0000702902-95-000010.txt : 19950809 0000702902-95-000010.hdr.sgml : 19950809 ACCESSION NUMBER: 0000702902-95-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950808 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARLEYSVILLE NATIONAL CORP CENTRAL INDEX KEY: 0000702902 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232210237 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15237 FILM NUMBER: 95559525 BUSINESS ADDRESS: STREET 1: 483 MAIN ST CITY: HARLEYSVILLE STATE: PA ZIP: 19438 BUSINESS PHONE: 2152568851 MAIL ADDRESS: STREET 1: 483 MAIN STREET CITY: HARLEYSVILLE STATE: PA ZIP: 19438 10-Q 1 FORM 10-Q FOR 06/30/95 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1995. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _______________. Commission file number 0-15237 HARLEYSVILLE NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 23-2210237 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 483 Main Street, Harleysville, Pennsylvania 19438 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 256-8851 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 5,873,685 shares of Common Stock, $1.00 par value, outstanding on July 31, 1995. Page 2 HARLEYSVILLE NATIONAL CORPORATION INDEX TO FORM 10-Q REPORT PAGE Part I. Financial Information Consolidated Balance Sheets - June 30, 1995 and December 31, 1994 3 Consolidated Statements of Income - Six Months Ended June 30, 1995 and 1994 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1995 and 1994 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. Other Information 15 Signatures 17 Page 3 PART 1. FINANCIAL INFORMATION HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, 1995 December 31, 1994 --------------- ----------------- Assets ------ Cash and due from banks $35,872,592 $35,390,357 Federal Funds sold 27,100,000 - Interest-bearing deposits in banks 322,477 205,719 Securities available for sale (amortized cost $94,034,684 and $107,307,249, respectively) 93,837,932 102,211,333 Investment securities (fair value $97,251,927 and $79,896,560, respectively) 96,124,526 82,867,003 Loans 586,963,942 578,063,239 Less: Unearned income (9,746,180) (9,804,357) Allowance for loan losses (8,931,548) (7,934,385) ----------- ---------- Net loans 568,286,214 560,324,497 ----------- ----------- Bank premises and equipment, net 10,198,274 8,794,530 Accrued income receivable 4,938,621 4,726,117 Other real estate owened 593,623 1,242,887 Intangible assets, net 2,137,430 2,315,000 Other assets 1,991,427 1,701,041 ----------- ----------- Total assets $841,403,116 $799,778,484 =========== =========== Liabilities and Shareholders' Equity ------------------------------------ Deposits: Noninterest-bearing $116,535,878 $110,502,583 Interest-bearing: Now accounts 79,503,438 83,828,901 Money market accounts 141,858,976 162,219,289 Savings 85,813,752 88,200,527 Time under $100,000 265,468,299 224,598,588 Time $100,000 or greater 28,149,061 19,227,711 ----------- ----------- Total deposits 717,329,404 688,577,599 Accrued interest payable 9,014,765 8,058,926 U.S. Treasury demand notes 2,158,365 2,392,975 Federal funds purchased - 12,716,000 Federal Home Loan Bank (FHLB) borrowings 17,200,000 5,000,000 Securities sold under agreements to repurchase 17,259,103 15,212,755 Other liabilities 4,500,611 1,244,847 ----------- ----------- Total liabilities 767,462,248 733,203,102 Shareholder's 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 5,873,685 shares in 1995 and 5,753,294 shares in 1994 5,873,685 5,753,294 Surplus 27,486,716 24,415,932 Undivided profits 40,708,355 39,718,501 Net unrealized losses on securities available for sale, (127,888) (3,312,345) net of taxes ------------ ----------- Total shareholders' equity 73,940,868 66,575,382 ------------ ----------- Total liabilities and shareholders' equity $841,403,116 $799,778,484 ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
Page 4 HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Six months Ended Three months Ended June 30, June 30, -------------------- ----------------------- 1995 1994 1995 1994 Interest Income --------------- Loans, including fees $24,099,551 $18,737,802 $12,315,461 $9,707,847 Lease financing 1,524,280 1,278,938 765,135 652,897 Commercial paper 29,534 - 17,099 - Investment securities: Taxable 4,439,500 4,389,338 2,310,553 2,173,026 Exempt from federal taxes 1,208,055 1,244,716 596,927 608,493 Federal funds sold 140,578 158,961 131,683 65,219 Deposits in banks 10,735 60,112 5,798 29,736 ---------- ---------- ---------- ---------- Total interest income 31,452,233 25,869,867 16,142,656 13,237,218 Interest Expense ---------------- Savings deposits 4,545,646 4,180,678 2,220,915 2,090,916 Time Under $100,000 6,442,650 4,701,746 3,513,118 2,342,691 Time $100,000 or greater 675,257 216,616 374,303 120,103 Borrowed funds 1,087,259 42,266 548,340 28,718 ---------- --------- --------- --------- Total interest