<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: Commission File Number:
SEPTEMBER 30, 1996 0-18505
SOUTHWEST BANKS, INC.
------------------------------------------------------------
(Exact name of registrant as specified on its charter)
<TABLE>
<S> <C>
FLORIDA 65-0083473
- -------------------------------------------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
900 GOODLETTE ROAD NORTH, NAPLES, FLORIDA 34102
- ------------------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (941)262-7600
------------------------------
(Former name, former address and former fiscal year, if changed since last report)
</TABLE>
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 and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
COMMON STOCK, $.10 PAR VALUE 3,654,803
- ---------------------------- -------------------------------
Class Outstanding at October 25, 1996
1
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<TABLE>
<CAPTION>
INDEX PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets:
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income:
Three Months Ended September 30, 1996 and 1995 4
Nine Months Ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Securities Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
(Unaudited)
------------------- -------------------
<S> <C> <C>
ASSETS
Cash and Demand Balances Due from Banks $ 24,897,073 $ 25,135,628
Federal Funds Sold 4,100,000 31,724,000
------------------- -------------------
Total Cash and Cash Equivalents 28,997,073 56,859,628
Securities Available for Sale at Fair Value
(Cost of $61,771,953 and $50,109,434) 60,764,051 50,401,563
Securities Held to Maturity at Cost
(Fair Value of $15,936,308 and $23,946,120) 16,163,273 23,834,164
Loans 299,712,504 238,509,066
Less: Allowance for loan losses (2,095,197) (1,585,285)
Unearned income & deferred loan fees (188,975) (257,550)
------------------- -------------------
Net Loans 297,428,332 236,666,231
Premises and Equipment 14,178,467 14,413,940
Accrued Interest Receivable 2,712,224 2,594,888
Other Assets 4,473,440 1,691,377
------------------- -------------------
TOTAL $ 424,716,860 $ 386,461,791
LIABILITIES AND STOCKHOLDERS' EQUITY =================== ===================
Deposits $ 332,822,906 $ 324,830,614
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase 30,270,902 18,276,769
Other Short Term Borrowings 26,250,000 10,000,000
Accrued Interest Payable 1,860,293 1,714,022
Accrued Expenses and Other Liabilities 1,225,881 1,696,483
------------------- -------------------
Total Liabilities 392,429,982 356,517,888
Stockholders' Equity:
Common Stock, Par Value $.10, 25,000,000 Shares
Authorized, 3,654,803 and 3,654,089 Shares Issued
and Outstanding 365,480 365,409
Capital Surplus 28,331,392 28,322,888
Retained Earnings 4,078,565 1,462,295
Unrealized (Loss)Gain on Securities Available for Sale (488,559) 182,201
Employee Stock Ownership Plan Obligation 0 (388,890)
------------------- -------------------
Total Stockholders' Equity 32,286,878 29,943,903
------------------- -------------------
TOTAL $ 424,716,860 $ 386,461,791
=================== ===================
</TABLE>
See notes to consolidated financial statements.
3
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SOUTHWEST BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1996 1995
----------------- ------------------
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 6,707,034 $ 5,551,471
Interest on Federal Funds Sold 71,295 287,679
Interest on Investment Securities and Other 1,202,407 1,038,226
----------------- ------------------
Total Interest Income 7,980,736 6,877,376
INTEREST EXPENSE
Interest Expense on Deposits 2,923,645 2,662,938
Interest on Short-Term Borrowings 507,700 628,937
----------------- ------------------
Total Interest Expense 3,431,345 3,291,875
----------------- ------------------
Net Interest Income 4,549,391 3,585,501
Provision for Loan Losses 290,000 195,000
----------------- ------------------
Net Interest Income after Provision for Loan Losses 4,259,391 3,390,501
OTHER INCOME
Service Charges, Commissions and Fees 877,275 688,642
Gain on Sale of Investment Securities 0 0
----------------- ------------------
Total Other Income 877,275 688,642
OTHER EXPENSE
Salaries and Benefits 2,094,569 1,762,272
Occupancy 313,013 284,745
Equipment Rental, Depreciation and Maintenance 517,341 410,860
General Operating 810,043 864,827
----------------- ------------------
Total Other Expenses 3,734,966 3,322,704
----------------- ------------------
Income Before Taxes 1,401,700 756,439
Provision for Income Taxes 485,413 255,921
----------------- ------------------
NET INCOME $ 916,287 $ 500,518
================= ==================
EARNINGS PER SHARE $ 0.23 $ 0.13
================= ==================
Weighted average shares outstanding 3,973,901 3,877,961
================= ==================
</TABLE>
See notes to consolidated financial statements.
