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, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file Number 0-19209 .
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Cardinal Bancorp, Inc.
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(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)
Registrant's telephone number, including Area Code (814) 652-2131
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.50 Par Value
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(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
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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
----- -----
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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $36,382,500 as of March 16, 1998.
As of March 16, 1998, there were outstanding 990,000 shares of common
stock, $.50 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1997, (the "1997 Annual Report") are incorporated into
Parts I and II.
Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting
of Shareholders (the "1998 Proxy Statement") are incorporated by reference
into Part III.
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INDEX
PART I PAGE
Item 1. Business ........................................ 4
Item 2. Properties ...................................... 10
Item 3. Legal Proceedings ............................... 10
Item 4. Submission of Matters to a Vote
of Security Holders ............................. 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters...................... 11
Item 6. Selected Financial Data.......................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 12
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk................................ 12
Item 8. Financial Statements and Supplementary Data...... 12
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........... 12
PART III
Item 10. Directors and Executive Officers of the
Registrant....................................... 13
Item 11. Executive Compensation........................... 13
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................ 13
Item 13. Certain Relationships and Related
Transactions..................................... 13
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................. 13
SIGNATURES 16
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PART I
ITEM 1. BUSINESS.
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The information required by this Item is incorporated by reference
herein, from page 1 of the 1997 Annual Report of Cardinal Bancorp, Inc. (the
"Registrant" or "Corporation"). Additionally, certain other matters are
discussed below.
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.
At December 31, 1997, the Registrant had 67 full-time and 11
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.
For additional information with respect to the Registrant's business
activities, see Part II, Item 7 hereof.
Supervision and Regulation - Registrant and Subsidiary,
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First American National Bank of Pennsylvania (the "Bank").
----------------------------------------------------------
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 ("BHCA"), and to supervision by the Federal Reserve
Board. Bank holding companies are required to file periodic reports with and
are subject to examination by the Federal Reserve.
The BHCA prohibits the Corporation from acquiring direct or indirect
control of more than 5% of the outstanding shares of any class of voting stock
or substantially all of the assets of any bank or merging or consolidating
with another bank holding company without prior approval of the Federal
Reserve. Such a transaction would also require approval of the Pennsylvania
Department of Banking. Pennsylvania law permits Pennsylvania bank holding
companies to control an unlimited number of banks.
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Additionally, the BHCA prohibits the Corporation from engaging in or from
acquiring ownership or control of more than 5% of the outstanding shares of
any class of voting stock of any company engaged in a nonbanking business
unless such business is determined by the Federal Reserve to be so closely
related to banking as to be a proper incident thereto. The Federal Reserve
can differentiate between nonbanking activities that are initiated by a bank
holding company or subsidiary and activities that are acquired as a going
concern. Federal Reserve approval may be required before the Corporation or
its nonbank subsidiaries may begin to engage in any permissible activity and
before any business engaged in a permissible activity may be acquired. The
BHCA does not place territorial restrictions on the activities of such
nonbanking-related activities. The Corporation and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property, or furnishing of services.
Legislation and Regulatory Changes
----------------------------------
In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act
(the "Interstate Banking Act") was enacted. The Interstate Banking Act
facilitates the interstate expansion and consolidation of banking
organizations (i) by permitting bank holding companies that are adequately
capitalized and adequately managed to acquire banks located in states outside
their home states regardless of whether such acquisitions are authorized under
the law of the host state; (ii) by permitting the interstate merger of banks
subject to the right of individual states to "opt in" or "opt out" of this
authority before that date; (iii) by permitting banks to establish new
branches on an interstate basis provided that such action is specifically
authorized by the law of the host state; (iv) by permitting a bank to engage
in certain agency relationships (i.e., to receive deposits, renew time
deposits, close loans (but not including loan approvals or disbursements),
service loans, and receive payments on loans and other obligations) as agent
for any bank or thrift affiliate, whether the affiliate is located in the same
state or a different state than the agent bank; and (v) by permitting foreign
banks to establish, with approval of the regulators in the United States,
branches outside their "home" states to the same extent that national or state
banks located in the home state would be authorized to do so. One effect of
this legislation will be to permit the Corporation to acquire banks and bank
holding companies located in any state and to permit qualified banking
organizations located in any state to acquire banks and bank holding companies
located in Pennsylvania, irrespective of state law.
Since 1995, the Pennsylvania Banking Code has authorized full interstate
banking and branching under Pennsylvania law. Specifically, the legislation
(i) eliminates the "reciprocity" requirement previously applicable to
interstate commercial bank acquisitions by bank holding companies, (ii)
authorizes interstate
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bank mergers and reciprocal interstate branching into Pennsylvania by
interstate banks, and (iii) permits Pennsylvania institutions to branch into
other states with the prior approval of the Pennsylvania Department of
Banking.
Overall, this federal and state legislation has, as was predicted, had
the effect of increasing consolidation and competition and promoting
geographic diversification in the banking industry.
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.
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
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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. 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.
FDIC Insurance
--------------
The Bank is subject to FDIC deposit insurance assessments. The FDIC has
adopted a risk-related premium assessment system for the Bank Insurance Fund
("BIP"). Under this system, FDIC insurance premiums are assessed based on
capital and supervisory measures.
Under the risk-related premium assessment system, the FDIC, on a
semiannual basis, assigns each institution to one of three capital groups
(well capitalized, adequately capitalized, or undercapitalized) and further
assigns such institution to one of three subgroups within a capital group
corresponding to the FDIC's judgment of its strength based on supervisory
evaluations, including examination reports, statistical analysis, and other
information relevant to gauging the risk posed by the institution. Only
institutions with a total risk-based capital to risk-adjusted assets ratio of
10% or greater, a Tier 1 capital to risk-adjusted assets ratio of 6% or
greater, and a Tier 1 leverage ratio of 5% or greater, are assigned to the
well-capitalized group.
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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
$330,000). 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 1997 and
thereafter is 9.99% and is imposed upon a 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
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The financial services industry in the Corporation's service area is
extremely competitive. The Corporation's competitors within its service area
include multi-bank holding companies, with resources substantially greater
than those of the Company. Many competitor financial institutions have legal
lending limits substantially higher than the Bank's legal lending limit. In
addition, the Bank competes with savings banks, credit unions,
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mortgage companies, leasing companies, finance companies, and other financial
services companies that offer products and services similar to those offered
by the Bank on competitive terms.
The manner in which banking institutions conduct their operations may
change materially as the activities increase in which bank holding companies
and their banking and nonbanking subsidiaries are permitted to engage, and
funding and investment alternatives continue to broaden, although the long-
range effects of these changes cannot be predicted, with reasonable certainty,
at this time. These changes most probably will further narrow the differences
and intensify competition between and among commercial banks, thrift
institutions, and other financial service companies.
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.
As the Year 2000 approaches, regulation of both the Corporation and the
Bank with respect to completing Year 2000 modifications is likely to increase.
A brief discussion of the most recent federal banking agency pronouncements
that affect the Corporation and/or the Bank follows.
In December 1997, the Federal Financial Institutions Examination Council
("FFIEC") issued an interagency statement. The statement indicates that
Senior management and the board of directors should be actively involved in
managing the Corporation's and the Bank's Year 2000 compliance efforts. The
statement also recommended that institutions obtain Year 2000 compliance
certification from vendors followed by appropriate internal testing as well as
comprehensive testing of all internal and external systems. In addition,
contingency plans should be developed for all vendors that service "mission
critical" applications, which are those applications vital to the successful
continuance of a core business activity.
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The Office of the Comptroller of the Currency ("OCC") has also issued an
advisory indicating that Year 2000 preparedness will be factored into its
review of de novo charters, conversions, business combinations and
establishment of federal branches and agencies as well as hardware and
software systems integrations issues related to business combinations.
From time to time, various federal and state legislation is proposed that
could result in additional regulation of, and restrictions on, the business of
the Corporation and the Bank, or otherwise change the business environment.
Management cannot predict whether any of this legislation, if enacted,
will have a material effect on the business of the Corporation.
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.
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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
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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
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
1997 and 1996 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 1997 Annual Report.
<TABLE>
<CAPTION>
1997 1996
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Dividends Dividends
High Low Declared High Low Declared
Quarter Bid Bid Per share Bid Bid Per share
- ------- ----- ----- --------- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
First 20.875 19.25 $.10 17.25 16.25 $.075
Second 23.750 20.00 .11 18.00 17.12 .10
Third 23.500 20.00 .13 18.37 17.12 .10
Fourth 36.750 20.00 .15 19.75 17.75 .10
</TABLE>
As of March 16, 1998, there were 487 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
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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 1998
was $2,526,795 at December 31, 1997.
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
1998, as earnings permit.
ITEM 6. SELECTED FINANCIAL DATA.
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The information required by this Item is incorporated by reference
herein, from pages 3 and 4 of the Registrant's 1997 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 5 through 23 of the Registrant's 1997 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
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MARKET RISK.
------------
The information required by this Item is incorporated by reference
herein, from pages 20 through 23 of the Registrant's 1997 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 through 49 of the Registrant's
1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
------------------------------------
During the Registrant's two most recent fiscal years and the subsequent
interim period, no independent accountant engaged by the Registrant has
resigned, declined to stand for re-election or was dismissed nor has a new
independent accountant been engaged or consulted regarding any accounting,
auditing or financial reporting matter.
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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 1998 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
The information required by this Item is incorporated by reference
herein, from pages 7 through 10 of the Registrant's 1998 Proxy Statement.
Additionally, certain matters are discussed below.
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 Ray E. Koontz,
formerly having held the position of President and CEO of the Registrant,
served on the Board of Directors of the Registrant and Mr. Helsel and Mr.
Koontz participated during 1997 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, Mr. Helsel did not participate 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 1998 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 1998 Proxy Statement.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS
------------------------------------------------------
ON FORM 8-K.
------------
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(a) 1. CARDINAL BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS for the
period ended December 31, 1997:
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.
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
(10) Material Contracts. Executive Employment
Agreement with Merle Helsel
(11) Statement Re: Computation of Per Share
Earnings *
(13) Registrant's 1997 Annual Report to Shareholders
(21) Subsidiaries of the Registrant
(23) Consent of Accountants **
(27)(i) Financial Data Schedule
(27)(ii) Amended Financial Data Schedule for the second
quarter ended June 30, 1996, Form 10-Q
(27)(iii) Amended Financial Data Schedule for the third
quarter ended September 30, 1996, Form 10-Q
(27)(iv) Amended Financial Data Schedule for the year
ended December 31, 1996, Form 10-K
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(27)(v) Amended Financial Data Schedule for the first
quarter ended March 31, 1997, Form 10-Q
(27)(vi) Amended Financial Data Schedule for the second
quarter ended June 30, 1997, Form 10-Q
(27)(vii) Amended Financial Data Schedule for the third
quarter ended September 30, 1997, Form 10-Q
(99) Proxy Statement and Accompanying Notice of Annual Meeting
and Form of Proxy for the 1998 Annual Meeting of
Shareholders
* Incorporated by reference herein from Note 2 of the
Registrant's 1997 Annual Report to Shareholders.
** Incorporated by reference herein from page 24 of the
Registrant's 1997 Annual Report to Shareholders.
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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: March 30, 1998
-------------------------------
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 3/30/98
-------------------------------- ---------
Clyde R. Morris
Chairman of the Board of Directors
and Director
By: /s/ Merle W. Helsel 3/30/98
-------------------------------- ---------
Merle W. Helsel
President, Chief Executive Officer
and Director
(principal executive officer)
By: /s/ Robert F. Lafferty 3/30/98
-------------------------------- ---------
Robert F. Lafferty
Chief Financial Officer
(principal financial and accounting officer)
By: /s/ Donald W. DeArment 3/30/98
-------------------------------- ---------
Donald W. DeArment
Director
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By: /s/ Ray E. Koontz 3/30/98
-------------------------------- ---------
Ray E. Koontz
Director
By: /s/ William B. Zimmerman 3/30/98
-------------------------------- ---------
William B. Zimmerman
Director
By: /s/ Robert E. Ritchey 3/30/98
-------------------------------- ---------
Robert E. Ritchey
Director
By: /s/ James C. Vreeland 3/30/98
-------------------------------- ---------
James C. Vreeland
Director
By: /s/ Darrell Dodson 3/30/98
-------------------------------- ---------
Darrell Dodson
Director
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INDEX TO EXHIBITS
Page Number
in Manually Signed
Original
--------
Exhibit Number
- --------------
3(i) Registrant's Articles of Incorporation, 19
as amended
3(ii) Registrant's Bylaws, as amended 27
(10) Material Contracts. Executive Employment 53
Agreement with Merle Helsel
(11) Statement Re: Computation of Per Share *
Earnings
(13) Registrant's 1997 Annual Report to 64
Shareholders
(21) Subsidiaries of the Registrant 115
(23) Consent of Accountants **
(99) Proxy Statement and Accompanying Notice 116
of Annual Meeting and Form of Proxy
for the 1998 Meeting of Shareholders
* Incorporated by reference herein from Note 2 of the
Registrant's 1997 Annual Report to Shareholders.
** Incorporated by reference herein from page 24 of the
Registrant's 1997 Annual Report to Shareholders.
18
EXHIBIT (3)(i)
--------------
Registrant's Articles of Incorporation,
as amended
<PAGE>
DSCB265 (Rev.81) Please indicate (check one) type
of corporation
ARTICLES OF INCORPORATION [X] DOMESTIC BUSINESS CORPORATION
COMMONWEALTH OF PENNSYLVANIA [ ] DOMESTIC BUSINESS CORPORATION
DEPARTMENT OF STATE CLOSE CORPORATION - COMPLETE BACK
CORPORATION BUREAU
NORTH OFFICE BUILDING [ ] DOMESTIC PROFESSIONAL CORPORATION
HARRISBURG, PA 17120 ENTER BOARD LICENSE NO.
- -----------------------------------------------------------------------
010 Name of Corporation must contain a corporate indicator unless exempt
under 15 P.S. 2908 8)
Cardinal Bancorp, Inc.
- ------------------------------------------------------------------------
011 Address of Registered Office in Pennsylvania (P. O. Box Number not
acceptable)
140 East Main Street
- -------------------------------------------------------------------------
012 City 033 County 013 State 064 Zip
Everett Bedford Pennsylvania 15537 (05)
- -------------------------------------------------------------------------
050 Explain the purpose or purposes of the Corporation
To have unlimited power to engage in and do any lawful act
concerning any or all lawful business for which corporations may be
incorporated under the provisions of the Business Corporation Law of the
Commonwealth of Pennsylvania.
- --------------------------------------------------------------------------
The Aggregate Number of Shares, Classes of Shares and Par Value of Shares
Which the Corporation Shall have Authority to Issue:
Two Million (2,000,000) Shares
040 Number and Class 041 Stated Par Value 042 Total Authorized
of Shares Per Share if any
of Common Stock $.50 $1,000,000
031 Term of Existence
Perpetual
- ------------------------------------------------------------------------
Name and Address of Each Incorporator, and the Number and Class of Shares
Subscribed to by each Incorporator
<TABLE>
<CAPTION>
061,062
060 Name 063, 064 Address (Street, City, State, Zip Code
- -----------------------------------------------------------------------------
<S> <C> <C>
Ray E. Koontz 73 Fifth Avenue, Everett, PA 15537
- -----------------------------------------------------------------------------
C. Clair Winter Crystal Spring, PA 15536
- -----------------------------------------------------------------------------
Jackson E. Bussard R.D.A-4, Box 84, Everett, PA 15537
- -----------------------------------------------------------------------------
Ralph C. Over R.D. #1, Everett, PA 15537
- -----------------------------------------------------------------------------
<CAPTION>
<S> <C>
Number & Class of Shares
Ray E. Koontz 1 sh. Common Stock
- -------------------------------------------------
C. Clair Winter 1 sh. Common Stock
- -------------------------------------------------
Jackson E. Bussard 1 sh. Common Stock
- -------------------------------------------------
Ralph C. Over 1 sh. Common Stock
- -------------------------------------------------
</TABLE>
IN TESTIMONY WHEREOF, THE INCORPORATOR (S) HAS (HAVE) SIGNED AND SEALED
THE ARTICLES OF INCORPORATION THIS twentieth DAY OF November 1986.
--------- --------
Ray E. Koontz /s/ Ralph C. Over /s/
- -------------------- ---------------------
C. Clair Winter /s/ Jackson E. Bussard /s/
- -------------------- ----------------------
<PAGE>
1. The following provisions shall regulate the status of the corporation
as a close corporation:
(a) (Strike out(i) or (ii) below, whichever is not applicable.)
(i) All of the issued shares of the corporation of all classes, exclusive
of treasury shares, shall be held of record by not more than
________________ persons.
(Number not to exceed 30)
(ii) All of the issued shares of the corporation of all classes, exclusive
of treasury shares, shall be held of record by not more than the smaller
of twenty-five "shareholders" within the meaning of Subchapter S of the
Internal Revenue Code of 1954, as amended, or 30 persons.
(b) All of the issued shares of all classes of the corporation shall be
subject to one or more of the restrictions on transfer permitted by
section 613.1 of the Business Corporation Law (15 P.S. Section 1613.1).
(c) The corporation shall make no offering of any of its shares of any
class which would constitute a "public offering" - within the meaning of
the Securities Act of 1933, as amended.
2. (Optional: BCL Section 372B) A person (other than an estate) who is
not an "individual" or who is a "non-resident alien," in either case
within the meaning of the Internal Revenue Code of 1954, as amended
("Code"), shall not be entitled to be a holder of record of shares of the
corporation. Only a person whose consent is currently in effect to the
election of the corporation to bc treated as an electing small business
corporation under Subchapter S of the Code and a shareholder who has not
affirmatively refused to consent to the election within sixty days after
he acquires his stock, shall be entitled to be a holder of record of
shares of the corporation.
3. (Optional: BCL Section 382) The business and affairs of the corporation
shall be managed by the shareholders of the corporation rather than by a
board of directors.
4. (Optional: Section 376B) The status of the corporation as a "close
corporation" within the meaning of the Business Corporation Law shall not
be terminated without the affirmative vote or written consent of (all
holders of) (shareholders holding ________________ of the) shares of all
classes of the corporation. fraction at least two-thirds)
5. (Optional: BCL Section 384B) (Any shareholder) (shareholders holding
________________ of the shares) of the corporation may apply for the
appointment of a provisional director of the corporation in the manner and
upon the circumstances provided by statute.
6. (Optional: BCL Section 386) (Any shareholder) (shareholders holding
_________________ of the shares) of the corporation shall have the right
at will to cause the corporation to be dissolved by proceeding in the
manner provided by statue.
<PAGE>
CARDINAL BANCORP, INC.
ARTICLES OF INCORPORATION
ADDITIONAL ARTICLES
7. No merger, consolidation, liquidation or dissolution of this
corporation nor any action that would result in the sale or other
disposition of all or substantially all of the assets of this corporation
shall be valid unless first approved by the affirmative vote of the
holders of at least seventy-five percent (75%) of the outstanding shares
of Common Stock of this corporation. This Article 7 may not be amended
unless first approved by the affirmative vote of the holders of at least
seventy-five percent (75%) of the outstanding shares of Common Stock of
this corporation.
8. Cumulative voting rights shall not exist with respect to the
election of directors.
9. (a) The Board of Directors may, if it deems it advisable, oppose
a tender or other offer for the corporation's securities, whether the
offer is in cash or in the securities of a corporation or otherwise. When
considering whether to oppose an offer, the Board of Directors may, but is
not legally obligated to, consider any relevant, germane or pertinent
issue; by way of illustration, but not to be considered any limitation on
the power of the Board of Directors to oppose a tender or other offer for
this corporation's securities, the Board of Directors may, but shall not
be legally obligated to, consider any or all of the following:
(i) Whether the offer price is acceptable based on the historical
and present operating results or financial condition of this corporation;
(ii) Whether a more favorable price could be obtained for this
corporation's securities in the future;
(iii) The social and economic effects of the offer or transaction
on this corporation and any of its subsidiaries, employees, depositors,
loan and other customers, creditors, shareholders and other elements of
the communities in which this corporation and any of its subsidiaries
operate or are located;
(iv) The reputation and business practice of the offeror and its
management and affiliates as they would affect the shareholders, employees,
depositors and customers of the corporation and its subsidiaries and the
future value of the corporation's stock;
(v) The value of the securities (if any) which the offeror is
offering in exchange for the corporation's securities, based on an
analysis of the worth of the corporation or other entity whose securities
are being offered;
<PAGE>
CARDINAL BANCORP, INC.
(vi) The business and financial conditions and earnings
prospects of the offeror, including, but not limited to, debt service and
other existing or likely financial obligations of the offeror, and the
possible affect of such conditions upon this corporation and any of its
subsidiaries and the other elements of the communities in which this
corporation and any of its subsidiaries operate or are located;
(vii) Any antitrust or other legal and regulatory issues that
are raised by the offer.
(b) If the Board of Directors determines that an offer should be
rejected, it may take any lawful action to accomplish its purpose,
including, but not limited to, any or all of the following: advising
shareholders not to accept the offer; litigation against the offeror;
filing complaints with all governmental and regulatory authorities;
acquiring the offeror corporation's securities; selling or otherwise
issuing authorized but unissued securities or treasury stock or granting
options with respect thereto; acquiring a company to create an antitrust
or other regulatory problem for the offeror; and obtaining a more
favorable offer from another individual or entity.
10. (a) It is the declared intent and policy of this corporation
and its shareholders that control of this corporation is an asset that
belongs to all shareholders of this corporation and that no shareholder
should have, either directly or indirectly, beneficial ownership of
twenty-five percent (25%) or more of the outstanding shares of this
corporation. Therefore, to carry out the aforementioned intent and
policy, this corporation and its shareholders approve and adopt this
Article 10.
(b) When any person is determined by the Board of Directors to be
the beneficial owner, either directly or indirectly, of twenty-five percent
(25%) or more of the outstanding shares of this corporation (the
"Substantial Shareholder"), then the Board of Directors may issue in its
sole discretion on a pro rata basis to those shareholders of the
corporation who are not affiliated with the Substantial Shareholder
warrants to purchase additional shares of the common stock of this
corporation at a purchase price equivalent to fifty percent (50%) of the
average transaction price of all purchases and sales of the common stock
of this corporation that occurred during the previous twelve month period
and that are known by the Board of Directors. Such warrants shall be
issued without any consideration, shall not be assignable and shall expire
six (6) months from the date of their issuance. The Board of Directors
shall have the sole discretion in the determination of the number of
shares of common stock of this corporation that may he purchased pursuant
to such warrants.
