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 September 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: 5,876,884 shares of Common
Stock, $1.00 par value, outstanding on October 31, 1995.
<PAGE> Page 2
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-Q REPORT
PAGE
Part I. Financial Information
Consolidated Balance Sheets-September 30, 1995 and December 31, 1994 3
Consolidated Statements of Income-Nine Months and Three Months Ended 4
September 30, 1995 and 1994
Consolidated Statements of Cash Flows-Nine Months Ended 5
September 30, 1995 and 1994
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and 7
Results of Operations
Part II. Other Information 15
Signatures 16
<PAGE> Page 3
<TABLE>
PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Sept. 30, 1995 December 31, 1994
---------------- -------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 33,834,003 $ 35,390,357
Federal Funds sold 10,600,000 -
Interest-bearing deposits in banks 346,868 205,719
Securities available for sale
(amortized cost $94,401,780 and $107,307,249, respectively) 94,281,215 102,211,333
Investment securities
(fair value $109,708,998 and $79,896,560, respectively) 108,725,682 82,867,003
Loans 591,515,653 578,063,239
Less: Unearned income (9,488,019) (9,804,357)
Allowance for loan losses (9,289,897) (7,934,385)
---------------- -------------------
Net loans 572,737,737 560,324,497
---------------- -------------------
Bank premises and equipment, net 10,744,466 8,794,530
Accrued income receivable . 5,635,399 4,726,117
Other real estate owned 823,754 1,242,887
Intangible assets, net . 2,048,645 2,315,000
Other assets 3,150,573 1,701,041
---------------- -------------------
Total assets $ 842,928,342 $ 799,778,484
================ ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing . $ 107,060,780 $ 110,502,583
Interest-bearing:
Now accounts 78,170,144 83,828,901
Money market accounts 136,075,541 162,219,289
Savings 84,554,125 88,200,527
Time under $100,000 270,248,820 224,598,588
Time $100,000 or greater 35,284,650 19,227,711
---------------- -------------------
Total deposits . 711,394,060 688,577,599
Accrued interest payable 10,108,079 8,058,926
U.S. Treasury demand notes 2,082,222 2,392,975
Federal funds purchased - 12,716,000
Federal Home Loan Bank (FHLB) borrowings 19,700,000 5,000,000
Securities sold under agreements to repurchase 18,293,809 15,212,755
Other liabilities 5,567,456 1,244,847
---------------- -------------------
Total liabilities 767,145,626 733,203,102
---------------- -------------------
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 5,873,682 shares in 1995 and
5,753,294 shares in 1994 5,873,682 5,753,294
Surplus 27,486,653 24,415,932
Undivided profits 42,500,748 39,718,501
Net unrealized losses on securities available for sale, net of taxes (78,367) (3,312,345)
---------------- -------------------
Total shareholders' equity 75,782,716 66,575,382
---------------- -------------------
Total liabilities and shareholders' equity $ 842,928,342 $ 799,778,484
================ ===================
<FN>
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
Nine months Ended Nine months Ended
September 30, September 30,
<CAPTION>
1995 1994 1995 1994
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $36,334,690 $29,257,905 $12,235,139 $10,520,100
Lease financing 2,318,864 1,976,049 794,584 697,111
Investment securities:
Taxable 6,855,016 6,472,395 2,415,516 2,083,058
Exempt from federal taxes 1,860,102 1,852,370 652,047 607,654
Federal funds sold . 366,504 259,950 225,926 100,989
Deposits in banks and other 45,021 68,529 4,752 8,417
------------ ----------- ------------ ------------
Total interest income 47,780,197 39,887,198 16,327,964 14,017,329
------------ ----------- ------------ ------------
INTEREST EXPENSE
Savings deposits 6,690,977 6,376,170 2,145,331 2,194,177
Time Under $100,000 10,296,375 7,064,915 3,853,725 2,372,690
Time $100,000 or greater 1,116,129 413,695 440,872 188,872
Borrowed funds 1,589,826 122,985 502,567 80,719
------------ ----------- ------------ ------------
Total interest expense 19,693,307 13,977,765 6,942,495 4,836,458
------------ ----------- ------------ ------------
