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, 1997
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: (724) 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 $1,311,644,723 based on the reported closing bid in the NASDAQ system
as of February 27, 1998.
Number of outstanding shares of registrant's common stock as of February
27, 1998: 3,064,794.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 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 21, 1998
(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 7A. Quantitative and Qualitative Disclosures About
Market Risk 6
Item 8. Financial Statements and Supplementary Data 6
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 6
PART III. 6-7
Item 10. Directors and Executive Officers of the Registrant 6
Item 11. Executive Compensation 7
Item 12. Security Ownership of Certain Beneficial Owners
and Management 7
Item 13. Certain Relationships and Related Transactions 7
PART IV. 7-8
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 7-8
Signatures 9-10
Exhibit Index 11
</TABLE>
<PAGE> 1
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 material 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 are 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 17 automated teller
machines (ATMs), 14 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), and a national ATM network,
Cirrus(registered trademark), which makes it possible for customers to
access over 82,000 banking machines in all 50 states and many countries
around the world.
The Bank ended the year with a staff of 389 employees which was
comprised of 331 full-time and 58 part-time employees. Full-time
equivalent employees averaged 373 in 1997.
<PAGE> 2
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 1997 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 established 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> 3
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, the highest rating
presently available. 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 was 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 1998. 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 1997 Annual Report which are incorporated herein by
reference.
<PAGE> 4
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 50 of the 1997 Annual Report and is incorporated herein by
reference.
II. INVESTMENT PORTFOLIO
Information required by this section is presented on page 42 of the 1997
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 1997 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 1997
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 1997 Annual Report and is incorporated herein by reference.
VI. RETURN ON EQUITY AND ASSETS
Information required by this section is presented on page 50 of the 1997
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 48 President and Chief Executive Officer
David M. Hanna 50 Vice President
Donald A. Lawry 47 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. Donald A. Lawry
was elected Secretary and Treasurer in July, 1989; he had previously
served as Controller of the Corporation since 1986. After the Annual
Meeting of the shareholders, the Board has a reorganization meeting and
elects the executive officers. The positions held by the present executive
officers in the Registrant's subsidiary during the past five years are as
follows:
<PAGE> 5
<TABLE>
<CAPTION>
NAME TERM POSITION WITH BANK
<S> <C> <C>
David S. Dahlmann 1993-1997 President and Chief Executive
Officer
David M. Hanna 1997 Executive Vice President
1993-1997 Senior Vice President
Donald A. Lawry 1993-1997 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, 1997, 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
1997 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 1997 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 1997 Annual Report and is incorporated herein
by reference.
<PAGE> 6
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 48 of the 1997 Annual Report and is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this section is presented on pages 46 and 47
of the 1997 Annual Report and is herein incorporated 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 1997 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, 1997 and 1996 18
Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995 17
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995 19
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 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 1, 2 and
3 of the Proxy Statement and is incorporated herein by reference.
<PAGE> 7
ITEM 11. EXECUTIVE COMPENSATION
Information required by this section is presented on pages 5
through 8 of the Proxy Statement and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this section is presented on pages 2, 3 and
10 of the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this section is presented on page 5 of the
Proxy Statement and is incorporated herein by reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The financial statements and schedules required for the Annual
Report of the Registrant are included in the following index. Page
numbers refer to pages of the 1997 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, 1997 and
1996 18
Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995 17
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995 19
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 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.
<PAGE> 8
(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, 1997.
</TABLE>
<PAGE> 9
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 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Ray T. Charley Director March 17, 1998
Ray T. Charley
/s/ James A. Critchfield, Jr. Director March 17, 1998
James A. Critchfield, Jr.
/s/ David S. Dahlmann President and Chief March 17, 1998
David S. Dahlmann Executive Officer;
Director
/s/ Charles E. Henry Director March 17, 1998
Charles E. Henry
/s/ A. Richard Kacin Director March 17, 1998
A. Richard Kacin
/s/ Alexander H. Lindsay, Jr. Director March 17, 1998
Alexander H. Lindsay, Jr.
/s/ Joseph V. Morford, Jr. Director March 17, 1998
Joseph V. Morford, Jr.
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ James W. Newill Director March 17, 1998
James W. Newill
/s/ John A. Robertshaw, Jr. Director March 17, 1998
John A. Robertshaw, Jr.
/s/ Laurie Stern Singer Director March 17, 1998
Laurie Stern Singer
/s/ William W. Thomson Director March 17, 1998
William W. Thomson
/s/ Donald A. Lawry Secretary and Treasurer March 17, 1998
Donald A. Lawry (Principal Financial Officer)
</TABLE>
<PAGE> 11
<TABLE>
SOUTHWEST NATIONAL CORPORATION
EXHIBITS TO ANNUAL REPORT
on FORM 10-K for the
YEAR ENDED DECEMBER 31, 1997
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, 1997 (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 21, 1998
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>
SOUTHWEST NATIONAL CORPORATION
1997 ANNUAL REPORT
The front cover of the annual report is beige. The Corporate Logo
appears 1/2 inch from top left hand corner. The Corporation name and
title of report are located 1/2 inch from top of right hand corner.
Four inches from top, centered on cover are two (1" x 2") pictures with
statement "Checks & Balances" between the pictures. Top picture is of
people's legs walking on brick street. Lower picture is a shot of of a
woman's back with a child's head resting on her shoulder.
<PAGE>
Inside the front cover of the annual report is an overleaf embossed with
the Corporate Logo. 5 1/2 inches from top of page, centered is the quote
"It is vital that our shareholders continue to see value in Southwest Bank.
Our goal is to consistently deliver balanced long-term growth to maintain
their financial investment in us."
David S. Dahlmann, President and CEO
<PAGE> 1
(Please note: The pages are numbered 5 1/2 inches from top corner, 1/2 inch
from paper edge.)
<TABLE>
SOUTHWEST NATIONAL CORPORATION
Greensburg, Pennsylvania
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)
- ------------------------------------------------------------------------------
<CAPTION>
FOR THE YEAR 1997 1996 % change
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 9,005 $ 9,610 - 6.3%
Cash dividends 4,044 3,870 + 4.5
Return on average assets 1.21% 1.32%
Return on average shareholders' equity 11.19 12.31
PER SHARE
- ------------------------------------------------------------------------------
Basic net income $ 2.92 $ 3.03 - 3.6
Cash dividends 1.31 1.22 + 7.4
AT YEAR-END
- ------------------------------------------------------------------------------
Shareholders' equity $ 82,489 $ 80,164 + 2.9
Total assets 739,242 755,358 - 2.1
Loans 515,434 489,188 + 5.4
Investment securities 159,104 197,250 - 19.3
Money market investments 27,055 28,882 - 6.3
Deposits 641,865 651,328 - 1.5
PERIOD-END RATIOS AT DECEMBER 31,
- ------------------------------------------------------------------------------
Book value per share $ 26.91 $ 25.57 + 5.2
Risk-based capital ratios:
Tier 1 capital 16.23% 16.46%
Total capital 17.45 17.68
Leverage capital ratio 11.10 10.87
Nonperforming assets to loans,
other real estate owned and
other repossessions .72 .37
Nonperforming loans to loans .67 .33
Loans past due 90 days or more
to loans .36 .41
Reserve for possible loan losses to
nonperforming loans 179.51 362.58
- ------------------------------------------------------------------------------
</TABLE>
At the bottom of this page is the following content material for the
annual report.
<TABLE>
<S> <C>
Letter to Shareholders 2-3
Checks and Balances 4-16
Financial Information 17-50
Administrative Directory 51
</TABLE>
<PAGE> 2
(On page 2 one inch from top is a 5 1/2 inch x 8 inch picture. Caption reads:
David S. Dahlmann, President and Chief Executive Officer, delivering Southwest
Bank's Strategic Vision speech to a group of bank employees).
The 1997 financial results did not meet our expectations. Southwest
National Corporation reported basic net income of $2.92 per share. This
represents a decline of $0.11 or 3.6% from the $3.03 per share earned in
1996.
Return on average assets was 1.21% and return on shareholders' equity
was 11.19% for 1997. The Corporation paid cash dividends in 1997 of
$4,044,000 or $1.31 per share. We increased the quarterly dividend during
1997 by 9.4% to $0.35 per share. This continues a record of uninterrupted
dividend increases spanning the last 39 years.
There were two reasons for the Corporation not meeting its financial
objectives. First, we increased our provision for loan losses by $1,423,000
due to the rising trend of consumer delinquencies and chargeoffs in our
indirect auto portfolio. With the deteriorating profitability of this
business line, we have made a decision to substantially cut back the
indirect automobile financing business as of year-end 1997. Additionally,
we have provided adequate reserves for future credit risks associated
with winding down this part of our business. The credit quality and
performance of the remainder of the loan portfolio
<PAGE> 3
continues to be satisfactory and our reserves remain adequate.
The second reason was noninterest expense increased $1,239,000 or 5.7%
compared to 1996. This rise was due primarily to direct and indirect
expenditures related to building the foundation necessary to support
the Bank's organizational improvement project and strategic development
initiatives.
The year 1997 was a year of significant transition for our organization.
Over the years, we have fulfilled our commitment to serve the various
communities in the area, and we will continue to do so. However, to
ensure continued success well into the future, change is necessary in
meeting intense competition in the financial services environment.
During the year, we completed a comprehensive review of all aspects of
our organization and made significant structural and information system
changes in order to reposition ourselves to operate more efficiently
and effectively. These changes focused primarily on realigning around
three customer segments: consumer, corporate and trust. Within each
of these segments are highly qualified product and relationship
managers. These organizational changes are designed to focus all
processes on our customers and enhance the value perceived by them.
Finally, we made a significant investment in management information
systems, which will provide high-quality tools for our employees to
make rapid and effective decisions to enhance our service levels and
improve financial results.
These changes evolve out of our objectives to meet the needs of four key
groups. First, the customer, who is truly our reason for being. Clearly,
it is critical we deliver the products and services our customers need -
when and how they need them - while continuing to maintain our commitment
to the highest quality customer service and fair pricing. It is vital that
our shareholders continue to see value in the Corporation. Our goal is to
consistently deliver balanced long term growth to justify your investment
in us. As a community bank, it is essential to understand and appreciate
the needs of the communities we serve, and to provide assistance whenever
possible through our financial, human resource and advisory capabilities.
And, finally, it is important for our employees to accomplish their
professional goals with a sense of satisfaction from their work endeavors.
In order to achieve this, we need to consistently provide a challenging,
rewarding work environment.
As we move into 1998, change continues. The needs of our customers continue
to evolve...to grow more complicated. In an era of working families, busier
schedules and fewer hours of convenience, our customers have different needs
from the past. As their lives become more complex with more demands placed
upon their time, it must be the Corporation's goal not to add to these
complexities, but rather to provide financial services which become solutions.
To be there when we are needed.
The Corporation is positioned to meet the challenges incumbent in a highly
technological and competitive environment. Our commitment is unwaivering to
succeed in meeting the expectations of those who depend on us.
/s/David s. Dahlmann
David S. Dahlmann
President and Chief Executive Officer
March 20, 1998
(At this point in the 1997 annual report there appears a bar graph as
set out in the following table. It is placed 1" from the top of the page
and 1/4" from the right edge of the page.)
<TABLE>
BASIC NET INCOME
(per share)
<S> <C>
93 $2.54
94 2.70
95 2.84
96 3.03
97 2.92
</TABLE>
<PAGE> 4
Four 1" x 1" pictures (centered from right to left), 3" from top of page,
are set against a teal blue background. Pictures are placed in a vertical
line. Top picture is a woman on the telephone. Second picture is a four
lane expressway at night. A caption "CHECKS & BALANCES" is directly
below this picture. The third picture shows a laptop keyboard with a pair of
hands typing. The fourth and final picture is a ground shot of a four engine
jet airliner against the sky.
<PAGE> 5
The following text is set on a 7" x 9 1/2" beige background.
/It is a time of contradictions. /As a culture, we have more opportunities,
more technologies, more gadgets and gizmos than the generations before.
/Yet, as individuals, we have less time to enjoy them. /We have become both
breadwinners and bakers. Work weeks have stretched from 40 hours to 60, 70
even 80. Everyday, we find ourselves running in 20 million directions - to
work, school, soccer games, dance recitals, night classes, second jobs - in
search of the good life. And the time to enjoy it. /It's a hustling,
bustling, time-crunching kind of life. And Southwest Bank wants to make it
a little easier. /So in 1997, we made an important decision. We would
change the way we work so we could be more in step with the way our customers
live. /Since no one except perhaps bankers, keeps banker's hours, we're tossing
them out. From now on, Southwest Bank is extending its hours and keeping
some branches open on weekends. What's more, we've added services like
telephone banking so you can check balances, transfer funds, even apply for
a loan, any time of the day or night. /In other words, from now on,
Southwest Bank is going to work around your schedule, instead of the other
way. /That's just the beginning. /In 1998, Southwest Bank will be offering
a wider array of financial services, including annuities, mutual funds and
other investments. So you can find all the financial help you need in one
convenient place. /Middle market businesses will find life easier at
Southwest, as well. Every business will now be assigned a business banking
representative; a trusted financial adviser who understands where they've
been, where they want to go, and just how to get them there. /Amidst all
this change, we want to reassure you that some aspects of Southwest Bank
will always remain the same. Namely, our sense of honesty and fairness,
our tradition of reliability and strength, and our concern for our community
and the people in it. /In a sense, these core values are the catalyst for
this change. /You see, at Southwest Bank we're committed to helping our
customers have both the good life and the time to enjoy it. /To us, it's
simply a matter of creating the right balance.
<PAGE> 6
A 1 1/2" x 2 1/2" snapshot of a young boy smiling is 1" from top, left edge.
5 1/2" from top of page is a beige strip with the caption: 3 KIDS, 2 DOGS,
1 CAT, 2 BIRDS AND NEARLY 300 PARISHIONERS. The following text 6 1/2" from
top of page 6 explains the picture on page 7.
Cheryl Lawrence leads a very full life. /As a mother of three, there's
school, preschool, clarinet practice, ice skating lessons, saxophone practice,
basketball practice or Pioneer Club. As a pastor's wife, there are luncheons,
meetings, Bible studies and other activities. As a homemaker, there's
cooking, laundry, shopping, cleaning... the list goes on and on. /Luckily
Cheryl gets a lot of help from her husband, her kids, even from Southwest
Bank. Who has made a point of providing the banking options that can make
even the busiest life a little easier.
