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, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______
Commission file number 0-11026
Southwest National Corporation
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1409649
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 South Main Street
Greensburg, Pennsylvania 15601
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (412) 834-2310
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 the number of shares outstanding of each of the issuer's common
stock, as of the latest practicable date.
Class Outstanding at August 12, 1996
Common Stock, $2.50 Par Value 3,180,787
<PAGE>
<TABLE>
SOUTHWEST NATIONAL CORPORATION
FORM 10-Q INDEX
FOR QUARTER ENDED JUNE 30, 1996
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Southwest National Corporation and Subsidiary
Consolidated Statement of Income 1
Consolidated Balance Sheet 2
Consolidated Statement of Changes in Shareholders' Equity 3
Consolidated Statement of Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
</TABLE>
<PAGE>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
<TABLE>
Southwest National Corporation and Subsidiary
Consolidated Statement of Income
(in thousands, except per share amounts)
<CAPTION>
Three months Six months
ended June 30, ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME
$9,473 $9,441 Interest and fees on loans $18,891 $18,413
Interest on money market investments:
0 2 Interest bearing deposits with banks 2 4
343 632 Federal funds sold 657 1,089
Interest and dividends on investment
securities:
U.S. Treasury securities and
obligations of U.S. government
1,941 1,481 agencies and corporations 3,689 3,009
Obligations of states and political
270 314 subdivisions 560 652
1,051 1,132 Collateralized mortgage obligations 2,148 2,268
40 42 Other securities 80 82
- ---------------- -----------------
13,118 13,044 Total interest income 26,027 25,517
INTEREST EXPENSE
5,089 5,134 Interest on deposits 10,208 9,858
46 28 Interest on short-term borrowings 92 43
37 37 Interest on long-term borrowings 75 76
- ---------------- -----------------
5,172 5,199 Total interest expense 10,375 9,977
- ---------------- -----------------
7,946 7,845 Net interest income 15,652 15,540
450 340 Provision for possible loan losses 900 850
- ---------------- -----------------
Net interest income after
provision for possible
7,496 7,505 loan losses 14,752 14,690
NONINTEREST INCOME
377 514 Trust income 763 868
557 561 Service charges on deposit accounts 1,093 1,068
Other service charges, commissions,
179 159 and fees 326 311
92 92 Other income 380 180
- ---------------- ----------------
1,205 1,326 Total noninterest income 2,562 2,427
NONINTEREST EXPENSE
2,667 2,694 Salaries and employee benefits 5,433 5,374
483 435 Net occupancy expense 1,007 873
Equipment expenses and data
807 802 processing fees 1,616 1,603
165 153 Pennsylvania shares tax 329 306
18 341 FDIC insurance expense 36 683
1,243 1,224 Other expenses 2,426 2,414
- ---------------- ----------------
5,383 5,649 Total noninterest expense 10,847 11,253
- ---------------- ----------------
3,318 3,182 Income before income taxes 6,467 5,864
1,004 951 Income taxes 1,930 1,716
- ---------------- ----------------
$2,314 $2,231 NET INCOME $4,537 $4,148
================ ================
Per share (based on 3,180,787
average common shares in 1996
and 3,185,301 in 1995
$ .73 $ .70 Net income $1.43 $1.30
.30 .28 Cash dividends .60 .56
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 1
<TABLE>
SOUTHWEST NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in thousands)
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
<S> <C> <C> <C>
ASSETS
Cash and due from banks $26,125 $25,254 $26,677
Money market investments:
Int. bearing deposits with banks 3 108 135
Federal funds sold 27,900 12,200 40,000
----------------------------------
Total money market investments: 27,903 12,308 40,135
Investment securities:
Securities available for sale 143,685 139,895 111,698
Securities held to maturity
(market values: $66,642; $71,981
and $93,172) 67,670 71,991 93,617
------------------------------------
Total investment securities 211,355 211,886 205,315
Loans, net of unearned income of
$306; $643 and $1,208 450,004 446,917 419,447
Less: reserve for possible loan
losses (5,857) (5,651) (5,455)
------------------------------------
Loans, net 444,147 441,266 413,992
Bank premises and equipment 8,204 8,266 7,291
Other assets 13,814 11,836 12,031
------------------------------------
Total assets $731,548 $710,816 $705,441
====================================
LIABILITIES
Deposits
Noninterest bearing demand $100,014 $100,811 $99,680
NOW accounts 54,105 53,014 55,325
Savings 245,554 235,809 242,523
Time 242,869 234,151 226,637
------------------------------------
Total deposits 642,542 623,785 624,165
Short-term borrowings 5,073 3,441 2,641
Long-term borrowings 1,882 1,907 1,930
Other liabilities 4,028 4,473 3,778
------------------------------------
Total liabilities 653,525 633,606 632,514
SHAREHOLDERS' EQUITY
Common stock 7,952 7,952 7,952
Surplus 31,760 31,760 31,760
Retained earnings 39,020 36,392 33,346
Net unrealized gain (loss) on
