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 June 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 August 9, 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 Six months
ended June 30, ended June 30,
1995 1994 1995 1994
Interest income
$9,441 $7,865 Interest and fees on loans $18,413 $15,371
Interest on money market investments:
2 19 Interest bearing deposits with banks 4 39
632 215 Federal funds sold 1,089 526
Interest and dividends on investment
securities:
U.S. Treasury securities and
obligations of U.S. government
1,481 2,245 agencies and corporations 3,009 4,331
Obligations of states and political
314 388 subdivisions 652 773
1,132 1,122 Collateralized mortgage obligations 2,268 2,230
42 33 Other securities 82 78
13,044 11,887 Total interest income 25,517 23,348
Interest expense
5,134 4,124 Interest on deposits 9,858 8,237
28 11 Interest on short-term borrowings 43 20
37 -- Interest on long-term borrowings 76 --
5,199 4,135 Total interest expense 9,977 8,257
7,845 7,752 Net interest income 15,540 15,091
340 390 Provision for possible loan losses 850 780
Net interest income after provision
7,505 7,362 for possible loan losses 14,690 14,311
Noninterest income
514 380 Trust income 868 761
561 521 Service charges on deposit accounts 1,068 997
Other service charges, commissions,
159 231 and fees 311 428
92 101 Other income 180 183
1,326 1,233 Total noninterest income 2,427 2,369
Noninterest expense
2,694 2,598 Salaries and employee benefits 5,374 5,140
435 431 Net occupancy expense 873 875
Equipment expenses and data
802 822 processing fees 1,603 1,676
153 144 Pennsylvania shares tax 306 288
341 349 FDIC insurance expense 683 698
1,224 1,221 Other expenses 2,414 2,370
5,649 5,565 Total noninterest expense 11,253 11,047
3,182 3,030 Income before income taxes 5,864 5,633
951 880 Income taxes 1,716 1,601
$2,231 $2,150 Net income $4,148 $4,032
Per share (based on 3,185,301
year-to-date average common shares
in 1995 and 3,192,295 in 1994)
$0.70 $0.67 Net income $ 1.30 $ 1.26
0.28 0.26 Cash dividends .56 .52
See accompanying notes to consolidated financial statements.
Southwest National Corporation and Subsidiary
Consolidated Balance Sheet
(in thousands)
June 30, December 31, June 30,
1995 1994 1994
Assets
Cash and due from banks $26,677 $32,500 $25,042
Money market investments:
Int. bearing deposits with banks 135 113 72
Federal funds sold 40,000 20,100 16,000
Total money market investments: 40,135 20,213 16,072
Investment securities:
Securities available for sale 111,698 107,598 149,920
Securities held to maturity
(market values: $93,172; $91,397
and $96,430) 93,617 96,943 99,157
Total investment securities 205,315 204,541 249,077
Loans, net of unearned income of
$1,208; $2,105 and $3,480 419,447 411,769 389,442
Less: reserve for possible loan
losses (5,455) (5,038) (4,747)
Loans, net 413,992 406,731 384,695
Bank premises and equipment 7,291 7,607 7,552
Other assets 12,031 13,691 11,573
Total assets $705,441 $685,283 $694,011
Liabilities
Deposits
Noninterest bearing demand $99,680 $98,677 $97,089
NOW accounts 55,325 58,880 60,815
Savings 225,137 238,052 254,370
Time 244,023 216,466 210,328
Total deposits 624,165 612,075 622,602
Short-term borrowings 2,641 643 1,768
Long-term borrowings 1,930 1,953 --
Other liabilities 3,778 2,510 2,746
Total liabilities 632,514 617,181 627,116
Shareholders' equity
Common stock 7,952 7,981 7,981
Surplus 31,760 31,760 31,760
Retained earnings 33,346 31,262 28,476
Net unrealized loss on securities
available for sale (131) (2,901) (1,322)
Total shareholders' equity 72,927 68,102 66,895
Total liabilities and
shareholders' equity $705,441 $685,283 $694,011
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 -- -- 4,032 -- 4,032
Cash dividends -- -- (1,655) -- (1,655)
Stock dividend
(20%) 1,330 14,632 (15,962) -- --
Net unrealized
loss on
securities
available
for sale -- -- -- (1,322) (1,322)
Balance at
June
30, 1994 $7,981 $31,760 $28,476 ($1,322) $66,895
Balance at
January
1, 1995 7,981 31,760 31,262 (2,901) 68,102
Net income -- -- 4,148 -- 4,148
Cash dividends -- -- (1,784) -- (1,784)
Retirement of
common stock (29) -- (280) -- (309)
Net unrealized
gain on
securities
available
for sale -- -- -- 2,770 2,770
Balance at
June
30, 1995 $7,952 $31,760 $33,346 ($131) $72,927
See accompanying notes to consolidated financial statements.
