496 1,529 ======= ======= ======= Portion of impaired loans on non-accrual....... 5,413 975 5,125 ======= ======= ======= Average impaired loans......................... 4,945 5,887 13,389 ======= ======= ======= Income recognized on impaired loans............ 492 99 822 ======= ======= ======= ALLOWANCE FOR LOAN LOSSES Following is an analysis of changes in the allowance for loan losses (in thousands): Year Ended December 31 1998 1997 1996 ------- ------- ------- Balance at beginning of year............... $31,055 $31,199 $27,771 Reduction due to the sale of a subsidiary and loans................................. (3,828) Addition due to acquisitions............... 1,167 Charge-offs................................ (7,634) (10,281) (8,305) Recoveries................................. 1,315 1,295 1,670 ------- ------- ------- NET CHARGE-OFFS........................ (6,319) (8,986) (6,635) Provision for loan losses.................. 7,572 11,503 10,063 ------- ------- ------- Balance at end of year..................... $32,308 $31,055 $31,199 ======= ======= ======= PREMISES AND EQUIPMENT Following is a summary of premises and equipment (in thousands): December 31 1998 1997 -------- -------- Land................................ $ 18,537 $ 15,283 Premises............................ 76,059 64,949 Equipment........................... 51,287 44,004 -------- -------- 145,883 124,236 Accumulated depreciation............ (52,299) (47,252) -------- -------- $ 93,584 $ 76,984 ======== ======== Depreciation expense was $8.1 million for 1998, $7.0 million for 1997 and $6.4 million for 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 $3.6 million for 1998, $4.0 million for 1997 and $3.0 million for 1996. Total minimum rental commitments under such leases were $28.2 million at December 31, 1998. Following is a summary of future minimum lease payments for years following December 31, 1998 (in thousands): 1999.............................. $ 1,925 2000.............................. 1,609 2001.............................. 1,277 2002.............................. 1,172 2003.............................. 987 Later years....................... 21,208 DEPOSITS Following is a summary of deposits (in thousands): December 31 1998 1997 ---------- ---------- Non-interest bearing................ $ 401,272 $ 329,347 Savings and NOW..................... 1,264,779 1,107,763 Certificates of deposit and other time deposits............... 1,184,991 1,147,431 ---------- ---------- $2,851,042 $2,584,541 ========== ========== Following is a summary of the scheduled maturities of certificates of deposits and other time deposits for each of the five years following December 31, 1998 (in thousands): 1999.............................. $915,732 2000.............................. 171,371 2001.............................. 49,932 2002.............................. 22,083 2003.............................. 24,479 Later years....................... 1,394 Time deposits of $100,000 or more were $249.9 million and $232.1 million at December 31, 1998 and 1997, respectively. Following is a summary of these time deposits by remaining maturity at December 31, 1998 (in thousands): CERTIFICATES OTHER TIME OF DEPOSIT DEPOSITS TOTAL ------------ ---------- -------- Three months or less............. $ 83,458 $ 5,229 $ 88,687 Three to six months.............. 60,050 1,321 61,371 Six to twelve months............. 54,885 3,779 58,664 Over twelve months............... 23,205 17,949 41,154 -------- ------- -------- $221,598 $28,278 $249,876 ======== ======= ======== SHORT-TERM BORROWINGS Following is a summary of short-term borrowings (in thousands): December 31 1998 1997 -------- -------- Securities sold under repurchase agreements... $ 99,590 $ 59,136 Federal funds purchased....................... 561 16,862 Other short-term borrowings................... 1,221 4,257 Subordinated notes............................ 49,609 46,931 -------- -------- $150,981 $127,186 ======== ======== Credit facilities amounting to $45.0 million at December 31, 1998 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. These credit facilities were unused at December 31, 1998. LONG-TERM DEBT Following is a summary of long-term debt (in thousands): December 31 1998 1997 -------- -------- Federal Home Loan Bank advances............... $ 21,305 $ 28,386 Other long-term debt.......................... 6,000 Subordinated notes............................ 42,187 43,860 -------- -------- $ 69,492 $ 72,246 ======== ======== Certain subsidiaries have lines of credit available with the Federal Home Loan Bank. These lines totaled $406.5 million, of which $21.3 million was used as of December 31, 1998. These advances are secured by residential real estate loans and Federal Home Loan Bank Stock and are scheduled to mature in various amounts periodically through the year 2008. Interest rates paid on these advances range from 5.10% to 6.20% in 1998 and 5.66% to 6.32% in 1997. Subordinated notes are unsecured and subordinated to other indebtedness of the Corporation. The subordinated notes are scheduled to mature in various amounts periodically through the year 2008. At December 31, 1998, $32.1 million of long-term subordinated debt is redeemable prior to maturity at a discount equal to three months of interest. The Corporation 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 6.66% at December 31, 1998 and 7.58% at December 31, 1997. Scheduled annual maturities for all of the long-term debt for each of the five years following December 31, 1998 are as follows (in thousands): 1999.............................. $21,136 2000.............................. 5,013 2001.............................. 8,276 2002.............................. 17,178 2003.............................. 7,380 Later years....................... 10,509 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 1998 1997 -------- -------- Commitments to extend credit................ $426,699 $379,765 Standby letters of credit................... 21,417 21,345 At December 31, 1998, 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 issued in 1985. Holders of Series A Preferred are entitled to 5.7 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 1998, 600 shares of Series A Preferred were converted to 410 shares of common stock. At December 31, 1998, 18,732 shares of common stock were reserved by the Corporation for the conversion of the remaining 20,718 outstanding shares. Series B - Cumulative Convertible Preferred Stock (Series B Preferred) was issued in 1992. 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 $11.08 per share. The Corporation has the right to require the redemption of the balance of all outstanding shares at the conversion rate. During 1998, 48,915 shares of Series B Preferred were converted to 108,770 shares of common stock. At December 31, 1998, 489,923 shares of common stock were reserved by the Corporation for the conversion of the remaining 217,267 outstanding shares. COMPREHENSIVE INCOME The components of comprehensive income, net of related tax, are as follows (in thousands): Year Ended December 31 1998 1997 1996 ------- ------- ------- Net income................................... $32,198 $36,883 $22,278 Other comprehensive income: Unrealized gains on securities: Arising during the period, net of tax expense (benefit) of $924, $1,788 and $(86)................................. 1,745 3,332 (228) Less: reclassification adjustment for gains included in net income, net of tax benefit of $436, $300 and $306........ (810) (557) (568) ------- ------- ------- Other comprehensive income................... 935 2,775 (796) ------- ------- ------- Comprehensive income......................... $33,133 $39,658 $21,482 ======= ======= ======= STOCK INCENTIVE PLANS The Corporation has available up to 1,007,643 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, 1998, 15,577 shares out of a total of 72,096 shares were vested under these plans. The weighted average grant date fair value of the restricted shares issued through December 31, 1998 was $25.29. The Corporation has available up to 2,599,108 shares of common stock to be issued under both incentive and non-qualified stock option plans to key employees of the Corporation. The options vest in equal installments over periods ranging from three to ten years. 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. 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 using the Black-Scholes option pricing model is as follows (in thousands, except per share data): Year Ended December 31 1998 1997 1996 ------- ------- ------- Pro forma net income before extraordinary items................. $31,544 $27,699 $22,080 Extraordinary items, net of tax....... 8,809 ------- ------- ------- Pro forma net income.................. $31,544 $36,508 $22,080 ======= ======= ======= Pro forma earnings per share: Basic: Before extraordinary items........ $1.55 $1.40 $1.10 Extraordinary items, net of tax... .45 ----- ----- ----- Net income........................ $1.55 $1.85 $1.10 ===== ===== ===== Diluted: Before extraordinary items........ $1.48 $1.33 $1.07 Extraordinary items, net of tax... .42 ----- ----- ----- Net income........................ $1.48 $1.75 $1.07 ===== ===== ===== 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. 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. The following input assumptions were utilized: 1998 1997 1996 ---- ---- ---- Risk-free interest rate..................... 5.54% 6.53% 5.63% Dividend yield.............................. 2.52% 1.66% 3.00% Volatility factor of the expected market price of the Corporation's common stock... .23% .22% .19% Weighted average expected life of the options (years)........................... 