(c) The Board of Directors may use, but is not necessarily limited
to, the following indicia to determine "beneficial ownership": the effect
of stock ownership by a person's spouse and minor children; ownership of
shares held by a corporation or foundation of which a Substantial
Shareholder is an officer or affiliate; the extent of a Substantial
Shareholder's ownership of partnership shares; transfers pursuant to
<PAGE>
CARDINAL BANCORP, INC.
divorce; installment purchases; stock warrants, grants and options; control
over the voting power of any stock; the status of a Substantial
Shareholder as trustee, trust beneficiary or settlor of a trust of which
part or all of the corpus is shares of the common stock of this
corporation; and stock dividends.
(d) "Affiliate" of, or a person "affiliated" with, the Substantial
Shareholder, is a person that directly, or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control
with, the Substantial Shareholder.
(e) "Person" means an individual, corporation, partnership,
association, joint stock company, syndicate, trust where the interests of
the beneficiaries are evidenced by a security, an unincorporated
organization, group of persons acting in consort, or any other entity.
"Person" does not mean the Board of Directors of this corporation acting
collectively in its capacity as the Board of Directors. "Person" does
include an individual who is a member of the Board of Directors.
(f) This Article 10 may not be amended unless first approved by the
affirmative vote of the holders of at least seventy-five percent (75%) of
the outstanding shares of common stock of this corporation.
<PAGE>
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE
CORPORATION BUREAU
ARTICLES OF AMENDMENT - DOMESTIC BUSINESS CORPORATION
In compliance with the requirements of 15 Pa.C.S. Section 1915
(relating to articles of amendment), the undersigned business corporation,
desiring to amend its Articles, does hereby certify and state that:
1. The Name of the Corporation is:
Cardinal Bancorp, Inc.
2. The Address, including street and number, of its Registered Office in
this Commonwealth is: (The Department of State is hereby authorized to
correct the following statement to conform to the records of the
Department):
140 East Main Street, Everett, Bedford County, Pennsylvania 15537-0327.
3. The Statute by or under which the Corporation was Incorporated is:
Business Corporation Law of 1933, Act of May 5, 1933, P.L. 364, as
amended.
4. The Date of its Incorporation is:
November 20, 1986
5. The Manner in which the Amendment was Adopted by the Corporation is:
The amendment was duly adopted and proposed to the Shareholders by the
Board of Directors of the Corporation at a Special Meeting of the Board
of Directors of the Corporation duly called and convened and held on July
23, 1991. The amendment was adopted by the Shareholders of the Corporation
pursuant to Section 1914(a) and (b) of the Business Corporation Law of
1988, as amended, at a Special Meeting of the Shareholders duly called and
convened and held pursuant to a Notice of Special Meeting of Shareholders,
Proxy Statement, and Form of Proxy dated August 20, 1991 and first sent
on or about August 20, 1991 by United States Mail, first class postage
prepaid, to the shareholders of record as of the Record Date of August
12, 1991. The Special Meeting of Shareholders was held at 1:30 p.m.,
prevailing time, on Wednesday, September 18, 1991 at The First National
Bank of Everett, 140 East Main Street, Everett, Pennsylvania 15537. The
total number of shares outstanding was 495,000 with each share entitled to
one vote. The total number of shares entitled to vote was 495,000. The
total number of shares voted for the amendment was 360,468 and the total
number of shares voted against the amendment was 4,011 and the total
number of shares abstaining from voting on the
<PAGE>
matter was 2,405. Thus, the amendment was approved and adopted by 72.8% of
the Shareholders, which constitutes a majority of the votes cast by all
Shareholders entitled to vote at the Special Meeting of Shareholders.
6. The Amendment shall be Effective upon filing these Articles of
Amendment with the Commonwealth of Pennsylvania, Department of State.
7. The Amendment adopted by the Corporation, set forth in full, is as
follows:
11. This Corporation specifically opts out and shall not be governed
by Subchapter G, Control-share Acquisitions, and Subchapter H, Disgorgement
by Certain Controlling Shareholders Following Attempts to Acquire Control,
of Chapter 25 of the Business Corporation Law of 1988, as added and
amended by Act 36 of 1990. Subchapter G, Control-share Acquisitions, and
Subchapter H, Disgorgement by Certain Controlling Shareholders Following
Attempts to Acquire Control, of Chapter 25 of the Business Corporation Law
of 1988, as added and amended by Act 36 of 1990, shall not be applicable
to the Corporation.
IN TESTIMONY WHEREOF, the undersigned Corporation has caused these
Articles of Amendment to be signed by a duly authorized officer thereof
and its corporate seal, duly attested by another such officer, to be
hereunto affixed this 18th day of September, 1991.
CARDINAL BANCORP, INC.
Attest:
Jackson E. Bussard /s/ By Ray E. Koontz /s/
- ----------------------------- --------------------------
Jackson E. Bussard, Secretary Ray E. Koontz, President
(CORPORATE SEAL)
EXHIBIT (3)(ii)
---------------
Registrant's Bylaws,
as amended
<PAGE>
BY-LAWS
of
CARDINAL BANCORP, INC.
Article 1
CORPORATION OFFICE
Section 1.1 The Corporation shall have and continuously maintain in
Pennsylvania a registered office which may, but need not, be the same as
its place of business and at an address to be designated from time to
time by the Board of Directors.
Section 1.2 The Corporation may also have offices at such other
places as the Board of Directors may from time to time designate or the
business of the Corporation may require.
Article 2
SHAREHOLDERS MEETINGS
Section 2.1 All meetings of the shareholders shall be held at such
time and place as may be fixed from time to time by the Board of
Directors.
Section 2.2 The annual meeting of the shareholders shall be held on
the second Tuesday in April in each year if not a legal holiday, and if a
legal holiday, then on the next full business day, when they shall elect
a Board of Directors and transact such other business as may properly be
brought before the meeting.
Section 2.3 Special meetings of the shareholders may be called at
any time by the Chairman of the Board, the President, a majority of the
Board of Directors or of its Executive Committee or by shareholders
entitled to cast at least twenty-five percent (25%) of the votes which all
shareholders are entitled to cast at the particular meeting. If such
request is addressed to the Secretary, it shall be signed by the persons
making the same and shall state the purpose or purposes of the proposed
meeting. Upon receipt of any such request, the person or persons making
the request may issue the call.
Section 2.4 Written notice of all meetings other than adjourned
meetings of shareholders, stating the place, date and hour, and, in case
of special meetings of shareholders, the purpose thereof, shall be served
upon, or mailed, postage prepaid, or telegraphed, charges prepaid, at
least ten days before such meeting, unless a greater period of notice is
required by statute or by these By-laws, to each shareholder entitled to
vote thereat at such address as appears on the transfer books of the
Corporation.
<PAGE>
Article 3
QUORUM OF SHAREHOLDERS
Section 3.1 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 on the particular matter shall constitute a quorum
for purposes of considering such matters, and unless otherwise provided by
statute the acts of such shareholders at a duly organized meeting shall be
the acts of the shareholders. If, however, any meeting of shareholders
cannot be organized because of lack of a quorum, those present, in person
or by proxy, shall have the power, except as otherwise provided by
statute, to adjourn the meeting to such time and place as they may
determine, without notice other than an announcement at the meeting, until
the requisite number of shareholders for a quorum shall be present, in
person or by proxy, except that in the case of any meeting called for the
election of directors such meeting may be adjourned only for periods not
exceeding 15 days as the holders of a majority of the shares present, in
person or by proxy, shall direct, and those who attend the second of such
adjourned meetings, although less than a quorum, shall nevertheless
constitute a quorum for the purpose of electing directors. At any
adjourned meeting at which a quorum shall be present or so represented,
any business may be transacted which might have been transacted at the
original meeting if a quorum had been present. The shareholders present,
in person or by proxy, at a duly organized meeting can continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
Article 4
VOTING RIGHTS
Section 4.1 Except as may be otherwise provided by statute or by
the Articles of Incorporation, at every shareholders meeting, every
shareholder entitled to vote thereat shall have the right to one vote for
every share having voting power standing in his name on the books of the
Corporation on the record date fixed for the meeting. No share shall be
voted at any meeting if an installment is due and unpaid thereon.
Section 4.2 When a quorum is present at any meeting the voice vote
of the holders of a majority of the stock having voting power, present,
in person or by proxy, shall decide any question brought before such
meeting except as provided differently by statute or by the Articles of
Incorporation.
Section 4.3 Upon demand made by a shareholder entitled to vote at
any election for directors before the voting begins, the election shall be
by ballot.
<PAGE>
Article 5
PROXIES
Section 5.1 Every shareholder entitled to vote at a meeting of
shareholders or to express consent or dissent to corporate action in
writing without a meeting may authorize another person or persons to act
for him by proxy. Every proxy shall be executed in writing by the
shareholder or his duly authorized attorney in fact and filed with the
Secretary of the Corporation. A proxy, unless coupled with an interest,
shall be revocable at will, notwithstanding any other agreement or any
provision in the proxy to the contrary, but the revocation of a proxy
shall not be effective until notice thereof has been given to the
Secretary of the Corporation. No unrevoked proxy shall be valid after 11
months from the date of its execution, unless a longer time is expressly
provided therein, but in no event shall a proxy, unless coupled with an
interest, be voted after three years from the date of its execution. A
proxy shall not be revoked by the death or incapacity of the maker,
unless before the vote is counted or the authority is exercised, written
notice of such death or incapacity is given to the Secretary of the
Corporation.
Article 6
RECORD DATE
Section 6.1 The Board of Directors may fix a time, not more than 45
days prior to the date of any meeting of shareholders, or the date fixed
for the payment of any dividend or distribution, or the date for the
allotment of rights, or the date when any change or conversion or exchange
of shares will be made or go into effect, as a record date for the
determination of the shareholders entitled to notice of, and to vote at,
any such meeting, or entitled to receive payment of any such dividend or
distribution, or to receive any such allotment of rights, or to exercise
the rights in respect to any such change, conversion or exchange of
shares. In such case, only such shareholders as shall be shareholders of
record on the date so fixed shall be entitled to notice of, or to vote
at, such meeting or to receive payment of such dividend or to receive
such allotment of rights or to exercise such rights, as the case may be,
notwithstanding any transfer of any shares of the books of the Corporation
after any record date fixed as aforesaid. The Board of Directors may close
the books of the corporation against transfers of shares during the whole
or any part of such period, and in such case written or printed notice
thereof shall be mailed at least ten days before closing thereof to each
shareholder of record at the address appearing on the records of the
Corporation or supplied by him to the Corporation for the purpose of
notice. While the stock transfer books of the Corporation are closed, no
transfer of shares shall be made thereon. If no record date is fixed by
the Board of Directors for the determination of shareholders entitled to
receive notice of, and vote at, a shareholders meeting, transferees of
shares which are transferred on the books of the Corporation within ten
days next preceding the date of such meeting shall not be entitled to
notice of or to vote at such meeting.
<PAGE>
Article 7
VOTING LISTS
Section 7.1 The officer or agent having charge of the transfer
books for shares of the Corporation shall make, at least five days before
each meeting of shareholders, a complete alphabetical list of the
shareholders entitled to vote at the meeting, with their addresses and the
number of shares held by each, which list shall be kept on file at the
registered office or principal place of business of the Corporation and
shall be subject to inspection by any shareholder during the entire
meeting. The original transfer books for shares of the Corporation, or a
duplicate thereof kept in this Commonwealth, shall be prima facie evidence
as to who are the shareholders entitled to exercise the rights of a
shareholder.
Article 8
JUDGES OF ELECTION
Section 8.1 In advance of any meeting of shareholders, the Board of
Directors may appoint judges of election, who need not be shareholders, to
act at such meeting or any adjournment thereof. If judges of election are
not so appointed, the Chairman of any such meeting may, and on the
request of any shareholder or his proxy shall, make such appointment at
the meeting. The number of judges shall be one or three. If appointed at
a meeting on the request of one or more shareholders or proxies, the
majority of shares present and entitled to vote shall determine whether
one or three judges are to be appointed. No person who is a candidate for
office shall act as a judge. The judges of election shall do all such
acts as may be proper to conduct the election or vote, and such other
duties as may be prescribed by statute, with fairness to all shareholders,
and if requested by the Chairman of the meeting or any shareholder or his
proxy, shall make a written report of any matter determined by them and
execute a certificate of any fact found by them. If there are three
judges of election, the decision, act or certificate of a majority shall
be the decision, act or certificate of all.
Article 9
CONSENT OF SHAREHOLDERS IN LIEU OF MEETING
Section 9.1 Any action required to be taken at a meeting of the
shareholders, or of a class of shareholders, may be taken without a
meeting, if a consent or consents in writing setting forth the action so
taken shall be signed by all of the shareholders who would be entitled to
vote at a meeting for such purpose and shall be filed with the Secretary
of the Corporation.
<PAGE>
Article 10
DIRECTORS
Section 10.1 Any shareholder who intends to nominate or to cause to
have nominated any candidate for election to the Board of Directors (other
than any candidate proposed by the Corporation's then existing Board of
Directors) shall so 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. Such notification shall
contain the following information to the extent known by the notifying
shareholder.
(a) the name and address of each proposed nominee;
<PAGE>
(b) the age of each proposed nominee;
(c) the principal occupation of each proposed nominee;
(d) the number of shares of the Corporation owned by each proposed
nominee;
(e) the total number of shares that to the knowledge of the notifying
shareholder will be voted for each proposed nominee;
(f) the name and residence address of the notifying shareholder; and
(g) the number of shares of the Corporation owned by the notifying
shareholder.
Any nomination for director not made in accordance with this Section
shall be disregarded by the chairman of the meeting, and votes cast for
each such nominee shall be disregarded by the judges of election. In the
event that the same person is nominated by more than one shareholder, if
at least one nomination for such person complies with this Section, the
nomination shall be honored and all votes cast for such nominee shall be
counted.
Section 10.2 The number of directors that shall constitute the whole
Board of Directors shall be not less than five nor more than twenty-five.
The Board of Directors shall be classified into three classes, each class
to be elected for a term of three years. The terms of the respective
classes shall expire in successive years as provided in Section 10.3
hereof. Within the foregoing limits, the Board of Directors may from time
to time fix the number of directors and their respective classifications.
No person who has attained the age of seventy-two years shall be and
remain a director except for Messrs. Winter, Over, King, Morris and
Koontz. No person shall be a director who is not a resident of the
Commonwealth of Pennsylvania.
Section 10.3 At the 1988 annual meeting of shareholders of the
Corporation, the shareholders shall elect eight directors as follows: two
Class A directors to serve until the 1989 annual meeting of shareholders,
three Class B directors to serve until
<PAGE>
the 1990 annual meeting of shareholders, and three Class C directors to
serve until the 1991 annual meeting of shareholders. Each class shall be
elected in a separate election. At each annual meeting of shareholders
thereafter, successors to the class of directors whose term shall then
expire shall be elected to hold office for a term of three years, so that
the term of office of one class of directors shall expire in each year.
Section 10.4 The Board of Directors may declare vacant the office
of a director if he is declared of unsound mind by an order of court or
convicted of felony or for any other proper cause or if, within thirty
days after notice of election, he does not accept such office either in
writing or by attending a meeting of the Board of Directors.
Article 11
VACANCIES ON BOARD OF DIRECTORS
Article 11.1 Vacancies on the Board of Directors, including
vacancies resulting from an increase in the number of directors, shall be
filled by a majority of the remaining members of the Board of Directors,
though less than a quorum, and each person so appointed shall be a
director until the expiration of the term of office of the class of
directors to which he was appointed.
Article 12
POWERS OF BOARD OF DIRECTORS
Section 12.1 The business and affairs of the Corporation shall be
managed by its Board of Directors, which may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by
statute or by the Articles of Incorporation or by these By-laws directed
or required to be exercised and done by the shareholders.
Section 12.2 The Board of Directors shall have the power and
authority to appoint an Executive Committee and such other committees as
may be deemed necessary by the Board of Directors for the efficient
operation of the Corporation. The Executive Committee shall consist of the
President and not less than two nor more than three other directors (which
other directors shall not be employees of the Corporation or any of its
subsidiaries). The Executive Committee shall meet at such time as may be
fixed by the Board of Directors, or upon call of the Chairman of the
Board or the President. A majority of members of the Executive Committee
shall constitute a quorum. The Executive Committee shall have and exercise
the authority of the Board of Directors in the intervals between the
meetings of the Board of Directors as far as may be permitted by law.
<PAGE>
Article 13
MEETINGS OF THE BOARD OF Directors
Section 13.1 An organization meeting may be held immediately
following the annual shareholders meeting without the necessity of notice
to the directors to constitute a legally convened meeting, or the
directors may meet at such time and place as may be fixed by either a
notice or waiver of notice or consent signed by all of such directors.
Section 13.2 Regular meetings of the Board of Directors shall be
held not less often than semi-annually at a time and place determined by
the Board of Directors at the presiding meeting. One or more directors may
participate in any meeting of the Board of Directors, or of any committee
thereof, by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can
hear one another.
Section 13.3 Special meetings of the Board of Directors may be
called by the Chairman of the Board or the President on one day's notice
to each director, either personally or by mail, telegram or telephone;
special meetings shall be called by the Chairman of the Board or the
President in like manner and on like notice upon the written request of
three directors.
Section 13.4 At all meetings of the Board of Directors, a majority
of the directors shall constitute a quorum for the transaction of
business, and the acts of a majority of the directors present at a
meeting in person or by conference telephone or similar communications
equipment at which a quorum is present in person or by such communications
equipment shall be the acts of the Board of Directors, except as may be
otherwise specifically provided by statute or by the Articles of
Incorporation or by these By-laws. If a quorum shall not be present in
person or by communications equipment at any meeting of the directors, the
directors present may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be
present or as permitted herein.
Article 14
INFORMAL ACTION BY THE BOARD OF DIRECTORS
Section 14.1 If all the directors shall severally or collectively
consent in writing, including but not limited to telegrams and radiograms,
to any action to be taken by the Corporation, such action shall be as
valid a corporation action as though it had been authorized at a meeting
of the Board of Directors.
<PAGE>
Article 15
COMPENSATION OF DIRECTORS
Section 15.1 Directors, as such, may receive a stated salary for
their services or a fixed sum and expenses for attendance at regular and
special meetings, or any combination of the foregoing as may be determined
from time to time by resolution of the Board of Directors, and nothing
contained herein shall be construed to preclude any director from serving
the Corporation in any other capacity and receiving compensation therefor.
Article 16
OFFICERS
Section 16.1 The officers of the Corporation shall be elected by
the Board of Directors at its organization meeting and shall be a
President, a Secretary and a Treasurer. At its option, the Board of
Directors may elect a Chairman of the Board. The Board of Directors may
also elect one or more Vice Chairmans and/or one or more Vice Presidents
and such other officers and appoint such agents as it shall deem
necessary, who shall hold their offices for such terms, have such
authority and perform such duties as may from time to time be prescribed
by the Board of Directors. Any two or more offices may be held by the
same person.
Section 16.2 The compensation of all officers of the Corporation
shall be fixed by the Board of Directors.
Section 16.3 The Board of Directors may remove any officer or agent
elected or appointed, at any time and within the period, if any, for
which such person was elected or employed whenever in the Board of
Directors' judgment it is in the best interests of the Corporation, and
all persons shall be elected and employed subject to the provisions
thereof. If the office of any officer becomes vacant for any reason, the
vacancy may be filled by the Board of Directors.
Article 17
THE CHAIRMAN AND VICE-CHAIRMAN OF THE BOARD
Section 17.1 The Chairman of the Board shall preside at all
meetings of the shareholders and directors. He shall supervise the
carrying out of the policies adopted or approved by the Board of
Directors. He shall also have and may exercise such further powers and
duties as from time to time may be conferred upon or assigned to him by
the Board of Directors.
Section 17.2 The Vice-Chairman of the Board shall preside, in the
absence of the Chairman of the Board, at all meetings of the shareholders
and directors. He shall also have and may exercise such further powers and
duties as from time to time may be conferred upon or assigned to him by
the Board of Directors.
<PAGE>
Article 18
THE PRESIDENT
Section 18.1 The President shall be the chief executive officer of
the Corporation; shall have general and active management of the business
of the Corporation; shall see that all orders and resolutions of the Board
of Directors are put into effect, subject, however, to the right of the
Board of Directors to delegate any specific powers, except such as may be
by the statute exclusively conferred on the President, to any other
officer or officers of the Corporation. The President shall execute Bonds,
mortgages and other contracts requiring a seal under the seal of the
Corporation, except where required or permitted by Law to be otherwise
signed and executed and except where the signing and execution thereof
shall be expressly delegated by the Board of Directors to some other
officer or agent of the Corporation. In the absence or incapacity of the
Chairman and Vice Chairman of the Board, the President shall preside at
meetings of the shareholders and the directors. If there is no Chairman or
Vice Chairman of the Board, the President shall have and exercise all
powers conferred by these By-laws or otherwise on the Chairman of the
Board.
Article 19
THE VICE PRESIDENT
Section 19.1 The Vice President or, if more than one, the Vice
Presidents in the order established by the Board of Directors shall, in
the absence or incapacity of the President, exercise all powers and
perform the duties of the President. The Vice Presidents, respectively,
shall also have such other authority and perform such other duties as may
be provided in these By-laws or as shall be determined by the Board of
Directors or the President. Any Vice President may, in the discretion of
the Board of Directors, be designated as "executive", "senior", or by
departmental or functional classification.
Article 20
THE SECRETARY
Section 20.1 The Secretary shall attend all meetings of the Board
of Directors and of the shareholders and keep accurate records thereof in
one or more minute books kept for that purpose and shall perform the
duties customarily performed by the secretary of a corporation and such
other duties as may be assigned to him by the Board of Directors or the
President.
<PAGE>
Article 21
THE TREASURER
Section 21.1 The Treasurer shall have the custody of the corporate
funds and securities; shall keep full and accurate accounts of receipts
and disbursements in books belonging to the Corporation and shall perform
such other duties as may be assigned to him by the Board of Directors or
the President. He shall give bond in such sum and with such surety as the
Board of Directors may from time to time direct.
Article 22
ASSISTANT OFFICERS
Section 22.1 Each assistant officer shall assist in the performance
of the duties of the officer to whom he is assistant and shall perform
such duties in the absence of the officer. He shall perform such
additional duties as the Board of Directors, the President or the officer
to whom he is assistant may from time to time assign him. Such officers
may be given such functional titles as the Board of Directors shall from
time to time determine.
