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, 1995.
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 0-15237
HARLEYSVILLE NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2210237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
483 Main Street, Harleysville, Pennsylvania 19438
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 256-8851
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.
Yes X . No .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date: 5,873,685 shares of Common Stock, $1.00 par
value, outstanding on July 31, 1995.
<PAGE> Page 2
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-Q REPORT
PAGE
Part I. Financial Information
Consolidated Balance Sheets - June 30, 1995 and
December 31, 1994 3
Consolidated Statements of Income - Six Months Ended
June 30, 1995 and 1994 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1995 and 1994 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information 15
Signatures 17
<PAGE> Page 3
<TABLE>
PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, 1995 December 31, 1994
--------------- -----------------
<S> <C> <C>
Assets
------
Cash and due from banks $35,872,592 $35,390,357
Federal Funds sold 27,100,000 -
Interest-bearing deposits in banks 322,477 205,719
Securities available for sale
(amortized cost $94,034,684 and $107,307,249, respectively) 93,837,932 102,211,333
Investment securities
(fair value $97,251,927 and $79,896,560, respectively) 96,124,526 82,867,003
Loans 586,963,942 578,063,239
Less: Unearned income (9,746,180) (9,804,357)
Allowance for loan losses (8,931,548) (7,934,385)
----------- ----------
Net loans 568,286,214 560,324,497
----------- -----------
Bank premises and equipment, net 10,198,274 8,794,530
Accrued income receivable 4,938,621 4,726,117
Other real estate owened 593,623 1,242,887
Intangible assets, net 2,137,430 2,315,000
Other assets 1,991,427 1,701,041
----------- -----------
Total assets $841,403,116 $799,778,484
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Noninterest-bearing $116,535,878 $110,502,583
Interest-bearing:
Now accounts 79,503,438 83,828,901
Money market accounts 141,858,976 162,219,289
Savings 85,813,752 88,200,527
Time under $100,000 265,468,299 224,598,588
Time $100,000 or greater 28,149,061 19,227,711
----------- -----------
Total deposits 717,329,404 688,577,599
Accrued interest payable 9,014,765 8,058,926
U.S. Treasury demand notes 2,158,365 2,392,975
Federal funds purchased - 12,716,000
Federal Home Loan Bank (FHLB) borrowings 17,200,000 5,000,000
Securities sold under agreements to repurchase 17,259,103 15,212,755
Other liabilities 4,500,611 1,244,847
----------- -----------
Total liabilities 767,462,248 733,203,102
Shareholder's Equity:
Series preferred stock, par value $1 per share;
authorized 3,000,000 shares, none issued - -
Common stock, par value $1 per share; authorized
30,000,000 shares; issued and outstanding 5,873,685
shares in 1995 and 5,753,294 shares in 1994 5,873,685 5,753,294
Surplus 27,486,716 24,415,932
Undivided profits 40,708,355 39,718,501
Net unrealized losses on securities available for sale, (127,888) (3,312,345)
net of taxes
------------ -----------
Total shareholders' equity 73,940,868 66,575,382
------------ -----------
Total liabilities and shareholders' equity $841,403,116 $799,778,484
============ ============
<FN>
<F1>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE> Page 4
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Six months Ended Three months Ended
June 30, June 30,
-------------------- -----------------------
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Interest Income
---------------
Loans, including fees $24,099,551 $18,737,802 $12,315,461 $9,707,847
Lease financing 1,524,280 1,278,938 765,135 652,897
Commercial paper 29,534 - 17,099 -
Investment securities:
Taxable 4,439,500 4,389,338 2,310,553 2,173,026
Exempt from federal taxes 1,208,055 1,244,716 596,927 608,493
Federal funds sold 140,578 158,961 131,683 65,219
Deposits in banks 10,735 60,112 5,798 29,736
---------- ---------- ---------- ----------
Total interest income 31,452,233 25,869,867 16,142,656 13,237,218
Interest Expense
----------------
Savings deposits 4,545,646 4,180,678 2,220,915 2,090,916
Time Under $100,000 6,442,650 4,701,746 3,513,118 2,342,691
Time $100,000 or greater 675,257 216,616 374,303 120,103
Borrowed funds 1,087,259 42,266 548,340 28,718
---------- --------- --------- ---------
Total interest expense 12,750,812 9,141,306 6,656,676 4,582,428
---------- ---------- --------- ---------
Net interest income 18,701,421 16,728,561 9,485,980 8,654,790
Provision for loan losses 1,047,500 1,480,226 515,000 945,900
---------- ---------- --------- ---------
Net interest income after provision for 17,653,921 15,248,335 8,970,980 7,708,890
loan losses
Other Operating Income
----------------------
Service charges 1,118,566 1,175,852 574,356 605,443
Secruity gains (losses), net (172,316) 922,562 (28,667) 860,629
Trust income 501,014 375,791 271,561 184,677
Other Income 500,026 525,704 245,238 275,887
--------- --------- --------- ---------
Total other income 1,947,290 2,999,909 1,062,488 1,926,636
--------- --------- --------- ---------
