SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11026
Southwest National Corporation
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1409649
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 South Main Street
Greensburg, Pennsylvania 15601
(Address of principal executive offices)(Zip Code)
(412) 834-2310
(Registrant's telephone number, including area code)
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.
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.
Title of class Common stock, par value $2.50 per share
Shares outstanding as of November 10, 1995 3,180,787
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Southwest National Corporation and Subsidiary
Consolidated Statement of Income
(in thousands, except per share amounts)
Three months Nine months
ended ended
September 30, September 30,
1995 1994 1995 1994
Interest income
$9,334 $8,207 Interest and fees on loans $27,747 $23,578
Interest on money market investments:
2 1 Interest bearing deposits with banks 6 40
395 222 Federal funds sold 1,484 748
Interest and dividends on investment
securities:
U.S. Treasury securities and
obligations of U.S. government
1,758 2,086 agencies and corporations 4,767 6,417
Obligations of states and political
306 376 subdivisions 958 1,149
1,121 1,130 Collateralized mortgage obligations 3,389 3,360
44 40 Other securities 126 118
12,960 12,062 Total interest income 38,477 35,410
Interest expense
5,229 4,233 Interest on deposits 15,087 12,470
33 8 Interest on short-term borrowings 76 28
39 -- Interest on long-term borrowings 115 --
5,301 4,241 Total interest expense 15,278 12,498
7,659 7,821 Net interest income 23,199 22,912
375 390 Provision for possible loan losses 1,225 1,170
Net interest income after provision
7,284 7,431 for possible loan losses 21,974 21,742
Noninterest income
354 369 Trust income 1,222 1,130
562 517 Service charges on deposit accounts 1,630 1,514
Other service charges, commissions,
137 159 and fees 448 587
88 80 Other income 268 263
1,141 1,125 Total noninterest income 3,568 3,494
Noninterest expense
2,643 2,626 Salaries and employee benefits 8,017 7,766
446 426 Net occupancy expense 1,319 1,301
Equipment expenses and data
773 758 processing fees 2,376 2,434
153 144 Pennsylvania shares tax 459 432
(15) 349 FDIC insurance expense 668 1,047
1,092 1,054 Other expenses 3,506 3,424
5,092 5,357 Total noninterest expense 16,345 16,404
3,333 3,199 Income before income taxes 9,197 8,832
967 933 Income taxes 2,683 2,534
$2,366 $2,266 Net income $6,514 $6,298
Per share :
$ .75 $ .71 Net income $ 2.05 $ 1.97
.28 .26 Cash dividends .84 .78
3,181 3,192 Average common shares outstanding 3,184 3,192
See accompanying notes to consolidated financial statements.
Southwest National Corporation and Subsidiary
Consolidated Balance Sheet
(in thousands)
September 30, December 31, September 30,
1995 1994 1994
Assets
Cash and due from banks $27,160 $32,500 $25,874
Money market investments:
Int. bearing deposits
with banks 121 113 105
Federal funds sold 7,200 20,100 28,400
Total money market
investments: 7,321 20,213 28,505
Investment securities:
Securities available
for sale 118,342 107,598 120,268
Securities held to
maturity (market values:
$92,531; $91,397
and $94,711) 92,555 96,943 97,982
Total investment
securities 210,897 204,541 218,250
Loans, net of unearned income
of $890; $2,105 and $2,700 433,047 411,769 398,647
Less: reserve for possible
loan losses (5,697) (5,038) (4,925)
Loans, net 427,350 406,731 393,722
Bank premises and equipment 7,465 7,607 7,588
Other assets 12,588 13,691 12,405
Total assets $692,781 $685,283 $686,344
Liabilities
Deposits
Noninterest bearing demand $97,062 $98,677 $93,894
NOW accounts 54,910 58,880 60,817
Savings 214,353 238,052 248,793
Time 243,371 216,466 211,218
Total deposits 609,696 612,075 614,722
Short-term borrowings 2,787 643 648
Long-term borrowings 1,918 1,953 --
Other liabilities 4,149 2,510 3,142
Total liabilities 618,550 617,181 618,512
Shareholders' equity
Common stock 7,952 7,981 7,981
Surplus 31,760 31,760 31,760
Retained earnings 34,822 31,262 29,912
Net unrealized loss on
securities available for sale (303) (2,901) (1,821)
Total shareholders' equity 74,231 68,102 67,832
Total liabilities and
shareholders' equity $692,781 $685,283 $686,344
See accompanying notes to consolidated financial statements.