The following statement from Southwest Bank president, David S. Dahlmann,
in teal blue print, 9" from top and justified to the bottom right of page,
reads:
Clearly, it is critical we deliver the products and services customers need,
when and how they need them, while continuing to maintain our commitment to
the highest quality customer service and fair pricing.
David S. Dahlmann, President and CEO
<PAGE> 7
This page has a 9" x 6 3/4" black and white photograph on a teal blue
background. The photo shows a woman on the telephone in a kitchen making
notes on a tablet. A young girl is shown holding a dog and a pair of ice
skates. To the woman's right is a young boy leaning over a kitchen
counter. In the rear of the picture is a young teenage boy holding a
basketball.
<PAGE> 8
Page 8 is a faded white and grey background photograph. The hands pictured
in the photograph are doing paperwork. 1" from the top of the page is a
caption in black print describing the photo on page 9. The caption reads:
It's one o'clock in the morning and most of the community is asleep. At
Hilltop Hose Company No. 3, however, the lights are on and the coffee is
perking. /Jeff Balog isn't a night owl by nature, but by necessity. You
see, between his job, his responsibilities as Assistant Chief at the Fire
Department, his wife and his daughter, Balog has learned to make the most
of his time, as well as his money. /Today, Southwest Bank is uniquely
positioned to help him on both fronts.
9" from the top of the page, in the lower right hand corner, is a 1/4",
black and beige strip spanning pages 8 and 9. Within the strip is a caption
in black print that reads: BURNING THE 1:00 A.M. OIL.
<PAGE> 9
On the white background 3 1/2" from the top of the page is a 4" x 4 1/2"
colored picture of a man in glasses doing paperwork. He is holding a pen
in his right hand and wearing a ring and a watch on his left hand. 1/4"
below and 3 1/2" from the left edge of the page is a statement that reads as
follows:
As a community bank, it is essential to understand and appreciate the needs
of the individuals we serve...
Edgar J. Malanowsky
Senior Vice President, Consumer Services
<PAGE> 10
On the white background of this page, 1 1/2" from the top and 6 1/2" from the
left edge of the page is a 1/4" black and white strip that spans pages 10 and
11. The caption within the strip reads: IF IT'S WEDNESDAY, IT MUST BE PARIS.
2 1/2" from the top is a 5" x 7 1/2" black and white photo. The photo shows
a woman carrying an airline bag checking airline departure screens in an
airline terminal. 1/4" below the picture and 1" from left edge of the page
in blue ink is the following statement:
Ultimately, we must enable our customers to bank with us-to have access to
us. Anywhere. Any place. Any time. Technology will be our tool to make
this a reality.
David M. Hanna
Executive Vice President,
Corporate and Consumer Services
<PAGE> 11
This page has a beige background. 4 1/2" from the top of the page is the
caption for the picture on the page 10 in black ink. The caption reads as
follows:
Today's relationships are stretched by distance and time. /Cancun Saturday.
Detroit Monday. Paris Wednesday. Over the miles, flight attendant Sandy
Smith has learned the importance of being accessible. Just as she's learned
the value of the cellular phone, a modem and a bank that's available when,
and where, she needs it to be.
A 1 1/2" x 2 1/2" black and white snapshot is 7 1/2" from the top of the page
and sits along the left edge of the page. In this photo, a waist-high
photo of a woman pulling a luggage carrier is shown.
<PAGE> 12
This page has a white background. 2 1/2" from the top of the page is a
1/4" wide x 5 3/4" long black and beige strip that spans pages 12 and 13.
The caption within the strip reads: FIRST CLASS TICKETS, THREE MARTINI
LUNCHES AND OTHER BUSINESS LEGENDS.
3 1/2" from the top of the page is a caption for the picture on page 13.
The caption is in black print and reads as follows:
As an 8th generation cobbler, you could say that the shoe business is in
Ron Mancuso's heart and sole. But the work of his forefathers is very
different from the business of today. /The artistry and craftmanship is
still there. But now, the world has added sales, marketing, accounting,
inventory, health plans and investments. /Luckily, Mancuso isn't in this
alone. He has a full-time partner in his wife. And he has Joe Brennan.
Who for the past 20 years has been both a loyal customer and his business
banking representative.
7 1/2" from the top of the page, justified to the right edge of the page,
is the following statement in black ink:
We must continue to provide our customers with solutions, not just
transactions. This is how we provide value to the customer. This is how
we will be the best.
Joseph A. Giangiulio
Senior Vice President, Corporate Services
<PAGE> 13
The background is a faded shot in grey and white of a shoe repair bench.
3 1/2" from the top of the page is a 4 1/2" x 3 3/4" colored photograph
of a man holding a shoe and tack hammer in a shoe repair shop.
<PAGE> 14
This page has a teal blue background. 1" from the top of the page is
a 1/4" wide x 3 1/2" long beige and black strip that spans pages 14 and
15. The caption within the strip reads: A WORLD OF CHANGE, A WORLD OF
STABILITY.
2 1/2" from the top of the page is a 5 1/2" x 3 1/2" colored photo. An
elderly gentleman is pictured on a chair in a kitchen petting his dog.
<PAGE> 15
This page has a white background. 2 1/2" from the top of the page is a
caption for the picture on page 14 and it reads:
The world we depend on. /Over the years Ken Fry has seen a lot of changes.
The first passenger airplane. The first VCR. The first computer. /Still,
there are a few things in life that Ken Fry can always count on. Such as
Thanksgiving dinner with his family. A dog that never forgets to come back
for seconds. And the fact that Southwest Bank will always be just a few
steps, a phone call, and someday soon, a computer line away.
7 1/2" from the top and 3 1/2" from the left edge of the page the following
statement is in black print:
We need to be a partner with our customers in both good times and bad times.
We need to see them through both. The key is being accessible.
Michael Earle
Senior Vice President, Trust and Financial Services
<PAGE> 16
This page has a beige background. 1" from the top of the page is a 1/4" wide
x 2" long blue strip with the following caption within: THE FINER THINGS IN
LIFE. 1/2" below this strip is a caption for the picture immediately below
the following:
Amidst our busy, flurried, jumbled days are moments of remarkable peace,
wonderment, and hope. These are the times our customers work so hard for.
And they are indeed worth all of our efforts.
A 2 1/2" x 4" black and white photo shows the back of a woman with a small
child resting her head on the woman's shoulder.
1 1/2" below the picture and 3 1/2" from the left edge of the page the
following statement is printed in black ink:
We are planning for the next decade...these are not incremental changes, but
fundamental changes. We are no longer planning for the short future. We
are now looking for the future.
David S. Dahlmann,
President and CEO
<PAGE> 17
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $42,681 $38,902 $37,250
Interest on money market investments:
Interest bearing deposits with banks 6 6 8
Federal funds sold 677 1,122 1,750
Interest and dividends on investment securities:
U.S. Treasury securities and obligations of
U.S. government agencies and corporations 10,320 11,501 11,050
Obligations of states and political subdivisions 1,103 1,162 1,253
Equity and other securities 174 166 170
-----------------------------
Total interest income 54,961 52,859 51,481
INTEREST EXPENSE
Interest on deposits:
NOW accounts 489 659 870
Savings 7,312 7,400 7,729
Time 13,312 12,415 11,736
Interest on federal funds purchased and securities
sold under agreements to repurchase 290 227 110
Interest on Federal Home Loan Bank advances 270 163 156
-----------------------------
Total interest expense 21,673 20,864 20,601
-----------------------------
Net interest income 33,288 31,995 30,880
Provision for possible loan losses 3,223 1,800 1,450
-----------------------------
Net interest income after provision for
possible loan losses 30,065 30,195 29,430
NONINTEREST INCOME
Trust income 1,723 1,728 1,801
Service charges on deposit accounts 2,711 2,288 2,194
Other service charges and commissions 668 650 645
Net security gains 139 196 -
Other income 457 355 349
-----------------------------
Total noninterest income 5,698 5,217 4,989
NONINTEREST EXPENSE
Salaries 8,414 8,124 8,043
Employee benefits 2,836 2,655 2,636
Net occupancy expense 1,907 1,947 1,761
Equipment expenses and data processing fees 3,454 3,233 3,182
Pennsylvania shares tax 709 658 612
FDIC insurance expense 96 216 743
Other expenses 5,533 4,877 4,650
-----------------------------
Total noninterest expense 22,949 21,710 21,627
-----------------------------
Income before income tax expense 12,814 13,702 12,792
Income tax expense 3,809 4,092 3,754
-----------------------------
NET INCOME $ 9,005 $ 9,610 $ 9,038
- --------------------------------------------------------------------------------
Per share
Basic net income $ 2.92 $ 3.03 $ 2.84
Cash dividends 1.31 1.22 1.14
Average common shares outstanding 3,088,622 3,172,735 3,183,026
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 18
<TABLE>
CONSOLIDATED BALANCE SHEET
(In thousands)
<CAPTION>
- --------------------------------------------------------------------------------
December 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 22,391 $ 26,521
Money market investments:
Interest bearing deposits with banks 55 82
Federal funds sold 27,000 28,800
--------------------
Total money market investments 27,055 28,882
Investment securities:
Securities available for sale:
U.S. Treasury securities and obligations of
U.S. government agencies and corporations 87,508 111,792
Obligations of states and political subdivisions 18,934 20,728
Equity securities 2,845 2,663
--------------------
Total securities available for sale 109,287 135,183
Securities held to maturity:
Obligations of U.S. government agencies and corporations
(market value: $49,625 and $61,609) 49,817 62,067
--------------------
Total investment securities 159,104 197,250
Loans, net of unearned income of $15 and $138 515,434 489,188
Less: reserve for possible loan losses (6,166) (5,910)
--------------------
Loans, net 509,268 483,278
Bank premises and equipment 8,953 8,089
Other assets 12,471 11,338
--------------------
Total assets $739,242 $755,358
- --------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest bearing demand $109,139 $105,202
NOW accounts 33,176 55,232
Savings 233,960 239,794
Time 265,590 251,100
--------------------
Total deposits 641,865 651,328
Securities sold under agreements to repurchase 4,531 6,811
Federal Home Loan Bank advances 5,000 11,907
Other liabilities 5,357 5,148
--------------------
Total liabilities 656,753 675,194
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 47,093 42,132
Treasury stock of 115,877 and 45,905 shares, at cost (4,840) (1,800)
Unrealized gain on securities available for sale 524 120
--------------------
Total shareholders' equity 82,489 80,164
--------------------
Total liabilities and shareholders' equity $739,242 $755,358
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 19
<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, 1995 $ 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
Net income - - 9,005 - - 9,005
Cash dividends - - (4,044) - - (4,044)
Purchase of treasury stock - - - - (3,040) (3,040)
Net unrealized gain on
securities available for sale - - - 404 - 404
----------------------------------------------------------------------
Balance at December 31, 1997 $7,952 $31,760 $47,093 $ 524 $(4,840) $ 82,489
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 20
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,005 $ 9,610 $ 9,038
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 1,258 1,248 1,155
Provision for possible loan losses 3,223 1,800 1,450
Increase (decrease) in net interest receivable/payable (125) 214 (839)
Net increase (decrease) from other operating activities (1,056) (115) 1347)
------------------------------------------
Net cash from operating activities 12,305 12,757 13,829
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 43,525 43,513 43,000
Proceeds from sales of securities available for sale 20,238 10,242 51
Purchase of securities available for sale (37,080) (50,395) (49,946)
Proceeds from maturities of securities held to maturity 12,254 9,913 6,412
Purchase of securities held to maturity - - (905)
Net increase in loans made to customers (29,343) (42,361) (36,303)
Net property and equipment expenditures (2,122) (1,071) (1,814)
------------------------------------------
Net cash from (used for) investing activities 7,472 (30,159) (39,505)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (9,463) 27,543 11,710
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase (2,280) 3,416 2,794
Repayment of Federal Home Loan Bank advances (11,907) (46) (42)
Proceeds from Federal Home Loan Bank advances 5,000 10,000 -
Dividends paid (4,044) (3,870) (3,629)
Purchase of treasury stock (3,040) (1,800) -
Retirement of common stock - - (308)
------------------------------------------
Net cash from (used for) financing activities (25,734) 35,243 10,525
------------------------------------------
Net change in cash and cash equivalents (5,957) 17,841 (15,151)
Cash and cash equivalents at beginning of year 55,403 37,562 52,713
------------------------------------------
Cash and cash equivalents at end of year $ 49,446 $55,403 $37,562
- ---------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $ 14,693 $14,810 $14,568
Income taxes 4,310 4,372 3,661
- ---------------------------------------------------------------------------------------------------------
NONCASH ITEMS
Transfers from loans to other real estate
owned and other repossessions $ 2,210 $ 1,272 $ 667
Transfer from securities held to maturity
to securities available for sale - - 19,436
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 21
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.
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.
Investment Securities
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
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 Statement of Financial Accounting Standards (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, 1997 and December 31, 1996. Payments received on
nonaccrual loans generally are either applied against principal
or reported as interest income, according to management's judgment
as to the collectability of principal. Consumer loans are not considered
to be impaired because they are evaluated 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.
Interest Income And Interest Expense
The Bank uses various accrual methods of accounting for interest
income, fees on loans and interest expense which approximate level
yields. All amortizing loans, other than consumer 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.
<PAGE> 22
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
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.
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.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (FASB)
issued FAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities."
The statement provides consistent standards for distinguishing
transfers of financial assets that are sales, from transfers that
are secured borrowings, based on a control-oriented "financial-
components" approach. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing
assets it controls and liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes
liabilities when extinguished. The provisions of FAS No. 125 are
effective for transactions occurring after December 31, 1996, except
those provisions relating to repurchase agreements, securities lending
and other similar transactions and pledged collateral, which have been
delayed until after December 31, 1997 by FAS No. 127 "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125, an
amendment of Statement No. 125". The adoption of this statement did not
have a material effect on the Corporation's financial position or
results of operations.
In February 1997, the FASB issued FAS No. 128, "Earnings Per Share".
FAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for
all periods have been presented in conformity to FAS No. 128 requirements.
Since the Corporation has a simple capital structure (i.e., only common
stock) only presentation of basic earnings per share is required.
In June 1997, the FASB released FAS No. 131, "Disclosures About
Segments of An Enterprise and Related Information". FAS No. 131
establishes standards for the way public business enterprises are
to report information about operating segments in annual financial
statements and requires those enterprises to report selected information
about operating segments in interim financial statements issued to
shareholders. This statement also establishes standards for related
disclosures about products and services, geographic areas and major
customers. This standard is required to be adopted as of January 1, 1998.
Management believes that adoption of the statement will not materially
affect the Corporations financial condition 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 $3.665 million in 1997 and
$5.555 million in 1996.
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 1998
of approximately $5.798 million of its total undivided profits at
December 31, 1997, plus an additional amount equal to the net profits
for 1998 up to the date of any such dividend declaration.
As a member of the Federal Home Loan Bank (FHLB), the Bank is required
to maintain a position in stock of the FHLB. As of year-end, the Bank
owned $2.266 million of FHLB stock. On an annual basis, this amount is
adjusted based on the Bank's calculated minimum FHLB stock requirement.
3 PLEDGED ASSETS
Investment securities carried at $48.747 million at December 31, 1997,
were pledged, as required, to secure deposits of public funds and for
other purposes.
<PAGE> 23
4 INVESTMENT SECURITIES
The unrealized gain, net of tax, on securities available for sale at
December 31, 1997, was $524 thousand and was recorded as a separate
component of shareholders' equity.
- -----------------------------------------------------------------------
The amortized cost and estimated market value of investment securities
at December 31, 1997 and 1996 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>
1997
Securities available for sale:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 87,438 $ 224 $(154) $ 87,508
Obligations of states and
political subdivisions 18,200 736 (2) 18,934
Equity securities 2,843 2 - 2,845
------------------------------------------
Total securities available
for sale 108,481 962 (156) 109,287
Securities held to maturity:
Obligations of U.S. government
agencies and corporations 49,817 9 (201) 49,625
------------------------------------------
Total investment securities $158,298 $ 971 $ (357) $158,912
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
</TABLE>
Proceeds from the sale of securities available for sale were
$20.238 million in 1997, $10.242 million in 1996 and $51 thousand
in 1995. Gross gains recognized in 1997 were $151 thousand and gross
losses were $12 thousand. Gross gains recognized in 1996 were $196
thousand. No gains or losses were recognized in 1995.
- -----------------------------------------------------------------------------
The amortized cost and estimated market value of investment securities
at December 31, 1997, 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 $ 35,012 $ 34,933
Due after one year through five years 52,106 52,794
Due after five years through ten years 17,028 17,190
Due after ten years 1,492 1,525
No fixed maturity 2,843 2,845
-----------------------
Total securities available for sale $108,481 $109,287
Securities held to maturity:
Due in one year or less $ - $ -
Due after one year through five years 7,771 7,733
Due after five years through ten years 40,802 40,650
Due after ten years 1,244 1,242
-----------------------
Total securities held to maturity $ 49,817 $49,625
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 24
5 LOANS
A summary of outstanding loans, by category, at December 31 was as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Commercial $ 73,401 $ 63,752
Real estate mortgages:
Construction and land development 17,435 15,009
Residential 196,701 191,348
Commercial 75,717 66,025
Consumer 152,180 153,054
--------------------------
Total loans, net of unearned income $515,434 $489,188
- -----------------------------------------------------------------------
</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 1997 was as
follows:
<TABLE>
(In thousands)
- --------------------------------------------------------------------------------
<CAPTION>
Balance Loans Made/ Loan Balance
December 31, 1996 Advanced Payments Other<F1> December 31,1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$6,533 $5,671 $6,711 $(110) $5,383
<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) 1997 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 5,910 $ 5,651 $ 5,038
Provision for possible loan losses 3,223 1,800 1,450
Losses (3,660) (2,129) (1,486)
Recoveries 693 588 649
-----------------------------
Net loan charge-offs (2,967) (1,541) (837)
-----------------------------
Balance at end of year $ 6,166 $ 5,910 $ 5,651
- ---------------------------------------------------------------------
</TABLE>
The following table presents the Banks investment in loans considered
to be impaired and related information on those impaired loans:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Balance of loans considered to be
impaired $ 3,435 $ 1,630 $ 1,363
Average balance of loans considered
to be impaired 2,070 1,778 1,613
Impaired loans with related loan
loss reserve 2,694 1,492 559
Impaired loans with no related loan
loss reserve 741 138 804
Loan loss reserve for loans considered
to be impaired 104 229 236
Interest income on impaired loans
(cash basis) 23 111 80
</TABLE>
Nonaccrual loans are considered to be impaired. Payments received on impaired
loans generally are applied against principal or reported as interest income,
according to managements judgement 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) 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Land $ 1,024 $ 1,024
Buildings 9,338 9,176
Leasehold improvements 3,933 3,898
Furniture, fixtures and equipment 10,271 8,370
--------------------
Total original cost 24,566 22,468
Less: accumulated depreciation and amortization (15,613) (14,379)
--------------------
Total bank premises and equipment $ 8,953 $ 8,089
- ---------------------------------------------------------------------
</TABLE>
<PAGE> 25
8 BANK PREMISES AND EQUIPMENT (cont.)
Depreciation and amortization charged to noninterest expense amounted to
$1.258 million in 1997, $1.248 million in 1996 and $1.155 million in
1995.
- ------------------------------------------------------------------------
Net rental expense of leased bank premises and equipment was as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Buildings and land (net of sublease income
of $4, $3 and $70) $340 $344 $269
Equipment 68 72 118
----------------------------
Total $408 $416 $387
- -------------------------------------------------------------------------------
</TABLE>
Minimum rental commitments under noncancelable leases having an original
term at December 31, 1997, of more than one year were $633 thousand in
1998, $671 thousand in 1999, $617 thousand in 2000, $614 thousand in
2001, $609 thousand in 2002 and $2.230 million for the years thereafter,
totaling $5.374 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) 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Three months or less $12,035 $ 8,847
Three to six months 2,477 2,690
Six to twelve months 7,060 6,827
Over one year 5,864 6,984
---------------------
Total $27,436 $25,348
</TABLE>
- ----------------------------------------------------------------------
Interest expense on time deposits of $100 thousand or more amounted to
$1.467 million in 1997, $1.336 million in 1996 and $1.075 million in
1995.
- ----------------------------------------------------------------------
The following table illustrates by remaining maturity, time deposits
with original terms of more than one year, as of December 31:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
One year or less $ 60,132 $19,680
One to two years 16,867 30,854
Two to three years 10,337 10,806
Three to four years 4,692 6,776
Four to five years 9,216 4,798
More than five years 12,044 17,702
----------------------
Total $113,288 $90,616
</TABLE>
- -----------------------------------------------------------------------
10 FEDERAL HOME LOAN BANK ADVANCES
The Bank is a member of the (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.
As of year-end, outstanding advances totaled $5.000 million. This
consists of one floating rate advance with a rate of 5.82% as of
year-end, maturing in June of 1998.
- -----------------------------------------------------------------------
<PAGE> 26
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, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, 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, 1997 and 1996, 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>
1997
Total Capital $87,921 $40,308 $50,385
(to Risk-Weighted
Assets) 17.45% >or= 8% >or= 10%
Tier I Capital 81,755 20,149 30,224
(to Risk-Weighted
Assets) 16.23 >or= 4 >or= 6%
Tier I Capital/
Leverage 81,755 22,087 36,812
(to Average Assets) 11.10 >or= 3 >or= 5%
- --------------------------------------------------------------------------------
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 22,006 36,677
(to Average Assets) 10.87 >or= 3 >or= 5%
- --------------------------------------------------------------------------------
</TABLE>
12 FEDERAL INCOME TAXES
The current and deferred income tax expense (benefit) breakdown was as
follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $3,997 $4,175 $3,931
Deferred (188) (83) (177)
-------------------------------
Total $3,809 $4,092 $3,754
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 27
12 FEDERAL INCOME TAXES (cont.)
In addition to income taxes applicable to income before taxes, a
deferred tax benefit of $216 thousand was recorded as a decrease to
shareholders' equity to reflect the current year change in the tax
effect of the unrealized net gain on investment securities available
for sale.
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Provision for possible loan losses $2,109 $2,021
Net loan origination fees 267 350
Postretirement benefits other than pensions 475 361
Interest on nonaccrual loans 153 118
Depreciation and amortization expense 158 112
Other 64 52
---------------------
Gross deferred tax assets 3,226 3,014
Deferred tax liabilities:
Securities available for sale 281 65
Accretion of bond discount 20 23
Pension expense 306 280
Other 21 20
---------------------
Gross deferred tax liabilities 628 388
---------------------
Net deferred tax assets $2,598 $2,626
- -------------------------------------------------------------------------------
</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 1997, 1996 and 1995, 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>
1997 1996 1995
- -------------------------------------------------------------------------------
<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) (3.9) (4.3)
Surtax exemption ( .7) ( .7) ( .7)
Other ( .7) ( .5) ( .8)
-------------------------------
Reported income tax rate 29.7% 29.9% 29.2%
- -------------------------------------------------------------------------------
</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) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 327 $ 303 $ 281
Interest cost on projected benefit obligation 411 375 341
Actual return on plan assets (1,042) 126 (1,215)
Net amortization and deferral 507 (590) 789
-------------------------------
Net periodic pension cost $ 203 $ 214 $ 196
- -------------------------------------------------------------------------------
</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) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Market value of plan assets, primarily registered
investment companies, U.S. government and agency
obligations and money markets $7,679 $6,970
Projected benefit obligation 6,794 5,915
--------------------
Plan assets in excess of projected benefit obligation 855 1,055
Unrecognized net transition asset (154) (184)
Unrecognized prior service cost due to plan amendment 130 147
Unrecognized net gain (loss) 34 (212)
--------------------
Prepaid pension expense recognized on the balance sheet $ 895 $ 806
--------------------
Actuarial present value of accumulated benefits,
including vested benefits of $4,102 and $3,672 $4,617 $3,999
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 28
13 EMPLOYEE BENEFITS (cont.)
Assumptions used in determining the actuarial present value of the
projected benefit obligation were as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Discount rates 7.0% 7.0%
Rates of increase in compensation levels 4.5 4.5
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) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Service cost $ 75 $ 58
Interest cost on projected benefit obligation 265 231
Amortization of transition obligation 119 119
Loss amortization 29 19
--------------------
Net periodic benefit cost $488 $427
- -------------------------------------------------------------------------------
</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) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $2,853 $2,371
Fully eligible active plan participants 40 550
Other plan participants 912 864
--------------------
Total accumulated postretirement benefit obligation 3,805 3,785
Plan assets at fair value - -
--------------------
Accumulated postretirement benefit obligation in excess
of plan assets 3,805 3,785
Unrecognized transition obligation (1,234) (1,908)
Unrecognized net loss (1,183) (823)
--------------------
Accrued benefit liability recognized on the balance sheet $1,388 $1,054
- -------------------------------------------------------------------------------
</TABLE>
Assumptions used to determine the actuarial present value of the
accumulated postretirement benefit obligation were as follows at
December 31:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<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 $309 thousand and the
aggregate of the service and interest cost components of net periodic
postretirement health care benefit cost by $26 thousand.
- ------------------------------------------------------------------------
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 amounts charged to noninterest expense were
as follows:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Employer matching contributions $313 $311 $149
Discretionary contributions 387 393 528
----------------------------
Total Bank contributions $700 $704 $677
- ------------------------------------------------------------------------------
</TABLE>
<PAGE> 29
14 COMMITMENTS AND CONTINGENTS
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 $26.932 million of U.S. government obligations from its
investment securities portfolio at December 31, 1997, 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) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loan commitments $ 1,371 $ 658
Unused portion of:
Home equity lines of credit 22,956 22,850
Commercial lines of credit (secured and unsecured) 46,589 56,030
Consumer unsecured lines of credit and credit cards 41,198 36,204
---------------------
Total commitments to extend credit $112,114 $115,742
Standby letters of credit and financial guarantees
written $ 17,270 $17,454
- -------------------------------------------------------------------------------
</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, $13.639 million in 1997 and
$10.440 million in 1996 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.
- ------------------------------------------------------------------------
The Corporation is aware of the issues associated with the programming code
in existing computer systems as the millennium, "Year 2000," approaches. A
team has been designated to conduct a comprehensive review of the
Corporation's computer systems to identify the systems that could be
affected by the "Year 2000" issues and is developing an implementation
plan to address those issues. The Corporation relies on external
processing vendors for the majority of its data processing requirements.
To date, confirmations have been received from these vendors that plans
are being developed to address processing of transactions in the year
2000. The team has not uncovered any issue, that is not being addressed,
that would have a material impact on the operations of the Corporation.
