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
For the fiscal year ended December 31, 1998.
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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 .
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Commission file number 0-15237
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HARLEYSVILLE NATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2210237
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
483 Main Street, Harleysville, Pennsylvania 19438
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(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.
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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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.
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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. ( )
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.
$236,053,383 as of February 26, 1999
Indicate the number of shares outstanding of each class of the registrant's
classes of common stock, as of the latest practicable date.
7,535,899 shares of Common Stock, $1 par value per share, were outstanding as
of February 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1998 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 13, 1999 are incorporated by
reference into Part III of this report.
PAGE 2
<TABLE>
<CAPTION>
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-K REPORT
PAGE
----
<S> <C> <C> <C>
I. PART I.
Item 1. Business 4
Item 2. Properties 16
Item 3. Legal Proceeding. 18
Item 4. Submission of Matters to a Vote of Security Holders 18
II. PART II.
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters 19
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 19
Item 7.A. Quantitative and Qualitative Disclosure about Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19
III. PART III.
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial Owners and Management 21
Item 13. Certain Relationships and Related Transactions 21
IV. PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
Signatures 25
</TABLE>
PAGE 3
PART I
Item 1. Business.
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History and Business
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Harleysville National Corporation, a Pennsylvania corporation (the
Corporation), was incorporated in June 1982. On January 1, 1983, the
Corporation became the parent bank holding company of Harleysville National Bank
and Trust Company (HNB), 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 (CNB). 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 CNB and is now
operating as a branch office of CNB. On July 1, 1994 the Corporation acquired
all of the outstanding stock of Security National Bank (SNB). On March 1,
1996, the Corporation acquired all of the outstanding common stock of Farmers &
Merchants Bank ("F & M"). F & M was merged into CNB and is now operating as a
branch office of CNB. On March 17, 1997, the HNC Financial Company was
incorporated as a Delaware Corporation. HNC Financial Company's principal
business function is to expand the investment opportunities of the Corporation.
The Corporation is primarily a bank holding company that provides financial
services through its three bank subsidiaries. Since commencing operations, the
Corporation's business has consisted primarily of managing HNB, CNB and SNB
(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.
HNB, which was established in 1909, CNB, which was established in 1903,
and SNB, 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 OCC). The Corporation and HNB's legal headquarters are
located at 483 Main Street, Harleysville, Pennsylvania 19438. CNB's legal
headquarters is located at 13-15 West Ridge Street, Lansford, Pennsylvania
18232. SNB's legal headquarters is located at One Security Plaza, Pottstown,
Pennsylvania 19464. HNC Financial Company's legal headquarters is located at
300 Delaware Avenue, Suite 1704, Wilmington, Delaware 19801.
In addition to historical information, this Form 10-K contains
forward-looking statements. We have made forward-looking statements in this
document, and in documents that we incorporate by reference, that are subject to
risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of Harleysville
National Corporation and its subsidiaries. When we use words such as
"believes," "expects," "anticipates," or similar expressions, we are making
forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document and in the documents that we incorporate by
reference, could affect the future financial results of Harleysville National
Corporation and its subsidiaries and could cause those results to differ
materially from those expressed in our forward-looking statements contained or
incorporated by reference in this document. These factors include the
following:
- - operating, legal and regulatory risks;
- - economic, political and competitive forces affecting our banking,
securities, asset management and credit services businesses; and
- - the risk that our analyses of these risks and forces could be incorrect
and/or that the strategies developed to address them could be
unsuccessful.
As of December 31, 1998, the Corporation had total assets of
$1,332,389,000, total shareholders' equity of $122,811,000 and total deposits of
$1,033,968,000.
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
PAGE 4
personal trust services. Their deposits are insured by the Federal Deposit
Insurance Corporation to the extent provided by law. The Banks have 30 branch
offices located in Montgomery, Bucks, Carbon, Wayne, Chester and Schuylkill
counties, Pennsylvania, 18 of which are owned by the Banks and 12 of which are
leased from third parties.
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 believe
they respond to customer requests quickly and with flexibility. Management
believes these competitive strengths are reflected in the Corporation's results
of operations.
As of December 31, 1998, the Corporation and the Banks employed
approximately 483 full-time equivalent employees. The Corporation provides a
variety of employment benefits and considers its relationships with its
employees to be satisfactory.
Competition
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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 areas with respect
to interest rates paid on time and savings deposits, service charges on deposit
accounts, interest rates charged on loans, and fees and charges for trust
services. At December 31, 1998, HNB's legal lending limit to a single customer
was $10,829,000 and CNB's and SNB's legal lending limits to a single customer
were $3,484,000 and $1,152,000, 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 Corporation is a registered bank holding company subject to the
provisions of the Bank Holding Company Act of 1956, as amended (the "Bank
Holding Company Act"), and to supervision by the Board of Governors of the
Federal Reserve System. 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 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 limitations
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 5% of the voting shares of any company engaged
in non-banking activities unless the Federal Reserve, 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 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 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 as collateral for loans to any borrower.
PAGE 5
Permitted Activities
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The Federal Reserve 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 Corporation does not at this
time engage in any other permissible activities, nor does the Corporation have
any current plans to engage in any other permissible activities in the
foreseeable future.
Legislation and Regulatory Changes
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There are currently a number of issues before Congress that may affect the
Corporation and its business operations, and the business operations of its
subsidiaries. However, management does not believe these issues will have a
material adverse effect on liquidity, capital resources or the results of
operations.
Congress is currently considering legislative reforms to modernize
the financial services industry. In addition to including repealing the
Glass-Steagall Act, which prohibits commercial banks from engaging in various
securities activities, the reforms would allow, if the legislation passes, banks
to be involved in underwriting and selling insurance. The Corporation does not
currently have plans for entering into these activities, but will continue to
investigate business opportunities as they become available
The Corporation has analyzed the recently enacted changes to the
federal tax law. The impact of such changes on liquidity, operating results,
and capital should not be material.
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulation of, and
restrictions on, the business of the Corporation and the Banks. We cannot
predict whether the legislation will be enacted or, if enacted, how the
legislation would affect the business of the Corporation and the Banks. As a
consequence of the extensive regulation of commercial banking activities in the
United States, the Corporation's and the Banks' business is particularly
susceptible to being affected by federal legislation and regulations that may
increase the costs of doing business. Except as specifically described above,
management believes that the effect of the provisions of the aforementioned
legislation on liquidity, capital resources and results of operations of the
Corporation will be immaterial.
Management is not aware of any other current specific
recommendations by regulatory authorities or proposed legislation, which if they
were implemented, would have a material adverse effect upon the liquidity,
capital resources, or results of operations, although the general cost of
compliance with numerous and multiple federal and state laws and regulations
does have, and in the future may have, a negative impact on the Corporation's
results of operations.
Further, the business of the Corporation is also affected by the
state of the financial services industry in general. As a result of legal and
industry changes, management predicts that the industry will continue to
experience an increase in consolidations and mergers as the financial services
industry strives for greater cost efficiencies and market share. Management
also expects increased diversification of financial products and services
offered by the Banks and its competitors. Management believes that such
consolidations and mergers, and diversification of products and services may
enhance the Banks' competitive position.
Pending Legislation
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There are numerous proposals before Congress to modify the financial
services industry and the way commercial banks and other financial institutions
operate. Some of these proposals include changes to the ownership of financial
companies and the types of products and services that may be offered by
financial institutions. However, it is difficult to determine at this time what
effect such provisions may have until they are enacted into law. 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,
PAGE 6
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
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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.
Effect of Government Monetary Policies
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The earnings of the Corporation 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 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 and, therefore, the policies
and regulations of the Federal Reserve 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
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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 a 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 are the
Corporation and the Banks aware of any circumstances that 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 and to banks whose deposits are insured by the
FDIC. The Banks' operations are also subject to regulations of the OCC, the
Federal Reserve and the FDIC. The primary supervisory authority of the Banks is
the OCC, who regularly examines the Banks. The OCC 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 regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal shareholders of its
PAGE 7
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.
Under the Federal Deposit Insurance Act, the OCC 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.
Under the Community Reinvestment Act of 1977, as amended ("CRA"), the OCC
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 OCC 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.
Under the Bank Secrecy Act, 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 Bank Secrecy Act for failure to file a required report, for failure to
supply information required by the Bank Secrecy Act or for filing a false or
fraudulent report.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires that 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).
<TABLE>
<CAPTION>
Total Tier 1 Under a
Risk Risk Tier 1 Capital
Based Based Leverage Order or
Ratio Ratio Ratio Directive
----- ------ -------- ---------
<S> <C> <C> <C> <C>
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 undercapitalized < 6.0 <3.0 <3.0
Critically undercapitalized <2.0
*3.0 for those banks having the highest available regulatory rating.
</TABLE>
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.
Under FDICIA, financial institutions are subject to increased regulatory
PAGE 8
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.
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 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 regarding the
internal control structure of the bank. 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 CNB or SNB.
FDICIA also requires that banking agencies reintroduce loan-to-value
ratio regulations which were previously repealed by the 1982 Act.
Loan-to-values 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.
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.
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.
Year 2000
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The following section contains forward-looking statements, which involve
risks and uncertainties. The actual impact on the Corporation of the Year 2000
issue could materially differ from that which is anticipated in the
forward-looking statements as a result of certain factors identified below.
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming century date change. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000
(Y2K). The Year 2000 issue affects virtually all companies and organizations.
PAGE 9
Corporation's State of Readiness:
The Corporation began addressing the Y2K issue in August 1997. Management
has initiated an enterprise-wide program to prepare the Corporation's computer
systems and applications for the Year 2000. The Corporation developed a Y2K
plan to include assessing the impact of the Y2K issue on the Corporation,
renovating systems to alleviate Y2K problems, validating the new systems and
implementing them. The Corporation focused on information technology and
non-information technology systems. A non-information system could be, for
example, a microcontroller in an elevator, which may be subject to Y2K problems.
The Corporation also reviewed Y2K issues related to material third parties.
The assessment phase of the Y2K plan included assigning accountabilities
throughout the Corporation. An inventory was completed of mainframe and PC
based applications, third-party relationships and non-information technology
systems. The final step in the assessment phase was to identify non-compliant
Y2K systems. The assessment phase was completed in November 1997.
The Corporation began the renovation phase of the Y2K plan in January 1998.
The renovation phase included developing action plans to correct non-compliant
Y2K systems. The action plans included either enhancing the current system to
resolve the Y2K problem or purchasing a new system that is Y2K compliant. The
renovation phase was completed in May 1998. The Corporation developed a
remediation plan for the non-compliant systems. As of December 31, 1998, 88% of
the remediation phase has been completed.
The next phase of the plan was to validate the Y2K compliance of all of the
systems. This phase includes developing written test plans and completing the
testing of the systems. The validation phase is scheduled to be completed by
March 31, 1999. As of December 31, 1998, 74% of the computer applications,
including all mission-critical systems, have been validated to be Y2K compliant.
The Corporation has reviewed the Y2K issues related to material third
parties and completed an analysis on the loan portfolio. The Corporation's
third parties include its vendors and commercial customers. Our material third
party relationships are primarily our commercial borrowers. These borrowers may
pose a credit risk to the Corporation if they are not Y2K compliant. We have
contacted the material commercial customers and their responses were evaluated.
We have also performed an analysis on the impact of Y2K issues on the remaining
loan portfolio. The Corporation has allocated a portion of the allowance for
loans losses as a result of the Y2K issues.
Because most computer systems are, by their very nature, interdependent, it
is possible that noncompliant third-party computers could impact the
Corporation's computer systems. The Corporation could be adversely affected by
the Y2K problem if it or unrelated parties fail to successfully address the
problem. The Corporation has taken steps to communicate with the unrelated
parties with whom it deals to coordinate Year 2000 compliance. Additionally, we
are dependent on external suppliers, such as, wire transfer systems, telephone
systems, electric companies, and other utility companies for continuation of
service.
Cost of Year 2000:
The Committee has prepared a Y2K budget and has tracked expenses related to
the Y2K issue. As of December 31, 1998, the Corporation has expensed $117,000
and capitalized fixed assets of $54,000 related to the Y2K issue. The
Corporation has estimated the future Y2K expenditures to be $60,000 and future
capitalized fixed assets to be under $69,000. The Y2K project is being funded
through operating cash flows.
The cost of the projects and the date on which the Corporation plans to
complete both Year 2000 modifications and systems conversions are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
PAGE 10
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
Risk of Year 2000:
At present, management believes its progress in remedying the proprietary
programs and installing the Y2K compliant upgrades to the third-party vendor
mainframe and PC based computer applications is on plan. The Y2K computer
problem creates risk for the Corporation from unforeseen problems in its own
computer systems and from third-party vendors who provide the majority of
mainframe and PC based computer applications. Failure of third-party systems
relative to the Y2K issue could have a material impact on the Corporation's
ability to conduct business and on its financial position and results of
operation.
Contingency Plans:
A contingency plan is being developed to handle the most reasonably likely
Y2K worst-case scenario should it occur. The contingency plan will involve
obtaining back-up service providers, working up contingency plans and assessing
the potential adverse risks to the Corporation. The contingency plan is
scheduled to be completed by March 31, 1999. The Corporation has also utilized
an independent consulting firm to verify and validate the Corporation's Y2K
plans.
Statistical Data
- -----------------
The information for this item is listed below and is incorporated by
reference to pages 24 through 32 of the Corporation's Annual Report to
Shareholders for the year ended December 31, 1998 which pages are included at
Exhibit (13) to this Annual Report on Form 10-K.
INVESTMENT PORTFOLIO
The following shows the carrying value of the Corporation's investment
securities held to maturity:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(Dollars in Thousands) 1998 1997 1996
------- ------- -------
Obligations of other U.S. Government agencies
and corporations $ 6,490 $21,707 $33,129
Obligations of states and political subdivisions 17,093 19,589 26,701
Mortgage-backed securities 1,039 2,048 1,499
Other securities 1,366 2,894 3,897
------- ------- -------
Total investment securities held to maturity $25,988 $46,238 $65,226
======= ======= =======
</TABLE>
The following shows the carrying value of the Corporation's investment
securities available for sale:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(Dollars in Thousands) 1998 1997 1996
-------- -------- --------
U. S. Treasury notes $ 44,168 $ 46,614 $ 35,127
Obligations of other U.S. Government agencies
and corporations 45,668 42,945 43,885
Obligations of states and political subdivisions 164,045 94,305 62,423
Mortgage-backed securities 87,373 57,299 55,511
Other securities 48,090 15,905 12,849
-------- -------- --------
Total investment securities available for sale $389,344 $257,068 $209,795
======== ======== ========
</TABLE>
There are no significant concentrations of securities (greater than 10% of
PAGE 11
shareholders' equity) in any individual security issuer. The maturity analysis
of investment securities held to maturity, including the weighted average yield
for each category as of December 31, 1998, 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:
Amortized cost $ - $5,990 $ - $ 500 $ 6,490
Weighted average yield - % 7.54% - % 8.18% 7.59%
Weighted average maturity 5 yrs 11 mos
Obligations of states and
political subdivisions:
Amortized cost 3,665 1,894 784 10,750 17,093
Weighted average yield 8.70% 8.43% 8.72% 8.82% 8.75%
Weighted average maturity 8 yrs 5 mos
Mortgage-backed securities:
Amortized cost - 154 885 - 1,039
Weighted average yield - % 6.70% 6.37% - % 6.42%
Weighted average maturity 6 yrs 6 mos
Other securities:
Amortized cost 111 1,255 - - 1,366
Weighted average yield 7.10% 7.50% - % - % 7.47%
Weighted average maturity 3 yrs 2 mos
Total:
Amortized cost 3,776 9,293 1,669 11,250 25,988
Weighted average yield 8.65% 7.70% 7.48% 8.79% 8.26%
Weighted average maturity 7 yrs 5 mos
</TABLE>
The maturity analysis of securities available for sale, including the weighted
average yield for each category, as of December 31, 1998 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 $11,492 $31,516 $ - $ - $ 43,008
Weighted average yield 6.23% 5.99% - % - % 6.05%
Weighted average maturity 1 yrs 8 mos
Obligations of other U.S.