5.00 5.00 5.00 Activity in the Option Plan during the past three years was as follows: WEIGHTED AVERAGE PRICE PER 1998 SHARE 1997 1996 --------- --------- --------- --------- Outstanding, beginning of year.................... 1,390,417 $11.27 1,321,012 1,123,936 Granted during the year..... 295,314 28.36 210,446 216,937 Exercised during the year... (294,165) 9.46 (87,924) (12,931) Forfeited during the year... (25,946) 19.13 (53,117) (6,930) --------- --------- --------- Ending balance................ 1,365,620 15.21 1,390,417 1,321,012 ========= ========= ========= The following table summarizes information about the stock options outstanding at December 31, 1998: OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ---------------------------------------------------- --------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - --------------- ----------- ----------- -------- ----------- -------- $ 5.44 - $ 8.16 409,411 7.03 $ 6.65 396,281 $ 6.63 8.17 - 12.26 337,311 5.26 10.72 220,304 10.78 12.27 - 18.40 232,003 6.80 16.31 114,453 16.29 18.41 - 27.62 144,440 8.11 20.71 48,048 21.12 27.63 - 31.57 242,455 9.05 31.57 7,771 31.57 --------- ------- 1,365,620 786,857 ========= ======= The Corporation has granted warrants to purchase common stock (at an exercise price of $5.94 or $9.90 per share). Such warrants are exercisable and will expire on June 19, 2001 or December 17, 2003. The Corporation has reserved 160,499 shares of common stock for issuance in connection with these warrants. RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS Retirement Plans Following are reconciliations of the change in benefit obligation, change in plan assets and funded status (in thousands): December 31 1998 1997 ------- ------- Benefit obligation at beginning of year........ $25,400 $21,632 Service cost................................. 1,310 1,265 Interest cost................................ 1,839 1,726 Plan amendments.............................. 549 23 Actuarial loss............................... 2,522 1,561 Curtailments................................. (69) Benefits paid................................ (727) (738) ------- ------- Benefit obligation at end of year.............. $30,893 $25,400 ======= ======= December 31 1998 1997 ------- ------- Fair value of plan assets at beginning of year.. $25,228 $20,238 Actual return on plan assets.................. 3,808 4,614 Company contribution.......................... 31 1,114 Benefits paid................................. (727) (738) ------- ------- Fair value of plan assets at end of year........ $28,340 $25,228 ======= ======= December 31 1998 1997 ------- ------- Funded status of plan.......................... $(2,553) $ (172) Unrecognized actuarial gain.................... (2,573) (3,324) Unrecognized prior service cost................ 2,043 1,771 Unrecognized net transition obligation......... 42 47 ------- ------- Accrued pension cost........................... $(3,041) $(1,678) ======= ======= Included in the above reconciliation is the benefit obligation and fair value of plan assets for the Basic Retirement Plan which were $5.5 million and $0, respectively, as of December 31, 1998, and $4.1 million and $0, respectively, as of December 31, 1997. The amounts recognized in the Corporation's consolidated financial statements include the following (in thousands): December 31 1998 1997 ------- ------- Prepaid pension cost........................... $ 1,016 $ 1,506 Accrued pension cost........................... (4,057) (3,184) Additional minimum liability................... (1,475) (928) Intangible asset............................... 1,475 928 ------- ------- Net amount recognized on balance sheet......... $(3,041) $(1,678) ======= ======= The pension expense for the defined benefit plans included the following components (in thousands): Year Ended December 31 1998 1997 1996 ------- ------- ------- Service costs............................. $ 1,310 $ 1,265 $ 1,244 Interest cost............................. 1,839 1,726 1,525 Expected return on plan assets............ (1,989) (1,603) (1,423) Net amortization.......................... 233 293 291 Curtailment gain.......................... (69) ------- ------- ------- Net pension expense....................... $ 1,393 $ 1,612 $ 1,637 ======= ======= ======= Assumptions as of December 31 1998 1997 1996 ---- ---- ---- Weighted average discount rate............. 6.5% 7.0% 7.5% 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, 1998, plan assets include 60,528 shares of the Corporation's common stock, having a market value of $1.7 million. Dividends received on these shares totaled $36,000 for 1998. 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 $667,000 in 1998, $606,000 in 1997 and $565,000 in 1996. Certain 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. 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 $705,000 in 1998, $468,000 in 1997 and $384,000 in 1996 related to the Salary Savings ESOP Plan. Postretirement Plans Following are reconciliations of the change in benefit obligation, change in plan assets and funded status (in thousands): December 31 1998 1997 ---- ---- Benefit obligation at beginning of year................... $779 $816 Service cost............................................ 77 60 Interest cost........................................... 65 56 Plan participants' contributions........................ 3 4 Actuarial loss (gain)................................... 126 (103) Benefits paid........................................... (85) (54) ---- ---- Benefit obligation at end of year......................... $965 $779 ==== ==== December 31 1998 1997 ----- ----- Fair value of plan assets at beginning of year............ $ 0 $ 0 Company contribution.................................... 81 50 Plan participants' contributions........................ 4 4 Benefits paid........................................... (85) (54) ----- ----- Fair value of plan assets at end of year.................. $ 0 $ 0 ===== ===== December 31 1998 1997 ----- ----- Funded status of plan.................................... $(965) $(779) Unrecognized actuarial gain.............................. (177) (310) Unrecognized prior service cost.......................... 5 6 Unrecognized net transition obligation................... 522 563 ----- ----- Accrued pension cost..................................... $(615) $(520) ===== ===== Net periodic postretirement benefit cost included the following components (in thousands): Year Ended December 31 1998 1997 1996 ---- ---- ---- Service cost.................................. $ 77 $ 60 $ 66 Interest cost................................. 65 56 54 Net amortization.............................. 34 25 30 ---- ---- ---- Net periodic postretirement benefit cost...... $176 $141 $150 ==== ==== ==== Discount rates of 6.5%, 7.0% and 7.5% for 1998, 1997 and 1996, respectively, were used to determine the accumulated postretirement benefit obligation. The assumed health care cost trend rate has a significant effect on the amounts reported. A 5.50% annual rate of increase in the per capita costs of covered health care benefits is assumed for 1999, gradually decreasing to 4.25% by the year 2001. A one percentage point change in the assumed health care cost trend rate would have had the following effects on 1998 service and interest cost and the accumulated postretirement benefit obligation at December 31, 1998: 1% 1% INCREASE DECREASE -------- -------- Effect on service and interest components of net periodic cost............................. $ 17,814 $(15,780) Effect on accumulated postretirement benefit obligation............................... 98,172 (88,639) 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 by chartered commercial banks as a result of previous acquisitions. The one-time assessment paid by the Corporation totaled $3.2 million, or $.16 per share. The legislation also included provisions that resulted in a reduction in annual deposit insurance costs. INCOME TAXES Income tax expense consists of the following (in thousands): Year Ended December 31 1998 1997 1996 -------- -------- -------- Current income taxes: Federal taxes.......................... $ 19,723 $ 13,850 $ 12,899 State taxes............................ 915 410 501 -------- -------- -------- 20,638 14,260 13,400 Deferred income taxes: Federal taxes.......................... (4,220) (1,247) (2,193) -------- -------- -------- $ 16,418 $ 13,013 $ 11,207 ======== ======== ======== The tax effects of temporary differences that give rise to deferred tax assets and liabilities are presented below (in thousands): December 31 1998 1997 -------- -------- Deferred tax assets: Allowance for loan losses................. $ 11,242 $ 10,604 Deferred compensation..................... 2,011 2,103 Deferred benefits......................... 1,414 913 Loan fees................................. 661 Other..................................... 924 846 -------- -------- TOTAL GROSS DEFERRED TAX ASSETS......... 15,591 15,127 -------- -------- Deferred tax liabilities: Depreciation.............................. (230) (218) Deferred gain on sale of subsidiary....... (3,555) (3,555) Unrealized gains on securities available for sale...................... (3,403) (2,911) Leasing................................... (9,732) (4,997) Other..................................... (1,450) (1,513) -------- -------- TOTAL GROSS DEFERRED TAX LIABILITIES.... (18,370) (13,194) -------- -------- NET DEFERRED TAX (LIABILITIES) ASSETS... $ (2,779) $ 1,933 ======== ======== Following is a reconciliation between tax expense using federal statutory tax and actual effective tax: Year Ended December 31 1998 1997 1996 ---- ---- ---- Federal statutory tax........................ 35.0% 35.0% 35.0% Effect of nontaxable interest and dividend income............................ (3.2) (3.6) (4.2) State taxes.................................. 1.2 .6 .6 Goodwill..................................... .5 .3 .3 Merger related costs......................... 1.1 .6 2.2 Other items.................................. (.8) (1.2) (.4) ---- ---- ---- Actual effective taxes....................... 33.8% 31.7% 33.5% ==== ==== ==== Income tax expense related to gains on the sale of securities was $484,000, $450,000 and $277,000 for the years ended December 31, 1998, 1997 and 1996, respectively. EARNINGS PER SHARE The following tables set forth the computation of basic and diluted earnings per share (in thousands, except per share data): Year Ended December 31 1998 1997 1996 ---------- ---------- ---------- BASIC Income before extraordinary items... $ 32,198 $ 28,074 $ 22,278 Less: Preferred stock dividends declared................... (492) (588) (766) Income before extraordinary items applicable to common stock........ 31,706 27,486 21,512 Extraordinary items, net of tax..... 8,809 -------- -------- -------- Net income applicable to basic earnings per share................ $ 31,706 $ 36,295 $ 21,512 ======== ======== ======== Average common shares outstanding... 20,042,100 19,415,505 19,327,118 ========== ========== ========== Income before extraordinary items... $1.58 $1.42 $1.11 Extraordinary items, net of tax..... .45 ----- ----- ----- Earnings per share.................. $1.58 $1.87 $1.11 ===== ===== ===== DILUTED Income before extraordinary items... $32,198 $28,074 $22,278 Extraordinary items, net of tax..... 8,809 ------- ------- ------- Net income applicable to diluted earnings per share................ $32,198 $36,883 $22,278 ======= ======= ======= Average common shares outstanding... 20,042,100 19,415,505 19,327,118 Convertible preferred stock......... 595,875 695,819 994,581 Net effect of dilutive stock options based on the treasury stock method using the average market price.... 639,233 640,856 276,796 ---------- ---------- ---------- 21,277,208 20,752,180 20,598,495 ========== ========== ========== Income before extraordinary items... $1.51 $1.35 $1.08 Extraordinary items, net of tax..... .43 ----- ----- ----- Earnings per share.................. $1.51 $1.78 $1.08 ===== ===== ===== CASH FLOW INFORMATION Following is a summary of cash flow information (in thousands): Year Ended December 31 1998 1997 1996 -------- -------- -------- Cash paid during year for: Interest................................ $107,292 $ 94,471 $ 87,252 Income taxes............................ 9,642 11,620 11,984 Non-cash Investing and Financing Activities: Acquisition of real estate in settlement of loans................. $ 3,037 $ 3,336 $ 6,720 Loans granted in the sale of other real estate................... 2,396 1,557 407 REGULATORY MATTERS 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, 1998, that the Corporation and each of its banking subsidiaries meet all capital adequacy requirements to which they are subject. As of December 31, 1998, 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. Following are the capital ratios as of December 31, 1998 for the Corporation and its significant subsidiaries, First National Bank of Pennsylvania, First National Bank of Naples and First National Bank of Florida (dollars in thousands):
MINIMUM CAPITAL WELL CAPITALIZED ACTUAL REQUIREMENTS REQUIREMENTS ---------------- --------------- --------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ------ -------- ----- -------- ----- TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): F.N.B. Corporation...................... $303,402 12.7% $191,305 8.0% $239,132 10.0% First National Bank of Pennsylvania..... 89,833 10.2 70,171 8.0 87,714 10.0 First National Bank of Naples........... 49,233 10.2 38,783 8.0 48,479 10.0 First National Bank of Florida.......... 26,533 12.1 17,534 8.0 21,918 10.0 TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS): F.N.B. Corporation...................... $260,399 10.9% $ 95,653 4.0% $143,479 6.0% First National Bank of Pennsylvania..... 78,852 9.0 35,086 4.0 52,629 6.0 First National Bank of Naples........... 44,816 9.2 19,391 4.0 29,087 6.0 First National Bank of Florida.......... 23,793 10.9 8,767 4.0 13,151 6.0 TIER 1 CAPITAL (TO AVERAGE ASSETS): F.N.B. Corporation...................... $260,399 7.9% $132,592 4.0% $165,740 5.0% First National Bank of Pennsylvania..... 78,852 6.6 47,721 4.0 59,651 5.0 First National Bank of Naples........... 44,816 7.0 25,660 4.0 32,075 5.0 First National Bank of Florida.......... 23,793 7.3 13,060 4.0 16,325 5.0
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. The Corporation's banking subsidiaries were required to maintain aggregate cash reserves with the Federal Reserve Bank amounting to $16.0 million at December 31, 1998. 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, 1998, the subsidiaries had $37.2 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 $43.6 million at December 31, 1998. BUSINESS SEGMENTS The Corporation operates in one reportable segment: community banking. The Corporation's community banking subsidiaries offer services traditionally offered by full-service commercial banks, including commercial and individual demand and time deposit accounts and commercial, mortgage and individual installment loans. In addition to traditional banking products, the Corporation's banking subsidiaries offer various alternative investment products, including mutual funds and annuities. The following tables provide financial information for this segment of the Corporation (in thousands). Other items shown in the table below represent the parent company, other non- bank subsidiaries and eliminations, which are necessary for purposes of reconciling to the consolidated amounts. COMMUNITY ALL BANKING OTHER CONSOLIDATED ---------- -------- ------------ At or for the Year Ended December 31, 1998 Interest income....................... $ 228,780 $ 17,194 $ 245,974 Interest expense...................... 104,414 3,646 108,060 Non-interest income................... 28,366 5,044 33,410 Non-interest expense.................. 99,047 16,089 115,136 Intangible amortization............... 1,277 44 1,321 Income tax expense (credit)........... 16,607 (189) 16,418 Core operating earnings*.............. 35,298 1,243 36,541 Non-recurring items, net of tax*...... (3,225) (1,118) (4,343) Net income............................ 32,073 125 32,198 Total assets.......................... 3,319,678 83,862 3,403,540 At or for the Year Ended December 31, 1997 Interest income....................... $ 206,638 $ 18,421 $ 225,059 Interest expense...................... 92,213 4,414 96,627 Non-interest income................... 31,446 (3,967) 27,479 Non-interest expense.................. 91,615 11,706 103,321 Intangible amortization............... 1,474 110 1,584 Income tax expense (credit)........... 15,293 (2,280) 13,013 Core operating earnings*.............. 31,047 1,592 32,639 Non-recurring items, net of tax*...... 737 3,507 4,244 Net income............................ 31,784 5,099 36,883 Total assets.......................... 3,006,101 88,697 3,094,798 At or for the Year Ended December 31, 1996 Interest income....................... $ 191,770 $ 17,953 $ 209,723 Interest expense...................... 83,168 4,787 87,955 Non-interest income................... 20,513 3,385 23,898 Non-interest expense.................. 90,725 11,393 102,118 Intangible amortization............... 997 50 1,047 Income tax expense (credit)........... 10,044 1,163 11,207 Core operating earnings*.............. 24,060 2,361 26,421 Non-recurring items, net of tax*...... (2,224) (1,919) (4,143) Net income............................ 21,836 442 22,278 Total assets.......................... 2,626,575 167,064 2,793,639 * Core operating earnings exclude merger related and other non-recurring costs of $4.3 million in 1998, extraordinary gains on the sale of a subsidiary and branches of $8.8 million and merger related and other non- recurring costs of $4.6 million in 1997, and a one-time assessment of $2.1 million legislated by Congress to recapitalize the Savings Association Insurance Fund and merger related and other non-recurring costs of $2.0 million in 1996, all on an after-tax basis. Such presentation is provided in order to eliminate all items deemed by management to be of a non-recurring nature. PARENT COMPANY FINANCIAL STATEMENTS Below is condensed financial information of F.N.B. Corporation (parent company only). In this information, the parent's investments in subsidiaries are stated at cost plus equity in undistributed earnings of subsidiaries since acquisition. This information should be read in conjunction with the consolidated financial statements. BALANCE SHEET (IN THOUSANDS): December 31 1998 1997 -------- -------- ASSETS Cash..................................... $ 467 $ 6 Short-term investments................... 14,945 2,095 Advances to subsidiaries................. 1,621 12,122 Other assets............................. 10,248 5,414 Investment in bank subsidiaries.......... 244,897 239,016 Investment in non-bank subsidiaries...... 114,943 110,940 -------- -------- $387,121 $369,593 ======== ======== LIABILITIES Other liabilities........................ $ 7,552 $ 6,555 Short-term borrowings.................... 49,609 49,931 Long-term debt........................... 48,187 43,860 -------- -------- TOTAL LIABILITIES...................... 