However, if these modifications and conversions are not completed on a
timely basis, it is understood that the year 2000 problem could have a
material impact on the operations 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> 30
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, 1997 1996 1995
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
INCOME
Dividends from Southwest National Bank
of Pennsylvania $7,284 $5,592 $3,972
Expense 49 42 35
-------------------------------
Income before income tax benefit and equity
in undistributed net income of subsidiary 7,235 5,550 3,949
Income tax benefit (17) (14) (12)
--------------------------------
Income before equity in undistributed
net income of subsidiary 7,252 5,564 3,949
Equity in undistributed net income
of subsidiary 1,753 4,046 5,089
-------------------------------
NET INCOME $9,005 $9,610 $9,038
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET
- -------------------------------------------------------------------------------
DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 19 $ 2
Investment in Southwest National Bank of Pennsylvania 82,406 80,251
Other securities available for sale 47 -
Other assets 17 14
-------------------
Total assets $82,489 $80,267
- -------------------------------------------------------------------------------
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 47,617 42,252
Treasury stock of 115,807 and 45,905 shares, at cost (4,840) (1,800)
-------------------
Total shareholders' equity $82,489 $80,164
-------------------
Total liabilities and shareholders' equity $82,489 $80,267
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,005 $ 9,610 $ 9,038
Adjustments to reconcile net income to
net cash from operating activities:
Equity in undistributed net income of
subsidiary (1,753) (4,046) (5,089)
Net increase from other operating activities (3) (13) -
-------------------------------
Net cash from operating activities 7,249 5,551 3,949
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale (45) - -
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease)in short-term borrowings (103) 103 -
Dividends paid (4,044) (3,870) (3,629)
Purchase of treasury stock (3,040) (1,800) -
Retirement of common stock - - (308)
-------------------------------
Net cash from financing activities (7,187) (5,567) (3,937)
-------------------------------
Net change in cash and cash equivalents 17 (16) 12
Cash and cash equivalents at beginning of year 2 18 6
-------------------------------
Cash and cash equivalents at end of year $ 19 $ 2 $ 18
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 31
16 QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly financial data for the years ended December 31, 1997 and 1996,
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>
1997
Interest income $13,505 $13,762 $13,925 $13,769
Interest expense 5,319 5,344 5,526 5,484
Provision for possible
loan losses 450 645 668 1,460
Noninterest income 1,283 1,349 1,442 1,624
Noninterest expense 5,681 5,601 5,765 5,902
Income tax expense 998 1,057 1,022 732
Net income 2,340 2,464 2,386 1,815
Per share:
Basic net income $ 0.75 $ 0.80 $ 0.77 $ 0.60
Cash dividends 0.32 0.32 0.32 0.35
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:
Basic net income $ 0.70 $ 0.73 $ 0.76 $ 0.84
Cash dividends 0.30 0.30 0.30 0.32
- -------------------------------------------------------------------------------
</TABLE>
17 FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS No. 107 requires the Bank to disclose estimated fair values for its
financial instruments. It also requires that fair values 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 consequences or estimated transaction costs. Fair value
estimates, methods and assumptions are set forth below for the Bank's
financial instruments.
- -------------------------------------------------------------------------------
Cash, Due From Banks and Money Market Investments
For these instruments, carrying amount approximates fair value because they
mature in 90 days or less and do not present unanticipated credit risks.
- -------------------------------------------------------------------------------
Securities
The fair value of investment securities is determined by market
quotations and is disclosed in Note 4.
- -------------------------------------------------------------------------------
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 contracted maturity, adjusted
for estimated prepayments, using estimated market discount rates that
reflect the credit and interest rate risk inherent in the loan.
Fair value for significant nonperforming loans is based on the carrying
value adjusted for anticipated credit loss risk and the valuation of
underlying collateral.
--------------------------------------------------------------------------
Deposits
The fair value of deposits with no stated maturity such as demand
deposits, NOW accounts and savings deposits, 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.
- ------------------------------------------------------------------------
<PAGE> 32
17 FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)
Other Financial Liabilities
Fair value approximates carrying value because of the short-term or
floating interest rate nature of these items.
The fair value estimates below 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.
<TABLE>
<CAPTION>
1997 1996
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash, due from banks and
money-market investments $ 49,446 $ 49,446 $ 55,485 $ 55,485
Securities 159,104 158,912 197,250 196,792
Loans 515,434 506,517 489,188 477,737
Less: Reserve for loan
losses (6,166) - (5,910) -
---------------------------------------------
Total financial assets $717,818 $714,875 $736,013 $730,014
Financial liabilities:
Deposits $641,865 $643,073 $651,328 $653,464
Federal funds purchased and
securities sold under
agreements to repurchase 4,531 4,531 6,811 6,811
Federal Home Loan Bank
advances 5,000 5,000 11,907 11,904
---------------------------------------------
Total financial liabilities $651,396 $652,604 $670,046 $672,179
- --------------------------------------------------------------------------------
</TABLE>
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> 33
(Please note that all text on pages 33 through 50--except for the
Corporation information on page 51--is presented in columnar form
utilizing two 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 17, 1998
/s/ Donald A. Lawry
Donald A. Lawry
Secretary and Treasurer
February 17, 1998
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, 1997
and 1996, 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, 1997. 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, 1997
and 1996, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
February 17, 1998
<PAGE> 34
MANAGEMENT'S DISCUSSION OF FINANCIAL STATEMENTS
The Managements 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
Net income slipped to $9.005 million in 1997, a decline of $605 thousand
(6.3%) from the $9.610 million earned by the Corporation in 1996. This
compares to last years rise of $572 thousand (6.3%) over 1995. Basic earnings
per share in 1997 were $2.92, decreasing $0.11 (3.6%) from the $3.03 earned
in 1996, based on average shares outstanding of 3,088,622 and 3,172,735 in
1997 and 1996, respectively. The decrease in weighted average shares
outstanding from 1996 to 1997 was due to the purchase of treasury shares
under a board authorization for the repurchase of common stock. Basic
earnings per share were $2.84 in 1995 based on 3,183,026 average shares
outstanding.
Earnings in 1997 were negatively impacted by two factors: the major factor
was a significant increase in Southwests provision for loan losses of $1.423
million for the year because of the rising trend of consumer loan charge-offs
in the indirect automobile portfolio. Because of the deteriorating
profitability of this line of business, Southwest made a business decision
to significantly scale back activity in the indirect automobile financing
business as of year-end 1997. Secondly, earnings were also impacted by a rise
in noninterest expense of $1.239 million (5.7%) compared to 1996. This rise
was due primarily to direct and indirect expenditures related to building the
foundation necessary to support the Bank's organizational improvement project
and strategic development initiatives.
Several factors contributed to net income growth in 1996, a rise in net
interest income of $1.115 million, growth of 4.6% in noninterest income
and only nominal growth of 0.4% in noninterest expense. In 1995, the factors
affecting the growth of net income were a rise in net interest income of $187
thousand, growth in noninterest income of 3.2%, a lower provision for loan
losses and a decline of 0.9% in noninterest expense.
Return on average assets dipped to 1.21% in 1997 compared to 1.32% in 1996
and 1.30% in 1995. Return on average shareholders equity amounted to 11.19%,
12.31% and 12.61% for the years 1997, 1996 and 1995, respectively.
NET INTEREST INCOME
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $54,961 $52,859 $51,481 $47,724 $47,936
Taxable equivalent adjustment 833 876 910 962 1,025
-------------------------------------------
Total interest income--fully taxable equivalent basis 55,794 52,735 52,391 48,686 48,961
Total interest expense 21,673 20,864 20,601 17,031 18,112
--------------------------------------------
Net interest income--fully taxable equivalent basis $34,121 $32,871 $31,790 $31,655 $30,849
</TABLE>
NET INTEREST MARGIN ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Yield on interest earning assets 7.89% 7.77% 7.94%
Rate on interest bearing liabilities 3.93 3.84 3.94
------------------------------
Net interest rate spread 3.96 3.93 4.00
Effect of noninterest bearing sources of funds .86 .82 .81
------------------------------
Net interest margin 4.82% 4.75% 4.81%
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 35
NET INTEREST INCOME
The fundamental source of Southwest's earnings, net interest income, is
defined as the difference between income on earning assets and the cost
of funds supporting those assets. Significant categories of earning assets
are loans and investment securities while deposits and borrowed funds
represent the major component of interest bearing liabilities. The level
of net interest income is primarily impacted by variations in the volume
and mix of these assets and liabilities, as well as changes in the levels of
interest rates.
Net interest income is presented on a taxable equivalent basis to enhance
the comparability of assets with differing tax characteristics. This
comparability is achieved through increasing interest income on tax-exempt
assets by an amount equal to the federal income taxes which would have been
paid had the income been fully taxable. As a result, a taxable equivalent
adjustment based on the statutory income tax rate of 35% for the years 1995
through 1997 is shown in the table on the preceding page. The following
discussion is based on results of a fully taxable equivalent basis.
Net interest income advanced to $34.121 million in 1997, a rise of $1.250
million (3.8%) after a $1.081 million (3.4%) increase in 1996 compared to
a $135 thousand (less than one percent) rise in 1995. Growth in 1997 was
driven by three factors: a higher yielding asset mix, improved net interest
(At this point in the 1997 Annual Report there appears a bar graph as
set out in the following table.)
<TABLE>
NET INTEREST INCOME
(fully taxable equivalent, in millions)
<S> <C>
93 $30.8
94 31.7
95 31.8
96 32.9
97 34.1
</TABLE>
margin and growth in average earning assets. Growth in 1996 and 1995 was
powered through a higher level of earning assets working in tandem with a
higher yielding asset mix.
The table at the bottom of the preceding page illustrates the components of
the net interest margin. The net interest margin is calculated as net interest
income divided by average earning assets and represents the Corporation's net
yield on its earning assets. The margin increased seven basis points to 4.82%
in 1997 following a decline of six basis points to 4.75% in 1996 after
remaining stable at 4.81% in 1995. The Corporation's net interest margin
continues to compare favorably to our peer group (bank holding companies with
assets between $500 million and $1 billion).
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 rose to 3.96% in 1997, compared to 3.93% in 1996 and
4.00% in 1995.
Throughout 1997, market interest rates fluctuated in a relatively narrow band
as continued growth and modest inflationary pressure kept the economy on a
positive course.
Redeployment of funds into higher yielding asset categories helped to spur
the rise in the yield on interest earning assets
ANALYSIS OF YEAR-TO-YEAR CHANGES IN NET INTEREST INCOME*
<TABLE>
<CAPTION>
(In thousands) 1997/1996 1996/1995
- ---------------------------------------------------------------------------------------------------------
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 $ - $ - $ (2) $ (2)
Federal funds sold (468) 23 (445) (464) (164) (628)
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations (1,048) (133) (1,181) 469 (18) 451
Obligations of states and
political subdivisions (42) (43) (85) (104) (35) (139)
Equity and other securities 9 (1) 8 3 (7) (4)
Loans 3,623 139 3,762 2,798 (1,132) 1,666
------- -------
Total interest earning assets 1,231 828 2,059 2,410 (1,065) 1,344
INTEREST BEARING LIABILITIES
NOW accounts (155) (15) (170) (32) (179) (211)
Savings deposits 85 (173) (88) (59) (270) (329)
Time deposits 727 170 897 1,131 (452) 679
Federal funds purchased and
securities sold under agreements
to repurchase 52 11 63 128 (11) 117
Federal Home Loan Bank advances 162 (55) 107 13 (6) 7
------ -------
Total interest bearing
liabilities 313 496 809 800 (537) 263
------ -------
CHANGE IN NET INTEREST INCOME 918 332 $1,250 1,610 (528) $1,081
<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> 36
At this point in the 1997 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) 1997
- -------------------------------------------------------------------------------
Average Average
balance Interest yields/rates
------------------------------------
<S> <C> <C> <C>
USES OF FUNDS
Interest earning assets:
Interest bearing deposits with banks $ 94 $ 6 6.38%
Federal funds sold 12,452 677 5.44
---------------------
Total money market investments 12,546 683 5.44
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations 172,410<F1> 10,320 5.99
Obligations of states and
political subdivisions 18,925<F1> 1,674 8.85
Equity and other securities 2,792<F1> 175 6.27
---------------------
Total investment securities 194,127 12,169 6.27
Loans 500,618 42,942 8.58
---------------------
Total interest earning assets $707,291 55,794 7.89%
SOURCES OF FUNDS
Interest bearing liabilities:
NOW accounts $ 40,693 489 1.20%
Savings deposits 242,768 7,312 3.01
Time deposits 256,511 13,312 5.19
Federal funds purchased and securities
sold under agreements to repurchase 6,555 290 4.42
Federal Home Loan Bank advances 4,928 270 5.48
---------------------
Total interest bearing liabilities 551,455 21,673 3.93
Sources supporting interest earning
assets on which interest is not paid 155,836 -
---------------------
Total sources of funds $707,291 $21,673 3.07%
------------------
NET INTEREST INCOME/YIELD ON INTEREST
EARNING ASSETS $34,121 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
<TABLE>
ANALYSIS OF NET INTEREST INCOME AND INTEREST YIELDS/RATES* (cont.)
<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 458,449 39,180 8.55
-------------------
Total interest earning assets $691,410 53,735 7.77%
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 147,983 -
-------------------
Total sources of funds $691,410 $20,864 3.02%
------------------
NET INTEREST INCOME/YIELD ON INTEREST
EARNING ASSETS $32,871 4.75%
<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) 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 425,503 37,514 8.82
------------------
Total interest earning assets $660,324 52,391 7.94
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 137,729 -
------------------
Total sources of funds $660,324 $20,601 3.13
--------------------
NET INTEREST INCOME/YIELD ON INTEREST
EARNING ASSETS $31,790 4.81%
<FN>
* Calculated on a fully taxable equivalent basis.
<F1> Amounts exclude adjustments to fair value as required by FAS No. 115.
</FN>
</TABLE>
<PAGE> 38
by 12 basis points for the year. The rate on interest bearing liabilities
also rose in 1997, increasing by nine basis points. This change in rate is
attributable to the continued shift in the interest bearing deposit mix as
customers registered preferences for higher yielding products, mainly time
deposits.
The percentage contribution of noninterest bearing sources of funds to the
net interest rate spread (commonly known as the free funds ratio) rose four
basis points to 0.86%. This resulted from a rise in the percentage of interest
earning assets funded by noninterest bearing sources of funds to 22.0% in 1997
from 21.4% in 1996. The improvement in the free funds ratio combined with the
rise in the yield on earning assets were the principal factors in the
expansion of the net interest margin year-to-year.
During 1996, continued deployment of funds into higher yielding earning
assets helped to soften the decline in the yield on interest earning assets
to 17 basis points for the year. The rate on interest bearing liabilities fell
by only 10 basis points as the result of the shifting in mix to higher cost
time deposits. This was the principal factor in the shrinkage of the net
interest margin as the free funds component remained relatively unchanged
year-to-year.
The table on page 35 shows how changes in average earning assets, interest
bearing liabilities and average interest rates or yields effect net interest
income. In 1997 and 1996 changes in volume were the principal contributors
to the rise in net interest income.
The schedule on the preceding pages illustrate the Corporation's average daily
balance of interest earning assets and interest earning liabilities together
with the yields or rates associated with each asset or liability category.
Average earning assets rose $15.8 million (2.3%) which followed a $31.1
million (4.7%) increase in 1996.
