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, 1996.
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: 6,320,134 shares of Common
Stock, $1.00 par value, outstanding on April 30, 1996.
PAGE 1
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-Q REPORT
PAGE
Part I. Financial Information
Consolidated Balance Sheets - March 31, 1996 and December 31, 1995 3
Consolidated Statements of Income - Three Months Ended 4
March 31, 1996 and 1995
Consolidated Statements of Cash Flows - Three Months Ended 5
March 31, 1996 and 1995
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and 7
Results of Operations
Part II. Other Information 14
Signatures 15
PAGE 2
PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
---------------- -------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 37,573,667 $ 34,312,059
Federal Funds sold 17,300,000 16,295,000
---------------- -------------------
Total cash and cash equivalents 54,873,667 50,607,059
---------------- -------------------
Interest-bearing deposits in banks 1,538,120 1,703,268
Investment securities available for sale 189,478,870 159,325,961
Investment securities held to maturity
(market value $64,345,201 and $85,651,810, respectively) 63,255,325 83,668,528
Loans 640,078,651 638,219,573
Less: Unearned income (8,896,096) (9,481,622)
Allowance for loan losses (10,185,529) (9,891,324)
---------------- -------------------
Net loans 620,997,026 618,846,627
---------------- -------------------
Bank premises and equipment, net 12,463,003 11,995,396
Accrued income receivable 6,300,481 6,150,130
Other real estate owned 1,348,476 1,220,131
Intangible assets, net 1,884,470 1,959,860
Other assets 2,306,935 1,867,912
---------------- -------------------
Total assets $ 954,446,373 $ 937,344,872
================ ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 117,048,858 $ 117,698,263
Interest-bearing:
NOW accounts 89,754,270 91,616,367
Money market accounts 161,707,109 155,641,250
Savings 105,134,842 101,993,095
Time, under $100,000 302,898,920 299,359,040
Time, $100,000 or greater 33,186,615 28,191,693
---------------- -------------------
Total deposits 809,730,614 794,499,708
Accrued interest payable 12,730,360 12,081,557
U.S. Treasury notes 1,903,555 1,837,396
Federal Home Loan Bank (FHLB) borrowings 20,000,000 21,200,000
Securities sold under agreements to repurchase 15,818,588 16,713,629
Other liabilities 6,264,517 4,650,512
---------------- -------------------
Total liabilities 866,447,634 850,982,802
---------------- -------------------
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 6,318,953 shares in 1996 and
6,316,208 shares in 1995 6,318,953 6,316,208
Additional-paid-in-capital 30,951,125 30,882,765
Retained Earnings 49,825,531 47,780,078
Net unrealized gains on investment securities available for sale 903,130 1,383,019
---------------- -------------------
Total shareholders' equity 87,998,739 86,362,070
---------------- -------------------
Total liabilities and shareholders' equity $ 954,446,373 $ 937,344,872
================ ===================
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 3
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months Ended
March 31,
--------------------
1996 1995
-------------------- ------------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $ 13,103,549 $12,337,025
Lease financing 843,384 759,145
Investment securities:
Taxable 2,893,208 2,531,896
Exempt from federal taxes 850,213 626,416
Federal funds sold 256,331 31,218
Deposits in banks 20,276 24,812
-------------------- ------------
Total interest income 17,966,961 16,310,512
-------------------- ------------
INTEREST EXPENSE
Savings deposits 2,338,521 2,511,629
Time, under $100,000 4,304,817 3,194,413
Time, $100,000 or greater 413,123 300,954
Borrowed funds 519,004 538,919
-------------------- ------------
Total interest expense 7,575,465 6,545,915
-------------------- ------------
Net interest income 10,391,496 9,764,597
Provision for loan losses 525,991 535,500
-------------------- ------------
Net interest income after provision for loan losses 9,865,505 9,229,097
-------------------- ------------
OTHER OPERATING INCOME
Service charges 607,871 549,847
Secruity losses, net (49,869) (143,649)
Trust income 395,381 241,598
Other Income 275,442 264,622
-------------------- ------------
Total other operating income 1,228,825 912,418
-------------------- ------------
Net interest income after provision for loan losses
and other operating income 11,094,330 10,141,515
-------------------- ------------
OTHER OPERATING EXPENSES
Salaries, wages and employee benefits 3,416,516 3,111,613
Occupancy 475,929 392,536