Net interest income after provision for
loan losses and other income 19,601,211 18,248,244 10,033,468 9,635,526
Other Operating Expenses
------------------------
Salaries, wages and employee benefits 5,835,537 4,842,917 2,897,710 2,559,330
Net occupancy 699,842 708,703 335,992 340,108
Furniture and equipment 831,438 652,645 438,254 325,596
FDIC premium 771,478 754,831 385,739 377,415
Other expenses 3,086,593 3,325,602 1,635,990 1,796,320
---------- ---------- --------- ---------
Total other expenses 11,224,888 10,284,698 5,693,685 5,398,769
---------- ---------- --------- ---------
Income before income taxes 8,376,323 7,963,546 4,339,783 4,236,757
Income tax expense 2,483,773 2,402,872 1,293,562 1,307,682
--------- --------- --------- ---------
Net income $5,892,550 $5,560,674 $3,046,221 $2,929,075
========== ========= ========= =========
Weighted average number of common shares:
Primary 5,883,501 5,905,726 5,907,394 5,914,268
Fully diluted 5,884,276 5,913,674 5,908,353 5,917,701
========= ========= ========= =========
Net income per share information:
Primary $1.00 $0.94 $0.52 $0.50
========= ========= ======== =========
Fully diluted $1.00 $0.94 $0.52 $0.49
========= ========= ======== =========
Cash dividends per share $0.36 $0.29 $0.18 $0.15
========= ========= ======== =========
<FN>
<F1>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
<PAGE> Page 5
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Six Months Ended June 30,
---------------------------
<S> <C> <C>
1995 1994
Operating Activities: ---------- ----------
--------------------
Net Income $5,892,550 $5,560,674
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,047,500 1,480,226
Depreciation and amortization 466,609 438,051
Net amortization of investment
securities' discount/amortization 230,546 311,147
Net realized securities (gain) loss 172,316 (922,562)
Increase accrued income receivable (212,504) (225,368)
Increase accrued interest payable 955,839 138,704
Net increase in other assets (290,386) (1,368,885)
Net increase in other liabilities 1,541,057 3,109,557
Decrease in unearned income (58,177) (1,287,038)
Write down of other real estate owned 99,894 30,000
Decrease in intangible assets 177,570 258,750
---------- ----------
Net cash provided by operating activities 10,022,814 7,523,256
---------- ---------
Investing Activities:
--------------------
Proceeds from sales of securities available for 10,886,479 32,051,990
sale
Proceeds - maturity or calls of investment 13,753,016 24,244,533
securities
Proceeds - maturity or calls of securities 2,701,510 282,443
available for sale
Purchases of investment securities (27,126,575) (10,031,463)
Purchases of securities available for sale (602,250) (25,062,418)
Net decrease (increase) in short-term investments (116,758) 104,529
Net increase in loans (9,225,566) (33,793,511)
Net increase in premises and equipment (1,870,353) (277,474)
Proceeds from sales of other real estate 823,896 674,694
----------- ----------
Net cash used in investing activities (10,776,601) (11,806,677)
----------- ----------
Financing Activities:
--------------------
Net increase in deposits 28,751,805 4,902,722
Increase (decrease) in U.S. Treasury demand notes (234,610) 20,681
Decrease in Federal Funds purchased (12,716,000) (415,000)
Increase in FHLB borrowings 12,200,000 -
Increase in securities sold under agreement 2,046,348 -
Cash dividends and fractional shares (2,114,527) (1,559,669)
Dividend reinvestment (76) 341,171
Stock options 403,082 52,800
---------- -----------
Net cash provided by financing activities 28,336,022 3,342,705
---------- -----------
Increase (decrease) in cash 27,582,235 (940,716)
Cash and cash equivalents at beginning of year 35,390,357 45,484,518
---------- -----------
Cash and cash equivalents at end of the second $62,972,592 $44,543,802
quarter =========== ==========
Cash paid during the year for:
Interest $11,794,973 $9,002,602
========== ==========
Supplemental disclosure of noncash investing
and financing activities:
Transfer of assets from loans to
foreclosed and repossessed property $274,526 $625,694
========== =========
Net unrealized gain (loss) on securities
available for sale, net of taxes of ($68,864)
and ($787,961), respectively $(127,888) $(1,464,911)
========= ===========
</TABLE>
<PAGE> Page 6
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - In the opinion of management, the accompanying
unaudited consolidated financial statements contain all
adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated
financial position of Harleysville National Corporation (the
"Corporation") and its wholly owned subsidiaries -
Harleysville National Bank and Trust Company
("Harleysville"), The Citizens National Bank of Lansford
("Citizens") and Security National Bank ("Security") - as
of June 30, 1995, and the results of its operations for the
six and three month periods ended June 30, 1995 and 1994 and
changes in its consolidated financial position for the
periods then ended. It is suggested that these unaudited
consolidated financial statements be read in conjunction
with the audited consolidated financial statements of the
Corporation and the notes thereto set forth in the
Corporation's annual report.
