SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
Securities registered pursuant to Section 12(b) of the Act: N/A
Name of each exchange
Title of each class on which registered
N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
Title of Class
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 .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (X)
Page 1
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant. The aggregate market value
shall be computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the
date of filing.
$136,120,426 as of February 23, 1996
Indicate the number of shares outstanding of each class of
the registrant's classes of common stock, as of the latest
practicable date.
5,880,828 shares of Common Stock, $1 par value
per share, were outstanding as of February 23, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1995 are incorporated by
reference into Parts I, II and IV of this report.
2. Portions of the Registrant's Definitive Proxy Statement
relating to the Annual Meeting of Shareholders to be held
April 9, 1996 are incorporated by reference into Part III of
this report.
Page 2
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-K REPORT
PAGE
I. PART I.
Item 1. Business . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of 11
Security Holders . . . . . . . . . . . .
II. PART II.
Item 5. Market for Registrant's Common Stock and 12
Related Shareholder Matters . . . . . .
Item 6. Selected Financial Data . . . . . . . . 12
Item 7. Management's Discussion and Analysis of 12
Financial Condition and Results of
Operations .
Item 8. Financial Statements and Supplementary 12
Data . .
Item 9. Changes in and Disagreements with 12
Accountants on Accounting and Financial
Disclosure . . . . . .
III PART. III.
Item 10. Directors and Executive Officers of the 13
Registrant . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . 14
Item 12. Security Ownership of Certain Beneficial 14
Owners and Management . . . . . . . . .
Item 13. Certain Relationships and Related 15
Transactions .
IV. PART IV.
Item 14. Exhibits, Financial Statement Schedules 16
and Reports on Form 8-K . . . . . . . .
Signatures. . . . . . . . . . . . . . . . . . . . 18
Page 3
PART I
Item 1. Business.
History and Business
- --------------------
Harleysville National Corporation (the "Corporation"),
a Pennsylvania business corporation, was incorporated in
June 1982. On January 1, 1983, the Corporation acquired all
of the outstanding common stock of Harleysville National
Bank and Trust Company ("Harleysville") at which time
Harleysville became a wholly-owned subsidiary of the
Corporation. On February 13, 1991, the Corporation acquired
all of the outstanding common stock of The Citizens National
Bank of Lansford ("Citizens"). On June 1, 1992, the
Corporation acquired all of the outstanding stock of Summit
Hill Trust Company ("Summit Hill"). On September 25, 1992,
Summit Hill merged into Citizens and is now operating as a
branch office of Citizens. On September 7, 1995, the
Corporation, Citizens and Farmers and Merchants Bank
("Farmers") executed an Agreement and Plan of Reorganization
and an Agreement and Plan of Merger. On March 1, 1996, the
Corporation acquired all of the outstanding stock of Farmers
and merged it with and into Citizens. On July 1, 1994 the
Corporation acquired all of the outstanding stock of
Security National Bank ("Security"). The Corporation is a
three-bank holding company providing financial services
through its Bank subsidiaries. Since commencing operations,
the Corporation's business has consisted primarily of
managing Harleysville, Citizens and Security (collectively
the "Banks"), and its principal source of income has been
dividends paid by the Banks. The Corporation is registered
as a bank holding company under the Bank Holding Company Act
of 1956, as amended (the "Bank Holding Company Act"). As of
December 31, 1995, the Company had total consolidated
assets, deposits and shareholders' equity of $874,145,992,
$741,218,395 and $77,516,176 respectively.
Harleysville, which was established in 1909, Citizens,
which was established in 1903, and Security, which was
established in 1988, are national banking associations under
the supervision of the Comptroller of the Currency of the
United States of America. The Corporation's and
Harleysville's legal headquarters are located at 483 Main
Street, Harleysville, Pennsylvania 19438. Citizens' legal
headquarters is located at 13-15 West Ridge Street,
Lansford, Pennsylvania 18232. Security's legal headquarters
is located at One Security Plaza, Pottstown, Pennsylvania
19464.
The Banks engage in the full-service commercial
banking and trust business, including accepting time and
demand deposits, making secured and unsecured commercial and
consumer loans, financing commercial transactions, making
construction and mortgage loans and performing corporate
pension and personal trust services. Their deposits are
insured by the Federal Deposit Insurance Corporation (FDIC)
to the maximum extent provided by law.
The Banks enjoy a stable base of core deposits and are
leading community banks in their service areas. The Banks
believe they have gained their position as a result of a
customer oriented philosophy and a strong commitment to
service. Senior management has made the development of a
sales orientation throughout the Banks one of their highest
priorities and emphasizes this objective with extensive
training and sales incentive programs that the Company
believes are unusual for community banks. The Banks
maintain close contact with the local business community to
monitor commercial lending needs and believes they respond
to customer requests quickly and with flexibility.
Management believes these competitive strengths are
reflected in the Corporation's results of operations.
The Banks have twenty-two (22) offices located in
Montgomery, Bucks and Carbon Counties, 12 of which are owned
by the Banks and 10 of which are leased from third parties.
As of December 31, 1995, the Corporation and the Banks
employed approximately 350 full-time and full-time equivalent
persons. The Corporation provides a variety of employment
benefits and considers its relationships with its employees
to be satisfactory.
Page 4
Competition
- -----------
The Banks compete actively with other eastern
Pennsylvania financial institutions, many larger than the
Banks, as well as with financial and non-financial
institutions headquartered elsewhere. The Banks are
generally competitive with all institutions in their service
areas with respect to interest rates paid on time and
savings deposits, service charges on deposit accounts and
interest rates charged on loans. At December 31, 1995,
Harleysville's legal lending limit to a single customer was
$9,650,000 and Citizens' and Security's legal lending limits
to a single customer were $1,815,000 and $590,000,
respectively. Many of the institutions with which the Banks
compete are able to lend significantly more than these
amounts to a single customer.
Supervision and Regulation - The Registrant
- -------------------------------------------
The Registrant is subject to the provisions of the
Bank Holding Company Act of 1956, as amended (the "Bank
Holding Company Act"), and to supervision by the Federal
Reserve Board. The Bank Holding Company Act requires the
Registrant to secure the prior approval of the Federal
Reserve Board before it owns or controls, directly or
indirectly, more than five percent (5%) of the voting shares
or substantially all of the assets of any institution,
including another bank. In addition, the Bank Holding
Company Act has been amended by the Riegle-Neal Interstate
Banking and Branching Efficiency Act which permits bank
holding companies to acquire a bank located in any state
subject to certain limitation and restrictions which are
more fully described below.
A bank holding company is prohibited from engaging in
or acquiring direct or indirect control of more than five
percent (5%) of the voting shares of any company engaged in
non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be so
closely related to banking or managing or controlling banks
as to be a proper incident thereto. In making this
determination, the Federal Reserve Board considers whether
the performance of these activities by a bank holding
company would offer benefits to the public that outweigh
possible adverse effects.
Federal law also prohibits acquisitions of control of
a bank holding company without prior notice to certain
federal bank regulators. Control is defined for this
purpose as the power, directly or indirectly, to direct the
management or policies of the bank or bank holding company
or to vote twenty-five percent (25%) or more of any class of
voting securities.
Subsidiary banks of a bank holding company are subject
to certain restrictions imposed by the Federal Reserve Act
on any extensions of credit to the bank holding company or
any of its subsidiaries, on investments in the stock or
other securities of the bank holding company and on taking
of such stock or securities of the bank holding company and
on taking of such stock or securities as collateral for
loans to any borrower.
Permitted Activities
- --------------------
The Federal Reserve Board permits bank holding
companies to engage in certain activities so closely related
to banking or managing or controlling banks as to be proper
incident thereto. Other than making an equity investment in
a low to moderate income housing limited partnership, the
Registrant does not at this time engage in any other
permissible activities, nor does the Registrant have any
current plans to engage in any other permissible activities
in the foreseeable future.
Legislation and Regulatory Changes
- ----------------------------------
From time to time, legislation is enacted which has the
effect of increasing the cost of doing business, limiting or
expanding permissible activities or affecting the
competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently
made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of
any major changes or the impact such changes might have on
the Registrant and its subsidiaries. Certain changes of
potential significance to the Registrant which have been
enacted recently and others which are currently under
consideration by Congress or various regulatory or
professional agencies are discussed below.
Page 5
The passage of the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 and the Riegle Community
Development and Regulatory Improvement Act may have a
significant impact upon the Corporation. The key provisions
pertain to interstate banking and interstate branching as
well as a reduction in the regulatory burden on the banking
industry. Since September 1995, bank holding companies may
acquire banks in other states without regard to state law.
In addition, banks can merge with other banks in another
state beginning in June 1997. States may adopt laws
preventing interstate branching but, if so, no out-of-state
bank can establish a branch in such state and no banks in
such state may branch outside the state. Pennsylvania
recently amended the provisions of its banking code to
authorize full interstate banking and branching under
Pennsylvania law and to facilitate the operations of
interstate banks in Pennsylvania. As a result of legal and
industry changes, management predicts that consolidation
will continue as the financial services industry strives for
greater cost efficiencies and market share. Management
believes that such consolidation may enhance its competitive
position as a community bank.
The Interstate Banking and Branching Act also amends the
International Banking Act to allow a foreign bank to
establish and operate a federal branch or agency upon
approval of the appropriate federal and state banking
regulator. As a national bank, the Bank currently can
relocate its main office across state lines by utilizing a
provision in the National Bank Act which permits such
relocation to a location not more than thirty miles from its
existing main office. In effect, a national bank can
thereby move across state lines as long as the relocation
does not exceed thirty miles and also retain as branches the
offices located in the original state.
The Federal Reserve Board, the FDIC, and the
Comptroller of the Currency ("Comptroller") have issued
certain risk-based capital guidelines. See pages 34 and 35
of Registrant's 1995 Annual Report, which is incorporated by
reference herein, for information concerning the
Registrant's capital.
Pending Legislation
- -------------------
Various congressional bills and other proposals have
proposed a sweeping overhaul of the banking system,
including provisions for: limitations on deposit insurance
coverage; changing the timing and method financial
institutions use to pay for deposit insurance; expanding the
power of banks by removing the restrictions on bank
underwriting activities; tightening the regulation of bank
derivatives activities; allowing commercial enterprises to
own banks; and permitting bank holding companies to own
affiliates that engage in securities, mutual funds and
insurance activities.
There are numerous proposals before Congress to modify
the financial services industry and the way commercial banks
operate. However, it is difficult to determine at this time
what effect such provisions may have until they are enacted
into law. Except as specifically described on page 35 of
the 1995 Annual Report to Shareholders, management believes
that the effect of the provisions of the aforementioned
legislation on the 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.
Effects of Inflation
- --------------------
Inflation has some impact on the Corporation's and the
Banks' operating costs. Unlike many industrial companies,
however, substantially all of the Banks' assets and
liabilities are monetary in nature. As a result, interest
rates have a more significant impact on the Corporation's
and the Banks' performance than the general level of
inflation. Over short periods of time, interest rates may
not necessarily move in the same direction or in the same
magnitude as prices of goods and services.
Page 6
Effect of Government Monetary Policies
- --------------------------------------
The earnings of the Registrant are and will be affected
by domestic economic conditions and the monetary and fiscal
policies of the United States government and its agencies.
An important function of the Federal Reserve System is to
regulate the money supply and interest rates. Among the
instruments used to implement those objectives are open
market operations in United States government securities and
changes in reserve requirements against member bank
deposits. These instruments are used in varying
combinations to influence overall growth and distribution of
bank loans, investments and deposits, and their use may also
affect rates charged on loans or paid for deposits.
The Banks are members of the Federal Reserve System
and, therefore, the policies and regulations of the Federal
Reserve Board have a significant effect on its deposits,
loans and investment growth, as well as the rate of interest
earned and paid, and are expected to affect the Banks'
operations in the future. The effect of such policies and
regulations upon the future business and earnings of the
Corporation and the Banks cannot be predicted.
Environmental Regulations
- -------------------------
There are several federal and state statutes which
regulate the obligations and liabilities of financial
institutions pertaining to environmental issues. In
addition to the potential for attachment of liability
resulting from its own actions, a bank may be held liable
under certain circumstances for the actions of its
borrowers, or third parties, when such actions result in
environmental problems on properties that collateralize
loans held by the bank. Further, the liability has the
potential to far exceed the original amount of the loan
issued by the Bank. Currently, neither the Corporation nor
the Banks are a party to any pending legal proceeding
pursuant to any environmental statute, nor is the
Corporation and the Banks aware of any circumstances which
may give rise to liability under any such statute.
Supervision and Regulation - Banks
- ----------------------------------
The operations of the Banks are subject to federal and
state statutes applicable to banks chartered under the
banking laws of the United States, to members of the Federal
Reserve System and to banks whose deposits are insured by
the Federal Deposit Insurance Corporation. The Banks'
operations are also subject to regulations of the
Comptroller of the Currency (Comptroller), the Federal
Reserve Board and the FDIC.
The primary supervisory authority of the Banks is the
Comptroller, who regularly examines the Banks. The
Comptroller has authority to prevent a national bank from
engaging in unsafe or unsound practices in conducting its
business.
Federal and state banking laws and regulations govern,
among other things, the scope of a bank's business, the
investments a bank may make, the reserves against deposits a
bank must maintain, loans a bank makes and collateral it
takes, the maximum interest rates a bank may pay on
deposits, the activities of a bank with respect to mergers
and consolidations and the establishment of branches.
As a subsidiary bank of a bank holding company, the
Banks are subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to the bank
holding company or its subsidiaries, or investments in the
stock or other securities as collateral for loans. The
Federal Reserve Act and Federal Reserve Board regulations
also place certain limitations and reporting requirements on
extensions of credit by a bank to principal shareholders of
its parent holding company, among others, and to related
interests of such principal shareholders. In addition, such
legislation and regulations may affect the terms upon which
any person becoming a principal shareholder of a holding
company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
FDIC
- ----
Under the Federal Deposit Insurance Act, the
Comptroller possesses the power to prohibit institutions
regulated by it (such as the Banks) from engaging in any
activity that would be an unsafe and unsound banking
practice or would otherwise be in violation of the law.
Page 7
CRA
- ---
Under the Community Reinvestment Act of 1977, as
amended ("CRA"), the Comptroller is required to assess the
record of all financial institutions regulated by it to
determine if these institutions are meeting the credit needs
of the community (including low and moderate income
neighborhoods) which they serve and to take this record into
account in its evaluation of any application made by any of
such institutions for, among other things, approval of a
branch or other deposit facility, office relocation, a
merger or an acquisition of bank shares. The Financial
Institutions Reform, Recovery and Enforcement Act of 1989
amended the CRA to require, among other things, that the
Comptroller make publicly available the evaluation of a
bank's record of meeting the credit needs of its entire
community, including low and moderate income neighborhoods.
This evaluation will include a descriptive rating
("outstanding", "satisfactory", "needs to improve" or
"substantial noncompliance") and a statement describing the
basis for the rating. These ratings are publicly disclosed.
BSA
- ---
Under the Bank Secrecy Act ("BSA"), banks and other
financial institutions are required to report to the
Internal Revenue Service currency transactions of more than
$10,000 or multiple transactions of which the bank is aware
in any one day that aggregate in excess of $10,000. Civil
and criminal penalties are provided under the BSA for
failure to file a required report, for failure to supply
information required by the BSA or for filing a false or
fraudulent report.
FDICIA
- ------
Capital Categories: On December 19, 1991, the Federal
Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") became law. Under FDICIA, institutions must be
classified, based on their risk-based capital ratios into
one of five defined categories, as illustrated below (well
capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically
undercapitalized).
Total Tier 1 Under a
Risk- Risk- Tier 1 Capital
Based Based Leverage Order or
Ratio Ratio Ratio Directive
CAPITAL CATEGORY
Well capitalized >10.0 >6.0 >5.0 NO
Adequately capitalized > 8.0 >4.0 >4.0*
Undercapitalized < 8.0 <4.0 <4.0*
Significantly Under-
capitalized < 6.0 <3.0 <3.0
Critically Under-
capitalized <2.0
*3.0 for those banks having the highest available regulatory
rating.
Prompt Corrective Action: In the event an
institution's capital deteriorates to the undercapitalized
category or below, FDICIA prescribes an increasing amount of
regulatory intervention, including: (1) the institution of a
capital restoration plan and a guarantee of the plan by a
parent institution; and (2) the placement of a hold on
increases in assets, number of branches or lines of
business. If capital has reached the significantly or
critically undercapitalized levels, further material
restrictions can be imposed, including
restrictions on interest payable on accounts, dismissal of
management and (in critically undercapitalized situations)
appointment of a receiver. For well capitalized
institutions, FDICIA provides authority for regulatory
intervention where the institution is deemed to be engaging
in unsafe or unsound practices or receives a less than
satisfactory examination report rating for asset quality,
management, earnings or liquidity. All but well capitalized
institutions are prohibited from accepting brokered deposits
without prior regulatory approval.
Page 8
Operational Controls: Under FDICIA, financial
institutions are subject to increased regulatory scrutiny
and must comply with certain operational, managerial and
compensation standards to be developed by Federal Reserve
Board regulations. FDICIA also requires the regulators to
issue new rules establishing certain minimum standards to
which an institution must adhere including standards
requiring a minimum ratio of classified assets to capital,
minimum earnings necessary to absorb losses and minimum
ratio of market value to book value for publicly held
institutions. Additional regulations are required to be
developed relating to internal controls, loan documentation,
credit underwriting, interest rate exposure, asset growth
and excessive compensation, fees and benefits.
Examinations and Audits: Annual full-scope, on site
regulatory examinations are required for all the FDIC-
insured institutions except institutions with assets under
$100 million which are well capitalized, well-managed and
not subject to a recent change in control, in which case,
the examination period is every eighteen (18) months. Banks
with total assets of $500 million or more, as of the
beginning of fiscal year 1993, are required to submit to
their supervising federal and state banking agencies a
publicly available annual audit report. The independent
accountants of such bank are required to attest to the
accuracy of management's report. The accountants also are
required to monitor management's compliance with governing
laws and regulations. In addition, such banks also are
required to have an independent audit committee composed of
outside directors who are independent of management, to
review with management and the independent accountants, the
reports that must be submitted to the bank regulatory
agencies. If the independent accountants resign or are
dismissed, written notification must be given to the bank's
supervising government banking agencies. These accounting
and reporting reforms do not apply to an institution such as
a bank with total assets at the beginning of its fiscal year
of less than $500 million, such as Citizens or Security.
Real Estate Loans: FDICIA also requires that banking
agencies reintroduce loan-to-value ("LTV") ratio regulations
which were previously repealed by the 1982 Act. LTVs limit
the amount of money a financial institution may lend to a
borrower, when the loan is secured by real estate, to no
more than a percentage, set by regulation, of the value of
the real estate.
Truth-In-Savings: A separate subtitle within FDICIA,
called the "Bank Enterprise Act of 1991", requires "truth-in-
savings" on consumer deposit accounts so that consumers can
make meaningful comparisons between the competing claims of
banks with regard to deposit accounts and products. Under
this provision, the Bank is required to provide information
to depositors concerning the terms of their deposit
accounts, and in particular, to disclose the annual
percentage yield. The operational cost of complying with
the Truth-In-Savings law had
no material impact on liquidity, capital resources or
reported results of operations.
While the overall impact of fully implementing all
provisions of the FDICIA cannot be accurately calculated,
Management believes that full implementation of the FDICIA
had no material impact on liquidity, capital resources or
reported results of operation in future periods.
Other: From time to time, various types of federal and
state legislation have been proposed that could result in
additional regulation of, and restriction on, the business
of the Banks. It cannot be predicted whether any such
legislation will be adopted or, if adopted, how such
legislation would affect the business of the Banks. As a
consequence of the extensive regulation of commercial
banking activities in the United States, the Banks' business
is particularly susceptible to being affected by federal
legislation and regulations that may increase the costs of
doing business.
Statistical Data
- ----------------
The information for this Item is incorporated by
reference to pages 23 through 37 of the Company's Annual
Report to Shareholders for the year ended December 31, 1995,
which is included as Exhibit (13) to this Form 10-K Report.
Page 9
Item 2. Properties.
