SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15 (D) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
------- -------
Commission file number 0-11026
SOUTHWEST NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1409649
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 SOUTH MAIN STREET
GREENSBURG, PENNSYLVANIA 15601
(Address of principal executive offices)
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 834-2310
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
Title of each class: None
Name of each exchange on which registered: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
Common stock ($2.50 par value)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] 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 the voting stock held by non-affiliates was
$94,601,035 based on the reported closing bid in the NASDAQ system as of
February 29, 1996.
Number of outstanding shares of registrant's common stock as of Feburary
29, 1996: 3,180,787.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1995 Annual Report of Southwest National Corporation are
incorporated by reference into Parts I and II. Portions of the Proxy
Statement for Annual Meeting of Shareholders to be held April 16, 1996 (the
"Proxy Statement") are incorporated by reference into Part III.
<PAGE>
<TABLE>
SOUTHWEST NATIONAL CORPORATION
FORM 10-K
Index
<CAPTION>
Page
<S> <C> <C>
PART I. 1-5
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II. 5-6
Item 5. Market for the Registrant's Securities and Related
Stockholder Matters 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 8. Financial Statements and Supplementary Data 6
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 6
PART III. 6-7
Item 10. Directors and Executive Officers of the Registrant 6
Item 11. Executive Compensation 7
Item 12. Security Ownership of Certain Beneficial Owners
and Management 7
Item 13. Certain Relationships and Related Transactions 7
PART IV. 7-8
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 7-8
Signatures 9-10
Exhibit Index 11
</TABLE>
<PAGE>
PART I.
Item 1. Business
Southwest National Corporation
Southwest National Corporation (the "Corporation") is a Pennsylvania
Corporation which was organized November 6, 1981 at the direction of
Southwest National Bank of Pennsylvania (the "Bank") for the purpose of
engaging in the business of a bank holding company and of owning all of the
outstanding common stock of the Bank. The Corporation is engaged
principally in commercial banking activities through its banking
subsidiary. The business of the Bank has been carried on since July 1,
1982, by a wholly-owned subsidiary of the Corporation, also named Southwest
National Bank of Pennsylvania. As used herein, the Bank means the former
Bank prior to July 1, 1982 and the present Bank since that date.
The Corporation has no other subsidiaries and no other significant assets
or liabilities. The Corporation's only business activity is holding all
of the stock of the Bank and has no plans to change that activity.
Southwest National Bank of Pennsylvania
The Bank is a national banking association organized under the laws of the
United States in 1900. Its deposits are insured by the Federal Deposit
Insurance Corporation and the Bank is a member of the Federal Reserve
System. Through 16 locations in Westmoreland and Allegheny counties,
Pennsylvania, the Bank engages in full-service commercial banking, retail
banking, and trust activities serving a primary market area within a 35
mile radius of its headquarter's office. Deposit services offered by the
Bank include savings accounts, NOW accounts, money market accounts,
certificates of deposit, individual retirement accounts and checking
accounts. Lending services include commercial loans to businesses and
governmental units, construction financing, real estate and mortgage loans,
as well as installment, home improvement, home equity and personal credit
lines, credit card, automobile and other consumer loans. The loan
portfolio contains no loans to foreign governments, foreign enterprises or
foreign operations of domestic companies. In addition to depository and
lending services, the Bank provides various other services including night
deposit facilities, safe deposit boxes, collection services and discount
brokerage services. The Bank is also involved in a third-party arrangement
with a financial services company to make mutual funds and annuities
available to Bank customers. A wide range of trust and financial
management services is offered including administration of estates, trust
and agency accounts, employee benefit services and other personal and
fiduciary services.
The Bank serves customers through a network of 15 automated teller machines
(ATMs), 13 of which provide access to routine financial services 24 hours
a day. These ATMs are connected to a super regional ATM network, MAC (at
this point in the 10-K there appears a registered trademark), which covers
40 states with approximately 19,000 machines. The Bank is also a member
of a national ATM network, Cirrus (at this point in the 10-K there appears
a registered trademark), which makes it possible for customers to access
machines throughout the United States, Canada and many countries throughout
the world.
The Bank ended the year with a staff of 389 employees which was comprised
of 343 full-time and 46 part-time employees. Full-time equivalent
employees averaged 372 in 1995.
<PAGE> 1
COMPETITION
The Bank is subject to intense competition from various financial
institutions and other companies or firms that engage in similar
activities. Other commercial banks ranging in size from one-office
community banks to local branches of multi-billion dollar Pittsburgh-based
banks conduct business in the same primary service area as the Bank's 16
offices. Technological innovation has also led to greater competition as
well. With the advent of automated transfer payment systems, competition
between depository and nondepository institutions has increased. These
sources of competition include savings and loan associations, credit
unions, brokerage firms, money market mutual funds, finance and insurance
companies, mortgage banking firms and retail establishments.
SUPERVISION AND REGULATION
The Corporation, as a bank holding company, is subject to regulation under
the Federal Bank Holding Company Act of 1956 as amended (the "Act").
Pursuant to the Act, the Corporation is required to file certain reports
with the Board of Governors of the Federal Reserve System (the "Board") and
is subject to examination by the Board. With respect to nonbanking
investments and activities, the Act generally precludes the Corporation
from engaging in, or acquiring more than 5% of the voting shares of any
company engaged in nonbanking activities unless the Board has determined,
by order or regulation, that such proposed activities are so closely
related to banking or managing or controlling banks as to be a proper
incident thereto. The Act prohibits, except with the prior approval of the
Board, the acquisition by a bank holding company of more than 5% of the
outstanding voting shares of any domestic bank. Also, the Act and
regulation of the Board prohibit a bank holding company and its subsidiary
from engaging in certain tie-in arrangements in connection with any
extension of credit or provision of any property or services.
A fundamental principle underlying the Federal Reserve's supervision and
regulation of bank holding companies, is that bank holding companies should
serve as a source of managerial and financial strength to their subsidiary
banks. Banks in turn are to be operated in a manner that protects the
overall soundness of the institution and the safety of deposits. The bank
regulators can take various remedial measures to deal with banks and bank
holding companies that fail to meet legal and regulatory standards.
Limitations on dividends from the Bank to the Corporation are described on
page 20 of the 1995 Annual Report and is herein incorporated by reference.
The Bank is subject to regulation by the Office of the Comptroller of the
Currency (OCC). In addition, the Bank is insured by and therefore subject
to the authority of the Federal Deposit Insurance Corporation (FDIC).
In 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA) was enacted which, among other things, was intended to protect the
federal deposit insurance fund by requiring regulators to take specific
prompt actions with respect to institutions that do not meet minimum
capital standards. FDICIA establishes five capital tiers to be defined in
implementing regulations to be adopted: "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized" and
"critically undercapitalized". An undercapitalized institution is
prohibited from making capital distributions and may be required to submit
a capital plan, restrict asset growth and limit new lines of business.
Significantly undercapitalized institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting
stock to
<PAGE> 2
become adequately capitalized, requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized institutions are subject to appointment of a receiver or
conservator.
Pursuant to FDICIA, the federal regulatory agencies adopted regulations
defining the five capital tiers. Under these regulations, a "well
capitalized" institution must have a Tier 1 capital ratio of at least 6%,
a total capital ratio of at least 10% and a leverage ratio of at least 5%
and not be subject to a directive, order or written agreement to meet and
maintain specific capital levels. An "adequately capitalized" institution
must have a Tier 1 capital ratio of at least 4%, total capital ratio of at
least 8% and a leverage ratio of at least 4%, or 3% in some cases. The
Bank currently exceeds the minimum capital and leverage ratio requirements
and, accordingly, is considered "well capitalized" under the numerical
capital standards. In addition, under the regulations the regulators can
downgrade the capital status of a depository institution under certain
circumstances.
Under FDICIA, regulations became effective June 16, 1992 governing the
receipt of brokered deposits based on the institution's capital rating.
These regulations do not have a material effect on the Bank's results of
operations.
Other FDICIA revisions included the imposition of specific accounting and
reporting requirements and risk-based assessments for FDIC insurance.
Effective January 1, 1993, the FDIC adopted a risk-based assessment system
under which the assessment rate for an insured depository institution
varies according to the level of risk incurred in its activities.
Implementation of the new assessment system did not have a material effect
on the Bank's results of operations.
FDICIA contains numerous other provisions including termination of the "too
big to fail" doctrine except in special cases, limitations on the FDIC's
payment of deposits at foreign branches and revised regulatory standards
including real estate lending and capital adequacy. FDICIA requires
Federal regulators to promulgate regulations to implement the law's
provisions. Until all these regulations are adopted, the full effect of
FDICIA on the Bank will remain uncertain.
Earlier this year the FDIC announced a reduction in premiums for member
banks when the Bank Insurance Fund reached its Congressionally mandated
reserve target. As a result, the assessment rate fell from 23 cents to 4
cents per $100 of insured deposits, an 82.6% decline.
Future assessment rates will be based on capital levels and bank regulation
ratings as is required by FDICIA. The FDIC premium related to the Bank
Insurance Fund has been eliminated for at least the first half of 1996.
MONETARY POLICY AND ECONOMIC CONTROLS
The earnings of the Bank, and therefore the earnings of the Corporation,
are affected by the policies of regulatory authorities, including the Board
of Governors of the Federal Reserve System. The policies of the Board,
which regulates the national supply of bank credit, have a significant
effect on the overall growth of bank loans, investments and deposits and
the interest rates charged on loans or paid for deposits.
As a result of changing conditions in the economy and the effect of the
Board's credit policies, no prediction can be made as to possible future
changes in loan demand, deposit levels, interest rates or to their effect
on the business and earnings of the Corporation and its subsidiary.
<PAGE> 3
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
Information regarding statistical disclosure for bank holding companies
required by Securities Act Industry Guide 3 is set forth in the portions
of the 1995 Annual Report which are incorporated herein by reference.
I. Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential
Information required by this section is presented on pages 33 through 36,
43 and 47 of the 1995 Annual Report and is incorporated herein by
reference.
II. Investment Portfolio
Information required by this section is presented on page 40 of the 1995
Annual Report and is incorporated herein by reference.
III. Loan Portfolio
Information required by this section is presented on pages 40, 41 and 43
of the 1995 Annual Report and is incorporated herein by reference.
IV. Summary of Loan Loss Experience
Information required by this section is presented on page 42 of the 1995
Annual Report and is incorporated herein by reference.
V. Deposits
Information required by this section is presented on pages 23, 34 and 35
of the 1995 Annual Report and is incorporated herein by reference.
VI. Return on Equity and Assets
Information required by this section is presented on page 47 of the 1995
Annual Report and is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION WITH REGISTRANT
<S> <C> <C>
David S. Dahlmann 46 President and Chief Executive Officer
Irving A. Pratt 62 Vice President
Robert J. Stack 45 Vice President
Donald A. Lawry 45 Secretary and Treasurer
</TABLE>
<PAGE> 4
David S. Dahlmann was elected Chief Executive Officer in April, 1991; he
had previously served as President of the Corporation since September,
1990. Irving A. Pratt was elected Vice President in July, 1991. Robert
J. Stack was elected Vice President in September, 1993. Donald A. Lawry
was elected Secretary and Treasurer in July, 1989; he had previously served
as Controller of the Corporation since 1986. After the Annual Meeting of
the shareholders, the Board has a reorganization meeting and elects the
executive officers. The positions held by the present executive officers
in the Registrant's subsidiary during the past five years are as follows:
<TABLE>
<CAPTION>
NAME TERM POSITION WITH BANK
<S> <C> <C>
David S. Dahlmann 1991-1995 President and Chief Executive Officer
Donald A. Lawry 1991-1995 Executive Vice President
Irving A. Pratt 1991-1995 Executive Vice President
Robert J. Stack 1991-1995 Executive Vice President
</TABLE>
Item 2. Properties
The principal executive office of the Corporation and Bank is located at
111 South Main Street, Greensburg, Pennsylvania. This seven story building
is owned by the Bank, which occupies the entire building. At December 31,
1995, the Bank owned 12 properties in fee and leased 6 others that were
used in its operations. These leases expire intermittently through 2018.
Nearly all leases include renewal provisions at the option of the lessee.
In addition, the Bank owns other real property which, when considered in
the aggregate, is not material to its operations.
Item 3. Legal Proceedings
Information required by this section is presented on page 27 of the 1995
Annual Report and is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders.
PART II.
Item 5. Market for the Registrant's Securities and Related Stockholder
Matters
Dividends are declared quarterly by the Board of Directors.
Other information required by this section is presented on pages 20, 29,
38 and 47 of the 1995 Annual Report and is incorporated herein by
reference.
<PAGE> 5
Item 6. Selected Financial Data
Information required by this section is presented on pages 19, 20, 29, 46
and 47 of the 1995 Annual Report and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information required by this section is presented on pages 27 and 32
through 45 of the 1995 Annual Report and is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedules required for the Annual Report of
the Registrant are included in the following index. Page numbers refer to
pages of the 1995 Annual report and are incorporated herein by reference:
<TABLE>
<CAPTION>
Page
<S> <C>
Management's Statement on Financial Reporting 31
Independent Auditors' Report 31
Financial Statements:
Consolidated Balance Sheet as of December 31, 1995 and 1994 16
Consolidated Statement of Income for the years ended
December 31, 1995, 1994 and 1993 15
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993 17
Consolidated Statement of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 18
Notes to Consolidated Financial Statements 19 - 30
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III.
Item 10. Directors and Executive Officers of the Registrant
Information required by this section is presented on pages 2, 3 and 4 of
the Proxy Statement and is incorporated herein by reference.
<PAGE> 6
Item 11. Executive Compensation
Information required by this section is presented on pages 6, 7 and 8 of
the Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this section is presented on pages 2, 3 and 10 of
the Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information required by this section is presented on page 5 of the Proxy
Statement and is incorporated herein by reference.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The financial statements and schedules required for the Annual Report of
the Registrant are included in the following index. Page numbers refer to
pages of the 1995 Annual Report and are incorporated herein by reference.
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Management's Statement on Financial Reporting 31
Independent Auditors' Report 31
(A)(1) Financial Statements:
Consolidated Balance Sheet as of December 31, 1995 and
1994 16
Consolidated Statement of Income for the years ended
December 31, 1995, 1994 and 1993 15
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993 17
Consolidated Statement of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 18
Notes to Consolidated Financial Statements 19 - 30
(A)(2) Financial statement schedules:
No schedules are listed since the required information is
either not applicable, not deemed material or is shown in
the respective financial statements or in the notes thereto.
(A)(3) Exhibits:
The Exhibits listed on the Exhibit Index on page 11 of this
document are filed herewith in response to this item.
<PAGE> 7
(B) Reports on Form 8-K:
The Registrant filed no Form 8-K Current Report during the
fourth quarter of the year ended December 31, 1995.
</TABLE>
<PAGE> 8
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.
(Registrant) Southwest National Corporation
By (Signature and Title) /s/ David S. Dahlmann
David S. Dahlmann
President and Chief Executive Officer
Date February 20, 1996
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Ray T. Charley Director February 20, 1996
Ray T. Charley
/s/ James A. Critchfield, Jr. Director February 20, 1996
James A. Critchfield, Jr.
/s/ David S. Dahlmann President and Chief February 20, 1996
David S. Dahlmann Executive Officer;
Director
/s/ Charles E. Henry Director February 20, 1996
Charles E. Henry
/s/ A. Richard Kacin Director February 20, 1996
A. Richard Kacin
/s/ Alexander H. Lindsay, Jr. Director February 20, 1996
Alexander H. Lindsay, Jr.
/s/ Joseph V. Morford, Jr. Director February 20, 1996
Joseph V. Morford, Jr.
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ James W. Newill Director February 20, 1996
James W. Newill
/s/ Timothy T. Reese Director February 20, 1996
Timothy T. Reese
/s/ John A. Robertshaw, Jr. Director February 20, 1996
John A. Robertshaw, Jr.
/s/ Laurie Stern Singer Director February 20, 1996
Laurie Stern Singer
/s/ William W. Thomson Director February 20, 1996
William W. Thomson
/s/ Donald A. Lawry Secretary and Treasurer February 20, 1996
Donald A. Lawry (Principal Financial Officer)
</TABLE>
<PAGE> 10
<TABLE>
SOUTHWEST NATIONAL CORPORATION
EXHIBITS TO ANNUAL REPORT
on FORM 10-K for the
YEAR ENDED DECEMBER 31, 1995
EXHIBIT INDEX
<CAPTION>
Exhibit No. Sequential
Per Table Page No.
Under Item 601 of Where
Regulation S-K Found
<S> <C>
(13) Annual Report to Security Holders for the year
ended December 31, 1995 (filed as an exhibit
solely to the extent portions thereof are
specifically incorporated herein by reference in
the Form 10-K Report to which this Exhibit
Index relates).
(21) Subsidiaries of the Registrant (incorporated herein
by reference to page 1 of this document).
(22) Published report regarding matters submitted to vote
of security holders (the Proxy Statement for Annual
Meeting of Shareholders to be held April 16, 1996
is filed as an exhibit solely to the extent portions
thereof are specifically incorporated herein by
reference in the Form 10-K Report to which this
Exhibit Index relates).
(27) Financial Data Schedule.
</TABLE>
<PAGE> 11
SOUTHWEST NATIONAL CORPORATION
1995 ANNUAL REPORT
Front cover of the annual report. The title appears vertically
approximately 1/4 inch down from the top of the page and 1/2 inch from
the right edge of the page with the Corporate Logo. There is a picture
of the President and Chief Executive Officer, David S. Dahlmann, talking
to a little boy. Approximately 1 inch under the picture is the title,
"What Does it Mean to be a Community Bank?"
<PAGE>
The inside front cover of the annual report. The following information
is centered on the page.
<TABLE>
CONTENTS
<S> <C>
Financial Highlights 1
Letter to Shareholders 2
My Views on the Community Bank 4-13
Financial Information 15-47
Administrative Directory 48
</TABLE>
The following is located at the bottom center of the page.
Cover: Cody Miller meets Southwest Bank President David Dahlmann at
"Headquarters for a Day" in Latrobe.
<PAGE>
<TABLE>
SOUTHWEST NATIONAL CORPORATION
Greensburg, Pennsylvania
Financial Highlights
(In thousands, except per share amounts)
<CAPTION>
FOR THE YEAR 1995 1994 % change
<S> <C> <C> <C>
Net income $ 9,038 $ 8,606 + 5.0%
Cash dividends 3,629 3,443 + 5.4
Return on average assets 1.30% 1.24%
Return on average shareholders' equity 12.61 12.81
PER SHARE
Net income $ 2.84 $ 2.70 + 5.2
Cash dividends 1.14 1.08 + 5.6
AT YEAR-END
Shareholders' equity $ 77,210 $ 68,102 +13.4
Total assets 710,816 685,283 + 3.7
Loans 446,917 411,769 + 8.5
Investment securities 211,886 204,541 + 3.6
Money market investments 12,308 20,213 -39.1
Deposits 623,785 612,075 + 1.9
PERIOD-END RATIOS AT DECEMBER 31,
Book value per share $ 24.27 $ 21.33 +13.8
Risk-based capital ratios:
Tier 1 capital 17.85% 17.91%
Total capital 19.10 19.17
Leverage capital ratio 10.86 10.32
Nonperforming assets to loans, other
real estate owned and other
repossessions .33 .34
Nonperforming loans to loans .30 .30
Loans past due 90 days or more to loans .34 .22
Reserve for possible loan losses to
nonperforming loans 414.60 407.61
</TABLE>
<PAGE> 1
LETTER TO OUR SHAREHOLDERS
At this point in the 1995 Annual Report the following text is depicted
in columnar form. The form has been modified for electronic filing
purposes.
