SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 7,020,211 shares of Common
Stock, $1.00 par value, outstanding on October 31, 1997.
PAGE 1
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-Q REPORT
PAGE
----
Part I. Financial Information
Consolidated Balance Sheets - (unaudited) Sept. 30, 1997 and
(audited) Dec. 31, 1996 3
Consolidated Statements of Income (unaudited) - Nine Months and Three 4
Months Ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended 5
September 30, 1997 and 1996
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
Part II. Other Information 18
Signatures 19
PAGE 2
PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
(Dollars in thousands) September 30, 1997 December 31, 1996
-------------------- -------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 32,064 $ 39,407
Federal Funds sold 9,050 6,000
-------------------- -------------------
Total cash and cash equivalents 41,114 45,407
-------------------- -------------------
Interest-bearing deposits in banks 9,231 8,475
Investment securities available for sale 258,255 209,795
Investment securities held to maturity
(market value $50,636 and $66,680, respectively) 49,552 65,226
Loans 726,456 689,203
Less: Unearned income (5,261) (7,793)
Allowance for loan losses (11,689) (10,710)
-------------------- -------------------
Net loans 709,506 670,700
-------------------- -------------------
Bank premises and equipment, net 17,323 14,810
Accrued income receivable 7,743 6,653
Other real estate owned 715 972
Intangible assets, net 1,812 1,658
Other assets 3,237 2,432
-------------------- -------------------
Total assets $ 1,098,488 $ 1,026,128
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 142,772 $ 139,723
Interest-bearing:
NOW accounts 96,481 102,270
Money market accounts 177,773 155,516
Savings 106,366 104,329
Time, under $100,000 301,674 294,501
Time, $100,000 or greater 71,616 51,360
-------------------- -------------------
Total deposits 896,682 847,699
Accrued interest payable 14,418 13,927
U.S. Treasury demand notes 2,016 2,572
Federal funds purchased 14,000 -
Federal Home Loan Bank (FHLB) borrowings 27,000 35,000
Securities sold under agreements to repurchase 28,237 21,949
Other liabilities 9,222 7,350
-------------------- -------------------
Total liabilities 991,575 928,497
-------------------- -------------------
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 7,020,211 shares in 1997 and
6,656,770 shares in 1996 7,020 6,657
Additional paid in capital 49,305 40,316
Retained Earnings 46,680 47,849
Net unrealized gains on investment securities available for sale 3,908 2,809
-------------------- -------------------
Total shareholders' equity 106,913 97,631
-------------------- -------------------
Total liabilities and shareholders' equity $ 1,098,488 $ 1,026,128
==================== ===================
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 3
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited)
Nine months ended Three months Ended
September 30, September 30,
------------------- -------------------
<S> <C> <C> <C> <C>
(Dollars in thousands except weighted average number
of common shares and per share information) 1997 1996 1997 1996
------------------- ----------- ------------------- ----------
INTEREST INCOME:
Loans, including fees $ 41,939 $ 39,220 $ 14,332 $ 13,161
Lease financing 3,376 2,796 1,139 1,087
Investment securities:
Taxable 9,294 8,976 3,038 3,078
Exempt from federal taxes 3,917 2,866 1,417 1,041
Federal funds sold 781 547 465 148
Deposits in banks 309 168 91 97
------------------- ----------- ------------------- ----------
Total interest income 59,616 54,573 20,482 18,612
------------------- ----------- ------------------- ----------
INTEREST EXPENSE:
Savings deposits 7,436 7,236 2,585 2,503
Time, under $100,000 12,332 12,711 4,182 4,184
Time, $100,000 or greater 2,421 1,393 980 518
Borrowed funds 2,859 1,559 940 566
------------------- ----------- ------------------- ----------
Total interest expense 25,048 22,899 8,687 7,771
------------------- ----------- ------------------- ----------
Net interest income 34,568 31,674 11,795 10,841
Provision for loan losses 1,670 1,572 540 517
------------------- ----------- ------------------- ----------
Net interest income after provision for loan losses 32,898 30,102 11,255 10,324
------------------- ----------- ------------------- ----------
OTHER OPERATING INCOME:
Service charges 2,122 1,922 706 657
Security gains (losses), net 1,134 (96) 430 23
Trust income 1,107 1,007 369 322
Other Income 804 947 146 362
------------------- ----------- ------------------- ----------
Total other operating income 5,167 3,780 1,651 1,364
------------------- ----------- ------------------- ----------
Net interest income after provision for loan losses
and other operating income 38,065 33,882 12,906 11,688
------------------- ----------- ------------------- ----------
OTHER OPERATING EXPENSES:
Salaries, wages and employee benefits 11,349 10,668 3,911 3,914
Occupancy 1,467 1,379 511 474
Furniture and equipment 1,976 1,516 721 521
Other expenses 6,094 5,525 2,006 1,781
------------------- ----------- ------------------- ----------
Total other operating expenses 20,886 19,088 7,149 6,690
------------------- ----------- ------------------- ----------
Income before income taxes 17,179 14,794 5,757 4,998
Income tax expense 4,651 4,250 1,513 1,483
------------------- ----------- ------------------- ----------
Net income $ 12,528 $ 10,544 $ 4,244 $ 3,515
=================== =========== =================== ==========
Weighted average number of common shares 7,006,084 6,995,446 7,019,406 6,996,467