Furniture and equipment 500,423 410,697
FDIC premium 44,375 417,287
Other expenses 1,884,999 1,565,974
-------------------- ------------
Total other operating expenses 6,322,242 5,898,107
-------------------- ------------
Income before income taxes 4,772,088 4,243,408
Income tax expense 1,387,975 1,247,988
-------------------- ------------
Net income $ 3,384,113 $ 2,995,420
==================== ============
Weighted average number of common shares 6,350,150 6,297,449
==================== ============
Net income per share information $ 0.53 $ 0.48
==================== ============
Cash dividends per share $ 0.20 $ 0.18
==================== ============
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 4
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
<S> <C> <C>
OPERATING ACTIVITIES: 1996 1995
------------------------------ -------------
Net Income $ 3,384,113 $ 2,995,420
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 525,991 535,500
Depreciation and amortization 312,876 239,852
Net amortization of investment
securities' discount/premiums 117,693 117,670
Net realized security loss 49,869 143,649
Increase in accrued income receivable (150,351) (720,517)
Increase in accrued interest payable 648,803 931,067
Net increase in other assets (439,023) (722,674)
Net increase in other liabilities 1,841,826 938,219
(Decrease) increase in unearned income (585,526) 9,694
Write-down of other real estate owned 110,425 -
Decrease in intangible assets 75,390 88,785
------------------------------ -------------
Net cash provided by operating activities 5,892,086 4,556,665
------------------------------ -------------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale 17,530,847 7,064,584
Proceeds from maturity or calls of investment securities held to maturity 3,604,083 5,285,582
Proceeds from maturity or calls of investment securities available for sale 9,613,848 4,865,940
Purchases of investment securities held to maturity - (19,233,799)
Purchases of investment securities available for sale (41,363,756) (603,500)
Net decrease (increase) in short-term investments 165,148 (348,501)
Net increase in loans (2,530,917) (9,447,560)
Net increase in premises and equipment (780,483) (930,641)
Proceeds from sales of other real estate 201,283 265,943
------------------------------ -------------
Net cash used in investing activities (13,559,947) (13,081,952)
------------------------------ -------------
FINANCING ACTIVITIES:
Net increase in deposits 15,230,906 8,400,291
Increase (decrease) in U.S. Treasury demand notes 66,159 (1,130,571)
Decrease in Federal Funds purchased - (12,716,000)
(Decrease) increase in FHLB borrowings (1,200,000) 9,200,000
(Decrease) increase in securities sold under agreement (895,041) 723,114
Cash dividends (1,263,791) (1,177,626)
Dividend reinvestment (3,770) (10)
Stock options 6 403,082
------------------------------ -------------
Net cash provided by financing activities 11,934,469 3,702,280
------------------------------ -------------
Increase (decrease) in cash and cash equivalents 4,266,608 (4,823,007)
Cash and cash equivalents at beginning of year 50,607,059 36,820,176
------------------------------ -------------
Cash and cash equivalents at end of the first quarter $ 54,873,667 $ 31,997,169
============================== =============
Cash paid during the year for:
Interest $ 6,926,662 $ 5,680,453
============================== =============
Supplemental disclosure of noncash investing and financing activities:
Transfer of assets from loans to other real estate owned $ 440,053 $ 88,750
============================== =============
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 5
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") (collectively, the "Banks") - as of March
31, 1996, and the results of its operations and cash flows for the three month
periods ended March 31, 1996 and 1995. 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, 1996 and
1995 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 - The Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," as amended
by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures," on January 1, 1995. This new standard requires
that a creditor measure impairment based on the present value of expected
future 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. Regardless of the measurement method, a
creditor must measure impairment based on the fair value of the collateral
when the creditor determines that foreclosure is probable. The adoption of
SFAS No. 114, as amended by SFAS No. 118 on January 1, 1995, did not have a
material impact on the Corporation's liquidity, results of operations and
capital resources.