Government agencies and
Corporations:
Amortized cost - 2,004 40,157 2,490 44,651
Weighted average yield - % 7.31% 6.82% 7.00% 6.85%
Weighted average maturity 8 yrs 7 mos
Obligations of states and
Political subdivisions:
Amortized cost 2,500 5,153 9,698 143,702 161,053
Weighted average yield 5.91% 7.62% 7.88% 7.80% 7.20%
Weighted average maturity 15 yrs 0 mos
Mortgage-backed securities:
Amortized cost - 1,123 9,165 76,646 86,934
Weighted average yield - % 6.41% 6.28% 6.46% 6.44%
Weighted average maturity 18 yrs 11 mos
Other securities:
Amortized cost - 6,665 13,622 25,104 45,391
Weighted average yield - % 6.23% 6.36% 6.81% 6.59%
Weighted average maturity 10 yrs 0 mos
Total:
Amortized Cost 13,992 46,461 72,642 247,942 381,037
Weighted average yield 6.17% 6.27% 8.08% 7.27% 7.02%
Weighted average maturity 13 yrs 0 mos
</TABLE>
PAGE 12
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%.
LOANS
The following table shows the composition of the Banks' loans:
<TABLE>
<CAPTION>
December 31,
-------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands) 1998 1997 1996 1995 1994
------------- -------- -------- -------- --------
Real estate $ 306,575 $246,259 $237,155 $227,458 $220,091
Commercial and industrial 204,173 192,694 164,327 165,491 156,387
Consumer loans 265,688 249,242 238,098 201,329 187,170
Lease financing 68,753 55,413 49,623 43,942 41,233
------------- -------- -------- -------- --------
Total loans $ 845,189 $743,608 $689,203 $638,220 $604,881
============= ======== ======== ======== ========
</TABLE>
The following table details maturities and interest sensitivity of real estate,
commercial and industrial, consumer loans and lease financing at December 31,
1998.
<TABLE>
<CAPTION>
Within 1 - 5 Over
(Dollars in thousands) 1 year Years 5 years Total
<S> <C> <C> <C> <C>
-------- -------- -------- --------
Real estate $ 41,227 $152,985 $112,363 $306,575
Commercial and industrial 140,627 29,439 34,107 204,173
Consumer loans 64,343 116,972 84,373 265,688
Lease financing 23,230 45,523 - 68,753
-------- -------- -------- --------
Total $269,427 $344,919 $230,843 $845,189
======== ======== ======== ========
Loans with variable or
Floating interest rates $199,198 $67,759 $- $266,957
Loans with fixed
predetermined
Interest rates 70,229 277,160 230,843 578,232
-------- -------- -------- --------
Total $269,427 $344,919 $230,843 $845,189
======== ======== ======== ========
</TABLE>
The following table details those loans that were placed on nonaccrual status,
were accounted for as troubled debt restructuring or were delinquent by 90 days
or more and still accruing interest:
<TABLE>
<CAPTION>
December 31,
-------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands) 1998 1997 1996 1995 1994
------------- ------ ------ ------- ------
Nonaccrual loans $ 2,950 $2,621 $2,983 $ 9,055 $2,521
Trouble debt restructurings 583 1,099 1,717 1,183 1,867
Delinquent loans 824 2,253 1,848 1,553 2,234
------------- ------ ------ ------- ------
Total $ 4,357 $5,973 $6,548 $11,791 $6,622
============= ====== ====== ======= ======
</TABLE>
ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
December 31,
--------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands) 1998 1997 1996 1995 1994
-------------- --------- --------- --------- ---------
Average loans $ 781,459 $706,643 $652,157 $607,335 $540,030
============== ========= ========= ========= =========
Allowance, beginning of period $ 11,925 $ 10,710 $ 9,891 $ 8,150 $ 6,087
-------------- --------- --------- --------- ---------
Loans charged off:
Real estate 424 544 412 127 84
Commercial and industrial 217 66 392 240 491
Consumer loans 627 1,038 614 277 387
Lease financing 145 78 33 39 44
-------------- --------- --------- --------- ---------
Total loans charged off 1,413 1,726 1,451 683 1,006
-------------- --------- --------- --------- ---------
Recoveries:
Real estate 88 206 30 1 56
Commercial and industrial 94 113 84 143 170
Consumer loans 98 104 56 72 152
Lease financing 18 18 18 36 26
-------------- --------- --------- --------- ---------
Total recoveries 298 441 188 252 404
-------------- --------- --------- --------- ---------
Net loans charged off 1,115 1,285 1,263 431 602
-------------- --------- --------- --------- ---------
Provision for loan losses 2,140 2,500 2,082 2,172 2,665
-------------- --------- --------- --------- ---------
Allowance, end of period $ 12,950 $ 11,925 $ 10,710 $ 9,891 $ 8,150
============== ========= ========= ========= =========
Ratio of net charge offs to
Average loans outstanding 0.14% 0.18% 0.19% 0.07% 0.11%
============== ========= ========= ========= =========
</TABLE>
PAGE 13
The following table sets forth an allocation of the allowance for loan losses
by category. The specific allocations in any particular category 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,
-------------
1998 1997 1996 1995 1994
------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) Percent Percent Percent Percent Percent
Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans
------------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
Real estate $ 1,153 36% $ 1,469 33% $ 1,434 34% $ 1,292 35% $ 1,010 36%
Commercial
and industrial 2,249 24% 2,719 28% 2,897 24% 3,952 26% 2,967 26%
Consumer loans 1,747 32% 1,566 32% 1,251 35% 885 32% 1,063 31%
Lease financing 220 8% 177 7% 104 7% 127 7% 139 7%
Unallocated 7,581 N/A 5,994 N/A 5,024 N/A 3,635 N/A 2,971 N/A
------------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
Total 12,950 100% 11,925 100% 10,710 100% 9,891 100% 8,150 100%
============= ========= ======= ========= ======= ========= ======= ========= ======= =========
</TABLE>
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,
------------
1998 1997 1996
------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
------------- ----- -------- ----- ------ ----
Demand - noninterest-bearing $ 150,274 --% $135,307 --% $122,459 --%
Demand - interest-bearing 112,733 1.48% 98,397 1.54% 91,856 1.57%
Money market and savings 317,813 3.12% 282,917 3.05% 270,034 3.03%
Time - under $100,000 304,058 5.53% 297,263 5.57% 298,777 5.63%
Time -- $100,000 or greater 85,754 5.48% 64,282 5.49% 38,261 5.29%
------------- -------- --------
Total $ 970,632 $878,166 $821,387
============= ======== ========
The maturity distribution of certificates of deposit of $100,000 and over is as follows:
December 31,
-------------
(Dollars in thousands) 1998 1997 1996
------------- -------- ---------
Three months or less $ 48,789 $ 43,499 $ 29,919
Over three months to six months 20,425 13,505 12,850
Over six months to twelve months 9,800 7,535 4,512
Over twelve months 9,222 4,015 4,079
------------- -------- --------
Total $ 88,236 $ 68,554 $ 51,360
============= ======== ========
</TABLE>
PAGE 14
NET INTEREST INCOME
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>
Year ended December 31,
------------------------
<S> <C> <C> <C>
(Dollars in thousands) 1998 1997 1996
-------- ------- -------
Interest income $ 87,597 $80,202 $73,718
Interest expense 37,809 33,851 30,876
-------- ------- -------
Net interest income 49,788 46,351 42,842
Tax equivalent adjustment 4,640 3,331 2,489
-------- ------- -------
Net interest income $ 54,428 $49,682 $45,331
======== ======= =======
</TABLE>
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.
<TABLE>
<CAPTION>
1998 over (under) 1997 1997 over (under) 1996
due to changes in due to changes in
-------------------------- ------------------------
Change Rate Volume Change Rate Volume
-------- -------- -------- ------- ------ -------
INTEREST INCOME:
<S> <C> <C> <C> <C> <C> <C>
Investment securities (1) $ 4,202 $ (502) $ 4,704 $ 2,472 $ 423 $ 2,049
Loans 4,878 (1,442) 6,320 4,318 (410) 4,728
Other assets (376) (132) (244) 536 60 476
-------- -------- -------- ------- ------ -------
Total 8,704 (2,076) 10,780 7,326 73 7,253
-------- -------- -------- ------- ------ -------
INTEREST EXPENSE:
Savings deposits 1,447 121 1,326 533 16 517
Time deposits 1,436 (124) 1,560 1,222 (139) 1,361
Borrowings and other interest-
bearing liabilities 1,075 (192) 1,267 1,220 (16) 1,236
-------- -------- -------- ------- ------ -------
Total 3,958 (195) 4,153 2,975 (139) 3,114
-------- -------- -------- ------- ------ -------
Changes in net interest income $ 4,746 $(1,881) $ 6,627 $ 4,351 $ 212 $ 4,139
======== ======== ======== ======= ====== =======
</TABLE>
(1) The interest earned on nontaxable investment securities and loans is shown
on a tax equivalent basis.
Tax-equivalent net interest income was $54,428,000 for 1998, compared to
$49,682,000 for 1997, an increase of $4,746,000, or 9.6%. This increase in
tax-equivalent net interest income was primarily due to the net $6,627,000
increase related to volume, partially offset by a decrease related to interest
rates of $1,881,000. Total interest income increased $8,704,000, the result of
higher volumes of interest-earning assets, in part offset by the lower rates
experienced during 1998. Interest Income on loans grew 8.0% and investment
interest income increased 20.2%. These increases were the result of the 1998
average loan and investment volumes increasing 10.6% and 23.2% respectively.
The growth in loans is a result of persistent sales efforts and new branch
openings. The increase in investment securities was due to both the institution
of a capital leverage program during 1998 and the planned growth related to the
increase in deposit funding.
PAGE 15
Total interest expense grew $3,958,000 during 1998 or 11.7%, compared to 1997.
This growth was the result of increases in all interest-bearing liability
categories. The volumes of savings deposits, time deposits and borrowings and
other interest-bearing liabilities grew 12.9%, 7.8% and 36.9%, respectively.
Borrowings and other interest-bearing liabilities include federal funds
purchased, FHLB borrowings, securities sold under agreements to repurchase and
U.S. Treasury notes. The increase in borrowings and other interest-bearing
liabilities was primarily due to the growth in FHLB borrowings related to the
institution of a capital leverage program during 1998.
The 1997 tax-equivalent net interest income was $49,682,000, a $4,351,000
increase compared to $45,331,000 for 1996. This increase in tax-equivalent net
interest income was primarily due to both the $7,253,000 increase related to
earning asset volumes, partially offset by the $3,114,000 increase in interest
expense related to interest-bearing liabilities volumes. The growth in earning
asset volumes was primarily in investment securities and loans and the growth in
interest-bearing liabilities was principally the result of higher time deposit
and borrowing volumes.
Item 2. Properties.
- --------------------
The principal executive offices of the Corporation and of HNB are located in
Harleysville, Pennsylvania in a two-story office building owned by HNB, built in
1929. HNB also owns the buildings in which twelve of its branches are located
and leases space for the other nine branches from unaffiliated third parties
under leases expiring at various times through 2036. The principal executive
offices of CNB are located in Lansford, Pennsylvania in a two-story office
building owned by CNB. Citizens also owns the buildings where its branches are
located. The principal executive offices of SNB are located in Pottstown,
Pennsylvania, in a building leased by SNB. SNB leases its East End and North
End branches, and owns its Pottstown Center branch. HNC Investment Company
leases an office in Wilmington, Delaware.
<TABLE>
<CAPTION>
Office Office Location Owned/Leased
- ------------------- ------------------------------ ------------
<S> <C> <C>
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
PAGE 16
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
Quakertown Main 224 West Broad St. Owned
Quakertown PA
Spring House 1017-1021 North Bethlehem Pike Owned
Spring House PA
Red Hill 400 Main Street Owned
Red Hill PA
Doylestown 500 East State Road Leased
Doylestown PA
Audubon 2624 Egypt Road Owned
Audubon PA
Chalfont 251 West Butler Avenue Leased
Chalfont PA
Spring City 44 North Main Street Owned
Spring City 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
Farmers & Merchants 1001 Main Street Owned
Honesdale PA
McAdoo 25 North Kennedy Drive Owned
McAdoo PA
Pottstown One Security Plaza Leased
Pottstown PA
Pottstown 1450 East High Street Leased
Pottstown PA
Pottstown Charlotte & Mervine Sts. Leased
Pottstown PA
Pottstown Rte. 100 & Shoemaker Road Owned
Pottstown PA
</TABLE>
PAGE 17
In management's opinion, 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 Corporation. There are no proceedings
pending other than the ordinary routine litigation incident to the business of
the Corporation and its subsidiaries - Harleysville National Bank and Trust
Company, The Citizens National Bank of Lansford, Security National Bank and HNC
Financial Company. 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 1998 to a vote of holders
of the Corporation's Common Stock.
PAGE 18
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
- --------------------------------------------------------------------------------
Matters.
- --------
The information required by this Item is incorporated by reference to pages 8,
19 and 20 of the Corporation's Annual Report to Shareholders for the year ended
December 31, 1998, which pages are included at Exhibit (13) to this Annual
Report on Form 10-K.
Item 6. Selected Financial Data.
- ------------------------------------
The information required by this Item is incorporated by reference to page 24
of the Corporation's Annual Report to Shareholders for the year ended December
31, 1998, which pages are included at Exhibit (13) to this Annual Report on Form
10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- --------------
The information required by this Item is incorporated by reference to pages 24
through 32 of the Corporation's Annual Report to Shareholders for the year ended
December 31, 1998, which pages are included at Exhibit (13) to this Annual
Report on Form 10-K.
Item 7.A. Quantitative and Qualitative Disclosure about Market Risk.
- ----------------------------------------------------------------------------
The information required by this Item is incorporated by reference to pages 28
and 29 of the Corporation's Annual Report to Shareholders for the year ended
December 31, 1998, which pages are included at Exhibit (13) to this Annual
Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data.
- ---------------------------------------------------------
The information required by this Item is incorporated by reference to pages 8
through 23 of the Corporation's Annual Report to Shareholders for the year ended
December 31, 1998, which pages are included at Exhibit (13) to this Annual
Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
None.
PAGE 19
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------------
The information required by this Item with respect to the Corporation's
directors is incorporated by reference to pages 15 through 18 of the
Corporation's Proxy Statement relating to the Annual Meeting of Shareholders to
be held April 13, 1999.
<TABLE>
<CAPTION>
Executive Officers of Registrant
- -----------------------------------
<S> <C> <C>
Name Age Position
- --------------------- --- -----------------------------------------------------
Walter E. Daller, Jr. 59 Chairman of the Board, President and Chief Executive
Officer of the Corporation.
Demetra M. Takes 48 President and Chief Operating Officer of
Harleysville since 1998, prior position was Executive
Vice President and Chief Operating Officer of
Harleysville.
Fred C. Reim, Jr. 55 President and Chief Executive Officer of Security
National bank since 1998, prior position was
Senior Vice President of Harleysville.
Thomas D. Oleksa 45 President and Chief Executive Officer of Citizens.
Vernon L. Hunsberger 50 Treasurer of the Company, Senior Vice President/CFO
and Cashier of Harleysville.
Geoffrey D. Brandon 33 Senior Vice President of Branch Administration for
Harleysville since 1998, prior position was Vice
President of Harleysville.
Mikkalya W. Brown 43 Senior Vice President of Loan Administration of
Harleysville.
David Crews 47 Senior Vice President of Harleysville since 1998,
prior position was Vice President of Business Development.
Dennis L. Detwiler 51 Senior Vice President of Harleysville.