Southwest National Corporation and Subsidiary
Consolidated Statement of Cash Flows
(in thousands)
Six months
ended June 30,
1995 1994
Cash flows from operating activities:
Net income $4,148 $4,032
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation 569 576
Provision for loan losses 850 780
Increase (decrease) in net interest
receivable/payable 1,242 (284)
Net increase (decrease) from other
operating activities (116) 69
Net cash from operating activities 6,693 5,173
Cash flows from investing activities:
Proceeds from maturities of inv. securities
(available for sale) 25,051 43,876
Purchase of investment securities
(available for sale) (25,011) (69,843)
Proceeds from maturities of inv. securities
(held to maturity) 3,325 17,560
Purchase of investment securities
(held to maturity) -- (6,906)
Net increase in loans made to customers (7,678) (18,206)
Net property and equipment expenditures (253) (521)
Net cash used for investing activities (4,566) (34,040)
Cash flows from financing activities:
Net increase (decrease) in deposits 12,090 (10,646)
Net increase in short-term borrowings 1,998 232
Repayment of long-term borrowings (23) --
Dividends paid (1,784) (1,655)
Retirement of common stock (309) --
Net cash from financing activities 11,972 (12,069)
Net change in cash and cash equivalents $14,099 ($40,936)
Cash and cash equivalents at beginning
of period $52,713 $82,050
Cash and cash equivalents at end of period 66,812 41,114
Net change in cash and cash equivalents $14,099 ($40,936)
Cash paid during the period for:
Interest $7,130 $6,380
Income taxes 1,661 1,915
Transfers from loans to other real estate owned and other repossessions
totaled $374 thousand and $225 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 $131
thousand and an unrealized loss net of tax of $1.322 million at June 30,
1995 and June 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
identified for evaluation 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:
SIX MONTHS ENDED JUNE 30, 1995 1994
(In thousands)
Balance at beginning of year $5,038 $4,451
Provision for possible loan losses 850 780
Losses (807) (728)
Recoveries 374 244
Net loan charge-offs (433) (484)
Balance at end of period $5,455 $4,747
At June 30, 1995, the recorded investment in loans that are considered
to be impaired under FAS No. 114 was $1.729 million (of which $1.248
million were on a nonaccrual basis). Included in this amount is $936
thousand of impaired loans for which the related reserve for possible
loan losses is $426 thousand and $45 thousand of impaired loans that, as
a result of write-downs, do not have a reserve for credit losses. The
average recorded investment in impaired loans during the period ended
June 30, 1995, was approximately $1.781 million. For the period ended
June 30, 1995, the Company recognized interest income on those impaired
loans of $52 thousand, which was recognized using the cash basis method
of income recognition.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
First six months of 1995 compared to first six months of 1994
Net income for the first six months of 1995 was $4,148,000, an
increase of $116,000 or 2.9% compared to the same period of 1994.
Return on assets rose to 1.21% up from the 1.16% reported for the first
six months of 1994.