Southwest National Corporation and Subsidiary
Consolidated Statement of Changes in Shareholders' Equity
(in thousands)
Unrealized gain Total
Common Retained (loss) on securities shareholders'
stock Surplus earnings available for sale equity
Balance at
January
1, 1994 $6,651 $17,128 $42,061 -- $65,840
Net income -- -- 6,298 -- 6,298
Cash dividends -- -- (2,485) -- (2,485)
Stock dividend
(20%) 1,330 14,632 (15,962) -- --
Net unrealized
loss on
securities
available
for sale -- -- -- (1,821) (1,821)
Balance at
September
30, 1994 $7,981 $31,760 $29,912 ($1,821) $67,832
Balance at
January
1, 1995 7,981 31,760 31,262 (2,901) 68,102
Net income -- -- 6,514 -- 6,514
Cash dividends -- -- (2,675) -- (2,675)
Retirement of
common stock (29) -- (279) -- (308)
Net unrealized
gain on
securities
available
for sale -- -- -- 2,598 2,598
Balance at
September
30, 1995 $7,952 $31,760 $34,822 ($303) $74,231
See accompanying notes to consolidated financial statements.
Southwest National Corporation and Subsidiary
Consolidated Statement of Cash Flows
(in thousands)
Nine months
ended
September 30,
1995 1994
Cash flows from operating activities:
Net income $6,514 $6,298
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation 846 836
Provision for loan losses 1,225 1,170
Increase in net interest receivable/payable 720 60
Net increase (decrease) from other operating
activities 211 (752)
Net cash from operating activities 9,516 7,612
Cash flows from investing activities:
Proceeds from maturities of inv. securities
(available for sale) 33,051 72,876
Purchase of investment securities
(available for sale) (39,946) (69,843)
Proceeds from maturities of inv. securities
(held to maturity) 5,287 18,715
Purchase of investment securities
(held to maturity) (905) (6,906)
Net increase in loans made to customers (21,278) (27,411)
Net property and equipment expenditures (704) (815)
Net cash used for investing activities (24,495) (13,384)
Cash flows from financing activities:
Net decrease in deposits (2,379) (18,526)
Net increase (decrease) in short-term borrowings 2,144 (888)
Repayment of long-term borrowings (35) --
Dividends paid (2,675) (2,485)
Retirement of common stock (308) --
Net cash from financing activities (3,253) (21,899)
Net change in cash and cash equivalents ($18,232)($27,671)
Cash and cash equivalents at beginning of period $52,713 $82,050
Cash and cash equivalents at end of period 34,481 54,379
Net change in cash and cash equivalents ($18,232)($27,671)
Cash paid during the period for:
Interest $10,452 $9,268
Income taxes 2,461 2,960
Transfers from loans to other real estate owned and other repossessions
totaled $473 thousand and $465 thousand in 1995 and 1994,respectively.
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.
See accompanying notes to consolidated financial statements.
SOUTHWEST NATIONAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies have not changed since the last
reporting period, except for the accounting for impaired loans, which is
discussed in Note 3.
Basis of Presentation
The accompanying unaudited consolidated financial statements of
Southwest National Corporation (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. In the opinion of management, all normal recurring
adjustments necessary for fair presentation of the financial position
and results of operations for the periods have been included.
