SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997.
----------------
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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___. 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: 6,657,496 shares of Common
Stock, $1.00 par value, outstanding on April 30, 1997.
PAGE 1
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-Q REPORT
PAGE
----
Part I. Financial Information
Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income - Three Months Ended 4
March 31, 1997 and 1996
Consolidated Statements of Cash Flows - Three Months Ended 5
March 31, 1997 and 1996
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and 7
Results of Operations
Part II. Other Information 15
Signatures 16
PAGE 2
PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1997 December 31, 1996
---------------- -------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 48,638 $ 39,407
Federal Funds sold 13,800 6,000
---------------- -------------------
Total cash and cash equivalents 62,438 45,407
---------------- -------------------
Interest-bearing deposits in banks 6,625 8,475
Investment securities available for sale 217,256 209,795
Investment securities held to maturity
(market value $62,952 and $66,680, respectively) 62,165 65,226
Loans 698,842 689,203
Less: Unearned income (7,011) (7,793)
Allowance for loan losses (10,885) (10,710)
---------------- -------------------
Net loans 680,946 670,700
---------------- -------------------
Bank premises and equipment, net 15,793 14,810
Accrued income receivable 7,643 6,653
Other real estate owned 955 972
Intangible assets, net 1,583 1,658
Other assets 2,564 2,432
---------------- -------------------
Total assets $ 1,057,968 $ 1,026,128
================ ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 145,095 $ 139,723
Interest-bearing:
NOW accounts 98,279 102,270
Money market accounts 167,623 155,516
Savings 107,940 104,329
Time, under $100,000 294,939 294,501
Time, $100,000 or greater 52,342 51,360
---------------- -------------------
Total deposits 866,218 847,699
Accrued interest payable 14,061 13,927
U.S. Treasury demand notes 1,933 2,572
Federal Home Loan Bank (FHLB) borrowings 47,750 35,000
Securities sold under agreements to repurchase 20,836 21,949
Other liabilities 8,063 7,350
---------------- -------------------
Total liabilities 958,861 928,497
---------------- -------------------
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 6,657,495 shares in 1997 and
6,656,770 shares in 1996 6,657 6,657
Additional paid in capital 40,333 40,316
Retained Earnings 50,281 47,849
Net unrealized gains on investment securities available for sale 1,836 2,809
---------------- -------------------
Total shareholders' equity 99,107 97,631
---------------- -------------------
Total liabilities and shareholders' equity $ 1,057,968 $ 1,026,128
================ ===================
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 3
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
<S> <C> <C>
(Dollars in thousands except weighted average number
of common shares and per share information) 1997 1996
-------------------- -----------
INTEREST INCOME:
Loans, including fees $ 13,703 $ 13,104
Lease financing 1,108 844
Investment securities:
Taxable 3,125 2,893
Exempt from federal taxes 1,230 850
Federal funds sold 49 256
Deposits in banks 124 20
-------------------- -----------
Total interest income 19,339 17,967
-------------------- -----------
INTEREST EXPENSE:
Savings deposits 2,328 2,338
Time, under $100,000 4,041 4,306
Time, $100,000 or greater 641 413
Borrowed funds 963 519
-------------------- -----------
Total interest expense 7,973 7,576
-------------------- -----------
Net interest income 11,366 10,391
Provision for loan losses 540 526
-------------------- -----------
Net interest income after provision for loan losses 10,826 9,865
-------------------- -----------
OTHER OPERATING INCOME:
Service charges 685 608
Security gains (losses), net 29 (50)
Trust income 383 395
Other Income 293 276
-------------------- -----------
Total other operating income 1,390 1,229
-------------------- -----------
Net interest income after provision for loan losses
and other operating income 12,216 11,094
-------------------- -----------
OTHER OPERATING EXPENSES:
Salaries, wages and employee benefits 3,630 3,417
Occupancy 517 476
Furniture and equipment 602 500
Other expenses 2,084 1,929
-------------------- -----------
Total other operating expenses 6,833 6,322
-------------------- -----------
Income before income taxes 5,383 4,772
Income tax expense 1,469 1,388
-------------------- -----------
Net income $ 3,914 $ 3,384
==================== ===========
Weighted average number of common shares 6,680,798 6,665,647
==================== ===========
