Item 1. Business
Southwest National Corporation
Southwest National Corporation (the "Corporation") is a Pennsylvania Corporation which was organized November 6, 1981 at the direction of Southwest National Bank of Pennsylvania (the "Bank") for the purpose of engaging in the business of a bank holding company and of owning all of the outstanding common stock of the Bank. The Corporation is engaged principally in commercial banking activities through its banking subsidiary. The business of the Bank has been carried on since July 1, 1982, by a wholly-owned subsidiary of the Corporation, also named Southwest National Bank of Pennsylvania. As used herein, the Bank means the former Bank prior to July 1, 1982 and the present Bank since that date.
The Corporation has no other subsidiaries and no other significant assets or liabilities. The Corporation's only business activity is holding all of the stock of the Bank and has no plans to change that activity.
Southwest National Bank of Pennsylvania
The Bank is a national banking association organized under the laws of the United States in 1900. Its deposits are insured by the Federal Deposit Insurance Corporation and the Bank is a member of the Federal Reserve System. Through 16 locations in Westmoreland and Allegheny counties, Pennsylvania, the Bank engages in full-service commercial banking, retail banking, and trust activities serving a primary market area within a 35 mile radius of its headquarter's office. Deposit services offered by the Bank include savings accounts, NOW accounts, money market accounts, certificates of deposit, individual retirement accounts and checking accounts. Southwest's deposit base is such that the loss of one depositor or a related group of depositors would not have a material adverse effect on its business. Lending services include commercial loans to businesses and governmental units, construction financing, real estate and mortgage loans, as well as installment, home improvement, home equity and personal credit lines, credit card, automobile and other consumer loans. The loan portfolio contains no loans to foreign governments, foreign enterprises or foreign operations of domestic companies. In addition to depository and lending services, the Bank provides various other services including night deposit facilities, safe deposit boxes, and collection services. A wide range of trust and financial management services are offered including administration of estates, trust and agency accounts, employee benefit services and other personal and fiduciary services.
The Bank serves customers through a network of 17 automated teller machines (ATMs), 14 of which provide access to routine financial services 24 hours a day. These ATMs are connected to a super regional ATM network, MAC(registered trademark), and a national ATM network, Cirrus(registered trademark), which makes it possible for customers to access over 82,000 banking machines in all 50 states and many countries around the world.
The Bank ended the year with a staff of 389 employees which was comprised of 331 full-time and 58 part-time employees. Full-time equivalent employees averaged 373 in 1997.
COMPETITION
The Bank is subject to intense competition from various financial institutions and other companies or firms that engage in similar activities. Other commercial banks ranging in size from one-office community banks to local branches of multi-billion dollar Pittsburgh- based banks conduct business in the same primary service area as the Bank's 16 offices. Technological innovation has also led to greater competition as well. With the advent of automated transfer payment systems, competition between depository and nondepository institutions has increased. These sources of competition include savings and loan associations, credit unions, brokerage firms, money market mutual funds, finance and insurance companies, mortgage banking firms and retail establishments.
SUPERVISION AND REGULATION
The Corporation, as a bank holding company, is subject to regulation under the Federal Bank Holding Company Act of 1956 as amended (the "Act"). Pursuant to the Act, the Corporation is required to file certain reports with the Board of Governors of the Federal Reserve System (the "Board") and is subject to examination by the Board. With respect to nonbanking investments and activities, the Act generally precludes the Corporation from engaging in, or acquiring more than 5% of the voting shares of any company engaged in nonbanking activities unless the Board has determined, by order or regulation, that such proposed activities are so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Act prohibits, except with the prior approval of the Board, the acquisition by a bank holding company of more than 5% of the outstanding voting shares of any domestic bank. Also, the Act and regulation of the Board prohibit a bank holding company and its subsidiary from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or services.
A fundamental principle underlying the Federal Reserve's supervision and regulation of bank holding companies, is that bank holding companies should serve as a source of managerial and financial strength to their subsidiary banks. Banks in turn are to be operated in a manner that protects the overall soundness of the institution and the safety of deposits. The bank regulators can take various remedial measures to deal with banks and bank holding companies that fail to meet legal and regulatory standards.
Limitations on dividends from the Bank to the Corporation are described on page 22 of the 1997 Annual Report and is herein incorporated by reference.
The Bank is subject to regulation by the Office of the Comptroller of the Currency (OCC). In addition, the Bank is insured by and therefore subject to the authority of the Federal Deposit Insurance Corporation (FDIC).
In 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) was enacted which, among other things, was intended to protect the federal deposit insurance fund by requiring regulators to take specific prompt actions with respect to institutions that do not meet minimum capital standards. FDICIA established five capital tiers to be defined in implementing regulations to be adopted: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". An undercapitalized institution is prohibited from making capital distributions and may be required to submit a capital plan, restrict asset growth and limit new lines of business. Significantly undercapitalized institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to
become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to appointment of a receiver or conservator.
