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, 1999.
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
------ ------
Commission file number 0-15237
-------
HARLEYSVILLE NATIONAL CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2210237
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
483 Main Street, Harleysville, Pennsylvania 19438
------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 256-8851
Securities registered pursuant to Section 12(b) of the Act: N/A
Name of each exchange
Title of each class on which registered
. N/A N/A.
---------------- ------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
-----------------------------
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No.
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
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.
$206,063,156 as of February 29, 2000
Indicate the number of shares outstanding of each class of the registrant's
classes of common stock, as of the latest practicable date.
7,915,552 shares of Common Stock, $1 par value per share, were outstanding as
of February 29, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1999 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 11, 2000 are incorporated by
reference into Part III of this report.
PAGE 2
<TABLE>
<CAPTION>
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-K REPORT
<S> <C> <C>
PAGE
-------------------------------------------------------------------------------------
I. . . . . . PART I.
Item 1. Business 4
Item 2. Properties 15
Item 3. Legal Proceedings 17
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.
- -------
History and 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), established in 1909, a wholly owned subsidiary of the
Corporation. On February 13, 1991, the Corporation acquired all of the
outstanding common stock of Citizens National Bank (CNB), established in 1903.
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), established in 1988. 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. On January 20, 1999, the Corporation acquired
all of the outstanding stock of Northern Lehigh Bancorp, Inc., parent company of
Citizens National Bank of Slatington. 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.
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 actual results to differ
materially from those expressed in the 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, 1999, the Corporation had total assets of
$1,635,679,000, total shareholders' equity of $129,660,000 and total deposits of
$1,231,265,000.
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
personal trust services. Their deposits are insured by the Federal Deposit
Insurance Corporation to the extent provided by law. The Banks have 35 branch
offices located in Montgomery, Bucks, Carbon, Wayne, Chester, Lehigh,
Northampton and Schuylkill counties, Pennsylvania, 22 of which are owned by the
Banks and 13 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
PAGE 4
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
Corporation 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, 1999, the Corporation and the Banks employed
approximately 517 full-time equivalent employees. The Corporation provides a
variety of employment benefits and considers its relationships with its
employees to be satisfactory.
Competition
- -----------
The Banks compete actively with other eastern Pennsylvania financial
institutions, many larger than the Banks, as well as with financial and
non-financial institutions headquartered elsewhere. The Banks are generally
competitive with all competing institutions in their service 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, 1999, HNB's legal lending limit to a single customer
was $14,426,000 and CNB's and SNB's legal lending limits to a single customer
were $3,246,000 and $1,441,000, 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
- ------------------------------------------------
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, the Financial Services Modernization Act. The
Financial Services Modernization Act repeals the two affiliation provisions of
the Glass-Steagall Act:
- - Section 20, which restricted the affiliation of Federal Reserve Member
Banks with firms "engaged principally" in specified securities activities; and
- - Section 32, which restricts officer, director or employee interlocks
between a member bank and any company or person "primarily engaged" in specified
securities activities.
In addition, the Financial Services Modernization Act also contains provisions
that expressly preempt any state law insurance. The general effect of the law
is to establish a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms and other financial
service providers by revising and expanding the Bank Holding Company Act
framework to permit a holding company system to engage in a full range of
financial activities through a new entity known as Financial Holding Company.
"Financial activities" is broadly defined to include not only banking, insurance
and securities activities, but also merchant banking and additional activities
that the Federal Reserve, in consultation with the Secretary of Treasury,
determines to be financial in nature, incidental to such financial activities,
or complementary activities that do not pose a substantial risk to the safety
and soundness of depository institutions or the financial system generally.
PAGE 5
Generally, the Financial Services Modernization Act:
- - Repeals historical restrictions on, and eliminates many federal and state
law barriers to, affiliations among banks, securities firms, insurance
companies, and other financial service providers;
- - Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
- - Broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies, and their financial subsidiaries;
- - Provides an enhanced framework for protecting the privacy of consumer
information;
- - Adopts a number of provisions related to the capitalization, membership,
corporate governance and the other measures designed to modernize the Federal
Home Loan Bank system;
- - Modifies the laws governing the implementation of the Community
Reinvestment Act; and
- - Addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
In order for the Corporation to take advantage of the ability to affiliate
with other financial services providers, the Corporation must become a
"Financial Holding Company" as permitted under an amendment to the Bank Holding
Company Act. To become a Financial Holding Company, the Corporation would file
a declaration with the Federal Reserve, electing to engage in activities
permissible for Financial Holding Companies and certifying that it is eligible
to do so because all of its insured depository institution subsidiaries are
well-capitalized and well-managed. In addition, the Federal Reserve must
determine that each insured depository institution subsidiary of the Corporation
has at least a satisfactory CRA rating. The Corporation currently meets the
requirements to make an election to become a Financial Holding Company. The
Corporation's management has not determined at this time whether it will seek an
election to become a Financial Holding Company. The Corporation is examining
its strategic business plan to determine whether, based on market conditions,
the relative financial conditions of the Corporation and its subsidiaries,
regulatory requirements, general economic conditions, and other factors, the
Corporation desires to utilize any of its expanded powers provided in the
Financial Service Modernization Act.
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries.
A national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company. Financial activities include all activities
permitted under new sections of the Bank Holding Company Act or permitted by
regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized" and
"well-managed." The total assets of all financial subsidiaries may not exceed
the lesser of 45% of a bank's total assets or $50 billion. A national bank must
exclude from its assets and equity all equity investments, including retained
earnings, in a financial subsidiary. The assets of the subsidiary may not be
consolidated with risk and protect the bank from such risks and potential
liabilities.
The Corporation and the Banks do not believe that the Financial Services
Modernization Act will have a material adverse effect on our operations in the
near-term. However, to the extent that it permits banks, securities firms, and
insurance companies to affiliate, the financial services industry may experience
further consolidation. The Financial Services Modernization Act is intended to
grant to community banks certain powers as a matter of right that larger
institutions have accumulated on an ad hoc basis. Nevertheless, this act may
have the result of increasing the amount of competition that the company and the
bank face from larger institutions and other types of companies offering
financial products, many of which may have substantially more financial
resources than the company bank.
PAGE 6
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
- --------------------
Management is not aware of any other current specific recommendations by
regulatory authorities or proposed legislation which, if they were implemented,
would have a material adverse effect upon the liquidity, capital resources, or
results of operations, although the general cost of compliance with numerous and
multiple federal and state laws and regulations does have, and in the future may
have, a negative impact on the Corporation's results of operations.
Effects of Inflation
- ----------------------
Inflation has some impact on the Corporation's and the Banks' operating
costs. Unlike many industrial companies, however, substantially all of the
Banks' assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on the Corporation's and the Banks'
performance than the general level of inflation. Over short periods of time,
interest rates may not necessarily move in the same direction or in the same
magnitude as prices of goods and services.
Effect of Government Monetary Policies
- ------------------------------------------
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
PAGE 7
effect of such policies and regulations upon the future business and earnings of
the Corporation and the Banks cannot be predicted.
Environmental Regulations
- --------------------------
There are several federal and state statutes which regulate the obligations
and liabilities of financial institutions pertaining to environmental issues.
In addition to the potential for attachment of liability resulting from its own
actions, a bank may be held liable under certain circumstances for the actions
of its borrowers, or third parties, when such actions result in environmental
problems on properties that collateralize loans held by the bank. Further, the
liability has the potential to far exceed the original amount of 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 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
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, 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 like "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 a 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.
PAGE 8
The Federal Deposit Insurance Corporation Improvement Act of 1991 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
</TABLE>
*3.0 for those banks having the highest available regulatory rating.
In the event an institution's capital deteriorates to the undercapitalized
category or below, FDICIA prescribes an increasing amount of regulatory
intervention, including: the institution of a capital restoration plan and a
guarantee of the plan by a parent institution; and 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
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.
PAGE 9
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, a 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
- ----------
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 change in the century. 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.
The Corporation did not experience problems associated with the Y2K issue
and has not found Y2K problems with its related third parties, as of February
29, 2000. The Corporation's third parties include its vendors and commercial
customers. The Corporation continues to monitor its own computer systems for
Y2K problems and will continue to investigate any potential problems with its
related third parties.
The Corporation prepared a Y2K budget and has tracked expenses related to
the Y2K issue. As of December 31, 1999, the Corporation expensed $381,000 and
capitalized fixed assets of $116,000 during the last three years to address the
Y2K issue.
Statistical Data
- -----------------
The information for this item is listed below and is incorporated by
reference to pages 25 through 32 of the Corporation's Annual Report to
Shareholders for the year ended December 31, 1999 which pages are included at
Exhibit (13) to this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO
The following shows the carrying value of the Corporation's investment
securities held to maturity:
(Dollars in Thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
U. S. Treasury notes. . . . . . . . . . . . . . . $ 1,000 $ - $ -
Obligations of other U.S. Government agencies
and corporations . . . . . . . . . . . . . . - 6,816 21,707
Obligations of states and political subdivisions. 21,450 17,093 19,609
Mortgage-backed securities. . . . . . . . . . . . 568 1,039 2,048
Other securities. . . . . . . . . . . . . . . . . 1,253 16,572 5,323
------- ------- -------
Total . . . . . . . . . . . . . . . . . . . . $24,271 $41,520 $48,687
======= ======= =======
</TABLE>
PAGE 10
The following shows the carrying value of the Corporation's investment
securities available for sale:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U. S. Treasury notes. . . . . . . . . . . . . . . $ 46,553 $ 44,168 $ 46,614
Obligations of other U.S. Government agencies
And corporations . . . . . . . . . . . . . . 32,915 45,668 48,615
Obligations of states and political subdivisions. 149,213 164,226 94,488
Mortgage-backed securities. . . . . . . . . . . . 154,941 88,252 57,299
Other securities. . . . . . . . . . . . . . . . . 67,337 48,124 15,939
-------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . $450,959 $390,438 $262,955
======== ======== ========
</TABLE>
There are no significant concentrations of securities (greater than 10% of
shareholders' equity) in any individual security issuer. The maturity analysis
of investment securities held to maturity, Including the weighted average yield
for each category as of December 31, 1999, is as follows:
<TABLE>
<CAPTION>
Under 1 - 5 5 - 10 Over
1 year years years 10 years Total
- ---------------------------------- -------------- -------- ---------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury notes:
Carrying value . . . . . . $ 500 $ 500 $ - $ - $ 1,000
Weighted average yield.. . 6.24% 6.31% - % - % 6.28%
Weighted average maturity. 1 yr 0 mos
Obligations of states and
Political subdivisions:
Carrying value . . . . . . 771 596 1,915 18,168 21,450
Weighted average yield . . 9.03% 8.55% 9.46% 8.57% 8.66%
Weighted average maturity. 10 yrs 7 mos
Mortgage-backed securities:
Carrying value . . . . . . - - 568 - 568
Weighted average yield . . - % - % 6.63% - % 6.63%
Weighted average maturity. 2 yrs 0 mos
Other securities:
Carrying value . . . . . . 250 1,003 - - 1,253
Weighted average yield . . 9.07% 7.09% - % - % 7.49%
Weighted average maturity. 2 yrs 5 mos
Total:
Carrying value . . . . . . $ 1,521 $ 2,099 $ 2,483 $18,168 $24,271
Weighted average yield . . 8.12% 6.89% 8.82% 8.57% 8.45%
Weighted average maturity. 9 yrs 7 mos
</TABLE>
The maturity analysis of securities available for sale, including the weighted
average yield for Each category, as of December 31, 1999 is as follows:
PAGE 11
<TABLE>
<CAPTION>
Under 1 - 5 5 - 10 Over
(Dollars in thousands) 1 year years Years 10 years Total
------------ ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
U.S. Treasury notes:
Amortized cost $17,526 $28,931 $ - $ - $ 46,457
Weighted average yield 5.89% 6.15% - % - % 6.05%
Weighted average maturity. 1 yr 8 mos
Obligations of other U.S.