- -------------------
The principal executive offices of the Company and of
Harleysville are located in Harleysville, Pennsylvania in a
two-story office building owned by Harleysville which was
built in 1929. Harleysville also owns the buildings in
which nine of its branches are located and leases space for
the other seven branches from unaffiliated third parties
under leases expiring at various times through 2012. The
principal executive offices of Citizens are located in
Lansford, Pennsylvania in a two-story office building owned
by Citizens. Citizens also owns the buildings where the
Summit Hill and Lehighton branches are located. The
principal executive offices of Security are located in
Pottstown, Pennsylvania in a building leased by Security.
Security also leases its East End and North End Branches.
Office Office Location Owned/Leased
Harleysville 483 Main Street Owned
Harleysville Pa
Skippack Route 73 Owned
Skippack Pa
Limerick Ridge Pike Owned
Limerick Pa
North Penn Welsh & North Wales Rd Owned
North Wales Pa
Gilbertsville Gilbertsville Shopping Leased
Gilbertsville Pa
Hatfield Snyder Square Leased
Hatfield Pa
North Broad North Broad Street Owned
Lansdale Pa
Marketplace Marketplace Shopping Leased
Lansdale Pa
Normandy Farms Morris Road Leased
Blue Bell Pa
Horsham Babylon Business Center Leased
Horsham Pa
Meadowood Route 73 Leased
Worcester Pa
Collegeville 364 Main Street Owned
Collegeville Pa
Sellersville 209 North Main St Owned
Sellersville Pa
Trainers Corner Trainers Corner Center Leased
Quakertown Pa
Page 10
Quakertown Main 224 West Broad St Owned
Quakertown PA
Red Hill 400 Main Street Owned
Red Hill PA
Citizens 13-15 West Ridge Street Owned
Lansford PA
Summit Hill 2 East Ludlow Street Owned
Summit Hill PA
Lehighton 904 Blakeslee Blvd Owned
Lehighton PA
Pottstown One Security Plaza Leased
Pottstown PA
Pottstown 1450 East High Street Leased
Pottstown PA
Pottstown Charlotte & Mervine Sts. Leased
Pottstown PA
All of the above properties are in good condition and
are adequate for the Registrant's and the Banks' purposes.
Item 3. Legal Proceedings.
- --------------------------
Management, based on consultation 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 Company. 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 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
No matter was submitted during the fourth quarter of
1995 to a vote of holders of the Company's Common Stock.
Page 11
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters.
- -------------------------------------------------------------
The information for this Item is incorporated by
reference to pages 8 and 18 of the Corporation's Annual
Report to Shareholders for the year ended December 31, 1995,
which is included as Exhibit (13) to this Form 10-K Report.
Item 6. Selected Financial Data.
- --------------------------------
The information for this Item is incorporated by
reference to pages 23 and 37 of the Corporation's Annual
Report to Shareholders for the year ended December 31, 1995,
which is included as Exhibit (13) to this Form 10-K Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- ------------------------------------------------------------------------
The information for this Item is incorporated by
reference to pages 23 through 36 of the Corporation's Annual
Report to Shareholders for the year ended December 31, 1995,
which is included as Exhibit (13) to this Form 10-K Report.
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
The information for this Item is incorporated by
reference to pages 8 through 22 of the Corporation's Annual
Report to Shareholders for the year ended December 31, 1995,
which is included as Exhibit (13) to this Form 10-K Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- ------------------------------------------------------------------------
The information for this Item is incorporated by
reference to pages 18 and 19 of the Registrant's Definitive
Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 9, 1996.
Page 12
PART III
Item 10. Directors and Executive Officers of the Registrant.
- ------------------------------------------------------------
The information for this Item with respect to the
Corporation's directors is incorporated by reference to
pages 3 through 7 of the Corporation's Definitive Proxy
Statement relating to the Annual Meeting of Shareholders to
be held April 9, 1996.
Executive Officers of Registrant
- --------------------------------
Name Age Position
Walter E. Daller, Jr. 56 President and Chief
Executive Officer
of the Company and of Harleysville
James W. Hamilton 49 Senior Vice President and
Senior Trust Officer of
Harleysville
Demetra M. Takes 45 Executive Vice President
and Chief Operating
Officer of Harleysville
Frank J. Lochetto 48 Senior Vice President and
Senior Lending Officer of
Harleysville
Vernon L. Hunsberger 47 Treasurer of the Company,
Senior Vice President/CFO and
Cashier of Harleysville
Fred C. Reim, Jr. 52 Senior Vice President of
Harleysville since August 1993;
Senior Vice President
of First Valley Bank from
December 1990 to August 1993
Henry R. Gehman 60 Vice President of Harleysville
Jo Ann M. Bynon 44 Secretary of the Company
Dennis L. Detwiler 48 Vice President of Harleysville
Bruce D. Fellman 49 Vice President of Harleysville
Thomas L. Spence 49 Vice President of Harleysville
Robert L. Reilly 46 Vice President of Harleysville
David R. Crews 45 Vice President of Harleysville
Larry E. Nolt 50 Vice President and Trust Officer of
Harleysville since July 1993; Trust
Officer of Harleysville from August
1991 to July 1993; Trust Officer of
Union National Bank of Souderton for 4
years prior thereto
Mikkalya W. Walton 40 Vice President of Loan
Administration of Harleysville since
July 1994; Vice President Security
National Bank September 1991 to June
1994; Assistant Vice President Mellon
Bank January 1990 to August 1991
Gregg J. Wagner 35 Vice President and Comptroller of
Harleysville National Bank since
December 1994; Senior Vice President
Security National Bank March 1992 to
November 1994; Vice President and
Comptroller Bryn Mawr Trust Company
December 1989 to February 1992
Page 13
Harry T. Weierbach 51 Vice President of Investments of
Harleysville since December 1995;
Assistant Vice President of
Harleysville from June 1994 to
December 1995; Vice President of
Investments of Continental Bank from
1982
Thomas D. Oleksa 42 President and Chief Executive Officer
of Citizens
Martha A. Rex 47 Vice President and Cashier of Citizens
Maurice Infante 56 Vice President Consumer Lending of
Citizens since April 1994; Assistant
Vice President Consumer Lending of
Citizens December 1991 to March 1994;
Vice President Home Savings
Association of Pennsylvania January
1988 to November 1991
Raymond H. Melcher 44 President and Chief Executive Officer
of Security since November 1994;
Executive Vice President, Chief
Operating Officer Hi-Tech Connections
1990 to 1994; Executive Vice President
Keystone Financial 1988 to 1990
Allen R. Loeb 47 Vice President of Lending of Security
since April 1995; Vice President of
Lending National Penn Bank from April
1994 to April 1995
Item 11. Executive Compensation.
- --------------------------------
The information for this Item is incorporated by
reference to pages 7 through 13 of the Corporation's
Definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 9, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
The information for this Item is incorporated by
reference to pages 3 through 4 of the Corporation's
Definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 9, 1996.
Page 14
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
The information for this Item is incorporated by
reference to page 18 of the Corporation's Definitive Proxy
Statement relating to the Annual Meeting of Shareholders to
be held April 9, 1996, and to page 16 of the Corporation's
Annual Report to Shareholders for the year ended December
31, 1995, which is included as Exhibit (13) to this form 10-
K Report.
Page 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) Financial Statements, Financial Statement Schedules and Exhibits Filed:
(1) Consolidated Financial Statements Page
Harleysville National Corporation and Subsidiary:
Consolidated Balance Sheets as of
December 31, 1995 and 1994 9*
Consolidated Statements of Income for the
Years Ended December 31, 1995, 1994
and 1993 10*
Consolidated Statements of Shareholders'
Equity for the Years Ended
December 31, 1995, 1994 and 1993 11*
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1995,
1994 and 1993 12*
Notes to Consolidated Financial Statements 13-22*
Independent Auditors' Report 8*
(2) Financial Statement Schedules
None
All other schedules are omitted since they are not
required, not applicable or the information is included in
the consolidated financial statements or notes thereto.
- ----------------------------------------------------------------
*Refers to the respective page of Harleysville National
Corporation's 1995 Annual Report to Shareholders. The
Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Auditor's Report thereon on pages 8
to 22 are incorporated by reference. With the exception of
the portions of such Annual Report specifically incorporated
by reference in this Item and in Items 1, 5, 6, 7 and 8,
such Annual Report shall not be deemed filed as part of this
Form 10-K Report or otherwise subject to the liabilities of
Section 18 of the Securities Exchange Act of 1934.
Page 16
(3) Exhibits
Exhibit No. Description of Exhibits
- ---------- -----------------------
(3.1) Articles of Incorporation as amended were previously
filed with the Commission on December 14, 1995 as Exhibit
3a to Registration Statement 33-65021 and is hereby
incorporated by reference
(3.2) Amended By-laws of the Registrant were previously filed
with the Commission on December 14, 1995 as Exhibit 3b to
registration statement 33-65021 and is hereby
incorporated by reference
(13) 1995 Annual Report to Shareholders (this document is
filed only to the extent of pages 8 through 37 which are
incorporated by reference herein.)
(21) Subsidiaries of Registrant
(23) (a) Consent of Grant Thornton LLP Independent Certified
Public Accountants
(b) Consent of KPMG Peat Marwick LLP Independent
Certified Public Accountants
(27) Financial Data Schedule.
(99) Additional Exhibits
(a) Report of Independent Certified Public Accountants -
Grant Thornton LLP
(b) Report of Independent Certified Public Accountants -
KPMG Peat Marwick LLP
(b) Reports on Form 8-K
During the quarter ended December 31, 1995, the Registrant did not
file any reports on Form 8-K.
Page 17
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) 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
Date: March 14, 1996 By: /s/ Walter E. Daller, Jr.
Walter E. Daller, Jr.
President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signatures Title Date
---------- ----- -----
/s/ John W. Clemens Director March 14, 1996
John W. Clemens
/s/ Walter E. Daller, Jr. President, Chief March 14, 1996
Walter E. Daller, Jr. Executive Officer
and Director (Princi-
pal Executive Officer)
/s/ Martin E. Fossler Director March 14, 1996
Martin E. Fossler
/s/ Harold A. Herr Director March 14, 1996
Harold A. Herr
/s/ Vernon L. Hunsberger Treasurer (Princi- March 14, 1996
Vernon L. Hunsberger pal Financial and
Accounting Officer)
Page 18
/s/ Howard E. Kalis, III Director March 14, 1996
Howard E. Kalis, III
/s/ Bradford W. Mitchell Director March 14, 1996
Bradford W. Mitchell
/s/ Walter F. Vilsmeier Director March 14, 1996
Walter F. Vilsmeier
/s/ William M. Yocum Director March 14, 1996
William M. Yocum
Page 19
EXHIBIT INDEX
-------------
(13) 1995 Annual Report to Shareholders (this document is filed
only to the extent of pages 8 through 37 which are
incorporated by reference herein)
(21) Subsidiaries of Registrant
(23) Consent of Grant Thornton LLP Independent Certified
Public Accountants
(99) Additional Exhibits
Page 20
/TEXT>
Exhibit 21
Registrant owns all of the issued and outstanding capital stock of
Harleysville National Bank and Trust Company, a national banking association
headquartered at 483 Main Street, Harleysville, PA 19438, the Citizens
National Bank of Lansford, a national banking association headquartered at
13-15 West Ridge Street, Lansford, PA 18232 and of Security National Bank, a
national banking association headquartered at One Security Plaza, Pottstown,
PA 19464.
Exhibit 23(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 12, 1996, accompanying the
consolidated financial statements incorporated by reference or included in the
1995 Annual Report of Harleysville National Corporation on Form 10-K for the
year ended December 31, 1995. We hereby consent to the incorporation by
reference of said report in the Registration Statements of Harleysville
National Corporation on Form S-3 (Registration No. 33-57790, effective
February 3, 1993) and Form S-8 (Registration No. 33-69784, effective October
1, 1993).
GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 25, 1996
Exhibit 23(b)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Harleysville National Corporation
Re: Registration Statement on Form S-3 (Registration No. 33-57790)
Registration Statement on Form S-8 (Registration No. 33-69784)
We consent to the incorporation by reference in the above listed registration
statements of Harleysville National Corporation (The Company) of our report
dated January 31, 1995 related to the consolidated balance sheets of
Harleysville National Corporation and its subsidiaries as of December 31, 1994
and 1993 and the related consolidated statements of income, shareholders'
equity and cash flows for each of the years then ended, which report appears
in the December 31, 1995 Form 10-K of Harleysville National Corporation. Our
report contains an explanatory paragraph which discussed that the Company
changed its method of accounting for investments in 1994 and income taxes in
1993.
KPMG PEAT MARWICK LLP
March 25, 1996
Philadelphia, Pennsylvania
Exhibit 99(a)
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Harleysville National Corporation
We have audited the consolidated balance sheet of Harleysville National
Corporation as of December 31, 1995, and the related consolidated statements
of income, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Harleysville National Corporation as of December 31, 1995, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Philadelphia, Pennsylvania
January 12, 1996
Exhibit 99(b)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Harleysville National Corporation:
We have audited the accompanying consolidated balance sheets of Harleysville
National Corporation and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of income, cash flows, and shareholders'
equity for the years then ended. These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Harleysville National Corporation and subsidiaries at December 31, 1994 and
1993, and the results of their operations and their cash flows for the years
then ended.
As discussed in note 1 to the consolidated financial statements, the
Corporation has changed its method of accounting for investments in 1994 and
income taxes in 1993.
KPMG PEAT MARWICK LLP
January 31, 1995
Philadelphia, Pennsylvania
HARLEYSVILLE NATIONAL CORPORATION
Our mission is to maintain and enhance our image as a respected, independent,
community-oriented financial institution providing needed services to our
customers, a fair return to our shareholders and a rewarding working experience
for our employees. We will commit our resources to the achievement of growth
and economic stability of our communities.
CONTENTS
Financial Highlights 1
Shareholders' Letter 2
Snapshots of an Exciting and Busy Year 4
Report of Independent Certified Public Accountants 8
Consolidated Financial Statements 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
Financial Ratios and Summary of Key Information 37
Corporate Directory 38
<TABLE>
FINANCIAL HIGHLIGHTS:
December 31,
1995 1994 % INCREASE
FOR THE YEAR
<S> <C> <C> <C>
Total interest income $ 64,322,000 $ 54,614,000 17.8%
Total interest expense 26,827,000 19,439,000 38.0
Net interest income 37,495,000 35,175,000 6.6
Net income 11,776,000 10,745,000 9.6
PER SHARE
Primary $ 2.00 $ 1.84 8.7%
Fully diluted 2.00 1.84 8.7
Cash dividends paid 0.79 0.61 29.5
Shareholders' equity 13.19 11.57 14.0
AVERAGE BALANCES
Loans $580,612,000 $515,101,000 12.7%
Total earning assets 786,732,000 721,880,000 9.0
Total assets 830,465,000 765,037,000 8.6
Total deposits 706,357,000 682,112,000 3.6
Shareholders' equity 73,537,000 66,716,000 10.2
RETURN ON AVERAGE
Assets 1.42% 1.40% 1.4%
Shareholders' equity 16.01 16.11 (0.6)
</TABLE>
Page 1
TO OUR SHAREHOLDERS
The past year was another one of good growth for Harleysville National
Corporation as we continued to build our community bank franchise.
STRONGEST EARNINGS EVER
Net income for 1995 was $11,776,000, an increase of 9.6% over the
$10,745,000 earned in 1994. Earnings per share for the year increased to
$2.00 from $1.84 the previous year. Fourth-quarter primary and fully diluted
earnings per share at $.50 were up 16.3% from $.43 in the comparable period
last year.
Dividends on Harleysville National Corporation's common stock increased 29.5%
over 1994 to $.79 per share. The graphs on page one, highlighting our history
of dividend and earnings increases, represent our commitment to building
shareholder value.
KEY PERFORMANCE RATIOS
Our return on assets (ROA) for 1995 improved from 1.40% to 1.42%, and our
return on equity (ROE) experienced a slight decline from 16.11% to 16.01%.
These ratios continue to place HNC in an enviable position among our peers and
in the industry as a whole.
As HNC's growth continues, so does our progress in lowering overhead
expense. As the graph below illustrates, our overhead expense decreased to
2.77% of average assets, well below our peer banks. In addition, our rate of
improvement in this key ratio also exceeds that of our peer group.
ASSET QUALITY AND GROWTH
Total assets for 1995 increased 9.3% to $874,146,000, from $799,778,000
at December 31, 1994. Nonperforming assets, including nonaccrual loans,
restructured loans, and other real estate owned, were $11,191,000 at year end,
or 1.3% of total assets. At December 31, 1994, the nonperforming asset total
was $5,594,000, or .7% of total assets. While nonaccruing loans increased from
$2,458,000 at December 31, 1994 to $8,993,000 at December 31, 1995, 77.5% of
these funds, or approximately $6,972,000, are attributable to just two
unrelated borrowers. Both these loans are in workout and are being resolved
as promptly as legal constraints permit. However, they are well-secured with
real estate and are being managed closely.
Net charge-offs for the year were $420,000, down from $602,000 a year
ago. The provision for loan losses at December 31, 1995 was $2,160,000
compared to $2,650,000 for 1994. The allowance for loan losses for 1995
totaled $9,674,000 compared to $7,934,000 at December 31, 1994. This results
in a ratio of allowance to total loans outstanding of 1.61% compared to a
ratio of 1.40% at December 31, 1994.
BUILDING THE FRANCHISE
Despite pundits' predictions that banking will be entirely electronic in
the future, our customers have told us that they want a local branch office
through which to do their banking. As a result of this continuing dialog with
our customers, each of our subsidiary banks added a new location to their
delivery system during 1995:
* In May, Harleysville National Bank opened a new office in Red Hill,
Montgomery County.
* In September, Citizens National Bank opened a new office in Lehighton,
Carbon County.
* In November, Security National Bank opened a new office at the North End
Shopping Center in Pottstown, Montgomery County.
January of 1996 saw a continuation of branch office growth for our
company when Security National opened an additional new office in the premier
Pottstown Center Shopping Complex on Route 100 in Pottstown.
Harleysville National Bank is continuing to pursue locations in
Doylestown, Spring House, and Audubon, all of which are in various stages of
municipal approval and construction bidding. All are expected to open during
1996.
Capping an exciting and profitable year of growth, Harleysville National
Corporation announced its fifth acquisition in September. Located in
Honesdale, Wayne County, PA, Farmers & Merchants Bank is a $65 million
community bank with a rich heritage of serving its constituents.
Page 2
While Farmers & Merchants will retain its name, we will integrate its
operations and charter into our Citizens National Bank subsidiary. This will
accomplish two key objectives: maintaining Farmers & Merchants' hometown,
personalized image, while achieving operating efficiencies. In addition, a
regional board, composed of F&M's directors, will continue to offer input and
guidance so that a local touch is maintained. The merger will quickly impact
Citizens' bottom line, giving the bank a larger asset base on which to build
earnings.
BUILDING OUR GREATEST RESOURCE
The caliber of our people is one of the few distinguishing factors left
in an industry where products are virtually homogenized. We sincerely believe
we have built one of the strongest core of banking and service professionals
in our marketplace, and it is because of their commitment that we continue to
build customer and shareholder value. In an environment of bank
consolidations and massive industry layoffs, we are proud to say that
Harleysville National Corporation is expanding and hiring. We are pleased to
see specialized career paths developing in each of our banks. The members of
the HNC team are a great resource, and we are proud to watch many of them
progress into various levels of management.
BOLSTERING NONINTEREST INCOME
Increasing noninterest income is a major objective of our corporation,
and 1995 saw an important milestone: our Trust and Financial Services Division
passed the million dollar mark in gross income. The Division has shown
tremendous growth over the past five years, and we look forward to their
continued success. A new money management program, Mutual Choice, which offers
a variety of mutual fund investment options for customers, is now part of
their product line.
Leasing is another one of our successful corporate divisions, and
continues to add bottom-line strength. Lease financing grew by $2,709,000 in
1995, to total $43,942,000. A popular financing alternative, leasing will
remain a viable source of fee income.
1995 saw the introduction, at all subsidiaries, of a new banking package
called "Rewards." Aimed at those 49 years of age or better, this attractive
group of financial services showed solid growth with a significant number of
new depositors. In addition to an interest checking account, the majority of
customers were cross-sold savings and money market accounts. As the
competition for core deposits continues at a frenetic pace, it is our
intention to heavily market "Rewards" so that all three of our banks maintain
their market share.