=================== =========== =================== ==========
Net income per share information $ 1.79 $ 1.51 $ 0.60 $ 0.50
=================== =========== =================== ==========
Cash dividends per share $ 0.65 $ 0.56 $ 0.23 $ 0.20
=================== =========== =================== ==========
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) Nine Months Ended Sept. 30,
<S> <C> <C>
OPERATING ACTIVITIES: 1997 1996
----------------------------- ----------
Net Income $ 12,528 $ 10,544
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,670 1,572
Depreciation and amortization 1,172 1,009
Net amortization of investment
securities' discount/premiums 186 341
Net realized security (gain) loss (1,134) 96
Increase in accrued income receivable (1,090) (634)
Increase in accrued interest payable 491 1,016
Increase in other assets (806) (434)
Net increase in other liabilities 1,279 3,311
Decrease in unearned income (2,532) (1,122)
Write-down of other real estate owned 4 119
(Increase) decrease in intangible assets (153) 226
----------------------------- ----------
Net cash provided by operating activities 11,615 16,044
----------------------------- ----------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale 29,047 59,239
Proceeds, maturity or calls of investment securities held to maturity 12,904 7,069
Proceeds, maturity or calls of investment securities available for sale 16,947 26,479
Purchases of investment securities available for sale (88,045) (115,871)
Purchases of investment securities held to maturity (1,001) (4,439)
Net increase in interest-bearing deposits in banks (756) (6,538)
Net increase in loans (38,764) (45,407)
Net increase in premises and equipment (3,684) (2,423)
Proceeds from sales of other real estate 1,074 449
----------------------------- ----------
Net cash used in investing activities (72,278) (81,442)
----------------------------- ----------
FINANCING ACTIVITIES:
Net increase in deposits 48,983 42,065
(Decrease) increase in U.S. Treasury demand notes (556) 92
Increase in federal funds purchased 14,000 12,000
(Decrease) increase in FHLB borrowings (8,000) 300
Increase in securities sold under agreement 6,288 3,283
Cash dividends & fractional shares (4,545) (3,922)
Dividend reinvestment (17) (19)
Stock Options 217 31
----------------------------- ----------
Net cash provided by financing activities 56,370 53,830
----------------------------- ----------
Increase in cash and cash equivalents (4,293) (11,568)
Cash and cash equivalents at beginning of period 45,407 50,607
----------------------------- ----------
Cash and cash equivalents at end of the period $ 41,114 $ 39,039
============================= ==========
Cash paid during the period for:
Interest $ 24,557 $ 21,882
============================= ==========
Supplemental disclosure of noncash investing and financing activities:
Transfer of assets from loans to other real estate owned $ 820 $ 1,056
============================= ==========
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"),
Security National Bank ("Security") (collectively, the "Banks") and HNC
Financial Company - as of September 30, 1997, the results of its operations
for nine and three month periods ended September 30, 1997 and 1996 and the
cash flows for the nine month periods ended September 30, 1997 and 1996.
These unaudited consolidated financial statements should 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 nine and three month periods ended September
30, 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, 438,126 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 8, 1997, 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 30,
1997, to shareholders of record June 13, 1997.
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
Prior period weighted average number of common shares, net
income per share and cash dividends per share information have been restated
to reflect the stock dividends.
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.
NOTE 8 - In February 1997, the FASB issued SFAS No. 129, Disclosure
Information about Capital Structure. SFAS No. 129 summarizes previously
issued disclosure guidance contained within APB Opinion No. 10 and 15, as well
as SFAS No. 47. SFAS No. 129 is effective for fiscal years ending after
December 15, 1997. The Banks' current disclosures will not be affected by the
adoption of SFAS No. 129.
NOTE 9 - In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards to provide prominent disclosure of
comprehensive income items. Comprehensive income is the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. SFAS No. 130 is effective for all
periods beginning after December 15, 1997. Subsequent to the effective date,
all prior-period amounts are required to be restated to conform to the
provisions of SFAS No. 130. The adoption of SFAS No. 130 is not expected to
have a material impact on the Corporation's financial position or results of
operations.
NOTE 10 - In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 requires that
public business enterprises report certain information about operating
segments in complete sets of financial statements of the enterprise and in
condensed financial statements of interim periods issued to shareholders. It
also requires that public business enterprises report certain information
about their products and services, the geographic areas in which they operate,
and their major customers. SFAS No. 131 is effective for all periods
beginning after December 15, 1997. The adoption of SFAS No. 131 will have no
impact on the Corporation's financial position or results of operation.