Bruce D. Fellman 52 Senior Vice President of Harleysville since 1998,
prior position was Vice President.
James W. Hamilton 52 Senior Vice President of Harleysville.
Clay T. Henry 38 Senior Vice President and Senior Trust Officer of
Harleysville since 1998, prior position was Director
of Investments Services for the Private Bank of PNC
Financial Corporation.
Frank J. Lochetto 51 Senior Vice President of Harleysville.
Linda C. Lockhart 47 Senior Vice President of Customer Support of
Harleysville since 1998, Vice President of Customer
Support since 1997, Vice President of First Sterling
Bank (1991-1996).
Gregg J. Wagner 38 Senior Vice President of Finance of Harleysville
since 1998, prior position was Vice President &
Comptroller of Harleysville.
Harry T. Weierbach 54 Senior Vice President and Chief Investment Officer
of Harleysville since 1998, Vice President (1996
to 1998), Assistant Vice President (1994 to 1998).
</TABLE>
PAGE 20
Item 11. Executive Compensation.
- ----------------------------------
The information required by this Item is incorporated by reference to pages 19
through 24 of the Corporation's Proxy Statement relating to the Annual Meeting
of Shareholders to be held April 13, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------------
The information required by this Item is incorporated by reference to pages 15
through 16 of the Corporation's Proxy Statement relating to the Annual Meeting
of Shareholders to be held April 13, 1999.
Item 13. Certain Relationships and Related Transactions.
- -------------------------------------------------------------
The information required by this Item is incorporated by reference to page 28
of the Corporation's Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 13, 1999, and to page 17 of the Corporation's
Annual Report to Shareholders for the year ended December 31, 1998, which page
is included at Exhibit (13) to this Annual Report on Form 10-K.
PAGE 21
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, 1998 and 1997 9*
Consolidated Statements of Income for the
Years Ended December 31, 1998, 1997
and 1996 10*
Consolidated Statements of Shareholders'
Equity for the Years Ended
December 31, 1998, 1997 and 1996 11*
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1998,
1997 and 1996 12*
Notes to Consolidated Financial Statements 13-23*
Independent Auditors' Report 8*
(2) Financial Statement Schedules
Financial Statements Schedules are omitted because the required information is
either not applicable, not required, or the information is included in the
consolidated financial statements or notes thereto.
- --------------------------------------------------------------------------------
*Refers to the respective page of the Annual Report to Shareholders. The
Consolidated Financial Statements and Notes to Consolidated Financial Statements
and Auditor's Report thereon on pages 8 to 23 of the Annual Report to
Shareholders, are incorporated herein by reference and attached at Exhibit 13 to
this Annual Report on Form 10-K. 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
Annual Report on Form 10-K or otherwise subject to the liabilities of Section 18
of the Securities Exchange Act of 1934.
PAGE 22
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
- ----------- -------------------------
<S> <C>
(3.1) Harleysville National Corporation Articles of Incorporation, as amended.
(Incorporated by reference to Exhibit 3(a) to the Corporation's
Registration Statement No.33-65021 on Form S-4, as filed on December 14,
1995.)
(3.2) Harleysville National Corporation By-laws. (Incorporated by reference to
Exhibit 3(b) to the Corporation's Registration Statement No. 33-65021 on
Form S-4, as filed on December 14, 1995.)
(10.1) Harleysville National Corporation 1993 Stock Incentive Plan.
(Incorporated by Reference to Exhibit 4.3 of Registrant's Registration
Statement No.33-57790 on Form S-8,filed with the Commission on October 1,
1993.)
(10.2) Harleysville National Corporation Stock Bonus Plan. (Incorporated by
Reference to Exhibit 99A of Registrant's Registration Statement No.33-17813
on Form S-8, filed with the Commission on December 13, 1996.)
(10.3) Supplemental Executive Retirement Plan. (Incorporated by Reference to
Exhibit 10.3 of Registrant's Annual Report in Form 10-K for the year ended
December 31, 1997, filed with the Commission on March 27, 1998.)
(10.4) Walter E. Daller, Jr., Chairman, President and Chief Executive Officer's
employment agreement. (Incorporated by Reference to Registrant's
Registration Statement on Form 8-K, filed with the Commission on March 25,
1999.)
(10.5) Demetra M. Takes, President and Chief Operating Officer of Harleysville
employment agreement. (Incorporated by Reference to Registrant's
Registration Statement on Form 8-K, filed with the Commission on March 25,
1999.)
(10.6) Vernon L. Hunsberger. Senior Vice President/CFO and Cashier's employment
agreement. (Incorporated by Reference to Registrant's Registration Statement
on Form 8-K, filed with the Commission on March 25, 1999.)
(11) Computation of Earnings per Common Share. The information for this Exhibit is
incorporated by reference to page 15 of the Corporation's Annual Report to
Shareholders for the year ended December 31, 1998, which is included as
Exhibit (13) to this Form 10-K Report.
(12) Statements Re: Computation of Ratios. The information for this exhibit is
incorporated by reference to page 1 of the Corporation's Annual Report to
Shareholders for the year ended December 31, 1998, which is included as
Exhibit (13) to this Form 10-K Report.
(13) Excerpts from the Corporation's 1998 Annual Report to Shareholders. (This
excerpt includes only page 1 and pages 8 through 32 which are incorporated in
this Report by reference.)
(21) Subsidiaries of Registrant
(23) Consent of Grant Thornton LLP, Independent Certified Public Accountants
(27) Financial Data Schedule.
(99) Additional Exhibits
None.
PAGE 23
(b) Reports on Form 8-K
During the quarter ended December 31, 1998, the Registrant did not file any
reports on Form 8-K.
</TABLE>
PAGE 24
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 11, 1999 By:/s/ Walter 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.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
- --------- ----- ----
____________________ Director March 11, 1999
LeeAnn Bergy
/s/ Walter E. Daller, Jr. Chairman of the Board, President March 11, 1999
- ----------------------------- and Chief Executive Officer and
Walter E. Daller, Jr. Director (Principal Executive Officer)
/s/ Martin E. Fossler Director March 11, 1999
- ------------------------
Martin E. Fossler
/s/ Harold Herr Director March 11, 1999
- -----------------
Harold A. Herr
/s/ Vernon L. Hunsberger Treasurer (Principal Financial March 11, 1999
- --------------------------- and Accounting Officer)
Vernon L. Hunsberger
____________________ Director March 11, 1999
Thomas S. McCready
___________________ Director March 11, 1999
Henry M. Pollak
/s/ Palmer E. Retzlaff Director March 11, 1999
- -------------------------
Palmer E. Retzlaff
PAGE 25
/s/ Walter F. Vilsmeier Director March 11, 1999
- --------------------------
Walter F. Vilsmeier
/s/ William M. Yocum Director March 11, 1999
- -----------------------
William M. Yocum
</TABLE>
PAGE 26
EXHIBIT INDEX
- --------------
Exhibit
-------
(10.3) Supplemental Executive Retirement Plan.
(13) Excerpts from the Corporation's 1998 Annual Report to Shareholders
(This excerpt includes only page 1 and pages 8 through 32, which are
incorporated in this Report by reference.)
(21) Subsidiaries of Registrant
(23) Consent of Grant Thornton LLP, Independent Certified Public Accountants
(99) Additional Exhibits
None.
PAGE 27
Financial Ratios and Summary of Key Information
Harleysville National Corporation and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
(Dollars in thousands, except per share data and average shares outstanding) 1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Per Share Information
Basic earnings ................................................................. $ 2.67 $ 2.38* $ 2.06*
Diluted earnings ............................................................... 2.67 2.38* 2.06*
Cash dividends paid ............................................................ 1.00 0.91* 0.80*
Book value (at year-end) ....................................................... 17.45 15.64 14.67
Market Value
Bid price of common stock (high) ............................................... $ 43.50 $ 42.00* $ 25.85*
Bid price of common stock (low) ................................................ 32.50 23.10* 22.38*
Average basic shares outstanding ............................................... 7,029,394 7,005,184* 6,993,535*
Average Balance Sheet
Loans .......................................................................... $ 781,459 $ 706,643 $ 652,157
Earning assets ................................................................. 1,158,162 1,020,983 929,589
Total assets ................................................................... 1,209,273 1,075,702 978,899
Deposits ....................................................................... 970,632 878,166 821,387
Interest-bearing liabilities plus demand deposits .............................. 1,067,864 949,200 868,200
Shareholders' equity ........................................................... 116,480 103,807 91,687
Selected Operating Ratios
Return on average assets ....................................................... 1.55% 1.55% 1.47%
Return on average shareholders' equity ......................................... 16.12% 16.05% 15.71%
Leverage (assets divided by shareholders' equity) .............................. 10.85X 10.17X 10.51X
Average shareholders' equity as a percentage of:
Average loans ............................................................... 14.91% 14.69% 14.06%
Average deposits ............................................................ 12.00 11.82 11.16
Average assets .............................................................. 9.63 9.65 9.37
Average earning assets ...................................................... 10.06 10.17 9.86
Dividend payout ratio .......................................................... 37.45 38.23 38.76
Average total loans as a percentage of average deposits and borrowed funds...... 73.18 74.45 75.12
Net interest margin on average earning assets:
Interest income** ........................................................... 7.96% 8.18% 8.20%
Interest expense ............................................................ (3.26) (3.31) (3.32)
Net interest margin ......................................................... 4.70 4.87 4.88
Noninterest margin .......................................................... (1.97) (2.07) (2.23)
</TABLE>
*Adjusted for 5% stock dividends effective 6/30/97 and 6/28/96
**Tax-Equivalent Basis
1
PAGE 1
Description of Business
Harleysville National Corporation, a Pennsylvania corporation (the
Corporation), was incorporated in June 1982. On January 1, 1983, the Corporation
became the parent bank holding company of Harleysville National Bank and Trust
Company (HNB), 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 (CNB). 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 CNB and is now operating
as a branch office of CNB. On July 1, 1994, the Corporation acquired all of the
outstanding stock of Security National Bank (SNB). On March 1, 1996, the
Corporation acquired all of the outstanding common stock of Farmers & Merchants
Bank (F&M). F&M was merged into CNB and is now operating as a branch office of
CNB. On March 17, 1997, the HNC Financial Company was incorporated as a Delaware
Corporation. HNC Financial Company's principal business function is to expand
the investment opportunities of the Corporation.
HNB, which was established in 1909, CNB, which was established in 1903, and
SNB, 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 HNB's legal headquarters are located at 483
Main Street, Harleysville, Pennsylvania 19438. CNB's legal headquarters are
located at 13-15 West Ridge Street, Lansford, Pennsylvania 18232. SNB's legal
headquarters are located at One Security Plaza, Pottstown, Pennsylvania 19464.
HNC Financial Company's legal headquarters are located at 300 Delaware Avenue,
Suite 1704, Wilmington, Delaware 19801.
As of December 31, 1998, the Banks had total assets of $1,332,389,000, total
shareholders' equity of $122,811,000 and total deposits of $1,033,968,000.
The Banks engage in full-service commercial banking and the 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) Bank Insurance Fund to the extent provided by law. The Banks
have 30 branch offices located in Montgomery, Bucks, Carbon, Wayne, Chester and
Schuylkill Counties, Pennsylvania.
On December 31, 1998, the Banks had 483 full-time equivalent employees.
Competition
The Banks compete actively with other eastern Pennsylvania financial services
companies, many larger than the Banks, as well as with financial and
nonfinancial 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, interest rates charged on loans, and fees and charges for trust
services.
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 asset quality,
investments, management practices and other aspects of bank operations).
The Corporation is subject to federal and state securities laws, certain
rules and regulations of the Securities and Exchange Commission, 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 1998 and 1997. The
Corporation's stock is traded in the over-the-counter market under the symbol
"HNBC" and commonly quoted under NASDAQ National Market Issues.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Price of Common Stock
1998 Low Price High Price Dividend
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter ................ $ 39.00 $ 43.50 $ .240
Second Quarter ............... 40.06 43.38 .240
Third Quarter ................ 34.50 42.88 .250
Fourth Quarter ............... 32.50 41.50 .270
</TABLE>
<TABLE>
<CAPTION>
1997 Low Price* High Price* Dividend*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter* $ 23.10 $ 27.38 $ .210
Second Quarter* 25.48 32.00 .210
Third Quarter 31.25 38.75 .230
Fourth Quarter 36.50 42.00 .260
</TABLE>
*Adjusted for a 5% stock dividend effective 6/30/97.
- --------------------------------------------------------------------------------
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 sheets of Harleysville
National Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1998. 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 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 consolidated financial position of
Harleysville National Corporation and Subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations and their consolidated
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
Grant Thornton LLP
Philadelphia, Pennsylvania
January 7, 1999
(Except for Note 2, as to which the date is January 20, 1999.)
PAGE 8
Consolidated Balance Sheets
Harleysville National Corporation and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
--------------------------
Assets 1998 1997
---------- ----------
<S> <C> <C>
Cash and due from banks .......................... $ 37,763 $ 38,471
Federal funds sold ............................... 11,486 11,050
---------- ----------
Total cash and cash equivalents ............... 49,249 49,521
---------- ----------
Interest-bearing deposits in banks ............... 3,707 5,574
Investment securities available for sale ......... 389,344 257,068
Investment securities held to maturity
(market value $26,681 and $47,354, respectively) 25,988 46,238
Loans ............................................ 845,189 743,608
Less: Unearned income ............................ (2,302) (4,155)
Allowance for loan losses .................. (12,950) (11,925)
---------- ----------
Net loans .............................. 829,937 727,528
---------- ----------
Bank premises and equipment, net ................. 18,891 17,934
Accrued interest receivable ...................... 9,271 7,719
Other real estate owned .......................... 664 453
Intangible assets, net ........................... 1,936 1,851
Other assets ..................................... 3,402 2,368
---------- ----------
Total assets ........................... $1,332,389 $1,116,254
========== ==========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing ........................... $ 183,057 $ 152,621
Interest-bearing:
Checking accounts ......................... 129,037 108,954
Money market accounts ..................... 205,656 180,949
Savings ................................... 120,156 108,199
Time, under $100,000 ...................... 307,826 299,794
Time, $100,000 or greater ................. 88,236 68,554
---------- ----------
Total deposits ......................... 1,033,968 919,071
Accrued interest payable ......................... 13,836 14,388
U.S. Treasury demand notes ....................... 1,320 2,150
Federal funds purchased .......................... 11,000 13,700
Federal Home Loan Bank (FHLB) borrowings ......... 93,500 17,000
Securities sold under agreements to repurchase ... 43,158 31,288
Other liabilities ................................ 12,796 8,865
---------- ----------
Total liabilities ...................... 1,209,578 1,006,462
---------- ----------
Shareholders' equity:
Series preferred stock, par value $1 per share;
authorized 3,000,000 shares, none issued .... -- --
Common stock, par value $1 per share; authorized
30,000,000 shares; issued and outstanding
7,037,814 shares in 1998 and 7,020,211
shares in 1997 .............................. 7,038 7,020
Additional paid in capital .................... 49,641 49,305
Retained earnings ............................. 60,733 48,988
Accumulated other comprehensive income ........ 5,399 4,479
---------- ----------
Total shareholders' equity ............. 122,811 109,792
---------- ----------
Total liabilities and shareholders' equity $1,332,389 $1,116,254
========== ==========
</TABLE>
================================================================================
See accompanying notes to consolidated financial statements.