Net income per share information $ 0.59 $ 0.51
==================== ===========
Cash dividends per share $ 0.22 $ 0.19
==================== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 4
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended March 31,
<S> <C> <C>
OPERATING ACTIVITIES: 1997 1996
------------------------------ ---------
Net Income $ 3,914 $ 3,384
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 540 526
Depreciation and amortization 330 313
Net amortization of investment
securities' discount/premiums 61 118
Net realized security (gain) loss (29) 50
Increase in accrued income receivable (990) (151)
Increase in accrued interest payable 134 649
Net increase in other assets (132) (439)
Net increase in other liabilities 1,238 1,842
Decrease in unearned income (782) (585)
Write-down of other real estate owned 4 110
Decrease in intangible assets 75 75
------------------------------ ---------
Net cash provided by operating activities 4,363 5,892
------------------------------ ---------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale 8,881 17,531
Proceeds, maturity or calls of investment securities held to maturity 336 3,604
Proceeds, maturity or calls of investment securities available for sale 2,899 9,614
Purchases of investment securities available for sale (18,046) (41,364)
Net decrease in interest-bearing deposits in banks 1,850 165
Net increase in loans (10,315) (2,531)
Net increase in premises and equipment (1,314) (780)
Proceeds from sales of other real estate 325 201
------------------------------ ---------
Net cash used in investing activities (15,384) (13,560)
------------------------------ ---------
FINANCING ACTIVITIES:
Net increase in deposits 18,519 15,232
(Decrease) increase in U.S. Treasury demand notes (639) 66
Increase (decrease) in FHLB borrowings 12,750 (1,200)
Decrease in securities sold under agreement (1,113) (895)
Cash dividends fractional shares (1,465) (1,264)
Dividend reinvestment - (4)
------------------------------ ---------
Net cash provided by financing activities 28,052 11,935
------------------------------ ---------
Increase in cash and cash equivalents 17,031 4,267
Cash and cash equivalents at beginning of period 45,407 50,607
------------------------------ ---------
Cash and cash equivalents at end of the period $ 62,438 $ 54,874
============================== =========
Cash paid during the period for:
Interest $ 7,840 $ 6,927
============================== =========
Supplemental disclosure of noncash investing and financing activities:
Transfer of assets from loans to other real estate owned $ 312 $ 440
============================== =========
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") and HNC
Financial Company - as of March 31, 1997, the results of its operations for
three month periods ended March 31, 1997 and 1996 and the cash flows for the
three month periods ended March 31, 1997 and 1996. 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 1996 annual report.
The results of operations for the three month periods ended March 31, 1997 and
1996 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 Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, which is
effective for financial statements issued after December 15, 1997. Early
adoption of the new standard is not permitted. The new standard eliminates
primary and fully diluted earnings per share and requires presentation of
basic and diluted earnings per share together with disclosure of how the per
share amounts were computed. The adoption of this new standard is not
expected to have a material impact on the disclosure of earnings per share in
the financial statements.
NOTE 4 - On January 1, 1996, the Corporation adopted the Financial Accounting
Standards Board issued (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation is
then recognized over the service period, which is usually the vesting period.
Alternatively, the standard permits entities to continue accounting for
employee stock options and similar instruments under Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion No. 25
are required to make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined in SFAS No. 123
had been applied. The Corporation's employee stock option plan is accounted
for under APB Opinion No. 25. Accordingly, the adoption of SFAS No. 123 did
not have an impact on the Corporation's consolidated financial position or
results of operations.
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's
Common Stock, 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.
NOTE 7 - On March 17, 1997, the HNC Financial Company, a subsidiary of
Harleysville National Corporation was incorporated as a Delaware Corporation.
HNC Financial Company's principal business function is to expand the
investment opportunities of the Corporation.
