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, 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: 6,639,864 shares of Common
Stock, $1.00 par value, outstanding on October 31, 1996.
PAGE 1
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-Q REPORT
PAGE
Part I. Financial Information
Consolidated Balance Sheets - September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income - Nine Months and Three Months Ended 4
September 30, 1996 and 1995
Consolidated Statements of Cash Flows - Nine Months Ended 5
September 30, 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 16
Signatures 17
PAGE 2
PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
-------------------- -------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 36,538,660 $ 34,312,059
Federal Funds sold 2,500,000 16,295,000
-------------------- -------------------
Total cash and cash equivalents 39,038,660 50,607,059
-------------------- -------------------
Interest-bearing deposits in banks 8,241,457 1,703,268
Investment securities available for sale 204,916,629 159,325,961
Investment securities held to maturity
(market value $64,959,411 and $85,651,810, respectively) 64,138,536 83,668,528
Loans 681,852,299 638,219,573
Less: Unearned income (8,359,816) (9,481,622)
Allowance for loan losses (10,745,616) (9,891,324)
-------------------- -------------------
Net loans 662,746,867 618,846,627
-------------------- -------------------
Bank premises and equipment, net 13,409,505 11,995,396
Accrued income receivable 6,783,656 6,150,130
Other real estate owned 1,707,908 1,220,131
Intangible assets, net 1,733,690 1,959,860
Other assets 2,302,351 1,867,912
-------------------- -------------------
Total assets $ 1,005,019,259 $ 937,344,872
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 139,283,220 $ 117,698,263
Interest-bearing:
NOW accounts 91,565,701 91,616,367
Money market accounts 169,913,645 155,641,250
Savings 101,377,237 101,993,095
Time, under $100,000 294,084,562 299,359,040
Time, $100,000 or greater 40,340,114 28,191,693
-------------------- -------------------
Total deposits 836,564,479 794,499,708
Accrued interest payable 13,097,974 12,081,557
U.S. Treasury demand notes 1,929,128 1,837,396
Federal funds purchased 12,000,000 -
Federal Home Loan Bank (FHLB) borrowings 21,500,000 21,200,000
Securities sold under agreements to repurchase. 19,997,035 16,713,629
Other liabilities 6,695,041 4,650,512
-------------------- -------------------
Total liabilities 911,783,657 850,982,802
-------------------- -------------------
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 6,638,667 shares in 1996 and
6,316,208 shares in 1995 6,638,667 6,316,208
Additional-paid-in-capital 40,153,921 30,882,765
Retained Earnings 45,746,851 47,780,078
Net unrealized gains on investment securities available for sale 696,163 1,383,019
-------------------- -------------------
Total shareholders' equity 93,235,602 86,362,070
-------------------- -------------------
Total liabilities and shareholders' equity $ 1,005,019,259 $ 937,344,872
==================== ===================
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 3
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended Three months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
------------------- ------------ ------------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 39,220,392 $38,003,780 $ 13,161,333 $12,791,417
Lease financing 2,795,545 2,318,864 1,086,887 794,584
Investment securities:
Taxable 8,975,825 8,068,195 3,078,421 2,807,806
Exempt from federal taxes 2,866,437 1,901,496 1,040,859 664,244
Federal funds sold 546,724 479,753 147,950 277,525
Deposits in banks 168,330 107,317 96,497 53,154
------------------- ------------ ------------------- ------------
Total interest income 54,573,253 50,879,405 18,611,947 17,388,730
------------------- ------------ ------------------- ------------
INTEREST EXPENSE
Savings deposits 7,236,109 7,251,263 2,502,799 2,330,174
Time, under $100,000 12,710,893 11,133,232 4,184,212 4,157,972
Time, $100,000 or greater 1,392,827 1,167,129 518,269 459,872
Borrowed funds 1,559,053 1,589,826 565,864 502,567
------------------- ------------ ------------------- ------------
Total interest expense 22,898,882 21,141,450 7,771,144 7,450,585
------------------- ------------ ------------------- ------------
Net interest income 31,674,371 29,737,955 10,840,803 9,938,145
Provision for loan losses 1,572,443 1,651,500 517,235 598,000
------------------- ------------ ------------------- ------------
Net interest income after provision for loan losses 30,101,928 28,086,455 10,323,568 9,340,145
------------------- ------------ ------------------- ------------
OTHER OPERATING INCOME
Service charges 1,921,745 1,703,621 656,860 574,107
Security losses, net (96,091) (171,955) 22,959 361
Trust income 1,007,153 817,291 321,713 287,294
Other Income 947,007 832,102 362,476 307,460
------------------- ------------ ------------------- ------------
Total other operating income 3,779,814 3,181,059 1,364,008 1,169,222
