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, 1997
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, 1997
Common Stock, $2.50 Par Value 3,070,910
<PAGE>
<TABLE>
SOUTHWEST NATIONAL CORPORATION
FORM 10-Q INDEX
FOR QUARTER ENDED JUNE 30, 1997
<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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1996 1997 1996
- ---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
$10,654 $9,473 Interest and fees on loans $20,899 $18,891
Interest on money market investments:
1 0 Interest bearing deposits with banks 4 2
102 343 Federal funds sold 361 657
Interest and dividends on investment
securities: U.S. Treasury securities
and obligations of U.S. government
1,812 1,941 agencies and corporations 3,577 3,689
Obligations of states and political
290 270 subdivisions 575 560
861 1,051 Collateralized mortgage obligations 1,768 2,148
42 40 Other securities 83 80
- --------------- ---------------
13,762 13,118 Total interest income 27,267 26,027
INTEREST EXPENSE
5,251 5,089 Interest on deposits 10,375 10,208
Interest on Federal funds purchased
and securities sold under agreements
55 51 to repurchase 167 90
Interest on Federal Home Loan Bank
38 32 advances 121 77
- --------------- ---------------
5,344 5,172 Total interest expense 10,663 10,375
- --------------- ---------------
8,418 7,946 Net interest income 16,604 15,652
645 450 Provision for possible loan losses 1,095 900
- --------------- ---------------
Net interest income after
provision for possible loan
7,773 7,496 losses 15,509 14,752
NONINTEREST INCOME
441 377 Trust income 827 763
659 557 Service charges on deposit accounts 1,239 1,093
Other service charges, commissions
162 179 and fees 328 326
87 92 Other income 238 380
- --------------- ---------------
1,349 1,205 Total noninterest income 2,632 2,562
NONINTEREST EXPENSE
2,781 2,667 Salaries and employee benefits 5,625 5,433
500 483 Net occupancy expense 984 1,007
Equipment expenses and data
898 807 processing fees 1,709 1,616
178 165 Pennsylvania shares tax 355 329
25 18 FDIC insurance expense 48 36
1,219 1,243 Other expenses 2,561 2,426
- --------------- ---------------
5,601 5,383 Total noninterest expense 11,282 10,847
- --------------- ---------------
3,521 3,318 Income before income taxes 6,859 6,467
1,057 1,004 Income taxes 2,055 1,930
- --------------- ---------------
$2,464 $2,314 NET INCOME $4,804 $4,537
=============== ===============
Per share (based on 3,108,569
average common shares in 1997
and 3,180,787 in 1996)
$0.80 $0.73 Net income $1.55 $1.43
0.32 0.30 Cash dividends 0.64 0.60
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE> 1
<TABLE>
SOUTHWEST NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in thousands)
<CAPTION>
June 30, December 31, June 30,
1997 1996 1996
--------- ------------ --------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $24,205 $26,521 $26,125
Money market investments:
Int. bearing deposits with banks 59 82 3
Federal funds sold 11,200 28,800 27,900
-----------------------------------
Total money market investments: 11,259 28,882 27,903
Investment securities:
Securities available for sale 139,991 135,183 143,685
Securities held to maturity
(market values: $56,155;
$61,609 and $66,642) 56,572 62,067 67,670
-----------------------------------
Total investment securities 196,563 197,250 211,355
Loans, net of unearned income of
$57; $138 and $306 496,497 489,188 451,734
Less: reserve for possible
loan losses (5,851) (5,910) (5,857)
-----------------------------------
Loans, net 490,646 483,278 445,877
Bank premises and equipment 8,487 8,089 8,204
Other assets 12,474 11,338 12,084
-----------------------------------
Total assets $743,634 $755,358 $731,548
===================================
LIABILITIES
Deposits
Noninterest bearing demand $109,306 $105,202 $100,014
NOW accounts 32,612 55,232 54,105
Savings 247,942 239,794 245,554
Time 255,869 251,100 242,869
-----------------------------------
Total deposits 645,729 651,328 642,542
Securities sold under agreements
to repurchase 7,613 6,811 5,073
Federal Home Loan Bank borrowings 5,000 11,907 1,882
Other liabilities 4,594 5,148 4,028
-----------------------------------
Total liabilities 662,936 675,194 653,525
SHAREHOLDERS' EQUITY
Common stock 7,952 7,952 7,952
Surplus 31,760 31,760 31,760
Retained earnings 44,948 42,132 39,020
Treasury stock, at cost (4,026) (1,800) 0
Net unrealized gain (loss) on
securities available for sale 64 120 (709)
----------------------------------
Total shareholders' equity 80,698 80,164 78,023
----------------------------------
Total liabilities and
shareholders' equity $743,634 $755,358 $731,548