I am pleased to report record earnings for Southwest National
Corporation for the year 1995. Net income for the year increased 5.0% to
$9,038,000. On a per share basis, this amounted to $2.84 per share
compared to the $2.70 earned in 1994. This is the sixth consecutive year
we have achieved a record level of earnings.
Return on average assets was 1.30% and return on shareholders' equity
was 12.61% for 1995. The Corporation paid cash dividends in 1995 of
$3,629,000 or $1.14 per share. This continues an uninterrupted series of
annual increases over the past 37 years.
We began 1995 anticipating a shrinking net interest margin. Rising
interest rates motivated depositors to move to longer term deposits with
higher yields. The effect of this was an increase in our interest
expense. The favorable earnings report for 1995 demonstrates our ability
to offset this increasing interest expense by the redeployment of funds
from investment securities to loans. This resulted in higher yielding
earning assets which have been a key factor in maintaining a net
interest margin of 4.82% which was unchanged from 1994.
We achieved total loan growth of 8.5% from the prior year. Commercial
loan demand was the primary contributor growing 26.0% during 1995.
Nonperforming loans represent a modest .30% of outstanding loans and the
lower provision for loan losses for the year was justified by the 14.0%
lower level of net charge-offs. We have not sacrificed asset quality to
achieve our growth in loans and we continue to maintain adequate
reserves.
Noninterest income grew by 3.2% during 1995. This was due in large part
to favorable growth in trust income of 8.0%. Noninterest expense
decreased by .9% during 1995. The organization benefitted from a
reduction in the deposit insurance premiums paid by the Bank. Earlier
this year, the Federal Deposit Insurance Corporation announced a
reduction in premiums for member banks due to the Bank Insurance Fund
reaching its
At this point in the 1995 Annual Report there appears a bar graph as set
out in the following table.
<TABLE>
Net Income
(per share)
<S> <C>
1991 1.95
1992 2.37
1993 2.54
1994 2.70
1995 2.84
</TABLE>
Congressionally mandated reserve target. Excluding the FDIC insurance
expense, the organization held noninterest expense growth to a modest
2.2%.
Total assets for the Corporation reached a record level of $710,816,000,
at December 31, a 3.7% increase from year-end 1994. We end the year in a
strong capital position. The leverage capital ratio at year-end was
10.86% providing a base to expand lending, protect depositors and
provide for growth as opportunities for expansion may arise.
During the year, the Board of Directors accepted with regret the
resignation of Timothy T. Reese as a Director. Mr. Reese's commitments
to his business were dramatically expanding and he felt this impaired
his ability to act effectively as a director. We will miss his energy
and his advice. In 1995, Gary L. Weleski, President of Weleski
Enterprises, was appointed to our Allegheny Valley Advisory Board.
With regret, we note the passing of Alexander H. Lindsay and Harry K.
Wilcox during the year. Both gentlemen had a long association with
Southwest Bank and its predecessors and served as members of the Board
of Directors. The dedication, support and counsel they gave is
acknowledged.
During 1995, the Corporation continued its long-standing commitment of
allocating both human and financial resources to supporting those
community organizations that help improve the overall quality of life in
the areas in which we serve. It is in our best interest to make a
contribution to the social and financial prosperity of our customers and
their communities. We cannot separate ourselves from those we serve. In
fact, the notion of being closely tied to the community, and the
competitive advantages that arise from it, explains in large part why I
look to the future with such confidence.
/s/ David S. Dahlmann
David S. Dahlmann
President and
Chief Executive Officer
March 19, 1996
<PAGE> 2
At this point in the 1995 Annual Report there appears a full-page, black
and white picture of David S. Dahlmann, President and Chief Executive
Officer speaking with a customer. The following caption is printed in
columnar form 1/2 inch from the right edge of the page.
Most days, you can find David Dahlmann, President and CEO of Southwest
Bank, sitting behind his desk on the mezzanine of our corporate
headquarters. A good place to get work done, yes, but not the best way
to keep in touch with customers. That's why Dahlmann created a program
called "Headquarters for a Day," through which he spends one day, each
quarter, at a different branch office. Just recently, the program took
him to our office in Latrobe. Where, after spending the entire day
listening to comments, concerns and compliments, David Dahlmann had a
better understanding of his customers. And a better idea of how
Southwest Bank could help them.
<PAGE> 3
At this point in the 1995 Annual Report the text changes from columnar
form back to regular form.
MY VIEWS ON THE COMMUNITY BANK.
by David S. Dahlmann
"Know the community better than anyone else. Through superior service,
respond to the community's needs better than anyone else. Draw your
people from the community, and keep decision-making within its borders.
In short, be totally intertwined - and inseparable - from the community
you serve." This is the 'community bank philosophy'. A long-standing set
of ideals that has helped to guide countless banks past challenges, over
obstacles, and toward opportunities. It has been a consistent and
enduring philosophy, firmly founded in the belief that a community bank
is at the very heart of the community.
"Draw your people from the community..." In the case of Southwest Bank,
we have always believed that our most important asset is our people.
From our officers and employees to our shareholders and board of
directors.
In my view, our people are the community. They represent the feelings
and needs of the community, and by drawing upon their insight, the bank
is better able to serve everyone involved.
From an employee's point of view, a community bank offers more
opportunities to get involved in a wide variety of tasks. They're able,
by virtue of our size, to make real contributions to the operation of
the bank. They see, quite literally, their work in action. And because
they live here, they have a vested interest in making sure we answer the
needs of their neighbors, and ultimately, the community at large. In
many ways, I think that explains the enormous commitment our employees
make to various community service organizations - from the American
Cancer Society and Hospital Auxiliaries to the Special Olympics and The
United Way.
At a community bank, the board of directors also have a local focus. In
the case of Southwest Bank, our board represents various area businesses
and organizations, so they're able to bring their observations of
community needs to the table, along with suggestions on how to best meet
those needs.
<PAGE> 4
At this point in the 1995 Annual Report there appears a black and white
5 x 7 picture of two customers. The picture is centered on the page and
the caption is given below.
Last year, Marietta Cramer and her son, Gerald, experienced something
rather remarkable. They opened the door to the first house they'd ever
been able to call their own. Until then, high closing costs and down
payments had made owning a home more a dream rather than a reality.
That was until Southwest Bank stepped in, encouraging the Cramers to
utilize our Mortgage Assistance and First-Time Homebuyer Programs, which
offered special financing arrangements and substantial savings. And
made it possible for the Cramers, after all these years, to come home.
<PAGE> 5
In addition, when we look at the list of our shareholders, we recognize
many of the names. They're often customers, people who live in the area.
So their stock is more than just a financial investment. It's an
investment in the community. They know the benefits of having a
community bank, and will help to ensure that we keep our focus where it
belongs.
"...respond to the community's needs better than anyone else..."
Small communities rely on the community bank to finance their futures.
At Southwest, we are often the bank that finances community projects. In
fact, our close ties to the community often make it possible for us to
play a part in the project's developmental stages, as well. It then
becomes a natural extension for a civic organization to come to
Southwest for financing because we've been involved from the very
beginning. We helped set the vision and can then help realize it.
Also worth noting is that community banks traditionally have a stronger
capital position than larger, regional banks, which enables us to better
meet the needs of a growing community. One issue, however, that I feel
is having a negative effect on community banking is the current
regulatory framework. There is too much regulation, period. It drains
capital from the bank, limiting the amount we're able to put back into
our community. I have a real concern in this area, and believe that if
the regulatory framework can be brought down to a more reasonable level,
community banks and their customers will be better served.
"...keep the decision-making within its borders..." I think it is fair
to say that bankers who have to live with their decisions not only from
a financial side, but from a quality of life side, are the most
qualified to make civic financing decisions. It is one thing to make a
mistake and write it off. It's quite another to live with that mistake
and its impact on your friends and neighbors.
At a community bank, customers have greater access to those making the
decisions. This is a tremendous advantage, particularly to those who
have small to mid-sized businesses. For them, time is of the essence.
They don't have the time to explain and re-explain their financial needs
to layer after layer of management. Customers want to deal directly with
bank personnel who can gauge their loan needs not only in terms of their
<PAGE> 6
At this point in the 1995 Annual Report there appears a black and white
5 x 7 picture of the front of the Palace Theatre. The picture is
centered on the page and the following caption is located below it.
Five years ago, the Palace Theatre was in the midst of its own drama.
After providing entertainment for three generations, the venerable hall
was placed on the market for sale. The price, $200,000. But that was
only the beginning: Restoration was estimated at several million.
Southwest Bank, working closely with community leaders, rallied to save
the historic structure. The Bank arranged special financing that
enabled The Westmoreland Trust to purchase the Theatre, and also made a
sizeable charitable contribution to the Trust's fund-raising efforts for
restoration. It took a lot of work, but the Palace was saved. So that
today, when the curtain rises and the footlights shine, the people of
this community can enjoy a very happy ending.
<PAGE> 7
financials, but in terms of their character. It's very difficult for
large financial institutions to be successful here, because there's a
disconnection between the customer who has built a business, is proud of
it and wants to tell his or her own story, and the final decision-maker.
When character has to be dependent upon other people relaying a story
through several layers of management, character drops by the wayside.
Community banks, on the other hand, make it a point to deal directly
with their customers. Such an approach takes into account not only sound
business strategy, but also human nature: The simple fact is that
customers want to deal with those making the decisions. That is the
essence of the community bank. And that provides us with a very
important advantage over our competitors.
And make no mistake, there are plenty of tough competitors out there.
Large regional institutions are still trying to portray themselves as
community banks. In many instances, large banks acquire a community bank
and let it operate under the same name, hoping to retain customer
loyalty while investing resources into increasing market share. The bank
may operate under the same name, but it is no longer what it was; it is
no longer a community bank. Instead, it is part of a large financial
conglomerate, whose decision-makers may well be located half way across
the country.
That is why I believe it is very important to make the distinction
between those banks that are independent and those that are not.
Southwest Bank remains independent, answering only to our employees,
customers, shareholders and board members - all of whom are part of the
communities we serve.
So while we may not always be better than the large regional banks in
terms of products or price, we do have an advantage in terms of personal
service, direct access to decision-makers, and the ability to provide
quick answers to customer questions. Large financial institutions are
not capable of offering these services, not because they don't want to,
but because they are not structured to do so.
Non-banks are tough competitors, too. But the underlying functions
driving them are quite a bit different - we're not trading on the same
assumptions. Non-banks are product oriented; they focus their efforts on
<PAGE> 8
At this point in the 1995 Annual Report there is a black and white, 5 x
7 picture centered on the page. It is a picture of Laurie Stern Singer,
a Director, speaking during a meeting. The following information is
printed below the picture.
Give Laurie Stern Singer the chance, and she'll talk all day about what
she values most. This Valley; its people, businesses, libraries,
schools, stores and celebrations. As President of the Allegheny Valley
Chamber of Commerce, and the Allegheny Valley Development Corporation,
Singer is aware of the area's problems, but she also knows its
potential. and that the key to realizing it, is flourishing businesses.
That's why she works so tirelessly at creating opportunities and
assisting developing businesses. Last year, Southwest Bank asked Ms.
Singer to serve on our board of directors. To us, she was the natural
choice. We do, after all, share the same values.
<PAGE> 9
selling products to the consumer, and once that is accomplished, move on
to sell the product to the next consumer. The philosophy of community
banks, on the other hand, is to concentrate on establishing
relationships with customers. We're more interested in providing
consumers with options...today and in the future. The product or service
- - in and of itself - is not as important as the fact that it answers the
financial needs of the customer. And since financial needs change over
time, the relationships we establish, rather than the products we offer,
give community banks a very real advantage.
So while it's true that non-bank competitors can influence certain
segments of the market by product and price, the simple fact is that not
everything is driven only by product and price. And that again plays to
a community bank's strength: personal service, and the relationships
that arise from it.
"...be totally intertwined - and inseparable - from the community you
serve..." I believe the greatest threat to the community bank's future
success is to stray from what has made us successful in the first place.
To believe only size matters, or that we can substitute financials for
personal service is not what we're about. It runs contrary to the
philosophy of a community bank. In short, we can deal with challenges
from other financial service competitors. Our greatest threat, in my
mind, is losing our focus.
Today and in the future, there is solid economic justification for the
community bank. As far as the impact of mergers and interstate banking,
I think it will have a positive impact. I believe that as more of our
competitors merge and combine institutions, we will benefit by serving
individuals and businesses who are looking for banks that are part of
the community, as well as decision-makers who are right next door. This
is a positive development for well-run community banks that don't lose
their focus.
Because we are an integral part of the community, we have the ability to
anticipate and adjust rapidly to meeting the area's needs. And because
our people are part of the community, there is an added dimension, a
very real commitment to ensuring the success of the bank in which they
work, and ultimately, the community in which they live.
<PAGE> 10
At this point in the 1995 Annual Report there is a black and white, 5 x
7 picture of Mt. View Inn's front desk in the center of the page. The
following
appears below the picture.
Welcome to the Mountain View Inn. Over half a century old, with a strong
history of cozy rooms, warm hospitality and a profitable bottom line.
Yet, when Vance and Vicki Booher wanted to expand their Inn and were
looking for financing, only one bank would accommodate them. Southwest
Bank. You see, to most big banks, hospitality ventures are considered
risky; they don't look good on paper. Of course, from Westmoreland
County, we had a much better viewpoint. One that revealed savvy
innkeepers, a successful business and plenty of growth potential. So the
Boohers have their loan. The Inn will soon have additional space. And we
have a customer who'll be staying with us for quite awhile.
<PAGE> 11
At this point in the 1995 Annual Report the following statement appears
in the center of the page.
"Because our people are so deeply involved in the community, I believe
we're able to provide a more effective and committed organization to
meeting the needs of the community."
David S. Dahlmann
<PAGE> 12
At this point in the 1995 Annual Report there is a black and white, 5 x
7 picture of employee, Sandy Chockla, holding a fireman's boot in the
center of the page. The following explanation appears below the
picture.
Almost every bank gives away calendars to its customers. But Sandy
Chockla, a staff member at our Derry office, will tell you that not
every bank has a Community Calendar Program. This year, Sandy joined our
other employees in choosing local volunteer fire departments as the
beneficiary of this charitable program. As a result, the Bank made a
contribution to area VFDs on behalf of our employees. And then, in
November and December, while distributing calendars, our employees asked
our customers to join in. And soon, people from all our offices were
filling rubber boots with whatever money they could. But more than
money, it was a gesture. A sign. A way of saying thanks. From a bank,
its employees and its customers.
<PAGE> 13
At this point in the 1995 Annual Report the following text appears in
the center of the page.
FINANCIAL INFORMATION
Consolidated Financial Statements...................................15
Notes to Financial Statements.......................................19
Management's Statement on
Financial Reporting...............................................31
Report of Independent Auditors......................................31
Management's Discussion of
Financial Statements..............................................32
Supplementary Financial Data........................................46
<PAGE> 14
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $37,250 $32,172 $30,417
Interest on money market investments:
Interest bearing deposits with banks 8 42 169
Federal funds sold 1,750 1,170 888
Interest and dividends on investment securities:
U.S. Treasury securities and obligations of
U.S. government agencies and corporations 11,050 12,676 14,753
Obligations of states and political subdivisions 1,253 1,504 1,541
Corporate collateralized mortgage obligations - - 64
Equity and other securities 170 160 104
-----------------------------
Total interest income 51,481 47,724 47,936
INTEREST EXPENSE
Interest on deposits:
NOW accounts 870 1,054 1,384
Savings 6,888 6,772 6,661
Time 12,577 9,136 10,030
Interest on short-term borrowings 113 34 37
Interest on long-term borrowings 153 35 -
-----------------------------
Total interest expense 20,601 17,031 18,112
-----------------------------
Net interest income 30,880 30,693 29,824
-----------------------------
Provision for possible loan losses 1,450 1,560 1,597
Net interest income after provision for
possible loan losses 29,430 29,133 28,227
NONINTEREST INCOME
Trust income 1,801 1,667 1,551
Service charges on deposit accounts 2,194 2,035 2,035
Other service charges and commissions 645 792 653
Other income 349 339 327
-----------------------------
Total noninterest income 4,989 4,833 4,566
NONINTEREST EXPENSE
Salaries 8,043 7,672 7,186
Employee benefits 2,636 2,699 2,507
Net occupancy expense 1,761 1,712 1,625
Equipment expenses and data processing fees 3,182 3,241 3,148
Pennsylvania shares tax 612 577 536
FDIC insurance expense 743 1,396 1,372
Other expenses 4,650 4,528 5,032
-----------------------------
Total noninterest expense 21,627 21,825 21,406
-----------------------------
Income before income tax expense 12,792 12,141 11,387
Income tax expense 3,754 3,535 3,285
-----------------------------
NET INCOME $ 9,038 $ 8,606 $ 8,102
Per share
Net income $ 2.84 $ 2.70 $ 2.54
Cash dividends 1.14 1.08 .98
Average common shares outstanding 3,183,026 3,192,295 3,192,295
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 15
<TABLE>
CONSOLIDATED BALANCE SHEET
(In thousands)
<CAPTION>
December 31, 1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 25,254 $ 32,500
Money market investments:
Interest bearing deposits with banks 108 113
Federal funds sold 12,200 20,100
--------------------
Total money market investments 12,308 20,213
Investment securities:
Securities available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations 116,815 104,958
Obligations of states and political subdivisions 20,491 -
Equity securities 2,589 2,640
--------------------
Total securities available for sale 139,895 107,598
Securities held to maturity
Obligations of U.S. government agencies and corporations
(market value: $71,981 and $68,286) 71,991 74,107
Obligations of states and political subdivisions
(market value: $0 and $23,111) - 22,836
--------------------
Total securities held to maturity 71,991 96,943
--------------------
Total investment securities 211,886 204,541
Loans, net of unearned income of $643 and $2,105 446,917 411,769
Less: reserve for possible loan losses (5,651) (5,038)
--------------------
Loans, net 441,266 406,731
Bank premises and equipment 8,266 7,607
Other assets 11,836 13,691
--------------------
Total assets $710,816 $685,283
LIABILITIES
Deposits:
Noninterest bearing demand $100,811 $ 98,677
NOW accounts 53,014 58,880
Savings 218,480 238,052
Time 251,480 216,466
--------------------
Total deposits 623,785 612,075
Short-term borrowings 3,441 643
Long-term borrowings 1,907 1,953
Other liabilities 4,473 2,510
--------------------
Total liabilities 633,606 617,181
SHAREHOLDERS' EQUITY
Common stock ($2.50 par value)
Authorized 5,000,000 shares
Issued and outstanding 3,180,787 and 3,192,295 shares 7,952 7,981
Surplus 31,760 31,760
Retained earnings 36,392 31,262
Unrealized gain (loss) on securities available for sale 1,106 (2,901)
--------------------
Total shareholders' equity 77,210 68,102
--------------------
Total liabilities and shareholders' equity $710,816 $685,283
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 16
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<CAPTION>
Unrealized
gain (loss)
on Total
Common Retained securities share-
stock Surplus earnings available holders'
for sale equity
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $ 6,651 $ 17,128 $ 37,098 $ - $ 60,877
Net income - - 8,102 - 8,102
Cash dividends - - (3,139) - (3,139)
----------------------------------------------------
Balance at December 31, 1993 6,651 17,128 42,061 - 65,840
Net income - - 8,606 - 8,606
Cash dividends - - (3,443) - (3,443)
Stock dividend (20%) 1,330 14,632 (15,962) - -
Net unrealized (loss) on
securities available
for sale - - - (2,901) (2,901)
----------------------------------------------------
Balance at December 31, 1994 7,981 31,760 31,262 (2,901) 68,102
Net income - - 9,038 - 9,038
Cash dividends - - (3,629) - (3,629)
Retirement of common stock (29) - (279) - (308)
Net unrealized gain on
securities available
for sale - - - 4,007 4,007
----------------------------------------------------
Balance at December 31, 1995 $7,952 $31,760 $36,392 $1,106 $77,210
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 17
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<CAPTION>
Year Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,038 $ 8,606 $ 8,102
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 1,155 1,123 1,059
Provision for possible loan losses 1,450 1,560 1,597
Increase (decrease) in net interest
receivable/payable 839 (658) 697
Net increase (decrease) from other
operating activities 192 (1,632) 503
---------------------------
Net cash from operating activities 12,674 8,999 11,958
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in money market investments - 1,000 10,000
Proceeds from maturities of securities
available for sale 43,000 63,000 -
Proceeds from sales of securities
available for sale 51 19,876 -
Purchase of securities available for sale (49,946) (69,845) -
Proceeds from maturities of securities held
to maturity 6,412 19,950 112,970
Purchase of securities held to maturity (905) (7,106) (100,169)
Net increase in loans made to customers (35,148) (40,533) (29,038)
Net property and equipment expenditures (1,814) (1,122) (1,801)
----------------------------
Net cash used for investing activities (38,350) (14,780) (8,038)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 11,710 (21,173) 19,873
Net increase (decrease) in short-term borrowings 2,798 (893) 100
Repayment of long-term borrowings (46) (47) -
Proceeds from long-term borrowings - 2,000 -
Dividends paid (3,629) (3,443) (3,139)
Retirement of common stock (308) - -
----------------------------
Net cash from financing activities 10,525 (23,556) 16,834
----------------------------
Net change in cash and cash equivalents (15,151) (29,337) 20,754
Cash and cash equivalents at beginning of year 52,713 82,050 61,296
----------------------------
Cash and cash equivalents at end of year $ 37,562 $ 52,713 $ 82,050
CASH PAID DURING THE YEAR FOR
Interest $ 14,568 $ 13,045 $ 14,240
Income taxes 3,661 4,100 4,525
</TABLE>
Transfers from loans to other real estate owned and other repossessions
totaled $667 thousand, $673 thousand and $795 thousand in 1995, 1994 and
1993, respectively.