Net interest income 28,086,890 25,909,433 9,385,469 9,180,871
Provision for loan losses 1,642,500 2,007,726 595,000 527,500
------------ ----------- ------------ ------------
Net interest income after provision for loan losses 26,444,390 23,901,707 8,790,469 8,653,371
------------ ----------- ------------ ------------
OTHER OPERATING INCOME
Service charges 1,685,659 1,748,571 567,093 572,718
Secruity gains (losses), net (172,316) 884,012 - (38,550)
Trust income 778,786 492,298 277,772 116,507
Other Income 797,672 822,629 297,646 296,926
------------ ----------- ------------ ------------
Total other income 3,089,801 3,947,510 1,142,511 947,601
------------ ----------- ------------ ------------
Net interest income after provision for loan losses
and other income 29,534,191 27,849,217 9,932,980 9,600,972
------------ ----------- ------------ ------------
OTHER OPERATING EXPENSES
Salaries, wages and employee benefits 9,278,065 7,967,137 3,442,528 3,138,583
Net occupancy 1,052,396 1,030,525 352,554 321,823
Furniture and equipment 1,281,109 1,050,903 449,671 398,259
FDIC premium 727,925 1,136,569 (43,553) 381,737
Other expenses 4,715,232 4,902,679 1,628,639 1,562,712
------------ ----------- ------------ ------------
Total other expenses 17,054,727 16,087,813 5,829,839 5,803,114
------------ ----------- ------------ ------------
Income before income taxes 12,479,464 11,761,404 4,103,141 3,797,858
Income tax expense 3,678,522 3,522,652 1,194,749 1,119,780
------------ ----------- ------------ ------------
Net income $ 8,800,942 $ 8,238,752 $ 2,908,392 $ 2,678,078
============ =========== ============ ============
Weighted average number of common shares:
Primary 5,891,873 5,865,915 5,908,332 5,878,187
Fully diluted 5,892,389 5,865,915 5,908,350 5,878,187
============ =========== ============ ============
Net income per share information:
Primary $ 1.49 $ 1.40 $ 0.49 $ 0.46
============ =========== ============ ============
Fully diluted $ 1.49 $ 1.40 $ 0.49 $ 0.46
============ =========== ============ ============
Cash dividends per share $ 0.55 $ 0.44 $ 0.19 $ 0.15
============ =========== ============ ============
<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 FLOW
<CAPTION>
Nine Months Ended September 30,
<S> <C> <C>
OPERATING ACTIVITIES: 1995 1994
------------- -------------
Net Income $ 8,800,942 $ 8,238,752
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,642,500 2,007,726
Depreciation and amortization 733,810 692,948
Net amortization of investment
securities' discount/amortization 343,327 423,889
Net realized securities (gain) loss 172,316 (884,012)
Increase accrued income receivable (909,282) (926,887)
Increase accrued interest payable 2,049,153 603,869
Net increase in other assets (1,449,532) (1,790,541)
Net increase in other liabilities 2,581,236 812,278
Decrease in unearned income (316,338) (1,430,911)
Write down of other real estate owned. 190,499 61,269
Decrease in intangible assets 266,355 388,125
------------- -------------
Net cash provided by operating activities . 14,104,986 8,196,505
------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 10,886,479 38,178,035
Proceeds - maturity or calls of investment securities 15,949,002 16,880,130
Proceeds - maturity or calls of securities available for sale 5,268,372 12,085,396
Purchases of investment securities (41,963,893) (10,031,463)
Purchases of securities available for sale (3,608,813) (31,025,407)
Net (increase) decrease in short-term investments (141,149) 891,381
Net increase in loans (14,721,080) (64,682,592)
Net increase in premises and equipment (2,683,746) (1,087,404)
Proceeds from sales of other real estate 1,210,312 985,533
------------- -------------
Net cash used in investing activities (29,804,516) (37,806,391)
------------- -------------
FINANCING ACTIVITIES:
Net increase in deposits 22,816,461 4,068,192
(Decrease) increase in U.S. Treasury demand notes (310,753) 8,737
(Decrease) increase in Federal Funds purchased (12,716,000) 5,585,000
Increase in FHLB borrowings 14,700,000 -
Increase in securities sold under agreement 3,081,054 12,789,763
Cash dividends and fractional shares (3,230,527) (2,437,990)
Dividend reinvestment . (141) 513,001
Stock options 403,082 (347,234)