expense 12,750,812 9,141,306 6,656,676 4,582,428 ---------- ---------- --------- --------- Net interest income 18,701,421 16,728,561 9,485,980 8,654,790 Provision for loan losses 1,047,500 1,480,226 515,000 945,900 ---------- ---------- --------- --------- Net interest income after provision for 17,653,921 15,248,335 8,970,980 7,708,890 loan losses Other Operating Income ---------------------- Service charges 1,118,566 1,175,852 574,356 605,443 Secruity gains (losses), net (172,316) 922,562 (28,667) 860,629 Trust income 501,014 375,791 271,561 184,677 Other Income 500,026 525,704 245,238 275,887 --------- --------- --------- --------- Total other income 1,947,290 2,999,909 1,062,488 1,926,636 --------- --------- --------- --------- Net interest income after provision for loan losses and other income 19,601,211 18,248,244 10,033,468 9,635,526 Other Operating Expenses ------------------------ Salaries, wages and employee benefits 5,835,537 4,842,917 2,897,710 2,559,330 Net occupancy 699,842 708,703 335,992 340,108 Furniture and equipment 831,438 652,645 438,254 325,596 FDIC premium 771,478 754,831 385,739 377,415 Other expenses 3,086,593 3,325,602 1,635,990 1,796,320 ---------- ---------- --------- --------- Total other expenses 11,224,888 10,284,698 5,693,685 5,398,769 ---------- ---------- --------- --------- Income before income taxes 8,376,323 7,963,546 4,339,783 4,236,757 Income tax expense 2,483,773 2,402,872 1,293,562 1,307,682 --------- --------- --------- --------- Net income $5,892,550 $5,560,674 $3,046,221 $2,929,075 ========== ========= ========= ========= Weighted average number of common shares: Primary 5,883,501 5,905,726 5,907,394 5,914,268 Fully diluted 5,884,276 5,913,674 5,908,353 5,917,701 ========= ========= ========= ========= Net income per share information: Primary $1.00 $0.94 $0.52 $0.50 ========= ========= ======== ========= Fully diluted $1.00 $0.94 $0.52 $0.49 ========= ========= ======== ========= Cash dividends per share $0.36 $0.29 $0.18 $0.15 ========= ========= ======== ========= The accompanying notes are an integral part of these consolidated financial statements.
Page 5 HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, --------------------------- 1995 1994 Operating Activities: ---------- ---------- -------------------- Net Income $5,892,550 $5,560,674 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,047,500 1,480,226 Depreciation and amortization 466,609 438,051 Net amortization of investment securities' discount/amortization 230,546 311,147 Net realized securities (gain) loss 172,316 (922,562) Increase accrued income receivable (212,504) (225,368) Increase accrued interest payable 955,839 138,704 Net increase in other assets (290,386) (1,368,885) Net increase in other liabilities 1,541,057 3,109,557 Decrease in unearned income (58,177) (1,287,038) Write down of other real estate owned 99,894 30,000 Decrease in intangible assets 177,570 258,750 ---------- ---------- Net cash provided by operating activities 10,022,814 7,523,256 ---------- --------- Investing Activities: -------------------- Proceeds from sales of securities available for 10,886,479 32,051,990 sale Proceeds - maturity or calls of investment 13,753,016 24,244,533 securities Proceeds - maturity or calls of securities 2,701,510 282,443 available for sale Purchases of investment securities (27,126,575) (10,031,463) Purchases of securities available for sale (602,250) (25,062,418) Net decrease (increase) in short-term investments (116,758) 104,529 Net increase in loans (9,225,566) (33,793,511) Net increase in premises and equipment (1,870,353) (277,474) Proceeds from sales of other real estate 823,896 674,694 ----------- ---------- Net cash used in investing activities (10,776,601) (11,806,677) ----------- ---------- Financing Activities: -------------------- Net increase in deposits 28,751,805 4,902,722 Increase (decrease) in U.S. Treasury demand notes (234,610) 20,681 Decrease in Federal Funds purchased (12,716,000) (415,000) Increase in FHLB borrowings 12,200,000 - Increase in securities sold under agreement 2,046,348 - Cash dividends and fractional shares (2,114,527) (1,559,669) Dividend reinvestment (76) 341,171 Stock options 403,082 52,800 ---------- ----------- Net cash provided by financing activities 28,336,022 3,342,705 ---------- ----------- Increase (decrease) in cash 27,582,235 (940,716) Cash and cash equivalents at beginning of year 35,390,357 45,484,518 ---------- ----------- Cash and cash equivalents at end of the second $62,972,592 $44,543,802 quarter =========== ========== Cash paid during the year for: Interest $11,794,973 $9,002,602 ========== ========== Supplemental disclosure of noncash investing and financing activities: Transfer of assets from loans to foreclosed and repossessed property $274,526 $625,694 ========== ========= Net unrealized gain (loss) on securities available for sale, net of taxes of ($68,864) and ($787,961), respectively $(127,888) $(1,464,911) ========= ===========