STOCK PERFORMANCE
It is always gratifying to report positive news about our stock price to
our loyal shareholders. I thought you might be interested to see the closing
prices over the past ten years:
Between 1985 and 1995, the percentage increase equaled 856%! While we
make no assertions that level of performance will continue, it validates, from
the market's perspective, what we have done and are doing here at HNC.
On a personal note, I was very honored to be selected by the Federal
Reserve Bank of Philadelphia to represent Pennsylvania, New Jersey, and
Delaware on the Federal Advisory Council of the Board of Governors. The
Federal Advisory Council comprises 12 bankers, one from each Federal Reserve
District, and meets with the Board of Governors quarterly. What makes the
appointment particularly satisfying is the fact that I am one of the first
community bank presidents chosen to serve in this capacity.
Our industry is rife with mergers and consolidations, presenting both
challenges and opportunities. Megabanks are being put together, and customers
and prospects from many of them tell us that they don't like being treated as
a number. They want to do business with people, and they want to be viewed,
not as a statistic, but as an individual, with flexibility and understanding.
We like that, because we are committed to growing our banks, as always, one
satisfied customer at a time.
Thanks for your continued loyalty and support.
Sincerely,
Walter E. Daller, Jr.
President and Chief Executive Officer
Page 3
"We are committed to growing our community bank franchise in areas that
complement our existing markets. Each new office we build will feature the
latest in retail banking, but more importantly, will be staffed by quality
bankers focused on building relationships."
Fred C. Reim, Jr.
Senior Vice President,
Branch Administration,
Harleysville National Bank and Trust Company
PICTURE: Red Hill office building, teller stations and CSR station
PICTURE: Teller automation terminal
PICTURE: Architectural renderings of Audubon, Doylestown and Spring House
PICTURE: Customer transaction receipt from new teller automation terminal
PICTURE: Bucks County: site of our future Doylestown office
RED HILL OPENS
Harleysville National Bank successfully filled a gap in the Upper Perkiomen
region of its service area with the opening of its Red Hill office in May. The
office links the bank's Harleysville, Quakertown and Gilbertsville locations
and has quickly become a highly visible member of the Red Hill business
community.
Two new elements were introduced to the office's design - a sawtooth-style
teller line and a multipurpose customer station. The jagged shape of the
teller line gives the customer more privacy while conducting transactions and
creates a more suitable atmosphere for sales opportunities. Combining the
teller and customer service functions, we created a multipurpose customer area
at the end of the teller line, where customers can be seated while opening new
accounts and/or conducting routine transactions.
GROWING WITH TECHNOLOGY
New teller technology was introduced to all of our banks in 1995, transforming
the way we process all transactions. Transactions are now captured on-line,
allowing us to operate more efficiently and accurately. Customers receive
detailed receipts of their transactions, which list time, date, summary,
reference number, and even a customized marketing message.
Page 4
While individual teller transactions are taking somewhat longer as our people
"learn the ropes," there are immediate benefits from the system:
* tellers can now balance in half the time;
* descriptive receipts provide a better customer record of each transaction;
* many customer transaction questions can be answered in minutes and on
the spot; and
* the system enables us to track and schedule tellers when they are most
needed, for better customer service.
Our goal, of course, is to utilize technology to increase efficiency, reduce
cost and to deliver our products to our customers faster, in a better format.
LOOKING TO THE FUTURE AUDUBON, SPRING HOUSE AND DOYLESTOWN TO OPEN IN '96
Three new HNB branch sites will be built in 1996 - Audubon (Audubon Square
Shopping Center, Egypt and Trooper Rds.), Spring House (Bethlehem and Pennlyn
Blue Bell Pike), and Doylestown (Rte. 202 and Progress Dr.).
All three represent new communities for Harleysville National, but are natural
extensions of the bank's marketplace and represent enormous opportunities for
growth. The Audubon site will link the bank to the booming Rte. 422 corridor,
opening up the King of Prussia and Valley Forge markets. The Spring House
site, to be constructed on 1.75 acres, will be the largest HNB facility to
date and will include a separate service area for trust and investment
business. Opposite Doylestown Hospital, our Doylestown site sits in a high
traffic area, and the community itself is ripe with residential and business
development.
Page 5
"With the flurry of consolidations, mergers, and bank closings, the people of
Lansford were pleased to see a locally managed bank investing in the community
and digging its roots even deeper."
Thomas D. Oleksa
President and CEO,
Citizens National Bank of Lansford
PICTURE: Citizens National Bank, Lansford Office
PICTURE: Citizens National Bank, Lehighton Office
RIBBON CUTTING IN LANSFORD
Citizens National Bank of Lansford spent a good portion of 1995 under
construction. In March, a major renovation to its main office lobby was begun,
and the bank's teller and customer service areas were temporarily housed in a
building purchased by CNB from a former competitor just two doors down. With
ribbon cutting scissors in one hand and a groundbreaking shovel in another,
President & CEO Thomas D. Oleksa unveiled the new Lansford office and turned
over the first pile of dirt on CNB's new Lehighton office within days of one
another. The renovated Lansford office features a traditional, yet innovative
decor, an expanded teller line, and larger, more private customer service
areas. The response from customers and the community has been overwhelmingly
positive. The temporary quarters next door have been converted into a
centralized operations center for data processing and mortgage operations.
LEHIGHTON OPENS IN RECORD BREAKING TIME
CNB's Lehighton office (Rte. 443) opened with much fanfare in late September.
Customers lined the parking lot on opening day-a sign of successful marketing,
but also the strength of CNB's reputation. Literally hundreds of new accounts
were opened the first week, validating CNB's decision to locate in the
exciting Lehighton market.
It was during this opening that we tested a new Grand Opening promotion-
Charter checking- offering free checking for life to the first 250 customers.
The program was so well received that it is now a major marketing tool in HNC
Grand Opening celebrations.
Page 6
NORTH END OPENS
Capitalizing on the banking consolidation taking place in its market, Security
National Bank seized the opportunity to quickly and economically open a third
office when a competitor abandoned a prime shopping center location in the
north end of Pottstown. The office, in the North End Shopping Center, opened
in early November and fulfilled management's expectations of attracting the
area's retail interest.
GRAND OPENING AT POTTSTOWN CENTER
Security National celebrated the new year with the Grand Opening of its fourth
office in the new 40-acre Pottstown Center Shopping Complex, Rte.100 and
Shoemaker Rd. Traffic is heavy in the Wal-Mart-anchored shopping center, and
Security National's people and products are drawing new customers in every
day.
"People recognize our commitment to the Pottstown community and value the
opportunity to build a long-term relationship with a locally managed
institution."
Raymond H. Melcher, Jr.
President and CEO,
Security National Bank
PICTURE: Security National Bank, North End Office
PICTURE: Security National Bank, Pottstown Center
Page 7
<TABLE>
<CAPTION>
GRAPHS ON PAGE 1: 1990 1992 1994 1995
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Capital in Millions 43.7 54.6 66.6 77.5
Assets in Millions 490.2 707.6 799.8 874.1
Deposits in Millions 433.0 640.2 688.6 741.2
Loans in Millions 323.5 425.0 568.3 602.4
Net Income in Millions 6.6 8.0 10.7 11.8
Cash Dividends per share 0.31 0.43 0.61 0.79
Earnings Per Share 1.19 1.43 1.84 2.00
GRAPHS ON PAGE 2: 1990 1992 1994 1995
------ ------ ------ ------
Allowance/Year-End Loans 0.99% 1.03% 1.40% 1.61%
HNC PEER
------ ------
Total Overhead Expense
as of 9/30/95 2.77 3.45
Total Overhead Expense
as of 9/30/94 2.92 3.49
GRAPHS ON PAGE 3: 1985 1987 1989 1991 1993 1995
------ ------ ------ ------ ----- -----
10-Year Stock Price per share 2.98 8.42 11.22 13.15 21.19 28.50
</TABLE>
DESCRIPTION OF BUSINESS
Harleysville National Corporation, a Pennsylvania corporation (the
"Corporation"), was incorporated in June 1982. On January 1, 1983, the
Corporation acquired all of the outstanding common stock of Harleysville
National Bank and Trust Company ("Harleysville") at which time Harleysville
became a wholly-owned subsidiary of the Corporation. On February 13, 1991,
the Corporation acquired all of the outstanding common stock of The Citizens
National Bank of Lansford ("Citizens"). On June 1, 1992, the Corporation
acquired all of the outstanding stock of Summit Hill Trust Company ("Summit
Hill"). On September 25, 1992, Summit Hill merged into Citizens and is now
operating as a branch office of Citizens. On July 1, 1994, the Corporation
acquired all of the outstanding stock of Security National Bank ("Security").
The Corporation is a three-bank holding company providing financial services
through its bank subsidiaries.
Harleysville, which was established in 1909, Citizens, which was
established in 1903, and Security, which was established in 1988,
(collectively the "Banks"), are national banking associations under the
supervision of the Office of the Comptroller of the Currency. The
Corporation's and Harleysville's legal headquarters are located at 483 Main
Street, Harleysville, Pennsylvania 19438. Citizens' legal headquarters is
located at 13-15 West Ridge Street, Lansford, Pennsylvania 18232. Security's
legal headquarters is located at One Security Plaza, Pottstown, Pennsylvania
19464.
As of December 31, 1995, the Banks had total assets of $874,146,000,
total shareholders' equity of $77,516,000 and total deposits of $741,218,000.
The Banks engage in full-service commercial banking and trust business,
including accepting time and demand deposits, making secured and unsecured
commercial and consumer loans, financing commercial transactions, making
construction and mortgage loans and performing corporate pension and personal
trust services. Their deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) to the extent provided by law. The Banks have 22 offices
located in Montgomery, Bucks and Carbon counties.
On December 31, 1995, the Banks had 350 full-time equivalent employees.
COMPETITION
The Banks compete actively with other eastern Pennsylvania financial
institutions, many larger than the Banks, as well as with financial and
non-financial institutions headquartered elsewhere. The Banks are generally
competitive with all competing institutions in their service area with respect
to interest rates paid on time and savings deposits, service charges on
deposit accounts and interest rates charged on loans.
SUPERVISION AND REGULATION
The operations of the Banks are subject to federal, state and local
statutes applicable to banks chartered under the banking laws of the United
States, to members of the Federal Reserve System and to banks whose deposits
are insured by the FDIC. The Banks' operations are also subject to the
regulations of the Federal Reserve Board, the FDIC and the Office of the
Comptroller of the Currency (who regularly examines the Banks' areas such as
reserves, loans, investments, management practices and other aspects of bank
operations).
The Corporation is subject to certain rules and regulations of the
Securities and Exchange Commission and to the provisions of the Bank Holding
Company Act of 1956, as amended, and to supervision by the Federal Reserve
Board.
MARKET INFORMATION
The following table sets forth quarterly dividend information and the
high and low prices for the Corporation's common stock for 1995 and 1994. The
Corporation's stock is traded in the over-the-counter market under the symbol
"HNBC" and commonly quoted under NASDAQ National Market Issues.
PRICE OF COMMON STOCK
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1995 Low Price High Price Dividend
First Quarter $ 25.00 $ 28.00 $ .180
Second Quarter 25.00 28.00 .180
Third Quarter 25.00 28.50 .190
Fourth Quarter 26.25 28.50 .240
1994 Low Price* High Price* Dividend*
First Quarter $ 20.00 $ 31.43 $ .133
Second Quarter 28.57 31.43 .153
Third Quarter 26.07 30.95 .153
Fourth Quarter 24.76 28.10 .171
<FN>
*Adjusted for a five percent stock dividend effective 12/31/94.
</TABLE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Harleysville National Corporation and Subsidiaries
To the Board of Directors and Shareholders
Harleysville National Corporation:
We have audited the accompanying consolidated balance sheet of
Harleysville National Corporation and subsidiaries as of December 31, 1995,
and the related consolidated statements of income, shareholders' equity and
cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Corporation's management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of Harleysville National
Corporation and subsidiaries as of and for the years ended December 31, 1994
and 1993 were audited by other auditors whose report, dated January 31, 1995,
expressed an unqualified opinion on those consolidated financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provides a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Harleysville National Corporation and subsidiaries at December 31, 1995, and
the consolidated results of their operations and their consolidated cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements,
Harleysville National Corporation and subsidiaries changed their method of
accounting for certain investments in debt and equity securities in 1994 and
income taxes in 1993.
Grant Thornton LLP
Philadelphia, Pennsylvania
January 12, 1996
Page 8
CONSOLIDATED BALANCE SHEETS
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------- -------------------
ASSETS
<S> <C> <C>
Cash and due from banks. $ 33,886,739 $ 35,390,357
Federal funds sold 12,900,000 -
------------------- -------------------
Total cash and cash equivalents 46,786,739 35,390,357
------------------- -------------------
Interest-bearing deposits in banks 347,755 205,719
Investment securities available for sale. 146,082,135 102,211,333
Investment securities held to maturity
(market value $68,711,915 and $79,896,560, respectively) 66,850,063 82,867,003
Loans 611,625,480 578,063,239
Less: Unearned income (9,204,942) (9,804,357)
Allowance for loan losses (9,673,948) (7,934,385)
------------------- -------------------
Net loans. 592,746,590 560,324,497
------------------- -------------------
Bank premises and equipment, net 11,088,288 8,794,530
Accrued income receivable 5,558,735 4,726,117
Other real estate owned 981,084 1,242,887
Intangible assets, net 1,959,860 2,315,000
Other assets. 1,744,743 1,701,041
------------------- -------------------
Total assets. $ 874,145,992 $ 799,778,484
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 113,522,849 $ 110,502,583
Interest-bearing:.
NOW accounts. 86,941,025 83,828,901
Money market accounts. 151,496,159 162,219,289
Savings. 85,909,556 88,200,527
Time, under $100,000 275,157,113 224,598,588
Time, $100,000 or greater 28,191,693 19,227,711
------------------- -------------------
Total deposits 741,218,395 688,577,599
Accrued interest payable. 11,742,832 8,058,926
U.S. Treasury demand notes. 1,837,396 2,392,975
Federal funds purchased. - 12,716,000
FHLB borrowings 21,200,000 5,000,000
Securities sold under agreements to repurchase 16,713,629 15,212,755
Other liabilities. 3,917,564 1,244,847
------------------- -------------------
Total liabilities 796,629,816 733,203,102
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 5,878,082 shares in 1995
and 5,753,294 shares in 1994 5,878,082 5,753,294
Additional-paid-in-capital 27,601,451 24,415,932
Retained earnings 43,965,589 39,718,501
Net unrealized gain (losses) on investment securities available for sale 71,054 (3,312,345)
------------------- -------------------
Total shareholders' equity 77,516,176 66,575,382
------------------- -------------------
Total liabilities and shareholders' equity $ 874,145,992 $ 799,778,484
=================== ===================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
Page 9
CONSOLIDATED STATEMENTS OF INCOME
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1995 1994
-------------------------- -----------
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $ 48,631,458 $40,502,191
Lease financing 3,141,491 2,737,357
Investment securities:
Taxable 9,344,857 8,611,300
Exempt from federal taxes 2,575,537 2,434,697
Federal funds sold 605,199 247,094
Deposits in banks 23,381 81,377
-------------------------- -----------
Total interest income 64,321,923 54,614,016
-------------------------- -----------
INTEREST EXPENSE:
Savings deposits 8,828,010 8,707,831
Time, under $100,000 14,253,682 9,666,034
Time, $100,000 or greater 1,576,508 664,197
Borrowed funds 2,168,470 400,633
-------------------------- -----------
Total interest expense 26,826,670 19,438,695
-------------------------- -----------
Net interest income 37,495,253 35,175,321
Provision for loan losses 2,160,000 2,650,226
-------------------------- -----------
Net interest income after provision for loan losses. 35,335,253 32,525,095
-------------------------- -----------
OTHER OPERATING INCOME:
Service charges 2,312,855 2,313,799
Security (losses) gains, net (172,316) 530,286
Trust income 1,055,220 719,233
Other Income 1,132,815 962,052
-------------------------- -----------
Total other operating income 4,328,574 4,525,370
-------------------------- -----------
Net interest income after provision for loan losses
and other operating income 39,663,827 37,050,465
-------------------------- -----------
OTHER OPERATING EXPENSES:
Salaries, wages and employee benefits 12,433,961 10,982,434
Occupancy. 1,431,779 1,354,692
Furniture and equipment 1,847,051 1,487,443
FDIC premium 798,141 1,518,291
Other expenses 6,374,077 6,414,555
-------------------------- -----------
Total other operating expenses 22,885,009 21,757,415
-------------------------- -----------
Income before income taxes and the cumulative effect of a
change in accounting for income taxes 16,778,818 15,293,050
Income tax expense 5,003,097 4,548,081
-------------------------- -----------
Income before the cumulative effect of a change in
accounting for income taxes 11,775,721 10,744,969
-------------------------- -----------
Cumulative effect of a change in accounting for income taxes - -
-------------------------- -----------
Net income $ 11,775,721 $10,744,969
========================== ===========
Weighted average number of common shares:
Primary 5,893,334 5,847,473
Fully diluted 5,895,353 5,847,473
========================== ===========
Net income per share information:
Primary:
Before cumulative effect of a change in accounting for income taxes $ 2.00 $ 1.84
Cumulative effect of a change in accounting for income taxes. - -
-------------------------- -----------
Net income $ 2.00 $ 1.84
========================== ===========
Fully diluted:
Before cumulative effect of a change in accounting for income taxes $ 2.00 $ 1.84
Cumulative effect of a change in accounting for income taxes. - -
-------------------------- -----------
Net income $ 2.00 $ 1.84
========================== ===========
Cash dividends per share $ 0.79 $ 0.61
========================== ===========
1993
-----------
<S> <C>
INTEREST INCOME:
Loans, including fees $35,749,479
Lease financing 2,390,767
Investment securities:
Taxable 9,302,765
Exempt from federal taxes 2,292,144
Federal funds sold 490,975
Deposits in banks 123,403
-----------
Total interest income 50,349,533
-----------
INTEREST EXPENSE:
Savings deposits 9,223,689
Time under $100,000 9,809,193
Time $100,000 or greater 440,101
Borrowed funds 57,570
-----------
Total interest expense 19,530,553
-----------
Net interest income 30,818,980
Provision for loan losses 3,072,775
-----------
Net interest income after provision for loan losses. 27,746,205
-----------
OTHER OPERATING INCOME:
Service charges 2,346,799
Security (losses) gains, net 397,315
Trust income 648,834
Other Income 1,474,687
-----------
Total other operating income 4,867,635
-----------
Net interest income after provision for loan losses
and other operating income 32,613,840
-----------
OTHER OPERATING EXPENSES:
Salaries, wages and employee benefits 9,938,701
Occupancy. 1,210,599
Furniture and equipment 1,224,712
FDIC premium 1,425,088
Other expenses 6,323,241
-----------
Total other operating expenses 20,122,341
-----------
Income before income taxes and the cumulative effect of a
change in accounting for income taxes 12,491,499
Income tax expense 3,553,445
-----------
Income before the cumulative effect of a change in
accounting for income taxes 8,938,054
-----------
Cumulative effect of a change in accounting for income taxes 300,000
-----------
Net income $ 9,238,054
===========
Weighted average number of common shares:
Primary 5,642,790
Fully diluted 5,824,099
===========
Net income per share information:
Primary:
Before cumulative effect of a change in accounting for income taxes $ 1.58
Cumulative effect of a change in accounting for income taxes. 0.06
-----------
Net income $ 1.64
===========
Fully diluted:
Before cumulative effect of a change in accounting for income taxes $ 1.53
Cumulative effect of a change in accounting for income taxes. 0.06
-----------
Net income $ 1.59
===========
Cash dividends per share $ 0.49
===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
Page 10
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
on Investment
Common Stock Securities
-------------
Number of Par Additional Retained Available
Shares Value Paid-in-Capital Earnings For Sale Total
------------- ----------- ----------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 2,721,143 $2,721,143 $ 16,259,529 $35,578,664 $ - $54,559,336
Stock options 2,248 2,248 81,490 (83,738) - -
Proceeds of stock offering 71,362 71,362 929,959 - - 1,001,321
Stock awards 58 58 1,972 (2,030) - -
Dividends reinvestment 8,977 8,977 328,389 - - 337,366
Stock split 2,592,332 2,592,332 (2,592,332) - - -
Net income for 1993 - - - 9,238,054 - 9,238,054
Cash dividends - - - (2,664,788) - (2,664,788)
------------- ----------- ----------------- ------------ ---------------- ------------
Balance, December 31, 1993 5,396,120 5,396,120 15,009,007 42,066,162 - 62,471,289
Stock options 58,264 58,264 1,653,328 (2,295,879) - (584,287)
Stock dividends 273,535 273,535 7,084,576 (7,369,331) - (11,220)
Stock awards 128 128 3,072 (3,200) - -
Dividends reinvestment 25,247 25,247 665,949 - - 691,196
Net income for 1994 - - - 10,744,969 - 10,744,969
Cash dividends - - - (3,424,220) - (3,424,220)
Net unrealized losses on
investment securities available
for sale - - - - (3,312,345) (3,312,345)
------------- ----------- ----------------- ------------ ---------------- ------------
Balance, December 31, 1994 5,753,294 5,753,294 24,415,932 39,718,501 (3,312,345) 66,575,382
Stock options 124,672 124,672 3,182,739 (2,884,191) - 423,220