In 1995, a transfer from securities held to maturity to securities
available for sale of $19.436 million occurred. This resulted when the
Financial Accounting Standards Board (FASB) issued in November 1995, "A
Guide to Implementation of Statement No. 115 on Accounting for Certain
Investments in Debt and Equity Securities," which explains a one-time
opportunity for entities to reconsider their ability and intent to hold
securities to maturity.
See accompanying notes to consolidated financial statements.
<PAGE> 18
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Southwest National Corporation (the Corporation) is a one bank holding
company which engages in full service commercial banking, retail banking
and trust activities, serving a primary market within a 35-mile radius
of its headquarters office. The consolidated financial statements of the
Corporation include the accounts of the Corporation and its wholly-owned
subsidiary, Southwest National Bank of Pennsylvania (the Bank). All
significant intercompany accounts and transactions have been eliminated
in the consolidated financial statements. Certain items previously
reported have been reclassified to conform with the current year's
classifications.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
STOCK DIVIDEND
On March 15, 1994, the Corporations' Board of Directors declared a 20%
stock dividend payable June 3, 1994, to shareholders of record April 15,
1994. The consolidated financial statements of the Corporation for all
periods presented reflect the stock dividend applied on a retroactive
basis. The number of shares and per share amounts have been restated to
reflect this distribution.
INVESTMENT SECURITIES
Effective January 1, 1994, the Corporation adopted Statement of
Financial Accounting Standards (FAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," on a prospective basis.
Investment securities are classified as follows: debt securities that
the Corporation has the positive intent and ability to hold to maturity
are classified as securities held to maturity and reported at amortized
cost; debt and equity securities bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in the current period earnings; or debt and equity securities
not classified as either securities held to maturity or trading
securities are classified as securities available for sale and reported
at fair value, with unrealized gains and losses reported as a separate
component of shareholders' equity.
RESERVE FOR POSSIBLE LOAN LOSSES
On January 1, 1995, the Corporation adopted FAS No. 114, "Accounting by
Creditors for Impairment of a Loan," which provides guidelines for
measuring impairment losses on loans. A loan is considered to be
impaired when, based on current information and events, it is probable
that the creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. In accordance with FAS No.
114, the reserve for possible loan losses related to loans considered to
be impaired is based on discounted cash flows using the initial
effective interest rate of the loans or the fair value of the collateral
for certain collateral dependent loans. All of the Corporation's
nonaccrual loans are considered to be impaired at December 31, 1995.
Interest received on nonaccrual loans generally is either applied
against principal or reported as interest income, according to
management's judgment as to the collectability of principal.
The reserve for possible loan losses is maintained to absorb future
losses from the loan portfolio based on management's judgment. Factors
considered in determining the level of the reserve include industry
concentrations; specific known risks; adequacy of collateral; past
experience; the status and amount of nonaccrual loans; restructured and
past due loans; and current, as well as anticipated, economic
conditions. The reserve is increased by provisions charged to earnings
and reduced by net charge-offs.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization, which are computed on the straight-line
method for financial reporting and on accelerated methods for income tax
purposes. Buildings and furniture, fixtures and equipment are
depreciated over their estimated useful lives; leasehold improvements
are generally amortized over the terms of their related leases.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of properties acquired through
foreclosure and are recorded at the lower of cost or fair value less
cost to sell. OREO is included with other assets.
<PAGE> 19
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
INTEREST INCOME AND INTEREST EXPENSE
The Bank uses various accrual methods of accounting for interest income
and interest expense which approximate level yields. All amortizing
loans, other than consumer loans and residential real estate loans, are
placed in nonaccrual status when either principal or interest is more
than 90 days past due unless the loan is well secured and in the process
of collection. Loans not placed in nonaccrual status are charged off
when they are 120 to 180 days past due unless they are well secured and
in the process of collection.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The
effect of a change in tax rates on deferred tax assets and liabilities
is recognized in income in the period that includes the enactment date.
PENSION PLAN
The Bank has a noncontributory defined benefit pension plan to which it
contributes the actuarially determined amount necessary to fund total
benefits. Unfunded past service costs are being funded on a schedule
ranging to 44 years.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The expected cost of postretirement benefits is charged to expense
during the period that eligible employees render such service. The Bank
provides comprehensive major medical and life insurance to retirees 55
and older with 20 years of service.
CASH AND CASH EQUIVALENTS
The Corporation has defined cash and cash equivalents as cash and due
from banks, certain interest bearing deposits with banks and federal
funds sold with an original maturity of less than three months.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB released FAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." FAS No. 121 establishes guidelines for recognition of impairment
losses related to long-lived assets and certain intangibles and related
goodwill for assets to be held and used, as well as assets held for
disposition. This statement excludes financial instruments, long-term
customer relationships of financial institutions and other servicing
rights and deferred tax assets. This standard became effective on
January 1, 1996. Adoption of FAS No. 121 is not expected to have any
material effect on the Corporation's financial position or results of
operations.
2 REGULATORY REQUIREMENTS
The Federal Reserve Bank requires maintenance of certain average reserve
balances for all financial institutions. In addition, commercial banks
maintain compensating balances to offset specific charges for check
clearing and other services. The Bank's compensating and reserve ledger
balances averaged $6.493 million in 1995 and $8.187 million in 1994.
The approval of the Comptroller of the Currency is required if the total
of all dividends declared by the Bank in any calendar year exceeds the
total of the Bank's net profits of that year combined with its retained
net profits of the preceding two years. With this limitation, the Bank
can declare dividends to the Corporation in 1996 of approximately
$10.273 million of its total undivided profits of $58.388 million at
December 31, 1995, plus an additional amount equal to the net profits
for 1996 up to the date of any such dividend declaration.
3 PLEDGED ASSETS
Investment securities carried at $39.336 million at December 31, 1995,
were pledged, as required, to secure deposits of public funds and for
other purposes.
<PAGE> 20
4 INVESTMENT SECURITIES
The unrealized gain, net of tax, on securities available for sale at
December 31, 1995, was $1.106 million and was recorded as a separate
component of shareholders' equity.
The amortized cost and estimated market values of investment securities
at December 31, 1995 and 1994 were as follows:
<TABLE>
(In thousands)
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
1995
Securities available for sale:
U.S. Treasury securities and
obligations of
U.S. government agencies
and corporations $116,191 $ 752 $ (128) $116,815
Obligations of states and
political subdivisions 19,436 1,072 (17) 20,491
Equity securities 2,589 - - 2,589
------------------------------------------
Total securities available
for sale $138,216 $1,824 $ (145) $139,895
Securities held to maturity:
Obligations of U.S. government
agencies and corporations 71,991 189 (199) 71,981
------------------------------------------
Total securities held
to maturity 71,991 189 (199) 71,981
------------------------------------------
Total investment securities $210,207 $2,013 $ (344) $211,876
1994
Securities available for sale:
U.S. Treasury securities and
obligations of
U.S. government agencies
and corporations $ 109,360 $ 82 $ (4,484) $104,958
Equity securities 2,640 - - 2,640
-------------------------------------------
Total securities available
for sale 112,000 82 (4,484) 107,598
Securities held to maturity:
Obligations of U.S. government
agencies and corporations 74,107 - (5,821) 68,286
Obligations of states and
political subdivisions 22,836 538 (263) 23,111
-------------------------------------------
Total securities held
to maturity 96,943 538 (6,084) 91,397
-------------------------------------------
Total investment securities $ 208,943 $ 620 $(10,568) $198,995
</TABLE>
Proceeds from the sale of securities available for sale were $51
thousand in 1995, $19.876 million in 1994 and $0 in 1993. No gain or
loss was recognized. There were no sales of securities held to maturity
in 1995, 1994 or 1993.
The amortized cost and estimated market value of investment securities
at December 31, 1995, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to prepay obligations with or without prepayment
penalties.
<TABLE>
(In thousands)
<CAPTION>
Estimated
Amortized Market
Cost Value
<S> <C> <C>
Securities available for sale:
Due in one year or less $ 21,282 $ 21,513
Due after one year through five years 101,666 102,378
Due after five years through ten years 12,364 13,091
Due after ten years 315 324
No fixed maturity 2,589 2,589
--------------------
Total securities available for sale $138,216 $139,895
Securities held to maturity:
U.S. government agencies' collateralized
mortgage obligations $ 71,991 $ 71,981
</TABLE>
<PAGE> 21
5 LOANS
A summary of outstanding loans, by category, at December 31 was as
follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
<S> <C> <C>
Commercial $ 61,781 $ 35,809
Real estate mortgages 249,038 243,836
Consumer 136,098 132,124
-------------------
Total loans, net of unearned income $446,917 $411,769
</TABLE>
6 LOANS TO RELATED PARTIES
Certain executive officers, directors and their affiliates were
customers of the Bank in the ordinary course of business. All loans were
made at rates and terms prevailing in the marketplace at that time.
Activity with respect to aggregate related party loans in 1995 was as
follows:
<TABLE>
(In thousands)
<CAPTION>
Balance Loans Made/ Loan Balance
December 31, 1994 Advanced Payments Other<F1> December 31,1995
<S> <C> <C> <C> <C>
$5,943 $5,261 $5,264 $146 $6,086
<FN>
<F1> Represents the net change in loan balance resulting from changes in related
parties during the year.
</FN>
</TABLE>
7 RESERVE FOR POSSIBLE LOAN LOSSES
An analysis of the reserve for possible loan losses was as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $ 5,038 $ 4,451 $ 3,538
Provision for possible loan losses 1,450 1,560 1,597
Losses (1,486) (1,503) (1,319)
Recoveries 649 530 635
--------------------------
Net loan charge-offs (837) (973) (684)
--------------------------
Balance at end of year $ 5,651 $ 5,038 $ 4,451
</TABLE>
At December 31, 1995, the recorded investment in loans considered
impaired under FAS No. 114 was $1.363 million. This amount includes
impaired loans in the amount of $559 thousand for which the related
reserve for possible loan losses is $236 thousand, $40 thousand of
impaired loans that, as a result of write-downs, do not have a reserve
for possible loan losses and $764 thousand in impaired loans that have
no reserve for possible loan losses because they are adequately
collateralized. The average recorded investment in impaired loans during
the year-ended December 31, 1995, was approximately $1.613 million. For
the year-ended December 31, 1995, the Bank recognized interest income of
$80 thousand on impaired loans, which was recognized using the cash
basis method of income recognition.
At December 31, 1994, the Bank had nonaccrual loans of $1.236 million,
all of which would be considered impaired under FAS No. 114. The Bank
recorded $123 thousand of interest income on these loans in 1994.
Interest received on nonaccrual loans generally is either applied
against principal or reported as interest income, according to
management's judgment as to the collectability of principal.
<PAGE> 22
8 BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
<S> <C> <C>
Land $ 1,024 $ 1,024
Buildings 8,730 8,393
Leasehold improvements 3,890 3,217
Furniture, fixtures and equipment 7,898 7,434
------------------
Total original cost 21,542 20,068
Less: accumulated depreciation and amortization (13,276) (12,461)
------------------
Total bank premises and equipment $ 8,266 $ 7,607
</TABLE>
Depreciation and amortization charged to noninterest expense amounted to
$1.155 million in 1995, $1.123 million in 1994 and $1.059 million in
1993.
Net rental expense of leased bank premises and equipment was as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
<S> <C> <C> <C>
Buildings and land (net of sublease
income of $70, $75 and $75) $269 $199 $202
Equipment 118 170 187
----------------------
Total $387 $369 $389
</TABLE>
Minimum rental commitments under noncancelable leases having an original
term at December 31, 1995, of more than one year were $200 thousand in
1996, $154 thousand in 1997, $126 thousand in 1998, $108 thousand in
1999, $59 thousand in 2000 and $977 thousand in 2001 through 2018,
totaling $1.624 million.
9 DEPOSITS
The following table sets forth, by time remaining to maturity, time
certificates of deposit of $100 thousand or more at December 31:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
<S> <C> <C>
Three months or less $ 5,587 $ 3,237
Three to six months 2,888 1,946
Six to twelve months 5,695 4,748
Over one year 6,132 6,193
----------------
Total $20,302 $16,124
</TABLE>
Interest expense on time certificates of deposit of $100 thousand or
more amounted to $1.032 million in 1995, $793 thousand in 1994 and $840
thousand in 1993.
<PAGE> 23
10 FEDERAL INCOME TAXES
The current and deferred income tax expense (benefit) breakdown was as
follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
<S> <C> <C> <C>
Current $3,931 $3,863 $4,305
Deferred (177) (328) (1,020)
-------------------------
Total $3,754 $3,535 $3,285
</TABLE>
In addition to income taxes applicable to income before taxes, a
deferred tax liability of $2.074 million was recorded as a decrease to
shareholders' equity to reflect the current year change in the tax
effect of the unrealized net gain on investment securities available for
sale.
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
<S> <C> <C> <C>
Deferred tax assets:
Provision for possible loan losses $1,938 $1,718 $1,518
Securities available for sale - 1,501 -
Net loan origination fees 454 523 503
Postretirement benefits other than pensions 262 166 78
Interest on nonaccrual loans 127 126 125
Depreciation and amortization expense 50 - -
Other 42 92 160
-------------------------
Gross deferred tax assets 2,873 4,126 2,384
Deferred tax liabilities:
Securities available for sale 573 - -
Accretion of bond discount 43 39 35
Depreciation and amortization expense - 25 53
Pension expense 171 78 141
Other 51 52 52
--------------------------
Gross deferred tax liabilities 838 194 281
--------------------------
Net deferred tax assets $2,035 $3,932 $2,103
</TABLE>
The significant components of deferred tax benefit for the year ended
December 31 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
<S> <C> <C> <C>
Deferred income tax benefit exclusive of the
effects of other components listed below $(177) $(328) $ (989)
Adjustment to deferred tax assets and liabilities
for enacted changes in tax laws and tax rates - - (31)
---------------------------
Deferred tax benefit $(177) $(328) $(1,020)
</TABLE>
The Corporation has determined that it is not required to establish a
valuation allowance for deferred tax assets in accordance with FAS No.
109 since the deferred tax asset likely will be realized through
carryback to taxable income in prior years, future reversals of existing
taxable temporary differences and, to a lesser extent, future taxable
income.
Income tax expense for 1995, 1994 and 1993, was less than the amount
computed by applying the statutory federal income tax rate to income
before income tax expense. A reconciliation to the reported income tax
rate was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Effect of tax-exempt interest on loans to and
obligations of states and political subdivisions (4.3) (5.0) (6.0)
Surtax exemption ( .7) ( .9) ( .9)
Other ( .8) - .8
--------------------------
Reported income tax rate 29.2% 29.1% 28.9%
</TABLE>
<PAGE> 24
11 EMPLOYEE BENEFITS
PENSION PLAN
The Bank's noncontributory defined benefit pension plan covers all
eligible employees and provides benefits that are based on each
employee's years of service and compensation.
Net periodic pension cost of this plan for each of the last three years
was as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993
<S> <C> <C> <C>
Service cost $ 281 $ 253 $ 231
Interest cost on projected benefit obligation 341 330 306
Actual return on plan assets (413) (385) (381)
Net amortization (13) (13) (13)
-----------------------------
Net periodic pension cost $ 196 $ 185 $ 143
</TABLE>
The following table sets forth the plan's funded status and the amounts
recognized on the Corporation's consolidated balance sheet as of
December 31:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
<S> <C> <C>
Market value of plan assets, primarily marketable securities $6,941 $5,838
Projected benefit obligation 5,450 4,964
-----------------
Plan assets in excess of projected benefit obligation 1,491 874
Unrecognized net transition asset (215) (246)
Unrecognized prior service cost due to plan amendment 164 182
Unrecognized net gain (832) (265)
-----------------
Prepaid pension expense recognized on the balance sheet $ 608 $ 545
-----------------
Actuarial present value of accumulated benefits, including
vested benefits of $3,725 and $3,367 $3,756 $3,418
</TABLE>
Assumptions used in determining the actuarial present value of the
projected benefit obligation were as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Discount rates 7.0% 7.0%
Rates of increase in compensation levels 4.0 4.0
Expected long-term rate of return on assets 7.0 7.0
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Net periodic benefit cost of this plan was as follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
<S> <C> <C>
Service cost $ 56 $ 57
Interest cost on projected benefit obligation 213 202
Amortization of transition obligation 119 119
Loss amortization 12 6
---------------
Net periodic benefit cost $400 $384
</TABLE>
<PAGE> 25
11 EMPLOYEE BENEFITS (cont.)
The following table sets forth the plan's funded status reconciled with
amounts reported on the Corporation's consolidated balance sheet as of
December 31:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $2,111 $2,205
Fully eligible active plan participants 531 232
Other plan participants 666 603
------------------
Total accumulated postretirement benefit obligation 3,308 3,040
Plan assets at fair value - -
------------------
Accumulated postretirement benefit obligation in
excess of plan assets 3,308 3,040
Unrecognized transition obligation (2,027) (2,146)
Unrecognized net loss (518) (407)
------------------
Accrued benefit liability recognized on the
balance sheet $ 763 $ 487
</TABLE>
Assumptions used to determine the actuarial present value of the
accumulated postretirement benefit obligation were as follows at
December 31:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Discount rate 7.0% 7.0%
Health care cost trend rate
Initial 8.0 8.0
Ultimate 6.0 6.0
</TABLE>
The health care cost trend rate assumption can have a significant impact
on the amounts reported. Increasing the assumed health care cost trend
by one percentage point in each year would increase the accumulated
postretirement benefit obligation by approximately $240 thousand and the
aggregate of the service and interest cost components of net periodic
postretirement health care benefit cost by $32 thousand.
401(K) EMPLOYEE SAVINGS PLAN
Effective April 1, 1995, the Deferred Compensation Plan (Former Plan)
was amended to become the Southwest National Bank of Pennsylvania 401(k)
Plan (Plan). Assets from the Former Plan were liquidated, with the
exception of the Bank's certificates of deposit, and funds were
transferred to a third-party trustee for investment.