The results of operations for the six and three month
periods ended June 30, 1995 and 1994 are not necessarily
indicative of the results to be expected for the full year.
Note 2 - Income tax expense is less than the amount
calculated using the statutory tax rate primarily the result
of tax exempt income earned from state and municipal
securities and loans.
Note 3 - On January 1, 1995, the Corporation adopted
Statement of Financial Accounting Standards No.114 ("SFAS
No. 114"), "Accounting for Certain Investments in Debt and
Equity Securities." The statement establishes accounting
measurement, recognition, and reporting standards for
impaired loans. SFAS 114 provides that a loan is impaired
when, based on current information and events, it is
probable that the creditor will be unable to collect all
amounts due according to the contractual terms (both
principal and interest). SFAS 114 requires that when a loan
is impaired, impairment should be measured based on the
present value of the expected cash flows, discounted at the
loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a
loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. The value
of the loan is adjusted through a valuation allowance
created though a charge against income. Residential
mortgages, consumer installment obligations and credit cards
are excluded. The adoption of SFAS 114 is not anticipated to
have a material impact on the Corporation's financial position
or results of operations.
Note 4 - On December 2, 1993, the Corporation and Security
National Bank of Pottstown ("Security") executed an
Agreement and Plan of Reorganization and an Agreement and
Plan of Merger, which agreements delineate the terms of the
combination. The shareholders of Security approved the
merger at a meeting of shareholders on April 28, 1994. For
each share of Security common stock outstanding, 0.7483
shares of the Corporation's common stock were issued at the
closing on July 1, 1994. As a result of the transaction,
211,456 new shares of Harleysville National Corporation, par
value $1.00 per share, were issued pursuant to Registration
Statement No. 33-76618 filed with the SEC and which was
effective March 28, 1994. The Security merger was accounted
for on a pooling-of-interests basis.
<PAGE> Page 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
---------------------
Consolidated net income for the first six months of
1995 was $5,892,000, an increase of $331,000, or 6.0%, over
the first six months of 1994 net income of $5,561,000.
Primary earnings per share and fully diluted earnings per
share for the first six months of 1995 were $1.00 compared
to $.94 in the first six months of 1994. Consolidated net
income for the second quarter of 1995 was $3,046,000, an
increase of $117,000, or 4.0%, over the second quarter of
1994 net income of $2,929,000. Primary earnings per share
for the second quarter of 1995 was $0.52 compared to $0.50
for the second quarter of 1994, while fully diluted earnings
per share was $.52 in the second quarter of 1995 compared to
$.49 for the same period in 1994.
For the six months ended June 30, 1995 , the
annualized return on average assets and the annualized
return on average shareholders' equity were 1.45% and
16.61%, respectively. For the same period in 1994 the
annualized return on average assets was 1.47% and the
annualized return on average shareholders' equity was
17.08%. For the three months ended June 30, 1995, the
annualized return on average assets was 1.48%, compared to
1.55% for the same period of 1994, and the annualized return
on average shareholders' equity was 16.73% for the second
quarter of 1995 and 17.68% for the second period of 1994.
Net income is affected by five major elements: net
interest income, or the difference between interest income
earned on loans and investments and interest expense paid on
deposits and borrowed funds; the provision for loan losses,
or the amount added to the allowance for loan losses to
provide reserves for future losses on loans; other operating
income, which is made up primarily of certain fees and gains
and losses from sales of securities; other operating
expenses, which consist primarily of salaries and other
operating expenses and income taxes. Each of these major
elements will be reviewed in more detail in the following
discussion.
Net Interest Income and Related Assets and Liabilities
------------------------------------------------------
Net interest income for the first six months of 1995 of
$18,701,000 increased by $1,972,000, or 11.8%, over the
first six months of 1994 net interest income of $16,729,000.
Net interest income for the second quarter of 1995 increased
by $831,000, or 9.6%, over the second quarter of 1994. As
illustrated in the table on the next page, the primary
source of this increase was the result of increases to loan
rates and volumes in the first six months of 1995, compared
to the same period in 1994. Loan rate increases were
related to the rise in the prime rate during this period,
and the growth in loan volumes were the result of strong
customer loan demand.
The rate-volume variance analysis set forth in the
table on the next page, which is computed on a tax
equivalent basis, analyzes changes in net interest income
for the six months ended June 30, 1995 over June 30, 1994
and the three months ended June 30, 1995 over June 30, 1994
by their rate and volume components.