------------- -------------
Net cash provided by financing activities 24,743,176 20,179,469
------------- -------------
Increase (decrease) in cash 9,043,646 (9,430,417)
Cash and cash equivalents at beginning of year 35,390,357 45,484,518
------------- -------------
Cash and cash equivalents at end of the second quarter $ 44,434,003 $ 36,054,101
============= =============
Cash paid during the year for:
Interest $ 17,644,154 $ 13,373,986
============= =============
Supplemental disclosure of noncash investing
and financing activities:
Transfer of assets from loans to
foreclosed and repossessed property $ 981,678 $ 769,162
============= =============
Net unrealized gain (loss) on securities
available for sale, net of taxes of ($42,198)
and ($1,223,826), respectively . $ (78,367) $ (2,274,722)
============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</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 September 30, 1995, and the
results of its operations for the nine and three month periods ended September
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 nine and three month periods ended
September 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 July 1, 1994 the merger of Security National Bank ("Security')
and the Corporation was completed. For each share of Security common stock
outstanding, 0.7483 shares of the Corporation's common stock were issued. 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.
NOTE 5 - On September 7, 1995, the Corporation and Farmers & Merchants Bank
of Honesdale ("FMB") executed an Agreement and Plan of Reorganization and an
Agreement and Plan of Merger, which agreements delineate the terms of the
combination. For each share of FMB stock outstanding, FMB shareholders will
receive between 0.5915 and 0.6915 shares of Harleysville Common Stock, based
on the Closing Price of Harleysville's Common Stock on the Effective Date of
the Acquisition. The approximate deal value to Farmers & Merchants
shareholders is $17.00 per share, an aggregate of $12 million, or 1.45 times
their June 30, 1995 book value.
Upon completion of the acquisition, FMB's banking operations will be merged
into those of the Citizens National Bank of Lansford, Lansford, Pennsylvania,
a wholly-owned subsidiary of Harleysville. The FMB merger will be accounted
for on a pooling-of-interest 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 nine months of 1995 was $8,801,000,
an increase of $562,000, or 6.8%, over the first nine months of 1994 net
income of $8,239,000. Primary earnings per share and fully diluted earnings
per share for the first nine months of 1995 were $1.49 compared to $1.40 in
the first nine months of 1994. Consolidated net income for the third quarter
of 1995 was $2,908,000, an increase of $230,000, or 8.6%, over the third
quarter of 1994 net income of $2,678,000. Primary earnings per share and
fully diluted earnings per share for the third quarter of 1995 were $0.49
compared to $0.46 for the third quarter of 1994.
For the nine months ended September 30, 1995,the annualized return on
average assets and the annualized return on average shareholders' equity were
1.43% and 16.22%, respectively. For the same period in 1994 the annualized
return on average assets was 1.44% and the annualized return on average
shareholders' equity was 16.52%. The annualized return on average assets was
1.39% for both of the three months periods ended September 30, 1995 and 1994,
and the annualized return on average shareholders' equity was 15.40% for the
third quarter of 1995 and 15.48% for the third quarter 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 nine months of 1995 of $28,087,000
increased $2,178,000, or 8.4%, over the first nine months of 1994 net interest
income of $25,909,000. Net interest income for the third quarter of 1995
increased by $204,000, or 2.2%, over the third 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 nine 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 was the result of customer loan demand. The increase in
interest income was partially offset by a rise in interest expense, led by an
increase in time deposit interest expense related to higher volumes and rates.