PAGE 9
Consolidated Statements of Income
Harleysville National Corporation and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands except weighted average number of
common shares and per share information) Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest Income
Loans, including fees ...................................... $ 60,611 $ 56,381 $ 52,873
Lease financing ............................................ 5,084 4,531 3,811
Investment securities:
Taxable ................................................. 13,167 12,433 12,110
Exempt from federal taxes ............................... 7,671 5,417 4,020
Federal funds sold ......................................... 859 1,035 622
Deposits in banks .......................................... 205 405 282
---------- ---------- ----------
Total interest income ................................... 87,597 80,202 73,718
---------- ---------- ----------
Interest Expense
Savings deposits ........................................... 11,596 10,149 9,616
Time, under $100,000 ....................................... 16,812 16,550 16,830
Time, $100,000 or greater .................................. 4,700 3,526 2,024
Borrowed funds ............................................. 4,701 3,626 2,406
---------- ---------- ----------
Total interest expense .................................. 37,809 33,851 30,876
---------- ---------- ----------
Net interest income ..................................... 49,788 46,351 42,842
Provision for loan losses .................................. 2,140 2,500 2,082
---------- ---------- ----------
Net interest income after provision for
loan losses ............................................ 47,648 43,851 40,760
---------- ---------- ----------
Other Operating Income
Service charges ............................................ 3,205 2,841 2,587
Security (losses) gains, net ............................... 1,543 1,757 (39)
Trust income ............................................... 2,117 1,509 1,293
Other income ............................................... 2,945 1,284 1,274
---------- ---------- ----------
Total other operating income ............................ 9,810 7,391 5,115
---------- ---------- ----------
Net interest income after provision for
loan losses and other operating income ................ 57,458 51,242 45,875
---------- ---------- ----------
Other Operating Expenses
Salaries, wages and employee benefits ...................... 17,716 15,479 14,398
Occupancy .................................................. 2,140 1,980 1,873
Furniture and equipment .................................... 3,449 2,817 2,083
Other expenses ............................................. 9,268 8,253 7,520
---------- ---------- ----------
Total other operating expenses .......................... 32,573 28,529 25,874
---------- ---------- ----------
Income before income tax expense ........................ 24,885 22,713 20,001
Income tax expense ......................................... 6,109 6,051 5,593
---------- ---------- ----------
Net income ................................................. $ 18,776 $ 16,662 $ 14,408
========== ========== ==========
Weighted average number of common shares:
Basic ................................................... 7,029,394 7,005,184 6,993,535
========== ========== ==========
Diluted ................................................. 7,033,612 7,012,279 7,017,402
========== ========== ==========
Net income per share information:
Basic ................................................... $ 2.67 $ 2.38 $ 2.06
========== ========== ==========
Diluted ................................................. $ 2.67 $ 2.38 $ 2.06
========== ========== ==========
Cash dividends per share ................................... $ 1.00 $ 0.91 $ 0.80
========== ========== ==========
</TABLE>
================================================================================
See accompanying notes to consolidated financial statements
PAGE 10
Consolidated Statements of Shareholders' Equity
Harleysville National Corporation and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands) Common Stock Accumulated
------------------ Other
Number of Par Additional Retained Comprehensive Comprehensive
Shares Value Paid in Capital Earnings Income Total Income
--------- ------ --------------- -------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 .............. 5,878 $5,878 $27,602 $44,621 $1,383 $ 79,484
Acquisition of Farmers & Merchants Bank 438 438 3,281 3,159 -- 6,878
Stock options ......................... 14 14 335 (237) -- 112
Stock dividends ....................... 316 316 8,171 (8,502) -- (15)
Stock awards .......................... 11 11 -- (16) -- (5)
Stock compensation tax benefit ........ -- -- 927 -- -- 927
Net income for 1996 ................... -- -- -- 14,408 -- 14,408 $14,408
Other comprehensive income,
net of reclassifications and tax ... -- -- -- -- 1,426 1,426 1,426
Cash dividends ........................ -- -- -- (5,584) -- (5,584)
----------------------------------------------------------------------------------
Comprehensive income .................. $15,834
=======
Balance, December 31, 1996 ............ 6,657 6,657 40,316 47,849 2,809 97,631
Stock options ......................... 29 29 187 -- -- 216
Stock dividends ....................... 333 333 8,785 (9,135) -- (17)
Stock awards .......................... 1 1 17 (18) -- --
Net income for 1997 ................... -- -- -- 16,662 -- 16,662 $16,662
Other comprehensive income,
net of reclassifications and tax ... -- -- -- -- 1,670 1,670 1,670
Cash dividends ........................ -- -- -- (6,370) -- (6,370)
----------------------------------------------------------------------------------
Comprehensive income .................. $18,332
=======
Balance, December 31, 1997 ............ 7,020 7,020 49,305 48,988 4,479 109,792
Stock options ......................... 18 18 331 -- -- 349
Stock awards .......................... -- -- 5 -- -- 5
Net income for 1998 ................... -- -- -- 18,776 -- 18,776 $18,776
Other comprehensive income,
net of reclassifications and tax ... -- -- -- -- 920 920 920
Cash dividends ........................ -- -- -- (7,031) -- (7,031)
----------------------------------------------------------------------------------
Comprehensive income .................. $19,696
=======
Balance, December 31, 1998 ............ 7,038 $7,038 $49,641 $60,733 $5,399 $122,811
======================================================================
</TABLE>
================================================================================
See accompanying notes to consolidated financial statements.
PAGE 11
Consolidated Statements of Cash Flows
Harleysville National Corporation and Subsidiaries
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net income .......................................... $ 18,776 $ 16,662 $ 14,408
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ........................ 2,140 2,500 2,082
Depreciation and amortization .................... 2,153 1,762 1,412
Net amortization of investment securities
discount/premiums .............................. 425 280 403
Deferred income taxes ............................ 1,475 1,420 844
Net realized securities (gain) loss .............. (1,543) (1,757) 39
Increase in accrued income receivable ............ (1,552) (1,066) (503)
(Decrease) increase in accrued interest payable .. (552) 461 1,845
Net (increase) decrease in other assets .......... (1,034) 64 (564)
Net increase (decrease) in other liabilities ..... 1,960 (804) 1,984
Decrease in unearned income ...................... (1,853) (3,637) (1,689)
Write-down of other real estate owned ............ 65 73 144
(Increase) decrease in intangible assets ......... (85) (193) 302
--------- --------- ---------
Net cash provided by operating activities ..... 20,375 15,765 20,707
--------- --------- ---------
Investing Activities
Proceeds from sales of investment securities
available for sale ................................ 52,921 39,571 64,327
Proceeds, maturity or calls of investment
securities held to maturity ....................... 20,170 16,210 9,078
Proceeds, maturity or calls of investment
securities available for sale ..................... 29,238 23,331 29,789
Purchases of investment securities held to maturity . -- (1,001) (5,847)
Purchases of investment securities available for sale (211,821) (102,351) (127,591)
Net decrease (increase) in interest-bearing
deposits in banks ................................. 1,867 2,901 (6,772)
Net increase in loans ............................... (103,938) (56,709) (53,491)
Net increase in premises and equipment .............. (3,110) (4,886) (4,227)
Proceeds from sales of other real estate ............ 966 1,465 1,348
--------- --------- ---------
Net cash used in investing activities ......... (213,707) (81,469) (93,386)
--------- --------- ---------
Financing Activities
Net increase in deposits ............................ 114,897 71,372 53,200
(Decrease) increase in U.S. Treasury demand notes ... (830) (422) 735
(Decrease) increase in federal funds purchased ...... (2,700) 13,700 --
Increase (decrease) in FHLB borrowings .............. 76,500 (18,000) 13,800
Increase in securities sold under agreement ......... 11,870 9,339 5,236
Cash dividends and fractional shares ................ (7,031) (6,370) (5,584)
Dividends reinvestment .............................. -- (17) (20)
Stock options ....................................... 354 216 112
--------- --------- ---------
Net cash provided by financing activities ..... 193,060 69,818 67,479
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ... (272) 4,114 (5,200)
Cash and cash equivalents at beginning of year ......... 49,521 45,407 50,607
--------- --------- ---------
Cash and cash equivalents at end of year ............... $ 49,249 $ 49,521 $ 45,407
========= ========= =========
Cash paid during the year for:
Interest ............................................ $ 38,362 $ 33,389 $ 29,030
========= ========= =========
Income taxes ........................................ 3,950 5,100 3,710
========= ========= =========
Supplemental disclosure of noncash investing and
financing activities:
Transfer of assets from loans to other
real estate owned ................................. $ 1,242 $ 1,019 $ 1,243
========= ========= =========
</TABLE>
================================================================================
See accompanying notes to consolidated financial statements.
PAGE 12
Notes to Consolidated Financial Statements
Harleysville National Corporation and Subsidiaries
1 - Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Business
Harleysville National Corporation (the Corporation) through its subsidiary
banks, Harleysville National Bank and Trust Company, The 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. The Banks compete with other banking and financial
institutions in their primary market communities, including financial
institutions with resources substantially greater than their own. Commercial
banks, savings banks, savings and loan associations, credit unions and money
market funds actively compete for deposits and for types of loans. Such
institutions, as well as consumer finance and insurance companies, may be
considered competitors of the Banks with respect to one or more of the services
they render. In addition to being subject to competition from other financial
institutions, the Banks are subject to federal and state laws and 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 applicable to banks. All
significant intercompany transactions are eliminated in consolidation and
certain reclassifications are made when necessary to conform with the previous
years' financial statements to 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
dates of the balance sheets and revenues and expenditures for the periods
presented. Therefore, actual results could differ significantly from those
estimates.
Investment Securities
The Corporation accounts for securities under the Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," 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 other
comprehensive income, 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 Corporation
and its Subsidiaries 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 fair 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. Realized gains and
losses on the sale of investment securities are recognized using the specific
identification method and are included in 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 loans is credited to income based on the principal
amount outstanding.
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.
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 accounts for impaired loans under 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 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 Corporation adopted SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125 -- An Amendment of FASB Statement No. 125" on January 1, 1997. SFAS No. 125
applies a control-oriented, financial components approach to
financial-asset-transfer transactions whereby the Corporation (1) recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
(2) derecognizes financial assets when control has been surrendered, and (3)
derecognizes liabilities once they are extinguished. Under SFAS No. 125, control
is considered to have been surrendered only if: (i) the transferred assets have
been isolated from the transferor and its creditors, even in bankruptcy or other
receivership (ii) the transferee has the
PAGE 13
right to pledge or exchange the transferred assets, or, is a qualifying special
purpose entity (as defined) and the holders of beneficial interests in that
entity have the right to pledge or exchange those interests; and (iii) the
transferor does not maintain effective control over the transferred assets
through an agreement which both entitles and obligates it to repurchase or
redeem those assets prior to maturity, or through an agreement which both
entitles and obligates it to repurchase or redeem those assets if they were not
readily obtainable elsewhere. If any of these conditions are not met, the
Corporation accounts for the transfer as a secured borrowing.
SFAS No. 125 also requires that the Corporation derecognize a liability if
and when it is extinguished. A liability is considered extinguished under SFAS
No. 125 if (1) the Corporation pays the creditor, and thus, is relieved of its
obligation for the liability, or (2) is legally released from being the primary
obligor under the liability, either judicially or by the creditor. The adoption
of this statement did not have a material impact on the Corporation's
consolidated financial position or results of operations.
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' allowances 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.
On January 1, 1996, the Corporation adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and 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 SFAS No. 121 did not have a
material impact on the Corporation's consolidated financial position or results
of operations.
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 income and expenses.
Intangible Assets
Intangible assets consist 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. Intangible
assets also include mortgage servicing rights. The core deposit intangibles are
being amortized over a 10-year life on an accelerated basis. The amortization
charged to income related to the core deposit intangibles was $325,000, $309,000
and $302,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The mortgage servicing rights are amortized in proportion to and over the period
of estimated net servicing income.
Stock Options
On January 1, 1996, the Corporation adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation cost
at the grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, the standard permits entities to continue accounting for employee
stock options and similar instruments under Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that
continue to account for stock options using APB Opinion No. 25 are required to
make pro forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied. The
Corporation's employee stock option plan is accounted for under APB Opinion No.
25. Accordingly, the adoption of SFAS No. 123 did not have an impact on the
Corporation's consolidated financial position or results of operations.
Income Taxes
The Corporation accounts for income taxes under the liability method
specified by SFAS No. 109, "Accounting for Income Taxes." Under 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. 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 loan losses, leased assets,
deferred loan fees and compensation.
Pension Plans
The Corporation has certain employee benefit plans covering substantially all
employees. The Corporation accrues service cost as incurred.
Advertising Costs
The Corporation expenses advertising costs as incurred.
Restrictions on Cash and Due From Banks
As of December 31, 1998, the Banks did not need to maintain reserves (in the
form of deposits with the Federal Reserve Bank) to satisfy federal regulatory
requirements.
PAGE 14
Net Income Per Share
During 1997, the Corporation adopted the provisions of SFAS No. 128,
"Earnings per Share." SFAS No. 128 eliminates primary and fully diluted earnings
per share and requires presentation of basic and diluted earnings per share
(EPS) in conjunction with the disclosure of the methodology used in the
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common shareholders by the
weighted-average common shares outstanding during the period. Diluted earnings
per share take into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock. Prior periods' earnings per share calculations have been
restated to reflect the adoption of SFAS No. 128.
The reconciliation of the numerators and denominators of the basic and
diluted EPS follows:
Year Ended December 31, 1998
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income .................. $18,776,000
===========
Basic EPS
Income available to
common shareholders ......... $18,776,000 7,029,394 $ 2.67
======
Effect of Dilutive Securities
Stock options ............... -- 4,218
----------- ---------
Diluted EPS
Income available to
common shareholders ......... $18,776,000 7,033,612 $ 2.67
=========== ========= ======
Year Ended December 31, 1997
--------------------------------------
Net income .................. $16,662,000
===========
Basic EPS
Income available to
common shareholders ......... $16,662,000 7,005,184 $ 2.38
======
Effect of Dilutive Securities
Stock options ............... -- 7,095
----------- ---------
Diluted EPS
Income available to
common shareholders ......... $16,662,000 7,012,279 $ 2.38
=========== ========= ======
Year Ended December 31, 1996
--------------------------------------
Net income .................. $14,408,000
===========
Basic EPS
Income available to
common shareholders ......... $14,408,000 6,993,535 $ 2.06
======
Effect of Dilutive Securities
Stock options ............... -- 23,867
----------- ---------
Diluted EPS
Income available to
common shareholders ......... $14,408,000 7,017,402 $ 2.06
=========== ========= ======
Comprehensive Income
On January 1, 1998 the Corporation adopted the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," SFAS No. 130 establishes standards to provide
prominent disclosure of comprehensive income items. Comprehensive income is the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. Other comprehensive
income consists of net unrealized gains on investment securities available for
sale. Comprehensive income for 1998, 1997 and 1996 was $19,696,000, $18,332,000,
and $15,834,000, respectively. The components of other comprehensive income are
as follows:
(Dollars in thousands) Before tax Tax Net of tax
December 31, 1998 amount expense amount
- ----------------- ---------- -------- ----------
Unrealized gains on securities:
Unrealized holding gains
arising during period .... $2,958 $(1,035) $1,923
Less reclassification
adjustment for gains
realized in net income ... 1,543 (540) 1,003
------ ------- ------
Other comprehensive income, net $1,415 $ (495) $ 920
====== ======= ======
Before tax Tax Net of tax
December 31, 1997 amount expense amount
- ----------------- ---------- -------- ----------
Unrealized gains on securities:
Unrealized holding gains
arising during period .... $4,326 $(1,514) $2,812
Less reclassification
adjustment for gains
realized in net income ... 1,757 (615) $1,142
------ ------- ------
Other comprehensive income, net $2,569 $ (899) $1,670
====== ======= ======
Before tax Tax Net of tax
December 31, 1996 amount expense amount
- ----------------- ---------- -------- ----------
Unrealized gains on securities:
Unrealized holding gains
arising during period .... $2,155 $ (754) $1,401
Less reclassification
adjustment for losses
realized in net income ... (39) 14 (25)
------ ------- ------
Other comprehensive income, net $2,194 $(768) $1,426
====== ======= ======
Other Information
On January 1, 1998, the Corporation adopted the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 redefines how operating segments are determined and requires disclosures of
certain financial and descriptive information about a company's operating
segments. Management has determined that under current conditions, the
Corporation will report one business segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of derivative (gains and
losses) depends on the intended use of the derivative and resulting designation.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after
PAGE 15
June 15, 1999. Earlier application is permitted only as of the beginning of any
fiscal quarter. On January 1, 1999, the Corporation adopted SFAS No. 133.
