UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----
ACT OF 1934
For the fiscal year ended December 31, 1996 or
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
----- -----
Commission file number 0-19209.
-------
Cardinal Bancorp, Inc.
------------------------------------------------------
(Exact Name of Registrant as Specified in its charter)
Pennsylvania 25-1537130
- ------------------------------ ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
140 East Main Street, Everett, Pennsylvania 15537
- ------------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
(814) 652-2131
---------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- ---------------------
None None
- ------------------- ---------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.50 Par Value
----------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing. (See definition of affiliate in Rule 405, 17 CFR 230.405.)
Note: If a determination as to whether a particular person or entity is
an affiliate cannot be made without involving unreasonable effort and expense,
the aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form.
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $20,171,250 as of March 11, 1997.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PRECEDING
FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _____ No _____
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of March 25, 1997 there were outstanding 990,000 shares of common
stock, $.50 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
List hereunder the following documents if incorporated by reference and
the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the
document is incorporated: (1) any annual report to security holders; (2) any
proxy or information statement; and (3) any prospectus filed pursuant to Rule
424(b) or (c) under the Securities Act of 1933. The listed documents should
be clearly described for identification purposes (e.g., annual report to
security-holders for fiscal year ended December 24, 1980).
<PAGE>
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1996, (the "1996 Annual Report") are incorporated into
Parts I and II.
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting
of Shareholders (the "1997 Proxy Statement") are incorporated by reference
into Part III.
PART I
------
ITEM 1. BUSINESS.
- ------- --------
The information required by this Item is incorporated by reference
herein, from page 1 of the 1996 Annual Report of Cardinal Bancorp, Inc. (the
"Registrant" or "Corporation"). Additionally, certain other matters are
discussed below.
Employees
---------
At December 31, 1996, the Registrant had 70 full-time and 8 part-time
employees. None of these employees is represented by a collective bargaining
agent, and the Registrant believes it enjoys good relations with its
personnel.
The Registrant experiences substantial competition in attracting and
retaining deposits and in lending funds. Primary factors in competing for
deposits are the ability to offer attractive rates and the convenience of
office locations. Direct competition for deposits comes primarily from other
commercial banks and thrift institutions. Competition for deposits also comes
from money market mutual funds, corporate and government securities and credit
unions. The primary factors in the competition for loans are interest rates,
loan origination fees and the range of products and services offered.
Competition for origination of real estate loans normally comes from other
commercial banks, thrift institutions, mortgage bankers, mortgage brokers and
insurance companies.
For additional information with respect to the Registrant's business
activities, see Part II, Item 7 hereof.
Supervision and Regulation - Registrant and Subsidiary,
-------------------------------------------------------
First American National Bank of Pennsylvania (the "Bank"),
--------------------------------------------------------
formerly The First National Bank of Everett.
--------------------------------------------
The Registrant operates in a heavily regulated environment. Changes in
laws and regulations affecting the Registrant and its subsidiary, the Bank,
may have an impact on operations.
The Registrant is subject to the provisions of the Bank Holding Company
Act of 1956, as amended (the "Bank Holding Company Act"), and to supervision
by the Federal Reserve Board. The Federal Reserve Board permits bank holding
companies to engage in activities so closely related to banking or managing or
controlling
<PAGE>
banks as to be a proper incident thereto. The Registrant does not at this
time engage, nor does the Registrant have any current plans to engage, in any
of the permissible activities.
Legislation and Regulatory Changes
-----------------------------------
The passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 and the Riegle Community Development and Regulatory
Improvement Act may have a significant impact upon the Corporation. The key
provisions pertain to interstate banking and interstate branching as well as a
reduction in the regulatory burden on the banking industry. Since September,
1995, bank holding companies may acquire banks in other states without regard
to state law. In addition, banks can merge with other banks in another state
beginning in June, 1997. States may adopt laws preventing interstate
branching but, if so, no out-of-state bank can establish a branch in such
state and no bank in such state may branch outside the state. Pennsylvania
has amended the provisions of its Banking code to authorize full interstate
banking and branching under Pennsylvania law and to facilitate the operations
of interstate banks in Pennsylvania. As a result of legal and industry
changes, management predicts that consolidation will continue as the financial
services industry strives for greater cost efficiencies and market share.
Management believes that such consolidation may enhance its competitive
position as a community bank.
There are numerous proposals before Congress to modify the financial
services industry and the way commercial banks operate. However, it is
difficult to determine at this time what effect such provisions may have until
they are enacted into law. Except as specifically described above, Management
believes that the effect of the provisions of the aforementioned legislation
on the liquidity, capital resources, and results of operations of the
Corporation will be immaterial. Management is not aware of any other current
specific recommendations by regulatory authorities or proposed legislation,
which, if they were implemented, would have a material adverse effect upon the
liquidity, capital resources, or results of operations of the Corporation,
although the general cost of compliance with numerous and multiple federal and
state laws and regulations does have, and in the future may have, a negative
impact on the Corporation's results of operations.
Effects of Inflation
--------------------
Inflation has some impact on the Corporation's and the Bank's operating
costs. Unlike many industrial companies, however, substantially all of the
Bank's assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on the Corporation's and the Bank's
performance than the general level of inflation. Over short periods of time,
interest rates may not necessarily move in the same direction or in the same
magnitude as prices of goods and services.
<PAGE>
Monetary Policy
---------------
The earnings of the Corporation and the Bank are affected by domestic
economic conditions and the monetary and fiscal policies of the United States
Government and its agencies. An important function of the Federal Reserve
System is to regulate the money supply and interest rates. Among the
instruments used to implement those objectives are open market operations in
United States government securities and changes in reserve requirements
against member bank deposits. These instruments are used in varying
combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect rates charged on loans
or paid for deposits.
The Bank is a member of the Federal Reserve System and, therefore, the
policies and regulations of the Federal Reserve Board have a significant
effect on its deposits, loans and investment growth, as well as the rate of
interest earned and paid, and are expected to affect the Bank's operations in
the future. The effect of such policies and regulations upon the future
business and earnings of the Corporation and the Bank cannot be predicted.
Environmental Laws
-------------------
Neither the Registrant nor the Bank anticipate that compliance with
environmental laws and regulations will have any material effect on capital,
expenditures, earnings, or on its competitive position. However,
environmentally related hazards have become a source of high risk and
potentially unlimited liability for financial institutions. Environmentally
contaminated properties owned by an institution's borrowers may result in a
drastic reduction in the value of the collateral securing the institution's
loans to such borrowers, high environmental clean up costs to the borrower
affecting its ability to repay the loans, the subordination of any lien in
favor of the institution to a state or federal lien securing clean up costs,
and liability to the institution for clean up costs if it forecloses on the
contaminated property or becomes involved in the management of the borrower.
To minimize this risk, if circumstances affecting a property indicate a
potential for contamination, the Bank may require an environmental examination
of and report with respect to the property of any borrower or prospective
borrower, taking into consideration a potential loss to the institution in
relation to the borrower. Such examination must be performed by an
engineering firm experienced in environmental risk studies and acceptable to
the institution, and the cost of such examinations and reports are the
responsibility of the borrower. These costs may be substantial and may deter
a prospective borrower from entering into a loan transaction with the Bank.
The Registrant is not aware of any borrower who is currently subject to any
environmental investigation or clean up proceeding that is likely to have a
material adverse effect on the financial condition or results of operations of
the Bank.
<PAGE>
In 1995, the Pennsylvania General Assembly enacted the Economic
Development Agency, Fiduciary and Lender Environmental Liability Protection
Act which, among other things, provides protection to lenders from
environmental liability and remediation costs under the environmental laws for
releases and contamination caused by others. A lender who engages in
activities involved in the routine practices of commercial lending, including,
but not limited to, the providing of financial services, holding of security
interests, workout practices, foreclosure or the recovery of funds from the
sale of property, shall not be liable under the environmental acts or common
law equivalents to the Pennsylvania Department of Environmental Resources or
to any other person by virtue of the fact that the lender engages in such
commercial lending practice. A lender, however, will be liable if it, its
employees or agents, directly cause an immediate release or directly
exacerbate a release of regulated substances on or from the property, or
knowingly and willfully compel a borrower to commit an action which causes
such release or to violate an environmental act. The Economic Development
Agency, Fiduciary and Lender Environmental Liability Protection Act, however,
does not limit federal liability which still exists under certain
circumstances.
Federal Taxation
-----------------
The Registrant and the Bank are subject to those rules of federal income
taxation generally applicable to corporations and report their respective
income and expenses on the accrual method of accounting. The Registrant and
its subsidiary file a consolidated federal income tax return on a calendar
year basis. Intercompany distributions (including dividends) and certain
other items of income and loss derived from intercompany transactions are
eliminated upon consolidation of all the consolidated group members'
respective taxable income and losses.
The Internal Revenue Code (the "IRC") imposes a corporate alternative
minimum tax (AMT). The corporate AMT only applies if such tax exceeds a
corporation's regular tax liability. In general, the AMT is calculated by
multiplying the corporate AMT rate of 20% by an amount equal to the excess of
(i) the sum of (a) regular taxable income plus (b) certain adjustments and tax
preference items ("alternative minimum taxable income" or "AMTI") over (ii) an
exemption amount ($40,000 for a corporation, which amount is reduced by 25% of
the excess of AMTI over $150,000 and is completely eliminated when AMTI equals
$310,000). There are certain applicable adjustment and preference items
(e.g., the adjustment for depreciation) for determining AMTI. If a banking
institution is subject to AMT, then all or a portion of the amount of a
preference will effectively be subject to a 20% surtax.
State Tax
----------
The Registrant is subject to the Pennsylvania Corporate Net Income Tax
and Capital Stock Tax. The Corporate Net Income Tax rate for 1996 and
thereafter is 9.99% and is imposed upon a
<PAGE>
corporate taxpayer's unconsolidated taxable income for federal tax purposes
with certain adjustments. In general, the Capital Stock Tax is a property tax
imposed on a corporate taxpayer's capital stock value apportionable to the
Commonwealth of Pennsylvania, which is determined in accordance with a fixed
formula based upon average book income and net worth. In the case of a
holding company, an optional elective method permits the corporate taxpayer to
be taxed on only 10% of such capital stock value. The Capital Stock Tax rate
is presently 1.275%.
Competition
-----------
The Bank competes actively with other area commercial and savings banks,
many of which are larger than the Bank, as well as with major regional banking
and financial institutions headquartered in or near Altoona, Johnstown and
Pittsburgh, Pennsylvania and Cleveland Ohio. The Bank's major competitors are
Mid-State Bank and Trust Company, Altoona First Savings Bank, Hollidaysburg
Trust Company, Johnstown Bank and Trust Company, National City Bank and
Central Bank. In terms of asset size, the Bank is smaller than its other
major competitors.
Supervision and Regulation - Bank
---------------------------------
The operations of the Bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits are insured
by the Federal Deposit Insurance Corporation. Bank operations are also
subject to regulations of the Comptroller of the Currency (Comptroller), the
Federal Reserve Board and the FDIC.
The primary supervisory authority of the Bank is the Comptroller, which
regularly examines the Bank. The Comptroller has the authority to prevent a
national bank from engaging in an unsafe or unsound practice in conducting its
business.
Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, loans a bank makes and
collateral it takes, the activities of a bank with respect to mergers and
consolidations and the establishment of branches.
Annual full-scope, on site examinations are generally required for all
FDIC-insured institutions. However, institutions with assets under $100
million which are well-capitalized, well-managed, have a composite CAMEL
rating of 1 or 2 and are not subject to a recent change in control, and
institutions with assets under $250 million which are well-capitalized, well-
managed, have a composite CAMEL rating of 1 and are not subject to a recent
change in control are subject to an examination period of eighteen (18)
months.
As noted above, from time to time various types of federal and state
legislation may be proposed that could result in
<PAGE>
additional regulation of, and restrictions on, the business of the Bank. It
cannot be predicted whether any such legislation will be adopted or, if
adopted, how such legislation would affect the business of the Bank. As a
consequence of the extensive regulations of commercial banking activities in
the United States, the Bank's business is particularly susceptible to being
affected by federal legislation and regulations that may increase the costs of
doing business.
ITEM 2. PROPERTIES.
- ------- -----------
The Bank owns its main office, which houses the administration center of
the Bank and the Corporation, four branch offices and certain parking
facilities related to its banking offices, all of which are free and clear of
any lien. The Bank's main office is located in the central business district
of Everett, Pennsylvania. Below is a table containing the location and date
of acquisition of the Bank's properties.
Office Address When Acquired
- ------ ------- -------------
Main Office 140 East Main Street 1902
and Administration Everett, PA 15537
Center
Bedford Branch 601 East Pitt Street 5/13/85
Office Bedford, PA 15522
Breezewood Branch Main Street 8/4/58
Office Breezewood, PA 15533
Woodbury Branch Main Street 1/23/61
Office Woodbury, PA 16695
Altoona/Hollidaysburg 2430 North Business 220 2/28/95
Office Duncansville, PA 16635
All the above properties are in good condition and are deemed adequate
for the Bank's purposes.
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
Management, after consulting with the Corporation's legal counsel, is not
aware of any litigation that would have a material adverse effect on the
consolidated financial position of the Corporation. There are no proceedings
pending other than ordinary routine litigation incident to the business of the
Corporation and the Bank. No material proceedings are known to be
contemplated by governmental authorities against the Corporation or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
- ------ ----------------------------------------------------
NOT APPLICABLE
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------- -------------------------------------------------
STOCKHOLDER MATTERS.
-------------------
Cardinal Bancorp, Inc. has only common stock authorized, issued and
outstanding. The outstanding common stock is traded in the over-the-counter
market. Set forth in the table below is the range of high and low bid
information for the stock for each full quarterly period within the two most
recent years, as reported by Legg Mason Wood Walker, Inc., a market maker of
the Registrant's stock. On October 16, 1996, the Board of Directors of the
Corporation approved a two for one stock split. The additional shares
resulting from the split, which was effected in the form of a 100 percent
stock dividend, were distributed on November 14, 1996, to holders of record on
October 31, 1996. The market prices and dividend amounts set forth below for
1996 and 1995 have been, where appropriate, adjusted to give retroactive
effect to the stock split. These quotations do not include retail markups or
markdowns or any commission to the broker-dealer. These quotations may not
reflect actual transactions. For additional information refer to page 1 of
the Registrant's 1996 Annual Report.
1996 1995
---------------------- -----------------------
Dividends Dividends
High Low Declared High Low Declared
Quarter Bid Bid Per share Bid Bid Per share
- ------- ---- --- --------- ---- --- ---------
First 17.25 16.25 $.075 16.375 15.625 $.075
Second 18.00 17.12 $.10 16.4375 15.50 .075
Third 18.37 17.12 $.10 33.00 16.375 .075
Fourth 19.75 17.75 $.10 33.00 16.1875 .075
As of March 19, 1997 there were 485 holders of record of the Registrant's
common stock.
The Registrant is subject to restrictions on the payment of dividends to
its shareholders pursuant to the Pennsylvania Business Corporation Law of
1988, as amended (the "BCL"). The BCL operates generally to preclude dividend
payments if the effect thereof would render the Registrant insolvent, as
defined. As a practical matter, the Registrant's payment of dividends is
contingent upon its ability to obtain funding in the form of dividends from
the Bank. Payment of dividends to the Registrant by the Bank is subject to
the restrictions set forth in the National Bank Act. The National Bank Act
requires the approval of the Comptroller of the Currency if the total of all
dividends declared by a national bank, such as the Bank, in any calendar year
exceeds the net profits (as defined) for that year, combined with its retained
net profits for the preceding two calendar years. Without regulatory
approval, the amount available for payment of dividends by the Bank in 1997
was $2,550,532 at December 31, 1996.
<PAGE>
The table set forth above states the frequency and amount of cash
dividends declared by the Corporation on its common stock for the two most
recent years. The Registrant intends to pay a dividend in each quarter of
1997, as earnings permit.
ITEM 6. SELECTED FINANCIAL DATA.
- ------- -----------------------
The information required by this Item is incorporated by reference
herein, from page 4 and 5 of the Registrant's 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS.
------------------------------------
The information required by this Item is incorporated by reference
herein, from pages 6 to 23 of the Registrant's 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
Report of Independent Auditors and Consolidated Financial Statements are
incorporated by reference herein, from pages 24 to 48 of the Registrant's 1996
Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------- ------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
Information concerning a change in independent accountants during 1995
has been disclosed previously. See also the disclosure appearing under
Ratification of Independent Auditors contained in the Registrant's 1997 Proxy
- ------------------------------------
Statement, incorporated by reference herein.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ---------------------------------------------------
The information required by this Item is incorporated by reference
herein, from pages 5, 6, and 11 of the Registrant's 1997 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
The information required by this Item is incorporated by reference
herein, from pages 7 to 10 of the Registrant's 1997 Proxy Statement.
Additionally, certain matters are discussed below.
<PAGE>
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
The Board of Directors of the Registrant determines the amount of
executive compensation as the Registrant has no compensation committee. Merle
W. Helsel, the President and CEO of the Registrant, and James B. Bexley and
Ray E. Koontz, both formerly having held the position of President and CEO of
the Registrant, served on the Board of Directors of the Registrant and Mr.
Bexley and Mr. Koontz participated during 1996 in deliberations concerning
compensation of other executive officers. No party participates in
deliberations concerning executive officer compensation which would affect the
compensation of that party. As a result, neither Mr. Helsel nor Mr. Bexley
participated in any deliberations concerning his compensation as an executive
officer.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------
MANAGEMENT.
-----------
The information required by this Item is incorporated by reference
herein, from pages 2, 3 and 4 of the Registrant's 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
The information required by this Item is incorporated by reference
herein, from pages 10 and 11 of the Registrant's 1997 Proxy Statement.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS
- -------- ------------------------------------------------------
ON FORM 8-K.
------------
(a) 1. CARDINAL BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS for
the period ended December 31, 1996:
i. Report of Independent Auditors
ii. Consolidated Balance Sheets
iii. Consolidated Statements of Income
iv. Consolidated Statements of Cash Flows
v. Consolidated Statements of Changes in
Stockholders' Equity
vi. Notes to Consolidated Financial Statements
2. The financial statement schedules, required by Regulation S-X, are
omitted because the information is either not applicable or is included
elsewhere in the consolidated financial statements.
<PAGE>
3. The following Exhibits are filed as part of this filing on Form 10-
K, or incorporated by reference hereto:
(3)(i) Registrant's Articles of Incorporation, as amended *
(3)(ii) Registrant's Bylaws *
(13)(i) Registrant's 1996 Annual Report to Shareholders
(13)(ii) Registrant's 1994 Report of Independent Auditors
(21) Subsidiaries of the Registrant
(27) Financial Data Schedule
(99) Proxy Statement and Accompanying Notice of Annual Meeting
and Form of Proxy for the 1997 Annual Meeting of
Shareholders
* Incorporated by reference herein from the Registrant's 1991 Form
10-K, File No. 0-19209.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Cardinal Bancorp, Inc.
- ---------------------------------------
(Registrant)
By: /s/ Merle W. Helsel
---------------------------------
Merle W. Helsel
President and Chief Executive Officer
Date
----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated.
DATE
By: /s/ Clyde R. Morris
---------------------------------- ---------
Clyde R. Morris
Chairman of the Board of Directors
and Director
By: /s/ Merle W. Helsel
---------------------------------- ---------
Merle W. Helsel
President, Chief Executive Officer
and Director
(principal executive officer)
By: /s/ Robert F. Lafferty
--------------------------------- ---------
Robert F. Lafferty
Chief Financial Officer
(principal financial and accounting officer)
By: /s/ Donald W. DeArment
--------------------------------- ---------
Donald W. DeArment
Director
<PAGE>
By: /s/ Ray E. Koontz
--------------------------------- ---------
Ray E. Koontz
Director
By: /s/ William B. Zimmerman
--------------------------------- ---------
William B. Zimmerman
Director
By: /s/ Robert E. Ritchey
--------------------------------- ----------
Robert E. Ritchey
Director
By: /s/ James C. Vreeland
--------------------------------- ---------
James C. Vreeland
Director
By: /s/ Darrell Dodson
--------------------------------- ---------
Darrell Dodson
Director
<PAGE>
INDEX TO EXHIBITS
Page Number
in Manually Signed
Original
--------
Exhibit Number
- --------------
3(i) Registrant's Articles of Incorporation, *
as amended
3(ii) Registrant's Bylaws, as amended *
(13)(i) Registrant's 1995 Annual Report to 16
Shareholders
(13)(ii) Registrant's 1994 Report of Independent 65
Auditors
(21) Subsidiaries of the Registrant 67
(99) Proxy Statement and Accompanying Notice 68
of Annual Meeting and Form of Proxy
for the 1996 Meeting of Shareholders
* Incorporated by reference herein from the Registrant's 1991 Form
10-K, File No. 0-19209
EXHIBIT (13) (i)
----------------
Registrant's 1996 Annual Report to Shareholders
<PAGE>
TABLE OF CONTENTS
Shareholders' Information 1
President's Message 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations 4
Report of S.R. Snodgrass, A.C., Independent Auditors 24
Consolidated Financial Statements
Consolidated Balance Sheets 25
Consolidated Statements of Income 26
Consolidated Statements of Changes in Shareholders' Equity 27
Consolidated Statements of Cash Flows 28
Notes to Consolidated Financial Statements 30
Board of Directors and Officers Inside Back Cover
SHAREHOLDERS' INFORMATION
Corporate Introduction
June 1, 1987, was the effective operational date of Cardinal Bancorp, Inc.,
the bank holding company. First American National Bank of Pennsylvania,
formerly The First National Bank of Everett, the wholly-owned subsidiary of
the Corporation, has full-service offices in the communities of Everett,
Bedford, Breezewood, Altoona/Hollidaysburg and Woodbury, Pennsylvania. First
American National Bank of Pennsylvania, an insured member of the Federal
Deposit Insurance Corporation (FDIC), has been serving the area since 1902.
Notice of Annual Meeting
The annual meeting of shareholders will be held on April 8, 1997, at 9:30 a.m.
at the Arena Restaurant, Bedford, Pennsylvania.
Stock and Dividend Information
Cardinal Bancorp, Inc. has only common stock authorized, issued and
outstanding. The outstanding common stock is traded in the local over-the-
counter market, primarily in Bedford County, Pennsylvania. Prices in the
table below reflect actual transactions. Generally, cash dividends are
declared on a quarterly basis and paid on the last day of the quarter. As of
February 3, 1997, the Corporation had 487 shareholders of record.
<TABLE>
<CAPTION>
1996 1995
------------------------- ---------------------------
Dividends Dividends
Declared Declared
Quarter High Low Per Share High Low Per Share
- --------- ---- --- --------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C>
First 17.25 16.25 $.075 16.375 15.625 $.075
Second 18.00 17.12 .10 16.4375 15.50 .075
Third 18.37 17.12 .10 16.75 16.375 .075
Fourth 19.75 17.75 .10 17.125 16.1875 .075
</TABLE>
1
<PAGE>
A MESSAGE TO THE SHAREHOLDERS
Dear Shareholders:
Cardinal Bancorp, Inc. completed another successful year in 1996. The
Corporation ended the year with total assets of $129,556,732 and earnings of
$1,523,704. The Corporation achieved a Return on Average Assets (ROA) of
1.20% and a Return on Average Shareholders' Equity (ROE) of 10.01%.