------------------- ------------ ------------------- ------------
Net interest income after provision for loan losses
and other operating income 33,881,742 31,267,514 11,687,576 10,509,367
------------------- ------------ ------------------- ------------
OTHER OPERATING EXPENSES
Salaries, wages and employee benefits 10,667,753 9,791,957 3,914,290 3,612,983
Occupancy 1,379,458 1,138,447 473,682 381,396
Furniture and equipment 1,515,505 1,330,681 521,156 466,525
FDIC premium 130,325 823,523 42,975 (11,353)
Other expenses 5,395,252 5,066,457 1,738,306 1,747,491
------------------- ------------ ------------------- ------------
Total other operating expenses 19,088,293 18,151,065 6,690,409 6,197,042
------------------- ------------ ------------------- ------------
Income before income taxes 14,793,449 13,116,449 4,997,167 4,312,325
Income tax expense 4,249,595 3,856,532 1,481,898 1,253,374
------------------- ------------ ------------------- ------------
Net income $ 10,543,854 $ 9,259,917 $ 3,515,269 $ 3,058,951
=================== ============ =================== ============
Weighted average number of common shares 6,662,442 6,645,496 6,663,463 6,661,967
=================== ============ =================== ============
Net income per share information $ 1.58 $ 1.39 $ 0.53 $ 0.46
=================== ============ =================== ============
Cash dividends per share $ 0.59 $ 0.52 $ 0.21 $ 0.18
=================== ============ =================== ============
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 4
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
<S> <C> <C>
OPERATING ACTIVITIES: 1996 1995
----------------------------- -------------
Net Income $ 10,543,854 $ 9,259,917
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,572,443 1,651,500
Depreciation and amortization 1,009,156 778,555
Net amortization of investment
securities' discount/premiums 340,649 370,241
Net realized security loss 96,091 171,955
Increase in accrued income receivable (633,526) (1,069,079)
Increase in accrued interest payable 1,016,417 2,109,533
Net increase in other assets (434,439) (1,487,793)
Net increase in other liabilities 3,310,627 2,635,186
Decrease in unearned income (1,121,806) (350,844)
Write-down of other real estate owned. 119,201 190,499
Decrease in intangible assets 226,170 266,355
----------------------------- -------------
Net cash provided by operating activities 16,044,837 14,526,025
----------------------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale 59,238,563 10,886,479
Proceeds from maturity or calls of investment securities held to maturity 7,068,726 16,714,002
Proceeds from maturity or calls of investment securities available for sale 26,478,911 15,977,480
Purchases of investment securities held to maturity (4,438,760) (48,522,696)
Purchases of investment securities available for sale (115,870,977) (6,612,954)
Net increase in short-term investments. (6,538,189) (302,437)
Net increase in loans (45,407,057) (15,173,693)
Net increase in premises and equipment (2,423,265) (2,695,448)
Proceeds from sales of other real estate 449,202 1,211,031
----------------------------- -------------
Net cash used in investing activities (81,442,846) (28,518,236)
----------------------------- -------------
FINANCING ACTIVITIES:
Net increase in deposits 42,064,771 24,069,453
Increase (decrease) in U.S. Treasury demand notes 91,732 (310,753)
Increase (decrease) in Federal Funds purchased 12,000,000 (12,716,000)
Increase in FHLB borrowings 300,000 14,700,000
Increase in securities sold under agreement 3,283,406 3,081,054
Cash dividends (3,922,135) (3,450,011)
Dividend reinvestment (19,175) (141)
Stock options 31,011 403,082
----------------------------- -------------
Net cash provided by financing activities 53,829,610 25,776,684
----------------------------- -------------
Increase (decrease) in cash and cash equivalents (11,568,399) 11,784,473
Cash and cash equivalents at beginning of period 50,607,059 36,820,176
----------------------------- -------------
Cash and cash equivalents at end of the third quarter. $ 39,038,660 $ 48,604,649
============================= =============
Cash paid during the period for:
Interest $ 21,882,465 $ 19,031,917
============================= =============
Income taxes $ 2,410,000 $ 2,745,915
============================= =============
Supplemental disclosure of noncash investing and financing activities:
Transfer of assets from loans to other real estate owned $ 1,056,180 $ 1,184,761
============================= =============
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
September 30, 1996, the results of its operations for the nine and three month
periods ended September 30, 1996 and 1995 and the cash flows for the nine
month periods ended September 30, 1996 and 1995. Prior year amounts have been
restated to incorporate the acquisition of Farmers & Merchants Bank (see note
five). 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 1995
annual report.
