-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ExAJa1tfJT05k78CHYFgZCNfYP1cPoCwXrGpw5RSzkovQdoFWiN/K3KOCUMxMJaK BgrGo/NdNMoAoVUzHxIfOg== 0000702902-96-000004.txt : 19960401 0000702902-96-000004.hdr.sgml : 19960401 ACCESSION NUMBER: 0000702902-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARLEYSVILLE NATIONAL CORP CENTRAL INDEX KEY: 0000702902 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232210237 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15237 FILM NUMBER: 96541030 BUSINESS ADDRESS: STREET 1: 483 MAIN ST CITY: HARLEYSVILLE STATE: PA ZIP: 19438 BUSINESS PHONE: 2152568851 MAIL ADDRESS: STREET 1: 483 MAIN STREET CITY: HARLEYSVILLE STATE: PA ZIP: 19438 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _____________ to ______________ . Commission file number 0-15237 HARLEYSVILLE NATIONAL CORPORATION (Exact name of registrant as specified in its charter) Pennsylvania 23-2210237 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 483 Main Street, Harleysville, Pennsylvania 19438 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 256-8851 Securities registered pursuant to Section 12(b) of the Act: N/A Name of each exchange Title of each class on which registered N/A N/A Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 par value Title of Class Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Page 1 State the aggregate market value of the voting stock held by nonaffiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. $136,120,426 as of February 23, 1996 Indicate the number of shares outstanding of each class of the registrant's classes of common stock, as of the latest practicable date. 5,880,828 shares of Common Stock, $1 par value per share, were outstanding as of February 23, 1996. DOCUMENTS INCORPORATED BY REFERENCE: 1. Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1995 are incorporated by reference into Parts I, II and IV of this report. 2. Portions of the Registrant's Definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held April 9, 1996 are incorporated by reference into Part III of this report. Page 2 HARLEYSVILLE NATIONAL CORPORATION INDEX TO FORM 10-K REPORT PAGE I. PART I. Item 1. Business . . . . . . . . . . . . . . . . 4 Item 2. Properties . . . . . . . . . . . . . . . 10 Item 3. Legal Proceedings . . . . . . . . . . . 11 Item 4. Submission of Matters to a Vote of 11 Security Holders . . . . . . . . . . . . II. PART II. Item 5. Market for Registrant's Common Stock and 12 Related Shareholder Matters . . . . . . Item 6. Selected Financial Data . . . . . . . . 12 Item 7. Management's Discussion and Analysis of 12 Financial Condition and Results of Operations . Item 8. Financial Statements and Supplementary 12 Data . . Item 9. Changes in and Disagreements with 12 Accountants on Accounting and Financial Disclosure . . . . . . III PART. III. Item 10. Directors and Executive Officers of the 13 Registrant . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . 14 Item 12. Security Ownership of Certain Beneficial 14 Owners and Management . . . . . . . . . Item 13. Certain Relationships and Related 15 Transactions . IV. PART IV. Item 14. Exhibits, Financial Statement Schedules 16 and Reports on Form 8-K . . . . . . . . Signatures. . . . . . . . . . . . . . . . . . . . 18 Page 3 PART I Item 1. Business. History and Business - -------------------- Harleysville National Corporation (the "Corporation"), a Pennsylvania business corporation, was incorporated in June 1982. On January 1, 1983, the Corporation acquired all of the outstanding common stock of Harleysville National Bank and Trust Company ("Harleysville") at which time Harleysville became a wholly-owned subsidiary of the Corporation. On February 13, 1991, the Corporation acquired all of the outstanding common stock of The Citizens National Bank of Lansford ("Citizens"). On June 1, 1992, the Corporation acquired all of the outstanding stock of Summit Hill Trust Company ("Summit Hill"). On September 25, 1992, Summit Hill merged into Citizens and is now operating as a branch office of Citizens. On September 7, 1995, the Corporation, Citizens and Farmers and Merchants Bank ("Farmers") executed an Agreement and Plan of Reorganization and an Agreement and Plan of Merger. On March 1, 1996, the Corporation acquired all of the outstanding stock of Farmers and merged it with and into Citizens. On July 1, 1994 the Corporation acquired all of the outstanding stock of Security National Bank ("Security"). The Corporation is a three-bank holding company providing financial services through its Bank subsidiaries. Since commencing operations, the Corporation's business has consisted primarily of managing Harleysville, Citizens and Security (collectively the "Banks"), and its principal source of income has been dividends paid by the Banks. The Corporation is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). As of December 31, 1995, the Company had total consolidated assets, deposits and shareholders' equity of $874,145,992, $741,218,395 and $77,516,176 respectively. Harleysville, which was established in 1909, Citizens, which was established in 1903, and Security, which was established in 1988, are national banking associations under the supervision of the Comptroller of the Currency of the United States of America. The Corporation's and Harleysville's legal headquarters are located at 483 Main Street, Harleysville, Pennsylvania 19438. Citizens' legal headquarters is located at 13-15 West Ridge Street, Lansford, Pennsylvania 18232. Security's legal headquarters is located at One Security Plaza, Pottstown, Pennsylvania 19464. The Banks engage in the full-service commercial banking and trust business, including accepting time and demand deposits, making secured and unsecured commercial and consumer loans, financing commercial transactions, making construction and mortgage loans and performing corporate pension and personal trust services. Their deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to the maximum extent provided by law. The Banks enjoy a stable base of core deposits and are leading community banks in their service areas. The Banks believe they have gained their position as a result of a customer oriented philosophy and a strong commitment to service. Senior management has made the development of a sales orientation throughout the Banks one of their highest priorities and emphasizes this objective with extensive training and sales incentive programs that the Company believes are unusual for community banks. The Banks maintain close contact with the local business community to monitor commercial lending needs and believes they respond to customer requests quickly and with flexibility. Management believes these competitive strengths are reflected in the Corporation's results of operations. The Banks have twenty-two (22) offices located in Montgomery, Bucks and Carbon Counties, 12 of which are owned by the Banks and 10 of which are leased from third parties. As of December 31, 1995, the Corporation and the Banks employed approximately 350 full-time and full-time equivalent persons. The Corporation provides a variety of employment benefits and considers its relationships with its employees to be satisfactory. Page 4 Competition - ----------- The Banks compete actively with other eastern Pennsylvania financial institutions, many larger than the Banks, as well as with financial and non-financial institutions headquartered elsewhere. The Banks are generally competitive with all institutions in their service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. At December 31, 1995, Harleysville's legal lending limit to a single customer was $9,650,000 and Citizens' and Security's legal lending limits to a single customer were $1,815,000 and $590,000, respectively. Many of the institutions with which the Banks compete are able to lend significantly more than these amounts to a single customer. Supervision and Regulation - The Registrant - ------------------------------------------- The Registrant is subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and to supervision by the Federal Reserve Board. The Bank Holding Company Act requires the Registrant to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than five percent (5%) of the voting shares or substantially all of the assets of any institution, including another bank. In addition, the Bank Holding Company Act has been amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act which permits bank holding companies to acquire a bank located in any state subject to certain limitation and restrictions which are more fully described below. A bank holding company is prohibited from engaging in or acquiring direct or indirect control of more than five percent (5%) of the voting shares of any company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the Federal Reserve Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. Federal law also prohibits acquisitions of control of a bank holding company without prior notice to certain federal bank regulators. Control is defined for this purpose as the power, directly or indirectly, to direct the management or policies of the bank or bank holding company or to vote twenty-five percent (25%) or more of any class of voting securities. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company and on taking of such stock or securities of the bank holding company and on taking of such stock or securities as collateral for loans to any borrower. Permitted Activities - -------------------- The Federal Reserve Board permits bank holding companies to engage in certain activities so closely related to banking or managing or controlling banks as to be proper incident thereto. Other than making an equity investment in a low to moderate income housing limited partnership, the Registrant does not at this time engage in any other permissible activities, nor does the Registrant have any current plans to engage in any other permissible activities in the foreseeable future. Legislation and Regulatory Changes - ---------------------------------- From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Registrant and its subsidiaries. Certain changes of potential significance to the Registrant which have been enacted recently and others which are currently under consideration by Congress or various regulatory or professional agencies are discussed below. Page 5 The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the Riegle Community Development and Regulatory Improvement Act may have a significant impact upon the Corporation. The key provisions pertain to interstate banking and interstate branching as well as a reduction in the regulatory burden on the banking industry. Since September 1995, bank holding companies may acquire banks in other states without regard to state law. In addition, banks can merge with other banks in another state beginning in June 1997. States may adopt laws preventing interstate branching but, if so, no out-of-state bank can establish a branch in such state and no banks in such state may branch outside the state. Pennsylvania recently amended the provisions of its banking code to authorize full interstate banking and branching under Pennsylvania law and to facilitate the operations of interstate banks in Pennsylvania. As a result of legal and industry changes, management predicts that consolidation will continue as the financial services industry strives for greater cost efficiencies and market share. Management believes that such consolidation may enhance its competitive position as a community bank. The Interstate Banking and Branching Act also amends the International Banking Act to allow a foreign bank to establish and operate a federal branch or agency upon approval of the appropriate federal and state banking regulator. As a national bank, the Bank currently can relocate its main office across state lines by utilizing a provision in the National Bank Act which permits such relocation to a location not more than thirty miles from its existing main office. In effect, a national bank can thereby move across state lines as long as the relocation does not exceed thirty miles and also retain as branches the offices located in the original state. The Federal Reserve Board, the FDIC, and the Comptroller of the Currency ("Comptroller") have issued certain risk-based capital guidelines. See pages 34 and 35 of Registrant's 1995 Annual Report, which is incorporated by reference herein, for information concerning the Registrant's capital. Pending Legislation - ------------------- Various congressional bills and other proposals have proposed a sweeping overhaul of the banking system, including provisions for: limitations on deposit insurance coverage; changing the timing and method financial institutions use to pay for deposit insurance; expanding the power of banks by removing the restrictions on bank underwriting activities; tightening the regulation of bank derivatives activities; allowing commercial enterprises to own banks; and permitting bank holding companies to own affiliates that engage in securities, mutual funds and insurance activities. There are numerous proposals before Congress to modify the financial services industry and the way commercial banks operate. However, it is difficult to determine at this time what effect such provisions may have until they are enacted into law. Except as specifically described on page 35 of the 1995 Annual Report to Shareholders, management believes that the effect of the provisions of the aforementioned legislation on the liquidity, capital resources, and results of operations of the Corporation will be immaterial. Management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation which, if they were implemented, would have a material adverse effect upon the liquidity, capital resources, or results of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on the Corporation's results of operations. Effects of Inflation - -------------------- Inflation has some impact on the Corporation's and the Banks' operating costs. Unlike many industrial companies, however, substantially all of the Banks' assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation's and the Banks' performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services. Page 6 Effect of Government Monetary Policies - -------------------------------------- The earnings of the Registrant are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve System is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect rates charged on loans or paid for deposits. The Banks are members of the Federal Reserve System and, therefore, the policies and regulations of the Federal Reserve Board have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Banks' operations in the future. The effect of such policies and regulations upon the future business and earnings of the Corporation and the Banks cannot be predicted. Environmental Regulations - ------------------------- There are several federal and state statutes which regulate the obligations and liabilities of financial institutions pertaining to environmental issues. In addition to the potential for attachment of liability resulting from its own actions, a bank may be held liable under certain circumstances for the actions of its borrowers, or third parties, when such actions result in environmental problems on properties that collateralize loans held by the bank. Further, the liability has the potential to far exceed the original amount of the loan issued by the Bank. Currently, neither the Corporation nor the Banks are a party to any pending legal proceeding pursuant to any environmental statute, nor is the Corporation and the Banks aware of any circumstances which may give rise to liability under any such statute. Supervision and Regulation - Banks - ---------------------------------- The operations of the Banks are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System and to banks whose deposits are insured by the Federal Deposit Insurance Corporation. The Banks' operations are also subject to regulations of the Comptroller of the Currency (Comptroller), the Federal Reserve Board and the FDIC. The primary supervisory authority of the Banks is the Comptroller, who regularly examines the Banks. The Comptroller has authority to prevent a national bank from engaging in unsafe or unsound practices in conducting its business. Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, loans a bank makes and collateral it takes, the maximum interest rates a bank may pay on deposits, the activities of a bank with respect to mergers and consolidations and the establishment of branches. As a subsidiary bank of a bank holding company, the Banks are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or its subsidiaries, or investments in the stock or other securities as collateral for loans. The Federal Reserve Act and Federal Reserve Board regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship. FDIC - ---- Under the Federal Deposit Insurance Act, the Comptroller possesses the power to prohibit institutions regulated by it (such as the Banks) from engaging in any activity that would be an unsafe and unsound banking practice or would otherwise be in violation of the law. Page 7 CRA - --- Under the Community Reinvestment Act of 1977, as amended ("CRA"), the Comptroller is required to assess the record of all financial institutions regulated by it to determine if these institutions are meeting the credit needs of the community (including low and moderate income neighborhoods) which they serve and to take this record into account in its evaluation of any application made by any of such institutions for, among other things, approval of a branch or other deposit facility, office relocation, a merger or an acquisition of bank shares. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 amended the CRA to require, among other things, that the Comptroller make publicly available the evaluation of a bank's record of meeting the credit needs of its entire community, including low and moderate income neighborhoods. This evaluation will include a descriptive rating ("outstanding", "satisfactory", "needs to improve" or "substantial noncompliance") and a statement describing the basis for the rating. These ratings are publicly disclosed. BSA - --- Under the Bank Secrecy Act ("BSA"), banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions of which the bank is aware in any one day that aggregate in excess of $10,000. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report. FDICIA - ------ Capital Categories: On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") became law. Under FDICIA, institutions must be classified, based on their risk-based capital ratios into one of five defined categories, as illustrated below (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Total Tier 1 Under a Risk- Risk- Tier 1 Capital Based Based Leverage Order or Ratio Ratio Ratio Directive CAPITAL CATEGORY Well capitalized >10.0 >6.0 >5.0 NO Adequately capitalized > 8.0 >4.0 >4.0* Undercapitalized < 8.0 <4.0 <4.0* Significantly Under- capitalized < 6.0 <3.0 <3.0 Critically Under- capitalized <2.0 *3.0 for those banks having the highest available regulatory rating. Prompt Corrective Action: In the event an institution's capital deteriorates to the undercapitalized category or below, FDICIA prescribes an increasing amount of regulatory intervention, including: (1) the institution of a capital restoration plan and a guarantee of the plan by a parent institution; and (2) the placement of a hold on increases in assets, number of branches or lines of business. If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well capitalized institutions, FDICIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity. All but well capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Page 8 Operational Controls: Under FDICIA, financial institutions are subject to increased regulatory scrutiny and must comply with certain operational, managerial and compensation standards to be developed by Federal Reserve Board regulations. FDICIA also requires the regulators to issue new rules establishing certain minimum standards to which an institution must adhere including standards requiring a minimum ratio of classified assets to capital, minimum earnings necessary to absorb losses and minimum ratio of market value to book value for publicly held institutions. Additional regulations are required to be developed relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and excessive compensation, fees and benefits. Examinations and Audits: Annual full-scope, on site regulatory examinations are required for all the FDIC- insured institutions except institutions with assets under $100 million which are well capitalized, well-managed and not subject to a recent change in control, in which case, the examination period is every eighteen (18) months. Banks with total assets of $500 million or more, as of the beginning of fiscal year 1993, are required to submit to their supervising federal and state banking agencies a publicly available annual audit report. The independent accountants of such bank are required to attest to the accuracy of management's