Article 23
INDEMNIFICATION OF OFFICERS AND EMPLOYEES
Section 23.1 The Corporation shall indemnify any officer and/or
employee, or any former officer and/or employee, who was or is a party
to, or is threatened to be made a party to, or who is called to be a
witness in connection with, any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation)
by reason of the fact that such person is or was an officer and/or
employee of the Corporation, or is or was serving at the request of
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not of itself create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be
in, or not opposed to, the best interests of the Corporation, and, with
respect to any criminal action or preceding, had no reasonable cause to
believe that his conduct was unlawful.
<PAGE>
Section 23.2 The Corporation shall indemnify any officer and/or
employee, who was or is a party to, or is threatened to be made a party
to, or who is called as a witness in connection with, any threatened,
pending or completed action or suit by or in the right of the Corporation
to procure a judgment in its favor by reason of the fact that such person
is or was a director, officer, and/or employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
amounts paid in settlement and expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of, or serving as a witness in, such action or suit if he
acted in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Corporation and except that no
indemnification shall be made in respect of any such claim, issue or
matter as to which such person shall have been adjudged to be liable for
misconduct in the performance of his duty to the Corporation.
Section 23.3 Except as may be otherwise ordered by a court, there
shall be a presumption that any officer and/or employee is entitled to
indemnification as provided in Sections 23.1 and 23.2 of this Article
unless either a majority of the directors who are not involved in such
proceedings ("disinterested directors") or, if there are less than three
disinterested directors, then the holders of one-third of the outstanding
shares of the Corporation determine that the person is not entitled to
such presumption by certifying such determination in writing to the
Secretary of the Corporation. In such event the disinterested Director(s)
or, in the event of certification by shareholders, the Secretary of the
Corporation shall request of independent counsel, who may be the outside
general counsel of the Corporation, a written opinion as to whether or not
the parties involved are entitled to indemnification under Sections 23.1
and 23.2 of this Article.
Section 23.4 Expenses incurred by an officer and/or employee in
defending a civil or criminal action, suit or proceeding may be paid by
the Corporation in advance of the final disposition of such action, suit
or proceeding as authorized in the manner provided under Section 23.3 of
this Article upon receipt of an undertaking by or on behalf of the
officer and/or employee to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation.
Section 23.5 The indemnification provided by this Article shall not
be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled under any agreement, vote of shareholders
or disinterested directors, or otherwise, both as to action in his
official capacity while serving as an officer and/or employee and as to
action in another capacity while holding such office, and shall continue
as to a person who has ceased to be an officer and/or employee and shall
inure to the benefit of the heirs,executors and administrators of such a
person.
Section 23.6 The Corporation may create a fund of any nature, which
may, but need not be, under the control of a trustee, or otherwise secure
or insure in any manner its indemnification obligations arising under this
Article.
Section 23.7 The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was an officer
and/or employee of the
<PAGE>
Corporation, or is or was serving at the request of the Corporation as an
officer and/or employee of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Article.
Section 23.8 Indemnification under this Article shall not be made in
any case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful
misconduct or recklessness.
Article 24
INDEMNIFICATION OF Directors
Section 24.1 A director of this Corporation shall stand in a
fiduciary relation to the Corporation and shall perform his duties as a
director, including his duties as a member of any committee of the board
upon which he may serve, in good faith, in a manner he reasonably
believes to be in the best interests of the Corporation, and with such
care, including reasonable inquiry, skill and diligence, as a person of
ordinary prudence would use under similar circumstances. In performing his
duties, a director shall be entitled to rely in good faith on information,
opinions, reports or statements, including financial statements and other
financial data, in each case prepared or presented by any of the
following:
(a) One or more officers or employees of the Corporation whom the
director reasonably believes to be reliable and competent in the matters
presented.
(b) Counsel, public accountants or other persons as to matters which
the director reasonably believes to be within the professional or expert
competence of such person.
(c) A committee of the board upon which he does not serve, duly
designated in accordance with law, as to matters within its designated
authority, which committee the director reasonably believes to merit
confidence.
A director shall not be considered to be acting in good faith if he
has knowledge concerning the matter in question that would cause his
reliance to be unwarranted.
Section 24.2 In discharging the duties of their respective
positions, the board of directors, committees of the board, and individual
directors may, in considering the best interests of the Corporation,
consider the effects of any action upon employees, upon suppliers and
customers of the Corporation and upon communities in which offices or
other establishments of the Corporation are located, and all other
pertinent factors. m e consideration of those factors shall not constitute
a violation of Section 24.1.
<PAGE>
Section 24.3 Absent a breach of fiduciary duty, lack of good faith
or self-dealing, actions taken as a director or any failure to take any
action shall be presumed to be in the best interests of the Corporation.
Section 24.4 A director of this Corporation shall not be personally
liable for monetary damages as such for any action taken or for any
failure to take any action, unless:
(a) the director has breached or failed to perform the duties of
his office under the provisions of Sections 24.1 and 24.2, and
(b) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
Section 24.5 The provisions of Section 24.4 shall not apply to:
(a) the responsibility or liability of a director pursuant to a
criminal statute, or
(b) the liability of a Director for the payment of taxes pursuant
to local, state or federal law.
Section 24.6 The Corporation shall indemnify any director, or any
former director who was or is a party to, or is threatened to be made a
party to, or who is called to be a witness in connection with, any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in
the right of the Corporation) by reason of the fact that such person is
or was a director of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not of itself create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be
in, or not opposed to, the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe that his conduct was unlawful.
Section 24.7 The Corporation shall indemnify any director who was or
is a party to, or is threatened to be made a party to, or who is called
as a witness in connection with, any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that such person is or was a
director, officer and/or employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against amounts paid
in settlement and expenses (including attorneys' fees) actually and
reasonably incurred
<PAGE>
by him in connection with the defense or settlement of, or serving as a
witness in, such action or suit if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of
the Corporation and except that no indemnification shall be made in
respect of any such claim, issue or matter as to which such person shall
have been adjudged to be liable for misconduct in the performance of his
duty to the Corporation.
Section 24.8 Except as may be otherwise ordered by a court, there
shall be a presumption that any director is entitled to indemnification as
provided in Sections 24.6 and 24.7 of this Article unless either a
majority of the directors who are not involved in such proceedings
("disinterested directors n) or, if there are less than three
disinterested directors, then the holders of one-third of the outstanding
shares of the Corporation determine that the person is not entitled to
such presumption by certifying such determination in writing to the
Secretary of the Corporation. In such event the disinterested director(s)
or, in the event of certification by shareholders, the Secretary of the
Corporation shall request of independent counsel, who may be the outside
general counsel of the Corporation, a written opinion as to whether or not
the parties involved are entitled to indemnification under Sections 24.6
and 24.7 of this Article.
Section 24.9 Expenses incurred by a director in defending a civil
or criminal action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding as
authorized in the manner provided under Section 24.8 of this Article upon
receipt of an undertaking by or on behalf of the director, officer and/or
employee to repay such amount if it shall ultimately be determined that he
is not entitled to be indemnified by the Corporation as authorized in this
Article.
Section 24.10 The indemnification provided by this Article shall not
be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled under any agreement, vote of shareholders
or disinterested directors, or otherwise, both as to action in his
official capacity while serving as a director and as to action in another
capacity while holding such office, and shall continue as to a person who
has ceased to be a director and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 24.11 The Corporation may create a fund of any nature,
which may, but need not be, under the control of a trustee, or otherwise
secure or insure in any manner its indemnification obligations arising
under this Article.
Section 24.12 The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Article.
<PAGE>
Section 24.13 Indemnification under this Article shall not be made
in any case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful
misconduct or recklessness.
Article 25
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 25.1 The Corporation shall indemnify any director, officer
and/or employee, or any former director, officer and/or employee, who was
or is a party to, or is threatened to be made a party to, or who is
called to be a witness in connection with, any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right
of the Corporation) by reason of the fact that such person is or was a
director, officer and/or employee of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not of itself create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be
in, or not opposed to, the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe that his conduct was unlawful.
Section 25.2 The Corporation shall indemnify any director, officer
and/or employee, who was or is a party to, or is threatened to be made a
party to, or who is called as a witness in connection with, any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that
such person is or was a director, officer and/or employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against amounts paid in settlement and expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of, or serving as a witness in, such action or suit if he
acted in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Corporation and except that no
indemnification shall be made in respect of any such claim, issue or
matter as to which such person shall have been adjudged to be liable for
misconduct in the performance of his duty to the Corporation.
Section 25.3 Except as may be otherwise ordered by a court, there
shall be a presumption that any director, officer and/or employee is
entitled to indemnification as provided in Sections 25.1 and 25.2 of this
Article unless either a majority of the directors who are not involved in
such proceedings ("disinterested directors") or, if there are less than
three disinterested directors, then the holders of one-third of the
outstanding shares of the Corporation determine that the person is not
entitled to
<PAGE>
such presumption by certifying such determination in writing to the
Secretary of the Corporation. In such event the disinterested director(s)
or, in the event of certification by shareholders, the Secretary of the
Corporation shall request of independent counsel, who may be the outside
general counsel of the Corporation, a written opinion as to whether or not
the parties involved are entitled to indemnification under Sections 25.1
and 25.2 of this Article.
Section 25.4 Expenses incurred in defending a civil or criminal
action, suit or proceeding may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding as authorized in
a manner provided under Section 25.3 of this Article upon receipt of an
undertaking by or on behalf of the director, officer and/or employee to
repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the Corporation as authorized in this
Article.
Section 25.5 The indemnification provided by this Article shall not
be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled under any agreement, vote of shareholders
or disinterested directors, or otherwise, both as to action in his
official capacity while serving as a director, officer and/or employee and
as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer and/or
employee and shall inure to the benefit of the heirs and personal
representatives of such a person.
Article 26
SHARE CERTIFICATES
Section 26.1 The share certificates of the Corporation shall be
numbered and registered in a share register as they are issued; shall bear
the name of the registered holder, the number and class of shares
represented thereby, the par value of each share or a statement that such
shares are without par value, as the case may be; shall be signed by the
President or a Vice President and the Secretary or the Treasurer or any
other person properly authorized by the Board of Directors, and shall bear
the corporate seal, which seal may be a facsimile engraved or printed.
Where the certificate is signed by a transfer agent or a registrar, the
signature of any corporate officer on such certificate may be a facsimile
engraved or printed. In case any officer who has signed, or whose
facsimile signature has been placed upon, any share certificate shall have
ceased to be such officer because of death, resignation or otherwise
before the certificate is issued, it may be issued by the Corporation with
the same effect as if the officer had not ceased to be such at the date
of its issue.
Article 27
TRANSFER OF SHARES
Section 27.1 Upon surrender to the Corporation of a share
certificate duly endorsed by the person named in the certificate or by
attorney duly appointed in
<PAGE>
writing and accompanied where necessary by proper evidence of succession,
assignment or authority to transfer, a new certificate shall be issued to
the person entitled thereto and the old certificate cancelled and the
transfer recorded upon the share register of the Corporation. No transfer
shall be made if it would be inconsistent with the provisions of Article
8 of the Pennsylvania Uniform Commercial Code.
Article 28
LOST CERTIFICATES
Section 28.1 Where a shareholder of the Corporation alleges the
loss, theft or destruction of one or more certificates for shares of the
Corporation and requests the issuance of a substitute certificate therefor,
the Board of Directors may direct a new certificate of the same tenor and
for the same number of shares to be issued to such person upon such
person's making of an affidavit in form satisfactory to the Board of
Directors setting forth the facts in connection therewith, provided that
prior to the receipt of such request the Corporation shall not have either
registered a transfer of such certificate or received notice that such
certificate has been acquired by a bona fide purchaser. When authorizing
such issue of a new certificate the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require
the owner of such lost, stolen or destroyed certificate, or his heirs or
legal representatives, as the case may be, to advertise the same in such
manner as it shall require and/or give the Corporation a bond in such
form and with surety or sureties, with fixed or open penalty, as shall be
satisfactory to the Board of Directors, as indemnity for any liability or
expense which it may incur by reason of the original certificate remaining
outstanding.
Article 29
DIVIDENDS
Section 29.1 The Board of Directors may, from time to time, at any
duly convened regular or special meeting or by unanimous consent in
writing, declare and pay dividends upon the outstanding shares of capital
stock of the Corporation in cash, property or shares of the Corporation,
as long as any dividend shall not be in violation of law of the Articles
of Incorporation.
Section 29.2 Before payment of any dividend, there may be set aside
out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve fund to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purposes as the Board of Directors shall
believe to be for the best interests of the Corporation, and the Board of
Directors may reduce or abolish any such reserve in the manner in which
it was created.
<PAGE>
Article 30
FINANCIAL REPORT TO SHAREHOLDERS
Section 30.1 The President and the Board of Directors shall present
at each annual meeting of the shareholders a full and complete statement
of the business and affairs of the corporation for the preceding year.
Article 31
INSTRUMENTS
Section 31.1 All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other
persons as the President or the Board of Directors may from, time to time
designate.
Section 31.2 All agreements, indentures, mortgages, deeds,
conveyances, transfers, certificates, declarations, receipts, discharges,
releases, satisfactions, settlements, petitions, schedules, accounts,
affidavits, bonds, undertakings, proxies and other instruments and
documents may be signed, executed, acknowledged, verified, delivered or
accepted, including those in connection with the fiduciary powers of the
Corporation, on behalf of the Corporation by the President or other
persons as may be designated by him.
Article 32
FISCAL YEAR
Section 32.1 The fiscal year of the Corporation shall be the
calendar year.
Article 33
SEAL
Section 33.1 The corporate seal shall have inscribed thereon the
name of the Corporation, the year of its organization and the words
"Corporate Seal, Pennsylvania". Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed in any manner reproduced.
Article 34
NOTICES AND WAIVERS THEREOF
Section 34.1 Whenever, under the provisions of applicable law or of
the Articles of Incorporation or of these By-laws, written notice is
required to be given to any person, it may be given to such person either
personally or by sending a copy thereof through the mail or by telegram,
charges prepaid, to his address appearing on the books of the Corporation
or supplied by him to the Corporation for the
<PAGE>
purpose of notice. If the notice is sent by mail or telegraph, it shall
be deemed to have been given to the person entitled thereto when deposited
in the United States mail or with a telegraph office for transmission to
such person. Such notice shall specify the place, day and hour of the
meeting and, in the case of a special meeting of shareholders, the general
nature of the business to be transacted.
Section 34.2 Any written notice required to be given to any person
may be waived in writing signed by the person entitled to such notice
whether before or after the time stated therein. Attendance of any person
entitled to notice whether in person or by proxy, at any meeting shall
constitute a waiver of notice of such meeting, except where any person
attends a meeting for the express purpose of objecting to the transaction
of any business because the meeting was not lawfully called or convened.
Where written notice is required of any meeting, the waiver thereof must
specify the purpose only if it is for a special meeting of shareholders.
Article 35
AMENDMENTS
Section 35.1 These By-laws may be altered, amended or repealed by
the affirmative vote of the holders of seventy-five percent (75%) of the
outstanding shares of Common Stock at any regular or special meeting duly
convened after notice to the shareholders of that purpose, or by a
majority vote of the members of the Board of Directors at any regular or
special meeting thereof duly convened after notice to the directors of
that purpose, subject always to the power of the shareholders to change
such action of the Board of Directors by the affirmative vote of the
holders of seventy-five percent (75%) of the outstanding shares of Common
Stock.
<PAGE>
CARDINAL BANCORP, INC.
SHAREHOLDERS' CONSENT TO CORPORATE ACTION
The undersigned, being all the Shareholders of the above-named
corporation, entitled to vote at a meeting thereof, do hereby consent to
the adoption of the following resolution and to the taking of the
corporate action hereinafter specified as though same had been adopted at
a meeting of the Shareholders duly called and convened, this consent being
given pursuant to Section 513 of the Pennsylvania Business Corporation
Law, as amended:
-----------
RESOLVED, that present Article 23 of the By-laws of this corporation
is hereby declared null and void and that the Shareholders of this
corporation hereby adopt, ratify and approve the following new Articles 23
and 24 to the By-laws (relating to indemnification of directors, officers
and employees under the recently-enacted Directors' Liability Act) and
hereby also adopt, ratify and approve the renumbering of present Articles
24 through 33 of the By-laws to Articles 25 through 34 respectively:
Article 23
INDEMNIFICATION OF OFFICERS AND EMPLOYEES
Section 23.1 The Corporation shall indemnify any officer and/or
employee, or any former officer and/or employee, who was or is a party
to, or is threatened to be made a party to, or who is called to be a
witness in connection with, any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation)
by reason of the fact that such person is or was an officer and/or
employee of the Corporation, or is or was serving at the request of
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not of itself create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be
in, or not opposed to, the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe that his conduct was unlawful.
Section 23.2 The Corporation shall indemnify any officer and/or
employee, who was or is a party to, or is threatened to be made a party
to, or who is called as a witness in connection with, any threatened,
pending or completed action or suit by or in the right of the Corporation
to procure a judgment in its favor by reason of the fact that such person
is or was a director, officer, and/or employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
<PAGE>
amounts paid in settlement and expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of, or serving as a witness in, such action or suit if he
acted in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Corporation and except that no
indemnification shall be made in respect of any such claim, issue or
matter as to which such person shall have been adjudged to be liable for
misconduct in the performance of his duty to the Corporation.
Section 23.3 Except as may be otherwise ordered by a court, there
shall be a presumption that any officer and/or employee is entitled to
indemnification as provided in Sections 23.1 and 23.2 of this Article
unless either a majority of the directors who are not involved in such
proceedings ("disinterested directors") or, if there are less than three
disinterested directors, then the holders of one-third of the outstanding
shares of the Corporation determine that the person is not entitled to
such presumption by certifying such determination in writing to the
Secretary of the Corporation. In such event the disinterested director(s)
or, in the event of certification by shareholders, the Secretary of the
Corporation shall request of independent counsel, who may be the outside
general counsel of the Corporation, a written opinion as to whether or not
the parties involved are entitled to indemnification under Sections 23.1
and 23.2 of this Article.
Section 23.4 Expenses incurred by an officer and/or employee in
defending a civil or criminal action, suit or proceeding may be paid by
the Corporation in advance of the final disposition of such action, suit
or proceeding as authorized in the manner provided under Section 23.3 of
this Article upon receipt of an undertaking by or on behalf of the
officer and/or employee to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation.
Section 23.5 The indemnification provided by this Article shall not
be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled under any agreement, vote of shareholders
or disinterested directors, or otherwise, both as to action in his
official capacity while serving as an officer and/or employee and as to
action in another capacity while holding such office, and shall continue
as to a person who has ceased to be an officer and/or employee and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
Section 23.6 The Corporation may create a fund of any nature, which
may, but need not be, under the control of a trustee, or otherwise secure
or insure in any manner its indemnification obligations arising under this
Article.
Section 23.7 The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was an officer
and/or employee of the Corporation, or is or was serving at the request
of the Corporation as an officer and/or employee of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising
out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of this
Article.
<PAGE>
Section 23.8 Indemnification under this Article shall not be made in
any case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful
misconduct or recklessness.
Article 24
INDEMNIFICATION OF DIRECTORS
Section 24.1 A director of this Corporation shall stand in a
fiduciary relation to the Corporation and shall perform his duties as a
director, including his duties as a member of any committee of the board
upon which he may serve, in good faith, in a manner he reasonably
believes to be in the best interests of the Corporation, and with such
care, including reasonable inquiry, skill and diligence, as a person of
ordinary prudence would use under similar circumstances. In performing his
duties, a director shall be entitled to rely in good faith on information,
opinions, reports or statements, including financial statements and other
financial data, in each case prepared or presented by any of the
following:
(a) One or more officers or employees of the Corporation whom the
director reasonably believes to be reliable and competent in the matters
presented.
(b) Counsel, public accountants or other persons as to matters which
the director reasonably believes to be within the professional or expert
competence of such person.
(c) A committee of the board upon which he does not serve, duly
designated in accordance with law, as to matters within its designated
authority, which committee the director reasonably believes to merit
confidence.
A director shall not be considered to be acting in good faith if he
has knowledge concerning the matter in question that would cause his
reliance to be unwarranted.
Section 24.2 In discharging the duties of their respective
positions, the board of directors, committees of the board, and individual
directors may, in considering the best interests of the Corporation,
consider the effects of any action upon employees, upon suppliers and
customers of the Corporation and upon communities in which offices or
other establishments of the Corporation are located, and all other
pertinent factors. The consideration of those factors shall not constitute
a violation of Section 24.1.
Section 24.3 Absent a breach of fiduciary duty, lack of good faith
or self-dealing, actions taken as a director or any failure to take any
action shall be presumed to be in the best interests of the Corporation.
Section 24.4 A director of this Corporation shall not be personally
liable for monetary damages as such for any action taken or for any
failure to take any action, unless:
<PAGE>
(a) the director has breached or failed to perform the duties of
his office under the provisions of Sections 24.1 and 24.2, and
(b) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
Section 24.5 The provisions of Section 24.4 shall not apply to:
(a) the responsibility or liability of a director pursuant to a
criminal statute, or
(b) the liability of a director for the payment of taxes pursuant
to local, state or federal law.
Section 24.6 The Corporation shall indemnify any director, or any
former director who was or is a party to, or is threatened to be made a
party to, or who is called to be a witness in connection with, any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in
the right of the Corporation) by reason of the fact that such person is
or was a director of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not of itself create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be
in, or not opposed to, the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe that his conduct was unlawful.
Section 24.7 The Corporation shall indemnify any director who was or
is a party to, or is threatened to be made a party to, or who is called
as a witness in connection with, any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that such person is or was a
director, officer and/or employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against amounts paid
in settlement and expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement
of, or serving as a witness in, such action or suit if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the Corporation and except that no indemnification
shall be made in respect of any such claim, issue or matter as to which
such person shall have been adjudged to be liable for misconduct in the
performance of his duty to the Corporation.
<PAGE>
Section 24.8 Except as may be otherwise ordered by a court, there
shall be a presumption that any director is entitled to indemnification as
provided in Sections 24.6 and 24.7 of this Article unless either a
majority of the directors who are not involved in such proceedings
("disinterested directors") or, if there are less than three disinterested
directors, then the holders of one-third of the outstanding shares of the
Corporation determine that the person is not entitled to such presumption
by certifying such determination in writing to the Secretary of the
Corporation. In such event the disinterested director(s) or, in the event
of certification by shareholders, the Secretary of the Corporation shall
request of independent counsel, who may be the outside general counsel of
the Corporation, a written opinion as to whether or not the parties
involved are entitled to indemnification under Sections 24.6 and 24.7 of
this Article.