The results of operations for the nine and three month periods ended September
30, 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 on September 7, 1995. 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 effective date 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 was 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
The following is management's discussion and analysis of the
significant changes in the results of operations, capital resources and
liquidity presented in its accompanying consolidated financial statements for
the Corporation, and the Banks. The Corporation's consolidated financial
condition and results of operations consist almost entirely of the Bank's
financial condition and results of operations. This discussion should be read
in conjunction with the 1995 Annual Report. Current performance does not
guarantee, assure, or may be indicative of similar performance in the future.
In addition to historical information, this Form 10-Q contains
forward-looking statements. The forward-looking statements contained herein
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking statements.
Important factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The
Corporation undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described
in other documents the Corporation files from time to time with the Securities
and Exchange Commission, including the Quarterly Reports on Form 10-Q to be
filed by the Corporation in 1996 and 1997, and any Current Reports on Form 8-K
filed by the corporation.
Consolidated net income for the first nine months of 1996 was
$10,544,000, an increase of $1,284,000, or 13.9%, over the first nine months
of 1995 net income of $9,260,000. Earnings per share for the first nine
months of 1996 were $1.58, compared to $1.39 in the first nine months of 1995.
Consolidated net income for the third quarter of 1996 was $3,515,000, an
increase of $456,000, or 14.9%, over the third quarter of 1995 net income of
$3,059,000. Earnings per share for the third quarter of 1996 of $0.53
increased $0.07, or 15.2% , over the third quarter of 1995 earnings per share
of $0.46.
For the nine months ended September 30, 1996, the annualized return on
average assets and the annualized return on average shareholders' equity were
1.46% and 15.61%, 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 15.34%. For the three months ended September 30,
1996, the annualized return on average assets was 1.42% compared to 1.35% for
the same period of 1995, and the annualized return on average shareholders'
equity was 15.23% for the third quarter of 1996 and 14.58% for the third
quarter of 1995.
