SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: 6,637,824 shares of Common
Stock, $1.00 par value, outstanding on July 31, 1996.
PAGE 1
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-Q REPORT
PAGE
Part I. Financial Information
Consolidated Balance Sheets - June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income - Six Months and Three Months Ended 4
June 30, 1996 and 1995
Consolidated Statements of Cash Flows - Six Months Ended 5
June 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 15
Signatures 17
PAGE 2
PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------------ -------------------
<S> <C> <C>
ASSETS
Cash and due from banks $38,643,057 $34,312,059
Federal Funds sold 8,000,000 16,295,000
------------------ -------------------
Total cash and cash equivalents 46,643,057 50,607,059
------------------ -------------------
Interest-bearing deposits in banks 4,539,631 1,703,268
Investment securities available for sale 199,227,714 159,325,961
Investment securities held to maturity
(market value $60,406,756 and $85,651,810, respectively) 60,089,255 83,668,528
Loans 663,497,905 638,219,573
Less: Unearned income (8,661,385) (9,481,622)
Allowance for loan losses (10,494,247) (9,891,324)
------------------ -------------------
Net loans 644,342,273 618,846,627
------------------ -------------------
Bank premises and equipment, net 12,503,018 11,995,396
Accrued income receivable 6,470,711 6,150,130
Other real estate owned 1,866,667 1,220,131
Intangible assets, net 1,809,080 1,959,860
Other assets 2,383,835 1,867,912
------------------ -------------------
Total assets $979,875,241 $937,344,872
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $129,393,940 $117,698,263
Interest-bearing:
NOW accounts 90,729,178 91,616,367
Money market accounts 166,989,778 155,641,250
Savings 106,863,539 101,993,095
Time, under $100,000 300,500,689 299,359,040
Time, $100,000 or greater 38,962,520 28,191,693
------------------ -------------------
Total deposits 833,439,644 794,499,708
Accrued interest payable 13,099,411 12,081,557
U.S. Treasury notes 2,035,904 1,837,396
Federal Home Loan Bank (FHLB) borrowings 18,500,000 21,200,000
Securities sold under agreements to repurchase. 17,285,840 16,713,629
Other liabilities 5,349,911 4,650,512
------------------ -------------------
Total liabilities 889,710,710 850,982,802
------------------ -------------------
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 6,636,625 shares in 1996 and
6,316,208 shares in 1995 6,636,625 6,316,208
Additional-paid-in-capital 40,105,114 30,882,765
Retained Earnings 43,667,139 47,780,078
Net unrealized gains on investment securities available for sale (244,347) 1,383,019
------------------ -------------------
Total shareholders' equity 90,164,531 86,362,070
------------------ -------------------
Total liabilities and shareholders' equity $979,875,241 $937,344,872
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE 3
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six months Ended Three months Ended
June 30, June 30,
------------------ --------------------
<S> <C> <C> <C>
1996 1995 1996
------------------ ------------------- --------------------
INTEREST INCOME
Loans, including fees $ 26,059,059 $ 25,212,363 $ 12,955,510
Lease financing 1,708,658 1,524,280 865,274
Investment securities:
Taxable . 5,897,404 5,260,389 3,004,196
Exempt from federal taxes 1,825,578 1,237,252 975,365
Federal funds sold 398,774 202,228 142,443
Deposits in banks 71,833 54,163 51,557
------------------ ------------------- --------------------
Total interest income 35,961,306 33,490,675 17,994,345
------------------ ------------------- --------------------
INTEREST EXPENSE
Savings deposits 4,733,310 4,921,089 2,394,789
Time, under $100,000 8,526,681 6,975,260 4,221,864
Time, $100,000 or greater 874,558 707,257 461,435
Borrowed funds 993,189 1,087,259 474,185
------------------ ------------------- --------------------
Total interest expense 15,127,738 13,690,865 7,552,273
------------------ ------------------- --------------------
Net interest income 20,833,568 19,799,810 10,442,072
Provision for loan losses 1,055,208 1,053,500 529,217
------------------ ------------------- --------------------
Net interest income after provision for loan losses 19,778,360 18,746,310 9,912,855
------------------ ------------------- --------------------
OTHER OPERATING INCOME
Service charges 1,264,885 1,129,514 657,014
Security losses, net (119,050) (172,316) (69,181)
Trust income 685,440 529,997 290,059
Other Income 584,531 524,642 309,089
------------------ ------------------- --------------------
Total other operating income 2,415,806 2,011,837 1,186,981
------------------ ------------------- --------------------
Net interest income after provision for loan losses