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 nine months ended September 30, 1995 over September
30, 1994 and the three months ended September 30, 1995 over September 30, 1994
by their rate and volume components.
<PAGE> Page 8
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1995
Over/ (Under)
September 30, 1994
-----------------------------
Total Caused by:
----------
Variance Rate Volume
-------- ---------- -------
(dollars in thousands)
<S> <C> <C> <C>
Interest Income:
Securities * 396 1,104 (708)
Money market instruments 83 104 (21)
Loans * 7,464 2,379 5,085
-------- ---------- -------
Total 7,943 3,587 4,356
-------- ---------- -------
Interest Expense:
Savings deposits 314 989 (675)
Time deposits and 3,935 1,973 1,962
certificates of deposit
Other borrowings 1,467 21 1,446
-------- ---------- -------
Total 5,716 2,983 2,733
-------- ---------- -------
Net interest income 2,227 604 1,623
======== ========== =======
*Tax Equivalent Basis
Three Months Ended
September 30, 1995
Over/(Under)
September 30, 1994
------------------------------
Total Caused by:
-----------
Variance Rate Volume
--------- ----------- -------
(dollars in thousands)
<S> <C> <C> <C>
Interest Income:
Securities * 403 330 73
Money market instruments 121 (1) 122
Loans * 1,832 591 1,241
--------- ----------- -------
Total 2,356 920 1,436
--------- ----------- -------
Interest Expense:
Savings deposits (49) 260 (309)
Time deposits and 1,733 781 952
certificates of deposit
Other borrowings 422 (1) 423
--------- ----------- -------
Total 2,106 1,040 1,066
--------- ----------- -------
Net interest income 250 (120) 370
========= =========== =======
*Tax Equivalent Basis
</TABLE>
Taxable-equivalent net interest income was $29,294,000 for the first nine
months of 1995, compared to $27,066,000 for the same period in 1994, an 8.2%
or $2,228,000 increase. The overall favorable variance for the nine months
ended September 30, 1995 was due to both increased rates and volumes. Average
year-to-date interest-bearing assets increased to $778,379,000 at September
30, 1995 from $717,216,000 at September 30, 1994, an 8.5% 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 74% of average
interest-earning assets during the first nine months of 1995, compared to 70%
in the first nine months of 1994. The increase in the loan portfolio was
also funded by a rise in average time deposits and other borrowings. Average
year-to-date deposits at September 30, 1995 grew $19,987,000 over the same
balance at September 30, 1994. A $48,169,000 increase in average time
deposits and a $3,820,000 growth in average non-interest bearing deposits was
offset by a $32,002,000 decrease in average savings deposits. Average other
borrowings grew $32,375,000 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 $6,760,000,
$11,385,000 and $14,144,000, respectively.
Taxable-equivalent net interest income was $9,810,000 for the third
quarter of 1995, compared to $9,560,000 for the same period in 1994, a
$250,000 or 2.6% increase. This rise is primarily the result of higher loan
volumes, partially offset by higher rates paid on deposits. Third quarter
average earning assets grew $67,462,000, compared to the third quarter of
1994, due to an increase in loans. The increase in loans was funded by an
increase in both deposits and other borrowings. Nonaccruing loans are included
in the average balance yield calculations, but the average nonaccruing loans
was 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 5.02% for the nine month period ended
September 30, 1995, compared to the 5.03% net interest margin for the same
period in 1994. The net interest margin for the third quarter of 1995 of 4.94%
was lower than the 5.23% net interest margin for the same period in 1994.