Concurrent with the adoption, the Corporation reclassified $7,530,000 of
investment securities from the held to maturity category to the available for
sale category and recorded $221,000 net of taxes of unrealized holding gains in
accumulated other comprehensive income.
2 - Acquisitions
- --------------------------------------------------------------------------------
Subsequent Event. On January 20, 1999, the Corporation consummated its
acquisition of Northern Lehigh Bancorp, Inc., parent company of Citizens
National Bank of Slatington. Accounted for as a pooling-of-interest, Northern
Lehigh Bancorp, shareholders received 3.57 shares of Harleysville National
Corporation common stock for each share of Northern Lehigh Bancorp common stock.
The acquisition was affected by the merger of Northern Lehigh Bancorp, Inc.
with Citizens National Bank, a bank holding company and wholly-owned subsidiary
of Harleysville National Corporation. Citizens National Bank of Slatington
merged with and into The Citizens National Bank of Lansford, a national banking
association and wholly-owned subsidiary of Harleysville National Corporation
North, Inc., under the name Citizens National Bank.
A summary of pro-forma unaudited condensed consolidated financial information
of the Corporation and Northern Lehigh Bancorp follows:
(Dollars in thousands except weighted average number of common shares
and per share information)
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
Operating results (unaudited):
Net interest income ..................... $ 53,255 $ 49,741 $ 45,915
Noninterest income ...................... 10,008 7,591 5,311
Net income from continuing operations ... 19,308 17,642 15,267
Net income per share:
Basic ................................ 2.56 2.35 2.04
Diluted .............................. 2.56 2.35 2.03
Weighted average number of common shares:
Basic ................................ 7,527,402 7,505,023 7,498,147
Diluted .............................. 7,541,130 7,517,520 7,525,720
On March 1, 1996, the Corporation consummated the acquisition of Farmers &
Merchants Bank (Honesdale, PA) ("Farmers"). For each share of Farmers common
stock outstanding, 0.6190 shares of the Corporation's Common Stock were issued
at the effective date on March 1, 1996. As a result of the transaction, 438,126
new shares of the Corporation's Common Stock, par value $1.00 per share, were
issued on March 1, 1996, pursuant to the Agreements. Farmer's Banking operations
were merged into those of Citizens. The Farmers merger was accounted for on a
pooling-of-interest basis, and all prior periods have been restated to reflect
the combination. The results of operations for the previously separate companies
follows:
(Dollars in thousands) Revenue Net Income
-------- ----------
Year Ended December 31, 1996
Harleysville National Corporation .... $78,115 $14,282
Farmers & Merchants Bank,
as of February 29, 1996 ........... 718 126
------- -------
Total .......................... $78,833 $14,408
======= =======
3 - Investment 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:
(Dollars in thousands) December 31, 1998
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Held to Maturity Cost Gains (Losses) Value
--------- ---------- ---------- ---------
Obligations of other U.S.
Government agencies
and corporations ..... $ 6,490 $ 80 $ (3) $ 6,567
Obligations of states and
political subdivisions 17,093 544 (1) 17,636
Mortgage-backed
securities ........... 1,039 11 -- 1,050
Other securities ........ 1,366 62 -- 1,428
--------- ------- -------- --------
Totals ............... $ 25,988 $ 697 $ (4) $ 26,681
========= ======= ======== ========
Available for Sale
U.S. Treasury notes ..... $ 43,008 $ 1,160 $ -- $ 44,168
Obligations of other U.S.
Government agencies
and corporations ..... 44,651 1,017 -- 45,668
Obligations of states and
political subdivisions 161,053 4,009 (1,017) 164,045
Mortgage-backed
securities ........... 86,934 487 (48) 87,373
Other securities ........ 45,391 2,868 (169) 48,090
--------- ------- -------- --------
Totals ............... $ 381,037 $ 9,541 $(1,234) $389,344
========= ======= ======== ========
Held to Maturity December 31, 1997
- ---------------- ----------------------------------------
Obligations of other U.S.
Government agencies
and corporations ...... $ 21,707 $ 303 $ (14) $ 21,996
Obligations of states and
political subdivisions 19,589 765 (6) 20,348
Mortgage-backed
securities ............ 2,048 13 -- 2,061
Other securities ......... 2,894 55 -- 2,949
-------- ------- ------- --------
Totals ................ $ 46,238 $ 1,136 $ (20) $ 47,354
======== ======= ======= ========
Available for Sale
- ------------------
U.S. Treasury notes ...... $ 45,988 $ 634 $ (8) $ 46,614
Obligations of other U.S.
Government agencies
and corporations ...... 42,211 738 (4) 42,945
Obligations of states and
political subdivisions 92,007 2,508 (210) 94,305
Mortgage-backed
securities ............ 56,455 850 (6) 57,299
Other securities ......... 13,518 2,413 (26) 15,905
-------- ------ ------ --------
Totals ................ $250,179 $7,143 $(254) $257,068
======== ====== ====== ========
There are no significant concentrations of securities (greater than 10% of
shareholders' equity) in any individual security issuer.
PAGE 16
Securities with a carrying value of $151,039,000 and $138,121,000 at December
31, 1998 and 1997, respectively, were pledged to secure public funds, government
deposits and repurchase agreements.
The amortized cost and estimated market value of investment securities, at
December 31, 1998, by contractual maturities, are shown below. Actual maturities
will differ from contractual maturities because issuers and borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
(Dollars in thousands) Held to Maturity Available for Sale
------------------- ---------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
Due in one year or less $ 3,776 $ 3,832 $ 13,992 $ 14,046
Due after one year
through five years . 9,139 9,344 45,338 46,667
Due after five years
through ten years .. 784 800 63,477 65,159
Due after ten years ... 11,250 11,655 171,296 176,099
------- ------- -------- --------
24,949 25,631 294,103 301,971
Mortgage-backed
securities ......... 1,039 1,050 86,934 87,373
------- ------- -------- --------
Totals ............. $25,988 $26,681 $381,037 $389,344
======= ======= ======== ========
Proceeds from sales of investment securities available for sale during 1998
were $52,921,000. Gross gains of $1,544,000 and gross losses of $1,000 were
realized on these sales. Proceeds from sales of investment securities available
for sale during 1997 were $39,571,000. Gross gains of $2,073,000 and gross
losses of $316,000 were realized on these sales. Proceeds from sales of
investment securities available for sale during 1996 were $64,327,000. Gross
gains of $168,000 and gross losses of $207,000 were realized on these sales.
4 - Loans
- --------------------------------------------------------------------------------
Major classifications of loans are as follows:
(Dollars in thousands) December 31,
---------------------
1998 1997
-------- --------
Real estate ................ $306,575 $246,259
Commercial and industrial .. 204,173 192,694
Consumer loans ............. 265,688 249,242
Lease financing ............ 68,753 55,413
-------- --------
Total loans ............. 845,189 743,608
Less:
Unearned income ......... 2,302 4,155
Allowance for loan losses 12,950 11,925
-------- --------
Net loans ............... $829,937 $727,528
======== ========
On December 31, 1998, nonaccrual loans were $2,950,000, loans 90 days or more
past due and still accruing interest were $824,000 and troubled debt
restructured loans were $583,000. On December 31, 1997, nonaccrual loans were
$2,621,000, loans 90 days or more past due and still accruing interest were
$2,253,000 and troubled debt restructured loans were $1,099,000.
The balance of impaired loans was $2,096,000 at December 31, 1998, compared
to $2,441,000 at December 31, 1997. 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 December 31, 1998, impaired
loan balance included $1,513,000 of nonaccrual loans and $583,000 of troubled
debt restructured loans. The December 31, 1997, impaired loan balance included
$1,429,000 of nonaccrual loans and $1,012,000 of troubled debt restructured
loans. The allowance for loan loss associated with the impaired loans was
$302,000 at December 31, 1998, and $341,000 at December 31, 1997. The average
impaired loan balance was $2,263,000 in 1998, compared to $3,538,000 in 1997.
The income recognized on impaired loans during 1998 and 1997 was $103,000 and
$135,000, respectively.
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 which exceeded 10% of
total loans at December 31, 1998 and 1997. 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, Carbon, Bucks,
and Wayne counties, but also includes Chester, Berks and Schuylkill Counties,
Pennsylvania.
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:
(Dollars in thousands) Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Balance, January 1 .... $ 3,574 $ 7,723 $ 12,586
New loans .......... 12,183 9,462 7,721
Repayments ......... (11,286) (13,611) (12,584)
-------- -------- --------
Balance, December 31... $ 4,471 $ 3,574 $ 7,723
======== ======== ========
PAGE 17
5 - Allowance for Loan Losses
- --------------------------------------------------------------------------------
Transactions in the allowance for loan losses are as follows:
(Dollars in thousands) Year Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
Balance, beginning of year $11,925 $10,710 $ 9,891
------- ------- -------
Provision charged to
operating expenses ... 2,140 2,500 2,082
------- ------- -------
Loans charged off:
Commercial
and industrial ....... (217) (66) (392)
Consumer .............. (627) (1,038) (614)
Real estate ........... (424) (544) (412)
Lease financing ....... (145) (78) (33)
------- ------- -------
Total charged off .. (1,413) (1,726) (1,451)
------- ------- -------
Recoveries:
Commercial
and industrial ....... 94 113 84
Consumer .............. 98 104 56
Real estate ........... 88 206 30
Lease financing ....... 18 18 18
------- ------- -------
Total recoveries ... 298 441 188
------- ------- -------
Balance, end of year ..... $12,950 $11,925 $10,710
======= ======= =======
6 - Bank Premises and Equipment
- -------------------------------------------------------------------------------
Bank premises and equipment consist of the following:
(Dollars in thousands) Estimated December 31,
Useful -----------------
Lives 1998 1997
----------- ------- -------
Land ................................ $ 2,841 $ 2,851
Building ............................ 15-39 years 16,349 15,858
Furniture, fixtures and equipment.... 3-10 years 14,788 12,250
------- -------
Total cost ....................... 33,978 30,959
Less accumulated depreciation
and amortization ................. 15,087 13,025
------- -------
$18,891 $17,934
======= =======
7 - Deposits and Borrowings
- --------------------------------------------------------------------------------
At December 31, 1998, scheduled maturities of certificates of deposit are as
follows:
(Dollars in thousands)
Year Ended December 31,
1999 2000 2001 2002 2003 Thereafter Total
-------- ------- ------- ------- ------- ---------- --------
Amount $240,263 $71,960 $40,679 $30,912 $12,223 $25 $396,062
======== ======= ======= ======= ======= === ========
Federal Home Loan Bank (FHLB) advances at December 31, 1998, totaled
$93,500,000. The advances are collateralized by FHLB stock and certain first
mortgage loans and mortage-backed securities. First mortgages used as collateral
for these advances totaled $69,934,000. These advances had a weighted average
interest rate of 5.06.%. Advances are made pursuant to several different credit
programs offered from time to time by the FHLB. Unused lines of credit at the
FHLB were $105,935,000 at December 31, 1998.
Outstanding borrowings mature as follows (dollars in thousands):
2000 ................................... $ 500
2002 ................................... 15,000
2003 and thereafter .................... 78,000
-------
$93,500
=======
The Banks, pursuant to a designated cash management agreement, utilize
securities sold under agreements to repurchase as vehicles for customers' sweep
and term investment products. Securitization under these cash management
agreements are in U.S. Treasury Securities.
The U.S. Treasury Securities are held in a third party custodian's account,
designated by the Banks under a written custodial agreement that explicitly
recognizes the Banks' interest in the securities. The U.S. Treasury Securities
are non-deliverable and held in the name of the customer in the custodial
account. At December 31, 1998, these agreements matured within one year. The
average balance of securities sold under agreements to repurchase for 1998 was
$39,002,000, and the maximum amounts outstanding at any month-end during 1998
was $51,176,000.
8 - Federal Income Taxes
- --------------------------------------------------------------------------------
Income tax expense from current operations is composed of the following:
(Dollars in thousands) Year Ended December 31,
------------------------
1998 1997 1996
------ ------ ------
Current tax payable ..... $4,602 $4,631 $4,699
Deferred income tax ..... 1,507 1,420 894
------ ------ ------
Tax expense ............ $6,109 $6,051 $5,593
====== ====== ======
The effective income tax rates of 24.5% for 1998, 26.6% for 1997 and 28.0%
for 1996 were less than the applicable federal income tax rate of 35% for each
year. The reason for these differences follows:
(Dollars in thousands) Year Ended December 31,
-----------------------------
1998 1997 1996
------- ------- -------
Expected tax expense ....... $ 8,710 $ 7,722 $ 6,800
Tax-exempt income (net of
expense disallowance) ... (2,688) (1,893) (1,414)
Other ...................... 87 222 207
------- ------- -------
Actual tax expense ...... $ 6,109 $ 6,051 $ 5,593
======= ======= =======
PAGE 18
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:
(Dollars in thousands) 1998 1997
----------------- -------------------
Asset Liability Asset Liability
----- --------- ----- ---------
Allowance for
loan losses................. $ 4,532 $ -- $ 4,174 $ --
Lease assets .................. -- 11,021 -- 9,330
Deferred loan fees ............ 449 -- 628 --
Deferred compensation ......... 722 -- 620 --
Unrealized gain
on securities .............. -- 2,907 -- 2,410
Other ......................... 114 -- 212 --
------- ------- ------- -------
Total deferred taxes ....... $ 5,817 $13,928 $ 5,634 $11,740
======= ======= ======= =======
The exercise of stock options which have been granted under the Corporation's
various stock option plans gives rise to compensation, which is includable in
the taxable income of the applicable employees and deductible by the Corporation
for income tax purposes. Compensation resulting from increases in the fair
market value of the Corporation's Common Stock subsequent to the date of grant
of the applicable exercised stock options is not recognized, in accordance with
APB Opinion No. 25, as an expense for financial accounting purposes and the
related tax benefits are taken directly to Additional Paid in Capital. For the
year ended December 31, 1996, such deductions resulted in $927,000 of income tax
benefits which increased the Additional Paid in Capital.
9 - Pension Plans
- --------------------------------------------------------------------------------
The Corporation has noncontributory defined benefit pension plans 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 plans' funded status and amounts recognized in the financial statements
follow:
(Dollars in thousands) 1998 1997
------------- ------------
Change in benefit obligation:
- -----------------------------
Benefit obligation at beginning of year ........ $ 4,382 $ 3,967
Service cost ................................... 264 247
Interest cost .................................. 297 275
Actual gain .................................... 241 (42)
Benefits paid .................................. (842) (65)
Change in assumptions .......................... 634 --
------- -------
Benefits obligation at end of year.............. $ 4,976 $ 4,382
======= =======
Change in plans assets:
- -----------------------
Fair value of plan assets at beginning of year.. $ 6,295 $ 5,436
Actual return on plan assets ................... 521 924
Employer contribution .......................... -- --
Benefits paid .................................. (842) (65)
------- -------
Fair value of plan assets at end of year ....... $ 5,974 $ 6,295
======= =======
Funded status .................................. $ 998 $ 1,913
Unrecognized transition liability (asset)....... (207) (224)
Unrecognized prior service cost ................ (661) (772)
Unrecognized net (gain) or loss ................ 527 (258)
------- -------
Prepaid (accrued) benefit cost ............ $ 657 $ 659
======= =======
Weighted-average assumptions as of
December 31: 1998 1997 1996
- ---------------------------------- -------- -------- --------
Discount rate ............................ 6.00% 7.00% 7.15%
Expected return on plan assets ........... 7.00% 7.00% 7.50%
Rate of compensation increase ............ 4.50% 5.00% 5.35%
Components of net periodic benefit cost 1998 1997 1996
- --------------------------------------- -------- -------- --------
Service cost ............................. $ 264 $ 247 $ 295
Interest cost ............................ 297 275 222
Expected return on plan assets ........... (431) (394) (220)
Amortization of prior service cost ....... (111) (110) 4
Recognized net actuarial loss ............ (17) 18 24
----- ----- -----
Net periodic benefit cost $ 2 $ 36 $ 325
===== ===== =====
As of December 31, 1998, the pension plan had an investment in the
Corporation's stock with a market value of $239,000.