Section 24.9 Expenses incurred by a director in defending a civil
or criminal action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding as
authorized in the manner provided under Section 24.8 of this Article upon
receipt of an undertaking by or on behalf of the director, officer and/or
employee to repay such amount if it shall ultimately be determined that he
is not entitled to be indemnified by the Corporation as authorized in this
Article.
Section 24.10 The indemnification provided by this Article shall not
be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled under any agreement, vote of shareholders
or disinterested directors, or otherwise, both as to action in his
official capacity while serving as a director and as to action in another
capacity while holding such office, and shall continue as to a person who
has ceased to be a director and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 24.11 The Corporation may create a fund of any nature,
which may, but need not be, under the control of a trustee, or otherwise
secure or insure in any manner its indemnification obligations arising
under this Article.
Section 24.12 The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Article.
Section 24.13 Indemnification under this Article shall not be made
in any case where the act or failure to act giving rise to the claim for
indemnification is determined by a court to have constituted willful
misconduct or recklessness.
Dated: January 29, 1987
<PAGE>
Ray E. Koontz /s/ Jackson E. Bussard /s/
- ----------------------- ------------------------------
Ray E. Koontz Jackson E. Bussard
C. Clair Winter /s/ Ralph C. Over /s/
- ----------------------- ------------------------------
C. Clair Winter Ralph C. Over
EXHIBIT (10)
------------
Material Contracts
Executive Employment Agreement
with Merle Helsel
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS AGREEMENT is made as of the 2nd day of January, 1998, between First
American National Bank of Pennsylvania, a Pennsylvania banking institution
(the "Bank"), Cardinal Bancorp, Inc., a Pennsylvania business corporation (the
"Corporation") and Merle Helsel, an adult individual (the "Executive").
WHEREAS, the Bank is a subsidiary of the Corporation; and
WHEREAS, the Corporation desires to employ the Executive as President and
Chief Executive Officer and the Bank desires to employ the Executive as its
President and Chief Executive Officer both under the terms and conditions set
forth herein; and
WHEREAS, the Executive desires to serve the Corporation and Bank in an
executive capacity under the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and intending to be legally bound hereby, the parties agree
as follows:
1. TERMS OF EMPLOYMENT. The Corporation and Bank hereby shall employ
--------------------
the Executive and the Executive hereby accepts employment with the Corporation
and Bank for a term of three (3) years beginning on January 2, 1998, and
ending on January 1, 2001, subject, however, to prior termination of this
Agreement as set forth below.
2. POSITION AND DUTIES. The Executive shall serve as the President
--------------------
and Chief Executive Officer of the Corporation and Bank and a member of the
Board of Directors of the Corporation and Bank, reporting only to the Board of
Directors of the Corporation and Bank and shall have supervision and control
over, and responsibility for, the general management and operation of the
Corporation and Bank, and shall have such other powers and duties as may from
time to time be prescribed by the Board of Directors of the Corporation and
Bank, provided that such powers and duties are consistent with the Executive's
position as the Chief Executive Officer in charge of the general management of
the Corporation and Bank.
3. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall not engage
-------------------------------
in any business or commercial activities, duties or pursuits which compete
with the business or commercial activities of the Corporation or Bank, nor may
the Executive serve as a director or officer or in any other capacity in a
company which competes with the Corporation or Bank.
4. COMPENSATION.
-------------
(a) ANNUAL DIRECT SALARY: As compensation for services
---------------------
rendered the Corporation and Bank under this Agreement,
<PAGE>
the Executive shall be entitled to receive from the Bank an annual direct
salary of Eighty-five Thousand ($85,000) Dollars per year, (the "Annual Direct
Salary") payable in substantially equal bi-monthly installments (or such other
intervals, consistent with the Bank's payroll policy) prorated for any partial
employment period. The Annual Direct Salary shall be reviewed annually, no
later than November 30 of the then calendar year and shall be subject to such
annual change (but not reduced below $85,000 without the Executive's written
consent, except in cases of national financial depression or emergency when
compensation reduction has been implemented by the Board of Directors for the
Bank's senior management) as may be set by the Board of Directors of the
Corporation and Bank taking into account the position and duties of the
Executive and the performance of the Corporation and Bank under the
Executive's leadership.
(b) BONUS. The Board of Directors of the Corporation and Bank in its sole
------
discretion may provide for payment of a periodic bonus to the Executive in
such an amount or nature as it may deem appropriate to provide incentive to
the Executive and to reward the Executive for his performance.
5. FRINGE BENEFITS, VACATION, EXPENSES, AND PERQUISITES.
-----------------------------------------------------
(a) EMPLOYEE BENEFIT PLANS. The Executive shall be entitled to participate
-----------------------
in or receive benefits under all Bank employment benefit plans including, but
not limited to, any pension plan, profit-sharing plan, savings plan, life
insurance plan or disability insurance plan as made available by the Bank to
its employees, subject to and on a basis consistent with terms, conditions and
overall administration of such plans and arrangements.
(b) VACATION, HOLIDAYS, SICK DAYS AND PERSONAL DAYS. The Executive shall
------------------------------------------------
be entitled to the number of paid vacation days in each calendar year
determined by the Corporation and/or the Bank from time to time for its senior
executive officers. The Executive shall also be entitled to all paid
holidays, sick days and personal days given by the Corporation and/or the Bank
to its employees.
(c) BUSINESS EXPENSES. During the term of his employment hereunder, the
------------------
Executive shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him, which are properly accounted for, in accordance with
the policies and procedures established by the Board of Directors of the
Corporation and/or the Bank for its senior executive officers.
(d) AUTOMOBILE. The Executive shall be entitled to the use of a Bank
-----------
purchased or leased automobile as may be
<PAGE>
agreed upon by the Board of Directors of the Corporation and/or the Bank and
the Executive. The Executive shall also be entitled to reimbursement for all
operating expenses of the automobile, including, but not limited to, oil,
gasoline, maintenance, repairs and insurance. The use of said automobile
shall be limited to the Executive, his spouse, authorized Bank personnel, or
designated driver in the event of an emergency.
6. POSITIONS. The Executive agrees to serve as a director on the Board
----------
of Directors of the Corporation or Bank and, if elected or appointed thereto,
in one or more offices of the Corporation or Bank, and/or in one or more
offices or as a director of any of the Corporation's and/or Bank's
subsidiaries. The Executive shall be entitled to receive additional
compensation for the duties described in this paragraph, consistent with the
Bank's and/or the Corporation's policies regarding compensation of its Board
of Directors and officers.
7. LIABILITY INSURANCE. The Bank and/or the Corporation shall use its
--------------------
best efforts to obtain insurance coverage for the Executive under an insurance
policy covering officers and directors of the Bank and Corporation against
lawsuits, arbitrations or other legal or regulatory proceedings; however,
nothing herein shall be construed to require the Bank and/or the Corporation
to obtain such insurance, if the Board of Directors of the Bank and/or the
Corporation determine that such coverage cannot be obtained at a reasonable
price.
8. UNAUTHORIZED DISCLOSURE. During the term of his employment hereunder,
------------------------
or at any later time, the Executive shall not, without the written consent of
the Board of Directors of the Corporation or Bank or a person authorized
thereby, knowingly disclose to any person, other than an employee of the
Corporation or Bank or a person to whom disclosure is reasonably necessary or
appropriate in connection with the performance by the Executive of his duties
as an executive of the Corporation or Bank, any material confidential
information obtained by him while in the employ of the Corporation or Bank
with respect to any of the Corporation or Bank's services, products,
improvements, formulas, designs or styles, processes, customers, methods of
business or any business practices the disclosure of which could be or will be
materially damaging to the Corporation or Bank provided, however, that
confidential information shall not include any information known generally to
the public (other than as a result of unauthorized disclosure by the Executive
or any person with the assistance, consent or direction of the Executive) or
any information of a type not otherwise
considered confidential by persons engaged in the same business or a business
similar to that conducted by the Corporation or Bank or any information that
must be disclosed as required by law.
<PAGE>
9. RESTRICTIVE COVENANT. The Executive covenants and agrees that the
---------------------
Executive shall not directly or indirectly, within the marketing area of the
Bank and/or the Corporation (defined as an area within ten (10) miles of any
branch location of the Bank), enter into or engage generally in direct or
indirect competition with the Corporation or Bank or any subsidiary of the
Corporation, either as an individual on his own or as a partner or joint
venturer, or as a director, officer, shareholder, employee, agent, independent
contractor, lessor or creditor of or for any person, for a period of one (1)
year after the date of termination of his employment. The existence of any
claim or cause of action of the Executive against the Corporation or Bank,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Corporation or Bank of this covenant. The
Executive agrees that any breach of the restrictions set forth in this
paragraph or paragraph 8 will result in irreparable injury to the Corporation
or Bank for which it shall have no adequate remedy at law and the Corporation
or Bank shall be entitled to injunctive relief in order to enforce the
provisions hereof. In the event that this paragraph shall be determined by
any court of competent jurisdiction to be unenforceable in part by reason of
it being too great a period of time or covering too great a geographical area,
it shall be in full force and effect as to that period of time or geographical
area determined to be reasonable by the court.
10. TERMINATION.
------------
(a) Death. The Executive's employment hereunder shall terminate upon his
-----
death.
(b) Disability. If the Executive becomes disabled because of sickness,
-----------
physical or mental disability, or any other reason, the Corporation or Bank
shall have the option to terminate this Agreement by giving written notice of
termination to the Executive. Executive shall be deemed to have become
"disabled" only in the event and at such time as he qualifies (after
expiration of any applicable waiting period) to receive benefits for total
disability under the employee disability insurance benefit plan referred to in
paragraph 5(a) above.
(c) Cause. The Corporation may terminate the Executive's employment
------
hereunder for Cause. As used in this Agreement, the Corporation shall have
Cause to terminate the Executive's employment hereunder upon: (1) the willful
failure by the Executive to substantially perform his duties hereunder after
notice from the Corporation and a failure to cure such violation within thirty
(30) days of said notice; (2) the willful engaging by the Executive in
misconduct injurious to the Corporation or Bank; (3) the willful violation by
the Executive of the provisions of
<PAGE>
Paragraph 3 or 8 hereof after notice from the Corporation and/or Bank and a
failure to cure such violation within thirty (30) days of said notice, or if
said violation cannot be cured within thirty (30) days, within a reasonable
time thereafter unless the Executive is diligently attempting to cure the
violation; (4) the dishonesty or gross negligence of the Executive in the
performance of his duties; (5) the breach of Executive's fiduciary duty
involving personal profit; (6) the violation of any law, rule or regulation
governing banks or bank officers or any final cease and desist order issued by
a bank regulatory authority any of which materially jeopardizes the business
of the Corporation or Bank; (7) conduct on the part of Executive which brings
public discredit to the Corporation or Bank; or (8) the Executive's failure to
either be elected or to serve as a member of the Board of Directors of the
Corporation after having been nominated by the Board of Directors unless such
nomination is inconsistent with the duties of the Directors or the terms of
this Agreement.
(d) Termination by Executive. The Executive may terminate his employment
-------------------------
hereunder if (1) his health should become impaired to an extent that it makes
continued performance of his duties hereunder hazardous to his physical or
mental health or his life, or (2) for Good Reason. The term "Good Reason":
shall mean (i) any assignment to the Executive, without his consent, of any
duties other than those contemplated by, or any limitation of the powers of
the Executive not contemplated by, paragraphs 2 and 6 hereof, or (ii) any
removal of the Executive from (other than as a result of his regulatory
removal or failure to be re-elected on the Corporation and Bank's Boards of
Directors) any of the positions indicated in paragraph 2 hereof, except in
connection with termination of the Executive's employment for Cause, or (iii)
failure of the Bank to comply with paragraph 5 hereof, or (iv) any Change of
Control (as defined herein); all after notice from the Executive to the
Corporation and Bank that such action or limitation of the Bank or Corporation
constitutes Good Reason and the failure to cure such situation within thirty
(30) days of said notice, or if said situation cannot be cured within thirty
(30) days, within a reasonable time thereafter if a diligent effort is being
made by the Corporation and/or the Bank to cure such situation.
11. PAYMENTS UPON TERMINATION.
--------------------------
(a) If the Executive's employment shall be terminated because of death,
disability or for Cause, the Bank shall pay the Executive or his fiduciary his
full Annual Direct Salary through the date of termination at the rate in
effect at the time of termination and
<PAGE>
the Corporation and Bank shall have no further obligation to the Executive
under this Agreement.
(b) If the Executive's employment is terminated by the Corporation or Bank
(other than pursuant to paragraphs 10(a) "Death"or 10(b)"Disability" or
10(c)"Cause" hereof), then the Bank shall pay the Executive his full Annual
Direct Salary from the date of termination through the last day of the term of
this Agreement or an amount equal to his current Annual Direct Salary,
whichever is greater. If the Executive shall terminate his employment for
Good Reason, other than a Change of Control as defined herein, then the Bank
shall pay the Executive an amount equal to his Annual Direct Salary.
(c) If the Executive shall terminate his employment for Good Reason, as
defined in paragraph 10(d)(iv), constituting a Change of Control, then the
Executive shall be entitled to receive from the Corporation and/or the Bank a
lump sum payment equal to the highest annual compensation, including cash
bonuses, during the three year period ending on the date of termination, for
the period of time left in the term. The Bank shall also maintain in full
force and effect, for the continued benefit of the Executive for an equivalent
period, all employee benefit plans and programs to which the Executive was
entitled prior to the date of termination, except those under paragraphs 5(b)
(but not including accrued vacation days), (c), and (d), if the Executive's
continued participation is possible under the general terms and provisions of
such plans and programs except that if the Executive's participation in any
health, medical, life insurance, or disability plan or program is barred, the
Bank shall obtain and pay for, on the Executive's behalf, individual insurance
plans, policies or programs which provide to the Executive health, medical,
life and disability insurance coverage which is substantially equivalent to
the insurance coverage to which the Executive was entitled prior to the date
of termination. In the event that:
(i) the aggregate payments or benefits to be made or afforded to the
Executive under said paragraph 11(c) would be deemed to include an excess
parachute payment under Section 280G of the Internal Revenue Code of 1986
(the" Code") or any successor thereto, and
(ii) if such Payments Upon Termination were reduced to an amount (the "Non-
Triggering Amount"), the value of which is one dollar ($1.00) less than an
amount equal to three (3) times Executive's "base amount," as determined in
accordance with said Section 280G, and the Non-Triggering Amount would be
greater than the aggregate value of the Payments Upon Termination (without
such reduction) minus the amount of tax required to be paid by the
<PAGE>
Executive thereon by Section 4999 of the Code, then the Payments Upon
Termination shall be reduced to the Non-Triggering Amount. The allocation of
the reduction required hereby among the Payments Upon Termination provided by
the preceding paragraph of this Section shall be determined by the Executive.
(d) In the event the Executive serves the full term of this Agreement, and
the Bank or Corporation do not offer to renew this Agreement, the Executive
shall not be entitled to any severance allowance whatsoever and the
Corporation and Bank shall have no further obligations to the Executive under
this Agreement.
12. DAMAGES FOR BREACH OF CONTRACT. In the event of a breach of this
-------------------------------
Agreement by either the Corporation, Bank or the Executive resulting in
damages to another party to this Agreement, that party may recover from the
party breaching the Agreement only those damages as set forth herein. In no
event shall any party be entitled to the recovery of attorney's fees or costs.
13. DEFINITION OF CHANGE OF CONTROL. For purposes of this Agreement, the
--------------------------------
term "Change of Control" shall mean: A change in control (other than one
occurring by reason of an acquisition of the Corporation by Executive) of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A and any successor rule or regulation
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act") if
Corporation were subject to the Exchange Act reporting requirements; provided
that, without limiting the foregoing, such a change in control shall be deemed
to have occurred if;
(a) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than the Corporation or any "person" who on the date
hereof is a director or officer of the Corporation is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Corporation representing twenty-five
percent (25%) or more of the combined voting power of the Corporation's then
outstanding securities, or
(b) during any period of two consecutive years during the term of Executive's
employment under this Agreement, individuals who at the beginning of such
period constitute the Board of Directors of the Corporation cease for any
reason to constitute at least a majority thereof, unless the election of each
director who was not a director at the beginning of such period has been
approved in advance by directors representing at least two-thirds of the
directors then in office who were directors at the beginning of the period.
<PAGE>
14. DEFINITION OF DATE OF CHANGE OF CONTROL. For purposes of this Agreement,
----------------------------------------
the date of Change of Control shall mean:
(a) the first date on which a single person and/or entity, or group of
affiliated persons and/or entities, acquire the beneficial ownership of
twenty-five percent (25%) or more of the Corporation's voting securities, or
(b) the date of the transfer of all or substantially all of the Bank or
Corporation's assets, or
(c) the date on which a merger, consolidation or combination is consummated,
as applicable, or
(d) the date on which individuals who formerly constituted a majority of the
Board of Directors of the Bank or Corporation under paragraph 13(b) above,
ceased to be a majority.
15. NOTICE. For the purposes of this Agreement, notices and all other
-------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when hand-delivered or mailed by United States
certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive: Merle W. Helsel
R. D. 1, Box 122A
New Enterprise
Pennsylvania 16664-9718
If to the Bank: Clyde R. Morris
Chairman of the Board
First American National Bank of
Pennsylvania
140 East Main Street
P. O. Box 327
Everett, Pennsylvania 15537-1258
If to the Corporation: Clyde R. Morris
Chairman of the Board
Cardinal Bancorp, Inc.
140 East Main Street
P. O. Box 327
Everett, Pennsylvania 15537-1258
or to such other address as any party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
16. SUCCESSORS. This Agreement shall inure to the benefit of and be binding
-----------
upon the Executive, his personal representatives, heirs or assigns and to the
Bank and/or the Corporation and any successors or assigns.
<PAGE>
17. SEVERABILITY. If any provision of this Agreement is declared
-------------
unenforceable for any reason, the remaining provisions of this Agreement shall
be unaffected thereby and shall remain in full force and effect.
18. AMENDMENT. This Agreement may be amended or canceled only by mutual
----------
agreement of the parties in writing.
19. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. In the event of Executive's
----------------------------------------
death, any moneys that may be due him from the Bank under this Agreement as of
the date of death shall be paid to the person designated by him in writing for
this purpose, or in the absence of any such designation to his estate.
20. LAW GOVERNING. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the Commonwealth of Pennsylvania.
21. ENTIRE AGREEMENT. This Agreement supersedes any and all agreements,
-----------------
either oral or in writing, between the parties with respect to the employment
of the Executive by the Corporation and Bank, and this Agreement contains all
the covenants and agreements between the parties with respect to the
employment.
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement to be duly executed in their respective
names and, in the case of the Corporation and Bank, by its authorized
representatives the day and year above mentioned.
ATTEST: FIRST AMERICAN NATIONAL BANK
OF PENNSYLVANIA
/s/ William B. Zimmerman By: /s/ Clyde R. Morris
- ----------------------------- ------------------------------
William B. Zimmerman Clyde R. Morris
Secretary Chairman of the Board
ATTEST: CARDINAL BANCORP, INC.
/s/ William B. Zimmerman By: /s/ Clyde R. Morris
- ----------------------------- -------------------------------
William B. Zimmerman Clyde R. Morris
Secretary Chairman of the Board
WITNESS:
/s/ Merle W. Helsel
- ----------------------------- -------------------------------
Merle Helsel
EXHIBIT (13)
Registrant's 1997 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 .................... 3
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 ..........................................50
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, 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 14, 1998, 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 20, 1998, the Corporation had 489 shareholders of record.
<TABLE>
<CAPTION>
1997 1996
------------------------ ---------------------------
Dividends Dividends
Declared Declared
Quarter High Low Per Share High Low Per Share
------- ---- --- --------- ---- --- ----------
<S> <C> <C> <C> <C> <C> <C>
First 20.875 19.250 $.10 17.25 16.25 $.075
Second 23.750 20.000 .11 18.00 17.12 .10
Third 23.500 20.000 .13 18.37 17.12 .10
Fourth 36.750 20.000 .15 19.75 17.75 .10
</TABLE>
1
<PAGE>
SHAREHOLDERS' MESSAGE
To Our Shareholders:
It is very gratifying for me to report on behalf of the directors,
management and employees of Cardinal Bancorp, Inc. that annual earnings
reached record levels in 1997. The Corporation ended the year with total
assets of $129,941,247 and net income of $1,859,533. This represents a 22.04%
increase in net income from 1996 as earnings per share increased to $1.88 in
1997 from $1.54 in the prior year. The return on average assets and return on
average equity increased to 1.41% and 11.31%, respectively, in 1997 as
compared to 1.20% and 10.01% in 1996.
Due to a planned reduction in short term borrowing from year end 1996,
total assets increased minimally in 1997, however, deposits, including funds
deposited to acquire securities under repurchase agreements, increased
$6,036,000 or 5.70%. The Corporation's loan portfolio grew even more
significantly, as loans net of unearned discount increased $6,767,000 or
10.07%.
The Corporation's well capitalized position was enhanced as shareholders'
equity increased to $17,180,213 at December 31, 1997, the highest level in
the history of the Corporation. Additionally, during 1997 the Corporation
paid dividends of $.49 per share as compared to $.375 per share in 1996. This
represents an increase of approximately 30.67%.
The Corporation's improving asset quality also contributed substantially
to our 1997 performance as no provision to the allowance for loan losses was
required and total loan recoveries actually exceeded loans charged off for the
year. Nonperforming loans as a percent of loans also declined during 1997.
Cardinal Bancorp, Inc. and First American National Bank of Pennsylvania
recognize that success means adapting and improving customer service. Future
success requires further development of the skills of our employees through
ongoing training and building efficiencies through enhanced technologies. Our
success has been built upon the quality of our staff and our dedication to the
delivery of superior customer service to our community. Improvements planned
for 1998 will continue to enhance the service provided to our customers.
Each year presents new challenges and opportunities. The banking
industry continues to change rapidly but your Corporation has the most
important asset to meet the challenges of the future, dedicated employees
committed to the success of a community bank. However, your support is also
extremely important to us. The directors, management and employees of
Cardinal Bancorp will continue to work diligently to earn your support.