During 1996 total assets increased $5,084,775 from the previous year-end.
The Bank's commitment to the consumers and businesses in our community was
reflected in an increase in loans of $5,571,942. Although year-end deposits
declined, the Bank experienced increases in deposits throughout much of the
year as average deposits in 1996 increased by more than $4,800,000 from 1995.
Shareholders' equity increased to $15,223,493 at December 31, 1996, the
highest level in the history of the Corporation. On October 16, 1996, the
Board of Directors approved a two for one stock split. The additional shares
resulting from the split, which was effected in the form of a 100 percent
stock dividend, were distributed November 14, 1996, to shareholders of record
on October 31, 1996. In addition to the stock dividend, cash dividends paid
per share based upon shares outstanding after the split increased by 25% to
$.375 from $.30.
The banking industry is continuing to experience a large number of
mergers and acquisitions as you have seen both nationally and locally. We
certainly have heard of and seen the results of this trend as jobs are lost,
local decision making is removed and community involvement and contributions
to nonprofit organizations are curtailed. Community banks play a vital role
in promoting the local economy and in improving the quality of life in their
communities. First American National Bank of Pennsylvania strives to keep
this philosophy alive through the community commitment of its directors and
employees. We are confident our success will continue through this commitment
and our concern for the shareholders and customers of the Corporation. Our
continued success will be built on relationships and the delivery of service
beyond that which is normally expected.
As you may be aware, James B. Bexley, the Corporation's President and
CEO, retired in December. Although many of the shareholders and customers of
Cardinal Bancorp, Inc. and First American National Bank of Pennsylvania are
familiar with me, this is the first time I have
2
<PAGE>
been privileged to write to you as President and CEO. As a result of having
grown up in the middle of the communities served by the Corporation and having
been employed by the Bank for most of my working years, the shareholders,
customers and employees of the Bank and the communities we serve are very
important to me. I extend an invitation to each of you to call me at any time
if I may be of assistance.
The annual shareholders meeting of the Corporation will be held on April
8, 1997, at the Arena Restaurant in Bedford. I hope you will be able to
attend. The directors and officers of the Corporation look forward to the
opportunity to meet with you.
Sincerely,
/s/ Merle W. Helsel
- --------------------
Merle W. Helsel
President and CEO
3
<PAGE>
CARDINAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
CONSOLIDATED SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
<CAPTION>
As of Year End 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets $129,557 $124,472 $112,606 $121,222 $118,933
Total Deposits 105,755 108,796 99,650 108,590 107,173
Loans, Net of Unearned Income 67,173 61,601 60,845 64,871 71,258
Shareholders' Equity 15,223 14,829 12,123 12,053 11,181
Shareholders' Equity per
Common Share* 15.38 14.98 12.25 12.18 11.29
Average Number of Shares
Outstanding* 990,000 990,000 990,000 990,000 990,000
<CAPTION>
For the Year Ended December 31 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest Income $9,532 $9,238 $7,944 $8,150 $9,593
Interest Expense 4,098 3,995 3,230 3,782 4,682
------ ------ ------ ------ ------
Net Interest Income 5,434 5,243 4,714 4,368 4,911
Provision for Loan Losses 0 0 (300) 125 2,470
----- ----- ----- ----- -----
Net Interest Income After
Provision for Loan Losses 5,434 5,243 5,014 4,243 2,441
Other Income 533 476 456 529 930
Other Expenses 4,096 3,714 3,487 3,509 4,155
----- ----- ----- ----- -----
Income (Loss) Before Income
Taxes and Cumulative
Effect Adjustment 1,871 2,005 1,983 1,263 (784)
Cumulative Effect
Adjustment 0 0 0 60 0
Income Tax Expense (Benefit) 347 265 318 273 (161)
----- ----- ----- ----- -----
Net Income (Loss) 1,524 1,740 1,665 1,050 (623)
===== ===== ===== ===== =====
Per Share Data:
Income (Loss) Before
Cumulative Effect
Adjustment 1.54 1.76 1.68 1.00 (.63)
Net Income (Loss) 1.54 1.76 1.68 1.06 (.63)
Cash Dividends Declared .375 .30 .55 .225 .30
4
<PAGE>
CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED)
Return on Average Assets 1.20% 1.45% 1.42% .88% (0.50)%
Return on Average
Shareholders' Equity 10.01% 12.61% 13.31% 9.06% (5.41)%
Dividend Payout ratio 24.34% 17.07% 32.70% 21.21% **
Average Shareholders' Equity
to Average Assets 11.97% 11.48% 10.69% 9.66% 9.31%
Tier 1 Risk-Based Capital Ratio 19.76% 19.13% 17.92% 14.42% 13.77%
Total Risk-Based Capital Ratio 20.96% 20.38% 19.17% 15.67% 15.02%
Leverage Capital Ratio 12.20% 11.64% 11.39% 9.81% 9.04%
</TABLE>
* Gives retroactive effect to a two for one stock split effected in the form
of a 100% stock dividend on October 16, 1996.
** A net loss was incurred for the year 1992
5
<PAGE>
RESULTS OF OPERATIONS
OVERVIEW OF THE
SUMMARY OF OPERATIONS
Cardinal Bancorp, Inc. (the Corporation) is a one-bank holding company
headquartered in Everett, Pennsylvania. The Corporation's wholly-owned
subsidiary is First American National Bank of Pennsylvania (the Bank). The
subsidiary is engaged in commercial banking activities which provide financial
services to both consumer and commercial customers. As a national bank, First
American National Bank of Pennsylvania is subject to the supervision,
examination and regulation of the Office of the Comptroller of the Currency.
The Bank is a member of the Federal Deposit Insurance Corporation (FDIC) and
the deposits of the Bank's customers are insured by the agency.
The following discussion is intended to focus on and highlight certain
information regarding Cardinal Bancorp, Inc. This discussion should be read
in conjunction with the Consolidated Financial Statements and related notes
appearing elsewhere in this report.
FINANCIAL SUMMARY
The consolidated earnings of the Corporation are derived primarily from
the operations of its wholly-owned subsidiary, First American National Bank of
Pennsylvania. During 1996, the Corporation recorded a net profit of
$1,523,704 or $1.54 per share compared to net income of $1,739,703 or $1.76
per share in 1995 and net income of $1,665,123 or $1.68 per share in 1994.
Per share data has been restated to reflect a 2 for 1 stock split which was
effected in the form of a 100% stock dividend which was paid November 14, 1996
to shareholders of record on October 31, 1996.
Two ratios widely recognized as performance indicators for financial
institutions are the return on average assets and the return on average
shareholders' equity. The return on average assets in 1996 was 1.20%,
compared to a return on average assets in 1995 of 1.45%, and a return on
average assets of 1.42% in 1994. The return on average shareholders' equity
was 10.01% in 1996, while the return on average shareholders' equity was
12.61% and 13.31% in 1995 and 1994, respectively. The return on average
assets and the return on average shareholders' equity are computed based upon
average assets and average equity without adjustment for the impact of
unrealized securities gains or losses. During 1996, average assets totalled
$127,226,000, an increase of $7,089,000 or 5.9% from the 1995 average asset
total of $120,137,000.
6
<PAGE>
Net income may be analyzed by reviewing seven major elements: interest
income, which consists primarily of income earned on loans and investments;
interest expense, which consists of interest paid on deposits and borrowed
funds; the provision for loan losses, which represents amounts set aside in
the allowance for loan losses to provide reserves for losses on loans; other
noninterest operating income, which is made up primarily of safe deposit
rentals, income from fees and commissions and service charges; gains or losses
on the sales of securities; noninterest expenses, which consist primarily of
salaries, expenses of premises and equipment and of other operating expenses;
and income taxes. These elements are reviewed in greater detail below.
NET INTEREST INCOME
Net interest income, the Corporation's primary source of revenue,
represents the difference between interest income and interest expense.
Interest income is generated by loans, investment securities, interest earning
balances in financial institutions and federal funds sold while interest
expense reflects payments to depositors and interest on short-term borrowings.
Interest income for the years 1996, 1995 and 1994 was $9,531,740, $9,237,820,
and $7,943,513, respectively, while interest expense amounted to $4,098,155,
$3,994,400, and $3,229,642, respectively, for the same periods.
Net interest income is affected by changes in interest rates and changes
in average balances (volume) in the various interest-sensitive assets and
liabilities. The following discussion and analysis of the Corporation's net
interest income is based primarily on Table 1, "Average Balances, Effective
Interest Differential and Interest Yields" and Table 2, "Rate/Volume Analysis
of Changes in Net Interest Income". Net interest income as presented in Table
1 and in Table 2 is adjusted to a tax-equivalent basis. This adjustment
facilitates performance comparison between taxable and tax-exempt assets by
increasing tax-exempt income by an amount equivalent to the Federal income
taxes which would have been paid if this income were taxable at the
Corporation's 34% Federal statutory rate.
As noted in Table 1, net interest income in 1996 on a tax equivalent
basis increased approximately $302,000 or 5.6% above that of 1995, while net
interest income in 1995 had increased approximately $524,000 or 10.7% above
that of 1994. The increase in net interest income in 1996 was primarily the
result of an increase in the volume of interest earning assets. As noted in
Table 1, average total earning assets increased $5,661,000 from 1995 to 1996.
As noted in Table 2, the increase in the volume of earning assets taken in
isolation, resulted in an increase in gross interest income on a tax
equivalent basis of $550,000.
In addition to the positive impact on net interest income in 1996 of the
increase in the Corporation's total earning assets, the Corporation's net
interest margin also increased by two basis points from 4.81% to 4.83%. The
relatively immaterial change in net interest margin was partially a result of
relatively stable interest rates during 1996 resulting from controlled
economic growth and a low inflation rate. The relative stability in interest
rates is reflected in the cost of interest bearing liabilities which declined
only nine basis points overall and remained unchanged for time deposits.
Although yields on different classes of interest earning assets did change,
the total yield on all interest earning assets declined only six basis points.
During 1996, the yield on the Corporation's taxable securities increased
43 basis points from 6.15% to 6.58%. In early 1996 in anticipation of
relatively stable interest rates and in consideration of its well balanced
rate sensitivity position, the Corporation converted some of its variable rate
securities to fixed rate investments bearing higher yields. As a result, the
yield on the Corporation's taxable securities portfolio was increased.
Furthermore, in consideration of the Corporation's Federal income tax
alternative minimum tax position, additional tax-exempt securities were
purchased. The newly acquired securities bear rates lower than yields on
previously owned tax-exempt securities which caused an overall decline on the
tax-exempt portfolio yield. The yield on the Corporation's loan portfolio
also declined 34 basis points in 1996 from 9.76% to 9.42%. Many of the
Corporation's loan products have variable interest rates which reprice
immediately upon a change in the Prime Rate. Throughout much of 1996, the
Prime Rate was 25 basis points below the rate in effect throughout
7
<PAGE>
most of 1995. The cumulative effect of the rate changes of each of the
Corporation's classes of assets and liabilities resulted in the Corporation's
net interest margin on a tax equivalent basis increasing from 4.81% in 1995 to
4.83% for 1996. The Corporation's net interest margin for 1994 was 4.45%.
The Corporation actively monitors interest rate risk through the use of a
simulation model which calculates the impact on earnings of changes in yields
earned and rates paid based upon economic forecasts of rate changes as well as
the maturity and repricing characteristics of the Corporation's interest
sensitive assets and liabilities. The Corporation evaluates the impact on
earnings of rate changes projected as most likely, as well as projected
extremes of rate changes in rising and declining rate scenarios. Currently,
economists have differing opinions regarding rate projections for 1997,
however, many economic indicators suggest rates may remain relatively level
through much of the coming year.
The simulation model is also utilized to calculate the Corporation's
interest sensitivity gap. Because projecting interest rate movements is not
an exact science, the Corporation attempts to maintain its rate sensitivity
gap within ranges specified by policy. Although the Corporation may shift its
assets and/or liabilities to become slightly more or less asset sensitive or
liability sensitive, Management attempts to keep the interest rate gap
relatively near 1.00 at all times. This enables the Corporation to minimize
the risk inherent in unexpected, significant changes in rates. This also
enables the Corporation to reposition its interest rate gap without the
potential impact of relying heavily on projections of interest rate movements
which may not occur. Currently, the Corporation's rate sensitive liabilities
exceed rate sensitive assets. Based upon projections of level interest rates,
the Corporation will attempt to increase its rate sensitive assets in 1997.
The Corporation also actively monitors and reprices its deposits in an effort
to maintain an appropriate net interest margin.
Table 2 analyzes changes in interest income by applying either volume or
rate changes to interest sensitive assets and liabilities. Referring to the
Table, taxable equivalent loan income decreased $128,000 or 2.1% in 1996,
while 1995 loan earnings had increased $548,000 or 10.0% from the prior year.
Average volume increased loan income by $82,000 in 1996 while rate declines
caused a decrease in loan income in the amount of $210,000. Yields on loans
declined 34 basis points in 1996 as compared to an increase of 91 basis points
in 1995. As noted above, the Corporation has structured many of its loans
with variable interest rates which reprice as interest rates change. In so
doing, the Corporation is better able to react to changes in rates which may
increase interest expense. In this manner, the Corporation is able to reduce
interest rate risk and is more effectively able to maintain a favorable
interest spread in a changing rate environment. As noted on Table 12, at
year-end 1996 approximately $49,341,000 of the loan portfolio is capable of
repricing within one year.
Securities income on a tax equivalent basis increased $832,000 or 27.9%
in 1996 from the previous year while 1995 earnings increased $526,000 from
1994. In 1996, change in volume increased securities income $757,000 while
rate changes increased investment earnings by $75,000. As noted above, yields
on taxable securities increased 43 basis points in 1996 due primarily to the
conversion of variable rate securities to fixed rate securities. This
followed a 124 basis point increase in the yield on taxable securities in 1995
which resulted primarily from the upward repricing of the Corporation's
variable rate securities which accompanied a general increase in rates
throughout the nation. Taxable equivalent yields on tax-exempt securities
decreased 126 basis points in 1996 after a 14 basis point decrease in 1995.
As noted above, due to the Corporation's tax position, Management acquired
additional fixed rate tax-exempt investments. Because many of the tax-exempt
securities previously held by the Corporation were acquired when rates were
higher, the newly acquired securities did not bear rates as high as those
previously held resulting in an overall decline in the yield on tax-exempt
securities.
Interest income from federal funds sold decreased $109,000 or 65.7% in
1996 while such income in 1995 had increased $75,000 or 82.4% from 1994. In
1996, the average balance decreased by $1,818,000 as the Corporation invested
liquid funds previously held in the forms of federal funds sold and interest
earning balances with the Federal Home Loan Bank in higher yielding securities
and loans. The change in the volume of federal funds sold resulted in a
decline in the income of $106,000 while rate declines on federal funds caused
earnings to decrease $3,000 from the prior year. Average interest earning
balances with the Federal Home Loan Bank were $589,000 during 1996, a decrease
of $3,102,000 from 1995. The decrease in volume caused interest income from
the Federal Home Loan Bank to decline $183,000, while a decrease in rates on
such deposits resulted in a decrease in earnings of $6,000. Although the
decline in liquid funds negatively impacted the Corporation's liquidity
8
<PAGE>
<TABLE>
TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
INCOME AND RATES ON A TAX EQUIVALENT BASIS
FOR YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands)
<CAPTION>
1996 1995
----------------------- ---------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
Taxable $44,565 $2,933 6.58% $38,368 $2,358 6.15%
Tax-Exempt 9,462 885 9.35% 5,918 628 10.61%
Interest Earning Balances 589 29 4.84% 3,691 218 5.91%
Federal Funds Sold 1,022 57 5.54% 2,840 166 5.85%
Loans, Net 62,779 5,916 9.42% 61,939 6,044 9.76%
---------------------- ----------------------
Total Earning Assets 118,417 9,820 8.29% 112,756 9,414 8.35%
------------- -------------
Allowance for Loan Losses (1,282) (1,392)
Nonearning Assets 10,091 8,773
-------- --------
Total Assets $127,226 $120,137
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
NOW, MMDA & Savings $ 39,625 $ 960 2.42% $ 38,843 $1,043 2.69%
Time 56,834 3,103 5.46% 53,936 2,945 5.46%
Repurchase Agreements and
Short-term Borrowings 846 35 4.77% 104 6 5.88%
--------------------- ----------------------
Total interest bearing
liabilities 97,305 4,098 4.21% 92,883 3,994 4.30%
------------- -------------
Demand Deposits 13,625 12,454
Other Liabilities 1,074 1,004
------- -------
Total Liabilities 112,004 106,341
Shareholders' Equity 15,222 13,796
-------- --------
Total Liabilities and
Shareholders' Equity $127,226 $120,137
======== ========
Net Interest Income $5,722 $5,420
======== ========
Net Yield on Interest Earning
Assets:
Total Yield on Earning Assets 8.29% 8.35%
Rate on Supporting Liabilities 4.21% 4.30%
Net Interest Margin 4.83% 4.81%
<CAPTION>
1994
-----------------------
Average Yield/
Balance Interest Rate
-----------------------
<S> <C> <C> <C>
ASSETS
Securities:
Taxable $38,278 $1,880 4.91%
Tax-Exempt 5,396 580 10.75%
Interest Earning Balances 2,079 78 3.75%
Federal Funds Sold 2,132 91 4.26%
Loans, Net 62,128 5,496 8.85%
-----------------------
Total Earning Assets 110,013 8,125 7.39%
-------------
Allowance for Loan Losses (1,831)
Nonearning Assets 8,897
--------
Total Assets $117,079
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
NOW, MMDA & Savings $ 41,831 $ 982 2.35%
Time 49,702 2,241 4.51%
Repurchase Agreements and
Short-term Borrowings 88 6 7.33%
----------------------
Total interest bearing
liabilities $91,621 3,229 3.52%
--------------
Demand Deposits 12,256
Other Liabilities 683
-------
Total Liabilities 104,560
Shareholders' Equity 12,519
--------
Total Liabilities and
Shareholders' Equity $117,079
========
Net Interest Income $4,896
========
Net Yield on Interest Earning
Assets:
Total Yield on Earning Assets 7.39%
Rate on Supporting Liabilities 3.52%
Net Interest Margin 4.45%
</TABLE>
Interest and average interest rates are presented on a fully taxable
equivalent basis, using an effective tax rate of 34%. For purposes of
calculating loan yields, average loan balances include nonaccrual loans. Loan
fees, which are immaterial in amount, have been excluded from interest income
in the calculations of interest income and yields on loans.
9
<PAGE>
position, the Corporation has access to liquidity through lines of credit with
correspondent banks and the Federal Home Loan Bank of Pittsburgh as well as
borrowing capability with the Federal Reserve Bank of Philadelphia.
Expense relating to interest-bearing deposits increased by $104,000 or
2.6% in 1996 while in 1995 such expense increased by $765,000 or 23.7% from
the prior year. The increase in expense on deposits was caused primarily by
the general increase in average deposit volume during 1996, while the increase
in 1995 was caused primarily by the general increase in interest rates during
1994 and the early part of 1995. As noted in Table 2, volume increase during
1996 caused interest expense on deposits to increase $179,000, while a
decrease in rates resulted in decreased interest expense on deposits of
$104,000. Rates paid on interest-bearing liabilities decreased nine basis
points in 1996 after an increase of 78 basis points in 1995. Short-term
borrowings expense, consisting of interest on temporary purchases of funds
from the Federal Reserve Bank and the Federal Home Loan Bank together with
interest paid on securities sold under agreements to repurchase and other
interest expense totalled approximately $35,000 in 1996, compared to $6,000
for 1995.
In summary, net interest income on a taxable equivalent basis increased
$302,000 from 1995 to 1996. As shown on Table 2, the improvement in net
interest income was the result of an increase in net asset volume which caused
an increase in earnings from 1995 to 1996 of $334,000. Interest rate changes
caused a decline in net interest income from 1995 to 1996 in the amount of
$32,000. In 1995, the increase in net interest income of $524,000 from the
1994 level was the result of an increase in the Corporation's net interest
margin which resulted from the increases in rates during 1995. Changes in
interest rates resulted in an increase in net interest income of $512,000 an
increase in volume in 1995 caused an increase in net interest income of
$12,000.
<TABLE>
TABLE 2: RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
<CAPTION>
Taxable Equivalent Basis 1996 Compared to 1995
(In Thousands) Increase (Decrease) in Income/Expense
Due to Change In:
Volume Rate Total
<S> <C> <C> <C>
Interest Earning Assets:
Securities:
Taxable $ 381 $ 194 $ 575
Tax-Exempt 376 (119) 257
Depository Institutions (183) (6) (189)
Federal Funds Sold (106) (3) (109)
Loans, Net 82 (210) (128)
----- ----- -----
Total Interest Earning Assets 550 (144) 406
----- ----- -----
Interest Bearing Sources of Funds:
Interest Bearing Deposits:
NOW, MMDA & Savings 21 (104) (83)
Time 158 0 158
Short-term Borrowings 37 (8) 29
----- ----- -----
Total Interest Bearing
Sources of Funds 216 (112) 104
----- ----- -----
Change in Net Interest Income $ 334 $ (32) $ 302
===== ===== =====
<CAPTION>
Taxable Equivalent Basis 1995 Compared to 1994
(In Thousands) Increase (Decrease) in Income/Expense
Due to Change In:
Volume Rate Total
<S> <C> <C> <C>
Interest Earning Assets:
Securities:
Taxable $ 4 $ 474 $ 478
Tax-Exempt 56 (8) 48
Depository Institutions 61 79 140
Federal Funds Sold 30 45 75
Loans, Net (17) 565 548
----- ----- -----
Total Interest Earning Assets 134 1,155 1,289
----- ----- -----
Interest Bearing Sources of Funds:
Interest Bearing Deposits:
NOW, MMDA & Savings (70) 131 61
Time 191 513 704
Short-term Borrowings 1 (1) 0
----- ----- -----
Total Interest Bearing
Sources of Funds 122 643 765
----- ----- -----
Change in Net Interest Income $ 12 $ 512 $ 524
===== ===== =====
</TABLE>
The analysis of year-to-year changes in net interest income is segregated
into amounts attributable to both volume and rate variances. In calculating
the variances, the changes are first segregated into (1) changes in volume
(change in volume times old rate), (2) changes in rate (change in rate times
old volume) and (3) changes in rate/volume (change in rate times the change in
volume). The latter change in rate/volume has been allocated 100% to the
change in rate variance.
10
<PAGE>
NONINTEREST INCOME/NONINTEREST EXPENSE
Noninterest income exclusive of net securities gains amounted to $533,000
in 1996, an increase of $57,000 from $476,000 in 1995. This change was due to
an increase in income from service charges on deposit accounts of $77,000.
There were net gains on sales of securities of $5,000 in 1996 compared to no
gains on sales of securities in 1995 or 1994. Noninterest income in 1994 was
$457,000.
