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, 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 November 12, 1996
Common Stock, $2.50 Par Value 3,142,982
<PAGE>
<TABLE>
SOUTHWEST NATIONAL CORPORATION
FORM 10-Q INDEX
FOR QUARTER ENDED SEPTEMBER 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
<PAGE>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
</TABLE>
<TABLE>
Southwest National Corporation and Subsidiary
Consolidated Statement of Income
(in thousands, except per share amounts)
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
INTEREST INCOME
$9,821 $9,334 Interest and fees on loans $28,712 $27,747
Interest on money market investments:
0 2 Interest bearing deposits with banks 2 6
292 395 Federal funds sold 949 1,484
Interest and dividends on investment
securities:
U.S. Treasury securities and
obligations of U.S. government
1,905 1,758 agencies and corporations 5,594 4,767
Obligations of states and political
301 306 subdivisions 861 958
1,006 1,121 Collateralized mortgage obligations 3,154 3,389
43 44 Other securities 123 126
- ------------------ -----------------
13,368 12,960 Total interest income 39,395 38,477
INTEREST EXPENSE
5,099 5,229 Interest on deposits 15,307 15,087
68 33 Interest on short-term borrowings 160 76
37 39 Interest on long-term borrowings 112 115
- ------------------ -----------------
5,204 5,301 Total interest expense 15,579 15,278
- ------------------ -----------------
8,164 7,659 Net interest income 23,816 23,199
450 375 Provision for possible loan losses 1,350 1,225
- ------------------ -----------------
Net interest income after
provision for possible loan
7,714 7,284 losses 22,466 21,974
NONINTEREST INCOME
400 354 Trust income 1,163 1,222
584 562 Service charges on deposit accounts 1,677 1,630
Other service charges, commissions,
174 137 and fees 500 448
86 88 Other income 466 268
- ------------------ -----------------
1,244 1,141 Total noninterest income 3,806 3,568
NONINTEREST EXPENSE
2,707 2,643 Salaries and employee benefits 8,140 8,017
475 446 Net occupancy expense 1,482 1,319
Equipment expenses and data
786 773 processing fees 2,402 2,376
165 153 Pennsylvania shares tax 494 459
179 (15) FDIC insurance expense 215 668
1,173 1,092 Other expenses 3,599 3,506
- ------------------ -----------------
5,485 5,092 Total noninterest expense 16,332 16,345
- ------------------ -----------------
3,473 3,333 Income before income taxes 9,940 9,197
1,045 967 Income taxes 2,975 2,683
- ------------------ -----------------
$2,428 $2,366 NET INCOME $6,965 $6,514
================== =================
PER SHARE:
$0.76 $0.75 Net income $2.19 $2.05
0.30 0.28 Cash dividends 0.90 0.84
3,180 3,181 Average commom shares outstanding 3,181 3,184
See accompanying notes to consolidated financial statements.
<PAGE> 1
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<TABLE>
SOUTHWEST NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in thousands)
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
<S> <C> <C> <C>
ASSETS
Cash and due from banks $26,712 $25,254 $27,160
Money market investments:
Int. bearing deposits with banks 87 108 121
Federal funds sold 9,200 12,200 7,200
----------------------------------
Total money market investments: 9,287 12,308 7,321
Investment securities:
Securities available for sale 146,084 139,895 118,342
Securities held to maturity (market
values: $64,133; $71,981 and
$92,531) 64,916 71,991 92,555
----------------------------------
Total investment securities 211,000 211,886 210,897
Loans, net of unearned income of
$201; $643 and $890 469,598 446,917 433,047
Less: reserve for possible loan
losses (5,947) (5,651) (5,697)
-----------------------------------
Loans, net 463,651 441,266 427,350
Bank premises and equipment 8,151 8,266 7,465
Other assets 13,208 11,836 12,588
-----------------------------------
Total assets $732,009 $710,816 $692,781
===================================
LIABILITIES
Deposits
Noninterest bearing demand $104,346 $100,811 $97,062
NOW accounts 54,577 53,014 54,910
Savings 238,816 235,809 231,450
Time 242,685 234,151 226,274
-----------------------------------
Total deposits 640,424 623,785 609,696
Short-term borrowings 5,542 3,441 2,787
Long-term borrowings 1,870 1,907 1,918
Other liabilities 4,554 4,473 4,149
-----------------------------------
Total liabilities 652,390 633,606 618,550
SHAREHOLDERS' EQUITY
Common stock 7,952 7,952 7,952
Treasury stock, at cost (135) 0 0
Surplus 31,760 31,760 31,760
Retained earnings 40,494 36,392 34,822
Net unrealized gain (loss) on
securities available for sale (452) 1,106 (303)
------------------------------------
Total shareholders' equity 79,619 77,210 74,231
------------------------------------
Total liabilities and
shareholders' equity $732,009 $710,816 $692,781
====================================
See accompanying notes to consolidated financial statements.