The Bank contributed to the Plan and the Former Plan for all eligible
employees. Bank contributions have been determined each year by the
Board of Directors. The amount charged to noninterest expense was $677
thousand in 1995, $650 thousand in 1994 and $610 thousand in 1993.
Contributions in 1995 ($149 thousand representing the employee matching
portion and $528 thousand representing the Bank's discretionary portion)
related to the Plan; 1994 and 1993 contributions related to the Former
Plan.
<PAGE> 26
12 COMMITMENTS AND CONTINGENCIES
The Bank serves a primary market area within a 35-mile radius of its
headquarters office. Substantially all of the Bank's loans have been
granted to consumers or businesses located in this marketplace. There
are no significant concentrations of credit risk from an individual
counterparty or groups of counterparties. Although the portfolio is
diversified, the Bank and its borrowers are dependent on the continued
viability of the Southwestern Pennsylvania economy.
The Bank loaned $60.229 million of U.S. government obligations from its
investment securities portfolio to brokerage firms, to enhance fee
income. These securities lent are collateralized in excess of 100% of
their market value, including accrued interest, by Treasury obligations
or obligations of agencies of the U.S. government. The Bank evaluates
the collateral daily to determine that the market value of securities
pledged are at least equal to the value of securities lent. The
collateral is held by third-party agents for the benefit of the Bank.
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers and to enhance revenue.
Financial instruments whose contract amounts represent off-balance sheet
credit risk were as follows at December 31:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
<S> <C> <C>
Commitments to extend credit $78,102 $77,208
Standby letters of credit and financial
guarantees written 14,274 10,384
</TABLE>
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. The Bank evaluates each customer's creditworthiness prior to
extending the commitment. Of the total commitments outstanding, $22.071
million in 1995 and $21.380 million in 1994 represent the unfunded
portion of home equity lines of credit secured by first or second liens
against residential real property, $1.332 million in 1995 and $669
thousand in 1994 represent mortgage loan commitments in which the Bank
requires a security interest in improved real property and $24.329
million in 1995 and $29.281 million in 1994 represent the unfunded
portion of commercial lines of credit. Collateral, if any, for these
commercial lines of credit varies, but may include accounts receivable,
inventory, plant and equipment or commercial real estate. The unfunded
portion of unsecured consumer lines of credit totaled $17.050 million in
1995 and $15.186 million in 1994. Available credit on credit cards
totaled $13.320 million in 1995 and $10.692 million in 1994.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Bank to guarantee the performance
of a customer to a third party. Generally, letters of credit and
financial guarantees expire annually and are subject to credit review
prior to renewal. Credit and collateral standards for these credit
facilities are the same as the Bank's standards for on-balance sheet
credit facilities in that collateral may be required depending on the
credit evaluation of the borrower. Of the total standby letters of
credit and financial guarantees written, $7.472 million in 1995 and
$4.487 million in 1994 were collateralized by assets ranging from
certificates of deposit to improved real property.
Market risk arises if interest rates, at the time a fixed-rate
commitment is funded, have moved adversely subsequent to the extension
of the commitment. Fixed-rate commitments and their associated market
risk are minimal. Management does not anticipate that losses, if any,
which may occur as a result of these transactions, would materially
affect the shareholders' equity of the Corporation.
Southwest, in the normal course of business, is subject to various legal
proceedings in which claims for monetary damages are asserted. No
material losses are anticipated by management as a result of any current
legal proceedings.
<PAGE> 27
13 PARENT COMPANY FINANCIAL STATEMENTS
Following are the statement of income, balance sheet and statement of
cash flows for the Parent Company:
<TABLE>
STATEMENT OF INCOME
<CAPTION>
Year Ended December 31, 1995 1994 1993
(In thousands)
<S> <C> <C> <C>
INCOME
Dividends from Southwest National Bank
of Pennsylvania $3,972 $3,443 $3,164
Expense 35 32 32
------------------------------
Income before income tax benefit and
equity in undistributed net income
of subsidiary 3,937 3,411 3,132
Income tax benefit (12) (11) (11)
------------------------------
Income before equity in undistributed net
income of subsidiary 3,949 3,422 3,143
Equity in undistributed net income of
subsidiary 5,089 5,184 4,959
------------------------------
NET INCOME $9,038 $8,606 $8,102
</TABLE>
<TABLE>
BALANCE SHEET
<CAPTION>
DECEMBER 31, 1995 1994
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 18 $ 6
Investment in Southwest National Bank
of Pennsylvania 77,192 68,096
-------------------
Total assets $77,210 $68,102
SHAREHOLDERS' EQUITY
Common stock ($2.50 par value)
Authorized 5,000,000 shares
Issued and outstanding 3,180,787 and
3,192,295 shares $ 7,952 $ 7,981
Surplus 31,760 31,760
Retained earnings 37,498 28,361
-------------------
Total shareholders' equity $77,210 $68,102
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
Year Ended December 31, 1995 1994 1993
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,038 $ 8,606 $ 8,102
Adjustments to reconcile net income to
net cash from operating activities:
Equity in undistributed net income
of subsidiary (5,089) (5,184) (4,959)
----------------------------
Net cash from operating activities 3,949 3,422 3,143
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (3,629) (3,443) (3,139)
Retirement of common stock (308) - -
----------------------------
Net Cash from financing activities (3,937) (3,443) (3,139)
----------------------------
Net change in cash and cash equivalents 12 (21) 4
Cash and cash equivalents at beginning
of year 6 27 23
----------------------------
Cash and cash equivalents at end of year $ 18 $ 6 $ 27
</TABLE>
<PAGE> 28
14 QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1995 and 1994,
were as follows:
<TABLE>
<CAPTION>
Three Months Ended Mar. 31 June 30 Sept. 30 Dec. 31
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
1995
Interest income $12,473 $13,044 $12,960 $13,004
Interest expense 4,778 5,199 5,301 5,323
Provision for possible loan losses 510 340 375 225
Noninterest income 1,101 1,326 1,141 1,421
Noninterest expense 5,604 5,649 5,092 5,282
Income tax expense 765 951 967 1,071
Net income 1,917 2,231 2,366 2,524
Per share:
Net income $ .60 $ .70 $ .75 $ .79
Cash dividends .28 .28 .28 .30
1994
Interest income $ 11,461 $ 11,887 $ 12,062 $ 12,314
Interest expense 4,122 4,135 4,241 4,533
Provision for possible loan losses 390 390 390 390
Noninterest income 1,136 1,233 1,125 1,339
Noninterest expense 5,482 5,565 5,357 5,421
Income tax expense 721 880 933 1,001
Net income 1,882 2,150 2,266 2,308
Per share:
Net income $ .59 $ .67 $ .71 $ .73
Cash dividends .26 .26 .26 .30
</TABLE>
15 FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the Bank to disclose estimated fair values for its financial
instruments. Fair value estimates, methods and assumptions are set forth
below for the Bank's financial instruments.
FAS No. 107 specifies that fair values should be calculated based on the
value of one unit without regard to any premium or discount that may
result from concentrations of ownership of a financial instrument,
possible tax ramifications or estimated transaction costs.
INVESTMENT SECURITIES AND MONEY MARKET INVESTMENTS
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated
credit concerns. Short-term investments consist of federal funds sold.
For the fair value of investment securities as determined by market
quotations, refer to Note 4. At December 31, 1995, the carrying value
and fair value of interest bearing deposits with banks were each $108
thousand, and in 1994, $113 thousand.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest
rate risk inherent in the loan. The estimate of maturity is based on the
Bank's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic and lending conditions. The fair value reflects market
prepayment estimates adjusted for servicing and credit costs.
The fair value for significant nonperforming loans is based on the
carrying value adjusted for anticipated credit loss risk and the
valuation of underlying collateral.
<PAGE> 29
15 FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)
The following table presents information for loans at December 31:
<TABLE>
<CAPTION>
1995 1994
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Total Loans $441,266 $441,985 $406,731 $395,280
</TABLE>
DEPOSITS AND OTHER LIABILITIES
Under FAS No. 107, the fair value of deposits with no stated maturity,
such as noninterest bearing demand deposits, NOW accounts and savings
accounts, is equal to the amount payable on demand. The fair value of
time deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered
for deposits of similar remaining maturities. The fair value of
short-term borrowings approximates the carrying value of these
instruments based upon their short-term nature. The fair value of
long-term borrowings was estimated using discounted cash flow analyses
based on the Corporation's borrowing rates at December 31 1995 and 1994,
for comparable types of borrowing arrangements.
The following table presents the carrying value and estimated fair value
of deposits and other liabilities:
<TABLE>
<CAPTION>
1995 1994
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Deposits $623,785 $627,359 $612,075 $609,786
Other liabilities:
Short-term borrowings 3,441 3,441 643 643
Long-term borrowings 1,907 2,015 1,953 1,912
</TABLE>
The fair value estimates above do not include the benefit that results
from the low-cost funding provided by deposit liabilities compared to
the cost of borrowing funds in the market.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market data and information about each financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Bank's entire holdings of a
particular financial instrument. Because no market exists for a
significant portion of the Bank's financial instruments, fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial
instruments. For example, the Bank's trust department contributes net
fee income annually. The trust department is not considered a financial
instrument, and its value has not been incorporated into the fair value
estimates. Other significant assets that are not considered financial
instruments include deferred tax assets and premises and equipment.
<PAGE> 30
From this point forward in the 1995 Annual Report all text is presented
in 3 columnar form.
MANAGEMENT'S STATEMENT ON FINANCIAL REPORTING
The management of Southwest National Corporation and its subsidiary,
Southwest National Bank of Pennsylvania, is responsible for the
preparation, content and integrity of the financial data included in
this annual report. Management believes that the financial statements
and related notes have been prepared in accordance with generally
accepted accounting principles, which, in the judgment of management,
are appropriate in the circumstances. Financial information elsewhere in
this report is consistent with that in the financial statements.
In meeting its responsibility for the reliability of the financial
statements, management depends upon the Bank's accounting system and
related internal accounting controls. This system is designed to provide
reasonable assurance that assets are safeguarded against loss from
unauthorized use or disposition, transactions are properly recorded and
executed in accordance with management's authorization, and that
accounting records are reliable for the preparation of the financial
statements. This system is augmented by written policies and procedures
and by examinations performed by an internal audit staff which reports
to the Board of Directors of the Corporation through the Board's
Examining Committee.
The Board of Directors approves the appointment of the independent
certified public accountants for the Corporation and its subsidiary. The
Examining Committee meets with the independent certified public
accountants, the internal auditors and management to ensure that the
system of internal accounting control is being properly administered and
that the financial data is being properly reported. The independent
certified public accountants and the internal auditors each have free
access to the Examining Committee to discuss internal accounting
control, auditing and financial reporting matters.
The consolidated financial statements of Southwest National Corporation
and its subsidiary, as identified in the accompanying Independent
Auditors' Report, have been audited by our independent certified public
accountants, KPMG Peat Marwick LLP. This audit was conducted in
accordance with generally accepted auditing standards, which included a
review of the system of internal accounting control, tests of the
accounting records and other auditing procedures they considered
necessary to formulate an opinion on the consolidated financial
statements.
/s/ David S. Dahlmann
David S. Dahlmann
President and Chief Executive Officer
February 20, 1996
/s/ Donald A. Lawry
Donald A. Lawry
Secretary and Treasurer
February 20, 1996
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Southwest National Corporation:
We have audited the accompanying consolidated balance sheets of
Southwest National Corporation and subsidiary as of December 31, 1995
and 1994, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of Southwest National Corporation's
management. Our responsibility is to express an opinion on these
consolidated 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
Southwest National Corporation and subsidiary at December 31, 1995 and
1994, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
Southwest National Corporation adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standard
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," on January 1, 1994.
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
February 20, 1996
<PAGE> 31
MANAGEMENT'S DISCUSSION OF FINANCIAL STATEMENTS
The Management's discussion of financial statements should be read in
conjunction with the consolidated financial statements and the
supplementary financial data contained in this annual report.
RESULTS OF OPERATIONS
NET INCOME
1995 marked another successful year for the Corporation as earnings
advanced to record levels for the sixth consecutive year. Net income was
$9.038 million, up $432 thousand or 5.0% from the $8.606 million earned
in 1994. This follows last year's rise of $504 thousand or 6.2% over
1993 results.
Earnings for 1995 were boosted by an increase in net interest income, up
$187 thousand as average earning assets rose $2.0 million and the net
interest margin held steady. Other factors contributing to the earnings
improvement for the year were growth of 3.2% in noninterest income, a
lower provision for possible loan losses and a decline of .9% in
noninterest expense. Earning asset growth, increased noninterest income
and control of expenses remain important strategic performance targets
for the Corporation.
Three factors contributed to net income growth in 1994: a rise in net
interest income of $869 thousand, modest noninterest expense growth of
2.0%, and growth in noninterest income of 5.8%. In 1993, the major
factors affecting the growth in net income were a rise in net interest
income combined with a lower provision for loan losses and a higher
level of noninterest income.
Earnings per share were $2.84 in 1995, $2.70 in 1994 and $2.54 in 1993.
Per share data was restated to reflect the 20% stock dividend declared
on March 15, 1994. Return on average assets amounted to 1.30%, 1.24% and
1.18% for the years 1995, 1994 and 1993, respectively. Return on average
shareholders' equity was 12.61% in 1995, 12.81% in 1994 and 12.84% in
1993. Exclusive of the FAS 115 adjustment for 1995 and 1994, these
ratios would have been 12.40% and 12.66%, respectively.
<TABLE>
NET INTEREST INCOME
(In thousands)
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Total interest income $51,481 $47,724 $47,936 $51,240 $53,754
Taxable equivalent adjustment 910 962 1,025 1,156 1,228
-------------------------------------------
Total interest income-fully
taxable equivalent basis 52,391 48,686 48,961 52,396 54,982
Total interest expense 20,601 17,031 18,112 22,732 28,871
-------------------------------------------
Net interest income-fully
taxable equivalent basis $31,790 $31,655 $30,849 $29,664 $26,111
</TABLE>
<TABLE>
NET INTEREST MARGIN ANALYSIS
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994 1993
<S> <C> <C> <C>
Yield on interest earning assets 7.95% 7.41% 7.59%
Rate on interest bearing liabilities 3.94 3.21 3.40
---------------------------
Net interest rate spread 4.01 4.20 4.19
Effect of noninterest bearing liabilities .81 .62 .59
---------------------------
Net interest margin 4.82% 4.82% 4.78%
</TABLE>
<PAGE> 32
NET INTEREST INCOME
Net interest income, the engine that drives operating revenue for the
Corporation, is the difference between the interest, dividends and fees
on earning assets less interest expense incurred for funding sources.
Earning assets primarily include loans and investments. Sources used to
fund those assets include deposits, borrowed funds and capital. Changes
in net interest income generally occur due to fluctuations in the volume
and/or mix of interest-earning assets and interest-bearing liabilities,
and changes in corresponding interest yields and rates.
A portion of the Corporation's interest income is not subject to federal
income taxes. For comparative purposes, a taxable equivalent adjustment
based on the statutory income tax rate of 35% for the years 1993 through
1995 is shown on the preceding page. The following discussion is based
on results on a fully taxable equivalent basis.
Net interest income increased a modest $135 thousand (less than 1.0%)
compared to a $806 thousand (2.6%) rise in 1994 and a $1.185 million
rise in 1993. Growth in net interest income in all three years was
fueled primarily through a higher yielding asset mix and a higher level
of earning assets. Results for 1994 and 1993 were also improved by an
increase in the net interest margin.
The table at the bottom of the preceding page illustrates the components
of the net interest margin for the last three years. Net interest margin
is interest income calculated as a percentage of average earning assets.
The margin remained stable in 1995 at 4.82% after a four basis point
rise to 4.82% in 1994 and a ten basis point rise in 1993.
Net interest rate spread is the difference between the average yield
earned on total interest earning assets and the average rate paid on
total funding sources. This spread declined to 4.01% in 1995 compared to
4.20% in 1994 and 4.19% in 1993.
The average prime rate advanced to 8.83% in 1995 compared to 7.14% in
1994. Market interest rates rose through mid year then fell back
slightly through the second
At this point in the 1995 Annual Report there appears a bar graph as set
out in the following table.
<TABLE>
NET INTEREST INCOME
(fully taxable equivalent, in millions)
<S> <C>
1991 26.111
1992 29.664
1993 30.849
1994 31.655
1995 31.790
</TABLE>
half of the year, based on economic uncertainty.
Higher interest rates and continued redeployment of funds into higher
yielding earning assets helped to raise the yield on interest earning
assets by 54 basis points for the year. The rate on interest bearing
liabilities rose 73 basis points, however, outpacing the increase in
interest earning assets. This change in rate is attributable to a shift
in the interest bearing deposit mix as more customers register
preferences for time versus savings accounts.
<TABLE>
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME*
<CAPTION>
(In thousands) 1995/1994 1994/1993
Increase/(decrease) in income/expense due to
changes in:
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Interest bearing deposits
with banks $ (27) $ (7) $ (34) $ (167) $ 40 $(127)
Federal funds sold 54 526 580 (33) 315 282
U.S.Treasury securities and
obligations of
U.S. government agencies
and corporations (1,878) 252 (1,626) (988) (1,089)(2,077)
Obligations of states and
political subdivisions (349) (31) (380) 18 (76) (58)
Corporate collateralized
mortgage obligations - - - (64) - (64)
Equity and other securities (2) 12 10 62 (6) 56
Loans 3,134 2,021 5,155 2,589 (876) 1,713
------ -------
Total interest
earning assets 150 3,555 3,705 898 (1,173) (275)
INTEREST BEARING LIABILITIES
NOW accounts (84) (100) (184) (16) (314) (330)
Savings deposits (856) 972 116 338 (227) 111
Time deposits 1,151 2,290 3,441 (587) (307) (894)
Short-term borrowings 41 38 79 (13) 10 (3)
Long-term borrowings 117 1 118 35 - 35
------ ------
Total interest
bearing liabilities (248) 3,818 3,570 (58) (1,023)(1,081)
------ -------
CHANGE IN NET INTEREST INCOME 398 (263) $ 135 956 (150) $ 806
<FN>
* Changes in net interest income due to both volume and rate were combined with
the changes of each based on their proportionate amounts. Amounts are calculated
on a fully taxable equivalent basis.
</FN>
</TABLE>
<PAGE> 33
At this point in the 1995 Annual Report is the following table which
spans two pages. This table covers pages 34 and 35 respectively. It
has been condensed for electronic filing purposes.
<TABLE>
ANALYSIS OF NET INTEREST INCOME AND INTEREST YIELDS/RATES*
<CAPTION>
(In thousands) 1995
Average Average
balance Interest yields/rates
<S> <C> <C> <C>
USES OF FUNDS
Interest earning assets:
Interest bearing deposits with banks $ 129 $ 8 6.20%
Federal funds sold 29,502 1,750 5.93
---------------------
Total money market investments 29,631 1,758 5.93
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations 182,059<F1> 11,050 6.07
Obligations of states and
political subdivisions 20,531<F1> 1,898 9.24
Corporate collateralized mortgage
obligations - - -
Equity and other securities 2,600<F1> 171 6.58
---------------------
Total investment securities 205,190 13,119 6.39
Loans 424,203 37,514 8.84
---------------------
Total interest earning assets $659,024 52,391 7.95%
SOURCES OF FUNDS
Interest bearing liabilities:
NOW accounts $ 55,839 870 1.56%
Savings deposits 224,687 6,888 3.07
Time deposits 237,720 12,577 5.29
Short-term borrowings 2,421 113 4.67
Long-term borrowings 1,928 153 7.94
---------------------
Total interest bearing liabilities 522,595 20,601 3.94
Sources supporting interest earning
assets on which interest is not paid 136,429 -
---------------------
Total sources of funds $659,024 20,601 3.13%
------------------
NET INTEREST INCOME/YIELD ON INTEREST
EARNING ASSETS $31,790 4.82%
<FN>
* Calculated on a fully taxable equivalent basis.
