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, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
------- -------
Commission file number 0-11026
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 $121,423,334 based on the reported closing bid in the NASDAQ system
as of February 25, 1997.
Number of outstanding shares of registrant's common stock as of February
25, 1997: 3,122,382.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 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 15, 1997
(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 5
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 6
Item 12. Security Ownership of Certain Beneficial Owners
and Management 7
Item 13. Certain Relationships and Related Transactions 7
PART IV. 7
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 7
Signatures 8-9
Exhibit Index 10
</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. Southwest's deposit base is such that
the loss of one depositor or a related group of depositors would not
have a materially adverse effect on its business. 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, and collection services. 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 16 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(registered trademark), which covers 45 states with
approximately 23,900 machines. The Bank is also a member of a national
ATM network, Cirrus(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 385 employees which was
comprised of 338 full-time and 47 part-time employees. Full-time
equivalent employees averaged 371 in 1996.
<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 22 of the 1996 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.
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.
Congress enacted the Deposit Insurance Funds Act of 1996 (DIFA) to
recapitalize the Savings Association Insurance Fund (SAIF). This law
affected those banks which have deposits of acquired thrift
institutions. The Bank was assessed $162 thousand related to the
deposits of Atlantic Financial's Latrobe branch which were acquired from
the Resolution Trust Corporation in 1991.
Future assessment rates will be based on capital levels and bank
regulators' ratings as is required by FDICIA. The premium for the Bank
Insurance Funds (BIF) and the SAIF have been eliminated for the first
half of 1997. However, DIFA authorized payments to the Financing
Corporation (FICO), based on assessments to both the BIF and SAIF funds
to be paid by all insured institutions, as applicable.
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.
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 1996 Annual Report which are incorporated herein by
reference.
<PAGE> 3
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
Information required by this section is presented on pages 35 through
38, 45 and 49 of the 1996 Annual Report and is incorporated herein by
reference.
II. INVESTMENT PORTFOLIO
Information required by this section is presented on page 42 of the 1996
Annual Report and is incorporated herein by reference.
III. LOAN PORTFOLIO
Information required by this section is presented on pages 42, 43 and 45
of the 1996 Annual Report and is incorporated herein by reference.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
Information required by this section is presented on page 44 of the 1996
Annual Report and is incorporated herein by reference.
V. DEPOSITS
Information required by this section is presented on pages 25, 36 and 37
of the 1996 Annual Report and is incorporated herein by reference.
VI. RETURN ON EQUITY AND ASSETS
Information required by this section is presented on page 49 of the 1996
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 47 President and Chief Executive Officer
David M. Hanna 49 Vice President
Robert J. Stack 46 Vice President
Donald A. Lawry 46 Secretary and Treasurer
</TABLE>
David S. Dahlmann was elected Chief Executive Officer in April, 1991; he
had previously served as President of the Corporation since September,
1990. David M. Hanna was elected Vice President in 1997. 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
<PAGE> 4
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 1992-1996 President and Chief Executive
Officer
David M. Hanna 1997 Executive Vice President
1992-1996 Senior Vice President
Donald A. Lawry 1992-1996 Executive Vice President
Robert J. Stack 1992-1996 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, 1996, the Bank owned 12 properties in fee and leased 6
others that were used in its operations. These leases expire
intermittently through 2015. 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 29 of the
1996 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
22, 31, 40 and 49 of the 1996 Annual Report and is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this section is presented on pages 21, 22
and 46 through 49 of the 1996 Annual Report and is incorporated herein
by reference.
<PAGE> 5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information required by this section is presented on pages 29 and
34 through 47 of the 1996 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 1996 Annual Report and are incorporated
herein by reference:
<TABLE>
<CAPTION>
Page
<S> <C>
Management's Statement on Financial Reporting 33
Independent Auditors' Report 33
Financial Statements:
Consolidated Balance Sheet as of December 31, 1996 and 1995 18
Consolidated Statement of Income for the years ended
December 31, 1996, 1995 and 1994 17
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 19
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 20
Notes to Consolidated Financial Statements 21 - 32
</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 3, 4 and
5 of the Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this section is presented on pages 7
through 10 of the Proxy Statement and is incorporated herein by
reference.
<PAGE> 6
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this section is presented on pages 4, 5 and
11 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 6 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 1996 Annual Report and are incorporated
herein by reference.
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Management's Statement on Financial Reporting 33
Independent Auditors' Report 33
(A)(1) Financial Statements:
Consolidated Balance Sheet as of December 31, 1996 and
1995 18
Consolidated Statement of Income for the years ended
December 31, 1996, 1995 and 1994 17
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 19
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 20
Notes to Consolidated Financial Statements 21 - 32
(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 10 of this
document are filed herewith in response to this item.
(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, 1996.
</TABLE>
<PAGE> 7
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 March 18, 1997
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 March 18, 1997
Ray T. Charley
/s/ James A. Critchfield, Jr. Director March 18, 1997
James A. Critchfield, Jr.
/s/ David S. Dahlmann President and Chief March 18, 1997
David S. Dahlmann Executive Officer;
Director
/s/ Charles E. Henry Director March 18, 1997
Charles E. Henry
/s/ A. Richard Kacin Director March 18, 1997
A. Richard Kacin
/s/ Alexander H. Lindsay, Jr. Director March 18, 1997
Alexander H. Lindsay, Jr.
/s/ Joseph V. Morford, Jr. Director March 18, 1997
Joseph V. Morford, Jr.
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ James W. Newill Director March 18, 1997
James W. Newill
/s/ John A. Robertshaw, Jr. Director March 18, 1997
John A. Robertshaw, Jr.
/s/ Laurie Stern Singer Director March 18, 1997
Laurie Stern Singer
/s/ William W. Thomson Director March 18, 1997
William W. Thomson
/s/ Donald A. Lawry Secretary and Treasurer March 18, 1997
Donald A. Lawry (Principal Financial Officer)
</TABLE>
<PAGE> 9
<TABLE>
SOUTHWEST NATIONAL CORPORATION
EXHIBITS TO ANNUAL REPORT
on FORM 10-K for the
YEAR ENDED DECEMBER 31, 1996
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, 1996 (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 15, 1997
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> 10
SOUTHWEST NATIONAL CORPORATION
1996 ANNUAL REPORT
(Front cover of the annual report. The title appears horizontally word
by word approximately 3 inches down from the top of the page and 1/2
inch from the left edge of the page with the Corporate Logo at the top
left of the page. On the far right of the cover beginning at the top of
the page there are four slide size pictures from top down they depict:
1) an employee in the coin room; 2) a customer's child swinging on the
rope in the lobby; 3) two employees at a meeting; and 4) two employees
in the computer room. Approximately 1 inch under the picture is the
title, "A day in the life of a community bank.")
<PAGE>
(The inside front cover of the annual report is a full page picture taken
in the lobby of the main office looking outside.)
<PAGE>
(Please note: The page numbering for pages 1 through 16 are depicted in
the bottom center of the page by using squares.)
<TABLE>
SOUTHWEST NATIONAL CORPORATION
Greensburg, Pennsylvania
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------
<CAPTION>
FOR THE YEAR 1996 1995 % change
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 9,610 $ 9,038 + 6.3%
Cash dividends 3,870 3,629 + 6.6
Return on average assets 1.32% 1.30%
Return on average shareholders' equity 12.31 12.61
PER SHARE
- ------------------------------------------------------------------------------
Net income $ 3.03 $ 2.84 + 6.7
Cash dividends 1.22 1.14 + 7.0
AT YEAR-END
- ------------------------------------------------------------------------------
Shareholders' equity $ 80,164 $ 77,210 + 3.8
Total assets 755,358 710,816 + 6.3
Loans 487,049 446,917 + 9.0
Investment securities 197,250 211,886 - 6.9
Money market investments 28,882 12,308 +134.7
Deposits 651,328 623,785 + 4.4
PERIOD-END RATIOS AT DECEMBER 31,
- ------------------------------------------------------------------------------
Book value per share $ 25.57 $ 24.27 + 5.4
Risk-based capital ratios:
Tier 1 capital 16.46% 17.85%
Total capital 17.68 19.10
Leverage capital ratio 10.87 10.86
Nonperforming assets to loans,
other real estate owned and
other repossessions .37 .33
Nonperforming loans to loans .33 .30
Loans past due 90 days or more
to loans .41 .34
Reserve for possible loan losses to
nonperforming loans 362.58 414.60
- ------------------------------------------------------------------------------
</TABLE>
(At the bottom of this page, in ocher ink, is the following content material for
the annual report.)
<TABLE>
<S> <C>
Letter to Shareholders 2-4
A Day in the Life of a Community Bank 5-16
Financial Information 17-49
Administrative Directory 50
</TABLE>
<PAGE> 1
(On pages 2 and 3 spanning across the center of the pages are three
"Kodaks" of David S. Dahlmann, President and Chief Executive Officer
giving a presentation. The following quote appears on page 2 directly
before the "Kodaks".)
"We see an inherent competitive advantage of the community bank -- local
market flexibility, responsive decision making and an intensely
community oriented focus."
The year 1996 was a successful one for the organization. Southwest
National Corporation achieved a seventh consecutive year of record
earnings. Net income for the year was $9,610,000, an increase of 6.3%
over 1995. On a per share basis, this amounted to $3.03 per share
representing a 6.7% increase over the $2.84 per share earned in 1995.
Return on average assets was 1.32% and return on shareholders' equity
was 12.31% for 1996. The Corporation paid cash dividends in 1996 of
$3,870,000 or $1.22 per share. As you are aware, we increased the
quarterly dividend during 1996 by 6.7% to $.32 per share. You may not be
aware that this continues an uninterrupted series of annual increases
spanning 38 years.
In July, the Corporation's Board of Directors authorized the repurchase
of 150,000 shares of the Corporation's outstanding common stock, an
amount representing slightly less than 5% of the outstanding shares.
The Board believes the repurchase will benefit the Corporation by
providing added flexibility in its planning. At this time, our
repurchase program is progressing well with similar expectations during
1997.
The Corporation experienced continued growth in 1996. Total assets
reached a record level of $755,358,000, at December 31, a 6.3% increase
from year-end 1995. Loan volume increased by 9.0% over the year and this
has contributed positively to earnings. Expansion in our commercial
loans of 20.2% continued to be a significant factor in total loan growth
as it was in 1995. We have had a continual focus on commercial business
development and have benefited through this emphasis by capitalizing on
competitive opportunities presented to us in our markets.
<PAGE> 2
Consumer borrowing, which had been weak earlier in 1996, picked up in
the latter half of the year with a resultant 10.9% growth in consumer
loans as of year-end. In spite of a favorable interest rate environment,
mortgage borrowing remained a relatively weak category within the loan
portfolio.
We have not sacrificed asset quality in achieving loan growth.
Nonperforming loans represent a modest .33% of outstanding loans. Our
reserve for possible loan losses to nonperforming loans continues to be
adequately maintained at 362.58%. We have increased our loan loss
reserve over the year by 4.6% to $5,910,000 to adjust for the growth in
our loans.
Total deposits were $651,328,000 at December 31, an increase of 4.4%
from the same period of 1995. Competition for deposits in our market has
been strong throughout 1996. This has been particularly true for price
sensitive time deposits. Time deposits have increased 7.2% as we have
responded to our competition and consumers have shifted deposits to
obtain higher yields. Noninterest bearing demand deposits increased by
4.4% and have offset some of the impact of the time deposit growth.
The growth in time deposits was a contributing factor in the shrinkage
of our net interest margin during 1996. The margin was 4.77% for the
year, a decline from the 4.82% margin achieved in 1995. Although this
occurred, net interest income increased by 3.6% from 1995 as the growth
in deposit and loan volume for 1996 was more than sufficient to offset
the impact of the lower margin. In addition, growth in noninterest
income of 4.6% and modest growth in noninterest expense of .4% combined
to drive the overall net income growth of 6.3% from 1995.
<PAGE> 3
(At this point in the 1996 annual report there appears a line graph as
set out in the following table. It is placed 1" from the top of the page
and 1/4" from the left edge of the page.)
<TABLE>
NET INCOME
(per share)
<S> <C>
92 $2.37
93 2.54
94 2.70
95 2.84
96 3.03
</TABLE>
During the third quarter, the Bank absorbed a one-time expense of
$162,000 that was assessed to recapitalize the Savings Association
Insurance Fund (SAIF). Those banks holding deposits of acquired thrift
institutions were affected by this assessment in 1996. Our particular
assessment was related to the deposits of Atlantic Financial's Latrobe
branch that we acquired from the Resolution Trust Corporation in 1991.
Excluding this charge, expenses would have shown a decline of .4% from
1995.
Notable accomplishments in 1996 include the introduction of our
telephone banking service in July. This permits customers to
conveniently obtain account information, transfer funds and apply for
loans using the phone seven-days-a-week, around-the-clock. The service
has experienced steady growth and acceptance by our customers.
Also, in July of 1996, the Bank entered into an agreement to assume
roughly $7 million in deposit liabilities of First Home Savings Bank's
Natrona Heights branch. The Allegheny Valley, where this branch is
located, represents an important market for us and we see this
acquisition as strengthening our position in that market. The actual
transfer occurred in December, following regulatory approval, and the
transferred deposits have been absorbed by our nearby Harrison Township
branch.
I am pleased to note that Southwest Bank has again been rated
outstanding under the Community Reinvestment Act by the Office of the
Comptroller of the Currency this past year. Achieving this recognition
of our community involvement is very important to us.
We are a community bank. As such, we are closely tied to and deeply
invested in the communities in which we do business. We see an inherent
competitive advantage of the community bank -- local market flexibility,
responsive decision making and an intensely community oriented focus.
On the following pages, we attempt to provide you with some
understanding and appreciation of the essence of community banking at
Southwest by walking you through a day at the Bank. Unless you are our
customer and experience the Bank first-hand, this is the best way we
know to share a little bit of us with you.
/s/ David S. Dahlmann
David S. Dahlmann
President and Chief Executive Officer
March 14, 1997
<PAGE> 4
(The excerpt below appears on an ocher flyer--with text in black ink--which is
bound between pages 4 and 5 of the annual report.)
Here at Southwest Bank
no two days are the same.
In fact, every day brings
something new.
A new customer.
A new product. A new service.
But no matter what day it is,
certain things you can count on.
The way we treat our customers.
The way we plan for the future.
The security we offer.
The charitable causes
we support.
Day in and day out, we operate
as a community bank.
Headquartered here in
Westmoreland County,
making decisions here,
supporting the people and
businesses here, always keeping
our focus...right here.
Is there a typical day at
Southwest Bank? No, not really.
After all, we're not your typical
bank. But you can be sure that
every day is full of meetings and
decisions and people that
illustrate our standing as a true
community bank.
<PAGE>
(Page 5 is a full-page black and white photograph of a control-teller
station with a large poster stating: "JOB TIP It's not just what you do
but how you do it!")
<PAGE> 5
(At the top of this page there appears three small black and white
pictures approximately 3" from the top margin and centered on the page.
The first picture is of a branch manager reporting to work. The second
picture is of one of the parking lot attendants at our main office. The
third is a picture of a money counter.)
Alarm clocks sound off everywhere. Beeping. Buzzing. Playing music
that's much too loud. Babies begin crying and dogs begin barking and the
school bus pulls into view. A bank guard reports for work. Can't you
just see him? Hat, shoes, neatly-pressed pants, the pleats as
crisp as crackers.
Morning arrives, smiling broadly as it eases over the horizon,
peering inside the lightly frosted windows of homes in places like New
Alexandria, Tarentum and Brackenridge. And soon, very soon, the bank
will open. Our bank. Your bank. Southwest Bank.
It's 8:04. Still early. But the coffee is already brewing. And the
coin room at the Main office in Greensburg rattles with sound. KA-CHING.
Sorting nickles from the Post Office, counting quarters from a vending
company, wrapping dimes for branch offices in Delmont and Derry and New
Stanton.
(The following sentence is approximately 2" up from bottom margin, 2" in
from right margin and printed in maroon ink.)
Just another day.
<PAGE> 6
(This page has a white background with left and right margins of
approximately 1 1/2" and 2" top and bottom margins. 1" down from the
top margin in the center of the page in script is written "eight o' four
a.m." stamped on top of that in burgundy ink is the time "8:04" in 3/4"
characters. The black and white picture on this page depicts an
employee placing a bag of coin into the change counter.)
<PAGE> 7
(This page has a white background with left and right margins of
approximately 2" and 2" top and bottom margins. 1" down from the top
margin in the center of the page in script is written "ten fifteen a.m."
stamped on top of that in burgundy ink is the time "10:15" in 3/4"
characters. The black and white "Kodak", 2 1/2" x 3", on this page
depicts a look through the doorway of our Human Resources Department.
There are 3 3/4" x 1" prints l/8" from the left margin of the page
stacked from the bottom margin. Print 1 depicts an employee from the
platform printing out customer information. Print 2 depicts an employee
on the telephone assisting a customer. Print 3 is of an adding machine
tape. The following text is centered on the page between the left and
right margins.)
The coffee is still warm when a new employee meets a
long-time employee as part of the corporation's "Mentor Program."
That same employee picks up a newsletter and notes the names
of those being recognized with 30 years of service. She smiles.
And wonders about the year 2027.
Ten minutes before ten and, on the seventh floor of the Main office,
the fax machine hums incessantly.
Another customer credit application from an area car dealer.
Only 15 minutes later, an approval is faxed back.
Something that's possible when you're a community bank.
It's 11:17 when a young lady at the East Hills office has her
student loan approved.
Three minutes later, on the fourth floor, a mortgage is approved.
Another neighbor in the community.
<PAGE> 8
(There is a full-page black and white picture of an employee in one of
our safe deposit areas. 1" down from the top margin in the center of
the page in script is written "eleven thirty a.m." stamped on top of
that in ocher ink is the time "11:30" in 3/4" characters.)
<PAGE> 9
(On pages 10 and 11 there is one faded black and white picture covering
both pages. The picture is of a little girl swaying the ropes to the
main office teller line while she waits with her father to do his
banking. Spanning across both pages 6" down from the top margin and 2
1/2" tall there are four 2 1/2" x 3" black and white prints--these
prints follow the text box which has a burgundy background and white
text and is 4" in width. Print 1 depicts one of our trust officers
working in his office. Print 2 depicts two of the main office platform
employees speaking with a customer in the waiting area. Print 3 depicts
the executive waiting area in the trust department. Print 4 is an
overhead of a main office teller assisting a customer with his
transactions.