Government agencies and
corporations:
Amortized cost - - 33,745 - 33,745
Weighted average yield - % - % 6.76% - % 6.76%
Weighted average maturity. 7 yrs 9 mos
Obligations of states and
political subdivisions:
Amortized cost 3,200 3,121 9,144 142,067 157,532
Weighted average yield 6.03% 8.04% 8.17% 7.72% 7.72%
Weighted average maturity. 14 yrs 0 mos
Mortgage-backed securities:
Amortized cost - - 15,325 143,343 158,668
Weighted average yield - % - % 6.43% 6.58% 6.56%
Weighted average maturity. 6 yrs 8 mos
Other securities:
Amortized cost - 5,828 26,356 37,385 69,569
Weighted average yield - % 6.44% 6.35% 6.90% 6.65%
Weighted average maturity. 12 yrs 4 mos
Total:
Amortized Cost $20,726 $37,880 $84,570 $322,795 $465,971
Weighted average yield 5.91% 6.35% 6.72% 7.12% 6.92%
Weighted average maturity. 9 yrs 7 mos
</TABLE>
<TABLE>
<CAPTION>
LOANS
The following table shows the composition of the Banks' Loans:
December 31,
-------------
(Dollars in thousands) 1999 1998 1997 1996 1995
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real estate. . . . . . . . $ 337,260 $318,048 $259,801 $252,632 $241,048
Commercial and industrial. 280,136 245,648 233,187 199,970 194,152
Consumer loans . . . . . . 348,865 270,445 254,399 243,006 206,070
Lease financing. . . . . . 94,909 68,753 55,413 49,623 43,942
---------- -------- -------- -------- --------
Total loans. . . . $ 1,061,170 $902,894 $802,800 $745,231 $685,212
========== ======== ======== ======== ========
</TABLE>
The following table details maturities and interest sensitivity of real
estate, commercial and industrial, consumer loans and lease financing at
December 31, 1999:
<TABLE>
<CAPTION>
Within 1 - 5 Over
<S> <C> <C> <C> <C>
(Dollars in thousands). . . . . 1 year years 5 years Total
------ ----- ------- --------
Real estate $ 70,037 $139,309 $127,914 $ 337,260
Commercial and industrial 152,848 83,655 43,633 280,136
Consumer 84,690 195,983 68,192 348,865
Lease financing 31,380 63,529 - 94,909
-------- -------- -------- ----------
Total $338,955 $482,476 $239,739 $1,061,170
======== ======== ======== ==========
Loans with variable or
floating interest rates $229,944 $ 61,476 $ - $ 291,420
Loans with fixed predetermined
interest rates 109,011 421,000 239,739 769,750
-------- -------- -------- ----------
Total $338,955 $482,476 $239,739 $1,061,170
======== ======== ======== ==========
</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:
PAGE 12
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1999 1998 1997 1996 1995
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans . . . . . . $3,690 $3,696 $3,730 $5,090 $10,635
Trouble debt restructurings. 465 583 1,099 1,717 1,183
Delinquent loans . . . . . . 269 1,350 2,341 2,053 1,911
------ ------ ------ ------ -------
Total . . . . . . . . $4,424 $5,629 $7,170 $8,860 $13,729
====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
A summary of the allowance for loan losses is as follows:
December 31,
(Dollars in thousands) 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average loans. . . . . . . . . . . $973,398 $839,102 $763,000 $704,032 $651,955
========= ========= ========= ========= =========
Allowance, beginning of period . . $ 13,706 $ 12,592 $ 11,228 $ 10,353 $ 8,592
--------- --------- --------- --------- ---------
Loans charged off:
Commercial and industrial . 108 217 66 453 240
Consumer. . . . . . . . . . 627 630 1,057 615 286
Real estate . . . . . . . . 723 424 544 412 178
Consumer. . . . . . . . . . 226 145 78 33 39
--------- --------- --------- --------- ---------
Total loans charged off . . 1,684 1,416 1,745 1,513 743
--------- --------- --------- --------- ---------
Recoveries:
Commercial and industrial . 28 94 113 84 143
Consumer. . . . . . . . . . 105 100 124 59 82
Real estate . . . . . . . . 94 88 264 30 1
Lease financing . . . . . . 52 18 18 18 36
--------- --------- --------- --------- ---------
Total recoveries. . . . . . 279 300 519 191 262
--------- --------- --------- --------- ---------
Net loans charged off. . . . . . . 1,405 1,116 1,226 1,322 481
--------- --------- --------- --------- ---------
Provision for loan losses. . . . . 1,907 2,230 2,590 2,197 2,242
--------- --------- --------- --------- ---------
Allowance, end of period . . . . . $ 14,208 $ 13,706 $ 12,592 $ 11,228 $ 10,353
========= ========= ========= ========= =========
Ratio of net charge offs to
Average loans outstanding. 0.14% 0.13% 0.16% 0.19% 0.07%
========= ========= ========= ========= =========
</TABLE>
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,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- --------- -------- ---------
(Dollars in thousands) Percent Percent Percent Percent Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans
- ---------------------- --------- -------- --------- -------- --------- ------- --------- ------- --------- ----------
Commercial
and industrial . $ 3,694 26% $ 3,729 27% $ 3,658 29% $ 3,013 27% $ 2,899 28%
Consumer . . . . . . . 4,689 33% 4,076 30% 3,959 31% 3,631 32% 3,106 30%
Real estate. . . . . . 4,547 32% 4,858 35% 4,107 33% 3,836 34% 3,727 36%
Lease financing. . . . 1,279 9% 1,044 8% 869 7% 748 7% 621 6%
-------- ------- -------- ------ ------ ----- ------- ------ ------ ----
Total . . . . . 14,208 100% 13,706 100% 12,592 100% 11,228 100% 10,353 100%
========= ======== ========= ======== ========= ======= ========= ======= ========= ====
</TABLE>
PAGE 13
<TABLE>
<CAPTION>
DEPOSIT STRUCTURE
The following table is a distribution of average balances and average rates paid on the
deposit categories for the last three years:
December 31,
------------------------------------------------------
1999 1998 1997
----------- -------- -------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Demand - noninterest-bearing $ 181,147 --% $158,332 --% $142,358 --%
Demand -- interest-bearing 139,841 1.29% 121,873 1.57% 106,951 1.63%
Money market and savings 384,314 2.98% 343,954 3.16% 308,537 3.09%
Time -- under $100,000 343,657 5.35% 324,674 5.52% 316,799 5.54%
Time -- $100,000 or greater 110,418 5.11% 88,206 5.49% 66,093 5.50%
---------- -------- --------
Total $1,159,377 $1,037,039 $940,738
========== =========== ========
</TABLE>
The maturity distribution of certificates of deposit of $100,000 and over
is as follows:
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Three months or less. . . . . . . $ 71,708 $50,023 $45,098
Over three months to six months . 29,915 20,942 14,002
Over six months to twelve months. 17,961 10,047 7,812
Over twelve months. . . . . . . . 8,095 9,456 4,163
-------- ------- -------
Total. . . . . . . . . . . $127,679 $90,468 $71,075
======== ======= =======
</TABLE>
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,
- ------------------------------------------------------
Dollars in thousands) 1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Interest income. . . . . . $106,117 $93,492 $85,827
Interest expense . . . . . 46,873 40,238 36,086
-------- ------- -------
Net interest income. . . . 59,244 53,254 49,741
Tax equivalent adjustment. 5,091 4,249 3,093
-------- ------- -------
Net interest income. . . . $ 64,335 $57,503 $52,834
======== ======= =======
</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>
1999 over (under) 1998 1998 over (under) 1997
due to changes in due to changes in
-------------------- ---------------------
Dollars in thousands) Net Net
<S> <C> <C> <C> <C> <C> <C>
Change Rate Volume Change Rate Volume
-------- -------- -------- -------- -------- --------
INTEREST INCOME:
Investment securities (1) . . . $ 6,274 $ 301 $ 5,973 $ 4,182 $ (579) $ 4,761
Loans . . . . . . . . . . . . . 8,026 (2,924) 10,950 4,966 (1,505) 6,471
Other rate-sensitive assets . . (833) (115) (718) (327) (133) (194)
-------- -------- -------- -------- -------- --------
Total . . . . . . . . . . . 13,467 (2,738) 16,205 8,821 (2,217) 11,038
-------- -------- -------- -------- -------- --------
PAGE 14
INTEREST EXPENSE:
Savings deposits. . . . . . . . 466 (1,009) 1,475 1,517 135 1,382
Time deposits . . . . . . . . . 1,290 (891) 2,181 1,562 (90) 1,652
Borrowings and other interest-
bearing liabilities . . . . . 4,879 154 4,725 1,073 (192) 1,265
-------- -------- -------- -------- -------- --------
Total . . . . . . . . . . . 6,635 (1,746) 8,381 4,152 (147) 4,299
-------- -------- -------- -------- -------- --------
Changes in net interest income . . $ 6,832 $ (992) $ 7,824 $ 4,669 $(2,070) $ 6,739
======== ======== ======== ======== ======== ========
<FN>
(1) The interest earned on nontaxable investment securities and loans is shown on a tax
equivalent basis.
</TABLE>
Tax-equivalent net interest income was $64,335,000 for 1999, compared to
$57,503,000 for 1998, an increase of $6,832,000, or 11.9%. This increase in
tax-equivalent net interest income was primarily due to the net $7,824,000
increase related to volume, partially offset by a decrease related to interest
rates of $992,000. Total interest income increased $13,467,000, primarily the
result of higher volumes of loans and investment securities, in part offset by
the lower loan rates experienced during 1999. Tax-equivalent interest income on
loans grew 11.2% and tax-equivalent investment interest income increased 25.0%.
The 1999 average loan and investment volumes increased 16.0% and 23.5%
respectively. The Banks experienced growth throughout all loan portfolios. The
increase in investment securities was due to both the funding of a $25,000,000
of a capital leverage program during 1999 and the planned growth of related to
the increase in deposit funding.
Total interest expense grew $6,635,000 during 1999 or 16.5%, compared to
1998. 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 12.5%, 10.0% and 97.3%, 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 due to both the growth in the capital leverage program and the
loan portfolio during 1999.
The 1998 tax-equivalent net interest income was $57,503,000, a $4,669,000
increase compared to $52,834,000 for 1997. This increase in tax-equivalent net
interest income was primarily due to the $6,739,000 increase related to volumes,
partially offset by the $2,070,000 decrease in net interest income related to
rates. The growth in earning asset volumes was in investment securities and
loans and the interest-bearing liabilities volume growth was due to increases in
all categories.
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 thirteen of its branches are
located and leases space for the other ten 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
PAGE 15
North Penn. . . . . . . . . . Welsh & North Wales Rd Owned
North Wales PA
Gilbertsville . . . . . . . . Gilbertsville Shopping Leased
Gilbertsville PA
Hatfield. . . . . . . . . . . Snyder Square Leased
Hatfield PA
North Broad . . . . . . . . . North Broad Street Owned
Lansdale PA
Marketplace . . . . . . . . . Marketplace Shopping Leased
Lansdale PA
Normandy Farms. . . . . . . . Morris Road Leased
Blue Bell PA
Horsham . . . . . . . . . . . Babylon Business Center Leased
Horsham PA
Meadowood . . . . . . . . . . Route 73 Leased
Worcester PA
Collegeville. . . . . . . . . 364 Main Street Owned
Collegeville PA
Sellersville. . . . . . . . . 209 North Main St. Owned
Sellersville PA
Trainers Corner . . . . . . . Trainers Corner Center Leased
Quakertown PA
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
PAGE 16
Royersford . . . . . . . . . . 440 W. Linfield-Trappe Road
Royersford PA Owned
Foulkeways . . . . . . . . . 1120 Meetinghouse Road
Gwynedd PA Leased
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
Slatington . . . . . . . . . . 502 Main Street
Slatington PA Owned
Slatington Handi-Bank . . . . 705 Main Street
Slatington, PA Owned
Lehigh Township . . . . . . . 4421 Lehigh Drive
Walnutport PA Owned
Pottstown . . . . . . . . . . One Security Plaza Leased
Pottstown PA
Pottstown . . . . . . . . . . 1450 East High Street Leased
Pottstown PA
Pottstown . . . . . . . . . . 930 North Charlotte Street Leased
Pottstown PA
Pottstown . . . . . . . . . . Rte. 100 & Shoemaker Road Owned
Pottstown PA
</TABLE>
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.
PAGE 17
Item 4. Submission of Matters to a Vote of Security Holders.
- ---------------------------------------------------------------------
No matter was submitted during the fourth quarter of 1999 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 and 20 of the Corporation's Annual Report to Shareholders for the year ended
December 31, 1999, 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
25 of the Corporation's Annual Report to Shareholders for the year ended
December 31, 1999, 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
25 through 32 of the Corporation's Annual Report to Shareholders for the year
ended December 31, 1999, 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 29 and 30 of the Corporation's Annual Report to Shareholders for the year
ended December 31, 1999, 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 24 of the Corporation's Annual Report to Shareholders for the year
ended December 31, 1999, 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 6 through 9 of the Corporation's
Proxy Statement relating to the Annual Meeting of Shareholders to be held April
11, 2000.
<TABLE>
<CAPTION>
Executive Officers of Registrant
- -----------------------------------
Name Age Position
- ----------------------------------------------------------------------------
S> <C> <C>
Walter E. Daller, Jr. . . . 60 Chairman of the Board, President and Chief
Executive Officer of the Corporation.
Demetra M. Takes . . . . . 49 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. . . . . . 56 President and Chief Executive Officer of
Security National Bank since 1998, prior
position was Senior Vice President of
Harleysville.
Thomas D. Oleksa . . . . . 46 President and Chief Executive Officer of
Citizens.
Vernon L. Hunsberger . . . 51 Treasurer of the Company, Senior Vice
President/CFO and Cashier of Harleysville.
Geoffrey D. Brandon . . . . 34 Senior Vice President of Branch Administra-
tion for Harleysville since 1998, prior
position was Vice President of Harleysville.
David Crews . . . . . . . . 48 Senior Vice President of Harleysville since
1998, prior position was Vice President of
Business Development.
Dennis L. Detwiler . . . . 52 Senior Vice President of Harleysville.
Bruce D. Fellman. . . . . . 53 Senior Vice President of Harleysville since
1998, prior position was Vice President.
James W. Hamilton . . . . . 53 Senior Vice President of Harleysville.
Clay T. Henry . . . . . . . 39 Senior Vice President and Senior Trust
Officer of Harleysville since 1998, prior
position was Director of Investment Services
for the Pridate Brank of PNC Financial
Corporation.
Linda C. Lockhart . . . . . 48 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).
PAGE 20
Mikkayla B. Murray. . . . . 44 Senior Vice President of Loan Administra-
tion of Harleysville.
Gregg J. Wagner . . . . . . 39 Senior Vice President of Finance of Harleys-
ville since 1998, prior position was Vice
President & Comptroller of Harleysville.
Harry T. Weierbach . . . . 55 Senior Vice President and Chief Investment
Officer of Harleysville since 1998, Vice
President (1996 to 1998), Assistant Vice
President (1994 to 1998).
</TABLE>
Item 11. Executive Compensation.
- ----------------------------------
The information required by this Item is incorporated by reference to pages
10 through 15 of the Corporation's Proxy Statement relating to the Annual
Meeting of Shareholders to be held April 11, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------------
The information required by this Item is incorporated by reference to pages
6 through 7 of the Corporation's Proxy Statement relating to the Annual Meeting
of Shareholders to be held April 11, 2000.
Item 13. Certain Relationships and Related Transactions.
- -------------------------------------------------------------
The information required by this Item is incorporated by reference to page
20 of the Corporation's Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 11, 2000, and to page 17 of the Corporation's
Annual Report to Shareholders for the year ended December 31, 1999, which page
is included at Exhibit (13) to this Annual Report on Form 10-K.