<F1> Amounts exclude adjustments to fair value as required by FAS No. 115.
</FN>
</TABLE>
<PAGE> 34
<TABLE>
ANALYSIS OF NET INTEREST INCOME AND INTEREST YIELDS/RATES* (cont.)
<CAPTION>
(In thousands) 1994
Average Average
balance Interest yields/rates
<S> <C> <C> <C>
USES OF FUNDS
Interest earning assets:
Interest bearing deposits with banks $ 542 $ 42 7.75%
Federal funds sold 28,248 1,170 4.14
-------------------
Total money market investments 28,790 1,212 4.21
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations 213,144<F1> 12,676 5.95
Obligations of states and
political subdivisions 24,312 2,278 9.37
Corporate collateralized mortgage
obligations - - -
Equity and other securities 2,632<F1> 161 6.12
-------------------
Total investment securities 240,088 15,115 6.30
Loans 388,119 32,359 8.34
-------------------
Total interest earning assets $656,997 48,686 7.41%
SOURCES OF FUNDS
Interest bearing liabilities:
NOW accounts $ 60,911 1,054 1.73%
Savings deposits 254,776 6,772 2.66
Time deposits 212,791 9,136 4.29
Short-term borrowings 1,311 34 2.59
Long-term borrowings 449 35 7.80
-------------------
Total interest bearing liabilities 530,238 17,031 3.21
Sources supporting interest earning
assets on which interest is not paid 126,759 -
-------------------
Total sources of funds $656,997 17,031 2.59%
------------------
NET INTEREST INCOME/YIELD ON INTEREST
EARNING ASSETS $31,655 4.82%
<FN>
* Calculated on a fully taxable equivalent basis.
<F1> Amounts exclude adjustments to fair value as required by FAS No. 115.
</FN>
</TABLE>
<TABLE>
ANALYSIS OF NET INTEREST INCOME AND INTEREST YIELDS/RATES* (cont.)
<CAPTION>
(In thousands) 1993
Average Average
balance Interest yields/rates
<S> <C> <C> <C>
USES OF FUNDS
Interest earning assets:
Interest bearing deposits with banks $ 2,835 $ 169 5.96%
Federal funds sold 29,305 888 3.03
------------------
Total money market investments 32,140 1,057 3.29
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations 228,950 14,753 6.44
Obligations of states and
political subdivisions 24,123 2,336 9.68
Corporate collateralized mortgage
obligations 921 64 6.95
Equity and other securities 1,612 105 6.51
------------------
Total investment securities 255,606 17,258 6.75
Loans 357,307 30,646 8.58
------------------
Total interest earning assets 645,053 48,961 7.59%
SOURCES OF FUNDS
Interest bearing liabilities:
NOW accounts $ 61,629 1,384 2.25%
Savings deposits 241,960 6,661 2.75
Time deposits 226,467 10,030 4.43
Short-term borrowings 1,871 37 1.98
Long-term borrowings - - -
------------------
Total interest bearing liabilities 531,927 18,112 3.40
Sources supporting interest earning
assets on which interest is not paid 113,126 -
------------------
Total sources of funds $645,053 18,112 2.81%
--------------------
NET INTEREST INCOME/YIELD ON INTEREST
EARNING ASSETS $30,849 4.78%
<FN>
* Calculated on a fully taxable equivalent basis.
<F1> Amounts exclude adjustments to fair value as required by FAS No. 115.
</FN>
</TABLE>
<PAGE> 35
The percentage contribution of noninterest bearing liabilities to the
net interest rate spread (commonly known as the free funds ratio)
increased 19 basis points to .81%; this was the principal factor in
holding the net interest margin stable year to year. Key factors in the
rise of the free funds ratio were the higher interest rate environment
and the increase from 19.2% in 1994 to 20.7% in 1995 in the percentage
of interest earning assets funded by noninterest bearing sources of
funds including shareholders' equity.
During 1994, market rates rose, but the yield on earning assets fell 18
basis points as the improved rates were not enough to offset run-off of
higher yielding assets. The rate paid on interest bearing liabilities
also fell, basically matching the change in interest earning assets; the
net effect was a one basis point rise in the net interest rate spread.
Further improving the net interest margin was a three basis point rise
in the free funds ratio, which resulted from the higher interest rate
environment and an increase in the percentage of interest earning assets
funded by noninterest bearing sources of funds.
The table on page 33 shows how changes in average interest earning
assets, interest bearing liabilities and average interest rates or
yields affect net interest income. In 1995 and 1994, changes in volume
were the primary contributor to the rise in net interest income.
The schedule on the preceding pages illustrates the Corporation's
average daily balance of interest earning assets and interest bearing
liabilities together with the yields or rates associated with each asset
or liability category. Average earning assets rose $2.0 million (less
than 1%) which followed a rise of $11.9 million (1.9%) in 1994.
Management continued to achieve positive results by focusing on
improving the quality and composition of earning assets, even in a low
growth environment.
NONINTEREST INCOME
Total noninterest income grew $156 thousand to $4.989 million in 1995.
Annual growth rates were 3.2% in 1995, 5.8% in 1994 and 9.2% in 1993,
amounting to a compound growth rate of 6.1% over the past three years.
Growth in trust income and service charges on deposit accounts
contributed to the 1995 increase. The rise in 1994 was fueled by growth
in trust income and fees
At this point in the 1995 Annual Report there appears a bar graph as set
out in the following table.
<TABLE>
Noninterest Income
(in millions)
<S> <C>
1991 3.802
1992 4.180
1993 4.566
1994 4.833
1995 4.989
</TABLE>
generated by the sale of nondeposit investment products; 1993 also
benefitted from a rise in trust income as well as growth in service
charges on deposit accounts. Management reviews all fee-based products
on an annual basis for opportunities to enhance results.
During 1995, trust income continued to grow, rising $134 thousand (8.0%)
following a $116 thousand (7.5%) increase in 1994 and a $174 thousand
(12.6%) increase in 1993. The growth in 1995 was primarily due to
increased fees generated from the personal trust sector. The growth in
1994 resulted from increased fees from pension and profit sharing plans,
personal trusts and estate management activity while 1993 was favorably
impacted from increased fees generated from personal trust and estate
management activity.
Service charges on deposit accounts, which represent the largest
component of noninterest income, rose by 7.8% in 1995 following a flat
year in 1994 and a 5.3% increase in 1993. The rise in 1995 is due
principally to increases in fees charged (mainly NSF fees) and growth in
fees on relationship deposit products. The lack of growth in 1994 was
due to a drop in transaction activity resulting from stable deposit
levels. The rise in 1993 was due to management's efforts to control
collection of those fees and cross-sell deposit products. Management
strives to implement reasonable fees for services and closely monitors
the collection of those fees.
Other service charges and commissions declined 18.6% ($147 thousand) in
1995 following increases of 21.3% and 15.8% in 1994 and 1993,
respectively. The drop in 1995 is due primarily to reduced fees
recognized from mutual funds and annuity products coupled with reduced
credit life insurance premiums and a lower level of fees earned on our
securities lending program. The rise in 1994 was due primarily to
increased fees recognized from mutual fund and annuity products. The
rise in 1993 resulted from increased credit life insurance premiums,
growth in the number of MasterCard/VISA accounts and increased fees
generated by our securities lending program.
Other income increased 3.0% ($10 thousand) in 1995 after increasing 3.7%
in 1994 and 6.9% in 1993. The increase in 1995 was due in part to
increased safe deposit fees. The rise in 1994 resulted from additional
income recognized upon settlement of the Pennsylvania Shares Tax issue;
the increase in 1993 was due to increased safe deposit fees.
<PAGE> 36
NONINTEREST EXPENSE
Noninterest expense fell $198 thousand (.9%) in 1995 due principally to
a sharp drop in the deposit insurance premiums paid by the Bank.
Excluding this item, noninterest expense growth was held to a modest
2.2%.
Control of expenses is and will continue to be an important performance
target with management. The Corporation's efficiency ratio, which
measures noninterest expense as a percent of noninterest income plus net
interest income on a taxable equivalent basis, declined to 58.8% in 1995
from 59.8% in 1994 and 60.4% in 1993. This ratio continues to compare
favorably to the average of 63.1% for our peer group (bank holding
companies between $500 million and $1 billion in assets).
In 1994, noninterest expense rose only 2.0% ($419 thousand). Adjusting
for the writedown of an OREO property and a nonrecurring item,
noninterest expense increased by 4.0%.
In 1993, noninterest expense increased 6.3% ($1.262 million). Excluding
expenses associated with the adoption of FAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions," the
adjustment in the carrying value of an OREO property and a writedown on
the anticipated settlement of the Pennsylvania Shares Tax issue,
noninterest expense would have risen only 3.0%. Salaries and employee
benefits increased $308 thousand (3.0%) in 1995 compared with a $678
thousand (7.0%) rise in 1994 and a $606 thousand (6.7%) rise in 1993.
The rise in 1995 is due principally to normal merit increases offset
partially by reduced health care costs. The increase in 1994 was due to
the reduction in the deferral of expenses due to a changing loan mix,
the addition of two full-time equivalent employees and normal merit
increases. The rise in 1993 resulted from the additional costs
associated with the adoption of FAS No. 106, the addition of six-full
time equivalent employees and normal merit increases.
Net occupancy expense grew $49 thousand (2.9%) in 1995 following an $87
thousand (5.4%) increase in 1994 and a $96 thousand (6.3%) increase in
1993. Normal increases in the various costs of managing facilities
accounted for most of the increases in all three years. Also, costs
associated with additional space occupied by support staff impacted 1994
and 1993.
At this point in the 1995 Annual Report there appears a bar graph as set
out in the following table.
<TABLE>
Noninterest Expense
(in millions)
<S> <C>
1991 18.521
1992 20.144
1993 21.406
1994 21.825
1995 21.627
</TABLE>
Equipment expenses and data processing fees fell $59 thousand (1.8%) in
1995 compared to a $93 thousand (3.0%) increase in 1994 and a $25
thousand (less than 1.0%) increase in 1993. In 1995, equipment expenses
declined 4.2% primarily due to reduced equipment rentals as data
processing fees essentially remained unchanged. In 1994, increases in
maintenance contract fees, higher equipment depreciation and increased
student loan data processing fees accounted for the rise. In 1993,
increases in data processing fees were offset by reduced equipment
costs.
FDIC insurance expense dropped a substantial 46.8% ($653 thousand)
following nominal increases of 1.7% and 2.5% in 1994 and 1993,
respectively. Earlier this year the Federal Deposit Insurance
Corporation announced a reduction in premiums for member banks when the
Bank Insurance Fund reached its Congressionally mandated reserve target.
As a result, the assessment rate fell from 23 cents to 4 cents per $100
of insured deposits, an 82.6% decline.
Future assessment rates will be based on capital levels and bank
regulators' ratings as is required by the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA). The FDIC premium related
to the Bank Insurance Fund has been eliminated for at least the first
half of 1996. This will result in an additional savings of approximately
$670 thousand compared with 1995 assuming there will be no premium in
1996 other than the annual $2 thousand statutory minimum assessment.
Other expenses rose $122 thousand (2.7%) following a decrease of $504
thousand (10.0%) in 1994 and a rise of $461 thousand (10.1%) in 1993.
The increase in 1995 is due primarily to higher marketing expenditures,
up $135 thousand (11.9%), related to promotional efforts regarding the
relocation of a branch office, and certain loan and deposit products.
The decline in 1994 was principally the result of two items that
inflated this category in 1993: an adjustment in the carrying value of
an OREO property of $315 thousand due to a decline in the fair value,
and a nonrecurring $113 thousand writedown on the potential settlement
of the Pennsylvania Shares Tax issue. Excluding these items, other
expenses would have decreased $76 thousand or 1.7% year to year.
<PAGE> 37
FEDERAL INCOME TAXES
Federal income tax expense increased $219 thousand in 1995, $250
thousand in 1994 and $315 thousand in 1993. In all three years, taxable
income rose principally because of growth in earnings. The effective tax
rates for the Corporation of 29.2% in 1995, 29.1% in 1994 and 28.9% in
1993, were less than the statutory federal income tax rate of 35.0% in
all three years. This difference was primarily the result of the tax
exempt status of interest income on obligations of states and political
subdivisions.
The Corporation adopted FAS No. 109, "Accounting for Income Taxes," on a
prospective basis effective January 1, 1993. Adoption of this standard
did not have a material effect on the Corporation's 1993 financial
position or results of operations.
During the third quarter of 1993, the Omnibus Budget Reconciliation Act
of 1993 was signed into law. This legislation impacted the Corporation's
effective tax rate by .3% in 1995 and .1% in both 1994 and 1993.
DIVIDENDS
Cash dividends paid amounted to $3.629 million in 1995, $3.443 million
in 1994 and $3.139 million in 1993. On a per common share basis, they
were $1.14 (5.6% increase) in 1995, $1.08 (9.7% increase) in 1994 and
$.98 (10.3% increase) in 1993. All per share amounts were restated to
reflect the 20% stock dividend declared on March 15, 1994. This increase
in dividends reflects the Corporation's strong capital position and
solid earnings performance. The dividend payout ratio was 40.15% in
1995, 40.00% in 1994 and 38.74% in 1993. Our ratio has been around the
80th percentile in comparison with our peer group over the last three
years.
The continuing growth in cash dividends reflects a trend of increases
over the last 37 years by the Corporation and its predecessors.
Management continues to be committed to delivering maximum return to our
shareholders and building shareholder value.
At this point in the 1995 Annual Report there appears a bar graph as set
out in the following table.
<TABLE>
Cash Dividends
(per share)
<S> <C>
1991 0.82
1992 0.89
1993 0.98
1994 1.08
1995 1.14
</TABLE>
STOCK PRICES
The Corporation lists its common stock on the National Association of
Security Dealers automated quotation (NASDAQ) system under the symbol
SWPA. Currently the following firms are registered with NASD as market
makers for the Corporation's common stock:
Ferris, Baker, Watts Inc.;
F.J. Morrissey & Co., Inc.;
Herzog, Heine, Geduld, Inc.;
Legg Mason Wood Walker, Inc.; and
Sandler O'Neill & Partners.
The table to the right lists the bid prices during the periods
presented; these do not necessarily reflect prices in actual
transactions.
At this point in the 1995 Annual Report there appears a bar graph as set
out in the following table.
<TABLE>
Book Value
(per share)
<S> <C>
1991 17.60
1992 19.07
1993 20.62
1994 21.33
1995 24.27
</TABLE>
<TABLE>
<CAPTION> 1995 1994*
High Low High Low
<S> <C> <C> <C> <C>
First quarter $27.25 $23.50 $32 $24.875
Second quarter 27.50 26.25 30.375 27.50
Third quarter 33 26.75 30.50 26.50
Fourth quarter 34.50 32 27.75 23.50
<FN>
*Prices in 1994 were adjusted to reflect a 20% stock dividend paid June 3, 1994
to shareholders of record April 15, 1994.
</FN>
</TABLE>
<PAGE> 38
FINANCIAL CONDITION
INVESTMENTS
In November 1995, the FASB issued "A Guide to Implementation of
Statement No. 115 on Accounting for Certain Investments in Debt and
Equity Securities." This guide describes a one-time opportunity for
entities to reconsider their ability and intent to hold securities to
maturity. The Corporation elected to redesignate $19.4 million of
obligations of states and political subdivisions with an unrealized
gain, net of tax, of $695 thousand, from the held to maturity portfolio
to the available for sale portfolio.
Further, the Corporation has designated as available for sale the entire
U.S. Treasury securities portfolio, the U.S. government agencies and
corporations portfolio excluding agency issued real estate mortgage
investment conduits (REMICs) and the entire equity securities portfolio.
In December 1995, as a result of the reclassification opportunity
described above, the entire portfolio of obligations of states and
political subdivisions was shifted to the available for sale category.
The REMIC portion of the U.S. government agencies and corporations
portfolio comprises the held to maturity portfolio. The Corporation
recorded a $1.1 million unrealized gain (net of tax) on securities
classified as available for sale at December 31, 1995, which was
recorded as a separate component of shareholders' equity.
The investment portfolio is comprised of investment securities, both
available for sale and held to maturity, as well as money market
instruments. During 1995, investments continued to decline on average
falling to $233.0 million, a drop of $34.7 million or 13.0% compared to
an average of $267.7 million in 1994. In both years, management's
strategy was continued redeployment of funds to higher yielding earning
assets, principally loans. Average investments represented 35% and 41%
of total earning assets in 1995 and 1994, respectively.
The table on the following page shows the breakdown of securities
available for sale and securities held to maturity at December 31, 1995,
1994 and 1993. During 1995 and 1994, the Bank's strategy was to purchase
securities with maturities in the two to five year range, as
opportunities continued to be limited due to low deposit growth and the
significant rise in loans during the period. This compares to 1993 when
the Bank's investment strategy was directed towards U.S. Treasury
securities in the three to five year range.
At year-end 1995, the portfolio contained $72.0 million of REMICs
compared to $74.1 million on December 31, 1994. This represented 34% and
36% of total investment securities at year-end 1995 and 1994,
respectively. The REMIC portfolio's weighted average life declined to
2.3 years in 1995 from 3 years in 1994. Management believes that the
issuers of this portfolio are well diversified, the mortgages are
geographically dispersed and the portfolio yield will not be
significantly impaired by a variance of prepayment activity.
Because of the negative attention derivatives have received, it is
important to note that the Bank does not carry an exposure to
off-balance sheet derivatives.
<PAGE> 39
<TABLE>
INVESTMENT SECURITIES
(In thousands)
<CAPTION>
DECEMBER 31, 1995 1994 1993
<S> <C> <C> <C>
Securities available for sale:<F1>
U.S. Treasury securities $ 71,240 $ 93,364 $ -
Obligations of U.S. government agencies
and corporations 44,951 15,996 -
Obligations of states and political
subdivisions 19,436 - -
Equity securities 2,589 2,640 -
-----------------------------
Total securities available for sale 138,216 112,000 -
Securities held to maturity:
U.S. Treasury securities - - 90,190
Obligations of U.S. government agencies
and corporations 71,991 74,107 117,036
Obligations of states and political
subdivisions - 22,836 24,936
Equity and other securities - - 2,607
-----------------------------
Total securities held to maturity 71,991 96,943 234,769
-----------------------------
Total investment securities $210,207 $208,943 $234,769
<FN>
<F1> Amounts exclude adjustments to fair value as required by FAS No. 115.
</FN>
</TABLE>
At this point in the 1995 Annual Report is the following table which
spans across the page. It has been modified for electronic filing
purposes.
<TABLE>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
(In thousands)
<CAPTION>
After 1 After 5
DECEMBER 31, 1995 Within 1 but within but within
Amounts maturing: year 5 years 10 years
<S> <C> <C> <C>
Securities available for sale<F1>
U.S. Treasury securities $16,005 $ 55,235 $ -
Obligations of U.S. government
agencies and corporations 5,002 39,949 -
Obligations of states and political
subdivisions 275 6,482 12,364
Equity securities - - -
---------------------------------
Total securities available for sale 21,282 101,666 12,364
Securities held to maturity
Obligations of U.S. government
agencies and corporations 2,615 69,376 -
---------------------------------
Total securities held to maturity 2,615 69,376 -
---------------------------------
Total investment securities $23,897 $171,042 $12,364
---------------------------------
Weighted average yields* 7.46% 6.06% 9.05%
<FN>
*Calculated on a fully taxable equivalent basis. The weighted average yields are
based on book value and effective yields weighted for the scheduled maturity of
each security.