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, the Banks and HNC Financial Company. 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 1996 Annual Report. Current
performance does not guarantee, assure, or indicate 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 Results of Operations and Financial Condition." 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 1997 and 1998, and any Current Reports on Form 8-K
filed by the Corporation.
Consolidated net income for the first three months of 1997 was
$3,914,000, an increase of $530,000, or 15.7%, over the first three months of
1996 net income of $3,384,000. Earnings per share for the first three months
of 1997 of $0.59 increased $0.08, over the first three months of 1996 earnings
per share of $0.51.
For the three months ended March 31, 1997, the annualized return on
average assets and the annualized return on average shareholders' equity were
1.52% and 15.84%, respectively. For the same period in 1996, the annualized
return on average assets was 1.44% and the annualized return on average
shareholders' equity was 15.45%.
Net income is affected by five major elements: net interest income, or
the difference between interest income earned on loans and investments and
interest expense paid on deposits and borrowed funds; the provision for loan
losses, or the amount added to the allowance for loan losses to provide
reserves for future losses on loans; other operating income, which is made up
primarily of certain fees, trust income and gains and losses from sales of
securities; other operating expenses, which consist primarily of salaries and
other operating expenses and income taxes. Each of these major elements will
be reviewed in more detail in the following discussion.
NET INTEREST INCOME AND RELATED ASSETS AND LIABILITIES
- -------------------------------------------------------------
Net interest income for the first three months of 1997 of $11,366,000
increased $975,000, or 9.4%, over the first three months of 1996 net interest
income of $10,391,000. 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 three months of 1997, compared
to the same period in 1996. The increase in interest income was partially
offset by a rise in interest expense, primarily led by an increase in other
borrowings interest expense, related to higher volumes and rates. Other
borrowings include Federal Funds purchased, Federal Home Loan Bank borrowings,
securities sold under agreements to repurchase and U. S. Treasury demand
notes.
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 three months ended March 31, 1997 over
March 31, 1996 by their rate and volume components.
PAGE 7
Three Months Ended
March 31, 1997
Over/Under
March 31,1996
<TABLE>
<CAPTION>
Total Caused by:
------------
Variance Rate Volume
---------- ------------ --------
Interest Income:
<S> <C> <C> <C>
Securities * $ 817 $ 229 $ 588
Money market instruments (103) 39 (142)
Loans * 861 (445) 1,306
---------- ------------ --------
Total 1,575 (177) 1,752
---------- ------------ --------
Interest Expense:
Savings deposits (10) (85) 75
Time deposits and certificates of deposit (37) (187) 150
Other borrowings 444 184 260
---------- ------------ --------
Total 397 (88) 485
---------- ------------ --------
Net interest income $ 1,178 ($89) $ 1,267
========== ============ ========
*Tax Equivalent Basis
</TABLE>
Taxable-equivalent net interest income was $12,104,000 for the first
three months of 1997, compared to $10,926,000 for the same period in 1996, a
10.8% or $1,178,000 increase. This increase in taxable-equivalent net
interest income was due to a $1,267,000 increase related to volume, offset by
a $89,000 decrease related to interest rates. Total taxable-equivalent
interest income grew $1,575,000, the result of the higher volumes in both the
security and loan earning asset categories. Average year-to-date earning
assets increased to $979,136,000 at March 31, 1997 from $895,616,000 at March
31, 1996, a 9.3% increase. This increase in earning assets was primarily due
to the growth in loans, as a result of persistent sales efforts and new branch
openings. Nonaccruing loans are included in the average balance yield
calculations, but the average nonaccruing loans had no material effect on the
results.
Total interest expense grew $397,000 during the first three months
of 1997, compared to the same period in 1996. This growth was principally the
result of both higher rates and volumes associated with other borrowings. The
volume of average other borrowings increased $14,643,000, or 37.0% during the
first three months of 1997, compared to the first three months of 1996. The
increase in other borrowings was used to finance asset growth. Partially
offsetting this growth in interest expense were lower savings and time deposit
interest expense, primarily related to lower rates experienced during the
first quarter of 1997, compared to the same period in 1996.