4
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SOUTHWEST BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1996 1995
----------------- ------------------
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 18,726,932 $ 14,997,505
Interest on Federal Funds Sold 485,368 692,347
Interest on Investment Securities and Other 3,610,559 2,654,125
----------------- ------------------
Total Interest Income 22,822,859 18,343,977
INTEREST EXPENSE
Interest Expense on Deposits 8,519,313 6,944,024
Interest on Short-Term Borrowings 1,168,097 1,749,234
----------------- ------------------
Total Interest Expense 9,687,410 8,693,258
----------------- ------------------
Net Interest Income 13,135,449 9,650,719
Provision for Loan Losses 770,000 510,000
----------------- ------------------
Net Interest Income after Provision for Loan Losses 12,365,449 9,140,719
OTHER INCOME
Service Charges, Commissions and Fees 2,615,230 1,836,248
Gain on Sale of Investment Securities 16,649 0
----------------- ------------------
Total Other Income 2,631,879 1,836,248
OTHER EXPENSE
Salaries and Benefits 6,047,100 4,972,241
Occupancy 930,563 761,625
Equipment Rental, Depreciation and Maintenance 1,496,216 1,171,551
General Operating 2,528,303 2,630,603
----------------- ------------------
Total Other Expenses 11,002,182 9,536,020
----------------- ------------------
Income Before Taxes 3,995,146 1,440,947
Provision for Income Taxes 1,378,877 467,416
----------------- ------------------
NET INCOME $ 2,616,269 $ 973,531
================= ==================
EARNINGS PER SHARE $ 0.66 $ 0.25
================= ==================
Weighted average shares outstanding 3,973,541 3,870,598
================= ==================
</TABLE>
See notes to consolidated financial statements.
5
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SOUTHWEST BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1996 1995
----------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,616,269 $ 973,531
Adjustments to reconcile net income to cash provided
by (used in) operating activities:
Depreciation and Amortization 1,314,018 1,003,775
Accretion of discounts and deferred loan fees, net (229,970) (330,336)
Provision for loan losses 770,000 510,000
(Increase) decrease in other assets (2,782,063) 318,754
Increase (decrease) in accrued expenses and
other liabilities (81,712) 449,489
(Increase) decrease in accrued interest receivable (117,336) (863,612)
Increase (decrease) in accrued interest payable 146,271 781,644
----------------- -------------------
Cash provided by (used in) operating activities 1,635,477 2,843,245
NET CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (60,669,362) (45,728,254)
Gross loan participations sold 0 448,845
Loan participations purchased (610,573) (3,125,828)
Purchase of held-to-maturity-securities 0 (2,208,179)
Proceeds from maturing held-to-maturity securities 7,648,695 6,357,843
Purchases of available-for-sale securities (24,987,534) (34,399,123)
Proceeds from available-for-sale securities 13,954,286 10,559,090
Purchases of premises and equipment (1,078,545) (4,201,371)
----------------- -------------------
Cash used in investing activities (65,743,033) (72,296,977)
NET CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 7,992,292 79,942,071
Net increase (decrease) in securities sold under
agreement to repurchase 8,372,133 7,934,562
Net increase (decrease) in federal funds purchased and
other short-term borrowings 19,872,000 (3,287,000)
Net proceeds from sale of common stock 8,576 243,414
----------------- -------------------
Cash provided by financing activities 36,245,001 84,833,047
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (27,862,555) 15,379,315
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 56,859,628 14,934,854
----------------- -------------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 28,997,073 $ 30,314,169
SUPPLEMENTAL DISCLOSURES OF CASH ================= ===================
FLOW INFORMATION - Cash paid during period for:
Interest $ 9,541,139 $ 7,911,614
================= ===================
Taxes $ 1,552,000 $ 515,500
================= ===================
</TABLE>
See notes to consolidated financial statements.