Centered 1/2" above each of the prints are the times they were taken (in
script) in black ink, stamped on top of that in white is the time in
3/4" characters. Print 1: twelve thirty p.m., 12:30; Print 2: one
o'five p.m., 1:05; Print 3: two ten p.m., 2:10; Print 4: two forty five
p.m., 2:45.
The following text is right justified within the text box.)
In a restaurant across town, over lunch, a commercial lending
customer shares his views with bank executives. The Bank's
president is there. And together, they talk about ideas, discuss
realities, ponder the future. It all happens face-to-face.
The way it SHOULD happen. At 1:15, a customer pulls into the
drive-thru at her local branch. Another customer
steps into the lobby. Yet another calls from home, taking full
advantage of our new telephone banking services.
Three customers. Three choices. One bank.
<PAGE> 10
(The aforementioned prints 2, 3, and 4 appear on this page. Also, the a
partial picture of little girls father appears on page 10 while the
little girl is on this page at the point where it is bound.)
<PAGE> 11
(This page of the annual report shows an 8" x 10 1/4" black and white
print of three employees attending a meeting. The picture is faded at
the left margin and becomes focused on the third employee. There is a
1/4" white border around the picture. Written in script, approximately
1" from the top margin centered on the page in white is the time "three
fifteen p.m." with the following in 3/4" ocher print "3:15" stamped on
top of the text.)
<PAGE> 12
(The background of this page is white, with two 1 1/2" x 2 1/2" black
and white prints depicting employees at meetings. Print 1 is placed
1" from the top margin in the center of the page; Print 2 is placed 1"
from the bottom margin in the center of the page. The following text
appears on the page with 3" margins on either side. The sentence
"Remember...always give something back." is depicted in ocher ink.)
It's just before two o'clock when
members of the Community
Development Team gather for a meeting
at headquarters. Their job is to reach
out, listen, monitor the needs of the
communities we serve. "How can the
Bank help? What projects can we sup-
port? Is there anything more we can
do?" They keep their fingers on the
pulse of surrounding communities. The
signals are strong. And so is our support.
Remember...always give
something back.
The clock in the lobby says 3:20.
A new customer stands before a new
teller. New faces. Unfamiliar. But they
will meet again. And again. And soon,
what was once unfamiliar will grow
familiar. The same familiar voice. The
same familiar smile. Want to know the
true definition of a community bank?
That's it. Teller. And customer...
just talking.
Five after four and the
Brackenridge branch should be closing.
But no doors shut. No locks click. It's
payday at the mill and the branch
extends its hours, so the shift that gets off
at 3:45 will have time to cash their
checks. Not time to quit, yet.
<PAGE> 13
(The background of this page is white, with two 1 1/2" x 2 1/2" black
and white prints. Print one depicts employees working in the mailroom;
Print 2 depicts three employees who volunteered to work at Overly's
Country Christmas. Both prints are centered on the page 5 3/4" from the
top margin. Centered 1/2" below each of the prints are the times they
were taken (in script) in black ink, stamped on top of that in ocher is
the time in 3/4" characters. Print 1: six thirty p.m., 6:30; Print 2:
eight fifteen p.m., 8:15. The following text is placed above the
pictures 3 1/2" from the top margin. The first digit "5" of the text is
in dark burgundy ink and 3/4" high. The following two sentences are
depicted in burgundy ink. "It happens all night long." "A new day at a
community bank.")
5:05 and the sun falls down the ladder. Time to head home. Make
dinner. See the kids. Seek the kids play basketball. See the kids play
soccer. See the kids...play. We are parents. Grandparents. Neighbors.
Residents. Involved in the PTA, The Rotary, Boy Scouts and the Brownie
Troop. Volunteering our time for Habitat for Humanity and Overly's
Christmas.
It's important -- don't you think? -- to make time for the
important things.
9:30. The day closes as the moon opens. People sleep, relax. But
the bank's operations center buzzes with electricity. Checks are being
processed, magnetically encoded, sorted by the tens of thousands.
It happens all night long, but no one ever sees it. Not until they open
their monthly statement, and then, that's where the work is all spelled
out: withdrawals and deposits and check #2304, written on the fourth day
of the month for $16.49.
The night shift ends. And the morning begins to show its face. A
new day at a community bank.
<PAGE> 14
(On page 15 there is 9" x 7" black and white picture -- depicting
employees working in our data center -- centered on the page 1" from the
top of the page. Centered 1/2" above the print is the time it was taken
(in script) in black ink, stamped on top of that in ocher is the time in
3/4" characters. The time is "twelve fifteen a.m." and "12:15".)
<PAGE> 15
(This page of the annual report has a glossy black background and the
words are centered on the page from the top to bottom margin and printed
in ocher ink.)
Alarm clocks sound off everywhere. Beeping and buzzing and playing music
that's much too loud. Babies begin crying and dogs begin barking and the
school bus pulls into view...
<PAGE> 16
(Please note: On pages 17 through 50 the page numbers (appear in ocher
ink) horizontally 1/4" in from either end of page (unbound side) and
1/4" from bottom of page.)
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $38,902 $37,250 $32,172
Interest on money market investments:
Interest bearing deposits with banks 6 8 42
Federal funds sold 1,122 1,750 1,170
Interest and dividends on investment securities:
U.S. Treasury securities and obligations of
U.S. government agencies and corporations 11,501 11,050 12,676
Obligations of states and political subdivisions 1,162 1,253 1,504
Equity and other securities 166 170 160
-----------------------------
Total interest income 52,859 51,481 47,724
INTEREST EXPENSE
Interest on deposits:
NOW accounts 659 870 1,054
Savings 7,400 7,729 7,417
Time 12,415 11,736 8,491
Interest on federal funds purchased and securities
sold under agreements to repurchase 227 110 33
Interest on Federal Home Loan Bank advances 163 156 36
-----------------------------
Total interest expense 20,864 20,601 17,031
-----------------------------
Net interest income 31,995 30,880 30,693
Provision for possible loan losses 1,800 1,450 1,560
-----------------------------
Net interest income after provision for
possible loan losses 30,195 29,430 29,133
NONINTEREST INCOME
Trust income 1,728 1,801 1,667
Service charges on deposit accounts 2,288 2,194 2,035
Other service charges and commissions 650 645 792
Other income 551 349 339
-----------------------------
Total noninterest income 5,217 4,989 4,833
NONINTEREST EXPENSE
Salaries 8,124 8,043 7,672
Employee benefits 2,655 2,636 2,699
Net occupancy expense 1,947 1,761 1,712
Equipment expenses and data processing fees 3,233 3,182 3,241
Pennsylvania shares tax 658 612 577
FDIC insurance expense 216 743 1,396
Other expenses 4,877 4,650 4,528
-----------------------------
Total noninterest expense 21,710 21,627 21,825
-----------------------------
Income before income tax expense 13,702 12,792 12,141
Income tax expense 4,092 3,754 3,535
-----------------------------
NET INCOME $ 9,610 $ 9,038 $ 8,606
- --------------------------------------------------------------------------------
Per share
Net income $ 3.03 $ 2.84 $ 2.70
Cash dividends 1.22 1.14 1.08
Average common shares outstanding 3,172,735 3,183,026 3,192,295
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 17
<TABLE>
CONSOLIDATED BALANCE SHEET
(In thousands)
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 26,521 $ 25,254
Money market investments:
Interest bearing deposits with banks 82 108
Federal funds sold 28,800 12,200
--------------------
Total money market investments 28,882 12,308
Investment securities:
Securities available for sale:
U.S. Treasury securities and obligations of
U.S. government agencies and corporations 111,792 116,815
Obligations of states and political subdivisions 20,728 20,491
Equity securities 2,663 2,589
--------------------
Total securities available for sale 135,183 139,895
Securities held to maturity:
Obligations of U.S. government agencies and corporations
(market value: $61,609 and $71,981) 62,067 71,991
--------------------
Total investment securities 197,250 211,886
Loans, net of unearned income of $138 and $643 487,049 446,917
Less: reserve for possible loan losses (5,910) (5,651)
--------------------
Loans, net 481,139 441,266
Bank premises and equipment 8,089 8,266
Other assets 13,477 11,836
--------------------
Total assets $755,358 $710,816
- --------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest bearing demand $105,202 $100,811
NOW accounts 55,232 53,014
Savings 239,794 235,809
Time 251,100 234,151
--------------------
Total deposits 651,328 623,785
Securities sold under agreements to repurchase 6,811 3,395
Federal Home Loan Bank advances 11,907 1,953
Other liabilities 5,148 4,473
--------------------
Total liabilities 675,194 633,606
SHAREHOLDERS' EQUITY
Common stock ($2.50 par value):
Authorized 5,000,000 shares
Issued 3,180,787 shares 7,952 7,952
Surplus 31,760 31,760
Retained earnings 42,132 36,392
Treasury stock of 45,905 and -0- shares, at cost (1,800) --
Unrealized gain on securities available for sale 120 1,106
--------------------
Total shareholders' equity 80,164 77,210
--------------------
Total liabilities and shareholders' equity $755,358 $710,816
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 18
<TABLE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Unrealized
gain (loss)
on securities Total
Common Retained available Treasury shareholders'
Stock Surplus earnings for sale Stock equity
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ 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
Net income - - 9,610 - - 9,610
Cash dividends - - (3,870) - - (3,870)
Purchase of treasury stock - - - - (1,800) (1,800)
Net unrealized loss on
securities available for sale - - - (986) - (986)
----------------------------------------------------------------------
Balance at December 31, 1996 $7,952 $31,760 $42,132 $ 120 $(1,800) $ 80,164
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 19
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,610 $ 9,038 $ 8,606
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 1,248 1,155 1,123
Provision for possible loan losses 1,800 1,450 1,560
Increase (decrease) in net interest receivable/payable 214 839 (658)
Net increase (decrease) from other operating activities (775) 989 (346)
------------------------------------------
Net cash from operating activities 12,097 13,471 10,285
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in money market investments - - 1,000
Proceeds from maturities of securities available for sale 43,513 43,000 63,000
Proceeds from sales of securities available for sale 10,242 51 19,876
Purchase of securities available for sale (50,395) (49,946) (69,845)
Proceeds from maturities of securities held to maturity 9,913 6,412 19,950
Purchase of securities held to maturity - (905) (7,106)
Net increase in loans made to customers (41,701) (35,945) (41,819)
Net property and equipment expenditures (1,071) (1,814) (1,122)
------------------------------------------
Net cash used for investing activities (29,499) (39,147) (16,066)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 27,543 11,710 (21,173)
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 3,416 2,794 (936)
Repayment of Federal Home Loan Bank advances (46) (42) (4)
Proceeds from Federal Home Loan Bank advances 10,000 - 2,000
Dividends paid (3,870) (3,629) (3,443)
Purchase of treasury stock (1,800) - -
Retirement of common stock - (308) -
------------------------------------------
Net cash from financing activities 35,243 10,525 (23,556)
------------------------------------------
Net change in cash and cash equivalents 17,841 (15,151) (29,337)
Cash and cash equivalents at beginning of year 37,562 52,713 82,050
------------------------------------------
Cash and cash equivalents at end of year $ 55,403 $37,562 $52,713
- ---------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $ 14,810 $14,568 $13,045
Income taxes 4,372 3,661 4,100
- ---------------------------------------------------------------------------------------------------------
NONCASH ITEMS
Transfers from loans to other real estate
owned and other repossessions $ 1,272 $ 667 $ 673
Transfer from securities held to maturity
to securities available for sale - 19,436 -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Corporation's 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. 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 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. The cost of securities sold is determined on a
specific identification basis.
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, 1996 and
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. Consumer and residential mortgage loans are not considered to
be impaired because they are included in large groups of smaller balance
homogeneous loans.
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, 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> 21
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. Nonaccrual loans are generally returned to
an accrual status when principal and interest payments become current,
or when the loan becomes well-secured and is 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 did not have a 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 $5.555 million in 1996 and $6.493 million in 1995.
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 1997 of
approximately $9.134 million of its total undivided profits of $62.433
million at December 31, 1996, plus an additional amount equal to the net
profits for 1997 up to the date of any such dividend declaration.
- ------------------------------------------------------------------------
3 PLEDGED ASSETS
Investment securities carried at $45.693 million at December 31, 1996,
were pledged, as required, to secure deposits of public funds and for
other purposes.
- ------------------------------------------------------------------------
<PAGE> 22
4 INVESTMENT SECURITIES
The unrealized gain, net of tax, on securities available for sale at
December 31, 1996, was $120 thousand and was recorded as a separate
component of shareholders' equity.
- -----------------------------------------------------------------------
The amortized cost and estimated market value of investment securities
at December 31, 1996 and 1995 were as follows:
(In thousands)
- -----------------------------------------------------------------------
<TABLE>
(In thousands)
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
1996
Securities available for sale:
U.S. Treasury securities and
obligations of
U.S. government agencies
and corporations $112,448 $ 188 $ (844) $111,792
Obligations of states and
political subdivisions 19,887 850 (9) 20,728
Equity securities 2,663 - - 2,663
------------------------------------------
Total securities available
for sale 134,998 1,038 (853) 135,183
Securities held to maturity:
Obligations of U.S. government
agencies and corporations 62,067 64 (522) 61,609
------------------------------------------
Total investment securities $197,065 $1,102 $(1,375) $196,792
- -------------------------------------------------------------------------------
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 investment securities $210,207 $2,013 $ (344) $211,876
- -------------------------------------------------------------------------------
</TABLE>
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 $19.436 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.
Proceeds from the sale of securities available for sale were
$10.242 million in 1996, $51 thousand in 1995 and $19.876 million in
1994. Gross gains recognized in 1996 were $196 thousand. No gains or
losses were recognized in 1995 or 1994. There were no sales of
securities held to maturity in 1996, 1995 or 1994.
- -----------------------------------------------------------------------
The amortized cost and estimated market value of investment securities
at December 31, 1996, 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 $ 16,399 $ 16,441
Due after one year through five years 95,215 95,229
Due after five years through ten years 20,269 20,387
Due after ten years 452 463
No fixed maturity 2,663 2,663
-----------------------
Total securities available for sale 134,998 135,183
Securities held to maturity:
U.S. government agencies' collateralized
mortgage obligations $ 62,067 $ 61,609
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 23
5 LOANS
A summary of outstanding loans, by category, at December 31 was as
follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Commercial $ 63,752 $ 61,781
Real estate mortgages:
Residential 191,348 186,090
Commercial 81,034 62,948
Consumer 150,915 136,098
--------------------------
Total loans, net of unearned income $487,049 $446,917
- -----------------------------------------------------------------------
</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 1996 was as
follows:
<TABLE>
(In thousands)
- --------------------------------------------------------------------------------
<CAPTION>
Balance Loans Made/ Loan Balance
December 31, 1995 Advanced Payments Other<F1> December 31,1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$6,086 $6,752 $6,226 $(79) $6,533
<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) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 5,651 $ 5,038 $ 4,451
Provision for possible loan losses 1,800 1,450 1,560
Losses (2,129) (1,486) (1,503)
Recoveries 588 649 530
-----------------------------
Net loan charge-offs (1,541) (837) (973)
-----------------------------
Balance at end of year $ 5,910 $ 5,651 $ 5,038
- ---------------------------------------------------------------------
</TABLE>
At December 31, 1996, the recorded investment in loans considered
impaired under FAS No. 114 was $1.630 million. This amount includes
impaired loans in the amount of $1.492 million for which the related
reserve for possible loan losses is $229 thousand, $29 thousand of
impaired loans, that, as a result of write-downs, do not have a reserve
for possible loan losses and $109 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, 1996, was approximately $1.778 million. For
the year ended December 31, 1996, the Bank recognized interest income of
$111 thousand on impaired loans, which was recognized using the cash
basis method of income recognition.
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.
Nonaccrual loans are considered to be impaired. Interest received
on impaired loans generally is either applied against principal or
reported as interest income, according to management's judgment as to
the collectability of principal.
- ------------------------------------------------------------------------
8 BANK PREMISES AND EQUIPMENT
Bank premises and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Land $ 1,024 $ 1,024
Buildings 9,176 8,730
Leasehold improvements 3,898 3,890
Furniture, fixtures and equipment 8,370 7,898
--------------------
Total original cost 22,468 21,542
Less: accumulated depreciation and amortization (14,379) (13,276)
--------------------
Total bank premises and equipment $ 8,089 $ 8,266
- ---------------------------------------------------------------------
</TABLE>
Depreciation and amortization charged to noninterest expense amounted to
$1.248 million in 1996, $1.155 million in 1995 and $1.123 million in
1994.
- ------------------------------------------------------------------------
<PAGE> 24
8 BANK PREMISES AND EQUIPMENT (cont.)
Net rental expense of leased bank premises and equipment was as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Buildings and land (net of sublease income
of $3, $70 and $75) $344 $269 $199
Equipment 72 118 170
----------------------------
Total $416 $387 $369
- -------------------------------------------------------------------------------
</TABLE>
Minimum rental commitments under noncancelable leases having an original
term at December 31, 1996, of more than one year were $347 thousand in
1997, $339 thousand in 1998, $322 thousand in 1999, $275 thousand in
2000, $283 thousand in 2001 and $2.452 million for the years thereafter,
totaling $4.018 million.
- ------------------------------------------------------------------------
9 DEPOSITS
The following table sets forth, by time remaining to maturity, time
deposits of $100 thousand or more at December 31:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
Three months or less $ 8,847 $ 5,587
Three to six months 2,690 2,888
Six to twelve months 6,827 6,610
Over one year 6,984 6,132
---------------------
Total $25,348 $21,217
</TABLE>
- ----------------------------------------------------------------------
Interest expense on time deposits of $100 thousand or more amounted to
$1.336 million in 1996, $1.075 million in 1995 and $825 thousand in
1994.