The expansion in earnings was principally the result of improved net
interest income as a result of growth in the net interest margin. Net
interest income on a fully taxable equivalent basis increased to
$15,973,000 from $15,579,000, a $394,000 or 2.5% rise. Excluding the
taxable equivalent adjustment, net interest income rose to $15,540,000
from $15,091,000, an increase of $449,000 or 3.0%. This increase
resulted primarily from an expansion in the net interest margin to 4.93%
in 1995, up 17 basis points over the 4.76% registered in 1994. The
redeployment of funds to higher yielding earning assets, primarily
loans, was the primary factor in the improvement in the net interest
margin year to year. Average earning assets declined slightly to
$653,213,000 for the period, a decrease of $7,130,000 or 1.1% compared
to 1994.
Noninterest income rose $58,000 or 2.4% to $2,427,000 in 1995.
Trust income rose $107,000 or 14.1%. Service charges on deposit
accounts rose $71,000 or 7.1% due primarily to increases in fees charged
for certain services. Other service charges, commissions and fees
declined $117,000 or 27.3% due to lower levels of income received from
mutual fund and annuity products and lower commissions earned on credit
life insurance period to period.
Noninterest expense increased $206,000 or a modest 1.9% to
$11,253,000 for the first six months of 1995. Salaries and employee
benefits rose $234,000 or 4.6% as a result of periodic merit increases
for existing staff. Equipment expenses fell $54,000 due to lower
expenses in most equipment categories period to period. Other expenses
rose period to period $42,000 principally as a result of increased
marketing expenses.
At June 30, 1995, assets totalled $705,441,000 up $11,430,000 or
1.6% compared to $694,011,000 at June 30, 1994. During the same period,
loans rose $30,005,000 or 7.7% as management continued the strategy of
redeploying funds from investment securities to improve earning asset
yields. Deposits at June 30, 1995 totalled $624,165,000, up $1,563,000
or only 0.3% year to year. Deposit growth over the last year has been
difficult and this challenge is shared by the entire banking industry.
Shareholders' equity at June 30, 1995 totalled $72,927,000 up
$6,032,000 or 9.0% over the June 30, 1994 balance of $66,895,000. As
the result of the implementation of FAS No. 115 in 1994, shareholders'
equity includes an unrealized loss on securities net of tax of $131,000
and an unrealized loss net of tax of $1,322,000 at June 30, 1995 and
June 30, 1994, respectively. Total capital as a percentage of risk-
weighted assets was 19.02% at June 30, 1995 compared to 19.32% at June
30, 1994. The Corporation's leverage capital ratio at June 30, 1995 was
10.54%.
Total nonperforming assets declined from period end to period end.
Net loan charge-offs and the ratio of nonperforming loans to loans are
both below year ago levels. Also, the reserve for possible loan losses
to nonperforming loans improved to 394.15% at June 30, 1995, which
represents coverage of almost $4 for every $1 of nonperforming loans.
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.
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 also imposed certain specific
accounting and reporting requirements and risk-based assessments for
FDIC insurance. These risk-based assessments became effective January
1, 1993.
In January 1995, the FDIC proposed a reduction in the assessment
rate that banks pay for deposit insurance. This proposal had a 60 day
comment period and has been delayed and may be revised. If the proposal
is adopted, it is expected to be effective in the second half of 1995.
This would result in a reduction in FDIC insurance expense in 1995.
Second quarter 1995 compared to second quarter 1994
Net income for the second quarter of 1995 totalled $2,231,000, an
$81,000 or 3.8% increase over the same period in 1994. Per share
results were $.70 in 1995 compared to $.67 in 1994, also a 3.8%
increase.
The rise in earnings was primarily the result of an expansion in the
net interest margin. Net interest income on a fully taxable equivalent
basis rose from $7,996,000 in 1994 to $8,058,000 in 1995, a $62,000 or
0.8% increase. Exclusive of the taxable equivalent adjustment,
quarterly net interest income expanded $93,000 or 1.2% to $7,845,000 in
1995. The net interest margin rose 7 basis points to 4.91% in 1995 from
4.84% in 1994. Average earning assets declined to $657,921,000 in 1995
from $662,073,000, a $4,152,000 or less than 1% decline.