The Banks had a profit sharing plan for eligible employees. The
continuation of the profit sharing plan was voluntary on the part of the Banks.
The Banks expressly reserved the right to amend or terminate the plan and to
reduce, suspend or discontinue contributions at any time. In 1996, the profit
sharing plan was modified to a 401(K) plan. All employees may contribute up to a
maximum of 15% of salary on a pre-tax basis with a 50% employer match up to a
maximum of 3% of salary. Contributions charged to earnings were $241,942,
$202,857, and $699,282 for 1998, 1997 and 1996, 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, 1998, and 1997, the Corporation had accrued a liability of $1,246,500 and
$992,589, respectively, for the SERP.
10 - Shareholders' Equity
- --------------------------------------------------------------------------------
On June 30, 1997, the Corporation paid a 5% stock dividend on its common
stock to shareholders of record as of June 13, 1997.
On June 28, 1996, the Corporation paid a 5% stock dividend on its common
stock to shareholders of record as of June 14, 1996.
11 - Stock Options
- --------------------------------------------------------------------------------
The Corporation has a fixed stock option plan accounted for under APB Opinion
No. 25 and related interpretations. The plan allows the Corporation to grant
options to employees for up to 80,000 shares of common stock. The options have a
term of 10 years when issued and are completely vested over a five-year period.
The exercise price of each option equals the market price of the Corporation's
stock on the date of grant. Accordingly, no compensation cost has been
recognized for the plan. Had compensation cost for the plan been determined
based on the fair value of the options at the grant dates consistent with the
method of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Corporation's net income and earnings per share for all periods presented would
not be materially different from amounts reported. Disclosures are not likely to
be representative of the effect on reported net income for future years, since
options vest over several years and additional awards may be made each year.
PAGE 19
Under the Corporation's stock option plan, the exercisable option prices
ranged from $24.38 to $42.69 at December 31, 1998. The weighted-average exercise
price and weighted-average remaining contractual life of the stock option plan
is $35.25 and 9 years and 8 months, respectively. A summary of the status of the
Corporation's fixed stock option plans as of December 31, 1998, 1997 and 1996,
and changes during the years ending on those dates is presented below.
1998 1997 1996
-------- -------- --------
Number of Common Shares:
Outstanding, January 1* ............. 20,539 55,076 71,853
Granted ............................. 72,500 -- --
Exercised ........................... (18,802) (34,537) (16,777)
------- ------- -------
Outstanding, December 31 ............ 74,237 20,539 55,076
======= ======= =======
Exercisable, December 31 ............ 1,042 20,539 55,076
======= ======= =======
* Adjusted for stock splits and stock dividends.
12 - Commitments and Contingent Liabilities
- --------------------------------------------------------------------------------
Based on consultation with the Corporation's legal counsel, management 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. In addition, no material proceedings are
pending or are known to be threatened or contemplated against the Corporation or
its Subsidiaries 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, 1998 are as follows:
Total
Operating Leases
----------------
1999 $ 1,460,000
2000 1,350,000
2001 1,055,000
2002 535,000
2003 517,000
Thereafter 4,341,000
------------
Total .................. $ 9,258,000
============
Total lease expense amounted to $1,494,000 in 1998, $1,259,000 in 1997 and
$895,000 in 1996.
13 - Financial Instruments with Off-Balance Sheet Risk
- --------------------------------------------------------------------------------
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, 1998 and 1997 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 at December 31, 1998
and 1997 of $6,215,000 and $5,463,000, respectively; commitments to extend
credit of $36,349,000 and $23,945,000, respectively for revolving home equity
lines; $99,106,000 and $78,715,000, respectively for commercial and real estate
loans; $21,356,000 and $21,059,000, respectively, for consumer loans.
The Banks' exposure to credit loss in the event of nonperformance 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 Capital
- --------------------------------------------------------------------------------
The Banks are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
Corporation's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet specific
capital guidelines that involve quantitative measures of the Banks' assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the
table) of total and Tier 1 capital to risk-weighted assets. Management believes,
as of December 31, 1998, that the Banks meet all capital adequacy requirements
to which they are subject. To be categorized as well capitalized, the Banks must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as
set forth in the table. There are no conditions or events which have occurred
that management believes have changed the institutions' category.
PAGE 20
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) To Be Well Capitalized Under
Actual For Capital Adequacy Purposes Prompt Corrective Action Provision
As of December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk weighted assets):
- ----------------------------------------
Corporation ............................. $128,441 13.84% $74,226 8.00% $92,783 10.00%
Harleysville National Bank .............. 70,733 9.70% 58,316 8.00% 72,895 10.00%
Citizens National Bank .................. 23,186 21.08% 8,798 8.00% 10,997 10.00%
Security National Bank .................. 7,629 10.74% 5,680 8.00% 7,101 10.00%
Tier 1 Capital (to risk weighted assets):
- ----------------------------------------
Corporation ............................. $115,982 12.50% $37,113 4.00% $55,670 6.00%
Harleysville National Bank .............. 61,603 8.45% 29,158 4.00% 43,737 6.00%
Citizens National Bank .................. 21,811 19.83% 4,399 4.00% 6,598 6.00%
Security National Bank .................. 6,741 9.49% 2,840 4.00% 4,260 6.00%
Tier 1 Capital (to average assets):
- ----------------------------------
Corporation ............................. $115,982 8.98% $51,643 4.00% $64,554 5.00%
Harleysville National Bank .............. 61,603 6.11% 40,191 4.00% 50,238 5.00%
Citizens National Bank .................. 21,811 12.31% 7,089 4.00% 8,861 5.00%
Security National Bank .................. 6,741 7.10% 3,799 4.00% 4,749 5.00%
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) To Be Well Capitalized Under
Actual For Capital Adequacy Purposes Prompt Corrective Action Provision
As of December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk weighted assets):
- ---------------------------------------
Corporation ............................. $113,276 14.68% $61,745 8.00% $77,182 10.00%
Harleysville National Bank .............. 80,778 12.96% 49,851 8.00% 62,314 10.00%
Citizens National Bank .................. 21,971 23.74% 7,403 8.00% 9,254 10.00%
Security National Bank .................. 6,884 12.39% 4,446 8.00% 5,558 10.00%
Tier 1 Capital (to risk weighted assets):
- ----------------------------------------
Corporation ............................. $103,600 13.42% $30,873 4.00% $46,309 6.00%
Harleysville National Bank .............. 72,965 11.71% 24,926 4.00% 37,388 6.00%
Citizens National Bank .................. 20,811 22.49% 3,701 4.00% 5,552 6.00%
Security National Bank .................. 6,188 11.13% 2,223 4.00% 3,335 6.00%
Tier 1 Capital (to average assets):
- ---------------------------------
Corporation ............................. $103,600 9.36% $44,327 4.00% $55,408 5.00%
Harleysville National Bank .............. 72,965 8.42% 34,740 4.00% 43,425 5.00%
Citizens National Bank .................. 20,811 13.00% 6,405 4.00% 8,006 5.00%
Security National Bank .................. 6,188 8.20% 3,018 4.00% 3,773 5.00%
</TABLE>
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 exceed 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 1999 of
approximately $22,000,000 plus an amount equal to the net profits of the Banks
in 1999 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, 1998, there were no
investments, loans, extensions of credit or advances from any of the subsidiary
banks to the Corporation.
15 - Fair Value of Financial Instruments
- --------------------------------------------------------------------------------
SFAS No. 107 "Disclosures about Fair Values of Financial Instruments,"
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 and investments. Therefore, the Corporation had to use significant
estimates and present value calculations to prepare this disclosure.
PAGE 21
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, 1998 and 1997 are outlined
below.
For cash and due from banks, interest-bearing deposits in banks and federal
funds sold, the recorded book values of $52,956,000 and $55,095,000 at December
31, 1998 and 1997, 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 loan portfolio, net of unearned income, at December 31, 1998 and 1997 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.
1998 1997
-------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ----------- -------- ----------
Investment
securities ....... $ 415,332,000 $ 416,025,000 $ 303,306,000 $ 304,422,000
Loans, net ......... $ 842,887,000 $ 847,289,000 $ 739,453,000 $ 747,008,000
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
receivable and payable approximates fair value.
1998 1997
-------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ----------- -------- ----------
Time deposits ....... $ 396,062,000 $ 399,770,000 $ 368,348,000 $ 369,709,000
The fair values of demand notes, borrowings, and securities sold under
agreements to repurchase of $147,986,000 and $64,143,000 at December 31, 1998
and 1997, 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 $163,026,000 and $129,182,000 at December 31, 1998 and 1997,
respectively, and primarily comprised unfunded loan commitments which are
generally priced at market at the time of funding.
16 - Condensed Financial Information -
Parent Company Only
- --------------------------------------------------------------------------------
Condensed financial statements of Harleysville National Corporation follow:
CONDENSED BALANCE SHEETS
(Dollars in thousands) December 31,
-----------------------------
1998 1997
------------- ------------
Assets:
Cash .................................... $ 244 $ 748
Investments in subsidiaries ............. 123,014 109,493
-------- --------
Total assets ............................ $123,258 $110,241
======== ========
Liabilities and shareholders' equity:
Other liabilities ....................... $ 447 $ 449
-------- --------
Total liabilities ....................... $ 447 $ 449
-------- --------
Shareholders' equity:
Common stock ............................ $ 7,038 $ 7,020
Additional paid in capital .............. 49,641 49,305
Retained earnings ....................... 60,733 48,988
Net unrealized gain on investment
securities available for sale ......... 5,399 4,479
-------- --------
Total shareholders' equity .............. 122,811 109,792
-------- --------
Total liabilities and
shareholders' equity .................. $123,258 $110,241
======== ========
CONDENSED STATEMENTS OF INCOME
(Dollars in thousands) Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Dividends from banks ................. $ 27,845 $ 8,371 $ 5,584
Other income ......................... 1 71 156
-------- ------- -------
Total operating income ............ 27,846 8,442 5,740
-------- ------- -------
Operating expense .................... 9 -- --
-------- ------- -------
Income before income tax expense
and equity in undistributed
net income of banks ............... 27,837 8,442 5,740
Income tax expense ................... (3) 24 55
-------- ------- -------
Income before equity in undistributed.
net income of banks ............... 27,840 8,418 5,685
Equity in undistributed
net income of banks ............... (9,064) 8,244 8,723
-------- ------- -------
Net income ........................ $ 18,776 $16,662 $14,408
======== ======= =======
PAGE 22
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Operating activities:
Net income .......................... $18,776 $16,662 $14,408
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Equity in undistributed
net income of banks ........... 9,064 (8,244) (8,723)
Realized gain on sale
of securities ................. -- (6) (68)
Net increase in
other liabilities ............. (3) 24 55
Net cash provided by
operating activities ................ 27,837 8,436 5,672
Investing activities:
Capital contributions
made to the banks ................. (21,664) (3,944) --
Proceeds from sales
of securities ..................... -- 1,874 405
Purchase of securities
available for sale ................ -- -- (1,576)
Net cash (used in) provided
by investing activities ............. (21,664) (2,070) (1,171)
Financing activities:
Cash dividends and
fractional shares ................. (7,031) (6,387) (5,604)
Stock options and awards ............ 354 216 112
Net cash used in
financing activities ................ (6,677) (6,171) (5,492)
Net (decrease) increase in cash ........ (504) 195 (991)
Cash and cash equivalents at
beginning of year ................... 748 553 1,544
Cash and cash equivalents at
end of year ......................... $ 244 $ 748 $ 553
17 - Quarterly Financial Data (Unaudited)
- --------------------------------------------------------------------------------
The following is the summarized (unaudited) consolidated 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:
(Dollars in thousands, except per share information)
Three Months Ended
---------------------------------------------
1998: March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest income ............. $20,911 $21,627 $ 22,182 $22,877
Net interest income ......... 12,112 12,346 12,540 12,790
Provision for losses ........ 535 535 535 535
Noninterest income .......... 1,862 2,172 2,895 2,881
Operating expenses .......... 7,804 8,019 7,941 8,809
Income before income
tax expense .............. 5,635 5,964 6,959 6,327
Income tax expense .......... 1,385 1,439 1,885 1,400
-------- ------- -------- -------
Net income .................. $ 4,250 $ 4,525 $ 5,074 $ 4,927
======== ======= ======== =======
Net income per share
Basic .................... $ 0.61 $ 0.64 $ 0.72 $ 0.70
======== ======= ======== =======
Diluted .................. $ 0.61 $ 0.64 $ 0.72 $ 0.70
======== ======= ======== =======
1997:
Interest income ............. $19,340 $19,795 $ 20,482 $20,585
Net interest income ......... 11,366 11,407 11,795 11,783
Provision for losses ........ 540 590 540 830
Noninterest income .......... 1,390 2,126 1,651 2,224
Operating expenses .......... 6,833 6,904 7,149 7,643
Income before income
tax expense .............. 5,383 6,039 5,757 5,534
Income tax expense .......... 1,469 1,669 1,513 1,400
-------- ------- -------- -------
Net income .................. $ 3,914 $ 4,370 $ 4,244 $ 4,134
======== ======= ======== =======
Net income per share
Basic .................... $ 0.57 $ 0.62 $ 0.60 $ 0.59
======== ======= ======== =======
Diluted .................. $ 0.57 $ 0.62 $ 0.60 $ 0.59
======== ======= ======== =======
================================================================================
PAGE 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Harleysville National Corporation and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Summary of Operations
(Dollars in thousands, except per share Year Ended December 31,
data and average shares outstanding) -----------------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income And Expense
Interest income .................................... $ 87,597 $ 80,202 $ 73,718 $ 68,491 $ 58,381
Interest expense ................................... 37,809 33,851 30,876 28,784 21,101
---------- ---------- ---------- ---------- ----------
Net interest income ................................ 49,788 46,351 42,842 39,707 37,280
Provision for loan losses .......................... 2,140 2,500 2,082 2,172 2,665
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses. 47,648 43,851 40,760 37,535 34,615
Noninterest income ................................. 9,810 7,391 5,115 4,437 4,746
Noninterest expense ................................ 32,573 28,529 25,874 24,267 23,314
---------- ---------- ---------- ---------- ----------
Income before income tax expense ................... 24,885 22,713 20,001 17,705 16,047
Income tax expense ................................. 6,109 6,051 5,593 5,277 4,767
---------- ---------- ---------- ---------- ----------
Net income ......................................... $ 18,776 $ 16,662 $ 14,408 $ 12,428 $ 11,280
========== ========== ========== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------
Per Share
Basic earnings ..................................... $ 2.67 $ 2.38* $ 2.06* $ 1.79* $ 1.66*
Diluted earnings ................................... 2.67 2.38* 2.06* 1.78* 1.62*
Cash dividends paid ................................ 1.00 0.91* 0.80* 0.71* 0.55*
Basic average shares outstanding ................... 7,029,394 7,005,184* 6,993,535* 6,949,275* 6,789,795*
Diluted average shares outstanding ................. 7,033,612 7,012,279* 7,017,402* 6,983,099* 6,948,892*
*Adjusted for 5% stock dividends effective 6/30/97, 6/28/96 and 12/30/94.