This reduction in the net interest margin is the result of an increase in the
rates paid on deposits related to the shifting of deposits from lower yielding
savings deposits to higher yielding time deposits and the increase in other
borrowings. Average quarterly higher costing time deposits and other
borrowings grew $66,621,000 and $30,358,000, respectively from the third
<PAGE> Page 9
quarter of 1994 to the third quarter of 1995. Average quarterly lower
yielding savings deposits decreased $44,006,000 during this period.
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.
For the first nine months of 1995 provision for loan losses was
$1,642,000. This was $366,000, or 18.2% lower than the $2,008,000 provision
recorded during the first nine months of 1994. The growth of the loan loss
reserve from September 30, 1994 to September 30, 1995 of 21.2%, outpaced the
7.4% growth of loans during this period. Net charge offs were $286,000 for
the nine months ended September 30, 1995, compared with $227,000 for the nine
months ended September 30, 1994. The ratio of the allowance for loan losses
to loans of 1.60% at September 30, 1995 increased from the December 31, 1994
ratio of 1.40% and the September 30, 1994 ratio of 1.42%. The provision for
loan losses in the third quarter of 1995 was $595,000, compared to $528,000 in
the third quarter of 1994.
<TABLE>
Allowance for Loan Losses
- -------------------------
<CAPTION>
Transactions in the allowance for loan losses are as follows:
1995 1994
----------- -----------
<S> <C> <C>
Balance, Beginning of Year $7,934,000 $5,886,000
Provision charged to operating expenses 1,642,000 2,008,000
Loans charged off (513,000) (606,000)
Recoveries 227,000 379,000
---------- ----------
Balance, September 30 $9,290,000 $7,667,000
========== ==========
</TABLE>
The following table sets forth an allocation of the allowance for loan
losses by loan category:
<TABLE>
<CAPTION>
September 30, 1995
-------------------
Percent
Amount of Loans
------------------- ---------
<S> <C> <C>
Commercial and industrial $ 3,665,000 27%
Installment and other 838,000 31%
Real estate 1,227,000 35%
Lease financing 124,000 7%
Unallocated 3,436,000 N/A
--------- ----
Total $ 9,290,000 100%
========= ====
</TABLE>
Non-performing assets (non-accruing loans, net assets in foreclosure and
troubled debt restructured loans) were 1.90% of total loans and net assets
acquired in foreclosure at September 30, 1995, compared to 0.97% at December
31, 1994 and .77% at September 30, 1994. The ratio of the allowance to
non-performing assets was 82.5% at September 30, 1995 compared to 141.8% at
December 31, 1994 and 179.0% at September 30, 1994.
<PAGE> Page 10
Non-accruing loans at September 30, 1995 of $9,242,000, increased
$6,784,000 from the December 31, 1994 level of $2,458,000. Approximately
$6,980,000, or 75.5%, of total non-accruing loans are attributable to two
unrelated borrowers at September 30,1995. One borrower has four loans in the
aggregate principal amount of $5,070,000. These four loans are well secured
principally by real estate. These loans relate to a real estate development
project. The other borrower has two loans in the aggregate principal amount
of $1,910,000. These two loans are well secured principally by real estate.
These two loans relate to a restaurant. Management continues to monitor
these loans, and efforts to work out each of these loans are proceeding as
quickly as administrative and legal constraints permit. The level of
non-accruing loans was $1,952,000 at September 30, 1994.
Net assets in foreclosure totaled $824,000 as of September 30, 1995, a
decrease of $419,000, or 33.7%, 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 nine months of 1995. The balance of net
assets in foreclosure at September 30, 1994 was $1,242,000. During the first
nine months of 1995, sales of foreclosed properties totaled $1,210,000;
transfers from loans to assets in foreclosure were $981,000 and write downs of
assets in foreclosure equaled $190,000. 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 September 30, 1995, there were five unrelated borrowers with
troubled debt
restructured loans totaling $1,198,000, compared with a balance of
$1,868,000 as of December 31, 1994 and $1,238,000 at September 30, 1994. All
five customers were complying with the restructured terms as of September 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 September 30, 1995, loans past due 90 days or more
and still accruing interest were $1,138,000, compared to $2,145,000 as of
December 31, 1994 and $1,753,000 as of September 30, 1994.