- ----------------------------------------------------------------------
The following table illustrates by remaining maturity, time deposits
with original terms of more than one year, as of December 31, 1996:
<TABLE>
<CAPTION>
(In thousands)
- -----------------------------------------------------------------------
<S> <C>
1997 $19,680
1998 30,854
1999 10,806
2000 6,776
2001 4,798
2002-2006 17,702
-------
$90,616
</TABLE>
- -----------------------------------------------------------------------
10 FEDERAL HOME LOAN BANK ADVANCES
The Bank is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh.
Advances from the FHLB are secured by stock in the FHLB, qualifying
residential first mortgage loans, mortgage-backed securities and other
investment securities. Certain of these advances are subject to
restrictions or penalties in the event of prepayment.
- -----------------------------------------------------------------------
Outstanding balances of advances with original maturities greater than
one year at December 31 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
<S> <C> <C>
FHLB advance maturing October 1999 (fixed rate) $ 1,907 $1,953
FHLB advance maturing December 2001 (floating rate) 10,000 -
---------------
$11,907 $1,953
- --------------------------------------------------------------------
</TABLE>
Remaining maturities of these advances were as follows at December 31:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
1996 $ - $ 46
1997 50 50
1998 55 55
1999 1,802 1,802
2000 - -
2001 10,000 -
-----------------
$11,907 $1,953
- -----------------------------------------------------------------------
</TABLE>
The weighted average rate of these advances was 7.59% in 1996 and 7.91%
in 1995.
<PAGE> 25
11 CAPITAL ADEQUACY REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators, that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities and
certain off-balance sheet items as calculated under regulatory
accounting practice. The Bank's capital amounts and classifications are
also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier I capital
to average assets (as defined). Management believes, as of December 31,
1996, that the Bank meets all capital adequacy requirements to which it
is subject.
As of December 31, 1996, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
The capital amounts and ratios presented in the following table as
of December 31, 1996 and 1995, are only those of the Corporation since
the Bank's are not materially different.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
(In thousands) Actual Adequacy Purposes Action Provisions
- --------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996
Total Capital $85,651 $38,756 $48,445
(to Risk-Weighted
Assets) 17.68% >or= 8% >or= 10%
Tier I Capital 79,741 19,378 29,067
(to Risk-Weighted
Assets) 16.46% >or= 4% >or= 6%
Tier I Capital/
Leverage 79,741 29,342 36,677
(to Average Assets) 10.87% >or= 3% >or= 5%
- --------------------------------------------------------------------------------
1995
Total Capital $81,408 $34,098 $42,622
(to Risk-Weighted
Assets) 19.10% >or= 8% >or= 10%
Tier I Capital 76,080 17,049 25,573
(to Risk-Weighted
Assets) 17.85% >or= 4% >or= 6%
Tier I Capital/
Leverage 76,080 28,017 35,021
(to Average Assets) 10.86% >or= 3% >or= 5%
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 26
12 FEDERAL INCOME TAXES
The current and deferred income tax expense (benefit) breakdown was as
follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $4,175 $3,931 $3,863
Deferred (83) (177) (328)
-------------------------------
Total $4,092 $3,754 $3,535
- --------------------------------------------------------------------------------
</TABLE>
In addition to income taxes applicable to income before taxes, a
deferred tax benefit of $508 thousand was recorded as an increase 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) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Provision for possible loan losses $2,021 $1,938 $1,718
Securities available for sale - - 1,501
Net loan origination fees 350 454 523
Postretirement benefits other than pensions 361 262 166
Interest on nonaccrual loans 118 127 126
Depreciation and amortization expense 112 50 -
Other 52 42 92
--------------------------------
Gross deferred tax assets 3,014 2,873 4,126
Deferred tax liabilities:
Securities available for sale 65 573 -
Accretion of bond discount 23 43 39
Depreciation and amortization expense - - 25
Pension expense 280 171 78
Other 20 51 52
--------------------------------
Gross deferred tax liabilities 388 838 194
--------------------------------
Net deferred tax assets $2,626 $2,035 $3,932
- -------------------------------------------------------------------------------
</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 1996, 1995 and 1994, 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>
1996 1995 1994
- -------------------------------------------------------------------------------
<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 (3.9) (4.3) (5.0)
Surtax exemption ( .7) ( .7) ( .9)
Other ( .5) ( .8) -
-------------------------------
Reported income tax rate 29.9% 29.2% 29.1%
- -------------------------------------------------------------------------------
</TABLE>
13 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) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 303 $ 281 $ 253
Interest cost on projected benefit obligation 375 341 330
Actual return on plan assets 126 (1,215) (169)
Net amortization and deferral (590) 789 (229)
-------------------------------
Net periodic pension cost $ 214 $ 196 $ 185
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 27
13 EMPLOYEE BENEFITS (cont.)
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) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Market value of plan assets, primarily registered
investment companies, U.S. government and agency
obligations and money markets $6,970 $6,941
Projected benefit obligation 5,915 5,450
--------------------
Plan assets in excess of projected benefit obligation 1,055 1,491
Unrecognized net transition asset (184) (215)
Unrecognized prior service cost due to plan amendment 147 164
Unrecognized net gain (212) (832)
--------------------
Prepaid pension expense recognized on the balance sheet $ 806 $ 608
--------------------
Actuarial present value of accumulated benefits,
including vested benefits of $3,672 and $3,725 $3,999 $3,756
- -------------------------------------------------------------------------------
</TABLE>
Assumptions used in determining the actuarial present value of the
projected benefit obligation were as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Discount rates 7.0% 7.0%
Rates of increase in compensation levels 4.5 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) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Service cost $ 58 $ 56
Interest cost on projected benefit obligation 231 213
Amortization of transition obligation 119 119
Loss amortization 19 12
--------------------
Net periodic benefit cost $427 $400
- -------------------------------------------------------------------------------
</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) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $2,371 $2,111
Fully eligible active plan participants 550 531
Other plan participants 864 666
--------------------
Total accumulated postretirement benefit obligation 3,785 3,308
Plan assets at fair value - -
--------------------
Accumulated postretirement benefit obligation in excess
of plan assets 3,785 3,308
Unrecognized transition obligation (1,908) (2,027)
Unrecognized net loss (823) (518)
--------------------
Accrued benefit liability recognized on the balance sheet $1,054 $ 763
- -------------------------------------------------------------------------------
</TABLE>
Assumptions used to determine the actuarial present value of the
accumulated postretirement benefit obligation were as follows at
December 31:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<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 $200 thousand and the
aggregate of the service and interest cost components of net periodic
postretirement health care benefit cost by $14 thousand.
- ------------------------------------------------------------------------
<PAGE> 28
13 EMPLOYEE BENEFITS (cont.)
401(k) 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
$704 thousand in 1996, $677 thousand in 1995 and $650 thousand in 1994.
Contributions in 1996 and 1995 ($311 thousand and $149 thousand,
respectively, representing the employee matching portion and $393
thousand and $528 thousand, respectively, representing the Bank's
discretionary portion) related to the Plan; 1994 contributions related
to the Former Plan.
- ------------------------------------------------------------------------
14 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 $46.760 million of U.S. government obligations from its
investment securities portfolio at December 31, 1996, 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) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan commitments $ 658 $ 1,332
Unused portion of:
Home equity lines of credit 22,850 22,071
Commercial lines of credit (secured and unsecured) 56,030 24,329
Consumer unsecured lines of credit and credit cards 36,204 30,370
---------------------
Total commitments to extend credit $115,742 $78,102
Standby letters of credit and financial guarantees
written $ 17,454 $14,274
- -------------------------------------------------------------------------------
</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.
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, $10.440 million in 1996 and
$7.472 million in 1995 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> 29
15 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, 1996 1995 1994
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
INCOME
Dividends from Southwest National Bank
of Pennsylvania $5,592 $3,972 $3,443
Expense 42 35 32
-------------------------------
Income before income tax benefit and equity
in undistributed net income of subsidiary 5,550 3,937 3,411
Income tax benefit (14) (12) (11)
--------------------------------
Income before equity in undistributed
net income of subsidiary 5,564 3,949 3,422
Equity in undistributed net income
of subsidiary 4,046 5,089 5,184
-------------------------------
NET INCOME $9,610 $9,038 $8,606
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET
- -------------------------------------------------------------------------------
DECEMBER 31, 1996 1995
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2 $ 18
Investment in Southwest National Bank of Pennsylvania 80,251 77,192
Other assets 14 -
-------------------
Total assets $80,267 $77,210
- -------------------------------------------------------------------------------
LIABILITIES
Short-term borrowings $ 103 $ -
SHAREHOLDERS' EQUITY
Common stock ($2.50 par value):
Authorized 5,000,000 shares
Issued 3,180,787 shares 7,952 7,952
Surplus 31,760 31,760
Retained earnings 42,252 37,498
Treasury stock of 45,905 and -0- shares, at cost (1,800) -
-------------------
Total shareholders' equity $80,164 $77,210
-------------------
Total liabilities and shareholders' equity $80,267 $77,210
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,610 $ 9,038 $ 8,606
Adjustments to reconcile net income to
net cash from operating activities:
Equity in undistributed net income of
subsidiary (4,046) (5,089) (5,184)
Net increase from other operating activities (13) - -
-------------------------------
Net cash from operating activities 5,551 3,949 3,422
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings 103 - -
Dividends paid (3,870) (3,629) (3,443)
Purchase of treasury stock (1,800) - -
Retirement of common stock - (308) -
-------------------------------
Net cash from financing activities (5,567) (3,937) (3,443)
-------------------------------
Net change in cash and cash equivalents (16) 12 (21)
Cash and cash equivalents at beginning of year 18 6 27
-------------------------------
Cash and cash equivalents at end of year $ 2 $ 18 $ 6
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 30
16 QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly financial data for the years ended December 31, 1996 and 1995,
was 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>
1996
Interest income $12,909 $13,118 $13,368 $13,464
Interest expense 5,203 5,172 5,204 5,285
Provision for possible
loan losses 450 450 450 450
Noninterest income 1,357 1,205 1,244 1,411
Noninterest expense 5,464 5,383 5,485 5,378
Income tax expense 926 1,004 1,045 1,117
Net income 2,223 2,314 2,428 2,645
Per share:
Net income $ .70 $ .73 $ .76 $ .84
Cash dividends .30 .30 .30 .32
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
- -------------------------------------------------------------------------------
</TABLE>
17 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, 1996, the carrying value
and fair value of interest bearing deposits with banks were each $82
thousand, and in 1995, $108 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> 31
17 FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)
The following table presents information for loans at December 31:
<TABLE>
<CAPTION>
1996 1995
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total loans $481,139 $475,598 $441,266 $441,985
- --------------------------------------------------------------------------------
</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
securities sold under agreements to repurchase approximates the carrying
value of these instruments, based upon their short-term nature. The fair
value of Federal Home Loan Bank advances was estimated, using discounted
cash flow analyses, based on the Corporation's borrowing rates at
December 31, 1996 and 1995, for comparable types of borrowing
arrangements.
The following table presents the carrying value and estimated fair value
of deposits and other liabilities:
<TABLE>
<CAPTION>
1996 1995
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits $651,328 $653,464 $623,785 $627,359
Other liabilities:
Federal funds purchased and
securities sold under agreements
to repurchase 6,811 6,811 3,395 3,395
Federal Home Loan Bank advances 11,907 11,904 1,953 2,061
- -------------------------------------------------------------------------------
</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> 32
(Please note that all text on pages 33 through 50--except for the
Corporation information on page 50--is presented in columnar form
utilizing three columns per page.)
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 18, 1997
/s/ Donald A. Lawry
Donald A. Lawry
Secretary and Treasurer
February 18, 1997
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, 1996
and 1995, 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, 1996. 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, 1996
and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
February 18, 1997
<PAGE> 33
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
The year 1996 marked another successful year for the Corporation. Record
earnings were achieved for the seventh consecutive year. Net income for
the year was $9.610 million, an increase of $572 thousand (6.3%) from
the $9.038 million earned in 1995. This follows last year's rise of $432
thousand (5.0%) over 1994 results.
Earnings for 1996 were energized by increased net interest income,
up $1.115 million (3.6%) since the favorable growth in average earning
assets was more than sufficient to overcome the dip in the net interest
margin of five basis points. Other factors which contributed to the
year-to-year earnings improvement were growth of 4.6% in noninterest
income and only nominal growth of .4% in noninterest expense. Earning
asset growth, increased noninterest income and control of expense
continue to be key strategic performance objectives for the Corporation.
Several factors boosted net income growth in 1995, a rise in net
interest income of $187 thousand, growth of 3.2% in noninterest income,
a lower provision for loan losses and a decline of .9% in noninterest
expense. In 1994, the three factors affecting the growth of net income
were a rise in net interest income of $869 thousand, growth in
noninterest income of 5.8% and modest noninterest expense growth of
2.0%.
Earnings per share were $3.03 in 1996, $2.84 in 1995 and $2.70 in
1994. Return on average assets rose to 1.32% in 1996 from 1.30% in 1995,
and 1.24% in 1994. Return on average shareholders' equity amounted to
12.31%, 12.61% and 12.81% for the years 1996, 1995 and 1994,
respectively.
NET INTEREST INCOME
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $52,859 $51,481 $47,724 $47,936 $51,240
Taxable equivalent adjustment 876 910 962 1,025 1,156
-------------------------------------------
Total interest income--fully taxable equivalent basis 53,735 52,391 48,686 48,961 52,396
Total interest expense 20,864 20,601 17,031 18,112 22,732
--------------------------------------------
Net interest income--fully taxable equivalent basis $32,871 $31,790 $31,655 $30,849 $29,664
</TABLE>
NET INTEREST MARGIN ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Yield on interest earning assets 7.79% 7.95% 7.41%
Rate on interest bearing liabilities 3.84 3.94 3.21
------------------------------
Net interest rate spread 3.95 4.01 4.20
Effect of noninterest bearing liabilities .82 .81 .62
------------------------------
Net interest margin 4.77% 4.82% 4.82%
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 34
NET INTEREST INCOME
Net interest income is the driving force behind the Corporation's
earnings as it represents fully 86.0% of operating revenue. It includes
interest income, dividends and fees generated by interest earning
assets, primarily loans and investment securities, less interest expense
on interest-bearing liabilities, primarily deposits and other
borrowings. Net interest income is affected by the volume, interest
rates, and relative mix of both earning assets and interest-bearing and
noninterest-bearing sources of funds.
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
1994 through 1996 is shown on the preceding page. The following
discussion is based on results on a fully-taxable equivalent basis.
Net interest income advanced to $32.871 million in 1996, up $1.081
million (3.4%), compared to a $135 thousand (less than one percent) rise
in 1995, and an $806 thousand (2.6%) rise in 1994. Growth
(At this point in the 1996 Annual Report there appears a line graph as
set out in the following table.)
<TABLE>
NET INTEREST INCOME
(fully taxable equivalent, in millions)
<S> <C>
92 $29.66
93 30.85
94 31.66
95 31.79
96 32.87
</TABLE>
in 1996 was powered through a significant rise in earning assets and a
higher yielding asset mix, more than outpacing the decline in the net
interest margin. Growth in 1995 and 1994 was also enhanced through a
higher level of earning assets and a higher yielding asset mix. Results
for 1994 also benefited from 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 net interest income calculated as a percentage of
average earning assets. The margin declined five basis points to 4.77%
in 1996 after remaining stable at 4.82% in 1995, following a four basis
point rise in 1994.
Net interest rate spread is the difference between the average
yield earned on total interest earning assets and the average rate paid
on total sources of funds. This spread declined to 3.95% in 1996,
compared to 4.01% in 1995 and 4.20% in 1994.
Market interest rates were relatively stable throughout the year
as modest growth and low inflationary pressures tended to keep the
economy in check. The average prime rate declined slightly to 8.27% in
1996 compared to 8.83% in 1995.
Continued deployment of funds into higher yielding earning assets
helped to soften the decline of the yield on interest earning assets to
16 basis points for the year. The rate on interest bearing liabilities
fell by only 10 basis points as a result of the continuing shift in the
interest
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME*
<TABLE>
<CAPTION>
(In thousands) 1996/1995 1995/1994
- ---------------------------------------------------------------------------------------------------------
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 $ - $ (2) $ (2) $ (27) $ (7) $ (34)
Federal funds sold (464) (164) (628) 54 526 580
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations 469 (18) 451 (1,878) 252 (1,626)
Obligations of states and
political subdivisions (104) (35) (139) (349) (31) (380)
Equity and other securities 3 (7) (4) (2) 12 10
Loans 2,798 (1,132) 1,666 3,134 2,021 5,155
------- -------
Total interest earning assets 2,410 (1,065) 1,344 150 3,555 3,705
INTEREST BEARING LIABILITIES
NOW accounts (32) (179) (211) (84) (100) (184)
Savings deposits (59) (270) (329) (856) 972 116
Time deposits 1,311 (452) 679 1,151 2,290 3,441
Federal funds purchased and
securities sold under agreements
to repurchase 128 (11) 117 41 38 79
Federal Home Loan Bank advances 13 (6) 7 117 1 118
------ -------
Total interest bearing
liabilities 800 (537) 263 (248) 3,818 3,570
------ -------
CHANGE IN NET INTEREST INCOME 1,610 (528) $1,081 398 (263) $ 135
<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> 35
At this point in the 1995 Annual Report is the following table which
spans two pages. This table covers pages 36 and 37, respectively. It
has been condensed for electronic filing purposes.
<TABLE>
ANALYSIS OF NET INTEREST INCOME AND INTEREST YIELDS/RATES*
<CAPTION>
(In thousands) 1996
- -------------------------------------------------------------------------------
Average Average
balance Interest yields/rates
------------------------------------
<S> <C> <C> <C>
USES OF FUNDS
Interest earning assets:
Interest bearing deposits with banks $ 126 $ 6 5.56%
Federal funds sold 21,040 1,122 5.33
---------------------
Total money market investments 21,166 1,128 5.33
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations 189,755<F1> 11,501 6.06
Obligations of states and
political subdivisions 19,395<F1> 1,759 9.07
Equity and other securities 2,645<F1> 167 6.31
---------------------
Total investment securities 211,795 13,427 6.34
Loans 456,696 39,180 8.58
---------------------
Total interest earning assets $689,657 53,735 7.79%
SOURCES OF FUNDS
Interest bearing liabilities:
NOW accounts $ 53,695 659 1.23%
Savings deposits 239,900 7,400 3.08
Time deposits 242,307 12,415 5.12
Federal funds purchased and securities
sold under agreements to repurchase 5,378 227 4.22
Federal Home Loan Bank advances 2,147 163 7.59
---------------------
Total interest bearing liabilities 543,427 20,864 3.84
Sources supporting interest earning
assets on which interest is not paid 146,230 -
---------------------
Total sources of funds $689,657 20,864 3.02%
------------------
NET INTEREST INCOME/YIELD ON INTEREST
EARNING ASSETS $32,871 4.77%
<FN>
* Calculated on a fully taxable equivalent basis.