- ----------------------------------------------------------------------------------------------------------------------
Average Balance Sheet
Loans .............................................. $ 781,459 $ 706,643 $ 652,157 $ 607,335 $ 540,030
Investments ........................................ 356,109 289,018 260,483 226,747 236,319
Other interest-earning assets ...................... 20,594 25,322 16,949 14,605 10,351
Total assets ....................................... 1,209,273 1,075,702 978,899 894,350 829,241
Deposits ........................................... 970,632 878,166 821,387 761,089 738,029
Other interest-bearing liabilities ................. 97,232 71,034 46,813 37,067 8,348
Shareholders' equity ............................... 116,480 103,807 91,687 81,788 74,234
- ----------------------------------------------------------------------------------------------------------------------
Balance Sheet At Year-End
Loans .............................................. $ 842,887 $ 739,453 $ 681,410 $ 628,738 $ 594,754
Investments ........................................ 415,332 303,306 275,021 242,995 216,816
Other earning assets ............................... 15,193 16,624 14,475 17,998 2,980
Total assets ....................................... 1,332,389 1,116,254 1,026,128 937,345 862,669
Deposits ........................................... 1,033,968 919,071 847,699 794,499 743,326
Other interest-bearing liabilities ................. 148,978 64,138 59,521 39,751 35,322
Shareholders' equity ............................... 122,811 109,792 97,631 86,362 74,182
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
PAGE 24
Forward-looking statements may prove inaccurate. We have made
forward-looking statements in this document, and in documents that we
incorporate by reference, that are subject to risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of Harleysville National Corporation and
its Subsidiaries. When we use words such as "believes," "expects,"
"anticipates," or similar expressions, we are making forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document and in the documents that we incorporate by
referenece, could affect the future financial results of Harleysville National
Corporation and its Subsidiaries and could cause those results to differ
materially from those expressed in our forward-looking statements contained or
incorporated by reference in this document. These factors include the following:
o operating, legal and regulatory risks;
o economic, political and competitive forces affecting our banking,
securities, asset management and credit services businesses; and
o the risk that our analyses of these risks and forces could be incorrect
and/or that the strategies developed to address them could be unsuccessful.
Introduction
The Corporation reported a strong earnings performance during 1998. This
performance was accomplished through an increase in assets, efforts to contain
overhead expenses, and an increased emphasis on the origination and sales of
residential mortgages. The results of 1998 also included an improvement in the
quality of the loan portfolio.
Net income amounted to $18,776,000 in 1998, compared to the $16,662,000
reported in 1997. Both basic and diluted earnings per share increased 12.2% to
$2.67, from $2.38 earned in 1997. Earnings were enhanced by the growth in
earning assets and an increase in income from the Investment Management and
Trust Services Division. Average earning assets increased $137,179,000, or
13.4%, from a year ago. During 1998, the Corporation instituted a capital
leverage program, which contributed to the increase in earning assets.
An improvement in asset quality in 1998 was reflected by a decline in loans
past due 90 days or more. At December 31, 1998, loans past due 90 days or more
were reduced by $1,429,000, to $824,000, compared to the December 31, 1997,
balance of $2,253,000. Nonperforming assets as a percentage of total loans and
net assets acquired in foreclosure at December 31, 1998, declined to 0.50%, from
0.56% at December 31, 1997.
Interest-Earning Assets and Interest-Bearing Liabilities
Average interest-earning assets totaled $1,158,162,000 in 1998, an increase
of $137,179,000, or 13.4%, compared to 1997. The increase occurred in the loan
and investment portfolios. During 1998, the average balance of the loan
portfolio increased $74,816,000, or 10.6%, while the average balance of
investment securities increased $67,091,000 or 23.2%. Average interest earning
assets were $929,589,000 in 1996.
Average interest-bearing liabilities totaled $917,590,000 in 1998, an
increase of $103,697,000, or 12.7%, compared to 1997. This increase was
attributable to an increase in savings, time, and other borrowings of
$49,232,000, $28,267,000, and $26,198,000, respectively. Average
interest-bearing liabilities were $745,741,000 in 1996.
PAGE 25
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.
Distribution Of Assets, Liabilities And Shareholders' Equity,
Interest Rates And Interest Differential
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
Average Average Average Average
(Dollars in thousands) Balance Rate Interest Balance Rate Interest
---------- ------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investment securities:
Taxable investments ................... $ 209,143 6.30% $ 13,167 $ 188,935 6.58% $ 12,433
Nontaxable investments (1) ............ 146,966 8.03 11,802 100,083 8.33 8,334
---------- ---- -------- ---------- ---- --------
Total investment securities ...... 356,109 7.01 24,969 289,018 7.19 20,767
Loans (1) (2) ................................ 781,459 8.47 66,204 706,643 8.68 61,326
Other rate-sensitive assets .................. 20,594 5.17 1,064 25,322 5.69 1,440
---------- ---- -------- ---------- ---- --------
Total earning assets ............. 1,158,162 7.96 92,237 1,020,983 8.18 83,533
Noninterest-earning assets ................... 51,111 -- -- 54,719 -- --
---------- ---- -------- ---------- ---- -------
Total assets ..................... $1,209,273 7.63% $ 92,237 $1,075,702 7.77% $83,533
========== ==== ======== ========== ==== =======
Liabilities And Shareholders' Equity
Deposits:
Demand ................................ $ 150,274 --% $ -- $ 135,307 --% $ --
Savings ............................... 430,546 2.69 11,596 381,314 2.66 10,149
Time .................................. 389,812 5.52 21,512 361,545 5.55 20,076
---------- ---- -------- ---------- ---- -------
Total ............................ 970,632 3.41 33,108 878,166 3.44 30,225
Borrowings and other
interest-bearing liabilities .............. 97,232 4.83 4,701 71,034 5.10 3,626
Other liabilities ............................ 24,929 -- -- 22,695 -- --
---------- ---- -------- ---------- ---- -------
Total liabilities ................ 1,092,793 3.46 37,809 971,895 3.48 33,851
Shareholders' equity ......................... 116,480 -- -- 103,807 -- --
---------- ---- -------- ---------- ---- -------
Total liabilities and
shareholders' equity .......... $1,209,273 3.13% $ 37,809 $1,075,702 3.15% $33,851
========== ==== ======== ========== ==== =======
Average effective rate on
interest-bearing liabilities .............. $ 917,590 4.12% $ 37,809 $ 813,893 4.16% $33,851
========== ==== ======== ========== ==== =======
=================================================================================================================================
Interest Income/Earning Assets ............... $1,158,162 7.96% $ 92,237 $1,020,983 8.18% $83,533
Interest Expense/Earning Assets .............. $1,158,162 3.26 $ 37,809 $1,020,983 3.31 $33.851
---- ----
Effective Interest Differential .............. 4.70% 4.87%
==== ====
</TABLE>
- ------
STUB
- ------
<TABLE>
<CAPTION>
--------------------------------------
1996
--------------------------------------
Average Average
(Dollars in thousands) Balance Rate Interest
--------- ------- --------
<S> <C> <C> <C>
Assets
Investment securities:
Taxable investments ...................... $ 186,213 6.50% $12,110
Nontaxable investments (1) ............... 74,270 8.33 6,185
--------- ---- -------
Total investment securities ......... 260,483 7.02 18,295
Loans (1) (2) ................................... 652,157 8.74 57,008
Other rate-sensitive assets ..................... 16,949 5.33 904
--------- ---- -------
Total earning assets ................ 929,589 8.20 76,207
Noninterest-earning assets ...................... 49,310 -- --
--------- ---- -------
Total assets ........................ $ 978,899 7.78% 76,207
========= ==== =======
Liabilities And Shareholders' Equity
Deposits:
Demand ................................... $ 122,459 --% $ --
Savings .................................. 361,890 2.66 9,616
Time ..................................... 337,038 5.59 18,854
--------- ---- -------
Total ............................... 821,387 3.47 28,470
Borrowings and other
interest-bearing liabilities ................. 46,813 5.14 2,406
Other liabilities ............................... 19,012 -- --
--------- ---- -------
Total liabilities ................... 887,212 3.48 30,876
Shareholders' equity ............................ 91,687 -- --
--------- ---- -------
Total liabilities and
shareholders' equity ............. $ 978,899 3.15% $30,876
========= ==== =======
Average effective rate on
interest-bearing liabilities ................. $ 745,741 4.14% $30,876
========= ==== =======
==========================================================================================
Interest Income/Earning Assets .................. $929,589 8.20% $76,207
Interest Expense/Earning Assets ................. $929,589 3.32 $30,876
----
Effective Interest Differential ................. 4.88%
====
</TABLE>
(1) The interest earned on nontaxable investment securities and loans 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.
- --------------------------------------------------------------------------------
PAGE 26
Investment Securities
Statement of Financial Accounting (SFAS) Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," 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 other comprehensive income. 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.
Total investment securities at December 31, 1998 of $415,332,000 grew
$112,026,000, or 36.9% over the December 31, 1997 balance of $303,306,000. This
increase included the $53,000,000 in securities purchased as part of the capital
leverage program. The increase in deposit balances and borrowings funded the
growth in securities during this period. Investment securities held to maturity
decreased $20,250,000 during 1998, as a result of maturities and calls.
Investment securities available for sale increased $132,276,000. The increase in
the investments available for sale were funded by proceeds from the maturities
and calls in the held to maturity portfolio and through the increase in deposits
and borrowings during 1998.
Loans
Total loans grew $101,581,000, from $743,608,000 at December 31, 1997 to
$845,189,000 at December 31, 1998. The banks experienced growth in all loan
categories. During 1997, real estate, consumer, lease financing and commercial
loans grew $60,316,000, $11,479,000, $16,446,000, and 13,340,000, respectively.
Residential mortgages sold during 1998 were $34,313,000 compared to $11,514,000
in 1997.
At December 31, 1998, 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.
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.
Nonperforming assets (nonaccruing loans, net assets in foreclosure and
troubled debt restructured loans) were 0.50% of total loans and net assets
acquired in foreclosure at December 31, 1998, compared to 0.56% at December 31,
1997, and 0.83% at December 31, 1996. The ratio of the allowance to
nonperforming assets was 308.5% at December 31, 1998, compared to 285.8% at
December 31, 1997, and 188.8% at December 31, 1996.
Nonaccruing loans of $2,950,000 at December 31, 1998, increased $329,000 from
the December 31, 1997, balance of $2,621,000. This increase was associated with
real estate related loans. The December 31, 1997, balance of nonaccrual loans
was $362,000 less than the December 31, 1996 balance.
Net assets in foreclosure totaled $664,000 as of December 31, 1998, an
increase of $211,000, from the December 31, 1997, balance. During 1998,
sales of foreclosed properties totaled $966,000, transfers from loans to
assets in foreclosure were $1,242,000 and write-downs of assets in foreclosure
equaled $65,000. 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, less selling costs.
Loans past due 90 days or more and still accruing interest are loans that are
generally well secured and are in the process of collection. As of December 31,
1998, loans past due 90 days or more and still accruing interest were $824,000,
compared to $2,253,000 as of December 31, 1997. This decrease was a result of a
reduction in real estate loans past due 90 days at December 31, 1998.
As of December 31, 1998, there were three unrelated commercial borrowers with
troubled debt restructured loans totaling $583,000. These customers were
complying with the restructured terms as of December 31, 1998.
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 allowance for loan losses grew
8.6% from $11,925,000 at December 31, 1997 to $12,950,000 at December 31, 1998.
Year Ended December 31,
-------------------------------------
1998 1997 1996
---------- ---------- ----------
Nonperforming assets ................. $4,197,000 $4,172,000 $5,672,000
Allowance for loan losses to
nonperforming assests ............ 308.5% 285.8% 188.8%
Nonperforming assets to total
loans and net assets acquired
in foreclosure ................... .50% .56% .83%
Allowance for loan losses
to total loans ................... 1.54% 1.61% 1.57%
Unallocated allowance for loan
losses to total allowance for
loan losses ...................... 58.5% 50.3% 46.9%
Deposits and Borrowings and Other Interest-Bearing Liabilities
The primary funding sources of the Corporation is deposits and other
borrowings. Total deposits of $1,033,968,000 at December 31, 1998, increased
$114,897,000, or 12.5% from the $919,071,000 balance at December 31, 1997. All
deposit categories increased during this period. Other borrowings of
$148,978,000 at December 31, 1998, grew $84,840,000, or 132.3% compared to the
December 31, 1997, balance. This increase included $53,000,000 in FHLB
borrowings related to the capital leverage program. Borrowings and other
interest-bearing liabilities include federal funds purchased, FHLB borrowings,
securities sold under agreements to repurchase and U.S. Treasury notes.
PAGE 27
INCOME STATEMENT ANALYSIS
Results of Operations
Consolidated net income for 1998 was $18,776,000, an increase of $2,114,000,
or 12.7%, over 1997. On a per share basis, basic and diluted earnings were $2.67
in 1998, compared to basic and diluted earnings per share of $2.38 in 1997.
Consolidated net income increased in 1997 by $2,254,000, a 15.6% increase over
1996.
Return on average assets in 1998 of 1.55% was the same as 1997. The 1996
return on average assets was 1.47%. The return on average shareholders' equity
was 16.12% for 1998, compared to 16.05% for 1997 and 15.71% in 1996.
Net income is affected by five major elements: net interest income, or the
difference between interest income earned on loans and investments and interest
expense paid on deposits and borrowed funds; the provision for loan losses, or
the amount added to the allowance for loan losses to provide reserves for 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 1998 increased by $3,437,000, or 7.4%, to
$49,788,000. Net interest income was $46,351,000 during 1997, which was 8.2%
above the $42,842,000 reported in 1996.
Interest income at December 31, 1998, of $87,597,000 grew $7,395,000, or 9.2%
from the $80,202,000 balance at December 31, 1997. The increase in interest
income is the result of the growth in both average loans and investment
securities during this period. This growth in interest income was partially
offset by the $3,958,000, or 11.7% increase in interest expense at December 31,
1998, compared to December 31, 1997. This rise in interest expense was the
result of the increase in both average interest-bearing deposits and borrowings
during this period.
Net Interest Margin
The 1998 net interest margin of 4.70% was lower than both the net interest
margins for 1997 and 1996 of 4.87% and 4.88%, respectively. The lower net
interest margin experienced in 1998 is related to the high cost of attracting
new deposits and the impact of the capital leverage program. During the falling
interest rate environment experienced during 1998, the Banks saw the
tax-equivalent yield on total interest-earning assets decrease 22 basis points
from 8.18% in 1997 to 7.96% in 1998. This decrease was not matched by a
reduction in the cost of interest-bearing liabilities. The 1998 cost of
interest-bearing liabilities only decreased 4 basis points from 4.16% in 1997 to
4.12% in 1998.
The institution of a capital leverage program during 1998 also contributed to
the decrease in the net interest margin. To more fully leverage its capital, the
Corporation entered into $53,000,000 of structured transactions in which the
Bank borrows funds from the FHLB and invests these borrowed funds into
securities that are priced to yield a spread over the FHLB borrowing rate. The
actual leverage program yield spread earned during 1998 was 1.60%. Since the
current competitive interest rate environment will continue to place downward
pressure on the net interest margin, the Banks expect to increase net interest
income through the continued growth in market share of loans and deposits.
The 1996 tax-equivalent yield on total interest-earning assets, cost of
interest-bearing liabilities and net interest margin were 8.20%, 4.14% and
4.88%, respectively.
Interest Rate Sensitivity Analysis
The Banks actively manages its interest rate sensitivity positions. 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 approved by the Banks Boards of Directors, is
responsible for managing the 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,
borrowings from the FHLB and their offering of loan and deposit terms. The
nature of the Banks current operations is such that it is not subject to foreign
currency exchange or commodity price risk. The Banks do not own trading assets
and they do not have any hedging transactions in place such as interest rate
swaps, caps or floors.