Stock awards 127 127 3,048 (3,175) - -
Dividends reinvestment (11) (11) (268) - - (279)
Net income for 1995 - - - 11,775,721 - 11,775,721
Cash dividends - - - (4,641,267) - (4,641,267)
Net unrealized gains
on investment securities
available for sale - - - - 3,383,399 3,383,399
------------- ----------- ----------------- ------------ ---------------- ------------
Balance, December 31, 1995 5,878,082 $5,878,082 $ 27,601,451 $43,965,589 $ 71,054 $77,516,176
============= =========== ================= ============ ================ ============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
Page 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES: 1995 1994
-------------------------- -------------
Net Income. $ 11,775,721 $ 10,744,969
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses. 2,160,000 2,650,226
Depreciation and amortization 1,160,742 980,319
Net amortization of investment
securities' discounts/premiums 442,343 611,135
Deferred income taxes 423,930 143,717
Cumulative effect of a change in accounting for income taxes. - -
Net realized securities loss (gain) 172,316 (530,286)
Write-down on investment - -
Realized gain on sale of loans - -
(Increase) decrease in accrued income receivable (832,618) (749,918)
Increase (decrease) in accrued interest payable 3,683,906 1,373,259
Net (increase) decrease in other assets (43,702) (908,238)
Net increase (decrease) in other liabilities 426,957 980,377
Decrease in unearned income (599,415) (1,522,492)
Write-down of other real estate owned. 190,500 61,268
Decrease in intangible assets 355,140 617,500
-------------------------- -------------
Net cash provided by operating activities 19,315,820 14,451,836
-------------------------- -------------
INVESTING ACTIVITIES:
Proceeds from sale of investment securities held to maturity. - -
Proceeds from sales of investment securities available for sale. 10,886,479 41,674,091
Proceeds from maturity or calls of investment securities held to maturity 23,578,233 22,724,787
Proceeds from maturity or calls of investment securities available for sale 8,052,745 13,141,815
Purchases of investment securities held to maturity. (47,629,707) (15,997,904)
Purchases of investment securities available for sale (18,151,042) (33,626,107)
Net (increase) decrease in short-term investments. (142,036) 1,375,662
Proceeds from sales of loans - -
Net increase in loans. (34,986,245) (91,476,770)
Net increase in premises and equipment (3,454,500) (1,113,483)
Proceeds from sales of other real estate 1,074,870 1,060,533
-------------------------- -------------
Net cash used in investing activities. (60,771,203) (62,237,376)
-------------------------- -------------
FINANCING ACTIVITIES:
Net increase in deposits. 52,640,796 8,112,721
(Decrease) increase in U.S. Treasury notes (555,579) 393,434
(Decrease) increase in federal funds purchased. (12,716,000) 12,301,000
Increase in FHLB borrowings 16,200,000 5,000,000
Increase in securities sold under agreement 1,500,874 15,212,755
Cash dividends and fractional shares. (4,641,267) (3,435,440)
Dividends reinvestment. (279) 691,196
Net proceeds from stock sale - -
Stock options. 423,220 (584,287)
-------------------------- -------------
Net cash provided by financing activities 52,851,765 37,691,379
-------------------------- -------------
Increase (decrease) in cash and cash equivalents 11,396,382 (10,094,161)
Cash and cash equivalents at beginning of year. 35,390,357 45,484,518
-------------------------- -------------
Cash and cash equivalents at end of the year $ 46,786,739 $ 35,390,357
========================== =============
Cash paid during the year for:
Interest. $ 23,142,764 $ 18,065,436
Income taxes 4,119,188 4,086,921
========================== =============
Supplemental disclosure of noncash investing
and financing activities:
Transfer of assets from loans to
foreclosed and repossessed property $ 1,003,567 $ 859,162
========================== =============
Transfer of securities from investment securities held to
maturity to investment securities available for sale $ 39,946,783 $ 6,029,113
========================== =============
<S> <C>
OPERATING ACTIVITIES: 1993
-------------
Net Income. $ 9,238,054
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses. 3,072,775
Depreciation and amortization 1,117,128
Net amortization of investment
securities' discounts/premiums 421,493
Deferred income taxes (374,485)
Cumulative effect of a change in accounting for income taxes. (300,000)
Net realized securities loss (gain) (447,315)
Write-down on investment 50,000
Realized gain on sale of loans (469,091)
(Increase) decrease in accrued income receivable 613,531
Increase (decrease) in accrued interest payable (359,458)
Net (increase) decrease in other assets 341,516
Net increase (decrease) in other liabilities (1,215,748)
Decrease in unearned income (4,672,324)
Write down of other real estate owned. 111,670
Decrease in intangible assets 345,000
-------------
Net cash provided by operating activities 7,472,746
-------------
INVESTING ACTIVITIES:
Proceeds from sale of investment securities held to maturity. 742,295
Proceeds from sales of investment securities available for sale. 26,765,477
Proceeds from maturity or calls of investment securities held to maturity 63,039,778
Proceeds from maturity or calls of investment securities available for sale -
Purchases of investment securities held to maturity. (25,397,611)
Purchases of investment securities available for sale (77,353,055)
Net (increase) decrease in short-term investments. (44,746)
Proceeds from sales of loans 15,360,878
Net increase in loans. (64,749,257)
Net increase in premises and equipment (741,058)
Proceeds from sales of other real estate 2,120,614
-------------
Net cash used in investing activities. (60,256,685)
-------------
FINANCING ACTIVITIES:
Net increase in deposits. 40,225,654
(Decrease) increase in U.S. Treasury notes 72,002
(Decrease) increase in federal funds purchased. 415,000
Increase in FHLB borrowings -
Increase in securities sold under agreement -
Cash dividends and fractional shares. (2,664,788)
Dividends reinvestment. 337,366
Net proceeds from stock sale 1,001,321
Stock options. -
-------------
Net cash provided by financing activities 39,386,555
-------------
Increase (decrease) in cash and cash equivalents (13,397,384)
Cash and cash equivalents at beginning of year. 58,881,902
-------------
Cash and cash equivalents at end of the year $ 45,484,518
=============
Cash paid during the year for:
Interest. $ 19,890,011
Income taxes 4,709,613
=============
Supplemental disclosure of noncash investing
and financing activities:
Transfer of assets from loans to
foreclosed and repossessed property $ 1,165,114
=============
Transfer of securities from investment securities held to
maturity to investment securities available for sale $ -
=============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
Page 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Harleysville National Corporation (the "Corporation") through its
subsidiary banks, Harleysville National Bank and Trust Company, Citizens
National Bank of Lansford, and Security National Bank (collectively the
"Banks"), provides a full range of banking services to individual and
corporate customers located in eastern Pennsylvania. In addition to being
subject to competition from other financial institutions, the Banks are
subject to regulations of certain federal agencies and, accordingly, they are
periodically examined by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting and reporting policies of the Corporation and its
subsidiaries conform with generally accepted accounting principles. All
significant intercompany transactions are eliminated in consolidation and
certain reclassifications are made when necessary to the previous year's
financial statements to conform with the current year's presentation. In
preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenditures
for the periods. Therefore, actual results could differ significantly from
those estimates.
The principal estimate that is particularly susceptible to significant
change in the near term relates to the allowance for loan losses. In
connection with this estimate, when circumstances warrant, management obtains
independent appraisals for significant properties. However, future changes in
real estate market conditions and the economy could affect the Banks'
allowance for loan losses.
SECURITIES
The Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," on January 1, 1994, which requires, among other things, that debt
and equity securities classified as available for sale be reported at fair
value with unrealized gains and losses excluded from earnings and reported in
a separate component of shareholders' equity, net of income taxes. The net
effect of unrealized gains or losses, caused by marking an available-for-sale
portfolio to market, could cause fluctuations in the level of shareholders'
equity and equity-related financial ratios as market interest rates cause the
fair value of fixed-rate securities to fluctuate.
Investment securities are classified as held to maturity when the Banks
have the ability and intent to hold those securities to maturity. These
investment securities are carried at cost, adjusted for amortization of
premiums and accretion of discounts.
Investment securities expected to be held for an indefinite period of
time are classified as available for sale and are stated at the lower of
aggregate cost or market value. Investment securities expected to be held for
an indefinite period of time include securities that management intends to use
as part of its asset/liability strategy (other than securities that are
intended to be held to maturity because they offset core deposits that have
demonstrated stability) or that may be sold in response to changes in interest
rates, changes in prepayment risks, the need to increase regulatory capital or
other similar factors. The adjusted cost of a specific investment sold is the
basis for determining gains or losses under the completed transaction method
on the sale of investment securities available for sale. These gains and
losses are shown on the consolidated statements of income.
LOANS
Loans are stated at the principal amount outstanding. Net loans
represent the principal loan amount outstanding reduced by unearned income and
allowance for loan losses. Interest on commercial and industrial, real
estate, consumer loans and direct installment loans originated after March
1993 is credited to income based on the principal amount outstanding.
Interest on direct installment loans originated prior to April 1993 is
credited to income using the actuarial method, which approximates the level
yield method. Interest on indirect installment loans is credited to income
using the actuarial method.
Loan origination fees and direct loan origination costs of completed
loans are deferred and recognized over the life of the loan as an adjustment
to yield. The net loan origination fees recognized as yield adjustments are
reflected in total interest income in the consolidated statements of income,
and the unamortized balance of such net loan origination fees is reported in
the consolidated balance sheets as part of unearned income.
Income recognition of interest is discontinued when, in the opinion of
management, the collectibility of such interest becomes doubtful. A loan is
generally classified as nonaccrual when principal or interest has consistently
been in default for a period of 90 days or more or because of a deterioration
in the financial condition of the borrower, and payment in full of principal
or interest is not expected. 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.
The Corporation adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures," on January 1,
1995. This new standard requires that a creditor measure impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. Regardless of
the measurement method, a creditor must measure impairment based on the fair
value of the collateral when the creditor determines that foreclosure is
probable. The adoption of SFAS No. 114, as amended by SFAS No. 118, on
January 1, 1995 did not have a material impact on the Corporation's liquidity,
results of operations and capital resources.
In May 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 122, "Accounting for Mortgage Servicing Rights," an amendment of SFAS No.
65, which requires that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others. This statement requires
that a mortgage banking enterprise assess its capitalized mortgage servicing
rights for impairment based on the fair value of those rights. SFAS No. 122
is to be applied prospectively for financial statements for fiscal years
beginning after December 15, 1995, to transactions with retained servicing
rights and to impairment evaluations of capitalized amounts. Once adopted,
this statement will not have a material effect on the Corporation's liquidity,
results of operations or capital resources. The Corporation is required to
adopt this new statement on January 1, 1996.
Page 13
LEASE FINANCING
Lease financing represents automobile and equipment leasing. The lease
financing receivable included in loans is stated at the gross amount of lease
payments receivable plus the residual value less income to be earned over the
life of the leases. Such income is recognized over the term of the leases
using the level yield method.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that management
considers adequate to provide for potential losses based upon an evaluation of
known and inherent risks in the loan portfolio. Allowance for loan losses is
based on estimated net realizable value unless it is probable that loans will
be foreclosed, in which case allowance for loan losses is based on fair value
less selling costs. Management's periodic evaluation is based upon evaluation
of the portfolio, past loss experience, current economic conditions and other
relevant factors. While management uses the best information available to
make such evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making
the evaluation. 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 examination.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is recorded using the straight-line and
accelerated depreciation methods over the estimated useful life of the assets.
Leasehold improvements are amortized over the term of the lease or estimated
useful life, whichever is shorter.
OTHER REAL ESTATE OWNED
Other real estate owned includes foreclosed real estate which is carried
at the lower of cost (lesser of carrying value of loan or fair value at date
of acquisition) or estimated fair value less selling costs. Any write-down,
at or prior to the dates the real estate is considered foreclosed, is charged
to the allowance for loan losses. Subsequent write-downs are recorded in
other expenses, and expenses incurred in connection with holding such assets
and any gains or losses upon their sale are included in other expenses.
INTANGIBLE ASSETS
Intangible assets consists of a core deposit intangible which represents
the present value of the difference in costs between the acquired core
deposits and the market alternative funding sources and a covenant not to
compete. The intangibles are being amortized over a 10-year life on an
accelerated basis. The amortization charged to income was $355,140, $617,500
and $345,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
The FASB issued a new standard, SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which provides guidance on when to recognize and how to measure impairment
losses of long-lived assets and certain identifiable intangibles and how to
value long-lived assets to be disposed of. The adoption of this new statement
is not expected to have a material impact on the Corporation's liquidity,
results of operations or capital resources. The Corporation is required to
adopt this new standard on January 31, 1996.
INCOME TAXES
The Corporation adopted SFAS No. 109, "Accounting for Income Taxes" on
January 1, 1993. Under the liability method specified by SFAS No. 109,
deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date. The principal types of accounts,
resulting in differences between assets and liabilities for financial
statement and tax return purposes, are the allowance for possible credit
losses, leased assets, deferred loan fees and compensation. The provisions of
the statement were applied without restating prior years' financial
statements. Adoption of SFAS No. 109 resulted in a reduction of the net
deferred tax liability in the amount of $300,000 in 1993.
The deferred method used in years prior to 1993 requires the Corporation
to provide deferred tax expense based on certain items of income and expense
which were reported in different years in the financial statements and the tax
return as measured by the tax rate in effect for the year the difference
occurred.
PENSION PLAN
The Corporation has certain employee benefit plans covering substantially
all employees. The Corporation accrues service cost as incurred.
RESTRICTIONS ON CASH AND DUE FROM BANKS
Aggregate reserves (in the form of deposits with the Federal Reserve
Bank) of $8,406,000 were maintained to satisfy federal regulatory
requirements at December 31, 1995.
NET INCOME PER SHARE
Net income per share was computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year,
including the effects of dilutive stock options, and after giving retroactive
effect to the following events: the shares issued when Security National Bank
(1994) was merged into the Corporation and accounted for on a
pooling-of-interests basis, the 5% stock dividend issued in 1994 and the
two-for-one stock split in the form of a 100% stock dividend paid on December
31, 1993.
STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the
Corporation considers cash, amounts due from banks and federal funds sold to
be cash equivalents. Generally, federal funds are sold for one-day periods.
Page 14
2-ACQUISITIONS
On September 7, 1995, the Corporation, Citizens National Bank of
Lansford ("Citizens") and Farmers and Merchants Bank ("Farmers") executed an
Agreement and Plan of Reorganization and an Agreement and Plan of Merger (the
Agreement). The Corporation wishes to acquire Farmers, and Farmers wishes to
merge with and into Citizens. Under the terms of the agreement, each share of
Farmers common stock will be converted into between 0.5915 and 0.6915 shares
of the Corporation's common stock, subject to proportional adjustments; as
specified in the agreement, resulting in the issuance of between 418,791 and
489,593 shares of the Corporation's Common Stock.
This transaction is expected to be accounted for under the
pooling-of-interests method of accounting. A summary of unaudited restated
condensed consolidated financial information of the Corporation and Farmers
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1995 1994 1993
------------------------- ------------ ------------
<S> <C> <C> <C>
Operating results (unaudited):
Net interest income $ 39,706,000 $ 37,279,000 $ 32,748,000
Noninterest income 4,437,000 4,747,000 4,964,000
Net income applicable to
common stock 12,428,000 11,280,000 9,738,000
Per common share 1.96 1.79 1.60
Average number of common
shares outstanding 6,347,526 6,301,665 6,097,444
Years Ended December 31,
-------------------------
1995 1994 1993
------------------------- ------------ ------------
Balance sheet at year-end
(unaudited):
Assets 937,345,000 $862,668,000 $816,314,000
Loans, net of unearned discounts 628,738,000 594,755,000 498,139,000
Deposits 794,499,000 743,326,000 735,328,000
Common shareholders' equity 86,362,000 74,182,000 69,357,000
Book value per common share 13.64 11.95 11.85
</TABLE>
On July 1, 1994, the Corporation completed a merger with Security
National Bank ("Security"). Under the terms of the merger, each share of
Security common stock was converted into 0.7483 shares of the Corporation's
common stock, resulting in the issuance of 211,456 shares of the Corporation's
common stock. This transaction was accounted for under the
pooling-of-interests method of accounting and all prior periods have been
restated to reflect the combination as follows:
<TABLE>
<CAPTION>
Net
(Dollars in thousands) Revenue Income (Loss)
------- -------------
Year Ended December 31, 1994
<S> <C> <C>
Harleysville National Corporation 57,783 11,023
Security National Bank, as of June 30, 1994 1,356 (278)
------- -------
Total 59,139 10,745
======= =======
Year Ended December 31, 1993
Harleysville National Corporation 52,734 9,280
Security National Bank 2,483 (42)
------- -------
Total 55,217 9,238
======= =======
</TABLE>
3-SECURITIES
The amortized cost, unrealized gains and losses, and the estimated market
values of the Corporation's investment securities held to maturity and
available for sale are as follows:
<TABLE>
<CAPTION>
December 31, 1995
------------------
Held to Maturity
- --------------------------
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------------ ------------ -----------
Obligations of other U.S.
Government agencies
and corporations $34,494,123 $926,117 $(7,181) $35,413,059
Obligations of states and
political subdivisions 25,466,163 756,129 (23,356) 26,198,936
Mortgage-backed securities 377,955 10,242 - 388,197
Other securities 6,511,822 199,901 - 6,711,723
----------- ------------------ ------------ -----------
Totals $66,850,063 $ 1,892,389 $ (30,537) $68,711,915
=========== ================== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
------------------
Available for Sale
- --------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 32,670,977 $ 248,483 $ (54,740) $ 32,864,720
Obligations of other U.S.
Government agencies
and corporations 6,253,928 - (65,567) 6,188,361
Obligations of states and
political subdivisions 30,904,969 266,653 (567,052) 30,604,570
Mortgage-backed securities 67,336,406 521,041 (486,630) 67,370,817
Other securities 8,806,542 261,603 (14,478) 9,053,667
------------ ------------------ ------------ ------------
Totals $145,972,822 $ 1,297,780 $(1,188,467) $146,082,135
============ ================== ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
------------------
Held to Maturity
- ---------------- Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------------ ------------ -----------
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 2,562,102 $ - $ (74,287) $ 2,487,815
Obligations of other U.S.
Government agencies
and corporations 16,992,226 11,570 (828,838) 16,174,958
Obligations of states and
political subdivisions 44,539,484 191,430 (1,891,508) 42,839,406
Mortgage-backed securities 617,285 - (22,420) 594,865
Other securities 18,155,906 17,588 (373,978) 17,799,516
----------- ------------------ ------------ -----------
Totals $82,867,003 $ 220,588 $(3,191,031) $79,896,560
=========== ================== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
------------------
Available for Sale
- ------------------ Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 32,320,868 $ 7,351 $(1,282,778) $ 31,045,441
Mortgage-backed securities 70,773,466 53,992 (3,992,676) 66,834,782
Other securities 4,212,915 136,384 (18,189) 4,331,110
------------ ------------------ ------------ ------------
Totals $107,307,249 $ 197,727 $(5,293,643) $102,211,333
============ ================== ============ ============
</TABLE>
Page 15
There are no significant concentrations of securities (greater than 10% of
shareholders' equity) in any individual security issuer.