NET INTEREST MARGIN
---------------------
The net interest margin of 4.94% for the three month period ended March
31, 1997, increased from the 4.88% net interest margin for the first three
months of 1996. The yield on earning assets of 8.20% during the first three
months of 1997 was lower than the 8.26% earned during the first three months
of 1996. This drop in yield is due to the lower interest yields on loans in
1997, compared to 1996. The 4.19% average interest rate paid on deposits and
other borrowings during the first three months of 1997, increased from the
4.18% rate paid during the same period in 1996. The increase in the rate is
due generally to the higher volumes and rates paid on other borrowings. The
Banks have been able to effectively match assets and liabilities and maintain
a consistent percentage of earning assets to total assets.
PAGE 8
PROVISION FOR LOAN LOSSES
- ----------------------------
The provision is based on management's analysis of the adequacy of the
allowance for loan losses. In its evaluation, management considers past loan
experience, overall characteristics of the loan portfolio, current economic
conditions and other relevant factors. Based on the latest monthly evaluation
of potential loan losses, management currently believes that the allowance is
adequate to absorb known and inherent losses in the loan portfolio.
Ultimately, however, the adequacy of the allowance is largely dependent upon
the economy, a factor beyond the Corporation's control. With this in mind,
additions to the allowance for loan losses may be required in future periods,
especially if economic trends worsen or certain borrowers' ability to repay
declines.
For the first three months of 1997 the provision for loan losses was
$540,000, compared to $526,000 for the same period in 1996. Net charge offs
were $365,000 for the three months ended March 31, 1997, compared with
$231,000 for the three months ended March 31, 1996. The net loans charged
off during the first three months of 1997 were primarily attributed to
consumer loans (installment, personnel credit lines and credit cards). During
the first quarter of 1997, management took steps to control the risk of
consumer charge offs by tightening credit standards and increasing reserve for
loan losses for consumer loans. The ratio of the allowance for loan losses to
loans at March 31, 1997 of 1.57% did not change from the December 31, 1996
ratio, and was lower than the March 31, 1996 ratio of 1.61%.
ALLOWANCE FOR LOAN LOSSES
- ----------------------------
Transactions in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ---------------
<S> <C> <C>
Balance, Beginning of Year $10,710,000 $9,891,000
Provision charged to operating expenses 540,000 526,000
Loans charged off (431,000) (265,000)
Recoveries 66,000 34,000
----------------- ---------------
Balance, March 31 $10,885,000 $10,186,000
================= ===============
Ratios:
- -------
March 31, 1997 Dec. 31, 1996 March 31, 1996
----------------- --------------- ---------------
Allowance for loan losses to nonperforming assets 179.7% 188.8% 84.8%
Nonperforming assets to total loans & net assets
acquired in foreclosure 0.87% 0.83% 1.87%
Allowance for loan losses to total loans 1.57% 1.57% 1.61%
</TABLE>
PAGE 9
The following table sets forth an allocation of the allowance for loan
losses by loan category:
<TABLE>
<CAPTION>
March 31, 1997
---------------
Percent
Amount of Loans
--------------- ---------
<S> <C> <C>
Commercial and industrial $ 2,171,000 26%
Installment and other 1,554,000 32%
Real estate 1,716,000 34%
Lease financing 118,000 8%
Unallocated 5,326,000 N/A
--------------- ---------
Total $ 10,885,000 100%
=============== =========
</TABLE>
Nonperforming assets (nonaccruing loans, net assets in foreclosure and
troubled debt restructured loans) were 0.87% of total loans and net assets
acquired in foreclosure at March 31, 1997, compared to 0.83% at December 31,
1996 and 1.87% at March 31, 1996. The decline in this ratio from March 31,
1996 to March 31, 1997, is the result of the reduction in nonaccruing loans
during this period. The ratio of the allowance for loan losses to
non-performing assets was 179.7% at March 31, 1997 compared to 188.8% at
December 31, 1996 and 84.8% at March 31, 1996.