6
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SOUTHWEST BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1: Basis of Presentation
The Consolidated Balance Sheets for Southwest Banks, Inc. and Subsidiaries (the
Company) as of September 30, 1996 and December 31, 1995, the Consolidated
Statements of Income for the three month and nine month periods ended September
30, 1996 and 1995, and the Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 1996 and 1995 included in this form 10-Q have
been prepared by the Company which is responsible for their integrity and
objectivity pursuant to the rules and regulations of the Securities and
Exchange Commission. The statements are unaudited except for the Balance Sheet
as of December 31, 1995 and have not been compiled, reviewed or audited by
outside accountants.
The accounting policies followed for interim financial reporting are set forth
in Note A of the Company's latest Annual Report to Shareholders, which is
incorporated by reference in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
The Company maintains a system of internal accounting control designed to
provide reasonable assurance that assets are safeguarded and the transactions
are properly executed, recorded and summarized to produce reliable records and
reports.
To the best of management's knowledge and belief, the statements and related
information were prepared in conformity with generally accepted accounting
principles and are based on recorded transactions and management's best
estimates and judgments. The interim results of operations are not necessarily
indicative of the results which may be expected for the full year.
The consolidated financial statements included herein include, in the opinion
of management, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the financial condition and
results of operations of the Company for the periods indicated.
Note 2: Pending Merger Transaction
In February, 1996, the Company entered into an Agreement and Plan of Merger
with F.N.B. Corporation ("FNB"), Hermitage, Pennsylvania, which provides for
the merger of the Company into FNB. Upon effectiveness of the merger, the
Company's shareholders will become entitled to receive, 0.819 shares of FNB
common stock in exchange for each share of common stock of the Company then
held by them. In connection with this agreement, the Company has granted FNB
an option to purchase 727,163 shares of the Company's common stock for $15 per
share, which becomes exercisable upon the occurrence of certain events, as
defined.
The proposed merger is expected to be treated as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code and shall be treated as a
pooling-of-interests for accounting purposes.
In this connection, the Company is deferring expenses associated with the
merger until such time as all conditions precedent to the merger are met or the
merger agreement is otherwise terminated. Costs incurred in connection with
the merger aggregate approximately $317,067. In addition, the Company has a
commitment to provide a success fee to its financial advisor to this merger of
1% of the value of the transaction or approximately $700,000. The merger is
expected to be completed in January 1997.
7
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
For the nine months ended September 30, 1996, the Company experienced continued
asset, loan and deposit growth. Total assets were $424,716,860, an increase of
$38,255,069 or 9.9%, compared to fiscal year end 1995. The increase was
recognized primarily by increases in net loans of $60.8 million, partially
offset by a decrease in cash and cash equivalents of $27.9 million. Total
earning assets grew by $36.8 million aggregating $378 million at September 30,
1996.
Funding the increase in assets was an increase in deposits and short term
borrowings. Deposits and short term borrowings increased 10.3% or $36.2
million since December 31, 1995.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 and 1995:
Interest income increased $1,103,360 or 16.0% in the third quarter of 1996
compared to the comparable period for 1995, while average earning assets
increased by 17.5%. Yields on average earning assets were 8.68% and 8.77% for
the respective periods, the decrease resulting from decreases in market rates
since this time last year.