report. The accountants also are required to monitor management's compliance with governing laws and regulations. In addition, such banks also are required to have an independent audit committee composed of outside directors who are independent of management, to review with management and the independent accountants, the reports that must be submitted to the bank regulatory agencies. If the independent accountants resign or are dismissed, written notification must be given to the bank's supervising government banking agencies. These accounting and reporting reforms do not apply to an institution such as a bank with total assets at the beginning of its fiscal year of less than $500 million, such as Citizens or Security. Real Estate Loans: FDICIA also requires that banking agencies reintroduce loan-to-value ("LTV") ratio regulations which were previously repealed by the 1982 Act. LTVs limit the amount of money a financial institution may lend to a borrower, when the loan is secured by real estate, to no more than a percentage, set by regulation, of the value of the real estate. Truth-In-Savings: A separate subtitle within FDICIA, called the "Bank Enterprise Act of 1991", requires "truth-in- savings" on consumer deposit accounts so that consumers can make meaningful comparisons between the competing claims of banks with regard to deposit accounts and products. Under this provision, the Bank is required to provide information to depositors concerning the terms of their deposit accounts, and in particular, to disclose the annual percentage yield. The operational cost of complying with the Truth-In-Savings law had no material impact on liquidity, capital resources or reported results of operations. While the overall impact of fully implementing all provisions of the FDICIA cannot be accurately calculated, Management believes that full implementation of the FDICIA had no material impact on liquidity, capital resources or reported results of operation in future periods. Other: From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restriction on, the business of the Banks. It cannot be predicted whether any such legislation will be adopted or, if adopted, how such legislation would affect the business of the Banks. As a consequence of the extensive regulation of commercial banking activities in the United States, the Banks' business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. Statistical Data - ---------------- The information for this Item is incorporated by reference to pages 23 through 37 of the Company's Annual Report to Shareholders for the year ended December 31, 1995, which is included as Exhibit (13) to this Form 10-K Report. Page 9 Item 2. Properties. - ------------------- The principal executive offices of the Company and of Harleysville are located in Harleysville, Pennsylvania in a two-story office building owned by Harleysville which was built in 1929. Harleysville also owns the buildings in which nine of its branches are located and leases space for the other seven branches from unaffiliated third parties under leases expiring at various times through 2012. The principal executive offices of Citizens are located in Lansford, Pennsylvania in a two-story office building owned by Citizens. Citizens also owns the buildings where the Summit Hill and Lehighton branches are located. The principal executive offices of Security are located in Pottstown, Pennsylvania in a building leased by Security. Security also leases its East End and North End Branches. Office Office Location Owned/Leased Harleysville 483 Main Street Owned Harleysville Pa Skippack Route 73 Owned Skippack Pa Limerick Ridge Pike Owned Limerick Pa North Penn Welsh & North Wales Rd Owned North Wales Pa Gilbertsville Gilbertsville Shopping Leased Gilbertsville Pa Hatfield Snyder Square Leased Hatfield Pa North Broad North Broad Street Owned Lansdale Pa Marketplace Marketplace Shopping Leased Lansdale Pa Normandy Farms Morris Road Leased Blue Bell Pa Horsham Babylon Business Center Leased Horsham Pa Meadowood Route 73 Leased Worcester Pa Collegeville 364 Main Street Owned Collegeville Pa Sellersville 209 North Main St Owned Sellersville Pa Trainers Corner Trainers Corner Center Leased Quakertown Pa Page 10 Quakertown Main 224 West Broad St Owned Quakertown PA Red Hill 400 Main Street Owned Red Hill PA Citizens 13-15 West Ridge Street Owned Lansford PA Summit Hill 2 East Ludlow Street Owned Summit Hill PA Lehighton 904 Blakeslee Blvd Owned Lehighton PA Pottstown One Security Plaza Leased Pottstown PA Pottstown 1450 East High Street Leased Pottstown PA Pottstown Charlotte & Mervine Sts. Leased Pottstown PA All of the above properties are in good condition and are adequate for the Registrant's and the Banks' purposes. Item 3. Legal Proceedings. - -------------------------- Management, based on consultation with the Corporation's legal counsel, is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Company. There are no proceedings pending other than the ordinary routine litigation incident to the business of the Corporation and its subsidiaries - Harleysville National Bank and Trust Company, The Citizens National Bank of Lansford and Security National Bank. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation and the Banks by government authorities. Item 4. Submission of Matters to a Vote of Security Holders. - ------------------------------------------------------------ No matter was submitted during the fourth quarter of 1995 to a vote of holders of the Company's Common Stock. Page 11 PART II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters. - ------------------------------------------------------------- The information for this Item is incorporated by reference to pages 8 and 18 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1995, which is included as Exhibit (13) to this Form 10-K Report. Item 6. Selected Financial Data. - -------------------------------- The information for this Item is incorporated by reference to pages 23 and 37 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1995, which is included as Exhibit (13) to this Form 10-K Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. - ------------------------------------------------------------------------ The information for this Item is incorporated by reference to pages 23 through 36 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1995, which is included as Exhibit (13) to this Form 10-K Report. Item 8. Financial Statements and Supplementary Data. - ---------------------------------------------------- The information for this Item is incorporated by reference to pages 8 through 22 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1995, which is included as Exhibit (13) to this Form 10-K Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. - ------------------------------------------------------------------------ The information for this Item is incorporated by reference to pages 18 and 19 of the Registrant's Definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held April 9, 1996. Page 12 PART III Item 10. Directors and Executive Officers of the Registrant. - ------------------------------------------------------------ The information for this Item with respect to the Corporation's directors is incorporated by reference to pages 3 through 7 of the Corporation's Definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held April 9, 1996. Executive Officers of Registrant - -------------------------------- Name Age Position Walter E. Daller, Jr. 56 President and Chief Executive Officer of the Company and of Harleysville James W. Hamilton 49 Senior Vice President and Senior Trust Officer of Harleysville Demetra M. Takes 45 Executive Vice President and Chief Operating Officer of Harleysville Frank J. Lochetto 48 Senior Vice President and Senior Lending Officer of Harleysville Vernon L. Hunsberger 47 Treasurer of the Company, Senior Vice President/CFO and Cashier of Harleysville Fred C. Reim, Jr. 52 Senior Vice President of Harleysville since August 1993; Senior Vice President of First Valley Bank from December 1990 to August 1993 Henry R. Gehman 60 Vice President of Harleysville Jo Ann M. Bynon 44 Secretary of the Company Dennis L. Detwiler 48 Vice President of Harleysville Bruce D. Fellman 49 Vice President of Harleysville Thomas L. Spence 49 Vice President of Harleysville Robert L. Reilly 46 Vice President of Harleysville David R. Crews 45 Vice President of Harleysville Larry E. Nolt 50 Vice President and Trust Officer of Harleysville since July 1993; Trust Officer of Harleysville from August 1991 to July 1993; Trust Officer of Union National Bank of Souderton for 4 years prior thereto Mikkalya W. Walton 40 Vice President of Loan Administration of Harleysville since July 1994; Vice President Security National Bank September 1991 to June 1994; Assistant Vice President Mellon Bank January 1990 to August 1991 Gregg J. Wagner 35 Vice President and Comptroller of Harleysville National Bank since December 1994; Senior Vice President Security National Bank March 1992 to November 1994; Vice President and Comptroller Bryn Mawr Trust Company December 1989 to February 1992 Page 13 Harry T. Weierbach 51 Vice President of Investments of Harleysville since December 1995; Assistant Vice President of Harleysville from June 1994 to December 1995; Vice President of Investments of Continental Bank from 1982 Thomas D. Oleksa 42 President and Chief Executive Officer of Citizens Martha A. Rex 47 Vice President and Cashier of Citizens Maurice Infante 56 Vice President Consumer Lending of Citizens since April 1994; Assistant Vice President Consumer Lending of Citizens December 1991 to March 1994; Vice President Home Savings Association of Pennsylvania January 1988 to November 1991 Raymond H. Melcher 44 President and Chief Executive Officer of Security since November 1994; Executive Vice President, Chief Operating Officer Hi-Tech Connections 1990 to 1994; Executive Vice President Keystone Financial 1988 to 1990 Allen R. Loeb 47 Vice President of Lending of Security since April 1995; Vice President of Lending National Penn Bank from April 1994 to April 1995 Item 11. Executive Compensation. - -------------------------------- The information for this Item is incorporated by reference to pages 7 through 13 of the Corporation's Definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held April 9, 1996. Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------ The information for this Item is incorporated by reference to pages 3 through 4 of the Corporation's Definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held April 9, 1996. Page 14 Item 13. Certain Relationships and Related Transactions. - -------------------------------------------------------- The information for this Item is incorporated by reference to page 18 of the Corporation's Definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held April 9, 1996, and to page 16 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1995, which is included as Exhibit (13) to this form 10- K Report. Page 15 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. - ------------------------------------------------------------------------- (a) Financial Statements, Financial Statement Schedules and Exhibits Filed: (1) Consolidated Financial Statements Page Harleysville National Corporation and Subsidiary: Consolidated Balance Sheets as of December 31, 1995 and 1994 9* Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993 10* Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 11* Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 12* Notes to Consolidated Financial Statements 13-22* Independent Auditors' Report 8* (2) Financial Statement Schedules None All other schedules are omitted since they are not required, not applicable or the information is included in the consolidated financial statements or notes thereto. - ---------------------------------------------------------------- *Refers to the respective page of Harleysville National Corporation's 1995 Annual Report to Shareholders. The Consolidated Financial Statements and Notes to Consolidated Financial Statements and Auditor's Report thereon on pages 8 to 22 are incorporated by reference. With the exception of the portions of such Annual Report specifically incorporated by reference in this Item and in Items 1, 5, 6, 7 and 8, such Annual Report shall not be deemed filed as part of this Form 10-K Report or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934. Page 16 (3) Exhibits Exhibit No. Description of Exhibits - ---------- ----------------------- (3.1) Articles of Incorporation as amended were previously filed with the Commission on December 14, 1995 as Exhibit 3a to Registration Statement 33-65021 and is hereby incorporated by reference (3.2) Amended By-laws of the Registrant were previously filed with the Commission on December 14, 1995 as Exhibit 3b to registration statement 33-65021 and is hereby incorporated by reference (13) 1995 Annual Report to Shareholders (this document is filed only to the extent of pages 8 through 37 which are incorporated by reference herein.) (21) Subsidiaries of Registrant (23) (a) Consent of Grant Thornton LLP Independent Certified Public Accountants (b) Consent of KPMG Peat Marwick LLP Independent Certified Public Accountants (27) Financial Data Schedule. (99) Additional Exhibits (a) Report of Independent Certified Public Accountants - Grant Thornton LLP (b) Report of Independent Certified Public Accountants - KPMG Peat Marwick LLP (b) Reports on Form 8-K During the quarter ended December 31, 1995, the Registrant did not file any reports on Form 8-K. Page 17 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HARLEYSVILLE NATIONAL CORPORATION Date: March 14, 1996 By: /s/ Walter E. Daller, Jr. Walter E. Daller, Jr. President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ----- /s/ John W. Clemens Director March 14, 1996 John W. Clemens /s/ Walter E. Daller, Jr. President, Chief March 14, 1996 Walter E. Daller, Jr. Executive Officer and Director (Princi- pal Executive Officer) /s/ Martin E. Fossler Director March 14, 1996 Martin E. Fossler /s/ Harold A. Herr Director March 14, 1996 Harold A. Herr /s/ Vernon L. Hunsberger Treasurer (Princi- March 14, 1996 Vernon L. Hunsberger pal Financial and Accounting Officer) Page 18 /s/ Howard E. Kalis, III Director March 14, 1996 Howard E. Kalis, III /s/ Bradford W. Mitchell Director March 14, 1996 Bradford W. Mitchell /s/ Walter F. Vilsmeier Director March 14, 1996 Walter F. Vilsmeier /s/ William M. Yocum Director March 14, 1996 William M. Yocum Page 19 EXHIBIT INDEX ------------- (13) 1995 Annual Report to Shareholders (this document is filed only to the extent of pages 8 through 37 which are incorporated by reference herein) (21) Subsidiaries of Registrant (23) Consent of Grant Thornton LLP Independent Certified Public Accountants (99) Additional Exhibits Page 20 /TEXT> EX-21 2 Exhibit 21 Registrant owns all of the issued and outstanding capital stock of Harleysville National Bank and Trust Company, a national banking association headquartered at 483 Main Street, Harleysville, PA 19438, the Citizens National Bank of Lansford, a national banking association headquartered at 13-15 West Ridge Street, Lansford, PA 18232 and of Security National Bank, a national banking association headquartered at One Security Plaza, Pottstown, PA 19464. EX-23 3 Exhibit 23(a) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated January 12, 1996, accompanying the consolidated financial statements incorporated by reference or included in the 1995 Annual Report of Harleysville National Corporation on Form 10-K for the year ended December 31, 1995. We hereby consent to the incorporation by reference of said report in the Registration Statements of Harleysville National Corporation on Form S-3 (Registration No. 33-57790, effective February 3, 1993) and Form S-8 (Registration No. 33-69784, effective October 1, 1993). GRANT THORNTON LLP Philadelphia, Pennsylvania March 25, 1996 Exhibit 23(b) INDEPENDENT AUDITORS' CONSENT The Board of Directors Harleysville National Corporation Re: Registration Statement on Form S-3 (Registration No. 33-57790) Registration Statement on Form S-8 (Registration No. 33-69784) We consent to the incorporation by reference in the above listed registration statements of Harleysville National Corporation (The Company) of our report dated January 31, 1995 related to the consolidated balance sheets of Harleysville National Corporation and its subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of income, shareholders' equity and cash flows for each of the years then ended, which report appears in the December 31, 1995 Form 10-K of Harleysville National Corporation. Our report contains an explanatory paragraph which discussed that the Company changed its method of accounting for investments in 1994 and income taxes in 1993. KPMG PEAT MARWICK LLP March 25, 1996 Philadelphia, Pennsylvania EX-99 4 Exhibit 99(a) REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders Harleysville National Corporation We have audited the consolidated balance sheet of Harleysville National Corporation as of December 31, 1995, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Harleysville National Corporation as of December 31, 1995, and the consolidated results of their operations and their consolidated cash flows for the year then ended, in conformity with generally accepted accounting principles. GRANT THORNTON LLP Philadelphia, Pennsylvania January 12, 1996 Exhibit 99(b) INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders Harleysville National Corporation: We have audited the accompanying consolidated balance sheets of Harleysville National Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, cash flows, and shareholders' equity for the years then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harleysville National Corporation and subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for the years then ended. As discussed in note 1 to the consolidated financial statements, the Corporation has changed its method of accounting for investments in 1994 and income taxes in 1993. KPMG PEAT MARWICK LLP January 31, 1995 Philadelphia, Pennsylvania EX-13 5 HARLEYSVILLE NATIONAL CORPORATION Our mission is to maintain and enhance our image as a respected, independent, community-oriented financial institution providing needed services to our customers, a fair return to our shareholders and a rewarding working experience for our employees. We will commit our resources to the achievement of growth and economic stability of our communities. CONTENTS Financial Highlights 1 Shareholders' Letter 2 Snapshots of an Exciting and Busy Year 4 Report of Independent Certified Public Accountants 8 Consolidated Financial Statements 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Financial Ratios and Summary of Key Information 37 Corporate Directory 38 FINANCIAL HIGHLIGHTS: December 31, 1995 1994 % INCREASE FOR THE YEAR Total interest income $ 64,322,000 $ 54,614,000 17.8% Total interest expense 26,827,000 19,439,000 38.0 Net interest income 37,495,000 35,175,000 6.6 Net income 11,776,000 10,745,000 9.6 PER SHARE Primary $ 2.00 $ 1.84 8.7% Fully diluted 2.00 1.84 8.7 Cash dividends paid 0.79 0.61 29.5 Shareholders' equity 13.19 11.57 14.0 AVERAGE BALANCES Loans $580,612,000 $515,101,000 12.7% Total earning assets 786,732,000 721,880,000 9.0 Total assets 830,465,000 765,037,000 8.6 Total deposits 706,357,000 682,112,000 3.6 Shareholders' equity 73,537,000 66,716,000 10.2 RETURN ON AVERAGE Assets 1.42% 1.40% 1.4% Shareholders' equity 16.01 16.11 (0.6)