Securities with a carrying value of $44,541,000 and $32,925,000 at
December 31, 1995 and 1994, respectively, were pledged to secure public
funds and government deposits.
The amortized cost and estimated market value of investment securities
held to maturity and available for sale at December 31, 1995 are shown below.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
Held To Maturity Available For Sale
----------------- -------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
----------------- ------------- ------------------- -------------
<S> <C> <C> <C> <C>
Due in one year or
less $ 8,282,639 $ 8,349,291 $ 23,697,746 $ 23,682,091
Due through one year
through five years 53,708,109 55,291,257 44,100,000 42,731,375
Due through five years
through ten years 4,231,360 4,431,490 7,086,958 7,108,827
Due after ten years 250,000 251,680 3,751,711 3,976,525
----------------- ------------- ------------------- -------------
66,472,108 68,323,718 78,636,415 77,498,818
Mortgage-backed
securities 377,955 388,197 67,336,407 68,583,317
----------------- ------------- ------------------- -------------
Totals $ 66,850,063 $ 68,711,915 $ 145,972,822 $ 146,082,135
================= ============= =================== =============
</TABLE>
There were no sales of investment securities held to maturity during
1995. Proceeds from sales of investment securities available for sale during
1995 were $10,886,479. Gross gains of $26,943 and gross losses of $199,259
were realized on these sales. There were no sales of investment securities
held to maturity during 1994. Proceeds from sales of investment securities
available for sale during 1994 were $41,674,091. Gross gains of $1,227,628
and gross losses of $725,039 were realized on these sales. Proceeds from
sales of investment securities during 1993 were $742,295. Gross gains of
$1,517 were realized on these sales. Proceeds from sales of investment
securities available for sale during 1993 were $26,765,477. Gross gains of
$459,891 and gross losses of $34,284 were realized on these sales.
4-LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31,
-------------
1995 1994
------------- ------------
<S> <C> <C>
Real estate $ 207,818,780 $200,139,092
Commercial and industrial 163,677,259 154,319,013
Installment 155,012,074 143,782,888
Student Loans 6,263,904 5,879,578
Consumer loans 28,284,451 27,501,295
Lease financing 43,941,811 41,232,967
Other 6,627,201 5,208,406
------------- ------------
Total loans 611,625,480 578,063,239
Less:
Unearned income 9,204,942 9,804,357
Allowance for loan losses 9,673,948 7,934,385
------------- ------------
Net Loans $ 592,746,590 $560,324,497
============= ============
</TABLE>
On December 31, 1995, nonaccrual loans were $8,992,715, loans 90 days or
more past due were $1,459,763 and troubled debt restructured loans were
$1,183,016. On December 31, 1994, nonaccrual loans were $2,457,526, loans 90
days or more past due were $2,145,109 and troubled debt restructured loans
were $1,867,587.
The balance of impaired loans was $9,278,000 at December 31, 1995. The
Banks have identified a loan as impaired when it is probable that interest
and principal will not be collected according to the contractual terms of the
loan agreement. The impaired loan balance included $8,095,000 of nonaccrual
loans and $1,183,000 of troubled debt restructured loans. The allowance for
loan loss associated with the $9,278,000 of impaired loans was $1,122,000 at
December 31, 1995. The average impaired loan balance was $3,906,000 in 1995
and the income recognized on impaired loans during 1995 was $231,000. The
Banks' policy for interest income recognition on impaired loans is to
recognize income on restructured loans under the accrual method. The Banks
recognize income on nonaccrual loans under the cash basis when the loans are
both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Banks. The Banks will not recognize income if
these factors do not exist.
The Banks have no concentration of loans to borrowers engaged in similar
activities which exceeded 10% of total loans at December 31, 1995. The Banks
continued to pursue new lending opportunities while seeking to maintain a
portfolio that is diverse as to industry concentration, type and geographic
distribution. The Banks' geographic lending area is primarily concentrated in
Montgomery County, but also includes Bucks, Carbon, Chester and Berks
counties.
Loans to directors, executive officers and their associates, are made in
the ordinary course of business and on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with others. Activity of these loans is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
-------------------------- ------------ ------------
<S> <C> <C> <C>
Balance, January 1 $ 11,618,389 $ 8,893,780 $ 9,281,111
New Loans 8,592,251 9,756,903 7,657,256
Repayments (7,624,928) (7,032,294) (8,044,587)
-------------------------- ------------ ------------
Balance, December 31 $ 12,585,712 $11,618,389 $ 8,893,780
========================== ============ ============
</TABLE>
Page 16
5-ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1995 1994 1993
-------------------------- ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 7,934,385 $ 5,886,427 $ 4,386,893
-------------------------- ------------ ------------
Provision charged to
operating expenses 2,160,000 2,650,226 3,072,775
-------------------------- ------------ ------------
Loans charged off:
Commercial and industrial (239,945) (490,589) (1,211,088)
Installment (276,966) (386,477) (401,155)
Real estate (116,639) (84,927) (211,708)
Lease financing (38,775) (44,426) (92,186)
-------------------------- ------------ ------------
Total charged off (672,325) (1,006,419) (1,916,137)
-------------------------- ------------ ------------
Recoveries:
Commercial and industrial 142,930 169,626 85,760
Installment 71,867 152,267 155,911
Real estate 1,211 55,735 76,530
Lease financing 35,880 26,523 24,695
-------------------------- ------------ ------------
Total recoveries 251,888 404,151 342,896
-------------------------- ------------ ------------
Balance, end of year $ 9,673,948 $ 7,934,385 $ 5,886,427
========================== ============ ============
</TABLE>
6-BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
Useful December 31,
Lives 1995 1994
----------- ------------- -----------
<S> <C> <C> <C>
Land $ 2,223,583 $ 1,687,083
Buildings 15-30 years 9,535,868 8,101,621
Furniture, fixtures and equipment 3-10 years 8,556,736 7,098,635
------------- -----------
Total cost 20,316,187 16,887,339
Less accumulated depreciation and
amortization 9,227,899 8,092,809
------------- -----------
Bank premises and equipment, net $ 11,088,288 $ 8,794,530
============= ===========
</TABLE>
7-LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
<S> <C> <C> <C> <C>
Description 1995 1994 Maturity Interest Rate
- ------------------------------ ------------- ---------- ------------- --------------
FHLB $ 2,000,000 $ - August 1997 6.12%
FHLB 5,000,000 5,000,000 December 1997 6.45%
FHLB 1,500,000 - October 1998 5.82%
FHLB 500,000 - August 2000 6.49%
------------- ----------
$ 9,000,000 $5,000,000
============= ==========
Advances are made pursuant to several different credit programs offered from
time to time by the Federal Home Loan Bank (FHLB).
</TABLE>
8-FEDERAL INCOME TAXES
Income tax expense from current operations is composed of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1995 1994 1993
------------- ---------- -----------
<S> <C> <C> <C>
Current tax payable $ 3,652,334 $4,404,364 $3,927,930
Deferred income tax 423,930 143,717 (374,485)
Charge in lieu of income tax 926,833 - -
------------ ---------- -----------
Tax expense $ 5,003,097 $4,548,081 $3,553,445
============ ========== ===========
</TABLE>
The effective income tax rates of 29.8% for 1995, 29.7% for 1994 and
28.4% for 1993 were less than the applicable federal income tax rate of 35%
for each year. The reason for these differences follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1995 1994 1993
--------------- ----------- -----------
<S> <C> <C> <C>
Expected tax expense $ 5,704,795 $5,352,568 $4,372,505
Tax-exempt income net of
interest disallowance (944,217) (898,234) (882,016)
Other 242,519 93,747 62,956
----------------- ----------- -----------
Actual tax expense $ 5,003,097 $4,548,081 $3,553,445
================= =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
Asset Liability Asset Liability
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for possible
credit losses $3,374,483 $ - $2,700,807 $ -
Lease assets - 6,382,556 - 5,404,702
Deferred loan fees 868,347 - 1,013,072 -
Deferred compensation 459,563 - 413,308 -
Other 222,830 - 244,112 -
---------- ---------- ---------- ----------
Total deferred taxes $4,925,223 $6,382,556 $4,371,299 $5,404,702
========== ========== ========== ==========
</TABLE>
Page 17
9-PENSION PLAN
The Corporation has a noncontributory defined benefit pension plan
covering substantially all employees. Benefits are based on years of service
and the employee's average compensation during any five consecutive years
within the 10-year period preceding retirement.
The plan's funded status and amounts recognized in the financial
statements are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
Plan assets at fair value $2,721,007 $2,435,204
Projected benefit obligation
(including an accumulated benefit obligation of
$2,296,276 in 1995, $1,808,907 in 1994, and
a vested benefit obligation of $2,169,256 in
1995, and $1,704,112 in 1994) 2,974,259 2,392,143
----------- -----------
Plan assets in (deficit) excess of
projected benefit obligation (253,252) 43,061
Unrecognized net gain from past
experience being different from
that which was assumed 449,619 496,504
Unrecognized prior service cost 32,998 36,665
Unrecognized net assets at January 1, 1987,
being recognized over 15 years (104,201) (121,568)
----------- -----------
Prepaid pension cost $125,164 $454,662
=========== ===========
Net pension cost for the years ended December 31, 1995, 1994 and 1993 included
the following components:
<S> <C> <C> <C>
1995 1994 1993
---------- ----------- -----------
Service cost $ 333,099 $ 266,907 $ 232,652
Interest cost 168,943 137,329 122,950
Actual return on plan assets (316,452) (84,426) (171,996)
Net amortization and deferral 143,908 (61,198) 45,318
---------- ----------- -----------
Net periodic pension cost $ 329,498 $ 258,612 $ 228,924
========== =========== ===========
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 6.75% and 5.0% for 1995 and 1994, and 6.75%
and 3.0% for 1993, respectively; the expected long-term rate of return on
assets was 7.5% for all years.
The Banks have a profit-sharing plan for eligible employees. The
continuation of the profit-sharing plan is voluntary on the part of the Banks.
The Banks expressly reserve the right to amend or terminate the plan and to
reduce, suspend or discontinue contributions at any time. Contributions
charged to earnings were $1,081,068, $971,640 and $801,104 for 1995, 1994 and
1993, respectively.
The Corporation has a Supplemental Executive Retirement Plan (SERP) for
certain individuals. The SERP provides for payments based on a certain
percentage of salary for a period of 10 years after retirement. As of
December 31, 1995 and 1994, the Corporation had accrued a liability of
$634,882 and $565,562, respectively, for the SERP.
10-SHAREHOLDERS' EQUITY
On December 30, 1994, the Corporation paid a 5% stock dividend on its
common stock to shareholders of record as of December 16, 1994.
On December 31, 1993, the Corporation paid a two-for-one stock split on
its common stock in the form of a 100% stock dividend, to shareholders of
record as of December 17, 1993.
11-STOCK OPTIONS
Under the Corporation's Equity Incentive Plan, 386,738 shares of common
stock were reserved for issuance upon exercise of options granted to officers
and key employees. The plan provides that the option price and exercise date
will be set by a disinterested committee of the Board of Directors, but the
option price will not be less than 100% of the fair value of the stock at date
of grant. The plan also provides for stock appreciation rights, which enable
the recipient on exercise to receive payment in cash of increases in the
market value of the stock from the date of grant.
Under the Corporation's stock option plan, the exercisable option prices
ranged from $8.38 to $21.38 at December 31, 1995. The 1995 stock options
granted are exercisable in February 1996, at $26.875 per share. An analysis
of the activity in this plan for the last three years is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Number of Common Shares:
Outstanding, January 1* 219,539 337,018 351,028
Granted 4,575 - -
Exercised (158,942) (117,479) (14,010)
--------- --------- --------
Outstanding, December 31 65,172 219,539 337,018
========= ========= ========
Exercisable, December 31 60,597 219,539 337,018
========= ========= ========
* Adjusted for stock splits and stock dividends.
</TABLE>
On April 13, 1993, the shareholders of the Corporation approved the 1993
Stock Incentive Plan. There are 163,425 shares of the Corporation's common
stock available for issuance under the Plan. During 1995, 4,575 shares were
granted under the 1993 Stock Incentive Plan at a price of $26.875 per share.
Page 18
12-COMMITMENTS AND CONTINGENT LIABILITIES
Management, based on consultation 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, 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.
Lease commitments for equipment and banking locations expire
intermittently over the years through 2036. Most banking location leases
require the lessor to pay insurance, maintenance costs and property taxes.
Approximate minimum rental commitments for existing operating leases at
December 31, are as follows:
<TABLE>
<CAPTION>
Total
Operating
Leases
<S> <C>
1996 $ 749,000
1997 459,000
1998 364,000
1999 300,000
2000 182,000
Thereafter 2,261,000
----------
Total $4,315,000
</TABLE>
Total lease expense amounted to $764,714 in 1995, $531,415 in 1994 and
$313,505 in 1993. Security is committed to enter into a $475,000 ground lease
for their Pottstown Center branch scheduled to open during 1996. This prepaid
ground lease will be amortized over a 30-year period. The amortization for
this lease will be approximately $12,000 during 1996.
13-FINANCIAL INSTRUMENTS
The Banks have not entered into any interest rate swaps, caps, floors or
collars and are not a party to any forward or futures transactions. However,
the Banks are a party to various other financial instruments at December 31,
1995 and 1994 which are not included in the consolidated financial statements
but are required in the normal course of business to meet the financing needs
of its customers and to assist in managing its exposure to changes in interest
rates. Management does not expect any material losses from these
transactions, which include standby letters of credit of $5,629,000 and
$7,133,000, respectively; commitments to extend credit of $19,819,000 and
$18,412,000, respectively, for revolving home equity lines; $57,387,000 and
$54,030,000, respectively, for commercial and real estate loans; and
$17,462,000 and $16,537,000, respectively, for consumer loans.
The Banks' exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual or notional
amounts of those instruments. The Banks use the same stringent credit
policies in extending these commitments as they do for recorded financial
instruments and control their exposure to loss through credit approval and
monitoring procedures. These commitments are generally issued for one year or
less, often expire without being drawn upon, and often are secured with
appropriate collateral.
The Banks offer commercial, mortgage and consumer credit products to
their customers in the normal course of business, which are detailed in note
4. These products represent a diversified credit portfolio and are generally
issued to borrowers within the Banks' branch office systems in eastern
Pennsylvania. The ability of the customers to repay their credits is, to some
extent, dependent upon the economy in the Banks' market areas.
14-REGULATORY RESTRICTIONS
The National Banking Laws require the approval of the Office of the
Comptroller of the Currency if the total of all dividends declared by a
national bank in any calendar year exceeds the net profits of the bank (as
defined) for that year combined with its retained net profits for the
preceding two calendar years. Under this formula, the Banks may declare
dividends in 1996 of approximately $14,400,000 plus an amount equal to the net
profits of the Banks in 1996 up to the date of any such dividend declaration.
Additionally, banking regulations limit the amount of investments, loans,
extensions of credit and advances that one subsidiary bank can make to the
Corporation at any time to 10% and in the aggregate 20% of the Banks' capital
stock and surplus. These regulations also require that any such investment,
loan, extension of credit or advance be secured by securities having a market
value in excess of the amount thereof. At December 31, 1995, there were no
investments, loans, extensions of credit or advances from any of the
subsidiary banks to the Corporation.
Page 19
15-FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For
the Corporation, as for most financial institutions, the majority of its
assets and liabilities are considered financial instruments as defined in SFAS
No. 107. However, many such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Also, it is the Corporation's general practice and intent to
hold its financial instruments to maturity and not to engage in trading or
sales activities, except for certain loans. Therefore, the Corporation had to
use significant estimates and present value calculations to prepare this
disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned
that there may not be reasonable comparability between institutions due to the
wide range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity
in estimating financial instrument fair values.
Estimated fair values have been determined by the Corporation using the
best available data and an estimation methodology suitable for each category
of financial instruments. The estimation methodologies used, the estimated
fair values, and recorded book balances at December 31, 1995 and 1994 are
outlined below.
For cash and due from banks, interest-bearing deposits in banks and
federal funds sold, the recorded book values of $47,134,000 and $35,596,000 at
December 31, 1995 and 1994, respectively, approximate fair values. The
estimated fair values of investment securities are based on quoted market
prices, if available. Estimated fair values are based on quoted market prices
of comparable instruments if quoted market prices are not available.
The net loan portfolio at December 31, 1995 and 1994 has been valued
using a present value discounted cash flow analysis where market prices were
not available. The discount rate used in these calculations is the estimated
current market rate adjusted for credit risk. The carrying value approximates
its fair value.
<TABLE>
1995 1994
------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Investment securities $212,932,000 $214,794,000 $185,078,000 $182,107,000
Loans, net $592,747,000 $599,646,000 $560,324,000 $523,885,000
</TABLE>
The estimated fair values of demand deposits (i.e., interest and
noninterest-bearing checking accounts, savings and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts of
variable rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. The carrying amount of
accrued interest payable approximates its fair value.
<TABLE>
1995 1994
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Time deposits $303,349,000 $305,431,000 $243,826,000 $241,422,000
</TABLE>
The fair values of short-term borrowings of $30,751,000 and $30,322,000
at December 31, 1995 and 1994, respectively, approximate their recorded book
balances.
There was no material difference between the notional amount and the
estimated fair value of off-balance-sheet items which totaled approximately
$100,297,000 and $96,112,000 at December 31, 1995 and 1994, respectively, and
primarily comprised unfunded loan commitments which are generally priced at
market at the time of funding.
