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 March 31, 1998
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 Identification No.)
incorporation or organization)
111 South Main Street
Greensburg, Pennsylvania 15601
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (724) 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 May 12, 1998
Common Stock, $2.50 Par Value 3,043,738
<PAGE>
<TABLE>
SOUTHWEST NATIONAL CORPORATION
FORM 10-Q INDEX
FOR QUARTER ENDED MARCH 31, 1998
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
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 6-7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 7
SIGNATURES 8
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
</TABLE>
<TABLE>
SOUTHWEST NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(in thousands, except per share amounts)
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1998 1997
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $10,712 $10,245
Interest on money market investments:
Interest bearing deposits with banks 1 3
Federal funds sold 426 259
Interest and dividends on investment securities:
U.S. Treasury securities and obligations of
U.S. government agencies and corporations 1,453 1,765
Obligations of states and political subdivisions 258 285
Collateralized mortgage obligations 667 907
Other securities 45 41
------------------
Total interest income 13,562 13,505
INTEREST EXPENSE
Interest on deposits 5,238 5,124
Interest on securities sold under agreements to repurchase 48 112
Interest on Federal Home Loan Bank advances 73 83
------------------
Total interest expense 5,359 5,319
------------------
Net interest income 8,203 8,186
Provision for possible loan losses 675 450
------------------
Net interest income after provision
for possible loan losses 7,528 7,736
NONINTEREST INCOME
Trust income 476 386
Service charges on deposit accounts 793 580
Other service charges, commissions, and fees 153 166
Other income 81 151
------------------
Total noninterest income 1,503 1,283
NONINTEREST EXPENSE
Salaries and employee benefits 2,887 2,844
Net occupancy expense 459 484
Equipment expenses and data processing fees 879 811
Pennsylvania shares tax 191 177
FDIC insurance expense 24 23
Other expenses 1,585 1,342
------------------
Total noninterest expense 6,025 5,681
------------------
Income before income taxes 3,006 3,338
Income taxes 842 998
------------------
NET INCOME $2,164 $2,340
==================
PER BASIC SHARE (based on 3,064,784 average common
shares in 1998 and 3,127,132 in 1997)
Net income $0.71 $0.75
Cash dividends 0.35 0.32
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE> 1
<TABLE>
SOUTHWEST NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands)
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
--------- ------------ --------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $23,909 $22,391 $25,659
Money market investments:
Int. bearing deposits with banks 20 55 106
Federal funds sold 28,200 27,000 5,500
--------- ----------- -------
Total money market investments: 28,220 27,055 5,606
Investment securities:
Securities available for sale 134,215 109,287 144,186
Securities held to maturity
(market values: $42,498; $49,625
and $58,457) 42,634 49,817 59,309
--------- -------- --------
Total investment securities 176,849 159,104 203,495
Loans, net of unearned income of $6; $15
and $90 498,723 515,434 495,217
Less: reserve for possible loan losses (6,094) (6,166) (5,737)
--------- -------- --------
Loans, net 492,629 509,268 489,480
Bank premises and equipment 9,189 8,953 8,627
Other assets 11,310 12,471 12,290
-------- ------- -------
Total assets $742,106 $739,242 $745,157
===============================
LIABILITIES
Deposits
Noninterest bearing demand $108,027 $109,139 $106,866
NOW accounts 32,954 33,176 53,975
Savings 238,354 233,960 240,193
Time 264,771 265,590 250,675
------- ------- -------
Total deposits 644,106 641,865 651,709
Securities sold under agreements to
repurchase 4,412 4,531 8,507
Federal Home Loan Bank borrowings 5,000 5,000 0
Other liabilities 5,202 5,357 5,196
------- ------- -------
Total liabilities 658,720 656,753 665,412
SHAREHOLDERS' EQUITY
Common stock ($2.50 par value)
Authorized 5,000,000 shares
Issued 3,180,787 shares 7,952 7,952 7,952
Surplus 31,760 31,760 31,760
Retained earnings 48,185 47,093 43,470