The provision for possible loan losses declined slightly from year
to year to $340,000 in 1995 from $390,000 in 1994. Net loan charge-offs
for 1995 have been less than anticipated resulting in the lower
provision.
Noninterest income rose $93,000 or 7.5% period to period. Trust
income grew $134,000 or 35.3% due to a higher level of fees recognized.
Service charges on deposit accounts rose $40,000 or 7.7% due to
increases in fees charged for certain services. Other service charges,
commissions and fees declined $72,000 or 31.2% due to a lower level of
fees recognized from the sale of nondeposit products and less
commissions earned on the sale of credit life insurance.
Noninterest expense rose a modest $84,000 or 1.5% period to period.
Salaries and employee benefits rose $96,000 or 3.7%. This accounted for
the bulk of the period-to-period rise in noninterest expense as most
other categories were relatively flat.
Second quarter 1995 compared to first quarter 1995
Net income for the second quarter of 1995 was $2,231,000 compared to
$1,917,000 for the first quarter of the year, a $314,000 or 16.4%
increase. On a per share basis, net income rose to $.70 from $.60, also
a 16.4% increase.
Increases in net interest income and noninterest income as well as a
lower provision for loan losses fueled the improvement in period-to-
period earnings. Net interest income calculated on a fully taxable
equivalent basis rose to $8,058,000, an increase of $143,000 or 1.8%.
Excluding the taxable equivalent adjustment, net interest income rose to
$7,845,000, an increase of $150,000 or 1.9% over the first quarter of
1995. Growth in average earning assets for the second quarter of 1995
of $9,468,000 or 1.5% to $657,921,000 from $648,453,000 in the first
quarter of 1995 more than offset the 4 basis point decline in the margin
from 4.95% to 4.91% in the same period.
The provision for loan losses decreased $170,000 to $340,000 for the
current quarter from $510,000 for the previous quarter. This reduction
is based on actual net charge offs for the year being significantly less
than anticipated.
Noninterest income rose $225,000 or 20.4% primarily due to increased
trust income and a higher level of service charges earned on deposit
accounts. Total noninterest expense remained flat quarter to quarter
increasing $45,000 or less than 1%.
Total assets grew to $705,441,000 at June 30, 1995 from $690,580,000
at March 31, 1995, a $14,861,000 or 2.2% rise. Loans increased slightly
from quarter to quarter reaching $419,447,000 from $414,787,000, a
$4,660,000 or 1.1% increase. Deposits also trended higher for the
current quarter rising $11,180,000 or 1.8% from the end of the first
quarter. Shareholders' equity increased to $72,927,000 at June 30,
1995, a $2,751,000 or 3.9% increase which resulted from earnings
retention and a reduction in unrealized losses on securities classified
as available for sale.
Balance Sheet comparison June 30, 1995 to December 31, 1994
Total assets rose to $705,441,000 at June 30, 1995, a $20,158,000 or
2.9% increase from $685,283,000 at December 31, 1994. Loans increased
$7,678,000 or 1.9% to $419,447,000 at June 30, 1995. Money market
investments increased over the period as a slowing in loan growth and
lack of other prudent investment opportunities prevented other
deployment of the funds. Deposits supporting these assets rose to
$624,165,000 from $612,075,000, an increase of 2.0%. Growth in deposits
will continue to be a challenge to the industry in the months ahead.
Shareholders' equity increased $4,825,000 or 7.1% to $72,927,000 at June
30, 1995.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
No Exhibits are being filed with this document.
The registrant filed no Form 8-K Current Report during the second
quarter ended June 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)
August 11, 1995 /s/ David S. Dahlmann
Date David S. Dahlmann
President and Chief Executive Officer
August 11, 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
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