Page 20
16-CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial statements of Harleysville National Corporation,
(parent company only) follow:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------
1995 1994
------------- ------------
<S> <C> <C>
Assets:
Cash $ 1,544,398 $ 1,121,457
Investment in subsidiaries 75,567,583 65,107,347
Investment securities available for sale 853,539 764,895
------------- ------------
Total assets $ 77,965,520 $66,993,699
============= ============
Liabilities and shareholders' equity:
Other liabilities $ 449,343 $ 418,317
------------- ------------
Total liabilities 449,343 418,317
------------- ------------
Shareholders' equity:
Common Stock 5,878,082 5,753,294
Additional-paid-in-capital 27,601,451 24,415,932
Retained earnings 43,965,590 39,718,501
Net unrealized gains on investment
securities available for sale 71,054 (3,312,345)
------------- ------------
Total shareholders' equity 77,516,177 66,575,382
------------- ------------
Total liabilities and
shareholders' equity $ 77,965,520 $66,993,699
============= ============
<FN>
CONDENSED STATEMENTS OF INCOME
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1995 1994 1993
------------------------- ----------- ----------
<S> <C> <C> <C>
Dividends from banks $ 4,816,267 $ 3,463,133 $2,689,786
Other income - 1,058,809 -
------------------------- ----------- ----------
Total operating income 4,816,267 4,521,942 2,689,786
Operating expense - - -
------------------------- ----------- ----------
Income before income taxes and equity
in undistributed net income of banks 4,816,267 4,521,942 2,689,786
Income taxes - 370,583 -
------------------------- ----------- ----------
Income before equity in undistributed net 4,816,267 4,151,359 2,689,786
income of banks
Equity in undistributed net income of banks 6,959,454 6,593,610 6,548,268
------------------------- ----------- ----------
Net income $ 11,775,721 $10,744,969 $9,238,054
========================= =========== ==========
<FN>
CONDENSED STATEMENTS OF CASH FLOWS
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1995 1994 1993
-------------------------- ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income $ 11,775,721 $10,744,969 $ 9,238,054
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed net income
of banks (6,959,454) (6,694,909) (6,885,786)
Dividends reinvestment (279) 691,196 337,366
Realized gain on sale of securities - (1,058,809) -
Net increase in other liabilities - 370,583 -
-------------------------- ------------ ------------
Net cash provided by
operating activities 4,815,988 4,053,030 2,689,634
-------------------------- ------------ ------------
Investing activities:
Capital contributions made to banks (175,000) - -
Proceeds from sales of securities - 1,083,807 -
Purchase of securities
available for sale - - (24,998)
-------------------------- ------------ ------------
Net cash (used in) provided by
investing activities (175,000) 1,083,807 (24,998)
-------------------------- ------------ ------------
Financing activities:
Cash dividends and fractional shares (4,641,267) (3,435,440) (2,664,788)
Stock options and awards 423,220 (584,287) -
-------------------------- ------------ ------------
Net cash used in financing activities: (4,218,047) (4,019,727) (2,664,788)
-------------------------- ------------ ------------
Increase (decrease) in cash 422,941 1,117,110 (152)
Cash at beginning of year 1,121,457 4,347 4,499
-------------------------- ------------ ------------
Cash at end of year $ 1,544,398 $ 1,121,457 $ 4,347
========================== ============ ============
</TABLE>
Page 21
17-QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summarized (unaudited) quarterly financial data of the
Corporation which, in the opinion of management, reflects all adjustments,
consisting only of normal recurring adjustments, necessary for fair
presentation of the Corporation's results of operations:
<TABLE>
<CAPTION>
Three Months Ended
-------------------
<S> <C> <C> <C> <C>
1995: March 31 June 30 Sept. 30 Dec. 31
------------------- ----------- ----------- -----------
Interest income $ 15,309,577 $16,142,656 $16,327,964 $16,541,726
Net interest income 9,215,441 9,485,980 9,385,469 9,408,363
Provision for loan losses 532,500 515,000 595,000 517,500
Noninterest income 884,802 1,062,488 1,142,511 1,238,773
Operating expenses 5,531,203 5,693,685 5,829,839 5,830,282
Income before income
taxes 4,036,540 4,339,783 4,103,141 4,299,354
Income taxes 1,190,211 1,293,562 1,194,749 1,324,575
------------------- ----------- ----------- -----------
Net income $ 2,846,329 $ 3,046,221 $ 2,908,392 $ 2,974,779
=================== =========== =========== ===========
Net income per share $ 0.49 $ 0.52 $ 0.49 $ 0.50
=================== =========== =========== ===========
<FN>
1994:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Interest income $12,632,649 $13,237,218 $14,017,329 14,726,818
Net interest income 8,073,771 8,654,790 9,180,871 9,265,888
Provision for loan
losses 534,326 945,900 527,500 642,500
Noninterest income 1,073,273 1,926,636 947,601 577,860
Operating expenses 4,885,929 5,398,769 5,803,114 5,669,602
Income before income
taxes 3,726,789 4,236,757 3,797,858 3,531,646
Income taxes 1,095,190 1,307,682 1,119,780 1,025,429
----------- ----------- ----------- -----------
Net income 2,631,599 2,929,075 2,678,078 2,506,217
=========== =========== =========== ===========
Net income per share $ 0.43 $ 0.51 $ 0.47 $ 0.43
=========== =========== =========== ===========
</TABLE>
Page 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME AND EXPENSE:
Interest income $ 64,322 $ 54,614 $ 50,350 $ 48,547 $ 46,667
Interest expense 26,827 19,439 19,531 21,850 24,703
---------- ---------- ---------- ---------- ----------
Net interest income 37,495 35,175 30,819 26,697 21,964
Provision for loan losses 2,160 2,650 3,073 2,299 1,306
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 35,335 32,525 27,746 24,398 20,658
Noninterest income 4,329 4,525 4,868 3,410 2,932
Noninterest expense 22,885 21,757 20,122 17,040 13,807
---------- ---------- ---------- ---------- ----------
Income before income taxes and the cumulative
effect of a change in accounting for income taxes 16,779 15,293 12,492 10,768 9,783
Income taxes 5,003 4,548 3,554 2,898 2,485
---------- ---------- ---------- ---------- ----------
Income before the cumulative effect of a change
in accounting for income taxes 11,776 10,745 8,938 7,870 7,298
Cumulative effect of a change in accounting for
income taxes - - 300 92 -
---------- ---------- ---------- ---------- ----------
Net income $ 11,776 $ 10,745 $ 9,238 $ 7,962 $ 7,298
========== ========== ========== ========== ==========
PER SHARE*:
Primary $ 2.00 $ 1.84 $ 1.64 $ 1.43 $ 1.31
Fully diluted 2.00 1.84 1.59 1.39 1.29
Cash dividends paid 0.79 0.61 0.49 0.43 0.37
Primary average shares outstanding 5,893,334 5,847,473 5,642,790 5,566,155 5,566,129
Diluted average shares outstanding 5,895,353 5,847,473 5,824,099 5,737,115 5,675,345
*Adjusted for a 5% percent stock dividend effective 12/30/94, a two-for-one
stock split effective 12/31/93, and a 5% stock dividend effective 12/31/92.
AVERAGE BALANCE SHEET:
Loans $ 580,612 $ 515,101 $ 451,057 $ 393,323 $ 333,389
Investments 195,579 199,335 202,015 174,352 126,680
Other earning assets 10,541 7,444 17,595 25,997 30,399
Total assets 830,465 765,037 714,719 632,490 520,103
Deposits 706,357 682,112 643,847 568,100 460,276
Other interest-bearing liabilities 37,067 8,145 2,014 1,608 1,608
Shareholders' equity 73,537 66,716 59,597 52,635 46,845
BALANCE SHEET AT YEAR-END:
Loans $ 602,421 $ 568,259 $ 476,721 $ 425,034 $ 359,948
Investments 212,932 185,078 218,172 206,037 131,653
Other earning assets 13,248 206 15,467 30,327 23,795
Total assets 874,146 799,779 753,941 707,559 546,988
Deposits 741,218 688,578 680,465 640,239 484,924
Other interest-bearing liabilities 39,751 35,322 2,415 2,828 2,052
Shareholders' equity 77,516 66,575 62,471 54,560 49,027
</TABLE>
The following discussion and analysis should be read in conjunction with
the detailed information and financial statements, including notes thereto,
included elsewhere in this report. The consolidated financial condition and
results of operations of the Corporation are essentially those of its
subsidiaries, the Banks. Therefore, the analysis that follows is directed to
the performance of the Banks. Such financial condition and results of
operations are not intended to be indicative of future performance.
Page 23
BALANCE SHEET ANALYSIS:
The table below presents the major asset and liability categories on an
average daily basis for the periods presented, along with interest income and
expense, and key rates and yields. The assets showing the greatest increase
were loans. On the liability side, the most significant source of new funds
was time deposits.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY, INTEREST RATES
AND INTEREST DIFFERENTIAL:
<TABLE>
Year Ended December 31,
<CAPTION>
(Dollars in thousands) 1995 1994
-------- --------
Average Average Average Average Average
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS Balance Rate Interest Balance Rate Interest Balance
-------- -------- --------- -------- -------- --------- --------
Investment securities:
Taxable investments $147,759 6.32% $ 9,345 $156,944 5.49% $ 8,611 $161,637
Nontaxable investments(1) 47,820 8.29 3,963 45,080 8.31 3,746 40,378
-------- -------- --------- -------- -------- --------- --------
Total securities 195,579 6.80 13,308 202,024 6.12 12,357 202,015
Money market instruments 10,541 5.97 629 7,444 4.41 328 17,640
Loans(2) 580,612 8.96 52,047 515,101 8.44 43,456 451,057
-------- -------- --------- -------- -------- --------- --------
Total earning assets 786,732 8.39 65,984 724,569 7.75 56,141 670,712
Noninterest-earning assets 43,733 - - 40,468 - - 44,007
-------- -------- --------- -------- -------- --------- --------
Total assets $830,465 7.95% $ 65,984 $765,037 7.34% $ 56,141 $714,719
======== ======== ========= ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $104,709 - % $ - $101,065 - % $ - $ 88,436
Savings 315,284 2.80 8,828 346,413 2.51 8,708 325,675
Time 286,364 5.53 15,830 234,634 4.40 10,330 229,736
-------- -------- --------- -------- -------- --------- --------
Total 706,357 3.49 24,658 682,112 2.79 19,038 643,847
Other borrowings 37,067 5.85 2,169 8,145 4.92 401 2,014
Other liabilities 13,504 - - 8,064 - - 9,261
-------- -------- --------- -------- -------- --------- --------
Total liabilities 756,928 3.54 26,827 698,321 2.78 19,439 655,122
Shareholders' equity 73,537 - - 66,716 - - 59,597
-------- -------- --------- -------- -------- --------- --------
Total liabilities and shareholders' equity $830,465 3.23% $ 26,827 $765,037 2.54% $ 19,439 $714,719
======== ======== ========= ======== ======== ========= ========
Average effective rate on interest-bearing liabilities $638,715 4.20% $ 26,827 $589,192 3.30% $ 19,439 $557,425
======== ======== ========= ======== ======== ========= ========
Interest Income/Earning Assets $786,732 8.39% $ 65,984 $724,569 7.75% $ 56,141 $670,712
Interest Expense/Earning Assets $786,732 3.41 $ 26,827 $724,569 2.68 $ 19,439 $670,712
-------- --------
Effective Interest Differential 4.98% 5.07%
======== ========
(Dollars in thousands) 1993
--------
Average
<S> <C> <C>
ASSETS Rate Interest
-------- ---------
Investment securities:
Taxable investments 5.76% $ 9,303
Nontaxable investments(1) 8.73 3,526
-------- ---------
Total securities 6.35 12,829
Money market instruments 3.48 614
Loans(2) 8.51 38,414
-------- ---------
Total earning assets 7.73 51,857
Noninterest-earning assets - -
-------- ---------
Total assets 7.26% $ 51,857
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand - % $ -
Savings 2.83 9,224
Time 4.46 10,249
-------- ---------
Total 3.02 19,473
Other borrowings 2.88 58
Other liabilities - -
-------- ---------
Total liabilities 2.98 19,531
Shareholders' equity - -
-------- ---------
Total liabilities and shareholders' equity 2.73% $ 19,531
======== =========
Average effective rate on interest-bearing liabilities 3.50% $ 19,531
======== =========
Interest Income/Earning Assets 7.73% $ 51,857
Interest Expense/Earning Assets 2.91 $ 19,531
--------
Effective Interest Differential 4.82%
========
<FN>
(1) The interest earned on nontaxable investment securities is shown on a tax equivalent basis.
(2) Nonaccrual loans have been included in the appropriate average loan balance category, but interest on nonaccrual loans has
not been included for purposes of determining interest income.
</TABLE>
Page 24 and 25
INVESTMENT PORTFOLIO
The following shows the carrying value of the Corporation's investment
securities held to maturity:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31,
(Dollars in Thousands) 1995 1994 1993
------- ------- -------
U. S. Treasury notes $ - $ 2,562 $ 2,300
Obligations of other U.S. Government agencies
and corporations 34,494 16,992 23,863
Obligations of states and political subdivisions 25,466 44,540 44,983
Mortgage-backed securities 378 617 -
Other securities 6,512 18,156 25,458
------- ------- -------
Total $66,850 $82,867 $96,604
======= ======= =======
<FN>
The following shows the carrying value of the Corporation's investment
securities available for sale:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31,
(Dollars in Thousands) 1995 1994 1993
-------- -------- --------
U. S. Treasury notes $ 32,865 $ 31,045 $ 40,530
Obligations of other U.S. Government agencies
and corporations 6,188 - -
Obligations of states and political subdivisions 30,604 - -
Mortgage-backed securities 67,371 66,835 81,038
Other securities 9,054 4,331 -
-------- -------- --------
Total $146,082 $102,211 $121,568
======== ======== ========
</TABLE>
The Corporation adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
(SFAS No. 115) on January 1, 1994, which requires, among other things, that
debt and equity securities classified as available for sale be reported at
fair value, with unrealized gains and losses excluded from earnings and
reported in a separate component of shareholders' equity, net of income taxes.
The net effect of unrealized gains or losses, caused by marking an available-
for-sale portfolio to market, causes fluctuations in the level of
shareholders' equity and equity-related financial ratios as market interest
rates cause the fair value of fixed-rate securities to fluctuate.
The Financial Accounting Standards Board gave banks an opportunity to
reassess the appropriateness of the classifications of all securities held and
account for any resulting reclassifications at fair value no later than
December 31, 1995. Reclassifications from the held-to-maturity category that
result from this one-time reassessment will not call into question the intent
of an enterprise to hold other debt securities to maturity in the future.
After reassessing the investment security portfolio, the Corporation
transferred $39,947,000 from investment securities held to maturity to
investment securities available for sale on December 21, 1995. This transfer
was the primary reason for both the decrease in the balance of investment
securities held to maturity of $16,017,000 and the increase in investment
securities available for sale of $43,871,000 from December 31, 1994 to
December 31, 1995. Total investment securities at December 31, 1995 of
$212,932,000 grew $27,854,000 over the December 31, 1994 balance of
$185,078,000. This growth was funded primarily by the increase in time
deposit balances during this period. From December 31, 1993 to the same date
in 1994, the investment securities held to maturity decreased $13,737,000 and
the investment securities available for sale decreased $19,357,000.
Page 26
There are no significant concentrations of securities (greater than 10% of
shareholders' equity) in any individual security issuer. The maturity
analysis of investment securities held to maturity, including the weighted
average for each category as of December 31, 1995, is as follows:
<TABLE>
<CAPTION>
Under 1 - 5 5 - 10 Over
1 year years years 10 years Total
-------- -------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Obligations of other U.S. Government
agencies and corporations:
Carrying value $ 3,999 $30,495 $ - $ - $ 34,494
Weighted average yield. 7.93% 7.37% - % - % 7.44%
Weighted average maturity 2 yrs 2 mos
Obligations of states and
political subdivisions:
Carrying value 1,871 19,612 3,733 250 25,466
Weighted average yield. 9.98% 8.89% 9.24% 13.46% 9.07%
Weighted average maturity 4 yrs 1 mos
Mortgage-backed securities:
Carrying value - - - 378 378
Weighted average yield. - % - % - % 7.42% 7.42%
Weighted average maturity 12 yrs 8 mos
Other securities:
Carrying value 2,412 3,602 498 - 6,512
Weighted average yield. 6.73% 7.26% 6.81% - % 7.03%
Weighted average maturity 2 yrs 8 mos
Total:
Carrying value 8,282 53,709 4,231 628 66,850
Weighted average yield. 8.04% 7.92% 8.96% 9.83% 8.02%
Weighted average maturity 3 yrs 0 mos
</TABLE>
The maturity analysis of securities available for sale, including the
weighted average for each category as of December 31, 1995, is as follows:
<TABLE>
<CAPTION>
Under 1 - 5 5 - 10 Over
<S> <C> <C> <C> <C> <C>
(Dollars in thousands) 1 year years years 10 years Total
-------- -------- -------- ---------- --------------
U.S. Treasury notes:
Amortized cost $14,178 $18,493 $ - $ - $ 32,671
Weighted average yield. 4.72% 5.67% - % - % 5.42%
Weighted average maturity 1 yr 5 mos
Obligations of other U.S.
Government agencies and
corporations:
Amortized cost 4,000 2,254 - - 6,254
Weighted average yield. 5.64% 3.84% - % - % 4.99%
Weighted average maturity 11 mos
Obligations of states and
political subdivisions:
Amortized cost 2,268 20,232 5,480 2,925 30,905
Weighted average yield. 7.32% 7.53% 7.73% 7.97% 7.59%
Weighted average maturity 3 yrs 4 mos
Mortgage-backed securities:
Amortized cost - 3,518 10,811 53,007 67,336
Weighted average yield. - % 6.35% 6.43% 6.81% 6.72%
Weighted average maturity 21 yrs 2 mos
Other securities:
Amortized cost 2,507 2,248 300 3,752 8,807
Weighted average yield. 7.30% 6.33% 6.13% 5.26% 6.14%
Weighted average maturity 4 yrs 3 mos
Total:
Amortized Cost 22,953 46,745 16,591 59,684 145,973
Weighted average yield. 5.42% 6.47% 6.85% 6.77% 6.47%
Weighted average maturity 11 yrs 1mos
</TABLE>
Weighted average yield is computed by dividing the annualized interest
income, including the accretion of discounts and the amortization of premiums,
by the carrying value. Tax-exempt securities were adjusted to a tax
equivalent basis and are based on the federal statutory tax rate of 35%.
Page 27
LOANS
The following table shows the composition of the Banks' loans:
<TABLE>
<CAPTION>
December 31,
-------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands) 1995 1994 1993 1992 1991
------------- -------- -------- -------- --------
Real estate $ 207,819 $200,139 $175,530 $161,171 $117,438
Commercial and industrial. 163,677 154,319 128,388 112,539 115,851
Installment. 155,012 143,783 118,869 111,349 95,574
Lease financing 43,942 41,233 32,304 27,399 21,511
Other 41,176 38,589 32,957 28,574 30,153
------------- -------- -------- -------- --------
Total $ 611,626 $578,063 $488,048 $441,032 $380,527
============= ======== ======== ======== ========
</TABLE>
Total loans grew $33,563,000 from $578,063,000 at December 31, 1994 to
$611,626,000 at December 31, 1995. The loan growth was distributed over all
loan categories. Real estate loans increased $7,680,000, commercial and
industrial loans grew $9,358,000 and installment loans rose $11,229,000.
Lease financing and other loans grew $2,709,000 and $2,587,000, respectively.
At December 31, 1995, there were no loan concentrations over 10% of loans
outstanding in any one category or to any one borrower. The Banks have no
foreign loans, and the impact of nonaccrual, restructured troubled debt and
delinquent loans on total interest income was not material.
Except as previously disclosed and discussed herein, management does
not believe there are any trends or uncertainties which are reasonably
expected to materially impact future operating results, liquidity or capital
resources, and management is not aware of any information not previously
disclosed or not disclosed herein which causes it to have serious doubts as
to the ability of borrowers to comply with the loan repayment terms.
The following table details maturities and interest sensitivity of real
estate, commercial and industrial, installment loans and lease financing at
December 31, 1995:
<TABLE>
<CAPTION>
Within 1 - 5 Over
<S> <C> <C> <C> <C>
(Dollars in thousands) 1 year years 5 years Total
-------- -------- -------- --------
Real estate $ 15,152 $ 42,876 $149,791 $207,819
Commercial and industrial. 44,377 56,037 63,263 163,677
Installment. 32,540 80,329 42,143 155,012
Lease financing 11,169 32,773 - 43,942
-------- -------- -------- --------
Total $103,238 $212,015 $255,197 $570,450
======== ======== ======== ========
Loans with variable or
floating interest rates $ 82,881 $ 72,927 $ 80,543 $236,351
Loans with fixed predetermined
interest rates. 20,357 139,088 174,654 334,099
-------- -------- -------- --------
Total $103,238 $212,015 $255,197 $570,450
======== ======== ======== ========
</TABLE>
A loan is generally classified as nonaccrual when principal or interest
has consistently been in default for a period of 90 days or more or because of
a deterioration in the financial condition of the borrower or payment in full
of principal or interest is not expected. Delinquent 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. The
following table details those loans that were placed on nonaccrual status,
were accounted for as troubled debt restructurings or were delinquent by 90
days or more:
<TABLE>
<CAPTION>
December 31,
-------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands) 1995 1994 1993 1992 1991
------------- ------ ------ ------ ------
Nonaccrual loans $ 8,993 $2,458 $1,876 $1,385 $3,688
Trouble debt restructurings 1,183 1,867 1,548 315 -
Delinquent loans 1,459 2,145 1,729 1,192 2,086
------------- ------ ------ ------ ------
Total $ 11,635 $6,470 $5,153 $2,892 $5,774
============= ====== ====== ====== ======
</TABLE>
Page 28
ALLOWANCE FOR LOAN LOSSES
A summary of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
December 31,
--------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands) 1995 1994 1993 1992 1991
-------------- --------- --------- --------- ---------
Average loans $ 580,612 $515,101 $451,057 $393,323 $333,389
============== ========= ========= ========= =========
Allowance, beginning of period $ 7,934 $ 5,886 $ 4,387 $ 3,916 $ 3,199
-------------- --------- --------- --------- ---------
Loans charged off:
Commercial and industrial 240 491 1,211 1,010 11
Installment and other. 277 387 401 690 495
Real estate 116 84 212 90 -
Lease financing 39 44 92 162 165
-------------- --------- --------- --------- ---------
Total loans charged off 672 1,006 1,916 1,952 671
-------------- --------- --------- --------- ---------
Recoveries:
Commercial and industrial 143 170 86 8 -
Installment and other. 72 152 155 97 68
Real estate 1 56 76 - -
Lease financing 36 26 25 19 13
-------------- --------- --------- --------- ---------
Total recoveries 252 404 342 124 81
-------------- --------- --------- --------- ---------
Net loans charged off 420 602 1,574 1,828 590
-------------- --------- --------- --------- ---------
Provision for loan losses 2,160 2,650 3,073 2,299 1,307
-------------- --------- --------- --------- ---------
Allowance, end of period $ 9,674 $ 7,934 $ 5,886 $ 4,387 $ 3,916
============== ========= ========= ========= =========
Ratio of net charge offs to
average loans outstanding 0.07% 0.12% 0.35% 0.46% 0.18%
============== ========= ========= ========= =========
</TABLE>
The Banks' policy is to maintain allowances for loan losses at a level
believed by management to be adequate to absorb potential losses.