and other operating income 22,194,166 20,758,147 11,099,836
------------------ ------------------- --------------------
OTHER OPERATING EXPENSES
Salaries, wages and employee benefits 6,753,463 6,178,974 3,336,947
Occupancy 905,776 757,051 429,847
Furniture and equipment 994,349 864,156 493,926
FDIC premium 87,350 834,876 42,975
Other expenses 3,656,946 3,318,966 1,771,947
------------------ ------------------- --------------------
Total other operating expenses 12,397,884 11,954,023 6,075,642
------------------ ------------------- --------------------
Income before income taxes 9,796,282 8,804,124 5,024,194
Income tax expense 2,767,697 2,603,158 1,379,722
------------------ ------------------- --------------------
Net income $ 7,028,585 $ 6,200,966 $ 3,644,472
================== =================== ====================
Weighted average number of common shares 6,663,650 6,637,124 6,664,252
================== =================== ====================
Net income per share information $ 1.05 $ 0.93 $ 0.55
================== =================== ====================
Cash dividends per share $ 0.38 $ 0.34 $ 0.19
================== =================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months Ended
June 30,
<S> <C>
1995
------------
INTEREST INCOME
Loans, including fees $12,875,338
Lease financing 765,135
Investment securities:
Taxable . 2,728,493
Exempt from federal taxes 610,836
Federal funds sold 171,010
Deposits in banks 29,351
------------
Total interest income 17,180,163
------------
INTEREST EXPENSE
Savings deposits 2,409,460
Time, under $100,000 3,780,847
Time, $100,000 or greater 406,303
Borrowed funds 548,340
------------
Total interest expense 7,144,950
------------
Net interest income 10,035,213
Provision for loan losses 518,000
------------
Net interest income after provision for loan losses 9,517,213
------------
OTHER OPERATING INCOME
Service charges 579,667
Security losses, net (28,667)
Trust income 288,399
Other Income 260,020
------------
Total other operating income 1,099,419
------------
Net interest income after provision for loan losses
and other operating income 10,616,632
------------
OTHER OPERATING EXPENSES
Salaries, wages and employee benefits 3,067,361
Occupancy 364,515
Furniture and equipment 453,459
FDIC premium 417,589
Other expenses 1,752,992
------------
Total other operating expenses 6,055,916
------------
Income before income taxes 4,560,716
Income tax expense 1,355,170
------------
Net income $ 3,205,546
============
Weighted average number of common shares 6,661,017
============
Net income per share information $ 0.48
============
Cash dividends per share $ 0.17
============
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 4
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
<S> <C> <C>
OPERATING ACTIVITIES: 1996 1995
------------- -------------
Net Income $ 7,028,585 $ 6,200,966
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,055,208 1,053,500
Depreciation and amortization 645,920 496,082
Net amortization of investment
securities' discount/premiums 242,758 215,651
Net realized security loss 119,050 172,316
Increase in accrued income receivable (320,581) (204,557)
Increase in accrued interest payable 1,017,854 996,502
Net increase in other assets (449,836) (332,052)
Net increase in other liabilities 2,471,922 1,551,231
Decrease in unearned income (820,237) (84,779)
Write-down of other real estate owned 111,067 99,894
Decrease in intangible assets 150,780 177,570
------------- -----------
Net cash provided by operating activities 11,252,490 10,342,324
------------- -----------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale 38,519,510 10,886,479
Proceeds from maturity or calls of investment securities held to maturity 7,552,678 14,403,016
Proceeds from maturity or calls of investment securities available for sale 20,506,109 10,903,472
Purchases of investment securities held to maturity - (31,162,273)
Purchases of investment securities available for sale (85,735,641) (3,606,391)
Net increase in short-term investments (2,836,363) (721,998)
Net increase in loans (26,641,325) (9,177,111)
Net increase in premises and equipment (1,153,542) (1,881,417)
Proceeds from sales of other real estate 87,018 823,896
-------------- -----------
Net cash used in investing activities (49,701,556) (9,532,327)
-------------- -----------
FINANCING ACTIVITIES:
Net increase in deposits 38,939,936 29,884,211
Increase (decrease) in U.S. Treasury demand notes 198,508 (234,610)
Decrease in Federal Funds purchased - (12,716,000)
(Decrease) increase in FHLB borrowings (2,700,000) 12,200,000
Increase in securities sold under agreement 572,211 2,046,348
Cash dividends (2,528,016) (2,284,452)
Dividend reinvestment (18,985) (76)
Stock options 21,410 403,082
-------------- -----------
Net cash provided by financing activities 34,485,064 29,298,503