Nonaccruing loans at March 31, 1997 of $3,420,000, increased $437,000
from the December 31, 1996 level of $2,983,000, and decreased $6,143,000 from
the March 31, 1996 level of $9,563,000. The $6,143,000 reduction in
nonaccrual loans from March 31, 1996 to March 31, 1997, is primarily due to
one loan being upgraded to accruing status during the fourth quarter of 1996.
This loan achieved accrual status after meeting appropriate standards.
Net assets in foreclosure totaled $955,000 as of March 31,
1997, a decrease of $17,000 from the December 31, 1996 balance of $972,000.
During the first three months of 1997, transfers from loans to assets in
foreclosure were $312,000, payments on foreclosed properties totaled $325,000
and write downs of assets in foreclosure equaled $4,000. The $312,000 in
loans transferred to assets in foreclosure included $221,000 of commercial
loans, $89,000 of consumer loans and $2,000 of loans associated with mortgage
loans. The balance of net assets in foreclosure at March 31, 1996 was
$1,348,000. Efforts to liquidate assets acquired in foreclosure are
proceeding as quickly as potential buyers can be located and legal constraints
permit. Generally accepted accounting principles require foreclosed assets to
be carried at the lower of cost (lesser of carrying value of asset or fair
value at date of acquisition) or estimated fair value.
As of March 31, 1997, there were four unrelated borrowers with troubled
debt restructured loans totaling $1,681,000, compared with a balance of
$1,717,000 as of December 31, 1996 and $1,102,000 at March 31, 1996. All four
customers were complying with the restructured terms as of March 31, 1997.
Loans past due 90 days or more and still accruing interest are loans that
are generally well-secured and expected to be restored to a current status in
the near future. As of March 31, 1997, loans past due 90 days or more and
still accruing interest were $2,174,000, compared to $1,848,000 as of
December 31, 1996 and $1,376,000 as of March 31, 1996. The $798,000 increase
in loans past due 90 days from March 31, 1996 to March 31, 1997 was the result
of increases in both real estate loans and installment loans past due 90 days
of $678,000 and $136,000, respectively. These increases were partially
offset by decreases in commercial loans past due 90 days or more.
PAGE 10
The following information concerns impaired loans:
Impaired Loans:
Restructured Loans $1,681,000
Nonaccrual Loans 2,354,000
----------
$4,035,000
==========
Average year-to-date impaired loans: $4,237,000
==========
Impaired loans with specific loss allowances: $4,035,000
==========
Loss allowances reserved on impaired loans: $ 514,000
==========
Income recognized on impaired loans during
the first three months of 1997 $ 40,000
==========
The Banks' policy for interest income recognition on impaired loans is to
recognize income on restructured loans under the accrual method. The Banks
recognize income on nonaccrual loans under the cash basis when the loans are
both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Banks. The Banks will not recognize income if
these factors do not exist.
OTHER OPERATING INCOME
- ------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------- -----------------
1997 1996
----------------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Service charges $ 685 $ 608
Securities gains (losses), net 29 (50)
Trust income 383 395
Other income 293 276
----------------------- -----------------
Total other operating income $ 1,390 $ 1,229
======================= =================
</TABLE>
Other operating income for the first three months of 1997 increased
$161,000, or 13.1%, from $1,229,000 at March 31, 1996 to $1,390,000 at March
31, 1997. This rise in other operating income is the result of a $77,000
growth in service charges, a $17,000 rise in other income and the impact of a
$29,000 gain on the sale of securities during the first quarter of 1997,
compared to a $50,000 loss on the sale of securities during the same period in
1996. Trust fees decreased $12,000 in the first quarter of 1997, compared to
the first quarter of 1996.