2. 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 the current period earnings; or debt and equity
securities not classified as either securities held to maturity or
trading securities are classified as securities available for sale and
reported at fair value, with unrealized gains and losses reported as a
separate component of shareholders' equity. As a result, shareholders'
equity includes an unrealized loss on securities net of tax of $303
thousand and an unrealized loss net of tax of $1.821 million at
September 30, 1995 and September 30, 1994, respectively.
3. Adoption of New Accounting Standards
On January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards (FAS) No. 114, "Accounting by Creditors for
Impairment of a Loan", which provides guidelines for measuring
impairment losses on loans. A loan is considered to be impaired when,
based on current information and events, it is probable that the
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Under the new standard, the
1995 reserve for possible loan losses related to loans that are
considered impaired in accordance with FAS No. 114 is based on
discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral for certain collateral dependent
loans. Nonaccrual loans are considered to be impaired. Prior to 1995,
the reserve for possible loan losses related to these loans was based on
undiscounted cash flows or the fair value of the collateral for
collateral dependent loans.
The following table presents changes in the reserve for possible
loan losses:
NINE MONTHS ENDED SEPTEMBER 30, 1995 1994
(In thousands)
Balance at beginning of year $5,038 $4,451
Provision for possible loan losses 1,225 1,170
Losses (1,095) (1,077)
Recoveries 529 381
Net loan charge-offs (566) (696)
Balance at end of period $5,697 $4,925
At September 30, 1995, the recorded investment in loans that are
considered to be impaired under FAS No. 114 was $1.359 million. This
amount includes impaired loans for which the related reserve for
possible loan losses is $249 thousand, $42 thousand of impaired loans
that, as a result of write-downs, do not have a reserve for possible
loan losses, and $1.068 million in impaired loans that have no reserve
for possible loan losses because they are adequately collateralized.
The average recorded investment in impaired loans during the period
ended September 30, 1995, was approximately $1.676 million. For the
period ended September 30, 1995, the Corporation recognized interest
income of $66 thousand on impaired loans, which was recognized using
the cash basis method.
Part I. Financial Information
(continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
First nine months of 1995 compared to first nine months of 1994
Net income for the nine months ended September 30, 1995 reached
$6,514,000 compared to $6,298,000 for the comparable period in 1994, a
$216,000 or 3.4% increase. Earnings per share were $2.05 in 1995
compared to $1.97 in 1994, an $.08 or 3.4% increase. Return on average
assets reached 1.26% in 1995, comparing favorably to the 1.21% in 1994.
Earnings increased principally as a result of a $287,000 or 1.3%
increase in net interest income, which reached $23,199,000 in 1995. On
a fully taxable equivalent basis, net interest income increased $232,000
from $23,642,000 in 1994 to $23,874,000, less than a 1% increase. This
increase in net interest income resulted from the 6 basis point rise in
the net interest margin offset by a decrease of $1,535,000 in average
earning assets. The rise in the net interest margin was the result of
the change in the composition of earning assets to loans from
investments. Average earning assets fell due to the decrease in
deposits of $12,080,000 offset by earnings retained over the period.
The provision for loan losses increased $55,000 or 4.7% as a result
of the significant loan growth and the change in loan composition
towards larger commercial loans.
Noninterest income advanced $74,000 or 2.1% as trust income
increased $92,000 and service charges on deposit accounts rose $116,000
as a result of price increases. The increases in these categories
offset the decline of $139,000 in other service charges, commissions,
fees and $91,000 in fees on annuity sales as a result of decreased sales
volume.
Noninterest expenses declined $59,000 or .4% as a result of the
$379,000 decrease in FDIC insurance expense offset by a $251,000
increase in salaries and employee benefits expense. The decrease in
FDIC insurance expense is principally the result of a $357,000 refund
from the FDIC for premiums paid in excess of those required to maintain
the Bank insurance Fund. Without this $357,000 refund, noninterest
expenses would have been $16,702,000 for the first nine months of 1995.
Under this scenario, noninterest expenses would have increased $298,000
or 1.8% over the prior period. Salaries and employee benefits expense
increased as a result of regular salary merit raises.