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 nine months of 1996 of $31,674,000
increased $1,936,000, or 6.5%, over the first nine months of 1995 net interest
income of $29,738,000. Net interest income for the third quarter of 1996
increased by $903,000, or 9.1%, over the third quarter of 1995. As illustrated
in the table on the next page, the primary source of this increase was a rise
in interest income resulting from increases to earning asset volumes in the
first nine months of 1996, compared to the same period in 1995. The increase
in interest income was partially offset by a rise in interest expense,
PAGE 7
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 nine months ended September 30, 1996
over September 30, 1995 and the three months ended September 30, 1996 over
September 30 1995 by their rate and volume components.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, 1996 September 30, 1996
Over/(Under) Over/(Under)
September 30, 1995 September 30, 1995
Total Caused by: Total Caused by:
------------ ------------
Variance Rate Volume Variance Rate Volume
---------- ------------ ------- ---------- ------------ --------
Interest Income:
<S> <C> <C> <C> <C> <C> <C>
Securities * $ 2,392 $ 564 $ 1,828 $ 849 $ 264 $ 585
Money market instruments 128 (55) 183 (86) (56) (31)
Loans * 1,717 (887) 2,604 682 (525) 1,208
---------- ------------ ------- ---------- ------------ --------
Total 4,237 (378) 4,615 1,445 (317) 1,762
---------- ------------ ------- ---------- ------------ --------
Interest Expense:
Savings deposits (15) (369) 354 173 95 77
Time deposits and certificates of deposit 1,803 461 1,342 85 (108) 193
Other borrowings (31) (217) 186 63 (42) 106
---------- ------------ ------- ---------- ------------ --------
Total 1,757 (125) 1,882 321 (55) 376
---------- ------------ ------- ---------- ------------ --------
Net interest income $ 2,480 ($253) $ 2,733 $ 1,124 ($262) $ 1,386
========== ============ ======= ========== ============ ========
*Tax Equivalent Basis
</TABLE>
Taxable-equivalent net interest income was $33,464,000 for the first nine
months of 1996, compared to $30,984,000 for the same period in 1995, a 8.0% or
$2,480,000 increase. This increase in taxable-equivalent net interest income
was due to a $2,733,000 increase related to volume, offset by a $253,000
decrease related to interest rates. Total taxable-equivalent interest income
grew $4,237,000, the result of the higher volumes in each earning asset
category. Average year-to-date earning assets increased to $917,919,000 at
September 30, 1996 from $838,744,000 at September 30, 1995, a 9.4% increase.
Total interest expense grew $1,757,000 during the first nine months of
1996, compared to the same period in 1995. This growth was principally the
result of both higher time deposit rates and volumes. The volume of average
time deposits increased $31,950,000, or 10.5% during the first nine months of
1996, compared to the first nine months of 1995. Also contributing to the
growth in interest expense were increases in savings deposits and other
borrowings of $17,684,000 and $4,818,000, respectively. Other borrowings
include Federal Funds purchased, Federal Home Loan Bank borrowings, securities
sold under agreements to repurchase and U. S. Treasury demand notes.
Taxable-equivalent net interest income of $11,499,000 was $1,126,000, or
10.9% higher for the third quarter of 1996, compared to $10,373,000 for the
same period in 1995. Interest income grew $1,445,000 during this period, as
a result of an increase in earning asset volumes. Third quarter average
earning assets grew $86,200,000, compared to the third quarter of 1995. This
growth included a $55,720,000 rise in loans and a $32,709,000 increase in
investment securities. The increase in the interest income was partially
offset by a $321,000 rise in interest expense. Increases in all deposit
category balances and an increase in savings rates, contributed to this
increase in interest expense. Nonaccruing loans are included in the average
balance yield calculations, but the average nonaccruing loans had no material
effect on the results.
Page 8
NET INTEREST MARGIN
The net interest margin was 4.86% for the nine month period ended
September 30, 1996, a decrease of .07% from the 4.93% net interest margin for
the first nine months of 1995. The yield on earning assets of 8.19%
during the first nine months of 1996 was lower than the 8.29% earned during
the first nine months of 1995. This drop in yield is due to the lower
interest rate environment in 1996, compared to 1995. The 4.14% average
interest rate paid on deposits during the first nine months of 1996 increased
from the 4.13% rate paid during the same period in 1995. The increase in the
rate is due generally to the higher rates paid on time deposits. The net
interest margin was 4.89% in the third quarter of 1996, a .04% increase from
the 4.85% net interest margin recorded in the third quarter of 1995. 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 nine months of 1996 the provision for loan losses was
$1,572,000, compared to $1,652,000 for the same period in 1995. Net charge
offs were $717,000 for the nine months ended September 30, 1996, compared with
$298,000 for the nine months ended September 30, 1995. The net loans charged
off during the first nine months of 1996 were attributed to all loan
categories. The growth in the loan loss reserve of 13.1% from September 30,
1995 to September 30, 1996, was greater than the 10.6% growth in the loan
portfolio during this period. The ratio of the allowance for loan losses to
loans increased to 1.60% at September 30, 1996, from both the December 31,
1995 and September 30, 1995 ratios of 1.58% and 1.56%, respectively.