securities available for sale (709) 1,106 (131)
-------------------------------------
Total shareholders' equity 78,023 77,210 72,927
-------------------------------------
Total liabilities and
shareholders' equity $731,548 $710,816 $705,441
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 2
<TABLE>
Southwest National Corporation and Subsidiary
Consolidated Statement of Changes in Shareholders' Equity
(in thousands)
<CAPTION>
Unrealized gain Total
Common Retained (loss) on securities shareholders'
stock Surplus earnings available for sale equity
<S> <C> <C> <C> <C> <C>
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
===========================================================
Balance at
January 1, 1996 7,952 31,760 36,392 1,106 77,210
Net income -- -- 4,537 -- 4,537
Cash dividends -- -- (1,909) -- (1,909)
Net unrealized
loss on securities
available for sale -- -- -- (1,815) (1,815)
------------------------------------------------------------
Balance at
June 30, 1996 $7,952 $31,760 $39,020 ($709) $78,023
============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
<TABLE>
Southwest National Corporation and Subsidiary
Consolidated Statement of Cash Flows
(in thousands)
<CAPTION>
Six months
ended
June 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,537 $4,148
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation 615 569
Provision for loan losses 900 850
Increase (decrease) from net interest
receivable/payable (699) 1,242
Net increase (decrease) from other
operating activities (1,430) (116)
-------------------
Net cash from operating activities 3,923 6,693
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of inv. securities
(available for sale) 25,806 25,051
Purchase of investment securities
(available for sale) (32,392) (25,011)
Proceeds from maturities of inv. securities
(held to maturity) 4,314 3,325
Purchase of investment securities
(held to maturity) 0 0
Net increase in loans made to customers (3,087) (7,678)
Net property and equipment expenditures (553) (253)
-------------------
Net cash used for investing activities (5,912) (4,566)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 18,757 12,090
Net increase in short-term borrowings 1,632 1,998
Repayment of long-term borrowings (25) (23)
Dividends paid (1,909) (1,784)
Retirement of common stock 0 (309)
-------------------
Net cash from financing activities 18,455 11,972
-------------------
Net change in cash and cash equivalents $16,466 $14,099
===================
Cash and cash equivalents at beginning
of period $37,562 $52,713
Cash and cash equivalents at end of period 54,028 66,812
-------------------
Net change in cash and cash equivalents $16,466 $14,099
===================
CASH PAID DURING THE PERIOD FOR:
Interest $7,385 $7,130
Income taxes 2,142 1,661
</TABLE>
Transfers from loans to other real estate owned and other repossessions
totaled $616 thousand and $374 thousand in 1996 and 1995, 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.
<PAGE> 4
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 impairment of long-lived
assets, which is discussed in Note 3 below.
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. Certain items previously reported have been reclassified to
conform with the current year's classifications. 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. A $709,000, net of tax,
unrealized loss on securities classified as available for sale at June
30, 1996, was recorded as a separate component of shareholders' equity.
3. ADOPTION OF NEW ACCOUNTING STANDARDS
On January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards (FAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Adoption of this standard did not have a material affect on the
Corporation's financial position or results of operations.
<PAGE> 5
PART I. FINANCIAL INFORMATION
(continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FIRST SIX MONTHS OF 1996 COMPARED TO FIRST SIX MONTHS OF 1995
Net income for the first six months of 1996 was $4,537,000, an
increase of $389,000 (9.4%) compared to the same period of 1995. Per
share results increased to $1.43 in 1996 from $1.30 in 1995, a $.13
(10.1%) rise. The expansion in earnings was fueled by reduced
noninterest expense down $406,000 (3.6%) due primarily to the
significant reduction in FDIC deposit premiums compared to last year.
Other factors contributing to the period-to-period rise included
improved net interest income, up $112,000 (.7%), and higher noninterest
income, up $135,000 (5.6%), related primarily to the gain on the sale of
available for sale securities of $199,000. Excluding the security
transaction, earnings would have risen $258,000 (6.2%).
Net interest income on a fully taxable equivalent basis increased
slightly to $16,088,000 from $15,973,000, a $115,000 (.7%) rise.
Excluding the taxable equivalent adjustment, net interest income
increased slightly to $15,652,000 from $15,540,000. The net interest
margin slipped 17 basis points to 4.72% in 1996 compared to the 4.89%
achieved in 1995. The decrease in the margin has resulted from two
factors: a continuing shift in deposit composition due to increased
demand for higher cost deposits and lower than planned loan growth.