<PAGE> 2
</TABLE>
<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 -- -- 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
==========================================================
Balance at
January 1, 1996 7,952 31,760 36,392 1,106 77,210
Net income -- -- 6,965 -- 6,965
Cash dividends -- -- (2,863) -- (2,863)
Purchase of
treasury stock (135) -- -- -- (135)
Net unrealized
loss on
securities
available
for sale -- -- -- (1,558) (1,558)
----------------------------------------------------------
Balance at
September 30,
1996 $7,817 $31,760 $40,494 ($452) $79,619
==========================================================
See accompanying notes to consolidated financial statements.
<PAGE> 3
</TABLE>
<TABLE>
SOUTHWEST NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,965 $6,514
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation 915 846
Provision for loan losses 1,350 1,225
Net loan charge-offs (1,054) (566)
Increase from net interest receivable/payable 30 720
Net increase (decrease) from other operating
activities (447) 777
-------- -------
Net cash from operating activities 7,759 9,516
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of inv. securities
(available for sale) 36,806 33,051
Purchase of investment securities
(available for sale) (45,417) (39,946)
Proceeds from maturities of inv. securities
(held to maturity) 7,065 5,287
Purchase of investment securities
(held to maturity) 0 (905)
Net increase in loans made to customers (22,681) (21,278)
Net property and equipment expenditures (800) (704)
-------- --------
Net cash used for investing activities (25,027) (24,495)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 16,639 (2,379)
Net increase in short-term borrowings 2,101 2,144
Repayment of long-term borrowings (37) (35)
Dividends paid (2,863) (2,675)
Purchase of treasury stock (135) 0
Retirement of common stock 0 (308)
-------- --------
Net cash from financing activities 15,705 (3,253)
-------- --------
Net change in cash and cash equivalents ($1,563) ($18,232)
========= =========
Cash and cash equivalents at beginning of period $37,562 $52,713
Cash and cash equivalents at end of period 35,999 34,481
--------- ---------
Net change in cash and cash equivalents ($1,563) ($18,232)
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest $10,776 $10,452
Income taxes 3,157 2,461
Transfers from loans to other real estate owned and other repossessions totaled
$903 thousand and $473 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 $452,000, net of tax, unrealized
loss on securities classified as available for sale at September 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 NINE MONTHS OF 1996 COMPARED TO FIRST NINE MONTHS OF 1995
Net income for the first nine months of 1996 reached $6,965,000 compared to
$6,514,000 for the comparable period in 1995, a $451,000 (6.9%) increase.
Excluding the one-time charge for recapitalization of the SAIF (Savings and Loan
Insurance Fund), earnings would have risen 8.6% year to date. Earnings per
share were $2.19 in 1996 compared to $2.05 in 1995, a $.14 (6.8%) rise. Return
on average assets reached 1.28% in 1996, a favorable comparison to the 1.26%
attained in 1995.
Earnings increased primarily as a result of a $617,000 increase in net
interest income which rose to $23,816,000 in 1996. On a fully-tax equivalent
basis, net interest income increased $598,000 from $23,874,000 in 1995 to
$24,472,000 in 1996, a rise of 2.5%. This increase in net interest income was
fueled by the $32,700,000 rise in earning assets offset in part by the 9 basis
point slippage in the net interest margin. The decline in the margin resulted
from increased demand for higher cost deposits coupled with a shift in earning
asset mix. Average earning assets rose due to the increase in deposits of
$22,541,000 (3.7%) combined with earnings retained over the period.