Page 6 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") - as of June 30, 1995, and the results of its operations for the six and three month periods ended June 30, 1995 and 1994 and changes in its consolidated financial position for the periods then ended. It is suggested that these unaudited consolidated financial statements be read in conjunction with the audited consolidated financial statements of the Corporation and the notes thereto set forth in the Corporation's annual report. The results of operations for the six and three month periods ended June 30, 1995 and 1994 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 - On January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards No.114 ("SFAS No. 114"), "Accounting for Certain Investments in Debt and Equity Securities." The statement establishes accounting measurement, recognition, and reporting standards for impaired loans. SFAS 114 provides that a loan is impaired when, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms (both principal and interest). SFAS 114 requires that when a loan is impaired, impairment should be measured based on the present value of the expected cash flows, discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. The value of the loan is adjusted through a valuation allowance created though a charge against income. Residential mortgages, consumer installment obligations and credit cards are excluded. The adoption of SFAS 114 is not anticipated to have a material impact on the Corporation's financial position or results of operations. Note 4 - On December 2, 1993, the Corporation and Security National Bank of Pottstown ("Security") executed an Agreement and Plan of Reorganization and an Agreement and Plan of Merger, which agreements delineate the terms of the combination. The shareholders of Security approved the merger at a meeting of shareholders on April 28, 1994. For each share of Security common stock outstanding, 0.7483 shares of the Corporation's common stock were issued at the closing on July 1, 1994. As a result of the transaction, 211,456 new shares of Harleysville National Corporation, par value $1.00 per share, were issued pursuant to Registration Statement No. 33-76618 filed with the SEC and which was effective March 28, 1994. The Security merger was accounted for on a pooling-of-interests basis. Page 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations --------------------- Consolidated net income for the first six months of 1995 was $5,892,000, an increase of $331,000, or 6.0%, over the first six months of 1994 net income of $5,561,000. Primary earnings per share and fully diluted earnings per share for the first six months of 1995 were $1.00 compared to $.94 in the first six months of 1994. Consolidated net income for the second quarter of 1995 was $3,046,000, an increase of $117,000, or 4.0%, over the second quarter of 1994 net income of $2,929,000. Primary earnings per share for the second quarter of 1995 was $0.52 compared to $0.50 for the second quarter of 1994, while fully diluted earnings per share was $.52 in the second quarter of 1995 compared to $.49 for the same period in 1994. For the six months ended June 30, 1995 , the annualized return on average assets and the annualized return on average shareholders' equity were 1.45% and 16.61%, respectively. For the same period in 1994 the annualized return on average assets was 1.47% and the annualized return on average shareholders' equity was 17.08%. For the three months ended June 30, 1995, the annualized return on average assets was 1.48%, compared to 1.55% for the same period of 1994, and the annualized return on average shareholders' equity was 16.73% for the second quarter of 1995 and 17.68% for the second period of 1994. 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 and gains and losses from sales of securities; other operating expenses, which consist primarily of salaries and other operating expenses and income taxes. Each of these major elements will be reviewed in more detail in the following discussion. Net Interest Income and Related Assets and Liabilities ------------------------------------------------------ Net interest income for the first six months of 1995 of $18,701,000 increased by $1,972,000, or 11.8%, over the first six months of 1994 net interest income of $16,729,000. Net interest income for the second quarter of 1995 increased by $831,000, or 9.6%, over the second quarter of 1994. As illustrated in the table on the next page, the primary source of this increase was the result of increases to loan rates and volumes in the first six months of 1995, compared to the same period in 1994. Loan rate increases were related to the rise in the prime rate during this period, and the growth in loan volumes were the result of strong customer loan demand. The rate-volume variance analysis set forth in the table on the next page, which is computed on a tax equivalent basis, analyzes changes in net interest income for the six months ended June 30, 1995 over June 30, 1994 and the three months ended June 30, 1995 over June 30, 1994 by their rate and volume components. Page 8 Six Months Ended Three Months Ended June 30, 1995 June 30, 1995 Over/ (Under) Over/(Under) June 30, 1994 June 30, 1994 ---------------- ------------------