Interest expense increased $139,470 or 4.2% in the third quarter of 1996 as
compared to the third quarter of 1995. While interest bearing liabilities
increased 17.9%, a change in the pricing and mix of deposit products reduced
average rates paid from 4.72% in 1995 to 4.18% in 1996.
Net interest income increased $963,890 or 26.9% in the third quarter of 1996 as
compared to the third quarter of 1995, primarily due to the growth in volume
complemented by the change in deposit pricing and mix as previously discussed.
The net interest margin rose from 4.57% in 1995 to 4.95% in 1996.
Non-interest income exclusive of securities gains for the quarter ended
September 30, 1996, increased $188,633 or 27.4% as compared to the comparable
period for 1995. The increase is a result of the growth in deposit and fee
generating activity, coupled with the introduction of service charges on
certain services that had previously been provided without charge.
Total non-interest expense increased $412,262 or 12.4% for the third quarter
ended September 30, 1996 compared to the comparable period for 1995. Salaries
and benefits expense represented the area of greatest change. Full time
equivalent employees (FTE) increased from 186 at September 30, 1995 to 217 at
September 30, 1996. Average assets per FTE at September 30, 1996 of
approximately $1.95 million improved from $1.89 million at September 30, 1995.
The provision for possible loan losses for the third quarter ended September
30, 1996 of $290,000 increased by 48.7% compared to that for the third quarter
ended September 30, 1995. While net loans have increased by 28% between the
comparable periods, because of the increase in the Company's lending limits and
the resultant increasing size of individual credits being extended, a
proportionately larger increase in the provision is warranted.
8
<PAGE> 9
Nine Months Ended September 30, 1996 and 1995:
Interest income increased $4,478,882 or 24.4% in the first nine months of 1996
compared to the comparable period for 1995, while average earning assets
increased by 22.2%. Yields on average earning assets were 8.66% and 8.51% for
the respective periods, the increase resulting from increases in market rates.
Interest expense increased $994,152 or 11.4% in the first nine months of 1996
as compared to the first nine months of 1995. While interest bearing
liabilities increased 22.6%, a change in the pricing and mix of deposit
products reduced average rates paid from 4.55% in 1995 to 4.13% in 1996.
Net interest income increased $3,484,730 or 36.1% in the first nine months of
1996 as compared to the first nine months of 1995, primarily due to the growth
in volume complemented by the increase in market rates of earning assets
together with the change in deposit pricing and mix as previously discussed.
The net interest margin rose from 4.48% in 1995 to 4.98% in 1996.
Non-interest income exclusive of securities gains for the nine months ended
September 30, 1996, increased $778,982 or 42.4% as compared to the comparable
period for 1995. The increase is a result of the growth in deposit and fee
generating activity, coupled with the introduction of service charges on
certain services that had previously been provided without charge.
Total non-interest expense increased $1,466,162 million or 15.4% for the first
nine months ended September 30, 1996 compared to the comparable period for
1995. Salaries and benefits expense represented the area of greatest change.
The provision for possible loan losses for the nine months ended September 30,
1996 of $770,000 increased by 51.0% compared to that for the nine month period
ended September 30, 1995, for the reasons discussed above.
CAPITAL RESOURCES AND LIQUIDITY
Consistent with the objective of operating a sound financial organization, the
Company maintains high capital ratios. Regulatory agencies including the
Office of the Comptroller of the Currency and the Federal Reserve Board have
approved guidelines for a risk-based capital framework that makes capital
requirements more sensitive to the risks germane to each individual
institution. The guidelines require that total capital of 8% be held against
total risk-adjusted assets.
At September 30, 1996, the Company's total risk-based capital ratio was 11.19%.
This compared to 12.53% at September 30, 1995.