<PAGE> Page 8
<TABLE>
Six Months Ended Three Months Ended
June 30, 1995 June 30, 1995
Over/ (Under) Over/(Under)
June 30, 1994 June 30, 1994
---------------- ------------------
<CAPTION>
Total Caused by: Total Caused by:
Variance Rate Volume Variance Rate Volume
---------------------------------- ----------------------------
Interest income: (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities * $ 23 $ 760 $ (737) $ 139 $ 408 $( 269)
Money market assets ( 67) 113 ( 180) 43 32 11
Loans* 5,632 1,787 3,845 2,757 900 1,857
------ ----- ----- ----- --- -----
Total 5,588 2,660 2,928 2,939 1,340 1,599
------ ----- ----- ----- ----- -----
Interest expense:
Savings deposits 364 729 ( 365) 130 372 (242)
Time deposits and certificates
of deposit 2,200 1,177 1,023 1,424 716 708
Other borrowings 1,046 19 1,027 520 0 520
----- ----- ----- ----- ----- ---
Total 3,610 1,925 1,685 2,074 1,088 986
----- ----- ----- ----- ----- ---
Net interest income $ 1,978 $ 735 $ 1,243 $ 865 $ 252 $ 613
*Tax Equivalent Basis ===== ===== ===== ===== ===== =====
</TABLE>
Taxable-equivalent net interest income was
$19,484,000 for the first six months of 1995, compared to
$17,506,000 for the same period in 1994, an 11.3% or
$1,978,000 increase. The overall favorable variance for the
six months ended June 30, 1995 was due to both increased
rates and volumes. Average year-to-date interest-bearing
assets increased to $770,401,000 at June 30, 1995 from
$712,133,000 at June 30, 1994, an 8.2% increase. Net
interest income also rose due to the change in the mix of
earning assets, as a portion of loan growth was funded by
reductions in both lower yielding securities and money
market assets. Loans accounted for 75% of average interest-
earning assets during the first six months of 1995, compared
to 69% in the first six months of 1994. The increase in
the loan portfolio was also funded by a rise in average
deposits and other borrowings. Average year-to-date
deposits at June 30, 1995 grew $17,458,000 over the same
balance at June 30, 1994. A $38,791,000 increase in average
time deposits and a $4,569,000 growth in average non-
interest bearing deposits was offset by a $25,902,000
decrease in average savings deposits. Average other
borrowings grew $33,400,000 during this same period. Other
borrowings include Federal Funds purchased, Federal Home
Loan Bank borrowings, securities sold under agreements to
repurchase and U. S. Treasury Demand Notes. This growth
included increases in average Federal Funds purchased,
Federal Home Loan Bank borrowings, and securities sold under
agreements to repurchase of $5,541,000, $12,421,000 and
$15,430,000, respectively.
Taxable-equivalent net interest income was $9,881,000
for the second quarter of 1995, compared to $9,016,000 for
the same period in 1994, a $865,000 or 9.6% increase.
Higher rates and volumes were responsible for the this
favorable rise in net interest income. Second quarter
average earning assets grew $66,818,000, compared to the
second quarter of 1994, due to an increase in loans. The
increase in loans was funded by a decrease in average
securities and an increase in both deposits and other
borrowings. Nonaccruing loans are included in the average
balance yield calculations, but the average nonaccruing
loans were insignificant and had no material effect on the
results. Variances attributed to both rate and volume are
included in the volume column.
<PAGE> Page 9
Net Interest Margin
-------------------
The net interest margin was 5.06% for the six month
period ended June 30, 1995, a rise of .14% from the 4.92%
net interest margin for the first half of 1994. This
increase is the result of the Corporation effectively
matching assets and liabilities through the rise in interest
rates during the past year and maintaining a consistent
percentage of earning assets to total assets. The net
interest margin for the second quarter of 1995 of 5.06% was
slightly higher than the 5.05% net interest margin for the
same period in 1994.
Provision for Loan Losses
-------------------------
The provision is based on management's analysis of the
adequacy of the allowance for loan losses. In its
evaluation, management considers past loan experience,
overall characteristics of the loan portfolio, current
economic conditions and other relevant factors. Based on
the latest monthly evaluation of potential loan losses,
management believes that the allowance is adequate to absorb
known and inherent losses in the loan portfolio.
Ultimately, however, the adequacy of the allowance is
largely dependent upon the economy, a factor beyond the
Corporation's control. With this in mind, additions to the
allowance for loan losses may be required in future periods
especially if economic trends worsen or certain borrowers'
ability to repay declines. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Banks' allowance for loan losses.
Such agencies may require the Banks to recognize additions
to the allowance based on their judgment of information
available to them at the time of their examinations.
The first six months of 1995 provision for loan losses
of $1,047,000 was $433,000, or 29% lower than the
$1,480,000 provision recorded during the first six months of
1994. Net charge offs were $49,000 for the six months ended
June 30, 1995, compared with $116,000 for the six months
ended June 30, 1994. Included in the charge offs during the
first quarter of 1995 were two mortgage loans in the amount
of $53,000. The ratio of the allowance for loan losses to
loans of 1.55% at June 30, 1995 increased from the December
31, 1994 ratio of 1.40% and the June 30, 1994 ratio of
1.42%. The lower provision for loan losses during the first
six months of 1995, compared to the same period in 1994, is
attributed to the fact the ratio of the allowance for loan
losses to nonperforming assets at June 30, 1995 of 175.5%,
increased from the June 30, 1994 ratio of 158.1%. The
provision was also lower during 1995, as a result of the
lower net loan charge offs experienced during the first six
months of 1995, compared to the same period in 1994.. The
provision for loan losses in the second quarter of 1995 was
$515,000, compared to $946,000 in the second quarter of
1994.