PAGE 21
<TABLE>
<CAPTION>
PART IV
-------
<S> <C>
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, 1999 and 1998 . . . . . . . . . . . . . . . . . . . . 9*
Consolidated Statements of Income for the
Years Ended December 31, 1999, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10*
Consolidated Statements of Shareholders'
Equity for the Years Ended
December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . . . 11*
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999,
1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . 12*
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 13-24*
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . 8*
(2) Financial Statement Schedules
</TABLE>
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 24 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
<TABLE>
<CAPTION>
(3) Exhibits
Exhibit No. Description of Exhibits
- ---------------------------------------
<C> <S>
(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 Current Report 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 the Registrant's Curent Report 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 Current Report 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, 1999, 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, 1999, which is included as Exhibit (13) to this
Form 10-K Report.
(13) Excerpts from the Corporation's 1999 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.
PAGE 23
(99) Additional Exhibits.
None.
(b) Reports on Form 8-K
During the quarter ended December 31, 1999, 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 3, 2000 By: /s/ Walter E. Daller, Jr.
- -------------------------------------------------------------------------------
Walter E. Daller, Jr.
President
<TABLE>
<CAPTION>
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.
Signature Title Date
- -------------------------------- -------------------------------- -------------
<S> <C> <C>
/s/ LeeAnn Bergy . . . . . . . . Director March 9, 2000
- --------------------------------
LeeAnn Bergy
/s/ Walter E. Daller, Jr.. . . . Chairman of the Board, President March 3, 2000
- -------------------------------- and Chief Executive Officer and
Walter E. Daller, Jr.. . . . . . Director (Principal Executive
Officer)
__________________________
- --------------------------------
Martin E. Fossler Director March 9, 2000
/s/ Harold A. Herr Director
- --------------------------------
Harold A. Herr March 9, 2000
/s/ Vernon L. Hunsberger . . . . Treasurer (Principal Financial March 9, 2000
- -------------------------------- and Accounting Officer)
Vernon L. Hunsberger
/s/ Thomas S. McCready Director
- --------------------------------
Thomas S. McCready March 9, 2000
/s/ Henry M. Pollak Director
- --------------------------------
Henry M. Pollak March 9, 2000
/s/ Palmer E. Retzlaff Director
- --------------------------------
Palmer E. Retzlaff March 9, 2000
PAGE 25
/s/ Walter F. Vilsmeier Director
- --------------------------------
Walter F. Vilsmeier March 9, 2000
_________________________
- --------------------------------
William M. Yocum . . . . . . . . Director March 9, 2000
</TABLE>
PAGE 26
EXHIBIT INDEX
- --------------
Exhibit
- -----------------------------------------------------------------------------
(13) Excerpts from the Corporation's 1999 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) 1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Per Share Information
Basic earnings* ................................................................. $ 2.82 $ 2.44 $ 2.24
Diluted earnings* ............................................................... 2.82 2.44 2.24
Cash dividends paid* ............................................................ 1.07 0.95 0.86
Book value ...................................................................... 16.38 17.38 15.65
Market Value
Bid price of common stock (high)* ............................................... $ 38.09 41.43 40.00
Bid price of common stock (low)* ................................................ 31.50 30.95 22.00
Average basic shares outstanding* ............................................... 7,913,540 7,902,962 7,878,752
Average Balance Sheet
Loans ........................................................................... $ 973,398 $ 839,102 $ 763,000
Earning assets .................................................................. 1,435,409 1,230,146 1,088,341
Total assets .................................................................... 1,509,248 1,284,706 1,146,573
Deposits ........................................................................ 1,159,377 1,037,039 940,738
Interest-bearing liabilities plus demand deposits ............................... 1,351,234 1,134,271 1,011,805
Shareholders' equity ............................................................ 130,689 124,684 111,306
Selected Operating Ratios
Return on average assets ........................................................ 1.48% 1.50% 1.54%
Return on average shareholders' equity .......................................... 17.10% 15.48% 15.85%
Leverage (assets divided by shareholders' equity) ............................... 12.62 10.78 10.10
Average shareholders' equity as a percentage of:
Average loans ................................................................ 13.43% 14.86% 14.59%
Average deposits ............................................................. 11.27 12.02 11.83
Average assets ............................................................... 8.66 9.71 9.71
Average earning assets ....................................................... 9.10 10.14 10.23
Dividend payout ratio ........................................................... 37.98 37.69 37.27
Average total loans as a percentage of average deposits and borrowed funds ...... 72.04 73.98 75.41
Net interest margin on average earning assets:
Interest income** ............................................................ 7.75% 7.95% 8.17%
Interest expense ............................................................. (3.27) (3.27) (3.32)
Net interest margin .......................................................... 4.48 4.67 4.85
Noninterest margin ........................................................... (1.97) (2.06) (2.12)
</TABLE>
*Adjusted for 5% stock dividends effective 9/30/99 and 6/30/97.
**Tax-Equivalent Basis
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 (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. On January 20, 1999, the Corporation acquired all of the
outstanding stock of Northern Lehigh Bancorp, Inc., parent company of Citizens
National Bank of Slatington. Citizens National Bank of Slatington was merged
into CNB.
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, 1999, the Banks had total assets of $1,635,679,000,
total shareholders' equity of $129,660,000 and total deposits of $1,231,265,000.
The Banks engage in full-service commercial banking and trust business,
including accepting time and demand deposits, making secured and unsecured
commercial and consumer loans, financing commercial transactions, making
construction and mortgage loans and performing corporate pension and personal
trust services. Their deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) Bank Insurance Fund to the extent provided by law. The Banks
have 35 branch offices located in Montgomery, Bucks, Carbon, Wayne, Chester,
Lehigh, Northampton and Schuylkill Counties, Pennsylvania.
On December 31, 1999, the Banks had 517 full-time equivalent employees.
Competition
The Banks compete actively with other eastern Pennsylvania financial
institutions, many larger than the Banks, as well as with financial and
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 1999 and 1998. The
Corporation's stock is traded in the over-the-counter market under the symbol
"HNBC" and commonly quoted under NASDAQ National Market Issues.
- --------------------------------------------------------------------------------
Price of Common Stock
1999 Low Price High Price Dividend
- -----------------------------------------------------------------------
First Quarter* $31.50 $38.09 $.24
Second Quarter* 32.38 35.00 .25
Third Quarter 33.09 35.25 .26
Fourth Quarter 31.50 33.88 .32
1998 Low Price High Price Dividend
- -----------------------------------------------------------------------
First Quarter* $37.14 $41.43 $.23
Second Quarter* 38.15 41.31 .23
Third Quarter* 32.86 40.84 .24
Fourth Quarter* 30.95 39.52 .25
*Adjusted for a 5% stock dividend effective 9/30/99.
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, 1999 and
1998, and the related consolidated statements of income, shareholders' equity
and comprehensive income and cash flows for each of the three years in the
period ended December 31, 1999. 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 following consolidated financial statements present
fairly, in all material respects, the consolidated financial position of
Harleysville National Corporation and Subsidiaries as of December 31, 1999 and
1998, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
- ---------------------------
Grant Thornton LLP
Philadelphia, Pennsylvania
January 7, 2000
PAGE 8
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
Harleysville National Corporation and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands) December 31
----------------------
Assets 1999 1998
----------------------
<S> <C> <C>
Cash and due from banks ............................ $ 42,154 $ 40,204
Federal funds sold ................................. -- 13,426
---------- ----------
Total cash and cash equivalents ................. 42,154 53,630
---------- ----------
Interest-bearing deposits in banks ................. 5,123 3,707
Investment securities available for sale ........... 450,959 390,438
Investment securities held to maturity
(fair value $23,828 and $42,202, respectively) .... 24,271 41,520
Loans .............................................. 1,061,170 902,894
Less: Unearned income (deferred costs) ............. 806 (2,584)
Allowance for loan losses .................... (14,208) (13,706)
---------- ----------
Net loans .................................. 1,047,768 886,604
---------- ----------
Bank premises and equipment, net ................... 20,356 19,542
Accrued interest receivable ........................ 10,211 9,574
Other real estate owned ............................ 1,436 1,131
Intangible assets, net ............................. 2,006 1,936
Bank-owned life insurance .......................... 25,527 --
Other assets ....................................... 5,868 4,008
---------- ----------
Total assets ............................... $1,635,679 $1,412,090
========== ==========
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing ............................. 201,475 192,156
Interest-bearing:
Checking accounts .......................... 149,562 139,134
Money market accounts ...................... 250,025 212,156
Savings .................................... 143,414 140,797
Time, under $100,000 ....................... 359,110 329,605
Time, $100,000 or greater .. ............... 127,679 90,468
---------- ----------
Total deposits ............................. 1,231,265 1,104,316
Accrued interest payable ........................... 17,114 14,072
U.S. Treasury demand notes ......................... 2,014 1,320
Federal funds purchased ............................ 9,500 11,000
Federal Home Loan Bank (FHLB) borrowings ........... 130,250 93,500
Securities sold under agreements to repurchase ..... 106,554 43,158
Other liabilities .................................. 9,322 13,772
---------- ----------
Total liabilities .......................... 1,506,019 1,281,138
---------- ----------
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
7,915,130 shares in 1999 and 7,535,683
shares in 1998 ................................ 7,915 7,536
Additional paid in capital ...................... 63,080 50,899
Retained earnings ............................... 68,422 67,133
Accumulated other comprehensive income (loss) ... (9,757) 5,384
---------- ----------
Total shareholders' equity ................. 129,660 130,952
---------- ----------
Total liabilities and shareholders' equity.. $1,635,679 $1,412,090
========== ==========
================================================================================
</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
--------------------------------------
1999 1998 1997
--------------------------------------
Interest Income
<S> <C> <C> <C>
Loans, including fees .............................. $ 71,816 $ 65,679 $ 61,358
Lease financing .................................... 6,960 5,084 4,531
Investment securities:
Taxable ......................................... 17,427 13,722 12,825
Exempt from federal taxes ....................... 9,426 7,686 5,458
Federal funds sold ................................. 339 1,116 1,244
Deposits in banks .................................. 149 205 411
-------- -------- --------
Total interest income ........................... 106,117 93,492 85,827
-------- -------- --------
Interest Expense
Savings deposits ................................... 13,255 12,789 11,272
Time, under $100,000 ............................... 18,391 17,906 17,554
Time, $100,000 or greater .......................... 5,647 4,842 3,632
Borrowed funds ..................................... 9,580 4,701 3,628
-------- -------- --------
Total interest expense .......................... 46,873 40,238 36,086
-------- -------- --------
Net interest income ............................. 59,244 53,254 49,741
Provision for loan losses .......................... 1,907 2,230 2,590
-------- -------- --------
Net interest income after provision for
loan losses .................................... 57,337 51,024 47,151
-------- -------- --------
Other Operating Income
Service charges .................................... 3,572 3,287 2,930
Security gains, net ................................ 471 1,543 1,757
Trust income ....................................... 2,629 2,117 1,509
Bank-owned life insurance income ................... 527 -- --
Other income ....................................... 2,893 3,061 1,395
-------- -------- --------
Total other operating income .................... 10,092 10,008 7,591
-------- -------- --------
Net interest income after provision for loan
losses and other operating income .............. 67,429 61,032 54,742
-------- -------- --------
Other Operating Expenses
Salaries, wages and employee benefits .............. 20,436 18,876 16,452
Occupancy .......................................... 2,445 2,328 2,157
Furniture and equipment ............................ 4,476 3,640 2,994
Other expenses ..................................... 11,081 10,565 9,023
-------- -------- --------
Total other operating expenses .................. 38,438 35,409 30,626
-------- -------- --------
Income before income tax expense ................ 28,991 25,623 24,116
Income tax expense ................................. 6,644 6,316 6,473
-------- -------- --------
Net income ......................................... $ 22,347 $ 19,307 $ 17,643
========== ========== ==========
Weighted average number of common shares:*
Basic ........................................... 7,913,540 7,902,962 7,878,752
========== ========== ==========
Diluted ......................................... 7,925,384 7,918,337 7,885,847
========== ========== ==========
Net income per share information:*
Basic ........................................... $ 2.82 $ 2.44 $ 2.24
========== ========== ==========
Diluted ......................................... $ 2.82 $ 2.44 $ 2.24
========== ========== ==========
Cash dividends per share* .......................... $ 1.07 $ 0.95 $ 0.86
========== ========== ==========
</TABLE>
*Adjusted for 5% stock dividends effective 9/30/99 and 6/30/97.
================================================================================
See accompanying notes to consolidated financial statements.
PAGE 10
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
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 (Loss) Total Income (loss)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 .................. 6,657 $ 6,657 $ 40,316 $ 47,849 $ 2,809 $ 97,631
Acquisition of Northern Lehigh Bancorp .... 371 371 751 5,973 (23) 7,072
Stock options ............................. 29 29 187 -- -- 216
Stock dividends ........................... 460 460 9,292 (9,768) -- (16)
Stock awards .............................. 1 1 17 (18) -- --
Net income for 1997 ....................... -- -- -- 17,643 -- 17,643 $ 17,643
Other comprehensive income,
net of reclassifications and tax ....... -- -- -- -- 1,676 1,676 1,676
Cash dividends ............................ -- -- -- (6,576) -- (6,576)
----------------------------------------------------------------------------------------
Comprehensive income $ 19,319
========
Balance, December 31, 1997 ................ 7,518 7,518 50,563 55,103 4,462 117,646
Stock options ............................. 18 18 331 -- -- 349
Stock awards .............................. -- -- 5 -- -- 5
Net income for 1998 ....................... -- -- -- 19,307 -- 19,307 $ 19,307
Other comprehensive income,
net of reclassifications and tax ....... -- -- -- -- 922 922 922
Cash dividends ............................ -- -- -- (7,277) -- (7,277)
----------------------------------------------------------------------------------------
Comprehensive income $ 20,229
========
Balance, December 31, 1998 ................ 7,536 7,536 50,899 67,133 5,384 130,952
Stock options ............................. 3 3 28 -- -- 31
Stock dividends ........................... 376 376 12,145 (12,570) -- (49)
Stock awards .............................. -- -- 8 -- -- 8
Net income for 1999 ....................... -- -- -- 22,347 -- 22,347 $22,347
Other comprehensive loss,
net of reclassifications and tax ....... -- -- -- -- (15,141) (15,141) (15,141)
Cash dividends ............................ -- -- -- (8,488) -- (8,488)
----------------------------------------------------------------------------------------
Comprehensive income $ 7,206
========
Balance, December 31, 1999 ................ 7,915 $ 7,915 $ 63,080 $ 68,422 $ (9,757) $129,660
====================================================================
</TABLE>
================================================================================
See accompanying notes to consolidated financial statements.