Sincerely,
Merle W. Helsel
President and CEO
2
<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 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total Assets $129,941 $129,557 $124,472 $112,606 $121,222
Total Deposits 109,421 105,755 108,796 99,650 108,590
Loans, Net of Unearned Income 73,940 67,173 61,601 60,845 64,871
Shareholders' Equity 17,180 15,223 14,829 12,123 12,053
Shareholders' Equity per
Common Share* 17.35 15.38 14.98 12.25 12.18
Average Number of Shares
Outstanding* 990,000 990,000 990,000 990,000 990,000
<CAPTION>
For the Year Ended December 31 1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest Income $9,952 $9,532 $9,238 $7,944 $8,150
Interest Expense 4,213 4,098 3,995 3,230 3,782
----- ----- ----- ----- -----
Net Interest Income 5,739 5,434 5,243 4,714 4,368
Provision for Loan Losses 0 0 0 (300) 125
----- ----- ----- ----- -----
Net Interest Income After
Provision for Loan Losses 5,739 5,434 5,243 5,014 4,243
Other Income 620 533 476 456 529
Other Expenses 3,804 4,096 3,714 3,487 3,509
----- ----- ----- ----- -----
Income Before Income
Taxes and Cumulative
Effect Adjustment 2,555 1,871 2,005 1,983 1,263
Cumulative Effect
Adjustment 0 0 0 0 60
Income Tax Expense 695 347 265 318 273
----- ----- ----- ----- -----
Net Income 1,860 1,524 1,740 1,665 1,050
===== ===== ===== ===== =====
Per Share Data:
Income Before
Cumulative Effect
Adjustment 1.88 1.54 1.76 1.68 1.00
Net Income 1.88 1.54 1.76 1.68 1.06
Cash Dividends Declared .49 .375 .30 .55 .225
3
<PAGE>
<CAPTION>
CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED)
<S> <C> <C> <C> <C> <C>
Return on Average Assets 1.41% 1.20% 1.45% 1.42% .88%
Return on Average
Shareholders' Equity 11.31% 10.01% 12.61% 13.31% 9.06%
Dividend Payout ratio 26.09% 24.34% 17.07% 32.70% 21.21%
Average Shareholders' Equity
to Average Assets 12.49% 11.97% 11.48% 10.69% 9.66%
Tier 1 Risk-Based Capital Ratio 20.65% 19.76% 19.13% 17.92% 14.42%
Total Risk-Based Capital Ratio 21.81% 20.96% 20.38% 19.17% 15.67%
Leverage Capital Ratio 13.02% 12.20% 11.64% 11.39% 9.81%
* Gives retroactive effect to a two for one stock split effected in the form
of a 100% stock dividend on October 16, 1996.
</TABLE>
4
<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 1997, the Corporation recorded a net profit of
$1,860,000 which represents $1.88 basic earnings per share or $1.85 diluted
earnings per share. Net income in 1996 of $1,524,000 represents $1.54 basic
earnings per share or $1.53 diluted earnings per share. Net income in 1995 of
$1,740,000 represents $1.76 basic earnings per share or $1.75 diluted earnings
per share. 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 1997 was 1.41%,
compared to a return on average assets in 1996 of 1.20%, and a return on
average assets of 1.45% in 1995. The return on average shareholders' equity
was 11.31%in 1997, while the return on average shareholders' equity was
10.01% and 12.61% in 1996 and 1995, 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 1997, average assets totalled
$131,644,000, an increase of $4,418,000 or 3.5% from the 1996 average asset
total of $127,226,000.
5
<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 1997, 1996 and 1995 was $9,952,000, $9,532,000,
and $9,238,000, respectively, while interest expense amounted to $4,213,000,
$4,098,000, and $3,994,000, 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 1997 on a tax equivalent
basis increased approximately $235,000 or 4.1% above that of 1996, while net
interest income in 1996 had increased approximately $302,000 or 5.6% above
that of 1995. The increase in net interest income in 1997 was primarily the
result of an increase in the volume of interest earning assets. As noted in
Table 1, average total earning assets increased $4,233,000 from 1996 to 1997.
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 $303,000.
In addition to the positive impact on net interest income in 1997 of the
increase in the Corporation's total earning assets, the Corporation's net
interest margin also increased by three basis points from 4.83% to 4.86%. The
relatively immaterial change in net interest margin was partially a result of
relatively stable interest rates during 1997 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 increased
only four 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 remained unchanged.
During 1997, the yield on the Corporation's taxable securities increased
17 basis points from 6.58% to 6.75%. In August of 1997, to reduce the
volatility in the market value of the investment portfolio, securities were
sold, including longer term tax exempt securities, and replaced with shorter
term higher yielding securities. The planned investment transactions will
enable the Bank to maintain after tax income at the current level while
shortening the duration (life) of the investment portfolio. As a result, the
yield on the Corporation's taxable securities portfolio was increased.
Furthermore, the sale of some of the higher yielding tax exempt securities
caused an overall decline on the tax-exempt portfolio yield. The yield on the
Corporation's loan portfolio declined 6 basis points in 1997 from 9.42% to
9.36% primarily as a result of competition. Many of the Corporation's loan
products have variable interest rates which reprice immediately upon a change
in the Prime Rate. Throughout much of 1997, the Prime Rate was 25 basis
points above the rate in effect throughout most of 1996. 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 4.83% in 1996 to 4.86% for 1997. The
Corporation's net interest margin for 1995 was 4.81%.
6
<PAGE>
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,
most economists project for 1998 that rates will remain relatively level or
decline slightly 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 1998.
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 increased $621,000 or 10.5% in 1997,
while 1996 loan earnings had decreased $128,000 or 2.1% from the prior year.
Average volume increased loan income by $663,000 in 1997 while rate declines
caused a decrease in loan income in the amount of $42,000. Yields on loans
declined 6 basis points in 1997 as compared to a 34 basis points decline in
1996. 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 1997
approximately $51,484,000 of the loan portfolio is capable of repricing within
one year.
Securities income on a tax equivalent basis decreased $540,000 or 14.1%
in 1997 from the previous year while 1996 earnings increased $832,000 from
1995. In 1997, change in volume decreased securities income $598,000 while
rate changes increased investment earnings by $58,000. As noted above, yields
on taxable securities increased 17 basis points in 1997 due primarily to the
replacing of certain securities with shorter term higher yielding securities.
This followed a 43 basis point increase in the yield on taxable securities in
1996 which resulted primarily from the conversion of variable rate securities
to fixed rate securities. Taxable equivalent yields on tax-exempt securities
decreased 17 basis points in 1997 after a 126 basis point decrease in 1996.
As noted above, because many of the higher yielding tax-exempt securities were
liquidated as part of the Corporation's planned investment strategy, the
remaining tax-exempt 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 increased $45,000 or 78.9% in
1997 while such income in 1996 had decreased $109,000 or 65.7% from 1995. In
1997, the average balance increased by $818,000 as the Corporation retained
additional liquid funds in the forms of federal funds sold and interest
earning balances with the Federal Home Loan Bank in order to improve its
liquidity position. The change in the volume of federal funds sold resulted
in an increase in the income of $45,000 from the prior year. This increase in
income was accounted for entirely by the change in volume. Average interest
earning balances with the Federal Home Loan Bank were $4,579,000 during 1997,
an increase of $3,990,000 from 1996. The increase in volume caused interest
income from the Federal Home Loan Bank to increase $193,000, while an increase
in rates on such deposits resulted in an increase in earnings of $31,000.
Expense relating to interest-bearing liabilities increased by $115,000 or
2.8% in 1997 while in 1996 such expense increased by $104,000 or 2.6% from the
prior year. The increase in expense on deposits was caused primarily by the
general increase in average deposit volume during 1997. The increase in 1996
was also caused primarily by the general increase in average deposit volume.
As noted in Table 2, volume increase during 1997 caused interest expense on
deposits to increase $155,000, while a decrease in rates resulted in decreased
interest expense
7
<PAGE>
<TABLE>
<CAPTION>
TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
INCOME AND RATES ON A TAX EQUIVALENT BASIS
FOR YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In Thousands)
1997 1996
----------------------- ---------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities:
Taxable $40,451 $2,730 6.75% $44,565 $2,933 6.58%
Tax-Exempt 5,968 548 9.18% 9,462 885 9.35%
Interest Earning Balances 4,579 253 5.53% 589 29 4.84%
Federal Funds Sold 1,840 102 5.54% 1,022 57 5.54%
Loans, Net 69,812 6,537 9.36% 62,779 5,916 9.42%
---------------------- ----------------------
Total Earning Assets $122,650 $10,170 8.29% $118,417 $9,820 8.29%
------------- -------------
Allowance for Loan Losses (968) (1,282)
Nonearning Assets 9,962 10,091
-------- --------
Total Assets $131,644 $127,226
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
NOW, MMDA & Savings $36,333 $792 2.18% $39,625 $960 2.42%
Time 61,141 3,338 5.46% 56,834 3,103 5.46%
Repurchase Agreements and
Short-term Borrowings 1,569 83 5.26% 846 35 4.77%
--------------------- ----------------------
Total interest bearing
liabilities $99,043 $4,213 4.25% $97,305 $4,098 4.21%
------------- -------------
Demand Deposits 14,919 13,625
Other Liabilities 1,237 1,074
------- -------
Total Liabilities 115,199 112,004
Shareholders' Equity 16,445 15,222
-------- --------
Total Liabilities and
Shareholders' Equity $131,644 $127,226
======== ========
Net Interest Income $5,957 $5,722
======== ========
Net Yield on Interest Earning
Assets:
Total Yield on Earning Assets 8.29% 8.29%
Rate on Supporting Liabilities 4.25% 4.21%
Net Interest Margin 4.86% 4.83%
<CAPTION>
1995
-----------------------
Average Yield/
Balance Interest Rate
-----------------------
<S> <C> <C> <C>
ASSETS
Securities:
Taxable $38,368 $2,358 6.15%
Tax-Exempt 5,918 628 10.61%
Interest Earning Balances 3,691 218 5.91%
Federal Funds Sold 2,840 166 5.85%
Loans, Net 61,939 6,044 9.76%
-----------------------
Total Earning Assets 112,756 $9,414 8.35%
-------------
Allowance for Loan Losses (1,392)
Nonearning Assets 8,773
--------
Total Assets $120,137
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
NOW, MMDA & Savings $38,843 $1,043 2.69%
Time 53,936 2,945 5.46%
Repurchase Agreements and
Short-term Borrowings 104 6 5.88%
----------------------
Total interest bearing
liabilities $92,883 $3,994 4.30%
--------------
Demand Deposits 12,454
Other Liabilities 1,004
-------
Total Liabilities 106,341
Shareholders' Equity 13,796
--------
Total Liabilities and
Shareholders' Equity $120,137
========
Net Interest Income $5,420
========
Net Yield on Interest Earning
Assets:
Total Yield on Earning Assets 8.35%
Rate on Supporting Liabilities 4.30%
Net Interest Margin 4.81%
</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.
8
<PAGE>
on deposits of $88,000. Rates paid on interest-bearing liabilities increased
4 basis points in 1997 after a decrease of 9 basis points in 1996. 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 $83,000 in 1997, compared to $35,000
for 1996.
In summary, net interest income on a taxable equivalent basis increased
$235,000 from 1996 to 1997. 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 1996 to 1997 of $108,000. Interest rate changes
also caused an increase in net interest income from 1996 to 1997 in the amount
of $127,000. In 1996, the increase in net interest income of $302,000 from
the 1995 level was the result of an increase in net asset volume of $334,000.
Changes in interest rates resulted in a decline in net interest income of
$32,000.
<TABLE>
<CAPTION>
TABLE 2: RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
Taxable Equivalent Basis 1997 Compared to 1996
(In Thousands) Increase (Decrease) in Income/Expense
Due to Change In:
Volume Rate Total
------ ---- -----
<S> <C> <C> <C>
Interest Earning Assets:
Securities:
Taxable $ (271) $ 68 $ (203)
Tax-Exempt (327) (10) (337)
Depository Institutions 193 31 224
Federal Funds Sold 45 0 45
Loans, Net 663 (42) 621
---- ---- ----
Total Interest Earning Assets 303 47 350
---- ---- ----
Interest Bearing Sources of Funds:
Interest Bearing Deposits:
NOW, MMDA & Savings (80) (88) (168)
Time 235 0 235
Short-term Borrowings 40 8 48
---- ---- ----
Total Interest Bearing
Sources of Funds 195 (80) 115
---- ---- ----
Change in Net Interest Income $ 108 $ 127 $ 235
====== ====== ======
<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
====== ====== ======
</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.
NONINTEREST INCOME/NONINTEREST EXPENSE
Noninterest income exclusive of net securities gains amounted to $589,000
in 1997, an increase of $61,000 from $528,000 in 1996. This change was
primarily due to an increase in income from service charges on deposit
accounts of $54,000. There were net gains on sales of securities of $31,000
and $5,000 in 1997 and 1996 compared to no gains on sales of securities in
1995. Noninterest income in 1995 was $476,000.
9
<PAGE>
A summary of the major components of noninterest operating expense for
the years ended December 31, 1997, 1996 and 1995 is contained in the
Consolidated Statements of Income. Noninterest expense in 1997 decreased
$291,000 from 1996. The major elements contributing to the decrease were
expenses of salaries and employee benefits and net cost of operation and
disposal of other real estate owned. The most significant increase in
noninterest expense was data processing.
Salaries and employee benefit costs decreased $278,000 from 1996 to 1997.
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 $279,000,
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 $144,000, less applicable deductions, was paid in January,
1997. Salary and employee benefits expense for 1996 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. The payments,
pursuant to this Agreement, did not 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 $15,000 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 Corporation's noninterest expense was further lessened by the
reduction of the net cost of operation and disposal of other real estate owned
in 1997 of approximately $55,000. The reduction was primarily the result of a
net decrease in the write-down and the associated expenses of one particular
other real estate owned property of approximately $40,000 from 1996 to 1997.
The decreases in noninterest expense were offset with an increase in data
processing expense of approximately $34,000. The increase was due in part to
increased transaction volume of the Banks' customers.
Noninterest expense in 1996 increased $382,000 from 1995. The primary
factors in the increase were a rise in the cost of salaries and employee
benefits of $456,000 and an increase in occupancy and equipment expenses of
approximately $58,000. A decrease in FDIC insurance premiums in the amount of
$115,000 from the 1995 level and a $45,000 decline in the cost of supplies,
stationery and printing contributed to offset the increase.
The Corporation is aware of the issues associated with the programming
code in existing computer systems as the millennium (year 2000) approaches.
The "year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit year
value to 00. The issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Corporation is utilizing both internal and external resources to
identify, correct or reprogram, and test the systems for the year 2000
compliance. It is anticipated that all reprogramming efforts will be complete
by December 31, 1998, allowing adequate time for testing. To date,
confirmations have been received from the Corporation's primary processing
vendors that plans are being developed to address processing of transactions
in the year 2000. Management's assessment of the year 2000 compliance expense
was determined to be immaterial and not have a material effect on the
Corporation's future financial position or results of operations.
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. 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
10
<PAGE>
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, 1996, the market value of the investment portfolio had
decreased to a level at which unrealized losses exceeded unrealized gains in
the amount of $758,000. 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.
During the third quarter of 1997, the Corporation liquidated a number of
its longer term fixed rate securities and replaced them with mortgage-backed
securities. At the time, municipal securities were priced higher than normal
resulting in the Corporation being able to receive a comparatively more
attractive price. Additionally, the mortgage-backed securities purchased to
replace the municipals tend to have a less volatile price in the event of rate
changes. Because economic indicators and the inflation rate did not clearly
indicate whether rates would increase or decrease throughout the last half of
1997, it was felt securities which reacted with less volatility in the event
of rate changes would be preferred. In fact, the prime rate did not change
during the last three quarters of 1997 and other market rates fluctuated
throughout 1997. However, in general, rates declined during the last six
months of the year. As a result, the market value of the Corporation's
investment portfolio increased. At December 31, 1996, unrealized losses on
the Corporation's available-for-sale securities exceeded unrealized gains by
$758,000. By December 31, 1997, the Corporation's available-for-sale
securities portfolio contained an unrealized gain of $124,000. 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 $418,000 at December 31, 1997. 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's investment
portfolio did not contain any securities defined as derivatives at December
31, 1997.
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
gain at December 31, 1997 was $124,000 while the net unrealized loss on
securities at year-end 1996 was $758,000, as outlined in Note 5 to the
Consolidated Financial Statements.
<TABLE>
<CAPTION>
TABLE 3: CARRYING VALUES OF SECURITIES
Securities Available-for-Sale
--------------------------------------
(In Thousands) Years ended December 31,
--------------------------------------
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
U. S. Treasury Securities $ 0 $ 0 $ 2,009
Obligations of U.S.
Government Agencies 20,492 26,745 13,741
Mortgage-Backed:
U.S. Government Agencies 18,821 12,270 25,259
Other Mortgage-Backed 1,744 2,011 2,270
Asset-Backed 0 0 156
Obligations of State
& Political Subdivisions 2,624 9,870 6,963
Stock 475 549 601
------- ------- -------
Total $ 44,156 $ 51,445 $ 50,999
========= ========= =========
</TABLE>
11
<PAGE>
LOANS AND COMMITMENTS
At December 31, 1997, loans net of unearned income totalled approximately
$73,940,000, a $6,767,000 or 10.1% increase from December 31, 1996. At
December 31, 1996, such loans totalled $67,173,000 and at December 31, 1995,
loans net of unearned income totalled approximately $61,601,000. At December
31, 1997, loans net of unearned income represented 61.1% of earning assets as
compared to 56.6% at December 31, 1996. As the balance of the loan portfolio
at December 31, 1997, exceeded the December 31, 1996, balance by $6,767,000,
the average balance increased by a comparable amount of $7,029,000 in 1997.
The Corporation's loan volume has increased steadily over the past three
years while maintaining 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 been maintained in improving
asset quality while increasing the loan volume. Improvements in the
Corporation's credit underwriting standards continues to impact the amount of
mobile home loans contained within the portfolio which declined in excess of
$1,018,000 in 1997.
As noted in Table 7 following, nonperforming loans declined steadily from
1993 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 of which was liquidated during 1997.
Other loans on nonaccrual status were also reduced during 1996 and 1997 with a
resultant total decline in nonperforming loans of $1,260,000 and $58,000,
respectively. At December 31, 1997, nonperforming loans were $526,000, 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
portion of Huntingdon County. As noted in Table 4, loans to consumers
totalled $17,575,000, $18,051,000 and $17,924,000 at December 31, 1997, 1996
and 1995, 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 recoveries on residential mortgages
for the years 1993 through 1997 averaged approximately $3,000 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 $105,000 per year over the
last five years. Of such amount, approximately $93,000 or 88.6% 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
12
<PAGE>
charge-offs of consumer loans as a percentage of average consumer loans for
1995 through 1997 have totalled .71%.
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, 1997, loans to
these industries as a percent of total loans were approximately 5.50%, 4.63%,
4.75% and 6.31%. Loans to these groups were approximately 3.78%, 4.91%, 5.88%
and 7.48% of total loans, respectively, at December 31, 1996. 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, 1997, the hotel/motel/restaurant industry was the
only concentration that exceeded 25% of total equity capital as it totalled
27.30%. 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 $11,356,000 at December 31, 1997, from
$8,335,000 at December 31, 1996. 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 $210,000 at December 31, 1997, from $246,000 at December 31, 1996.
Commitments to extend credit to consumers secured by residential real estate
increased to $1,874,000 at December 31, 1997, from $1,578,000 at December 31,
1996. Unsecured consumer credit lines increased to $850,000 at December 31,
1997, from $685,000 at December 31, 1996.
Distribution of the loan portfolio of the Corporation according to major loan
classification is shown in Table 4.
<TABLE>
<CAPTION>
TABLE 4: LOAN PORTFOLIO
Years ended December 31,
-------------------------------
(In Thousands) 1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Residential mortgage $ 21,383 $ 19,534 $ 20,102
Commercial mortgage 23,197 19,584 17,428
Consumer 17,575 18,051 17,924
Commercial and agricultural 14,017 12,935 9,957
-------- -------- --------
Total Loans 76,172 70,104 65,411
Less: Unearned Income 2,232 2,931 3,810
Allowance for loan losses 958 957 1,333
-------- -------- --------
Net Loans $ 72,982 $ 66,216 $ 60,268
======== ======== ========
</TABLE>
13
<PAGE>
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 1997, 1996 and 1995, it was determined that no
additional provisions were required for 1995, 1996 or 1997.
A summary of charge-offs and recoveries on loans is presented in Table 5.
The ratio of net charge-offs to average outstanding loans was not applicable
in 1997 due to the recoveries exceeding the charge-offs. For 1996, the ratio
increased to .61% from .27% in 1995.
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, 1997, was approximately
$958,000 or 1.29% of loans net of unearned income as compared to $957,000 or
1.42% at December 31, 1996, and $1,333,000 or 2.16% at December 31, 1995.
14
<PAGE>
<TABLE>
<CAPTION>
TABLE 5: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Years ended December 31,
-------------------------------
(In Thousands) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Allowance for loan losses at January 1 $ 957 $ 1,333 $ 1,494
Loans charged off:
Commercial and agricultural 1 328 15
Real estate-residential mortgage 0 13 0
Consumer 75 149 180
------- ------- -------
Total loans charged off 76 490 195
------- ------- -------
Recoveries on loans previously charged off:
Commercial and agricultural 45 76 27
Real estate-residential mortgage 28 23 0
Consumer 4 15 7
------- ------- -------
Total Recoveries 77 114 34
------- ------- -------
Net Charge-offs(Recoveries) (1) 376 161
Provision for loan losses 0 0 0
------- ------- -------
Allowance for loan losses at December 31 $ 958 $ 957 $ 1,333
======= ======= =======
Net charge-offs to average loans ** .61% 0.27%
Provision to average loans 0.00% 0.00% 0.00%
Allowance to period-end loans 1.29% 1.42% 2.16%
Allowance as multiple of
net charge-offs ** 2.54x 8.28x
Allowance as multiple of
nonperforming loans 1.82x 1.64x .72x
<CAPTION>
Years ended December 31,
----------------------------
(In Thousands) 1994 1993
------ ------
<S> <C> <C>
Allowance for loan losses at January 1 $ 1,953 $ 2,239
Loans charged off:
Commercial and agricultural 38 500
Real estate-residential mortgage 23 0
Consumer 155 18
------- -------
Total loans charged off 216 518
------- -------
Recoveries on loans previously charged off:
Commercial and agricultural 51 86
Real estate-residential mortgage 0 0
Consumer 6 21
------- -------
Total Recoveries 57 107
------- -------
Net Charge-offs(Recoveries) 159 411
Provision for loan losses (300) 125
------- -------
Allowance for loan losses at December 31 $ 1,494 $ 1,953
======= =======
Net charge-offs to average loans 0.26% 0.60%
Provision to average loans * 0.18%
Allowance to period-end loans 2.46% 3.01%
Allowance as multiple of
net charge-offs 9.40x 4.75x
Allowance as multiple of
nonperforming loans 2.41x 2.04x
* A negative provision was recorded in 1994.