Allowance for Loan Losses
-------------------------
Transactions in the allowance for loan losses are as
follows:
1995 1994
---------- ----------
Balance, beginning of year $7,934,000 $5,886,000
Provision charged to
operating expenses 1,047,000 1,480,000
Loans charged off (241,000) (424,000)
Recoveries 192,000 308,000
--------- ---------
Balance, June 30 $8,932,000 $7,250,000
========= ==========
<PAGE> Page 10
The following table sets forth an allocation of the
allowance for loan losses by loan category:
June 30, 1995
--------------
Percent
Amount of Loans
--------- --------
Commercial and industrial $3,396,000 28%
Installment and other 871,000 31%
Real estate 1,027,000 34%
Lease financing 116,000 7%
Unallocated 3,522,000 N/A
--------- -----
Total $8,932,000 100%
========= ====
Non-performing assets (non-accruing loans, net assets
in foreclosure and troubled debt restructured loans) were
0.86% of total loans and net assets acquired in foreclosure
at June 30, 1995 compared to 0.97% at December 31, 1994 and .88% at
June 30, 1994. The ratio of the allowance to non-performing assets
was 175.5% at June 30, 1995 compared to 141.8% at December
31, 1994 and 158.1% at June 30, 1994.
Non-accruing loans at June 30, 1995 of $2,626,000,
increased $168,000 from the December 31, 1994 level of
$2,458,000. Approximately $1,254,000, or 47.8%, of total
non-accruing loans are attributable to four unrelated
borrowers at June 30, 1995. The level of non-accruing loans
was $1,889,000 at June 30, 1994. Efforts to liquidate or
work-out individual accounts are proceeding as quickly as
potential buyers can be located and legal constraints permit.
Net assets in foreclosure totaled $610,000 as of June
30, 1995, a decrease of $659,000, or 51.9%, from the
December 31, 1994 balance of $1,243,000. This decrease is
the result of the sale of assets, previously held in
foreclosure, during the first six months of 1995. The
balance of net assets in foreclosure at June 30, 1994 was
$1,438,000. Sales of foreclosed properties during the first
six months of 1995 totaled $824,000. Efforts to liquidate
assets acquired in foreclosure are proceeding as quickly as
potential buyers can be located and legal constraints
permit. Generally accepted accounting principles require
foreclosed assets to be carried at the lower of cost (lesser
of carrying value of asset or fair value at date of
acquisition) or estimated fair value.
As of June 30, 1995, there were five unrelated
borrowers with troubled debt restructured loans totaling
$1,854,000, compared with a balance of $1,868,000 as of
December 31, 1994 and $1,259,000 at June 30, 1994. All five
customers were complying with the restructured terms as of
June 30, 1995.
Loans past due 90 days or more and still accruing
interest are loans that are generally well-secured and
expected to be restored to a current status in the near
future. As of June 30, 1995, loans past due 90 days or
more and still accruing interest were $1,177,000, compared
to $2,145,000 as of December 31, 1994 and $1,284,000 as of
June 30, 1994.
<PAGE> Page 11
The following information concerns impaired loans as
described in note 3:
Impaired Loans:
Restructured Loans $1,854,000
Nonaccrual Loans 1,666,000
---------
$3,520,000
=========
Average impaired loans for the period: $3,684,000
=========
Impaired loans with specific loss allowances: $3,520,000
=========
Loss allowances reserved on impaired loans: $ 504,000
========
Income recognized on impaired loans during
the first six months of 1995 $ 88,000
=======
The Bank's policy for interest income recognition on
impaired loans is to recognize income on restructured loans
under the accrual method. The Bank does not recognize
income on nonaccrual loans.
<TABLE>
Other Operating Income
----------------------
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- --------------------------
1995 1994 1995 1994
------------------------- ---------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Service charges $ 1,118 $1,176 $ 574 $ 605
Securities gains (losses), net (172) 922 (29) 861
Trust income 501 376 272 185
Other income 500 526 245 276
----- ----- ----- -----
Total other operating income $ 1,947 $3,000 $ 1,062 $ 1,927
==== ==== ==== ====
</TABLE>
Other operating income for the first six months of 1995
decreased by $1,053,000, or 35.1%, from $3,000,000 at June
30, 1994 to $1,947,000 at June 30, 1995. Second quarter
1995 other operating income decreased $865,000, compared to
the second quarter of 1994. This reduction in other income
is principally the result of $172,000 in losses experienced
by the sale of securities available for sale during the
first half of 1995, compared to a gain of $922,000 recorded
in the same period in 1994. The $922,000 gain recognized
during the first half of 1994 was the result of the sale of
over 40,000 shares of First Eastern Bank stock which was
purchased by PNC Corporation on June 24, 1994. As a result
of this transaction, the Corporation realized a securities
gain of approximately $1,058,000. The corporation sells
securities to fund the purchase of other securities in an
effort to enhance the overall return of the portfolio and to
fund loan demand.