PAGE 7
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 Banks' 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 may be indicative of similar
performance in the future.
In addition to historical information, this Form 10-Q contains
forward-looking statements. The forward-looking statements contained herein
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking statements.
Important factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion
and Analysis of 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 nine months of 1997 was
$12,528,000, an increase of $1,984,000, or 18.8%, over the first nine months
of 1996 net income of $10,544,000. Earnings per share for the first nine
months of 1997 of $1.79 increased $0.28, over the first nine months of 1996
earnings per share of $1.51. Consolidated net income for the third quarter of
1997 was $4,244,000, an increase of $729,000, or 20.7%, over the third quarter
of 1996 net income of $3,515,000. Earnings per share for the third quarter of
1997 of $0.60 increased $0.10, over the third quarter of 1996 earnings per
share of $0.50.
The first nine months of 1997 net income included a security
gain, resulting from the sale of equity securities held at HNC Financial
Company. This gain contributed $863,000 to net income during the first nine
months of 1997. This gain was partially offset by losses on the sale of
mortgage loans and losses on the sales of securities at the banking
subsidiaries that reduced net income by $114,000 and $126,000, respectively.
The third quarter of 1997 net income included a security gain, resulting from
the sale of equity securities held at HNC Financial Company in the amount of
$455,000. This gain was partially offset by losses on the sale of mortgage
loans and losses on the sales of securities at the banking subsidiaries that
reduced net income for the third quarter by $114,000 and $176,000,
respectively. Management continuously reviews the available for sale
security portfolio for opportunities to sell securities and recognize gains.
The timing of security sales is dependent on portfolio management strategies
and market conditions. It is anticipated that Management may sell securities
in the future that may result in gains or losses.
As of September 30, 1997, the banks have seen an improvement in
asset quality, compared to December 31, 1996 and September 30, 1996.
Nonperforming assets, including nonaccrual loans, restructured loans and other
real estate owned, were $4,572,000, or .63% of total loans and net assets
acquired in foreclosure at September 30, 1997, compared to 0.83% at December
31, 1996 and 1.78% at September 30, 1996. The ratio of the allowance for loan
losses to nonperforming assets improved to 255.7% at September 30, 1997, from
188.8% at December 31, 1996 and 88.3% at September 30, 1996.
For the nine months ended September 30, 1997, the annualized return on
average assets and the annualized return on average shareholders' equity were
1.57% and 16.35%, respectively. For the same period in 1996, the annualized
return on average assets was 1.46% and the annualized return on average
PAGE 8
shareholders' equity was 15.61%. For the three months ended September 30,
1997, the annualized return on average assets was 1.55%, compared to 1.42% for
the same period in 1996, and the annualized return on average shareholders'
equity was 16.08% for the third quarter of 1997 and 15.23% for the third
period of 1996.
Net income is affected by five major elements: net interest income, or
the difference between interest income earned on loans and investments and
interest expense paid on deposits and borrowed funds; the provision for loan
losses, or the amount added to the allowance for loan losses to provide
reserves for future losses on loans; other operating income, which is made up
primarily of certain fees, trust income and gains and losses from sales of
securities; other operating expenses, which consist primarily of salaries and
other operating expenses and income taxes. Each of these major elements will
be reviewed in more detail in the following discussion.
NET INTEREST INCOME AND RELATED ASSETS AND LIABILITIES
-------------------------------------------------------------
Net interest income for the first nine months of 1997 of $34,568,000
increased $2,894,000, or 9.1%, over the first nine months of 1996 net interest
income of $31,674,000. As illustrated in the table below, the primary source
of this increase was a rise in interest income resulting from increases to
earning asset volumes in the first nine 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 as a result of an increase in the volumes
of time deposits and other borrowings. 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 below, which is
computed on a tax-equivalent basis (tax rate of 35%), analyzes changes in net
interest income for the nine months ended September 30, 1997 over September
30, 1996 and the three months ended September 30, 1997 over September 30, 1996
by their rate and volume components.