105,348 100,346 -------- -------- STOCKHOLDERS' EQUITY..................... 281,773 269,247 -------- -------- TOTAL.................................. $387,121 $369,593 ======== ======== INCOME STATEMENT (IN THOUSANDS) Year Ended December 31 1998 1997 1996 -------- -------- -------- INCOME Dividend income from subsidiaries: Bank................................... $ 29,401 $ 31,373 $ 11,778 Non-bank............................... 2,148 4,660 2,501 -------- -------- -------- 31,549 36,033 14,279 Gain on sale of securities............... 1,296 850 Interest income.......................... 452 5,423 5,394 Income from equity investment............ 621 Service fee income....................... 7,776 Other income............................. 98 95 254 -------- -------- -------- TOTAL INCOME........................... 39,875 43,468 20,777 EXPENSES Interest expense......................... 6,136 6,280 5,920 Salaries and personnel expense........... 8,264 Service fees............................. 985 970 617 Other expenses........................... 4,090 3,248 2,076 -------- -------- -------- TOTAL EXPENSES......................... 19,475 10,498 8,613 -------- -------- -------- INCOME BEFORE TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES... 20,400 32,970 12,164 Income tax benefit....................... 3,880 1,156 618 -------- -------- -------- 24,280 34,126 12,782 -------- -------- -------- Equity in undistributed income of subsidiaries: Bank................................. 2,514 (352) 8,463 Non-bank............................. 5,404 (2,118) 1,033 -------- -------- -------- 7,918 (2,470) 9,496 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM......... 32,198 31,656 22,278 Gain on sale of subsidiary, net of tax... 5,227 -------- -------- -------- NET INCOME............................... $ 32,198 $ 36,883 $ 22,278 ======== ======== ======== STATEMENT OF CASH FLOWS (IN THOUSANDS) Year Ended December 31 1998 1997 1996 -------- -------- -------- OPERATING ACTIVITIES Net income................................ $ 32,198 $ 36,883 $ 22,278 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of securities.............. (1,296) (850) Undistributed earnings of subsidiaries.. (7,918) 2,470 (9,496) Extraordinary gain on sale of subsidiaries.......................... (5,227) Other, net.............................. (3,386) (2,745) (501) -------- -------- -------- Net cash flows from operating activities................ 20,894 30,085 11,431 INVESTING ACTIVITIES Net change in short-term investments...... (12,493) 2,362 (1,529) Purchase of securities.................... (1,704) (235) Proceeds from sale of securities.......... 1,828 1,244 Advances from (to) subsidiaries........... 1,501 (2,735) (4,250) Cash paid upon acquisition of subsidiaries (13,586) Investment in subsidiaries................ 6,845 (11,700) 356 -------- -------- -------- Net cash flows from investing activities................ (4,147) (25,535) (4,414) FINANCING ACTIVITIES Net increase in due to non-bank subsidiary 2,950 Net decrease in short-term borrowings..... (322) (5,270) 4,839 Decrease in long-term debt................ (6,510) (6,680) (12,303) Increase in long-term debt................ 10,837 16,550 8,899 Net acquisition of treasury stock......... (7,572) (2,535) (1,560) Cash dividends paid....................... (12,719) (9,578) (6,889) -------- -------- -------- Net cash flows from financing activities............... (16,286) (4,563) (7,014) -------- -------- -------- NET INCREASE IN CASH...................... 461 (13) 3 Cash at beginning of year................. 6 19 16 -------- -------- -------- CASH AT END OF YEAR....................... $ 467 $ 6 $ 19 ======== ======== ======== CASH PAID Interest.................................. $ 6,049 $ 6,181 $ 6,251 FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each financial instrument: 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. 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. 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): 1998 1997 --------------------- --------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- FINANCIAL ASSETS Cash and short-term investments.................. $ 183,745 $ 183,745 $ 163,886 $ 163,886 Securities available for sale.. 455,082 455,082 470,118 470,118 Securities held to maturity.... 118,575 119,522 154,241 154,624 Net loans, including loans held for sale................ 2,406,523 2,449,270 2,151,270 2,163,632 FINANCIAL LIABILITIES Deposits....................... $2,851,042 $2,860,988 $2,584,541 $2,589,714 Short-term borrowings.......... 150,981 150,981 127,186 127,186 Long-term debt................. 69,492 71,448 72,246 73,837 F.N.B. CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The merger between F.N.B. Corporation and Guaranty Bank & Trust Company was completed on January 13, 1999 and accounted for as a pooling-of-interests. Accordingly, all financial information has been restated as if the companies were combined for all periods presented.
YEAR ENDED DECEMBER 31 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Total interest income...... $ 245,974 $ 225,059 $ 209,723 $ 197,318 $ 169,155 Total interest expense..... 108,060 96,627 87,955 84,303 66,593 Net interest income........ 137,914 128,432 121,768 113,015 102,562 Provision for loan losses.. 7,572 11,503 10,063 7,416 9,826 Total non-interest income.. 33,410 27,479 23,898 22,530 20,261 Total non-interest expenses 115,136 103,321 102,118 90,503 85,401 Net income before extraordinary items...... 32,198 28,074 22,278 25,054 18,578 Extraordinary items, net of tax............... 8,809 Net income................. 32,198 36,883 22,278 25,054 18,578 Core operating earnings*... 36,541 32,639 26,421 25,054 18,578 AT YEAR-END Total assets............... $3,403,540 $3,094,798 $2,793,639 $2,580,860 $2,395,132 Net loans.................. 2,390,576 2,144,734 1,939,819 1,739,413 1,642,486 Deposits................... 2,851,042 2,584,541 2,345,333 2,200,777 2,024,356 Long-term debt............. 69,492 72,246 58,179 50,784 56,614 Preferred stock............ 2,380 2,875 3,525 4,516 4,563 Total stockholders' equity. 281,773 269,247 233,853 220,414 192,176 PER COMMON SHARE Earnings Basic.................... $ 1.58 $ 1.87 $ 1.11 $ 1.27 $ .93 Diluted.................. 1.51 1.78 1.08 1.23 .93 Core operating earnings * Basic.................... 1.80 1.65 1.33 1.27 .93 Diluted.................. 1.72 1.57 1.28 1.23 .93 Cash dividends............. .67 .56 .55 .30 .22 Book value................. 13.71 13.00 12.21 11.00 9.70 RATIOS Return on average assets... 1.00% 1.29% .84% 1.00% .80% Return on average assets, based on core operating earnings *............... 1.13 1.14 .99 1.00 .80 Return on average equity... 11.66 14.96 9.75 12.01 10.14 Return on average equity, based on core operating earnings *............... 13.24 13.24 11.56 12.01 10.14 Dividend payout ratio...... 38.71 24.90 28.63 14.57 14.46 Average equity to average assets........... 8.56 8.59 8.59 8.34 7.93
* Core operating earnings excludes merger related and other non-recurring costs of $4.3 million in 1998, extraordinary gains on the sale of a subsidiary and branches of $8.8 million and merger related and other non- recurring costs of $4.7 million in 1997 and a one-time assessment of $2.1 million legislated by Congress to recapitalize the Savings Association Insurance Fund and merger related and other non-recurring costs of $2.1 million in 1996, all on an after-tax basis. Such presentation is provided in order to eliminate all items deemed by management to be of a non-recurring nature. F.N.B. CORPORATION AND SUBSIDIARIES QUARTERLY EARNINGS SUMMARY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The merger between F.N.B. Corporation and Guaranty Bank & Trust Company was completed on January 13, 1999 and accounted for as a pooling-of-interests. Accordingly, the unaudited quarterly financial data has been restated as if the companies were combined for all periods presented. QUARTER ENDED 1998 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ------- ------- -------- ------- Total interest income........... $59,962 $61,275 $62,193 $62,544 Total interest expense.......... 26,266 26,983 27,634 27,177 Net interest income............. 33,696 34,292 34,559 35,367 Provision for loan losses....... 1,761 1,615 1,977 2,219 Total non-interest income....... 7,791 7,924 8,342 9,353 Total non-interest expenses..... 27,612 28,580 28,970 29,974 Net income...................... 8,288 7,734 8,008 8,168 Core operating earnings *....... 8,458 9,147 9,489 9,447 PER COMMON SHARE Earnings Basic......................... $.41 $.38 $.39 $.40 Diluted....................... .39 .36 .38 .38 Core operating earnings * Basic......................... .42 .45 .47 .46 Diluted....................... .40 .43 .45 .44 Cash dividends.................. .16 .17 .17 .17 QUARTER ENDED 1997 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 ------- ------- -------- ------- Total interest income........... $54,855 $56,328 $55,642 $58,234 Total interest expense.......... 23,152 23,866 23,979 25,630 Net interest income............. 31,703 32,462 31,663 32,604 Provision for loan losses....... 2,423 3,673 2,505 2,902 Total non-interest income....... 6,883 6,050 7,055 7,491 Total non-interest expenses..... 24,759 29,350 23,069 26,143 Net income before extraordinary items........... 7,655 3,770 9,011 7,638 Extraordinary items, net of tax. 5,227 3,582 Net income...................... 7,655 8,997 9,011 11,220 Core operating earnings **...... 