A summary of the major components of noninterest operating expense for
the years ended December 31, 1996, 1995 and 1994 is contained in the
Consolidated Statements of Income. Noninterest expense in 1996 increased
$382,000 from 1995. The major elements contributing to the increase were
expense of salaries and employee benefits, occupancy and equipment expense,
data processing and shares tax. The most significant decreases in noninterest
expense were in FDIC insurance expense, legal and professional fees and the
cost of supplies, stationery and printing.
Salaries and employee benefit costs increased $456,000 from 1995 to 1996.
On December 9, 1996, the Corporation, the Bank and James B. Bexley entered
into an Agreement, the effect of which was to provide the terms of Mr.
Bexley's retirement from the Corporation and the Bank as President and Chief
Executive Officer as well as Mr. Bexley's resignation from the Board of
Directors of each of the Corporation and the Bank. Pursuant to the terms of
the Agreement, the Corporation and the Bank agreed to pay Mr. Bexley $278,654,
with applicable taxes withheld, in two separate payments. The first payment
of $135,000, less applicable deductions, was paid in December, 1996; the
second payment of $143,654, less applicable deductions, was paid in January,
1997. Salary and employee benefits expense includes the accrued liability for
all payments made to Mr. Bexley pursuant to this Agreement. The amount of
this payment represents a non-recurring expense. It is not expected that
payments, pursuant to this Agreement, will adversely impact liquidity, capital
resources or results of operations during 1997. In addition to the cash
amounts paid to Mr. Bexley, the Corporation agreed to provide certain health
and life insurance benefits to Mr. Bexley through February 14, 1999. The
present value of the cost of such benefits in the amount of $14,525 was also
accrued and charged to expense during 1996. It is presently anticipated that
such benefits will not adversely impact future income in a material amount.
The increase in expense of salaries and employee benefits was also
attributable in part to salaries and benefits of additional employees hired
for the Corporation's new Altoona/Hollidaysburg Branch which was opened in
November 1995. Salary and benefit expense for the new office increased
$108,079 from the previous year.
Occupancy and equipment expense increased approximately $58,000 primarily
due to expenses associated with the new branch, the most significant portion
of which was an increase in depreciation of fixed assets for the Branch in the
amount of approximately $23,000. Data processing expense increased
approximately $29,000. The increase was due in part to increased transaction
volume originated by several new large volume customers. During 1995, shares
tax expense was reduced by Neighborhood Assistance Tax Credits which had been
obtained through certain contributions made by the Corporation. During 1996,
the Bank's Pennsylvania Shares Tax expense increased approximately $32,000 to
a more typical level.
The Corporation's noninterest expense was lessened by the reduction of
FDIC insurance rates midway through 1995. Because the reduced rate was in
effect during the entire year of 1996, FDIC insurance premiums declined
further by approximately $115,000 from the 1995 amount. The cost of supplies,
stationery and printing declined approximately $45,000 in 1996 from the 1995
level. In 1995, such expense was increased as a result of the change of the
Bank name which necessitated reprinting many of the Corporation's paper
supplies. As a result, the volume of supplies purchased in 1996 declined with
a corresponding decrease in costs.
Noninterest expense in 1995 increased $227,000 from 1994. The primary
factors in the increase were a rise in the cost of salaries and employee
benefits of $258,000 and increase in depreciation expense of $30,000 and
charitable contributions of $67,000. A decrease in FDIC insurance premiums in
the amount of $153,000 from the 1994 level contributed to offset the increase.
11
<PAGE>
SECURITIES
The Corporation's securities portfolio is utilized to improve earnings
through investments of funds in highly rated debt securities which also
provide necessary balance sheet liquidity for the Corporation. The
Corporation's intent is generally to hold debt securities to maturity,
however, the Corporation has designated its securities portfolio as available-
for-sale as unforeseen changes in the Corporation's interest rate risk and
liquidity positions may from time to time require sales of securities. During
December 1995 the Corporation was provided the opportunity to reclassify its
securities between the previously allocated held-to-maturity and available-
for-sale portfolios. At that time, the entire investment portfolio was
reclassified as available-for-sale. The reclassification provides the
Corporation with more flexibility in liquidating securities for interest rate
risk management and for liquidity purposes. Furthermore, a portion of the
Corporation's investment portfolio consists of securities, such as U.S.
Government Agency and other mortgage-backed securities, on which a portion of
the principal amount is repaid each month. Payments on these securities
together with proceeds of maturing or called investments provide additional
sources of liquidity.
At December 31, 1995, the market value of the investment portfolio had
increased to a level at which unrealized gains exceeded unrealized losses in
the amount of $390,717. Prior to 1995, the Bank had positioned itself for
anticipated rate increases through the purchase of additional variable rate
investments. At the beginning of 1995, approximately 61.0% of the
Corporation's investment portfolio consisted of variable rate securities.
During the first half of 1995, interest rates increased throughout the nation
and, as a result, yields on the Corporation's variable rate securities rose as
each repriced. Accordingly, the market values of such securities increased.
As rates throughout the nation began to stabilize and decline in the later
part of 1995, the market value of the Corporation's fixed rate securities
began to increase and, because of repricing characteristics of the variable
rate securities, the market value of the Corporation's variable rate
investments remained near the higher levels which had been attained. As a
result, at December 31, 1995, the Corporation's investment portfolio contained
net unrealized gains of $390,717.
During the first quarter of 1996, in anticipation of declining interest
rates, the Corporation's investment strategy was to liquidate some of its
variable rate investments, especially those which were tied to indexes which
reacted more dramatically to declines in interest rates, and to reinvest in
fixed rate securities. Although the Federal Reserve Discount Rate declined 25
basis points in February of 1996 and remained at that level throughout 1996,
because economic indicators and the inflation rate did not clearly indicate if
a rate decrease or a rate increase was necessary in order to keep the economy
from slowing too dramatically and to keep inflation under control, bond rates
gradually increased through much of 1996. As a result, the market value of the
Corporation's investment portfolio declined. At December 31, 1996, unrealized
losses on the Corporation's available-for-sale securities exceeded unrealized
gains by $758,333. The Corporation's investment portfolio is utilized in part
to manage interest rate risk and to provide liquidity. As a necessary element
of such utilization, the Corporation continually strives to limit net
unrealized losses within the portfolio, however, unrealized losses may
sometimes exist.
Although the Corporation's investment portfolio contains mortgage backed
securities, the portfolio does not contain any collateralized mortgage
obligations (CMO's) and contains only one real estate mortgage investment
conduit (REMIC) with a carrying value of $541,359 at December 31, 1996. The
certificates of the REMIC owned by the Corporation, however, are mortgage
pass-through certificates which, based upon the current interest rate and
interest cap, is considered non high-risk. The Corporation also has one
Federal Home Loan Mortgage Corporation step-up bond in the par amount of
$1,000,000 with a market value of $995,000 at December 31, 1996. Although
step-up bonds are included among securities known as structured notes
(derivatives) which have risk elements which are not present in other
investments, step-up bonds are recognized as not especially risky. Management
purchased the step-up with an understanding of the market, liquidity and cash
flow characteristics of the bond and the risks inherent in such bonds.
Table 3 provides a history of the carrying value of securities at
December 31 for each of the past three years. As noted, the net unrealized
loss at December 31, 1996, was $758,334 while the net unrealized gain on
securities at year-end 1995 was $390,717, as outlined in Note 5 to the
Consolidated Financial Statements.
12
<PAGE>
<TABLE>
TABLE 3: CARRYING VALUES OF SECURITIES
<CAPTION>
Securities Available-for-Sale
-------------------------------
(In Thousands) Years ended December 31,
-------------------------------
1996 1995 1994
-------- -------- ----------
<S> <C> <C> <C>
U. S. Treasury Securities $ 0 $ 2,009 $ 1,980
Non-mortgage-backed
obligations of U.S.
Government Agencies 26,745 13,741 26,288
Mortgage-backed
obligations of U.S.
Government Agencies 12,270 25,259 899
Obligations of State
& Political Subdivisions 9,870 6,963 0
Mortgage-Backed 2,011 2,270 2,574
Asset-Backed 0 156 0
Stock 549 601 0
------- ------- -------
Total $ 51,445 $ 50,999 $ 31,741
======== ======== ========
<CAPTION>
Securities Held-to-Maturity
--------------------------------
(In Thousands) Years ended December 31,
--------------------------------
1996 1995 1994
--------- -------- ----------
<S> <C> <C> <C>
U. S. Treasury Securities $ 0 $ 0 $ 0
Non-mortgage-backed
obligations of U.S.
Government Agencies 0 0 0
Mortgage-backed
obligations of U.S.
Government Agencies 0 0 2,781
Obligations of State
& Political Subdivisions 0 0 5,313
Mortgage-Backed 0 0 0
Asset-Backed 0 0 424
Stock 0 0 85
-------- ------- -------
Total $ 0 $ 0 $ 8,603
======== ======= =======
</TABLE>
LOANS AND COMMITMENTS
At December 31, 1996, loans net of unearned income totalled approximately
$67,173,000, a $5,572,000 or 9.1% increase from December 31, 1995. At
December 31, 1995, such loans totalled $61,601,000 and at December 31, 1994,
loans net of unearned income totalled approximately $60,845,000. At December
31, 1996, loans net of unearned income represented 56.6% of earning assets as
compared to 52.6% at December 31, 1995. Although the balance of the loan
portfolio at December 31, 1996, exceeded the December 31, 1995, balance by
$5,572,000, the average balance increased only $840,000 in 1996.
The Corporation's loan volume has not increased significantly in recent
years prior to 1996 due to efforts made to improve credit quality within the
portfolio. The Corporation has improved its lending underwriting standards to
reduce the potential for loan losses. Procedures are in place under which the
Corporation conducts a thorough review of the operations of commercial loan
applicants including analyses of balance sheets, income statements and cash
flows of the applicant. In addition to reviews conducted by a credit analyst
and the applicant's loan officer, prior to approval of loans in excess of
specific dollar limits financial data are evaluated by loan review committees
consisting of the Bank's loan officers and/or members of the Board of
Directors. Furthermore, detailed appraisals of collateral offered to secure
loans which are approved are generally required. These enhancements have
resulted in increased asset quality but also contributed to a decline in
loans. Improvements in the Corporation's credit underwriting standards
especially impacted the amount of mobile home loans contained within the
portfolio which declined in excess of $1,500,000 in 1996.
As noted in Table 7 following, nonperforming loans declined steadily from
1992 through 1994. Nonperforming loans were reduced during 1994 by 35.2% from
the level at December 31, 1993, however, during 1995 nonperforming loans
increased $1,223,000. Of such increase, $1,093,000 was attributable to loans
to related entities of one individual. During 1996, liquidation of the
collateral which secured such related loan was nearly completed and at
December 31, 1996, only $26,000 remained outstanding and on nonaccrual status.
Other loans on nonaccrual status were also reduced during 1996 with a
resultant total decline in nonperforming loans of $1,260,000. At December 31,
1996, nonperforming loans were $584,000, the lowest year-end total in the most
recent five-year period.
The loan portfolio is diversified primarily among consumer and mortgage
loans to individuals, agricultural loans and loans to small and medium-sized
businesses located primarily within the Corporation's market area of Bedford
County and Blair County with extensions into the western portion of Fulton
County and the southern
13
<PAGE>
portion of Huntingdon County. As noted in Table 4, loans to consumers
totalled $18,051,000, $17,924,000 and $18,045,000 at December 31, 1996, 1995
and 1994, respectively. Such loans consist primarily of installment loans
extended for personal, family and household purposes, but also include student
loans and personal revolving lines of credit. The Corporation also makes real
estate secured loans to individuals for the acquisition or construction of
personal residences or for remodeling or other personal expenditures. Loans
to consumers are generally secured by tangible personal property and real
estate and, in order to protect itself from declining asset values, the
Corporation generally will lend no more than 80% of the market value of the
collateral pledged or will require the purchase of private mortgage insurance.
Unsecured loans are made to borrowers who are able to provide financial
statements which, upon review by the Corporation, demonstrate a substantial
net worth of the borrower. Such borrowers must also have an established
earnings record which indicates the ability to repay and must have a favorable
credit history.
As reflected in Table 5 below, net charge-offs on residential mortgages
for the years 1992 through 1996 averaged approximately $11,000 per year.
Residential real estate values have been steadily increasing in the
Corporation's market area. The values of the real estate securing such loans
are expected to continue to rise slowly and losses are expected to remain low.
Net charge-offs on consumer loans have averaged $101,000 per year over the
last five years. Of such amount, approximately $83,000 or 82.2% have been
attributable to mobile home loans originated in part through the involvement
of a third party servicer. Many of such loans were granted with more lenient
credit standards and with more lenient collateral loan to value ratios than
were required on direct consumer loans. As alluded to above, the Corporation
has redefined its underwriting standards with respect to this type of loan,
however, the full impact of the change in standards will not be realized for
several years. Net charge-offs of consumer loans as a percentage of average
consumer loans for 1994 through 1996 have totalled .89%.
The Corporation also originates loans for commercial and agricultural
purposes. While the Corporation maintains a diversified loan portfolio and
the ability of its debtors to honor their contracts is not substantially
dependent on any particular business sector, there are several industries in
which limited concentrations of commercial credit exist. These are the
agricultural industry, timber and lumber industry, automobile dealership
industry and motel/hotel/restaurant industry. At December 31, 1996, loans to
these industries as a percent of total loans were approximately 3.78%, 4.91%,
5.88% and 7.48%. Loans to these groups were approximately 4.50%, 4.28%, 6.00%
and 3.98% of total loans, respectively, at December 31, 1995. It is the
Corporation's policy to limit concentrations of credit to any one industry to
less than 55% of capital and to monitor concentrations in excess of 25% of
capital. At December 31, 1996, no concentration of credit exceeded 25% of
total equity capital. By limiting concentrations of credit within any one
industry, the risk of loss due to economic changes which may negatively impact
a specific industry is likewise limited. Additionally, most commercial and
agricultural loans which are made by the Corporation are secured by assets
which are assigned to the Corporation or are made subject to a security
interest in favor of the Corporation. Mortgages secured by commercial realty
are generally limited to 70% of market value. Loans secured by business
personalty are also generally limited to 70% of the market value of the
underlying collateral, however, if assets which secure a loan are not readily
marketable or are susceptible to a rapid decline in value, the Corporation may
finance a lesser percentage of the collateral's value. As in the case of
consumer loans, loans which may not be fully secured are made to commercial
borrowers which possess substantial net worth, have established earnings
records and have favorable credit histories.
The Corporation makes contractual commitments to extend credit and
extends lines of credit which are subject to the Corporation's credit approval
and monitoring procedures. Commitments to extend credit in the form of
commercial lines of credit increased to $6,072,000 at December 31, 1996, from
$5,516,000 at December 31, 1995. The Corporation also issues stand-by letters
of credit to its commercial customers. The risk associated with stand-by
letters of credit is essentially the same as the credit risk involved in other
loan extensions to commercial customers. Stand-by letters of credit decreased
to $246,000 at December 31, 1996, from $389,000 at December 31, 1995.
Commitments to extend credit to consumers secured by residential real estate
increased to $1,578,000 at December 31, 1996, from $1,351,000 at December 31,
1995. Unsecured consumer credit lines increased to $685,000 at December 31,
1996, from $466,000 at December 31, 1995.
14
<PAGE>
Distribution of the loan portfolio of the Corporation according to major loan
classification is shown in Table 4.
<TABLE>
TABLE 4: LOAN PORTFOLIO
<CAPTION>
Years ended December 31,
-------------------------------
(In Thousands) 1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Residential mortgage $ 19,534 $ 20,102 $ 21,537
Commercial mortgage 19,584 17,428 14,578
Consumer 18,051 17,924 18,045
Commercial and agricultural 12,935 9,957 11,542
Total Loans 70,104 65,411 65,702
Less: Unearned Income (2,931) (3,810) (4,857)
Allowance for loan losses (957) (1,333) (1,494)
------- ------- -------
Net Loans $ 66,216 $ 60,268 $ 59,351
======== ======== ========
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The loan loss provision is an expense charged to earnings in anticipation
of estimated losses attributable to loans based upon the adequacy of the
allowance for loan losses to provide for such losses. The adequacy of the
allowance for loan losses is based upon various factors which include
Management's assessment of local and national economic conditions, historical
losses, off balance sheet risk and an analysis of loans, including specific
evaluations of the financial status, cash flow and adequacy of collateral of
borrowers with indebtedness to the Corporation in excess of specific dollar
amounts and of loans classified as nonperforming. The Corporation uses a
specific identification method for materially large loans or when changes in a
borrower's financial status, cash flows or collateral values indicate a
potential loss. In these instances, the Corporation specifically allocates
amounts within the allowance to provide for potential losses. On loans which
fall outside the parameters of specific identification, the Corporation
allocates amounts within the allowance for specific categories of loans based
upon percentages derived from historical loss data for each category and upon
the total dollar amount of loans within each category.
Because the methodology used by the Corporation in determining the adequacy of
the allowance includes specific identification of potential losses for each
borrower with significant levels of indebtedness to the Corporation and for
loans classified as nonperforming, fluctuations in the levels of nonperforming
loans and/or the ratio of the allowance for loan losses to nonperforming loans
do not relate directly to the adequacy of the allowance. While Management
uses available information to make evaluations of the adequacy of the
allowance, future adjustments may be necessary if conditions differ
substantially from the assumptions used in making the evaluation. While
Management believes it has identified and provided for losses and that the
allowance for loan losses is adequate, Management cannot assure that further
adjustments may not be necessary.
Management, through its ongoing analysis of the adequacy of the allowance
for loan losses, determined the level of the allowance in 1994 was more than
adequate. During an examination of the Bank conducted in August of 1994, the
Office of the Comptroller of the Currency reviewed Management's analysis and
was in substantial agreement with the methodology used by the Bank. As a
result, a negative provision in the amount of $300,000 was recorded to the
allowance in 1994. As a result of subsequent analyses of the adequacy of the
allowance conducted during 1995 and 1996, it was determined that no additional
provisions were required for 1995 or 1996.
The aggregate provisions set aside in the past five years total
$2,295,000 compared to aggregate net charge-offs of $2,263,000. A summary of
charge-offs and recoveries on loans is presented in Table 5. The ratio of net
charge-offs to average outstanding loans increased to .61% in 1996 from .27%
in 1995 and .26% in 1994.
The allocation of the allowance for loan losses among the major
classifications is shown in Table 6 as of December 31 of each of the past five
years. The allowance for loan losses at December 31, 1996, was approximately
$957,000 or 1.42% of loans net of unearned income as compared to $1,333,000 or
2.16% at December 31, 1995, and $1,494,000 or 2.46% at December 31, 1994.
15
<PAGE>
<TABLE>
TABLE 5: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<CAPTION>
Years ended December 31,
-------------------------------
(In Thousands) 1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Allowance for loan losses at January 1 $ 1,333 $ 1,494 $ 1,953
Loans charged off:
Commercial and agricultural 328 15 38
Real estate-residential mortgage 13 0 23
Consumer 149 180 155
Total loans charged off 490 195 216
Recoveries on loans previously charged off:
Commercial and agricultural 76 27 51
Real estate-residential mortgage 23 0 0
Consumer 15 7 6
Total Recoveries 114 34 57
Net Charge-offs 376 161 159
Provision for loan losses 0 0 (300)
Allowance for loan losses at December 31 $ 957 $ 1,333 $ 1,494
Net charge-offs to average loans .61% 0.27% 0.26%
Provision to average loans 0.00% 0.00% *
Allowance to period-end loans 1.42% 2.16% 2.46%
Allowance as multiple of
net charge-offs 2.54x 8.28x 9.40x
Allowance as multiple of
nonperforming loans 1.64x .72x 2.41x
<CAPTION>
Years ended December 31,
------------------------
(In Thousands) 1993 1992
--------- ----------
<S> <C> <C>
Allowance for loan losses at January 1 $ 2,239 $ 925
Loans charged off:
Commercial and agricultural 500 1,201
Real estate-residential mortgage 0 48
Consumer 18 65
Total loans charged off 518 1,314
Recoveries on loans previously charged off:
Commercial and agricultural 86 142
Real estate-residential mortgage 0 4
Consumer 21 12
Total Recoveries 107 158
Net Charge-offs 411 1,156
Provision for loan losses 125 2,470
Allowance for loan losses at December 31 $ 1,953 $ 2,239
Net charge-offs to average loans 0.60% 1.49%
Provision to average loans 0.18% 3.18%
Allowance to period-end loans 3.01% 3.14%
Allowance as multiple of
net charge-offs 4.75x 1.94x
Allowance as multiple of
nonperforming loans 2.04x 1.64x
</TABLE>
* A negative provision was recorded in 1994.
<TABLE>
TABLE 6: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<CAPTION>
1996 1995 1994
---------------- ---------------- ----------------
(In Thousands) Percent Percent Percent
Amount of Loans Amount of Loans Amount of Loans
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Commercial
and agricultural $ 365 48% $ 826 44% $ 972 43%
Residential mortgage 0 29 2 33 3 35
Consumer 282 23 505 23 519 22
Unallocated 310 315 534
----- ---- ------ ---- ------ ----
Balance at Dec. 31 $ 957 100% $1,333 100% $1,494 100%
===== ==== ====== ==== ====== ====
<CAPTION>
1993 1992
---------------- ----------------
(In Thousands) Percent Percent
Amount of Loans Amount of Loans
------ -------- ------ --------
<S> <C> <C> <C> <C>
Commercial
and agricultural $1,113 44% $1,977 36%
Residential mortgage 17 25 66 32
Consumer 273 31 196 32
Unallocated 550 0
------ ---- ------ ----
Balance at Dec. 31 $1,953 100% $2,239 100%
====== ==== ====== ====
</TABLE>
NONPERFORMING LOANS
Nonperforming loans consist of nonaccruing loans, loans past due 90 days
or more and restructured troubled debt. A loan is generally classified as
nonaccrual when, because of a deterioration in the financial condition of the
borrower, payment in full of principal or interest is not expected. Generally
loans past due 90 days or more are transferred to nonaccrual status. Interest
on nonaccrual loans is recorded when received, but only after receipt of the
entire principal balance of any such loan or after the loan is returned to
accrual status. Loans past
16
<PAGE>
due 90 days or more and still accruing interest are loans that are generally
well-secured, in the process of collection and expected to be restored to a
current status in the near future. Restructured loans are those loans whose
terms have been modified to provide for a reduction of interest or principal
payments because of borrower financial difficulties. Nonperforming loans are
taken into consideration by Management when assessing the adequacy of the
allowance for loan losses, however, because of the methodology used by the
Corporation to evaluate the adequacy of the allowance, such loans may at times
be considered in the evaluation prior to being classified as nonperforming.
A presentation of nonperforming loans as of December 31 for each of the
past five years is given in Table 7. Nonperforming loans at December 31,
1996, totalled approximately $584,000 or .45% of total assets. Included
within the classification of nonperforming loans at December 31, 1996, are
loans classified as impaired. A loan is considered impaired when, based upon
current information and events, it is probable that the Corporation will be
unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. At December 31, 1996, the
Corporation's impaired loans totalled approximately $60,000 or 10% of total
nonperforming loans.