<TABLE>
Nine Months Ended Three Months Ended
September 30, 1997 September 30, 1997
Over/(Under) Over/(Under)
September 30, 1996 September 30, 1996
<CAPTION>
Total Caused by: Total Caused by:
------------ ------------
Variance Rate Volume Variance Rate Volume
--------- ------------ ------- --------- ------------ -------
Interest Income:
<S> <C> <C> <C> <C> <C> <C>
Securities * $ 1,935 $ 423 $ 1,512 $ 539 $ 44 $ 495
Money market instruments 375 34 341 311 4 307
Loans * 3,320 (242) 3,562 1,235 161 1,074
--------- ------------ ------- --------- ------------ -------
Total 5,630 215 5,415 2,085 209 1,876
--------- ------------ ------- --------- ------------ -------
Interest Expense:
Savings deposits 200 (89) 289 82 (25) 107
Time deposits and certificates of deposit 650 (183) 833 459 28 431
Other borrowings 1,300 (4) 1,304 375 8 368
--------- ------------ ------- --------- ------------ -------
Total 2,150 (276) 2,426 916 11 906
--------- ------------ ------- --------- ------------ -------
Net interest income $ 3,480 $ 491 $ 2,989 $ 1,169 $ 198 $ 970
========= ============ ======= ========= ============ =======
*Tax Equivalent Basis
</TABLE>
Taxable-equivalent net interest income was $36,944,000 for the first nine
months of 1997, compared to $33,464,000 for the same period in 1996, a 10.4%
or $3,480,000 increase. This increase in taxable-equivalent net interest
income was primarily due to a $2,989,000 increase related to volume. The
PAGE 9
increase related to interest rates was $491,000. Total taxable-equivalent
interest income grew $5,630,000, primarily the result of the higher volumes in
both the security and loan earning asset categories. Average year-to-date
earning assets increased to $1,008,643,000 at September 30, 1997 from
$917,920,000 at September 30, 1996, a 9.9% 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.
Total interest expense grew $2,150,000 during the first nine
months of 1997, compared to the same period in 1996. This growth was
principally the result of higher volumes, primarily due to an increase in
other borrowings. The volume of average other borrowings increased
$33,897,000, or 83.9% during the first nine months of 1997, compared to the
first nine months of 1996. The increase in other borrowings was used to
finance the earning asset growth. Partially offsetting this growth in interest
expense were lower interest rates paid on deposits during the first nine
months of 1997, compared to the same period in 1996. The lower deposit rates
were primarily due to lower time deposit rates. The decrease in the time
deposit rates is related to the repricing of maturing higher rate CD's, into
CD's with lower rates.
Taxable-equivalent net interest income of $12,668,000 was
$1,169,000, or 10.2% higher for the third quarter of 1997, compared to
$11,499,000 for the same period in 1996. Interest income grew $2,085,000
during the period, as a result of an increase in earning asset volumes. Third
quarter average earning assets grew $98,332,000, compared to the third quarter
of 1996. This growth included a $48,987,000 rise in loans and a $27,412,000
increase in securities. The increase in the interest income was partially
offset by a $916,000 rise in interest expense. Increases in all deposit
category volumes contributed to this increase in interest expense.
Nonaccruing loans are included in the average balance yield calculations, but
the average nonaccruing loans had no material effect on the results.
NET INTEREST MARGIN
---------------------
The net interest margin of 4.88% for the nine month period ended
September 30, 1997, increased from the 4.86% net interest margin for the first
nine months of 1996. The yield on earning assets was 8.20% during the first
nine months of 1997, compared to 8.19% for the same period in 1996. During
the first nine months of 1997, a decrease in the yield on loans was offset by
increases in both the securities and money market instrument earning asset
categories, compared to the same period in 1996. The average interest rate
paid on interest bearing deposits and other borrowings was 4.14% for both of
the first nine months of 1997 and 1996. The net interest margin was 4.87% in
the third quarter of 1997, a .02% decrease from the 4.89% net interest margin
recorded in the third quarter of 1996. The Banks have been able to
effectively match assets and liabilities and maintain a consistent percentage
of earning assets to total assets.
PROVISION FOR LOAN LOSSES
- ----------------------------
The provision is based on management's analysis of the adequacy of the
allowance for loan losses. In its evaluation, management considers past loan
experience, overall characteristics of the loan portfolio, current economic
conditions and other relevant factors. Based on the latest monthly evaluation
of potential loan losses, management currently believes that the allowance is
adequate to absorb known and inherent losses in the loan portfolio.
Ultimately, however, the adequacy of the allowance is largely dependent upon
the economy, a factor beyond the Corporation's control. With this in mind,
additions to the allowance for loan losses may be required in future periods,
especially if economic trends worsen or certain borrowers' ability to repay
declines.
For the first nine months of 1997 the provision for loan losses was
$1,670,000, compared to $1,572,000 for the same period in 1996. Net charge
offs were $691,000 for the nine months ended September 30, 1997, compared with
$718,000 for the nine months ended September 30, 1996. The net loans charged
off during the first nine months of 1997 were primarily attributed to consumer
loans (installment, personal credit lines and credit cards). During the
first half 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. Total net loans charged off during the third
quarter of 1997 were 79.5% less than the third quarter of 1996. The ratio of
PAGE 10
the allowance for loan losses to loans at September 30, 1997 of 1.62% was
higher than the December 31, 1996 ratio of 1.57%, and was lower than the
September 30, 1996 ratio of 1.60%.