Page 1 TO OUR SHAREHOLDERS The past year was another one of good growth for Harleysville National Corporation as we continued to build our community bank franchise. STRONGEST EARNINGS EVER Net income for 1995 was $11,776,000, an increase of 9.6% over the $10,745,000 earned in 1994. Earnings per share for the year increased to $2.00 from $1.84 the previous year. Fourth-quarter primary and fully diluted earnings per share at $.50 were up 16.3% from $.43 in the comparable period last year. Dividends on Harleysville National Corporation's common stock increased 29.5% over 1994 to $.79 per share. The graphs on page one, highlighting our history of dividend and earnings increases, represent our commitment to building shareholder value. KEY PERFORMANCE RATIOS Our return on assets (ROA) for 1995 improved from 1.40% to 1.42%, and our return on equity (ROE) experienced a slight decline from 16.11% to 16.01%. These ratios continue to place HNC in an enviable position among our peers and in the industry as a whole. As HNC's growth continues, so does our progress in lowering overhead expense. As the graph below illustrates, our overhead expense decreased to 2.77% of average assets, well below our peer banks. In addition, our rate of improvement in this key ratio also exceeds that of our peer group. ASSET QUALITY AND GROWTH Total assets for 1995 increased 9.3% to $874,146,000, from $799,778,000 at December 31, 1994. Nonperforming assets, including nonaccrual loans, restructured loans, and other real estate owned, were $11,191,000 at year end, or 1.3% of total assets. At December 31, 1994, the nonperforming asset total was $5,594,000, or .7% of total assets. While nonaccruing loans increased from $2,458,000 at December 31, 1994 to $8,993,000 at December 31, 1995, 77.5% of these funds, or approximately $6,972,000, are attributable to just two unrelated borrowers. Both these loans are in workout and are being resolved as promptly as legal constraints permit. However, they are well-secured with real estate and are being managed closely. Net charge-offs for the year were $420,000, down from $602,000 a year ago. The provision for loan losses at December 31, 1995 was $2,160,000 compared to $2,650,000 for 1994. The allowance for loan losses for 1995 totaled $9,674,000 compared to $7,934,000 at December 31, 1994. This results in a ratio of allowance to total loans outstanding of 1.61% compared to a ratio of 1.40% at December 31, 1994. BUILDING THE FRANCHISE Despite pundits' predictions that banking will be entirely electronic in the future, our customers have told us that they want a local branch office through which to do their banking. As a result of this continuing dialog with our customers, each of our subsidiary banks added a new location to their delivery system during 1995: * In May, Harleysville National Bank opened a new office in Red Hill, Montgomery County. * In September, Citizens National Bank opened a new office in Lehighton, Carbon County. * In November, Security National Bank opened a new office at the North End Shopping Center in Pottstown, Montgomery County. January of 1996 saw a continuation of branch office growth for our company when Security National opened an additional new office in the premier Pottstown Center Shopping Complex on Route 100 in Pottstown. Harleysville National Bank is continuing to pursue locations in Doylestown, Spring House, and Audubon, all of which are in various stages of municipal approval and construction bidding. All are expected to open during 1996. Capping an exciting and profitable year of growth, Harleysville National Corporation announced its fifth acquisition in September. Located in Honesdale, Wayne County, PA, Farmers & Merchants Bank is a $65 million community bank with a rich heritage of serving its constituents. Page 2 While Farmers & Merchants will retain its name, we will integrate its operations and charter into our Citizens National Bank subsidiary. This will accomplish two key objectives: maintaining Farmers & Merchants' hometown, personalized image, while achieving operating efficiencies. In addition, a regional board, composed of F&M's directors, will continue to offer input and guidance so that a local touch is maintained. The merger will quickly impact Citizens' bottom line, giving the bank a larger asset base on which to build earnings. BUILDING OUR GREATEST RESOURCE The caliber of our people is one of the few distinguishing factors left in an industry where products are virtually homogenized. We sincerely believe we have built one of the strongest core of banking and service professionals in our marketplace, and it is because of their commitment that we continue to build customer and shareholder value. In an environment of bank consolidations and massive industry layoffs, we are proud to say that Harleysville National Corporation is expanding and hiring. We are pleased to see specialized career paths developing in each of our banks. The members of the HNC team are a great resource, and we are proud to watch many of them progress into various levels of management. BOLSTERING NONINTEREST INCOME Increasing noninterest income is a major objective of our corporation, and 1995 saw an important milestone: our Trust and Financial Services Division passed the million dollar mark in gross income. The Division has shown tremendous growth over the past five years, and we look forward to their continued success. A new money management program, Mutual Choice, which offers a variety of mutual fund investment options for customers, is now part of their product line. Leasing is another one of our successful corporate divisions, and continues to add bottom-line strength. Lease financing grew by $2,709,000 in 1995, to total $43,942,000. A popular financing alternative, leasing will remain a viable source of fee income. 1995 saw the introduction, at all subsidiaries, of a new banking package called "Rewards." Aimed at those 49 years of age or better, this attractive group of financial services showed solid growth with a significant number of new depositors. In addition to an interest checking account, the majority of customers were cross-sold savings and money market accounts. As the competition for core deposits continues at a frenetic pace, it is our intention to heavily market "Rewards" so that all three of our banks maintain their market share. STOCK PERFORMANCE It is always gratifying to report positive news about our stock price to our loyal shareholders. I thought you might be interested to see the closing prices over the past ten years: Between 1985 and 1995, the percentage increase equaled 856%! While we make no assertions that level of performance will continue, it validates, from the market's perspective, what we have done and are doing here at HNC. On a personal note, I was very honored to be selected by the Federal Reserve Bank of Philadelphia to represent Pennsylvania, New Jersey, and Delaware on the Federal Advisory Council of the Board of Governors. The Federal Advisory Council comprises 12 bankers, one from each Federal Reserve District, and meets with the Board of Governors quarterly. What makes the appointment particularly satisfying is the fact that I am one of the first community bank presidents chosen to serve in this capacity. Our industry is rife with mergers and consolidations, presenting both challenges and opportunities. Megabanks are being put together, and customers and prospects from many of them tell us that they don't like being treated as a number. They want to do business with people, and they want to be viewed, not as a statistic, but as an individual, with flexibility and understanding. We like that, because we are committed to growing our banks, as always, one satisfied customer at a time. Thanks for your continued loyalty and support. Sincerely, Walter E. Daller, Jr. President and Chief Executive Officer Page 3 "We are committed to growing our community bank franchise in areas that complement our existing markets. Each new office we build will feature the latest in retail banking, but more importantly, will be staffed by quality bankers focused on building relationships." Fred C. Reim, Jr. Senior Vice President, Branch Administration, Harleysville National Bank and Trust Company PICTURE: Red Hill office building, teller stations and CSR station PICTURE: Teller automation terminal PICTURE: Architectural renderings of Audubon, Doylestown and Spring House PICTURE: Customer transaction receipt from new teller automation terminal PICTURE: Bucks County: site of our future Doylestown office RED HILL OPENS Harleysville National Bank successfully filled a gap in the Upper Perkiomen region of its service area with the opening of its Red Hill office in May. The office links the bank's Harleysville, Quakertown and Gilbertsville locations and has quickly become a highly visible member of the Red Hill business community. Two new elements were introduced to the office's design - a sawtooth-style teller line and a multipurpose customer station. The jagged shape of the teller line gives the customer more privacy while conducting transactions and creates a more suitable atmosphere for sales opportunities. Combining the teller and customer service functions, we created a multipurpose customer area at the end of the teller line, where customers can be seated while opening new accounts and/or conducting routine transactions. GROWING WITH TECHNOLOGY New teller technology was introduced to all of our banks in 1995, transforming the way we process all transactions. Transactions are now captured on-line, allowing us to operate more efficiently and accurately. Customers receive detailed receipts of their transactions, which list time, date, summary, reference number, and even a customized marketing message. Page 4 While individual teller transactions are taking somewhat longer as our people "learn the ropes," there are immediate benefits from the system: * tellers can now balance in half the time; * descriptive receipts provide a better customer record of each transaction; * many customer transaction questions can be answered in minutes and on the spot; and * the system enables us to track and schedule tellers when they are most needed, for better customer service. Our goal, of course, is to utilize technology to increase efficiency, reduce cost and to deliver our products to our customers faster, in a better format. LOOKING TO THE FUTURE AUDUBON, SPRING HOUSE AND DOYLESTOWN TO OPEN IN '96 Three new HNB branch sites will be built in 1996 - Audubon (Audubon Square Shopping Center, Egypt and Trooper Rds.), Spring House (Bethlehem and Pennlyn Blue Bell Pike), and Doylestown (Rte. 202 and Progress Dr.). All three represent new communities for Harleysville National, but are natural extensions of the bank's marketplace and represent enormous opportunities for growth. The Audubon site will link the bank to the booming Rte. 422 corridor, opening up the King of Prussia and Valley Forge markets. The Spring House site, to be constructed on 1.75 acres, will be the largest HNB facility to date and will include a separate service area for trust and investment business. Opposite Doylestown Hospital, our Doylestown site sits in a high traffic area, and the community itself is ripe with residential and business development. Page 5 "With the flurry of consolidations, mergers, and bank closings, the people of Lansford were pleased to see a locally managed bank investing in the community and digging its roots even deeper." Thomas D. Oleksa President and CEO, Citizens National Bank of Lansford PICTURE: Citizens National Bank, Lansford Office PICTURE: Citizens National Bank, Lehighton Office RIBBON CUTTING IN LANSFORD Citizens National Bank of Lansford spent a good portion of 1995 under construction. In March, a major renovation to its main office lobby was begun, and the bank's teller and customer service areas were temporarily housed in a building purchased by CNB from a former competitor just two doors down. With ribbon cutting scissors in one hand and a groundbreaking shovel in another, President & CEO Thomas D. Oleksa unveiled the new Lansford office and turned over the first pile of dirt on CNB's new Lehighton office