7,655 8,032 9,011 7,941 PER COMMON SHARE Earnings Basic......................... $.39 $.46 $.46 $.56 Diluted....................... .37 .44 .44 .53 Core operating earnings ** Basic......................... .39 .41 .46 .39 Diluted....................... .37 .39 .44 .37 Cash dividends.................. .14 .14 .14 .14 * Core operating earnings excludes merger related costs and other non- recurring costs of approximately $170,000, $1.4 million, $1.5 million and $1.4 million recognized during the first through fourth quarters of 1998, respectively, all on an after-tax basis. ** Core operating earnings items excludes merger related costs and other non- recurring costs of approximately $1.0 million recognized during the second quarter and merger related costs and other non-recurring items of approximately $3.3 million recognized during the fourth quarter, each on an after-tax basis. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial review summarizes the combined financial condition and results of operations giving retroactive effect to the merger of Guaranty Bank & Trust Company (Guaranty) with and into F.N.B. Corporation (the Corporation), and is intended to be read in conjunction with the Consolidated Financial Statements and accompanying Notes to those statements. The merger of the Corporation and Guaranty was consummated on January 13, 1999 and resulted in the Corporation issuing 1,250,994 shares of common stock. The merger has been accounted for on a pooling-of-interests basis. This financial review is presented as if the merger had been consummated for all periods presented. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 Core operating earnings increased 12.0% to $36.5 million in 1998 from $32.6 million in 1997. On a core operating earnings basis, basic earnings per share was $1.83 and $1.65 for 1998 and 1997, while diluted earnings per share were $1.73 and $1.57, respectively, for those same periods. The results for 1998 include merger related and other non-recurring costs of $4.3 million, net of tax. The results for 1997 include $8.8 million in gains relating to the sales of a subsidiary and branches and merger related and other non- recurring costs of $4.6 million, both net of tax. Including these items, net income was $32.2 million in 1998 versus $36.9 million in 1997, resulting in diluted earnings per share of $1.51 and $1.78. Net interest income, on a fully taxable equivalent basis, increased by 7.2% as net average interest earning assets increased by $41.6 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 1.13% for 1998 compared to 1.14% for 1997, while the Corporation's return on average equity was 13.24% for both 1998 and 1997, each calculated on a core operating earnings basis. Including the extraordinary and non-recurring items, the Corporation had a return on average assets of 1.00% and 1.29% for 1998 and 1997, respectively, and a return on average equity of 11.66% and 14.96% for those same periods. 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, 1998 1997 1996 --------------------------- --------------------------- --------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE --------- -------- ------ --------- -------- ------ --------- -------- ------ ASSETS Interest earning assets: Interest bearing deposits with banks.............. $ 3,765 $ 181 4.81% $ 4,312 $ 255 5.91% $ 7,549 $ 414 5.48% Federal funds sold........ 76,247 4,153 5.45 89,061 4,742 5.32 65,732 3,414 5.19 Taxable investment securities (1).......... 525,905 32,458 6.17 469,520 29,210 6.22 451,482 26,925 5.96 Non-taxable investment securities.............. 86,986 5,309 6.10 80,336 4,756 5.92 72,586 4,472 6.16 Loans (2)(3).............. 2,294,506 205,933 8.98 2,035,521 188,187 9.25 1,875,670 176,713 9.42 ---------- -------- ---------- -------- ---------- -------- Total interest earning assets.......... 2,987,409 248,034 8.30 2,678,750 227,150 8.48 2,473,019 211,938 8.57 ---------- -------- ---------- -------- ---------- -------- Cash and due from banks... 99,758 90,194 95,440 Allowance for loan losses. (32,193) (31,809) (28,746) Premises and equipment.... 86,899 66,451 56,714 Other assets.............. 85,101 66,124 63,790 ---------- ---------- ---------- $3,226,974 $2,869,710 $2,660,217 ========== ========== ========== LIABILITIES Interest bearing liabilities: Deposits: Interest bearing demand. $ 490,169 10,034 2.05 $ 388,861 9,327 2.40 $ 378,150 7,285 1.93 Savings................. 658,351 21,113 3.21 615,244 16,887 2.74 564,331 16,102 2.85 Other time.............. 1,201,560 65,510 5.45 1,100,901 60,252 5.47 1,029,475 56,154 5.45 Short-term borrowings..... 134,789 6,813 5.05 135,089 6,415 4.75 92,444 4,030 4.36 Long-term debt............ 73,411 4,590 6.25 51,145 3,746 7.32 49,977 4,384 8.77 ---------- -------- ---------- -------- ---------- -------- Total interest bearing liabilities............. 2,558,280 108,060 4.22 2,291,240 96,627 4.22 2,114,377 87,955 4.16 -------- -------- -------- Non-interest bearing demand deposits......... 347,264 294,162 273,536 Other liabilities......... 45,354 37,806 43,680 ---------- ---------- ---------- 2,950,898 2,623,208 2,431,593 ---------- ---------- ---------- STOCKHOLDERS' EQUITY...... 276,076 246,502 228,624 ---------- ---------- ---------- $3,226,974 $2,869,710 $2,660,217 ========== ========== ========== Excess of interest earning assets over interest bearing liabilities............. $ 429,129 $ 387,510 $ 358,642 ========== ========== ========== Net interest income....... $139,974 $130,523 $123,983 ======== ======== ======== Net interest spread....... 4.08% 4.26% 4.41% ==== ==== ==== Net interest margin (4)... 4.69% 4.87% 5.01% ==== ==== ====
(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 balances include 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 $140.0 million in 1998 versus $130.5 million in 1997. Net interest income consisted of interest income of $248.0 million and interest expense of $108.1 million in 1998, compared to $227.1 million and $96.6 million for each, respectively, in 1997. Net interest income as a percentage of average earning assets (commonly referred to as the margin) fell to 4.68% in 1998 compared to 4.87% in 1997. Interest income on loans, on a fully taxable equivalent basis, increased 9.4% from $188.2 million in 1997 to $205.9 million in 1998. This increase was the result of an increase in average loans of 12.7% as the average yield declined by 27 basis points. Interest expense on deposits increased 11.8% to $96.7 million in 1998. This increase was attributable to an increase in average deposits of 11.6% over the same period. The average balance in interest bearing demand and time deposits increased by $101.3 and $100.7 million, respectively. The average balance in non-interest bearing demand deposits increased by $53.1 million. 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, 1998 1997 ---------------------------- ---------------------------- VOLUME RATE NET VOLUME RATE NET -------- -------- -------- -------- -------- -------- INTEREST INCOME Interest bearing deposits with banks............... $ (30) $ (44) $ (74) $ (195) $ 36 $ (159) Federal funds sold......... (709) 120 (589) 1,240 88 1,328 Securities................. 3,885 (84) 3,801 1,539 1,030 2,569 Loans...................... 23,029 (5,283) 17,746 14,556 (3,082) 11,474 ------- ------- ------- ------- ------- ------- 26,175 (5,291) 20,884 17,140 (1,928) 15,212 ------- ------- ------- ------- ------- ------- INTEREST EXPENSE Deposits: Interest bearing......... 1,606 (899) 707 213 1,829 2,042 Savings.................. 1,226 3,000 4,226 1,372 (587) 785 Other time............... 5,477 (219) 5,258 3,892 206 4,098 Short-term borrowings...... (15) 413 398 1,998 387 2,385 Long-term debt............. 1,271 (427) 844 105 (743) (638) ------- ------- ------- ------- ------- ------- 9,565 1,868 11,433 7,580 1,092 8,672 ------- ------- ------- ------- ------- ------- NET CHANGE............... $16,610 $(7,159) $ 9,451 $ 9,560 $(3,020) $ 6,540 ======= ======= ======= ======= ======= =======
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 net 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 decreased 34.2% to $7.6 million in 1998. This decrease reflects the Corporation's continued strong asset quality as well as an increase in the provision for loan losses of $1.7 million related to an acquisition. This additional provision resulted from applying the Corporation's allowance for loan loss policy and methodology for evaluating the adequacy of the allowance to West Coast Bancorp, Inc., which was merged into the Corporation in April of 1997. (See "Non-Performing Loans and Allowance for Loan Losses" and "Mergers, Acquisitions and Divestitures" discussions). NON-INTEREST INCOME Total non-interest income increased 21.6% from $27.5 million in 1997 to $33.4 million in 1998. This increase was attributable to increases in service charges and gains on the sale of loans, primarily residential mortgages. Service charges increased 22.1% from $13.7 million in 1997 to $16.7 million in 1998. Revenue was recognized as a result of increases in the level of deposits. Net gains on the sale of loans increased 91.7% as the Corporation took advantage of the strong market for mortgage refinancings. During 1998, the Corporation recognized $1.3 million in income from its equity investment in Sun Bancorp, Inc., a bank holding company headquartered in Selinsgrove, Pennsylvania, as compared to $621,000 in 1997. NON-INTEREST EXPENSES Total non-interest expense increased from $103.3 million in 1997 to $115.2 million in 1998. The increase was attributable to a full year of operating expenses associated with former Mercantile Bank of Southwest Florida and Indian Rocks National Bank. Operating costs for these acquisitions were not recorded until after the closing of each transaction during the fourth quarter of 1997. The Corporation recognized $5.5 million in 1998 and $2.4 million in 1997 in merger related costs. The expenses were primarily legal and investment banking costs associated with the completion of mergers. INCOME TAXES The Corporation's income tax expense was $16.3 million for 1998 compared to $13.0 million for 1997. The 1998 effective tax rate of 33.7% was lower than the 35.0% 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 Consolidated 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 the available for sale securities portfolio, the Corporation generally has sufficient sources of funds available as needed to meet its routine, operational cash needs. Excluding mortgage-backed securities, debt securities due to mature within one year, which will provide a source of short-term liquidity, amounted to $55.5 million or 9.7% of the securities 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 $45.0 million was unused at the end of 1998. 