The nonperforming loan balance of $584,000 at December 31, 1996, was a
$1,260,000 decrease from December 31, 1995. At December 31, 1995,
nonperforming loans totalled approximately $1,844,000 or 1.48% of total
assets. As noted in the discussion "Loans" above, approximately $1,067,000 of
the decrease in nonperforming loans during 1996 was attributable to loans to
related entities of one individual for which provision for potential losses
had been previously made. Nonperforming loans at December 31, 1994, totalled
approximately $621,000 or .55% of total assets.
Table 7 reflects a restructured troubled debt total of $170,000 at
December 31, 1995. The loan represented by such amount was restructured in
1993 but was on nonaccrual status from the date of restructuring until 1995.
Based upon the borrowers sustained period of repayment performance and the
reasonable prospect for repayment under the revised loan terms, the loan was
returned to accrual status in 1995. The Corporation has not restructured any
other loans during 1996. Interest income on loans would have been increased
by approximately $108,000, $128,000 and $60,000 in 1996, 1995 and 1994,
respectively, if nonperforming loans, including nonperforming loans classified
as impaired under SFAS 114, had performed in accordance with their original
terms. Interest received and included in net income from such loans was
approximately $7,000, $6,000 and $15,000 in 1996, 1995 and 1994, respectively.
Based upon current information available and upon measures taken to
maintain the allowance for loan losses at an appropriate level, Management
does not believe there are any loans classified for regulatory purposes as
loss, doubtful, substandard, special mention or otherwise which will result in
losses which would reasonably be expected to have a material impact on future
operations, liquidity or capital reserves. At December 31, 1995, there were
no loans which were not included as past due, nonaccrual or restructured
troubled debt, where known information about possible credit problems of
borrowers causes Management to have serious doubts as to the ability of such
borrowers to comply over the next six months with present loan repayment
terms. Management is not aware of any other information which causes it to
have serious doubts as to the ability of borrowers in general to comply with
repayment terms.
<TABLE>
TABLE 7: NONPERFORMING LOANS
<CAPTION>
Years ended December 31,
-----------------------------------------------
(In Thousands) 1996 1995 1994 1993 1992
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Nonaccruing Loans $ 584 $ 1,674 $ 620 $ 921 $ 1,260
Accrual Loans-90 days
or more past due 0 0 1 38 109
Restructured Troubled Debt 0 170 0 0 0
Total nonperforming loans $ 584 $ 1,844 $ 621 $ 959 $ 1,369
Nonperforming Loans as a
percent of loans, net
of unearned income .87% 2.99% 1.02% 1.48% 1.92%
</TABLE>
17
<PAGE>
DEPOSITS AND OTHER FUNDING SOURCES
The Corporation's primary source of funds is its deposits. Deposits at
December 31, 1996, were approximately $105,755,000 compared to $108,796,000 at
December 31, 1995, a decrease of approximately $3,041,000. The deposit class
experiencing the largest decrease was time deposits of $100,000 and over which
declined $3,410,000. The total of other deposits increased slightly by
$369,000. Although certificates of deposit of $100,000 and over declined in
1996, such deposits are generally considered more volatile. Additionally, as
noted in Table 1 above, the average volume of deposits increased by $4,851,000
during 1996. The Corporation's core deposits have continued to remain stable
thereby reducing liquidity risk which may originate on the liability side of
the balance sheet. The Corporation's funds management/liquidity policy also
addresses the volatility of deposits of $100,000 and over in evaluating
liquidity needs.
At December 31, 1996, outstanding borrowed funds of the Corporation
totalled $7,667,000 although the average amount of short-term borrowings for
the year 1996 was $846,000, as noted in Table 1. Although the Corporation had
no borrowed funds at December 31, 1995, or December 31, 1994, average short-
term borrowings for 1995 were $104,000 as compared to $88,000 in 1994.
Average balances and average interest rates applicable to the major
classifications of deposits for the years ended December 1996, 1995 and 1994
are presented in Table 8.
<TABLE>
TABLE 8: DEPOSITS BY MAJOR CLASSIFICATION
<CAPTION>
(In Thousands) Years ended December 31,
---------------------------------------
1996 1995
---------------------------------------
Average Average Average Average
Balance Rate Balance Rate
------- ------- ----------------
<S> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 13,625 0.00% $ 12,454 0.00%
Interest bearing demand deposits 11,745 1.60% 10,568 2.02%
Money Market Accounts 7,322 2.65% 7,202 2.86%
Savings 20,558 2.81% 21,073 2.96%
Time 56,834 5.46% 53,936 5.46%
-------- --------
Total $110,084 $105,233
======== ========
<CAPTION>
----------------
1994
----------------
Average Average
Balance Rate
----------------
<S> <C> <C>
Noninterest bearing demand deposits $ 12,256 0.00%
Interest bearing demand deposits 10,474 1.76%
Money Market Accounts 8,197 2.38%
Savings 23,160 2.60%
Time 49,702 4.51%
--------
Total $103,789
========
</TABLE>
CAPITAL RESOURCES
Shareholders' equity, or capital, is evaluated in relation to total
assets and the risk associated with those assets. The greater the capital
resources, the more ability a corporation has to meet operating needs and
absorb unforseen losses. For these reasons capital adequacy has been, and
will continue to be, of paramount importance.
During 1996, capital increased by $394,081 or 2.7% above year-end 1995.
Earnings in 1996 of $1,523,704 net of dividends paid of $371,250 increased
capital by $1,152,454. This increase was partially offset by a capital
adjustment resulting from a decline in the market value of the Corporation's
available-for-sale investment portfolio which negatively impacted capital in
the amount of $758,373. Comparatively, in 1995 capital increased by
$2,706,173 or 22.3% above year-end 1994. During 1995, the Corporation
realized earnings in the amount of $1,739,703 of which $297,000 was paid to
shareholders as dividends. In addition to the increase in retained earnings
of $1,442,703, capital was increased even further by a net increase in
unrealized gains in the Corporation's available-for-sale investment portfolio
of $1,263,470.
As noted above, the annual shareholder cash dividend payment in 1996 was
$371,250 compared to $297,000 in 1995. The dividend payout ratio, which
represents the percentage of annual net income returned to the shareholders in
the form of cash dividends, was 24.3% for 1996 compared to 17.1% for 1995.
The dividend payout ratio for 1994 was 32.7%. In setting the level of
dividends to be paid, the Corporation considers the need to retain earnings at
a level sufficient to finance future corporate growth, the effect of dividend
payments on stock prices and, if applicable, regulatory restrictions on
dividend payments.
18
<PAGE>
In 1989, Federal Regulators adopted risk-based capital adequacy
guidelines under which the components of capital are classified into two
tiers. For the Corporation, Tier 1 capital consists of common shareholder's
equity and total risk-based capital consists of Tier 1 capital plus the
allowance for loan losses up to a maximum of 1.25% of risk-weighted assets.
The risk-based capital ratios are computed by dividing the components of
capital by risk-weighted assets. Risk-weighted assets are determined by
assigning credit risk weighing factors from 0% to 100% to various categories
of assets and off balance sheet financial instruments. Required minimum
levels of risk-based capital are 4.0% for Tier 1 capital and 8.0% for total
capital. At December 31, 1996, the Corporation's Tier 1 risk-weighted capital
ratio was 19.8% as compared to 19.1% at December 31, 1995. The Corporation's
total capital ratio at December 31, 1996, was 21.0% as compared to 20.4% at
the end of the prior year. Both risk-weighted capital ratios exceed the 1996
minimum regulatory requirements.
All national banks must also maintain a minimum total assets leverage
ratio. Each bank's Tier 1 capital must be maintained in an amount equal to at
least 3.0% of adjusted total assets. The Corporation`s total assets leverage
ratio at December 31, 1996, was 12.2% as compared to 11.6% at December 31,
1995.
Management believes the Corporation's current capital is adequate to
support its operations. At this time, the Corporation is not aware of any
recommendations by regulatory authorities which, if implemented, will have or
are reasonably likely to have a material effect on liquidity, capital
resources or operations.
INCOME TAXES
Income tax expenses for 1996, 1995 and 1994 were $347,230, $265,522 and
$318,316, respectively. Although income before income taxes decreased in
1996, income tax expense during 1996 increased. The increase in income tax
expense during 1996 was in part reflective of a reduction of 1995 income tax
expense resulting from adjustment of a valuation allowance for deferred income
taxes. Based upon the Corporation's earnings in 1995 and prior years and the
reasonable expectation of continued future earnings, during 1995 the
realization of the full amount of deferred tax assets, other than the
Alternative Minimum Tax Credit carryforwards, was deemed more likely than not.
Consequently, the valuation allowance was eliminated, except for an amount
equal to the Alternative Minimum Tax Credit carryforwards, which resulted in a
reduction of book income tax expense in 1995 in the amount of $289,511.
LIQUIDITY
Liquidity is a measure of the Corporation's ability to raise sufficient
funds to meet deposit withdrawals, fund loan growth and meet other operational
needs. As noted above, after a reallocation of the Corporation's investment
portfolio in December 1995, the Corporation's entire investment portfolio has
been deemed available-for-sale. This treatment enables the Corporation to
utilize its entire investment portfolio as an additional source of liquidity.
Although the Corporation's securities are generally purchased with the
intention of holding them until maturity, by holding the investments as
available-for-sale the Corporation's liquidity position is improved. In
addition, a portion of the Corporation's investment portfolio consists of
securities, such as U.S. Government Agency and other mortgage-backed
securities, on which a portion of the principal amount is repaid each month.
Payments on these securities, together with payments on loans and overnight
investments in federal funds sold and interest bearing deposits with the
Federal Home Loan Bank provide additional sources of liquidity.
Historically, the overall liquidity of the Corporation has been enhanced
by a relatively stable base of core deposits which has existed even in periods
of changing interest rates. At December 31, 1996, deposits exclusive of time
deposits of $100,000 and over, increased $368,000 from the balance at December
31, 1995 and the average balance of these deposits increased approximately
$4,030,000 from 1995 to 1996. Furthermore, there are no known trends or any
known demands, commitments, events or uncertainties that will result in, or
are reasonably likely to result in, liquidity increasing or decreasing in any
material way.
The Consolidated Statements of Cash Flow for the most recent three years
ended December 31, demonstrate the fluctuations in the deposit base of the
Corporation. Deposit accounts, exclusive of certificates of deposit, have
decreased approximately $6,443,000 since 1994. Although certificates of
deposit decreased during 1994 in the amount of $3,853,000, during 1995
certificates of deposit increased $9,424,000. During 1996, certificates of
deposit declined approximately $1,963,000. Total deposits for the years 1994
through 1996 decreased by
19
<PAGE>
approximately $2,835,000. In addition to its other sources of funds, the
Corporation can meet liquidity needs through the Federal Reserve Bank and
through a line of credit with the Federal Home Loan Bank of Pittsburgh. The
Bank also maintains federal funds lines of credit with two correspondent
banks.
The maturity distribution and weighted average yields of securities are
presented in Table 9. Yields are based upon rates at December 31, 1996,
although certain investments have variable rate features. Variable rate
investments are reported based upon maturity date and not repricing frequency.
Additionally, the maturity distribution of securities presented in Table 9 is
based upon contractual maturities, however, as noted above, a portion of the
portfolio consists of U.S. Government Agency and other mortgage-backed
securities on which principal payments are received monthly. Prepayments may
cause the average maturity of such securities to be shorter than the
contractual maturity. The maturity distribution and repricing characteristics
of the Corporation's loan portfolio are shown in Table 10. The maturity
distribution of time deposits of $100,000 or more is shown in Table 11.
<TABLE>
TABLE 9: MATURITY DISTRIBUTION OF SECURITIES AVAILABLE-FOR-SALE AND YIELD
<CAPTION>
(In Thousands) December 31, 1996
------------------------------------
After One After Five
One Year Year to Years to
or Less Five Years Ten Years
-------- ---------- ---------
<S> <C> <C> <C>
U.S. Government agencies 0 995 25,279
Mortgage-backed
U.S. Government agencies 0 1,346 994
State & political subdivisions 0 181 0
Other mortgage-backed securities 0 0 0
Stock 0 0 0
-------- --------- ---------
Total Securities $ 0 $ 2,522 $ 26,273
======== ======== ========
Percent of Total Securities 0.00% 4.90% 51.07%
Weighted Average Yields 0.00% 6.04% 7.04%
<CAPTION>
(In Thousands)
After No fixed
Ten Years Maturity Total
--------- -------- --------
<S> <C> 471 <C> <C>
U.S. Government agencies 0 26,745
Mortgage-backed
U.S. Government agencies 9,930 0 12,270
State & political subdivisions 9,689 0 9,870
Other mortgage-backed securities 2,011 0 2,011
Stock 0 549 549
------- ------- --------
Total Securities $ 22,101 $ 549 $ 51,445
======== ======== ========
Percent of Total Securities 42.96% 1.07% 100%
Weighted Average Yields 6.33% 6.35% 6.68%
</TABLE>
Yields are presented based on actual rates and are not computed on a tax
equivalent basis.
<TABLE>
TABLE 10: LOAN MATURITIES AND INTEREST SENSITIVITY
<CAPTION>
(In Thousands) December 31, 1996
------------------------------------
After One
One Year Year to After
Loan Maturities or Less Five Years Five Years
-------- ---------- ----------
<S> <C> <C> <C>
Fixed rate loans with a
remaining maturity of:
Residential Mortgage $ 164 $ 829 $ 3,263
Commercial Mortgage 202 584 314
Consumer 584 7,010 5,399
Commercial and Agricultural 83 1,881 1,668
------ ------ ------
Total Fixed 1,033 10,304 10,644
------ ------ ------
Variable rate loans with
a remaining maturity of:
Residential Mortgage 161 1,378 3,197
Commercial Mortgage 1,301 2,196 14,987
Consumer 88 356 2,227
Commercial and Agricultural 4,059 2,288 2,954
------ ------ ------
Total Variable 5,609 6,218 33,365
------ ------ ------
Total $ 6,642 $ 16,522 $ 44,009
======= ======= =======
<CAPTION>
--------
Total
--------
<S> <C>
Fixed rate loans with a
remaining maturity of:
Residential Mortgage $ 4,256
Commercial Mortgage 1,100
Consumer 12,993
Commercial and Agricultural 3,632
-------
Total Fixed 21,981
-------
Variable rate loans with
a remaining maturity of:
Residential Mortgage 14,736
Commercial Mortgage 18,484
Consumer 2,671
Commercial and Agricultural 9,301
------
Total Variable 45,192
------
Total $ 67,173
========
</TABLE>
20
<PAGE>
<TABLE>
TABLE 11: MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
<CAPTION>
(In Thousands) December 31,
------------
1996
-------
<S> <C>
Maturing in three months or less $ 5,179
Maturing in three to six months 1,499
Maturing in six to twelve months 1,740
Maturing over twelve months 1,699
-------
$ 10,117
=======
</TABLE>
ASSET-LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The principal purposes of asset-liability management are to insure
adequate liquidity exists to meet operational needs and to maximize current
net interest income while minimizing the risk to future earnings of negative
fluctuations in net interest margin. In order to maintain an appropriate net
interest margin and reduce the risk associated with interest rate movements,
the Corporation actively manages the interest rate sensitivity of its assets
and liabilities.
Interest rate sensitivity is measured as the difference between the
volume of assets and liabilities that are subject to repricing in a future
period of time. These differences are known as interest sensitivity gaps.
The Corporation utilizes gap management as the primary means of measuring
interest rate risk. Gap analysis identifies and quantifies the Corporation's
exposure or vulnerability to changes in interest rates in relationship to the
Corporation's interest rate sensitivity position. A rate sensitive asset or
liability is one which is capable of being repriced (i.e., the interest rate
can be adjusted or principal can be reinvested) within a specified period of
time. Subtracting total rate sensitive liabilities (RSL) from total rate
sensitive assets (RSA) within specified time horizons nets the Corporation's
gap positions. These gaps will reflect the Corporation's exposure to changes
in market interest rates, as discussed below.
Because many of the Corporation's deposit liabilities are capable of
being immediately repriced, a portion of the investment portfolio consists of
rate sensitive securities and the Corporation offers variable rate loan
products in order to maintain a proper balance in its ability to reprice
various interest bearing assets and liabilities. Furthermore, the
Corporation's deposit rates are not tied to an external index over which the
Corporation could exercise no control. As a result, although changing market
interest rates impact repricing, the Corporation has retained much of its
control over repricing.
Table 12, below, sets forth, in summary form, the Corporation's repricing
analysis at December 31, 1996. The repricing analysis in Table 12 is based
upon the repricing intervals of variable rate assets and liabilities and upon
contractual maturities of fixed rate instruments with adjustments for
principal amortization of appropriate balance sheet items and projected
prepayments for loans and mortgage-backed securities. Prepayment projections
are developed from historical prepayment data for each type of asset.
The Corporation conducts the rate sensitivity analysis through the use of
a simulation model which also monitors earnings at risk by projecting earnings
of the Corporation based upon an economic forecast of the most likely interest
rate movement. The model also calculates earnings of the Corporation based
upon what are estimated to be the largest foreseeable rate increase and the
largest foreseeable rate decrease. Such analysis translates interest rate
movements and the Corporation's rate sensitivity position into dollar amounts
by which earnings may fluctuate as a result of rate changes.
21
<PAGE>
<TABLE>
TABLE 12: INTEREST RATE SENSITIVITY GAPS
<CAPTION>
(In Thousands) Within Over Three Over One Year
Three Months Months to One Year to Five Years
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 37,953 $ 11,388 $13,665
Securities 9,958 3,337 2,834
Other interest-earning assets 14 0 0
------- ------- -------
Total Interest-earning assets 47,925 14,725 16,499
------- ------- -------
Interest-bearing liabilities:
Demand and savings deposits 36,521 0 0
Time deposits 21,152 18,962 15,746
Repurchase agreements 106 0 0
Short term borrowings 7,561 0 0
------- ------- -------
Total interest-bearing liabilities 65,340 18,962 15,746
------- ------- -------
Interest rate sensitivity gap (17,415) (4,237) 753
------- ------- -------
Cumulative rate sensitivity gap (17,415) (21,652) (20,899)
======== ======== ========
Interest rate sensitivity gap
as a percent of interest
earning assets (14.7%) (18.2%) (17.6%)
<CAPTION>
Over
Five Years Total
<S> <C> <C>
Interest-earning assets:
Loans $ 4,167 $ 67,173
Securities 35,316 51,445
Other interest-earning assets 0 14
------- -------
Total Interest-earning assets 39,483 118,632
Interest-bearing liabilities:
Demand and savings deposits 0 36,521
Time deposits 18 55,878
Repurchase agreements 0 106
Short term borrowings 0 7,561
Total interest-bearing liabilities 18 100,066
------- -------
Interest rate sensitivity gap 39,465
-------
Cumulative rate sensitivity gap 18,566
========
Interest rate sensitivity gap
as a percent of interest
earning assets 15.6%
</TABLE>
The data included in the table indicates that the Corporation is
liability sensitive within one year. Generally, a liability sensitive gap
indicates that declining interest rates could positively affect net interest
income as expense of liabilities would decrease more rapidly than interest
income would decline. Conversely, rising rates could negatively affect net
interest income as income from assets would increase less rapidly than deposit
costs. During times of rising interest rates, an asset sensitive gap could
positively affect net interest income as rates would be increased on a larger
volume of assets as compared to deposits. As a result, interest income would
increase more rapidly than interest expense. An asset sensitive gap could
negatively affect net interest income in an environment of decreasing interest
rates as a greater amount of interest bearing assets would be repricing at
lower rates. Although rate sensitivity analysis enables the Corporation to
minimize interest rate risk, the magnitude of rate increases or decreases on
assets versus liabilities may not correlate directly. As a result,
fluctuations in interest spreads can occur even when repricing capabilities
are perfectly matched.
It is the policy of the Corporation to generally maintain a gap of
between .80 and 1.20 for each time horizon of six months and one year,
although the Corporation typically attempts to maintain a ratio of near 1.00
in order to minimize the impact of changes in market interest rates. When
Management believes that interest rates will increase it can take actions to
increase the RSA/RSL ratio. When Management believes interest rates will
decline, it can take actions to decrease the RSA/RSL ratio.
During 1996 the Corporation acquired additional fixed rate securities in
order to shift its interest rate sensitivity position to become more liability
sensitive in consideration of economic forecasts of declines in market
interest rates. Additionally, in 1996 the Corporation utilized its most
liquid and most interest sensitive assets to fund loans which had higher
yields but were less interest sensitive. As a result, the Corporation's
interest sensitivity gap fell slightly below .80. Currently, many economists
are projecting no changes in interest rates through much of 1997, but rate
declines are not projected. Therefore, the Corporation's asset/liability
management focus for 1997 will include increasing the Corporation's rate
sensitivity gap. As noted above, at December 31, 1996, the Corporation was
liability sensitive within one year, however, the cumulative rate sensitivity
gap was such that the Corporation's earnings and capital should not be
materially affected by the repricing of assets and liabilities due to
increases or decreases in interest rates in 1997.
Changes in market interest rates can also affect the Corporation's
liquidity position through the impact rate changes may have on the market
value of the Corporation's investment portfolio. As noted in the above
22
<PAGE>
discussion relating to securities, rapid increases in market rates can
negatively impact the market values of investment securities. As securities
values decline it becomes more difficult to sell investments to meet liquidity
demands without incurring a loss. The Corporation can address this by
increasing liquid funds which may be utilized to meet unexpected liquidity
needs when a decline occurs in the volume of securities which may be sold
without the Corporation incurring a net loss.
EFFECTS OF INFLATION
A bank's asset and liability structure is substantially different from
that of an industrial company in that virtually all assets and liabilities of
a bank are monetary in nature. Management believes the impact of inflation on
its financial results depends principally upon the Corporation's ability to
react to changes in interest rates and, by such reaction, reduce the
inflationary impact on performance. Interest rates do not necessarily move in
the same direction or at the same magnitude as the prices of other goods and
services. As discussed previously, Management seeks to control the
relationship between interest sensitive assets and liabilities in order to
protect against wide interest rate fluctuations, including those resulting
from inflation.
Information shown elsewhere in this Annual Report will assist in the
understanding of how the Corporation is positioned to react to changing
interest rates. In particular, the summary of the compositions of loans,
investments, and deposits should be considered together with the discussion on
interest rate sensitivity.
23
<PAGE>
SNODGRASS
Certified Public Accountants
REPORT OF INDEPENDENT AUDITORS
------------------------------
Shareholders and Board of Directors
Cardinal Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Cardinal
Bancorp, Inc. and subsidiary as of 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 Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
consolidated financial statements of Cardinal Bancorp, Inc. as of December 31,
1994, and for the year then ended, were audited by other auditors whose report
dated January 27, 1995, expressed an unqualified opinion on those consolidated
financial statements.