-------------- -----------
Increase (decrease) in cash and cash equivalents (3,964,002) 30,108,500
Cash and cash equivalents at beginning of year 50,607,059 36,820,176
-------------- -----------
Cash and cash equivalents at end of the second quarter $ 46,643,057 $ 66,928,676
============== ============
Cash paid during the year for:
Interest $ 14,109,884 $ 12,694,363
============== =============
Income taxes $ 1,210,000 $ 1,617,006
============== =============
Supplemental disclosure of noncash investing and financing activities:
Transfer of assets from loans to other real estate owned $ 910,708 $ 274,526
============== =============
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 June
30, 1996, and the results of its operations and cash flows for the six month
periods ended June 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 six and three month periods ended June 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 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 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
Consolidated net income for the first six months of 1996 was $7,029,000,
an increase of $828,000, or 13.4%, over the first six months of 1995 net
income of $6,201,000. Earnings per share for the first six months of 1996
were $1.05, compared to $.93 in the first six months of 1995. Consolidated
net income for the second quarter of 1996 was $3,644,000, an increase of
$438,000, or 13.7%, over the second quarter of 1995 net income of $3,206,000.
Earnings per share for the second quarter of 1996 of $0.55 increased $0.07,
or 14.6% , over the second quarter of 1995 earnings per share of $0.48.
For the six months ended June 30, 1996, the annualized return on average
assets and the annualized return on average shareholders' equity were 1.48%
and 15.86%, respectively. For the same period in 1995, the annualized return
on average assets was 1.41% and the annualized return on average shareholders'
equity was 15.72%. For the three months ended June 30, 1996, the annualized
return on average assets was 1.51% compared to 1.44% for the same period of
1995, and the annualized return on average shareholders' equity was 16.23% for
the second quarter of 1996 and 15.83% for the second period 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 six months of 1996 of $20,834,000
increased $1,034,000, or 5.2%, over the first six months of 1995 net interest
income of $19,800,000. Net interest income for the second quarter of 1996
increased by $407,000, or 4.1%, over the second 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 six 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 on the next
page, which is computed on a tax-equivalent basis (tax rate of 35%), analyzes
changes in net interest income for the six months ended June 30, 1996 over
June 30, 1995 and the three months ended June 30, 1996 over June 30 1995 by
their rate and volume components.
PAGE 7
<TABLE>
<CAPTION>
Six Months ended
June 30, 1996
Over/(Under)
June 30, 1995
Total Caused by:
----------
Variance Rate Volume
--------- ----------- ------
<S> <C> <C> <C>
Interest Income:
Securities * 1,542 360 1,182
Money market instruments 214 (15) 229
Loans * 1,035 (343) 1,378
--------- ----------- ------
Total 2,791 2 2,789
--------- ----------- ------
Interest Expense:
Savings deposits (188) (284) 96
Time deposits and certificates of deposit 1,719 557 1,162
Other borrowings (95) (173) 78
--------- ----------- ------
Total 1,436 100 1,336
--------- ----------- ------
Net interest income 1,355 (98) 1,453
========= =========== ======
*Tax Equivalent Basis
Three Months Ended
June 30, 1996
Over/(Under)
June 30, 1995
Total Caused by:
-----------
Variance Rate Volume
-------- ----------- ------
<S> <C> <C> <C>
Interest Income:
Securities * 832 187 645
Money market instruments (6) (12) 6
Loans * 184 (574) 758
--------- ----------- ------
Total 1,010 (399) 1,409
--------- ----------- ------
Interest Expense:
Savings deposits (15) (148) 134
Time deposits and certificates of deposit 496 80 416
Other borrowings (74) (91) 18
--------- ----------- ------
Total 407 (159) 568
--------- ----------- ------
Net interest income 603 (240) 841
========= =========== ======
*Tax Equivalent Basis
</TABLE>
Taxable-equivalent net interest income was $21,965,000 for the first six
months of 1996, compared to $20,610,000 for the same period in 1995, a 6.6% or
$1,355,000 increase. This increase in taxable-equivalent net interest income
was due to a $1,453,000 increase related to volume, offset by a $98,000
decrease related to interest rates. Total taxable-equivalent interest income
grew $2,791,000, the result of the higher volumes in each earning asset
category. Average year-to-date earning assets increased to $905,386,000 at
June 30, 1996 from $831,137,000 at June 30, 1995, a 8.9% increase.
Total interest expense grew $1,436,000 during the first half 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 $41,351,000, or 14.1% during the first half of 1996,
compared to the first half of 1995. Also contributing to the growth in
interest expense were increases in savings deposits and other borrowing of
$7,284,000 and $3,034,000, respectively. Other borrowings include Federal
Funds purchased, Federal Home Loan Bank borrowings, securities sold under
agreements to repurchase and U. S. Treasury notes.
Taxable-equivalent net interest income of $11,043,000 was
$603,000, or 5.8% higher for the second quarter of 1996, compared to
$10,440,000 for the same period in 1995. Interest income grew $1,010,000
during this period, as a result of an increase in earning asset volumes.
Second quarter average earning assets grew $72,456,000, compared to the second
quarter of 1995. This growth included a $36,929,000 rise in investments and
a $35,075,000 increase in loans. The increase in the interest income was
partially offset by a $407,000 rise in interest expense. Increases in all
deposit category balances and an increase in time deposit rates, contributed
to this increase in interest expense. Nonaccruing loans are included in the
average balance yield calculations, but the average nonaccruing loans were
insignificant and had no material effect on the results. Variances
attributable to both rate and volume are included in the volume column.
NET INTEREST MARGIN
The net interest margin was 4.85% for the six month period ended June 30,
1996, a decrease of .11% from the 4.96% net interest margin for the first
PAGE 8
half of 1995. The yield earned on earning assets of 8.19% during the first
half of 1996 was lower than the 8.25% earned during the first half 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 half of 1996 increased from the 4.03% rate paid during the same
period in 1995. The increase in the rate is due to the higher rates paid on
time deposits. The net interest margin was 4.83% in the second quarter of
1996, a .13% decrease from the 4.96% net interest margin recorded in the
second 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 six months of 1996 the provision for loan losses was
$1,055,000, compared to $1,054,000 for the same period in 1995. The loan loss
reserve grew 14.7% from June 30, 1995 to June 30, 1996. Net charge offs were
$452,000 for the six months ended June 30, 1996, compared with $51,000 for the
six months ended June 30, 1995. The net loans charged off during the first
six months of 1996 were attributed to all loan categories. The ratio of the
allowance for loan losses to loans increased to 1.60% at June 30, 1996, from
1.58% at December 31, 1995.
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 1,055,000 1,054,000
Loans charged off (513,000) (242,000)
Recoveries 61,000 191,000
--------------- ---------------
Balance, June 30 $10,494,000 $9,153,000
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
Ratios:
- -------
June 30, 1996 Dec. 31, 1995 June 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Allowance for loan losses to nonperforming assets 83.9% 86.3% 178.4%
Nonperforming assets to total loans & net assets
acquired in foreclosure 1.93% 1.79% 0.85%
Allowance for loan losses to total loans 1.60% 1.58% 1.52%
</TABLE>
PAGE 9
The following table sets forth an allocation of the allowance for loan
losses by loan category:
<TABLE>
<CAPTION>
June 30, 1996
--------------
Percent
Amount of Loans
-------------- ---------
<S> <C> <C>
Commercial and industrial $ 2,812,000 26%
Installment and other 850,000 31%
Real estate 1,973,000 36%
Lease financing 96,000 7%
Unallocated 4,763,000 N/A
-------------- ---------
Total $ 10,494,000 100%
============== =========
</TABLE>
Nonperforming assets (nonaccruing loans, net assets in foreclosure and
troubled debt restructured loans) were 1.93% of total loans and net assets
acquired in foreclosure at June 30, 1996, compared to 1.79% at December 31,
1995 and .85% at June 30, 1995. The ratio of the allowance for loan losses to
non-performing assets was 83.9% at June 30, 1996 compared to 86.3% at December
31, 1995 and 178.4% at June 30, 1995.