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. The financial performance of the Corporation is subject to risk from interest rate fluctuations. This interest rate risk arises due to differences between the amount of interest-earning assets and the amount of interest-bearing liabilities subject to pricing over a specified period, the amount of change in individual interest rates and the embedded options in certain financial instruments. The principal objective of the Corporation's asset/liability management activities is to maximize net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding needs of the Corporation. The Corporation's Asset/Liability Committee (ALCO) is responsible for achieving this objective. The Corporation uses an asset/liability model to quantify its balance sheet strategies and their associated risks. Net interest income simulation is the principal tool utilized for these purposes. Gap analysis is employed as a secondary diagnostic measurement. The Corporation attempts to mitigate interest rate risk through asset and liability pricing and matched maturity funding. A gradual 300 basis point decrease in interest rates is estimated to cause a decline in net interest income of .80% or $1.1 million for 1999 as compared to net interest income if interest rates were unchanged during 1999. Comparatively, a gradual 300 basis point decrease in interest rates would have decreased net interest income by .90% or $1.1 million in 1998. These low level of variation are within the Corporation's policy limits. This simulation analyses assumed that savings and checking interest rates had a low correlation to changes in market rates of interest and that certain asset prepayments changed as refinancing incentives evolved. Further, in the event of a change of such a magnitude in interest rates, the ALCO would likely take actions to further mitigate its exposure to the change. However, due to the greater uncertainty of other specific actions that would be taken, the analysis assumed no change in the Corporation's asset/liability composition. Following is the gap analysis as of December 31, 1998 (dollars in thousands):
WITHIN 4-12 1-5 OVER 3 MONTHS MONTHS YEARS 5 YEARS TOTAL --------- -------- ---------- ---------- ---------- INTEREST EARNING ASSETS Interest bearing deposits with banks................. $ 3,592 $ 600 $ 4,192 Federal funds sold........... 44,706 44,706 Securities: Available for sale......... 10,596 30,824 $ 235,832 $ 177,830 455,082 Held to maturity........... 5,812 19,061 65,803 27,899 118,575 Loans, net of unearned income 676,883 636,879 1,022,868 102,201 2,438,831 --------- -------- ---------- ---------- ---------- 741,589 687,364 1,324,503 307,930 3,061,386 Other assets................ 342,154 342,154 --------- -------- ---------- ---------- ---------- $ 741,589 $687,364 $1,324,503 $ 650,084 $3,403,540 ========= ======== ========== ========== ========== INTEREST BEARING LIABILITIES Deposits: Interest checking.......... $ 152,689 $ 20,401 $ 370,839 $ 543,929 Savings.................... 255,728 5,548 $ 5,548 454,026 720,850 Time deposits.............. 310,833 604,900 267,864 1,394 1,184,991 Short-term borrowings........ 142,861 8,030 90 150,981 Long-term debt............... 14,664 6,472 37,847 10,509 69,492 --------- --------- ---------- ---------- ---------- 876,775 645,351 311,259 836,858 2,670,243 Other liabilities............ 451,524 451,524 Stockholders' equity......... 281,773 281,773 --------- --------- ---------- ---------- ---------- $ 876,775 $ 645,351 $ 311,259 $1,570,155 $3,403,540 ========= ========= ========== ========== ========== PERIOD GAP................... $(135,186) $ 42,013 $1,013,244 $ (920,071) ========= ========= ========== ========== CUMULATIVE GAP............... $(135,186) $ (93,173) $ 920,071 ========= ========= ========== CUMULATIVE GAP AS A PERCENT OF TOTAL ASSETS............ (3.97)% (2.74)% 27.03% ===== ===== ===== RATE SENSITIVE ASSETS/ RATE SENSITIVE LIABILITIES (CUMULATIVE)............... .85 .94 1.50 1.15 ==== ==== ==== ====
The preceding gap analysis is based on the amortization, maturity or repricing of the Corporation's interest-bearing assets and interest-bearing liabilities. Non-maturity deposits have been allocated to represent their lower sensitivity to changes in market interest rates than other variable- rate instruments. The cumulative gap represents the difference between these assets and liabilities over a specified time period. Based on the cumulative one year gap and assuming no change in asset/liability composition, a decrease in interest rates would be expected to result in a slight reduction in net interest income. This gap position is within the Corporation's policy limits. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 The Corporation's core operating earnings increased 23.5% to $32.6 million in 1997 from $26.4 million in 1996. Basic core operating earnings per share were $1.65 and $1.33 for 1997 and 1996, while diluted core operating earnings per share were $1.57 and $1.28, respectively, for those same periods. These results for 1997 exclude $8.8 million in gains relating to the sales of a subsidiary and branches and merger related and other non-recurring costs of $4.7 million, both net of tax. The results for 1996 exclude a special one- time assessment to recapitalize the Savings Association Insurance Fund (SAIF) of $2.1 million and merger related costs of $2.1 million, both net of tax. Including these items, net income was $36.9 million in 1997 versus $22.3 million in 1996. Based upon core operating earnings, the Corporation's return on average assets was 1.14% for 1997 compared to .99% for 1996, while the Corporation's return on average equity was 13.24% for 1997 compared to 11.56% for 1996. Net interest income, on a fully taxable equivalent basis, increased from $124.0 million in 1996 to $130.5 million in 1997. Net interest income consisted of interest income of $227.1 million and interest expense of $96.6 million in 1997, compared to $211.9 million and $88.0 million for each, respectively, in 1996. Net margin fell to 4.87% from 5.01% in 1996. Interest income on loans, on a fully taxable equivalent basis, increased 6.5% from $176.7 million in 1996 to $188.2 million in 1997. This increase is the result of loan growth. Average loans increased 8.5% from 1996. Interest expense on deposits increased 8.7% to $86.5 million in 1997. This increase was attributable to a $71.4 million increase in average other time deposits as well as a 47 basis point increase in the rate paid on interest bearing demand deposits. The provision for loan losses was $11.5 million and represented an increase of 14.3% from 1996. This increase resulted from applying the Corporation's allowance for loan loss policy and methodology for evaluating the adequacy of the adequacy of the allowance to acquired affiliates. Total non-interest income increased 15.0% from $23.9 million in 1996 to $27.5 million in 1997. This increase was attributable to increases in service charges and gains on the sale of securities, as well as income from the Corporation's equity investment. Service charges increased 6.1% from $12.9 million in 1996 to $13.7 million in 1997, as a result of increases in the level of deposits. Net gains on the sale of securities increased by 62.9% due to a higher level of equity security sales in 1997. Other non- interest income included $621,000 in income from the Corporation's equity investment during 1997. Total non-interest expense increased from $102.1 million in 1996 to $103.3 million in 1997. The increase was primarily attributable to an increase of $4.5 million in salaries and employee benefits and an increase in merger- related expenses from $2.1 million in 1996 to $2.4 million in 1997. Additionally, the 1996 total reflected a one-time assessment of $3.2 million to recapitalize the SAIF. Salaries and personnel expense increased 9.1% in 1997. This increase was due to 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 $3.2 million. Income tax expense was $13.0 million for 1997 compared to $11.2 million for 1996. The 1997 effective tax rate of 31.7% was below the 35% statutory tax rate due to the tax benefits resulting from tax-exempt instruments and excludable dividend income. FINANCIAL CONDITION LENDING ACTIVITY Following is a summary of loans (dollars in thousands):