within days of one another. The renovated Lansford office features a traditional, yet innovative decor, an expanded teller line, and larger, more private customer service areas. The response from customers and the community has been overwhelmingly positive. The temporary quarters next door have been converted into a centralized operations center for data processing and mortgage operations. LEHIGHTON OPENS IN RECORD BREAKING TIME CNB's Lehighton office (Rte. 443) opened with much fanfare in late September. Customers lined the parking lot on opening day-a sign of successful marketing, but also the strength of CNB's reputation. Literally hundreds of new accounts were opened the first week, validating CNB's decision to locate in the exciting Lehighton market. It was during this opening that we tested a new Grand Opening promotion- Charter checking- offering free checking for life to the first 250 customers. The program was so well received that it is now a major marketing tool in HNC Grand Opening celebrations. Page 6 NORTH END OPENS Capitalizing on the banking consolidation taking place in its market, Security National Bank seized the opportunity to quickly and economically open a third office when a competitor abandoned a prime shopping center location in the north end of Pottstown. The office, in the North End Shopping Center, opened in early November and fulfilled management's expectations of attracting the area's retail interest. GRAND OPENING AT POTTSTOWN CENTER Security National celebrated the new year with the Grand Opening of its fourth office in the new 40-acre Pottstown Center Shopping Complex, Rte.100 and Shoemaker Rd. Traffic is heavy in the Wal-Mart-anchored shopping center, and Security National's people and products are drawing new customers in every day. "People recognize our commitment to the Pottstown community and value the opportunity to build a long-term relationship with a locally managed institution." Raymond H. Melcher, Jr. President and CEO, Security National Bank PICTURE: Security National Bank, North End Office PICTURE: Security National Bank, Pottstown Center Page 7
GRAPHS ON PAGE 1: 1990 1992 1994 1995 ------ ------ ------ ------ Capital in Millions 43.7 54.6 66.6 77.5 Assets in Millions 490.2 707.6 799.8 874.1 Deposits in Millions 433.0 640.2 688.6 741.2 Loans in Millions 323.5 425.0 568.3 602.4 Net Income in Millions 6.6 8.0 10.7 11.8 Cash Dividends per share 0.31 0.43 0.61 0.79 Earnings Per Share 1.19 1.43 1.84 2.00 GRAPHS ON PAGE 2: 1990 1992 1994 1995 ------ ------ ------ ------ Allowance/Year-End Loans 0.99% 1.03% 1.40% 1.61% HNC PEER ------ ------ Total Overhead Expense as of 9/30/95 2.77 3.45 Total Overhead Expense as of 9/30/94 2.92 3.49 GRAPHS ON PAGE 3: 1985 1987 1989 1991 1993 1995 ------ ------ ------ ------ ----- ----- 10-Year Stock Price per share 2.98 8.42 11.22 13.15 21.19 28.50
DESCRIPTION OF BUSINESS Harleysville National Corporation, a Pennsylvania corporation (the "Corporation"), was incorporated in June 1982. On January 1, 1983, the Corporation acquired all of the outstanding common stock of Harleysville National Bank and Trust Company ("Harleysville") at which time Harleysville became a wholly-owned subsidiary of the Corporation. On February 13, 1991, the Corporation acquired all of the outstanding common stock of The Citizens National Bank of Lansford ("Citizens"). On June 1, 1992, the Corporation acquired all of the outstanding stock of Summit Hill Trust Company ("Summit Hill"). On September 25, 1992, Summit Hill merged into Citizens and is now operating as a branch office of Citizens. On July 1, 1994, the Corporation acquired all of the outstanding stock of Security National Bank ("Security"). The Corporation is a three-bank holding company providing financial services through its bank subsidiaries. Harleysville, which was established in 1909, Citizens, which was established in 1903, and Security, which was established in 1988, (collectively the "Banks"), are national banking associations under the supervision of the Office of the Comptroller of the Currency. The Corporation's and Harleysville's legal headquarters are located at 483 Main Street, Harleysville, Pennsylvania 19438. Citizens' legal headquarters is located at 13-15 West Ridge Street, Lansford, Pennsylvania 18232. Security's legal headquarters is located at One Security Plaza, Pottstown, Pennsylvania 19464. As of December 31, 1995, the Banks had total assets of $874,146,000, total shareholders' equity of $77,516,000 and total deposits of $741,218,000. The Banks engage in full-service commercial banking and trust business, including accepting time and demand deposits, making secured and unsecured commercial and consumer loans, financing commercial transactions, making construction and mortgage loans and performing corporate pension and personal trust services. Their deposits are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The Banks have 22 offices located in Montgomery, Bucks and Carbon counties. On December 31, 1995, the Banks had 350 full-time equivalent employees. COMPETITION The Banks compete actively with other eastern Pennsylvania financial institutions, many larger than the Banks, as well as with financial and non-financial institutions headquartered elsewhere. The Banks are generally competitive with all competing institutions in their service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. SUPERVISION AND REGULATION The operations of the Banks are subject to federal, state and local statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System and to banks whose deposits are insured by the FDIC. The Banks' operations are also subject to the regulations of the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency (who regularly examines the Banks' areas such as reserves, loans, investments, management practices and other aspects of bank operations). The Corporation is subject to certain rules and regulations of the Securities and Exchange Commission and to the provisions of the Bank Holding Company Act of 1956, as amended, and to supervision by the Federal Reserve Board. MARKET INFORMATION The following table sets forth quarterly dividend information and the high and low prices for the Corporation's common stock for 1995 and 1994. The Corporation's stock is traded in the over-the-counter market under the symbol "HNBC" and commonly quoted under NASDAQ National Market Issues. PRICE OF COMMON STOCK
1995 Low Price High Price Dividend First Quarter $ 25.00 $ 28.00 $ .180 Second Quarter 25.00 28.00 .180 Third Quarter 25.00 28.50 .190 Fourth Quarter 26.25 28.50 .240 1994 Low Price* High Price* Dividend* First Quarter $ 20.00 $ 31.43 $ .133 Second Quarter 28.57 31.43 .153 Third Quarter 26.07 30.95 .153 Fourth Quarter 24.76 28.10 .171 *Adjusted for a five percent stock dividend effective 12/31/94.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Harleysville National Corporation and Subsidiaries To the Board of Directors and Shareholders Harleysville National Corporation: We have audited the accompanying consolidated balance sheet of Harleysville National Corporation and subsidiaries as of December 31, 1995, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of Harleysville National Corporation and subsidiaries as of and for the years ended December 31, 1994 and 1993 were audited by other auditors whose report, dated January 31, 1995, expressed an unqualified opinion on those consolidated financial statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harleysville National Corporation and subsidiaries at December 31, 1995, and the consolidated results of their operations and their consolidated cash flows for the year then ended, in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, Harleysville National Corporation and subsidiaries changed their method of accounting for certain investments in debt and equity securities in 1994 and income taxes in 1993. Grant Thornton LLP Philadelphia, Pennsylvania January 12, 1996 Page 8 CONSOLIDATED BALANCE SHEETS HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
December 31, 1995 December 31, 1994 ------------------- ------------------- ASSETS Cash and due from banks. $ 33,886,739 $ 35,390,357 Federal funds sold 12,900,000 - ------------------- ------------------- Total cash and cash equivalents 46,786,739 35,390,357 ------------------- ------------------- Interest-bearing deposits in banks 347,755 205,719 Investment securities available for sale. 146,082,135 102,211,333 Investment securities held to maturity (market value $68,711,915 and $79,896,560, respectively) 66,850,063 82,867,003 Loans 611,625,480 578,063,239 Less: Unearned income (9,204,942) (9,804,357) Allowance for loan losses (9,673,948) (7,934,385) ------------------- ------------------- Net loans. 592,746,590 560,324,497 ------------------- ------------------- Bank premises and equipment, net 11,088,288 8,794,530 Accrued income receivable 5,558,735 4,726,117 Other real estate owned 981,084 1,242,887 Intangible assets, net 1,959,860 2,315,000 Other assets. 1,744,743 1,701,041 ------------------- ------------------- Total assets. $ 874,145,992 $ 799,778,484 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 113,522,849 $ 110,502,583 Interest-bearing:. NOW accounts. 86,941,025 83,828,901 Money market accounts. 151,496,159 162,219,289 Savings. 85,909,556 88,200,527 Time, under $100,000 275,157,113 224,598,588 Time, $100,000 or greater 28,191,693 19,227,711 ------------------- ------------------- Total deposits 741,218,395 688,577,599 Accrued interest payable. 11,742,832 8,058,926 U.S. Treasury demand notes. 1,837,396 2,392,975 Federal funds purchased. - 12,716,000 FHLB borrowings 21,200,000 5,000,000 Securities sold under agreements to repurchase 16,713,629 15,212,755 Other liabilities. 3,917,564 1,244,847 ------------------- ------------------- Total liabilities 796,629,816 733,203,102 Shareholders' equity: Series preferred stock, par value $1 per share; authorized 3,000,000 shares, none issued - - Common stock, par value $1 per share; authorized 30,000,000 shares; issued and outstanding 5,878,082 shares in 1995 and 5,753,294 shares in 1994 5,878,082 5,753,294 Additional-paid-in-capital 27,601,451 24,415,932 Retained earnings 43,965,589 39,718,501 Net unrealized gain (losses) on investment securities available for sale 71,054 (3,312,345) ------------------- ------------------- Total shareholders' equity 77,516,176 66,575,382 ------------------- ------------------- Total liabilities and shareholders' equity $ 874,145,992 $ 799,778,484 =================== =================== See accompanying notes to consolidated financial statements.
Page 9 CONSOLIDATED STATEMENTS OF INCOME HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, -------------------------- 1995 1994 -------------------------- ----------- INTEREST INCOME: Loans, including fees $ 48,631,458 $40,502,191 Lease financing 3,141,491 2,737,357 Investment securities: Taxable 9,344,857 8,611,300 Exempt from federal taxes 2,575,537 2,434,697 Federal funds sold 605,199 247,094 Deposits in banks 23,381 81,377 -------------------------- ----------- Total interest income 64,321,923 54,614,016 -------------------------- ----------- INTEREST EXPENSE: Savings deposits 8,828,010 8,707,831 Time, under $100,000 14,253,682 9,666,034 Time, $100,000 or greater 1,576,508 664,197 Borrowed funds 2,168,470 400,633 -------------------------- ----------- Total interest expense 26,826,670 19,438,695 -------------------------- ----------- Net interest income 37,495,253 35,175,321 Provision for loan losses 2,160,000 2,650,226 -------------------------- ----------- Net interest income after provision for loan losses. 35,335,253 32,525,095 -------------------------- ----------- OTHER OPERATING INCOME: Service charges 2,312,855 2,313,799 Security (losses) gains, net (172,316) 530,286 Trust income 1,055,220 719,233 Other Income 1,132,815 962,052 -------------------------- ----------- Total other operating income 4,328,574 4,525,370 -------------------------- ----------- Net interest income after provision for loan losses and other operating income 39,663,827 37,050,465 -------------------------- ----------- OTHER OPERATING EXPENSES: Salaries, wages and employee benefits 12,433,961 10,982,434 Occupancy. 1,431,779 1,354,692 Furniture and equipment 1,847,051 1,487,443 FDIC premium 798,141 1,518,291 Other expenses 6,374,077 6,414,555 -------------------------- ----------- Total other operating expenses 22,885,009 21,757,415 -------------------------- ----------- Income before income taxes and the cumulative effect of a change in accounting for income taxes 16,778,818 15,293,050 Income tax expense 5,003,097 4,548,081 -------------------------- ----------- Income before the cumulative effect of a change in accounting for income taxes 11,775,721 10,744,969 -------------------------- ----------- Cumulative effect of a change in accounting for income taxes - - -------------------------- ----------- Net income $ 11,775,721 $10,744,969 ========================== =========== Weighted average number of common shares: Primary 5,893,334 5,847,473 Fully diluted 5,895,353 5,847,473 ========================== =========== Net income per share information: Primary: Before cumulative effect of a change in accounting for income taxes $ 2.00 $ 1.84 Cumulative effect of a change in accounting for income taxes. - - -------------------------- ----------- Net income $ 2.00 $ 1.84 ========================== =========== Fully diluted: Before cumulative effect of a change in accounting for income taxes $ 2.00 $ 1.84 Cumulative effect of a change in accounting for income taxes. - - -------------------------- ----------- Net income $ 2.00 $ 1.84 ========================== =========== Cash dividends per share $ 0.79 $ 0.61 ========================== =========== 1993 ----------- INTEREST INCOME: Loans, including fees $35,749,479 Lease financing 2,390,767 Investment securities: Taxable 9,302,765 Exempt from federal taxes 2,292,144 Federal funds sold 490,975 Deposits in banks 123,403 ----------- Total interest income 50,349,533 ----------- INTEREST EXPENSE: Savings deposits 9,223,689 Time under $100,000 9,809,193 Time $100,000 or greater 440,101 Borrowed funds 57,570 ----------- Total interest expense 19,530,553 ----------- Net interest income 30,818,980 Provision for loan losses 3,072,775 ----------- Net interest income after provision for loan losses. 27,746,205 ----------- OTHER OPERATING INCOME: Service charges 2,346,799 Security (losses) gains, net 397,315 Trust income 648,834 Other Income 1,474,687 ----------- Total other operating income 4,867,635 ----------- Net interest income after provision for loan losses and other operating income 32,613,840 ----------- OTHER OPERATING EXPENSES: Salaries, wages and employee benefits 9,938,701 Occupancy. 1,210,599 Furniture and equipment 1,224,712 FDIC premium 1,425,088 Other expenses 6,323,241 ----------- Total other operating expenses 20,122,341 ----------- Income before income taxes and the cumulative effect of a change in accounting for income taxes 12,491,499 Income tax expense 3,553,445 ----------- Income before the cumulative effect of a change in accounting for income taxes 8,938,054 ----------- Cumulative effect of a change in accounting for income taxes 300,000 ----------- Net income $ 9,238,054 =========== Weighted average number of common shares: Primary 5,642,790 Fully diluted 5,824,099 =========== Net income per share information: Primary: Before cumulative effect of a change in accounting for income taxes $ 1.58 Cumulative effect of a change in accounting for income taxes. 0.06 ----------- Net income $ 1.64 =========== Fully diluted: Before cumulative effect of a change in accounting for income taxes $ 1.53 Cumulative effect of a change in accounting for income taxes. 0.06 ----------- Net income $ 1.59 =========== Cash dividends per share $ 0.49 =========== See accompanying notes to consolidated financial statements.
Page 10 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Net Unrealized Gains (Losses) on Investment Common Stock Securities ------------- Number of Par Additional Retained Available Shares Value Paid-in-Capital Earnings For Sale Total ------------- ----------- ----------------- ------------ ---------------- ------------ Balance, January 1, 1993 2,721,143 $2,721,143 $ 16,259,529 $35,578,664 $ - $54,559,336 Stock options 2,248 2,248 81,490 (83,738) - - Proceeds of stock offering 71,362 71,362 929,959 - - 1,001,321 Stock awards 58 58 1,972 (2,030) - - Dividends reinvestment 8,977 8,977 328,389 - - 337,366 Stock split 2,592,332 2,592,332 (2,592,332) - - - Net income for 1993 - - - 9,238,054 - 9,238,054 Cash dividends - - - (2,664,788) - (2,664,788) ------------- ----------- ----------------- ------------ ---------------- ------------ Balance, December 31, 1993 5,396,120 5,396,120 15,009,007 42,066,162 - 62,471,289 Stock options 58,264 58,264 1,653,328 (2,295,879) - (584,287) Stock dividends 273,535 273,535 7,084,576 (7,369,331) - (11,220) Stock awards 128 128 3,072 (3,200) - - Dividends reinvestment 25,247 25,247 665,949 - - 691,196 Net income for 1994 - - - 10,744,969 - 10,744,969 Cash dividends - - - (3,424,220) - (3,424,220) Net unrealized losses on investment securities available for sale - - - - (3,312,345) (3,312,345) ------------- ----------- ----------------- ------------ ---------------- ------------ Balance, December 31, 1994 5,753,294 5,753,294 24,415,932 39,718,501 (3,312,345) 66,575,382 Stock options 124,672 124,672 3,182,739 (2,884,191) - 423,220 Stock awards 127 127 3,048 (3,175) - - Dividends reinvestment (11) (11) (268) - - (279) Net income for 1995 - - - 11,775,721 - 11,775,721 Cash dividends - - - (4,641,267) - (4,641,267) Net unrealized gains on investment securities available for sale - - - - 3,383,399 3,383,399 ------------- ----------- ----------------- ------------ ---------------- ------------ Balance, December 31, 1995 5,878,082 $5,878,082 $ 27,601,451 $43,965,589 $ 71,054 $77,516,176 ============= =========== ================= ============ ================ ============ See accompanying notes to consolidated financial statements.