ALLOWANCE FOR LOAN LOSSES
- ----------------------------
Transactions in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ---------------
<S> <C> <C> <C>
Balance, Beginning of Year $10,710,000 $9,891,000
Provision charged to operating expenses 1,670,000 1,572,000
Loans charged off (1,058,000) (840,000)
Recoveries 367,000 123,000
----------------- ---------------
Balance, September 30 $11,689,000 $10,746,000
================= ===============
Ratios: Sept. 30, 1997 Dec. 31, 1996 Sept. 30, 1996
- ------------------------------------------------- ----------------- --------------- ---------------
Allowance for loan losses to nonperforming assets 255.7% 188.8% 88.3%
----------------- --------------- ---------------
Nonperforming assets to total loans & net assets
acquired in foreclosure 0.63% 0.83% 1.78%
Allowance for loan losses to total loans 1.62% 1.57% 1.60%
</TABLE>
The following table sets forth an allocation of the allowance for loan
losses by loan category:
<TABLE>
<CAPTION>
September 30, 1997
-------------------
Percent
Amount of Loans
------------------- ---------
<S> <C> <C>
Commercial and industrial $ 3,021,000 27%
Installment and other 1,725,000 31%
Real estate 1,474,000 34%
Lease financing 172,000 8%
Unallocated 5,297,000 N/A
------------------- ---------
Total $ 11,689,000 100%
=================== =========
</TABLE>
Nonperforming assets (nonaccruing loans, net assets in foreclosure and
troubled debt restructured loans) were 0.63% of total loans and net assets
acquired in foreclosure at September 30, 1997, compared to 0.83% at December
31, 1996 and 1.78% at September 30, 1996. The decline in this ratio from
September 30, 1996 to September 30, 1997, is primarily the result of the
reduction in nonaccruing loans during this period. The ratio of the allowance
for loan losses to non-performing assets was 255.7% at September 30, 1997
compared to 188.8% at December 31, 1996 and 88.3% at September 30, 1996.
Nonaccruing loans at September 30, 1997 of $2,833,000, decreased $150,000
from the December 31, 1996 level of $2,983,000, and decreased $6,538,000 from
the September 30, 1996 level of $9,371 ,000. The $6,538,000 reduction in
nonaccrual loans from September 30, 1996 to September 30, 1997, was 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 $714,000 as of September 30,
1997, an decrease of $258,000 from the December 31, 1996 balance of $972,000.
During the first nine months of 1997, transfers from loans to assets in
foreclosure were $820,000, payments on foreclosed properties totaled
$1,074,000 and write downs of assets in foreclosure equaled $4,000. The
balance of net assets in foreclosure at September 30, 1996 was $1,708,000.
PAGE 11
Efforts to liquidate assets acquired in foreclosure are proceeding as quickly
as potential buyers can be located and legal constraints permit. Generally
accepted accounting principles require foreclosed assets to be carried at the
lower of cost (lesser of carrying value of asset or fair value at date of
acquisition) or estimated fair value.
As of September 30, 1997, there were two unrelated borrowers with
troubled debt restructured loans totaling $1,025,000, compared with a balance
of $1,717,000 as of December 31, 1996 and $1,097,000 at September 30, 1996.
There were three unrelated borrowers at December 31, 1996 and September 30,
1996, including the same two borrowers at September 30, 1997. The two
unrelated borrowers were complying with the restructured terms, as of
September 30, 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 September 30, 1997, loans past due 90 days or more and
still accruing interest were $1,969,000, compared to $1,848,000 as of
December 31, 1996 and $1,544,000 as of September 30, 1996. The $121,000
increase in loans past due 90 days from December 31, 1996 to September 30,
1997 was primarily the result of an increase in commercial loans past due 90
days.
The following information concerns impaired loans:
Impaired Loans:
<TABLE>
<CAPTION>
Restructured Loans $1,025,000
Nonaccrual Loans 1,470,000
----------
$2,495,000
==========
<S> <C> <C>
Average year-to-date impaired loans: $3,917,000
==========
Impaired loans with specific loss allowances: $2,495,000
==========
Loss allowances reserved on impaired loans: $ 348,000
==========
Income recognized on impaired loans during
the first nine months of 1997 $ 110,000
==========
</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>
Nine Months Ended Sept. 30, Three Months Ended Sept. 30,
------------ ----------------- ------------- ----------------
1997 1996 1997 1996
------------ ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Service charges $ 2,122 $ 1,922 $ 706 $ 657
Securities gains (losses), net 1,134 (96) 430 23
Trust income 1,107 1,007 369 322
Other income 804 947 146 362
------------ ----------------- ------------- ----------------
Total other operating income $ 5,167 $ 3,780 $ 1,651 $ 1,364
============ ================= ============= ================
</TABLE>
PAGE 12
Other operating income for the first nine months of 1997 increased
$1,387,000, or 36.7%, from $3,780,000 at September 30, 1996 to $5,167,000 at
September 30, 1997. This rise in other operating income is primarily the
result of a $1,230,000 rise in net security gains during the first nine months
of 1997, compared to the same period in 1996. Also contributing to this
increase was a $200,000 increase in service charges and a $100,000 rise in
trust fees. These gains were partially offset by a $176,000 reduction in
other income related to losses on the sale of residential mortgages. The
third quarter of 1997 other income of $1,651,000 was $287,000, or 21.0%
higher than the third quarter of 1996 other operating income of $1,364,000.