Pursuant to FDICIA, the federal regulatory agencies adopted regulations defining the five capital tiers. Under these regulations, a "well capitalized" institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a directive, order or written agreement to meet and maintain specific capital levels. An "adequately capitalized" institution must have a Tier 1 capital ratio of at least 4%, total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases. The Bank currently exceeds the minimum capital and leverage ratio requirements and, accordingly, is considered "well capitalized" under the numerical capital standards, the highest rating presently available. In addition, under the regulations the regulators can downgrade the capital status of a depository institution under certain circumstances.
FDICIA contains numerous other provisions including termination of the "too big to fail" doctrine except in special cases, limitations on the FDIC's payment of deposits at foreign branches and revised regulatory standards including real estate lending and capital adequacy.
Congress enacted the Deposit Insurance Funds Act of 1996 (DIFA) to recapitalize the Savings Association Insurance Fund (SAIF). This law affected those banks which have deposits of acquired thrift institutions. The Bank was assessed $162 thousand related to the deposits of Atlantic Financial's Latrobe branch which was acquired from the Resolution Trust Corporation in 1991.
Future assessment rates will be based on capital levels and bank regulators' ratings as is required by FDICIA. The premium for the Bank Insurance Funds (BIF) and the SAIF have been eliminated for the first half of 1998. However, DIFA authorized payments to the Financing Corporation (FICO), based on assessments to both the BIF and SAIF funds to be paid by all insured institutions, as applicable.
MONETARY POLICY AND ECONOMIC CONTROLS
The earnings of the Bank, and therefore the earnings of the Corporation, are affected by the policies of regulatory authorities, including the Board of Governors of the Federal Reserve System. The policies of the Board, which regulates the national supply of bank credit, have a significant effect on the overall growth of bank loans, investments and deposits and the interest rates charged on loans or paid for deposits.
As a result of changing conditions in the economy and the effect of the Board's credit policies, no prediction can be made as to possible future changes in loan demand, deposit levels, interest rates or to their effect on the business and earnings of the Corporation and its subsidiary.
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES
Information regarding statistical disclosure for bank holding companies required by Securities Act Industry Guide 3 is set forth in the portions of the 1997 Annual Report which are incorporated herein by reference.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL
Information required by this section is presented on pages 35 through 38, 45 and 50 of the 1997 Annual Report and is incorporated herein by reference.
II. INVESTMENT PORTFOLIO
Information required by this section is presented on page 42 of the 1997 Annual Report and is incorporated herein by reference.
III. LOAN PORTFOLIO
Information required by this section is presented on pages 42, 43 and 45 of the 1997 Annual Report and is incorporated herein by reference.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
Information required by this section is presented on page 44 of the 1997 Annual Report and is incorporated herein by reference.
V. DEPOSITS
Information required by this section is presented on pages 25, 36 and 37 of the 1997 Annual Report and is incorporated herein by reference.
VI. RETURN ON EQUITY AND ASSETS
Information required by this section is presented on page 50 of the 1997 Annual Report and is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
David S. Dahlmann was elected Chief Executive Officer in April, 1991; he had previously served as President of the Corporation since September, 1990. David M. Hanna was elected Vice President in 1997. Donald A. Lawry was elected Secretary and Treasurer in July, 1989; he had previously served as Controller of the Corporation since 1986. After the Annual Meeting of the shareholders, the Board has a reorganization meeting and elects the executive officers. The positions held by the present executive officers in the Registrant's subsidiary during the past five years are as follows:
ITEM 2.
ITEM 2. PROPERTIES
The principal executive office of the Corporation and Bank is located at 111 South Main Street, Greensburg, Pennsylvania. This seven story building is owned by the Bank, which occupies the entire building. At December 31, 1997, the Bank owned 12 properties in fee and leased 6 others that were used in its operations. These leases expire intermittently through 2015. Nearly all leases include renewal provisions at the option of the lessee. In addition, the Bank owns other real property which, when considered in the aggregate, is not material to its operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Information required by this section is presented on page 29 of the 1997 Annual Report and is incorporated herein by reference.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.
PART II.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER MATTERS
Dividends are declared quarterly by the Board of Directors.
Other information required by this section is presented on pages 22, 31, 40 and 49 of the 1997 Annual Report and is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this section is presented on pages 21, 22 and 46 through 49 of the 1997 Annual Report and is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information required by this section is presented on pages 29 and 34 through 48 of the 1997 Annual Report and is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this section is presented on pages 46 and 47 of the 1997 Annual Report and is herein incorporated by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules required for the Annual Report of the Registrant are included in the following index. Page numbers refer to pages of the 1997 Annual Report and are incorporated herein by reference:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this section is presented on pages 1, 2 and 3 of the Proxy Statement and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this section is presented on pages 5 through 8 of the Proxy Statement and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this section is presented on pages 2, 3 and 10 of the Proxy Statement and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this section is presented on page 5 of the Proxy Statement and is incorporated herein by reference.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The financial statements and schedules required for the Annual Report of the Registrant are included in the following index. Page numbers refer to pages of the 1997 Annual Report and are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant) Southwest National Corporation
By (Signature and Title) /s/ David S. Dahlmann David S. Dahlmann President and Chief Executive Officer
Date March 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated.