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, 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: 5,873,687 shares of Common Stock, $1.00
par value, outstanding on April 30, 1995.
<PAGE> Page 2
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-Q REPORT
PAGE
Part I. Financial Information
Consolidated Balance Sheets - March 31, 1995 and
December 31, 1994 3
Consolidated Statements of Income - Three Months Ended
March 31, 1995 and 1994 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 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 13
Signatures 14
<PAGE> Page 3
<TABLE>
PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31,1995 December 31, 1994
-------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $29,341,631 $35,390,357
Interest-bearing deposits in banks 286,525 205,719
Commercial paper 3,012,901 -
Securities available for sale
(amortized cost $98,825,188 and
$107,307,249, respectively) 96,699,175 102,211,333
Investment securities
(fair value $92,359,290 and
$79,896,560, respectively) 93,224,246 82,867,003
Loans 586,796,260 578,063,239
Less: Unearned income (9,826,491) (9,804,357)
Allowance for loan losses (8,342,740) (7,934,385)
----------- -----------
Net loans 568,627,029 560,324,497
----------- -----------
Bank premises and equipment, net 9,493,564 8,794,530
Accrued income receivable 5,412,771 4,726,117
Other real estate owned 1,065,694 1,242,887
Intangible assets, net 2,226,215 2,315,000
Other assets 2,361,027 1,701,041
------------ ------------
Total assets $811,750,778 $799,778,484
============ ============
LIABILITIES AND SHAREHOLDER' EQUITY
Deposits:
Noninterest-bearing $103,249,076 $110,502,583
Interest-bearing 80,140,952 83,828,901
Now accounts 158,856,215 162,219,289
Money market accounts 84,658,634 88,200,527
Time under $100,000 245,045,489 224,598,588
Time $100,000 or greater 25,539,701 19,227,711
----------- -----------
Total deposits 697,490,067 688,577,599
Accrued interest payable 8,522,181 8,058,926
U.S. Treasury demand notes 1,262,404 2,392,975
Federal funds purchased - 12,716,000
Federal Home Loan Bank (FHLB)
borrowings 14,200,000 5,000,000
Securities sold under agreements 15,935,869 15,212,755
Other liabilities 3,642,301 1,244,847
----------- -----------
Total liabilities 741,052,822 733,203,102
Shareholders' 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 5,873,687
shares in 1995 and 5,753,294 shares 5,873,687 5,753,294
in 1994
Surplus 27,486,779 24,415,932
Undivided profits 38,719,398 39,718,501
Net unrealized losses on securities
available for sale, net of taxes (1,381,908) (3,312,345)
------------ ----------
Total shareholders' equity 70,697,956 66,575,382
------------ -----------
Total liabilities and share-
holders' equity $811,750,778 $799,778,484
============ ============
</TABLE>
<PAGE> Page 4
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Three months Ended
March 31,
-------------------------
1995 1994
<S> <C> <C>
INTEREST INCOME
Loans, including fees $11,784,090 $9,029,955
Lease financing 759,145 626,041
Commercial paper 12,435 -
Investment securities:
Taxable 2,128,947 2,216,312
Exempt from federal taxes 611,128 636,223
Federal funds sold 8,895 93,742
Deposits in banks 4,937 30,376
---------- ----------
Total interest income 15,309,577 12,632,649
INTEREST EXPENSE
Savings deposits 2,324,731 2,089,762
Time Under $100,000 2,929,532 2,359,055
Time 100,000 or greater 300,954 96,513
Borrowed funds 538,919 13,548
--------- ---------
Total interest expense 6,094,136 4,558,878
--------- ---------
Net interest income 9,215,441 8,073,771
Provision for loan losses 532,500 534,326
--------- ---------
Net interest income after provision for 8,682,941 7,539,445
loan losses
OTHER OPERATING INCOME
Service charges 544,210 570,409
Security gains (losses), net (143,649) 61,933
Trust income 229,453 191,114
Other income 254,788 249,817
-------- --------
Total other income 884,802 1,073,273
-------- ---------
Net interest income after provision for
loan losses and other income 9,567,743 8,612,718
OTHER OPERATING EXPENSES
Salaries, wages and employee benefits 2,937,827 2,283,587
Net occupancy 363,850 368,595
Furniture and equipment 393,184 327,049
FDIC premium 385,739 377,416
Other expenses 1,450,603 1,529,282
--------- ---------
Total other expenses 5,531,203 4,885,929
--------- ---------
Income before income taxes 4,036,540 3,726,789
Income tax expense 1,190,211 1,095,190
--------- ---------
Net income 2,846,329 2,631,599
========= =========
Weighted average number of common shares:
Primary 5,859,323 5,901,484
Fully diluted 5,859,323 5,911,007
========= =========
Net income per share information:
Primary $ 0.49 $ 0.45
========= =========
Fully diluted $ 0.49 $ 0.45
========= =========
Cash dividends per share $ 0.18 $ 0.13
========= =========
<FN>
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>
Three Months Ended March 31,
OPERATING ACTIVITIES: 1995 1994