NONINTEREST INCOME
Noninterest income advanced $481 thousand (9.2%) to $5.698 million in 1997,
compared to a $228 thousand (4.6%) increase in 1996 and a $156 thousand (3.2%)
rise in 1995. Growth in service charges on deposit accounts fueled the 1997
rise. The increase in 1996 was driven by growth in service charges on deposit
accounts and other income; 1995 also benefited from a rise in service charges
on deposit accounts as well as growth in trust income.
During 1997, trust income remained flat settling at $1.723 million following
a $73 thousand (4.1%) decline in 1996 and a $134 thousand (8.0%) rise in
1995. Results for 1997 were affected by a lower level of fees recognized on
estates which
(At this point in the 1997 Annual Report there appears a bar graph as
set out in the following table.)
<TABLE>
NONINTEREST INCOME
(in millions)
<S> <C>
93 $4.6
94 4.8
95 5.0
96 5.2
97 5.7
</TABLE>
more than offset increases in other categories. The decline in 1996 was
principally due to a lower level of fees generated in the personal trust
sector, while 1995 was favorably impacted from increased fees earned in
the personal trust sector.
Service charges on deposit accounts are the most significant component of
noninterest income amounting to 47.6% of the total. This category jumped
$423 thousand (18.5%) in 1997 following increases of 4.3% in 1996 and 7.8%
in 1995. During 1997 management undertook a comprehensive review of services
provided and the fee structure for those services. As a result, adjustments
were made to the fee structure which positively affected 1997 and which will
have a greater impact in 1998 as the full year effect of these changes is
realized. This category was also positively impacted by the introduction of
the MasterMoneyTM (debit card) product which generated approximately $113
thousand of revenue for the year. The increase in 1996 was due primarily to
growth in fees on relationship deposit products and improved collection of
fees charged (mainly NSF fees). The prior year, 1995, also showed growth in
relationship deposit products combined with increases in fees charged (NSF
fees).
Other service charges and commissions remained relatively flat, rising only
$18 thousand (2.8%)in 1997 following a rise of $5 thousand in 1996 compared
to a decline of $147 thousand (18.6%)in 1995. During 1997, a higher level of
letter of credit fee income in tandem with increased MasterCard (R) and
Visa (R) fees earned (primarily merchant and interchange related) was
partially offset by reduced fees earned on securities lending. The 1996
results were impacted by a rise in credit life insurance commissions
recognized, offset by flat or declining activity in most other categories.
The drop in 1995 was related to reduced fees recognized on mutual funds and
annuity products combined with reduced credit life insurance commissions and
a lower level of fees earned on securities lending.
Net security gains declined $57 thousand (18.9%) in 1997, due to a lower
level of gains recognized on the sale of available for sale securities,
compared to a rise of $196 thousand in 1996.
Other income rose $102 thousand (28.7%) in 1997 after remaining relatively
flat in 1996 and 1995. Increased income recognized on a grantor trust for
which the Bank is a beneficiary positively impacted 1997.
Noninterest income has grown at a compound growth rate of 5.7% over the last
three years and enhanced performance in this category will continue to be a
management focus.
<PAGE> 39
NONINTEREST EXPENSE
Noninterest expense rose $1.239 million (5.7%) in 1997. Approximately $540
thousand of this increase represents major direct and indirect investments
in organizational improvements and strategic initiatives designed to
reposition the Corporation to operate more efficiently and effectively.
Exclusive of these additional items noninterest expense growth would have
been 3.2%.
The Corporation's efficiency ratio, which measures noninterest expense as a
percent of noninterest income plus net interest income on a taxable equivalent
basis rose only slightly to 57.6% in 1997 despite the increased level of
expenditures. This compares to 57.0% in 1996 and 58.8% in 1995. This ratio,
although higher for the year, still compares favorably to our peer groups'
average ratio of 62.3% as of September 30, 1997. Control of expenses and
optimum utilization of resources continue to be important objectives for
management.
In 1996 noninterest expense rose $83 thousand (0.4%) due primarily to the
drop in the deposit insurance premiums paid by the Bank. Exclusive of this
item, noninterest expense growth was 2.9%.
During 1995 noninterest expense fell $198 thousand (0.9%), due principally
to the significant drop in deposit insurance premiums paid by the Bank.
Exclusive of this item, noninterest expense would have risen 2.2%.
Salaries and employee benefits rose $471 thousand (4.4%) in 1997 after a $100
thousand (0.9%) rise in 1996 compared to a $308 thousand (3.0%) rise in 1995.
The increase in 1997 is due mainly to normal merit increases and the addition
of two full-time equivalent employees. Also impacting 1997 were higher
employee benefit costs due principally to increased health care premiums.
The rise in 1996 was due 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.
Net occupancy expense declined $40 thousand (2.1%) in 1997 following a $186
thousand (10.6%) increase in 1996 and a $49 thousand (2.9%) rise in 1995. A
lower level of expenditures in several facilities management categories was
reflected in 1997 as 1996 included higher than normal costs due to the severe
winter weather experienced. Also impacting 1996 was a reduction in rental
income as well as expenses associated with a new location and branch
renovation. Normal increases for the various costs of facilities management
were included in 1995.
Equipment expenses and data processing fees rose $221 thousand (6.8%) in 1997
compared to a $51 thousand rise
(At this point in the 1997 Annual Report there appears a bar graph as
set out in the following table.)
<TABLE>
NONINTEREST EXPENSE
(in millions)
<S> <C>
93 $21.4
94 21.8
95 21.6
96 21.7
97 22.9
</TABLE>
in 1996 following a $59 thousand dip in 1995. In 1997, data processing fees
accounted for the increase due to the roll out of several new products and
services, most notably the MasterMoney CardTM (debit card) which accounted
for $127 thousand of the year to year rise. In 1996, data processing fees
remained flat as equipment expenses rose 3.9% due to costs associated with
the two locations aforementioned. The decrease in 1995 was the result of
reduced equipment expenses as data processing fees remained unchanged.
FDIC insurance expense decreased $120 thousand (55.6%) in 1997, following
substantial drops of $527 thousand (70.9%) and $653 thousand (46.8%) in 1996
and 1995, respectively.
The reduction in 1997 stemmed from the elimination of the Bank Insurance Fund
(BIF) and Savings Association Insurance Fund (SAIF) premiums. However, the
Deposit Insurance Fund Act (DIFA) of 1996 authorized payments to the Financing
Corporation (FICO), based on assessments to both the BIF and SAIF funds to be
paid, as applicable, by all insured institutions. Future assessment rates will
be based on capital levels and bank regulatory ratings as required by the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA).
Included in 1996 expense was an assessment under DIFA relating to banks that
have deposits of acquired thrift institutions. The Bank was assessed $162
thousand related to the deposits of Atlantic Financials Latrobe branch which
was acquired from the Resolution Trust Corporation in 1991.
Other expenses rose $656 thousand (13.5%) following an increase of $227
thousand (4.9%) in 1996 and a rise of $122 thousand (2.7%) in 1995. The rise
in 1997 is due primarily to increased consulting fees, up $296 thousand,
mainly associated with the organizational realignment. Other factors include
increased other services, up $104 thousand, higher core deposit amortization
expense, up $75 thousand, increased communications expense, up $57 thousand
and higher Pennsylvania Shares Tax expense, up $51 thousand. The increase in
1996 resulted from the following: increased correspondent bank service
charges, up $58 thousand, increased postage and communications expenses, up
$53 thousand, higher Pennsylvania Shares Tax expense, up $46 thousand and the
return to more normal activity regarding OREO expense.
The rise in 1995 was due primarily to higher marketing expenditures, up $135
thousand, related to promotional efforts regarding the relocation of a branch
office and certain loan and deposit products.
<PAGE> 40
FEDERAL INCOME TAXES
The Corporation's federal income tax expense declined to $3.809 million in
1997 compared to $4.092 million in 1996 and $3.754 million in 1995. The
effective tax rates for the Corporation of 29.7% in 1997, 29.9% in 1996 and
29.2% in 1995 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 state and political subdivisions,
excludable dividend income and tax benefits associated with low income housing
tax credit projects.
DIVIDENDS
Cash dividends paid amounted to $4.044 million in 1997, $3.870 million in 1996
and $3.629 million in 1995. On a per common share basis, they were $1.31
(7.4% rise)in
(At this point in the 1997 Annual Report there appears a bar graph as
set out in the following table.)
<TABLE>
CASH DIVIDENDS
(per share)
<S> <C>
93 $0.98
94 1.08
95 1.14
96 1.22
97 1.31
</TABLE>
1997, $1.22 (7.0% rise) in 1996 and $1.14 (5.6% rise) in 1995. The continued
increase in the return to shareholders reflects the Corporations strong
capital position. The dividend payout ratio was 44.91% in 1997, 40.27% in
1996 and 40.15% in 1995. Our ratio has compared favorably to our peer group
over the last three years, staying above the 80th percentile.
The continued growth in cash dividends reflects a trend of uninterrupted
increases spanning the last 39 years by the Corporation and its predecessors.
Management continues to be committed to delivering maximum return to our
shareholders and building shareholder value. Actions taken in 1997 to enhance
shareholder value include returning excess capital to shareholders through
increased dividends and the repurchase of common stock.
STOCK PRICES
The Corporation lists its common stock on The Nasdaq Stock MarketSM under the
symbol SWPA. Currently the following firms are registered with NASD as market
makers for the Corporations 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 1997 Annual Report there appears a bar graph as
set out in the following table.)
<TABLE>
BOOK VALUE
(per share)
<S> <C>
93 $20.62
94 21.33
95 24.27
96 25.57
97 26.91
</TABLE>
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
First
quarter $46 $41 1/2 $35 1/2 $33
Second
quarter 44 1/4 41 3/4 35 1/2 31
Third
quarter 48 1/2 42 3/4 37 31 1/2
Fourth
quarter 55 3/4 44 1/2 46 1/4 36 1/2
</TABLE>
<PAGE> 41
FINANCIAL CONDITION
OVERVIEW
On average, the Corporation continued to experience growth in 1997, although
declining deposit balances in the latter portion of the year caused total
footings at December 31, 1997 to fall below the prior year-end. Total average
assets reached $743.1 million, up $15.2 million (2.1%) over the record level
achieved in 1996. Average loans rose sharply, up $42.2 million (9.2%), which
made a positive contribution to the net interest margin. Average investments
dropped $26.3 million (11.3%) compared to 1996 as proceeds from maturities
provided the bulk of the funding to support loan growth. Funds were provided
to a lesser extent by an $8.3 million (1.3%) rise in average deposits, a $4.0
million (52.6%) rise in average borrowings and a $2.4 million (3.1%) 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 1997, the
average portfolio outstanding dropped $26.3 million (11.3%) compared to a
rise of just $69 thousand in 1996.
In 1997 funds from the maturities of investments were used to fund the
substantial rise in loans as deposit growth lagged. In 1996 funds from
maturities of investments were not required to the same degree to fund loan
growth since the growth in deposits was available for that use. Average
investments represented 29% and 34% of total earning assets in 1997 and 1996
and continues a declining trend.
The table on the following page shows the breakdown of securities available
for sale and securities held to maturity at December 31, 1997, 1996 and 1995.
The primary purpose of the investment function at the Bank is to insure
liquidity and management of interest rate risk incurred, while concurrently
maintaining the loan to deposit ratio within acceptable guidelines. During
the last three years, the Bank has pursued a strategy of acquiring securities
that maintain the portfolios weighted average maturity in the two year or
less range.
The Corporation's policy for investment security classification 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. 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, 1997
($524 thousand) was reflected as a separate component of shareholders equity.
At December 31, 1997, the market value of the entire portfolio was above the
amortized cost by $614 thousand compared to December 31, 1996 when the market
value was below the amortized cost by $273 thousand. The weighted average
maturity of the investment portfolio is 1.61 years as of December 31, 1997
compared to 2.12 years as of December 31, 1996. The weighted average maturity
has remained relatively short to insure 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> 42
INVESTMENT SECURITIES
<TABLE>
(In thousands)
<CAPTION>
- -------------------------------------------------------------------------------
DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Securities available for sale:<F1>
U.S. Treasury securities $ 41,935 $ 62,014 $ 71,240
Obligations of U.S. government agencies and
corporations 45,503 50,434 44,951
Obligations of states and political
subdivisions 18,200 19,887 19,436
Equity securities 2,843 2,663 2,589
-------------------------------
Total securities available for sale 108,481 134,998 138,216
Securities held to maturity:
Obligations of U.S. government agencies and
corporations 49,817 62,067 71,991
-------------------------------
Total investment securities $158,298 $197,065 $210,207
<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, 1997 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 $35,012 $ 6,923 $ - $ - $ - $ 41,935
Obligations of U.S. government
agencies and corporations - 35,003 10,500 - - 45,503
Obligations of states and
political subdivisions - 10,180 6,528 1,492 - 18,200
Equity securities - - - - 2,843 2,843
---------------------------------------------------------------------
Total securities available
for sale 35,012 52,106 17,028 1,492 2,843 108,481
Securities held to maturity:
Obligations of U.S. government
agencies and corporations - 7,771 40,802 1,244 - 49,817
----------------------------------------------------------------------
Total investment securities $35,012 $ 59,877 $57,830 $2,736 $2,843 $158,298
----------------------------------------------------------------------
Weighted average yields* 5.06% 6.69% 6.08% 6.27% 6.57% 6.10%
<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 the trend of planned growth in 1997 rising $42.2
million (9.2%) following a $32.9 million (7.7%) rise in 1996. Management's
lending strategy stresses quality growth, diversified by product and industry.
This tenet will continue to provide the foundation in management's strategic
objective to generate improved earning asset yields by building loan volume.
Changes in the composition of the loan portfolio in 1997 included increases
of $9.6 million in commercial loans, $17.5 million in real estate mortgages
and a slight decline of $1.0 million in consumer loans. The major emphasis
for the year was in the commercial sector, both in the commercial and
industrial categories and the commercial real estate areas as we were able
to successfully capitalize on opportunities in these segments. Lending
activity in 1996 emphasized the commercial real estate and consumer
installment sectors. 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 1997, up $9.6 million (15.0%) after
increasing $2.0 million (3.2%) in 1996. The rise in 1997 is due to management's
strategy to grow this segment by offering additional products such as asset-
based loans and cash management services in response to our customers' needs.