NOTE 4 - In October, 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation." This statement
requires a fair value approach to valuing compensation expense associated with
stock options and employee stock purchase plans. This statement encourages,
but does not require, the use of this method for financial statement purposes.
Companies that do not elect to adopt this statement for financial statement
purposes are required to present pro-forma footnote disclosures of net income
and earnings per share as if the fair value approach were used. Statement 123
is effective for the Corporation in 1996 and will be applicable to all options
granted after January 1, 1995. Management intends to adopt the disclosure
requirements of this statement only and, accordingly, there will be no impact
on the consolidated financial statements other than additional disclosures.
NOTE 5 - On March 1, 1996, the Corporation consummated the acquisition of
Farmers & Merchants Bank (Honesdale, PA.) ("Farmers"). The acquisition was
pursuant to an Agreement and Plan of Reorganization and an Agreement and Plan
of Merger which was executed. The agreements delineate the terms of the
combination. The shareholders of Farmers approved the merger at a meeting of
shareholders on January 31, 1996. For each share of Farmers common stock
outstanding, 0.6190 shares of the Corporation's common stock were issued at
the closing on March 1, 1996. As a result of the transaction, 438,262 new
shares of Harleysville National Corporation, par value $1.00 per share, were
issued on March 1, 1996 pursuant to Registration Statement No. 33-65021 filed
with the SEC and which was effective January 2, 1996. Farmers' banking
operations were merged into those of Citizens. The Farmers merger was
accounted for on a pooling-of-interests basis.
NOTE 6 - On May 9, 1996, the Board of Directors of Harleysville National
Corporation declared a 5% stock dividend (five shares of common stock for
each 100 shares of common stock outstanding held) that is payable June 28,
1996, to shareholders of record June 14, 1996.
PAGE 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Consolidated net income for the first three months of 1996 was
$3,384,000, an increase of $389,000, or 13.0%, over the first three months of
1995 net income of $2,995,000. Earnings per share for the first three months
of 1996 of $0.53 increased $0.05, or 10.4% , over the first three months of
1995 earnings per share of $0.48.
For the three months ended March 31, 1996, the annualized return on
average assets and the annualized return on average shareholders' equity were
1.44% and 15.45%, respectively. For the same period in 1995, the annualized
return on average assets was 1.39% and the annualized return on average
shareholders' equity was 15.58%.
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, trust income 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 1996 of $10,391,000
increased $626,000, or 6.4%, over the first three months of 1995 net interest
income of $9,765,000. As illustrated in the table below, the primary source
of this increase was a rise in interest income resulting from increases to
earning asset rates and volumes in the first three months of 1996, compared to
the same period in 1995. The increase in interest income was partially offset
by a rise in interest expense, primarily 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 below, which is
computed on a tax-equivalent basis (tax rate of 35%), analyzes changes in net
interest income for the three months ended March 31, 1996 over March 31, 1995
by their rate and volume components.
Three Months Ended March 31, 1996
Over/(Under) March 31, 1995
<TABLE>
<CAPTION>
Total Caused by:
-----------
Variance Rate Volume
--------- ----------- -------
Interest Income:
<S> <C> <C> <C>
Securities * 706 224 482
Money market instruments 221 10 211
Loans * 863 456 407
--------- ----------- -------
Total 1,790 690 1,100
--------- ----------- -------
Interest Expense:
Savings deposits (173) (135) (38)
Time deposits and certificates of deposit 1,223 471 752
Other borrowings (20) 27 (47)
--------- ----------- -------
Total 1,030 363 667
--------- ----------- -------
Net interest income 760 327 433
========= =========== =======
*Tax Equivalent Basis
</TABLE>
PAGE 7
Taxable-equivalent net interest income was $10,925,000 for the first
three months of 1996, compared to $10,165,000 for the same period in 1995, a
7.5% or $760,000 increase. This increase in taxable-equivalent net interest
income was due to a $433,000 increase related to volume and a $327,000
increase related to interest rates. Total taxable-equivalent interest income
grew $1,790,000, the result of the higher volumes and rates in each earning
asset category. Average year-to-date earning assets increased to $895,616,000
at March 31, 1996 from $833,012,000 at March 31, 1995, a 7.5% increase.