Average earning assets rose to $683,398,000 for the period up
$33,527,000 (5.2%) compared to 1995 which more than offset the shrinkage
in the net interest margin.
The provision for loan losses increased $50,000 (5.9%) due to
continued loan growth. Net charge-offs are up slightly for the period
as rising delinquencies have been an industry-wide issue.
Noninterest income rose $135,000 (5.6%) to $2,562,000 for 1996.
This increase was due primarily to the gain of $199,000 recorded in
other income on the sale of available for sale investment securities.
Service charges on deposit accounts rose $25,000 (2.3%) due to increases
in fees charged for certain services. Offsetting these increases was a
decline in trust income of $105,000 (12.1%) due to lower levels of
assets under management compared to last year.
Noninterest expense decreased $406,000 (3.6%) to $10,847,000 for the
first six months of 1996. Salaries and employee benefits rose $59,000
(1.1%) as a result of normal merit increases offset in part by increases
in the deferral of expenses due to a changing loan mix. Net occupancy
expense rose $134,000 (15.4%) as a result of increases in most
categories due to the severe winter weather of 1996 and costs associated
with a new location opened in late 1995. The FDIC insurance expense
dropped $647,000 because of the significant premium reduction compared
to last year. Excluding the deposit insurance premiums, noninterest
expense would have risen only a modest $241,000 (2.3%) period to period.
At June 30, 1996 assets totalled $731,548,000 up $26,107,000 (3.7%)
compared to $705,441,000 at June 30, 1995. During the same period loans
rose $30,557,000 (7.3%) and investment securities rose $6,040,000
(2.9%). Deposits also rose totalling $642,542,000 at June 30, 1996 up
$18,377,000 (2.9%) from the prior year which helped to fund the
expansion in earning assets.
Shareholders' equity at June 30, 1996 reached $78,023,000 an
increase of $5,096,000 (7.0%) over June 30, 1995. Shareholders' equity
includes unrealized losses on securities net of tax of $709,000 and
$131,000 at June 30, 1996 and June 30, 1995, respectively. Total
capital as a percentage of risk-weighted assets was 18.68% down slightly
from 19.02% at June 30, 1995. The Corporation's leverage capital ratio
rose to 10.79% at June 30, 1996.
Nonperforming assets and loans past due 90 days or more rose from
period end to period end. Asset quality ratios declined period to
period as the trend of delinquencies has been rising, primarily in the
consumer sector. Generally, this has been an industry-wide issue. The
reserve for loan losses totalled $5,857,000 at June 30, 1996 up from
$5,455,000 at June 30, 1995. The reserve for possible loan losses to
nonperforming loans ratio amounted to 293.88% at June 30, 1996, which
represents coverage of almost $3 for every $1 of nonperforming loans.
<PAGE> 6
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 who have 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 sources,
the Bank has numerous external funding sources. These sources provide
ample funding to meet short and long-term needs.
The Corporation is subject to a number of asserted and unasserted
potential claims encountered in the normal course of business. In the
opinion of management and legal counsel, the resolution of these claims
is not expected to have a material adverse effect on the Corporation's
financial position, liquidity, or results of operations.
SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 1995
Net income for the second quarter of 1996 rose to $2,314,000 an
$83,000 (3.7%) increase over the same period in 1995. Per share results
were $.73 in 1996 compared to $.70 in 1995, a 4.3% increase. The growth
in earnings period to period was primarily the result of lower
noninterest expense down $266,000 (4.7%) coupled with improved net
interest income up 1.3%. Partially offsetting these items were a higher
provision for loan losses and lower noninterest income down 9.1%.
Net interest income on a fully taxable equivalent basis increased
slightly to $8,153,000 from $8,058,000. Excluding the taxable
equivalent adjustment, net interest income also rose slightly to
$7,946,000 from $7,845,000 a $101,000 increase. The net interest margin
dropped 17 basis points to 4.73% for the quarter compared to the 4.90%
achieved in the second quarter of 1995. The decline in the margin has
resulted from the continuing shift in deposit composition to higher cost
funds as well as a shift in earning asset mix due to lower than
anticipated loan growth. Average earning assets rose to $691,261,000
for the period, an increase of $35,656,000 (5.4%) compared to the second
quarter of 1995, which more than offset the decline in the net interest
margin.
The provision for possible loan losses increased $110,000 (32.4%)
compared to the same period last year. Industry-wide, delinquencies
have been trending upward, however, our credit quality ratios continue
to compare favorably to our peer group.
Noninterest income declined $121,000 (9.1%) totalling $1,205,000 for
the quarter. Trust income fell $137,000 (26.7%) due to lower levels of
assets managed. Other service charges, commissions, and fees grew
$20,000 (12.6%) due to a higher level of credit life insurance fees
earned.