<F1> Amounts exclude adjustments to fair value as required by FAS No. 115.
</FN>
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 36
<TABLE>
ANALYSIS OF NET INTEREST INCOME AND INTEREST YIELDS/RATES* (cont.)
<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
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 241,898 7,729 3.20
Time deposits 220,509 11,736 5.32
Federal funds purchased and securities
sold under agreements to repurchase 2,376 110 4.63
Federal Home Loan Bank advances 1,973 156 7.91
-------------------
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>
<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<1> 12,676 5.95
Obligations of states and
political subdivisions 24,312 2,278 9.37
Equity and other securities 2,632<1> 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 272,996 7,417 2.72
Time deposits 194,571 8,491 4.36
Federal funds purchased and securities
sold under agreements to repurchase 1,311 33 2.52
Federal Home Loan Bank advances 449 36 8.02
------------------
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>
<PAGE> 37
bearing deposit mix as customers registered preferences for
high-yielding products, mainly time deposits. This was the principal
factor in the shrinkage of the net interest margin year to year.
The percentage contribution of noninterest bearing liabilities to
the net interest rate spread (commonly known as the free funds ratio)
remained relatively unchanged rising only one basis point to .82%. Even
though the percentage of interest earning assets funded by noninterest
bearing sources of funds increased to 21.2% in 1996 from 20.7% in 1995,
the stable rate environment effectively offset this benefit.
During 1995, higher interest rates and redeployment of funds into
higher yielding earning assets helped to raise the yield on interest
earning assets by 54 basis points, but was outpaced by the increase in
the rate paid on interest bearing liabilities, up 73 basis points. The
free funds ratio improved 19 basis points because of a higher interest
rate environment. As a result, the net interest margin remained stable
at 4.82%.
The table on page 35 shows how changes in average interest earning
assets, interest bearing liabilities and average interest rates or
yields effect net interest income. In 1996 and 1995, 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 a substantial $30.6
million (4.7%) which followed a rise of $2.0 million (less than one
percent) in 1995. Management was successful in improving the composition
of earning assets without sacrificing asset quality in 1996.
NONINTEREST INCOME
Noninterest income advanced $228 thousand (4.6%) to $5.217 million in
1996, compared to a $156 thousand (3.2%) rise in 1995, and a $267
thousand (5.8%) increase in 1994. Growth in service charges on deposit
accounts and other income helped to stoke the 1996 increase. The
rise in 1995 was fueled by growth in trust income and service charges on
deposit accounts; 1994 also benefited from a rise in trust income, as
well as fees generated by the sale of nondeposit investment products.
(At this point in the 1996 Annual Report there appears a line graph as
set out in the following table.)
<TABLE>
NONINTEREST INCOME
(in millions)
<S> <C>
92 $4.18
93 4.57
94 4.83
95 4.99
96 5.22
</TABLE>
During 1996, trust income declined $73 thousand (4.1%) following a
$134 thousand (8.0%) rise in 1995, and a $116 thousand (7.5%) increase
in 1994. The decline in 1996 was primarily due to a lower level of fees
generated from the personal trust sector. The growth in 1995 resulted
from increased fees earned from the personal trust sector, while 1994
was favorably impacted due to increased fees from pension and profit
sharing plans, personal trusts and estate management activity.
Service charges on deposit accounts are the largest component of
noninterest income (43.9% of the total). This category rose $94 thousand
(4.3%) in 1996 following an increase of 7.8% in 1995 and a flat year in
1994. The increase in 1996 is due primarily to growth in fees on
relationship deposit products and improved collection of fees charged
(mainly NSF fees). The rise in 1995 was primarily the result of
increases in fees charged (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. Management's
goal is to implement reasonable fees for services performed and to
monitor the collection activity of those fees.
Other service charges and commissions were relatively unchanged,
rising just $5 thousand in 1996 following a decline of $147 thousand
(18.6%) in 1995, compared to a rise of 21.3% in 1994. During 1996, a
significant rise in credit life insurance commissions earned was offset
by flat or declining results in most other components. The drop in 1995
was due primarily to reduced fees recognized on mutual funds and annuity
products, coupled with reduced credit life insurance commissions and
a lower level of fees earned on securities lending. The rise in 1994 was
due principally to increased fees recognized from mutual fund and
annuity products.
Other income increased $202 thousand (57.9%) in 1996 after
increasing 3.0% in 1995 and 3.7% in 1994. The gains of $196 thousand
recognized on the sale of available-for-sale investment securities
positively impacted 1996. The rise in 1995 was due in part to increased
safe deposit fees. The increase in 1994 resulted from additional income
recognized upon settlement of the Pennsylvania Shares Tax issue.
Noninterest income has grown at a compound rate of 4.5% over the
last three years.
<PAGE> 38
NONINTEREST EXPENSE
Noninterest expense rose $83 thousand or only .4% in 1996, due primarily
to the continued drop in the deposit insurance premiums paid by the
Bank. Exclusive of this item, noninterest expense growth was held to
2.9%.
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 57.0% in 1996 from 58.8% in 1995
and 59.8% in 1994. This ratio, which continues to improve, compares
favorably to our peer group (bank holding companies between $500 million
and $1 billion in assets). Control of expenses will continue to be an
important goal for management.
In 1995, noninterest expense fell $198 thousand (.9%), due
principally to the significant drop in deposit insurance premiums paid
by the Bank. Excluding this item, noninterest expense growth was held to
a modest 2.2%.
During 1994, noninterest expense rose only 2.0% ($419 thousand).
However, adjusting for the writedown of an OREO property and a
nonrecurring item that inflated 1993, noninterest expense would have
increased 4.0%.
Salaries and employee benefits rose only $100 thousand (.9%) in
1996, after a $308 thousand (3.0%) rise in 1995 compared to a $678
thousand (7.0%) rise in 1994. The rise in 1996 is due primarily to
normal merit increases, offset by the increase in the deferral of
expenses due to increasing loan volume and changing loan mix. The rise
in 1995 was due to normal merit increases offset partially by reduced
health care costs. The increase in 1994 was the result of a reduction in
the deferral of expenses due to a changing loan mix, the addition of two
full-time equivalent employees and normal merit increases.
Net occupancy expense grew $186 thousand (10.6%) in 1996 following
a $49 thousand (2.9%) increase in 1995 and an $87 thousand (5.4%)
increase in 1994. A reduction in rental income received, as well as
additional expenses associated with a new location and branch renovation
recognized for the entire year versus only a partial year in 1995,
impacted 1996. Also, all three years included normal increases in the
various costs of managing facilities. Costs associated with additional
space occupied by support staff also impacted 1994.
Equipment expenses and data processing fees rose $51 thousand in
1996,
(At this point in the 1996 Annual Report there appears a line graph as
set out in the following table.)
<TABLE>
NONINTEREST EXPENSE
(in millions)
<S> <C>
92 $20.14
93 21.41
94 21.83
95 21.63
96 21.71
</TABLE>
compared to a $59 thousand (1.8%) dip in 1995, compared to a $93
thousand (3.0%) increase in 1994. In 1996, data processing fees remained
unchanged as equipment expenses rose 3.9%, due to full year costs versus
partial-year costs associated with the two locations aforementioned. In
1995, equipment expenses declined 4.2% due to reduced equipment rentals
and data processing fees were flat. In 1994, increases in maintenance
contracts, higher equipment depreciation and increased student loan
processing fees accounted for the rise.
FDIC insurance expense fell $527 thousand (70.9%) in 1996,
following another substantial drop of $653 thousand (46.8%) in 1995 and
increased only nominally (1.7%) in 1994. Congress enacted the Deposit
Insurance Funds Act of 1996 (DIFA) to recapitalize the Savings
Association Insurance Fund (SAIF). This law affected those banks which
have deposits of acquired thrift institutions. The Bank was assessed
$162 thousand related to the deposits of Atlantic Financial's Latrobe
branch which we acquired from the Resolution Trust Corporation in 1991.
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 premium for the Bank
Insurance Fund (BIF) and the SAIF have been eliminated for the first
half of 1997. However, DIFA authorized payments to the Financing
Corporation (FICO), based on assessments to both the BIF and SAIF funds
to be paid by all insured institutions, as applicable. This will result
in additional savings to the Bank of approximately $118 thousand
assuming only payments for the FICO assessments in 1997.
Other expenses rose $227 thousand (4.9%) following an increase
of $122 thousand (2.7%) in 1995 and a decrease of $504 thousand (10.0%)
in 1994. The increase in 1996 is due primarily to increased
correspondent bank service charges, up $58 thousand, increased postage
and telephone expenses, up $53 thousand, higher Pennsylvania Shares Tax
expense, up $46 thousand, and the return to more normal activity
regarding OREO dispositions as 1995 included a $50 thousand gain. The
rise in 1995 was 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 the result of two items that inflated this category in 1993:
an adjustment to the carrying value of an OREO property of $315 thousand
and a nonrecurring $113 thousand writedown on the settlement of the
Pennsylvania Shares Tax issue.
<PAGE> 39
FEDERAL INCOME TAXES
The Corporation's Federal income tax provision totaled $4.092 million in
1996, compared to $3.754 million in 1995 and $3.535 million in 1994. In
all three years, taxable income rose principally because of growth in
earnings. The effective tax rates for the Corporation of 29.9% in 1996,
29.2% in 1995 and 29.1% in 1994 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.
DIVIDENDS
Cash dividends paid amounted to $3.870 million in 1996, $3.629 million
in 1995 and $3.443 million in 1994. On a per common share basis they
were $1.22 (7.0% increase) in 1996, $1.14 (5.6% increase) in 1995 and
$1.08 (10.2% increase) in 1994. The continued increase in the return to
shareholders reflects the Corporation's strong capital position and
solid earnings performance. The dividend payout ratio was 40.27% in
1996, 40.15% in 1995 and 40.00% in 1994. Our ratio has compared
favorably with our peer group over the last three years since it has
stayed around the 80th percentile.
The continued growth in cash dividends reflects a trend of
uninterrupted increases over the last 38 years by the Corporation and
its predecessors. Management continues to be committed to delivering
maximum return to our shareholders and building shareholder value.
Actions were taken in 1996 to enhance shareholder value by returning
excess capital to shareholders through both increased dividends and the
repurchase of common stock.
(At this point in the 1996 Annual Report there appears a line graph as
set out in the following table.)
<TABLE>
CASH DIVIDENDS
(per share)
<S> <C>
92 $0.89
93 0.98
94 1.08
95 1.14
96 1.22
</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.;
Sandler O'Neill & Partners; and
Wheat First Securities Inc.
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 1996 Annual Report there appears a line graph as
set out in the following table.)
<TABLE>
BOOK VALUE
(per share)
<S> <C>
92 $19.07
93 20.62
94 21.33
95 24.27
96 25.57
</TABLE>
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
First
quarter $35 1/2 $33 $27 1/4 $23 1/2
Second
quarter 35 1/2 31 27 1/2 26 1/4
Third
quarter 37 31 1/2 33 26 3/4
Fourth
quarter 46 1/4 36 1/2 34 1/2 32
</TABLE>
<PAGE> 40
FINANCIAL CONDITION
OVERVIEW
The Corporation experienced continued growth in 1996. Total average
assets reached a record level of $727.9 million, up $34.9 million (5.0%)
over 1995. Average loans also grew, up $32.5 million (7.7%) which
contributed positively to earnings. The bulk of the funding to support
this loan growth was provided by a $22.8 million (3.7%) increase in
average deposits, a $3.2 million rise in borrowings, and a $6.4 million
(8.9%) increase to average shareholders' equity.
INVESTMENTS
The investment portfolio is comprised of available for sale and held to
maturity securities, as well as money market instruments. During 1996,
the average outstanding portfolio was relatively stable declining by $69
thousand compared to a drop of $34.7 million (13.0%) in 1995.
In 1996, funds from maturities of investments were not required to
fund loan growth to the same degree as in 1995, since the growth in
deposits was available for that use. Because of the lack of deposit
growth in 1995, funds from maturities of investments were used to fund
the substantial loan growth which resulted in the large drop in the
portfolio. Average investments represented 34% and 35% of total earning
assets in 1996 and 1995, respectively.
The table on the following page shows the breakdown of securities
available for sale and securities held to maturity at December 31, 1996,
1995 and 1994. The primary purpose of the investment function at the
Bank is to assure liquidity and management of interest rate risk
incurred, while concurrently maintaining the loan to deposit ratio
within acceptable funds management guidelines. During the last three
years, the Bank has pursued a strategy of acquiring securities that
maintain the portfolio's weighted average maturity in approximately the
two-year range.
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
unrealized gain (net of tax) on securities classified as available for
sale at December 31, 1996 ($120 thousand), was reflected as a separate
component of shareholders' equity.
At December 31, 1996, the market value of the entire portfolio was
below the amortized cost by $273 thousand compared to December 31, 1995,
when the market value exceeded the amortized cost by $1.669 million. The
weighted average maturity of the investment portfolio is 2.12 years as
of December 31, 1996, compared to 2.22 years as of December 31, 1995.
The weighted average maturity has remained relatively short in order to
assure adequate liquidity and to capitalize on potential changes in the
interest rate environment. The table on the following page shows the
maturity distribution of the investment portfolio.
<PAGE> 41
INVESTMENT SECURITIES
<TABLE>
(In thousands)
<CAPTION>
- -------------------------------------------------------------------------------
DECEMBER 31, 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities available for sale:<F1>
U.S. Treasury securities $ 62,014 $ 71,240 $ 93,364
Obligations of U.S. government agencies and
corporations 50,434 44,951 15,996
Obligations of states and political
subdivisions 19,887 19,436 -
Equity securities 2,663 2,589 2,640
-------------------------------
Total securities available for sale 134,998 138,216 112,000
Securities held to maturity:
Obligations of U.S. government agencies and
corporations 62,067 71,991 74,107
Obligations of states and political
subdivisions - - 22,836
-------------------------------
Total securities held to maturity 62,067 71,991 96,943
-------------------------------
Total investment securities $197,065 $210,207 $208,943
<FN>
<F1>
Amounts exclude adjustments to fair value as required by FAS No. 115.
</FN>
</TABLE>
<TABLE>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
<CAPTION>
(In thousands)
- ---------------------------------------------------------------------------------------------------------
After 1 After 5
December 31, 1996 Within 1 but within but within After No fixed
Amounts maturing: year 5 years 10 years 10 years maturity Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:<F1>
U.S. Treasury securities $10,021 $ 51,993 $ - $ - $ - $ 62,014
Obligations of U.S. government
agencies and corporations 4,983 34,951 10,500 - - 50,434
Obligations of states and
political subdivisions 1,395 8,271 9,769 452 - 19,887
Equity securities - - - - 2,663 2,663
---------------------------------------------------------------------
Total securities available
for sale 16,399 95,215 20,269 452 2,663 134,998
Securities held to maturity:
Obligations of U.S. government
agencies and corporations 10,603 51,464 - - - 62,067
----------------------------------------------------------------------
Total investment securities $27,002 $146,679 $20,269 $452 $2,663 $197,065
----------------------------------------------------------------------
Weighted average yields* 6.30% 6.04% 7.52% 7.99% 6.38% 6.23%
<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
Average loans continued to experience sustained growth in 1996, rising
$32.5 million (7.7%), following a substantial increase of $36.1 million
(9.3%) in 1995. Management has been successful in achieving loan growth
without sacrificing asset quality. This goal will continue to be the
foundation in management's strategic objective to generate improved
earning asset yields by building loan volume.
Changes in composition of the loan portfolio in 1996 included
increases of $2.0 million in commercial loans, $23.3 million in real
estate mortgages and $14.8 million in consumer loans. The major emphasis
for the year was in commercial real estate loans and the consumer
installment sector, since we were able to capitalize on competitive
opportunities presented in our markets. Lending activity in 1995
emphasized the commercial sector since slightly higher interest rates
and economic uncertainties tended to dampen consumer expectations. The
table on the following page presents the components of the loan
portfolio at December 31 for each of the last five years. The Bank's
loan portfolio represents loans to businesses and consumers in our
western Pennsylvania market area rather than borrowers in other areas of
the country or other nations. The Bank has not concentrated its lending
activities in any industry or group.
The commercial loan portfolio grew in 1996, up $2.0 million (3.2%)
compared to the sizeable increase of $26.0 million (72.5%) in 1995. The
rise in 1996 was the result of a $4.5 million (9.2%) increase in
commercial and industrial loans. The Bank continues to focus on small to
medium-size businesses within our market area. Also, the Bank seeks to
diversify risk in this portfolio by closely monitoring industry
concentrations and
<PAGE> 42
portfolios to ensure that it does not exceed established guidelines for
lending. This diversification is intended to limit the risk of loss from
any single unexpected event or trend. Municipal loans dipped $2.5
million as opportunities in this very competitive sector were limited
during the year. The rise in commercial loans in 1995 resulted from the
$16.8 million increase in commercial and industrial loans coupled with a
$9.1 million increase in municipal loans. Commercial loans represented
13% of the total loan portfolio in 1996, down slightly from 14% in 1995.
Loans collateralized by real estate rose $23.3 million (9.4%) after
a $5.2 million (2.1%) increase in 1995. This growth was the result of a
$5.2 million (2.8%) increase in the residential portfolio combined with
an $18.1 million (28.7%) rise in the commercial sector. Although
commercial real estate loans can be an area of higher risk, management
believes these risks are mitigated by limiting the concentrations in the
portfolio, rigorous underwriting standards and lending within our market
area. The growth in 1995
(At this point in the 1996 Annual Report there appears a line graph as
set out in the following table.)