The Banks utilize three principal reports to measure interest rate risk: gap
analysis reports, asset/liability simulation reports and net interest margin
reports. The table on the next page shows the interest rate sensitivity gap
position as of December 31, 1998. The table presents data at a single point of
time and includes management assumptions estimating the prepayment rate and the
interest rate environment prevailing at December 31, 1998. Money Market,
Interest-bearing Checking Accounts and Savings 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. On a cumulative
basis over the next 12 months, the Banks are in a negative gap position of
(4.14)% of earning assets at December 31, 1998. This gap position is within the
guidelines set by the Banks' Asset/Liability policy.
PAGE 28
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------
less than less than
1 year 3 years
0 to 90 91 to 365 greater than greater than Over 5
Dollars in thousands) days days 3 years 5 years years
--------- ---------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C>
Assets
Other rate-sensitive assets ..................... $ 15,053 $ 40 $ 100 $ -- $ --
Loans ........................................... 201,948 66,798 212,224 131,675 230,242
Investment securities ........................... 20,224 37,059 119,862 44,183 185,697
-------- -------- -------- -------- --------
Total rate-sensitive assets ..................... 237,225 103,897 332,186 175,858 415,939
-------- -------- -------- -------- --------
Liabilities
Time deposits ................................... 101,589 138,674 112,740 43,034 25
Money market savings funds ...................... 5,459 21,515 24,942 18,599 135,141
Interest-bearing checking accounts .............. 8,248 14,494 17,265 13,308 75,722
Savings accounts ................................ 6,513 11,928 15,352 19,149 67,214
U.S. Treasury demand notes ...................... 1,320 -- -- -- --
Other borrowings ................................ 83,158 1,000 20,500 31,000 12,000
-------- -------- -------- -------- --------
Total rate-sensitive liabilities ................ $206,287 $187,611 $190,799 $125,090 $290,102
-------- -------- -------- -------- --------
Incremental gap ................................. $ 30,938 $(83,714) $141,387 $ 50,768 $125,837
======== ======== ======== ======== ========
Cumulative gap .................................. $ 30,938 $(52,776) $ 88,611 $139,379 $265,216
======== ======== ======== ======== ========
% of earning assets ............................. 2.43% (4.14)% 6.96% 10.95% 20.83%
======== ======== ======== ======== ========
</TABLE>
Management also simulates possible economic conditions and interest rate
scenarios in order to quantify the impact on net interest income. The effect
that changing interest rates has on the Banks' net interest income is simulated
by increasing and decreasing interest rates. This simulation is known as rate
shocks. The report below forecasts changes in the banks market value of equity
under alternative interest rate environments. The market value of equity is
defined as the net present value of the Banks existing assets and liabilities.
The results of the December 31, 1998 rate shock simulations show the Banks are
within all guidelines set by the Banks' Asset/Liability policy.
<TABLE>
<CAPTION>
Asset/Liability
Change in Policy
Market Value Market Value Percentage Approved
of Equity of Equity Change Percent Change
------------ ------------ ---------- ---------------
<S> <C> <C> <C> <C>
+200 Basis Points .................................. 219,679 (32,169) -12.77% +/- 20%
+150 Basis Points .................................. 228,154 (23,694) -9.41% +/- 20%
+100 Basis Points .................................. 236,437 (15,411) -6.12% +/- 20%
+50 Basis Points ................................... 244,555 (7,293) -2.90% +/- 20%
Flat Rate .......................................... 251,848 -- 0.00% +/- 20%
- -50 Basis Points ................................... 255,789 3,941 1.56% +/- 20%
- -100 Basis Points .................................. 255,475 3,627 1.44% +/- 20%
- -150 Basis Points .................................. 253,049 1,201 0.48% +/- 20%
- -200 Basis Points .................................. 249,514 (2,334) -0.93% +/- 20%
</TABLE>
In the event the Bank should experience a mismatch in their desired GAP
ranges or an excessive decline in its market value of equity resulting from
changes in interest rate, it has a number of options which it could utilize to
remedy such mismatch. The Bank could restructure its investment portfolio
through sale or purchase of securities with more favorable repricing attributes.
It could also emphasize loan products with appropriate maturities or repricing
attributes, or it could attract deposits or obtain borrowings with desired
maturities.
PAGE 29
Provision for Loan Losses
The provision for loan losses 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 1998 was $2,140,000, a decrease of $360,000 or 14.4%,
compared to the 1997 provision of $2,500,000. The decrease in the provision
during 1998 is related to the improvement in the ratio of the allowance for loan
losses to nonperforming assets ratio. The allowance for loan losses to
noperforming assets ratio for December 31, 1998, 1997 and 1996 was 308.5%,
285.8%, and 188.8%, respectively. Total loans charged off decreased 18.1% from
$1,726,000 in 1997 to $1,413,000 in 1998. Recoveries of $298,000 during 1998,
decreased from the 1997 recoveries of $441,000. The charged off loans and
recoveries for 1996 were $1,451,000 and $188,000, respectively.
Other Operating Income
Other operating income for 1998 of $9,810,000 increased $2,419,000, or 32.7%,
compared to the 1997 level of $7,391,000. This increase was primarily due to the
$1,661,000 increase in other income. Also contributing to this increase was a
$608,000 rise in trust income and a $364,000 growth in service charges. Security
gains decreased $214,000 in 1998, compared to 1997. The 1997 other operating
income was 44.5% higher than 1996, primarily due to an increase in gains
recognized on the sale of investment securities available for sale.
Income from service charges on deposit accounts of $3,205,000 in 1998
increased $364,000, or 12.8% from the 1997 income from service charges on
deposit accounts of $2,841,000. The increase in service charges during 1998 is
attributed to the 12.4% rise in average fee earning deposits, and management's
continued focus on growing noninterest income. The 1997 service charges grew
9.8% over 1996 service charges.
The Corporation recorded a $1,543,000 net security gain in 1998, compared to
a net security gain of $1,757,000 in 1997. The majority of the security gains in
1998 and 1997 were the result of the sale of equity securities held at HNC
Financial Company. From time to time, the Corporation sells investment
securities available for sale to fund the purchase of other securities in an
effort to enhance the overall return on the portfolio. The Corporation
recognized $39,000 of net securities losses in 1996.
The 1998 income from the Investment Management and Trust Services Division of
$2,117,000 increased $608,000, or 40.3%, compared to the $1,509,000 recorded in
1997. This increase was the result of both an increase in the book value of
trust assets of 22.1% from December 31, 1997 to December 31, 1998 and the
Corporation's continuing emphasis on marketing the Investment Management and
Trust Services Division's products and services. The 1996 Investment Management
and Trust Services Division income was $1,293,000.
Other income increased $1,661,000 during 1998, from $1,284,000 in 1997 to
$2,945,000 in 1998. This increase was primarily due to the gain on the sale of
residential mortgages of $716,000 in 1998, compared to a loss on the sale of
residential mortgages of $160,000 in 1997. During the last half of 1997, the
Banks entered into the strategy of increasing the booking and selling of
residential mortgages. Residential mortgages sold during 1998 were $34,313,000
compared to $11,514,000 in 1997. All loans sold in 1998 were originated with the
intention to be sold. The majority of loans sold in 1997 were loans in the Banks
residential mortgage portfolio. The Banks used the funds generated from the 1997
sale of residential mortgages to purchase residential mortgages that currently
earn a higher rate of return and reduce the overall interest rate risk of the
residential mortgage portfolio. The Banks continuously researches different
strategies it can use to enhance both the interest rate earned on loans, and to
reduce the interest rate risk of the loan portfolios. The increase in other
income is also due to higher automated teller machine fees and debit card fees
earned by the Banks. Other income in 1996 was $1,274,000.
Other Operating Expenses
Other operating expenses rose to $32,573,000 for 1998, a 14.2% increase over
the $28,529,000 for 1997. The 1997 amount was 10.3% above the $25,874,000 for
1996. The rise in operating expenses in 1998 was primarily due to higher
expenses related to four new branches opened after April 30, 1997, increases in
equipment expenses and other expenses related to the overall growth in the
Banks.
Employee salaries and benefits increased $2,237,000, or 14.5%, from
$15,479,000 in 1997 to $17,716,000 in 1998. The salary and benefits increase
directly related to the staffing of the four new branches was $415,000, or 18.6%
of the total salary and benefits increase. Net of the salary and benefit
expenses related to the new branches, the increase in 1998 was 11.8%. The
remaining increase in salaries and benefits reflects cost-of-living increases,
merit increases and additional staff necessitated by current and planned future
growth. The 1997 salaries and benefits expense increased 7.5% over the 1996
salary and benefits expense of $14,398,000. The 1997 expenses included a
reduction of $496,000 in profit sharing expenses, compared to 1996, related to
the modification of the Banks' profit-sharing plan into a 401(K) plan during
1996.
Net occupancy costs increased by $160,000, or 8.1%, in 1998, compared with a
$107,000, or 5.7%, increase in 1997. The four new branches were responsible for
$138,000 of the increase in 1998. Equipment expenses increased by $632,000, or
22.4%, during 1998, and $734,000, or 35.2%, in 1997. The four new branches were
responsible for $78,000 of the increase in equipment expenses during 1998. The
remainder of this rise is due to equipment depreciation, rental and maintenance
associated with planned increased data processing capabilities used to manage
the rise in volume related to the growth of the Corporation.
Other expenses increased $1,015,000, or 12.3%, from $8,253,000 in 1997 to
$9,268,000 in 1998. The 1997 other expenses increased 9.7%, compared to 1996.
These increases are the result of expenses associated with the overall growth of
the Banks.
PAGE 30
Income Taxes
The Corporation accounts for income taxes under the liability method
specified by SFAS No. 109, "Accounting for Income Taxes." Under 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 effective income tax rates of 24.5% for 1998, 26.6% for 1997 and 28.0%
for 1996 were less than the applicable federal income tax rate of 35.0%,
primarily 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 1998 was $122,811,000, an increase of $13,019,000,
or 11.9%, over the end of 1997. 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 position and liquidity position
are strong and that its capital position is adequate to support its operations.
Except as previously discussed, 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 5.0% for primary capital and
6.0% for total capital. The primary capital ratio was 9.73% at December 31,
1998, compared with 10.65% at December 31, 1997. 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-weighting 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, 1998, the Corporation's Tier 1 risk-adjusted capital ratio was
12.50%, and the total risk-adjusted capital ratio was 13.84%, 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 1998.
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 8.98% and 9.36%
at December 31, 1998 and 1997, respectively.
Under FDIC 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. As illustrated in the chart below,
the Corporation is above the regulatory minimum guidelines and meet the criteria
to be categorized as a "well capitalized" institution at December 31, 1998.
Well Adequately
Corporation Capitalized Capitalized
---------------------------------------
Leverage ratio ................... 8.98% 5.00% 4.00%
Tier 1 capital ratio ............. 12.50% 6.00% 4.00%
Total capital ratio .............. 13.84% 10.00% 8.00%
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 $15,763,000 during 1998, and
investment securities available for sale averaged $319,474,000 during 1998, 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, Citizens and Security are
members. Unused lines of credit at the FHLB were $105,935,000, as of December
31, 1998.
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.
PAGE 31
YEAR 2000
The following section contains forward-looking statements which involve risks
and uncertainties. The actual impact on the Corporation of the Year 2000 issue
could materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming century date change. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000
(Y2K). The Year 2000 issue affects virtually all companies and organizations.
Corporation's State of Readiness
The Corporation began addressing the Y2K issue in August 1997. Management has
initiated an enterprise-wide program to prepare the Corporation's computer
systems and applications for the Year 2000. The Corporation developed a Y2K plan
to include assessing the impact of the Y2K issue on the Corporation, renovating
systems to alleviate Y2K problems, validating the new systems and implementing
them. The Corporation focused on information technology and non-information
technology systems. A non-information system could be, for example, a
microcontroller in an elevator, which may be subject to Y2K problems. The
Corporation also reviewed Y2K issues related to material third parties.
The assessment phase of the Y2K plan included assigning accountabilities
throughout the Corporation. An inventory was completed of mainframe and PC based
applications, third-party relationships and non-information technology systems.
The final step in the assessment phase was to identify non-compliant Y2K
systems. The assessment phase was completed in November 1997.
The Corporation began the renovation phase of the Y2K plan in January 1998.
The renovation phase included developing action plans to correct non-compliant
Y2K systems. The action plans included either enhancing the current system to
resolve the Y2K problem or purchasing a new system that is Y2K compliant. The
renovation plan was completed in May 1998. The Corporation developed a
remediation plan for the non-compliant systems. As of December 31, 1998, 88% of
the remediation phase has been completed.
The next phase of the plan is to validate the Y2K compliance of all of the
systems. This phase includes developing written test plans and completing the
testing of the systems. The validation phase is scheduled to be completed by
March 31, 1999. As of December 31, 1998, 74% of the computer applications,
including all mission-critical systems, have been validated to be Y2K compliant.
The Corporation reviewed the Y2K issues related to material third parties and
completed an analysis on the loan portfolio. The Corporation's third parties
include its vendors and commercial customers. The material third party
relationships are primarily the commercial borrowers. These borrowers may pose a
credit risk to the Corporation if they are not Y2K compliant. We have contacted
the material commercial customers and their responses were evaluated. We have
also performed an analysis on the impact of Y2K issues on the remaining loan
portfolio. The Corporation has allocated a portion of the allowance for loan
losses as a result of the Y2K issues.
Because most computer systems are, by their very nature, interdependent, it
is possible that noncompliant third-party computers could impact the
Corporation's computer systems. The Corporation could be adversely affected
by the Y2K problem if it or unrelated parties fail to successfully address
the problem. The Corporation has taken steps to communicate with the unrelated
parties with whom it deals to coordinate Year 2000 compliance. Additionally, we
are dependent on external suppliers, such as, wire transfer systems, telephone
systems, electric companies, and other utility companies for continuation of
service.
Cost of Year 2000
The Corporation has prepared a Y2K budget and has tracked expenses related to
the Y2K issue. As of December 31, 1998, the Corporation has expensed $117,000
and capitalized fixed assets of $54,000 related to the Y2K issue. The
Corporation has estimated the future Y2K expenditures to be $60,000 and future
capitalized fixed assets to be $69,000. The Y2K project is being funded through
operating cash flows.
The cost of the projects and the date on which the Corporation plans to
complete both Year 2000 modifications and systems conversions are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
Risk of Year 2000
At present, management believes its progress in remedying the proprietary
programs and installing the Y2K compliant upgrades to the third-party vendor
mainframe and PC based computer applications is on plan. The Y2K computer
problem creates risk for the Corporation from unforeseen problems in its own
computer systems and from third-party vendors who provide the majority of
mainframe and PC based computer applications. Failure of third-party systems
relative to the Y2K issue could have a material impact on the Corporation's
ability to conduct business and on its financial position and results of
operation.
Contingency Plans
A contingency plan is being developed to handle the most reasonably likely
Y2K worst-case scenario should it occur. The contingency plan will involve
obtaining back-up service providers, working up contingency plans and assessing
the potential adverse risks to the Corporation. The contingency plan is
scheduled to be completed by March 31, 1999. The Corporation has also utilized
an independent consulting firm to verify and validate the Corporation's Y2K
plans.
OTHER ITEMS
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.
================================================================================
PAGE 32
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, Security National Bank, a national banking association
headquartered at One Security Plaza, Pottstown, PA 19464 and of HNC Financial
Company, a Delaware Corporation headquartered at 300 Delaware Avenue, Suite
1704, Wilmington, Delaware 19801
PAGE 29
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 7, 1999, (except for Note 2, as to
which the date is January 20, 1999) accompanying the consolidated financial
statements incorporated by reference or included in the 1998 Annual Report of
Harleysville National Corporation on Form 10-K for the year ended December 31,
1998. 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) and on Forms S-8 (Registration No. 33-69784 and
Registration No. 33-17813).
GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 25, 1999
PAGE 30
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