PAGE 11
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Harleysville National Corporation and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands) Year Ended December 31
-------------------------------------
1999 1998 1997
-------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income ......................................................... $ 22,347 $ 19,307 $ 17,643
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ....................................... 1,907 1,680 2,590
Depreciation and amortization ................................... 2,717 2,254 1,877
Net amortization of investment securities
discount/premiums .............................................. 898 425 296
Deferred income taxes ........................................... 3,646 1,475 1,373
Net realized securities gain .................................... (471) (1,543) (1,757)
Increase in accrued income receivable ........................... (636) (1,503) (974)
Increase (decrease) in accrued interest payable ................. 3,042 (527) 486
Net (increase) decrease in other assets ......................... (1,861) (1,263) 58
Net increase (decrease) in other liabilities .................... 56 2,453 (757)
Decrease in unearned income ..................................... (3,381) (1,911) (3,637)
Write-down of other real estate owned ........................... 117 65 73
Increase in intangible assets ................................... (70) (84) (193)
-------- -------- --------
Net cash provided by operating activities ..................... 28,311 20,828 17,078
-------- -------- --------
Investing Activities
Proceeds from sales of investment securities
available for sale ................................................ 66,823 52,924 44,835
Proceeds, maturity or calls of investment
securities held to maturity ....................................... 10,803 20,170 22,674
Proceeds, maturity or calls of investment
securities available for sale ..................................... 64,032 34,024 30,539
Purchases of investment securities held to maturity ................ (10,632) (13,083) (4,900)
Purchases of investment securities available
for sale .......................................................... (198,019) (211,821) (117,305)
Net (increase) decrease in interest-bearing
deposits in banks ................................................. (1,416) 1,867 2,901
Net increase in loans .............................................. (161,876) (101,903) (60,380)
Net increase in premises and equipment ............................. (3,532) (3,130) (5,033)
Purchase of bank-owned life insurance .............................. (25,527) -- --
Proceeds from sales of other real estate ........................... 1,765 1,060 1,569
-------- -------- --------
Net cash used in investing activities ......................... (257,579) (219,892) (85,100)
-------- -------- --------
Financing Activities
Net increase in deposits ........................................... 126,950 121,786 72,783
Increase (decrease) in U.S. Treasury demand notes .................. 694 (830) (422)
(Decrease) increase in federal funds purchased ..................... (1,500) (2,700) 13,700
Increase (decrease) in FHLB borrowings ............................. 36,750 76,500 (18,000)
Increase in securities sold under agreement ........................ 63,396 11,870 9,339
Cash dividends and fractional shares ............................... (8,488) (7,277) (6,576)
Dividends reinvestment ............................................. (49) -- (16)
Stock options ...................................................... 39 354 126
-------- -------- --------
Net cash provided by financing activities ..................... 217,792 199,703 70,934
-------- -------- --------
Net (decrease) increase in cash and
cash equivalents .................................................. (11,476) 639 2,912
Cash and cash equivalents at beginning of year ..................... 53,630 52,991 50,079
-------- -------- --------
Cash and cash equivalents at end of year ........................... $ 42,154 $ 53,630 $ 52,991
======== ======== ========
Cash paid during the year for:
Interest ........................................................ $ 43,830 $ 40,572 $ 35,599
======== ======== ========
Income taxes .................................................... 3,150 4,415 5,565
======== ======== ========
Supplemental disclosure of noncash investing
and financing activities:
Transfer of assets from loans to other
real estate owned .............................................. $ 2,186 $ 1,918 $ 1,695
======== ======== ========
Transfer of securities from investment
securities held to maturity to
investment securities available for sale ....................... $ 7,530 $ -- $ --
======== ======== ========
</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, Citizens National Bank, 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 various 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 (deferred costs).
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 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
(Continued)
PAGE 13
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.
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.
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. 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, $325,000 and $309,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. The mortgage
servicing rights are amortized in proportion to and over the period of estimated
net servicing income.
Stock Options
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.
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, 1999, the Banks did not need to maintain reserves (in
the form of deposits with the Federal Reserve Bank) to satisfy federal
regulatory requirements.
Bank Owned Life Insurance (BOLI)
During 1999, the corporation entered into a $25,000,000 investment of bank
owned life insurance (BOLI). BOLI involves the purchasing of life insurance by
the Corporation on a chosen group of employees. The corporation is the owner and
beneficiary of the policies. This pool of insurance, due to tax advantages to
the Banks, is profitable to the corporation. This profitability is used to
offset a portion of future benefit cost increases. Bank deposits fund BOLI and
the earnings from BOLI are recognized as other income.
Net Income Per Share
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
(Continued)
PAGE 14
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:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------
<S> <C> <C> <C>
Net income ................................... $22,347,000
===========
Basic EPS
Income available to
common shareholders .......................... $22,347,000 7,913,540 $2.82
=====
Effect of Dilutive Securities
Stock options ................................ -- 11,844
----------- ---------
Diluted EPS
Income available to
common shareholders .......................... $22,347,000 7,925,384 $2.82
=========== ========= =====
Year Ended December 31, 1998
----------------------------------------
Net income ................................... $19,307,000
===========
Basic EPS
Income available to
common shareholders .......................... $19,307,000 7,902,962 $2.44
=====
Effect of Dilutive Securities
Stock options ................................ -- 15,375
----------- ---------
Diluted EPS
Income available to
common shareholders .......................... $19,307,000 7,918,337 $2.44
=========== ========= =====
Year Ended December 31, 1997
----------------------------------------
Net income ................................... $17,643,000
===========
Basic EPS
Income available to
common shareholders .......................... $17,643,000 7,878,752 $2.24
=====
Effect of Dilutive Securities
Stock options ................................ -- 7,095
----------- ---------
Diluted EPS
Income available to
common shareholders .......................... $17,643,000 7,885,847 $2.24
=========== ========= =====
</TABLE>
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. The components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Before tax Tax benefit Net of tax
December 31, 1999 amount (expense) amount
-------------------------------------------------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding losses
arising during period .................... $(22,824) $ 7,988 $(14,836)
Less reclassification
adjustment for losses
realized in net income ................... 471 (166) 305
-------- ------- --------
Other comprehensive
income, net ................................ $(23,295) $ 8,154 $(15,141)
======== ======= ========
(Dollars in thousands) Before tax Tax benefit Net of tax
December 31, 1998 amount (expense) amount
-------------------------------------------------
Unrealized gains on securities:
Unrealized holding gains
arising during period .................... $ 2,958 $(1,033) $ 1,925
Less reclassification
adjustment for gains
realized in net income ................... 1,543 (540) 1,003
-------- ------- --------
Other comprehensive
income, net ................................ $ 1,415 $ (493) $ 922
======== ======= ========
(Dollars in thousands) Before tax Tax benefit Net of tax
December 31, 1997 amount (expense) amount
-------------------------------------------------
Unrealized gains on securities:
Unrealized holding gains
arising during period .................... $ 4,326 $(1,508) $ 2,818
Less reclassification
adjustment for gains
realized in net income ................... 1,757 (615) 1,142
-------- ------- --------
Other comprehensive
income, net ................................ $ 2,569 $ (893) $ 1,676
======== ======= ========
</TABLE>
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.
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.
(Continued)
PAGE 15
2 - Acquisitions
On December 28, 1999, the Corporation entered into a definitive Agreement
and Plan of Reorganization to acquire Citizens Bank and Trust Company. Under the
terms of the merger, accounted for as a pooling-of-interest, Citizens Bank and
Trust Company's shareholders will receive 166 shares of Harleysville National
Corporation common stock for each share of Citizens Bank and Trust Company
stock. The acquisition is subject to regulatory and shareholder approval. Upon
completion of the acquisition, Citizens Bank and Trust Company's banking
operations will be merged into those of Citizens National Bank, a wholly-owned
subsidiary of Harleysville National Corporation. A summary of pro-forma
unaudited condensed consolidated financial information of the Corporation and
Citizens Bank and Trust Company follows:
(Dollars in thousands except weighted average number of common shares
and per share information)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Operating results (unaudited):
Net interest income .......................... $ 63,517 $ 57,634 $ 54,124
Noninterest income ........................... 10,535 10,519 7,962
Net income from
continuing operations ..................... 23,238 20,758 19,029
Net income per share:
Basic ..................................... 2.63 2.35 2.14
Diluted ................................... 2.63 2.35 2.14
Weighted average number of common shares:
Basic ..................................... 8,838,010 8,838,870 8,874,752
Diluted ................................... 8,845,854 8,854,245 8,881,847
</TABLE>
On January 20, 1999, the Corporation consummated its acquisition of
Northern Lehigh Bancorp, Inc., parent company of Citizens National Bank of
Slatington. Northern Lehigh Bancorp, Inc. shareholders received 3.57 shares of
Harleysville National Corporation common stock for each share of Northern Lehigh
Bancorp common stock.
The acquisition was effected by the merger of Northern Lehigh Bancorp, Inc.
with Harleysville National Corporation North, Inc., 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 Bank North, Inc., under the name Citizens National Bank. The merger was
accounted for on a pooling-of-interest basis, and all prior periods have been
restated to reflect the combination.
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:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1999
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Held to Maturity Cost Gains (Losses) Value
- ---------------- ---------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury notes ................................... $ 1,000 $ 4 $ -- $ 1,004
Obligations of states and
political subdivisions ............................. 21,450 164 (585) 21,029
Mortgage-backed
securities ......................................... 568 -- (4) 564
Other securities ...................................... 1,253 4 (26) 1,231
-------- ------ -------- --------
Totals ............................................. $ 24,271 $ 172 $ (615) $ 23,828
======== ====== ======== ========
Available for Sale
- ------------------
U.S. Treasury notes ................................... $ 46,457 $ 134 $ (38) $ 46,553
Obligations of other U.S.
Government agencies
and corporations ................................... 33,745 -- (830) 32,915
Obligations of states and
political subdivisions ............................. 157,532 659 (8,978) 149,213
Mortgage-backed
securities ......................................... 158,668 164 (3,891) 154,941
Other securities ...................................... 69,569 1,542 (3,774) 67,337
-------- ------ -------- --------
Totals ............................................. $465,971 $2,499 $(17,511) $450,959
======== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1998
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Held to Maturity Cost Gains (Losses) Value
- ---------------- ---------------------------------------------
<S> <C> <C> <C> <C>
Obligations of other U.S.
Government agencies
and corporations ................................... $ 6,816 $ 80 $ (3) $ 6,893
Obligations of states and
political subdivisions ............................. 17,093 544 (1) 17,636
Mortgage-backed
securities ......................................... 1,039 11 -- 1,050
Other securities ...................................... 16,572 62 (11) 16,623
-------- ------ -------- --------
Totals ............................................. $ 41,520 $ 697 $ (15) $ 42,202
======== ====== ======== ========
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 ............................. 161,253 4,009 (1,036) 164,226
Mortgage-backed
securities ......................................... 87,818 487 (53) 88,252
Other securities ...................................... 45,425 2,868 (169) 48,124
-------- ------ -------- --------
Totals ............................................. $382,155 $9,541 $ (1,258) $390,438
======== ====== ======== ========
</TABLE>
(Continued)
PAGE 16
There are no significant concentrations of securities (greater than 10% of
shareholders' equity) in any individual security issuer.
Securities with a carrying value of $368,142,000 and $156,571,000 at
December 31, 1999 and 1998, 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, 1999, 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.
<TABLE>
<CAPTION>
(Dollars in thousands) Held to Maturity Available for Sale
---------------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less ................. $ 1,521 $ 1,538 $ 20,726 $ 20,740
Due after one year
through five years ................... 2,099 2,082 37,880 37,821
Due after five years
through ten years .................... 1,915 1,953 69,245 67,170
Due after ten years ..................... 18,168 17,691 179,452 170,287
------- -------- -------- --------
23,703 23,264 307,303 296,018
Mortgage-backed
securities ........................... 568 564 158,668 154,941
------- -------- -------- --------
Totals ............................... $24,271 $ 23,828 $465,971 $450,959
======= ======== ======== ========
</TABLE>
Proceeds from sales of investment securities available for sale during 1999
were $66,823,000. Gross gains of $721,000 and gross losses of $250,000 were
realized on these sales. Proceeds from sales of investment securities available
for sale during 1998 were $52,924,000. 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 $44,835,000. Gross gains of
$2,073,000 and gross losses of $316,000 were realized on these sales.
4 - Loans
Major classifications of loans are as follows:
(Dollars in thousands) December 31,
----------------------
1999 1998
----------------------
Real estate ......................................... $ 337,260 $318,048
Commercial and industrial ........................... 280,136 245,648
Consumer loans ...................................... 348,865 270,445
Lease financing ..................................... 94,909 68,753
---------- --------
Total loans ...................................... 1,061,170 902,894
Less:
Unearned income
(deferred costs) ............................... (806) 2,584
Allowance for loan losses ........................ 14,208 13,706
---------- --------
Net loans ........................................ $1,047,768 $886,604
========== ========
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.
On December 31, 1999, nonaccrual loans were $3,690,000, loans 90 days or
more past due and still accruing interest were $269,000 and troubled debt
restructured loans were $465,000. On December 31, 1998, nonaccrual loans were
$3,696,000, loans 90 days or more past due and still accruing interest were
$1,350,000 and troubled debt restructured loans were $583,000.