** Recoveries exceeded charge-offs in 1997.
</TABLE>
<TABLE>
<CAPTION>
TABLE 6: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
1997 1996 1995
---------------- ---------------- ----------------
(In Thousands) Percent Percent Percent
Amount of Loans Amount of Loans Amount of Loans
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Commercial
and agricultural $ 362 50% $ 365 48% $ 640 44%
Residential mortgage 0 29 0 29 2 33
Consumer 230 21 282 23 376 23
Unallocated 366 310 315
---- ---- ---- ---- ---- ----
Balance at Dec. 31 $ 958 100% $ 957 100% $1,333 100%
==== ==== ==== ==== ===== ====
<CAPTION>
1994 1993
--------------- ---------------
(In Thousands) Percent Percent
Amount of Loans Amount of Loans
------ -------- ------ --------
<S> <C> <C> <C> <C>
Commercial
and agricultural $ 624 43% $1,113 44%
Residential mortgage 2 35 17 25
Consumer 334 22 273 31
Unallocated 534 550
----- ---- ----- ----
Balance at Dec. 31 $1,494 100% $1,953 100%
</TABLE>
15
<PAGE>
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 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,
1997, totalled approximately $526,000 or .41% of total assets. Included
within the classification of nonperforming loans at December 31, 1997, 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, 1997, the
Corporation's impaired loans totalled approximately $289,000 or 55% of total
nonperforming loans as compared to $60,000 or 10% of total nonperforming loans
at December 31, 1996.
The nonperforming loan balance of $526,000 at December 31, 1997, was a
$58,000 decrease from December 31, 1996. At December 31, 1996, nonperforming
loans totalled approximately $584,000 a decrease of $1,260,000 from December
31, 1995. 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, 1995, totalled
approximately $1,844,000 or 1.48% 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 1997 or 1996. Interest income on loans would have been
increased by approximately $42,000, $108,000 and $128,000 in 1997, 1996 and
1995, 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 $13,000, $7,000 and $6,000 in 1997, 1996 and 1995,
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, 1997, 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.
16
<PAGE>
<TABLE>
<CAPTION>
TABLE 7: NONPERFORMING LOANS
Years ended December 31,
-------------------------------------------
(In Thousands) 1997 1996 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Nonaccruing Loans $ 311 $ 584 $ 1,674 $ 620
Accrual Loans-90 days
or more past due 215 0 0 1
Restructured Troubled Debt 0 0 170 0
------- ------- ------- -------
Total nonperforming loans $ 526 $ 584 $ 1,844 $ 621
======= ======= ======= =======
Nonperforming Loans as a
percent of loans, net
of unearned income .71% .87% 2.99% 1.02%
<CAPTION>
Years ended December 31,
------------------------
(In Thousands) 1993
--------
<S> <C>
Nonaccruing Loans $ 921
Accrual Loans-90 days
or more past due 38
Restructured Troubled Debt 0
-------
Total nonperforming loans $ 959
========
Nonperforming Loans as a
percent of loans, net
of unearned income 1.48%
</TABLE>
DEPOSITS AND OTHER FUNDING SOURCES
The Corporation's primary source of funds is its deposits. Deposits at
December 31, 1997, were approximately $109,421,000 compared to $105,755,000 at
December 31, 1996, an increase of approximately $3,666,000. The deposit class
experiencing the largest increase was time deposits of less than $100,000
which increased $3,427,000. The total of other deposits increased slightly by
$239,000. Although certificates of deposit of $100,000 and over declined in
1997, such deposits are generally considered more volatile. Additionally, as
noted in Table 1 above, the average volume of deposits increased by $2,309,000
during 1997. 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, 1997 and 1996, outstanding borrowed funds of the
Corporation totalled $2,476,000 and $106,000, respectively while the average
amount of repurchase agreements and short-term borrowings for the year 1997
and 1996 was $1,569,000 and $846,000, respectively, as noted in Table 1.
Although the Corporation had no borrowed funds at December 31, 1995, average
short-term borrowings for 1995 were $104,000. Average balances and average
interest rates applicable to the major classifications of deposits for the
years ended December 1997, 1996 and 1995 are presented in Table 8.
<TABLE>
<CAPTION>
TABLE 8: DEPOSITS BY MAJOR CLASSIFICATION
(In Thousands)
Years ended December 31,
-------------------------------------
1997 1996
-------------------------------------
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- -------
<S> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 14,919 0.00% $ 13,625 0.00%
Interest bearing demand deposits 12,081 1.37% 11,745 1.60%
Money Market Accounts 5,264 2.17% 7,322 2.65%
Savings 18,988 2.70% 20,558 2.81%
Time 61,141 5.46% 56,834 5.46%
------ ------
Total $112,393 $110,084
======== ========
<CAPTION>
----------------
1995
----------------
Average Average
Balance Rate
<S> <C> <C>
Noninterest bearing demand deposits $ 12,454 0.00%
Interest bearing demand deposits 10,568 2.02%
Money Market Accounts 7,202 2.86%
Savings 21,073 2.96%
Time 53,936 5.46%
--------
Total $105,233
========
</TABLE>
17
<PAGE>
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 1997, capital increased by $1,957,000 or 12.9% above year-end
1996. Earnings in 1997 of $1,860,000 net of dividends paid of $485,000
increased capital by $1,374,000. This increase was in addition to a capital
adjustment resulting from an increase in the market value of the Corporation's
available-for-sale investment portfolio which positively impacted capital in
the amount of $582,000. Comparatively, in 1996 capital increased by $394,000
or 2.7% above year-end 1995. During 1996, the Corporation realized earnings
in the amount of $1,524,000 of which $371,000 was paid to shareholders as
dividends. The increase in capital of $1,152,000 was partially offset by a
capital adjustment resulting from a decline in the market value of the
Corporation's available-for-sale investment portfolio of $758,000.
As noted above, the annual shareholder cash dividend payment in 1997 was
$485,000 compared to $371,000 in 1996. The dividend payout ratio, which
represents the percentage of annual net income returned to the shareholders in
the form of cash dividends, was 26.1% for 1997 compared to 24.3% for 1996.
The dividend payout ratio for 1995 was 17.1%. 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.
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, 1997, the Corporation's Tier 1 risk-weighted capital
ratio was 20.7% as compared to 19.8% at December 31, 1996. The Corporation's
total capital ratio at December 31, 1997, was 21.8% as compared to 21.0% at
the end of the prior year. Both risk-weighted capital ratios exceed the 1997
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, 1997, was 13.0% as compared to 12.2% at December 31,
1996.
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 1997, 1996 and 1995 were $695,000, $347,000 and
$266,000, respectively. The large increase in income tax expense during 1997
was in part reflective of a reduction of tax exempt income in 1997 and also
due in part to an increase in net income for 1997. For 1996, income before
income taxes decreased while income tax expense 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
$290,000.
18
<PAGE>
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. 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, 1997, deposits exclusive of time
deposits of $100,000 and over, increased $3,968,000 from the balance at
December 31, 1996 and the average balance of these deposits increased
approximately $2,407,000 from 1996 to 1997. 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 $816,000 since 1995. Although certificates of deposit
increased during 1995 in the amount of $9,424,000, during 1996 certificates of
deposit decreased $1,963,000. During 1997, certificates of deposit increased
approximately $3,126,000. Total deposits for the years 1995 through 1997
increased by approximately $9,771,000. 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, 1997,
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>
<CAPTION>
TABLE 9: MATURITY DISTRIBUTION OF SECURITIES AVAILABLE-FOR-SALE AND YIELD
(In Thousands) December 31, 1997
-----------------------------------
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 $ 0 $ 19,997
Mortgage-backed
U.S. Government agencies 306 709 842
State & political subdivisions 175 0 348
Other mortgage-backed securities 0 0 0
Stock 0 0 0
------- ------- -------
Total Securities $ 481 $ 709 $ 21,187
======= ======= =======
Percent of Total Securities 1.09% 1.61% 47.98%
Weighted Average Yields 6.19% 5.82% 6.98%
<CAPTION>
After No fixed
Ten Years Maturity Total
--------- --------- ---------
<S> <C> <C> <C>
U.S. Government agencies $ 495 $ 0 $ 20,492
Mortgage-backed
U.S. Government agencies 16,964 0 18,821
State & political subdivisions 2,101 0 2,624
Other mortgage-backed securities 1,744 0 1,744
Stock 0 475 475
------- ------- -------
Total Securities $ 21,304 $ 475 $ 44,156
======== ======== ========
Percent of Total Securities 48.25% 1.07% 100.00%
Weighted Average Yields 7.04% 6.50% 6.98%
</TABLE>
Yields are presented based on actual rates and are not computed on a tax
equivalent basis.
19
<PAGE>
<TABLE>
<CAPTION>
TABLE 10: LOAN MATURITIES AND INTEREST SENSITIVITY
(In Thousands) December 31, 1997
----------------------------------
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 $ 95 $ 1,352 $ 4,330
Commercial Mortgage 204 815 1,614
Consumer 474 7,298 4,191
Commercial and Agricultural 120 2,612 1,370
-------- -------- --------
Total Fixed 893 12,077 11,505
-------- -------- --------
Variable rate loans with
a remaining maturity of:
Residential Mortgage 149 1,127 13,920
Commercial Mortgage 1,128 1,842 17,594
Consumer 40 446 3,329
Commercial and Agricultural 4,658 2,466 2,766
-------- -------- --------
Total Variable 5,975 5,881 37,609
-------- -------- --------
Total $ 6,868 $ 17,958 $ 49,114
========= ========= =========
<CAPTION>
--------
Loan Maturities Total
--------
<S> <C>
Fixed rate loans with a
remaining maturity of:
Residential Mortgage $ 5,777
Commercial Mortgage 2,633
Consumer 11,963
Commercial and Agricultural 4,102
--------
Total Fixed 24,475
--------
Variable rate loans with
a remaining maturity of:
Residential Mortgage 15,196
Commercial Mortgage 20,564
Consumer 3,815
Commercial and Agricultural 9,890
--------
Total Variable 49,465
--------
Total $ 73,940
=========
</TABLE>
<TABLE>
<CAPTION>
TABLE 11: MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
(In Thousands) December 31,
------------
1997
--------
<S> <C>
Maturing in three months or less $ 2,716
Maturing in three to six months 584
Maturing in six to twelve months 3,814
Maturing over twelve months 2,701
--------
$ 9,815
========
</TABLE>
ASSET-LIABILITY, INTEREST RATE AND MARKET RISK MANAGEMENT
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.
The Corporation's primary market risk exposure is interest rate risk and,
to a lesser extent, liquidity risk. Because of the nature of the
Corporation's operations, the Corporation is not subject to currency exchange
or commodity price risk and, since the Corporation has no trading portfolio,
it is not subject to trading risk. Currently the Corporation has equity
securities that represent only 1.1% of its investment portfolio and,
therefore, equity price risk is not significant.
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
20
<PAGE>
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, 1997. 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. Based upon the
economic forecasts of the most likely interest rate movement, the
Corporation's 12 month percentage deviation of earnings from a flat rate
scenerio would be .5%.
<TABLE>
<CAPTION>
TABLE 12: INTEREST RATE SENSITIVITY GAPS
(In Thousands)
1998 1999 2000 2001
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans:
Fixed $ 5,621 $ 5,047 $ 4,392 $ 3,750
Variable 45,863 529 893 209
Securities:
Fixed 3,007 1,848 1,445 1,129
Variable 9,980
Other interest-earning assets 2,942 0 0 0
------ ------ ------ ------
Total Interest-earning assets 67,413 7,424 6,730 5,088
------ ------ ------ ------
Interest-bearing liabilities:
Demand and savings deposits 33,890 0 0 0
Time deposits:
Fixed 29,138 11,348 4,657 463
Variable 12,481
Repurchase agreements 2,476 0 0 0
------ ------ ------ ------
Total interest-bearing liabilities 77,985 11,348 4,657 463
Interest rate sensitivity gap (10,572) (3,924) 2,073 4,625
-------- -------- ------- -------
Cumulative rate sensitivity gap $ (10,572) $ (14,496) $ (12,423) $ (7,798)
======== ======== ======== ========
Interest rate sensitivity gap
as a percent of interest
earning assets (8.7%) (12.0%) (10.3%) (6.4%)
<CAPTION>
2002 Thereafter Total
------- ---------- -------
<S> <C> <C> <C>
Interest-earning assets:
Loans:
Fixed $ 2,226 $ 3,439 $ 24,475
Variable 134 1,837 49,465
Securities:
Fixed 880 25,867 34,176
Variable 9,980
Other interest-earning assets 0 0 2,942
------- ------- -------
Total Interest-earning assets 3,240 31,143 121,038
------- ------- -------
Interest-bearing liabilities:
Demand and savings deposits 0 0 33,890
Time deposits:
Fixed 913 4 46,523
Variable 12,481
Repurchase agreements 0 0 2,476
------- ------- -------
Total interest-bearing liabilities 913 4 $ 95,370
=======
Interest rate sensitivity gap 2,327 31,139
-------- --------
Cumulative rate sensitivity gap $ (5,471) $ 25,668
======== ========
Interest rate sensitivity gap
as a percent of interest
earning assets (4.5%) 21.2%
</TABLE>
21
<PAGE>
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 1997, in order to adjust its interest rate sensitivity, the
Corporation reduced its rate sensitive liabilities by allowing shorter term
time deposits of $100,000 and over to run off and eliminated its borrowed
funds. Rate sensitive assets were increased during 1997 with the growth of
variable rate loans. The above strategy was implemented to better position
the Corporation for rate changes in either direction in consideration
conflicting economic forecasts. The Corporation's asset/liability management
focus for 1998 will include increasing the Corporation's rate sensitivity gap.
As noted above, at December 31, 1997, 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 1998.
22
<PAGE>
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
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 and Consultants
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Cardinal Bancorp, Inc.
We have audited the consolidated balance sheet of Cardinal Bancorp, Inc. and
subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cardinal
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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
impairment of loans and related allowance for loan losses.
/s/ S. R. Snodgrass, A.C.
Wexford, PA
January 30, 1998
24
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,361,379 $ 6,452,163
Interest earning balances 1,434,306 13,857
Federal funds sold 1,508,000 0
Securities available-for-sale 44,156,043 51,445,492
Loans 76,171,719 70,103,719
Less: Unearned discount 2,231,598 2,930,655
Allowance for loan losses 958,338 956,685
---------- ----------
Net Loans 72,981,783 66,216,379
Accrued interest receivable 887,427 1,160,991
Premises and equipment, net 2,631,671 2,756,476
Foreclosed assets 168,585 229,357
Other assets 812,053 1,282,017
---------- ----------
TOTAL ASSETS $129,941,247 $129,556,732
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Demand (non-interest bearing) $ 16,526,799 $ 13,355,981
NOW, money market and
savings accounts 33,890,620 36,520,902
Time, less than $100,000 49,188,555 45,761,145
Time, $100,000 and over 9,815,095 10,116,849
----------- -----------
Total Deposits 109,421,069 105,754,877
Securities sold under agreements
to repurchase 2,475,926 105,939
Short term borrowings 0 7,561,000
Accrued interest payable 557,939 531,090
Other liabilities 306,100 380,333
----------- -----------
Total Liabilities 112,761,034 114,333,239
SHAREHOLDERS' EQUITY
Common stock, par value $.50,
2,000,000 shares authorized,
issued and outstanding
990,000 shares 495,000 495,000
Surplus 2,263,620 2,263,620
Retained earnings 14,339,806 12,965,373
Net unrealized securities gains/(losses) 81,787 (500,500)
----------- -----------
Total Shareholders' Equity 17,180,213 15,223,493
----------- -----------
TOTAL LIABILITIES & SHAREHOLDERS EQUITY $129,941,247 $129,556,732
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 6,504,371 $ 5,929,114 $ 6,081,265
Depository institutions 253,515 28,539 217,723
Federal funds sold 101,991 56,656 165,917
Securities:
Taxable 2,699,279 2,898,444 2,323,923
Tax-exempt 361,928 584,133 414,470
Dividends 30,873 34,854 34,522
---------- ---------- ----------
Total Interest Income 9,951,957 9,531,740 9,237,820
---------- ---------- ----------
INTEREST EXPENSE:
Deposits 4,130,157 4,062,674 3,988,273
Interest on securities sold under
agreements to repurchase 67,905 8,693 0
Short-term borrowings 14,686 26,788 6,127
---------- ---------- ----------
Total Interest Expense 4,212,748 4,098,155 3,994,400
---------- ---------- ----------
Net Interest Income 5,739,209 5,433,585 5,243,420
Provision for Loan Losses 0 0 0
---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses 5,739,209 5,433,585 5,243,420
---------- ---------- ----------
OTHER INCOME:
Service charges on deposit
accounts 427,1843 73,595 296,380
Net securities gains 30,875 4,685 0
Other income 161,727 154,868 179,495
---------- ---------- ----------
Total Other Income 619,786 533,148 475,875
---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits 2,123,534 2,401,427 1,945,413
Occupancy and equipment expenses 431,838 444,792 386,454
Data processing 159,829 125,964 96,891
F.D.I.C. insurance 13,262 2,003 117,010
Legal and professional fees 102,063 100,358 126,314
Net cost of operation and disposal
of other real estate owned 46,103 100,879 86,424
Shares tax 154,923 143,622 111,375
Supplies, stationery and printing 123,371 145,139 189,873
Other expenses 649,611 631,615 654,316
---------- ---------- ----------
Total Other Expenses 3,804,534 4,095,799 3,714,070
---------- ---------- ----------
Income before income taxes 2,554,461 1,870,934 2,005,225
Income tax expense 694,928 347,230 265,522
---------- ---------- ----------
NET INCOME $ 1,859,533 $ 1,523,704 $ 1,739,703
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
EARNINGS PER SHARE:
Basic $ 1.88 $ 1.54 $ 1.76
Diluted 1.85 1.53 1.75
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Securities
Common Retained Gains/
Stock Surplus Earnings (Losses)
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE At
JANUARY 1, 1995 $ 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 benefit
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 liability
change of $390,678 (758,373)
--------- ----------- ------------ -------------
BALANCE At
DECEMBER 31, 1996 $ 495,000 $ 2,263,620 $ 12,965,373 $ (500,500)
Net income for 1997 1,859,533
Cash dividends declared --
$.49 per share (485,100)
Net change in unrealized
gains/(losses) on
securities available-for-
sale, net of tax benefit
change of $(299,966) 582,287
---------- ---------- ----------- -----------
BALANCE AT
DECEMBER 31, 1997 $ 495,000 $ 2,263,620 $ 14,339,806 $ 81,787
========== ========== =========== ===========
<CAPTION>
Total
----------
<S> <C>
BALANCE At
JANUARY 1, 1995 $ 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 benefit
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
Net change in unrealized
gains/(losses) on
securities available-for-
sale, net of tax liability
change of $390,678 (758,373)
----------
BALANCE At
DECEMBER 31, 1996 $ 15,223,493
Net income for 1997 1,859,533
Cash dividends declared --
$.49 per share (485,100)
Net change in unrealized
gains/(losses) on
securities available-for-
sale, net of tax benefit
change of $(299,966) 582,287
----------
BALANCE AT
DECEMBER 31, 1997 $ 17,180,213
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,859,533 $ 1,523,704 $ 1,739,703
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Depreciation and amortization 208,365 222,864 198,995
Net amortization of
discounts and premiums 8,649 32,944 112,171
Net securities gains (30,875) (4,685) 0
Provision for loss on
foreclosed assets 30,507 70,121 0
Loss on sale of assets 1,190 10,826 12,507
(Increase) decrease in accrued
interest and other assets 443,561 (320,162) (681,193)
Increase (decrease) in accrued
interest and other liabilities (47,383) 65,097 276,533
--------- --------- ---------
Net Cash Provided by
Operating Activities 2,473,547 1,600,709 1,658,716
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sales of
securities available-
for-sale 14,731,238 11,067,779 0
Redemption of Federal Home
Loan Bank Stock 73,900 51,500 51,200
Proceeds from maturities
of securities available-
for-sale 4,422,208 6,588,917 4,598,292
Proceeds from maturities
of held-to-maturity
securities 0 0 491,091
Purchase of securities
available-for-sale (11,033,418) (19,332,099) (14,139,549)
Purchase of held-to-maturity
securities 0 0 (99,485)
Net loans (originated)
by customers (6,873,656) (6,241,562) (916,515)
Premises and equipment purchases (83,560) (109,033) (969,011)
Proceeds from sales of
premises and equipment 0 1,674 500
Proceeds from sales of
foreclosed assets 137,328 337,340 665,437
Net Cash Provided (Used) by
Investing Activities 1,374,040 (7,635,484) (10,318,040)
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
<CAPTION>
CARDINAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in
deposit accounts $ 540,536 $ (1,078,819) $ (278,209)
Net increase (decrease) in
certificates of deposit 3,125,656 (1,962,524) 9,424,302
Dividends paid (485,100) (371,250) (297,000)
Increase (decrease) in
other borrowings (5,191,014) 7,666,939 0
---------- ---------- ----------
Net Cash Provided (Used) by
Financing Activities (2,009,922) 4,254,346 8,849,093
---------- ---------- ----------
Increase (Decrease) in Cash and
Cash Equivalents 1,837,665 (1,780,429) 189,769
Cash and Cash Equivalents at
Beginning of Year 6,466,020 8,246,449 8,056,680
---------- ---------- ----------
Cash and Cash Equivalents at
End of Year $ 8,303,685 $ 6,466,020 $ 8,246,449
=========== =========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 4,185,899 $ 4,174,588 $ 3,783,128
Income taxes paid 525,000 369,670 435,000
Loans transferred to
foreclosed assets 108,253 293,032 198,659
</TABLE>
The accompanying notes are an integral part of these financial statements.
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). 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 Available-for-Sale: 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: 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 charged to operations. The provision for
loan losses is based on management's periodic evaluation of individual loans,
economic factors, past loan loss experience, changes in the composition and
volume of the portfolio, 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.