Total Caused by: Total Caused by: Variance Rate Volume Variance Rate Volume ---------------------------------- ---------------------------- Interest income: (dollars in thousands) Securities * $ 23 $ 760 $ (737) $ 139 $ 408 $( 269) Money market assets ( 67) 113 ( 180) 43 32 11 Loans* 5,632 1,787 3,845 2,757 900 1,857 ------ ----- ----- ----- --- ----- Total 5,588 2,660 2,928 2,939 1,340 1,599 ------ ----- ----- ----- ----- ----- Interest expense: Savings deposits 364 729 ( 365) 130 372 (242) Time deposits and certificates of deposit 2,200 1,177 1,023 1,424 716 708 Other borrowings 1,046 19 1,027 520 0 520 ----- ----- ----- ----- ----- --- Total 3,610 1,925 1,685 2,074 1,088 986 ----- ----- ----- ----- ----- --- Net interest income $ 1,978 $ 735 $ 1,243 $ 865 $ 252 $ 613 *Tax Equivalent Basis ===== ===== ===== ===== ===== =====
Taxable-equivalent net interest income was $19,484,000 for the first six months of 1995, compared to $17,506,000 for the same period in 1994, an 11.3% or $1,978,000 increase. The overall favorable variance for the six months ended June 30, 1995 was due to both increased rates and volumes. Average year-to-date interest-bearing assets increased to $770,401,000 at June 30, 1995 from $712,133,000 at June 30, 1994, an 8.2% increase. Net interest income also rose due to the change in the mix of earning assets, as a portion of loan growth was funded by reductions in both lower yielding securities and money market assets. Loans accounted for 75% of average interest- earning assets during the first six months of 1995, compared to 69% in the first six months of 1994. The increase in the loan portfolio was also funded by a rise in average deposits and other borrowings. Average year-to-date deposits at June 30, 1995 grew $17,458,000 over the same balance at June 30, 1994. A $38,791,000 increase in average time deposits and a $4,569,000 growth in average non- interest bearing deposits was offset by a $25,902,000 decrease in average savings deposits. Average other borrowings grew $33,400,000 during this same period. Other borrowings include Federal Funds purchased, Federal Home Loan Bank borrowings, securities sold under agreements to repurchase and U. S. Treasury Demand Notes. This growth included increases in average Federal Funds purchased, Federal Home Loan Bank borrowings, and securities sold under agreements to repurchase of $5,541,000, $12,421,000 and $15,430,000, respectively. Taxable-equivalent net interest income was $9,881,000 for the second quarter of 1995, compared to $9,016,000 for the same period in 1994, a $865,000 or 9.6% increase. Higher rates and volumes were responsible for the this favorable rise in net interest income. Second quarter average earning assets grew $66,818,000, compared to the second quarter of 1994, due to an increase in loans. The increase in loans was funded by a decrease in average securities and an increase in both deposits and other borrowings. Nonaccruing loans are included in the average balance yield calculations, but the average nonaccruing loans were insignificant and had no material effect on the results. Variances attributed to both rate and volume are included in the volume column. Page 9 Net Interest Margin ------------------- The net interest margin was 5.06% for the six month period ended June 30, 1995, a rise of .14% from the 4.92% net interest margin for the first half of 1994. This increase is the result of the Corporation effectively matching assets and liabilities through the rise in interest rates during the past year and maintaining a consistent percentage of earning assets to total assets. The net interest margin for the second quarter of 1995 of 5.06% was slightly higher than the 5.05% net interest margin for the same period in 1994. 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 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. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks' allowance for loan losses. Such agencies may require the Banks to recognize additions to the allowance based on their judgment of information available to them at the time of their examinations. The first six months of 1995 provision for loan losses of $1,047,000 was $433,000, or 29% lower than the $1,480,000 provision recorded during the first six months of 1994. Net charge offs were $49,000 for the six months ended June 30, 1995, compared with $116,000 for the six months ended June 30, 1994. Included in the charge offs during the first quarter of 1995 were two mortgage loans in the amount of $53,000. The ratio of the allowance for loan losses to loans of 1.55% at June 30, 1995 increased from the December 31, 1994 ratio of 1.40% and the June 30, 1994 ratio of 1.42%. The lower provision for loan losses during the first six months of 1995, compared to the same period in 1994, is attributed to the fact the ratio of the allowance for loan losses to nonperforming assets at June 30, 1995 of 175.5%, increased from the June 30, 1994 ratio of 158.1%. The provision was also lower during 1995, as a result of the lower net loan charge offs experienced during the first six months of 1995, compared to the same period in 1994.. The provision for loan losses in the second quarter of 1995 was $515,000, compared to $946,000 in the second quarter of 1994. Allowance for Loan Losses ------------------------- Transactions in the allowance for loan losses are as follows: 1995 1994 ---------- ---------- Balance, beginning of year $7,934,000 $5,886,000 Provision charged to operating expenses 1,047,000 1,480,000 Loans charged off (241,000) (424,000) Recoveries 192,000 308,000 --------- --------- Balance, June 30 $8,932,000 $7,250,000 ========= ========== Page 10 The following table sets forth an allocation of the allowance for loan losses by loan category: June 30, 1995 -------------- Percent Amount of Loans --------- -------- Commercial and industrial $3,396,000 28% Installment and other 871,000 31% Real estate 1,027,000 34% Lease financing 116,000 7% Unallocated 3,522,000 N/A --------- ----- Total $8,932,000 100% ========= ==== Non-performing assets (non-accruing loans, net assets in foreclosure and troubled debt restructured loans) were 0.86% of total loans and net assets acquired in foreclosure at June 30, 1995 compared to 0.97% at December 31, 1994 and .88% at June 30, 1994. The ratio of the allowance to non-performing assets was 175.5% at June 30, 1995 compared to 141.8% at December 31, 1994 and 158.1% at June 30, 1994. Non-accruing loans at June 30, 1995 of $2,626,000, increased $168,000 from the December 31, 1994 level of $2,458,000. Approximately $1,254,000, or 47.8%, of total non-accruing loans are attributable to four unrelated borrowers at June 30, 1995. The level of non-accruing loans was $1,889,000 at June 30, 1994. Efforts to liquidate or work-out individual accounts are proceeding as quickly as potential buyers can be located and legal constraints permit. Net assets in foreclosure totaled $610,000 as of June 30, 1995, a decrease of $659,000, or 51.9%, from the December 31, 1994 balance of $1,243,000. This decrease is the result of the sale of assets, previously held in foreclosure, during the first six months of 1995. The balance of net assets in foreclosure at June 30, 1994 was $1,438,000. Sales of foreclosed properties during the first six months of 1995 totaled $824,000. Efforts to liquidate assets acquired in foreclosure are proceeding as quickly as potential buyers can be located and legal constraints permit. Generally accepted accounting principles require foreclosed assets to be carried at the lower of cost (lesser of carrying value of asset or fair value at date of acquisition) or estimated fair value. As of June 30, 1995, there were five unrelated borrowers with troubled debt restructured loans totaling $1,854,000, compared with a balance of $1,868,000 as of December 31, 1994 and $1,259,000 at June 30, 1994. All five customers were complying with the restructured terms as of June 30, 1995. Loans past due 90 days or more and still accruing interest are loans that are generally well-secured and expected to be restored to a current status in the near future. As of June 30, 1995, loans past due 90 days or more and still accruing interest were $1,177,000, compared to $2,145,000 as of December 31, 1994 and $1,284,000 as of June 30, 1994. Page 11 The following information concerns impaired loans as described in note 3: Impaired Loans: Restructured Loans $1,854,000 Nonaccrual Loans 1,666,000 --------- $3,520,000 ========= Average impaired loans for the period: $3,684,000 ========= Impaired loans with specific loss allowances: $3,520,000 ========= Loss allowances reserved on impaired loans: $ 504,000 ======== Income recognized on impaired loans during the first six months of 1995 $ 88,000 ======= The Bank's policy for interest income recognition on impaired loans is to recognize income on restructured loans under the accrual method. The Bank does not recognize income on nonaccrual loans. Other Operating Income ----------------------
Six Months Ended June 30, Three Months Ended June 30, ------------------------- -------------------------- 1995 1994 1995 1994 ------------------------- --------------------------- (Dollars in thousands) Service charges $ 1,118 $1,176 $ 574 $ 605 Securities gains (losses), net (172) 922 (29) 861 Trust income 501 376 272 185 Other income 500 526 245 276 ----- ----- ----- ----- Total other operating income $ 1,947 $3,000 $ 1,062 $ 1,927 ==== ==== ==== ====