This increase was primarily the result of an increase in net security gains,
offset by losses on the sale of residential mortgages, during the third
quarter of 1997.
The $200,000, or 10.4% increase in service charges is the result of the
7.8% growth in average deposits eligible for service charges and an effort by
the banks to enhance the collection of service fees. During this period
service charges on deposits grew $82,000, or 9.7%, and overdraft fees
increased $93,000, or 10.9%. The 1997 third quarter increase in service
charges was 7.5%, compared to the third quarter in 1996.
The corporation recorded a net security gain of $1,134,000 in
the first nine months of 1997, compared to a $96,000 loss in the same period
in 1996. The third quarter 1997 net security gain was $407,000 higher than
the third quarter of 1996. The majority of the 1997 security gain is the
result of the sale of equity securities held at HNC Financial Company. 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.
Income from the Trust and Financial Services Department increased
$100,000, or 9.9%, in the first nine months of 1997, compared to the same
period in 1996. This increase was the result of both an increase in the book
value of trust assets of 8.8% from September 30, 1996 to September 30, 1997,
and the Corporation's continuing emphasis on marketing the Trust and Financial
Services Department's products and services. The third quarter 1997 trust
fees grew 14.6%, compared to the same period in 1996.
Other income for the nine months of 1997 decreased $143,000, or
15.1%, compared to the same period in 1996. This decrease is due to a
$176,000 net loss recognized on the sales of residential mortgages, during the
third quarter of 1997. The Corporation used the funds generated from these
sales to purchase mortgages that currently earn a higher rate of return and
reduce the overall interest rate risk of the residential mortgage portfolio.
The Corporation continuously researches different strategies it can use to
enhance both the interest rate earned on loans, and reduce the interest rate
risk of the loan portfolios. Net of the loss on the sale of residential
mortgages, other income grew 3.5%, primarily due to a rise in merchant credit
card processing fees. The third quarter of 1997 other income decreased
$216,000, compared to the same period in 1996, primarily due to the $176,000
mortgage loan sale loss. Also contributing to the lower third quarter 1997
other income were lower fees associated with loans.
OTHER OPERATING EXPENSES
- --------------------------
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30, Three Months Ended Sept. 30,
------------ ---------------- ------------- ----------------
1997 1996 1997 1996
------------ ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Salaries $ 8,746 $ 7,591 $ 3,044 $ 2,563
Employee benefits 2,603 3,077 867 1,351
Net occupancy expense 1,467 1,379 511 474
Equipment expense 1,976 1,516 721 521
Other expenses 6,094 5,525 2,006 1,781
------------ ---------------- ------------- ----------------
Total other operating expenses $ 20,886 $ 19,088 $ 7,149 $ 6,690
============ ================ ============= ================
</TABLE>
PAGE 13
Other operating expenses for the first nine months of 1997 of $20,886,000
increased $1,798,000, or 9.4%, from the $19,088,000 for the same period in
1996. The third quarter of 1997 other operating expenses grew 6.9%, compared
to the third quarter of 1996. The rise in operating expenses was due to
higher expenses related to four 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 $1,155,000, or 15.2% from $7,591,000 for the
first nine months of 1996 to $8,746,000 for the same period in 1997. The
salary increase directly related to the staffing of the four new branches was
$270,000, or 23.4% 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. The third quarter of
1997 salaries increased 18.8%, compared to the third quarter of 1996.
Employee benefits of $2,603,000 expensed in the first nine months of 1997,
were 15.4% lower than the employee benefits expensed during the same period in
1996. This decrease is the result of the modification of the Banks'
profit-sharing plan into a 401 (K) plan during 1996, and to lower pension
expenses. The profit-sharing plan was funded entirely by the Banks and the
modified 401 (K) plan is both Bank and employee funded. The third quarter of
1997 employee benefits decreased $484,000, compared to the third quarter of
1996.
Net occupancy expense increased $88,000, or 6.4%, from $1,379,000 in the
first nine months of 1996 to $1,467,000 in the first nine months of 1997. The
third quarter of 1997 occupancy expense increased $37,000 over the same period
in 1996. The four new branches were responsible for these increases.
Equipment expense increased $460,000, or 30.3% during the first nine months
of 1997, compared to the same period in 1996. The first nine months of 1997
equipment expense related to the new branches totaled $108,000. The remainder
of this increase is due to both equipment rental, and 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. The third
quarter of 1997 furniture and equipment expenses grew $200,000, compared to
the third quarter of 1996.
Other expenses increased $569,000, or 10.3%, from $5,525,000 in
the first nine months of 1996, compared to other expenses recorded during the
same period in 1997 of $6,094,000. The increase related to the three new
branches totaled $181,000. The remainder of the growth is the result of
higher stationery and supplies, postage expenses and other expenses directly
related to the 9.3% growth in the bank during this period. The third quarter
of 1997 other expenses grew 12.6%, compared to the third quarter in 1996.