The following information concerns impaired loans as described
in note 3:
Impaired Loans:
<TABLE>
<CAPTION>
Restructured Loans $1,198,000
Nonaccrual Loans 7,857,000
----------
$9,055,000
==========
<S> <C> <C>
Average year-to-date impaired loans: $5,518,000
==========
Impaired loans with specific loss allowances: $9,055,000
==========
Loss allowances reserved on impaired loans: $1,102,000
==========
Income recognized on impaired loans during
the first nine months of 1995 $ 83,000
==========
</TABLE>
The Bank's policy for interest income recognition on impaired loans is to
recognize income on restructured loans under the accrual method. The Bank
recognizes income on nonaccrual loans under the cash basis when the loans are
both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the bank, if these factors do not exist, the bank
will not recognize income.
<PAGE> Page 11
OTHER OPERATING INCOME
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30, Three Months Ended Sept. 30,
--------------------------- ----------------------------
1995 1994 1995 1994
------------------------ -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Service charges $ 1,685 $ 1,749 $ 567 $ 572
Securities gains (losses), net (172) 884 - (38)
Trust income 779 492 278 117
Other income 798 823 298 297
----- ----- ----- -----
Total other operating income $ 3,090 $ 3,948 $ 1,143 $ 948
===== ===== ===== ===
</TABLE>
Other operating income for the first nine months of 1995 decreased by
$858,000, or 21.7%, from $3,948,000 at September 30, 1994 to $3,090,000 at
September 30, 1995. This reduction in other income is principally the result
of $172,000 in losses experienced by the sale of low yielding securities
available for sale during the first nine months of 1995, compared to a gain of
$884,000 recorded in the same period in 1994. The $844,000 gain recognized
during the first nine months of 1994 was primarily 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. From time
to time 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. Third quarter 1995 other operating income increased
$195,000, compared to the third quarter of 1994.
Income from service charges on deposit accounts decreased 3.7% during the
first nine months of 1995 and .9% in the third quarter of 1995, compared to
the same periods in 1994. The decrease in service charges during 1995 is
attributed to lower service charges on business accounts; 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 and Financial Services Department increased
$287,000, or 58.3% in the first nine months of 1995 and $161,000, or 137.6% in
the third quarter of 1995, compared to the same periods in 1994. This was the
result of both an increase in the book value of trust assets of 15.3% from
September 30, 1994 to September 30, 1995 and the Corporation's continuing
emphasis on marketing the Trust and Financial Services Department's products
and services. Other income decreased from $823,000 in the first nine months
of 1994, to $798,000 in the first nine months of 1995.
OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT. 30, THREE MONTHS ENDED SEPT. 30,
------------ ----------------------- -------------- ----------------
1995 1994 1995 1994
------------ ----------------------- -------------- ----------------
(DOLLARS IN THOUSANDS)
-----------------------
<S> <C> <C> <C> <C>
SALARIES $ 6,322 $ 5,443 $ 2,151 $ 2,024
EMPLOYEE BENEFITS 2,956 2,524 1,292 1,114
NET OCCUPANCY EXPENSE 1,053 1,031 352 322
EQUIPENT EXPENSE 1,281 1,051 450 398
FDIC PREMIUMS 728 1,136 (44) 382
OTHER EXPENSES 4,715 4,903 1,629 1,563
------ ------ ----- -----
TOTAL OTHER OPERATING EXPENSES $ 17,055 $ 16,088 $ 5,830 $ 5,803
====== ====== ===== =====
</TABLE>
<PAGE> Page 12
Other operating expenses for the first nine months of 1995 of $17,055,000
increased $967,000, or 6.0%, from the $16,088,000 for the same period in
1994. The third quarter of 1995 showed a 4.7% increase in other operating
expenses, compared to the third quarter of 1994. The rise in operating
expenses was largely due to both higher salary and employee benefits cost
directly related to the Corporation's growth and planned salary increases.