<TABLE>
LOANS
(average in millions)
<S> <C>
92 $330
93 357
94 388
95 424
96 457
</TABLE>
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 ratio of real estate mortgages to the total
loan portfolio remained at 56%, unchanged from December 31, 1995.
Consumer loans also grew, rising a sizeable $14.8 million (10.9%)
compared to the $4.0 million (3.0%) increase in 1995. Consumer borrowing
had been weak earlier in 1996 but picked up to spur demand in the latter
half of the year as installment loans rose $13.8 million (11.6%).
During 1995, although consumer loans increased, the trend was one
of softening demand by consumers for autos and durable goods because of
economic uncertainties. Consumer loans rose slightly to 31% of total
loans at December 31, 1996, compared to 30% at December 31, 1995.
LOANS
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
DECEMBER 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial
Commercial and industrial $ 53,276 $ 48,807 $ 31,975 $ 33,217 $ 27,775
Municipal 10,476 12,974 3,834 3,153 7,607
-------------------------------------------------
Total 63,752 61,781 35,809 36,370 35,382
Real estate mortgages
Residential 191,348 186,090 179,485 171,155 152,728
Commercial 81,034 62,948 64,351 55,258 45,325
-------------------------------------------------
Total 272,382 249,038 243,836 226,413 198,053
Consumer
Installment 132,713 118,875 116,383 94,639 96,872
Demand and time 18,202 17,223 15,741 13,814 11,891
-------------------------------------------------
Total 150,915 136,098 132,124 108,453 108,763
-------------------------------------------------
Total loans, net of
unearned income $487,049 $446,917 $411,769 $371,236 $342,198
</TABLE>
<TABLE>
LOAN MATURITY DISTRIBUTION AND INTEREST SENSITIVITY OF COMMERCIAL LOANS
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
Due in 1 Due after 1 year Due after
December 31, 1996 year or less through 5 years 5 years Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial $43,313 $ 9,216 $ 747 $53,276
Municipal 7,248 2,219 1,009 10,476
----------------------------------------------------
Total commercial loans $50,561 $11,435 $1,756 $63,752
----------------------------------------------------
Predetermined interest
rates $ 9,342 $ 9,862 $1,213 $20,417
Floating interest rates 41,219 1,573 543 43,335
----------------------------------------------------
Total $50,561 $11,435 $1,756 $63,752
</TABLE>
<PAGE> 43
RESERVE FOR POSSIBLE LOAN LOSSES
The reserve for possible loan losses totalled $5.910 million at December
31, 1996, up $259 thousand (4.6%) from the $5.651 million reported at
December 31, 1995. Overall, credit quality ratios declined only slightly
from 1995 to 1996 despite the continued substantial loan growth
registered over the past several years. The reserve as a percent of
loans at year-end slipped to 1.21% in 1996 compared to 1.26% in 1995.
The reserve as a percent of nonperforming loans at December 31, 1996,
was 362.58% compared to 414.60% at year-end 1995.
Net loan charge-offs for 1996 were $1.541 million, a rise of $704
thousand, compared to a decline of $136 thousand (14.0%) in 1995. The
rise primarily reflected higher charge-offs in consumer loans,
particularly in the installment and credit card sectors. Net loan
charge-offs as a percent of average loans also rose from .20% in 1995 to
.34% in 1996. A five-year analysis of the Bank's reserve for possible
loan losses is presented below.
Asset quality continues to be a major focus of the Bank and a
reserve for possible loan losses is maintained at a level which, in
management's judgment, is adequate to absorb future losses inherent in
the loan portfolio. Management reviews the adequacy of the reserve on a
quarterly basis. 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 size and
number of individual loans that may require charge-off and the effects
of changing conditions. As a result, there can be no guarantee that the
level of the reserve or the level of the loan loss provision will not be
increased by the Bank.
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
standard, the 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 loans 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.
<TABLE>
ANALYSIS OF THE RESERVE FOR POSSIBLE LOAN LOSSES
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,651 $ 5,038 $ 4,451 $ 3,538 $ 3,011
Provision for possible loan losses 1,800 1,450 1,560 1,597 2,020
Losses:
Commercial (44) (13) (19) (20) (207)
Real estate mortgages (21) (58) (87) (126) (446)
Consumer (2,064) (1,415) (1,397) (1,173) (1,369)
--------------------------------------------
Total (2,129) (1,486) (1,503) (1,319) (2,022)
Recoveries:
Commercial 2 22 25 32 41
Real estate mortgages 28 73 26 81 51
Consumer 558 554 479 522 437
--------------------------------------------
Total 588 649 530 635 529
--------------------------------------------
Net loan charge-offs (1,541) (837) (973) (684) (1,493)
--------------------------------------------
Balance at end of year $ 5,910 $ 5,651 $ 5,038 $ 4,451 $ 3,538
--------------------------------------------
Total loans:
Average $456,696 $424,203 $388,119 $357,307 $330,017
At December 31 487,049 446,917 411,769 371,236 342,198
As a percent of average loans:
Net loan charge-offs .34% .20% .25% .19% .45%
Provision for possible loan
losses .39 .34 .40 .45 .61
Reserve for possible loan
losses 1.29 1.33 1.30 1.25 1.07
Reserve as a percent of loans at
December 31 1.21 1.26 1.22 1.20 1.03
Reserve as a percent of
nonperforming loans at
December 31 362.58 414.60 407.61 294.57 341.84
Reserve as a multiple of net loan
charge-offs 3.84X 6.75X 5.18X 6.51X 2.37X
</TABLE>
<PAGE> 44
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
Other Real Estate Owned (OREO), obtained in connection with the
collection effort on loans. Nonperforming loans include nonaccrual
loans. Nonaccrual loans are those 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 $295 thousand (19.8%) in 1996, compared to an $87 thousand (6.2%)
increase in 1995. 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, rose slightly to .37% at year end
from .33% at December 31, 1995.
Nonaccrual loans increased $267 thousand in 1996 after a rise of
$127 thousand in 1995. Major principal losses are not anticipated due
to the underlying collateral values. The interest income forgone on
these loans has not been significant, amounting to $73 thousand in 1996
and $89 thousand in 1995. Management recognizes the impact of
nonaccrual loans on income and continues to work towards their
reduction.
OREO and other repossessions increased slightly, in the aggregate
of $28 thousand following a $40 thousand decline in 1995. Loans past
due 90 days or more rose $473 thousand (31.0%) in 1996, after a $636
thousand (71.2%) rise in 1995. Residential mortgages and student loan
categories account for approximately 69% of the total. Potential
exposure should be minimal because of the collateral/guarantee positions
on these loans. The ratio of nonperforming loans and loans past due 90
days or more, in the aggregate, to period-end loans rose to .75% at
year-end 1996, up from .65% at year-end 1995. This ratio still compares
favorably to our peers.
<TABLE>
NONPERFORMING ASSETS AND PAST DUE LOANS
(In thousands)
- -------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans $1,630 $1,363 $1,236 $1,511 $1,035
Other real estate owned 85 59 136 496 1,016
Other repossessions 68 66 29 2 35
---------------------------------------------
Total nonperforming assets $1,783 $1,488 $1,401 $2,009 $2,086
---------------------------------------------
Nonperforming loans to
period-end loans .33% .30% .30% .41% .30%
Nonperforming assets to period-
end loans, other real estate
owned and other repossessions .37 .33 .34 .54 .61
- -------------------------------------------------------------------------------
Loans past due 90 days or more $2,002 $1,529 $ 893 $ 901 $1,305
---------------------------------------------
Loans past due 90 days or more
to period-end loans .41% .34% .22% .24% .38%
</TABLE>
<PAGE> 45
DEPOSITS
Average deposits advanced $22.8 million (3.7%) in 1996 compared to an
$8.3 million (1.3%) decline in 1995. Generally, deposit growth has
rebounded and competition for deposits in our market has been strong
throughout 1996. The composition of deposits continued to shift
significantly during 1996 with gains in time deposits as the outflows
from NOW and savings accounts slowed. Depositors displayed a preference
for longer-term accounts bearing higher interest rates, resulting mainly
in growth of time deposits with terms in the one-year range. Average
time deposits increased $21.8 million (9.9%) after the sharp increase of
$25.9 million (13.3%) recorded in 1995. Savings deposits, on average,
declined only $2.0 million (less than one percent), far below the drop
of $31.1 million (11.4%) realized in 1995. NOW accounts also declined on
average by $2.1 million (3.8%), compared to a $5.1 million (8.3%) drop
in 1995. Average demand deposits grew $5.1 million (5.3%) year to year
after a $1.9 million (2.1%) rise in 1995. This growth in demand
deposits,
(At this point in the 1996 Annual Report there appears a line graph as
set out in the following table.)
<TABLE>
DEPOSITS
(averages in millions)
<S> <C>
92 $610
93 618
94 623
95 615
96 637
</TABLE>
especially in 1996, has helped to offset a portion of the impact of the
growth in time deposits. Time deposits represented 38% of average
deposits in 1996 compared to 36% during 1995, as a result, the Bank's
cost of funds was negatively impacted.
The Bank has minimal reliance on time deposits of $100 thousand or
more as a source of funds. At December 31, 1996, they amounted to only
3.9% of total deposits. The composition of average interest-bearing
deposits to total deposits remained unchanged over the last two years at
84%. Noninterest bearing deposits were 16% in both years.
Total deposits were also positively affected in 1996 by the
assumption of approximately $7 million in deposit liabilities of the
Natrona Heights branch of First Home Savings Bank.
LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The principal objective of asset/liability management is to maximize
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. The Corporation 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 profile, the maintenance of high credit quality and sound leverage
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 asset funds
that support them.
The cumulative gap at the one-year repricing period was asset
sensitive in the amount of $10.7 million or 1.5% 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.
Management believes that interest rate risk is best measured by
simulation modeling, which calculates expected net interest income,
based on projected interest-earning assets, interest-bearing liabilities
and interest rates. The Corporation monitors exposure to a gradual
change in interest rates of 200 and 300 basis points up or down over a
rolling 12 month period. From time to time, the model horizon is
expanded to a 36 month period. The Corporation's policy limit for the
maximum negative impact on net interest income from a gradual change in
interest rates of two and three percentage points is 5.0% and 7.0%,
respectively. Management has maintained a risk position well within the
policy guideline range.
<PAGE> 46
(In the 1996 Annual Report the following table spans across the page.
It has been modified for electronic filing purposes.)
<TABLE>
INTEREST SENSITIVITY ANALYSIS
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
After 3 After 6
DECEMBER 31, 1996 Within but within months but
Rate sensitive: 3 months 6 months within 1 year
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Earning assets:
Money market investments $ 28,882 $ - $ -
Investment securities 7,695 8,230 12,140
Loans 202,683 22,409 27,488
---------------------------------------
Total earning assets 239,260 30,639 39,628
Interest bearing liabilities:
Deposits* 159,317 61,087 61,541
Securities sold under agreements
to repurchase 6,811 - -
Federal Home Loan Bank advances 10,012 13 26
Total interest bearing ---------------------------------------
liabilities 176,140 61,100 61,567
Sources supporting interest
earning assets on which interest
is not paid - - -
---------------------------------------
Interest sensitivity gap $ 63,120 $(30,461) $(21,939)
---------------------------------------
Cumulative gap $ 63,120 $ 32,659 $10,720
Ratio of cumulative gap to total
earning assets 8.9% 4.6% 1.5%
<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.)
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
Over 1 year and
DECEMBER 31, 1996 noninterest
Rate sensitive: sensitive Total
- -------------------------------------------------------------------------------
<S> <C> <C>
Earning assets:
Money market investments $ - $ 28,882
Investment securities 169,185 197,250
Loans 234,469 487,049
----------------------------------
Total earning assets 403,654 713,181
Interest bearing liabilities:
Deposits* 264,181 546,126
Securities sold under agreements
to repurchase - 6,811
Federal Home Loan Bank advances 1,856 11,907
Total interest bearing ----------------------------------
liabilities 266,037 564,844
Sources supporting interest
earning assets on which interest
is not paid 148,337 148,337
----------------------------------
Interest sensitivity gap $(10,720) $ -
----------------------------------
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
CAPITAL RESOURCES
Shareholders' equity at December 31, 1996, was $80.2 million, rising
$3.0 million (3.8%) over year-end 1995, following a rise of $9.1 million
(13.4%) from year-end 1994 to December 31, 1995. A strong 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 includes unrealized gains on
securities available for sale, net of tax, of $120 thousand and
$1.1 million at December 31, 1996, and December 31, 1995, respectively.
In July, the Corporation's Board of Directors authorized the
repurchase of 150,000 shares of the Corporation's outstanding common
stock, an amount representing slightly less than 5% of the outstanding
shares. This repurchase should benefit the Corporation by providing
added flexibility to its planning.
Federal regulators have adopted a capital-based supervisory system
for all financial institutions. If a financial institution's capital
ratios decline below predetermined levels, it would become subject to a
series of increasingly restrictive regulatory actions. The system
categorizes a financial institution's capital position into one of five
categories, ranging from well capitalized to critically
undercapitalized. For an institution to qualify as well capitalized, its
Tier 1, total and leverage capital ratios must be at least 6%, 10% and
5% respectively. Management seeks to maintain capital ratios at or above
the well capitalized levels. At December 31, 1996, the Bank's ratios
substantially exceeded those requirements.
Tier I and total capital are expressed as a percentage of
risk-adjusted assets, which include various credit risk-weighted
percentages of on-balance sheet assets, as well as off-balance sheet
exposures. The leverage capital ratio evaluates capital adequacy on the
basis of the ratio of Tier 1 capital to quarterly average total assets,
as reported on the Corporation's regulatory financial statements, net of
the loan loss reserve, goodwill and certain other intangibles.
The Tier 1 capital to risk-weighted assets ratio was 16.46% on
December 31, 1996, compared to the 17.85% reported at year-end 1995. The
total capital to risk-weighted assets ratio was 17.68% at year-end 1996,
down from the 19.10% at December 31, 1995. The decrease in these ratios
in 1996 was the result of asset growth, principally loans and to a
lesser extent common stock repurchases. The leverage capital ratio was
10.87% at December 31, 1996, up slightly from the 10.86% at year-end
1995. 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> 47
<TABLE>
SUPPLEMENTARY FINANCIAL DATA
CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $38,902 $37,250 $32,172 $30,417 $30,092
Interest on money market investments 1,128 1,758 1,212 1,057 2,370
Interest and dividends on
investment securities 12,829 12,473 14,340 16,462 18,778
-------------------------------------------
Total interest income 52,859 51,481 47,724 47,936 51,240
INTEREST EXPENSE
Interest on deposits 20,474 20,335 16,962 18,075 22,686
Interest on federal funds purchased
and securities sold under
agreements to repurchase 227 110 33 37 46
Interest on Federal Home Loan Bank
advances 163 156 36 - -
-------------------------------------------
Total interest expense 20,864 20,601 17,031 18,112 22,732
-------------------------------------------
Net interest income 31,995 30,880 30,693 29,824 28,508
Provision for possible loan losses 1,800 1,450 1,560 1,597 2,020
-------------------------------------------
Net interest income after
provision for possible loan
losses 30,195 29,430 29,133 28,227 26,488
NONINTEREST INCOME
Trust income 1,728 1,801 1,667 1,551 1,377
Service charges on deposit accounts 2,288 2,194 2,035 2,035 1,933
Other 1,201 994 1,131 980 870
-------------------------------------------
Total noninterest income 5,217 4,989 4,833 4,566 4,180
NONINTEREST EXPENSE
Salaries and employee benefits 10,779 10,679 10,371 9,693 9,087
Other 10,931 10,948 11,454 11,713 11,057
-------------------------------------------
Total noninterest expense 21,710 21,627 21,825 21,406 20,144
-------------------------------------------
Income before income tax expense 13,702 12,792 12,141 11,387 10,524
Income tax expense 4,092 3,754 3,535 3,285 2,970
-------------------------------------------
NET INCOME $ 9,610 $ 9,038 $ 8,606 $ 8,102 $ 7,554
- --------------------------------------------------------------------------------
PER SHARE
Net income $ 3.03 $ 2.84 $ 2.70 $ 2.54 $ 2.37
Cash dividends 1.22 1.14 1.08 .98 .89
</TABLE>
<PAGE> 48
<TABLE>
SUPPLEMENTARY FINANCIAL DATA
CONSOLIDATED BALANCE SHEET
<CAPTION>
Average daily balances for year
ending December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Interest bearing deposits
with banks $ 126 $ 129 $ 542 $ 2,835 $ 19,480
Federal funds sold 21,040 29,502 28,248 29,305 25,920
U.S. Treasury securities
and obligations of
U.S. government agencies
and corporations 188,854 180,238 211,959 228,950 223,899
Obligations of states and
political subdivisions 20,269 20,534 24,312 24,123 24,270
Corporate collateralized
mortgage obligations - - - 921 9,548
Equity and other securities 2,645 2,600 2,632 1,612 536
Loans 456,696 424,203 388,119 357,307 330,017
-------------------------------------------------
Total interest
earning assets 689,630 657,206 655,812 645,053 633,670
Noninterest earning assets:
Cash and due from banks 23,398 23,538 24,863 26,890 24,513
Reserve for possible loan
losses (5,876) (5,507) (4,772) (4,075) (3,159)
Bank premises and equipment 8,258 7,522 7,625 7,343 6,954
Other assets 12,502 10,284 9,625 9,486 10,766
-------------------------------------------------
Total noninterest
earning assets 38,282 35,837 37,341 39,644 39,074
-------------------------------------------------
Total assets $727,912 $693,043 $693,153 $684,697 $672,744
- --------------------------------------------------------------------------------
LIABILITIES
Interest bearing liabilities:
NOW accounts $ 53,695 $ 55,839 $ 60,911 $ 61,629 $ 57,137
Savings deposits 239,900 241,898 272,996 261,678 247,568
Time deposits 242,307 220,509 194,571 206,749 225,783
Federal funds purchased and
securities sold under
agreements to repurchase 5,378 2,376 1,311 1,871 1,606
Federal Home Loan Bank
advances 2,147 1,973 449 - -
-------------------------------------------------
Total interest bearing
liabilities 543,427 522,595 530,238 531,927 532,094
Noninterest bearing liabilities:
Demand deposits 101,386 96,260 94,317 87,665 79,398
Other liabilities 5,039 2,503 1,413 2,002 3,115
-------------------------------------------------
Total noninterest
bearing liabilities 106,425 98,763 95,730 89,667 82,513
-------------------------------------------------
Total liabilities 649,852 621,358 625,968 621,594 614,607
SHAREHOLDERS' EQUITY 78,060 71,685 67,185 63,103 58,137
-------------------------------------------------
Total liabilities and
shareholders' equity $727,912 $693,043 $693,153 $684,697 $672,744
</TABLE>
FINANCIAL RATIOS AND MISCELLANY
<TABLE>
<CAPTION>
(Based on consolidated balance
sheet averages) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shareholders' equity to assets 10.72% 10.34% 9.69% 9.22% 8.64%
Shareholders' equity to loans 17.09 16.90 17.31 17.66 17.62
Net income to:
Total assets 1.32 1.30 1.24 1.18 1.12
Total shareholders' equity 12.31 12.61 12.81 12.84 12.99
Shareholders' equity per share
at year-end $25.57 $24.27 $21.33 $20.62 $19.07
Dividend payout ratio 40.27% 40.15% 40.00% 38.74% 37.68%
Shareholders of record at
year-end 1,280 1,278 1,287 1,290 1,272
Average full-time equivalent
employees 371 372 374 372 366
</TABLE>
<PAGE> 49
SOUTHWEST NATIONAL BANK OF PENNSYLVANIA
EXECUTIVE OFFICERS
David S. Dahlmann
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
David M. Hanna
EXECUTIVE VICE PRESIDENT
Donald A. Lawry
EXECUTIVE VICE PRESIDENT
Robert J. Stack
EXECUTIVE VICE PRESIDENT
Emmanuel J. Answine
SENIOR VICE PRESIDENT AND CASHIER
Mark E. Lopushansky
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
David M. Hanna
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, JACKSON & MARTIN,
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
- -------------------------------------------------------------------
Southwest National Corporation
P.O. Box 760
Greensburg, PA 15601
Telephone: 412/834-2310
FAX: 412/832-6044
The Corporation will provide without charge to any shareholder a copy of
its 1996 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 of: Shareholder Relations.