December 31 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Real estate: Residential......... $ 994,157 $ 949,716 $ 788,874 $ 700,726 $ 640,667 Commercial.......... 632,304 542,251 493,990 447,638 361,237 Construction........ 103,672 70,093 48,070 40,635 56,278 Installment loans to individuals...... 292,418 301,911 417,300 404,261 390,485 Commercial, financial and agricultural.... 299,081 272,609 225,447 196,516 242,477 Lease financing....... 132,266 59,852 21,538 5,037 Unearned income....... (31,014) (20,643) (24,202) (28,726) (23,938) ---------- ---------- ---------- ---------- ---------- $2,422,884 $2,175,789 $1,971,017 $1,766,086 $1,667,206 ========== ========== ========== ========== ==========
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 was 85.0% at December 31, 1998 and 84.2% at December 31, 1997. During 1998 and 1997 the Corporation sold $50.8 million and $23.9 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. 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. As of December 31, 1998, 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 ONE YEAR FIVE YEARS FIVE YEARS TOTAL -------- ---------- ---------- -------- December 31, 1998 Commercial, financial and agricultural............. $171,279 $103,417 $ 24,385 $299,081 Real Estate - construction..... 63,383 28,455 11,834 103,672 -------- -------- -------- -------- Total........................ $234,662 $131,872 $ 36,219 $402,753 ======== ======== ======== ======== The total amount of loans due after one year includes $51.2 million with floating or adjustable rates of interest and $116.9 million with 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 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Non-accrual loans................ $12,250 $ 8,365 $10,363 $10,066 $11,756 Restructured loans............... 1,770 1,345 2,709 3,629 3,707 ------- ------- ------- ------- ------- $14,020 $ 9,710 $13,072 $13,695 $15,463 ======= ======= ======= ======= ======= Non-performing loans as a percentage of total loans...... .58% .45% .66% .78% .93% 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 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Gross interest income that would have been recorded if the loans had been current and in accordance with their original terms....... $1,563 $1,068 $1,473 $1,343 $1,864 Interest income recorded during the year................. 863 477 798 694 720 Following is a summary of loans 90 days or more past due, on which interest accruals continue (dollars in thousands): December 31 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Loans 90 days or more past due.... $2,943 $3,220 $3,092 $4,090 $2,753 Loans 90 days or more past due as a percentage of total loans..... .12% .15% .16% .23% .17% 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, portfolio growth and concentrations of credit risk. Following is a summary of changes in the allowance for loan losses (dollars in thousands): Year Ended December 31 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Balance at beginning of year..... $31,055 $31,199 $27,771 $25,551 $20,910 Reduction due to the sale of a subsidiary and loans.......... (3,828) Addition due to acquisitions..... 1,167 Charge-offs: Real estate - mortgage.......... (322) (888) (482) (736) (1,456) Installment loans to individuals (5,893) (6,978) (6,190) (5,537) (3,986) Lease financing................. (300) (106) (12) Commercial, financial and agricultural.................. (1,119) (2,309) (1,621) (1,273) (1,805) ------- ------- ------- ------- ------- (7,634) (10,281) (8,305) (7,546) (7,247) ------- ------- ------- ------- ------- Recoveries: Real estate - mortgage.......... 43 100 136 279 98 Installment loans to individuals 914 804 1,057 1,198 976 Lease financing................. 38 32 6 Commercial, financial and agricultural................. 320 359 471 873 988 ------- ------- ------- ------- ------- 1,315 1,295 1,670 2,350 2,062 ------- ------- ------- ------- ------- Net charge-offs.................. (6,319) (8,986) (6,635) (5,196) (5,185) Provision for loan losses........ 7,572 11,503 10,063 7,416 9,826 ------- ------- ------- ------- ------- Balance at end of year........... $32,308 $31,055 $31,199 $27,771 $25,551 ======= ======= ======= ======= ======= Net charge-offs as a percent of average loans, net of unearned income......................... .28% .44% .35% .30% .33% Allowance for loan losses as a percent of total loans, net of unearned income............. 1.33 1.43 1.58 1.57 1.53 Allowance for loan losses as a percent of non-performing loans 230.44 319.82 238.67 202.78 165.24 The increase in the level of charge-offs and the provision for loan losses in 1997 resulted primarily from the consistent application of the Corporation's charge-off policy and methodology for determining the adequacy of the allowance for loan losses to acquired affiliates. 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 December 31 1998 LOANS 1997 LOANS 1996 LOANS 1995 LOANS 1994 LOANS ------- -------- ------- -------- ------- -------- ------- -------- ------- ------ Commercial, financial and agricultural............ $ 6,018 38% $ 5,617 37% $ 7,725 37% $ 7,040 36% $ 9,117 36% Real estate - construction. 271 4 284 3 132 2 88 2 216 3 Real estate - mortgage..... 6,534 41 6,263 44 4,749 40 4,261 40 4,648 38 Installment loans to individuals............. 8,384 17 5,597 16 7,771 21 6,781 22 5,313 23 Unallocated portion........ 11,101 13,294 10,822 9,601 6,257 ------- --- ------- --- ------- --- ------- --- ------- --- $32,308 100% $31,055 100% $31,199 100% $27,771 100% $25,551 100% ======= === ======= === ======= === ======= === ======= ===
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. 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 1998, securities available for sale decreased 3.2% and securities held to maturity decreased 23.1% from December 31, 1997. The majority of this decrease was utilized to finance the purchase of $60.2 million of bank owned life insurance, which is included in other assets. Bank owned life insurance provides a mechanism to finance the cost of employee benefit plans through the use of higher yielding tax-exempt investments. The structure of the Corporation's investment in bank owned life insurance although providing a higher yield than the securities utilized to fund the purchase does not expose the Corporation to a higher level of risk. The following table indicates the respective maturities and weighted- average yields of securities as of December 31, 1998 (in thousands): Weighted Amount Average Yield --------- ------------- Obligations of U.S. Treasury and Other U.S. Government agencies: Maturing within one year...................... $ 44,779 5.87% Maturing after one year within five years..... 188,677 6.05% Maturing after five years within ten years.... 55,002 6.27% State & political subdivisions: Maturing within one year...................... 9,480 5.77% Maturing after one year within five years..... 26,824 6.27% Maturing after five years within ten years.... 16,224 6.17% Maturing after ten years...................... 4,848 6.51% Other securities: Maturing within one year...................... 1,256 6.11% Maturing after one year within five years..... 281 6.54% Maturing after ten years...................... 10 2.80% Mortgage-backed securities......................... 198,379 6.18% No stated maturity................................. 27,897 7.05% --------- TOTAL.................................. $ 573,657 6.16% ========= ==== 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 10.3% to $2.9 billion in 1998. The majority of this increase was due to a $157.0 million or 14.2% increase in savings and NOW accounts. Additionally, non-interest deposits increased by $71.9 million or 21.8%. Short-term borrowings, made up of repurchase agreements, federal funds purchased, notes payable and subordinated notes increased 18.7% in 1998 to $151.0 million. The primary reasons for this increase was an increase in securities sold under repurchase agreements. Securities sold under repurchase agreements increased $40.5 million in 1998. 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. Capital management is a continuous process. Since December 31, 1997, stockholders' equity has increased $19.4 million as a result of earnings retention. Total cash dividends declared represented 39.6% of net income for 1998 compared to 26.1% for 1997. Book value per share was $13.71 at December 31, 1998, compared to $13.00 at December 31, 1997. YEAR 2000 READINESS The Year 2000 (Y2K) Issue is the result of computer programs being written using year fields consisting of only two digits rather than four. Computer programs that have time-sensitive software may recognize "00" as the year 1900 rather than year 2000. If such programs were in use and not corrected, it could result in system failures and temporary interruptions in the processing of transactions. The Corporation's core processing systems were written with four digit year fields. The Y2K Issue is not only an internal issue but also affects third parties including customers, counter parties, service providers and vendors. Because the Y2K Issue poses an unprecedented and profound enterprise wide challenge for every organization, the Corporation formed a Y2K Committee. The Y2K Committee has developed a Year 2000 Enterprise Wide Project Plan (Y2K Plan). The Y2K Plan addresses both internal and external technology. In accordance with the Y2K Plan, the Corporation has completed its inventory and assessment of all internal technologies, including both software and hardware. Each system was assigned a significance rating as to the degree of criticality. Formal detailed test plans for systems with significance ratings of a critical nature have been completed. Such systems include core processing and ancillary systems required to sustain operations. By the end of 1999, each of the Corporation's banking subsidiaries will be processing on either of two core