ALLOWANCE FOR LOAN LOSSES
Transaction 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 1,572,000 1,652,000
Loans charged off (840,000) (525,000)
Recoveries 123,000 227,000
---------------- ---------------
Balance, September 30 $10,746,000 $9,504,000
================ ===============
</TABLE>
<TABLE>
<CAPTION>
Ratios:
- ------
<S> <C> <C> <C>
Sept. 30, 1996 Dec. 31, 1995 Sept. 30, 1995
---------------- --------------- ---------------
Allowance for loan losses to nonperforming assets 88.3% 86.3% 82.9%
Nonperforming assets to total loans & net assets
acquired in foreclosure 1.80% 1.79% 1.88%
Allowance for loan losses to total loans 1.60% 1.58% 1.56%
</TABLE>
PAGE 9
The following table sets forth an allocation of the allowance for loan
losses by loan category:
<TABLE>
<CAPTION>
September 30, 1996
------------------
Percent
Amount of Loans
------------------- ---------
<S> <C> <C>
Commercial and industrial $ 3,542,000 26%
Installment and other 1,194,000 32%
Real estate 2,037,000 35%
Lease financing 99,000 7%
Unallocated 3,874,000 N/A
------------------- ---------
Total $ 10,746,000 100%
=================== =========
</TABLE>
Nonperforming assets (nonaccruing loans, net assets in foreclosure and
troubled debt restructured loans) were 1.80% of total loans and net assets
acquired in foreclosure at September 30, 1996, compared to 1.79% at December
31, 1995 and 1.88% at September 30, 1995. The ratio of the allowance for loan
losses to non-performing assets was 88.3% at September 30, 1996 compared to
86.3% at December 31, 1995 and 82.9% at September 30, 1995.
Nonaccruing loans at September 30, 1996 of $9,371,000, increased $316,000
from the December 31, 1995 level of $9,055,000. Approximately $7,070,000, or
75.4%, of total nonaccruing loans are attributable to two unrelated commercial
borrowers at September 30, 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 $5,268,000. 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 $1,802,000. 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 $9,242,000 at September 30, 1995.
Net assets in foreclosure totaled $1,708,000 as of September 30, 1996,
an increase of $488,000, or 40.0%, from the December 31, 1995 balance of
$1,220,000. During the first nine months of 1996, transfers from loans to
assets in foreclosure were $1,056,000, payments on foreclosed properties
totaled $449,000 and write downs of assets in foreclosure equaled $119,000.
The $1,056,000 in loans transferred to assets in foreclosure included $532,000
of mortgage loans, $85,000 of commercial loans and $439,000 of loans
associated with consumer loans. The balance of net assets in foreclosure at
September 30, 1995 was $1,026,000. 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, 1996, there were three unrelated borrowers with
troubled debt restructured loans totaling $1,097,000, compared with a balance
of $1,183,000 as of December 31, 1995 and $1,198,000 at September 30, 1995.
All three customers were complying with the restructured terms as of September
30, 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 September 30, 1996, loans past due 90 days or more and
still accruing interest were $1,544,000, compared to $1,553,000 as of
December 31, 1995 and $1,253,000 as of September 30, 1995.
PAGE 10
The following information concerns impaired loans as described in note 3:
Impaired Loans:
Restructured Loans $1,097,000
Nonaccrual Loans 8,521,000
----------
$9,618,000
==========
Average year-to-date impaired loans: $9,342,000
==========
Impaired loans with specific loss allowances: $9,618,000
==========
Loss allowances reserved on impaired loans: $1,214,000
==========
Income recognized on impaired loans during
the first nine months of 1996 $ 549,000
==========
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>
Nine Months Ended Sept. 30, Three Months Ended Sept. 30,
------------------------------ -----------------------------
1996 1995 1996 1995
------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Service charges $ 1,922 $ 1,704 $ 657 $ 574
Securities gains (losses), net (96) (172) 23 0
Trust income 1,007 817 322 287
Other income 947 832 362 308
------------- ----------------- ------------- ----------------
Total other operating income $ 3,780 $ 3,181 $ 1,364 $ 1,169
============= ================= ============= ================
</TABLE>
Other operating income for the first nine months of 1996 increased
$599,000, or 18.8%, from $3,181,000 at September 30, 1995 to $3,780,000 at
September 30, 1996. This rise in other income is the result of a $218,000
growth in service charges, a $190,000 increase in trust income, a $115,000
increase in other income and a $76,000 reduction in security losses. The
third quarter 1996 other operating income of $1,364,000 was $195,000, or 16.7
% higher than the third quarter of 1995 other operating income of $1,169,000.