Other operating income for the first six months of 1995 decreased by $1,053,000, or 35.1%, from $3,000,000 at June 30, 1994 to $1,947,000 at June 30, 1995. Second quarter 1995 other operating income decreased $865,000, compared to the second quarter of 1994. This reduction in other income is principally the result of $172,000 in losses experienced by the sale of securities available for sale during the first half of 1995, compared to a gain of $922,000 recorded in the same period in 1994. The $922,000 gain recognized during the first half of 1994 was the result of the sale of over 40,000 shares of First Eastern Bank stock which was purchased by PNC Corporation on June 24, 1994. As a result of this transaction, the Corporation realized a securities gain of approximately $1,058,000. The corporation sells securities to fund the purchase of other securities in an effort to enhance the overall return of the portfolio and to fund loan demand. Income from service charges on deposit accounts decreased 4.9% during the first six months of 1995 and 5.1% in the second quarter of 1995, compared to the same periods in 1994. The decrease in service charges during 1995 is attributed to lower business service charges. The lower business service charges are a result of the increase in the earnings credit, attributable to the rise in interest rates, which is used to offset service charges. Income from the trust department increased $125,000, or 33.2% in the first six months of 1995 and $87,000, or 47.0% in the second quarter of 1995, compared to the same periods in 1994. This was primarily the result of the Corporation's continuing emphasis on marketing the Trust Department's products and services. Other income decreased from $526,000 in the first six months of 1994, to $500,000 in the first six months of 1995. Page 12 Other Operating Expenses ------------------------
Six Months Ended June 30, Three Months Ended June 30, ------------------------ -------------------------- 1995 1994 1995 1994 ------------------------ -------------------------- (Dollars in thousands) Salaries $ 4,173 $ 3,573 $ 2,123 $ 1,893 Employee benefits 1,663 1,269 775 667 Net occupancy expense 700 709 336 340 Equipment expense 831 653 438 326 FDIC premiums 771 755 386 377 Other expenses 3,087 3,326 1,636 1,796 ------ ------ ----- ------ Total other operating expenses $ 11,225 $ 10,285 $ 5,694 $ 5,399 ====== ====== ===== =====
Other operating expenses for the first six months of 1995 of $11,225,000 increased $940,000, or 9.1%, from the $10,285,000 expense for the same period in 1994. The second quarter of 1995 showed a 5.5% increase in other operating expenses compared to the second quarter of 1994. The rise in operating expenses was largely due to higher salary and employee benefits cost directly related to the Corporation's growth and planned salary increases. Employee salaries increased $599,000, or 16.8% from $3,573,000 for the first six months of 1994 to $4,172,000 for the same period in 1995. The second quarter of 1995 salary expense grew $230,000, or 12.2% compared to the second quarter of 1994. The increase reflects cost of living increases, merit increases and additional staff necessitated by current and planned future growth. Employee benefits grew $394,000, or 31.0% to $1,663,000 in the first half of 1995, from the $1,269,0000 employee benefits expensed during the same period in 1994. The 1995 second quarter employee benefits cost were $108,000 or 16.2% higher than the second quarter of 1994. The rise in employee benefits is directly related to the increase in salary expenses and to the costs associated with standardizing the pension plan for all subsidiaries. Net occupancy expense decreased $9,000, or 1.3% from $709,000 in the first six months of 1994 to $700,000 in the first six months of 1995. This decrease is related to a $32,000 reduction in snow removal costs in the first six months of 1995, compared to the same period in 1994. Net occupancy expense for the second quarter of 1995 of $336,000, was down slightly from the second quarter of 1994 expense of $340,000. Equipment expense increased by $178,000, or 27.3% during the first six months of 1995, compared to the same period in 1994. The second quarter of 1995 equipment expense of $438,000 grew $112,000, or 34.4% from the second quarter of 1994 equipment expense of $326,000. The majority of this rise is due to depreciation, maintenance and equipment rental expenses associated with planned increased data processing capabilities. The increased data processing capabilities include modernizing our branches through platform automation and teller terminals, and the ongoing updating of data processing equipment to manage the rise in volume related to the growth of the Corporation. Federal