Treasury stock of 117,933, 115,877
and 62,405 shares, at cost (4,945) (4,840) (2,521)
Accumulated other comprehensive income 434 524 (916)
------- ------- -------
Total shareholders' equity 83,386 82,489 79,745
-------- ------- -------
Total liabilities and
shareholders' equity
$742,106 $739,242 $745,157
================================
<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
(Unaudited)
(in thousands)
<CAPTION>
Accumulated Total
Common Retained Treasury Comprehensive Comprehensive Shareholders'
Stock Surplus Earnings Stock Income Income Equity
------ ------- -------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $7,952 $31,760 $42,132 ($1,800) $-- $120 $80,164
Comprehensive income:
Net income -- -- 2,340 -- 2,340 -- 2,340
Other comprehensive income,
net of tax
Unrealized losses on
securities -- -- -- -- (1,036) (1,036) (1,036)
--------
Total comprehesive income -- -- -- -- $1,304
========
Cash dividends -- -- (1,002) -- -- (1,002)
Purchase of treasury stock -- -- -- (721) -- (721)
--------------------------------------------- ---------------------------
Balance at March 31, 1997 $7,952 $31,760 $43,470 ($2,521) ($916) $79,745
===========================================================================================
Balance at January 1, 1997 $7,952 $31,760 $47,093 ($4,840) $ -- $524 $82,489
Comprehensive income:
Net income -- -- 2,164 -- 2,164 -- 2,164
Other comprehensive income,
net of tax
Unrealized losses on
securities -- -- -- -- (90) (90) (90)
Total comprehensive income -- -- -- -- $2,074
=======
Cash dividends -- -- (1,072) -- -- (1,072)
Purchase of treasury stock -- -- -- (105) -- (105)
--------------------------------------------- ----------------------------
Balance at March 31, 1998 $7,952 $31,760 $48,185 ($4,945) $434 $83,386
============================================= ============================
Disclosure of reclassification amount (1997):
Unrealized holding losses arising during the period ($1,037)
Plus: reclassification adjustment for losses included in net income 1
--------
Unrealized loss on securities ($1,036)
=========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
<PAGE> 3
<TABLE>
SOUTHWEST NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<CAPTION>
Three months
ended March 31,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,164 $2,340
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation 317 319
Provision for loan losses 675 450
Increase from net interest receivable/payable 669 124
Net increase (decrease) from other operating activities 378 (315)
------ -------
NET CASH FROM OPERATING ACTIVITIES 4,203 2,918
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of inv. securities
available 10,420 10,775
Purchase of investment securities available for sale (35,496) (21,340)
Proceeds from maturities of inv. securities held to
maturity 7,186 2,758
Purchase of investment securities held to maturity 0 0
Net (increase) decrease in loans 15,979 (6,839)
Net property and equipment expenditures (553) (857)
------- --------
NET CASH USED FOR INVESTING ACTIVITIES (2,464) (15,503)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 2,241 381
Net increase (decrease) in securities sold under agr.
to repurchase (119) 1,696
Repayment of Federal Home Loan Bank advances 0 (11,907)
Dividends paid (1,073) (1,002)
Purchase of treasury stock (105) (721)
------- --------
NET CASH FROM (USED FOR) FINANCING ACTIVITIES 944 (11,553)
------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS $2,683 ($24,138)
======= ========
Cash and cash equivalents at beginning of period 49,446 $55,403
Cash and cash equivalents at end of period 52,129 31,265
------ -------
NET CHANGE IN CASH AND CASH EQUIVALENTS $2,683 ($24,138)
====== =========
CASH PAID DURING THE PERIOD FOR:
Interest $3,122 $3,447
Income taxes 0 50
<FN>
<F1>Transfers from loans to other real estate owned and other repossessions totaled $507 thousand and
$549 thousand in 1998 and 1997, 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, except for the reporting of comprehensive income 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. 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
other comprehensive income. A $434,000, net of tax, unrealized gain on
securities classified as available for sale at March 31, 1998, was
recorded as a separate component of other comprehensive income.