The $77,000, or 12.7% increase in service charges is primarily the
result of a $35,000, or 12.6% rise in service charges on deposits and a
$28,000, or 10.2% growth in overdraft fees during this period. The remaining
increase is attributed to the 9.6% increase in deposits eligible for service
charges, from the first quarter of 1996 to the first quarter in 1997. The
corporation recorded a net security gain of $29,000 in the first quarter of
1997, compared to a $50,000 loss in the same period in 1996. 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 decreased
$12,000, or 3.0%, in the first three months of 1997, compared to the same
period in 1996. This decrease is the result of the timing of the recognition
of trust fees throughout the year. The book value of trust assets increased
5.2% from March 31, 1996 to March 31, 1997. Other income for the first
three months of 1997 increase $17,000, compared to the same period in 1996.
This increase was due to higher leasing fees and credit card related fees,
offset by lower loan insurance fees.
OTHER OPERATING EXPENSES
- --------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------- ----------------
1997 1996
----------------------- ----------------
Dollars in thousands)
<S> <C> <C>
Salaries $ 2,765 $ 2,529
Employee benefits 865 888
Net occupancy expense 517 476
Equipment expense 602 500
Other expenses 2,084 1,929
----------------------- ----------------
Total other operating expenses $ 6,833 $ 6,322
======================= ================
</TABLE>
Other operating expenses for the first three months of 1997 of $6,833,000
increased $511,000, or 8.1%, from the $6,322,000 for the same period in 1996.
The rise in operating expenses was due to higher expenses related to two new
branches opened after September 30, 1996, increases in equipment expenses and
other expenses related to the overall growth of the Banks.
Employee salaries increased $236,000, or 9.3% from $2,529,000 for the
first three months of 1996 to $2,765,000 for the same period in 1997. The
salary increase directly related to the staffing of the two new branches was
$64,000, or 27.1% 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
$865,000 expensed in the first three months of 1997, were lower than the
$888,000 of employee benefits expensed during the same period in 1996. This
small decline is the result of the modification of the Banks' profit-sharing
plan into a 401 (K) plan during 1996. The profit-sharing plan was funded
entirely by the Banks and the modified 401 (K) plan is both Bank and employee
funded.
Net occupancy expense increased $41,000, or 8.6%, from $476,000 in the
first three months of 1996 to $517,000 in the first three months of 1997. The
two new branches were responsible for this entire increase. Equipment expense
increased $102,000, or 20.4% during the first three months of 1997, compared
to the same period in 1996. The first three months of 1997 equipment expense
related to the new branches totaled $27,000. The remainder of this increase
is due to both equipment rental, depreciation and maintenance associated with
planned increased data processing capabilities. The increased data processing
capabilities include equipment used to process check imaging and the ongoing
updating of data processing equipment to manage the rise in volume related to
the growth of the Corporation.
Other expenses increased $155,000, or 8.0%, from $1,929,000 in
the first three months of 1996, compared to $2,084,000 other expenses recorded
during the same period in 1997. This growth is the result of higher
stationery and supplies, and postage expenses of $87,000 and $33,000,
respectively. The increase in stationery and supplies, is the result of an
increase in volume and the timing of stationery and supplies expenditures
throughout the year. The rise in postage expense is related to the increase
in volume. The remaining increase is related to the two new branches.
PAGE 12
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 $31,840,000, or 3.1%, from $1,026,128,000 at December
31, 1996 to $1,057,968,000 at March 31, 1997. This growth was primarily in
interest earning assets which grew $20,771,000 to $991,677,000 at March 31,
1997, from $970,906,000 at December 31, 1996. During the first three months
of 1997 loans grew $10,421,000, investment securities grew $4,400,000, Federal
funds sold rose $7,800,000 and interest-bearing deposits in banks declined
$1,850,000.
Total deposits rose $18,519,000 from $847,699,000 at December 31, 1996
to $866,218,000 at March 31, 1997. This growth was due to a $5,372,000 growth
in noninterest-bearing accounts, a $12,107,000 increase in money market
accounts, a $3,611,000 increase in savings accounts and a $1,420,000 rise in
time deposits. Offsetting these increases was a $3,991,000 decrease in NOW
accounts. Other borrowings increased $10,998,000 during the first three
months of 1997, primarily the result of an increase in Federal Home Loan Bank
borrowings. Other borrowings and deposits are used to fund loan and
investment growth.