This increase was primarily due to a $83,000 increase in service charges and a
$54,000 rise in other income.
Both the year-to-date $218,000 increase and the third quarter $83,000
rise in service charges are the result of higher overdraft fees and service
fees on checking accounts. The Corporation recorded a $96,000 net security
loss during the first nine months of 1996, compared to a net loss of $172,000
for the same period in 1995. The corporation recorded a net security gain of
$23,000 in the third quarter of 1996, compared to no gain or loss in the same
period in 1995. From time to time, the Corporation sells investment
securities available for sale to fund the purchase of other securities in an
effort to enhance the overall return of the portfolio.
PAGE 11
Income from the Trust and Financial Services Department increased
$190,000, or 23.3%, in the first nine 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 22.6% from September 30, 1995 to September 30, 1996 and the
Corporation's continuing emphasis on marketing the Trust and Financial
Services Department's products and services. Trust and Financial Services
Department income in the third quarter of 1996 was $35,000, or 12.2% ahead of
the third quarter of 1995. Other income for the first nine months of 1996 and
for the third quarter of 1996 increased $115,000 and $54,000, respectively,
compared to the same periods in 1995. These increases were due to higher
leasing fees and a rise in loan insurance fees.
OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT. 30, THREE MONTHS ENDED SEPT. 30,
---------------------------------- ------------------------------
1996 1995 1996 1995
------------ ----------------------- ------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries $ 7,591 $ 6,741 $ 2,563 $ 2,288
Employee Benefits 3,077 3,051 1,351 1,325
Net Occupancy Expense 1,379 1,138 474 381
Equipment Expense 1,516 1,331 521 467
FDIC Premiums 130 824 43 (11)
Other Expenses 5,395 5,066 1,738 1,747
------------ ----------------------- ------------- -----------------
Total Other Operating Expenses $ 19,088 $ 18,151 $ 6,690 $ 6,197
============ ======================= ============= =================
</TABLE>
Other operating expenses for the first nine months of 1996 of $19,088,000
increased $937,000, or 5.2%, from the $18,151,000 for the same period in
1995. The rise in operating expenses was largely due to higher expenses
related to three new branches opened after June 30, 1995 and one that opened
during May 1995. Also contributing to this rise were increases in legal fees,
consulting fees and expenses related to the overall growth of the Banks.
These increases were partially offset by a reduction in the Federal Deposit
Insurance Corporation ("FDIC") premium described on page 13. The third
quarter of 1996 other operating expenses of $6,690,000 increased $493,000,
over the third quarter of 1995 other operating expense of $6,197,000.
Employee salaries increased $850,000, or 12.6% from $6,741,000 for the
first nine months of 1995 to $7,591,000 for the same period in 1996. The
salary increase directly related to the staffing of the four new branches was
$299,000, or 35.2% of the total salary increase. The remaining increase in
salaries reflects cost of living increases, merit increases and additional
staff necessitated by current and planned future growth. Employee benefits of
$3,077,000 expensed in the first nine months of 1996 increased slightly, from
the $3,051,000 employee benefits expensed during the same period in 1995.
This small growth is the result of both the increase in employee benefits
associated with the new branches and normal 1996 salary increases. The
$26,000 growth in employee benefits expense in the third quarter of 1996,
compared to 1995 is primarily due to the new branches.