===================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE 2>
<TABLE>
SOUTHWEST NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<CAPTION>
Unrealized gain Total
Common Retained Treasury (loss) on securities shareholders'
stock Surplus earnings stock available for sale equity
------ ------- ------- --------- -------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
============================================================================
Balance at January 1, 1997 7,952 31,760 42,132 (1,800) 120 80,164
Net income -- -- 4,804 -- -- 4,804
Cash dividends -- -- (1,988) -- -- (1,988)
Purchase of treasury stock -- -- -- (2,226) -- (2,226)
Net unrealized loss on
securities available for sale -- -- -- -- (56) (56)
----------------------------------------------------------------------------
Balance at June 30, 1997 $7,952 $31,760 $44,948 ($4,026) $64 $80,698
============================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE 3>
<TABLE>
SOUTHWEST NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<CAPTION>
Six months
ended June 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $4,804 $4,537
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation 639 615
Provision for loan losses 1,095 900
Increase from net interest receivable/payable (516) (699)
Increase in prepaid assets (718) (405)
Net increase from other operating activities (353) (271)
-------- -------
Net cash from operating activities 4,951 4,677
Cash flows from investing activities:
Proceeds from sales and maturities of inv.
securities (available for sale) 21,490 26,005
Purchase of investment securities
(available for sale) (26,385) (32,392)
Proceeds from maturities of inv.
securities (held to maturity) 5,495 4,314
Purchase of investment securities (held to maturity) 0 0
Net increase in loans made to customers (8,535) (4,040)
Net property and equipment expenditures (1,037) (553)
-------- -------
Net cash used for investing activities (8,972) (6,666)
Cash flows from financing activities:
Net increase (decrease) in deposits (5,599) 18,757
Net increase in federal funds purchased and
securities sold under agreements to repurchase 802 1,630
Proceeds from Federal Home Loan Bank advances 5,000 0
Repayment of Federal Home Loan Bank advances (11,907) (23)
Dividends paid (1,988) (1,909)
Purchase of treasury stock (2,226) 0
-------- -------
Net cash from financing activities (15,918) 18,455
-------- -------
Net change in cash and cash equivalents ($19,939) $16,466
========= =======
Cash and cash equivalents at beginning of period $55,403 $37,562
Cash and cash equivalents at end of period 35,464 54,028
------- -------
Net change in cash and cash equivalents ($19,939) $16,466
Cash paid during the period for:
Interest $7,425 $7,385
Income taxes 2,182 2,142
<FN>
<F1>Transfers from loans to other real estate owned and other repossessions totaled $1.058 million and
$616 thousand in 1997 and 1996, respectively.
<F2>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.
<F3>See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<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.
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 $64,000, net of tax,
unrealized gain on securities classified as available for sale at June
30, 1997, was recorded as a separate component of shareholders' equity.
<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 1997 COMPARED TO FIRST SIX MONTHS OF 1996
Net income for the first six months of 1997 was $4,804,000, an
increase of 267,000 (5.9%), compared to the same period of 1996. Per
share results rose to $1.55 in 1997 from $1.43 in 1996, a $0.12 (8.4%)
increase. The expansion in earnings was sparked by the rise in net
interest income, up $952,000 (6.1%), due to growth in earning assets
combined with an improved net interest margin. A higher provision for
loan losses up $195,000 (21.7%) and increased noninterest expense, up
$435,000 (4.0%), partially offset the improved net interest income as
noninterest income grew only $70,000 period to period.
Net interest income on a fully taxable equivalent basis increased
to $17,028,000 in 1997 from $16,088,000 a $940,000 (5.8%) rise compared
to 1996. Excluding the taxable equivalent adjustment, net interest
income climbed to $16,604,000 from $15,652,000. The net interest margin
rose 10 basis points to 4.81% in 1997 compared to the 4.71% achieved in
1996. The increase in the margin is due primarily to the shifting in
composition of earning assets favoring loans (up $46,929,000 or 10.5% on
average) over other categories of earning assets. Average earning
assets in total also grew for the period reaching $708,331,000 up
$24,226,000 (3.5%) at June 30, 1997.