Total interest expense grew $1,030,000 during the first quarter of 1996,
compared to the same period in 1995. This growth was principally the result
of higher time deposit rates and volumes. The volume of average time deposits
increased $53,058,000, or 19.0% during the first quarter of 1996, compared to
the first quarter of 1995. Offsetting the growth in time deposits were
decreases in the volumes of savings and other borrowings of $5,698,000 and
$3,588,000, respectively. Other borrowings include Federal Funds purchased,
Federal Home Loan Bank borrowings, securities sold under agreements to
repurchase and U. S. Treasury notes. 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.
NET INTEREST MARGIN
The net interest margin was 4.88% for the both three month periods ended
March 31, 1996 and 1995. The yield earned on earning assets of 8.26% during
the first quarter of 1996 was higher than the 8.02% earned during the first
quarter of 1995. This increase in the yield earned on earning assets was
offset by an increase in the rate paid on deposits during the first quarter of
1996. The 4.18% rate paid on deposits during the first quarter of 1996
increased from the 3.85% rate paid during the same period in 1995. The
increase in the rate is due to the higher rates paid on time deposits. The
Banks have been able to effectively match assets and liabilities and maintain
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 currently 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 three months of 1996 the provision for loan losses was
$526,000, a decrease of $10,000, or 1.9%, compared to the provision recorded
during the first three months of 1995. The loan loss reserve grew 19.0% from
March 31, 1995 to March 31, 1996. Net charge offs were $231,000 for the
three months ended March 31, 1996, compared with $124,000 for the three months
ended March 31, 1995. The ratio of the allowance for loan losses to loans
increased to 1.61% at March 31, 1996, from 1.57% at December 31, 1995.
ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Balance, Beginning of Year $ 9,891,000 $8,150,000
Provision charged to operating expenses 526,000 536,000
Loans charged off (265,000) (188,000)
Recoveries 34,000 64,000
----------- ----------
Balance, March 31 $10,186,000 $8,562,000
=========== ==========
</TABLE>
PAGE 8
The following table sets forth an allocation of the allowance for loan losses
by loan category:
<TABLE>
<CAPTION>
March 31, 1996
----------------
Percent
Amount of Loans
---------------- ---------
<S> <C> <C>
Commercial and industrial $ 3,110,000 28%
Installment and other 776,000 30%
Real estate 1,670,000 35%
Lease financing 162,000 7%
Unallocated 4,468,000 N/A
--------- ----
Total $ 10,186,000 100%
========= ====
</TABLE>
Nonperforming assets (nonaccruing loans, net assets in foreclosure and
troubled debt restructured loans) were 1.87% of total loans and net assets
acquired in foreclosure at March 31, 1996, compared to 1.79% at December 31,
1995 and .88% at March 31, 1995. The ratio of the allowance to non-performing
assets was 84.8% at March 31, 1996 compared to 86.3% at December 31, 1995 and
158.7% at March 31, 1995.
Nonaccruing loans at March 31, 1996 of $9,563,000, increased $508,000
from the December 31, 1995 level of $9,055,000. Approximately $7,147,000, or
74.7%, of total nonaccruing loans are attributable to two unrelated commercial
borrowers at March 31,1996. The approximate amount of these two loans at
December 31, 1995 was $6,972,000, or 77.0%, of total nonaccruing loans. One
borrower has one loan in the amount of $5,245,000. This loan is well secured
principally by real estate. This loan relates to a real estate development
project. The other borrower has two loans in the aggregate principal amount
of $1,902,000. 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
nonaccruing loans was $2,470,000 at March 31, 1995.
Net assets in foreclosure totaled $1,348,000 as of March 31, 1996, an
increase of $128,000, or 10.5%, from the December 31, 1995 balance of
$1,220,000. During the first three months of 1996, sales of foreclosed
properties totaled $201,000; transfers from loans to assets in foreclosure
were $440,000 and write downs of assets in foreclosure equaled $111,000. The
balance of net assets in foreclosure at March 31, 1995 was $1,075,000.
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 March 31, 1996, there were three unrelated borrowers with
troubled debt restructured loans totaling $1,102,000, compared with a balance
of $1,183,000 as of December 31, 1995 and $1,850,000 at March 31, 1995. All
three customers were complying with the restructured terms as of March 31,
1996.