The provision for loan losses rose $125,000 (10.2%) due to continued loan
growth, primarily in the commercial sector.
Noninterest income advanced $238,000 (6.7%) to $3,806,000 in 1996. This
rise was principally due 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 $47,000 (2.9%), due to increases in fees charged for certain
services. Offsetting these increases was a decline in trust income of $59,000
(4.8%).
Noninterest expense was flat compared to the first nine months of 1995.
Salaries and employee benefits rose $123,000 (1.5%) as a result of regular
merit increases offset in part by increases in deferral of expenses due to
changes in the loan mix. Net occupancy expense increased $163,000 (12.4%) as a
result of increases in most categories primarily due to the severe winter
weather of 1996 and costs associated with a new location opened late in 1995.
FDIC insurance premiums dropped $453,000 due to the significant premium
reduction compared to last year. Excluding the deposit insurance premiums,
noninterest expense would have risen $440,000 (2.8%) period to period.
At September 30, 1996 assets totalled $732,009,000 up $39,228,000 (5.7%)
compared to $692,781,000 at September 30, 1995. During the same period loans
rose $36,551,000 (8.4%) reaching $469,598,000. Deposits also rose totalling
$640,424,000 at September 30, 1996 up $30,728,000 (5.0%) from the prior year
which helped to fund the expansion in earning assets.
Shareholders' equity at September 30, 1996 reached $79,619,000, an increase
of $5,388,000 (7.3%) over September 30, 1995. Shareholders' equity includes
unrealized losses on securities net of tax of $452,000 and $303,000 at September
30, 1996 and September 30, 1995, respectively. Total capital as a percentage of
risk-weighted assets was 18.34% down from the 19.28% at September 30, 1995. The
Corporation's leverage capital ratio rose to 10.89% at September 30, 1996.
Nonperforming assets and loans past due 90 days rose from period end to
period end. Asset quality ratios declined period to period as delinquencies
continue to trend up, primarily in the consumer sector. Generally this has been
an industry-wide issue. The reserve for loan losses totalled $5,947,000 at
September 30, 1996 up from $5,697,000 at September 30, 1995. The reserve for
loan losses to nonperforming loans ratio amounted to 304.19% at September 30,
1996 which represents coverage of $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.
THIRD QUARTER 1996 COMPARED TO THIRD QUARTER 1995
Net income for the third quarter of 1996 rose to $2,428,000 a $62,000
(2.6%) rise over the same period in 1995. Earnings would have risen 7.1%
excluding the one-time charge of $162,000 before tax for the recapitalization of
the SAIF recorded in the quarter. Per share results were $.76 in 1996 compared
to $.75 in 1995.
The rise in earnings was principally the result of improved net interest
income up $505,000 (6.6%) reaching $8,164,000 compared to the same period last
year. On a fully-taxable equivalent basis, net interest income increased
$483,000 from $7,901,000 in 1995 to $8,384,000 in 1996 a 6.1% rise. The
increase in net interest income resulted from the 6 basis point rise in the net
interest margin combined with the $31,087,000 increase in average earning
assets. The increase in the net margin resulted from the shifting asset mix due
to stronger loan growth, primarily in the commercial sector, compared to the
same period last year.
The provision for possible loan losses increased $75 thousand (20.0%)
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 increased $103,000 (9.0%) totalling $1,244,000 for the
quarter. Trust income rose $46,000, service charges on deposit accounts rose
$22,000 and other service charges, commissions, and fees increased $37,000.
Noninterest expense rose $393,000 (7.7%) amounting to $5,485,000 for the
third quarter of 1996. Salaries and employee benefits expense rose slightly, up
$64,000, and net occupancy expense rose $29,000. The FDIC Insurance expense
rose $194,000 due to the one-time assessment of $162,000 to recapitalize the
SAIF assessed in September of 1996. In 1995 the Bank benefitted from a $361,000
refund from the FDIC related to the overcapitalization of the Bank Insurance
Fund (BIF). Excluding the deposit insurance premiums, noninterest expense would
have risen $199,000 (3.9%) period to period.