The provision for loan losses increased $195,000(21.7%) compared to
last year. Continued growth in loans and the increased trend in consumer
delinquencies account for the rise.
Noninterest income rose only $70,000 (2.7%) due principally to the
gain of $196,000 recognized on the sale of investment securities in
1996. Exclusive of this item, noninterest income would have risen
$266,000 (11.2%) period to period. Trust income rose $64,000 (8.4%) due
to an increased level of fees generated by the personal trust sector.
Service charges on deposit accounts also rose period to period growing
$146,000 (13.4%) due to enhanced sales and collection efforts in the
retail sector.
Noninterest expense climbed $435,000 (4.0%) to $11,282,000 for the
first six months of 1997. Salaries and employee benefits rose $192,000
(3.5%) due to normal merit increases. Equipment expenses and data
processing fees rose $93,000 (5.8%) primarily due to increased data
processing fees and costs associated with the Bank's new debit card
product (Mastermoney). Other expenses increased $135,000 (5.6%) to
$2,561,000 for the period. Increases in several categories contributed
to this rise and included: office temporaries ($60,000), consulting
fees ($39,000), telephone and telegraph ($32,000) and core deposit
amortization ($43,000). Also, an adjustment of $185,000 regarding the
initial recording of the supplies inventory as an asset reduced supplies
expense which helped to offset increases in this category.
At June 30, 1997 assets totaled $743,634,000 up $12,086,000 (1.7%),
compared to $731,548,000 at June 30, 1996. During this same period,
loans rose $44,763,000 (9.9%), while investment securities declined
$14,792,000 (7.0%). Deposit growth slowed rising only $3,187,000 or
less than one percent as other borrowed funds rose $5,658,000 over the
period which helped to fund asset growth.
Shareholders' equity at June 30, 1997 reached $80,698,000 up
$2,675,000 (3.4%) over June 30, 1996. Shareholders' equity includes
unrealized gains on securities net of tax of $64,000 at June 30, 1997
and unrealized losses on securities net of tax of $709,000 at June 30,
1996. Total capital as a percentage of risk-weighted assets was 17.52%
down from the 18.68% at June 30, 1996. The Corporation's leverage
capital ratio rose to 10.83% at June 30, 1997.
The reserve for loan losses totaled $5,851,000 at June 30, 1997,
basically unchanged from June 30, 1996. The reserve for loan losses to
nonperforming loans ratio was 275.73% at June 30, 1997, down slightly
from the 293.88% reported at June 30, 1996. Nonperforming assets and
loans past due 90 days or more rose $339,000 from period end to period
end. The remaining asset quality ratios remained comparable at both
period ends. Net charge-offs climbed to $1,154,000 from $694,000 last
year which reflects the continued trend in consumer delinquencies, which
has generally been an industry-wide issue, as well as the continuing
growth in the loan portfolio.
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 available for sale securities 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 effect on the Corporation's financial
position, liquidity or results of operations.
<PAGE> 6
SECOND QUARTER 1997 COMPARED TO SECOND QUARTER 1996
Net income for the second quarter of 1997 rose to $2,464,000, a
$150,000 (6.5%) increase over the same period in 1996. Per share
results were $0.80 in 1997 compared to $0.73 in 1996, a 9.6% rise. The
growth in earnings period to period was primarily the result of higher
net interest income up $472,000 (5.9%) coupled with improved noninterest
income up $144,000 (12.0%). Partially offsetting these items were a
higher provision for loan losses and increased noninterest expense which
grew 4.0%.
Net interest income on a fully taxable equivalent basis grew to
$8,631,000 from $8,153,000, a rise of $478,000 (5.9%). Excluding the
taxable equivalent adjustment, net interest income rose to $8,418,000
from $7,946,000. The net interest margin climbed 18 basis points to
4.89% for the quarter compared to 4.71% in the second quarter of 1996.
The rise in the margin has resulted primarily from the continued shift
in earning asset mix due to strong loan growth, principally in the
commercial sector, compared to the second quarter of last year. Average
earning assets rose to $705,135,000 for the period, an increase of
$12,276,000 (1.8%) in comparison to the same period last year which also
helped to fuel the rise in net interest income.
The provision for possible loan losses rose $195,000 compared to
the same period last year. The period to period increase was primarily
the result of continued loan growth as well as a higher level of charge-
offs which reflect the rising trend of consumer delinquencies.