<F1> Amounts exclude adjustments to fair value as required by FAS No. 115.
</FN>
</TABLE>
<TABLE>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (cont.)
<CAPTION>
(In thousands)
DECEMBER 31, 1995 After No fixed
Amounts maturing: 10 years maturity Total
<S> <C> <C> <C>
Securities available for sale<F1>
U.S. Treasury securities $ - $ - $ 71,240
Obligations of U.S. government
agencies and corporations - - 44,951
Obligations of states and political
subdivisions 315 - 19,436
Equity securities - 2,589 2,589
-----------------------------------
Total securities available for sale 315 2,589 138,216
Securities held to maturity
Obligations of U.S. government
agencies and corporations - - 71,991
-----------------------------------
Total securities held to maturity - - 71,991
-----------------------------------
Total investment securities $ 315 $ 2,589 $210,207
-----------------------------------
Weighted average yields* 7.79% 6.70% 6.41%
<FN>
*Calculated on a fully taxable equivalent basis. The weighted average yields are
based on book value and effective yields weighted for the scheduled maturity of
each security.
<F1> Amounts exclude adjustments to fair value as required by FAS No. 115.
</FN>
</TABLE>
LOANS
The Bank's average loan portfolio continued to register significant
growth rising $36.1 million (9.3%) in 1995 following a sizable increase
of $30.8 million (8.6%) in 1994. Growth, without sacrificing asset
quality, continues to be a keystone in management's strategic focus to
generate higher yielding earning assets by building loan volume.
Changes in the composition of the loan portfolio in 1995 included
increases of $26.0 million in commercial loans, $5.2 million in real
estate mortgages and $4.0 million in consumer loans. The major emphasis
for the year was in the commercial sector as slightly higher interest
rates and economic uncertainties tended to dampen consumer expectations.
Lending activity in 1994 emphasized commercial real estate loans and
consumer installment loans as higher interest rates slowed the growth of
residential real estate mortgages. The table on the following page
presents the components of the loan portfolio on December 31 for each of
the last five years. It should be noted that the Bank does not
concentrate its lending activities in any industry or group, but does
focus its lending activities in the western Pennsylvania market.
Substantially all of its loans are provided to our area's businesses and
consumers.
The commercial loan portfolio registered a sizable increase in 1995 of
$26.0 million, up 72.5% compared to a $561 thousand or 1.5% decline in
1994. The rise in 1995 was primarily the result of a $16.8 million or
52.6% increase in commercial and industrial loans as the Bank focused on
small to medium size businesses within our market area. The Bank
diversifies risk in this portfolio by
<PAGE> 40
closely monitoring industry concentration and portfolios to insure that
it does not exceed established lending guidelines. Diversification is
intended to limit the risk of loss from any single unexpected event or
trend. Municipal loans also rose significantly, increasing by $9.1
million (more than 200%) reversing a generally declining trend as
opportunities in this very competitive sector arose in 1995. The decline
in 1994 was due to a $1.2 million (3.7%) decrease in commercial and
industrial loans, which was partially offset by a rise in municipal
loans. Commercial loans represented 14% of the total loan portfolio in
1995, up from 9% in 1994.
Loans collateralized by real estate increased $5.2 million (2.1%) in
1995 after a $17.4 million (7.7%) rise in 1994. This growth resulted
from an increase in the residential portfolio of $6.6 million (3.7%),
which was partially offset by a $1.4 million (2.2%) decline in the
commercial sector. The dollar growth in 1994 was due almost equally to
increases in the residential and commercial portfolios.
At this point in the 1995 Annual Report there appears a bar graph as set
out in the following table.
<TABLE>
Loans
(average in millions)
<S> <C>
1991 318.823
1992 330.017
1993 357.307
1994 388.119
1995 424.203
</TABLE>
The ratio of real estate mortgages to the total loan portfolio declined
to 56% at year-end 1995 compared to 59% at December 31, 1994.
Consumer loans also increased $4.0 million (3.0%) compared to a sizable
increase in 1994 of $23.7 million (21.8%). Even though consumer loans
increased from year to year, the trend during 1995 has been one of
softening demand by consumers for durable goods and autos because of the
economic uncertainties created by the gridlock in the Federal
government. During 1994, strong consumer demand for autos and other
durable goods, as a result of the improved economy, helped to spur
demand as installment loans rose $21.7 million (23.0%). Consumer loans
fell to 30% of total loans at December 31, 1995, compared to 32% at
year-end 1994.
Management will continue its strategic focus on quality loans in all
lending categories within our market area in order to continue to
provide the best possible service to our customers.
<TABLE>
LOANS
(In thousands)
<CAPTION>
DECEMBER 31, 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Commercial
Commercial and industrial $ 48,807 $ 31,975 $ 33,217 $ 27,775 $ 24,862
Municipal 12,974 3,834 3,153 7,607 8,350
------------------------------------------------
Total 61,781 35,809 36,370 35,382 33,212
Real estate mortgages
Residential 186,090 179,485 171,155 152,728 134,723
Commercial 62,948 64,351 55,258 45,325 42,786
------------------------------------------------
Total 249,038 243,836 226,413 198,053 177,509
Consumer
Installment 118,875 116,383 94,639 96,872 100,901
Demand and time 17,223 15,741 13,814 11,891 11,658
------------------------------------------------
Total 136,098 132,124 108,453 108,763 112,559
------------------------------------------------
Total loans, net of
unearned income $446,917 $411,769 $371,236 $342,198 $323,280
</TABLE>
<TABLE>
LOAN MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF COMMERCIAL LOANS
(In thousands)
<CAPTION>
Due in 1 Due after 1 year Due after
DECEMBER 31, 1995 year or less through 5 years 5 years Total
<S> <C> <C> <C> <C>
Commercial and industrial $40,698 $ 7,842 $ 267 $48,807
Municipal 9,366 2,479 1,129 12,974
----------------------------------------------------
Total commercial loans $50,064 $10,321 $1,396 $61,781
Predetermined interest
rates $16,008 $ 9,945 $ 709 $26,662
Floating interest rates 34,056 376 687 35,119
----------------------------------------------------
Total $50,064 $10,321 $1,396 $61,781
</TABLE>
<PAGE> 41
RESERVE FOR POSSIBLE LOAN LOSSES
The Bank adopted FAS No. 114 on January 1, 1995, which provides
guidelines for measuring impairment losses on loans. A loan is
considered to be impaired when, based on current information and events,
it is probable that the creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Under the
new standard, the 1995 reserve for possible loan losses related to loans
that are identified as impaired in accordance with FAS No. 114 is based
on discounted cash flows using the loan's initial effective interest
rate or the fair value of the collateral for certain collateral
dependent loans. Nonaccrual loans are considered to be impaired.
Adoption of this standard did not have a material effect on the
Corporation's financial statements.
Asset quality is a major corporate focus and a reserve for possible loan
losses is maintained which, in management's judgment, is adequate to
absorb future losses inherent in the loan portfolio. Management reviews
the adequacy of the reserve quarterly. For analytical purposes, this
methodology considers loan portfolio trends; historical loan loss
experience; identified credit problems and their exposure; current and
anticipated economic conditions; and past due loans. Management believes
there is no concentration of loans that contain an abnormal element of
risk.
The level of loan losses can vary from period to period due to the size
and number of individual loans that may require charge-off and the
effects of changing conditions. As a result, there can be no assurance
that the level of the reserve or the level of the loan loss provision
will not be increased by the Bank.
A five-year analysis of the Bank's reserve for possible loan losses is
presented below. The reserve totaled $5.651 million on December 31,
1995, up $613 thousand (12.2%) from the $5.038 million reported at
year-end 1994. All credit quality ratios improved from 1994 to 1995. The
reserve as a percent of loans at year-end increased to 1.26% in 1995
compared to 1.22% in 1994 despite strong loan growth in 1995 of 8.5%.
The reserve as a percent of nonperforming loans at December 31, 1995,
was 414.60% compared to 407.61% at year-end 1994. This represents
coverage of more than $4 for every $1 of nonperforming loans.
Net loan charge-offs for 1995 were $837 thousand, a drop of $136
thousand (14.0%) compared to $973 thousand in 1994. Net loan charge-offs
as a percent of average loans also declined from .25% in 1994 to .20% in
1995. Recoveries reached their highest level in the last five years and
the ratio of recoveries to losses rose to 43.7% in 1995 from 35.3% in
1994.
<TABLE>
ANALYSIS OF THE RESERVE FOR POSSIBLE LOAN LOSSES
(In thousands)
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,038 $ 4,451 $ 3,538 $ 3,011 $ 2,830
Provision for possible loan
losses 1,450 1,560 1,597 2,020 1,800
Losses:
Commercial (13) (18) (54) (529) (440)
Real estate mortgages (58) (14) (98) (31) (10)
Consumer (1,415) (1,471) (1,167) (1,462) (1,685)
----------------------------------------------
Total (1,486) (1,503) (1,319) (2,022) (2,135)
Recoveries:
Commercial 22 20 28 64 58
Real estate mortgages 73 4 48 10 4
Consumer 554 506 559 455 454
----------------------------------------------
Total 649 530 635 529 516
----------------------------------------------
Net loan charge-offs (837) (973) (684) (1,493) (1,619)
----------------------------------------------
Balance at end of year $ 5,651 $ 5,038 $ 4,451 $ 3,538 $ 3,011
----------------------------------------------
Total loans
Average $424,203 $388,119 $357,307 $330,017 $318,823
At December 31 446,917 411,769 371,236 342,198 323,280
As a percent of average loans:
Net loan charge-offs .20% .25% .19% .45% .51%
Provision for possible loan losses .34 .40 .45 .61 .56
Reserve for possible loan losses 1.33 1.30 1.25 1.07 .94
Reserve as a percent of loans at
December 31 1.26 1.22 1.20 1.03 .93
Reserve as a percent of
nonperforming loans at December 31 414.60 407.61 294.57 341.84 323.42
Reserve as a multiple of net loan
charge-offs 6.75X 5.18X 6.51X 2.37X 1.86X
</TABLE>
<PAGE> 42
NONPERFORMING ASSETS
"Nonperforming assets" is a term used to describe assets on which
revenue recognition has been discontinued or restricted. Nonperforming
assets include both nonperforming loans and acquired property, primarily
OREO, acquired in connection with the collection effort on loans.
Nonperforming loans include nonaccrual loans. Nonaccrual loans are loans
on which the accrual of interest has been discontinued. All amortizing
loans, other than consumer loans and residential real estate loans, are
placed in nonaccrual status when either principal or interest exceeds 90
days past due unless the loan is well secured and in the process of
collection. Nonaccrual loan balances are included in the loan category
on the balance sheet.
The schedule below presents nonperforming assets and past due loans at
December 31 for each of the last five years. Nonperforming assets rose
$87 thousand (6.2%) in 1995 compared to a $608 thousand (30.3%) drop in
1994. Substantially all nonperforming assets are secured and losses have
been considered, as appropriate, in establishing the reserve for
possible loan losses. The ratio of nonperforming assets to period-end
loans, OREO and other repossessions improved slightly in 1995 to .33% at
year end compared to .34% at December 31, 1994.
Nonaccrual loans increased $127 thousand in 1995 after a decline of $275
thousand in 1994. Major principal losses are not anticipated due to the
underlying collateral values. The interest income foregone on these
loans has not been significant, amounting to $89 thousand in 1995 and
$85 thousand in 1994. Management recognizes the impact of nonaccrual
loans on income and continues to work towards their reduction.
OREO and other repossessions declined in the aggregate $40 thousand
(24.2%) in 1995 following a $333 thousand (66.9%) decline in 1994, which
was due mainly to the sale of a commercial property. Loans past due 90
days or more rose $636 thousand (71.2%) after an $8 thousand (less than
1.0%) decline in 1994. Increases in the residential mortgages and
student loan categories accounted for the rise, but potential exposure
should be minimal because of the collateral/guarantee position. The
ratio of nonperforming loans and loans past due 90 days or more, in
aggregate, to period-end loans rose to .65% at year-end 1995, up from
the .52% at December 31, 1994; this ratio still compares favorably with
our peer group.
<TABLE>
NONPERFORMING ASSETS AND PAST DUE LOANS
(In thousands)
<CAPTION>
DECEMBER 31, 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans $1,363 $1,236 $1,511 $1,035 $ 931
Other real estate owned 59 136 496 1,016 1,206
Other repossessions 66 29 2 35 79
-------------------------------------------
Total nonperforming assets $1,488 $1,401 $2,009 $2,086 $2,216
-------------------------------------------
Nonperforming loans to
period-end loans .30% .30% .41% .30% .29%
Nonperforming assets to period-end
loans, other real estate owned
and other repossessions .33 .34 .54 .61 .68
Loans past due 90 days or more $1,529 $ 893 $ 901 $1,305 $1,901
-------------------------------------------
Loans past due 90 days or more
to period-end loans .34% .22% .24% .38% .59%
</TABLE>
<PAGE> 43
DEPOSITS
The Bank relies primarily on its retail deposit base to fund credit
needs. Total deposits, on average, declined $8.3 million (1.3%)
following a $5.1 million (.8%) rise in 1994. Generally, low deposit
growth has been an industry-wide issue. The composition of deposits
shifted significantly during 1995 with net inflows into time deposits
offset by net outflows from savings and NOW accounts. Depositors
displayed a preference for longer-term accounts bearing higher rates
resulting in growth mainly in time deposits with terms in the one year
range. Average time deposits increased sharply by $24.9 million (11.7%)
in 1995 after dropping $13.7 million (6.0%) in 1994. Savings deposits,
on average, dropped $30.1 million (11.8%) compared to a $12.8 million
(5.3%) rise in 1994. NOW accounts also declined on average by
At this point in the 1995 Annual Report there appears a bar graph as set
out in the following table.
<TABLE>
Deposits
(averages in millions)
<S> <C>
1991 567.232
1992 609.886
1993 617.721
1994 622.795
1995 614.506
</TABLE>
$5.1 million (8.3%) in 1995 following a $718 thousand (1.2%) decline in
1994. Demand deposits rose from year to year by $1.9 million (2.1%)
after a $6.7 million (7.6%) rise in 1994. Time deposits represented 39%
of average total deposits in 1995 compared to 34% during 1994; as a
result the Bank's cost of funds increased.
The Bank has minimal reliance on certificates of deposit of $100
thousand or more as a source of funds. At December 31, 1995, they
amounted to only 3.3% of total deposits. The composition in average
deposits has remained relatively unchanged over the last two years with
interest bearing deposits representing 84% and 85% in 1995 and 1994,
respectively. Noninterest bearing deposits in 1995 and 1994 were 16% and
15%, respectively.
LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The primary objective of asset/liability management is to provide
maximum levels of net interest income while maintaining acceptable
levels of interest rate risk and facilitating the Corporation's funding
requirements. Maintenance of adequate liquidity by the Corporation is
required to provide the funds necessary to meet customer credit needs
and satisfy depositor withdrawal requirements. Southwest takes a unified
approach to management of liquidity, capital and interest rate risk
through its Asset and Liability Management (ALM) process.
ALM has identified several internal sources available for liquidity
management. First and foremost is the Bank's core deposit base which is
the most stable source of liquidity a bank can have due to the long-term
relationship with depositors. Substantial internal funding can also be
derived from the Bank's investment portfolio. The portfolio provides
liquidity through the sale of securities available for sale and cash
flows derived from maturities.
In addition to internal funding, the Bank has numerous external funding
sources. These sources provide ample funding to meet both short and
long-term needs.
An important factor in the management of the Corporation's balance sheet
is interest rate sensitivity. Interest rate sensitivity refers to the
impact of future changes in interest rates on net interest income. The
Corporation actively manages its interest rate sensitivity to achieve
maximum shareholder value within the constraints of its interest rate
discipline, the maintenance of high credit quality and sound leverage
and liquidity positions.
Interest sensitive assets and liabilities are defined as those assets
and liabilities that reprice with changes in interest rates or whose
maturities or principal paydowns are within a designated short-term
period, or "gap," generally ranging from one day to one year.
The interest sensitivity table on the following page shows the repricing
of maturities and, where applicable, management's assumptions as to the
estimated repricing characteristics of certain assets and supporting
funds.
The cumulative gap at the one-year repricing period was asset sensitive
in the amount of $7.9 million or 1.2% of earning assets. Generally, an
asset sensitive gap indicates how rising interest rates could positively
affect net interest income and falling rates could negatively affect net
interest income. Assets and liabilities with similar contractual
repricing characteristics, however, may not reprice at the same time or
to the same degree. As a result, the Corporation's static interest rate
sensitivity gap position may not accurately predict the impact of
changes in general levels of interest rates or net interest income.
No single interest rate risk measurement system satisfies all objectives
of management, therefore, in order to better measure the effect of
interest rate fluctuations on the Corporation's net interest margin,
management uses a dynamic income simulation model as the primary
mechanism in assessing the impact of changes in interest rates on net
interest income. The model incorporates both the current gap position
and the expected magnitude of the repricing of specific asset and
liability categories. The analysis at December 31, 1995, incorporating a
300 basis point movement in interest rates in either direction,
indicated that the anticipated variability of net interest income in
1996 was within the policy range of plus or minus 7% as established by
ALM.
<PAGE> 44
In the 1995 Annual Report the following table spans across the page. It
has been modified for electronic filing purposes.
<TABLE>
INTEREST SENSITIVITY ANALYSIS
(In thousands)
<CAPTION>
After 3 After 6
DECEMBER 31, 1995 Within but within months but
Rate sensitive: 3 months 6 months within 1 year
<S> <C> <C> <C>
Earning assets
Money market investments $ 12,308 $ - $ -
Investment securities 8,097 9,391 19,463
Loans 185,042 23,232 27,389
---------------------------------------
Total earning assets 205,447 32,623 46,852
Interest bearing liabilities
Deposits* 159,994 56,862 56,684
Short-term borrowings 3,407 11 23
Long-term borrowings - - -
Total interest bearing ---------------------------------------
liabilities 163,401 56,873 56,707
Sources supporting interest
earning assets on which interest
is not paid - - -
---------------------------------------
Interest sensitivity gap $ 42,046 $(24,250) $(9,855)
---------------------------------------
Cumulative gap $ 42,046 $ 17,796 $ 7,941
Ratio of cumulative gap to total
earning assets 6.3% 2.7% 1.2%
<FN>
*Management has estimated, based on historical analysis, that savings deposits
in total are approximately 40% sensitive to interest rate changes. In order to
provide a more accurate one-year gap position, these deposits were distributed
in the appropriate repricing time frames based on their sensitivity to market
rates.
</FN>
</TABLE>
<TABLE>
INTEREST SENSITIVITY ANALYSIS (cont.)
(In thousands)
<CAPTION>
Over 1 year and
DECEMBER 31, 1995 noninterest
Rate sensitive: sensitive Total
<S> <C> <C>
Earning assets
Money market investments $ - $ 12,308
Investment securities 174,935 211,886
Loans 211,254 446,917
----------------------------------
Total earning assets 386,189 671,111
Interest bearing liabilities
Deposits* 249,434 522,974
Short-term borrowings - 3,441
Long-term borrowings 1,907 1,907
Total interest bearing ----------------------------------
liabilities 251,341 528,322
Sources supporting interest
earning assets on which interest
is not paid 142,789 142,789
----------------------------------
Interest sensitivity gap $ (7,941) $ -
----------------------------------
Cumulative gap $ -
Ratio of cumulative gap to total
earning assets
<FN>
*Management has estimated, based on historical analysis, that savings deposits
in total are approximately 40% sensitive to interest rate changes. In order to
provide a more accurate one-year gap position, these deposits were distributed
in the appropriate repricing time frames based on their sensitivity to market
rates.
</FN>
</TABLE>
CAPITAL RESOURCES
The Corporation continued to strengthen its capital position in 1995.