Management's determination of the adequacy of the allowance is determined
monthly based on a continuing evaluation of the portfolio, past loss
experience, current and anticipated economic conditions, and other factors
deemed relevant. Additions to the allowances are charged to operations. The
ratio of net charge- offs to average loans dropped from .12% in 1994 to .07%
in 1995, as a result of lower net charge- offs along with increased loans
outstanding. The 1994 ratio decreased from the 1993 ratio of 0.35%.
Management believes that the ratio of 0.07% compares favorably with peer group
ratios.
The following table sets forth an allocation of the allowance for loan
losses by category. In retrospect, the specific allocations in any particular
category may prove excessive or inadequate and, consequently, may be
reallocated in the future to reflect then current conditions. Accordingly,
management considers the entire allowance to be available to absorb losses in
any category.
<TABLE>
<CAPTION>
December 31,
-------------
1995 1994 1993 1992 1991
------------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) Percent Percent Percent Percent
Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount
------------- ---------- ------- ---------- ------- ---------- ------- ---------- ------
Commercial
and industrial $ 3,952 28% $ 2,967 27% $ 2,821 26% $ 1,786 26% $ 1,177
Installment and other 885 31% 1,063 32% 990 31% 895 31% 1,198
Real estate 1,292 34% 1,010 34% 879 36% 1,163 37% 1,167
Lease financing 127 7% 139 7% 225 7% 81 6% 109
Unallocated 3,418 N/A 2,755 N/A 971 N/A 462 N/A 265
------------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Total $ 9,674 100% $ 7,934 100% $ 5,886 100% $ 4,387 100% $ 3,916
============= ========== ======= ========== ======= ========== ======= ========== =======
<S> <C>
(Dollars in thousands) Percent
of Loans
----------
Commercial
and industrial 30%
Installment and other 33%
Real estate 31%
Lease financing 6%
Unallocated N/A
----------
Total 100%
==========
</TABLE>
Page 29
The allowance and the provision for loan losses are based on management's
judgment after considering charge-off history, nonperforming loans and reserve
levels relative to total loans in determining the allowance and the provision
for loan losses. While management uses the best information available to make
such evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making
the evaluation. 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 examination.
The Corporation adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," on January 1,
1995. This new standard requires that a creditor measure impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. Regardless of
the measurement method, a creditor must measure impairment based on the fair
value of the collateral when the creditor determines that foreclosure is
probable. The adoption of SFAS No. 114, as amended by SFAS No. 118, on
January 1, 1995 did not have a material impact on the Corporation's liquidity,
results of operations or capital resources.
DEPOSIT STRUCTURE
The following table is a distribution of average balances and average
rates paid on the deposit categories for the last three years:
<TABLE>
<CAPTION>
December 31,
-------------
1995 1994 1993
------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
------------- ----- -------- ----- -------- -----
Demand -- noninterest-bearing $ 104,709 --% $101,065 --% $ 88,436 --%
Demand -- NOW 80,115 1.97 82,747 2.06 76,962 2.59
Money market and savings 235,169 3.08 263,666 2.66 248,713 2.90
Time -- under $100,000 258,170 5.52 218,233 4.43 216,587 4.54
Time -- $100,000 or greater 28,194 5.59 16,401 4.05 13,149 3.22
------------- -------- --------
Total $ 706,357 $682,112 $643,847
============= ======== ========
<FN>
A maturity distribution of certificates of deposit of $100,000 and over is as
follows:
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------
<S> <C> <C> <C>
(Dollars in thousands) 1995 1994 1993
------------- ------- -------
Three months or less $ 14,095 $ 7,274 $ 5,598
Over three months to six months 3,848 7,809 1,623
Over six months to twelve months 7,619 1,943 901
Over twelve months 2,630 2,202 2,425
------------- ------- -------
Total $ 28,192 $19,228 $10,547
============= ======= =======
</TABLE>
INCOME STATEMENT ANALYSIS:
RESULTS OF OPERATIONS
Consolidated net income for 1995 was $11,776,000, an increase of
$1,031,000, or 9.6%, over 1994. On a per share basis, primary and fully
diluted earnings were $2.00 in 1995, compared to primary and fully diluted
earnings per share of $1.84 in 1994. Consolidated net income increased in
1994 by $1,507,000, a 16.3% increase over 1993. A change in accounting for
income taxes increased the 1993 net income by $300,000 to a total of
$9,238,000. Primary earnings per share in 1993 were $1.64, and fully diluted
earnings per share were $1.59.
Return on average assets was 1.42% for 1995, compared to 1.40% for 1994
and 1.29% for 1993, and return on average shareholders' equity was 16.01% for
1995, compared to 16.11% for 1994 and 15.50% for 1993.
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 is reviewed in more
detail in the following discussion.
NET INTEREST INCOME
Net interest income for 1995 increased by $2,320,000, or 6.6%, to
$37,495,000. Net interest income was $35,175,000 during 1994, which was 14.1%
above the $30,819,000 reported in 1993.
For analytical purposes, the following table reflects tax equivalent net
interest income in recognition of the income tax savings on tax-exempt items
such as interest on municipal securities and tax-exempt loans. Adjustments
are made using a statutory federal tax rate of 35%.
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------
<S> <C> <C> <C>
(Dollars in thousands) 1995 1994 1993
------------- ------- -------
Interest income $ 64,322 $54,614 $50,350
Interest expense 26,827 19,439 19,531
------------- ------- -------
Net interest income 37,495 35,175 30,819
Tax equivalent adjustment 1,662 1,527 1,507
------------- ------- -------
Net interest income
(fully taxable equivalent) $ 39,157 $36,702 $32,326
============= ======= =======
</TABLE>
Page 30
CHANGES IN NET INTEREST INCOME
The rate-volume analysis set forth in the following table, which is
computed on a tax equivalent basis (tax rate of 35%), analyzes changes in net
interest income for the last three years by their rate and volume components.
Taxable-equivalent net interest income was $39,157,000 for 1995, compared
to $36,702,000 for 1994, a 6.7% or $2,455,000 increase. This increase in
taxable-equivalent net interest income was due to a $1,939,000 increase
related to volume and a $516,000 increase related to interest rates. Total
interest income grew $9,843,000, primarily the result of a rise in loan
volumes. Total loan interest income increased $8,591,000, or 19.8%, in 1995,
compared to 1994, primarily as a result of total average loans increasing
$65,511,000, or 12.7%. The increase in loans was primarily the result of
management's efforts to increase the loan portfolio. Interest income earned on
commercial loans contributed $3,397,000 of this increase, and installment
loans and real estate loans contributed $2,476,000 and $1,497,000,
respectively. Total interest expense rose $7,388,000, principally as a
result of higher time deposit rates and volumes. The volume of average time
deposits increased $51,730,000, or 22.0% during 1995, compared to 1994. Other
borrowings also contributed to the rise in interest expense by increasing
$28,922,000, during this same period. Other borrowings include federal funds
purchased, Federal Home Loans Bank borrowings, securities sold under
agreements to repurchase and U.S. Treasury notes.
For the year ended December 31, 1994 net interest income increased
$4,376,000, primarily due to an increase in the volume of loans. Total loan
interest income increased $5,042,000, or 13.1%, in 1994, compared to 1993,
primarily as a result of total average loans increasing $64,044,000, or 14.2%.
This increase in loans was funded by a decrease in money market instruments
and an increase in other borrowings. The reduction in money market
instruments volume caused a $449,000 decrease in interest income, and growth
in the volume of other borrowings increased interest expense by $302,000.
Nonaccruing loans are included in the average balance yield calculations, but
the average nonaccruals were insignificant and had no material effect on the
results. Variances attributable to both rate and volume are included in the
volume column.
The increase in interest rates did not have a material effect on net
interest income during 1995 and 1994, as a result of management's ability to
properly price earning assets and deposits. Interest rates tended to be
stable during 1993.
<TABLE>
<CAPTION>
1995 over/(under) 1994 1994 over/(under) 1993
----------------------- ----------------------
due to changes in
-------------------
(Dollars in thousands) Net Net
<S> <C> <C> <C> <C>
Change Rate Volume Change
----------------------- ------------------- -------- ------------------------
INTEREST INCOME:
Securities(1) $ 951 $ 1,390 $ (439) $ (472)
Money market instruments 301 116 185 (286)
Loans 8,591 2,718 5,873 5,042
----------------------- ------------------- -------- ------------------------
Total 9,843 4,224 5,619 4,284
----------------------- ------------------- -------- ------------------------
INTEREST EXPENSE:
Savings deposits 120 992 (872) (516)
Time deposits and certificates
of deposit 5,500 2,640 2,860 81
Other borrowings 1,768 76 1,692 343
----------------------- ------------------- -------- ------------------------
Total 7,388 3,708 3,680 (92)
----------------------- ------------------- -------- ------------------------
Changes in net interest income $ 2,455 $ 516 $ 1,939 $ 4,376
======================= =================== ======== ========================
due to changes in
--------------------
(Dollars in thousands)
<S> <C> <C>
Rate Volume
-------------------- --------
INTEREST INCOME:
Securities(1) $ (473) $ 1
Money market instruments 163 (449)
Loans (352) 5,394
-------------------- --------
Total (662) 4,946
-------------------- --------
INTEREST EXPENSE:
Savings deposits (1,037) 521
Time deposits and certificates
of deposit (135) 216
Other borrowings 41 302
-------------------- --------
Total (1,131) 1,039
-------------------- --------
Changes in net interest income $ 469 $ 3,907
==================== ========
<FN>
(1) The interest earned on nontaxable investment securities is shown on a tax equivalent basis.
</TABLE>
Page 31
INTEREST RATE SENSITIVITY
The Banks actively manage their interest rate sensitivity position. The
objectives of interest rate risk management are to control exposure of net
interest income to risks associated with interest rate movements and to
achieve consistent growth in net interest income. The Asset/Liability
Committee, using policies and procedures set by senior management, is
responsible for managing the Banks' rate sensitivity position. The Banks
manage interest rate sensitivity by changing mix and repricing characteristics
of their assets and liabilities through their investment securities portfolios
and their offering of loan and deposit terms. The Banks utilize three
principal reports to measure interest rate risk - gap analysis reports, net
interest margin reports and asset/liability simulation reports. The table
below shows the interest rate sensitivity gap position, as of December 31,
1995. The table presents data at a single point of time. Savings and NOW
accounts have always been considered a stable source of funds, and although
the rates are subject to change, rates on these accounts historically have not
changed as quickly or as often as the other deposits included in the following
analysis. The 0 to 365 day gap was 7.01% of earning assets at December 31,
1995, compared to 4.96% at December 31, 1994.
<TABLE>
<CAPTION>
December 31, 1995
-------------------
0 to 90 91 to 180 181 to 365 1 - 5 Over 5
<S> <C> <C> <C> <C> <C>
(Dollars in thousands) days days days years years
------------------- ----------- ------------ --------- ---------
ASSETS
Money market
instruments $ 13,058 $ - $ - $ 90 $ 100
Loans 204,981 25,167 58,918 187,690 134,869
Investment securities 21,946 28,974 26,594 111,317 23,992
------------------- ----------- ------------ --------- ---------
Total rate sensitive
assets $ 239,985 $ 54,141 $ 85,512 $299,097 $158,961
=================== =========== ============ ========= =========
LIABILITIES
Certificates of deposit,
$100,000 or greater $ 14,095 $ 3,348 $ 7,619 $ 2,630 $ 500
All other certificates
of deposit 47,192 37,007 60,923 129,683 352
Money market
savings funds 58,797 - - - 92,699
NOW accounts 26,887 - - - 60,054
Savings accounts 29,108 - - - 56,802
U.S. Treasury notes 1,837 - - - -
Other borrowings 30,914 3,000 - 4,000 -
------------------- ----------- ------------ --------- ---------
Total rate sensitive
liabilities $ 208,830 $ 43,355 $ 68,542 $136,313 $210,407
=================== =========== ============ ========= =========
Incremental gap $ 31,155 $ 10,786 $ 16,970 $162,784 $(51,446)
Cumulative gap $ 31,155 $ 41,941 $ 58,911 $221,695 $170,249
3.72% 5.01% 7.03% 26.46% 20.32%
</TABLE>
NET INTEREST MARGIN
The 1995 net interest margin of 4.98% decreased from the 1994 net
interest margin of 5.07%. The decrease in the net interest margin is
primarily the result of higher rates paid on time deposits during 1995,
compared to 1994. The net interest margin in 1994 was higher than the 4.82%
net interest margin in 1993. 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, 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' abilities to repay decline.
The provision in 1995 was $2,160,000, a decrease of $490,000, or 18.5%,
compared to the 1994 provision of $2,650,000. The growth in the loan loss
reserve from December 31, 1994 to December 31, 1995 of 21.9% was greater than
the 6.0% growth of loans during this period. Net loans charged-off of
$420,000 in 1995 were lower than the net loans charged-off of $602,000 in
1994. Net charge-offs in 1993 were $1,574,000. The Corporation has made an
allocation of its reserve giving consideration to management's evaluation of
risk in the portfolio. The ratio of the allowance for loan losses to loans of
1.61% at December 31, 1995 increased from the December 31, 1994 ratio of
1.40%. The 1993 provision was $3,073,000 and the ratio of the allowance for
loan losses to loans was 1.23% at December 31, 1993. Included in the
charge-offs in 1993 were two commercial loans totaling $907,000. These two
charged-off commercial loans were to two unrelated borrowers.
Nonperforming assets (nonaccruing loans, net assets in foreclosure and
troubled debt restructured loans), were 1.85% of total loans and net assets
acquired in foreclosure at December 31, 1995 compared to 0.97% at December 31,
1994 and 1.01% at December 31, 1993. The ratio of the allowance to
nonperforming assets was 86.4% at December 31, 1995, compared to 141.8% at
December 31, 1994 and 118.9% at December 31, 1993.
Nonaccruing loans of $8,993,000 at December 31, 1995, increased
$6,535,000 from the December 31, 1994 balance of $2,458,000. Approximately
$6,972,000, or 77.5%, of total nonaccruing loans are attributable to two
unrelated borrowers at December 31, 1995. One borrower has four loans in the
aggregate principal amount of $5,070,000. These four loans are well-secured
principally by real estate. These loans relate to a real estate development
project. The other borrower has two loans in the aggregate principal amount
of $1,902,000. These two loans are well-secured principally by real estate.
These two loans are associated with a restaurant. Management is proceeding as
quickly as administrative and legal constraints permit to work out each of
these loans.
Net assets in foreclosure totaled $1,016,000 as of December 31, 1995, a
decrease of $253,000, or 19.9%, from the December 31, 1994 balance. During
1995, sales of foreclosed properties totaled $1,307,000, transfers from loans
to assets in foreclosure were $1,247,000 and write-downs of assets in
foreclosure equaled $193,000. 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.
Page 32
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 December 31, 1995, loans past due 90 days or more and
still accruing interest were $1,460,000, compared to $2,145,000 as of December
31, 1994.
As of December 31, 1995, there were three unrelated commercial borrowers
with troubled debt restructured loans totaling $1,183,000. All three
customers were complying with the restructured terms as of December 31, 1995.
The Corporation adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," on January 1,
1995. This new standard requires that a creditor measure impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent.
Regardless of the measurement method, a creditor must measure impairment based
on the fair value of the collateral when the creditor determines that
foreclosure is probable.
The balance of impaired loans was $9,278,000 at December 31, 1995. The
Banks have identified a loan as impaired when it is probable that interest and
principal will not be collected according to the contractual terms of the loan
agreement. The impaired loan balance included $8,095,000 of nonaccrual loans
and $1,183,000 of troubled debt restructured loans. The allowance for loan
loss associated with the $9,278,000 of impaired loans was $1,122,000 at
December 31, 1995. The average impaired loan balance was $3,906,000 in 1995
and the income recognized on impaired loans during 1995 was $231,000. The
Banks' policy for interest income recognition on impaired loans is to
recognize income on restructured loans under the accrual method. The Banks
recognize income on nonaccrual loans under the cash basis when the loans are
both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Banks. The Banks will not recognize income if
these factors do not exist.
OTHER OPERATING INCOME
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
<S> <C> <C> <C>
(Dollars in thousands) 1995 1994 1993
-------------- ------ ------
Service charges $ 2,313 $2,314 $2,347
Securities (losses) gains, net (172) 530 398
Trust income 1,055 719 649
Other 1,133 962 1,474
-------------- ------ ------
Total other operating income $ 4,329 $4,525 $4,868
============== ====== ======
</TABLE>
Other operating income for 1995 decreased $196,000, or 4.3%, compared to
1994, and other operating income for 1994 decreased $343,000, or 7.0%, over
1993.
Income from service charges on deposit accounts of $2,313,000 in 1995 was
almost even with the $2,314,000 of service charges on deposit accounts earned
in 1994 and lower than the $2,347,000 earned in 1993. The decrease in service
charges during 1995 and 1994 is attributed to lower service charges on
business accounts. This was the result of an increase in the earnings credit,
attributable to the rise in interest rates, which is used to offset service
charges.
The Corporation recorded a $172,000 net security loss in 1995, compared
to a net security gain of $530,000 in 1994. The $172,000 net security loss in
1995 is the result of selling low yielding investment securities
available-for-sale. From time to time, the Corporation sells securities to
fund the purchase of other securities in an effort to enhance the overall
return on the portfolio and to fund loan demand. During 1994, the Corporation
realized a securities gain of approximately $1,058,000 as a result of the
Corporation selling over 40,000 shares of First Eastern Bank stock which was
purchased by PNC Corporation on June 24, 1994. Investment securities
available for sale were sold during 1994 to help fund growth in loans and
resulted in a net loss of approximately $556,000. Eighteen mortgage-backed
securities that were held in the available for sale account were sold during
1993 due to the faster-than-expected repayments. This resulted in a gain of
$388,000, or 97.5%, of the total net securities gains for 1993.
Income from the Trust and Financial Services Department in 1995 of
$1,055,000 increased $336,000, or 46.7%, in 1995, compared to the $719,000
recorded in 1994. This increase was the result of both an increase in the
book value of trust assets of 25.7% from December 31, 1994 to December 31,
1995 and the Corporation's continuing emphasis on marketing the Trust and
Financial Services Department's products and services. The 1993 Trust and
Financial Services Department income was $649,000.
Other income increased $171,000 during 1995, from $962,000 in 1994 to
$1,133,000 in 1995. This increase is due to higher fees earned on credit
cards and a rise in fees associated with the sale of insurance policies on new
loans. Other income in 1993 of $1,474,000, included a $469,000 gain realized
when management decided to sell fixed-rate mortgages totaling approximately
$15,000,000 on the secondary market.
OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
<S> <C> <C> <C>
(Dollars in thousands) 1995 1994 1993
------------- ------- -------
Salaries $ 9,294 $ 8,048 $ 7,238
Employee benefits 3,140 2,934 2,701
Occupancy 1,432 1,355 1,210
Equipment expense 1,847 1,487 1,225
FDIC premiums 798 1,518 1,425
Other expenses 6,374 6,415 6,323
------------- ------- -------
Total other operating expenses $ 22,885 $21,757 $20,122
============= ======= =======
</TABLE>
Other operating expenses rose to $22,885,000 for 1995, a 5.2% increase
over the $21,757,000 for 1994. The 1994 amount was 8.1% above the $20,122,000
for 1993. The rise in operating expenses was largely due to both higher
salary and employee benefits costs directly related to the Corporation's
growth and planned salary increases. These increases were generally offset by
a reduction in the Federal Deposit Insurance Corporation (FDIC) premium.
Employee salaries increased $1,246,000, or 15.5%, from $8,048,000 in 1994
to $9,294,000 in 1995. This increase reflects cost-of-living increases, merit
increases and additional staff necessitated by current and planned future
growth. Employee benefits grew $206,000, or 7.0%, to $3,140,000 in 1995, from
the $2,934,000 in employee benefits during 1994. The rise in employee
benefits is directly related to the increase in salary expenses. The 1994
salary expenses and fringe benefits expenses increased 11.2% and 8.6%,
respectively, compared to 1993 expenses.