Noninterest income grew $144,000 (12.0%) for the quarter. Trust
income rose $64,000 (17.0%) due to increased fees realized in the
personal trust sector. Service charges on deposit accounts rose
$102,000 (18.3%) due to enhanced collection and sales efforts primarily
in the retail sector.
Noninterest expense increased $218,000 (4.0%) reaching $5,601,000
for the second quarter of 1997. Salaries and benefits rose $114,000
(4.3%) due primarily to normal merit increases. Data processing fees
rose $73,000 due principally to costs related to the Bank's new
Mastermoney (debit card) product. Other expenses declined $24,000
(1.9%) as the adjustment pertaining to the supplies inventory more than
offset increases in this category.
SECOND QUARTER 1997 COMPARED TO FIRST QUARTER 1997
Net income for the second quarter of 1997 was $2,464,000 compared
to $2,340,000 for the first quarter of the year, a $124,000 (5.3%) rise.
On a per share basis, income rose to $0.80 from $0.75. Improved net
interest income, higher noninterest income and lower noninterest expense
offset in part by a higher provision for loan losses were responsible
for the period to period increase.
<PAGE> 7
Net interest income calculated on a fully taxable equivalent basis
rose to $8,631,000, an increase of $234,000 (2.8%). Excluding the
taxable equivalent adjustment, net interest income rose to $8,418,000,
an increase of $232,000 (2.8%) over the first quarter of 1997.
Improvement in the net interest margin to 4.89% from 4.72%, offset
partially by a slight decline in average earning assets of $6,428,000
(less than one percent), helped to power the increase in net interest
income from the first to the second quarter of 1997.
Noninterest income rose $66,000 (5.1%) period to period. Increases
in trust income of $55,000 (14.2%) and service charges on deposit
accounts $79,000 (13.6%) helped to pace the quarter to quarter increase.
Noninterest expense declined $80,000 (1.4%) period to period.
Salary and benefit expense rose just $63,000 (2.2%). Data fees rose
$84,000 for the quarter as costs associated with the roll out of the
Bank's new debit card product impacted the second quarter of 1997.
Other expenses fell $123,000 as the result of the supplies inventory
adjustment recorded in the second quarter.
BALANCE SHEET COMPARISON JUNE 30, 1997 TO DECEMBER 31, 1996
Total assets slipped to $743,634,000 at June 30, 1997, a
$11,724,000 (1.6%) decline from $755,358,000 at December 31, 1996.
Loans advanced $7,309,000 (1.5%) to $496,497,000 at June 30, 1997.
Money market investments decreased over the period as those funds were
utilized to fund loan growth and reduce borrowings. Deposits supporting
these assets declined to $645,729,000 from $651,328,000, a decrease of
less than one percent. Shareholders' equity remained flat period to
period, settling at $80,698,000 at June 30, 1997.
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, 1997.
<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, 1997 /s/ David S. Dahlmann
- ----------------- ---------------------------------------
Date David S. Dahlmann
President and Chief Executive Officer
August 12, 1997 /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-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 24,205
<INT-BEARING-DEPOSITS> 59
<FED-FUNDS-SOLD> 11,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 139,991
<INVESTMENTS-CARRYING> 56,572
<INVESTMENTS-MARKET> 56,155
<LOANS> 496,497
<ALLOWANCE> 5,851
<TOTAL-ASSETS> 743,634
<DEPOSITS> 645,729
<SHORT-TERM> 12,613
<LIABILITIES-OTHER> 4,594
<LONG-TERM> 0
0
0
<COMMON> 7,952
<OTHER-SE> 72,746
<TOTAL-LIABILITIES-AND-EQUITY> 743,634
<INTEREST-LOAN> 20,899
<INTEREST-INVEST> 6,003
<INTEREST-OTHER> 365
<INTEREST-TOTAL> 27,267
<INTEREST-DEPOSIT> 10,375
<INTEREST-EXPENSE> 10,663
<INTEREST-INCOME-NET> 16,604
<LOAN-LOSSES> 1,095
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,282
<INCOME-PRETAX> 6,859
<INCOME-PRE-EXTRAORDINARY> 4,804
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,804
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.55
<YIELD-ACTUAL> 7.81
<LOANS-NON> 2,122
<LOANS-PAST> 1,350
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,910
<CHARGE-OFFS> 1,545
<RECOVERIES> 391
<ALLOWANCE-CLOSE> 5,851
<ALLOWANCE-DOMESTIC> 5,851
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