3. ADOPTION OF NEW ACCOUNTING STANDARDS
On January 1, 1998, the Corporation adopted Statement of Accounting
Standards (FAS) No. 130 "Reporting Comprehensive Income." FAS No. 130
requires reporting of comprehensive income by its components and in total
in the financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The adoption of this
statement did not have a material effect 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 QUARTER 1998 COMPARED TO FIRST QUARTER 1997
Net income for the first quarter of 1998 declined 7.5% to $2,164,000 from
the $2,340,000 achieved in the same period last year. Basic earnings per share
fell to $0.71 in 1998 from $0.75 in 1997, a 5.3% decrease. Return on assets
dipped to 1.17% for the first quarter of 1998 compared to 1.25% reported in
1997. Return on equity settled at 10.46% for the period down from the 11.66%
achieved for the first quarter of 1997.
The decline in earnings was principally the result of increased noninterest
expense coupled with a higher provision for loan losses. Improved noninterest
income (up 17.1% period to period) partially offset these items.
Net interest income on a fully taxable equivalent basis amounted to
$8,401,000 for the first quarter of 1998, basically unchanged from 1997.
Excluding the taxable equivalent adjustment, net interest income rose slightly
to $8,203,000 in 1998 from $8,186,000 in 1997. Average earning assets declined
to $705,723,000 for the period, a decline of less than one percent compared to
1997. The net interest margin improved to 4.77% in 1998 compared to 4.72% for
the prior period. This rise in the margin helped to offset the decline in
earning assets for the comparable periods.
The provision for loan losses rose to $675,000 for the first quarter of
1998, up $225,000 (50.0%) over the $450,000 recorded for the first quarter of
1997. This rise is primarily the result of higher consumer loan charge-offs in
the indirect automobile portfolio. This trend resulted in Southwest's
decision to scale back activity in this product line as of year-end 1997.
Noninterest income climbed $220,000 (17.1%) amounting to $1,503,000 for the
quarter. Service charges on deposit accounts rose $213,000 (36.7%) period to
period. This rise is the direct result of adjustments made to the fee structure
based on a comprehensive review conducted by management in 1997. Trust income
rose, climbing $90,000 (23.3%) compared to the prior period. Other income
declined $70,000 period to period as 1997 included receipt of income on a
grantor trust for which the Bank is a beneficiary.
Noninterest expense increased $344,000 (6.1%) reaching $6,025,000 compared
to the first quarter of 1997. Salaries and employee benefits rose only $43,000
(1.5%) as normal merit increases were offset by a lower level of full time
equivalent employees compared to the year ago period. Equipment expenses and
data processing fees rose $68,000 (8.4%). Increased data processing charges for
new products (i.e. telephone banking, debit cards) impacted the current period.
Other expenses increased to $1,585,000 for the first quarter of 1998, up
$243,000 (18.1%). Increases in several categories contributed to this rise and
included: professional fees up $154,000 (related to costs associated with the
Bank's ongoing organizational improvement and strategic development
initiatives); marketing up $21,000; subscriptions and services up $26,000 and
other expenses up $42,000.
At March 31, 1998, assets totaled $742,106,000, down slightly (0.4%)
compared to March 31, 1997. During the same period, loans rose $3,506,000
(0.7%) while investment securities declined $26,646,000 (13.1%). Deposits
slipped, totaling $644,106,000 at March 31, 1998, down $7,603,000 (1.2%) from
the prior year as consumers continue to direct money into alternative
investments.