Deposit Insurance Corporation (FDIC) premiums increased $16,000, or 2.1%, during the first six month of 1995, compared to the same period in 1994. The second quarter of 1995 FDIC premiums grew $9,000 over the second quarter of 1994 premium. These increases are directly related to the growth in the deposits of the Corporation. Other expenses decreased $240,000, or 7.2%, from $3,326,000 in the first six months of 1994, compared to $3,086,000 other expenses recorded during the same period in 1995. The second quarter of 1995 other expenses decreased $160,000, or 8.9% from the other expenses for the second quarter of 1994. The reductions in other expenses included a decrease in intangible asset expense of $81,000 and a $159,000 reduction in legal expenses related to both the 1994 legal expenses associated with the Security National Bank merger and to the recovery of legal expenses in 1995 related to non-performing assets that were expensed in prior periods. Page 13 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 $41,625,000, or 5.2% from $799,778,000 at December 31, 1994 to $841,403,000 at June 30, 1995. This growth was primarily in interest earning assets which grew $41,060,000 to $794,603,000 at June 30, 1995, from $753,543,000 at December 31, 1994. During the first six months of 1995 Federal Funds sold increased $27,100,000, investment securities grew $13,257,000, loans increased $8,959,000, interest bearing deposits rose $117,000 and securities available for sale decreased $8,373,000. Total deposits rose $28,752,000 from $688,578,000 at December 1994 to $717,329,000 at June 30, 1995. A growth in time deposits of $49,791,000 was offset by decrease in now accounts, money market accounts and savings accounts of $4,325,000, $20,360,000, $2,387,000, respectively. Non- interest bearing deposits rose by $6,033,000, or 5.5% during this period. Other borrowing increased $1,296,000 during the first six months of 1995. Capital ------- Capital formation is critical to the Corporation's well being and future growth. Capital for the period ending June 30, 1995 was $73,941,000, an increase of $7,365,000 over the end of 1994. 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 consolidated ratios at June 30, 1995 exceed all regulatory requirements, including Federal 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-weighing factors from 0% to 100% to various categories of assets and off- balance-sheet financial instruments. The minimum for the Tier 1 ratio is 4.0%, and the total capital ratio (Tier 1 plus Tier 2 capital divided by risk-adjusted assets) minimum is 8.0%. At June 30, 1995, the Corporation's Tier 1 risk- adjusted capital ratio was 11.55%, and the total risk- adjusted capital ratio was 12.80%, both well above the regulatory requirements. To supplement the risk-based capital adequacy guidelines, the Federal Reserve Board (the "FRB") established a leverage ratio guideline as part of its risk- based capital adequacy guidelines. The leverage ratio consists of Tier 1 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 8.87% at June 30, 1995 and 8.59% at December 31, 1994. Page 14 Existing minimum regulatory capital ratio requirements are 5.5% for primary capital and 6.0% for total capital. The Corporation's primary capital ratio was 9.52% at June 30, 1995, compared with 8.96% at December 31, 1994. Due to the fact the Corporation's only capital is primary capital, the total capital ratios are the same as the primary capital ratios. The year-to-date June 30, 1995 cash dividend per share of $.3600 was 26.0% higher than the cash dividend for the same period in 1994 of $.2857. The second quarter 1995 dividend of $.1800 per share was 18.1% greater than the second quarter of 1994 cash dividend of $.1524. Activity in both the Corporation's dividend reinvestment and stock options plans did not have a material impact on capital during the first quarter of 1995. Liquidity --------- Liquidity is a measure of the ability of the Corporation to meet its needs and obligations on a timely basis. For a bank, liquidity requires 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 Corporation arranges its 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 $4,664,000 during the first six months of 1995 and securities available for sale averaged $96,938,000 during the first half of 1995, more than sufficient to match normal fluctuations in loan demand or deposit fund supplies. Backup sources of liquidity are provided by Federal Fund lines carried in the subsidiary banks. Additional liquidity could be generated through borrowings from the Federal Reserve Bank of Philadelphia, of which Harleysville, Citizens and Security are members and from the Federal Home Loan Bank of Pittsburgh, of which Harleysville and Citizens are members. The FDIC has reported that it anticipates that the Bank Insurance Fund could reach its statutory reserve ratio