Shareholders' equity at December 31, 1995, increased $9.1 million
(13.4%) over year-end 1994 following a rise of $2.3 million (3.4%) from
year-end 1993 to December 31, 1994. A solid capital position provides
the Corporation with a base to expand lending, to protect depositors and
to provide for growth as opportunities for expansion may arise; however,
management has no current plans for any acquisitions. Shareholders'
equity included an unrealized gain on securities available for sale, net
of tax, of $1.1 million at year-end 1995, compared to an unrealized loss
on securities available for sale, net of tax, of $2.9 million at
December 31, 1994.
The principal source of capital has been retained earnings, which is a
function of both net income and the dividend payout to shareholders. The
current economic and regulatory environment has placed an increased
emphasis on capital strength. Acquisition capability, funding
alternatives, new business activities, deposit insurance premiums and
the level and nature of expanded regulatory oversight depend in part on
capital adequacy.
The Corporation is well capitalized. Its strength is demonstrated by
three key ratios all of which exceed regulatory requirements for bank
holding companies. Under FDICIA, the three ratios are tier 1 capital to
risk-weighted assets, total capital to risk-weighted assets and leverage
capital. Tier 1 and total capital are expressed as a percentage of
risk-adjusted assets on the balance sheet as well as off-balance sheet
exposures. The minimum capital ratios are 4% for tier 1, 8% for total
risk-weighted and 3% for leverage capital. Regulators may set higher
capital standards should a bank's particular circumstances warrant.
Classification as a well-capitalized institution under FDICIA requires a
6% tier 1 ratio, 10% total risk-weighted capital ratio and a 5% leverage
capital ratio. Management seeks to maintain capital ratios at or above
such requirements. At December 31, 1995, Southwest's ratios
substantially exceed those minimums. FDICIA has also mandated changes to
risk-based capital rules that are expected to become effective in 1996,
notably the requirement to incorporate interest rate risk into the
risk-based capital computation. Because proposals to accomplish this
change are not final, the effect on the Corporation's capital
requirements cannot be determined.
The tier 1 capital to risk-weighted assets ratio was 17.85% on December
31, 1995, compared to the 17.91% reported at year-end 1994. The total
capital to risk-weighted assets ratio was 19.10% at year-end 1995 down
slightly from 19.17% at December 31, 1994. The leverage capital ratio,
which is tier 1 capital divided by average tangible assets, was 10.86%
at December 31, 1995, up from 10.32% at year-end 1994. In accordance
with regulatory guidelines, these ratios do not include net unrealized
gains or losses on securities available for sale under FAS No. 115.
<PAGE> 45
<TABLE>
SUPPLEMENTARY FINANCIAL DATA
CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1994 1993 1992 1991
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $37,250 $32,172 $30,417 $30,092 $32,231
Interest on money market investments 1,758 1,212 1,057 2,370 3,984
Interest and dividends on
investment securities 12,473 14,340 16,462 18,778 17,539
------------------------------------------
Total interest income 51,481 47,724 47,936 51,240 53,754
INTEREST EXPENSE
Interest on deposits 20,335 16,962 18,075 22,686 28,828
Interest on short-term borrowings 113 34 37 46 43
Interest on long-term borrowings 153 35 - - -
------------------------------------------
Total interest expense 20,601 17,031 18,112 22,732 28,871
------------------------------------------
Net interest income 30,880 30,693 29,824 28,508 24,883
Provision for possible loan losses 1,450 1,560 1,597 2,020 1,800
------------------------------------------
Net interest income after
provision for possible loan
losses 29,430 29,133 28,227 26,488 23,083
NONINTEREST INCOME
Trust income 1,801 1,667 1,551 1,377 1,252
Service charges on deposit accounts 2,194 2,035 2,035 1,933 1,802
Other 994 1,131 980 870 748
------------------------------------------
Total noninterest income 4,989 4,833 4,566 4,180 3,802
NONINTEREST EXPENSE
Salaries and employee benefits 10,679 10,371 9,693 9,087 8,634
Other 10,948 11,454 11,713 11,057 9,887
------------------------------------------
Total noninterest expense 21,627 21,825 21,406 20,144 18,521
------------------------------------------
Income before income tax expense 12,792 12,141 11,387 10,524 8,364
Income tax expense 3,754 3,535 3,285 2,970 2,130
------------------------------------------
NET INCOME $ 9,038 $ 8,606 $ 8,102 $ 7,554 $ 6,234
PER SHARE
Net income $ 2.84 $ 2.70 $ 2.54 $ 2.37 $ 1.95
Cash dividends 1.14 1.08 .98 .89 .82
</TABLE>
<PAGE> 46
<TABLE>
SUPPLEMENTARY FINANCIAL DATA
CONSOLIDATED BALANCE SHEET
<CAPTION>
Average daily balances for year
ending December 31, 1995 1994 1993 1992 1991
(In thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Interest bearing deposits
with banks $ 129 $ 542 $ 2,835 $ 19,480 $ 30,828
Federal funds sold 29,502 28,248 29,305 25,920 26,402
U.S. Treasury securities
and obligations of U.S.
government agencies and
corporations 180,238 211,959 228,950 223,899 170,290
Obligations of states and
political subdivisions 20,534 24,312 24,123 24,270 22,875
Corporate collateralized
mortgage obligations - - 921 9,548 20,198
Equity and other securities 2,600 2,632 1,612 536 537
Loans 424,203 388,119 357,307 330,017 318,823
---------------------------------------------
Total interest earning assets 657,206 655,812 645,053 633,670 589,953
Noninterest earning assets:
Cash and due from banks 23,538 24,863 26,890 24,513 22,512
Reserve for possible loan losses (5,507) (4,772) (4,075) (3,159) (3,077)
Bank premises and equipment 7,522 7,625 7,343 6,954 7,053
Other assets 10,284 9,625 9,486 10,766 9,884
---------------------------------------------
Total noninterest
earning assets 35,837 37,341 39,644 39,074 36,372
---------------------------------------------
Total assets $693,043 $693,153 $684,697 $672,744 $626,325
LIABILITIES
Interest bearing liabilities:
NOW accounts $ 55,839 $ 60,911 $ 61,629 $ 57,137 $ 47,212
Savings deposits 224,687 254,776 241,960 225,926 197,663
Time deposits 237,720 212,791 226,467 247,425 248,827
Short-term borrowings 2,421 1,311 1,871 1,606 874
Long-term borrowings 1,928 449 - - -
---------------------------------------------
Total interest bearing
liabilities 522,595 530,238 531,927 532,094 494,576
Noninterest bearing liabilities:
Demand deposits 96,260 94,317 87,665 79,398 73,530
Other liabilities 2,503 1,413 2,002 3,115 4,176
---------------------------------------------
Total noninterest
bearing liabilities 98,763 95,730 89,667 82,513 77,706
---------------------------------------------
Total liabilities 621,358 625,968 621,594 614,607 572,282
SHAREHOLDERS' EQUITY 71,685 67,185 63,103 58,137 54,043
---------------------------------------------
Total liabilities and
shareholders' equity $693,043 $693,153 $684,697 $672,744 $626,325
</TABLE>
<TABLE>
FINANCIAL RATIOS AND MISCELLANY
<CAPTION>
(Based on consolidated balance
sheet averages) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Shareholders' equity to assets 10.34% 9.69% 9.22% 8.64% 8.63%
Shareholders' equity to loans 16.90 17.31 17.66 17.62 16.95
Net income to:
Total assets 1.30 1.24 1.18 1.12 1.00
Total shareholders' equity 12.61 12.81 12.84 12.99 11.54
Shareholders' equity per share
at year-end $24.27 $21.33 $20.62 $19.07 $17.60
Dividend payout ratio 40.15% 40.00% 38.74% 37.68% 41.82%
Shareholders of record at
year-end 1,278 1,287 1,290 1,272 1,275
Average full-time equivalent
employees 372 374 372 366 366
</TABLE>
<PAGE> 47
SOUTHWEST NATIONAL BANK OF PENNSYLVANIA
EXECUTIVE OFFICERS
David S. Dahlmann
President and
Chief Executive Officer
Donald A. Lawry
Executive Vice President
Irving A. Pratt
Executive Vice President
Robert J. Stack
Executive Vice President
Emmanuel J. Answine
Senior Vice President and Cashier
David M. Hanna
Senior Vice President
Edgar J. Malanowsky
Senior Vice President
C. Kim Michael
Senior Vice President
SOUTHWEST NATIONAL CORPORATION
OFFICERS
David S. Dahlmann
President and
Chief Executive Officer
Irving A. Pratt
Vice President
Robert J. Stack
Vice President
Donald A. Lawry
Secretary and Treasurer
DIRECTORS
Ray T. Charley
President, Thomi Co., retail grocers
James A. Critchfield, Jr.
Attorney at Law
David S. Dahlmann
President and Chief Executive Officer
of the Bank
Charles E. Henry
President, Chas. M. Henry Printing Co.
A. Richard Kacin
President, A. Richard Kacin, Inc.,
real estate construction and
development and President,
Delmont Builders Supply, Inc.
Alexander H. Lindsay, Jr.
President, Lindsay, Lutz, Jackson,
Pawk & McKay, P.C., Attorneys
Joseph V. Morford, Jr.
Retired, formerly President, Moore
and Morford, Inc., steel fabricators
James W. Newill
Certified Public Accountant,
formerly President,
J. W. Newill Company,
public accounting firm
John A. Robertshaw, Jr.
Chairman, Laurel Vending, Inc.,
vending and food service
Laurie Stern Singer
President, Allegheny Valley
Chamber of Commerce and
President, Allegheny Valley Development Corporation
William W. Thomson
Managing Partner,
Thomson, Tomsey & Co.,
Certified Public Accountants
All corporate directors also serve as directors of Southwest National
Bank of Pennsylvania.
BANK ADVISORY DIRECTORS
ALLEGHENY VALLEY
Guy E. Bubb
James A. Esler
Alexander H. Lindsay, Jr.
Laurie Stern Singer
Gary L. Weleski
DERRY/LATROBE
George Danko
Louis V. Kasperik
David E. Mastrorocco
Henry E. Shaw
William W. Thomson
ROUTE 22
Edward J. Ferri
Terrence S. Jacobs
A. Richard Kacin
Wayne Norris
<PAGE> 48
The following information is imprinted in the center of the inside back
cover of the 1995 Annual Report.
Southwest National Corporation
P.O. Box 760
Greensburg, PA 15601
412/834-2310
The Corporation will provide without charge to any shareholder a copy of
its 1995 Annual Report on Form 10-K as required to be filed with the
Securities and Exchange Commission. Requests should be made in writing
to the above address, attention Stock Transfer Department.
The annual meeting of the shareholders will be held at the Main office,
111 South Main Street, Greensburg, Pennsylvania, at 1:00 P.M., Tuesday,
April 16, 1996.
Direct Deposit of Cash Dividends-Direct deposit is a safe, fast and
time-saving method of receiving cash dividends through automatic deposit
on date of payment to a checking or savings account at any financial
institution which participates in an Automated Clearing House. For more
information, contact the Stock Transfer Department at 412/832-6002.
<PAGE>
SOUTHWEST NATIONAL CORPORATION
GREENSBURG, PENNSYLVANIA
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
APRIL 16, 1996
TO THE SHAREHOLDERS:
Notice is hereby given that the annual meeting of shareholders of
Southwest National Corporation will be held at its main office, 111
South Main Street, Greensburg, Pennsylvania, on Tuesday, April 16, 1996
at 1:00 p.m., for the purpose of considering and voting upon the
following:
1. ELECTION OF DIRECTORS: Fixing the number of Directors to be
elected at 11 and electing the 11 nominees listed in the Proxy Statement
accompanying the notice of the meeting.
2. OTHER BUSINESS: To consider and act upon any other matter
which may properly be brought before the meeting or any adjournment
thereof.
Only those shareholders of record at the close of business on March
8, 1996, will be entitled to notice of and to vote at the meeting.
There are enclosed herewith a Proxy Statement and form of proxy.
It will be appreciated if you will date and sign the proxy and return it
promptly in the enclosed envelope.
By Order of the Board of Directors
/s/ Donald A. Lawry
Donald A. Lawry
Secretary and Treasurer
March 15, 1996
<PAGE>
SOUTHWEST NATIONAL CORPORATION
111 SOUTH MAIN STREET, P.O. BOX 760
GREENSBURG, PENNSYLVANIA 15601
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 16, 1996
The enclosed proxy is being solicited by the Board of Directors of
Southwest National Corporation (the "Corporation") for use at the annual
meeting of shareholders of the Corporation to be held April 16, 1996 at
1:00 p.m. at the main office of the Corporation, 111 South Main Street,
Greensburg, Pennsylvania. This Proxy Statement and the enclosed form of
proxy are being sent to shareholders of the Corporation on March 15,
1996.
The proxy may be revoked by a shareholder at any time before it is
exercised by sending a written notice of revocation to the Secretary,
Southwest National Corporation, P. O. Box 760 Greensburg, Pennsylvania
15601 or by attending the meeting and voting in person. Solicitations
of proxies may be made by personal interviews and telephone by Directors
and officers of the Corporation. Brokerage houses and other custodians,
nominees and fiduciaries will be requested to forward solicitation
material to the beneficial owners of the stock held of record by such
persons. Expenses for such solicitation will be borne by the
Corporation.
The only class of stock of the Corporation presently outstanding is
common stock. The total number of outstanding shares of common stock at
the close of business on March 8, 1996, the record date for the
determination of the shareholders entitled to vote at the meeting, was
3,180,787. In electing Directors of the Corporation, every shareholder
entitled to vote has cumulative voting rights; that is, the shareholder
has the right to multiply the number of shares that he or she may be
entitled to vote by the total number of Directors to be elected and may
cast the entire number of such votes for one candidate or may distribute
them among any two or more candidates. For all other purposes each
share is entitled to one vote.
At the meeting, the shareholders will (i) act upon a proposal to
fix the number of Directors at 11; (ii) vote on the election of the 11
nominees listed in the Proxy Statement as Directors; and (iii) consider
and act upon any other business that may be properly brought before the
meeting. The Board of Directors of the Corporation recommends a vote
FOR the proposal to fix the number of Directors at 11 and the election
as Directors of the 11 nominees hereinafter named. The 11 nominees
receiving the highest number of votes cast, including votes cast
cumulatively, shall be elected Directors. To be adopted, all of the
proposals must be approved by a majority of the votes cast at the
meeting.
The Corporation's business is carried on primarily by its wholly-
owned subsidiary Southwest National Bank of Pennsylvania (the "Bank").
<PAGE> 1
ELECTION OF DIRECTORS
INFORMATION CONCERNING NOMINEES
The bylaws of the Corporation provide that the number of Directors
shall be not less than 5 nor more than 25, as from time to time shall be
determined by the shareholders at any meeting of the shareholders at
which Directors are elected or by a full majority of the Board of
Directors. Pursuant to the bylaws, the full Board of Directors may add
additional persons to the Board during the year if it, in its
discretion, believes that the best interests of the Corporation would be
served by so doing. The Board of Directors has proposed that the
shareholders fix the number to be elected at the annual meeting on April
16, 1996, at 11. Currently there are 11 Directors.
The nominees named below are proposed to be elected to hold office
until the next annual meeting of shareholders and until the election and
qualification of their successors. The proxies solicited hereby, unless
directed to the contrary therein, will vote for the nominees named
below. All of the nominees have expressed their willingness to serve.
The Board of Directors has no reason to believe that any nominee will be
unavailable or unable to serve as a Director, but if for any reason any
of these nominees should not be available or able to serve, the
accompanying proxy will be voted by the persons acting under the proxy
according to the best judgment of the persons named in the proxy. The
names of the 11 nominees for election as Directors of the Corporation,
their principal occupations or present positions with the Corporation or
the Bank, if any, the year they first became Directors of the
Corporation or the Bank, their age and the number of shares of the
Corporation's common stock beneficially owned by them, as of February 2,
1996, are set forth in the following table:
<TABLE>
<CAPTION>
Name and principal Approximate
occupation or Beneficial percentage of
employment for the Director ownership outstanding
past five years (1)(2) since Age of shares(3) shares
<S> <C> <C> <C> <C>
Ray T. Charley 1989 44 13,560 .426%
President, Thomi Co.,
retail grocers
James A. Critchfield, Jr. 1983 70 384 .012
Attorney at Law
David S. Dahlmann 1990 46 720 .023
President and Chief
Executive Officer of the
Corporation and the Bank,
formerly Chief Operating
Officer and Executive Vice
President of the Bank
Charles E. Henry 1989 65 3,421 .108
President, Chas. M. Henry
Printing Co.
A. Richard Kacin 1994 55 1,460 .046
President, A. Richard Kacin,
Inc., real estate
construction and development
and President, Delmont
Builders Supply, Inc.
Alexander H. Lindsay, Jr. 1986 49 760 .024
President, Lindsay, Jackson,
and Martin, P.C., Attorneys
<PAGE> 2
Joseph V. Morford, Jr. 1983 66 1,225 .039
Retired, formerly President,
Moore and Morford, Inc.,
steel fabricators
James W. Newill 1978 61 77,800 2.446
Certified Public Accountant,
formerly President,
J. W. Newill Company,
public accounting firm
John A. Robertshaw, Jr. 1986 69 9,334 .293
Chairman, Laurel Vending,
Inc., vending and food
service
Laurie Stern Singer 1994 44 120 .004
President, Allegheny Valley
Chamber of Commerce and
President, Allegheny Valley
Development Corporation
William W. Thomson 1992 60 770 .024
Managing Partner, Thomson,
Tomsey & Co., Certified
Public Accountants
Directors, nominees and 110,564 3.476%
officers of the Corporation
as a group
(14 persons)(4)
<FN>
(1) All nominees held the position indicated or other senior executive
position with the same entity for the past five years.
(2) No Director of the Corporation is presently a Director of another
company filing reports with the Securities and Exchange Commission.
(3) The nominees identified in the table possess sole voting and
investment powers with respect to the shares shown opposite their names
except the following who hold shares jointly with their respective
wives: Mr. Charley, 480 shares; Mr. Dahlmann, 720 shares and Mr. Henry,
2,529 shares. The following Directors were beneficial owners of shares
held by their respective wives: Mr. Morford, 495 shares and Mr.
Robertshaw, 840 shares. The shares listed for Mr. Thomson include 90 of
the 120 shares listed in the name of a partnership of which he is
managing partner and has a 75% interest. The shares listed for Mr.
Kacin include 600 shares held in the name of an employees retirement
plan which he is a trustee. The total number of shares includes 700
shares owned by Irving A. Pratt, Vice President of the Corporation, 160
shares owned by Robert J. Stack, Vice President of the Corporation,
jointly with his wife and 150 shares owned by Donald A. Lawry, Secretary
and Treasurer of the Corporation, jointly with his wife.
(4) Mr. Dahlmann listed above; Irving A. Pratt, Vice President, Robert
J. Stack, Vice President and Donald A. Lawry, Secretary and Treasurer
are the only officers of the Corporation.
T. Timothy Reese resigned from the Board of Directors effective October
1995. Mr. Reese had no disagreement with management or the Board of
Directors. Mr. Reese owned 120 share or .004% of the total outstanding
shares of the Corporation.