Assets totaled $692,781,000 at September 30, 1995, a $6,437,000 or
less than 1% increase over the prior year. Loans grew $34,400,000 or
8.6% over the period to $433,047,000 at September 30, 1995. This
increase was principally the result of growth in the commercial loan
portfolio. This loan growth has been funded by conversion of money
market investments and maturities of investment securities. Money
market investments declined $21,184,000 or 74.3% over the period, while
investment securities displayed a $7,353,000 or 3.4% decrease. Deposits
supporting these assets decreased $5,026,000 to $609,696,000 at
September 30, 1995. This decrease reflects heightened competition among
banks for deposits. Shareholders' equity reached $74,231,000 at
September 30, 1995, a $6,399,000 or 9.4% increase over the year. Total
capital as a percentage of risk-weighted assets was 19.28% at September
30, 1995 compared to 19.31% at September 30, 1994. The Corporation's
leverage capital ratio at September 30, 1995 was 10.64%.
Asset quality showed improvement over the year. The nonperforming
assets to loans, other real estate owned and other repossessions ratio
improved from .49% in 1994 to .33% in 1995.
The reserve for possible loan losses totaled $5,697,000 at
September 30, 1995 up from $4,925,000 at September 30, 1994. The
reserve for possible loan losses to nonperforming loans ratio also
increased to 419.21%, which represented more than $4 of reserve coverage
for every $1 of nonperforming loans.
The Bank has identified several internal sources available for
liquidity management. First and foremost is the Bank's core deposit
base, consisting of deposits from customers with long-standing
relationships with the Bank. Substantial internal funding can also be
derived from the Bank's investment portfolio. The portfolio provides
liquidity through the sale of securities available for sale and cash
flows derived from maturities.
In addition to internal funding, the Bank has numerous external
funding sources. These sources provide ample funding to meet the short-
and long-term needs.
The Corporation adopted FAS No. 114 and No. 118 on a prospective
basis on January 1, 1995. FAS No. 114 established standards to
determine in which circumstances a creditor should measure impairment of
a loan based on either the present (discounted) value of future cash
flows related to the loan, the market value of the loan or the fair
value of the underlying collateral. FAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures", modified FAS No. 114 permitting creditors to use existing
methods for recognizing interest income on impaired loans. Adoption of
these standards did not have a material effect on the Corporation's
financial statements.
Third quarter 1995 compared to third quarter 1994
Net income for the third quarter of 1995 totaled $2,366,000 an
increase of $100,000 or 4.4%. Per share results were $.75 in 1995
versus $.71 in 1994.
The rise in earnings was primarily the result of decreased
noninterest expense, which declined $265,000. Net interest income on a
fully taxable equivalent basis slipped from $8,063,000 in 1994 to
$7,901,000 in 1995, a $162,000 or 2.0% decrease. Exclusive of the
taxable equivalent adjustment, quarterly net interest income also
declined $162,000 or 2.1% to $7,659,000 in 1995. The net interest
margin slipped 17 basis points to 4.71% in 1995 from 4.88% in 1994.
Average earning assets grew to $665,077,000 in 1995 from $655,599,000, a
$9,478,000 or 1.4% increase.
The provision for loan losses decreased $15,000 or 3.8%. Such
provisions were a result of an analysis of the adequacy of the reserve
for possible loan losses in connection with a review of the Bank's loan
portfolio.
Noninterest income rose $16,000 or 1.4% principally as a result of
increased service charges on deposit accounts. Noninterest expense
declined $265,000 or 4.9% primarily as a result of a $364,000 decrease
in FDIC insurance expense. This category declined as a result of the
refund from the FDIC.
Third quarter 1995 compared to second quarter 1995
Net income for the third quarter of 1995 was $2,366,000 compared to
$2,231,000 for the second quarter of the year, a $135,000 or 6.1%
increase. On a per share basis, net income rose to $.75 from $.70, also
a 6.1% increase.