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 Corporation
individually evaluates such loans for impairment and does not aggregate loans
by major risk classifications. The definition of "impaired loans" is not the
same as the definition of "nonaccrual loans," although the two categories
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, provided the loan is not a commercial or commercial real
estate classification. Factors considered by management in determining
impairment include payment status and collateral value. The amount of
impairment for these types of 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 secured by one-to-four family properties and all consumer loans
are generally of smaller balances, and a homogeneous nature, thus 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
31
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a case-by-case basis, taking into consideration all of the circumstances
concerning the loan, the credit worthiness and payment history of the
borrower, the length of the payment delay, and the amount of shortfall in
relation to the principal and interest owed.
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: In February 1997, the Financial Accounting Standards
- -------------------
Board (the FASB) issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." Statement No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share.
All earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements.
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 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pending Accounting Pronouncements: In June 1996, the FASB issued Statement of
- ----------------------------------
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings based on a control-oriented
"financial-components" approach. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities when
extinguished. The provisions of Statement 125 are effective for transactions
occurring after December 31, 1996, except those provisions relating to
repurchase agreements, securities lending, and other similar transactions and
pledged collateral, which have been delayed until after December 31, 1997, by
Statement No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125, an amendment of FASB Statement No. 125." The adoption
of the provisions of Statement No. 127 is not expected to have a material
impact on the financial position or results of operations.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and presentation
of comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general purpose financial statements. It requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is presented with the same prominence as other financial statements. The
provisions of the statement are effective for all fiscal years beginning after
December 15, 1997. The adoption of this statement is not expected to have a
material impact on financial position or results of operations.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share. There were no convertible securities which would effect the
numerator in calculating basic and diluted earnings per share; therefore, net
income as presented on the Consolidated Statements of Income will be used as
the numerator. The following table sets forth a reconciliation of the
denominator of the basic and diluted earnings per share computation.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Denominator:
Denominator for basic earnings per
share-weighted-average shares 990,000 990,000 990,000
Stock options 16,569 6,149 2,269
-------- -------- --------
Denominator for diluted earnings per
share-adjusted weighted-average
average assumed conversions 1,006,569 996,149 992,269
========= ========= =========
</TABLE>
33
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - 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 have been restated to reflect
the stock split.
NOTE 4 - 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, 1997 and 1996, were approximately $590,000
and 546,000, respectively.
NOTE 5 - 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 1998 was $2,526,795 at December 31, 1997.
34
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - SECURITIES AVAILABLE-FOR-SALE
Amortized cost and estimated fair values of securities available-for-sale are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Obligations of U.S.
government agencies $ 20,383,910 $ 111,812 $ 3,960 $ 20,491,762
Mortgage-backed:
U.S. government
agencies 18,888,732 83,674 151,862 18,820,544
Other mortgage-backed 1,750,746 0 6,571 1,744,175
Obligations of states and
political subdivisions 2,533,436 90,826 0 2,624,262
Stock 475,300 0 0 475,300
---------- -------- --------- ----------
$ 44,032,124 $ 286,312 $ 162,393 $ 44,156,043
============ ========= ========== ============
<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
============ ========= =========== ============
</TABLE>
The Corporation recognized gross realized gains on sales of securities of
$179,301 and $121,397 in 1997 and 1996, respectively while gross realized
losses on sales of securities totaled $148,426 in 1997 and $116,712 in 1996.
Proceeds from sales of securities were $14,731,238 and $11,067,779 in 1997 and
1996, respectively. There were no sales of securities in 1995, and therefore,
there was no gross realized gain or loss incurred in that year.
At December 31, 1997 and 1996, securities with a carrying value of $22,228,054
and $18,850,220, respectively, were pledged to secure public monies as
required by law, and for other purposes.
35
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
The maturities of debt securities at December 31, 1997, 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 $ 479,292 $ 480,643
Due from one to five years 710,625 708,717
Due from five to ten years 21,065,830 21,186,784
Due after ten years 21,301,077 21,304,599
----------- -----------
$43,556,824 $43,680,743
=========== ===========
</TABLE>
NOTE 7 - LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Residential Mortgage $ 21,382,996 $ 19,534,376
Commercial Mortgage 23,197,168 19,583,590
Consumer 17,574,504 18,050,964
Commercial and Agricultural 14,017,051 12,934,789
----------- -----------
Total Loans 76,171,719 70,103,719
Less: Unearned Discount 2,231,598 2,930,655
Allowance for Loan Losses 958,338 956,685
----------- -----------
Net Loans $ 72,981,783 $ 66,216,379
============ ============
</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, 1997, loans to these industries as a percent of total loans were
approximately 5.50%, 6.31%, 4.63% and 4.75%, respectively. Loans to these
groups were approximately 3.78%, 7.48%, 4.91% and 5.88% of total loans,
respectively, at December 31, 1996.
36
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE - 7 LOANS (CONTINUED)
At December 31, 1997 and 1996, the recorded investment in loans that are
considered to be impaired was $289,252 and $59,705, respectively, of which
$90,965 and $59,705 were on a nonaccrual basis, respectively. These loans
have a related allowance for loan losses of $0 and $16,725 at December 31,
1997 and 1996, respectively.
The average recorded investment in impaired loans during the year ended
December 31, 1997, was $80,676 while the average recorded investment in such
loans at December 31, 1996, was $767,949. For the years ended December 31,
1997 and 1996, the Corporation recognized no interest income on impaired
loans.
The Corporation had nonaccrual loans of approximately $311,000 and $584,000 at
December 31, 1997, and 1996, respectively. Interest income on loans would
have been increased by approximately $42,000, $108,000 and $128,000 in 1997,
1996 and 1995, 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
$13,000, $7,000 and $6,000 in 1997, 1996 and 1995, 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, 1997 and 1996. 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 $2,921,891 and $507,796 at December 31, 1997 and 1996,
respectively. During 1997, $2,999,061 of new loans were made to or guaranteed
by such related parties and repayments of such loans totaled $584,966. 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 $510,855
and $338,403 at December 31, 1997 and 1996, respectively.
NOTE 8 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three years ended December
31, 1997, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1 $ 956,685 $ 1,333,273 $ 1,494,171
Provision for loan losses 0 0 0
Loans charged off (75,939) (490,458) (195,131)
Recoveries 77,592 113,870 34,233
---------- ---------- ----------
Balance at December 31 $ 958,338 $ 956,685 $ 1,333,273
=========== =========== ===========
</TABLE>
37
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - PREMISES AND EQUIPMENT
Premises and equipment are as follows:
<TABLE>
<CAPTION>
December 31
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land $ 498,534 $ 498,534
Buildings and improvements 3,340,192 3,338,672
Furniture and equipment 1,996,508 1,928,566
5,835,234 5,765,772
Less: Accumulated depreciation 3,203,563 3,009,296
---------- ----------
$ 2,631,671 $ 2,756,476
=========== ===========
</TABLE>
Depreciation expense amounted to $208,365, $222,864 and $198,995 in 1997, 1996
and 1995, respectively.
NOTE 10 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-
TERM BORROWINGS
The outstanding balances and related information for securities sold under
agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
Amount Rate Amount Rate
----------- ----- ----------- -----
<S> <C> <C> <C> <C>
Balance at year end $ 2,475,926 4.58% $ 105,939 5.00%
Average balance outstanding
during the year 1,380,950 4.91% 173,852 5.00%
Maximum amount outstanding
at any month end 3,408,692 390,228
</TABLE>
Average amounts outstanding during the year represent daily average balances
and average interest rates represent interest expense divided by the related
average balance.
Investment securities with an amortized cost of approximately $3,000,000 and
$2,000,000 and an estimated market value of $3,008,120 and $1,949,731 at
December 31, 1997 and 1996, respectively have been pledged for the securities
sold under agreements to repurchase.
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 1997, the Bank had a borrowing limit of
$1,899,000 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 $20,446,000 less any amounts outstanding
38
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-
TERM BORROWINGS (CONTINUED)
under the Flexline credit arrangement, all of which was available as of
December 31, 1997. Certain 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.
A summary of the components of the Corporation's short-term borrowings at the
end of the reporting period follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
FHLB RepoPlus
Balance at year-end $ 0 $ 3,824,000
Maximum amount outstanding at any month-end 793,000 3,824,000
Average balance outstanding during the year 134,608 469,950
Weighted average interest rate:
As of year-end - 7.00%
Paid during the year 6.11% 4.96%
Federal Reserve Bank
Balance at year-end $ 0 $ 3,737,000
Maximum amount outstanding at any month-end 0 3,737,000
Average balance outstanding during the year 23,339 90,732
Weighted average interest rate:
As of year-end - 5.00%
Paid during the year 5.31% 5.00%
</TABLE>
NOTE 11 - INCOME TAXES
The total federal income tax expense in the statements of income are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Currently Payable $ 653,911 $ 336,116 $ 274,000
Deferred 45,010 70,221 281,033
Reduction of
Valuation Allowance (3,993) (59,107) (289,511)
--------- --------- ---------
$ 694,928 $ 347,230 $ 265,522
========== ========== ==========
</TABLE>
39
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - 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:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses $ 149,535 $ 149,535
Real estate owned 34,214 23,841
Depreciation 5,861 8,406
Alternative minimum tax credits 0 3,993
Securities available-for-sale 0 257,834
Accrued interest on loans 57,424 51,526
Other 44,406 93,038
---------- ----------
Total Deferred Tax Assets 291,440 588,173
---------- ----------
Deferred Tax Liabilities:
Pension (41,092) (34,982)
Securities available-for-sale (42,133) 0
---------- ----------
Total Deferred Tax Liabilities (83,225) (34,982)
---------- ----------
208,215 553,191
Valuation Allowance 0 (3,993)
---------- ----------
Net Deferred Tax Assets $ 208,215 $ 549,198
========== ==========
</TABLE>
At December 31, 1996, the level of the valuation allowance is attributable to
the alternative minimum tax credits carryforward.
The following schedule provides a reconciliation between the statutory and the
effective tax rates for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Statutory Federal Tax Rate 34.0% 34.0% 34.0%
Adjustments:
Tax exempt interest income (7.3) (12.3) (7.9)
Reduction in valuation
allowance (.2) (3.1) (14.4)
Other, net .7 .0 1.5
------ ------ ------
Effective Tax Rate 27.2% 18.6% 13.2%
====== ====== ======
</TABLE>
Income taxes applicable to net security gains amounted to $10,498 and $1,593
for the years ended December 31, 1997 and 1996, respectively.
40
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - 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,
1997, 1996 and 1995, the Corporation made contributions of $25,524, $11,020
and $5,746, respectively, to the plan. At December 31, 1997 and 1996, the
plan held 6,460 and 2,980 shares of common 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.
The following table sets forth the plan's funded status and amounts recognized
in the balance sheet at:
<TABLE>
<CAPTION>
December 31
-----------------------------
1997 1996
------------ -------------
<S> <C> <C>
Accumulated benefit obligation, including
vested benefits of $1,391,246 in 1997
and $1,286,919 in 1996 $ 1,402,252 $ 1,319,981
============ ============
Plan assets at fair value 3,249,113 2,776,276
Projected benefit obligation
for service rendered to date (2,078,046) (1,894,467)
----------- -----------
Plan assets in excess of
projected benefit obligation 1,171,067 881,809
Unrecognized net gain from
past experience different from
that assumed and effects of
changes in assumptions (772,613) (482,687)
Unrecognized net assets at transition
being recognized over approximately
22 years (277,596) (298,327)
---------- ----------
Prepaid pension cost, included
in other assets $ 120,858 $ 100,795
============ ============
</TABLE>
41
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - EMPLOYEE BENEFITS (CONTINUED)
Net periodic pension benefit included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 99,951 $ 97,738 $ 70,129
Interest cost on projected
benefit obligation 127,417 115,978 106,182
Actual return on plan assets (565,424) (334,671) (546,764)
Net amortization and deferral 317,993 110,661 363,644
--------- --------- ---------
Net periodic pension benefit $ (20,063) $ (10,294) $ (6,809)
========== ========== =========
</TABLE>
Actuarial assumptions used in the determination of the projected benefit
obligation were as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------
1997 1996 1995
--------- --------- ----------
<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% 7.0%
Rate of increase in future
compensation levels 5.0% 5.0% 5.0%
</TABLE>
NOTE 13 - STOCK OPTIONS
In 1997, the Corporation, through its Board of Directors, approved an
Incentive Stock Option Plan which granted each director an annual option of
1,000 shares of the Corporation's common stock to be exercised within a ten
year period at an option price equal to the fair market value at the date of
grant. For 1996 and 1995, the Corporation approved an incentive Stock Option
Plan which granted each director an annual option of 2,000 shares of the
Corporation's common stock to be exercised within a ten year period at an
option price equal to the fair market value at the date of grant. For 1996
and 1995, the Corporation's former President and CEO was 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.
42
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 - 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, 1994. 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 No. 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 Statement No. 123, net
income and earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net Income:
As reported $ 1,859,533 $ 1,523,704 $ 1,739,703
=========== =========== ===========
Proforma $ 1,430,006 $ 1,387,305 $ 1,704,312
=========== =========== ===========
Earnings Per Share:
As reported
Basic $ 1.88 $ 1.54 $ 1.76
====== ====== ======
Diluted $ 1.85 $ 1.53 $ 1.75
====== ====== ======
Proforma
Basic $ 1.44 $ 1.40 $ 1.72
====== ====== ======
Diluted $ 1.44 $ 1.40 $ 1.72
====== ====== ======
</TABLE>
The following table presents share data related to the stock option plan:
<TABLE>
<CAPTION>
Shares Under Option
-------------------
1997 1996
------ ------
<S> <C> <C>
Outstanding, January 1 86,000 66,000
Granted 8,000 20,000
Exercised 0 0
Forfeited 0 0
------ ------
Outstanding, December 31 (at prices
ranging from $13.19 - $21.00) 94,000 86,000
====== ======
</TABLE>
43
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - 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>
1997 1996
----------- -----------
<S> <C> <C>
Loan commitments $11,356,339 $ 8,334,939
Stand-by letters of credit 209,556 245,901
----------- -----------
$11,565,895 $ 8,580,840
=========== ===========
</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 15 - 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
44
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15 - 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, 1997,
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, 1997, that the Corporation and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 1997, 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>
1997 1996
-------------------- -------------------
Amount Ratio Amount Ratio
------------ ------ ----------- -------
<S> <C> <C> <C> <C>
Total Capital(to Risk Weighted Assets)
- -------------------------------------
Actual $ 18,056,764 21.81% $ 16,680,678 20.96%
For Capital Adequacy Purposes 6,622,647 8.00% 6,365,795 8.00%
To Be Well Capitalized 8,278,309 10.00% 7,957,244 10.00%
Tier 1 Capital (to Risk Weighted Assets)
- ---------------------------------------
Actual $ 17,098,426 20.65% $ 15,723,993 19.76%
For Capital Adequacy Purposes 3,311,324 4.00% 3,182,898 4.00%
To Be Well Capitalized 4,966,985 6.00% 4,774,346 6.00%
Tier 1 Capital (to Average Assets)
- ---------------------------------
Actual $ 17,098,426 13.02% $ 15,723,993 12.20%
For Capital Adequacy Purposes 3,939,206 3.00% 3,867,921 3.00%
To Be Well Capitalized 6,565,344 5.00% 6,446,534 5.00%
</TABLE>
45
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - FAIR VALUE DISCLOSURE
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
1997
---------------------------------
Carrying Fair
Value Value
------------- -------------
<S> <C> <C>
Financial assets:
Cash and due from banks, interest earning
balances and federal funds sold $ 8,303,685 $ 8,303,685
Investment securities 44,156,043 44,156,043
Net loans 72,981,783 73,214,000
Accrued interest receivable 887,427 887,427
------------ ------------
Total $ 126,328,938 $ 126,561,155
============= =============
Financial liabilities:
Deposits $ 109,421,069 $ 109,761,069
Securities Sold Under Repurchase
Agreements 2,475,926 2,475,926
Accrued interest payable 557,939 557,939
------------ ------------
Total $ 112,454,934 $ 112,794,934
============= =============
<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
============= =============
</TABLE>
46
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - FAIR VALUE DISCLOSURE (CONTINUED)
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.
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.
47
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 - FAIR VALUE DISCLOSURE (CONTINUED)
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.
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.
48
<PAGE>
CARDINAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 - CARDINAL BANCORP, INC. (PARENT CORPORATION)
The condensed financial information for the Corporation is as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash $ 6,017 $ 2,552
Investment in banking subsidiary 17,171,243 15,218,790
Other assets 2,953 2,151
----------- -----------
$17,180,213 $15,223,493
=========== ===========
SHAREHOLDERS' EQUITY
Capital stock $ 495,000 $ 495,000
Surplus 2,263,620 2,263,620
Retained earnings 14,421,593 12,464,873
----------- -----------
$17,180,213 $15,223,493
=========== ===========
<CAPTION>
STATEMENTS OF INCOME
December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income
Dividends from banking
subsidiary $ 495,100 $ 371,250 $ 347,000
Net equity in undistributed
earnings of subsidiary 1,370,166 1,156,629 1,393,902
--------- --------- ---------
1,865,266 1,527,879 1,740,902
Operating expenses 8,686 6,326 1,817
--------- --------- ---------
Net Income before Taxes 1,856,580 1,521,553 1,739,085
Income Tax Benefit (2,953) (2,151) (618)
--------- --------- ---------
Net Income $1,859,533 $1,523,704 $1,739,703
========== ========== ==========
<CAPTION>
STATEMENTS OF CASH FLOWS
December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities
Net Income $1,859,533 $1,523,704 $1,739,703
Adjustment to reconcile
net income to net cash
provided by operating
activities:
Increase in
undistributed earnings (1,370,166) (1,156,629) (1,393,902)
(Increase) Decrease in
other assets (802) (1,533) 1,783
---------- ---------- ----------
Net Cash Provided by
Operating Activities 488,565 365,542 347,584
Net Cash Used by
Investing Activities 0 0 (50,000)
Net Cash Used by
Financing Activities
Dividends Paid (485,100) (371,250) (297,000)
---------- ---------- ----------
Increase (Decrease) in
Cash and Cash Equivalents 3,465 (5,708) 584
Cash and Cash Equivalents
at Beginning of Year 2,552 8,260 7,676
---------- ---------- ----------
Cash and Cash Equivalents
at End of Year $ 6,017 $ 2,552 $ 8,260
========== ========== ==========
</TABLE>
49
<PAGE>
CARDINAL BANCORP, INC. &
FIRST AMERICAN NATIONAL BANK OF PENNSYLVANIA
BOARD OF DIRECTORS
CLYDE R. MORRIS, Chairman
DONALD W. DEARMENT, Vice Chairman
MERLE W. HELSEL, President & CEO
WILLIAM B. ZIMMERMAN, Secretary/Treasurer
DARRELL DODSON
RAY E. KOONTZ
ROBERT E. RITCHEY
JAMES C. VREELAND
______
FIRST AMERICAN NATIONAL BANK OF PENNSYLVANIA
OFFICERS
MERLE W. HELSEL ...........................President & Chief Executive Officer
TED J. CHWATEK..................Senior Vice President & Senior Lending Officer
ROBERT F. LAFFERTY....................Vice President & Chief Financial Officer
BONNIE K. REDINGER..................Vice President & Senior Operations Officer
RICHARD J. HORTON.....................Vice President & Commercial Loan Officer
BARRY D. VELMAR.......................Vice President & Commercial Loan Officer
JOYCE E. SHAW................Assistant Vice President & Everett Office Manager
WILLIAM F. WISE .............Assistant Vice President & Bedford Office Manager
JOSEPH E. SHOEMAKER............Assistant Vice President & Business Development
PATTY L. DIUGUID................Assistant Vice President & Executive Secretary
SARA J. CHAPPELL.........................Assistant Vice President & Controller
ELAINE F. BARFIELD........Assistant Vice President & Credit Department Manager
DONALD L. BUSSARD................Assistant Cashier & Breezewood Office Manager
THOMAS C. GHEER....................Assistant Cashier & Woodbury Office Manager
SALLY A. CVIJANOVICH..........................Compliance & Loan Review Officer
LARHONDA A. BATZEL....Consumer Loan Officer & Assistant Manager Everett Office
ALLEN D. HARR.........Consumer Loan Officer & Assistant Manager Bedford Office
RODNEY G. CLAPPER......................................Commercial Loan Officer
CAROL L. LYNCH.....................Data Processing/Information Service Officer
BONNIE L. STANTON..........................................Collections Officer
DAVID S. GREENAWALT...........................................Internal Auditor
______
COMMUNITY OFFICE LOCATIONS
EVERETT OFFICE BEDFORD OFFICE BREEZEWOOD OFFICE
140 East Main Street 601 East Pitt Street Route 30 West
Everett, PA 15537 Bedford, PA 15522 Breezewood, PA 15533
ALTOONA/HOLLIDAYSBURG OFFICE WOODBURY OFFICE
2430 North Business 220 Route 36
Duncansville, PA 16635 Woodbury, PA 16695
50
<PAGE>
EXHIBIT (21)
------------
Subsidiaries of the Registrant
Subsidiary Corporation
Name: First American National Bank of Pennsylvania
Address: 140 East Main Street
Everett, Pennsylvania 15537
Jurisdiction of
Incorporation: National Banking
Association, United States
of America
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,361
<INT-BEARING-DEPOSITS> 1,434
<FED-FUNDS-SOLD> 1,508
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,156
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 73,940
<ALLOWANCE> 958
<TOTAL-ASSETS> 129,941
<DEPOSITS> 109,421
<SHORT-TERM> 2,476
<LIABILITIES-OTHER> 864
<LONG-TERM> 0
0
0
<COMMON> 2,759
<OTHER-SE> 14,421
<TOTAL-LIABILITIES-AND-EQUITY> 129,941
<INTEREST-LOAN> 6,504
<INTEREST-INVEST> 3,092
<INTEREST-OTHER> 356
<INTEREST-TOTAL> 9,952
<INTEREST-DEPOSIT> 4,130
<INTEREST-EXPENSE> 83
<INTEREST-INCOME-NET> 5,739
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 31
<EXPENSE-OTHER> 3,805
<INCOME-PRETAX> 2,554
<INCOME-PRE-EXTRAORDINARY> 1,860
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,860
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.85
<YIELD-ACTUAL> 4.62
<LOANS-NON> 311
<LOANS-PAST> 215
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 957
<CHARGE-OFFS> 76
<RECOVERIES> 77
<ALLOWANCE-CLOSE> 958
<ALLOWANCE-DOMESTIC> 592
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 366
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,827
<INT-BEARING-DEPOSITS> 43
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,884
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 62,563
<ALLOWANCE> 1,277
<TOTAL-ASSETS> 124,984
<DEPOSITS> 108,185
<SHORT-TERM> 1,595
<LIABILITIES-OTHER> 816
<LONG-TERM> 0
0
0
<COMMON> 2,511
<OTHER-SE> 11,877
<TOTAL-LIABILITIES-AND-EQUITY> 124,984
<INTEREST-LOAN> 2,909
<INTEREST-INVEST> 1,765
<INTEREST-OTHER> 70
<INTEREST-TOTAL> 4,744
<INTEREST-DEPOSIT> 2,072
<INTEREST-EXPENSE> 2,080
<INTEREST-INCOME-NET> 2,664
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 1,795
<INCOME-PRETAX> 1,126
<INCOME-PRE-EXTRAORDINARY> 907
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 907
<EPS-PRIMARY> 1.83
<EPS-DILUTED> 1.81
<YIELD-ACTUAL> 4.46
<LOANS-NON> 1,115
<LOANS-PAST> 3
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,333
<CHARGE-OFFS> 155
<RECOVERIES> 99
<ALLOWANCE-CLOSE> 1,277
<ALLOWANCE-DOMESTIC> 846
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 431
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,781
<INT-BEARING-DEPOSITS> 12
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,591
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 62,357
<ALLOWANCE> 1,244
<TOTAL-ASSETS> 124,101
<DEPOSITS> 107,784
<SHORT-TERM> 635
<LIABILITIES-OTHER> 880
<LONG-TERM> 0
0
0
<COMMON> 2,511
<OTHER-SE> 12,291
<TOTAL-LIABILITIES-AND-EQUITY> 124,101
<INTEREST-LOAN> 4,382
<INTEREST-INVEST> 2,649
<INTEREST-OTHER> 75
<INTEREST-TOTAL> 7,106
<INTEREST-DEPOSIT> 3,062
<INTEREST-EXPENSE> 3,083
<INTEREST-INCOME-NET> 4,023
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 2,688
<INCOME-PRETAX> 1,720
<INCOME-PRE-EXTRAORDINARY> 1,348
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,348
<EPS-PRIMARY> 2.72
<EPS-DILUTED> 2.69
<YIELD-ACTUAL> 4.48
<LOANS-NON> 1,097
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,333
<CHARGE-OFFS> 199
<RECOVERIES> 110
<ALLOWANCE-CLOSE> 1,244
<ALLOWANCE-DOMESTIC> 747
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 497
</TABLE>
<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> 1.53
<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>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,882
<INT-BEARING-DEPOSITS> 531
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,207
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 68,550
<ALLOWANCE> 966
<TOTAL-ASSETS> 129,608
<DEPOSITS> 113,306
<SHORT-TERM> 161
<LIABILITIES-OTHER> 857
<LONG-TERM> 0
0
0
<COMMON> 2,759
<OTHER-SE> 12,525
<TOTAL-LIABILITIES-AND-EQUITY> 129,608
<INTEREST-LOAN> 1,527
<INTEREST-INVEST> 846
<INTEREST-OTHER> 17
<INTEREST-TOTAL> 2,390
<INTEREST-DEPOSIT> 1,024
<INTEREST-EXPENSE> 20
<INTEREST-INCOME-NET> 1,346
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 891
<INCOME-PRETAX> 594
<INCOME-PRE-EXTRAORDINARY> 453
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 453
<EPS-PRIMARY> .46
<EPS-DILUTED> .45
<YIELD-ACTUAL> 4.50
<LOANS-NON> 578
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 957
<CHARGE-OFFS> 3
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 966
<ALLOWANCE-DOMESTIC> 647
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 319
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,321
<INT-BEARING-DEPOSITS> 9,378
<FED-FUNDS-SOLD> 202
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,064
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 69,367
<ALLOWANCE> 992
<TOTAL-ASSETS> 132,400
<DEPOSITS> 114,752
<SHORT-TERM> 564
<LIABILITIES-OTHER> 1,025
<LONG-TERM> 0
0
0
<COMMON> 2,759
<OTHER-SE> 13,300
<TOTAL-LIABILITIES-AND-EQUITY> 132,400
<INTEREST-LOAN> 3,141
<INTEREST-INVEST> 1,587
<INTEREST-OTHER> 184
<INTEREST-TOTAL> 4,912
<INTEREST-DEPOSIT> 2,114
<INTEREST-EXPENSE> 28
<INTEREST-INCOME-NET> 2,770
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 1,824
<INCOME-PRETAX> 1,237
<INCOME-PRE-EXTRAORDINARY> 929
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 929
<EPS-PRIMARY> .94
<EPS-DILUTED> .93
<YIELD-ACTUAL> 4.48
<LOANS-NON> 513
<LOANS-PAST> 9
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 957
<CHARGE-OFFS> 5
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 992
<ALLOWANCE-DOMESTIC> 595
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 397
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,975
<INT-BEARING-DEPOSITS> 1,128
<FED-FUNDS-SOLD> 1,015
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,238
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 71,844
<ALLOWANCE> 973
<TOTAL-ASSETS> 130,907
<DEPOSITS> 111,531
<SHORT-TERM> 1,672
<LIABILITIES-OTHER> 1,000
<LONG-TERM> 0
0
0
<COMMON> 2,759
<OTHER-SE> 13,945
<TOTAL-LIABILITIES-AND-EQUITY> 130,907
<INTEREST-LOAN> 4,796
<INTEREST-INVEST> 2,320
<INTEREST-OTHER> 288
<INTEREST-TOTAL> 7,404
<INTEREST-DEPOSIT> 3,129
<INTEREST-EXPENSE> 46
<INTEREST-INCOME-NET> 4,229
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 31
<EXPENSE-OTHER> 2,802
<INCOME-PRETAX> 1,881
<INCOME-PRE-EXTRAORDINARY> 1,389
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,389
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.38
<YIELD-ACTUAL> 4.55
<LOANS-NON> 292
<LOANS-PAST> 15
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 957
<CHARGE-OFFS> 27
<RECOVERIES> 43
<ALLOWANCE-CLOSE> 973
<ALLOWANCE-DOMESTIC> 611
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 362
</TABLE>
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.