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, 1996, loans past due 90 days or more and
still accruing interest were $1,376,000, compared to $1,553,000 as of
December 31, 1995 and $8,168,000 as of March 31, 1995. The reduction in the
loans past due 90 days or more and still accruing interest category from March
31, 1995 to December 31, 1995, is the result of transferring the three loans
mentioned above from two unrelated borrowers to the non-accrual category
during the third quarter of 1995.
PAGE 9
The following information concerns impaired loans as described in note 3:
Impaired Loans:
Restructured Loans $1,102,000
Nonaccrual Loans 8,616,000
----------
$9,718,000
==========
Average year-to-date impaired loans: $9,598,000
==========
Impaired loans with specific loss allowances: $9,718,000
==========
Loss allowances reserved on impaired loans: $1,268,000
==========
Income recognized on impaired loans during
the first three months of 1996 $ 276,000
==========
The Banks' policy for interest income recognition on impaired loans is to
recognize income on restructured loans under the accrual method. The Banks
recognize 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 Banks. The Banks will not recognize income if
these factors do not exist.
OTHER OPERATING INCOME
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 1995
(Dollars in thousands)
<S> <C> <C>
Service charges $ 608 $ 550
Securities gains (losses), net (50) (144)
Trust income 395 241
Other income 276 265
---------- --------
Total other operating income $ 1,229 $ 912
========== =========
</TABLE>
Other operating income for the first three months of 1996 increased
$317,000, or 34.8%, from $912,000 at March 31, 1995 to $1,229,000 at March 31,
1996. This rise in other income is primarily the result of a $154,000
increase in trust income, a $94,000 reduction in security losses and a $58,000
growth in service charges.
The $58,000, or 10.5% increase in service charges is the result of
higher overdraft fees and service fees on checking accounts. The Corporation
recorded a $50,000 net security loss during the first three months of 1996,
compared to a net loss of $144,000 for the same period in 1995. 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.
Income from the Trust and Financial Services Department increased
$154,000, or 63.9%, in the first three months of 1996, compared to the same
period in 1995. This was the result of both an increase in the book value of
trust assets of 27.8% from March 31, 1995 to March 31, 1996 and the
Corporation's continuing emphasis on marketing the Trust and Financial
Services Department's products and services. Other income increased from
$265,000 in the first three months of 1995, to $276,000 in the first three
months of 1996.
PAGE 10
OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 1995
(Dollars in thousands)
<S> <C> <C>
Salaries $ 2,529 $ 2,192
Employee benefits 888 920
Net occupancy expense 476 392
Equipment expense 500 411
FDIC premiums 44 417
Other expenses 1,885 1,566
------------- -----------------
Total other operating expenses $ 6,322 $ 5,898
============= =================
</TABLE>
Other operating expenses for the first three months of 1996 of $6,322,000
increased $424,000, or 7.2%, from the $5,898,000 for the same period in 1995.
The rise in operating expenses was largely due to higher expenses related to
four new branches opened after March 31, 1995, net assets in foreclosure write
downs and increases in legal and consulting fees. These increases were
partially offset by a reduction in the Federal Deposit Insurance Corporation
("FDIC") premium.
Employee salaries increased $337,000, or 15.4% from $2,192,000 for the
first three months of 1996 to $2,529,000 for the same period in 1996. Salary
increases directly related to the staffing of the four new branches were
$125,000. The remaining increase in salaries reflects cost of living
increases, merit increases and additional staff necessitated by current and
planned future growth. Employee benefits decreased $32,000, or 3.6%, to
$888,000 in the first three months of 1996, from the $920,000 employee
benefits expensed during the same period in 1995. The decrease in employee
benefits is due to the tax expense associated with stock options exercised
during the first quarter of 1995.
Net occupancy expense increased $84,000, or 21.4%, from $392,000 in the
first three months of 1995 to $476,000 in the first three months of 1996. The
four new branches were responsible for $56,000 of this increase. Equipment
expense increased $89,000, or 21.6% during the first three months of 1996,
compared to the same period in 1995. First quarter 1996 equipment expenses
related to the new branches totaled $36,000. The remainder of this rise is
due to both equipment depreciation and maintenance 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.