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 the financial statements. An
audit also includes assissing 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 1996 and 1995 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Cardinal Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, effective
January 1, 1995, the Corporation changed its method of accounting for impaired
loans and related allowance for loan losses.
/s/ S. R. Snodgrass, A.C.
- ----------------------------
S. R. Snodgrass, A.C.
Wexford, PA
January 13, 1997
24
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,452,163 $ 3,815,348
Interest earning balances 13,857 81,101
Federal funds sold 0 4,350,000
Securities available-for-sale 51,445,492 50,998,897
Loans 70,103,719 65,411,016
Less: Unearned discount 2,930,655 3,809,894
Allowance for loan losses 956,685 1,333,273
------------ ------------
Net Loans 66,216,379 60,267,849
Accrued interest receivable 1,160,991 975,123
Premises and equipment, net 2,756,476 2,871,417
Foreclosed assets 229,357 357,126
Other assets 1,282,017 755,096
------------ ------------
TOTAL ASSETS $129,556,732 $124,471,957
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Demand (non-interest bearing) $ 13,355,981 $ 13,695,350
NOW, money market and
savings accounts 36,520,902 37,260,352
Time, less than $100,000 45,761,145 44,313,895
Time, $100,000 and over 10,116,849 13,526,623
----------- -----------
Total Deposits 105,754,877 108,796,220
Securities sold under agreements
to repurchase 105,939 0
Short term borrowings 7,561,000 0
Accrued interest payable 531,090 607,523
Other liabilities 380,333 238,802
---------- ----------
Total Liabilities 114,333,239 109,642,545
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, par value $.50,
2,000,000 shares authorized,
issued and outstanding
990,000 and 495,000 shares 495,000 247,500
Surplus 2,263,620 2,263,620
Retained earnings 12,965,373 12,060,419
Net unrealized securities gains/(losses) (500,500) 257,873
----------- -----------
Total Shareholders' Equity 15,223,493 14,829,412
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS EQUITY $129,556,732 $124,471,957
============ ============
</TABLE>
25
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31
-----------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 5,929,114 $ 6,081,265 $ 5,511,299
Depository institutions 28,539 217,723 78,040
Federal funds sold 56,656 165,917 90,817
Securities:
Taxable 2,898,444 2,323,923 1,875,808
Tax-exempt 584,133 414,470 382,843
Dividends 34,854 34,522 4,706
--------- --------- ---------
Total Interest Income 9,531,740 9,237,820 7,943,513
--------- --------- ----------
INTEREST EXPENSE:
Deposits 4,062,674 3,988,273 3,223,168
Interest on securities sold under
agreements to repurchase 8,693 0 0
Short-term borrowings 26,788 6,127 6,474
--------- --------- ---------
Total Interest Expense 4,098,155 3,994,400 3,229,642
--------- --------- ---------
Net Interest Income 5,433,585 5,243,420 4,713,871
Provision for Loan Losses 0 0 (300,000)
--------- --------- ---------
Net Interest Income After
Provision for Loan Losses 5,433,585 5,243,420 5,013,871
--------- --------- ---------
OTHER INCOME:
Service charges on deposit
accounts 373,595 296,380 283,430
Net securities gains 4,685 0 0
Other income 154,868 179,495 173,340
--------- --------- ---------
Total Other Income 533,148 475,875 456,770
--------- --------- ---------
OTHER EXPENSES:
Salaries and employee benefits 2,401,427 1,945,413 1,687,546
Occupancy and equipment expenses 444,792 386,454 364,349
Data processing 125,964 96,891 94,763
F.D.I.C. insurance 2,003 117,010 269,568
Legal and professional fees 100,358 126,314 117,015
Net cost of operation and disposal
of other real estate owned 100,879 86,424 145,872
Shares tax 143,622 111,375 134,869
Supplies, stationery and printing 145,139 189,873 177,079
Other expenses 631,615 654,316 496,141
--------- --------- ---------
Total Other Expenses 4,095,799 3,714,070 3,487,202
--------- --------- ---------
Income before income taxes 1,870,934 2,005,225 1,983,439
Income tax expense 347,230 265,522 318,316
--------- --------- ---------
NET INCOME $ 1,523,704 $ 1,739,703 $ 1,665,123
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
<CAPTION>
Years Ended December 31
------------------------------------
1996 1995 1994
------- ------- -------
EARNINGS PER SHARE:
<S> <C> <C> <C>
Earnings per share $ 1.54 $ 1.76 $ 1.68
Average Common Shares Outstanding 990,000 990,000 990,000
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Net
Unrealized
Securities
Common Retained Gains/
Stock Surplus Earnings (Losses)
------- -------- --------- ------------
<S> <C> <C> <C> <C>
BALANCE At
JANUARY 1, 1994 $ 247,500 $ 2,263,620 $ 9,497,093 $ 44,312
Net income for 1994 1,665,123
Cash dividends declared--
$.55 per share (544,500)
Net change in unrealized
gains/(losses) on
securities available-for-
sale, net of tax benefit
change of $294,828 (1,049,909)
---------- ----------- ---------- -----------
BALANCE At
DECEMBER 31, 1994 $ 247,500 $ 2,263,620 $ 10,617,716 $(1,005,597)
Net income for 1995 1,739,703
Cash dividends declared--
$.30 per share (297,000)
Net change in unrealized
gains/(losses) on
securities available-for-
sale, net of tax liability
change of $(404,844) 1,263,470
-------- ----------- ----------- -----------
BALANCE At
DECEMBER 31, 1995 247,500 $ 2,263,620 $ 12,060,419 $ 257,873
Net income for 1996 1,523,704
Cash dividends declared --
$.375 per share (371,250)
Stock split effected
in the form of a 100%
stock dividend 247,500 (247,500)
Net change in unrealized
gains/(losses) on
securities available-for-
sale, net of tax benefit
change of $390,678 (758,373)
---------- ----------- ----------- -----------
BALANCE AT
DECEMBER 31, 1996 $ 495,000 $ 2,263,620 $ 12,965,373 $ (500,500)
========== =========== ============ ===========
<CAPTION>
Total
------------
<S> <C>
BALANCE At
JANUARY 1, 1994 $ 12,052,525
Net income for 1994 1,665,123
Cash dividends declared--
$.55 per share (544,500)
Net change in unrealized
gains/(losses) on
securities available-for-
sale, net of tax benefit
change of $294,828 (1,049,909)
-----------
BALANCE At
DECEMBER 31, 1994 $ 12,123,239
Net income for 1995 1,739,703
Cash dividends declared--
$.30 per share (297,000)
Net change in unrealized
gains/(losses) on
securities available-for-
sale, net of tax liability
change of $(404,844) 1,263,470
----------
BALANCE At
DECEMBER 31, 1995 $ 14,829,412
Net income for 1996 1,523,704
Cash dividends declared --
$.375 per share (371,250)
Stock split effected
in the form of a 100%
stock dividend (247,500)
Net change in unrealized
gains/(losses) on
securities available-for-
sale, net of tax benefit
change of $390,678 (758,373)
----------
BALANCE AT
DECEMBER 31, 1996 $ 15,223,493
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31
---------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $1,523,704 $1,739,703 $1,665,123
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Depreciation and amortization 222,864 198,995 168,757
Net amortization of
discounts and premiums 32,944 112,171 156,442
Net securities gains (4,685) 0 0
Provision for loan losses 0 0 (300,000)
Provision for loss on
foreclosed assets 70,121 0 56,575
Loss on sale of assets 10,826 12,507 48,286
Increase in accrued
interest and other assets (320,162) (681,193) (604,546)
Increase in accrued
interest and other liabilities 65,097 276,533 276,246
--------- --------- ---------
Net Cash Provided by
Operating Activities 1,600,709 1,658,716 1,466,883
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sales of
Securities available-
for-sale 11,067,779 0 0
Redemption of Federal Home
Loan Bank Stock 51,500 51,200 0
Proceeds from maturities
of securities available-
for-sale 6,588,917 4,598,292 7,257,242
Proceeds from maturities
of held-to-maturity
securities 0 491,091 1,204,924
Purchase of securities
available-for-sale (19,332,099)(14,139,549)(10,384,546)
Purchase of held-to-maturity
securities 0 (99,485) 0
Net loans (originated)
repaid by customers (6,241,562) (916,515) 3,866,830
Premises and equipment purchases (109,033) (969,011) (99,611)
Proceeds from sales of
premises and equipment 1,674 500 0
Proceeds from sales of
foreclosed assets 337,340 665,437 680,389
--------- --------- ---------
Net Cash Provided (Used) by
Investing Activities (7,635,484)(10,318,040) 2,525,228
The accompanying notes are an integral part of these financial statements.
</TABLE>
28
<PAGE>
<TABLE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<CAPTION>
Years Ended December 31
-------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net decrease in
deposit accounts $ (1,078,819) $ (278,209) $(5,086,398)
Net increase (decrease) in
certificates of deposit (1,962,524) 9,424,302 (3,853,326)
Dividends paid (371,250) (297,000) (544,500)
Increase in other
borrowings 7,666,939 0 0
--------- --------- ---------
Net Cash Provided (Used) by
Financing Activities 4,254,346 8,849,093 (9,484,224)
--------- --------- ---------
Increase (Decrease) in Cash and
Cash Equivalents (1,780,429) 189,769 (5,492,113)
Cash and Cash Equivalents at
Beginning of Year 8,246,449 8,056,680 13,548,793
--------- --------- ----------
Cash and Cash Equivalents at
End of Year $ 6,466,020 $ 8,246,449 $ 8,056,680
========== ========== ==========
<CAPTION>
SUPPLEMENTAL INFORMATION:
<S> <C> <C> <C>
Interest paid on deposits $ 4,139,107 $ 3,777,002 $ 3,242,032
Income taxes paid 369,670 435,000 100,000
Loans transferred to
foreclosed assets 293,032 198,659 321,386
The accompanying notes are an integral part of these financial statements.
</TABLE>
29
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
- ---------------------
accounts of Cardinal Bancorp, Inc. (the Corporation) and its wholly-owned
subsidiary, First American National Bank of Pennsylvania (the Bank) formerly
The First National Bank of Everett. All intercompany accounts have been
eliminated in consolidation. The investment in subsidiary on the parent
company financial statements is carried at the parent company's equity in the
underlying net assets.
The Corporation is a Pennsylvania corporation organized to become the holding
company of the Bank. The Bank is a Federally chartered National Bank, located
in Pennsylvania. The Bank's principal sources of revenue emanate from its
portfolio of commercial, mortgage and consumer loans, as well as income from
securities issued or secured by the U.S. Government, by States and Political
Subdivisions thereof and by corporations. The Corporation is supervised by
the Board of Governors of the Federal Reserve System, while the Bank is
subject to regulation and supervision by the Office of the Comptroller of the
Currency.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the statement of
financial condition and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
The major accounting policies and practices are summarized below.
Securities: Management determines the appropriate classification of debt
- ------------
securities at the time of purchase and re-evaluates such designation as of
each balance sheet date. Debt securities are classified as held-to-maturity
when the Bank has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value,
with the unrealized gains and losses, net of tax, reported as a component of
shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-related securities, over the
estimated life of the security. Mortgage-related securities include mortgage-
backed securities. Realized gains and losses, and declines in value judged to
be other-than-temporary, are included in net securities gains (losses). The
cost of securities sold is based on the specific identification method.
Common stock of the Federal Home Loan Bank and Federal Reserve Bank represents
ownership in institutions which are wholly-owned by other financial
institutions. These equity securities are accounted for at cost.
30
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans: Loans are stated at the amount of unpaid principal, reduced by
- ------
unearned discount and the allowance for loan losses. Unearned discount on
certain installment loans is recognized as income over the terms of the loans
by methods approximating the interest method. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding.
Generally, loans are placed on nonaccrual status when the payment in full of
principal or interest is not expected or when a loan is past due 90 days or
more unless the loan is well secured and in the process of collection. Any
unpaid interest previously accrued on such loans is reversed from income, and
thereafter, interest is recognized only to the extent of payments received.
Restructured loans are loans whose terms have been modified to provide for a
reduction of either principal or interest due to a deterioration in the
financial condition of the borrower.
Allowance for Loan Losses: Effective January 1, 1995, the Corporation adopted
- --------------------------
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan," as amended by Statement No. 118. Under this
Standard, the Corporation estimates credit losses on impaired loans based on
the present value of expected cash flows or fair value of the underlying
collateral if the loan repayment is expected to come from the sale or
operation of such collateral. Prior to 1995, the credit losses related to
these loans were estimated based on undiscounted cash flows or the fair value
of the underlying collateral. Statement 118 amends Statement 114 to permit a
creditor to use existing methods for recognizing interest income on impaired
loans eliminating the income recognition provisions of Statement 114. The
adoption of these statements did not have a material effect on the
Corporation's financial position or results of operations.
Impaired loans are commercial and commercial real estate loans for which 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 definition of
"impaired loans" is not the same as the definition of "nonaccrual loans"
although the two categories may overlap. The Corporation may choose to place
a loan on nonaccrual status due to payment delinquency or uncertain
collectibility, while not classifying the loan as impaired if the loan is not
a commercial or commercial real estate loan. Factors considered by management
in determining impairment include payment status and collateral value. The
amount of impairment for these types of impaired loans is determined by the
difference between the present value of the expected cash flows related to the
loan, using the original interest rate, and its recorded value, or, as a
practical expedient in the case of collateralized loans, the difference
between the fair value of the collateral and the recorded amount of the loans.
When foreclosure is probable, impairment is measured based on the fair value
of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which is defined as 90 days or less, generally are not classified as impaired.
Management determines the significance of payment delays on a case-
31
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
by-case basis, taking into consideration all of the circumstances surrounding
the loan and the
borrower, including the length of the delay, the borrower's prior payment
record and the amount of shortfall in relation to the principal and interest
owed.
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charged to the allowance and all recoveries are credited to it.
The allowance for loan losses is established through a provision for loan
losses, which is charged to operations. The provision is based on
management's periodic evaluation of individual loans, the overall risk
characteristics of the various portfolio segments, past experience with
losses, the impact of economic conditions on borrowers, and other relevant
factors. The estimates used in determining the adequacy of the allowance for
loan losses, including the amounts and timing of future cash flows expected on
impaired loans, are particularly susceptible to significant change in the near
term.
Foreclosed Assets: Foreclosed assets include real estate acquired and loan --
- ----------------
collateral repossessed as a result of foreclosure proceedings and acceptance
of deeds-in-lieu of foreclosure. Other real estate owned (OREO) includes
real estate acquired in satisfaction of a loan. Properties acquired by
foreclosure or deed in lieu of foreclosure are transferred to OREO and
recorded at the lower of cost or fair market value based on appraised value at
the date received. Losses arising from the acquisition of such property are
charged against the allowance for loan losses. Subsequently, OREO is recorded
at the lower of the amount recorded at the date acquired or the then current
market value less disposition costs. Declines in value of the properties
subsequent to acquisition and gains or losses realized upon disposition are
charged against income.
Premises and Equipment: Premises and equipment are stated at cost less
- -----------------------
accumulated depreciation. Depreciation is computed on both the straight-line
and accelerated methods over the estimated useful lives of the assets.
Income Taxes: The liability method is used in accounting for income taxes. -
- ------------
Under this method, deferred tax assets and liabilities 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.
Earnings Per Share: Earnings per share is calculated based upon the weighted
- -------------------
average number of issued and outstanding common shares.
Cash Equivalents: For purposes of the Statements of Cash Flows, cash and due
- -----------------
from banks, interest earning balances and federal funds sold are considered
cash equivalents.
32
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - COMMON STOCK SPLIT
On October 16, 1996, the Board of Directors approved a two for one stock
split. The additional shares resulting from the split, which was effected in
the form of a 100 percent stock dividend, were distributed on November 14,
1996, to holders of record on October 31, 1996. All references to the number
of common shares and per share amounts for 1995 and 1994 have been restated to
reflect the stock split.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank either indirectly through vault cash or directly with the Federal
Reserve. The average daily combined amount of the required reserve balances
for the years ended December 31, 1996, and 1995, were approximately $546,000
and 490,000, respectively.
NOTE 4 - RESTRICTIONS ON LOANS AND DIVIDENDS
Federal law prevents the Corporation from borrowing from the Bank unless the
loans are secured by specified obligations. Further, such loans are limited
in amount to ten percent (10%) of the Bank's total capital. Additionally, the
Office of the Comptroller of the Currency (OCC) must approve a dividend by the
Bank if the total dividends declared for the year exceed net profits for the
year combined with net profits less dividends for the two preceding calendar
years. Without regulatory approval, the amount available for payment of
dividends by the Bank in 1997 was $2,550,532 at December 31, 1996.
NOTE 5 - SECURITIES AVAILABLE-FOR-SALE
During 1995, in accordance with the Financial Accounting Standards Board
Special Report "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," the Corporation was
permitted an additional one time reclassification of investment securities.
Accordingly, the Corporation transferred from the held-to-maturity
classification to the available-for-sale classification securities with an
amortized cost of $8,249,068 and an estimated fair value of $8,592,719.
33
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
Amortized cost and estimated fair values of securities available-for-sale are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Obligations of U.S.
government agencies $27,337,328 $ 14,305 $ 606,336 $ 26,745,297
Mortgage-backed:
U.S. government
agencies 12,521,385 17,467 268,914 12,269,938
Other mortgage-backed 2,021,019 0 10,418 2,010,601
Obligations of states and
political subdivisions 9,774,894 220,809 125,247 9,870,456
Stock 549,200 0 0 549,200
--------- --------- --------- ----------
$ 52,203,826 $ 252,581 $ 1,010,915 $ 51,445,492
========== ======== ========== ==========
<CAPTION>
December 31, 1995
-------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury $ 2,001,828 $ 6,922 $ 0 $ 2,008,750
Obligations of U.S.
government agencies 13,494,865 253,248 7,500 13,740,613
Mortgage-backed:
U.S. government
agencies 25,528,795 96,514 365,944 25,259,365
Other mortgage-backed 2,293,745 0 23,745 2,270,000
Obligations of states and
political subdivisions 6,531,206 446,936 14,683 6,963,459
Asset-backed 157,041 0 1,031 156,010
Stock 600,700 0 0 600,700
---------- -------- -------- -----------
$ 50,608,180 $ 803,620 $ 412,903 $ 50,998,897
=========== ======== ======== ===========
</TABLE>
The Corporation recognized gross realized gains on sales of securities of
$121,397 in 1996 while gross realized losses on sales of securities totaled
$116,712. Proceeds from sales of securities in 1996 were $11,067,779. There
were no sales of securities in 1995 or 1994 and, therefore, there were no
gross realized gains or losses incurred on sales of securities in those years.
At December 31, 1996 and 1995, securities with a carrying value of $18,850,220
and $13,744,444, respectively, were pledged to secure public monies as
required by law, and for other purposes.
34
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
The maturities of debt securities at December 31, 1996, based upon contractual
maturity dates, are summarized below. Expected maturities will differ from
contractual maturities as the issuers may have the right to prepay obligations
without penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---------- -----------
<S> <C> <C>
Due in one year or less $ 0 $ 0
Due from one to five years 2,532,360 2,521,755
Due from five to ten years 26,844,190 26,273,306
Due after ten years 22,278,076 22,101,231
---------- ----------
$51,654,626 $50,896,292
========== ==========
</TABLE>
NOTE 6 - LOANS
<TABLE>
Major classifications of loans are as follows:
<CAPTION>
December 31,
--------------------------
1996 1995
--------- ----------
<S> <C> <C>
Residential Mortgage $ 19,534,376 $ 20,102,808
Commercial Mortgage 19,583,590 17,427,565
Consumer 18,050,964 17,923,671
Commercial and Agricultural 12,934,789 9,956,972
---------- ----------
Total Loans 70,103,719 65,411,016
Less: Unearned Discount 2,930,655 3,809,894
Allowance for Loan Losses 956,685 1,333,273
---------- ----------
Net Loans $ 66,216,379 $ 60,267,849
========== ==========
</TABLE>
The Bank primarily grants loans to customers in South Central Pennsylvania.
The Bank extends credit to customers and requires collateral based upon
Management's evaluation of each customer's financial condition and ability to
satisfy completely the terms of the agreement. While the Bank maintains a
diversified loan portfolio and the ability of its debtors to honor their
contracts is not substantially dependent on any particular economic business
sector, there are several industries in which concentrations of credit exist.
These are agricultural industry, motels/hotels and restaurants, timber and
lumber related industries, and loans to automobile dealerships. At December
31, 1996, loans to these industries as a percent of total loans were
approximately 3.78%, 7.48%, 4.91% and 5.88%, respectively. Loans to these
groups were approximately 4.50%, 3.98%, 2.68% and 6.00% of total loans,
respectively, at December 31, 1995.
35
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE - 6 LOANS (CONTINUED)
At December 31, 1996, and December 31, 1995, the recorded investment in loans
that are considered to be impaired in accordance with Statement 114 was
$59,705 and $1,299,268, respectively, all of which were on a nonaccrual basis.
These loans have a related allowance for loan losses of $16,725 and $462,600
at December 31, 1996 and December 31, 1995, respectively.
The average recorded investment in impaired loans during the year ended
December 31, 1996, was $767,949 while the average recorded investment in such
loans at December 31, 1995, was $697,257. For the years ended December 31,
1996, and December 31, 1995, the Corporation recognized no interest income on
impaired loans.
The Corporation had nonaccrual loans of approximately $584,000 and $1,674,000
at December 31, 1996, and 1995, respectively. Additionally, at December 31,
1995, the Corporation had a restructured troubled debt total of $170,000 for a
loan restructured and on accrual status. Interest income on loans would have
been increased by approximately $108,000, $128,000 and $60,000 in 1996, 1995
and 1994, respectively, if loans on nonaccrual status had performed in
accordance with their original terms. Interest received and included in
interest income from loans on nonaccrual status amounted to approximately
$7,000, $6,000 and $15,000 in 1996, 1995 and 1994, respectively.
Certain officers and directors of the Corporation and the Bank and their
family members, affiliates and companies in which they have beneficial
ownership were indebted to the Bank at December 31, 1996 and 1995. Such loans
are made on substantially the same terms as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans
outstanding was $507,796 and $791,357 at December 31, 1996 and 1995,
respectively. During 1996, $252,500 of new loans were made to or guaranteed
by such related parties and repayments of such loans totaled $545,698. Due to
changes in the composition of officers and directors, advances and payments on
loans may not relate directly to changes in balances outstanding from year to
year. In addition to the balances outstanding, certain borrowers in this
category had credit available on unused lines of credit in amounts of $338,403
and $240,600 at December 31, 1996 and December 31, 1995, respectively.
<TABLE>
NOTE 7 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three years ended December
31, 1996, were as follows:
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Balance at January 1 $ 1,333,273 $ 1,494,171 $ 1,952,913
Provision for loan losses 0 0 (300,000)
Loans charged off (490,458) (195,131) (215,749)
Recoveries 113,870 34,233 57,007
--------- --------- ----------
Balance at December 31 $ 956,685 $ 1,333,273 $ 1,494,171
========== ========== ==========
</TABLE>
36
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment are as follows:
<CAPTION>
December 31
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
Land $ 498,534 $ 498,534
Buildings and improvements 3,338,672 3,323,587
Furniture and equipment 1,928,566 1,845,303
--------- ---------
5,765,772 5,667,424
Less: Accumulated depreciation 3,009,296 2,796,007
--------- ---------
$ 2,756,476 $ 2,871,417
========== ==========
</TABLE>
Depreciation expense amounted to $222,864, $198,995 and $168,757 in 1996, 1995
and 1994, respectively.