Noninterest expense fell $266,000 (4.7%) amounting to $5,383,000 for
the second quarter of 1996. Salaries and employee benefits were
relatively flat period to period declining $27,000 (1.0%). Net
occupancy expense rose $48,000 (11.0%) due principally to costs
associated with a new location and reduced rental income earned. The
FDIC Insurance expense dropped $323,000 because of the reduced premiums
compared to the second quarter of last year. Excluding the deposit
insurance premiums, noninterest expense would have risen only $57,000
(1.1%) period to period.
SECOND QUARTER 1996 COMPARED TO FIRST QUARTER 1996
Net income for the second quarter of 1996 was $2,314,000 compared to
$2,223,000 for the first quarter of the year, a $91,000 (4.1%) rise. On
a per share basis net income rose to $.73 from $.70. Improved net
interest income and lower noninterest expense offset in part by lower
noninterest income were responsible for the period-to-period increase.
Net interest income calculated on a fully taxable equivalent basis
rose to $8,153,000 an increase of $218,000 (2.7%). Excluding the
taxable equivalent adjustment, net interest income rose to $7,946,000 an
increase of $240,000 (3.1%) over the first quarter of 1996. Improvement
in the net interest margin to 4.73% from 4.71% combined with growth in
average earning assets of $15,726,000 (2.3%) helped to fuel the increase
in net interest income from the first to the second quarter of 1996.
<PAGE> 7
Noninterest income slipped $152,000 (11.2%) primarily due to the
gain of $199,000 recorded on the sale of available for sale securities
during the first quarter. Increases in service charges on deposit
accounts of $21,000 and other service charges, commissions, and fees of
$32,000 helped to offset the decrease period to period.
Noninterest expense declined $81,000 (1.5%) period to period.
Salary and benefit expense declined $99,000 due principally to increased
deferral of expenses as a result of a changing loan mix. Occupancy
expense also declined relative to the higher level of expenditures in
the first quarter resulting from the severe weather. Other expenses
increased $60,000 partially offsetting these reductions due to increased
marketing expenditures during the second quarter.
BALANCE SHEET COMPARISON JUNE 30, 1996 TO DECEMBER 31, 1995
Total assets rose to $731,548,000 at June 30, 1996 a $20,732,000
(2.9%) increase over $710,816,000 at December 31, 1995. Loans advanced
$3,087,000 (.7%) to $450,004,000 at June 30, 1996. Money market
investments increased over the period as slower loan growth and lack of
prudent investment opportunities prevented other deployment of these
funds. Deposits supporting these assets grew to $642,542,000 from
$623,785,000 an increase of (3.0%). Shareholders' equity increased to
$78,023,000 up $813,000 (1.1%) compared to $77,210,000 at December 31,
1995.
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 second
quarter ended June 30, 1996.
<PAGE> 8
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 12, 1996 /s/ David S. Dahlmann
- ----------------- ---------------------------------------
Date David S. Dahlmann
President and Chief Executive Officer
August 12, 1996 /s/ Donald A. Lawry
- ----------------- ---------------------------------------
Date Donald A. Lawry
Secretary and Treasurer
(Chief Financial Officer)
<PAGE> 9
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 26,125
<INT-BEARING-DEPOSITS> 3
<FED-FUNDS-SOLD> 27,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 143,685
<INVESTMENTS-CARRYING> 67,670
<INVESTMENTS-MARKET> 66,642
<LOANS> 450,004
<ALLOWANCE> 5,857
<TOTAL-ASSETS> 731,548
<DEPOSITS> 642,542
<SHORT-TERM> 5,073
<LIABILITIES-OTHER> 4,028
<LONG-TERM> 1,882
0
0
<COMMON> 7,952
<OTHER-SE> 70,071
<TOTAL-LIABILITIES-AND-EQUITY> 731,548
<INTEREST-LOAN> 18,891
<INTEREST-INVEST> 6,477
<INTEREST-OTHER> 659
<INTEREST-TOTAL> 26,027
<INTEREST-DEPOSIT> 10,208
<INTEREST-EXPENSE> 10,375
<INTEREST-INCOME-NET> 15,652
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 199
<EXPENSE-OTHER> 10,847
<INCOME-PRETAX> 6,467
<INCOME-PRE-EXTRAORDINARY> 4,537
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,537
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.43
<YIELD-ACTUAL> 7.77
<LOANS-NON> 1,993
<LOANS-PAST> 1,232
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,651
<CHARGE-OFFS> 963
<RECOVERIES> 269
<ALLOWANCE-CLOSE> 5,857
<ALLOWANCE-DOMESTIC> 5,857
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