INCOME TAXES
- -------------
Income tax expense is less than the amount calculated using the statutory
tax rate primarily as a result of tax exempt income earned from state and
municipal securities and loans.
BALANCE SHEET ANALYSIS
- ------------------------
Total assets grew $72,360,000, or 7.1%, from $1,026,128,000 at December
31, 1996 to $1,098,488,000 at September 30, 1997. This growth was primarily
in interest earning assets which grew $76,377,000 to $1,047,283,000 at
September 30, 1997, from $970,906,000 at December 31, 1996. During the first
nine months of 1997 loans increased $39,785,000, investment securities rose
$32,786,000, federal funds sold grew $3,050,000 and interest-bearing deposits
in banks increased $756,000. The increase in interest earning assets was
partially offset by a $7,343,000 decrease in cash and due from bank deposits.
Total deposits grew $48,983,000 from $847,699,000 at December 31, 1996
to $896,682,000 at September 30, 1997. This growth was due to a $27,429,000
rise in time deposits, a $22,257,000 increase in money market accounts, a
$3,049,000 growth in noninterest-bearing accounts, and a $2,037,000 increase
in savings accounts. Offsetting these increases was a $5,789,000 decrease
in NOW accounts. Other borrowings increased $11,732,000 during the first nine
PAGE 14
months of 1997, primarily the result of an increase in federal funds
purchased. 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 September 30, 1997 was $106,913,000, an
increase of $9,282,000 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 adverse effect on the Corporation's capital.
<TABLE>
<CAPTION>
Tier 1 Capital to Risk- Total Capital to Risk-
Leverage Ratio Weighted Assets Ratio Weighted Asset Ratio
Sept. 30, 1997 Sept. 30,1997 Sept. 30, 1997
--------------- ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
--------------- ------ ------------------------ ------ ----------------------- ------
<S> <C> <C> <C> <C> <C> <C>
Entity:
Corporation $ 101,222 9.52% $ 101,222 13.50% $ 110,637 14.76%
Subsidiary Banks:
Harleysville National Bank 71,083 8.26 71,083 11.73 78,685 12.99
Citizens National Bank 20,889 12.98 20,889 22.75 21,977 23.93
Security National Bank 6,074 8.74 6,074 11.69 6,725 12.94
"Well Capitalized" institution
(under FDIC regulations) 5.00 6.00 10.00
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 December 31,1996 December 31, 1996
------------------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------------------ ------ ----------------- ------ ------------------ ------
Entity:
<S> <C> <C> <C> <C> <C> <C>
Corporation $ 93,164 9.21% $ 93,164 13.12% $ 102,061 14.38%
Subsidiary Banks:
Harleysville National Bank 67,253 8.34 67,253 11.59 74,528 12.85
Citizens National Bank 20,031 13.08 20,031 22.60 20,993 23.69
Security National Bank 3,885 6.81 3,885 9.57 4,394 10.83
"Well Capitalized" institution
(under FDIC regulations) 5.00 6.00 10.00
</TABLE>
(1) Accordingly, at September 30, 1997, both the Corporation and its
subsidiary banks were "well capitalized" under FDIC regulations.
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 10.54% at September 30, 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
PAGE 15
total capital ratio (Tier 1 plus Tier 2 capital divided by risk-adjusted
assets) minimum is 8.0%. At September 30, 1997, the Corporation's Tier 1
risk-adjusted capital ratio was 13.48%, and the total risk-adjusted capital
ratio was 14.73%, both well above the regulatory requirements. The risk-based
capital ratios of each of the Corporation's commercial banks also exceeded
regulatory requirements at September 30, 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 9.52% at
September 30, 1997 and 9.21% at December 31, 1996.
The year-to-date September 30, 1997 cash dividend per share of $.65 was
16.1% higher than the cash dividend for the same period in 1996 of $.56. The
dividend payout ratio for the first nine months of 1997 was 36.28%, compared
to 38.75% for the twelve month period ended December 31, 1996. On June 30,
1997, 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 13, 1997. On June 28, 1996, the Corporation paid a 5% stock
dividend (five shares of common stock for each 100 shares of common stock
outstanding held), to shareholders of record June 14, 1996. Activity in both
the Corporation's dividend reinvestment and stock purchase plan and the stock
option plan did not have a material impact on capital during the first nine
months of 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 $18,722,000 during
the first nine months of 1997 and securities available for sale averaged
$228,124,000 during the first nine 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 $191,499,000, as of September 30,
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.