140 EAST MAIN STREET
EVERETT, PENNSYLVANIA 15537-0327
_____________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 14, 1998
_____________________________
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 14, 1998, 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 three (3) Class A 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, 1998; 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 9, 1998, 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, 1997, is being mailed with this Notice. Copies of the
Corporation's Annual Report for the 1996 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 16, 1998
<PAGE>
CARDINAL BANCORP, INC.
PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON APRIL 14, 1998
GENERAL
INTRODUCTION, DATE, TIME AND PLACE OF ANNUAL MEETING
- ----------------------------------------------------
This Proxy Statement is 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 14,
1998, 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 16,
1998.
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 A 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, 1998. 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 9, 1998, 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
9, 1998, 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 three 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 9, 1998, 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 9, 1998, 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.
2
<PAGE>
<TABLE>
<CAPTION>
Name of Individual Amount and Nature of Percent of
or Identity of Group Beneficial Ownership (1) (2) of Class (14) (16)
- -------------------- ---------------------------- ------------------
<S> <C> <C>
Donald W. DeArment (4) 23,400 (6) 2.16%
Darrell Dodson (5) 13,900 (7) 1.28%
Merle W. Helsel (3) 2,670 (8) --
Ray E. Koontz (5) 14,400 (9) 1.33%
Clyde R. Morris (4) 32,000 (10) 2.95%
Robert E. Ritchey (3) 24,600 (11) 2.27%
James C. Vreeland (3) 13,100 (12) 1.21%
William B. Zimmerman (4) 14,120 (13) 1.30%
All Officers and Directors
as a Group (9 persons) (15) 138,753 12.80%
</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 9, 1998. Beneficial ownership may be disclaimed as to certain of the
securities.
(2) Information furnished by the Directors, Officers and the
Corporation.
(3) A Nominee for Class A Director whose term will expire in 2001 and
a current Class A Director whose term expires in 1998.
(4) Class B Director whose term expires in 1999.
(5) Class C Director whose term expires in 2000.
(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 9,000 shares of Common Stock which are currently
exercisable. In calculating the tabulated percent of class, the additional
9,000 shares were added to the shares of Common Stock currently held by Mr.
DeArment.
(7) Includes 4,900 shares of Common Stock held individually by Mr.
Dodson; and unexercised Stock Options for 9,000 shares of Common Stock which
are currently exercisable. In calculating the tabulated percent of class, the
additional 9,000 shares were added to the shares of Common Stock currently
held by Mr. Dodson.
(8) Includes 1,000 shares of Common Stock held jointly by Mr. Helsel
with his spouse; 670 shares (rounded to the nearest share) beneficially owned
individually by Mr. Helsel under the Cardinal Bancorp, Inc. Employee Stock
Ownership Plan; and unexercised stock options for 1,000 shares of common stock
which are currently exercisable. In calculating the tabulated percent of
class, the additional 1,000 shares were added to the shares of Common Stock
currently held by Mr. Helsel.
(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 9,000 shares of Common Stock which are currently
exercisable. In calculating the tabulated percent of class, the additional
9,000 shares were added to the shares of Common Stock currently held by Mr.
Koontz.
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 9,000 shares of Common Stock which
are currently exercisable. In calculating the tabulated percent of class, the
additional 9,000 shares were added to the shares of Common Stock currently
held by Mr. Morris.
(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 9,000 shares of Common Stock which are currently exercisable. In
calculating the tabulated percent of class, the additional 9,000 shares were
added to the shares of Common Stock currently held by Mr. Ritchey.
(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 9,000 shares of Common Stock which are currently
exercisable. In calculating the tabulated percent of class, the additional
9,000 shares were added to the shares of Common Stock currently held by Mr.
Vreeland.
(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 9,000 shares of Common Stock which are currently
exercisable. In calculating the tabulated percent of class, the additional
9,000 shares were added to the shares of Common Stock currently held by Mr.
Zimmerman.
(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 563 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 or options
exercisable in 60 days from March 9, 1998, issued to directors and officers
have been exercised and, therefore, on a pro forma basis, 1,084,000 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 1998 Annual Meeting, three (3) Class A 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 three 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 entitles the holder thereof 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>
INFORMATION AS TO NOMINEES AND DIRECTORS
The following table contains certain information with respect to nominees
for Class A Director whose term expires in 2001 and current Class A Directors
whose term expires in 1998 and the Class B Directors and Class C Directors
whose terms expire in 1999 and 2000, respectively:
<TABLE>
<CAPTION>
Age as of Principal Occupation for Director Since
March 9, Past Five Years and Position Corporation/
Name 1998 Held with Corporation and Bank Bank
- ---- ---- ------------------------------ ----
NOMINEES FOR CLASS A DIRECTOR WHOSE TERMS EXPIRE IN 2001
AND
CURRENT CLASS A DIRECTORS
WHOSE TERM EXPIRES IN 1998
---------------------------
<S> <C> <C> <C>
Merle W. Helsel 45 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 59 Retired, formerly officer of Curry
(3,5) Supply Company, Inc. 1987/1987
James C. Vreeland 58 President and Chief Executive 1987/1984
(3,7) Officer of UPMC Bedford Memorial
Hospital
<CAPTION>
CLASS B DIRECTORS
WHOSE TERM EXPIRES IN 1999
--------------------------
<S> <C> <C> <C>
Donald W. DeArment 63 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* 69 President of Morris International, 1987/1978
Inc. and Chairman of the Board
of the Corporation and the Bank
William B. Zimmerman 61 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
5
<PAGE>
<CAPTION>
CLASS C DIRECTORS
WHOSE TERM EXPIRES IN 2000
--------------------------
<S> <C> <C> <C>
Darrell Dodson 58 Retired, formerly Partner of Dodson 1990/1990
(2,3,4) Brothers Sawmill
Ray E. Koontz 65 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)
* 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 1997.
(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. Chwatek and one Bank officer also serve on this
committee. Mr. Koontz is chairman of this committee. This committee met
thirty-one (31) times in 1997.
(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 and Robert F. Lafferty, a
Bank officer, who are not directors, make up this committee. Mr. Helsel is
chairman of this committee. This committee met twelve (12) times in 1997.
(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 1997.
(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 four Bank officers also serve on this
committee, with Mr. Chwatek chairing the committee. The committee met four
(4) times in 1997.
(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.
Lafferty also serves on this committee. Mr. Morris is chairman of the
committee. The committee met two (2) times in 1997.
(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 and Bonnie K. Redinger, a Bank officer, also serve on this committee.
The committee did not meet in 1997.
6
<PAGE>
The aforementioned committees are committees of the Bank and not of the
Corporation.
During 1997, the Bank's Board of Directors held thirteen (13) meetings.
During 1997, the Board of Directors of the Corporation held seven (7)
meetings.
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 1997. 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, 1997, 1996 and 1995 paid to the Corporation's Chief
Executive Officer. No other executive officers of the Corporation or the Bank
had total annual salary and bonus exceeding $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
---------------------------
Annual Compensation
-------------------------------
<S> <C> <C> <C> <C>
(a) (b) (c) (d) (e)
Other
Annual
Name and Principal Salary(1) Bonus Compensation
Position Year ($) ($) ($)
- --------- ---- --- --- ---
Merle W. Helsel 1997 $ 81,216 $24,000 --
President/CEO
1996 $ 58,923 $21,600 --
1995 $ 55,935 $20,000 --
<CAPTION>
Long-Term Compensation
--------------------------------
Awards Payouts
<S> <C> <C> <C> <C>
(f) (g) (h) (i)
Restricted Securities
Stock Underlying LTIP All Other
Name and Principal Awards Options/SAR Payouts Compensation
Position ($) (#) ($) ($)
- -------- ___ ___ ___ ___
Merle W. Helsel -- 1,000 -- $ 3,676 (3)
President/CEO
-- -- -- $ 834 (2)
-- -- -- $ 434 (2)
- ----------------------
(1) Includes fees received for attendance at Board of Directors' meetings.
(2) Reflects contribution to defined contribution plan.
(3) Includes bonus of $1,650 earned as member of Board of Directors and
contribution of $2,026 to defined contribution plan.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Individual Grants
- ------------------------------------------------------------------------
<S> <C> <C> <C>
(a) (b) (c) (d)
Number % of Total
of Securities Options/
Underlying SARs
Options/ Granted to
SARs Employees Exercise or
Granted in Fiscal Base Price
Name (#) Year ($/Sh)
- ---------------------------------------------------------------------
Merle W. Helsel 1,000 (1) 100% $21.00
President/CEO
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates Alternative to
of Stock Price Appreciation (f) and (g):
for Option Term Grant Date Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(e) (f) (g) (h)
Grant Date
Expiration Present
Date 5% ($) 10% ($) Value ($)
- ---------------------------------------------------------------------------
Merle W. Helsel 4/07/07 $13,210 (2) $33,470 (2) --
President/CEO
- ---------------------------
(1) Option is exercisable at any time prior to the expiration date shown
above.
(2) The assumed annual rate of appreciation of 5% and 10% would result in a
price of the Corporation's stock increasing to $34.21 per share and $54.47 per
share.
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR ----
- ----------------------------------------------------------------------
Values
- ------
<S> <C> <C>
(a) (b) (c)
Shares Acquired Value Realized
Name on Exercise (#) ($)
- -----------------------------------------------------------------------------
Merle W. Helsel -- --
President/CEO
<S> <C> <C>
(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/
Unexercisable Unexercisable
- ------------------------------------------------------------------------------
Merle W. Helsel 1,000/0 $9,500/0
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>
<CAPTION>
ESTIMATED ANNUAL BENEFITS
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
</TABLE>
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. Helsel currently has 12.5 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 1997, the Bank was not required to and did not contribute to the
Plan. At December 31, 1997, there were ninety-two (92) 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 1997, 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 1997 each
director earned a bonus in the amount of $1,650 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 1997
totalled $55,752 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. In 1997, an
additional non-qualified stock option of one thousand (1,000) shares of
Cardinal Bancorp, Inc. Common Stock was granted to each director. 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 9,000 shares. Mr. Helsel has
received option grants totalling 1,000 shares. Directors received no
remuneration for attendance at Board of Directors meetings of the Corporation.
9
<PAGE>
AGREEMENTS WITH MERLE W. HELSEL
- --------------------------------
The Corporation and the Bank entered into a three-year employment
agreement with Merle W. Helsel, the Corporation's and the Bank's President and
Chief Executive Officer, effective January 2, 1998. Under the terms of the
Agreement, Mr. Helsel is to serve as President and Chief Executive Officer of
the Corporation and the Bank and also as a member of the Corporation's and the
Bank's Board of Directors.
The Agreement specifies Mr. Helsel's position and duties, compensation,
benefits, indemnification, and termination. The Agreement also contains a
non-competition and a confidentiality provision which inures to the benefit of
the Corporation and the Bank and a "Change of Control" provision which
entitles Mr. Helsel to certain payments and benefits if a change of control,
as defined in the Agreement, occurs. This provision provides, among other
things, that when "any person" , as defined therein, obtains the beneficial
ownership of at least 25% of the Corporation's Common Stock, Mr. Helsel may
terminate his employment for "Good Reason". In that event, Mr. Helsel would
be entitled to receive a payment equal to the amount he would receive from the
date of termination through the last day of the Agreement at an annual rate
equal to the highest annual compensation, including cash bonuses, which he had
received during the three year period prior to termination.
The Agreement also contains a provision allowing the Corporation and the
Bank to terminate Mr. Helsel's employment for "Cause." Additionally, the
Agreement provides that if Mr. Helsel's employment is terminated by the
Corporation or the Bank other than for "Cause" as defined therein, Mr. Helsel
is 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 is greater. On December 17, 1996, the Board of Directors set an
annual salary during 1997 for Mr. Helsel of $75,000 effective December 18,
1996. Mr. Helsel also receives customary employee benefits, including life,
disability and health insurance. Additionally, as a member of the
Corporation's and the Bank's Board of Directors, Mr. Helsel was granted a ten
year non-qualified incentive stock option of 1,000 shares of the Corporation's
Common Stock during 1997.
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.
Total loans outstanding from the Corporation and the Bank at December 31,
1997, 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 $2,921,891 or approximately 17.01% 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 1997 to such group was $2,921,891. The aggregate amount of indebtedness
outstanding as of the latest practicable date, February 25, 1998, to the above
described group was $3,042,715.
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
10
<PAGE>
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 report covering one transaction filed one day late by Mr. Helsel.
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 9, 1998.
<TABLE>
<CAPTION>
Bank Number of Age as of
Held Officer Shares Bene- March 9,
Name & Position Since Since ficially Owned 1998
- --------------- ----- ------ -------------- ----
<S> <C> <C> <C> <C>
Clyde R. Morris 1990 (1) 32,000 (2) 69
Chairman of the Board
Donald W. DeArment 1990 (1) 23,400 (3) 63
Vice Chairman of the Board
Merle W. Helsel 1996 1988 2,670 (4) 45
President & Chief
Executive Officer
Ted J. Chwatek 1993 1991 563 (5) 44
Senior Vice President
& Senior Lending Officer
William B. Zimmerman 1993 (1) 14,120 (6) 61
Secretary/Treasurer
__________________________________
</TABLE>
(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 9,000 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 9,000 shares of Common Stock which are currently
exercisable.
(4) Includes 1,000 shares of Common Stock held jointly by Mr. Helsel
with his spouse; 670 shares (rounded to the nearest share) beneficially owned
individually by Mr. Helsel under the Cardinal Bancorp, Inc. Employee Stock
Ownership Plan; and unexercised stock options for 1,000 shares of common stock
which are currently exercisable.
(5) The 563 shares (rounded to the nearest share) of Common Stock are
beneficially owned individually by Mr. Chwatek under the Cardinal Bancorp,
Inc. Employee Stock Ownership Plan.
11
<PAGE>
(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 9,000 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 9, 1998.
<TABLE>
<CAPTION>
Bank Number of Age as of
Held Officer Shares Bene- March 9,
Name & Position Since Since ficially Owned 1998
- --------------- ----- ----- -------------- ----
<S> <C> <C> <C> <C>
Clyde R. Morris 1990 (1) 32,000 (2) 69
Chairman of the Board
Donald W. DeArment 1990 (1) 23,400 (3) 63
Vice Chairman of the Board
Merle W. Helsel 1996 1988 2,670 (4) 45
President & Chief
Executive Officer
Ted J. Chwatek 1993 1991 563 (5) 44
Senior Vice President
& Senior Lending Officer
William B. Zimmerman 1993 (1) 14,120 (6) 61
Secretary/Treasurer
Robert F. Lafferty 1997 1993 188 (7) 38
Vice President &
Chief Financial Officer
Bonnie K. Redinger 1997 1993 1,474 (8) 47
Vice President &
Senior Operations Officer
__________________________________
</TABLE>
(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 9,000 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 9,000 shares of Common Stock which are currently
exercisable.
12
<PAGE>
(4) Includes 1,000 shares of Common Stock held jointly by Mr. Helsel
with his spouse; 670 shares (rounded to the nearest share) beneficially owned
individually by Mr. Helsel under the Cardinal Bancorp, Inc. Employee Stock
Ownership Plan; and unexercised stock options for 1,000 shares of common stock
which are currently exercisable.
(5) The 563 shares (rounded to the nearest share) of Common Stock are
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 9,000 shares of Common Stock which are currently
exercisable.
(7) The 188 shares (rounded to the nearest share) of Common Stock are
beneficially owned individually by Mr. Lafferty under the Cardinal Bancorp,
Inc. Employee Stock Ownership Plan.
(8) Includes 1,120 shares of Common Stock held individually by Ms.
Redinger and 354 shares (rounded to the nearest share) beneficially owned
individually by Ms.Redinger under the Cardinal Bancorp, Inc. Employee Stock
Ownership Plan.
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 1998 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 1997 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 1998 fiscal
year, another accounting firm may be chosen to provide independent audit
services for the 1998 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, 1998.
13
<PAGE>
ANNUAL REPORT
A copy of the Corporation's Annual Report for the fiscal year ended
December 31, 1997, 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 1999
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 9, 1998.
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, 1997, 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
PROXY
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 14, 1998
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
14, 1998, at 9:30 a.m., prevailing time, and at any adjournment or
postponement thereof as follows:
1. ELECTION OF CLASS A DIRECTORS TO SERVE FOR A THREE-YEAR TERM
Merle W. Helsel, Robert E. Ritchey, James C. Vreeland
[ ] 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, 1998.
[ ] 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 9, 1998: ________
_______________________________________
_______________________________________
Signature(s)
Dated: __________________________, 1998
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,
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EACH OWNER SHOULD SIGN.
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