NOTE 9 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-
TERM BORROWINGS
During 1996, the Corporation began entering into sales of securities under
agreements to repurchase. Securities sold under agreements to repurchase
averaged $173,852 during 1996 and the maximum amount outstanding at any month
end during 1996 was $390,228. The weighted average interest rate on these
repurchase agreements was 5.00% for 1996. At December 31, 1996, securities
sold under agreements to repurchase totaled $105,939 at an interest rate of
5.00%. The securities that serve as collateral for securities sold under
agreements to repurchase are U.S. Agency securities with a book and market
value of $2,000,000 and $1,949,731, respectively, at December 31, 1996. The
securities sold under agreements to repurchase are overnight borrowings.
The Bank maintains a Flexline credit arrangement with the Federal Home Loan
Bank of Pittsburgh (FHLB). The arrangement is a revolving line of credit and
is renewable annually. During 1996, the Bank had a borrowing limit of
$3,426,000 with a variable rate of interest, based upon the FHLB's cost of
funds. Additionally, the Bank is capable of borrowing from FHLB under a
RepoPlus borrowing arrangement up to $20,189,000 less any amounts outstanding
under the Flexline credit arrangement. The amount available as of December
31, 1996, was approximately $16,365,000. Certain U.S. Treasury securities and
obligations of U.S. Government corporations and agencies, mortgage-backed
securities and first mortgage loans are pledged to secure such borrowings. As
a member of the Federal Reserve system, the Bank is also capable of meeting
short-term credit needs by borrowing from the Federal Reserve Bank of
Philadelphia.
37
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-
TERM BORROWINGS (CONTINUED)
<TABLE>
A summary of the components of the Corporation's short-term borrowings at the
end of the reporting period follows.
<CAPTION>
1996 1995
<S> <C> <C>
FHLB RepoPlus
Balance at year-end $ 3,824,000 $ 0
Maximum amount outstanding at any month-end 3,824,000 0
Average balance outstanding during the year 469,950 0
Weighted average interest rate:
As of year-end 7.00% -
Paid during the year 4.96% -
Federal Reserve Bank
Balance at year-end $ 3,737,000 0
Maximum amount outstanding at any month-end 3,737,000 0
Average balance outstanding during the year 90,732 21,985
Weighted average interest rate:
As of year-end 5.00% -
Paid during the year 5.00% 5.09%
</TABLE>
<TABLE>
NOTE 10 - INCOME TAXES
The total federal income tax expense in the statements of income are as
follows:
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Currently Payable $ 336,116 $ 274,000 $ 290,316
Deferred 70,221 281,033 231,232
Reduction of
Valuation Allowance (59,107) (289,511) (203,232)
$ 347,230 $ 265,522 $ 318,316
========= ========= =========
</TABLE>
38
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
NOTE 10 - INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Corporation's deferred tax assets and liabilities as of December 31,
are as follows:
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses $ 149,535 $ 289,917
Real estate owned 23,841 0
Depreciation 8,406 11,635
Alternative minimum tax credits 3,993 63,100
Securities available-for-sale 257,834 0
Accrued interest on loans 51,526 0
Other 93,038 31,696
--------- ---------
Total Deferred Tax Assets 588,173 396,348
--------- ---------
Deferred Tax Liabilities:
Pension (34,982) (30,770)
Securities available-for-sale 0 (132,844)
-------- --------
Total Deferred Tax Liabilities (34,982) (163,614)
-------- --------
553,191 232,734
Valuation Allowance (3,993) (63,100)
-------- --------
Net Deferred Tax Assets $ 549,198 $ 169,634
======== ========
</TABLE>
At December 31, 1996, and December 31, 1995, the level of the valuation
allowance is attributable to the alternative minimum tax credits carryforward.
<TABLE>
The following schedule provides a reconciliation between the statutory and the
effective tax rates for the years ended December 31:
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Statutory Federal Tax Rate 34.0% 34.0% 34.0%
Adjustments:
Tax exempt interest income (12.3) (7.9) (7.3)
Reduction in valuation
allowance (3.1) (14.4) (10.2)
Other, net .0 1.5 (.4)
Effective Tax Rate 18.6% 13.2% 16.1%
==== ==== ====
</TABLE>
Income taxes applicable to net security gains amounted to $1,593 for the year
ended 1996.
39
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - EMPLOYEE BENEFITS
The Corporation provides an employee stock ownership plan and trust (with
401(K) provisions) for its employees whereby each eligible participant may
make before tax contributions based upon an election to defer a portion of his
salary. Additionally, the Board of Directors may authorize contributions by
the Corporation to each participant's account based upon a participant's
salary deferral or may authorize profit sharing contributions to the account
of each eligible employee. The plan is an amendment and restatement of the
Corporation's prior profit sharing plan. For the years ended December 31,
1996 and 1995, the Corporation made contributions of $11,020 and $5,746,
respectively, to the plan. For the year ended December 31, 1994 the
Corporation made no contributions to the plan. At December 31, 1996, the plan
held 2,980 shares of common stock of the Corporation. At December 31, 1995,
the plan held no stock of the Corporation.
The Bank maintains a non-contributory defined benefit pension plan for its
employees. The Bank's funding policy is to contribute annually the maximum
amount that can be deducted for federal income tax purposes. The plan
provides pension benefits to substantially all employees based on the average
base salary for the last five years of employment and the total number of
years of service. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future. The plan assets consist of investments in stocks, bonds and temporary
investment common trust funds. The Bank does not provide any post-retirement
or post employment benefits other than pension for its employees.
<TABLE>
The following table sets forth the plan's funded status and amounts recognized
in the balance sheet at:
<CAPTION>
December 31
----------------------------
1996 1995
--------- -----------
<S> <C> <C>
Accumulated benefit obligation, including
vested benefits of $1,286,919 in 1996
and $1,239,237 in 1995 $ 1,319,981 $ 1,277,557
=========== ===========
Plan assets at fair value 2,776,276 2,515,283
Projected benefit obligation
for service rendered to date (1,894,467) (1,719,832)
---------- ----------
Plan assets in excess of
projected benefit obligation 881,809 795,451
Unrecognized net gain from
past experience different from
that assumed and effects of
changes in assumptions (482,687) (385,892)
Unrecognized net assets at transition
being recognized over approximately
22 years (298,327) (319,058)
----------- ----------
Prepaid pension cost, included
in other assets $ 100,795 $ 90,501
=========== ===========
</TABLE>
40
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - EMPLOYEE BENEFITS (CONTINUED)
<TABLE>
Net periodic pension benefit included the following components:
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 97,738 $ 70,129 $ 66,953
Interest cost on projected
benefit obligation 115,978 106,182 105,072
Actual return on plan assets (334,671) (546,764) 17,009
Net amortization and deferral 110,661 363,644 (207,083)
--------- --------- --------
Net periodic pension benefit $ (10,294) $ (6,809) $ (18,049)
========= ========= =========
</TABLE>
<TABLE>
Actuarial assumptions used in the determination of the projected benefit
obligation were as follows:
<CAPTION>
December 31
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expected long-term rate of
return on plan assets 8.0% 8.0% 8.0%
Weighted average discount rate 7.0% 7.0% 8.0%
Rate of increase in future
compensation levels 5.0% 5.0% 5.0%
</TABLE>
NOTE 12 - STOCK OPTIONS
The Corporation, through its Board of Directors, has approved Incentive Stock
Option Plans which have granted each director an annual option of 2,000 shares
of the Corporation's common stock, as adjusted for the common stock split as
discussed in Note 2, to be exercised within a ten year period at an option
price equal to the fair market value at the date of grant. Additionally, the
Corporation's President and CEO, has been granted ten year non-qualified
incentive stock options of 4,000 shares of common stock, exercisable within
the ten year period at an exercise price equal to the market value of the
common stock at the date of the grant.
41
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - STOCK OPTIONS (CONTINUED)
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards Statement No. 123, "Accounting for Stock-Based
Compensation." This statement encourages, but does not require the
Corporation to recognize compensation expense for all awards of equity
instruments issued after December 31, 1995. The statement establishes a fair
value based method of accounting for stock-based compensation plans. The
standard applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities in amounts
based on the price of the entity's common stock or other equity instruments.
Statement 123 permits companies to continue to account for such transactions
under Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees", but requires disclosure in a note to the financial statements pro
forma net income and earnings per share as if the Corporation had applied the
new method of accounting.
Under APB Opinion 25, no compensation expense has been recognized with respect
to the options granted under the stock option plan. Had compensation expense
been determined on the basis of fair value pursuant to SFAS No. 123, net
income and earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net Income:
As reported $ 1,523,704 $ 1,739,703
========== ==========
Proforma $ 1,387,305 $ 1,704,312
========== ==========
Earnings Per Share:
As reported $ 1.54 $ 1.76
===== =====
Proforma $ 1.40 $ 1.72
===== =====
</TABLE>
<TABLE>
The following table presents share data related to the stock option plan:
<CAPTION>
Shares Under Option
-----------------------
1996 1995
--------- ----------
<S> <C> <C>
Outstanding, January 1 66,000 44,000
Granted 20,000 22,000
Exercised 0 0
Forfeited 0 0
------- -------
Outstanding, December 31 (at prices
ranging from $13.19 - $17.10) 86,000 66,000
======= =======
</TABLE>
42
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding various commitments
and contingent liabilities, such as guarantees, commitments to extend credit,
and stand-by letters of credit. These commitments involve, to varying
degrees, elements of credit risk in excess of amounts recognized in the
consolidated financial statements. Loan commitments are made to accommodate
the financing needs of the customers of the Bank. Stand-by letters of credit
commit the Bank to make payments on behalf of customers when certain specified
future events occur. Both arrangements have credit risk essentially the same
as that involved in extending loans to customers and are subject to the Bank's
normal credit policies. Collateral (e.g., securities, receivables, inventory
and equipment) is obtained based on Management's credit assessment of the
customer. Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract.
These commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee.
Because many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. Although the Bank recognizes future cash requirements may be
less than the total commitment amounts, the Bank utilizes the total amounts in
analyzing its liquidity needs.
Loan commitments (unfunded loans and unused lines of credit) and letters of
credit outstanding at December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Loan commitments $ 8,334,939 $ 7,332,809
Stand-by letters of credit 245,901 388,964
---------- ----------
$ 8,580,840 $ 7,721,773
========== ==========
</TABLE>
Additionally, in the normal course of business, the Corporation may be subject
to litigation in which claims for monetary damages are asserted. Management,
after consultation with legal counsel, is not aware of any pending or
threatened litigation that will have a material adverse affect on the
corporation's liquidity, capital resources or results of operations.
NOTE 14 - REGULATORY CAPITAL REQUIREMENTS
The Corporation (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary actions by the regulators that, if
undertaken, could have a direct material effect on the Corporation's and the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and the
Bank must meet specific capital guidelines
43
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
that involve quantitative measures of their assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation include risk-based capital
adequacy guidelines under which the components of capital are classified into
two tiers. For the Corporation, Tier 1 capital consists of common
shareholders' equity. Total risk-based capital consists of Tier 1 capital
plus the allowance for loan losses up to a maximum of 1.25% of risk-weighted
assets. The risk-based capital ratios are computed by dividing the components
of capital by risk-weighted assets. Risk-weighted assets are determined by
assigning credit risk weighing factors from 0% to 100% to various categories
of assets and off-balance-sheet financial instruments. At December 31, 1996,
the required minimum ratios are 4.0% for the Tier 1 capital ratio and 8.0% for
the total capital ratio. Federal regulations also require all national banks
maintain a total assets leverage ratio of at least 3.0%. Management believes,
as of December 31, 1996, that the Corporation and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notifications from the Federal
Deposit Insurance Corporation and the Federal Reserve Bank of Philadelphia
have categorized the Bank and the Corporation as well capitalized as defined
under the applicable regulatory framework. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios at least 100 to 200 basis points above the minimum
capital adequacy ratios set forth in the table. There have been no conditions
or events since that notification that management believes have changed the
Corporation's category.
The following table reflects the Corporation's capital ratios, which are
substantially the same as the Bank's, at December 31:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Total Capital(to Risk Weighted Assets)
- --------------------------------------
Actual $ 16,680,678 20.96% $ 15,523,759 20.38%
For Capital Adequacy Purposes 6,365,795 8.00% 6,094,203 8.00%
To Be Well Capitalized 7,957,244 10.00% 7,617,754 10.00%
Tier 1 Capital (to Risk Weighted Assets)
- ----------------------------------------
Actual $ 15,723,993 19.76% $ 14,571,539 19.13%
For Capital Adequacy Purposes 3,182,898 4.00% 3,047,101 4.00%
To Be Well Capitalized 4,774,346 6.00% 4,570,652 6.00%
Tier 1 Capital (to Average Assets)
- -----------------------------------
Actual $ 15,723,993 12.20% $ 14,571,539 11.64%
For Capital Adequacy Purposes 3,867,921 3.00% 3,754,943 3.00%
To Be Well Capitalized 6,446,534 5.00% 6,258,238 5.00%
</TABLE>
44
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - FAIR VALUE DISCLOSURE
<TABLE>
The estimated fair values of the Corporation's financial instruments are as
follows:
<CAPTION>
1996
-----------------------------------
Carrying Fair
Value Value
--------------- --------------
<S> <C> <C>
Financial assets:
Cash and due from banks, interest earning
balances and federal funds sold $ 6,466,020 $ 6,466,020
Investment securities 51,445,492 51,445,492
Net loans 66,216,379 65,447,000
Accrued interest receivable 1,160,991 1,160,991
------------ ------------
Total $ 125,288,882 $ 124,519,503
============ ============
Financial liabilities:
Deposits $ 105,754,877 $ 106,099,448
Securities Sold Under Repurchase
Agreements 105,939 105,939
Short Term Borrowings 7,561,000 7,561,000
Accrued interest payable 531,090 531,090
----------- -----------
Total $ 113,952,906 $ 114,297,477
============ ============
<CAPTION>
1995
-----------------------------------
Carrying Fair
Value Value
------------- -------------
<S> <C> <C>
Financial assets:
Cash and due from banks, interest earning
balances and federal funds sold $ 8,246,449 $ 8,246,449
Investment securities 50,998,897 50,998,897
Net loans 60,267,849 60,786,000
Accrued interest receivable 975,123 975,123
------------ ------------
Total $ 120,488,318 $ 121,006,469
============ ============
Financial liabilities:
Deposits $ 108,796,220 $ 109,270,740
Accrued interest payable 607,523 607,523
----------- -----------
Total $ 109,403,743 $ 109,878,263
============ ============
</TABLE>
Financial instruments are cash, evidence of an ownership interest in an
entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
45
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - FAIR VALUE DISCLOSURE (CONTINUED)
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments should be based upon Management's judgement regarding current
economic conditions, interest rate risk, expected cash flows, future estimated
losses and other factors, as determined through various option pricing
formulas or simulation modeling. As many of these assumptions result from
judgments made by Management based upon estimates which are inherently
uncertain, the resulting estimated fair values may not be indicative of the
amount realizable in the sale of a particular financial instrument. In
addition, changes in the assumptions on which the estimated fair values are
based may have a significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets, and premises and equipment are
not considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Corporation.
The Corporation utilized simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not
available, based upon the following assumptions:
Cash and Due From Banks, Interest Earning Balances, Federal Funds Sold,
- ----------------------------------------------------------------------
Accrued Interest Receivable and Accrued Interest Payable
- --------------------------------------------------------
The fair value is equal to the current carrying value.
Investment Securities
- ----------------------
The fair value of securities available-for-sale is based upon available quoted
market prices.
Loans and Deposits
- -------------------
The fair value of loans is estimated by discounting the future cash flows
using a simulation model which estimates future cash flows and constructs
discount rates that consider reinvestment opportunities, operating expenses,
non-interest income, credit quality and prepayment risk. Demand, savings and
money market deposit accounts are valued at the amount payable on demand as of
year end. Fair values for time deposits is estimated using a discounted cash
flow calculation that applies contractual costs currently being paid on the
existing portfolio to current market rates being offered for deposits of
similar remaining maturities.
46
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - FAIR VALUE DISCLOSURE (CONTINUED)
Borrowed Money
- ---------------
Borrowings consist of overnight advances received from the Federal Reserve
Bank and overnight advances on a line of credit with the Federal Home Loan
Bank together with securities sold under agreements to repurchase. The
carrying value of these liabilities is a reasonable estimate of the fair
value.
Commitments to Extend Credit and Standby Letters of Credit
- -----------------------------------------------------------
These financial instruments are generally not subject to sale and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment or letter of credit,
and the fair value determined by discounting the remaining contractual fee
over the term of the commitment using fees currently charged to enter into
similar agreements with similar credit risk, are not considered material for
disclosure. The contractual amounts of unfunded commitments and letters of
credit are presented in Note 13.
47
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - CARDINAL BANCORP, INC. (PARENT CORPORATION)
The condensed financial information for the Corporation is as follows:
<TABLE>
BALANCE SHEETS
<CAPTION>
December 31,
------------------------------
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
Cash $ 2,552 $ 8,260
Investment in banking subsidiary 15,218,790 14,820,534
Other assets 2,151 618
---------- ----------
$15,223,493 $14,829,412
========== ==========
SHAREHOLDERS' EQUITY
Capital stock $ 495,000 $ 247,500
Surplus 2,263,620 2,263,620
Retained earnings 12,464,873 12,318,292
---------- ----------
$15,223,493 $14,829,412
========== ==========
</TABLE>
<TABLE>
STATEMENTS OF INCOME
<CAPTION>
December 31,
-------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Income
Dividends from banking
subsidiary $ 371,250 $ 347,000 $ 544,500
Net equity in undistributed
earnings of subsidiary 1,156,629 1,393,902 1,125,283
--------- --------- ---------
1,527,879 1,740,902 1,669,783
Operating expenses 6,326 1,817 7,061
--------- --------- ---------
Net Income before Taxes 1,521,553 1,739,085 1,662,722
Income Tax Benefit (2,151) (618) (2,401)
--------- --------- ---------
Net Income $1,523,704 $1,739,703 $1,665,123
========= ========= =========
</TABLE>
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
December 31,
--------------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net Income $1,523,704 $1,739,703 $1,665,123
Adjustment to reconcile
net income to net cash
provided by operating
activities:
Increase in
undistributed earnings (1,156,629) (1,393,902) (1,125,283)
(Increase) Decrease in
other assets (1,533) 1,783 2,577
Net Cash Provided by
Operating Activities 365,542 347,584 542,417
Net Cash Used by
Investing Activities 0 (50,000) 0
Net Cash Used by
Financing Activities -
Dividends Paid (371,250) (297,000) (544,500)
--------- --------- ---------
Increase (Decrease) in
Cash and Cash Equivalents (5,708) 584 (2,083)
Cash and Cash Equivalents
at Beginning of Year 8,260 7,676 9,759
Cash and Cash Equivalents
at End of Year $ 2,552 $ 8,260 $ 7,676
========= ========= =========
</TABLE>
48
EXHIBIT (13) (ii)
-----------------
Registrant's 1994 Report of Independent Auditors
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
Cardinal Bancorp, Inc.
We have audited the accompanying consolidated statements of income, changes in
shareholders' equity, and cash flows of Cardinal Bancorp, Inc. and subsidiary
for the year ended December 31, 1994. These financial statements are the
responsibility of Cardinal Bancorp, Inc.'s management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit 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 sudit
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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of Cardinal
Bancorp, Inc. and subsidiary's operations and their cash flows for the year
ended December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
January 27, 1995
Pittsburgh, Pennsylvania
EXHIBIT (21)
------------
Subsidiaries of the Registrant
Subsidiary Corporation
Name: First American National Bank of Pennsylvania,
formerly The First National Bank of Everett
Address: 140 East Main Street
Everett, Pennsylvania 15537
Jurisdiction of
Incorporation: National Banking
Association, United States
of America
EXHIBIT (99)
------------
Proxy Statement and Accompanying
Notice of Annual Meeting and Form
of Proxy for the 1997 Annual
Meeting of Shareholders
<PAGE>
CARDINAL BANCORP, INC.
PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON APRIL 8, 1997
GENERAL
INTRODUCTION, DATE, TIME AND PLACE OF ANNUAL MEETING
- -------------------------------------------------------
This Proxy Statement is being furnished in connection with the
solicitation by the Board of Directors of CARDINAL BANCORP, INC. (the
"Corporation"), a Pennsylvania business corporation, of proxies to be voted at
the Annual Meeting of Shareholders of the Corporation to be held on Tuesday,
April 8, 1997, at 9:30 a.m., prevailing time, at The Arena Restaurant
(adjacent to the Quality Inn), Business Route 220 North at Pennsylvania
Turnpike Exit 11, Bedford, Pennsylvania 15522, and at any adjournment or
postponement of the Annual Meeting.
The principal executive office of the Corporation is located at First
American National Bank of Pennsylvania (the "Bank"), formerly The First
National Bank of Everett, 140 East Main Street, Everett, Pennsylvania 15537.
The telephone number for the Corporation is (814) 652-2131. All inquiries
should be directed to Merle W. Helsel, President and Chief Executive Officer
of the Corporation. The Bank is a wholly owned subsidiary of the Corporation.
SOLICITATION AND VOTING OF PROXIES
- ------------------------------------
This Proxy Statement and the enclosed form of proxy (the "Proxy") are
first being sent to shareholders of the Corporation on or about March 10,
1997.
Shares represented by proxies on the accompanying Proxy, if properly
signed and returned, will be voted in accordance with the specifications made
thereon by the shareholders. Any Proxy not specifying to the contrary will be
voted FOR the election of the nominees for Class C Director named below and
FOR ratification of the selection of S.R. Snodgrass, A.C., Certified Public
Accountants, of Wexford, Pennsylvania, as the independent auditors for the
Corporation for the year ending December 31, 1997. Execution and return of
the enclosed Proxy will not affect a shareholder's right to attend the Annual
Meeting and vote in person, after giving written notice to the Secretary of
the Corporation. The cost of preparing, assembling, printing, mailing and
soliciting proxies, and any additional material which the Corporation may
furnish shareholders in connection with the Annual Meeting, will be borne by
the Corporation. In addition to the use of the mails, certain directors,
officers and employees of the Corporation and the Bank may solicit proxies
personally, by telephone, telegraph and telecopier. Arrangements will be made
with brokerage houses and other custodians, nominees and fiduciaries to
forward proxy solicitation material to the beneficial owners of stock held of
record by these persons and, upon request therefor, the Corporation will
reimburse them for their reasonable forwarding expenses.