PAGE 11
During the third quarter of 1995, the 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. The first
quarter of 1996 FDIC premium expense was $44,000, compared to the first
quarter of 1995 premium expense of $417,000.
Other expenses increased $319,000, or 20.4%, from $1,566,000 in the first
three months of 1995, compared to $1,885,000 other expenses recorded during
the same period in 1996. This increase is primarily the result of a $110,000
write down of net assets in foreclosure, $38,000 in legal fees related to the
Farmers merger and an increase in consulting fees of $39,000. The additional
other operating expenses related to the four new branches was $16,000 during
the first quarter of 1996.
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 $17,101,000, or 1.8%, from $937,345,000 at December 31,
1995 to $954,446,000 at March 31, 1996. This growth was primarily in interest
earning assets which grew $13,024,000 to $902,755,000 at March 31, 1996, from
$889,731,000 at December 31, 1995. During the first three months of 1996
investment securities grew $9,740,000, loans increased $2,444,000, Federal
Funds sold rose $1,005,000 and interest-bearing deposits in banks decreased
$165,000.
Total deposits rose $15,231,000 from $794,500,000 at December 31, 1995
to $809,731,000 at March 31, 1996. This growth was due to a $8,535,000 rise
in time deposits, a $6,066,000 increase in money market accounts and a
$3,141,000 increase in savings accounts. Offsetting these increases were a
$1,862,000 decrease in NOW accounts and a $649,000 reduction in
noninterest-bearing accounts. Other borrowing decreased $2,029,000 during the
first three months of 1996.
CAPITAL
Capital formation is critical to the Corporation's well being and future
growth. Capital for the period ending March 31, 1996 was $87,999,000, an
increase of $1,637,000 over the end of 1995. 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 capital ratios exceed regulatory requirements.
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 10.00% at March 31, 1996, compared with 9.98% at December 31, 1995. Since
the Corporation's only capital is primary capital, the total capital ratios
are the same as the primary capital ratios.
Pursuant to the federal regulators' 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 March 31, 1996, the Corporation's Tier 1
risk-adjusted capital ratio was 12.76%, and the total risk-adjusted capital
ratio was 14.01%, both well above the regulatory requirements. The risk-based
capital ratios of each of the Corporation's commercial banks also exceeded
regulatory requirements at March 31, 1996.
PAGE 12
To supplement the risk-based capital adequacy guidelines, the Federal
Reserve Board established a leverage ratio guideline. The leverage ratio
consists of Tier 1 capital 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 9.07% at
March 31, 1996 and 8.99% at December 31, 1995.
The $.20 per share cash dividend paid during the first quarter of 1996
was 11.1% higher than the $.18 per share cash dividend paid during the first
quarter of 1995. Activity in both the Corporation's dividend reinvestment and
stock purchase and stock options plans did not have a material impact on
capital during the first quarter of 1996.
LIQUIDITY
Liquidity is a measure of the ability of the Banks to meet their needs
and obligations on a timely basis. For a bank, liquidity answers 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 Banks arrange their
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 $19,201,000 during
the first three months of 1996 and securities available for sale averaged
$174,402,000 during the first three months of 1996, 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.
There are currently a number of issues before Congress which may effect
the Corporation and its business operations, and the business operations of
its subsidiaries. However, management does not believe these issues will have
a material adverse 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 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.
- ------------------------------------------------------------
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 March 1, 1996, a Form 8-K was filed by the Registrant
reporting that on March 1, 1996, Farmers & Merchants Bank ("Farmers") was
merged with and into The Citizens National Bank of Lansford ("Citizens"), a
wholly owned subsidiary of Harleysville National Corporation (the
"Corporation"), pursuant to an Agreement and Plan of Reorganization dated
September 7, 1995, and a related Agreement and Plan of Merger of the same
date. Shareholders of Farmers received 0.6190 shares of the Corporation
Common Stock for each share of Farmers' Common Stock outstanding prior to the
acquisition. A total of 438,262 shares were issued by the Corporation in the
transaction. The acquisition is not expected to have a material impact on the
Corporation's financial position and results of operations.
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 14, 1996
PAGE 15
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