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 concentration and portfolios to ensure that it
does not exceed established guidelines for lending. Commercial loans rose
$2.0 million in 1996 as increases in the commercial and industrial sector
were partially offset by a decline in the
<PAGE> 43
municipal loan portfolio. Commercial loans represented 14% of the total loan
portfolio in 1997, unchanged from 1996.
Loans collateralized by real estate rose $17.5 million (6.4%) in 1997, building
on a $23.3 million (9.4%) increase in 1996. This growth was the result of a
$2.4 million (16.0%) increase in the construction and land development
portfolio coupled with increases in the residential portfolio of $5.4 million
(2.8%) and the commercial sector of $9.7 million (14.8%). The positive
economic news and stable rate structure during the year helped to fuel the
demand in all three sectors. Although commercial real estate loans can be an
area of higher risk, management believes these risks have been mitigated by
limiting the concentrations in the portfolio, rigorous underwriting standards
and lending within our market area. The growth in 1996 resulted from increases
in all three sectors as well, with increases of $5.1 million (50.9%), $5.3
million (2.8%) and $13.0 million (24.6%)
(At this point in the 1997 Annual Report there appears a bar graph as
set out in the following table.)
<TABLE>
LOANS
(average in millions)
<S> <C>
93 $357
94 389
95 426
96 458
97 501
</TABLE>
in the construction and land development, residential and commercial
segments, respectively. The ratio of real estate mortgages to the total
loan portfolio remained at 56%, unchanged from December 31, 1996.
Consumer loans were relatively flat, declining $1.0 million (less than one
percent) in 1997 compared to a sizeable increase of $15.5 million (11.3%)
in 1996. Credit quality and profitability issues led management to de-emphasize
indirect automobile lending in the latter portion of 1997. The decision to
scale back this business segment as of year-end 1997 will allow management
to redeploy resources to the remaining consumer and other loan segments where
opportunities for quality growth exist. In 1996, strong consumer demand in the
latter half of the year helped to spur the rise in this category. Consumer
loans fell slightly to 30% of total loans at December 31, 1997 compared to
31% at December 31, 1996.
LOANS
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
DECEMBER 31, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 73,401 $ 63,752 $ 61,781 $ 37,662 $ 38,944
Real estate mortgages:
Construction and land
development 17,435 15,009 9,945 11,073 5,147
Residential 196,701 191,348 186,090 179,485 171,153
Commercial 75,717 66,025 53,003 51,424 47,538
-------------------------------------------------
Total 289,853 272,382 249,038 241,982 223,838
Consumer 152,180 153,054 137,577 133,246 108,454
-------------------------------------------------
Total loans, net of
unearned income $515,434 $489,188 $448,396 $412,890 $371,236
</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, 1997 Year or Less Through 5 Years 5 Years Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Predetermined interest
rates $12,874 $ 8,658 $1,468 $23,000
Floating interest rates 49,862 207 332 50,401
----------------------------------------------------
Total $62,736 $ 8,865 $1,800 $73,401
</TABLE>
<PAGE> 44
RESERVE FOR POSSIBLE LOAN LOSSES
The reserve for possible loan losses totaled $6.166 million at December 31,
1997, up $256 thousand (4.3%) from the $5.910 million reported at December 31,
1996. The reserve as a percent of loans at year-end dropped slightly settling
at 1.20% in 1997 compared to 1.21% in 1996. Credit quality ratios declined
from 1996 to 1997, despite the higher provision recorded during the year,
which more than offset the higher level of net charge-offs. The reserve as a
percent of nonperforming loans at December 31, 1997 was 179.51% compared to
362.58% at year-end 1996.
Net loan charge-offs for 1997 were $2.967 million, an increase of $1.426
million (92.5%) after rising $704 thousand (84.1%) in 1996. This rise is
the direct result of higher consumer loan charge-offs, particularly in the
indirect automobile portfolio which represented $1.331 million or approximately
50% of this category. The credit quality and performance of the remainder of
the loan portfolio continues to be satisfactory and reserves remain adequate.
Net loan charge-offs as a percent of average loans also rose from 0.34% in
1996 to 0.59% in 1997. A five-year analysis of the Banks reserve for possible
loan losses is presented below.
Credit quality continues to be a major focal point of the Bank and a reserve
for possible loan losses is maintained at a level which, in managements
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;
investment 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-offs and the effects of
changing conditions. As a result, there can be no guarantee that the level of
the loan loss provision will not be increased by the Bank.
<TABLE>
ANALYSIS OF THE RESERVE FOR POSSIBLE LOAN LOSSES
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,910 $ 5,651 $ 5,038 $ 4,451 $ 3,538
Provision for possible loan losses 3,223 1,800 1,450 1,560 1,597
Losses:
Commercial (290) (44) (13) (19) (20)
Real estate mortgages (68) (21) (58) (87) (126)
Consumer (3,302) (2,064) (1,415) (1,397) (1,173)
--------------------------------------------
Total (3,660) (2,129) (1,486) (1,503) (1,319)
Recoveries:
Commercial 70 2 22 25 32
Real estate mortgages 4 28 73 26 81
Consumer 619 558 554 479 522
--------------------------------------------
Total 693 588 649 530 635
--------------------------------------------
Net loan charge-offs (2,967) (1,541) (837) (973) (684)
--------------------------------------------
Balance at end of year $ 6,166 $ 5,910 $ 5,651 $ 5,038 $ 4,451
--------------------------------------------
Total loans:
Average $500,618 $458,449 $425,503 $388,680 $357,307
At December 31 515,434 489,188 448,396 412,890 371,236
As a percent of average loans:
Net loan charge-offs .59% .34% .20% .25% .19%
Provision for possible loan
losses .64 .39 .34 .40 .45
Reserve for possible loan
losses 1.23 1.29 1.33 1.30 1.25
Reserve as a percent of loans at
December 31 1.20 1.21 1.26 1.22 1.20
Reserve as a percent of
nonperforming loans at
December 31 179.51 362.58 414.60 407.61 294.57
Reserve as a multiple of net loan
charge-offs 2.08X 3.84X 6.75X 5.18X 6.51X
</TABLE>
<PAGE> 45
NONPERFORMING ASSETS
Nonperforming assets are assets on which revenue recognition has been
discontinued or is restricted. Nonperforming assets include both nonperforming
loans and acquired property, principally Other Real Estate Owned (OREO),
obtained in the collection effort on loans. Nonperforming loans include
nonaccrual loans. Nonaccrual loans comprise loans on which the accrual of
interest has been discontinued. Commercial and mortgage 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 $1.937
million (108.6%) in 1997, primarily due to a rise in nonaccrual loans compared
to a $295 thousand (19.8%) increase in 1996. All nonperforming assets are
secured and losses have been recognized, as appropriate, in establishing the
reserve for possible loan losses. The ratio of nonperforming assets to
period-end loans, OREO and other repossessions, rose to 0.72% at year-end
1997 from 0.36% at December 31, 1996.
Nonaccrual loans increased $1.805 million in 1997 after rising $267 thousand
in 1996. This rise in nonaccrual loans is mainly due to the Bank establishing
a consumer mortgage nonaccrual category. Major principal losses on these loans
are not anticipated due to the underlying collateral values. The interest
income forgone on these loans has not been significant, even though it rose
to $208 thousand in 1997 compared to $73 thousand in 1996. Management
recognizes the negative impact of nonaccrual loans on income and continues
to diligently work towards their reduction.
OREO and other repossessions increased in the aggregate $132 thousand following
a $28 thousand rise in 1996. Loans past due 90 days or more declined $144
thousand (7.2%) after rising $473 thousand (31.0%) in 1996. This decline in
1997 is the result of Southwest improving its loan collection and recovery
efforts. The ratio of nonperforming loans and loans past due 90 days or more,
in the aggregate, to period-end loans rose to 1.03% at year-end 1997, up from
0.74% at year-end 1996. Although this ratio has risen, comparisons to our peer
group still remain favorable.
<TABLE>
NONPERFORMING ASSETS AND PAST DUE LOANS
(In thousands)
- -------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans:
Nonaccrual loans $3,435 $1,630 $1,363 $1,236 $1,511
Other real estate owned 162 85 59 136 496
Other repossessions 123 68 66 29 2
---------------------------------------------
Total nonperforming assets $3,720 $1,783 $1,488 $1,401 $2,009
---------------------------------------------
Nonperforming loans to
period-end loans .67% .33% .30% .30% .41%
Nonperforming assets to period-
end loans, other real estate
owned and other repossessions .72 .36 .33 .34 .54
- -------------------------------------------------------------------------------
Loans past due 90 days or more $1,858 $2,002 $1,529 $ 893 $ 901
---------------------------------------------
Loans past due 90 days or more
to period-end loans .36% .41% .34% .22% .24%
</TABLE>
<PAGE> 46
DEPOSITS
Average deposits rose $8.3 million (1.3%) in 1997 compared to a $22.8 million
(3.7%) increase in 1996. During the latter half of 1997, deposits actually
declined. Although registering a rise on average for the year, balances had
fallen back slightly below 1996 year-end levels. The entire banking industry
continues to experience slow growth in deposits due principally to the flow
of funds into mutual funds and other investment options that compete with bank
deposits. The composition of deposits continued the trend of the last
several years and continued to shift in mix during 1997. Time deposits rose
which were offset by outflows from NOW accounts. Depositors continue to
display a preference for longer-term accounts bearing higher interest rates
which resulted in growth of time deposits with maturities in the 12 to 15
month range. Average time deposits increased $14.2 million (5.9%) after a
jump of $21.8 million (9.9%) in
At this point in the 1997 Annual Report there appears a bar graph as set out
in the following table.)
<TABLE>
DEPOSITS
(averages in millions)
<S> <C>
93 618
94 623
95 615
96 637
97 646
</TABLE>
1996. Savings deposits, on average, rose only $2.9 million (1.2%) compared to
the decline of $2.0 million (less than one percent) recorded in 1996. NOW
accounts dropped on average $13.0 million (24.2%) after declining $2.1 million
(3.8%) in 1996. Average demand deposits grew $4.2 million (4.1%) year-to-year
rising $5.1 million (5.3%) in 1996. Demand deposit growth has helped to offset
a portion of the rise in time deposits. Time deposits continued to increase
as a percentage of average deposits rising to 40% during 1997, up from 38% in
1996. This has had a negative impact on the Bank's cost of funds. The Bank's
reliance on time deposits of $100 thousand or more as a source of funds is
minimal. At December 31, 1997, they amounted to only 4.3% 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.
LIQUIDITY MANAGEMENT AND INTEREST RATE SENSITIVITY
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates and
equity prices. Southwest's market risk is composed mainly of interest rate
risk. The Corporation's Asset/Liability Team (ALT) is responsible for reviewing
the interest rate sensitivity position of the Corporation and establishing
policies to monitor and limit exposure to interest rate risk. The guidelines
established by ALT are approved by the Executive Committee of the Corporation's
Board of Directors.
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 sources for liquidity management. First and
foremost is the Bank's core deposit base, 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 available for sale securities 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.
Interest rate risk is monitored through the use of two complementary measures:
interest sensitivity analysis (static gap analysis) and earnings simulation
modeling. While each interest rate risk measurement has limitations, taken
together they represent a reasonably comprehensive view of the magnitude of
interest rate risk in the Corporation, the distribution of risk along the
yield curve, the level of risk through time and the amount of exposure to
changes in certain interest rate relationships.
The interest sensitivity table on the following page measures the amount of
repricing risk embedded in the balance sheet at a point in time. It does so
by comparing the difference in the repricing characteristics of assets and
liabilities. A "gap" is defined as the difference between the principal amount
of assets and liabilities which reprices within a specified time period.
The cumulative gap at the one-year repricing period was asset sensitive in
the amount of $44.4 million or 6.33% of earning assets. Generally, an asset
sensitive gap indicates 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 earnings
simulation modeling, which forecasts net interest income under a variety of
scenarios that incorporate changes in the absolute level of interest rates,
changes in the shape of the yield curve and changes in interest rate
relationships. Management evaluates the effects on income of alternative
interest rate scenarios against a base line scenario. This type of analysis
is also useful in determining the short-term earnings exposure to changes in
customer behavior involving loan payments and deposit additions and
withdrawals. The dynamic
<PAGE> 47
simulation model also includes assumptions about how the balance sheet is
likely to evolve through time, in different interest rate environments. Loan
and deposit growth assumptions are derived from historical analysis and
managements consensus outlook, as are the assumptions used to project yields
and rates for loans and deposits. All maturities, calls and prepayments on
the securities portfolio are assumed to be reinvested in loans or investment
securities with maturities in the two to five year range. Mortgage loan
prepayment assumptions are developed from historical and projected activity.
Deposit growth rates and pricing are assumed to follow historical patterns.
The sensitivities of key assumptions are reviewed and revised as necessary on
a continual basis by ALT.
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 variance on net interest income during
the 12 months of simulation is 5.0% and 7.0% for a gradual change of two and
three percentage points respectively. Management has maintained a risk position
well within the policy guideline range.
The following table illustrates the simulated impact of a gradual 200 basis
point or 300 basis point upward or downward movement in interest rates on net
interest income. The impact of the rate movements was developed by simulating
the effect of rates changing over a twelve month period from December 31, 1997
levels.