The Company's ability to satisfy demands for credit, deposit withdrawals and
other corporate needs depends on its level of liquidity. The Company utilizes
various means to manage its liquidity. Traditionally, increases in deposits
are sufficient to provide adequate levels of liquidity; however, if needed, the
Company has approved extensions of credit available from correspondent banks,
sources for loan sales and primarily short term investments that could be
liquidated if necessary. Because of the seasonality of the Company's
marketplace, loan demand precedes the opportunity for deposit growth. In this
connection, at September 30, 1996, the Company has borrowings of $16,250,000
from the Federal Home Loan Bank with original maturities of nine to twelve
months. Such advances are secured principally by the Company's residential
mortgage portfolio.
9
<PAGE> 10
At September 30, 1996, loans aggregating $1,308,000 were accounted for on a
non-accrual basis, accruing loans of $40,000 were contractually past due 90
days or more as to principal or interest payments, and there were no loans
which would be defined as troubled debt restructurings. Management is not
otherwise aware of any known trends, demands, events, commitments or
uncertainties that either will result or are reasonably likely to result in a
material increase or decrease in liquidity.
For the nine months ended September 30, 1996, the Company provided cash of
$1,635,000 from operating activities as compared to $2,843,000 for the same
period in 1995. The change results principally from an increase in net accrued
and other assets aggregating approximately $3.5 million offset by increased
earnings of $1,642,000.
Cash used in investing activities for the first nine months of 1996 was
$65,743,000 as compared to $72,297,000 in 1995. The decrease was principally
realized in a reduction in the growth of the investment portfolio ($3.4 million
in 1996 compared to $19.7 million in 1995) net of an increase in loan growth
($61.2 million in 1996 as compared to $48.4 million in 1995).
Cash provided from financing activities was $36,245,000 for the nine months
ended September 30, 1996 as compared to $84,833,000 for the comparable period
in 1995. The decrease was principally due to a reduction in the growth rate of
deposits and customer repurchase agreements ($16.4 million in 1996 as compared
to $87.9 million in 1995) offset by an increase in short term borrowings ($19.9
million increase in 1996 as compared to a decrease of $3.3 million in 1995).
10
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended September 30, 1996.
11
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SIGNATURES
Pursuant to the requirements 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.
SOUTHWEST BANKS, INC.
Dated: October 25, 1996 By: /s/ Gary L. Tice
---------------------- ------------------------------
Gary L. Tice
President and
Chief Executive Officer
Dated: October 25, 1996 By: /s/ Lewis S. Albert
---------------------- ------------------------------
Lewis S. Albert
Senior Vice President and
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 23,897,073
<INT-BEARING-DEPOSITS> 1,000,000
<FED-FUNDS-SOLD> 4,100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 60,764,051
<INVESTMENTS-CARRYING> 16,163,273
<INVESTMENTS-MARKET> 15,936,308
<LOANS> 299,523,529
<ALLOWANCE> 2,095,197
<TOTAL-ASSETS> 424,716,860
<DEPOSITS> 332,822,906
<SHORT-TERM> 56,520,902
<LIABILITIES-OTHER> 3,086,174
<LONG-TERM> 0
0
0
<COMMON> 365,480
<OTHER-SE> 31,921,398
<TOTAL-LIABILITIES-AND-EQUITY> 424,716,860
<INTEREST-LOAN> 18,726,932
<INTEREST-INVEST> 3,610,559
<INTEREST-OTHER> 485,368
<INTEREST-TOTAL> 22,822,859
<INTEREST-DEPOSIT> 8,519,313
<INTEREST-EXPENSE> 9,687,410
<INTEREST-INCOME-NET> 13,135,449
<LOAN-LOSSES> 770,000
<SECURITIES-GAINS> 16,649
<EXPENSE-OTHER> 11,002,182
<INCOME-PRETAX> 3,995,146
<INCOME-PRE-EXTRAORDINARY> 2,616,269
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,616,269
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