The balance of impaired loans was $2,582,000 at December 31, 1999, compared
to $2,096,000 at December 31, 1998. 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, 1999, impaired
loan balance included $2,117,000 of nonaccrual loans and $465,000 of troubled
debt restructured loans. The December 31, 1998, impaired loan balance included
$1,513,000 of nonaccrual loans and $583,000 of troubled debt restructured loans.
The allowance for loan loss associated with the impaired loans was $262,000 at
December 31, 1999, and $302,000 at December 31, 1998. The average impaired loan
balance was $3,046,000 in 1999, compared to $2,263,000 in 1998. The income
recognized on impaired loans during 1999 and 1998 was $132,000 and $103,000,
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, 1999 and 1998. 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, Lehigh, Northampton and
Schuylkill counties.
Loans to directors, executive officers and their associates, are made in
the ordinary course of business and on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with others. Activity of these loans is as follows:
(Dollars in thousands) Year Ended December 31,
----------------------------------
1999 1998 1997
----------------------------------
Balance, January 1 ...................... $ 5,722 $ 4,711 $ 8,776
New loans ............................... 29,831 12,297 9,624
Repayments .............................. (26,612) (11,286) (13,689)
-------- -------- --------
Balance, December 31 .................... $ 8,941 $ 5,722 $ 4,711
======== ======== ========
(Continued)
PAGE 17
5 - Allowance for Loan Losses
Transactions in the allowance for loan losses are as follows:
(Dollars in thousands) Year Ended December 31,
-------------------------------------
1999 1998 1997
-------------------------------------
Balance, beginning of year ............. $ 13,706 $ 12,592 $ 11,228
-------- -------- --------
Provision charged to
operating expenses ................. 1,907 2,230 2,590
-------- -------- --------
Loans charged off:
Commercial
and industrial ................... (108) (217) (66)
Consumer ........................... (627) (630) (1,057)
Real estate ........................ (723) (424) (544)
Lease financing .................... (226) (145) (78)
-------- -------- --------
Total charged off ............... (1,684) (1,416) (1,745)
-------- -------- --------
Recoveries:
Commercial
and industrial ................... 28 94 113
Consumer ........................... 105 100 124
Real estate ........................ 94 88 264
Lease financing .................... 52 18 18
-------- -------- --------
Total recoveries ................. 279 300 519
-------- -------- --------
Balance, end of year ................... $ 14,208 $ 13,706 $ 12,592
======== ======== ========
6 - Bank Premises and Equipment
Bank premises and equipment consist of the following:
(Dollars in thousands) Estimated December 31,
Useful ----------------------
Lives 1999 1998
---------------------------------------
Land ................................ $ 3,042 $ 3,006
Building ............................ 15-39 years 19,007 17,669
Furniture, fixtures 3-10 years
and equipment 18,056 15,910
-------- --------
Total cost .................... 40,105 36,585
Less accumulated depreciation
and amortization .................. 19,749 17,043
-------- --------
Total ......................... $ 20,356 $ 19,542
======== ========
7 - Deposits and Borrowings
At December 31, 1999, scheduled maturities of certificates of deposit are
as follows:
(Dollars in thousands)
Year Ended December 31, Amount
-----------------------------------------------
2000 .............................. $ 308,707
2001 .............................. 85,552
2002 .............................. 65,124
2003 .............................. 19,475
2004 .............................. 7,909
Thereafter ........................ 22
---------
Total ............................. $ 486,789
=========
Federal Home Loan Bank (FHLB) advances at December 31, 1999 totaled
$130,250,000. The advances are collateralized by FHLB stock and certain first
mortgage loans and mortgage-backed securities. First mortgages used as
collateral for these advances totaled $52,312,000. These advances had a weighted
average interest rate of 5.46%. 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 $188,657,000 at December 31, 1999, and $105,935,000 at December
31, 1998.
Outstanding borrowings mature as follows (dollars in thousands):
2000 ................................................ $ 11,500
2001 ................................................ 15,000
2002 ................................................ 4,000
2003 ................................................ 10,000
2004 and thereafter ................................. 89,750
---------
$ 130,250
=========
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 and obligations of states and
political subdivisions securities.
These 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. At December 31, 1999, these agreements
matured within one year. The average balance of securities sold under agreements
to repurchase for 1999 was $56,612,000, and the maximum amounts outstanding at
any month-end during 1999 was $106,554,000.
8 - Federal Income Taxes
Income tax expense from current operations is composed of the following:
(Dollars in thousands) Year Ended December 31,
----------------------------------
1999 1998 1997
----------------------------------
Current tax payable .................... $ 2,998 $ 4,908 $ 5,097
Deferred income tax .................... 3,646 1,408 1,376
-------- ------- -------
Tax expense ......................... $ 6,644 $ 6,316 $ 6,473
======== ======= =======
The effective income tax rates of 22.9% for 1999, 24.6% for 1998 and 26.8%
for 1997 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,
----------------------------------
1999 1998 1997
----------------------------------
Expected tax expense ................... $ 10,147 $ 9,014 $ 8,199
Tax-exempt income net of
expense disallowance ................. (3,528) (2,786) (1,954)
Other .................................. 25 88 228
--------- -------- --------
Actual tax expense ................... $ 6,644 $ 6,316 $ 6,473
========= ======== ========
(Continued)
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) 1999 1998
-------------------------------------------
Asset Liability Asset Liability
-------------------------------------------
Allowance for
credit losses ................. $ 4,879 $ -- $ 4,703 $ --
Lease assets ..................... -- 14,740 -- 11,021
Deferred loan fees ............... 277 -- 422 --
Deferred compensation ............ 912 -- 802 --
Unrealized gain
on securities ................. 5,254 -- -- 2,907
Other ............................ 148 -- 216 --
-------- -------- ------- --------
Total deferred taxes .......... $ 11,470 $ 14,740 $ 6,143 $ 13,928
======== ======== ======= ========
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.
9 - Pension Plans
The Corporation has two noncontributory defined benefit pension plans
covering substantially all employees. These plans are the Harleysville National
Corporation Pension Plan and the Northern Lehigh Bancorp Pension Plan. On
January 20, 1999, the Corporation consummated its acquisition of Northern Lehigh
Bancorp, Inc. These plans were not consolidated, as of December 31, 1999.
The Harleysville National Corporation Pension Plans' 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
Harleysville National Corporation Pension Plans' funded status and amounts
recognized in the financial statements follow:
(Dollars in thousands) 1999 1998
---------------------
Change in benefit obligation:
Benefit obligation at beginning of year ............... $ 4,976 $ 4,382
Service cost .......................................... 365 264
Interest cost ......................................... 291 297
Actual gain ........................................... 167 241
Benefits paid ......................................... (220) (842)
Change in assumptions ................................. -- 634
-------- --------
Benefits obligation at end of year .................... $ 5,579 $ 4,976
======== ========
Change in plan assets:
Fair value of plan assets
at beginning of year ............................... $ 5,974 $ 6,295
Actual return on plan assets .......................... 401 521
Employer contribution ................................. -- --
Benefits paid ......................................... (220) (842)
-------- --------
Fair value of plan assets at end of year .............. $ 6,155 $ 5,974
======== ========
Funded status ......................................... $ 575 $ 998
Unrecognized transition liability (asset) ............. (189) (207)
Unrecognized prior service cost ....................... (550) (661)
Unrecognized net (gain) or loss ....................... 703 527
-------- --------
Prepaid (accrued) benefit cost ........................ $ 539 $ 657
======== ========
Weighted-average assumptions
as of December 31, 1999 1998 1997
-----------------------------
Discount rate .................................. 6.00% 6.00% 7.00%
Expected return on plan assets ................. 7.00% 7.00% 7.00%
Rate of compensation increase .................. 4.50% 4.50% 5.00%
Components of net periodic
benefit cost 1999 1998 1997
-----------------------------
Service cost ................................... $ 365 $ 264 $ 247
Interest cost .................................. 291 297 275
Expected return on plan assets ................. (410) (431) (394)
Amortization of prior service cost ............. (111) (111) (110)
Recognized net actuarial loss .................. (17) (17) 18
------ ------ ------
Net periodic benefit cost .................... $ 118 $ 2 $ 36
====== ====== ======
As of December 31, 1999, the Harleysville National Corporation's Pension
Plan had an investment in the Corporation's stock with a market value of
$208,000.
The Northern Lehigh Bancorp Pension Plan's Benefits are based primarily
upon years of service and compensation rates near retirement. The Northern
Lehigh Bancorp Pension Plan's funded status and amounts recognized in the
financial statements follows:
(Dollars in thousands) 1999 1998
------------------------
Change in benefit obligation:
Benefit obligation at beginning of year ............. $ 753 $ 864
Service cost ........................................ 55 54
Interest cost ....................................... 51 59
Actual gain ......................................... (13) (194)
Benefits paid ....................................... (24) (30)
Effect of curtailment ............................... (78) --
------- -------
Benefits obligation at end of year .................. $ 744 $ 753
======= =======
Change in plan assets:
Fair value of plan assets
at beginning of year ............................. $ 855 $ 707
Actual return on plan assets ........................ 67 140
Employer contribution ............................... -- 47
Plan expenses ....................................... (12) (9)
Benefits paid ....................................... (24) (30)
------- -------
Fair value of plan assets at end of year ............ $ 886 $ 855
======= =======
Funded status ....................................... $ 143 $ 101
Unrecognized transition liability (asset) ........... (48) (52)
Unrecognized prior service cost ..................... -- 5
Unrecognized net (gain) or loss ..................... (262) (270)
------- -------
Prepaid (accrued) benefit cost ...................... $ (167) $ (216)
======= =======
Weighted-average assumptions
as of December 31, 1999 1998 1997
----------------------------
Discount rate .................................. 7.00% 7.00% 7.00%
Expected return on plan assets ................. 8.00% 8.00% 8.00%
Rate of compensation increase .................. 5.00% 5.00% 6.00%
(Continued)
PAGE 19
Components of net periodic
benefit cost 1999 1998 1997
-----------------------------
Service cost ................................... $ 55 $ 54 $ 51
Interest cost .................................. 51 59 50
Expected return on plan assets ................. (67) (57) (133)
Amortization of prior service cost ............. (15) (5) 82
---- ---- -----
Net periodic benefit cost ................... $ 24 $ 51 $ 50
==== ==== =====
A 401(k) deferred savings plan covers eligible employees of the Banks.
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 $284,000, $242,000, and $203,000 for 1999, 1998 and 1997,
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, 1999, and 1998, the Corporation had accrued a liability of $1,528,000 and
$1,247,000, respectively, for the SERP.
10 - Shareholders' Equity
On September 30, 1999, the Corporation paid a 5% stock dividend on its
common stock to shareholders of record as of September 17, 1999.
On June 30, 1997, the Corporation paid a 5% stock dividend on its common
stock to shareholders of record as of June 13, 1997.
11 - Stock Options
The Corporation has a fixed stock option plan that allows the Corporation
to grant options up to 781,243 shares of common stock to key employees and
directors. The options have a term of ten 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.
The Corporation has elected to account for its stock option plan under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost has been recognized for its stock option 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 would have been:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $ 22,347 $19,307 $17,643
(in thousands) Pro forma $ 21,238 $18,385 $16,828
Earnings per share As reported $ 2.82 $ 2.44 $ 2.24
(Basic) Pro forma $ 2.68 $ 2.32 $ 2.13
Earnings per share As reported $ 2.82 $ 2.44 $ 2.24
(Diluted) Pro forma $ 2.68 $ 2.32 $ 2.13
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield
of 3.29%, 2.56% and 2.15%; expected volatility of 1.50%, 1.16% and 0.88%;
risk-free interest rate of 6.13%, 4.44% and 5.78%; and an expected life of 9.27
years, 9.30 years and 8.35 years.
Information about stock options outstanding at December 31, 1999, is
summarized as follows:
Shares Weighted-Average
Outstanding Exercise Price
----------------------------------
Balance 1/1/97 76,575 $ 12.25
Granted -- --
Exercised (36,264) 9.30
Cancelled -- --
------- -------
Balance 1/1/98 40,311 14.83
Granted 76,125 33.82
Exercised (19,742) 19.01
Cancelled -- --
------- -------
Balance 1/1/99 96,694 28.86
Granted 37,542 32.69
Exercised (3,749) 8.28
Cancelled (2,100) 36.47
------- -------
Balance 12/31/99 128,387 $30.46
======= ======
The weighted average fair value of options granted during 1999 and 1998
were $32.69 and $33.82, respectively. There were no options granted during 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise-Price Outstanding Remaining Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 8.13 - $12.20 14,996 2.0 years $ 9.56 14,996 $ 9.56
$20.33 - $24.40 1,824 5.6 years $23.22 1,459 $23.22
$32.53 - $36.59 107,367 9.0 years $33.11 71,524 $33.01
$36.59 - $40.66 4,200 8.3 years $40.50 840 $40.50
------- ------ ------
128,387 88,819 $28.96
======= ====== ======
</TABLE>
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, 1999, are as follows:
Total
Operating Leases
----------------
2000 ....................................... $1,489,000
2001 ....................................... 1,207,000
2002 ....................................... 656,000
2003 ....................................... 651,000
2004 ....................................... 546,000
Thereafter ................................. 4,476,000
----------
Total ...................................... $9,025,000
==========
Total lease expense amounted to $1,738,000 in 1999, $1,620,000 in 1998 and
$1,363,000 in 1997.