-----------------------------
<S> <C> <C>
Net income $ 2,846,329 $ 2,631,599
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 532,500 534,326
Depreciation and amortization 225,485 220,021
Net amortization of investment
securities' discount/amortization 121,396 134,622
Net realized securities (gain) loss 143,649 (61,933)
Increase accrued income receivable (686,654) (963,350)
Increase accrued interest payable 921,005 79,633
Net increase in other assets (659,986) (648,131)
Net increase in other liabilities 900,238 1,841,391
(Decrease) increase in unearned income 22,134 (1,125,582)
Decrease in intangible assets 88,785 129,375
--------- ----------
Net cash provided by operating activities 4,454,881 2,771,971
--------- ---------
INVESTING ACTIVITIES:
Purchase of commercial paper (3,012,901) -
Proceeds from sales of securities available
for sale 7,064,584 13,903,728
Proceeds - maturity or calls of investment
securities 4,785,582 4,536,652
Proceeds - maturity or calls of securities
available for sale 1,318,512 6,318,270
Purchases of investment securities (15,205,405) (8,012,153)
Purchases of securities available for sale (103,500) (14,660,665)
Net decrease (increase) in short-term
investments (80,806) 87,366
Net increase in loans (8,945,916) (10,447,842)
Net (increase) decrease in premises and
equipment (924,519) 95,046
Proceeds from sales of other real estate 265,943 -
----------- ----------
Net cash used in investing activities (14,838,426) (8,179,598)
----------- ----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 8,912,468 (8,202,109)
Increase (decrease) in U.S. Treasury
demand notes (1,130,571) 15,904
Increase (decrease) in Federal Funds
purchased (12,716,000) 415,000
Increase in FHLB borrowings 9,200,000 -
Increase in securities sold under agreement 723,114 -
Cash dividends and fractional shares (1,057,264) (726,981)
Dividend reinvestment (10) 165,989
Stock options 403,082 -
--------- ----------
Net cash provided by financing activities 4,334,819 (8,332,197)
--------- ----------
Increase (decrease in cash (6,048,726) (13,739,824)
Cash and cash equivalents at beginning of
year 35,390,357 45,484,518
---------- ----------
Cash and cash equivalents at end of the
first quarter $ 29,341,631 $ 31,744,694
=========== ===========
Cash paid during the year for:
Interest $ 5,238,736 $ 4,566,388
=========== ==========
Supplemental disclosure of noncash
investing and financing activities:
Transfer of assets from loans to
foreclosed and repossessed property $ 88,750 $ 589,956
=========== ===========
Net unrealized gain (loss) on securities
available for sale, net of taxes of
($744,105) and $32,481, respectively $ (1,381,908) $ 59,987
=========== ===========
</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 March 31, 1995, and the results of its operations for the
three months ended March 31, 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 three month periods ended
March 31, 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.
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 three months of
1995 was $2,846,000, an increase of $214,000, or 8.1%, over
the first three months of 1994 net income of $2,632,000.
Primary and fully diluted earnings per share for the first
three months of 1994 were $0.49 compared to $0.45 for the
first three months of 1994.
For the three months ended March 31, 1995,
the annualized return on average assets was 1.42%, compared
to 1.40% for the same period of 1994, and the annualized
return on average shareholders' equity was 16.46% for both
periods.
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 three months of 1995
of $9,215,000 increased by $1,141,000, or 14.1%, over the
first three months of 1994 net interest income of
$8,074,000. As illustrated in the table below, the primary
source of this increase was the result of increases to loan
rates and volumes in the first quarter of 1995, compared to
the same period in 1994.
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 three months ended March 31, 1995 over March 31,
1994 by their rate and volume components.
Three Months Ended March 31, 1995
Over/ (Under) March 31,1994
--------------------------------------
Caused by:
Total Variance Rate Volume
Interest income: --------------------------------------
(dollars in thousands)
Securities * $(125) $ 283 $ (408)
Money market assets (98) 96 (194)
Loans * 2,887 955 1,932
----- ----- -----
Total 2,664 1,334 1,330
----- ----- -----
Interest expense:
Savings deposits 235 356 (121)
Time deposits and certificates
of deposit 775 450 325
Other borrowings 525 15 510
----- ---- ----
Total 1,535 821 714
----- ---- ----
Net interest income $ 1,129 $ 513 $ 616
*Tax Equivalent Basis ===== ===== =====
<PAGE> Page 8
Taxable-equivalent net interest income was $9,599,000
for the first three months of 1995, compared to $8,470,000
for the same period in 1994, a 13.3% or $1,129,000 increase.