</TABLE>
<PAGE> 3
OTHER NOMINATIONS
Other nominations may be made at the meeting only after at least 14
days notice has been given in writing according to the procedures set
forth in Article III Section 3.3 of the bylaws of the Corporation that
states:
"Nominations for election to the Board of Directors may be made by
the Board of Directors or by any shareholder of the Corporation entitled
to vote for the election of Directors. Nominations, other than those
made by or on behalf of the existing management of the Corporation,
shall be made in writing and shall be delivered or mailed to the
President of the Corporation not less than 14 nor more than 50 days
prior to any meeting of the shareholders called for the purpose of
electing Directors; provided, however, that if less than 21 days'
notice of the meeting is given to shareholders, such nomination shall be
mailed or delivered to the President of the Corporation not later than
the close of business on the seventh day following the day on which the
notice of meeting was mailed. Such notice shall contain the following
information to the extent known to the notifying shareholder: (a) the
name and address of each proposed nominee; (b) the principal occupation
of each proposed nominee; (c) the total number of shares of stock of the
Corporation that will be voted for each proposed nominee; (d) the name
and residence address of the notifying shareholder; and (e) the number
of shares of stock of the Corporation owned by the notifying
shareholder. Nominations not made in accordance herewith may, in the
discretion of the chairman of the meeting, be disregarded by him, and
upon his instructions the judges of election may disregard all votes
cast for each such nominee."
BOARDS AND COMMITTEES
It is the policy of the Corporation that its Directors also serve
as Directors of its wholly-owned subsidiary, the Bank. The Board of the
Corporation met 12 times in 1995 and the Board of the Bank met 12 times
in 1995.
The Board of the Corporation has the following standing committees:
Examining Committee and Executive Committee. The Board of the Bank has
the following standing committees: Examining Committee, Executive
Committee, Personnel Committee and Trust Committee. Neither Board has a
Nominating Committee.
Directors appointed to the Examining Committee of the Corporation
also serve as members of the Examining Committee of the Bank. Both
Examining Committees met concurrently 5 times in 1995. The Examining
Committees perform the functions of an audit committee and their
responsibilities include causing an examination of the affairs of the
Corporation and Bank to be made, reviewing reports of examinations of
the Corporation and the Bank made by the Federal Reserve Bank and the
Office of the Comptroller of the Currency and reporting the findings and
recommendations to the respective Board. Appointment of the independent
public accountants is made by the Board of Directors upon the
recommendation of the Examining Committees. The Examining Committees
presently have as members Directors Henry, Kacin, Morford, Robertshaw,
Singer and Thomson.
Directors appointed to the Executive Committee of the Corporation
also serve as members of the Executive Committee of the Bank. Both
Executive Committees met concurrently 12 times in 1995. Their
responsibilities include review of the loans and securities of the Bank
and the exercise of all the powers of the full Boards between regular
meetings of the Boards. The Executive Committees presently have as
members Directors Critchfield, Dahlmann, Henry, Lindsay, Morford,
Robertshaw and Thomson.
<PAGE> 4
The Personnel Committee of the Bank met 5 times in 1995. Its
responsibilities include reviewing and recommending to the Board the
salaries of certain senior officers of the Bank. The Personnel
Committee presently has as members Directors Charley, Dahlmann, Kacin,
Lindsay, Newill and Singer.
The Trust Committee of the Bank met 12 times in 1995. Its
responsibilities include the general review of the activities of the
trust department of the Bank in the administration of its fiduciary
relations. The Trust Committee presently has as members Directors
Charley, Critchfield, Dahlmann and Newill.
COMPENSATION OF DIRECTORS
The Corporation paid for the year 1995 an annual retainer of $2,500
to Directors who are not officers. Directors who are not officers are
paid $400 by the Bank for each regularly scheduled Bank Board meeting
attended and $300 for attendance at each regularly scheduled Bank
Committee meeting. Officers of the Corporation or the Bank are not paid
for attendance at any meeting. Directors who are not officers will be
paid an additional $100 for attendance at special Bank Board meetings
and Bank Committee meetings.
All Directors of the Corporation and/or the Bank may defer all or a
portion of the receipt of their fees, according to the terms of a
Directors Deferred Compensation Plan, until they terminate their
election or cease to be a Director. Payment of interest on accumulated
balances under the Plan is at market rates, but balances are accrued
rather than funded by the Corporation or the Bank.
TRANSACTIONS WITH DIRECTORS, OFFICERS AND ASSOCIATES
Certain Directors, officers of the Corporation and the Bank and
their associates were customers of the Bank during 1995. Transactions
that involved loans or commitments by the Bank were made in the ordinary
course of business and on substantially the same terms, including
interest rates and collateral requirements, as those prevailing at the
time for comparable transactions with other persons and did not involve
more than normal risk of collectibility or present other unfavorable
features.
During 1995, the Bank paid $113,430 to Chas. M. Henry Printing Co.
for services that were in the normal course of business on substantially
the same terms as available from others. This firm has provided
printing services to the Bank for many years and is expected to continue
to do so in the future. Charles E. Henry is a Director and is President
of Chas. M. Henry Printing Co. Additionally, the Bank paid $750,373 to
A. Richard Kacin, Inc. as general contractor for the construction of a
new building and remodeling of an existing branch office. The awarding
of these contracts were in line with Bank policy and procedures. A
Richard Kacin is a Director and is President of A. Richard Kacin, Inc.
Under the securities laws of the United States, the Corporation's
Directors, executive officers and any persons holding more than ten
percent of the Corporation's stock are required to report their initial
ownership of the Corporation's common stock and any subsequent changes
in their ownership to the Securities and Exchange Commission. Specific
due dates for these reports have been established and the Corporation is
required to disclose in this Proxy Statement, any failure to file by
these dates during 1995. In making such disclosures, the Corporation
has relied solely on written representations of its Directors and
executive officers and copies of the reports they have filed with the
Securities and Exchange Commission. Based on such information, all of
such filings have been timely made except that A. Richard Kacin, a
Director of the
<PAGE> 5
Corporation, and a trustee of the A. Richard Kacin, Inc. and Delmont
Builders Supply, Inc. Employee Retirement Plan was delayed in the filing
of a Form 4 in connection with the Plan's purchase of certain of the
Corporation's shares in January of 1995.
PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Decisions on compensation of the executive officers of the Bank are
made by a six-member Personnel Committee of the Bank's Board of
Directors. No compensation was paid to the executive officers by the
Corporation during 1995. All compensation was paid by the Bank. Five
of the members of the Personnel Committee are nonemployee Directors. The
sixth member of the Committee is Mr. Dahlmann. Although Mr. Dahlmann,
the President and Chief Executive Officer of the Corporation and Bank,
served on the Personnel Committee, he did not participate in any
decisions regarding his own compensation. All decisions by the Personnel
Committee relating to the compensation of the Bank's executive officers
are reviewed by the full Board and the Board votes on Mr. Dahlmann's
compensation. Pursuant to recently adopted rules designed to enhance
disclosure of the policies of the Corporation toward executive
compensation, set forth below is a report of the Board's Personnel
Committee, addressing the Bank's compensation policies for 1995 as they
affected Mr. Dahlmann and generally as to other executive officers.
The Personnel Committee's executive compensation policies are
designed to provide compensation to the executive officers based upon a
performance evaluation of each executive officer using a matrix provided
by a consultant to the Bank, Peter R. Johnson & Company, rating the
performance of each executive on a scale of 1 through 5. The Personnel
Committee applies this performance rating to all executive officers
including Mr. Dahlmann. Mr. Dahlmann does not participate in his own
performance evaluation, but does participate in the evaluation of other
executive officers. Levels of base salary paid by the Bank to both Mr.
Dahlmann and the other executive officers are intended to be comparable
with other companies in the banking industry. The Bank uses the
services of Peter R. Johnson & Company to compile the executive
compensation of appropriate groupings of the banks that closely resemble
the Bank. The sources of information relied on by the consultant were
Cole Surveys, Inc., Bank Administration Institute, L.R. Webber
Associates, SNL Executive Compensation Survey, William M. Mercer, Inc.
and Johnson Salary Survey. This information is reviewed against the job
descriptions of Mr. Dahlmann and the other executive officers and
adjusted by utilization of the performance evaluation referred to above.
The Personnel Committee does not consider corporate performance in its
determination but only compensation by comparable companies adjusted by
an evaluation of the officer's performance.
Personnel Committee Members
Ray T. Charley Alexander H. Lindsay, Jr.
David S. Dahlmann James W. Newill
A. Richard Kacin Laurie Stern Singer
<PAGE> 6
EXECUTIVE COMPENSATION
The Corporation paid no compensation to any of its officers during
1995. All compensation was paid by the Bank.
The annual compensation of the President and Chief Executive
Officer of the Bank consisted only of a base salary. "All other
compensation" listed in the table includes amounts established under the
401(k) Plan for eligible employees including the President and Chief
Executive Officer. Each year the Board of Directors of the Bank as a
whole determines the amount with which the Bank's 401(k) Plan should be
funded. The amount is allocated to all eligible employees in accordance
with Plan provisions. In 1995 the allocation was the equivalent of 8.0%
of total eligible salaries. The President and Chief Executive Officer
and other executive officers receive this compensation in the same
manner as other eligible employees of the Bank. Also, included in "All
other compensation" is the cost of life insurance premiums paid for the
President and Chief Executive Officer. The Bank carries such life
insurance for all employees based upon twice the annual compensation of
each full-time employee. The maximum amount of coverage provided is
$300,000.
The incremental cost of the 401(k) Plan and term life insurance
plan provided to Mr. Dahlmann equals approximately 7.66% of his salary.
The compensation shown in the following table is for the President
and Chief Executive Officer only, since no other executive officer
received salary and bonus of $100,000 or more for the last fiscal year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
All other
Name and principal Year Salary compensation
position ($) ($)(1)
<S> <C> <C> <C>
David S. Dahlmann, 1995 185,000 14,162
President and Chief 1994 155,000 13,517
Executive Officer 1993 140,000 11,531
<FN>
(1) The amounts in the above table under "All other compensation"
include, for 1995, $13,118 contributed to the Bank's 401(k) Plan and
$1,044 as the cost of insurance premiums under the Bank's life insurance
plan. For 1994, such amounts are $12,543 and $974 respectively and for
1993 is $11,021 and $510 respectively.
</TABLE>
The Bank's 401(k) Plan is qualified under Section 401(a) of the
Internal Revenue Code. Each eligible employee of the Bank becomes
eligible to participate at the next available entry date following one
year of employment. The Plan is contributory on the part of employees.
The Bank may elect to match the employee contribution. The Board of
Directors determines the match amount annually. In addition, each year
the Bank has the discretion to make an annual contribution to eligible
Plan participants. This contribution is based on participants eligible
salary as defined under IRS Section 3401(a). All deferred amounts are
vested immediately and are payable to participants upon their
termination of employment.
<PAGE> 7
It is not possible to determine the extent of the benefits that any
participant may be entitled to receive under the Plan upon termination
of employment since the amount of such benefits will be dependent, among
other things, upon the future earnings of the Bank, the future
compensation of the participants and the future net earnings of the
investments selected by the participants.
DEFINED BENEFIT PENSION PLAN OF THE BANK
The Bank made a contribution of $317,409 to the Defined Benefit
Pension Plan for the Plan year ending June 30, 1995. Benefits are not
vested until the completion of five years of credited service when they
become fully vested. Retirement benefits are based upon the average of
the annual compensation for the highest five consecutive years during
the last ten years of credited service, and are 1% of average
compensation multiplied by the number of years of credited service
(subject to a maximum of 44 years), plus 1/2 of 1% of average
compensation in excess of covered compensation, multiplied by the number
of years of credited service (subject to a maximum of 40 years). The
Plan is noncontributory on the part of employees. The Bank contributes
the entire actuarially determined amount necessary to fund total
benefits. The following table sets forth an estimate of the annual
benefits payable under the Plan for employees, including officers,
reaching the normal retirement date (age 65):
<TABLE>
<CAPTION>
Estimated annual pension for years of credited service (1)
Annual basic
compensation 10 years 20 years 30 years 40 years
<S> <C> <C> <C> <C>
$ 25,000 $ 2,500 $ 5,000 $ 7,500 $ 10,000
50,000 6,150 12,300 18,450 24,600
75,000 9,900 19,800 29,700 39,600
100,000 13,650 27,300 40,950 54,600
125,000 17,400 34,800 52,200 69,600
150,000 21,150 42,300 63,450 84,600
<FN>
(1) The credited years of service for Mr. Dahlmann are 24.
</TABLE>
The amounts in the above table represent the estimated annual
benefits payable to an employee for life. Other available optional forms
of payment of benefits would reduce the amount shown in the table. The
benefit amounts shown are not subject to any deduction for social
security or other amounts. Effective for retirements on or after January
1, 1994, annual basic compensation for Plan purposes may not exceed
$150,000.
<PAGE> 8
PERFORMANCE REPORT
(Graphic material has been omitted from this section. The information
is being presented in tabular form.)
The following is a graph comparing the Corporation's cumulative
total shareholder returns with the performance of the NASDAQ Stock
Market index (US Companies) and with the NASDAQ Financial Stocks index
in which group the Corporation is included.
<TABLE>
<CAPTION>
Comparison of Five Year Cumulative Total Returns
Performance Graph for
SOUTHWEST NATIONAL CORPORATION
Company Index: CUSIP Ticker Class Sic Exchange
84518610 SWPA 6710 NASDAQ
Fiscal Year-end is 12/31/95
Market Index: Nasdaq Stock Market (US Companies)
Peer Index: Nasdaq Financial Stocks
SIC 6000-6799 US & Foreign
Date Company Index Market Index Peer Index
<S> <C> <C> <C>
12/31/90 100.000 100.000 100.000
01/31/91 104.545 111.085 105.447
02/28/91 109.010 121.770 116.522
03/28/91 105.939 129.918 122.822
04/30/91 118.990 130.741 128.248
05/31/91 138.468 136.742 133.057
06/28/91 135.357 128.414 130.383
07/31/91 138.468 136.016 137.589
08/30/91 136.754 142.778 144.014
09/30/91 143.042 143.303 141.819
10/31/91 139.898 148.057 145.657
11/29/91 144.676 143.093 142.723
12/31/91 136.727 160.564 154.738
01/31/92 143.086 169.953 163.107
02/28/92 143.891 173.805 169.825
03/31/92 152.734 165.601 170.804
04/30/92 159.165 158.500 175.404
05/29/92 159.179 160.559 181.603
06/30/92 155.931 154.282 181.058
07/31/92 177.046 159.746 188.332
08/31/92 168.942 154.865 185.604
09/30/92 175.503 160.622 191.437
10/30/92 180.424 166.948 196.475
11/30/92 177.451 180.230 208.194
12/31/92 177.451 186.866 221.318
01/29/93 205.644 192.185 230.272
02/26/93 202.531 185.016 233.541
03/31/93 237.681 190.371 243.055
04/30/93 234.334 182.247 234.376
05/28/93 221.086 193.134 231.685
06/30/93 209.272 194.026 237.965
07/30/93 216.867 194.256 247.530
08/31/93 245.211 204.297 254.524
09/30/93 252.023 210.382 262.477
10/29/93 255.429 215.110 260.345
11/30/93 250.700 208.695 249.915
12/31/93 254.993 214.511 257.227
01/31/94 264.437 221.022 263.656
02/28/94 245.903 218.957 260.267
03/31/94 238.976 205.488 253.150
04/29/94 245.210 202.821 260.116
05/31/94 239.040 203.317 269.544
06/30/94 254.766 195.885 268.633
07/29/94 243.234 199.907 272.450
08/31/94 228.562 212.649 281.460
09/30/94 234.911 212.104 276.629
10/31/94 228.562 216.271 268.665
11/30/94 219.425 209.096 256.572
12/30/94 201.229 209.686 257.828
01/31/95 211.933 210.786 266.429
02/28/95 222.990 221.922 279.659
03/31/95 235.980 228.493 283.565
04/28/95 233.815 235.677 288.502
05/31/95 234.075 241.778 297.794
06/30/95 234.075 261.361 307.119
07/31/95 240.637 280.535 321.794
08/31/95 280.556 286.237 338.555
09/29/95 287.184 292.820 350.034
10/31/95 300.438 290.996 351.476
11/30/95 307.671 297.839 367.743
12/29/95 298.753 296.304 375.641
<FN>
The index level for all series was set to 100.0 on 12/31/90
NOTES
A. The lines represent monthly index levels derived from compounded
daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on
the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a
trading day, the preceding trading day is used.
D. The index level for all series was set to $100.00 on 12/31/90.
</TABLE>
<PAGE> 9
PRINCIPAL SHAREHOLDERS
The following table lists any beneficial owner of more than 5% of
the outstanding common stock of the Corporation as of February 2, 1996:
<TABLE>
<CAPTION>
Amount and nature
Title of Name and address of beneficial Percent
class of beneficial owner ownership (1) of class
<S> <C> <C> <C>
Common stock Thomas, Heasley & Co., 373,207 11.73%
nominee of Southwest
National Bank
of Pennsylvania,
Greensburg, Pennsylvania
<FN>
(1) The shares are listed of record in the name of the Bank's nominee
and are held by the Bank in its fiduciary capacity in 66 separate trust
accounts. The Bank has the power to dispose or direct the disposition
of a portion of the shares as follows: Sole - 184,699; Shared -
165,251. The Bank has the power to vote or direct the voting of a
portion of these shares as follows: Sole - 285,973; Shared - 87,234. In
every instance, another entity is entitled to the dividends or proceeds
of sale. No individual account holds an interest of 5% or more.
</TABLE>
AUDITORS
The Board of Directors of the Bank approved the reappointment of
KPMG Peat Marwick LLP to audit its books and accounts for the year 1996.
The Board of Directors of the Corporation also approved the
reappointment of KPMG Peat Marwick LLP to audit its books and accounts
for the year 1996.
Audit services performed by KPMG Peat Marwick LLP during 1995
included examination of and reporting on the Corporation's consolidated
financial statements, review and consultation connected with filing
annual and periodic reports for the Bank and Corporation and auditing
the Bank's Defined Benefit Pension Plan and Deferred Compensation Plan
(which was converted to the Bank s 401(k) Plan on April 1, 1995).
Representatives of the auditors will be present at the annual
meeting to make a statement, if they desire, and to respond to
appropriate questions.
PROPOSALS OF SHAREHOLDERS
Any proposal that a shareholder wishes to have included in the
proxy material relating to the annual meeting to be held in 1997 must be
received by the Secretary no later than November 15, 1996.
OTHER MATTERS
The Board of Directors knows of no other business to be presented
at the meeting. If, however, any other business should properly come
before the meeting, or any adjournment of it, it is intended that the
proxy will be voted with respect thereto in accordance with the best
judgment of the persons named in the proxy.
By Order of the Board of Directors
/s/ Donald A. Lawry
Donald A. Lawry
Secretary and Treasurer
<PAGE> 10
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 25,254
<INT-BEARING-DEPOSITS> 108
<FED-FUNDS-SOLD> 12,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 139,895
<INVESTMENTS-CARRYING> 71,991
<INVESTMENTS-MARKET> 71,981
<LOANS> 446,917
<ALLOWANCE> 5,651
<TOTAL-ASSETS> 710,816
<DEPOSITS> 623,785
<SHORT-TERM> 3,441
<LIABILITIES-OTHER> 4,473
<LONG-TERM> 1,907
0
0
<COMMON> 7,952
<OTHER-SE> 69,258
<TOTAL-LIABILITIES-AND-EQUITY> 710,816
<INTEREST-LOAN> 37,250
<INTEREST-INVEST> 12,473
<INTEREST-OTHER> 1,758
<INTEREST-TOTAL> 51,481
<INTEREST-DEPOSIT> 20,335
<INTEREST-EXPENSE> 20,601
<INTEREST-INCOME-NET> 30,880
<LOAN-LOSSES> 1,450
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 21,627
<INCOME-PRETAX> 12,792
<INCOME-PRE-EXTRAORDINARY> 9,038
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,038
<EPS-PRIMARY> 2.84
<EPS-DILUTED> 2.84
<YIELD-ACTUAL> 7.95
<LOANS-NON> 1,363
<LOANS-PAST> 1,529
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,038
<CHARGE-OFFS> 1,486
<RECOVERIES> 649
<ALLOWANCE-CLOSE> 5,651
<ALLOWANCE-DOMESTIC> 5,651
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