Recently, Pennsylvania enacted a law to permit State chartered
banking institutions to sell insurance. This follows a U. S. Supreme Court
decision in favor of nationwide insurance sales by banks and which also bars
states from blocking insurance sales by national banks in towns with
populations of no more the 5,000. The Bank is currently evaluating its
options regarding the sale of insurance
Congress is currently considering legislative reforms to
modernize the financial services industry, including repealing the Glass
Steagall Act which prohibits commercial banks from engaging in the securities
industry. Consequently, equity underwriting activities of banks may increase
in the near future. However, the Corporation does not currently anticipate
entering into these activities.
Changes in the Bank's FDIC assessment rate, caused by the
enactment of the Deposit Insurance Funds Act of 1996, will adversely impact
results of operations, net of income taxes, in a currently estimated amount of
PAGE 16
$20,000 for the remaining months of 1997. The act also provides regulatory
relief to the financial services industry relative to environmental risks,
frequency of examinations, and the simplification of forms and disclosures.
The Corporation has analyzed the recently enacted changes to the
federal tax law. The impact of such changes on liquidity, operating results,
and capital should not be material.
The Corporation is in the process of assessing the cost and
extent of vulnerability of the Corporation's computer systems to the "Year
2000 problem." Modifications or replacements of computer systems to attain
Year 2000 compliance have begun, and the Corporation expects to attain Year
2000 compliance and institute appropriate testing of its modifications and
replacements before the Year 2000 date change. The Corporation believes that,
with modifications to existing software and conversions to new software, the
Year 2000 problem will not pose a significant operational problem for the
Corporation. The Corporation has taken steps to communicate with the
unrelated parties with whom it deals to coordinate Year 2000 compliance. Most
of the costs incurred in addressing the Year 2000 problem are expected to be
expensed as incurred, in compliance with GAAP.
The financial impact to the Corporation of Year 2000 compliance
has not been and is not anticipated to be material to the Corporation's
financial position or results of operations in any given year.
From time to time, various types of federal and state
legislation have been proposed that could result in additional regulation of,
and restrictions on, the business of the Corporation and the Banks. It cannot
be predicted whether such legislation will be enacted or, if enacted, how such
legislation would affect the business of the Corporation and the Banks. As a
consequence of the extensive regulation of commercial banking activities in
the United States, the Corporation's and the Bank's business is particularly
susceptible to being affected by federal legislation and regulations that may
increase the costs of doing business. Except as specifically described above,
Management believes that the affect of the provisions of the aforementioned
legislation on liquidity, capital resources, and results of operations of the
Corporation will be immaterial. Management is not aware of any other current
specific recommendations by regulatory authorities or proposed legislation,
which if they were implemented, would have a material adverse effect upon the
liquidity, capital resources, or results of operations, 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.
Further, the business of the Corporation is also affected by
the state of the financial services industry in general. As a result of legal
and industry changes, Management predicts that the industry will continue to
experience an increase in consolidations and mergers as the financial services
industry strives for greater cost efficiencies and market share. Management
also expects increased diversification of financial products and services
offered by the Bank and its competitors. Management believes that such
consolidations and mergers, and diversification of products and services may
enhance the Banks competitive position.
PAGE 17
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 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARLEYSVILLE NATIONAL CORPORATION
/s/ Walter E. Daller, Jr.
________________________
Walter E. Daller, Jr., President
and Chief Executive Officer
(Principal executive officer)
/s/ Vernon L. Hunsberger
________________________
Vernon L. Hunsberger, Treasurer
(Principal financial and accounting officer)
Date: November 13, 1997
PAGE 19
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 32,064
<INT-BEARING-DEPOSITS> 9,231
<FED-FUNDS-SOLD> 9,050
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 258,255
<INVESTMENTS-CARRYING> 49,552
<INVESTMENTS-MARKET> 50,636
<LOANS> 721,195
<ALLOWANCE> 11,689
<TOTAL-ASSETS> 1,098,488
<DEPOSITS> 896,682
<SHORT-TERM> 69,253
<LIABILITIES-OTHER> 23,640
<LONG-TERM> 2,000
0
0
<COMMON> 7,020
<OTHER-SE> 99,893
<TOTAL-LIABILITIES-AND-EQUITY> 1,048,488
<INTEREST-LOAN> 45,315
<INTEREST-INVEST> 13,211
<INTEREST-OTHER> 1,090
<INTEREST-TOTAL> 59,616
<INTEREST-DEPOSIT> 22,189
<INTEREST-EXPENSE> 2,859
<INTEREST-INCOME-NET> 34,568
<LOAN-LOSSES> 1,670
<SECURITIES-GAINS> 1,134
<EXPENSE-OTHER> 20,886
<INCOME-PRETAX> 17,179
<INCOME-PRE-EXTRAORDINARY> 17,179
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,528
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.79
<YIELD-ACTUAL> 4.88
<LOANS-NON> 2,833
<LOANS-PAST> 1,969
<LOANS-TROUBLED> 1,025
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,710
<CHARGE-OFFS> 1,058
<RECOVERIES> 367
<ALLOWANCE-CLOSE> 11,689
<ALLOWANCE-DOMESTIC> 11,689
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,297
</TABLE>