(Continued)
PAGE 20
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, 1999
and 1998, 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, 1999 and 1998, of $7,027,000
and $7,558,000, respectively; commitments to extend credit of $45,064,000 and
$37,981,000, respectively for revolving home equity lines; $99,966,000 and
$109,100,000, respectively for commercial and real estate loans; $27,116,000 and
$21,356,000, 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
<TABLE>
<CAPTION>
(Dollars in thousands)
Actual For Capital Adequacy Purposes
As of December 31, 1999 Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Capital (to risk weighted assets):
Corporation ................................... $152,815 12.64% $96,739 8.00%
Harleysville National Bank .................... 93,993 10.23% 73,484 8.00%
Citizens National Bank ........................ 21,466 11.62% 14,780 8.00%
Security National Bank ........................ 9,593 10.57% 7,259 8.00%
Tier 1 Capital (to risk weighted assets):
Corporation ................................... $138,273 11.43% $48,369 4.00%
Harleysville National Bank .................... 83,222 9.06% 36,742 4.00%
Citizens National Bank ........................ 19,155 10.37% 7,390 4.00%
Security National Bank ........................ 8,532 9.40% 3,629 4.00%
Tier 1 Capital (to average assets):
Corporation ................................... $138,273 8.52% $64,901 4.00%
Harleysville National Bank .................... 83,222 6.76% 49,288 4.00%
Citizens National Bank ........................ 19,155 7.14% 10,738 4.00%
Security National Bank ........................ 8,532 7.05% 4,844 4.00%
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
(Dollars in thousands) To Be Well Capitalized Under
Prompt Corrective Action Provision
As of December 31, 1999 Amount Ratio
- -----------------------------------------------------------------------------------
<S> <C> <C>
Total Capital (to risk weighted assets):
Corporation ................................... -- --
Harleysville National Bank .................... $ 91,855 10.00%
Citizens National Bank ........................ 18,475 10.00%
Security National Bank ........................ 9,074 10.00%
Tier 1 Capital (to risk weighted assets):
Corporation ................................... $ -- --
Harleysville National Bank .................... 55,113 6.00%
Citizens National Bank ........................ 11,085 6.00%
Security National Bank ........................ 5,444 6.00%
Tier 1 Capital (to average assets):
Corporation ................................... $ -- --
Harleysville National Bank .................... 61,536 5.00%
Citizens National Bank ........................ 13,423 5.00%
Security National Bank ........................ 6,055 5.00%
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Actual For Capital Adequacy Purposes
As of December 31, 1999 Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Capital (to risk weighted assets):
Corporation ................................... $137,371 13.77% $79,823 8.00%
Harleysville National Bank .................... 70,733 9.70% 58,316 8.00%
Citizens National Bank ........................ 32,040 17.90% 14,321 8.00%
Security National Bank ........................ 7,629 10.74% 5,680 8.00%
Tier 1 Capital (to risk weighted assets):
Corporation ................................... $124,039 12.43% $39,911 4.00%
Harleysville National Bank .................... 61,603 8.45% 29,158 4.00%
Citizens National Bank ........................ 29,868 16.69% 7,160 4.00%
Security National Bank ........................ 6,741 9.49% 2,840 4.00%
Tier 1 Capital (to average assets):
Corporation ................................... $124,039 9.05% $54,817 4.00%
Harleysville National Bank .................... 61,603 6.11% 40,191 4.00%
Citizens National Bank ........................ 29,868 11.64% 10,263 4.00%
Security National Bank ........................ 6,741 7.10% 3,799 4.00%
- -----------------------------------------------------------------------------------------------------
</TABLE>
[RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
(Dollars in thousands) To Be Well Capitalized Under
Prompt Corrective Action Provision
As of December 31, 1999 Amount Ratio
- -----------------------------------------------------------------------------------
<S> <C> <C>
Total Capital (to risk weighted assets):
Corporation ................................... $ -- --
Harleysville National Bank .................... 72,895 10.00%
Citizens National Bank ........................ 17,901 10.00%
Security National Bank ........................ 7,101 10.00%
Tier 1 Capital (to risk weighted assets):
Corporation ................................... $ -- --
Harleysville National Bank .................... 43,737 6.00%
Citizens National Bank ........................ 10,740 6.00%
Security National Bank ........................ 4,260 6.00%
Tier 1 Capital (to average assets):
Corporation ................................... $ -- --
Harleysville National Bank .................... 50,238 5.00%
Citizens National Bank ........................ 12,828 5.00%
Security National Bank ........................ 4,749 5.00%
- -----------------------------------------------------------------------------------
</TABLE>
(Continued)
PAGE 21
Regulatory Capital (continued)
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, 1999, 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.
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 2000 of
approximately $25,000,000 plus an amount equal to the net profits of the Banks
in 2000 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, 1999, 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.
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, 1999 and 1998 are outlined
below.
For cash and due from banks, interest-bearing deposits in banks and federal
funds sold, the recorded book values of $47,277,000 and $57,337,000 at December
31, 1999 and 1998, 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, 1999 and 1998,
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.
1999
-----------------------------------
Carrying Estimated
Amount Fair Value
-----------------------------------
Investment securities ................... $ 475,230,000 $ 474,787,000
Loans, net .............................. $1,061,976,000 $1,064,379,000
1998
-----------------------------------
Carrying Estimated
Amount Fair Value
-----------------------------------
Investment securities ................... $ 431,958,000 $ 432,640,000
Loans, net .............................. $ 900,310,000 $ 904,711,000
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.
1999
-----------------------------------
Carrying Estimated
Amount Fair Value
-----------------------------------
Time deposits ........................... $ 486,789,000 $ 490,503,000
1998
-----------------------------------
Carrying Estimated
Amount Fair Value
-----------------------------------
Time deposits ........................... $ 420,073,000 $ 423,781,000
The fair values of demand notes, borrowings, and securities sold under
agreements to repurchase of $248,318,000 and $148,978,000 at December 31, 1999
and 1998, 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
$179,173,000 and $175,995,000 at December 31, 1999 and 1998, respectively, and
primarily comprised unfunded loan commitments which are generally priced at
market at the time of funding.
(Continued)
PAGE 22
16 - Condensed Financial Information - Parent Company Only
Condensed financial statements of Harleysville National Corporation follow:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
(Dollars in thousands) December 31,
--------------------------------------
1999 1998
--------------------------------------
Assets:
<S> <C> <C>
Cash .................................................. $ 51 $ 244
Investments in subsidiaries ........................... 129,609 131,155
------------- -------------
Total assets ....................................... $ 129,660 $ 131,399
============= =============
Liabilities and shareholders' equity:
Other liabilities ..................................... $ -- $ 447
------------- -------------
Total liabilities .................................. $ -- $ 447
------------- -------------
Shareholders' equity:
Common stock .......................................... $ 7,915 $ 7,536
Additional paid in capital ............................ 63,080 50,899
Retained earnings ..................................... 68,422 67,133
Net unrealized gain on investment
securities available for sale ....................... (9,757) 5,384
------------- -------------
Total shareholders' equity ......................... 129,660 130,952
------------- -------------
Total liabilities and
shareholders' equity .............................. $ 129,660 $ 131,399
============= =============
CONDENSED STATEMENTS OF INCOME
(Dollars in thousands) Year Ended December 31,
--------------------------------------
1999 1998 1997
--------------------------------------
Dividends from banks ..................................... $20,763 $28,090 $ 8,577
Other income -- -- 71
------- ------- -------
Total operating income ................................ 20,763 28,090 8,648
------- ------- -------
Operating expense ........................................ 19 8 --
------- ------- -------
Income before income tax
expense and equity in
undistributed net income
of banks .............................................. 20,744 28,082 8,648
Income tax expense ....................................... (7) (3) 24
------- ------- -------
Income before equity in
undistributed net income
of banks .............................................. 20,751 28,085 8,624
Equity in undistributed
net income of banks ................................... 1,596 (8,778) 9,019
------- ------- -------
Net income ............................................ $22,347 $19,307 $17,643
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Year Ended December 31,
--------------------------------------
1999 1998 1997
--------------------------------------
Operating activities:
<S> <C> <C> <C>
Net income ............................................ $22,347 $19,307 $17,643
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Equity in undistributed
net income of banks ................................ (1,596) 8,778 (9,019)
Realized gain on sale
of securities ...................................... -- -- (6)
Net increase in
other liabilities .................................. (446) (3) 24
------- ------- -------
Net cash provided by
operating activities .................................. 20,305 28,082 8,642
------- ------- -------
Investing activities:
Capital contributions
made to the banks .................................. (12,000) (21,663) (3,944)
Proceeds from sales
of securities ...................................... -- -- 1,874
------- ------- -------
Net cash (used in) provided
by investing activities ............................... (12,000) (21,663) (2,070)
------- ------- -------
Financing activities:
Cash dividends and
fractional shares .................................. (8,488) (7,277) (6,593)
Dividend reinvestment ................................. (49) -- (16)
Stock options and awards .............................. 39 354 232
------- ------- -------
Net cash used in
financing activities .................................. (8,498) (6,923) (6,377)
------- ------- -------
Net (decrease) increase in cash .......................... (193) (504) 195
Cash and cash equivalents at
beginning of year ..................................... 244 748 553
------- ------- -------
Cash and cash equivalents at
end of year ........................................... $ 51 $ 244 $ 748
======= ======= =======
</TABLE>
(Continued)
PAGE 23
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:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share information)
Three Months Ended
---------------------------------------------
1999: March 31 June 30 Sept. 30 Dec. 31
---------------------------------------------
<S> <C> <C> <C> <C>
Interest income ..................................... $24,468 $25,743 $27,388 $28,518
Net interest income ................................. 14,019 14,867 15,269 15,089
Provision for losses ................................ 477 477 476 477
Noninterest income .................................. 2,315 2,541 2,380 2,856
Operating expenses .................................. 9,021 9,178 9,449 10,790
Income before income
tax expense ...................................... 6,836 7,753 7,724 6,678
Income tax expense .................................. 1,647 2,001 1,766 1,230
------- ------- ------- -------
Net income .......................................... $ 5,189 $ 5,752 $ 5,958 $ 5,448
======= ======= ======= =======
Net income per share
Basic ............................................ $ 0.65 $ 0.73 $ 0.75 $ 0.69
======= ======= ======= =======
Diluted .......................................... $ 0.65 $ 0.73 $ 0.75 $ 0.69
======= ======= ======= =======
1998:
Interest income ..................................... $22,345 $23,130 $23,656 $24,361
Net interest income ................................. 12,974 13,261 13,390 13,629
Provision for losses ................................ 565 565 550 550
Noninterest income .................................. 1,903 2,236 2,944 2,925
Operating expenses .................................. 8,349 8,584 8,517 9,959
Income before income
tax expense ...................................... 5,963 6,348 7,267 6,045
Income tax expense .................................. 1,486 1,558 1,979 1,293
------- ------- ------- -------
Net income .......................................... $ 4,477 $ 4,790 $5,288 $ 4,752
======= ======= ======= =======
Net income per share
Basic ............................................ $ 0.56 $ 0.61 $ 0.67 $ 0.60
======= ======= ======= =======
Diluted .......................................... $ 0.56 $ 0.61 $ 0.67 $ 0.60
======= ======= ======= =======
</TABLE>
PAGE 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Harleysville National Corporation and Subsidiaries
Consolidated Summary of Operations
<TABLE>
<CAPTION>
(Dollars in thousands, except per share Year Ended December 31,
data and average shares outstanding) 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income And Expense
Interest income ................................... $ 106,117 $ 93,492 $ 85,827 $ 78,926 $ 73,500
Interest expense .................................. 46,873 40,238 36,086 33,011 30,804
---------- ---------- ---------- ---------- ----------
Net interest income ............................... 59,244 53,254 49,741 45,915 42,696
Provision for loan losses ......................... 1,907 2,230 2,590 2,197 2,242
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 57,337 51,024 47,151 43,718 40,454
Noninterest income ................................ 10,092 10,008 7,591 5,311 4,737
Noninterest expense ............................... 38,438 35,409 30,626 27,842 26,186
---------- ---------- ---------- ---------- ----------
Income before income tax expense .................. 28,991 25,623 24,116 21,187 19,005
Income tax expense ................................ 6,644 6,316 6,473 5,920 5,646
---------- ---------- ---------- ---------- ----------
Net income ........................................ $ 22,347 $ 19,307 $ 17,643 $ 15,267 $ 13,359
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------
Per Share*
Basic earnings .................................... $ 2.82 $ 2.44 $ 2.24 $ 1.94 $ 1.71
Diluted earnings .................................. 2.82 2.44 2.24 1.94 1.70
Cash dividends paid ............................... 1.07 0.95 0.86 0.76 0.67
Basic average shares outstanding .................. 7,913,540 7,902,962 7,878,752 7,867,103 7,822,843
Diluted average shares outstanding ................ 7,925,384 7,918,337 7,885,847 7,890,970 7,856,667
*Adjusted for 5% stock dividends effective 9/30/99,
6/30/97 and 6/28/96
- --------------------------------------------------------------------------------------------------------------------
Average Balance Sheet
Loans ............................................. $ 973,398 $ 839,102 $ 763,000 $ 704,032 $ 651,955
Investments ....................................... 451,750 365,678 296,249 268,678 238,955
Other interest-earning assets ..................... 10,261 25,366 29,092 21,446 18,898
Total assets ...................................... 1,509,248 1,284,706 1,146,573 1,046,915 959,068
Deposits .......................................... 1,159,377 1,037,039 940,738 881,859 818,995
Other interest-bearing liabilities ................ 191,857 97,232 71,067 46,814 37,084
Shareholders' equity .............................. 130,689 124,684 111,306 98,515 87,926
- --------------------------------------------------------------------------------------------------------------------
Balance Sheet At Year-End
Loans ............................................. $1,061,976 $ 900,310 $ 798,306 $ 737,094 $ 675,240
Investments ....................................... 475,230 431,958 311,642 283,446 253,401
Other interest-earning assets ..................... 5,123 17,133 18,020 16,615 25,785
Total assets ...................................... 1,635,679 1,412,090 1,188,267 1,095,967 1,005,859
Deposits .......................................... 1,231,265 1,104,316 982,529 909,746 855,816
Other interest-bearing liabilities ................ 248,318 148,978 64,138 59,521 39,751
Shareholders' equity .............................. 129,660 130,952 117,646 104,793 92,860
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
PAGE 25
Forward-looking statements may prove inaccurate. We have made
forward-looking statements in this document, 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, 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 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 analysis of these risks and forces could be incorrect
and/or that the strategies developed to address them could be
unsuccessful.