Income from service charges on deposit accounts
decreased 4.9% during the first six months of 1995 and 5.1%
in the second quarter of 1995, compared to the same periods
in 1994. The decrease in service charges during 1995 is
attributed to lower business service charges. The lower
business service charges are a result of the increase in the
earnings credit, attributable to the rise in interest rates,
which is used to offset service charges.
Income from the trust department increased $125,000,
or 33.2% in the first six months of 1995 and $87,000, or
47.0% in the second quarter of 1995, compared to the same
periods in 1994. This was primarily the result of the
Corporation's continuing emphasis on marketing the Trust
Department's products and services. Other income decreased
from $526,000 in the first six months of 1994, to $500,000
in the first six months of 1995.
<PAGE> Page 12
<TABLE>
Other Operating Expenses
------------------------
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------ --------------------------
1995 1994 1995 1994
------------------------ --------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Salaries $ 4,173 $ 3,573 $ 2,123 $ 1,893
Employee benefits 1,663 1,269 775 667
Net occupancy expense 700 709 336 340
Equipment expense 831 653 438 326
FDIC premiums 771 755 386 377
Other expenses 3,087 3,326 1,636 1,796
------ ------ ----- ------
Total other operating expenses $ 11,225 $ 10,285 $ 5,694 $ 5,399
====== ====== ===== =====
</TABLE>
Other operating expenses for the first six months of
1995 of $11,225,000 increased $940,000, or 9.1%, from the
$10,285,000 expense for the same period in 1994. The
second quarter of 1995 showed a 5.5% increase in other
operating expenses compared to the second quarter of 1994.
The rise in operating expenses was largely due to higher
salary and employee benefits cost directly related to the
Corporation's growth and planned salary increases.
Employee salaries increased $599,000, or 16.8% from
$3,573,000 for the first six months of 1994 to $4,172,000
for the same period in 1995. The second quarter of 1995
salary expense grew $230,000, or 12.2% compared to the
second quarter of 1994. The increase reflects cost of living
increases, merit increases and additional staff necessitated
by current and planned future growth. Employee benefits
grew $394,000, or 31.0% to $1,663,000 in the first half of
1995, from the $1,269,0000 employee benefits expensed during
the same period in 1994. The 1995 second quarter employee
benefits cost were $108,000 or 16.2% higher than the second
quarter of 1994. The rise in employee benefits is directly
related to the increase in salary expenses and to the costs
associated with standardizing the pension plan for all
subsidiaries.
Net occupancy expense decreased $9,000, or 1.3% from
$709,000 in the first six months of 1994 to $700,000 in the
first six months of 1995. This decrease is related to a
$32,000 reduction in snow removal costs in the first six
months of 1995, compared to the same period in 1994. Net
occupancy expense for the second quarter of 1995 of
$336,000, was down slightly from the second quarter of 1994
expense of $340,000. Equipment expense increased by
$178,000, or 27.3% during the first six months of 1995,
compared to the same period in 1994. The second quarter of
1995 equipment expense of $438,000 grew $112,000, or 34.4%
from the second quarter of 1994 equipment expense of
$326,000. The majority of this rise is due to depreciation,
maintenance and equipment rental expenses associated with
planned increased data processing capabilities. The
increased data processing capabilities include modernizing
our branches through platform automation and teller
terminals, and the ongoing updating of data processing
equipment to manage the rise in volume related to the growth
of the Corporation.
Federal Deposit Insurance Corporation (FDIC) premiums
increased $16,000, or 2.1%, during the first six month of
1995, compared to the same period in 1994. The second
quarter of 1995 FDIC premiums grew $9,000 over the second
quarter of 1994 premium. These increases are directly
related to the growth in the deposits of the Corporation.
Other expenses decreased $240,000, or 7.2%, from
$3,326,000 in the first six months of 1994, compared to
$3,086,000 other expenses recorded during the same period in
1995. The second quarter of 1995 other expenses decreased
$160,000, or 8.9% from the other expenses for the second
quarter of 1994. The reductions in other expenses included a
decrease in intangible asset expense of $81,000 and a
$159,000 reduction in legal expenses related to both the
1994 legal expenses associated with the Security National
Bank merger and to the recovery of legal expenses in 1995
related to non-performing assets that were expensed in prior
periods.
<PAGE> Page 13
Income Taxes
------------
Income tax expense is less than the amount calculated
using the statutory tax rate primarily as a result of tax
exempt income earned from state and municipal securities and
loans.
Balance Sheet Analysis
----------------------
Total assets grew $41,625,000, or 5.2% from
$799,778,000 at December 31, 1994 to $841,403,000 at June
30, 1995. This growth was primarily in interest earning
assets which grew $41,060,000 to $794,603,000 at June 30,
1995, from $753,543,000 at December 31, 1994. During the
first six months of 1995 Federal Funds sold increased
$27,100,000, investment securities grew $13,257,000, loans
increased $8,959,000, interest bearing deposits rose
$117,000 and securities available for sale decreased
$8,373,000.