Page 33
Net occupancy costs increased by $77,000, or 5.7%, in 1995, compared with
a $145,000, or 12.0%, increase in 1994. The increase in 1995 is related to
the cost of the three new branches opened during 1995. Approximately $50,000
of the 1994 increase is the rent on a new branch that was opened in August
1993. Equipment expenses increased by $360,000, or 24.2%, during 1995, and
$262,000, or 21.4%, in 1994. The majority of the rise in 1995 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.
Approximately $144,000 of the increase in 1994 is the result of Harleysville
selling its existing IBM AS/400 computer system in the first quarter of 1994
and signing a two-year lease for a more powerful IBM AS/400 computer system.
During the third quarter of 1995, the FDIC confirmed that the Bank
Insurance Fund was fully recapitalized at the end of May 1995. As a result,
the new lower premium rates were made retroactive to June 1, 1995. In the
month of September, the FDIC refunded insurance premium overpayments for the
four months of June through September. The FDIC-reduced premiums resulted in
a $720,000, or 47.4%, reduction in FDIC premiums during 1995, compared to
1994. The 1994 FDIC premium was $93,000 higher than the 1993 FDIC premium
due to an increase in deposits of the Corporation.
Other expenses decreased $41,000, from $6,415,000 in 1994 to $6,374,000
in 1995. The reduction in other expenses included a decrease in intangible
asset expense of $262,000 and a $134,000 reduction in legal expenses. The
reduction in legal expenses is 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 nonperforming assets that were expensed in prior
periods. These reductions in other expenses were partially offset by an
increase in printing and stationery supply expenses related to bank
automation, increases in paper costs and the opening of the three new branches
during 1995 and the normal increases in expenses related to the overall growth
of the Corporation. Other expenses increased by $92,000, or 1.5%, during
1994, compared to 1993. A $273,000 rise in intangible asset expense during
1994 was offset by a $162,000 reduction in costs associated with the
liquidation of the assets in foreclosure and the collection of past due loans.
INCOME TAXES
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
<S> <C> <C> <C>
(Dollars in thousands) 1995 1994 1993
-------------- ------- -------
Expected tax expense $ 5,705 $5,353 $4,373
Tax-exempt income net of
interest disallowance (944) (898) (882)
Other 242 93 63
-------------- ------- -------
Actual tax expense $ 5,003 $4,548 $3,554
============== ======= =======
</TABLE>
The Corporation adopted SFAS No. 109, "Accounting for Income Taxes," on
January 1, 1993. Under the liability method specified by SFAS No. 109,
deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date. The principal types of accounts
resulting in differences between assets and liabilities for financial
statement and tax return purposes are the allowance for loan losses, leased
assets, deferred loan fees and compensation. The provisions of the statement
were applied without restating prior years' financial statements. Adoption of
SFAS No. 109 resulted in a reduction of the net deferred tax liability in the
amount of $300,000 in 1993.
The deferred method used in years prior to 1993 required the Corporation
to provide deferred tax expense based on certain items of income and expense
which were reported in different years in the financial statements and the tax
return as measured by the tax rate in effect for the year the difference
occurred.
The effective income tax rates of 29.8% for 1995, 29.7% for 1994 and
28.4% for 1993 were less than the applicable federal income tax rate of 35.0%,
as a result of tax-exempt income.
CAPITAL
Capital formation is critical to the Corporation's well-being and future
growth. Capital at the end of 1995 was $77,516,000, an increase of
$10,941,000, or 16.4%, over the end of 1994. The increase came as a result of
the retention of the Corporation's earnings and from the adjustment for the
net unrealized gains (losses) on the investment securities available for sale.
Management believes that the Corporation's current capital positions and
liquidity positions are strong and that their capital positions are adequate
to support their operations. Management is not aware of any recommendation by
any regulatory authority which, if it were to be implemented, would have a
material effect on the Corporation's capital.
The Corporation's capital ratios exceed regulatory requirements.
Existing minimum regulatory capital ratio requirements are 5.5% for primary
capital and 6.0% for total capital. The primary capital ratio was 9.66% at
December 31, 1995, compared with 8.96% at December 31, 1994. Because 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-weighing factors
from 0% to 100% to various categories of assets and off-balance-sheet
financial instruments. The minimum for the Tier 1 capital 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 December 31, 1995, the Corporation's Tier 1
risk-adjusted capital ratio was 11.80%, and the total risk-adjusted capital
ratio was 13.05%, both well above regulatory requirements. The risk-based
capital ratios of each of the Corporation's commercial banks also exceeded
regulatory requirements at the end of 1995.
To supplement the risk-based capital adequacy guidelines, the Federal
Reserve Board (FRB) 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% or 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 bank organization. The Corporation's leverage ratios were 8.79% and
8.59% at December 31, 1995 and 1994, respectively.
Page 34
<TABLE>
<CAPTION>
Tier 1 Capital to
Leverage Ratio (1) Risk-Weighted Assets Ratio
------------------ ---------------------------
December 31, December 31, December 31, December 31,
1995 1994 1995 1994
------------------ ------------- --------------------------- -------------
<S> <C> <C> <C> <C>
ENTITY:
Corporation 8.79% 8.59% 11.80% 11.25%
Harleysville National Bank 7.99 7.65 10.53 9.79
Citizens National Bank 14.15 15.00 21.20 22.64
Security National Bank 8.32 8.70 11.89 12.76
"Well Capitalized" institution
(under FDIC regulations) 5.00 5.00 6.00 6.00
Total Capital to Risk-
Weighted Asset Ratio
-----------------------
December 31, December 31,
1995 1994
----------------------- -------------
<S> <C> <C>
ENTITY:
Corporation 13.05% 12.40%
Harleysville National Bank 11.78 11.09
Citizens National Bank 22.45 24.08
Security National Bank 13.14 14.28
"Well Capitalized" institution
(under FDIC regulations) 10.00 10.00
<FN>
(1) Accordingly, at December 31, 1995, both the Corporation and its subsidiary banks were "well
capitalized" under FDIC regulations.
</TABLE>
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA), the FRB, the Office of the Comptroller of the Currency and the
FDIC adopted regulations setting forth prompt corrective action requirements.
In addition to the prompt corrective action requirements, FDICIA included
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for
certain kinds of deposits, increased supervision by the federal regulatory
agencies, increased reporting requirements for insured institutions, and new
regulations concerning internal controls, accounting and operations.
The prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital categories,
in declining order, are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." Institutions categorized as "undercapitalized" or worse
are subject to certain restrictions, including the requirement to file a
capital plan with its primary federal regulator, prohibitions on the payment
of dividends and management fees, restrictions on executive compensation and
increased supervisory monitoring, among other things. Other restrictions may
be imposed on the institution either by its primary federal regulator or by
the FDIC, including requirements to raise additional capital, sell assets or
sell the entire institution. Once an institution becomes "critically
undercapitalized" it must generally be placed in receivership or
conservatorship within 90 days.
Under the regulations, a "well capitalized" institution must have a
leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least
6% and a total risk-based capital ratio of at least 10% and not be subject to
a capital directive order. To be considered "adequately capitalized," an
institution must generally have a leverage ratio of at least 4%, a Tier 1
risk-based capital ratio of at least 4% and a total risk-based capital ratio
of at least 8%. An institution is deemed to be "critically undercapitalized"
if it has a tangible equity ratio of 2% or less. The Banks are above the
regulatory minimum guidelines and meet the criteria to be categorized as "well
capitalized" institutions at December 31, 1995.
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 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 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 $10,200,000 during
1995, and investment securities available for sale averaged $96,933,000 during
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 of credit established with correspondent 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.
There are no known trends or any 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.
OTHER ITEMS
The passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 and the Riegle Community Development and Regulatory
Improvement Act may have a significant impact upon the Corporation. The key
provisions pertain to interstate banking and interstate branching as well as a
reduction in the regulatory burden on the banking industry. Since September
1995, bank holding companies may acquire banks in other states without regard
to state law. In addition, banks can merge with other banks in another state
beginning in June 1997. States may adopt laws preventing interstate branching
but, if so, no out-of-state bank can establish a branch in such state and no
bank in such state may branch outside the state. Pennsylvania recently
amended the provisions of its banking code to authorize full interstate
banking and branching under Pennsylvania law and to facilitate the operations
of interstate banks in Pennsylvania. As a result of legal and industry
changes, management predicts that consolidation will continue as the financial
Page 35
services industry strives for greater cost efficiencies and market share.
Management believes that such consolidation may enhance its competitive
position as a community bank. There are numerous proposals before Congress to
modify the financial services industry and the way commercial banks operate.
However, it is difficult to determine at this time what effect such provisions
may have until they are enacted into law. Except as specifically described on
page 35, management believes that the effect of the provisions of the
aforementioned legislation on the 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.
In September 1995, the Corporation announced its fifth acquisition.
Located in Honesdale, Wayne County, Pennsylvania, Farmers & Merchants Bank
("Farmers") is a $65 million community bank. While Farmers will retain its
name, its operations and charter will be integrated into Citizens National
Bank. This will accomplish two key objectives: maintaining Farmers' hometown,
personalized image, while achieving operating efficiencies. The merger should
be completed during the first quarter of 1996. A summary of unaudited
restated consolidated financial information of the Corporation and Farmers is
located in note number 2 of the notes to consolidated financial statements.
The Corporation plans to open four new branches during 1996. Security
National Bank plans to open an additional new office in the premier Pottstown
Center Shopping Complex on Route 100 in Pottstown. Harleysville National Bank
is pursuing locations in Doylestown, Spring House, and Audubon. These new
branch sites are contiguous to our current service area and were chosen due to
the demand for additional delivery locations by our customers. These new
branches should not adversely impact capital, however, they may adversely
impact short term results of operations.
Page 36
FINANCIAL RATIOS AND SUMMARY OF KEY INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
<S> <C> <C> <C>
(Dollars in thousands, except per share data) 1995 1994 1993
------------- ----------- -----------
PER SHARE INFORMATION*:
Primary $ 2.00 $ 1.84 $ 1.64
Fully diluted 2.00 1.84 1.59
Cash dividends paid 0.79 0.61 0.49
Book value (at year-end) 13.19 11.57 11.58
MARKET VALUE*:
Bid price of common stock (high) 28.50 31.43 21.19
Bid price of common stock (low) 25.00 20.00 16.67
Average shares outstanding 5,893,334 5,847,473 5,642,790
AVERAGE BALANCE SHEET:
Loans $ 580,612 $ 515,101 $ 451,057
Earning assets 786,732 721,880 670,667
Total assets 830,465 765,037 714,719
Deposits 706,357 682,112 643,847
Interest-bearing liabilities plus demand deposits 743,424 690,257 645,861
Shareholders' equity 73,537 66,716 59,597
SELECTED OPERATING RATIOS:
Return on average assets 1.42% 1.40% 1.29%
Return on average shareholders' equity 16.01% 16.11% 15.50%
Leverage (assets divided by shareholders' equity) 11.29X 11.47X 11.99X
Average shareholders' equity as a percentage of:
Average loans 12.67% 12.95% 13.21%
Average deposits 10.41 9.78 9.26
Average assets 8.85 8.72 8.34
Average earning assets 9.35 9.24 8.89
Dividend payout ratio 39.41 31.87 28.84
Average total loans as a percentage of
average deposits and borrowed funds 78.10 74.62 69.84
Net interest margin on average earning assets:
Interest income** 8.39% 7.75% 7.73%
Interest expense (3.41) (2.68) (2.91)
Net interest margin 4.98 5.07 4.82
Noninterest margin (2.36) (2.39) (2.27)
<FN>
*Adjusted for a 5% stock dividend effective 12/30/94, and a two-for-one stock
split in the form of a 100% stock dividend effective 12/31/93.
**Tax Equivalent Basis.
</TABLE>
Page 37
THE BOARD OF DIRECTORS OF HARLEYSVILLE NATIONAL CORPORATION*
John W. Clemens
Walter E. Daller, Jr., Chairman
Bradford W. Mitchell
Martin E. Fossler
William M. Yocum
Harold A. Herr
Walter F. Vilsmeier
Howard E. Kalis, III
THE BOARD OF DIRECTORS OF CITIZENS NATIONAL BANK OF LANSFORD
Thomas S. McCready, Chairman
John J. Trojan
Joseph M. Porvaznik
William H. Fegley, Sr.
Walter E. Kruczek
Joseph J. Velitsky
James D. McMahon
Walter E. Daller, Jr.
D. M. Takes
Frank J. Lochetto
Thomas D. Oleksa
THE BOARD OF DIRECTORS OF SECURITY NATIONAL BANK
Howard E. Kalis, III, Chairman
Robert K. Hartenstine
Joseph M. Wheeler, Jr.
James F. Meade
Ronald A. Dinnocenti
S. Albert Kutz
John L. McGowan
Henry M. Pollak
Robert C. Smith
James J. Lennon,
Consultant to the Board
Walter E. Daller, Jr.
Bruce D. Fellman
D. M. Takes
Raymond H. Melcher, Jr.
THE OFFICERS OF HARLEYSVILLE NATIONAL BANK AND TRUST COMPANY
Walter E. Daller, Jr.**
President and Chief Executive Officer
D. M. Takes**
Executive Vice President and
Chief Operating Officer
Vernon L. Hunsberger**
Senior Vice President and
Chief Financial Officer
James W. Hamilton
Senior Vice President and Senior Trust Officer
Frank J. Lochetto
Senior Vice President and Senior Lender
Fred C. Reim, Jr.
Senior Vice President and Branch Administrator
Jo Ann M. Bynon**
Corporate Secretary
John E. Hartle
Audit Director
David R. Crews
Vice President
Dennis L. Detwiler
Vice President
Bruce D. Fellman
Vice President
Henry R. Gehman
Vice President
Larry E. Nolt
Vice President
Robert L. Reilly
Vice President
Thomas L. Spence
Vice President
Gregg J. Wagner
Vice President
Mikkalya W. Walton
Vice President
Harry T. Weierbach
Vice President
Tina K. Borrelli
Assistant Vice President
Ruth A. Dietterich
Assistant Vice President
Mary K. Eckart
Assistant Vice President
Tamra T. Garber
Assistant Vice President
Cathy Peifer Heckler
Assistant Vice President
Page 38
Robert H. Kreamer
Assistant Vice President
Nicholas Lozorak
Assistant Vice President
Jennifer G. Morris
Assistant Vice President
Sue Ellen Nolan
Assistant Vice President
Dale O. Smith
Assistant Vice President
Kenneth R. Stoudt
Assistant Vice President
Deborah L. Sweet
Assistant Vice President
Ann M. Dreyer
Banking Officer
Faye Frederick
Banking Officer
Arlene M. Gregory
Banking Officer
Elaine H. Hegh
Banking Officer
Dianne C. Herron
Banking Officer
Chris L. Holzer
Banking Officer
Sandra M. Hurst
Banking Officer
Patricia A. Longcoy
Banking Officer
Aileen E. Rolin
Banking Officer
Patricia H. Rosenberger
Banking Officer
Jan Marie Sloat
Banking Officer
Regina A. Stark
Banking Officer
Joan F. Whiteley
Banking Officer
Ann P. Wilson
Banking Officer
Betty Ruth Yerger
Banking Officer
Tracie A. Young
Banking Officer
THE OFFICE MANAGERS
Antoinette M. Smith
Assistant Vice President, Harleysville
H. Steen Woodland
Assistant Vice President, Skippack
Joseph A. Giunta
Assistant Vice President, Limerick
Lee-ann C. Kovac
Assistant Vice President, North Penn
Christine Schondelmaier
Banking Officer, Gilbertsville
Craig E. Morrow
Banking Officer, Hatfield
Geoffrey D. Brandon
Assistant Vice President, North Broad
Christine M. Matsinko
Banking Officer, Marketplace
Joseph Chirik, Jr.
Assistant Vice President, Horsham
Kay A. Gordon
Banking Officer, Normandy Farms/Meadowood
James R. Caldwell
Banking Officer, Collegeville
Grace H. Myers
Banking Officer, Sellersville
Nancy F. Kistler
Banking Officer, Quakertown/Trainers
Robert S. Jones
Banking Officer, Red Hill
THE OFFICERS OF CITIZENS NATIONAL BANK OF LANSFORD
Thomas D. Oleksa
President and Chief Executive Officer
Martha A. Rex
Vice President
Maurice J. Infante
Vice President
Joseph J. O 'Gurek
Assistant Vice President
Kay A. Bock
Banking Officer, Lehighton
THE OFFICERS OF SECURITY NATIONAL BANK
Raymond H. Melcher, Jr.
President and Chief Executive Officer
Allen R. Loeb
Vice President
Roxanne S. Selwyn
Assistant Vice President
Timothy B. Canfield
Assistant Vice President, Train Station
Linda L. Neiman
Assistant Vice President, Pottstown Center/
East End
Angela M. Spotts
Banking Officer, North End
*Also members of the Board of Directors of
Harleysville National Bank and Trust Company.
**Also an Officer of Harleysville National Corporation.
MEMBER FDIC
Page 39
CORPORATE INFORMATION
Copies of the Corporation 's Annual Report to the Securities and Exchange
Commission (Form 10-K) are available, without charge to shareholders, by
writing:
Jo Ann M. Bynon, Corporate Secretary
483 Main Street, P. O. Box 195
Harleysville, PA 19438
ANNUAL MEETING
The 1996 Annual Meeting of Shareholders of Harleysville National Corporation
will be held at the Presidential Caterers, Norristown, PA on April 9, 1996 at
9:30 a.m.
NASDAQ MARKET MAKERS
As of December 31 ,1995, the following firms made a market in the Corpora-
tion's common stock:
F.J. Morrissey & Co., Inc.
Fahnestock & Co., Inc.
Legg Mason Wood Walker, Inc.
Janney Montgomery Scott, Inc.
Herzog, Heine, Geduld, Inc.
Ryan Beck & Co., Inc.
COMMON STOCK
Harleysville National Corporation common stock is traded over the counter
under the symbol HNBC. The stock is commonly quoted under NASDAQ National
Market Issues. At the close of business on December 31, 1995, there were 2,172
shareholders of record.
DIVIDEND REINVESTMENT PLAN
The Corporation has a Dividend Reinvestment and Stock Purchase Plan.
Interested stockholders can obtain more information regarding the Plan by
contacting the Plan Administrator at (215) 256-8851, or 800 423-3955.
TRANSFER AGENT AND SHAREHOLDER SERVICES
Harleysville National Bank & Trust Company
483 Main Street, P. O. Box 195
Harleysville, PA 19438
(215) 256-8851, or 800 423-3955.
Printed on Recycled Paper
Design: Shirley Epps Artwork, Inc.
Photography: Dave Plank
Printing: Taggart Printing
Page 40
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 33887
<INT-BEARING-DEPOSITS> 348
<FED-FUNDS-SOLD> 12900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 146082
<INVESTMENTS-CARRYING> 66850
<INVESTMENTS-MARKET> 68712
<LOANS> 602421
<ALLOWANCE> 9674
<TOTAL-ASSETS> 874146
<DEPOSITS> 741218
<SHORT-TERM> 30751
<LIABILITIES-OTHER> 15660
<LONG-TERM> 9000
0
0
<COMMON> 5878
<OTHER-SE> 71638
<TOTAL-LIABILITIES-AND-EQUITY> 874146
<INTEREST-LOAN> 51773
<INTEREST-INVEST> 11920
<INTEREST-OTHER> 629
<INTEREST-TOTAL> 64322
<INTEREST-DEPOSIT> 24658
<INTEREST-EXPENSE> 26827
<INTEREST-INCOME-NET> 37495
<LOAN-LOSSES> 2160
<SECURITIES-GAINS> (172)
<EXPENSE-OTHER> 22885
<INCOME-PRETAX> 16779
<INCOME-PRE-EXTRAORDINARY> 16779
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11776
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 2.00
<YIELD-ACTUAL> 4.98
<LOANS-NON> 8993
<LOANS-PAST> 1460
<LOANS-TROUBLED> 1183
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7934
<CHARGE-OFFS> 672
<RECOVERIES> 252
<ALLOWANCE-CLOSE> 9674
<ALLOWANCE-DOMESTIC> 9674
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3418
</TABLE>