These increases were offset by a reduction in the Federal Deposit Insurance
Corporation premium.
Employee salaries increased $879,000, or 16.1% from $5,443,000 for the
first nine months of 1994 to $6,322,000 for the same period in 1995. The
third quarter of 1995 salary expense grew $127,000, or 6.3% compared to the
third quarter of 1994. This increase reflects cost of living increases, merit
increases and additional staff necessitated by current and planned future
growth. Employee benefits grew $432,000, or 17.1% to $2,956,000 in the first
nine months of 1995, from the $2,524,0000 employee benefits expensed during
the same period in 1994. The 1995 third quarter employee benefits cost were
$178,000 or 16.0% higher than the third 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 plans for all subsidiaries.
Net occupancy expense increased $22,000, or 2.1% from $1,031,000 in the
first nine months of 1994 to $1,053,000 in the first nine months of 1995. Net
occupancy expense for the third quarter of 1995 of $352,000, increased $30,000
from the third quarter of 1994 expense of $322,000. Equipment expense
increased by $230,000, or 21.9% during the first nine months of 1995, compared
to the same period in 1994. The third quarter of 1995 equipment expense of
$450,000 grew $52,000, or 13.1% from the third quarter of 1994 equipment
expense of $398,000. 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.
During the third quarter of 1995, the Federal Deposit Insurance
Corporation (FDIC) confirmed that the Bank Insurance Fund was fully
recapitalized at the end of May 1995. As a result, the new lower premium
rates were made retroactive to June 1, 1995. In the month of September, the
FDIC refunded insurance premium overpayments for the four months of June
through September. The FDIC premiums refunds resulted in a $408,000, or
35.9%, reduction in FDIC premiums during the first nine months of 1995,
compared to the same period in 1994. The third quarter of 1995 FDIC premium
expense was a credit of $44,000, compared to the second quarter of 1994
premium expense of $382,000.
Other expenses decreased $188,000, or 3.8%, from $4,715,000 in the first
nine months of 1994, compared to $4,903,000 other expenses recorded during the
same period in 1995. The reductions in other expenses included a decrease in
intangible asset expense of $122,000 and a $193,000 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. The third quarter
of 1995 other expenses increased $66,000, or 4.2% from the other expenses for
the third quarter of 1994.
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 $43,150,000, or 5.4% from $799,778,000 at December 31,
1994 to $842,928,000 at September 30, 1995. This growth was primarily in
interest earning assets which grew $42,438,000 to $795,981,000 at September
30, 1995, from $753,543,000 at December 31, 1994. During the first nine
months of 1995 Federal Funds sold increased $10,600,000, investment securities
grew $25,859,000, loans increased $13,768,000, interest bearing deposits rose
$141,000 and securities available for sale decreased $7,930,000.
<PAGE> Page 13
Total deposits rose $22,816,000 from $688,578,000 at December 1994 to
$711,394,000 at September 30, 1995. A growth in time deposits of $61,707,000
was offset by decreases in now accounts, money market accounts and savings
accounts of $5,659,000, $26,144,000, $3,646,000, respectively. Non-interest
bearing deposits declined $3,442,000, or 3.1% during this period. Other
borrowing increased $4,754,000 during the first nine months of 1995.
CAPITAL
Capital formation is critical to the Corporation's well being and future
growth. Capital for the period ending September 30, 1995 was $75,783,000, an
increase of $9,208,000 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 capital ratios at September 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-weighting 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 September 30, 1995, the
Corporation's Tier 1 risk-adjusted capital ratio was 11.81%, and the total
risk-adjusted capital ratio was 13.06%, both well above the regulatory
requirements.