requirement in 1995. Consequently, the FDIC has proposed a significant reduction of assessment rates. While such a reduction in Bank Insurance Fund assessment rates will result in lower deposit insurance premiums paid, there can be no assurance when, if ever, the FDIC will adopt its proposed assessment rates. There are currently a number of issues before Congress which may effect the Corporation and its business operations, and business operations of its subsidiaries. However, management does not believe these issues will have a material effect on liquidity, capital resources or the results of operations. There are no known trends or and known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. Page 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings. --------------------------- Management, based upon discussions with the Corporation's legal counsel, is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Corporation. There are no proceedings pending other than the ordinary routine litigation incident to the business of the Corporation and its subsidiaries - Harleysville National Bank and Trust Company, The Citizens National Bank of Lansford and Security National Bank. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation and the Banks by government authorities. Item 2. Change in Securities. ------------------------------ Not applicable. Item 3. Defaults Upon Senior Securities. ----------------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. ------------------------------------------------------------- (a) An annual meeting of shareholders was held at 9:30 a.m., on Tuesday, April 11, 1995, at Presidential Caterers, 2910 DeKalb Pike, Norristown, Pennsylvania 19401. (b), (c) Two matters were voted upon as follows: (1) Two directors were re-elected, as below: Re-elected: Term Expires: ---------- ------------ Walter F. Vilsmeier 1999 Harold A. Herr 1999 The results of the voting for the directors are as follows: Walter F. Vilsmeier For 5,356,810 Against 3,859 Abstain None Harold A. Herr For 5,357,447 Against 3,366 Abstain None Directors whose term continued after the meeting: Term Expires: ------------ Walter E. Daller, Jr. 1998 Martin E. Fossler 1998 John W. Clemens 1996 Howard E. Kalis, III 1996 Bradford W. Mitchell 1997 William M. Yocum 1997 Page 16 (2) The shareholders approved and adopted an amendment to Article 7 of the Corporation's amended Articles of Incorporation to provide that any merger, consolidation, liquidation or similar fundamental change transaction involving the corporation must be approved by holders of at least 80 percent of the outstanding shares of the Corporation's voting stock unless such transaction has received prior approval of at least 75 percent of all members of the Corporation's Board of Directors, in which case only a majority of the outstanding shares of the Corporation's voting stock is required to be voted in favor of such transaction in order to approve it. The shareholders vote regarding the amendment was: For 4,915,720 Against 220,553 Abstain 10,597 Item 5. Other Information. --------------------------- None. Item 6. Exhibits and Reports on Form 8-K. ------------------------------------------ (a) Exhibits: None. (b) Reports on Form 8-K: On May 18, 1995, a Form 8-K was filed by the registrant reporting effective May 11, 1995, the registrant has elected not to reappoint KPMG Peat Marwick LLP as its independent accountants and to appoint Grant Thornton LLP as its independent accountants. KPMG Peat Marwick LLP's reports on the financial statements for the two fiscal years ended December 31, 1994 and 1993 were unqualified and did not contain an adverse opinion, any disclaimers, qualification or modification as to uncertainty, audit scope, or accounting principles. The decision to change firms was recommended by the Audit Committee of the Board of Directors and approved by the Board of Directors. In connection with the audits for the financial statements of the registrants for the fiscal years ended December 31, 1994 and 1993 and during the period commencing January 1, 1995 through May 10, 1995, there were no disagreements or any reportable events as described in the applicable sections of Item 304(a) of Regulation SK. Page 17 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HARLEYSVILLE NATIONAL CORPORATION /s/ Walter E. Daller, Jr. ________________________________ Walter E. Daller, Jr., President and Chief Executive Officer (Principal executive officer) /s/ Vernon L. Hunsberger _______________________________ Vernon L. Hunsberger, Treasurer (Principal financial and accounting officer) Date: August 8, 1995 EX-27 2
9 1,000 6-MOS DEC-31-1995 JUN-30-1995 35873 322 27100 0 93838 96124 97252 577218 8932 841403 717329 19418 13515 17200 5874 0 0 68067 841403 25624 5647 181 31452 11664 12751 18701 1048 (172) 11225 8376 8376 0 0 5893 1.00 1.00 5.06 2626 1177 1854 0 7934 241 192 8932 8932 0 3522