processing systems. The Corporation's northern banking affiliates will continue to process transactions on their existing core processing system. During the second quarter of 1998, the Corporation made the strategic decision to convert each of the Florida banking affiliates to a new core processing system. All Florida banking affiliates will be converted by May 31, 1999. The decision to convert was based in part on the number of different systems currently being utilized by the Florida banking affiliates and the expiration of the Corporation's primary Florida core processing contract. The Corporation has received written representation from both vendors that each system is Y2K compliant as well as third party certification of the vendors compliance methodology. The Corporation participated in test verifications of each core system during the fourth quarter of 1998. The Corporation also developed a contingency plan which utilizes the two corporate wide core processing systems as contingencies for each other. During July of 1998, the Corporation's consumer finance subsidiary, Regency Finance Company (Regency), selected a third party vendor to support all of its future core application requirements. These core applications will include loans, insurance and the Corporation's subordinated note program. Regency's decision to select a new system was based upon the system's ability to support new lending products as well as the operating efficiencies resulting from real-time centralized processing. The vendor has provided a written warranty to Regency that it is Y2K compliant. The system was tested for Y2K readiness during the fourth quarter of 1998 and installation was completed on February 28, 1999. With respect to external technology, the Y2K Plan provides for the evaluation and assessment of all significant funds takers, including large borrowing customers and bond issuers, and funds providers, including contingency lines of credit and deposit accounts. All project plans for funds takers and providers have been substantially completed with continued monitoring to occur. An integral part of the Corporation's funds provider project plan includes a Customer Awareness Program. This program was developed to assure customer confidence and mitigate reputation and liquidity risk. The program was not only developed to educate the Corporation's customers, but also its employees in responding to customer inquiries. The Y2K Plan includes due diligence procedures as it relates to the fiduciary responsibilities of the Corporation's investment and trust department, including such activities as settlement transactions, remittance of bond payments and transactions related to mutual funds and other securities. In performing its fiduciary responsibilities, the Corporation assessed the Y2K readiness of its safekeeping agents and broker/dealers. The Corporation has rated each service provider, assessed their ability to be Y2K ready and is developing a contingency plan for those in question. The Corporation's current assessment of cost associated with the completion of its Y2K Plan is not considered by management to be material to the Corporation's future operations. Through December 31, 1998, the Corporation has expended $126,000 on its Y2K Plan and anticipates additional costs of approximately $50,000 to be incurred in 1999. The cost of completing the Corporation's Y2K Plan and the dates on which all procedures will be completed are based on management's best estimates. These estimates were derived utilizing various assumptions about future events, including the continued availability of resources, external technology modification plans and other significant factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. The Corporation believes that modifications to existing systems, conversion to new systems and vendor compliance upgrades will be resolved on a timely basis and related costs will not have a material impact on its results of operations or financial condition. 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 Seminole Bank Seminole, Florida: We have audited the balance sheets of Seminole Bank (the "Bank") at December 31, 1997 and 1996, and the related statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Bank'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 financial position of the Bank at December 31, 1997 and 1996, and the results of its operations and cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. HACKER, JOHNSON, COHEN & GRIEB PA Tampa, Florida January 9, 1998 EXHIBIT 99.5 INDEPENDENT AUDITORS' REPORT To the Board of Directors Citizens Holding Corporation Clearwater, Florida: We have audited the accompanying consolidated balance sheets of Citizens Holding Corporation and Subsidiaries (the "Company") at December 31, 1997 and 1996, and the related consolidated statements of earnings, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 1997 and 1996, and the results of its operations and cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. HACKER, JOHNSON, COHEN & GRIEB PA Tampa, Florida January 9, 1998, except for Note 18, as to which the date is April 6, 1998 EXHIBIT 99.6 April 23, 1999 Board of Directors Guaranty Bank & Trust Company Venice, Florida REPORT OT INDEPENDENT PUBLIC ACCOUNTANTS We have audited the accompanying statements of financial condition of Guaranty Bank & Trust Company as of December 31, 1998 and 1997, and the related statements of income, comprehensive income, changes in shareholders' equity and cash flows for the years ended December 31, 1998, 1997 and 1996. These financial statements are the responsibility of the Bank'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 financial position of Guaranty Bank & Trust Company as of December 31, 1998 and 1997 and the results of its operations and cash flows for the years ended December 31, 1998, 1997 and 1996 in conformity with generally accepted accounting principles. BOBBITT, PITTENGER & COMPANY, P.A. Sarasota, Florida EX-27.1 2
9 1000 12-MOS 12-MOS 12-MOS DEC-31-1998 DEC-31-1997 DEC-31-1996 DEC-31-1998 DEC-31-1997 DEC-31-1996 134,847 112,292 125,276 4,192 5,581 1,792 44,706 46,013 32,619 0 0 0 455,082 470,118 355,273 118,575 154,241 209,761 119,522 154,624 208,853 2,422,884 2,175,789 1,971,018 32,308 31,055 31,199 3,403,540 3,094,798 2,793,639 2,851,042 2,584,541 2,345,333 150,981 127,186 117,972 50,252 41,578 38,297 69,492 72,246 58,179 0 0 0 2,380 2,875 3,525 38,529 36,800 33,850 240,864 229,572 196,478 2,403,540 3,094,798 2,793,639 205,071 187,225 175,409 36,569 32,837 30,486 4,334 4,997 3,828 245,974 225,059 209,723 96,657 86,466 79,541 108,060 96,627 87,955 137,914 128,432 121,768 7,572 11,503 10,063 1,384 1,287 790 115,136 103,321 102,118 48,616 41,087 33,485 32,198 28,074 22,278 0 8,809 0 0 0 0 32,198 36,883 22,278 1.58 1.87 1.11 1.52 1.78 1.08 4.68 4.87 5.01 12,250 8,365 10,363 2,943 3,220 3,092 1,770 1,345 2,709 0 0 0 31,055 31,199 27,771 7,634 10,281 8,305 1,315 1,295 1,670 32,308 31,055 31,199 32,308 31,055 31,199 0 0 0 0 0 0
EX-27.2 3
9 1000 3-MOS 3-MOS 3-MOS 3-MOS DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998 MAR-31-1998 JUN-30-1998 SEP-30-1998 DEC-31-1998 111,861 116,884 114,787 134,847 8,324 6,575 5,449 4,192 114,707 48,203 29,997 44,706 0 0 0 0 462,678 479,019 505,081 455,082 140,103 134,109 127,586 118,575 140,599 134,607 129,081 119,522 2,223,807 2,278,713 2,354,238 2,422,884 31,741 32,202 32,676 32,308 3,204,651 3,214,826 3,281,146 3,403,540 2,701,542 2,681,451 2,689,550 2,851,042 119,910 141,323 188,915 150,981 37,934 45,044 47,983 50,252 72,798 70,614 71,747 69,492 0 0 0 0 2,749 2,719 2,568 2,380 36,782 38,313 38,381 38,529 232,936 235,362 242,002 240,864 3,204,651 3,214,826 3,281,146 3,403,540 49,556 50,870 51,968 52,677 9,167 8,954 9,317 9,131 1,239 1,451 908 736 59,962 61,275 62,193 62,544 23,654 24,144 24,619 24,240 26,266 26,983 27,634 27,177 33,696 34,292 34,559 35,367 1,761 1,615 1,977 2,219 547 415 173 249 27,612 28,580 28,970 29,974 12,269 12,166 12,054 12,127 8,288 7,734 8,008 8,168 0 0 0 0 0 0 0 0 8,288 7,734 8,008 8,168 .41 .38 .39 .40 .39 .36 .38 .39 4.78 4.69 4.63 4.63 8,437 9,619 10,449 12,250 2,463 2,648 2,868 2,943 1,712 1,831 1,840 1,770 0 0 0 0 31,055 31,741 32,202 32,676 1,566 1,490 1,724 2,854 491 336 221 267 31,741 32,202 32,676 32,308 31,741 32,202 32,676 32,308 0 0 0 0 0 0 0 0
EX-27.3 4
9 1000 3-MOS 3-MOS 3-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997 104,787 109,705 100,047 112,292 4,397 2,904 5,039 5,581 77,324 39,792 73,022 46,013 0 0 0 0 351,783 348,578 376,446 470,118 205,214 185,305 162,759 154,241 203,459 184,714 162,946 154,624 2,007,787 1,973,358 2,016,830 2,175,789 31,789 31,573 29,245 31,055 2,846,981 2,775,738 2,847,259 3,094,798 2,408,722 2,306,782 2,357,815 2,584,541 123,024 135,853 138,506 127,186 31,642 37,906 36,680 41,578 45,740 48,863 61,135 72,246 0 0 0 0 3,233 3,061 2,900 2,875 34,009 35,427 35,519 36,800 165,658 171,647 178,603 229,572 2,846,981 2,775,738 2,847,259 3,094,798 45,635 46,922 46,418 48,250 8,020 8,382 8,130 8,305 1,200 1,024 1,094 1,679 54,855 56,328 55,642 58,234 20,913 21,498 21,379 22,676 23,152 23,866 23,979 25,630 31,703 32,462 31,663 32,604 2,423 3,673 2,505 2,902 525 (55) 423 394 24,759 29,350 23,069 26,143 11,435 5,565 13,184 10,903 7,655 3,770 9,011 7,638 0 5,227 0 3,582 0 0 0 0 7,655 8,997 9,011 11,220 .39 .46 .46 .56 .37 .44 .44 .53 4.95 4.89 4.99 4.67 10,300 8,285 7,414 8,365 3,356 2,910 4,035 3,220 2,629 2,025 1,947 1,345 0 0 0 0 31,199 31,788 33,017 33,194 2,102 2,948 2,624 2,607 268 504 296 227 31,788 33,017 33,194 31,055 31,788 33,017 33,194 31,055 0 0 0 0 0 0 0 0
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