The overall favorable variance for the three months ended
March 31, 1995 was due to both increased rates and volumes.
Average interest-bearing assets increased to $772,678,000 at
March 31, 1995 from $720,386,000 at March 31, 1994, a 7.3%
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 quarter of
1995, compared to 68% in the first quarter of 1994. The
increase in the loan portfolio was also funded by a rise in
average other borrowings from $2,313,000 for the first
quarter of 1994 to $34,807,000 for the first quarter of
1995. 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 $9,734,000,
$8,356,000 and $14,268,000, respectively. Average deposit
accounts decreased $12,308,000 during this period primarily
due to a reduction in Money Market Accounts. Nonperforming
loans are included in the average balance yield
calculations, but the nonperforming loans were insignificant
and had no material effect on the results. Variances
attributed to both rate and volume are included in the
volume column.
NET INTEREST MARGIN:
The net interest margin was 4.97% for the three month
period ended March 31, 1995, a rise of .27% from the 4.70%
net interest margin for the first quarter 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.
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 of 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 quarter of 1995 provision for loan
losses of $533,000 was slightly lower than the $534,000
provision recorded during the first quarter of 1994. Net
charge offs were $124,000 for the three months ended March
31, 1995, compared with $60,000 for the three months ended
March 31, 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 1.42% at March 31, 1995 increased from the
December 31, 1994 ratio of 1.40% and the March 31, 1994
ratio of 1.28%.
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 533,000 534,000
Loans charged off (188,000) (123,000)
Recoveries 64,000 63,000
---------- ----------
Balance, March 31 $8,343,000 $6,360,000
========= =========
<PAGE> Page 9
The following table sets forth an allocation of the allowance
for loan losses by loan category:
March 31, 1995
--------------
Percent
Amount of Loans
---------- --------
Commercial and industrial $3,041,000 28%
Installment and other 912,000 31%
Real estate 1,104,000 34%
Lease financing 115,000 7%
Unallocated 3,171,000 N/A
---------- ----
Total $8,343,000 100%
========= ====
Non-performing assets (non-accruing loans, net assets
in foreclosure and troubled debt restructured loans) were
0.91% of total loans and net assets acquired in foreclosure at
March 31, 1995 compared 0.97% at December 31, 1994 and 1.04.% at
March 31, 1994. The ratio of the allowance to non-performing assets
was 155.8% at March 31, 1995 compared to 141.8% at December
31, 1994 and 122.3% at March 31, 1994.
Non-accruing loans decreased $29,000 during the first
quarter to a level of $2,429,000 from $2,458,000 as of
December 31, 1994. Approximately $853,000, or 35.1%, of
total non-accruing loans are attributable to two unrelated
borrowers at March 31,1995. Efforts to liquidate or
work-out individual accounts are proceeding as quickly as
potential buyers can be located and legal restraints permit.
Net assets in foreclosure totaled $1,075,000 as of
March 31, 1995, a decrease of $194,000, or 15.3%, from the
December 31, 1994 balance of $1,269,000. Sales of
foreclosed properties during the first quarter of 1995
totaled $266,000. Efforts to liquidate assets acquired in
foreclosure are proceeding as quickly potential buyers can
be located and legal constraints permit.
As of March 31, 1995, there were four unrelated borrowers with
troubled debt restructured loans totaling $1,850,000 compared with a
balance of $1,868,000 as of December 31, 1994. All four
customers were complying with the restructured terms as of
March 31, 1995. 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.
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 March 31, 1995, loans past due 90 days or
more and still accruing interest were $8,079,000, compared
to $2,145,000 as of December 31, 1994 and $1,049,000 as of
March 31, 1994. The $8,079,000 loans past due 90 days at
March 31, 1995 included two unrelated commercial loans in
the amounts of $5,000,000 and $2,000,000, respectively.
Subsequent to the close of the quarter, both of these
borrowers paid current all interest and principal due.
The following information concerns impaired
loans as described in note 3:
Impaired Loans:
Restructured Loans $1,850,000
Nonaccrual Loans 1,736,000
----------
$3,586,000
=========
Average impaired loans for the year: $3,618,000
=========
Impaired loans with specific loss allowances: $3,586,000
=========
Loss allowances reserved on impaired loans: $ 563,000
=========
<PAGE> Page 10
Income recognized on impaired loans during
the first quarter of 1995 $ 40,000
=========
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.