1
<PAGE>
REVOCABILITY OF PROXY
- ----------------------
A shareholder who returns a Proxy may revoke the Proxy at any time before
it is voted only: (1) by giving written notice of revocation to William B.
Zimmerman, Secretary, Cardinal Bancorp, Inc., 140 East Main Street, Everett,
Pennsylvania 15537; (2) by executing a later-dated Proxy and giving written
notice thereof to the Secretary of the Corporation; or (3) by voting in person
after giving written notice to the Secretary of the Corporation.
VOTING SECURITIES, RECORD DATE and QUORUM
- -------------------------------------------
At the close of business on March 3, 1997, the Corporation had outstanding
990,000 shares of common stock, par value $.50 per share, the only authorized
class of stock (the "Common Stock").
Only holders of Common Stock of record at the close of business on March
3, 1997, will be entitled to notice of and to vote at the Annual Meeting.
Cumulative voting rights do not exist with respect to the election of
directors. On all matters to come before the Annual Meeting, each share of
Common Stock is entitled to one vote. Proposals to be voted upon at the
Annual Meeting must receive the affirmative vote of a majority of shares voted
at the meeting to be binding upon the Corporation.
Under Pennsylvania law and the By-laws of the Corporation, the presence
of a quorum is required for each matter to be acted upon at the Annual
Meeting. Pursuant to Article 3, Section 3.1, of the By-laws of the
Corporation, the presence, in person or by proxy, of shareholders entitled to
cast at least a majority of the votes which all shareholders are entitled to
cast shall constitute a quorum for the transaction of business at the Annual
Meeting. Votes withheld and abstentions will be counted in determining the
presence of a quorum for the particular matter. Broker non-votes will not be
counted in determining the presence of a quorum for the particular matter as
to which the broker withheld authority.
Assuming the presence of a quorum, the two nominees for director
receiving the highest number of votes cast by shareholders entitled to vote
for the election of directors shall be elected. Votes withheld from a nominee
and broker non-votes will not be cast for such nominee.
Assuming the presence of a quorum, the affirmative vote of a majority of
all votes cast by shareholders is required for the ratification of the
selection of independent auditors. Abstentions and broker non-votes are not
deemed to constitute "votes cast" and therefore do not count either for or
against such ratification. Abstentions and broker non-votes, however, have
the practical effect of reducing the number of affirmative votes required to
achieve a majority for such matter by reducing the total number of shares
voted from which the required majority is calculated.
PRINCIPAL BENEFICIAL OWNERS OF THE CORPORATION'S COMMON STOCK
PRINCIPAL OWNERS
- ------------------
As of March 3, 1997, there are no persons who own of record or who are
known by the Board of Directors to be the beneficial owner of more that five
percent (5%) of the Corporation's outstanding Common Stock.
BENEFICIAL OWNERSHIP BY OFFICERS, DIRECTORS AND NOMINEES
- ----------------------------------------------------------
The following table sets forth as of March 3, 1997, the amount and
percentage of the Common Stock beneficially owned by each officer, each
director, each nominee and all officers and directors of the Corporation as a
group. The number of shares reported reflects a two for one stock split
effected in the form of a 100% stock dividend declared October 16, 1996.
2
<PAGE>
<TABLE>
<CAPTION>
Name of Individual Amount and Nature of Percent of
or Identity of Group Beneficial Ownership (1) (2) of Class (14)
<S> <C> <C>
Donald W. DeArment (4) 22,400 (6) 2.24%
Darrell Dodson (5) 12,900 (7) 1.29%
Merle W. Helsel (3) 1,192 (8) --
Ray E. Koontz (5) 13,400 (9) 1.34%
Clyde R. Morris (4) 31,000 (10) 3.11%
Robert E. Ritchey (3) 23,600 (11) 2.36%
James C. Vreeland (3) 12,100 (12) 1.21%
William B. Zimmerman (4) 13,120 (13) 1.31%
All Officers and Directors
as a Group (9 persons) (15) 129,973 (16) 12.43%
</TABLE>
_____________________
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in the
General Rules and Regulation of the Securities and Exchange Commission and may
include securities owned by or for the individual's spouse and minor children
and any other relative who has the same home, as well as securities to which
the individual has or shares voting or investment power or has the right to
acquire beneficial ownership within sixty (60) days after March 3, 1997.
Beneficial ownership may be disclaimed as to certain of the securities.
(2) Information furnished by the Directors, Officers and the Corporation.
(3) Class A Director whose term expires in 1998.
(4) Class B Director whose term expires in 1999.
(5) A Nominee for Class C Director whose term expires in 2000 and a
current Class C Director whose term expires in 1997.
(6) Includes 4,000 shares of Common Stock held individually by Mr.
DeArment; 10,400 shares of Common Stock held individually by his spouse; and
unexercised Stock Options for 8,000 shares of Common Stock which are currently
exercisable. In calculating the tabulated percent of class, the additional
8,000 shares were added to the shares of Common Stock currently held by Mr.
DeArment and to the total outstanding shares assuming all outstanding options
held by Mr. DeArment were exercised.
(7) Includes 4,900 shares of Common Stock held individually by Mr.
Dodson; and unexercised Stock Options for 8,000 shares of Common Stock which
are currently exercisable. In calculating the tabulated percent of class, the
additional 8,000 shares were added to the shares of Common Stock currently
held by Mr. Dodson and to the total outstanding shares assuming all
outstanding options held by Mr. Dodson were exercised.
(8) Includes 900 shares of Common Stock held jointly by Mr. Helsel with
his spouse and 292 shares (rounded to the nearest share) beneficially owned
individually by Mr. Helsel under the Cardinal Bancorp, Inc. Employee Stock
Ownership Plan.
(9) Includes 5,200 shares of Common Stock held individually by Mr.
Koontz; 200 shares of Common Stock held jointly with his spouse; and
unexercised Stock Options for 8,000 shares of Common Stock which are currently
exercisable. In calculating the tabulated percent of class, the additional
8,000 shares were added to the shares of Common Stock currently held by Mr.
Koontz and to the total outstanding shares assuming all outstanding options
held by Mr. Koontz were exercised.
3
<PAGE>
(10) Includes 200 shares of Common Stock held individually be Mr. Morris;
22,800 shares of Common Stock held as tenant in common with his spouse; and
unexercised Stock Options for 8,000 shares of Common Stock which are currently
exercisable. In calculating the tabulated percent of class, the additional
8,000 shares were added to the shares of Common Stock currently held by Mr.
Morris and to the total outstanding shares assuming all outstanding options
held by Mr. Morris were exercised.
(11) Includes 1,000 shares of Common Stock held individually by Mr.
Ritchey; 14,600 held individually by his spouse; and unexercised Stock
Options for 8,000 shares of Common Stock which are currently exercisable. In
calculating the tabulated percent of class, the additional 8,000 shares were
added to the shares of Common Stock currently held by Mr. Ritchey and to the
total outstanding shares assuming all outstanding options held by Mr. Ritchey
were exercised.
(12) Includes 4,000 shares of Common Stock held individually by Mr.
Vreeland; 100 shares of Common Stock held individually by his spouse; and
unexercised Stock Options for 8,000 shares of Common Stock which are currently
exercisable. In calculating the tabulated percent of class, the additional
8,000 shares were added to the shares of Common Stock currently held by Mr.
Vreeland and to the total outstanding shares assuming all outstanding options
held by Mr. Vreeland were exercised.
(13) Includes 4,100 shares of Common Stock held individually by Mr.
Zimmerman; 320 shares of Common Stock held individually by his spouse; 200
shares of Common Stock held by Zimmerman's Hardware & Supply Company, Inc.;
500 shares of Common Stock held by Zimmerman's American Hardware; and
unexercised Stock Options for 8,000 shares of Common Stock which are currently
exercisable. In calculating the tabulated percent of class, the additional
8,000 shares were added to the shares of Common Stock currently held by Mr.
Zimmerman and to the total outstanding shares assuming all outstanding options
held by Mr. Zimmerman were exercised.
(14) Less than one percent unless otherwise indicated.
(15) Ted J. Chwatek is a senior officer of the Corporation, but he is not
a member of the Board of Directors. Mr. Chwatek beneficially owns
individually 261 shares (rounded to the nearest share) of Common Stock under
the Cardinal Bancorp, Inc. Employee Stock Ownership Plan.
(16) The percent of class assumes all outstanding options issued to the
directors and officers have been exercised and, therefore, on a pro forma
basis, 1,046,000 shares of Common Stock would be outstanding.
ELECTION OF DIRECTORS
In accordance with the By-laws of the Corporation and actions of the
Board of Directors, at the 1997 Annual Meeting, two (2) Class C Directors
shall be elected to serve for a three-year term and until their successors are
elected and qualified. The By-laws provide for a classified Board of
Directors with staggered three-year terms of office.
Unless otherwise instructed, the Proxyholders will vote the Proxies
received by them for the election of the two nominees named below. If any
nominee should become unavailable for any reason, Proxies will be voted in
favor of a substitute nominee as the Board of Directors of the Corporation
shall determine. The Board of Directors has no reason to believe that the
nominees named will be unable to serve, if elected. Any vacancy occurring on
the Board of Directors of the Corporation, for any reason, may be filled by a
majority of the directors then in office until the expiration of the term of
the vacancy.
There is no cumulative voting for the election of directors. Each share
of Common Stock is entitled to cast only one vote for each nominee. For
example, if a shareholder owns ten shares of Common Stock, he or she may cast
up to ten votes for each of the directors in the class to be elected.
4
<PAGE>
<TABLE>
INFORMATION AS TO NOMINEES AND DIRECTORS
The following table contains certain information with respect to nominees
for Class C Director whose term expires in 2000 and current Class C Directors
whose term expires in 1997 and the Class A Directors and Class B Directors
whose terms expire in 1998 and 1999, respectively:
<CAPTION>
Age as of Principal Occupation for Director
Since
March 3, Past Five Years and Position Corporation/
Name 1997 Held with Corporation and Bank Bank
NOMINEES FOR CLASS C DIRECTOR WHOSE TERMS EXPIRE IN 2000
AND
CURRENT CLASS C DIRECTORS
WHOSE TERM EXPIRES IN 1997
<S> <C> <C> <C>
Darrell Dodson 57 Retired, formerly Partner of Dodson 1990/1990
(2,3,4) Brothers Sawmill
Ray E. Koontz 64 Assistant Secretary of the Corporation 1987/1977
(2,3,4,5) and the Bank - Retired, formerly
President/CEO of the Corporation and
the Bank (1977-1993)
<CAPTION>
CLASS A DIRECTORS
WHOSE TERM EXPIRES IN 1998
<S> <C> <C> <C>
Merle W. Helsel 44 President and Chief Executive Officer of 1996/1996
(1,2,3,5,6,7) the Corporation and the Bank; formerly
Vice President of the Corporation and/or
the Bank (1988-1996)
Robert E. Ritchey 58 Treasurer, Curry Supply Company, 1987/1987
(3,5) Inc.
James C. Vreeland 57 Administrator and Chief Executive 1987/1984
(3,7) Officer of Memorial Hospital of
Bedford County
<CAPTION>
CLASS B DIRECTORS
WHOSE TERM EXPIRES IN 1999
<S> <C> <C> <C>
Donald W. DeArment 62 President and Chief Executive Officer 1987/1985
(1,2,3,5,6) of both DeArment Insurance Associates,
Inc. and Friends Cove Mutual Insurance
Company - Vice Chairman of the
Corporation and the Bank
Clyde R. Morris* 68 President of Morris International, 1987/1978
Inc. and Chairman of the Board
of the Corporation and the Bank
5
<PAGE>
William B. Zimmerman 60 President and Chief Executive Officer 1987/1986
(1,2,3,4,5,7) Zimmerman Hardware and Supply Co.,
Inc. - Secretary of the Corporation
and the Bank
* Mr. Clyde R. Morris is an ex-officio member of all committees of the
Bank.
</TABLE>
- -----------------------
(1) Member of the Executive Committee of the Bank. This committee meets on
an as-needed basis between meetings of the Board to decide any issues and
solve any problems that require attention. Mr. Morris is chairman of this
committee. The committee did not meet in 1996.
(2) Member of the Directors Loan Committee of the Bank. This committee
meets on an as-needed basis between meetings of the Board to approve new
loans, renewals, lines of credit and letters of credit of customers whose
aggregate debt exceeds $200,000 and the renewal of all classified loans
regardless of amount. Mr. Koontz is chairman of this committee. This
committee met thirty-three (33) times in 1996.
(3) Member of the Asset/Liability Committee of the Bank. This committee
meets monthly as an adjunct to the Board of Directors meeting to evaluate the
Bank's balance of assets to liabilities and to evaluate the Bank's interest
rate sensitivity, interest rate spread and ratios of performing assets. All
directors plus Mr. Chwatek, who is not a director, make up this committee.
Mr. Helsel is chairman of this committee. This committee met twelve (12)
times in 1996.
(4) Member of the Audit Committee of the Bank. This committee insures the
review of significant audit and accounting principles, policies and
procedures, reviews the performance of internal audit procedures, and reviews
reports of examination from regulatory authorities. The committee also
recommends to the Board of Directors the engagement of an independent
certified public account. Mr. Dodson is chairman of this committee. This
committee met four (4) times in 1996.
(5) Member of the Compliance & Problem Loan Committee of the Bank. This
committee evaluates and reviews the activities of the Bank for compliance with
laws, rules and regulations. In addition, it reviews the action plans for all
classified or problem loans to insure that actions taken are consistent with
sound lending practices. In addition to the directors who serve on the
committee, Mr. Chwatek and two bank officers also serve on this committee,
with Mr. Chwatek chairing the committee. The committee met four (4) times in
1996.
(6) Member of the Investment Review Committee of the Bank. This committee
evaluates and reviews investment strategies utilized in purchasing and selling
investment securities and approves investment transactions. Mr. Morris is
chairman of the committee. The committee met four (4) times in 1996.
(7) Member of the Human Resources Committee of the Bank. This committee
reviews major changes and proposals relating to the personnel and human
relations function of the Bank. Mr. Zimmerman is the chairman of this
committee. In addition to the directors who serve on the committee, Mr.
Chwatek also serves on this committee. The committee did not meet in 1996.
The aforementioned committees are committees of the Bank and not of the
Corporation.
During 1996, the Bank's Board of Directors held twelve (12) meetings.
During 1996, the Board of Directors of the Corporation held ten (10) meetings.
6
<PAGE>
Each of the Directors attended at least seventy-five percent (75%) of the
combined total number of meetings of the Corporation's and Bank's Board of
Directors and of the committees of which he is a member.
The Audit Committee, composed of Chairman Dodson, Mr. Koontz, Mr. Morris
and Mr. Zimmerman, represents both the Bank and the Corporation to insure
compliance with significant accounting principles and auditing policies and
procedures, to review the performance of internal audit procedures and to
address reports of examination from regulatory authorities. The committee
also recommends to the Board of Directors the engagement of an independent
certified public accountant. As reported under the section delineating Bank
committees, the Audit Committee met four (4) times during 1996. The
Corporation does not have a compensation or a nominating committee, but sits
as a total body to consider matters of compensation and nominations.
A shareholder who desires to propose an individual for consideration by
the Board of Directors as a nominee for director should submit a proposal in
writing to the Secretary of the Corporation in accordance with Section 10.1 of
the Corporation's By-laws. Any shareholder who intends to nominate any
candidate for election to the Board of Directors must notify the Secretary of
the Corporation in writing not less than sixty (60) days prior to the date of
any meeting of shareholders called for the election of directors.
BOARD OF DIRECTORS INTERLOCKS AND INSIDER PARTICIPATION
The Corporation does not have a compensation committee, but the Board of
Directors sits as a total body to consider matters of compensation. Although
Mr. Helsel is an executive officer and member of the Board of Directors, he
does not participate in setting the level of compensation he receives.
EXECUTIVE COMPENSATION
Shown below is information concerning the annual compensation for
services in all capacities to the Corporation and the Bank for the fiscal
years ended December 31, 1996, 1995 and 1994 paid to the Corporation's Chief
Executive Officer and the former Chief Executive Officer. No other executive
officers of the Corporation or the Bank had total annual salary and bonus
exceeding $100,000.
<TABLE>
Summary Compensation Table
----------------------------
<CAPTION>
Annual Compensation
-------------------
<S> <C> <C> <C>
(a) (b) (c) (d) (e)
Other
Annual
Name and Principal Salary(1) Bonus Compensation
Position Year ($) ($) ($)
Merle W. Helsel 1996 $ 58,923 $21,600 --
President/CEO
1995 $ 55,935 $20,000 --
1994 $ 52,946 $10,000 --
James B. Bexley 1996 $135,011 $36,000 --
President/CEO
1995 $135,198 $40,000 --
1994 $130,130 $20,000 --
<CAPTION>
Long-Term Compensation
-----------------------
Awards Payouts
<S> <C> <C> <C> <C>
(a) (b) (f) (g) (h) (i)
Restricted Securities
Stock Underlying LTIP All Other
Name and Principal Awards Options/SARs Payouts Compensation
Position Year ($) (#) ($) ($)
Merle W. Helsel 1996 -- -- -- $ 834 (2)
President/CEO
1995 -- -- -- $ 434 (2)
1994 -- -- -- --
James B. Bexley 1996 -- 6,000 (5) -- $ 280,321 (3)
President/CEO
1995 -- 6,000 (5) -- $ 2,500 (4)
1994 -- 6,000 (5) -- --
</TABLE>
- ------------------------------------
(1) Includes fees received and fees deferred for attendance at Board of
Directors' meetings.
(2) Reflects contribution to defined contribution plan.
(3) Includes bonus of $1,667 earned as member of Board of Directors and
amounts received pursuant to an Agreement entered into in conjunction with Mr.
Bexley's retirement on December 9, 1996. Pursuant to the terms of the
Agreement, the Corporation and the Bank agreed to pay Mr. Bexley $278,654,
with applicable taxes withheld. The total expense of such payments was
accrued in 1996.
(4) Includes bonus of $1,750 earned as member of Board of Directors and
contribution of $750 to defined contribution plan.
(5) Reflects adjustment for two for one stock split effected in the form of a
100% stock dividend declared October 16, 1996.
7
<PAGE>
<TABLE>
Option/SAR Grants in Last Fiscal Year
-------------------------------------
<CAPTION>
Individual Grants
- ----------------------------------------------------------------
<S> <C> <C> <C>
(a) (b) (c) (d)
Number % of Total
of Securities Options/
Underlying SARs
Options/ Granted to
SARs Employees Exercise or
Granted in Fiscal Base Price
Name (#) Year ($/Sh)
- --------------------------------------------------------------------------
James B. Bexley 4,000 (1) 66.7% $16.81
President/CEO 2,000 (1) 33.3% $17.095
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates Alternative to
of Stock Price Appreciation (f) and (g):
for Option Term Grant Date Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(e) (f) (g) (h)
Grant Date
Expiration Present
Date 5% ($) 10% ($) Value ($)
- ------------------------------------------------------------------------------
James B. Bexley 2/14/06 $42,280 (2) $107,160 (2) --
President/CEO 4/10/06 $21,510 (3) $ 54,490 (3) --
</TABLE>
- ------------------------
(1) Option is exercisable at any time prior to the expiration date shown
above. Reflects adjustment for two for one stock split effected in the form
of a 100% stock dividend declared October 16, 1996.
(2) The assumed annual rate of appreciation of 5% and 10% would result in a
price of the Corporation's stock increasing to $27.38 per share and $43.60 per
share.
(3) The assumed annual rate of appreciation of 5% and 10% would result in a
price of the Corporation's stock increasing to $27.85 per share and $44.34 per
share.
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
- -----------------------------------------------------------------------------
<CAPTION>
(a) (b) (c)
Shares Acquired Value Realized
Name on Exercise (#) ($)
- -------------------------------------------------------
<S> <C> <C>
James B. Bexley -- --
President/CEO
<CAPTION>
(d) (e)
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at FY-End In-the-Money Options/
(#) SARs at FY-End ($)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ------------------------------------------------------------------------
<S> <C> <C>
James B. Bexley 24,000/0 $104,840/0
President/CEO
</TABLE>
RETIREMENT PLANS
- -----------------
The Corporation does not have a retirement or pension plan. The Bank,
however, maintains a non-contributory retirement plan (the "Plan"). An
employee does not contribute to the Plan. An employee is fully vested after
five years of service. There is no partial vesting. Normal retirement is at
sixty-five (65) years of age. The normal retirement benefit is based upon
the average of an employee's last five years of salary on a monthly basis.
The following pension table sets out the estimated annual benefits:
<TABLE>
ESTIMATED ANNUAL BENEFITS
<CAPTION>
Average Base Salary
Last 5 Years 10 20 25 30 35
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 40,000 $ 5,670 $11,340 $14,175 $17,010 $19,845
60,000 8,670 17,340 21,675 26,010 30,345
80,000 11,670 23,340 29,175 35,010 40,845
100,000 14,670 29,340 36,675 44,010 51,345
120,000 17,670 35,340 44,175 53,010 61,845
150,000 22,170 44,340 55,425 66,510 77,595
180,000 26,670 53,340 66,675 80,010 93,345
8
<PAGE>
Compensation covered by the Plan in computing the normal retirement
benefit is the basic monthly compensation paid to a participant, excluding any
amounts paid as bonus, commission, overtime compensation, contributions to any
benefit plan or any other supplemental compensation. Covered compensation is
represented in column (c) "Salary" in the Summary Compensation Table set
forth above but is limited to amounts received as an employee of the Bank.
Mr. Bexley had three years of credited service and four years of vested
service upon retirement and, therefore, benefits under the Plan were not
vested at his retirement. Mr. Helsel currently has 11.5 years of credited
service.
The formula to compute a normal retirement benefit is as follows (based
upon a hypothetical employee with twenty years of service and an average
monthly salary of $2,000):
$ 5.50 (1% of first $550 of average monthly salary)
21.75 (1 1/2% of average monthly salary over $550)
----------
$ 27.25 (Total)
x 20 (Times number of years of service)
----------
$ 545.00 (Total monthly retirement benefit)
----------
The Plan has an early retirement feature at 55 years of age which
provides for a deduction of 1/2% off the normal retirement benefit for each
month's difference between early retirement and the age of 65. For example,
using the above computation for an employee with 20 years of service and a
$2,000 average monthly salary who decides to retire at the age of 60, there
are 60 months between the ages of 60 and 65. 60 months multiplied by 1/2% per
month yields 30%. Therefore, such an employee would receive 70% of his normal
retirement benefit or $381.50 ($545.00 x 70%).
During 1996, the Bank was not required to and did not contribute to the
Plan. During 1996, there were ninety-seven (97) participants in the Plan.
SUPPLEMENTAL RETIREMENT PLAN
- ----------------------------
The Bank has a non-qualified supplemental retirement plan for the benefit
of Mr. Ray E. Koontz, who retired as President and Chief Executive Officer of
the Corporation and the Bank in April of 1993. In addition to Mr. Koontz's
normal retirement benefits, on May 1, 1993 the Bank began paying Mr. Koontz
the sum of One Thousand Dollars per month and will pay that amount for a total
period of 120 consecutive months. In the event of the death of Mr. Koontz
prior to completion of the payments under the plan, the remaining monthly
payments will be made to the beneficiary named by Mr. Koontz. Total benefits
payable to Mr. Koontz or his beneficiary under the plan are $120,000.