CAPITAL
- -------
Capital formation is critical to the Corporation's well being and future
growth. Capital for the period ending March 31, 1997 was $99,107,000, an
increase of $1,476,000 over the end of 1996. 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 5.0% for primary
capital and 6.0% for total capital. The Corporation's primary capital ratio
was 10.16% at March 31, 1997, compared with 10.29% at December 31, 1996.
Since the Corporation's only capital is primary capital, the total capital
ratios are the same as the primary capital ratios.
Pursuant to the federal regulators' risk-based capital adequacy
guidelines, the components of capital are called Tier 1 and Tier 2 capital.
For the Corporation, Tier 1 Capital is the shareholders' equity, and Tier 2
capital is the allowance for loan losses. The risk-based capital ratios are
computed by dividing the components of capital by risk-adjusted assets.
Risk-adjusted assets are determined by assigning credit risk-weighting factors
from 0% to 100% to various categories of assets and off-balance sheet
financial instruments. The minimum for the Tier 1 ratio is 4.0%, and the
total capital ratio (Tier 1 plus Tier 2 capital divided by risk-adjusted
assets) minimum is 8.0%. At March 31, 1997, the Corporation's Tier 1
risk-adjusted capital ratio was 13.20%, and the total risk-adjusted capital
ratio was 14.46%, both well above the regulatory requirements. The risk-based
capital ratios of each of the Corporation's commercial banks also exceeded
regulatory requirements at March 31, 1997.
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 9.28% at
March 31, 1997 and 9.21% at December 31, 1996.
PAGE 13
The year-to-date March 31, 1997 cash dividend per share of $.22 was 15.8%
higher than the cash dividend for the same period in 1996 of $.19. 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 three months of 1997.
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 $3,684,000 during
the first three months of 1997 and securities available for sale averaged
$213,526,000 during the first three months of 1997, 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.
Unused lines of credit at the FHLB were $170,749,000, as of March 31, 1997.
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. Pursuant to the act, 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.
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. However, 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.
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 regulations 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.
- -----------------------------------------------------------
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 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARLEYSVILLE NATIONAL CORPORATION
/s/ Walter E. Daller, Jr.
________________________________
Walter E. Daller, Jr., President
and Chief Executive Officer
(Principal executive officer)
/s/ Vernon L. Hunsberger
_______________________________
Vernon L. Hunsberger, Treasurer
(Principal financial and accounting officer)
Date: May 12, 1997
PAGE 16
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 48,638
<INT-BEARING-DEPOSITS> 6,625
<FED-FUNDS-SOLD> 13,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 217,256
<INVESTMENTS-CARRYING> 62,165
<INVESTMENTS-MARKET> 62,952
<LOANS> 691,831
<ALLOWANCE> 10,885
<TOTAL-ASSETS> 1,057,968
<DEPOSITS> 866,218
<SHORT-TERM> 68,519
<LIABILITIES-OTHER> 22,124
<LONG-TERM> 2,000
0
0
<COMMON> 6,657
<OTHER-SE> 92,450
<TOTAL-LIABILITIES-AND-EQUITY> 1,057,968
<INTEREST-LOAN> 14,811
<INTEREST-INVEST> 4,355
<INTEREST-OTHER> 173
<INTEREST-TOTAL> 19,339
<INTEREST-DEPOSIT> 7,010
<INTEREST-EXPENSE> 963
<INTEREST-INCOME-NET> 11,366
<LOAN-LOSSES> 540
<SECURITIES-GAINS> 29
<EXPENSE-OTHER> 6,833
<INCOME-PRETAX> 5,383
<INCOME-PRE-EXTRAORDINARY> 5,383
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,914
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
<YIELD-ACTUAL> 4.94
<LOANS-NON> 3,420
<LOANS-PAST> 2,174
<LOANS-TROUBLED> 1,681
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,710
<CHARGE-OFFS> 431
<RECOVERIES> 66
<ALLOWANCE-CLOSE> 10,885
<ALLOWANCE-DOMESTIC> 10,855
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,326
</TABLE>