OTHER OPERATING INCOME:
Three Months Ended March 31,
----------------------------
1995 1994
----------------------------
(Dollars in thousands)
Service charges $ 544 $ 570
Securities gains (losses), net (143) 62
Trust income 229 191
Other income 255 250
---- -----
Total other operating income $ 885 $1,073
==== =====
Other operating income for the first three months of
1995 decreased by $188,000, or 17.5%, from the comparable
period in 1994. This reduction in other income is
principally the result of $143,000 in losses experienced by
the sale of securities available for sale during the first
quarter of 1995, compared to a gain of $62,000 recorded in
the same period in 1994. The securities were sold to fund
the purchase of other securities in an effort to enhance the
overall return of the portfolio.
Income from service charges on deposit
accounts decreased 4.6% in during the first quarter of 1995,
compared to the same period 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, resulting
from the rise in interest rates, which is used to offset
service charges.
Income from the trust department increased $38,000, or
19.9%. This was primarily due to the Corporation's
continuing emphasis on marketing the Trust Department's
products and services. Other income grew 2.0% in the first
quarter of 1995, from the same period in 1994.
OTHER OPERATING EXPENSES:
Three Months Ended March 31,
----------------------------
1995 1994
----------------------------
(Dollars in thousands)
Salaries $ 2,050 $ 1,682
Employee benefits 888 602
Net occupancy expense 364 369
Equipment expense 393 327
FDIC premiums 385 377
Other expenses 1,451 1,529
----- -----
Total other operating expenses $ 5,531 $ 4,886
===== =====
Other operating expenses for the first quarter of 1995
increased $645,000, or 13.2%, from the same period in 1994.
The rise in operating expenses was largely due to the
Corporation's growth which resulted in higher salary and
employee benefits costs.
Employee salaries increased by $368,000, or 21.9%.
The increase reflects cost of living increases, merit
increases and additional staff necessitated by current and
planned future growth. Employee benefits grew $286,000, or
47.5%. This growth is primarily attributed to the increased
cost of standardizing the pension and profit sharing plans
for all subsidiaries. The rise in employee benefits is also
directly related to the increase in salary expenses.
<PAGE> Page 11
Net occupancy expense decreased $5,000, or 1.4%. This
decrease is related to a $30,000 reduction in snow removal
costs in the first quarter of 1995, compared to the same
period in 1994. Equipment expense increased by $66,000, or
20.2%. The majority of this rise is due to maintenance and
equipment rental expenses associated with planned increased
data processing capabilities.
Federal Deposit Insurance Corporation (FDIC) premiums
increased by $8,000, or 2.1%, as a result of an increase in
the deposits of the Corporation.
Other expenses decreased by $78,000, or 5.1%, over the
same period in 1994. The reductions in other expense
included a decrease in intangible asset expense of $41,000,
a $16,000 decline in deferred compensation expense and
insurance expenses were down $18,000.
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:
Interest earning assets grew $16,672,000 to
$780,019,000 at March 31, 1995, from $763,347,000 at
December 31, 1994. During the first three months of 1995
loans increased $8,733,000, commercial paper grew
$3,013,000, investment securities rose $10,357,000,
interest bearing deposits in banks increased $81,000 and
securities available for sale decreased $5,512,000.
Total deposits rose $8,912,000 from $688,578,000 at
December 1994 to $697,490,067 at March 31, 1995. Interest
bearing deposits grew by $16,166,000 and non-interest
deposits were lower by $7,254,000. Other borrowing
decreased $3,923,000 during the first quarter.
CAPITAL:
Capital formation is critical to the Corporation's well
being and future growth. Capital for the period ending
March 31, 1995 was $70,698,000, an increase of $4,123,000
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 March 31, 1995
exceed all regulatory requirements. Federal regulators have
adopted 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 March 31, 1995, the
Corporation's Tier 1 risk-adjusted capital ratio was 11.27%,
and the total risk-adjusted capital ratio was 12.52%, 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
<PAGE> Page 12
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 bank organization.
The Corporation's leverage ratios were 8.74% at March 31,
1995 and 8.59% at December 31, 1994.
Existing minimum regulatory capital ratio
requirements are 5.5% for primary capital and 6.0% for total
capital. The primary capital ratio was 9.32% at March 31,
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 $.1800 per share cash dividend paid
during the first quarter of 1995 was 35% higher than the
$.1333 per share cash dividend during the first quarter of
1994. 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, seasonally, interest
sensitivity and growth trends of its deposit funds. Federal
Funds Sold averaged $573,000 during the first quarter of
1995 and securities available for sale averaged $96,903,000
during the first quarter 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. 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 13
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:
Not applicable.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
<PAGE> Page 14
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: May 11, 1995
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