THIRD QUARTER 1996 COMPARED TO SECOND QUARTER 1996
Net income for the third quarter of 1996 was $2,428,000 compared to
$2,314,000 for the second quarter of 1996, a $114,000 (4.9%) rise. On a per
share basis net income rose to $.76 from $.73, a 4.1% increase. Improved net
interest income and higher noninterest income offset in part by higher
noninterest expense were responsible for the period-to-period increase.
Net interest income calculated on a fully-taxable equivalent basis rose to
$8,384,000 an increase of $231,000 (2.8%). Excluding the taxable equivalent
adjustment, net interest income rose to $8,164,000 an increase of $218,000
(2.7%) over the second quarter of 1996. Improvement in the net interest margin
to 4.81% from 4.73% in tandem with growth in average earning assets of
$4,701,000 helped to spur the increase in net interest income from the second to
the third quarter of 1996.
Noninterest income rose $39,000 (3.2%) due to slightly higher trust income,
up $23,000 and service charges on deposit accounts, up $27,000.
<PAGE> 7
Noninterest expense rose $102,000 (1.9%) period to period, primarily as the
result of increased FDIC insurance expense. The FDIC insurance expense rose
$161,000 as a result of the one-time assessment to recapitalize the SAIF.
Other expenses declined due to decreases in various expense categories.
Total assets rose slightly to $732,009,000 at September 30, 1996 from
$731,548,000 at June 30, 1996. Money market investments decreased $18,616,000
(66.7%) and were deployed in loans, which increased $19,594,000 (4.4%) to
$469,598,000 at September 30, 1996. Deposits supporting these assets slipped to
$640,424,000, a decrease of $2,118,000 (0.3%), from $642,542,000 at June 30,
1996. Shareholders' equity increased to $79,619,000 at September 30, 1996, a
$1,596,000 (2.1%) rise.
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, 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)
November 12, 1996 /s/ David S. Dahlmann
- ----------------- ---------------------------------------
Date David S. Dahlmann
President and Chief Executive Officer
November 12, 1996 /s/ Donald A. Lawry
- ----------------- ---------------------------------------
Date Donald A. Lawry
Secretary and Treasurer
(Chief Financial Officer)
<PAGE> 9
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 26,712
<INT-BEARING-DEPOSITS> 87
<FED-FUNDS-SOLD> 9,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 146,084
<INVESTMENTS-CARRYING> 64,916
<INVESTMENTS-MARKET> 64,133
<LOANS> 469,598
<ALLOWANCE> 5,947
<TOTAL-ASSETS> 732,009
<DEPOSITS> 640,424
<SHORT-TERM> 5,542
<LIABILITIES-OTHER> 4,554
<LONG-TERM> 1,870
0
0
<COMMON> 7,952
<OTHER-SE> 71,667
<TOTAL-LIABILITIES-AND-EQUITY> 732,009
<INTEREST-LOAN> 28,712
<INTEREST-INVEST> 9,732
<INTEREST-OTHER> 951
<INTEREST-TOTAL> 39,395
<INTEREST-DEPOSIT> 15,307
<INTEREST-EXPENSE> 15,579
<INTEREST-INCOME-NET> 23,816
<LOAN-LOSSES> 1,350
<SECURITIES-GAINS> 199
<EXPENSE-OTHER> 16,332
<INCOME-PRETAX> 9,940
<INCOME-PRE-EXTRAORDINARY> 6,965
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,965
<EPS-PRIMARY> 2.19
<EPS-DILUTED> 2.19
<YIELD-ACTUAL> 7.77
<LOANS-NON> 1,955
<LOANS-PAST> 2,170
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,651
<CHARGE-OFFS> 1,509
<RECOVERIES> 455
<ALLOWANCE-CLOSE> 5,947
<ALLOWANCE-DOMESTIC> 5,947
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