Total deposits rose $28,752,000 from $688,578,000 at
December 1994 to $717,329,000 at June 30, 1995. A growth in
time deposits of $49,791,000 was offset by decrease in now
accounts, money market accounts and savings accounts of
$4,325,000, $20,360,000, $2,387,000, respectively. Non-
interest bearing deposits rose by $6,033,000, or 5.5% during
this period. Other borrowing increased $1,296,000 during
the first six months of 1995.
Capital
-------
Capital formation is critical to the Corporation's well
being and future growth. Capital for the period ending June
30, 1995 was $73,941,000, an increase of $7,365,000 over
the end of 1994. The increase is primarily the result of
the retention of the Corporation's earnings. Management
believes that the Corporation's current capital and
liquidity positions are adequate to support its operations.
Management is not aware of any recommendations by any
regulatory authority which, if it were to be implemented,
would have a material effect on the Corporation's capital.
The Corporation's consolidated ratios at June 30, 1995
exceed all regulatory requirements, including Federal risk-
based capital adequacy guidelines. The components of
capital are called Tier 1 and Tier 2 capital. For the
Corporation, Tier 1 Capital is the shareholders' equity, and
Tier 2 capital is the allowance for loan losses. The risk-
based capital ratios are computed by dividing the components
of capital by risk-adjusted assets. Risk-adjusted assets
are determined by assigning credit risk-weighing factors
from 0% to 100% to various categories of assets and off-
balance-sheet financial instruments. The minimum for the
Tier 1 ratio is 4.0%, and the total capital ratio (Tier 1
plus Tier 2 capital divided by risk-adjusted assets) minimum
is 8.0%. At June 30, 1995, the Corporation's Tier 1 risk-
adjusted capital ratio was 11.55%, and the total risk-
adjusted capital ratio was 12.80%, both well above the
regulatory requirements.
To supplement the risk-based capital adequacy
guidelines, the Federal Reserve Board (the "FRB")
established a leverage ratio guideline as part of its risk-
based capital adequacy guidelines. The leverage ratio
consists of Tier 1 divided by quarterly average total
assets, excluding intangible assets. The minimum leverage
ratio guideline is 3% for banking organizations that do not
anticipate significant growth and that have well diversified
risk, excellent asset quality, high liquidity, good
earnings, and in general, are considered top-rated, strong
banking organizations. Other banking organizations are
expected to have ratios of at least 4% and 5%, depending
upon their particular condition and growth plans. Higher
leverage ratios could be required by the particular
circumstances or risk profile of a given banking organization.
The Corporation's leverage ratios were 8.87% at June 30,
1995 and 8.59% at December 31, 1994.
<PAGE> Page 14
Existing minimum regulatory capital ratio requirements
are 5.5% for primary capital and 6.0% for total capital.
The Corporation's primary capital ratio was 9.52% at June 30, 1995,
compared with 8.96% at December 31, 1994. Due to the fact
the Corporation's only capital is primary capital, the total
capital ratios are the same as the primary capital ratios.
The year-to-date June 30, 1995 cash dividend per share
of $.3600 was 26.0% higher than the cash dividend for the
same period in 1994 of $.2857. The second quarter 1995
dividend of $.1800 per share was 18.1% greater than the
second quarter of 1994 cash dividend of $.1524. Activity in
both the Corporation's dividend reinvestment and stock
options plans did not have a material impact on capital
during the first quarter of 1995.
Liquidity
---------
Liquidity is a measure of the ability of the
Corporation to meet its needs and obligations on a timely
basis. For a bank, liquidity requires the ability to meet
the day-to-day demands of deposit customers, along with the
ability to fulfill the needs of borrowing customers.
Generally, the Corporation arranges its mix of cash, money
market investments, investment securities and loans, in
order to match the volatility, seasonality, interest
sensitivity and growth trends of its deposit funds. Federal
Funds Sold averaged $4,664,000 during the first six months
of 1995 and securities available for sale averaged
$96,938,000 during the first half of 1995, more than
sufficient to match normal fluctuations in loan demand or
deposit fund supplies. Backup sources of liquidity are
provided by Federal Fund lines carried in the subsidiary
banks. Additional liquidity could be generated through
borrowings from the Federal Reserve Bank of Philadelphia, of
which Harleysville, Citizens and Security are members and
from the Federal Home Loan Bank of Pittsburgh, of which
Harleysville and Citizens are members.
The FDIC has reported that it anticipates that the Bank
Insurance Fund could reach its statutory reserve ratio
requirement in 1995. Consequently, the FDIC has proposed a
significant reduction of assessment rates. While such a
reduction in Bank Insurance Fund assessment rates will
result in lower deposit insurance premiums paid, there can
be no assurance when, if ever, the FDIC will adopt its
proposed assessment rates.
There are currently a number of issues before Congress
which may effect the Corporation and its business
operations, and business operations of its subsidiaries.
However, management does not believe these issues will have
a material effect on liquidity, capital resources or the
results of operations.
There are no known trends or and known demands,
commitments, events or uncertainties that will result in, or
that are reasonably likely to result in, liquidity
increasing or decreasing in any material way.