<TABLE>
<CAPTION>
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
- ----------------------------------------------------------------------------------------------------
Movements in interest rates from December 31, 1997, rates:
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase Decrease
Simulated impact in the next 12 months -------- --------
compared with December 31, 1997 +200 bp +300 bp -200 bp -300 bp
-----------------------------------------------------------
Net interest income increase (decrease) 3.5% 5.1% (3.3%) (4.9%)
</TABLE>
(In the 1997 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, 1997 Within but Within Months but
Rate sensitive: 3 Months 6 Months Within 1 Year
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Earning assets:
Money market investments $ 27,055 $ - $ -
Investment securities 17,122 22 284 23,542
Loans 210,191 27,329 26,571
---------------------------------------
Total earning assets 254,368 49,613 50,113
Interest bearing liabilities:
Deposits* 159,968 54,115 86,069
Securities sold under agreements
to repurchase 4,531 - -
Federal Home Loan Bank advances 5,000 - -
Total interest bearing ---------------------------------------
liabilities 169,499 54,115 86,069
Sources supporting interest
earning assets on which interest
is not paid - - -
---------------------------------------
Interest sensitivity gap $ 84,869 $ (4,502) $(35,956)
---------------------------------------
Cumulative gap $ 84,869 $ 80,367 $44,411
Ratio of cumulative gap to total
earning assets 12.10% 11.45% 6.33%
<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, 1997 Noninterest
Rate sensitive: Sensitive Total
- -------------------------------------------------------------------------------
<S> <C> <C>
Earning assets:
Money market investments $ - $ 27,055
Investment securities 96,156 159,104
Loans 251,343 515,434
----------------------------------
Total earning assets 347,499 701,593
Interest bearing liabilities:
Deposits* 232,574 532,726
Securities sold under agreements
to repurchase - 4,531
Federal Home Loan Bank advances - 5,000
Total interest bearing ----------------------------------
liabilities 232,574 542,257
Sources supporting interest
earning assets on which interest
is not paid 159,336 159,336
----------------------------------
Interest sensitivity gap $(44,411) $ -
----------------------------------
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>
<PAGE> 48
CAPITAL RESOURCES
CAPITAL RESOURCES
The Corporation's capital management objectives are to maintain a strong
capital base in excess of all regulatory guidelines while also maximizing
shareholders' value. Shareholders' equity at December 31, 1997 was $82.5
million, rising $2.3 million (2.9%) above year-end 1996, which followed a
rise of $3.0 million (3.8%) from year-end 1995 to December 31, 1996. A strong
capital base provides the Corporation with a foundation 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 $524 thousand and $120 thousand at December 31, 1997
and December 31, 1996 respectively.
During 1996 the Corporations Board of Directors authorized the repurchase of
150,000 shares of the Corporation's outstanding common stock, an amount which
represented less than 5% of the outstanding shares. This program continues to
progress with approximately 116,000 shares purchased through year-end 1997.
Federal Regulators have adopted a capital-based supervisory system for all
financial institutions. If a financial institutions capital ratios decline
below predetermined levels, it would become subject to a series of increasingly
restrictive regulatory actions. The system categorizes a financial institutions
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. At December 31, 1997, the Bank's ratios
substantially exceeded those requirements. Tier 1 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 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 16.23% on December 31,
1997 compared to 16.46% reported at year-end 1996. The total capital to
risk-weighted assets ratio was 17.45% at year-end 1997, down slightly from
the 17.68% at December 31, 1996. The leverage capital ratio was 11.10% at
December 31, 1997, up from the 10.87% reported at December 31, 1996. 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> 49
<TABLE>
SUPPLEMENTARY FINANCIAL DATA
CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $42,681 $38,902 $37,250 $32,172 $30,417
Interest on money market investments 683 1,128 1,758 1,212 1,057
Interest and dividends on
investment securities 11,597 12,829 12,473 14,340 16,462
-------------------------------------------
Total interest income 54,961 52,859 51,481 47,724 47,936
INTEREST EXPENSE
Interest on deposits 21,113 20,474 20,335 16,962 18,075
Interest on federal funds purchased
and securities sold under
agreements to repurchase 290 227 110 33 37
Interest on Federal Home Loan Bank
advances 270 163 156 36 -
-------------------------------------------
Total interest expense 21,673 20,864 20,601 17,031 18,112
-------------------------------------------
Net interest income 33,288 31,995 30,880 30,693 29,824
Provision for possible loan losses 3,223 1,800 1,450 1,560 1,597
-------------------------------------------
Net interest income after
provision for possible loan
losses 30,065 30,195 29,430 29,133 28,227
NONINTEREST INCOME
Trust income 1,723 1,728 1,801 1,667 1,551
Service charges on deposit accounts 2,711 2,288 2,194 2,035 2,035
Other 1,264 1,201 994 1,131 980
-------------------------------------------
Total noninterest income 5,698 5,217 4,989 4,833 4,566
NONINTEREST EXPENSE
Salaries and employee benefits 11,250 10,779 10,679 10,371 9,693
Other 11,699 10,931 10,948 11,454 11,713
-------------------------------------------
Total noninterest expense 22,949 21,710 21,627 21,825 21,406
-------------------------------------------
Income before income tax expense 12,814 13,702 12,792 12,141 11,387
Income tax expense 3,809 4,092 3,754 3,535 3,285
-------------------------------------------
NET INCOME $ 9,005 $ 9,610 $ 9,038 $ 8,606 $ 8,102
- --------------------------------------------------------------------------------
PER SHARE
Basic net income $ 2.92 $ 3.03 $ 2.84 $ 2.70 $ 2.54
Cash dividends 1.31 1.22 1.14 1.08 0.98
</TABLE>
<PAGE> 50
<TABLE>
SUPPLEMENTARY FINANCIAL DATA
CONSOLIDATED BALANCE SHEET
<CAPTION>
Average daily balances for year
ending December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Interest bearing deposits
with banks $ 94 $ 126 $ 129 $ 542 $ 2,835
Federal funds sold 12,452 21,040 29,502 28,248 29,305
U.S. Treasury securities
and obligations of
U.S. government agencies
and corporations 171,578 188,854 180,238 211,959 228,950
Obligations of states and
political subdivisions 19,673 20,269 20,534 24,312 24,123
Corporate collateralized
mortgage obligations - - - - 921
Equity and other securities 2,792 2,645 2,600 2,632 1,612
Loans 500,618 458,449 425,503 388,680 357,307
-------------------------------------------------
Total interest
earning assets 707,207 691,383 658,506 656,373 645,053
Noninterest earning assets:
Cash and due from banks 21,167 23,398 23,538 24,863 26,890
Reserve for possible loan
losses (5,875) (5,876) (5,507) (4,772) (4,075)
Bank premises and equipment 8,529 8,258 7,522 7,625 7,343
Other assets 12,074 10,749 8,984 9,064 9,486
-------------------------------------------------
Total noninterest
earning assets 35,895 36,529 34,537 36,780 39,644
-------------------------------------------------
Total assets $743,102 $727,912 $693,043 $693,153 $684,697
- --------------------------------------------------------------------------------
LIABILITIES
Interest bearing liabilities:
NOW accounts $ 40,693 $ 53,695 $ 55,839 $ 60,911 $ 61,629
Savings deposits 242,768 239,900 241,898 272,996 261,678
Time deposits 256,511 242,307 220,509 194,571 206,749
Federal funds purchased and
securities sold under
agreements to repurchase 6,555 5,378 2,376 1,311 1,871
Federal Home Loan Bank
advances 4,928 2,147 1,973 449 -
-------------------------------------------------
Total interest bearing
liabilities 551,455 543,427 522,595 530,328 531,927
Noninterest bearing liabilities:
Demand deposits 105,599 101,386 96,260 94,317 87,665
Other liabilities 5,593 5,039 2,503 1,413 2,002
-------------------------------------------------
Total noninterest
bearing liabilities 111,192 106,425 98,763 95,730 89,667
-------------------------------------------------
Total liabilities 662,647 649,852 621,358 625,968 621,594
SHAREHOLDERS' EQUITY 80,455 78,060 71,685 67,185 63,103
-------------------------------------------------
Total liabilities and
shareholders' equity $743,102 $727,912 $693,043 $693,153 $684,697
</TABLE>
FINANCIAL RATIOS AND MISCELLANY
<TABLE>
<CAPTION>
(Based on consolidated balance
sheet averages) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shareholders' equity to assets 10.83% 10.72% 10.34% 9.69% 9.22%
Shareholders' equity to loans 16.07 17.03 16.85 17.29 17.66
Net income to:
Total assets 1.21 1.32 1.30 1.24 1.18
Total shareholders' equity 11.19 12.31 12.61 12.81 12.84
Shareholders' equity per share
at year-end $26.91 $25.57 $24.27 $21.33 $20.62
Dividend payout ratio 44.91% 40.27% 40.15% 40.00% 38.74%
Shareholders of record at
year-end 1,259 1,280 1,278 1,287 1,290
Average full-time equivalent
employees 373 371 372 374 372
</TABLE>
<PAGE> 51
(The following information regarding bank officers is found inside the back
cover on a teal blue background)
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
Emmanuel J. Answine
SENIOR VICE PRESIDENT
Michael J. Earle
SENIOR VICE PRESIDENT
Joseph A. Giangiulio
SENIOR VICE PRESIDENT
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
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.
FORMERLY 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
BANK ADVISORY
DIRECTORS
ALLEGHENY VALLEY
Janet Czekalski
Alexander H. Lindsay
Laurie Stern Singer
Gary L. Weleski
DERRY/LATROBE
Vance E. Booher III
Louis V. Kasperik
David E. Mastrorocco
William W. Thomson
ROUTE 22
Edward J. Ferri
Terrence S. Jacobs
A. Richard Kacin
Wayne Norris
Advisory Directors Emeritus
James A. Esler
George Danko
Henry E. Shaw
All corporate directors also serve
as directors of Southwest National
Bank of Pennsylvania.
- -------------------------------------------------------------------
Southwest National Corporation
P.O. Box 760
Greensburg, PA 15601
Telephone: 724/834-2310
FAX: 724/832-6044
The Corporation will provide without charge to any shareholder a copy of
its 1997 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 21, 1998.
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 724/832-6002.
<PAGE>
The back cover is a beige background with Southwest Bank and the corporate
logo centered, 5 1/2" from the top of the page.
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 appropriate 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 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 21, 1998
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 21, 1998 at
1:00 p.m., for the purpose of considering and voting upon the
following:
1. To elect 3 Class 3 Directors to serve a term of three
years expiring in 2001.
2. 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 6, 1998 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
Donald A. Lawry
Secretary and Treasurer
March 20, 1998
- -----------------------------------------------------------------
<PAGE> 1
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 21, 1998
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 21, 1998 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 20, 1998.
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 6, 1998,
the record date for the determination of the shareholders
entitled to vote at the meeting, was 3,064,794. 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) vote on the
election of the 3 nominees listed in the Proxy Statement as
Directors; and (ii) consider and act upon any other business that
may be properly brought before the meeting. The Board of
Directors of the Corporation recommends a vote FOR the proposal
to elect as Directors the 3 nominees hereinafter named. The 3
nominees receiving the highest number of votes cast, including
votes cast cumulatively, shall be elected Directors.
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 and Directors
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 Board of Directors. The Board
of Directors has proposed that the shareholders elect the 3
nominees at the annual meeting on April 21, 1998. Currently there
are 11 Directors.
<PAGE> 2
The Board of Directors is currently divided into three
classes; one class of three members and two classes of four
members each. The term of office of one class expires each year.
Nominees to the class of Directors whose term expires at each
Annual Meeting are elected for a three-year term. In the event
the number of Directors is changed, any increase or decrease is
to be so apportioned among the classes so as to maintain the
classes as nearly equal in number as possible. Any additional
Director of a class shall hold office for a term which shall
coincide with the term of such class.
The Board has nominated three persons for election as
Directors for a three-year term expiring in 2001 Joseph V.
Morford, Jr. and William W. Thomson as continuing Directors and
Daniel C. Krezenski as a new nominee. Assuming the election of
these three nominees to the 2001 class, the 2001 class of
Directors will consist of three members, the 2000 class of
Directors and the 1999 class of Directors will consist of four
members each.
The Director's 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 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 following tables set forth certain information about the
nominees for election as Directors and about the continuing
Directors of the Corporation. The information includes the number
of shares of common stock beneficially owned by them as of
February 3, 1998.
<TABLE>
<CAPTION>
Approximate
Name and principal Beneficial percentage
occupation or employment ownership of
for the past five years Director of shares outstanding
(1) (2) since Age (3) shares (4)
<S> <C> <C> <C> <C>
CLASS 3
NOMINEES - SERVING A TERM OF THREE YEARS EXPIRING IN 2001
Daniel C. Krezenski -- 59 100 --
President, Westmoreland
County Community College
Joseph V. Morford, Jr. 1983 68 1,225 --
Retired, formerly
President, Moore and
Morford, Inc., steel
fabricators
William W. Thomson 1992 62 1,370 --
Managing Partner,
Thomson, Tomsey & Co.,
Certified Public
Accountants
CLASS 1
CONTINUING DIRECTORS- WITH TERMS EXPIRING IN 1999
David S. Dahlmann 1990 48 1,200 --
President and Chief
Executive Officer of the
Corporation and the Bank
Charles E. Henry 1989 67 4,021 --
President, Chas. M.
Henry Printing Co.
<PAGE> 3
Alexander H.Lindsay, Jr. 1986 51 760 --
President, Lindsay,
Jackson, and Martin,
P.C., Attorneys
John A. Robertshaw, Jr. 1986 71 9,334 --
Formerly Chairman,
Laurel Vending, Inc.,
vending and food service
CLASS 2
CONTINUING DIRECTORS - WITH TERMS EXPIRING IN 2000
Ray T. Charley 1989 46 18,560 --
President, Thomi Co.,
retail grocers
A. Richard Kacin 1994 57 2,530 --
President, A. Richard
Kacin, Inc., real
estate construction and
development and
President, Delmont
Builders Supply, Inc.
James W. Newill 1978 63 77,800 2.54%
Certified Public
Accountant, formerly
President, J. W. Newill
Company, public
accounting firm
Laurie Stern Singer 1994 46 220 --
President, Allegheny
Valley Chamber of
Commerce and President,
Allegheny Valley
Development Corporation
Directors, nominees and 118,270 3.86%
officers of the
Corporation as a group
(13 persons) (5)
<FN>
(1) All nominees or Directors held the position indicated or
other senior executive position with the same entity for the
past five years.
(2) No nominee or Director of the Corporation is presently
a Director of another company filing reports with the
Securities and Exchange Commission.
(3) The nominees or Directors 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, 2,829 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 as
custodian for his son 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, and Donald A. Lawry, Secretary and Treasurer
are the only officers of the Corporation.
</TABLE>
<PAGE> 4
Information Concerning Retiring Director
James A. Critchfield, Jr. will retire from the Board of
Directors upon the election of Directors at the 1998 Annual
Meeting under the current retirement policies of the Corporation.
Mr. Critchfield owns 384 shares, less than 1%, of the total
outstanding shares of the Corporation.
Other Nominations
Other nominations may be made at the meeting only after at
least 60 days' notice has been given in writing according to the
procedures set forth in Article 9.B. of the Corporation's
Articles of Incorporation.
Boards and Committees
It is the policy of the Corporation that its Directors also
serve as Directors of its wholly-owned subsidiary, the Bank.
All Directors attended at least 75% of the aggregate number of
meetings of the Board of Directors and the respective committees
on which they serve except for Director Lindsay who attended 72%
The Board of the Corporation met 12 times in 1997 and the Board
of the Bank met 12 times in 1997.
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
1997. The Examining Committees perform the functions of an audit
committee and their responsibilities include causing an
examination of the affairs of the Corporation and Bank to be
made, reviewing reports of examinations of the Corporation and
the Bank made by the Federal Reserve Bank and the Office of the
Comptroller of the Currency and reporting the findings and
recommendations to the respective Board. Appointment of the
independent public accountants is made by the Board of Directors
upon the recommendation of the Examining Committees. The
Examining Committees presently have as members Directors Henry,
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 13 times in
1997. 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 2 times in
1997. 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 6 times in 1997.
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 1997. 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.
<PAGE> 5
Compensation of Directors
The Corporation paid for the year 1997 an annual retainer of
$3,000 to Directors who are not officers. Directors who are not
officers are paid $500 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 and officers of the Corporation and the
Bank and their associates were customers of the Bank during 1997.
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 1997, the Bank paid $89,061 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.
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 1997. 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 1997, 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 1997. 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.
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 1997. All compensation was
paid by the Bank. Five of the members of the Personnel
<PAGE> 6
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 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 1997 as they affected Mr. Dahlmann and other
executive officers.
The Personnel Committee's executive compensation policies
are designed to provide compensation to the executive officers
based upon a performance evaluation of each executive officer
using a matrix provided by a consultant to the Bank, Peter R.
Johnson & Company, rating the performance of each executive on a
scale of 1 through 5. The Personnel Committee applies this
performance rating to all executive officers including Mr.
Dahlmann. Mr. Dahlmann does not participate in his own
performance evaluation, but does participate in the evaluation of
other executive officers. Levels of base salary paid by the Bank
to both Mr. Dahlmann and the other executive officers are
intended to be comparable with other companies in the banking
industry. The Bank uses the services of Peter R. Johnson &
Company to compile the executive compensation of appropriate
groupings of the banks that closely resemble the Bank. The
sources of information relied on by the consultant were Watson
Wyatt Data Services (formerly Cole Surveys, Inc.), Bank
Administration Institute, L.R. Webber Associates, SNL Executive
Compensation Survey, Financial Institutions Compensation Survey
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 1997. All compensation was paid by the Bank.
The compensation shown in the following table is for the
President and Chief Executive Officer and other highly
compensated executive officers who received salary and bonus of
$100,000 or more for the last fiscal year.
<PAGE> 7
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
All other
Name and principal compensation
position Year Salary (1)
<S> <C> <C> <C>
David S. Dahlmann, 1997 $212,000 $14,510
President and Chief 1996 200,000 13,948
Executive Officer 1995 185,000 14,162
David M. Hanna 1997 100,000 9,568
Executive Vice
President
Donald A. Lawry 1997 100,000 9,112
Executive Vice
President
<FN>
(1) The amounts in the above table under "All other
compensation" for 1997 include contributions to the
Bank's 401(k) Plan ($13,466, $8,416 and $8,416
respectively for Messrs. Dahlmann, Hanna and Lawry) and
the cost of insurance premiums under the Bank's Group
Life Insurance Plan ($1,044, $1,152 and $696
respectively for Messrs. Dahlmann, Hanna and Lawry).
</TABLE>
The Bank's 401(k) Plan is qualified under Section 401(a) of
the Internal Revenue Code. Each eligible employee of the Bank
becomes eligible to participate at the next available entry date
following one year of employment. The Plan is contributory on
the part of employees. The Bank may elect to match the employee
contribution. The Board of Directors determines the match amount
annually. In addition, each year the Bank has the discretion to
make an annual contribution to eligible Plan participants. This
contribution is based on participants' eligible salary as defined
under IRS Section 3401(a). All deferred amounts are vested
immediately and are payable to participants upon their
termination of employment.
In December, 1997, the Board of Directors approved the
establishment of a nonqualified Excess Benefit Defined
Contribution 401(k) Plan. The purpose of this Plan is to replace
benefits which may be lost for certain highly compensated
employees under the 401(k) Plan, due to eligible compensation
limits under current tax law. This Plan provides an opportunity
to eligible employees to make elective deferrals and to the
employer to make matching and discretionary contributions in
order to replace such benefits. The Board of Directors may
designate, in its sole discretion, persons eligible to
participate in this Plan. For the Plan year ending December 31,
1997 a contribution of $2,293 was made to this Plan on behalf of
Mr. Dahlmann.
It is not possible to determine the extent of the benefits
that any participant may be entitled to receive under the Plans
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. 48 1993-1997 Director,
Dahlmann President and
Chief
Executive
Officer of the
Corporation
and Bank
David M. Hanna 50 1997 Vice President
of the
Corporation
and Executive
Vice President
of the Bank
1993-1996 Senior Vice
President of
the Bank
Donald A. 47 1993-1997 Secretary and
Lawry Treasurer of
the
Corporation
and Executive
Vice President
of the Bank
</TABLE>
<PAGE> 8
Defined Benefit Pension Plan of the Bank
The Bank made a contribution of $292,132 to the Defined
Benefit Pension Plan for the Plan year ending June 30, 1997.
Benefits are not vested until the completion of five years of
credited service, when they become fully vested. Retirement
benefits are based upon the average of the annual compensation
for the highest five consecutive years during the last ten years
of credited service, and are 1% of average compensation
multiplied by the number of years of credited service (subject to
a maximum of 44 years), plus 1/2 of 1% of average compensation in
excess of covered compensation, multiplied by the number of years
of credited service (subject to a maximum of 40 years). The Plan
is noncontributory on the part of employees. The Bank
contributes the entire actuarially determined amount necessary to
fund total benefits. The following table sets forth an estimate
of the annual benefits payable under the Plan for employees,
including officers, reaching the normal retirement date (age 65):
<TABLE>
<CAPTION>
Estimated annual pension for years
of credited service
Annual basic 10 20 30 40
compensation years years years years
<S> <C> <C> <C> <C>
$ 25,000 $ 2,500 $ 5,000 $ 7,500 $ 10,000
50,000 6,000 12,000 18,000 24,000
75,000 9,750 19,500 29,250 39,000
100,000 13,500 27,000 40,500 54,000
125,000 17,250 34,500 51,750 69,000
150,000 21,000 42,000 63,000 84,000
175,000 24,750 49,500 74,250 99,000
200,000 28,500 57,000 85,500 114,000
225,000 32,250 64,500 96,750 129,000
</TABLE>
The credited years of service for Messrs. Dahlmann, Hanna
and Lawry are 26, 26 and 24, respectively. The compensation used
to determine pension benefits is approximately the same as the
salary set forth in the Summary Compensation Table.
The amounts in the above table represent the estimated
annual benefits payable to an employee for life. Other available
optional forms of payment of benefits would reduce the amount
shown in the table. The benefit amounts shown are not subject to
any deduction for social security or other amounts. Effective for
retirements on or after January 1, 1997, annual basic
compensation for Plan purposes may not exceed $160,000.
In December, 1997, the Board of Directors approved the
establishment of a nonqualified Excess Benefit Defined Benefit
(Pension) Plan. The purpose of this Plan is to replace benefits
which may be lost for certain highly compensated employees under
the Defined Benefit Pension Plan, due to eligible compensation
limits under current tax law. Participation in this Plan is
limited to a select group of management or highly compensated
employees. The Board of Directors may designate in its sole
discretion, persons eligible to participate in this Plan. The
basic benefit provided by this Plan is equal to (1) the benefit
which would have been provided by the Defined Benefit Pension
Plan when calculated without regard to eligible compensation
limits under current tax law, minus (2) the benefit actually
provided by the Defined Benefit Pension Plan.
<PAGE> 9
PERFORMANCE REPORT
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 12/31/97
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>
12/31/92 100.000 100.000 100.000
01/29/93 115.888 102.847 104.046
02/26/93 114.134 99.010 105.523
03/31/93 133.942 101.876 109.821
04/30/93 132.055 97.528 105.900
05/28/93 124.590 103.354 104.684
06/30/93 117.932 103.832 107.522
07/30/93 122.212 103.954 111.843
08/31/93 138.185 109.327 115.004
09/30/93 142.024 112.583 118.597
10/29/93 143.943 115.114 117.634
11/30/93 141.278 111.682 112.920
12/31/93 143.697 114.796 116.226
01/31/94 149.020 118.281 119.131
02/28/94 138.575 117.177 117.599
03/31/94 134.671 109.971 114.384
04/29/94 138.184 108.544 117.531
05/31/94 134.707 108.809 121.790
06/30/94 143.570 104.830 121.380
07/29/94 137.071 106.980 123.105
08/31/94 128.803 113.800 127.171
09/30/94 132.380 113.509 124.991
10/31/94 128.803 115.740 121.392
11/30/94 123.654 111.900 115.934
12/30/94 113.400 112.214 116.501
01/31/95 119.431 112.843 120.388
02/28/95 125.663 118.811 126.363
03/31/95 132.983 122.334 128.128
04/28/95 131.763 126.186 130.362
05/31/95 131.909 129.442 134.565
06/30/95 131.909 139.932 138.768
07/31/95 135.608 150.218 145.396
08/31/95 158.103 153.262 152.952
09/29/95 161.838 156.787 158.159
10/31/95 169.307 155.888 158.870
11/30/95 173.383 159.549 166.148
12/29/95 168.357 158.699 169.671
01/31/96 170.870 159.482 170.428
02/29/96 173.668 165.552 172.907
03/29/96 177.471 166.101 176.479
04/30/96 177.471 179.882 177.022
05/31/96 168.754 188.141 180.290
06/28/96 161.083 179.660 180.629
07/31/96 167.475 163.658 176.041
08/30/96 190.802 172.828 187.358
09/30/96 188.224 186.048 195.791
10/31/96 204.984 183.993 202.081
11/29/96 209.212 195.367 215.079
12/31/96 236.501 195.192 217.500
02/28/97 227.138 197.505 236.930
03/31/97 222.556 184.612 226.900
04/30/97 225.829 190.384 229.757
05/30/97 232.121 211.969 245.699
06/30/97 225.526 218.452 264.220
07/31/97 226.845 241.510 283.415
08/29/97 243.079 241.142 280.946
09/30/97 246.399 255.404 308.327
10/31/97 251.048 242.129 303.167
11/28/97 275.489 243.326 309.943
12/31/97 262.116 239.527 333.805
<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
12/31/92.
</TABLE>
<PAGE> 10
PRINCIPAL SHAREHOLDERS
As of February 3,1998 the trust department of the Bank held
in various fiduciary capacities 293,666 shares of the common
stock of the Corporation. These holdings represent 9.58% of the
total outstanding shares. The Bank has the power to dispose or
direct the disposition of a portion of the shares as follows:
Sole-234,808; Shared-89,156. The Bank has the power to vote or
direct the voting of a portion of these shares as follows: Sole-259,897;
Shared-31,493. In every instance another entity is entitled to the
dividends or proceeds of sale. No individual account holds an interest
of 5% or more. Additionally the Corporation is not aware of any other
person who is a beneficial owner of more than 5% of the outstanding
common stock of the Corporation.
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 1998. 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 1998.
Audit services performed by KPMG Peat Marwick LLP during
1997 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
1999 must be received by the Secretary no later than November 20,
1998.
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
Donald A. Lawry
Secretary and Treasurer
- -----------------------------------------------------------------
<PAGE>
(The following is the information depicted on the proxy card.)
SOUTHWEST NATIONAL CORPORATION
GREENSBURG, PENNSYLVANIA
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS - APRIL 21, 1998
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 21, 1998 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 To elect 3 Class 3 Directors to serve a term of
three years expiring in 2001.
[ ] For all nominees listed below:
(except as marked to the contrary below)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below:
Daniel C. Krezenski, Joseph V. Morford, Jr. and
William W. Thomson
[ ] ABSTAIN
INSTRUCTIONS: To withhold authority to vote for any individual
nominee, draw a line through that nominee's name.
OTHER To consider and act upon any other matter which
BUSINESS may 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.
IN WITNESS WHEREOF, the undersigned shareholder has duly
executed the proxy on _____________, 1998.
__________________________________(L.S.)
__________________________________(L.S.)
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.
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
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,391
<INT-BEARING-DEPOSITS> 55
<FED-FUNDS-SOLD> 27,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 109,287
<INVESTMENTS-CARRYING> 49,817
<INVESTMENTS-MARKET> 49,625
<LOANS> 515,434
<ALLOWANCE> 6,166
<TOTAL-ASSETS> 739,242
<DEPOSITS> 641,865
<SHORT-TERM> 9,531
<LIABILITIES-OTHER> 5,357
<LONG-TERM> 0
0
0
<COMMON> 7,952
<OTHER-SE> 74,537
<TOTAL-LIABILITIES-AND-EQUITY> 739,242
<INTEREST-LOAN> 42,681
<INTEREST-INVEST> 11,597
<INTEREST-OTHER> 683
<INTEREST-TOTAL> 54,961
<INTEREST-DEPOSIT> 21,113
<INTEREST-EXPENSE> 21,673
<INTEREST-INCOME-NET> 33,288
<LOAN-LOSSES> 3,223
<SECURITIES-GAINS> 139
<EXPENSE-OTHER> 22,949
<INCOME-PRETAX> 12,814
<INCOME-PRE-EXTRAORDINARY> 9,005
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,005
<EPS-PRIMARY> 2.92
<EPS-DILUTED> 2.92
<YIELD-ACTUAL> 7.89
<LOANS-NON> 3,435
<LOANS-PAST> 1,858
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,910
<CHARGE-OFFS> 3,660
<RECOVERIES> 693
<ALLOWANCE-CLOSE> 6,166
<ALLOWANCE-DOMESTIC> 6,166
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