Introduction
The Corporation experienced record performance during 1999. This
performance was achieved through an increase in earning assets and continued
emphasis on controlling overhead expenses. The primary source of the increase in
assets was the growth in loans. The Corporation's emphasis on building the loan
portfolio with quality loans was underscored through the improvement in key loan
performance ratios.
The Corporation's net income of $22,347,000 in 1999, increased 15.7%
compared to the $19,307,000 reported in 1998. Both basic and diluted earnings
per share increased 15.6% to $2.82 from $2.44 earned in 1998. The primary
sources of this increase in net income were the rise in earning assets,
continued growth in income from the Investment Management and Trust Division,
and the management of operating expenses. Average earning assets increased
$205,263,000, or 16.7%, from a year ago, compared to an 8.6% rise in other
operating expenses. Income from the Investment Management and Trust Division
grew 24.2% in 1999, compared to 1998.
An improvement in asset quality in 1999 was reflected by an improvement in
key loan performance ratios. Nonperforming assets as a percentage of total loans
and net assets acquired in foreclosure at December 31, 1999 declined to 0.53%,
from 0.60% at December 31, 1998. At December 31, 1999, loans past due 90 days or
more were reduced by $1,081,000, to $269,000, compared to the December 31, 1998,
balance of $1,350,000.
Interest-Earning Assets and
Interest-Bearing Liabilities
The level of average interest-earning assets was $1,435,409,000 in 1999, an
increase of $205,263,000, or 16.7%, compared to 1998. The increase was led by
strong growth in loans. During 1999, the average balance of the loan portfolio
increased $134,296,000, or 16.0%. Also contributing to the growth in average
interest-earning assets was an $86,072,000, or 23.5% rise in average investment
securities. Average interest-earning assets were $1,088,341,000 in 1997.
Average interest-bearing liabilities totaled $1,170,087,000 in 1999, an
increase of $194,148,000, or 19.9%, compared to 1998. This increase was
attributable to increases in other borrowings, savings deposits, and time
deposits of $94,625,000, $58,328,000, and $41,195,000, respectively. Average
interest-bearing liabilities were $869,447,000 in 1997.
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.
The investment securities total at December 31, 1999, of $475,230,000 grew
$43,272,000, or 10.0%, over the December 31, 1998, balance of $431,958,000. This
increase included $25,000,000 in securities purchased as part of a capital
leverage program. The capital leverage program involves structured transactions
in which the banks borrow funds from the Federal Home Loan Bank (FHLB) and
invest these borrowed funds in securities that are priced to yield a spread over
the FHLB borrowing rate. The investment securities held to maturity decreased
$17,249,000 during 1999, as a result of maturities and calls. The investment
securities available for sale increased $60,521,000. The increase in the
investments available for sale, not inclusive of the $25,000,000 capital
leverage program, was funded by proceeds from the maturities and calls in the
investment securities portfolios and through the increase in deposits during
1999.
Loans
The Corporation continued its strong growth in loans during 1999. Total
loans grew $158,276,000, from $902,894,000 at December 31, 1998, to
$1,061,170,000 at December 31, 1999. The Banks experienced growth in all loan
categories. During 1999, consumer loans, commercial loans, lease financing and
real estate loans grew $78,420,000, $34,488,000, $26,156,000, and $19,212,000,
respectively. The majority of the growth in consumer loans was related to the
growth in financing indirect automobile dealer loans during 1999. The
Corporation has maintained strong relationships with automobile dealers to
insure that we offer them the services and products to meet their financing
needs. Residential mortgages sold during 1999 were $38,215,000 compared to
$34,313,000 in 1998.
At December 31, 1999, 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.
The Banks continued to maintain a high quality loan portfolio during 1999.
Nonperforming assets (nonaccruing loans, net
(Continued after Balance Sheet Analysis)
PAGE 26
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,
-----------------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------------
Average Average Average Average
(Dollars in thousands) Balance Rate Interest Balance Rate Interest
-----------------------------------------------------------------------------------------
Assets
Investment securities:
<S> <C> <C> <C> <C> <C> <C>
Taxable investments .................. $266,477 6.54% $17,427 $218,523 6.28% $13,723
Nontaxable investments (1) ........... 185,273 7.51 13,923 147,155 7.71 11,353
---------- ---- ------- --------- ---- -------
Total investment securities ........ 451,750 6.94 31,350 365,678 6.86 25,076
Loans (1) (2) .......................... 973,398 8.15 79,370 839,102 8.50 71,344
Other rate-sensitive assets ............ 10,261 4.76 488 25,366 5.21 1,321
---------- ---- ------- --------- ---- -------
Total earning assets ............... 1,435,409 7.75 111,208 1,230,146 7.95 97,741
Noninterest-earning assets ............. 73,839 -- -- 54,560 -- --
---------- ---- ------- --------- ---- -------
Total assets ....................... $1,509,248 7.37% $111,208 $1,284,706 7.61% $97,741
========== ===== ======== ========== ===== =======
Liabilities And Shareholders' Equity
Deposits:
Demand ............................... $ 181,147 --% $ -- $ 158,332 --% $ --
Savings .............................. 524,155 2.53 13,255 465,827 2.75 12,789
Time ................................. 454,075 5.29 24,038 412,880 5.51 22,748
---------- ---- ------- --------- ---- -------
Total .............................. 1,159,377 3.22 37,293 1,037,039 3.43 35,537
Borrowings and other
interest-bearing liabilities ......... 191,857 4.99 9,580 97,232 4.83 4,701
Other liabilities ...................... 27,325 -- -- 25,751 -- --
---------- ---- ------- --------- ---- -------
Total liabilities .................. 1,378,559 3.40 46,873 1,160,022 3.47 40,238
Shareholders' equity ................... 130,689 -- -- 124,684 -- --
---------- ---- ------- --------- ---- -------
Total liabilities and
shareholders' equity .............. $1,509,248 3.11% $46,873 $1,284,706 3.13% $40,238
========== ===== ======== ========== ===== =======
Average effective rate on
interest-bearing liabilities ......... $1,170,087 4.01% $46,873 $ 975,939 4.12% $40,238
========== ===== ======== ========== ===== =======
====================================================================================================================================
Interest Income/Earning Assets ......... $1,435,409 7.75% $111,208 $1,230,146 7.95% $97,741
Interest Expense/Earning Assets ........ $1,435,409 3.27 $ 46,873 $1,230,146 3.27 $40,238
----- -----
Effective Interest Differential ........ 4.48% 4.67%
===== =====
</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.
- --------------------------------------------------------------------------------
(Continued)
<TABLE>
<CAPTION>
--------------------------------------------
1997
--------------------------------------------
Average Average
(Dollars in thousands) Balance Rate Interest
--------------------------------------------
Assets
Investment securities:
<S> <C> <C> <C>
Taxable investments .................. $195,557 6.56% $12,832
Nontaxable investments (1) ........... 100,692 8.01 8,062
---------- ---- -------
Total investment securities ........ 296,249 7.05 20,894
Loans (1) (2) .......................... 763,000 8.70 66,378
Other rate-sensitive assets ............ 29,092 5.66 1,648
---------- ---- -------
Total earning assets ............... 1,088,341 8.17 88,920
Noninterest-earning assets ............. 58,232 -- --
---------- ---- -------
Total assets ....................... $1,146,573 7.76% $88,920
========== ===== =======
Liabilities And Shareholders' Equity
Deposits:
Demand ............................... $142,358 --% $ --
Savings .............................. 415,488 2.71 11,272
Time ................................. 382,892 5.53 21,186
---------- ---- -------
Total .............................. 940,738 3.45 32,458
Borrowings and other
interest-bearing liabilities ......... 71,067 5.11 3,628
Other liabilities ...................... 23,462 -- --
---------- ---- -------
Total liabilities .................. 1,035,267 3.49 36,086
Shareholders' equity ................... 111,306 -- --
---------- ---- -------
Total liabilities and
shareholders' equity .............. $1,146,573 3.15% $36,086
========== ===== =======
Average effective rate on
interest-bearing liabilities ......... $869,447 4.15% $36,086
========== ===== =======
====================================================================================
Interest Income/Earning Assets ......... $1,088,341 8.17% $88,920
Interest Expense/Earning Assets ........ $1,088,341 3.32 $36,086
-----
Effective Interest Differential ........ 4.85%
=====
- -------------------------------------------------------------------------------------
</TABLE>
PAGE 27
assets in foreclosure and troubled debt restructured loans) were 0.53% of total
loans and net assets acquired in foreclosure at December 31, 1999, compared to
0.60% at December 31, 1998, and 0.73% at December 31, 1997. The ratio of the
allowance to nonperforming assets was 254.1% at December 31, 1999, compared to
253.3% at December 31, 1998 and 215.6% at December 31, 1997.
The balance of nonaccruing loans of $3,690,000 at December 31, 1999, decreased
$6,000 from the December 31, 1998, balance of $3,696,000. A decrease in
nonaccruing commercial loans was partially offset by an increase in real estate
nonaccruing loans. The December 31, 1998, balance of nonaccrual loans was
$34,000 less than the December 31, 1997, balance of $3,730,000.
Net assets in foreclosure totaled $1,436,000 as of December 31, 1999, an
increase of $304,000 from the December 31, 1998 balance. During 1999, sales of
foreclosed properties totaled $1,765,000, transfers from loans to assets in
foreclosure were $2,186,000 and write-downs of assets in foreclosure equaled
$117,000. 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.
During 1999, strong loan collection efforts by the Banks significantly reduced
loans past due 90 days or more. 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, 1999, loans past due 90 days or more
and still accruing interest were $269,000, compared to $1,350,000 as of December
31, 1998. This decrease was a result of a reduction in real estate loans and
consumer loans past due 90 days at December 31, 1999.
As of December 31, 1999, there were two unrelated commercial borrowers with
troubled debt restructured loans totaling $465,000. These customers were
complying with the restructured terms as of December 31, 1999.
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
3.7% from $13,706,000 at December 31, 1998, to $14,208,000 at December 31, 1999.
The allowance for loan losses to nonperforming assets at December 31, 1999, of
254.1% increased from the 253.3% at December 31, 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Nonperforming assets ......................... $5,591,000 $5,410,000 $5,841,000
Allowance for loan losses to
nonperforming assets ................ 254.1% 253.3% 215.6%
Nonperforming assets to total loans and
net assets acquired in foreclosure .. 0.53% 0.60% 0.73%
Allowance for loan losses
to total loans ...................... 1.34% 1.52% 1.58%
- ----------------------------------------------------------------------------------------------
</TABLE>
Deposits and Borrowings and Other Interest-Bearing Liabilities
The primary funding sources of the Corporation are deposits and other
borrowings. The Banks have seen significant increases in other borrowings during
the last few years as a result of the capital leverage program and an increase
in competition for deposits. Total deposits of $1,231,265,000 at December 31,
1999, increased $126,949,000, or 11.5%, from the $1,104,316,000 balance at
December 31, 1998. All deposit categories increased during this period. Other
borrowings of $248,318,000 at December 31, 1999, grew $99,340,000, or 66.7%,
compared to the December 31, 1998, balance. This increase included $25,000,000
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.
- --------------------------------------------------------------------------------
INCOME STATEMENT ANALYSIS
Results of Operations
The 1999 net income of $22,347,000 increased $3,040,000, or 15.7% from the
1998 net income of $19,307,000. On a per share basis, basic and diluted earnings
were $2.82 in 1999, compared to basic and diluted earnings per share of $2.44 in
1998. Net income increased in 1998 by $1,664,000, or 9.4% over 1997.
The return on average shareholders' equity was 17.10% for 1999, compared to
15.48% for 1998 and 15.85% in 1997. The 1999 return on average assets of 1.48%
decreased from the 1998 return on average asset rate of 1.50% as a result of the
strong asset growth experienced during 1999. The 1997 return on average assets
was 1.54%.
Net income is affected by five major elements: net interest income, or the
difference between interest income earned on loans and investments and interest
expense paid on deposits and borrowed funds; the provision for loan losses, or
the amount added to the allowance for loan losses to provide reserves for future
losses on loans; other operating income, which is made up primarily of certain
service fees and Investment Management and Trust Services income; 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
The 1999 net interest income of $59,244,000 increased $5,990,000, or 11.2%,
from 1998 levels. Net interest income was $53,254,000 in 1998, which was 7.1%
higher than the $49,741,000 reported in 1997.
Interest income at December 31, 1999, of $106,117,000 grew $12,625,000, or
13.5%, from the $93,492,000 balance at December 31, 1998. 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 $6,635,000, or 16.5%, increase in interest expense at December 31,
1999, compared to December 31, 1998. This rise in interest expense was the
result of the increase in both average interest-bearing deposits and borrowings
during this period. The higher rate of growth in interest expense, compared to
the interest income growth, is the result of funding bank
(Continued)
PAGE 28
owned life insurance (BOLI) with deposits during 1999. Income generated from
BOLI is recorded as other operating income.
Net Interest Margin
The net interest margin for 1999 of 4.48% was lower than both the net interest
margins for 1998 and 1997 of 4.67% and 4.85%, respectively. The lower net
interest margin experienced in 1999 is related to the high cost of attracting
new deposits, the impact of the additional capital leverage program, and the
funding of the BOLI. The tax-equivalent yield on total interest-earning assets
decreased 20 basis points from 7.95% in 1998 to 7.75% in 1999. This decrease is
the result of an increase in lower yielding investment securities related to the
capital leverage program, and lower loan yields. The Banks' 11 basis point
reduction in the cost of interest-bearing liabilities did not match the drop in
the tax-equivalent yield on total interest earning assets. The 1999 cost of
interest-bearing liabilities was 4.01% in 1999 and 4.12% in 1998.