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 15, 1997.
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 Shareholder Relations 412/832-6002.
<PAGE> 50
(The inside back cover of the 1996 Annual Report is a full-page
photograph taken in the Main Office Lobby. The picture depicts a mother
standing at one of the customer tables preparing her transactions with
a young boy waiting patiently beside her.)
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropirate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of
the Commission Only (as
permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Solicity Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SOUTHWEST NATIONAL CORPORATION
______________________________________________________________________
(Name of Registrant as Specified in Its Charter)
______________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if Other Than the
Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
______________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
______________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
______________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
______________________________________________________________________
(5) Total fee paid:
______________________________________________________________________
[ ] Fee paid previously with preliminary materials:
______________________________________________________________________
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
______________________________________________________________________
(2) Form, Schedule or Registration Statement no.:
______________________________________________________________________
(3) Filing Party:
______________________________________________________________________
(4) Date Filed:
______________________________________________________________________
<PAGE>
SOUTHWEST NATIONAL CORPORATION
GREENSBURG, PENNSYLVANIA
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
APRIL 15, 1997
TO THE SHAREHOLDERS:
Notice is hereby given that the annual meeting of shareholders of
Southwest National Corporation (the "Corporation") will be held at its
main office, 111 South Main Street, Greensburg, Pennsylvania, on
Tuesday, April 15, 1997 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. To act on proposals to amend the Corporation's Articles of
Incorporation and Bylaws as follows:
a. To amend Article 5 to increase the number of authorized
shares of the common stock of the Corporation (from 5 million to 10
million);
b. To add Article 7(b) which describes the factors which may
be taken into account by the Board of Directors in considering the best
interests of the Corporation and make conforming changes to the Bylaws;
c. To add Article 8 and amend appropriate Bylaw provisions
which will (1) divide the Board of Directors into three classes, (2)
specify the required shareholder vote for removal of a Director, (3)
provide for Director vacancies, and (4) approve corresponding changes in
the Bylaws;
d. To add Article 9 and make corresponding Bylaw changes to
establish a procedure for nominating Directors;
e. To add Article 10 which sets forth procedures and required
votes for amending the Bylaws of the Corporation;
f. To add Article 11 which sets forth procedures for
presenting shareholder proposals at the annual meeting of shareholders;
g. To add Article 12 which sets forth procedures and required
votes for amending the Corporation's Articles of Incorporation.
3. To approve an amendment to the Bylaws setting forth
requirements for calling special meetings of shareholders of the
Corporation.
4. 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
7, 1997 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 14, 1997
<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 15, 1997
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 15, 1997 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 14,
1997.
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 7, 1997, the record date for the
determination of the shareholders entitled to vote at the meeting, was
3,122,382. 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; (iii) vote on
proposals to amend the Corporation's Articles of Incorporation and
Bylaws; and (iv) consider and act upon any other business that may be
properly brought before the meeting.
The following paragraphs are a discussion of the Board's reasoning
for the proposal to amend the Corporation's Articles of Incorporation
and Bylaws.
In light of the continuing consolidation within the banking
industry, the Board of Directors undertook a general review of the
Corporation's existing business opportunities to determine the best
long-term strategy to enhance shareholder value. On the basis of that
review, the Corporation's Board of Directors believes that the best
strategy is to have the Bank remain an independent community bank
closely allied with the communities it serves and to have the Bank
expand its service territory through strategic acquisitions in
contiguous markets. The Board of Directors and the Corporation's senior
management subsequently undertook a review of the Corporation's Articles
of Incorporation and Bylaws to make sure that the Corporation's
corporate governance practices are structured in a manner to protect and
enhance shareholder value and to further the Corporation's purpose of
being an independent community bank holding company.
<PAGE> 1
As part of that review, the Corporation's senior management has
reviewed the corporate governance practices of all publicly traded bank
holding companies headquartered in Pennsylvania with total assets of at
least $450,000,000 and not more than $2,000,000,000. As of December 31,
1996 there were seventeen such corporations including the Corporation.
As of such date, the Corporation's total assets were $755,358,000. Of
the sixteen other corporations surveyed (i) fourteen had no cumulative
voting, (ii) all sixteen had a classified board of directors, (iii) all
sixteen had, as a percentage of shares outstanding, more authorized but
unissued common shares than the Corporation (36% of the Corporation's
shares are authorized but unissued while the unissued but authorized
shares of the other sixteen companies ranged from a low of 39% [one
company] to a high of between 61% to 80% [eight companies] with another
seven companies in the range of 41% to 60%), (iv) eleven had notice and
information provisions relating to shareholder nominations for directors
and shareholder proposals in which the time limitation in each case was
at least 30 days and (v) thirteen required super-majority votes to alter
critical elements of their respective articles of incorporation and
bylaws.
To date, primarily because of the business climate in southwestern
Pennsylvania, there have been no unsolicited takeover attempts of bank
holding companies in the Bank's market area. However, as consolidation
within the banking industry continues, the Corporation, if nothing is
done, may become subject to certain tactics that could be highly
disruptive to the Corporation and could result in dissimilar and unfair
treatment of some of the Corporation's shareholders.
On the basis of the foregoing, the Board of Directors has adopted a
resolution proposing a series of amendments to the Corporation's
Articles of Incorporation and Bylaws, the purpose of which, taken as a
whole, is to provide a greater likelihood that the Corporation shall
remain independent or, in the alternative, allow the Board greater
flexibility in negotiating with an unsolicited bidder. The Board of
Directors believes that the provisions described below are prudent and
will reduce the Corporation's vulnerability to takeover attempts and
certain other transactions that are not negotiated with and approved by
the Board of Directors of the Corporation. The Board of Directors
believes that these provisions are in the best interests of the
Corporation and its shareholders.
In the Board of Directors' judgment, the Board of Directors is in
the best position to determine the true value of the Corporation and to
negotiate more effectively for what may be in the best interests of its
shareholders. Accordingly, the Board of Directors believes that it is
in the best interests of the Corporation and its shareholders to
encourage potential acquirors to negotiate directly with the Board of
Directors and that the proposed amendments will encourage such
negotiations and discourage hostile takeover attempts.
Despite the Board of Directors' belief as to the benefits to the
Corporation's shareholders of the proposed amendments, these provisions
also may have the effect of discouraging a future takeover attempt.
Such provisions will also render the removal of the current Board of
Directors or management of the Corporation more difficult. The Board of
Directors, however, has concluded that the potential benefits of these
provisions outweigh their possible disadvantages.
The Board of Directors of the Corporation and the Bank are not
aware of any effort that might be made to acquire control of the Bank or
the Corporation.
The Board of Directors of the Corporation recommends a vote FOR the
following proposals:
PROPOSAL 1 to fix the number of Directors at 11.
PROPOSAL 2 to elect as Directors the 11 nominees hereinafter
named.
<PAGE> 2
PROPOSAL 3 to amend Article 5 to increase the number of
authorized shares of the common stock of the
Corporation (from 5 million to 10 million).
PROPOSAL 4 to add Article 7(b) which describes the factors
which may be taken into account by the Board of
Directors in considering the best interests of the
Corporation and make conforming changes to the
Bylaws.
PROPOSAL 5 to add Article 8 and amend appropriate Bylaw
provisions which will (1) divide the Board of
Directors into three classes, (2) specify the
required shareholder vote for removal of a Director,
(3) provide for Director vacancies, and (4) approve
corresponding changes in the Bylaws.
PROPOSAL 6 to add Article 9 and make corresponding Bylaw
changes to establish a procedure for nominating
Directors.
PROPOSAL 7 to add Article 10 which sets forth procedures and
required votes for amending the Bylaws of the
Corporation.
PROPOSAL 8 to add Article 11 which sets forth procedures for
presenting shareholder proposals at the annual
meeting of shareholders.
PROPOSAL 9 to add Article 12 which sets forth procedures and
required votes for amending the Corporation's
Articles of Incorporation.
PROPOSAL 10 to approve an amendment to the Bylaws setting forth
requirements for calling special meetings of
shareholders of the Corporation.
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").
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 of Directors to be elected at the annual
meeting on April 15, 1997 at 11 Directors. Currently there are 11
Directors.
The 11 nominees are listed below. If the shareholders adopt the
proposed amendment to classify the Board of Directors (see proposal 5
below), the nominees will be elected to serve a term of either one year
(Class 1), two years (Class 2), or three years (Class 3), as indicated
below. If the proposed amendment is not adopted, the nominees will be
elected for one year terms. In either event, the Directors' terms will
continue until their successors are elected and qualified. 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
<PAGE> 3
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 positions, if any, with
the Corporation or the Bank for the past five years, 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 3, 1997, are set forth in the following table:
<TABLE>
<CAPTION>
Name and principal
occupation or Approximate
employment for Beneficial percentage of
the past five years Director ownership of outstanding
(1) (2) since Age shares (3) shares (4)
<S> <C> <C> <C> <C>
CLASS 1 - NOMINEES - SERVING A TERM OF ONE YEAR EXPIRING IN 1998
James A. Critchfield, Jr.
Attorney at Law 1983 71 384 -
Joseph V. Morford, Jr.
Retired, formerly
President, Moore and
Morford, Inc., steel
fabricators 1983 67 1,225 -
William W. Thomson
Managing Partner,
Thomson, Tomsey & Co.,
Certified Public
Accountants 1992 61 770 -
CLASS 2 - NOMINEES - SERVING A TERM OF TWO YEARS EXPIRING IN 1999
David S. Dahlmann
President and Chief
Executive Officer of the
Corporation and the Bank 1990 47 1,200 -
Charles E. Henry
President, Chas. M.
Henry Printing Co. 1989 66 3,921 -
Alexander H. Lindsay, Jr.
President, Lindsay,
Jackson, and Martin,
P.C., Attorneys 1986 50 760 -
John A. Robertshaw, Jr.
Chairman, Laurel Vending,
Inc., vending and food
service 1986 70 9,334 -
CLASS 3 - NOMINEES - SERVING A TERM OF THREE YEARS EXPIRING IN 2000
Ray T. Charley
President, Thomi Co.,
retail grocers 1989 45 18,560 -
A. Richard Kacin
President, A. Richard
Kacin, Inc., real estate
construction and
development and President,
Delmont Builders Supply,
Inc. 1994 56 2,430 -
James W. Newill
Certified Public Accountant,
formerly President,
J. W. Newill Company,
public accounting firm 1978 62 77,800 2.49%
<PAGE> 4
Laurie Stern Singer
President, Allegheny
Valley Chamber of
Commerce and President,
Allegheny Valley
Development Corporation 1994 45 220 -
Directors, nominees and
officers of the
Corporation as a group
(14 persons) (5) 117,914 3.78%
<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, 1,200 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 of which he is a trustee. The total number of shares includes
1,000 shares owned by David M. Hanna, 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) Less than 1 percent unless otherwise indicated.
(5) Mr. Dahlmann listed above; David M. Hanna, Vice President; Robert
J. Stack, Vice President; and Donald A. Lawry, Secretary and Treasurer
are the only officers of the Corporation.
</TABLE>
OTHER NOMINATIONS
The present Bylaws of the Corporation provide that 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. However, proposed amendments will change
the number to at least 60 days' notice (see proposal 6 below).
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 1996 and the Board of the Bank met 12 times
in 1996.
The Board of the Corporation has the following standing committees:
Examining Committee, Executive Committee and Nominating Committee. The
Board of the Bank has the following standing committees: Examining
Committee, Executive Committee, Personnel Committee and Trust 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 4 times in 1996. 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
<PAGE> 5
Committees. The Examining Committees presently have as members
Directors Henry, Lindsay, 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 1996. 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 Dahlmann, Henry, Lindsay, Morford, Robertshaw and
Thomson.
The Nominating Committee of the Corporation met 1 time in 1996. Its
responsibilities include selecting and recommending to the Board of
Directors nominees for election as Director. The Nominating Committee
presently has as members Directors Charley, Dahlmann, Kacin, Newill and
Singer.
The Personnel Committee of the Bank met 5 times in 1996. 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, Critchfield,
Dahlmann, Kacin, Newill and Singer.
The Trust Committee of the Bank met 12 times in 1996. 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, Kacin and Newill.
COMPENSATION OF DIRECTORS
The Corporation paid for the year 1996 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 1996. 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 1996, the Bank paid $81,841 to Chas. M. Henry Printing Co.
for services that were in the normal course of business and 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
$345,948 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 was in line with Bank policy and
procedures. A. Richard Kacin is a Director and is President of A.
Richard Kacin, Inc.
<PAGE> 6
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 1996. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, Directors Charley, Critchfield, Dahlmann, Kacin,
Newill and Singer served as members of the Bank's Personnel Committee
which determines the compensation of the executive officers of the Bank.
No compensation was paid to the executive officers by the Corporation
during 1996. Directors Charley, Critchfield, Kacin, Newill and Singer
are neither officers nor employees of the Corporation or the Bank and
are not members of any Board of Directors (other than of the Corporation
or Bank) which has as a member an officer, employee or Director of the
Corporation or Bank.
The Bank paid $345,948 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 was in line with
Bank policy and procedures. A. Richard Kacin is a Director and is
President of A. Richard Kacin, Inc.
Director Dahlmann, the President and Chief Executive Officer of the
Corporation and Bank, is a member of the Personnel Committee but does
not participate in conducting his own review or determining his own
salary.
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 1996. 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 1996 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 compen-
<PAGE> 7
sation of appropriate groupings of the banks that closely resemble the
Bank. The sources of information relied on by the consultant were Watson
Wyatt Data Services, Inc. (formerly 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 A. Richard Kacin
James A. Critchfield, Jr. James W. Newill
David S. Dahlmann Laurie Stern Singer
EXECUTIVE COMPENSATION
The Corporation paid no compensation to any of its officers during
1996. 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 1996, 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 6.95% 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, 1996 200,000 13,948
President and Chief 1995 185,000 14,162
Executive Officer 1994 155,000 13,517
<FN>
(1) The amounts in the above table under "All other compensation"
include, for 1996, $12,904 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 1995, such amounts are $13,118 and $1,044 respectively and
for 1994 is $12,543 and $974 respectively.
</TABLE>
<PAGE> 8
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.
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.
CORPORATION'S EXECUTIVE OFFICERS
The following table sets forth certain information with respect to
the current executive officers of the Corporation.
<TABLE>
<CAPTION>
Name Age Term Position
<S> <C> <C> <C>
David S. Dahlmann 47 1992-1996 Director, President and
Chief Executive Officer
of the Corporation and
Bank
David M. Hanna 49 1997 Vice President of the
Corporation and Executive
Vice President of the
Bank
1992-1996 Senior Vice President of
the Bank
Donald A. Lawry 46 1992-1996 Secretary and Treasurer of
the Corporation and
Executive Vice President
of the Bank
Robert J. Stack 46 1993-1996 Vice President of the
Corporation
1992-1996 Executive Vice President
of the Bank
</TABLE>
DEFINED BENEFIT PENSION PLAN OF THE BANK
The Bank made a contribution of $258,395 to the Defined Benefit
Pension Plan for the Plan year ending June 30, 1996. 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>
Annual basic Estimated annual pension for years of credited service
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
</TABLE>
The credited years of service for Mr. Dahlmann are 25. The
compensation used to determine pension benefits is approximately the
same as the salary set forth in the Summary Compensation Table.
<PAGE> 9
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.