To supplement the risk-based capital adequacy guidelines, the Federal
Reserve Board ("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 8.82% at September 30, 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 Corporation's primary capital
ratio was 9.76% at September 30, 1995, compared with 8.96% at December 31,
1994. Since the Corporation's only capital is primary capital, the total
capital ratios are the same as the primary capital ratios.
The year-to-date September 30, 1995 cash dividend per share of $.5500 was
25.5% higher than the cash dividend for the same period in 1994 of $.4381.
The third quarter 1995 dividend of $.1900 per share was 24.7% greater than the
third 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 third 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 answers the
ability to meet the day-to-day demands of deposit customers, and the ability
to fulfill the needs of borrowing customers. Generally, the Corporation plans
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 $8,296,000 during
the first nine months of 1995 and securities available for sale averaged
$97,621,000 during the first nine months of 1995, more than sufficient to
match normal fluctuations in loan demand or deposit fund supplies. Backup
<PAGE> Page 14
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.
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 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.
- -------------------------------------------------------------
None.
Item 5. Other Information.
- ---------------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits:
None.
(b) Reports on Form 8-K:
On September 14, 1995, a Form 8-K was filed by the Registrant reporting
that effective September 7, 1995, the registrant signed a definitive agreement
to acquire Farmers & Merchants Bank ("FMB"), located in Honesdale,
Pennsylvania. The transaction is subject to obtaining regulatory and
shareholder approval and, therefore, the Effective Date of the transaction is
not expected until early 1996.
Under the terms of the merger, FMB shareholders will receive between
0.5915 and 0.6915 shares of Harleysville Common Stock for each share of FMB's
Common Stock, based on the Closing Price of Harleysville's Common Stock on the
Effective Date of the acquisition.
Upon completion of the acquisition, FMB's banking operations will be
merged into those of the Citizens National Bank of Lansford, Lansford,
Pennsylvania, a wholly-owned subsidiary of Harleysville.
<PAGE> Page 16
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
________________________________
Walter E. Daller, Jr., President
and Chief Executive Officer
(Principal executive officer)
_______________________________
Vernon L. Hunsberger, Treasurer
(Principal financial and accounting officer)
Date: November 13, 1995
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 33834
<INT-BEARING-DEPOSITS> 347
<FED-FUNDS-SOLD> 10600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 94281
<INVESTMENTS-CARRYING> 108726
<INVESTMENTS-MARKET> 109709
<LOANS> 582028
<ALLOWANCE> 9290
<TOTAL-ASSETS> 842928
<DEPOSITS> 711394
<SHORT-TERM> 24576
<LIABILITIES-OTHER> 15676
<LONG-TERM> 15500
<COMMON> 5874
0
0
<OTHER-SE> 69909
<TOTAL-LIABILITIES-AND-EQUITY> 75783
<INTEREST-LOAN> 38654
<INTEREST-INVEST> 8745
<INTEREST-OTHER> 383
<INTEREST-TOTAL> 47780
<INTEREST-DEPOSIT> 18103
<INTEREST-EXPENSE> 19693
<INTEREST-INCOME-NET> 28087
<LOAN-LOSSES> 1643
<SECURITIES-GAINS> (172)
<EXPENSE-OTHER> 17055
<INCOME-PRETAX> 12479
<INCOME-PRE-EXTRAORDINARY> 12479
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8801
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.49
<YIELD-ACTUAL> 5.02
<LOANS-NON> 9242
<LOANS-PAST> 1138
<LOANS-TROUBLED> 9055
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7934
<CHARGE-OFFS> 513
<RECOVERIES> 226
<ALLOWANCE-CLOSE> 9290
<ALLOWANCE-DOMESTIC> 9290
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3436
</TABLE>