Nonaccruing loans at June 30, 1996 of $9,612,000, increased $557,000 from
the December 31, 1995 level of $9,055,000. Approximately $7,132,000, or
74.2%, of total nonaccruing loans are attributable to two unrelated commercial
borrowers at June 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 $5,242,000. 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 $1,890,000. 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 $2,667,000 at June 30, 1995.
Net assets in foreclosure totaled $1,933,000 as of June 30,
1996, an increase of $713,000, or 58.4%, from the December 31, 1995 balance
of $1,220,000. During the first six months of 1996, transfers from loans to
assets in foreclosure were $911,000, payments on foreclosed properties totaled
$87,000 and write downs of assets in foreclosure equaled $111,000. The
$911,000 in loans transferred to assets in foreclosure included $387,000 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 June 30,
1995 was $610,000. Efforts to liquidate assets acquired in foreclosure are
proceeding as quickly as potential buyers can be located and legal constraints
permit. Generally accepted accounting principles require foreclosed assets to
be carried at the lower of cost (lesser of carrying value of asset or fair
value at date of acquisition) or estimated fair value.
As of June 30, 1996, there were three unrelated borrowers with troubled
debt restructured loans totaling $1,115,000, compared with a balance of
$1,183,000 as of December 31, 1995 and $1,854,000 at June 30, 1995. All three
customers were complying with the restructured terms as of June 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 June 30, 1996, loans past due 90 days or more and
still accruing interest were $1,988,000, compared to $1,553,000 as of
December 31, 1995 and $1,410,000 as of June 30, 1995.
PAGE 10
The following information concerns impaired loans as described
in note 3:
Impaired Loans:
<TABLE>
<CAPTION>
Restructured Loans $1,115,000
Nonaccrual Loans 8,640,000
----------
$9,755,000
==========
<S> <C> <C>
Average year-to-date impaired loans: $9,617,000
==========
Impaired loans with specific loss allowances: $9,755,000
==========
Loss allowances reserved on impaired loans: $1,280,000
==========
Income recognized on impaired loans during
the first six months of 1996 $ 400,000
==========
</TABLE>
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>
Six Months Ended June 30, Three Months Ended June 30,
------------ ---------------- -------------- ----------------
1996 1995 1996 1995
------------ ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Service charges $ 1,265 $ 1,130 $ 657 $ 580
Securities gains (losses), net (119) (172) (69) (29)
Trust income 685 530 290 288
Other income 585 524 309 260
------------ ---------------- -------------- ----------------
Total other operating income $ 2,416 $ 2,012 $ 1,187 $ 1,099
============ ================ ============== ================
</TABLE>
Other operating income for the first six months of 1996 increased
$404,000, or 20.1%, from $2,012,000 at June 30, 1995 to $2,416,000 at June 30,
1996. This rise in other income is primarily the result of a $155,000
increase in trust income, a $135,000 growth in service charges and a $53,000
reduction in security losses. The second quarter 1996 other operating income
of $1,187,000 was $88,000, or 8.0% higher than the second quarter of 1995
other operating income of $1,099,000. This increase was primarily due to a
$77,000 increase in service charges and a $49,000 rise in other income, offset
by an increase in security losses of $40,000.
Both the year-to-date $135,000 increase and the second quarter $77,000
rise in service charges are the result of higher overdraft fees and service
fees on checking accounts. The Corporation recorded a $119,000 net security
loss during the first six months of 1996, compared to a net loss of $172,000
for the same period in 1995. The 1996 second quarter net security loss of
$69,000 was greater than the $29,000 net security loss recorded in the second
quarter of 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.
PAGE 11
Income from the Trust and Financial Services Department increased
$155,000, or 29.2%, in the first six 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 26.3% from June 30, 1995 to June 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 second quarter of 1996 was slightly ahead of the
second quarter of 1995. Other income for the first six months of 1996 and for
the second quarter of 1996 increased $61,000 and $49,000, respectively,
compared to the same periods in 1995. These increases were due to higher
leasing fees and a rise in credit card fees.
OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
----------- ----------------------- ------------- ---------------
1996 1995 1996 1995
----------- ----------------------- ------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Salaries $ 5,028 $ 4,455 $ 2,499 $ 2,263
Employee benefits 1,725 1,724 837 804
Net occupancy expense 906 757 430 365
Equipment expense 994 864 494 453
FDIC premiums 87 835 43 418
Other expenses 3,657 3,319 1,773 1,753
----------- ------------- ---------- ---------
Total other operating expenses $ 12,397 $ 11,954 $ 6,076 $ 6,056
=========== ============= ========== =========
</TABLE>
Other operating expenses for the first six months of 1996 of $12,397,000
increased $443,000, or 3.7%, from the $11,954,000 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. The second quarter of 1996 other
operating expenses of $6,076,000 increased $20,000, over the second quarter of
1995 other operating expense of $6,056,000.
Employee salaries increased $573,000, or 12.9% from $4,455,000 for the
first six months of 1995 to $5,028,000 for the same period in 1996. The
salary increase directly related to the staffing of the four new branches was
$230,000. The remaining increase in salaries reflects cost of living
increases, merit increases and additional staff necessitated by current and
planned future growth. Employee benefits of $1,725,000 expensed in the first
six months of 1996 increased slightly, from the $1,724,000 employee benefits
expensed during the same period in 1995. This small growth is the result of
the tax expense associated with stock options exercised during the first
quarter of 1995, being equal to the increase in employee benefits associated
with the new branches and normal salary increases during 1996. The $33,000
growth in employee benefits expense in the second quarter of 1996, compared to
1995 is primarily due to the new branches.
Net occupancy expense increased $149,000, or 19.7%, from $757,000 in the
first six months of 1995 to $906,000 in the first six months of 1996. The
four new branches were responsible for $94,000 of this increase. The $65,000
increase in occupancy expenses in the second quarter of 1996, compared to the
same period in 1995, is primarily due to the $38,000 associated with the new
branches. Equipment expense increased $130,000, or 15.0% during the first
six months of 1996, compared to the same period in 1995. The first six months
of 1996 equipment expenses related to the new branches totaled $61,000. 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 $41,000 in the second 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
half of 1996 FDIC premium expense was $87,000, compared to the first half of
1995 premium expense of $835,000. The second quarter of 1996 FDIC premium
was $43,000 and the second quarter of 1995 FDIC premium was $418,000.
Congress is also considering a variety of proposals to remedy the large
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. Management is unable to
assess the exact cost associated with any of these proposals, but one or more
of these proposals should result in an increase of FDIC premiums in the future
and/or the payment of some type of special assessment.
Other expenses increased $338,000, or 10.2%, from $3,319,000 in
the first six months of 1995, compared to $3,657,000 other expenses recorded
during the same period in 1996. This increase is primarily the result of a
$149,000 increase in legal expenses, a $92,000 rise in consulting fees and
$32,000 in expenses related to the new branches. The increase in legal fees
are associated with the Farmers merger, the resolution of legal matters and
legal fees related to maintaining the loan portfolio. The rise in consulting
fees are related to franchise expansion and consultation concerning
enhancements to bank operations. The second quarter 1996 other expenses of
$1,773,000, were $20,000 higher than the other expenses recorded in the second
quarter of 1995.
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 $42,530,000, or 4.5%, from $937,345,000 at December 31,
1995 to $979,875,000 at June 30, 1996. This growth was primarily in interest
earning assets which grew $36,962,000 to $926,693,000 at June 30, 1996, from
$889,731,000 at December 31, 1995. During the first six months of 1996 loans
grew $26,099,000, investment securities grew $16,322,000, interest-bearing
deposits in banks rose $2,836,000 and Federal Funds Sold decreased $8,295,000.
Total deposits rose $38,940,000 from $794,500,000 at December 31, 1995
to $833,440,000 at June 30, 1996. This growth was due to a $11,912,000 rise
in time deposits, a $11,696,000 growth in noninterest-bearing accounts, an
$11,349,000 increase in money market accounts and a $4,870,000 increase in
savings accounts. Offsetting these increases was a $887,000 decrease in NOW
accounts. Other borrowing decreased $1,929,000 during the first six months of
1996.