The increase in net income was due to decreased noninterest expense
offset by declines in net interest income and noninterest income. Net
interest income on a fully taxable equivalent basis declined from
$8,058,000 in the second quarter to $7,901,000 in the third quarter, a
$157,000 or 1.9% decrease. Excluding the taxable equivalent adjustment,
net interest income slipped to $7,659,000, a decline of $186,000 or
2.4%. This decrease was the result of the net interest margin shrinking
from 4.91% in the second quarter to 4.71% in the third quarter, a 20
basis point decrease. A shift in the composition of our deposits to
higher cost deposits resulted in the margin shrinkage. The decrease in
the margin was offset by a $7,156,000 or 1.1% increase in earning assets
which reached $665,077,000 during the third quarter.
The provision for possible loan losses increased $35,000 to
$375,000 for the current quarter from $340,000 in the second quarter.
This provision was increased as a result of significant loan growth and
the change in loan composition towards larger commercial loans.
Noninterest income declined $185,000 or 14.0% due to a $160,000
decrease in trust income and a $22,000 decline in other service charges,
commissions, and fees, due principally to a decrease in letter of credit
fees.
Total noninterest expense decreased $557,000 or 9.9% as a result of
lower FDIC insurance expense and other expenses. FDIC insurance expense
decreased $356,000 as a result of the refund from the FDIC which
occurred in the third quarter. Other expenses declined $132,000 due to
decreases in various miscellaneous expense categories.
Total assets declined to $692,781,000 at September 30, 1995, a
$12,660,000 or 1.8% decrease. Money market investments decreased
$32,814,000 or 81.8% and were deployed in loans, which increased
$13,600,000 or 3.2% to $433,047,000 at September 30, 1995. Deposits
supporting these assets followed the same trend, declining $14,469,000
or 2.3% to $609,696,000 at September 30, 1995. Shareholders' equity
reached $74,231,000 at September 30, 1995, a $1,304,000 or 1.8% as a
result of earnings retention.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 27: Financial Data Schedule
The registrant filed no Form 8-K Current Report during the third
quarter ended September 30, 1995.
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 National Corporation
(Registrant)
November 10, 1995 /s/ David S. Dahlmann
Date David S. Dahlmann
President and Chief Executive Officer
November 10, 1995 /s/ Donald A. Lawry
Date Donald A. Lawry
Secretary and Treasurer
(Chief Financial Officer)
EXHIBIT INDEX
Exhibit No. Per Table
Under Item 601 of
Regulation S-K
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 27160
<INT-BEARING-DEPOSITS> 121
<FED-FUNDS-SOLD> 7200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 118342
<INVESTMENTS-CARRYING> 92555
<INVESTMENTS-MARKET> 92531
<LOANS> 433047
<ALLOWANCE> 5697
<TOTAL-ASSETS> 692781
<DEPOSITS> 609696
<SHORT-TERM> 2787
<LIABILITIES-OTHER> 4149
<LONG-TERM> 1918
<COMMON> 7952
0
0
<OTHER-SE> 66279
<TOTAL-LIABILITIES-AND-EQUITY> 692781
<INTEREST-LOAN> 27747
<INTEREST-INVEST> 9240
<INTEREST-OTHER> 1490
<INTEREST-TOTAL> 38477
<INTEREST-DEPOSIT> 15087
<INTEREST-EXPENSE> 15278
<INTEREST-INCOME-NET> 23199
<LOAN-LOSSES> 1225
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 16345
<INCOME-PRETAX> 9197
<INCOME-PRE-EXTRAORDINARY> 6514
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6514
<EPS-PRIMARY> 2.05
<EPS-DILUTED> 2.05
<YIELD-ACTUAL> 7.96
<LOANS-NON> 1359
<LOANS-PAST> 1353
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5038
<CHARGE-OFFS> 1095
<RECOVERIES> 529
<ALLOWANCE-CLOSE> 5697
<ALLOWANCE-DOMESTIC> 5697
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