<PAGE> Page 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
---------------------------
Management, based upon discussions with the
Corporation's legal counsel, is not aware of any litigation
that would have a material adverse effect on the
consolidated financial position of the Corporation. There are
no proceedings pending other than the ordinary routine litigation
incident to the business of the Corporation and its subsidiaries -
Harleysville National Bank and Trust Company, The Citizens National
Bank of Lansford and Security National Bank. In addition, no material
proceedings are pending or are known to be threatened or contemplated
against the Corporation and the Banks by government authorities.
Item 2. Change in Securities.
------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
-----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
-------------------------------------------------------------
(a) An annual meeting of shareholders was held
at 9:30 a.m., on Tuesday, April 11, 1995, at Presidential
Caterers, 2910 DeKalb Pike, Norristown, Pennsylvania 19401.
(b), (c) Two matters were voted upon as follows:
(1) Two directors were re-elected, as below:
Re-elected: Term Expires:
---------- ------------
Walter F. Vilsmeier 1999
Harold A. Herr 1999
The results of the voting for the directors are as
follows:
Walter F. Vilsmeier
For 5,356,810
Against 3,859
Abstain None
Harold A. Herr
For 5,357,447
Against 3,366
Abstain None
Directors whose term continued after the meeting:
Term Expires:
------------
Walter E. Daller, Jr. 1998
Martin E. Fossler 1998
John W. Clemens 1996
Howard E. Kalis, III 1996
Bradford W. Mitchell 1997
William M. Yocum 1997
<PAGE> Page 16
(2) The shareholders approved and
adopted an amendment to Article 7 of the Corporation's
amended Articles of Incorporation to provide that any
merger, consolidation, liquidation or similar fundamental
change transaction involving the corporation must be
approved by holders of at least 80 percent of the
outstanding shares of the Corporation's voting stock unless
such transaction has received prior approval of at least 75
percent of all members of the Corporation's Board of
Directors, in which case only a majority of the outstanding
shares of the Corporation's voting stock is required to be
voted in favor of such transaction in order to approve it.
The shareholders vote regarding the amendment was:
For 4,915,720
Against 220,553
Abstain 10,597
Item 5. Other Information.
---------------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
------------------------------------------
(a) Exhibits:
None.
(b) Reports on Form 8-K:
On May 18, 1995, a Form 8-K was filed by the
registrant reporting effective May 11, 1995, the registrant
has elected not to reappoint KPMG Peat Marwick LLP as its
independent accountants and to appoint Grant Thornton LLP as
its independent accountants. KPMG Peat Marwick LLP's
reports on the financial statements for the two fiscal years
ended December 31, 1994 and 1993 were unqualified and did
not contain an adverse opinion, any disclaimers,
qualification or modification as to uncertainty, audit
scope, or accounting principles. The decision to change
firms was recommended by the Audit Committee of the Board of
Directors and approved by the Board of Directors.
In connection with the audits for the financial
statements of the registrants for the fiscal years ended
December 31, 1994 and 1993 and during the period commencing
January 1, 1995 through May 10, 1995, there were no
disagreements or any reportable events as described in the
applicable sections of Item 304(a) of Regulation SK.
<PAGE> Page 17
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.
HARLEYSVILLE NATIONAL CORPORATION
/s/ Walter E. Daller, Jr.
________________________________
Walter E. Daller, Jr., President
and Chief Executive Officer
(Principal executive officer)
/s/ Vernon L. Hunsberger
_______________________________
Vernon L. Hunsberger, Treasurer
(Principal financial and accounting
officer)
Date: August 8, 1995
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 35873
<INT-BEARING-DEPOSITS> 322
<FED-FUNDS-SOLD> 27100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 93838
<INVESTMENTS-CARRYING> 96124
<INVESTMENTS-MARKET> 97252
<LOANS> 577218
<ALLOWANCE> 8932
<TOTAL-ASSETS> 841403
<DEPOSITS> 717329
<SHORT-TERM> 19418
<LIABILITIES-OTHER> 13515
<LONG-TERM> 17200
<COMMON> 5874
0
0
<OTHER-SE> 68067
<TOTAL-LIABILITIES-AND-EQUITY> 841403
<INTEREST-LOAN> 25624
<INTEREST-INVEST> 5647
<INTEREST-OTHER> 181
<INTEREST-TOTAL> 31452
<INTEREST-DEPOSIT> 11664
<INTEREST-EXPENSE> 12751
<INTEREST-INCOME-NET> 18701
<LOAN-LOSSES> 1048
<SECURITIES-GAINS> (172)
<EXPENSE-OTHER> 11225
<INCOME-PRETAX> 8376
<INCOME-PRE-EXTRAORDINARY> 8376
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5893
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 5.06
<LOANS-NON> 2626
<LOANS-PAST> 1177
<LOANS-TROUBLED> 1854
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7934
<CHARGE-OFFS> 241
<RECOVERIES> 192
<ALLOWANCE-CLOSE> 8932
<ALLOWANCE-DOMESTIC> 8932
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3522
</TABLE>