In an effort to more fully leverage its capital, the Corporation entered into
structured transactions in which the Banks borrow funds from the FHLB and invest
these borrowed funds into securities that are priced to yield a spread over the
FHLB borrowing rate. The Banks' capital leverage program balance at December 31,
1999, was $74,818,000. The actual leverage program yield spread earned during
1999 was 1.66%. Since the current competitive interest rate environment will
continue to place downward pressure on the net interest margin, the Banks will
increase net interest income through the continued growth in market share of
loans and deposits.
The 1997 tax-equivalent yield on total interest-earning assets, cost of
interest-bearing liabilities and net interest margin were 8.17%, 4.15% and
4.85%, respectively.
Interest Rate Sensitivity Analysis
The Corporation 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:
asset/liability simulation reports; gap analysis reports; and net interest
margin reports. The table below shows the interest rate sensitivity gap position
as of December 31, 1999. The table presents data at a single point in time and
includes management assumptions estimating the prepayment rate and the interest
rate environment prevailing at December 31, 1999. Money market, interest-bearing
checking, and savings accounts are considered stable sources 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 (8.87)% of earning assets at December 31, 1999.
This gap position is within the guidelines set by the Banks' Asset/ Liability
policy.
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 have on the Banks' net interest income is simulated
by increasing and decreasing interest rates. This simulation is known as rate
shocks. The report on the following page 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, 1999, rate shock simulations show
that the Banks are within all guidelines set by the Banks' Asset/Liability
policy.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands) December 31, 1999
---------------------------------------------------------------------
0 to 90 91 to 365 >1 year >3 years Over 5
days days <3 years <5 years years
---------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C> <C>
Other rate-sensitive assets ..................... $ 3,523 $1,500 $ 100 $ -- $ --
Loans ........................................... 228,012 110,943 310,965 171,511 240,545
Investment securities ........................... 25,797 45,361 51,392 49,290 318,402
-------- --------- -------- -------- --------
Total rate-sensitive assets ..................... 257,332 157,804 362,457 220,801 558,947
-------- --------- -------- -------- --------
Liabilities
Time deposits ................................... 142,698 164,582 150,676 28,811 22
Money market accounts ........................... 9,279 30,198 55,748 19,921 134,879
Interest-bearing checking accounts .............. 4,936 16,315 35,749 12,778 79,784
Savings accounts ................................ 5,460 14,175 31,097 17,887 74,795
Other borrowings ................................ 153,068 12,500 47,750 23,000 12,000
-------- --------- -------- -------- --------
Total rate-sensitive liabilities ................ $315,441 $237,770 $321,020 $102,397 $301,480
-------- --------- -------- -------- --------
Incremental gap ................................. $(58,109) $(79,966) $ 41,437 $118,404 $257,467
======== ========= ======== ======== ========
Cumulative gap .................................. $(58,109) $(138,075) $(96,638) $ 21,766 $279,233
======== ========= ======== ======== ========
% of earning assets ............................. (3.73)% (8.87)% (6.21)% 1.40% 17.93%
======== ========= ======== ======== ========
</TABLE>
(Continued)
PAGE 29
<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 ............... 264,676 (42,407) -13.81% +/-30%
+150 Basis Points ............... 274,984 (32,099) -10.45% +/-30%
+100 Basis Points ............... 285,504 (21,579) -7.03% +/-30%
+50 Basis Points ................ 296,161 (10,922) -3.56% +/-30%
Flat Rate ....................... 307,083 -- 0.00% +/-30%
- -50 Basis Points ................ 317,030 9,947 3.24% +/-30%
- -100 Basis Points ............... 325,920 18,837 6.13% +/-30%
- -150 Basis Points ............... 329,874 22,791 7.42% +/-30%
- -200 Basis Points ............... 330,367 23,284 7.58% +/-30%
- ------------------------------------------------------------------------------------------------------
</TABLE>
In the event the Banks should experience a mismatch in their desired GAP
ranges or an excessive decline in their market value of equity resulting from
changes in interest rates, they have a number of options which they could
utilize to remedy such a mismatch. The Banks could restructure their investment
portfolio through the sale or purchase of securities with more favorable
repricing attributes. They could also emphasize loan products with appropriate
maturities or repricing attributes, or attract deposits or obtain borrowings
with desired maturities.
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 1999 provision of $1,907,000, reflected a decrease of $323,000, or 14.4%,
compared to the 1998 provision of $2,230,000. The decrease in the provision
during 1999 is related to the improvement in the ratio of the allowance for loan
losses to nonperforming assets ratio. The allowance for loan losses to
nonperforming assets ratio for December 31, 1999, 1998 and 1997 were 254.1%,
253.3%, and 215.6%, respectively. Total loans charged off increased 18.9% from
$1,416,000 in 1998 to $1,684,000 in 1999. The increase in the loans charged off
was primarily due to real estate related loans. Recoveries of $279,000 during
1999 decreased from the 1998 recoveries of $300,000. The charged off loans and
recoveries for 1997 were $1,745,000 and $519,000, respectively.
Other Income
The 1999 other operating income of $10,092,000 increased $84,000, compared to
the 1998 level of $10,008,000. This minor growth was the result of a $1,072,000
decrease in security gains earned in 1999 compared to 1998. The 1999 other
operating income net of security gains increased $1,156,000, or 13.7%, over the
1998 other operating income net of security gains. Contributing to this increase
were a $512,000 rise in trust income, a $285,000 growth in service charges and a
$527,000 increase in BOLI income. These increases were offset by a $168,000
decrease in other income.
Income from service charges on deposit accounts of $3,572,000 in 1999 increased
$285,000, or 8.7%, from the 1998 income from service charges on deposit accounts
of $3,287,000. The increase in service charges during 1999 is attributed to the
13.0% rise in average fee earning deposits. The 1998 service charges grew 9.8%
over 1997 service charges.
The $471,000 net security gain in 1999 was lower than the 1998 and 1997 net
security gains of $1,543,000 and $1,757,000, respectively. The majority of the
security gains in 1998 and 1997 were the result of the sale of equity securities
held at HNC Financial Company. HNC Financial Company did not sell any securities
during 1999. 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.
Income from the Corporation's Investment Management and Trust Division of
$2,629,000 increased $512,000, or 24.2%, compared to the $2,117,000 recorded in
1998. This increase was primarily the result of a 24.7% increase in the book
value of trust assets from December 31, 1998 to December 31, 1999. The 1997
Investment Management and Trust Division income was $1,509,000.
During 1999, the corporation entered into a $25,000,000 investment of bank
owned life insurance (BOLI). BOLI involves the purchasing of life insurance by
the Corporation on a chosen group of employees. The corporation is the owner and
beneficiary of the policies. This pool of insurance, due to tax advantages to
the Banks, is profitable to the corporation. This profitability is used to
offset a portion of future benefit cost increases. Bank deposits fund BOLI and
the earnings from BOLI are recognized as other income. The corporation
recognized $527,000 of BOLI income during 1999.
Other income decreased $168,000 during 1999, from $3,061,000 in 1998 to
$2,893,000 in 1999. This decrease was due to a $388,000 reduction in gains on
the sale of residential mortgages, from $716,000 in 1998, to $328,000 in 1999.
Net of gains on the sale of residential mortgages, other income increased
$220,000, or 9.4%, in 1999, compared to 1998. This increase was the result of a
rise in gains on the sale of off-lease vehicles and equipment and the growth in
debit card fees. Other income in 1997 was $1,395,000.
Other Expenses
The Corporation's total overhead expense as a percentage of average assets of
2.51% was well below its peer banks' ratio of 3.02% as of September 30, 1999.
Other operating expenses rose to $38,438,000 for 1999, an 8.6% increase over the
$35,409,000 for 1998. This increase improved from the 15.6% increase in other
operating expenses experienced from 1997 to 1998. The Corporation's constant
focus on controlling expenses and improving efficiencies has held the growth of
its other operating expenses much lower than its 15.8%
(Continued)
PAGE 30
growth in total assets during 1999. Employee salaries and benefits increased
$1,560,000, or 8.3%, from $18,876,000 in 1998 to $20,436,000 in 1999. The
increase in salaries and benefits reflects cost-of-living increases, merit
increases and additional staff necessitated by current and planned growth. The
1998 salaries and benefits expense increased 14.7% over the 1997 salary and
benefits expense of $16,452,000.
Net occupancy costs increased by $117,000, or 5.0%, in 1999, compared with a
$171,000, or 7.9%, increase in 1998. These increases are primarily related to
the additional occupancy expense related to the opening of new branches during
these periods. Equipment expenses increased by $836,000, or 23.0%, during 1999,
and $646,000, or 21.6%, in 1998. These increases are due to equipment
depreciation, rental and maintenance associated with planned increases in data
processing capabilities used to manage the rise in volume related to the growth
of the Corporation and to enhance the products offered to its customers.
Other expenses grew $516,000, or 4.9%, from $10,565,000 in 1998 to $11,081,000
in 1999. The 1998 other expenses increased 17.1%, compared to 1997. These
increases are the result of expenses associated with the overall growth of the
Banks.
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 22.9% for 1999, 24.6% for 1998 and 26.8% for
1997 were less than the applicable federal income tax rate of 35.0%, as a result
of tax-exempt income.
CAPITAL
Capital, at the end of 1999, was $129,660,000, a decrease of $1,292,000, or
1.0%, over the end of 1998. The decrease was due to the adjustment for the net
unrealized losses on the available for sale investment securities, partially
offset by the retention of the Corporation's earnings. The accumulated other
comprehensive income at December 31, 1999, was a loss of $9,757,000, compared to
a gain of $5,384,000 at December 31, 1998. 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 9.29% December 31, 1999,
compared with 9.80% at December 31, 1998. Since the Corporation's only capital
is primary capital, the total capital ratios are the same as the primary capital
ratios.
Pursuant to the federal regulators' risk-based capital adequacy guidelines,
the components of capital are called Tier 1 and Tier 2 capital. For the
Corporation, Tier 1 capital is 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, 1999, the Corporation's Tier 1 risk-adjusted capital ratio was
11.43%, and the total risk-adjusted capital ratio was 12.64%, 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 1999.
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 8.52% and 9.05%
at December 31, 1999 and 1998, respectively.
Under FDIC 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 of December 31, 1999, the banks are above the
regulatory minimum guidelines and meet the criteria to be categorized as "well
capitalized" institutions.
(Continued)
PAGE 31
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 $7,010,000 during 1999, and
investment securities available for sale averaged $432,342,000 during 1999; both
are 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 $188,657,000 as of December 31,
1999.
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.
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 change in the century. 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.
The Corporation did not experience problems associated with the Y2K issue and
has not found Y2K problems with its related third parties, as of January 31,
2000. The Corporation's third parties include its vendors and commercial
customers. The Corporation continues to monitor its own computer systems for Y2K
problems and will continue to investigate any potential problems with its
related third parties.
The Corporation prepared a Y2K budget and has tracked expenses related to the
Y2K issue. As of December 31, 1999, the corporation has expensed $381,000 and
capitalized fixed assets of $116,000 during the last three years to address the
Y2K issue.
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
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 7, 2000, accompanying the
consolidated financial statements incorporated by reference or included in the
1999 Annual Report of Harleysville National Corporation on Form 10-K for the
year ended December 31, 1999. 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), on Forms S-8 (Registration
No. 33-69784 and Registration No. 33-17813) and on Form S-4 (Registration
Statement No. 333-95983).
GRANT THORNTON LLP
Philadelphia, Pennsylvania
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<CASH> 42,154 40,204 40,545
<INT-BEARING-DEPOSITS> 5,123 3,707 5,574
<FED-FUNDS-SOLD> 0 13,426 12,446
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 450,959 390,438 262,956
<INVESTMENTS-CARRYING> 24,271 41,520 48,686
<INVESTMENTS-MARKET> 23,828 42,202 49,799
<LOANS> 1,061,976 900,310 798,306
<ALLOWANCE> 14,208 13,706 12,592
<TOTAL-ASSETS> 1,635,679 1,412,090 1,188,267
<DEPOSITS> 1,231,265 1,104,316 982,529
<SHORT-TERM> 129,568 55,478 47,138
<LIABILITIES-OTHER> 26,436 27,844 23,954
<LONG-TERM> 118,750 93,500 17,000
0 0 0
0 0 0
<COMMON> 7,915 7,536 7,518
<OTHER-SE> 121,745 123,416 110,128
<TOTAL-LIABILITIES-AND-EQUITY> 1,635,679 1,412,090 1,118,267
<INTEREST-LOAN> 78,776 70,763 65,889
<INTEREST-INVEST> 26,853 21,408 18,283
<INTEREST-OTHER> 488 1,321 1,655
<INTEREST-TOTAL> 106,117 93,492 85,827
<INTEREST-DEPOSIT> 37,293 35,537 32,458
<INTEREST-EXPENSE> 46,873 40,238 36,086
<INTEREST-INCOME-NET> 59,244 53,254 49,741
<LOAN-LOSSES> 1,907 2,230 2,590
<SECURITIES-GAINS> 471 1,543 1,757
<EXPENSE-OTHER> 38,438 35,409 30,626
<INCOME-PRETAX> 28,991 25,623 24,116
<INCOME-PRE-EXTRAORDINARY> 28,991 25,623 24,116
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 22,347 19,307 17,643
<EPS-BASIC> 2.82 2.44 2.24
<EPS-DILUTED> 2.82 2.44 2.24
<YIELD-ACTUAL> 4.48 4.67 4.85
<LOANS-NON> 3,690 3,696 3,730
<LOANS-PAST> 269 1,350 2,341
<LOANS-TROUBLED> 465 583 1,099
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 13,706 12,592 11,228
<CHARGE-OFFS> 1,684 1,416 1,745
<RECOVERIES> 279 300 519
<ALLOWANCE-CLOSE> 14,208 13,706 12,592
<ALLOWANCE-DOMESTIC> 14,208 13,706 12,592
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