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 12/31/96
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>
12/31/91 100.000 100.000 100.000
01/31/92 104.651 105.847 105.409
02/28/92 105.240 108.246 109.751
03/31/92 111.707 103.137 110.384
04/30/92 116.411 98.714 113.356
05/29/92 116.421 99.996 117.363
06/30/92 114.045 96.086 117.010
07/31/92 129.489 99.490 121.711
08/31/92 123.562 96.449 119.945
09/30/92 128.360 100.034 123.715
10/30/92 131.959 103.974 126.970
11/30/92 129.785 112.247 134.540
12/31/92 129.785 116.378 143.021
01/29/93 150.405 119.691 148.808
02/26/93 148.128 115.226 150.920
03/31/93 173.836 118.561 157.069
04/30/93 171.388 113.501 151.460
05/28/93 161.699 120.281 149.721
06/30/93 153.059 120.837 153.779
07/30/93 158.613 120.980 159.960
08/31/93 179.344 127.233 164.481
09/30/93 184.326 131.022 169.620
10/29/93 186.816 133.967 168.242
11/30/93 183.358 129.972 161.501
12/31/93 186.498 133.595 166.228
01/31/94 193.405 137.650 170.383
02/28/94 179.849 136.363 168.193
03/31/94 174.783 127.976 163.593
04/29/94 179.343 126.315 168.095
05/31/94 174.830 126.624 174.187
06/30/94 186.332 121.993 173.600
07/29/94 177.897 124.495 176.067
08/31/94 167.167 132.432 181.882
09/30/94 171.810 132.094 178.764
10/31/94 167.167 134.689 173.618
11/30/94 160.484 130.221 165.811
12/30/94 147.176 130.587 166.623
01/31/95 155.004 131.318 172.181
02/28/95 163.091 138.263 180.727
03/31/95 172.592 142.360 183.252
04/28/95 171.008 146.842 186.447
05/31/95 171.198 150.628 192.458
06/30/95 171.198 162.835 198.469
07/31/95 175.998 174.804 207.947
08/31/95 205.194 178.347 218.752
09/29/95 210.041 182.448 226.152
10/31/95 219.736 181.403 227.153
11/30/95 225.025 185.662 237.591
12/29/95 218.503 184.674 242.615
01/31/96 221.764 185.587 243.780
02/29/96 225.395 192.660 247.354
03/29/96 230.331 193.300 252.411
04/30/96 230.331 209.334 253.165
05/31/96 219.017 218.945 257.863
06/28/96 209.062 209.078 258.396
07/31/96 217.358 190.458 251.765
08/30/96 247.633 201.130 268.158
09/30/96 244.286 216.524 280.282
10/31/96 266.038 214.151 289.142
11/29/96 271.526 227.423 307.666
12/31/96 306.942 227.164 311.057
<FN>
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 12/31/91.
</FN>
</TABLE>
<PAGE> 10
PRINCIPAL SHAREHOLDERS
The following table lists any beneficial owner of more than 5% of
the outstanding common stock of the Corporation as of February 3, 1997:
<TABLE>
<CAPTION>
Amount and nature
Title of Name and address of beneficial Percent of
class of beneficial owner ownership (1) class
<S> <C> <C> <C>
Common stock Thomas, Heasley & Co., 345,221 11.06%
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 - 179,814; Shared -
142,127. The Bank has the power to vote or direct the voting of a
portion of these shares as follows: Sole - 213,127; Shared - 62,315. In
every instance, another entity is entitled to the dividends or proceeds
of sale. No individual account holds an interest of 5% or more.
</FN>
</TABLE>
PROPOSED AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS
The following discussion is a general summary of the proposed
amendments to the Corporation's Articles of Incorporation and Bylaws.
THE DESCRIPTION OF THE PROPOSED AMENDMENTS IS NECESSARILY GENERAL, AND
REFERENCE SHOULD BE MADE IN EACH CASE TO PROPOSED AMENDMENTS OF OR
ADDITIONS TO THE ARTICLES OF INCORPORATION AND BYLAWS, WHICH ARE
ATTACHED HERETO AS EXHIBIT A; HOWEVER, ALL MATERIAL ASPECTS OF THE
PROPOSED AMENDMENTS ARE DISCUSSED BELOW.
PROPOSAL 3 - Increase in Authorized Shares
The proposed amendment to Article 5 of the Articles of
Incorporation authorizes the issuance of 10 million shares of Common
Stock. The proposed increase in the number of authorized shares of
Common Stock is designed to provide the Corporation's Board of Directors
with flexibility to effect, among other transactions, financing,
acquisitions, stock dividends, stock splits and employee stock options.
In addition, the proposed increase in the number of authorized shares
could have the following effect: (i) the risk of a hostile takeover
could be reduced; (ii) the voting power of present shareholders could be
potentially diluted if additional shares are issued other than on a pro-
rata basis; and (iii) the book value per share and earnings per share of
stock held by present shareholders could be potentially reduced. The
Corporation's Board currently has no plans for the issuance of
additional shares.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSED
AMENDMENT TO ARTICLE 5 OF THE CORPORATION'S ARTICLES OF INCORPORATION.
PROPOSAL 4 - Factors the Board of Directors May Consider
Proposed new Article 7(b) allows the Board of Directors of the
Corporation, when evaluating any offer of another person, to (i) make a
tender or exchange offer for any equity security of the Corporation,
(ii) merge or consolidate the Corporation with another corporation or
entity, or (iii) purchase or otherwise acquire all or substantially all
of the properties and assets of the Corporation, to give due
consideration to all relevant factors, in connection with the exercise
of its judgment in determining what is the best interest of the
<PAGE> 11
Corporation and its shareholders, including, without limitation, those
factors that Directors of any subsidiary of the Corporation may consider
in evaluating any action that may result in a change or potential change
in the control of the subsidiary; the social and economic effect of
acceptance of such offer on the Corporation's present and future
customers and employees and those of its subsidiaries and on the
communities in which the Corporation and its subsidiaries operate or are
located; the Corporation's long-term objectives, including the strategy
of enhancing shareholders' value which may best be served by remaining
independent; the ability of the Corporation to fulfill its corporate
objective as a bank holding company under applicable laws and
regulations; and the ability of its subsidiaries to fulfill their
legitimate corporate objectives under applicable statutes and
regulations.
Proposed new Article 7(b) incorporates into the Corporation's
Articles of Incorporation language currently found in the Pennsylvania
Business Corporation Law (the "BCL"). The Board of Directors believes
that it is beneficial to have such language in the Articles of
Incorporation because the Bank's long-term success as a community bank
and thus the long-term success of the Corporation relies on the
Corporation and the Bank being closely identified with the communities
they serve.
Section 3.15(b) of the current Bylaws reflects a similar but not
identical concept. If proposed Section 7(b) of the Articles of
Incorporation is adopted, a conforming change to Section 3.15(b) would
also be required. This change would require the deletion of the
language of existing Section 3.15(b) of the Bylaws and its replacement
with language identical to proposed Section 7(b) of the Articles of
Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSED
ADDITION OF ARTICLE 7(B) TO THE ARTICLES OF INCORPORATION AND THE
CONCURRENT MODIFICATION OF SECTION 3.15(B) OF THE CORPORATION'S BYLAWS.
PROPOSAL 5 - Classified Board
Section 3.2 of the current Bylaws provides that the Corporation's
Board of Directors be elected annually. Section 3.4 of the current
Bylaws provides that if a vacancy occurs on the Board of Directors, a
replacement is selected to serve until the next annual meeting. These
Sections of the Bylaws would be eliminated if the proposed addition of
Article 8 to the Corporation's Articles of Incorporation is approved.
Section 3.1 of the current Bylaws specifies the minimum and maximum
number of Directors, the minimum requirements for holding the office of
Director and the mechanism for determining the actual number of
Directors. The last sentence of Section 3.1 relating to the
determination of the actual number of Directors of the Corporation would
be deleted in its entirety if proposed Article 8 of the Corporation's
Articles of Incorporation is approved. Proposed new Article 8 of the
Corporation's Articles of Incorporation provides, among other things,
that the Board of Directors shall be divided into three classes as
nearly equal in number as possible with the term of office of one class
expiring each year. The classified Board of Directors is intended to
provide for continuity of the Board of Directors and to make it more
difficult and time-consuming for a shareholder group to fully use its
voting power to gain control of the Board of Directors without the
consent of the incumbent Board of Directors of the Corporation.
The proposed new Article 8 also provides that Directors may be
removed only for cause at a duly constituted meeting of shareholders
called expressly for that purpose upon the vote of the holders of at
least a majority of the total votes eligible to be cast by shareholders.
Any vacancy occurring in the Board of Directors for any reason
(including an increase in the number of authorized directors) may be
filled by the affirmative vote of a majority of the remaining Directors,
and a Director appointed to fill a vacancy shall
<PAGE> 12
serve for a term expiring at the annual meeting of shareholders at which
the term of office of the class to which the appointee has been chosen
expires.
The proposed amendments to the provisions regarding election of
Directors and other related provisions in the Articles of Incorporation
and the deletion of the existing provision of the Bylaws related thereto
discussed herein are generally designed to protect the ability of the
Board of Directors to negotiate with the proponent of an unfriendly or
unsolicited proposal to take over or restructure the Corporation. This
result is accomplished by making it more difficult and time-consuming to
change majority control of the Board of Directors, whether by proxy
contest or otherwise. The general effect of these provisions will be to
generally require two annual shareholders' meetings, instead of one, to
effect a change in control of the Board of Directors of the Corporation.
Because a majority of the Directors at any given time will have prior
experience as Directors, these requirements will help to ensure
continuity and stability of the Corporation's management and policies
and facilitate long-range planning for the Corporation's business. The
provisions relating to removal of Directors and filling of vacancies are
consistent with and supportive of a classified Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSED
ADDITION OF ARTICLE 8 TO THE CORPORATION'S ARTICLES OF INCORPORATION,
THE CONCURRENT DELETION OF SECTIONS 3.2 AND 3.4 FROM THE CORPORATION'S
BYLAWS AND THE CONCURRENT DELETION OF THE LAST FULL SENTENCE OF SECTION
3.1 OF THE CORPORATION'S BYLAWS.
PROPOSAL 6 - Nomination of Directors
Section 3.3 of the current Bylaws sets forth the manner in which
nominations for election to the Board of Directors may occur. That
Section of the Bylaws would be eliminated if the proposed addition of
Article 9 to the Corporation's Articles of Incorporation is approved.
Proposed Article 9 to the Articles of Incorporation governs nominations
for election to the Board of Directors and provides that nominations for
election to the Board of Directors may be made by, or at the direction
of, (i) a majority of the Board of Directors (or a Nominating Committee
designated by such majority) or (ii) by any shareholder entitled to vote
at such annual meeting who has complied with the notice provisions in
that section. Written notice of a stockholder nomination must be
delivered to, or mailed to and received at, the principal executive
offices of the Corporation not later than 60 days prior to the
anniversary date of the immediately preceding annual meeting. Each such
notice shall set forth: (a) as to each person whom the shareholder
proposes to nominate as a Director, and as to the shareholder giving the
notice, (i) the name, age, business address and residence address of
such person; (ii) the principal occupation or employment of such person;
(iii) the class and number of shares of the Corporation's stock
beneficially owned by such person on the date of the stockholder notice;
and (iv) such other information regarding such person as would be
required to be included in a proxy statement filed pursuant to the proxy
rules of the SEC; and (b) to the extent known by the shareholder giving
the notice, (i) the name and address of any other shareholders
supporting such nominees; and (ii) the class and number of shares of the
Corporation's stock beneficially owned by any other shareholders
supporting such nominees on the date of such shareholder notice.
The proposed amendments to the procedures regarding shareholder
nominations will provide the Board of Directors with sufficient time and
information to evaluate a shareholder nominee to the Board of Directors
and other relevant information, such as existing shareholder support for
the nominee. The proposed procedures will provide incumbent Directors
advance notice of a dissident slate of nominees for Directors and will
make it easier for the Board of Directors to solicit proxies resisting
such nominees.
<PAGE> 13
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSED
ADDITION OF ARTICLE 9 TO THE CORPORATION'S ARTICLES OF INCORPORATION AND
THE CONCURRENT DELETION OF SECTION 3.3 FROM THE CORPORATION'S BYLAWS.
PROPOSAL 7 - Amendment of Bylaws
The proposed new Article 10 to the Corporation's Articles of
Incorporation also sets forth that the Board of Directors is expressly
empowered to adopt, amend or repeal Bylaws of the Corporation to the
extent permitted by law. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the Board of Directors shall require the
approval of a majority of the entire Board of Directors then in office.
The shareholders shall also have power to adopt, amend or repeal the
Bylaws of the Corporation; provided, however, that in addition to any
vote of the holders of any class or series of stock of this Corporation
required by law or by the Articles of Incorporation, the affirmative
vote of the holders of at least 75 percent of the voting power of all of
the then-outstanding shares of the common stock of the Corporation
entitled to vote generally in the election of Directors, voting together
as a single class, shall be required to adopt, amend or repeal any
provisions of the Bylaws of the Corporation.
The adoption of this proposal would also require the concurrent
deletion of Section 1.4 of the Bylaws as inconsistent with the Articles
of Incorporation as so amended.
The Board of Directors believes that if proposals relating to a
classified board, Director's nominations, shareholder proposals, special
shareholders' meetings and Bylaw changes are adopted, then it is equally
important to ensure that these provisions remain in place subsequent to
their adoption unless a very high percentage of shares are voted in
favor of their further modification.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSED ARTICLE
10 OF THE ARTICLES OF INCORPORATION AND THE CONCURRENT DELETION OF
SECTION 1.4 FROM THE CORPORATION'S BYLAWS.
PROPOSAL 8 - Shareholder Proposals at Annual Meeting
The proposed addition of Article 11 of the Corporation's Articles
of Incorporation provides that only such business as shall have been
properly brought before an annual meeting of shareholders shall be
conducted at the annual meeting. In order to be properly brought before
an annual meeting if the proposed addition is adopted, business must be
(i) brought before the meeting by or at the direction of the Board of
Directors or (ii) otherwise properly brought before the meeting by a
shareholder who has given timely notice thereof in writing to the
Corporation. To be timely, a shareholder's notice must be delivered to
or mailed and received at the principal executive offices of the
Corporation not less than 60 days prior to the anniversary date of the
immediately preceding annual meeting. A shareholder's notice shall set
forth as to each matter the shareholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they
appear on the Corporation's books, of the shareholder proposing such
business and, to the extent known, any other shareholders known by such
shareholder to be supporting such proposal, (iii) the class and number
of shares of the Corporation that are beneficially owned by the
shareholder and, to the extent known, by any other shareholders known by
such shareholder to be supporting such proposal on the date of such
shareholder notice, and (iv) any financial interest of the shareholder
in such business other than interests that all shareholders would have.
The presiding officer of an annual meeting shall determine and declare
to
<PAGE> 14
the meeting whether the business was properly brought before the meeting
in accordance with the provisions of Article 11 and any such business
not properly brought before the meeting shall not be transacted.
The procedures regarding shareholder proposals are designed to
provide the Board of Directors with sufficient time and information to
evaluate a shareholder proposal and other relevant information, such as
existing shareholder support for the proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSED
ADDITION OF ARTICLE 11 TO THE CORPORATION'S ARTICLES OF INCORPORATION.
PROPOSAL 9 - Amendment of Articles of Incorporation
The proposed new Article 12 of the Corporation's Articles of
Incorporation generally provides that amendments to the Articles of
Incorporation must be first approved by a majority of the Board of
Directors and then by the holders of a majority of the shares of the
Corporation entitled to vote in an election of Directors, voting as a
single class, as well as such additional vote of any other class or
series of stock as may be required by the terms thereof or by law,
except that the approval of 75% of the shares of the Corporation
entitled to vote in an election of Directors is required for any
amendment to Articles 7, 8, 9, 10, 11 or 12 of the Articles of
Incorporation.
The Board of Directors believes that if proposals relating to a
classified board, Director's nominations, shareholder proposals, special
shareholders' meetings and Bylaw changes are adopted then it is equally
important to ensure that these provisions remain in place subsequent to
their adoption unless a very high percentage of shares are voted in
favor of their further modification. If one or more of the above
mentioned proposals is not approved but the remaining proposals are
approved, the Board of Directors also seeks shareholder approval to
further modify the proposed amendment so that the super-majority
provisions relate to the amendments to the Articles of Incorporation
approved by the shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" FOR PROPOSED
AMENDMENT OF ARTICLE 12 OF THE ARTICLES OF INCORPORATION, AS THE SAME
MAY BE FURTHER MODIFIED OR AMENDED BY THE BOARD OF DIRECTORS CONSISTENT
WITH THE VOTE OF THE SHAREHOLDERS ON EACH OF THE OTHER SEVERAL
AMENDMENTS OF OR ADDITIONS TO THE CORPORATION'S ARTICLES OF
INCORPORATION.
PROPOSAL 10 - Special Meetings of Shareholders
Section 2.2 of the current Bylaws sets forth the manner in which a
special meeting of the shareholders may be called. Consistent with the
other changes proposed by the Board of Directors, the Board believes
that special meetings of the shareholders should only be called by the
president or a majority of the Board of Directors. The current Bylaws
permit at least 25% of the shareholders to call a meeting.
To implement this proposal it is necessary to modify Section 2.2 of
the current Bylaws by deleting the existing first sentence thereof and
replacing it with the following:
"Special meetings of the shareholders, for any purpose or
purposes, unless otherwise provided by Law or the Articles of
Incorporation, may only be called by the president or a majority
of the Board of Directors."
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSED
AMENDMENT TO SECTION 2.2 OF THE BYLAWS.
<PAGE> 15
Please see Exhibit A attached to this Proxy Statement for the full text
of the proposed resolutions and amendments
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 1997.
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 1997.
Audit services performed by KPMG Peat Marwick LLP during 1996
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 401(k) Plan.
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 1998 must be
received by the Secretary no later than November 14, 1997.
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> 16
EXHIBIT A
PROPOSAL 3
RESOLVED, that existing Article 5 of the Corporation's Articles of
Incorporation be deleted and the following language be substituted
therefor:
ARTICLE 5. COMMON STOCK.
AUTHORIZED AMOUNT. The total number of shares of all classes
of stock that the Corporation shall have authority to issue is ten
million (10,000,000) shares of common stock.
PROPOSAL 4
RESOLVED, that existing Article 7(b) of the Corporation's Articles
of Incorporation be deleted and that a new Article 7(b) to the
Corporation's Articles of Incorporation, as set forth below, be
substituted therefor:
ARTICLE 7(b). CONSIDERATION OF THE BOARD.