CAPITAL
Capital formation is critical to the Corporation's well being and future
growth. Capital for the period ending June 30, 1996 was $90,165,000, an
increase of $3,803,000 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 June 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.
PAGE 13
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 June 30, 1996, the Corporation's Tier 1
risk-adjusted capital ratio was 12.67%, and the total risk-adjusted capital
ratio was 13.92%, both well above the regulatory requirements. The risk-based
capital ratios of each of the Corporation's commercial banks also exceeded
regulatory requirements at June 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 9.22% at
June 30, 1996 and 8.99% at December 31, 1995.
The year-to-date June 30, 1996 cash dividend per share of $.38 was 11.8%
higher than the cash dividend for the same period in 1995 of $.34. The $.19
per share cash dividend paid during the second quarter of 1996 was 11.8%
higher than the $.17 per share cash dividend paid during the second 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 and stock options plans did not have
a material impact on capital during the first six 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 $14,811,000 during
the first six months of 1996 and securities available for sale averaged
$182,678,000 during the first six 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.
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 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
- -----------------------------
Management, based upon discussions with the Corporation's legal counsel,
is not aware of any litigation that would have a material adverse effect on
the consolidated financial position of the Corporation. There are no
proceedings pending other than the ordinary routine litigation incident to the
business of the Corporation and its subsidiaries - Harleysville National Bank
and Trust Company, The Citizens National Bank of Lansford and Security
National Bank. In addition, no material proceedings are pending or are known
to be threatened or contemplated against the Corporation and the Banks by
government authorities.
Item 2. Change in Securities.
- ------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
- -----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
(a) An annual meeting of shareholders was held at 9:30 a.m., on
Tuesday, April 9, 1996, at Presidential caterers, 2910 DeKalb Pike,
Norristown, Pennsylvania 19401.
(b), (c) One matter was voted upon as follows:
(1) Two directors were elected, as below:
Elected Term Expires
------- ------------
John W. Clemens 2000
Palmer E. Retzlaff 2000
The results of the voting for the directors are as
follows:
John W. Clemens
For 5,181,945
Against 24,445
Abstain 1,726
Palmer E. Retzlaff
For 5,143,639
Against 62,751
Abstain 1,726
Directors whose term continued after the meeting:
Term Expires:
------------
Walter F. Vilsmeier 1999
Harold A. Herr 1999
Walter E. Daller, Jr. 1998
Martin E. Fossler 1998
Bradford W. Mitchell 1997
William M. Yocum 1997
PAGE 15
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 "Corpora-
tion"), pursuant to an Agreement and Plan of Reorganization dated September
7, 1995, and a related Agreement and Plan of Merger of the same date. Share-
holders of Farmers received 0.6190 shares of the Corporation's 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 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: August 13, 1996
PAGE 17
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 38643
<INT-BEARING-DEPOSITS> 4540
<FED-FUNDS-SOLD> 8000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 199228
<INVESTMENTS-CARRYING> 60089
<INVESTMENTS-MARKET> 60407
<LOANS> 654837
<ALLOWANCE> 10494
<TOTAL-ASSETS> 979875
<DEPOSITS> 833440
<SHORT-TERM> 28822
<LIABILITIES-OTHER> 18449
<LONG-TERM> 9000
0
0
<COMMON> 6637
<OTHER-SE> 83528
<TOTAL-LIABILITIES-AND-EQUITY> 979875
<INTEREST-LOAN> 27767
<INTEREST-INVEST> 7723
<INTEREST-OTHER> 471
<INTEREST-TOTAL> 35961
<INTEREST-DEPOSIT> 14135
<INTEREST-EXPENSE> 993
<INTEREST-INCOME-NET> 15128
<LOAN-LOSSES> 1055
<SECURITIES-GAINS> (119)
<EXPENSE-OTHER> 12398
<INCOME-PRETAX> 9796
<INCOME-PRE-EXTRAORDINARY> 9796
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7029
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 4.85
<LOANS-NON> 9612
<LOANS-PAST> 1988
<LOANS-TROUBLED> 1115
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9891
<CHARGE-OFFS> 513
<RECOVERIES> 61
<ALLOWANCE-CLOSE> 10494
<ALLOWANCE-DOMESTIC> 10494
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4763
</TABLE>