Net occupancy expense increased $241,000, or 21.2%, from $1,138,000 in
the first nine months of 1995 to $1,379,000 in the first nine months of 1996.
The four new branches were responsible for $157,000, or 65.1% of this
increase. The $93,000 increase in occupancy expenses in the third quarter of
1996, compared to the same period in 1995, is primarily due to the $63,000
associated with the new branches. Equipment expense increased $185,000, or
13.9% during the first nine months of 1996, compared to the same period in
1995. The first nine months of 1996 equipment expenses related to the new
branches totaled $84,000. 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. Equipment expenses grew $54,000 in the third
quarter of 1996, compared to the same quarter in 1995.
PAGE 12
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
nine months of 1996 FDIC premium expense was $130,000, compared to the same
period in 1995 premium expense of $824,000. The third quarter of 1996 FDIC
premium was $43,000 and the third quarter of 1995 FDIC premium was ($11,000).
On September 30, 1996 the President signed into law the Deposit Insurance
Funds Act of 1996 which included the resolution of the disparity of insurance
premiums paid by savings and loan associations for deposit insurance under the
Savings Association Insurance Fund ("SAIF") administered by the Federal
Deposit Insurance Corporation ("FDIC") in comparison to the premiums paid by
banks for deposit insurance under the Bank Insurance Fund ("BIF") also
administered by the FDIC. Beginning January 1, 1997, for a three-year period,
banks will be required to pay a premium of 1.29 basis points. This premium
will not have a material impact on earnings.
Other expenses increased $329,000, or 6.5%, from $5,066,000 in the first
nine months of 1995, compared to $5,395,000 other expenses recorded during the
same period in 1996. This increase is primarily the result of a $171,000
increase in legal expenses and a $143,000 rise in consulting fees. The
increase in legal fees is associated with the Farmers merger, the resolution
of legal matters and legal fees related to maintaining the loan portfolio.
The rise in consulting fees is related to franchise expansion, employee
benefits and consultation concerning enhancements to bank operations. The
third quarter 1996 other expenses of $1,738,000, were $9,000 lower than the
other expenses recorded in the third quarter of 1995, as a result of a
reduction of write downs of other real estate owned.
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 $67,674,000, or 7.2%, from $937,345,000 at December 31,
1995 to $1,005,019,000 at September 30, 1996. This growth was primarily in
interest earning assets which grew $63,558,000 to $953,289,000 at September
30, 1996, from $889,731,000 at December 31, 1995. During the first nine
months of 1996 loans grew $44,754,000, investment securities grew $26,061,000,
interest-bearing deposits in banks rose $6,538,000 and Federal Funds Sold
decreased $13,795,000.
Total deposits rose $42,064,000 from $794,500,000 at December 31, 1995
to $836,564,000 at September 30, 1996. This growth was due to a $21,584,000
growth in noninterest-bearing accounts, a $14,272,000 increase in money market
accounts and a $6,874,000 rise in time deposits. Offsetting these increases
was a $616,000 decrease in savings accounts and a $50,000 reduction in NOW
accounts. Other borrowings increased $15,675,000 during the first nine months
of 1996, primarily the result of an increase in Federal Funds purchased.
Other borrowings and deposits are used to funds loan and investment growth.
CAPITAL
Capital formation is critical to the Corporation's well being and future
growth. Capital for the period ending September 30, 1996 was $93,236,000, an
increase of $6,874,000 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
PAGE 13
capital and 6.0% for total capital. The Corporation's primary capital ratio
was 10.09% at September 30, 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 September 30, 1996, the Corporation's Tier 1
risk-adjusted capital ratio was 12.92%, and the total risk-adjusted capital
ratio was 14.18%, both well above the regulatory requirements. The risk-based
capital ratios of each of the Corporation's commercial banks also exceeded
regulatory requirements at September 30, 1996.
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 9.19% at
September 30, 1996 and 8.99% at December 31, 1995.