In discharging the duties of their respective positions, the
Board of Directors, committees of the Board of Directors and individual
Directors of the Corporation may, in considering the best interests of
the Corporation, consider to the extent they deem appropriate:
A. The effects of any action upon any or all groups affected
by such action, including shareholders, employees, suppliers, customers
and creditors of the Corporation, and upon communities in which the
Corporation is located;
B. The short-term and long-term interests of the Corporation,
including benefits that may accrue to the Corporation from its long-term
plans, and the possibility that these interests may be best served by
the continued independence of the Corporation;
C. The resources, intent and conduct (past, stated and
potential) of any person seeking to acquire control of the Corporation;
D. All other pertinent factors, including, but not limited
to, the effect on the Corporation's ability to fulfill its corporate
objective as a bank holding company under applicable laws and
regulations and the effect on the ability of its subsidiaries to fulfill
their objectives under applicable law and regulations.
FURTHER RESOLVED, that existing Section 3.15(b) of the
Corporation's Bylaws be deleted and that amended Section 3.15(b),
containing language identical to amended Article 7(b) of the Articles of
Incorporation, be substituted therefor.
PROPOSAL 5
RESOLVED, that a new Article 8, as set forth below, be added to the
Corporation's Articles of Incorporation:
ARTICLE 8. DIRECTORS.
A. NUMBER, CLASSIFICATION AND TERM. The number of Directors
shall be fixed from time to time exclusively by the Board of Directors
pursuant to a resolution duly adopted by the Board of Directors. The
Directors shall be divided into three classes as nearly equal in number
as rea-
<PAGE> 17
sonably possible, with the term of office of the first class to expire
at the annual meeting of shareholders occurring in 1998, the term of
office of the second class to expire at the annual meeting of
shareholders one year thereafter and the term of office of the third
class to expire at the annual meeting of shareholders two years
thereafter with each Director to hold office until his or her successor
shall have been duly elected and qualified. At each annual meeting of
shareholders following such initial classification and election,
Directors elected to succeed those Directors whose terms expire shall be
elected for a term of office to expire at the third succeeding annual
meeting of shareholders after their election with each Director to hold
office until his or her successor shall have been duly elected and
qualified.
B. VACANCIES. The newly created directorships resulting from
any increase in the authorized number of Directors or any vacancies in
the Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause may be filled only
by a majority vote of the Directors then in office, though less than a
quorum, and Directors so chosen shall hold office for a term expiring at
the annual meeting of shareholders at which the term of office of the
class to which they have been chosen expires. No decrease in the number
of Directors constituting the Board of Directors shall shorten the term
of any incumbent Director.
C. REMOVAL OF DIRECTORS. Any Director, or the entire Board
of Directors, may be removed from office at any time as follows: (i) for
cause by the vote of a majority of the shareholders of the Corporation
voting at a meeting of shareholders (cause for removal shall exist only
if the Director whose removal is proposed has been either declared of
unsound mind by an order of a court of competent jurisdiction, convicted
of a felony or of an offense punishable by imprisonment for a term of
more than one year by a court of competent jurisdiction, or deemed
liable by a court of competent jurisdiction for gross negligence or
misconduct in the performance of such Director's duties to the
Corporation) or (ii) by a vote of seventy-five percent (75%) of the
outstanding shares of the Corporation voting at a meeting of
shareholders. At least 30 days prior to such meeting of shareholders,
written notice shall be sent to the Director whose removal will be
considered at the meeting. Directors may also be removed from office in
the manner provided in Sections 1726(b) and 1726(c) of the Pennsylvania
Business Corporation Law of 1988 or any successors to such sections.
FURTHER RESOLVED, that existing Sections 3.1 through 3.4 of the
Corporation's Bylaws be amended as provided below:
SECTION 3.1 NUMBER. This section is amended to delete the
last full sentence thereof which reads as follows:
"A full majority of the Board of Directors, or the
shareholders at an annual or special meeting will have the power to fix
the number of Directors and, from time to time, to increase or decrease
the number thereof provided that the number so determined will not be
less than the number authorized by law."
Section 3.2 TERM. This section is deleted in its entirety
and replaced by the word "Reserved".
Section 3.3 NOMINATIONS. This section is deleted in its
entirety and replaced by the word "Reserved".
Section 3.4 VACANCIES. This section is deleted in its
entirety and replaced by the word "Reserved".
<PAGE> 18
PROPOSAL 6
RESOLVED, that Article 9, as set forth below, be added to the
Corporation's Articles of Incorporation:
ARTICLE 9. NOMINATIONS OF DIRECTORS.
A. GENERAL REQUIREMENTS. Nominations of candidates for
election as Directors at any annual meeting of shareholders may be made
(i) by, or at the direction of, a majority of the Board of Directors (or
a Nominating Committee designated by such majority), or (ii) by any
shareholder entitled to vote at such annual meeting. Only persons
nominated in accordance with the procedures set forth in this Article
shall be eligible for election as Directors at an annual meeting.
Ballots bearing the name of all the persons who have been nominated for
election as Directors at an annual meeting in accordance with the
procedures set forth in this Article shall be provided for use at the
annual meeting.
B. NOTICE. Nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely
notice in writing to the Secretary of the Corporation as set forth in
this Article. To be timely, a shareholder's notice shall be delivered
to, or mailed and received at, the principal executive offices of the
Corporation not later than 60 days prior to the anniversary date of the
immediately preceding annual meeting of shareholders of the Corporation.
Such shareholder's notice shall set forth (a) as to each person whom the
shareholder proposes to nominate for election or reelection as a
Director and as to the shareholder giving the notice (i) the name, age,
business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the number of
shares of Corporation stock that are beneficially owned by such person
on the date of such shareholder's notice, and (iv) any other information
relating to such person that is required to be disclosed in
solicitations of proxies with respect to nominees for election as
Directors, pursuant to Regulation 14A under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"); and (b) as to the shareholder
giving the notice (i) the name and address, as they appear on the
Corporation's books, of such shareholder and any other shareholders
known by such shareholder to be supporting such nominees and (ii) the
number of shares of Corporation stock that are beneficially owned by
such shareholder on the date of such shareholder's notice and, to the
extent known, by any other shareholders known by such shareholder to be
supporting such nominees as of the date of such shareholder's notice.
At the request of the Board of Directors, any person nominated by or at
its direction for election as a Director at an annual meeting shall
furnish to the Secretary of the Corporation that information required to
be set forth in a shareholder's notice of nomination that pertains to
the nominee.
C. NONCOMPLIANCE WITH NOTICE REQUIREMENT. The Board of
Directors may reject any nomination by a shareholder not timely made in
accordance with the requirements of this Article. If the Board of
Directors, or a designated committee thereof, determines that the
information provided in a shareholder's notice does not satisfy the
informational requirements of this Article in any material respect, the
Secretary of the Corporation shall promptly notify such shareholder of
the deficiency in the notice. The shareholder shall have an opportunity
to cure the deficiency by providing additional information to the
Secretary of the Corporation within such period of time, not to exceed
five days from the date such deficiency notice is given to the
shareholder, as the Board
<PAGE> 19
of Directors or such committee shall reasonably determine. If the
deficiency is not cured within such period, or if the Board of Directors
or such committee reasonably determines that the additional information
provided by the shareholder, together with information previously
provided, does not satisfy the requirements of this Article in any
material respect, then the Board of Directors may reject such
shareholder's nomination. The Secretary of the Corporation shall notify
a shareholder in writing whether his nomination has been made in
accordance with the time and informational requirements of this Article.
Notwithstanding the procedures set forth in this paragraph, if neither
the Board of Directors nor such committee makes a determination as to
the validity of any nominations by a shareholder, the presiding officer
of the annual meeting shall determine and declare at the annual meeting
whether the nomination was made in accordance with the terms of this
Article. If the presiding officer determines that a nomination was made
in accordance with the terms of this Article, he shall so declare at the
annual meeting and ballots shall be provided for use at the meeting with
respect to such nominee. If the presiding officer determines that a
nomination was not made in accordance with the terms of this Article, he
shall so declare at the annual meeting and the defective nomination
shall be disregarded.
FURTHER RESOLVED, that the present language of Section 3.3 of the
Corporation's Bylaws be deleted in its entirety and replaced by the word
"Reserved".
PROPOSAL 7
RESOLVED, that a new Article 10, as set forth below, be added to
the Corporation's Articles of Incorporation:
ARTICLE 10. AMENDMENT OF BYLAWS. The Board of Directors is
expressly empowered to adopt, amend or repeal Bylaws of the Corporation
to the extent permitted by law. Any adoption, amendment or repeal of
the Bylaws of the Corporation by the Board of Directors shall require
the approval of a majority of the entire Board of Directors then in
office. The shareholders shall also have power to adopt, amend or
repeal the Bylaws of the Corporation; provided, however, that, in
addition to any vote of the holders of any class or series of stock of
this Corporation required by law, the affirmative vote of the holders of
at least seventy-five percent (75%) of the voting power of all of the
then outstanding shares of the common stock of the Corporation entitled
to vote generally in the election of directors shall be required to
adopt, amend or repeal any provisions of the Bylaws of the Corporation.
FURTHER RESOLVED, that Section 1.4 of the Corporation's Bylaws be
deleted in its entirety and replaced by the word "Reserved".
PROPOSAL 8
RESOLVED, that Article 11, as set forth below, be added to the
Corporation's Articles of Incorporation:
ARTICLE 11. SHAREHOLDER PROPOSALS.
A. GENERAL REQUIREMENTS. At an annual meeting of
shareholders, only such new business shall be conducted, and only such
proposals shall be acted upon, as shall have been brought before the
annual meeting by, or at the direction of (1) the Board of Directors or
(2) any shareholder of the Corporation who complies with all the
requirements set forth in this Article.
<PAGE> 20
B. NOTICE. Proposals, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely
notice in writing to the Secretary of the Corporation as set forth in
this Article. For shareholder proposals to be included in the
Corporation's proxy materials, the shareholder must comply with all the
timing and informational requirements of Rule 14a-8 of the Exchange Act
(or any successor regulation). With respect to shareholder proposals to
be considered at the annual meeting of shareholders but not included in
the Corporation's proxy materials, the shareholder notice shall be
delivered to, or mailed and received at, the principal executive offices
of the Corporation not later than 60 days prior to the anniversary date
of the immediately preceding annual meeting of shareholders of the
Corporation. Such shareholder's notice shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (i) a
brief description of the proposal desired to be brought before the
annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and address, as they appear on the
Corporation's books, of the shareholder proposing such business and, to
the extent known, any other shareholders known by such shareholder to be
supporting such proposal, (iii) the number of shares of the Corporation
stock that are beneficially owned by the shareholder on the date of such
shareholder's notice and, to the extent known, by any other shareholders
known by such shareholder to be supporting such proposal on the date of
such shareholder's notice, and (iv) any financial interest of the
shareholder in such proposal, other than interests that all shareholders
would have.
C. NONCOMPLIANCE WITH NOTICE REQUIREMENT. The Board of
Directors may reject any shareholder proposal not timely made in
accordance with the terms of this Article. If the Board of Directors,
or a designated committee thereof, determines that the information
provided in a shareholder's notice does not satisfy the information
requirements of this Article in any material respect, the Secretary of
the Corporation shall promptly notify such shareholder of the deficiency
in the notice. The shareholder shall have an opportunity to cure the
deficiency by providing additional information to the Secretary within
such period of time not to exceed five days from the date such
deficiency notice is given to the shareholder as the Board of Directors
or such committee shall reasonably determine. If the deficiency is not
cured within such period, or if the Board of Directors or such committee
determines that the additional information provided by the shareholder,
together with information previously provided, does not satisfy the
requirements of this Article in any material respect, then the Board of
Directors may reject such shareholder's proposal. The Secretary of the
Corporation shall notify a shareholder in writing whether his proposal
has been made in accordance with the time and informational requirements
of this Article. Notwithstanding the procedures set forth in this
paragraph, if neither the Board of Directors nor such committee makes a
determination as to the validity of any shareholder proposal, the
presiding officer of the annual meeting shall determine and declare at
the annual meeting whether the shareholder proposal was made in
accordance with the terms of this Article. If the presiding officer
determines that the shareholder proposal was made in accordance with the
terms of this Article, then he shall so declare at the annual meeting
and ballots shall be provided for use at the meeting with respect to any
such proposal. If the presiding officer determines that a shareholder
proposal was not made in accordance with the terms of this Article, then
he shall so declare at the annual meeting and any such proposal shall
not be acted upon at the annual meeting.
<PAGE> 21
PROPOSAL 9
RESOLVED, that Article 12, as set forth below, be added to the
Corporation's Articles of Incorporation
ARTICLE 12. AMENDMENT OF ARTICLES. The Corporation reserves
the right to amend, alter, change or repeal any provision contained in
these Articles of Incorporation, in the manner now or hereafter
prescribed by law. All rights conferred upon shareholders herein are
granted subject to this reservation. No amendment, addition,
alteration, change or repeal of these Articles of Incorporation shall be
made unless it is first approved by the Board of Directors of the
Corporation pursuant to a resolution adopted by the affirmative vote of
a majority of the Directors then in office, and thereafter is approved
by the holders of a majority (except as provided below) of the shares of
the Corporation entitled to vote generally in an election of Directors,
voting together as a single class. Notwithstanding anything contained
in these Articles of Incorporation to the contrary, the affirmative vote
of the holders of at least seventy-five percent (75%) of the shares of
the Corporation entitled to vote generally in an election of Directors
shall be required to amend, adopt, alter, change or repeal any provision
inconsistent with this Article 12 and with Articles 7, 8, 9, 10 and 11
hereof, unless such change has been approved by a majority of Directors
then in office.
PROPOSAL 10
RESOLVED, that the first sentence of Section 2.2 of the
Corporation's Bylaws be hereby deleted and the following sentence be
substituted therefor:
"Special meetings of the shareholders, for any purpose or
purposes, unless otherwise provided by Law or the Articles of
Incorporation, may only be called by the president or a majority of the
Board of Directors."
<PAGE> 22
- ------------------------------------------------------------------------
(The following is the information depicted on the proxy card.)
REVOCABLE PROXY
SOUTHWEST NATIONAL CORPORATION
GREENSBURG, PENNSYLVANIA
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS - APRIL 15, 1997
The undersigned hereby constitutes and appoints David M. Hanna and
Donald A. Lawry, or either of them, as the attorneys and proxies of the
undersigned, with full power of substitution in each, to vote all shares
of the common stock of Southwest National Corporation (the
"Corporation") that the undersigned is entitled to vote at the annual
meeting of shareholders of the Corporation to be held April 15, 1997 at
1:00 p.m. at its main office in Greensburg, Pennsylvania, or any
adjournment thereof, notice of such adjournments being hereby waived, as
follows:
PROPOSAL 1 [ ] FOR To fix the number of Directors for the
[ ] AGAINST ensuing year at 11
[ ] ABSTAIN
PROPOSAL 2 To nominate and elect as Directors all
nominees listed below for one-, two- or
three-year terms (as specified in the Proxy
Statement) assuming that the Board
classification terms are adopted. If the
proposal is not adopted, all Directors
will be elected for a one-year term
[ ] FOR ALL NOMINEES LISTED BELOW
(except as marked to the contrary below)
[ ] WITHHOLD AUTHORITY TO VOTE FOR ALL NOMINEES LISTED
BELOW
Ray T. Charley, James A. Critchfield, Jr.,
David S. Dahlmann, Charles E. Henry, A.
Richard Kacin, Alexander H. Lindsay, Jr.,
Joseph V. Morford, Jr., James W. Newill,
John A. Robertshaw, Jr., Laurie Stern
Singer and William W. Thomson
INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
INDIVIDUAL NOMINEE, DRAW A LINE THROUGH
THAT NOMINEE'S NAME.
PROPOSAL 3 [ ] FOR Amend Articles to approve the increase of
[ ] AGAINST authorized shares of common stock
[ ] ABSTAIN
PROPOSAL 4 [ ] FOR Amend Articles and Bylaws describing the
[ ] AGAINST factors the Board of Directors may consider
[ ] ABSTAIN in rendering decisions
PROPOSAL 5 [ ] FOR Amend Articles and Bylaws to classify Board
[ ] AGAINST of Directors and provide for removal of
[ ] ABSTAIN Directors and vacancies of Directors
PROPOSAL 6 [ ] FOR Amend Articles and Bylaws to approve the
[ ] AGAINST procedures for nominating Directors
[ ] ABSTAIN
PROPOSAL 7 [ ] FOR Amend Articles to approve the procedures
[ ] AGAINST for amending the Bylaws
[ ] ABSTAIN
PROPOSAL 8 [ ] FOR Amend Articles to approve the procedures
[ ] AGAINST for presenting shareholder proposals at the
[ ] ABSTAIN annual meeting
PROPOSAL 9 [ ] FOR Amend Articles to approve the procedures
[ ] AGAINST for amending the Articles of Incorporation
[ ] ABSTAIN
PROPOSAL 10 [ ] FOR To approve an amendment to the Bylaws
[ ] AGAINST for calling special meetings of
[ ] ABSTAIN shareholders of the Corporation
OTHER To consider and act upon any other matter which may
BUSINESS: properly be brought before the meeting or any
adjournment thereof
Shares represented by duly executed and returned proxies will be
voted in accordance with the choices specified.
EACH OF THE MATTERS TO BE ACTED UPON IS PROPOSED BY, AND THIS PROXY
IS SOLICITED ON BEHALF OF, THE BOARD OF DIRECTORS OF THE CORPORATION.
THIS PROXY CONFERS AUTHORITY TO VOTE FOR ALL PROPOSALS IF NO
DIRECTION IS GIVEN. IF ANY OTHER BUSINESS IS PRESENTED AT THE MEETING,
THIS PROXY SHALL BE VOTED IN THE DISCRETION OF THE PROXIES NAMED ABOVE.
IN WITNESS WHEREOF, THE UNDERSIGNED SHAREHOLDER HAS DULY EXECUTED
THE PROXY ON _________________, 1997.
__________________________________(L.S.)
__________________________________(L.S.)
When signing as attorney,
executor, administrator,
trustee or guardian, please
give full title. If more
than one trustee, all should
sign. All joint owners must
sign.
PLEASE DATE AND SIGN PROXY ABOVE AND RETURN IMMEDIATELY
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 26,521
<INT-BEARING-DEPOSITS> 82
<FED-FUNDS-SOLD> 28,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 135,183
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0
0
<COMMON> 7,952
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<INTEREST-DEPOSIT> 20,474
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<ALLOWANCE-DOMESTIC> 5,910
<ALLOWANCE-FOREIGN> 0
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</TABLE>