Shareholders' equity at March 31, 1998 reached $83,386,000 up $3,641,000
(4.6%) over March 31, 1997. The other comprehensive income component of
shareholders' equity includes an unrealized gain on securities net of tax of
$434,000 and an unrealized loss net of tax of $916,000 at March 31, 1998 and
March 31, 1997 respectively. Total capital as a percentage of risk-weighted
assets was 18.17% at March 31, 1998 compared to 17.67% at March 31, 1997.
The Corporation's leverage capital ratio also rose amounting to 11.17%
at March 31, 1997.
<PAGE> 6
Nonperforming assets rose to $3,414,000 at March 31, 1998 from $2,503,000
at March 31, 1997 primarily due to a higher level of nonaccrual loans, up
$885,000 in the current period. Loans past due 90 days or more also rose
totaling $1,923,000 compared to $1,429,000 for the prior period. The ratio of
nonperforming loans to loans was 0.63% at March 31, 1998 up from 0.46% at
March 31, 1997. The rise in net charge-offs to $747,000 from $623,000 is the
result of increased consumer loan charge-offs in the indirect automobile
portfolio. The credit quality and performance of the remainder of the loan
portfolio continues to be satisfactory and reserves remain adequate. The
reserve for loan losses to nonperforming loans was 193.83% at period end, down
from 253.96% at March 31, 1997.
FIRST QUARTER 1998 COMPARED TO FOURTH QUARTER 1997 - BALANCE SHEET
Total assets rose slightly by $2,864,000 (0.4%) period to period. Loans
declined by $16,711,000 (3.2%) as investment securities grew by $17,745,000
(11.2%). Deposits funding those assets also rose reaching $644,106,000, up
$2,241,000 (0.3%) at period end. Net charge-offs declined significantly from
$1,145,000 for the prior quarter to $747,000 for the first quarter of 1998. In
general, the credit quality ratios have improved quarter to quarter which should
be a continuing trend. Total capital as a percentage of risk-weighted assets
increased to 18.17% at March 31, 1998 from 17.45% at December 31, 1997. The
leverage capital ratio remained basically unchanged period to period.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
There has been no material change in market risk since the end of the
most recent fiscal year. The Corporation continues to monitor interest rate
risk on a monthly basis using earnings simulation modeling. Management
continues to maintain a risk position well within the policy guideline range.
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 first
quarter ended March 31, 1998.
<PAGE> 7
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)
May 12, 1998 /s/ David S. Dahlmann
------------------ ------------------------------
Date David S. Dahlmann
President and Chief Executive Officer
May 12, 1998 /s/ Donald A. Lawry
------------------ -------------------------------
Date Donald A. Lawry
Secretary and Treasurer
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 23,909
<INT-BEARING-DEPOSITS> 20
<FED-FUNDS-SOLD> 28,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 134,215
<INVESTMENTS-CARRYING> 42,634
<INVESTMENTS-MARKET> 42,498
<LOANS> 498,723
<ALLOWANCE> 6,094
<TOTAL-ASSETS> 742,106
<DEPOSITS> 644,106
<SHORT-TERM> 9,412
<LIABILITIES-OTHER> 5,202
<LONG-TERM> 0
0
0
<COMMON> 7,952
<OTHER-SE> 75,434
<TOTAL-LIABILITIES-AND-EQUITY> 742,106
<INTEREST-LOAN> 10,712
<INTEREST-INVEST> 2,423
<INTEREST-OTHER> 427
<INTEREST-TOTAL> 13,562
<INTEREST-DEPOSIT> 5,237
<INTEREST-EXPENSE> 5,359
<INTEREST-INCOME-NET> 8,203
<LOAN-LOSSES> 675
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,025
<INCOME-PRETAX> 3,006
<INCOME-PRE-EXTRAORDINARY> 2,164
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,164
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
<YIELD-ACTUAL> 7.81
<LOANS-NON> 3,144
<LOANS-PAST> 1,923
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,166
<CHARGE-OFFS> 896
<RECOVERIES> 149
<ALLOWANCE-CLOSE> 6,094
<ALLOWANCE-DOMESTIC> 6,094
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