The year-to-date September 30, 1996 cash dividend per share of $.59 was
13.5% higher than the cash dividend for the same period in 1995 of $.52. The
$.21 per share cash dividend paid during the third quarter of 1996 was 16.7%
higher than the $.18 per share cash dividend paid during the third quarter of
1995. On June 28, 1996, the Corporation paid a 5% stock dividend (five shares
of common stock for each 100 shares of common stock outstanding held), to
shareholders of record June 14, 1996. Activity in both the Corporation's
dividend reinvestment and stock purchase plan and the stock option plan did
not have a material impact on capital during the first nine months 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 $13,422,000 during
the first nine months of 1996 and securities available for sale averaged
$188,237,000 during the first nine 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 and the Federal Home Loan Bank
of Pittsburgh, of which Harleysville, Citizens and Security are members.
There are currently a number of issues before Congress which may affect
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.
On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 to recapitalize the Savings Association Insurance
Fund ("SAIF") administered by the Federal Deposit Insurance Corporation
("FDIC") and to provide for repayment of the FICO (Financial Institution
Collateral Obligation) bonds issued by the United States Treasury Department.
The FDIC will levy a one-time special assessment on SAIF deposits equal to
65.7 cents per $100 of the SAIF-assessable deposit base as of March 31, 1995.
During the years 1997, 1998 and 1999, the Bank Insurance Fund ("BIF") will pay
$322 million of FICO debt service, and SAIF will pay $458 million.
PAGE 14
During 1997, 1998 and 1999, the average regular annual deposit insurance
assessment is estimated to be about 1.29 cents per $100 of deposits for BIF
deposits and 6.44 cents per $100 of deposits for SAIF deposits. Individual
institution's assessments will continue to vary according to their capital and
management ratings. As always, the FDIC will be able to raise the assessments
as necessary to maintain the funds at their target capital ratios provided by
law. After 1999, BIF and SAIF will share the FICO costs equally. Under
current estimates, BIF and SAIF assessment bases would each be assessed at the
rate of approximately 2.43 cents per $100 of deposits.
Based on current projected deposit levels during 1997, Management expects
that the increase in the FDIC assessment rate will not have a material impact
on earnings.
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.
Aside from those matters described above, management does not currently
believe that there are any known trends or uncertainties which would have a
material impact on future operating results, liquidity or capital resources
nor is it aware of any current recommendations by the regulatory authorities
which if they were to be implemented would have such an effect, although the
general cost of compliance with numerous and multiple federal and state laws
and regulation does have and in the future may have a negative impact on the
corporation's results of operations.
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:
None.
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
/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: November 12, 1996
PAGE 17
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 36,539
<INT-BEARING-DEPOSITS> 8,241
<FED-FUNDS-SOLD> 2,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 204,917
<INVESTMENTS-CARRYING> 64,139
<INVESTMENTS-MARKET> 64,959
<LOANS> 673,492
<ALLOWANCE> 10,746
<TOTAL-ASSETS> 1,005,019
<DEPOSITS> 836,564
<SHORT-TERM> 48,426
<LIABILITIES-OTHER> 19,793
<LONG-TERM> 7,000
0
0
<COMMON> 6,639
<OTHER-SE> 86,597
<TOTAL-LIABILITIES-AND-EQUITY> 1,005,019
<INTEREST-LOAN> 42,016
<INTEREST-INVEST> 11,842
<INTEREST-OTHER> 715
<INTEREST-TOTAL> 54,573
<INTEREST-DEPOSIT> 21,340
<INTEREST-EXPENSE> 1,559
<INTEREST-INCOME-NET> 31,674
<LOAN-LOSSES> 1,572
<SECURITIES-GAINS> (96)
<EXPENSE-OTHER> 19,088
<INCOME-PRETAX> 14,793
<INCOME-PRE-EXTRAORDINARY> 14,793
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,544
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.58
<YIELD-ACTUAL> 4.86
<LOANS-NON> 9,371
<LOANS-PAST> 1,544
<LOANS-TROUBLED> 1,097
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,891
<CHARGE-OFFS> 841
<RECOVERIES> 123
<ALLOWANCE-CLOSE> 10,746
<ALLOWANCE-DOMESTIC> 10,746
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,874
</TABLE>