COMPENSATION OF DIRECTORS
- ---------------------------
Directors are paid Five Hundred Dollars ($500) per month for attending
all meetings of the Board of Directors of the Bank. Directors do not receive
remuneration for attendance at committee meetings. If a director misses no
more than two (2) meetings in a year, the director's total aggregate cash
compensation is $6,000. During 1996, the Bank also offered directors the
right to defer receipt of fees earned as a director under Deferred Income
Agreements which provide benefits based upon the structure of fees paid
directors who elect not to defer receipt of fees. Additionally, in 1996 each
director earned a bonus in the amount of $1,667 based upon the performance of
the Bank, which amount was also subject to a deferral election. In the
aggregate, expense of directors' fees accrued, paid or deferred for 1996
totalled $57,279 for all Board of Directors' meetings and committee meetings
attended.
In addition to amounts earned by directors discussed above, a non-
qualified, ten-year stock option of Two Thousand (2,000) shares of Cardinal
Bancorp, Inc. Common Stock (after adjustment for a two for one stock split
effected in the form of a 100% stock dividend declared October 16, 1996) was
granted to each director in each year 1993 through 1996. Such options are
exercisable at any time during a ten year period commencing on the grant date
at an exercise price equal to the market value of the Common Stock on the
grant date. Each of the current directors with the exception of Mr. Helsel,
have received option grants totalling 8,000 shares. Directors received no
remuneration for attendance at Board of Directors meetings of the Corporation.
9
<PAGE>
AGREEMENTS WITH JAMES B. BEXLEY
- ---------------------------------
The Corporation and the Bank entered into a three-year employment
agreement with James B. Bexley, the Corporation's and the Bank's former
President and Chief Executive Officer, which began February 15, 1993, and
would have ended February 14, 1996. The Corporation and the Bank replaced the
former agreement with a new agreement (the "Agreement") on November 15, 1994,
which extended to February 14, 1999. Under the terms of the Agreement, Mr.
Bexley was to serve as President and Chief Executive Officer of the
Corporation and the Bank and was also a member of the Corporation's and the
Bank's Board of Directors.
The Agreement specified Mr. Bexley's position and duties, compensation,
benefits, indemnification, and termination. The Agreement also contained a
non-competition and a confidentiality provision which inured to the benefit of
the Corporation and the Bank and a "Change of Control" provision which
entitled Mr. Bexley to certain payments and benefits if a change of control,
as defined in the Agreement, occurred. This provision provided, among other
things, that when "any person" , as defined therein, obtained the beneficial
ownership of at least 50% of the Corporation's Common Stock, Mr. Bexley may
have terminated his employment for "Good Reason". In that event, Mr. Bexley
would be entitled to his full annual direct salary from the date of
termination through the last day of the Agreement (not to exceed three years)
or an amount equal to his then current annual direct salary for a 12 month
period, whichever was greater.
The Agreement also contained a provision allowing the Corporation and the
Bank to terminate Mr. Bexley's employment for "Cause." Additionally, the
Agreement provided that if Mr. Bexley's employment was terminated by the
Corporation or the Bank other than for "Cause" as defined therein, Mr. Bexley
was entitled to his full annual direct salary from the date of termination
through the last day of the Agreement (not to exceed three years) or an amount
equal to his then current annual direct salary for a 12 month period,
whichever was greater. On December 19, 1995, the Board of Directors set an
annual salary during 1996 for Mr. Bexley of $135,000 effective February 15,
1996. Mr. Bexley also received customary employee benefits, including life,
disability and health insurance.
On December 9, 1996, Cardinal Bancorp, Inc. and its subsidiary, First
American National Bank of Pennsylvania and James B. Bexley entered into an
Agreement, the effect of which was to provide the terms of Mr. Bexley's
retirement from the Corporation and the Bank as President and Chief Executive
Officer as well as Mr. Bexley's resignation from the Board of Directors of
each of the Corporation and the Bank. Pursuant to the terms of the Agreement,
the Corporation and the Bank agreed to pay Mr. Bexley $278,654.14, with
applicable taxes withheld, in two separate payments. The first payment of
$135,000.00, less applicable deductions, was paid in December, 1996; the
second payment of $143,654.14, less applicable deductions, was paid in
January, 1997. In addition to the cash amounts paid to Mr. Bexley, the
Corporation agreed to provide certain health and life insurance benefits to
Mr. Bexley through February 14, 1999. The present value of the cost of such
benefits at the time the Agreement was entered into was $14,524.75.
During his employment, Mr. Bexley had been granted ten year non-qualified
incentive stock options totalling 16,000 shares (adjusted for the stock split
discussed above) of the Corporation's Common Stock. Additionally, as a member
of the Corporation's and the Bank's Board of Directors, Mr. Bexley had been
granted additional ten year non-qualified incentive stock options of 8,000
shares of the Corporation's Common Stock.
CERTAIN TRANSACTIONS
There have been no material transactions between the Corporation and the
Bank nor any material transactions proposed with any director or executive
officer of the Corporation and the Bank or any associate of the foregoing
persons. The Corporation and the Bank have had, and intend to continue to
have, banking and financial transactions in the ordinary course of business
with directors and officers of the Corporation and the Bank and their
associates on comparable terms and with similar interest rates as those
prevailing from time to time for other customers of the Corporation and the
Bank.
10
<PAGE>
Total loans outstanding from the Corporation and the Bank at December 31,
1996, to the Corporation's and the Bank's officers and directors as a group
and members of their immediate families and companies in which they had an
ownership interest of 10% or more was $507,796 or approximately 3.34% of the
total equity capital of the Corporation. Loans to such persons were made in
the ordinary course of business, were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and did not involve more than the
normal risk of collectibility or present other unfavorable features. The
largest aggregate amount of indebtedness outstanding at any time during fiscal
year 1996 to such group was $809,673. The aggregate amount of indebtedness
outstanding as of the latest practicable date, February 28, 1996, to the above
described group was $572,046.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
----------
requires the Corporation's officers and directors, and persons who own more
than ten percent (10%) of the registered class of the Corporation's equity
securities, to file reports of ownership and change in ownership with the
Securities and Exchange Commission (SEC). Officers, directors and greater
than ten percent (10%) shareholders are required by SEC regulations to furnish
the Corporation with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required from those persons, the Corporation believes that during the period
January 1, 1996 through December 31, 1996, its officers and directors were in
compliance with all filing requirements applicable to them with the exception
of one (1) report covering one (1) transaction filed late by each of the
following individuals who were directors of the Corporation during 1996: Mr.
James B. Bexley; Mr. Donald W. DeArment; Mr. Darrell Dodson; Mr. Ray E.
Koontz; Mr. Clyde R. Morris; Mr. Robert E. Ritchey; Mr. James C. Vreeland; and
Mr. William B. Zimmerman. Each of the individuals are directors of the
Corporation with the exception of Mr. Bexley, who resigned from the Board of
Directors in December of 1996.
PRINCIPAL OFFICERS OF THE CORPORATION
The following table sets forth selected information about the principal
officers of the Corporation, each of whom is elected by the Board of Directors
of the Corporation and each of whom holds office at the discretion of the
Board of Directors, as of March 3, 1997. The number of shares reported
reflects a two for one stock split effected in the form of a 100% stock
dividend declared October 16, 1996.
</TABLE>
<TABLE>
<CAPTION>
Bank Number of Age as of
Held Officer Shares Bene- March 3,
Name & Position Since Since ficially Owned 1997
- ---------------- ------ ------ --------------- ----------
<S> <C> <C> <C> <C>
Clyde R. Morris 1990 (1) 31,000 (2) 68
Chairman of the Board
Donald W. DeArment 1990 (1) 22,400 (3) 62
Vice Chairman of the Board
Merle W. Helsel 1996 1988 1,192 (4) 44
President & Chief
Executive Officer
Ted J. Chwatek 1993 1991 261 (5) 43
Senior Vice President
& Senior Lending Officer
William B. Zimmerman 1993 (1) 13,120 (6) 60
Secretary/Treasurer
</TABLE>
- ---------------------------
11
<PAGE>
(1) Messrs. Morris, DeArment and Zimmerman are not employees of the
Corporation or the Bank.
(2) Includes 200 shares of Common Stock held individually by Mr. Morris;
22,800 shares of Common Stock held as tenant in common with his spouse; and
unexercised Stock Options for 8,000 shares of Common Stock which are currently
exercisable.
(3) Includes 4,000 shares of Common Stock held individually by Mr.
DeArment; 10,400 shares of Common Stock held individually by his spouse; and
unexercised Stock Options for 8,000 shares of Common Stock which are currently
exercisable.
(4) Includes 900 shares of Common Stock held jointly by Mr. Helsel with
his spouse and 292 shares (rounded to the nearest share) beneficially owned
individually by Mr. Helsel under the Cardinal Bancorp, Inc. Employee Stock
Ownership Plan.
(5) The 261 shares (rounded to the nearest share) of Common Stock is
beneficially owned individually by Mr. Chwatek under the Cardinal Bancorp,
Inc. Employee Stock Ownership Plan.
(6) Includes 4,100 shares of Common Stock held individually by Mr.
Zimmerman; 320 shares of Common Stock held individually by his spouse; 200
shares of Common Stock held by Zimmerman's Hardware & Supply Company, Inc.;
500 shares of Common Stock held by Zimmerman's American Hardware; and
unexercised Stock Options for 8,000 shares of Common Stock which are currently
exercisable.
PRINCIPAL OFFICERS OF THE BANK
The following table sets forth selected information about the principal
officers of the Bank, each of whom is elected by the Board of Directors of the
Bank and each of whom holds office at the discretion of the Board of
Directors, as of March 3, 1997. The number of shares reported reflects a two
for one stock split effected in the form of a 100% stock dividend declared
October 16, 1996.
<TABLE>
<CAPTION>
Bank Number of Age as of
Held Officer Shares Bene- March 1,
Name & Position since Since ficially Owned 1996
- ----------------- ------ ------- -------------- ---------
<S> <C> <C> <C> <C>
Clyde R. Morris 1990 (1) 31,000 (2) 68
Chairman of the Board
Donald W. DeArment 1990 (1) 22,400 (3) 62
Vice Chairman of the Board
Merle W. Helsel 1996 1988 1,192 (4) 44
President & Chief
Executive Officer
Ted J. Chwatek 1993 1991 261 (5) 43
Senior Vice President
& Senior Lending Officer
William B. Zimmerman 1993 (1) 13,120 (6) 60
Secretary/Treasurer
</TABLE>
- -------------------------------
12
<PAGE>
(1) Messrs. Morris, DeArment and Zimmerman are not employees of the
Corporation or the Bank.
(2) Includes 200 shares of Common Stock held individually by Mr. Morris;
22,800 shares of Common Stock held as tenant in common with his spouse; and
unexercised Stock Options for 8,000 shares of Common Stock which are currently
exercisable.
(3) Includes 4,000 shares of Common Stock held individually by Mr.
DeArment; 10,400 shares of Common Stock held individually by his spouse; and
unexercised Stock Options for 8,000 shares of Common Stock which are currently
exercisable.
(4) Includes 900 shares of Common Stock held jointly by Mr. Helsel with
his spouse and 292 shares (rounded to the nearest share) beneficially owned
individually by Mr. Helsel under the Cardinal Bancorp, Inc. Employee Stock
Ownership Plan.
(5) The 261 shares (rounded to the nearest share) of Common Stock is
beneficially owned individually by Mr. Chwatek under the Cardinal Bancorp,
Inc. Employee Stock Ownership Plan.
(6) Includes 4,100 shares of Common Stock held individually by Mr.
Zimmerman; 320 shares of Common Stock held individually by his spouse; 200
shares of Common Stock held by Zimmerman's Hardware & Supply Company, Inc.;
500 shares of Common Stock held by Zimmerman's American Hardware; and
unexercised Stock Options for 8,000 shares of Common Stock which are currently
exercisable.
LEGAL PROCEEDINGS
In the opinion of the management of the Corporation and the Bank, there
are no proceedings pending to which the Corporation or the Bank is a party or
to which their property is subject, which, if determined adversely to the
Corporation or the Bank, would be material in relation to the Corporation's
and the Bank's undivided profits or financial condition. There are no
proceedings pending other than ordinary routine litigation incident to the
business of the Corporation and the Bank. In addition, no material
proceedings are pending or are known to be threatened or contemplated against
the Corporation and the Bank by government authorities.
RATIFICATION OF INDEPENDENT AUDITORS
Unless instructed to the contrary, it is intended that votes will be cast
pursuant to the proxies for the ratification of the selection of S.R.
Snodgrass, A.C., Certified Public Accountants, of Wexford, Pennsylvania as the
Corporation's independent auditors for its 1997 fiscal year. The Corporation
has been advised by S.R. Snodgrass, A.C. that none of its members has any
financial interest in the Corporation. Ratification of S.R. Snodgrass, A.C.,
will require the affirmative vote of a majority of the shares of Common Stock
represented in person or by proxy at the Annual Meeting. S.R. Snodgrass, A.C.
served as the Corporation's independent auditors for the 1996 fiscal year,
assisted the Corporation and the Bank with preparation of their federal and
state tax returns, and provided assistance in connection with regulatory
matters, charging the Bank for such services at its customary billing rates.
These non-audit services were approved by the Corporation's and the Bank's
Boards of Directors after due consideration of the effect of the performance
thereof on the independence of the auditors and after the conclusion by the
Corporation's and the Bank's Boards of Directors that there was no effect on
the independence of the auditors.
In the event the shareholders do not ratify the selection of S.R.
Snodgrass, A.C. as the Corporation's independent auditors for the 1997 fiscal
year, another accounting firm may be chosen to provide independent audit
services for the 1997 fiscal year. S.R. Snodgrass, A.C., is not expected to
be represented at the Annual Meeting. The Board of Directors recommends that
the shareholders vote FOR the ratification of the selection of S.R. Snodgrass,
---
A.C. as the independent auditors for the Corporation for the year ending
December 31, 1997.
13
<PAGE>
On March 21, 1995, the Board of Directors of the Corporation approved a
resolution, based upon the recommendation of the Audit Committee of the Bank
to engage S.R. Snodgrass, A.C., as the Corporation's independent accountant,
replacing Ernst & Young, LLP, its prior independent accountant. Ernst &
Young, LLP's report on the Corporation's consolidated financial statements for
the prior two years contained no adverse opinion or disclaimer of opinion or
qualification or modification as to uncertainty, audit scope or accounting
principles. In connection with the audits of the two most recent fiscal years
and subsequent interim period prior to dismissal there were no disagreements
which, if not resolved to the satisfaction of the former accountant, would
have caused it to make reference in connection with its report to the subject
matter of the disagreement. The Corporation acknowledges that disagreements
required to be reported in response to the preceding sentence include both
those resolved to the former accountant's satisfaction and those not resolved
to the former accountant's satisfaction. The Corporation further acknowledges
that disagreements contemplated by this rule are those which occurred at the
decision-making level; i.e., between personnel of the Corporation responsible
for presentation of its financial statements and personnel of the accounting
firm responsible for rendering its report. There have been no "reportable
events," within the meaning of Item 304 of Regulation S-K.
On March 25, 1995, the Corporation filed a Current Report on Form 8-K
with the Securities and Exchange Commission (the "Commission") to notify the
Commission of the Corporation's change in accountant. The Corporation
provided Ernst & Young, LLP with a copy of the disclosures included in Form 8-
K and requested they furnish the Corporation with a letter addressed to the
Commission stating whether such firm agreed with the statements made by the
Corporation contained in the Form 8-K and, if not, stating the respects in
which the firm disagreed. A letter from Ernst & Young, LLP expressing
concurrence with the statements made in the Form 8-K in response to Item
304(a) of Regulation S-K was filed as an exhibit to the Form 8-K.
ANNUAL REPORT
A copy of the Corporation's Annual Report for the fiscal year ended
December 31, 1996, is enclosed with this Proxy Statement. A representative of
the Corporation will be available to respond to any appropriate questions
concerning the Annual Report presented by shareholders at the Annual Meeting.
SHAREHOLDER PROPOSALS
Any shareholder who, in accordance with and subject to the provisions of
the proxy rules of the Securities and Exchange Commission, wishes to submit a
proposal for inclusion in the Corporation's Proxy Statement for its 1998
Annual Meeting of Shareholders must deliver such proposal in writing to the
President of Cardinal Bancorp, Inc. at the Corporation's principal offices in
Everett, Pennsylvania, no later than Monday, November 10, 1997.
OTHER MATTERS
The Board of Directors does not know of any matters to be presented for
consideration other than the matters described in the accompanying Notice of
Annual Meeting of Shareholders, but if any matters are properly presented, it
is the intention of the persons named in the accompanying Proxy to vote such
matters in accordance with their best judgment.
ADDITIONAL INFORMATION
UPON WRITTEN REQUEST OF ANY SHAREHOLDER, A COPY OF THE CORPORATION'S
REPORT ON FORM 10-K FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1996, INCLUDING THE
FINANCIAL STATEMENTS AND SCHEDULES THERETO, REQUIRED TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 13a-1 UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, MAY BE OBTAINED, WITHOUT CHARGE, FROM MERLE
----------
W. HELSEL, PRESIDENT, CARDINAL BANCORP, INC., 140 EAST MAIN STREET, EVERETT,
PENNSYLVANIA 15537.
14
<PAGE>
CARDINAL BANCORP, INC.
140 EAST MAIN STREET
EVERETT, PENNSYLVANIA 15537-0327
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 8, 1997
----------------------
TO THE SHAREHOLDERS OF CARDINAL BANCORP, INC.:
Notice is hereby given that the Annual Meeting of Shareholders of
CARDINAL BANCORP, INC. (the "Corporation") will be held at 9:30 a.m.,
prevailing time, on Tuesday, April 8, 1997, at The Arena Restaurant (adjacent
to the Quality Inn), Business Route 220 North at Pennsylvania Turnpike Exit
11, Bedford, Pennsylvania 15522 for the following purposes:
1. To elect two (2) Class C Directors to serve for a three-year term and
until their successors are elected and qualified;
2. To ratify the selection of S.R. Snodgrass, A.C., Certified Public
Accountants, of Wexford, Pennsylvania, as the independent auditors for the
Corporation for the year ending December 31, 1997; and
3. To transact such other business as may properly come before the
Annual Meeting and any adjournment or postponement thereof.
In accordance with the By-laws of the Corporation and action of the Board
of Directors, only those shareholders of record at the close of business on
March 3, 1997, will be entitled to notice of, and to vote at, the Annual
Meeting and any adjournment or postponement thereof.
A copy of the Corporation's Annual Report for the fiscal year ended
December 31, 1996, is being mailed with this Notice. Copies of the
Corporation's Annual Report for the 1995 fiscal year may be obtained at no
cost by contacting Merle W. Helsel, President, 140 East Main Street, Everett,
Pennsylvania 15537, telephone (814) 652-2131.
You are urged to mark, sign, date and promptly return your Proxy in the
enclosed envelope so that your shares may be voted in accordance with your
wishes and in order that the presence of a quorum may be assured. The prompt
return of your signed Proxy, regardless of the number of shares you hold, will
aid the Corporation in reducing the expense of additional proxy solicitation.
The giving of such Proxy does not affect your right to vote in person if you
attend the meeting and give written notice to the Secretary of the
Corporation.
By Order of the Board of Directors,
Merle W. Helsel
President/Chief Executive Officer
March 10, 1997
<PAGE>
CARDINAL BANCORP, INC.
140 EAST MAIN STREET
EVERETT, PENNSYLVANIA 15537-0327
PROXY
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 8, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Thomas R. Watters and
Robert F. Lafferty, and each or any of them, proxies of the undersigned, with
full power of substitution, to vote all of the shares of Cardinal Bancorp,
Inc. (the "Corporation") that the undersigned may be entitled to vote at the
Annual Meeting of Shareholders of the Corporation to be held at The Arena
Restaurant (adjacent to the Quality Inn), Business 220 North at the
Pennsylvania Turnpike Exit 11, Bedford, Pennsylvania 15522, on Tuesday, April
8, 1997, at 9:30 a.m., prevailing time, and at any adjournment or postponement
thereof as follows:
1. ELECTION OF CLASS C DIRECTORS TO SERVE FOR A THREE-YEAR TERM
Darrell Dodson, Ray E. Koontz
[ ] FOR all nominees [ ] WITHHOLD AUTHORITY
listed above (except as to vote for all nominees
marked to the contrary listed above
below)
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE
THAT NOMINEE'S NAME ON THE SPACE PROVIDED BELOW.)
______________________________________________________________________________
2. PROPOSAL TO RATIFY THE SELECTION OF S.R. SNODGRASS, A.C., CERTIFIED
PUBLIC ACCOUNTANTS, OF WEXFORD, PENNSYLVANIA, AS THE INDEPENDENT AUDITORS FOR
THE CORPORATION FOR THE YEAR ENDING DECEMBER 31, 1997.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
______________________________________________________________________________
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting and any adjournment or
postponement thereof.
<PAGE>
THIS PROXY, WHEN PROPERLY SIGNED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR ALL NOMINEES LISTED ABOVE AND FOR PROPOSAL 2.
Number of Shares Held of
Record on March 3, 1997: _____________
_______________________________________________________
_______________________________________________________
Signature(s)
Dated: ____________________________, 1997
THIS PROXY MUST BE DATED, SIGNED BY THE SHAREHOLDER AND RETURNED
PROMPTLY TO THE CORPORATION IN THE ENCLOSED ENVELOPE. WHEN SIGNING AS
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL
TITLE. IF MORE THAN ONE TRUSTEE, ALL SHOULD SIGN. IF STOCK IS HELD JOINTLY,
-------------------------
EACH OWNER SHOULD SIGN.
- -----------------------
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,452
<INT-BEARING-DEPOSITS> 14
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,445
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 67,173
<ALLOWANCE> 957
<TOTAL-ASSETS> 129,557
<DEPOSITS> 105,755
<SHORT-TERM> 7,667
<LIABILITIES-OTHER> 911
<LONG-TERM> 0
0
0
<COMMON> 2,759
<OTHER-SE> 12,465
<TOTAL-LIABILITIES-AND-EQUITY> 129,557
<INTEREST-LOAN> 5,929
<INTEREST-INVEST> 3,518
<INTEREST-OTHER> 85
<INTEREST-TOTAL> 9,532
<INTEREST-DEPOSIT> 4,063
<INTEREST-EXPENSE> 4,098
<INTEREST-INCOME-NET> 5,434
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 4,096
<INCOME-PRETAX> 1,871
<INCOME-PRE-EXTRAORDINARY> 1,524
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,524
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.54
<YIELD-ACTUAL> 4.52
<LOANS-NON> 584
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,333
<CHARGE-OFFS> 490
<RECOVERIES> 114
<ALLOWANCE-CLOSE> 957
<ALLOWANCE-DOMESTIC> 647
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 310
</TABLE>