Page 11 CONSOLIDATED STATEMENTS OF CASH FLOWS HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, -------------------------- OPERATING ACTIVITIES: 1995 1994 -------------------------- ------------- Net Income. $ 11,775,721 $ 10,744,969 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses. 2,160,000 2,650,226 Depreciation and amortization 1,160,742 980,319 Net amortization of investment securities' discounts/premiums 442,343 611,135 Deferred income taxes 423,930 143,717 Cumulative effect of a change in accounting for income taxes. - - Net realized securities loss (gain) 172,316 (530,286) Write-down on investment - - Realized gain on sale of loans - - (Increase) decrease in accrued income receivable (832,618) (749,918) Increase (decrease) in accrued interest payable 3,683,906 1,373,259 Net (increase) decrease in other assets (43,702) (908,238) Net increase (decrease) in other liabilities 426,957 980,377 Decrease in unearned income (599,415) (1,522,492) Write-down of other real estate owned. 190,500 61,268 Decrease in intangible assets 355,140 617,500 -------------------------- ------------- Net cash provided by operating activities 19,315,820 14,451,836 -------------------------- ------------- INVESTING ACTIVITIES: Proceeds from sale of investment securities held to maturity. - - Proceeds from sales of investment securities available for sale. 10,886,479 41,674,091 Proceeds from maturity or calls of investment securities held to maturity 23,578,233 22,724,787 Proceeds from maturity or calls of investment securities available for sale 8,052,745 13,141,815 Purchases of investment securities held to maturity. (47,629,707) (15,997,904) Purchases of investment securities available for sale (18,151,042) (33,626,107) Net (increase) decrease in short-term investments. (142,036) 1,375,662 Proceeds from sales of loans - - Net increase in loans. (34,986,245) (91,476,770) Net increase in premises and equipment (3,454,500) (1,113,483) Proceeds from sales of other real estate 1,074,870 1,060,533 -------------------------- ------------- Net cash used in investing activities. (60,771,203) (62,237,376) -------------------------- ------------- FINANCING ACTIVITIES: Net increase in deposits. 52,640,796 8,112,721 (Decrease) increase in U.S. Treasury notes (555,579) 393,434 (Decrease) increase in federal funds purchased. (12,716,000) 12,301,000 Increase in FHLB borrowings 16,200,000 5,000,000 Increase in securities sold under agreement 1,500,874 15,212,755 Cash dividends and fractional shares. (4,641,267) (3,435,440) Dividends reinvestment. (279) 691,196 Net proceeds from stock sale - - Stock options. 423,220 (584,287) -------------------------- ------------- Net cash provided by financing activities 52,851,765 37,691,379 -------------------------- ------------- Increase (decrease) in cash and cash equivalents 11,396,382 (10,094,161) Cash and cash equivalents at beginning of year. 35,390,357 45,484,518 -------------------------- ------------- Cash and cash equivalents at end of the year $ 46,786,739 $ 35,390,357 ========================== ============= Cash paid during the year for: Interest. $ 23,142,764 $ 18,065,436 Income taxes 4,119,188 4,086,921 ========================== ============= Supplemental disclosure of noncash investing and financing activities: Transfer of assets from loans to foreclosed and repossessed property $ 1,003,567 $ 859,162 ========================== ============= Transfer of securities from investment securities held to maturity to investment securities available for sale $ 39,946,783 $ 6,029,113 ========================== ============= OPERATING ACTIVITIES: 1993 ------------- Net Income. $ 9,238,054 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses. 3,072,775 Depreciation and amortization 1,117,128 Net amortization of investment securities' discounts/premiums 421,493 Deferred income taxes (374,485) Cumulative effect of a change in accounting for income taxes. (300,000) Net realized securities loss (gain) (447,315) Write-down on investment 50,000 Realized gain on sale of loans (469,091) (Increase) decrease in accrued income receivable 613,531 Increase (decrease) in accrued interest payable (359,458) Net (increase) decrease in other assets 341,516 Net increase (decrease) in other liabilities (1,215,748) Decrease in unearned income (4,672,324) Write down of other real estate owned. 111,670 Decrease in intangible assets 345,000 ------------- Net cash provided by operating activities 7,472,746 ------------- INVESTING ACTIVITIES: Proceeds from sale of investment securities held to maturity. 742,295 Proceeds from sales of investment securities available for sale. 26,765,477 Proceeds from maturity or calls of investment securities held to maturity 63,039,778 Proceeds from maturity or calls of investment securities available for sale - Purchases of investment securities held to maturity. (25,397,611) Purchases of investment securities available for sale (77,353,055) Net (increase) decrease in short-term investments. (44,746) Proceeds from sales of loans 15,360,878 Net increase in loans. (64,749,257) Net increase in premises and equipment (741,058) Proceeds from sales of other real estate 2,120,614 ------------- Net cash used in investing activities. (60,256,685) ------------- FINANCING ACTIVITIES: Net increase in deposits. 40,225,654 (Decrease) increase in U.S. Treasury notes 72,002 (Decrease) increase in federal funds purchased. 415,000 Increase in FHLB borrowings - Increase in securities sold under agreement - Cash dividends and fractional shares. (2,664,788) Dividends reinvestment. 337,366 Net proceeds from stock sale 1,001,321 Stock options. - ------------- Net cash provided by financing activities 39,386,555 ------------- Increase (decrease) in cash and cash equivalents (13,397,384) Cash and cash equivalents at beginning of year. 58,881,902 ------------- Cash and cash equivalents at end of the year $ 45,484,518 ============= Cash paid during the year for: Interest. $ 19,890,011 Income taxes 4,709,613 ============= Supplemental disclosure of noncash investing and financing activities: Transfer of assets from loans to foreclosed and repossessed property $ 1,165,114 ============= Transfer of securities from investment securities held to maturity to investment securities available for sale $ - ============= See accompanying notes to consolidated financial statements.
Page 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Harleysville National Corporation (the "Corporation") through its subsidiary banks, Harleysville National Bank and Trust Company, Citizens National Bank of Lansford, and Security National Bank (collectively the "Banks"), provides a full range of banking services to individual and corporate customers located in eastern Pennsylvania. In addition to being subject to competition from other financial institutions, the Banks are subject to regulations of certain federal agencies and, accordingly, they are periodically examined by those regulatory authorities. BASIS OF FINANCIAL STATEMENT PRESENTATION The accounting and reporting policies of the Corporation and its subsidiaries conform with generally accepted accounting principles. All significant intercompany transactions are eliminated in consolidation and certain reclassifications are made when necessary to the previous year's financial statements to conform with the current year's presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenditures for the periods. Therefore, actual results could differ significantly from those estimates. The principal estimate that is particularly susceptible to significant change in the near term relates to the allowance for loan losses. In connection with this estimate, when circumstances warrant, management obtains independent appraisals for significant properties. However, future changes in real estate market conditions and the economy could affect the Banks' allowance for loan losses. SECURITIES The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," on January 1, 1994, which requires, among other things, that debt and equity securities classified as available for sale be reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity, net of income taxes. The net effect of unrealized gains or losses, caused by marking an available-for-sale portfolio to market, could cause fluctuations in the level of shareholders' equity and equity-related financial ratios as market interest rates cause the fair value of fixed-rate securities to fluctuate. Investment securities are classified as held to maturity when the Banks have the ability and intent to hold those securities to maturity. These investment securities are carried at cost, adjusted for amortization of premiums and accretion of discounts. Investment securities expected to be held for an indefinite period of time are classified as available for sale and are stated at the lower of aggregate cost or market value. Investment securities expected to be held for an indefinite period of time include securities that management intends to use as part of its asset/liability strategy (other than securities that are intended to be held to maturity because they offset core deposits that have demonstrated stability) or that may be sold in response to changes in interest rates, changes in prepayment risks, the need to increase regulatory capital or other similar factors. The adjusted cost of a specific investment sold is the basis for determining gains or losses under the completed transaction method on the sale of investment securities available for sale. These gains and losses are shown on the consolidated statements of income. LOANS Loans are stated at the principal amount outstanding. Net loans represent the principal loan amount outstanding reduced by unearned income and allowance for loan losses. Interest on commercial and industrial, real estate, consumer loans and direct installment loans originated after March 1993 is credited to income based on the principal amount outstanding. Interest on direct installment loans originated prior to April 1993 is credited to income using the actuarial method, which approximates the level yield method. Interest on indirect installment loans is credited to income using the actuarial method. Loan origination fees and direct loan origination costs of completed loans are deferred and recognized over the life of the loan as an adjustment to yield. The net loan origination fees recognized as yield adjustments are reflected in total interest income in the consolidated statements of income, and the unamortized balance of such net loan origination fees is reported in the consolidated balance sheets as part of unearned income. Income recognition of interest is discontinued when, in the opinion of management, the collectibility of such interest becomes doubtful. A loan is generally classified as nonaccrual when principal or interest has consistently been in default for a period of 90 days or more or because of a deterioration in the financial condition of the borrower, and payment in full of principal or interest is not expected. Loans past due 90 days or more and still accruing interest are loans that are generally well-secured and expected to be restored to a current status in the near future. The Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures," on January 1, 1995. This new standard requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. The adoption of SFAS No. 114, as amended by SFAS No. 118, on January 1, 1995 did not have a material impact on the Corporation's liquidity, results of operations and capital resources. In May 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 122, "Accounting for Mortgage Servicing Rights," an amendment of SFAS No. 65, which requires that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others. This statement requires that a mortgage banking enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. SFAS No. 122 is to be applied prospectively for financial statements for fiscal years beginning after December 15, 1995, to transactions with retained servicing rights and to impairment evaluations of capitalized amounts. Once adopted, this statement will not have a material effect on the Corporation's liquidity, results of operations or capital resources. The Corporation is required to adopt this new statement on January 1, 1996. Page 13 LEASE FINANCING Lease financing represents automobile and equipment leasing. The lease financing receivable included in loans is stated at the gross amount of lease payments receivable plus the residual value less income to be earned over the life of the leases. Such income is recognized over the term of the leases using the level yield method. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level that management considers adequate to provide for potential losses based upon an evaluation of known and inherent risks in the loan portfolio. Allowance for loan losses is based on estimated net realizable value unless it is probable that loans will be foreclosed, in which case allowance for loan losses is based on fair value less selling costs. Management's periodic evaluation is based upon evaluation of the portfolio, past loss experience, current economic conditions and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks' allowance for loan losses. Such agencies may require the Banks to recognize additions to the allowance based on their judgment of information available to them at the time of their examination. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line and accelerated depreciation methods over the estimated useful life of the assets. Leasehold improvements are amortized over the term of the lease or estimated useful life, whichever is shorter. OTHER REAL ESTATE OWNED Other real estate owned includes foreclosed real estate which is carried at the lower of cost (lesser of carrying value of loan or fair value at date of acquisition) or estimated fair value less selling costs. Any write-down, at or prior to the dates the real estate is considered foreclosed, is charged to the allowance for loan losses. Subsequent write-downs are recorded in other expenses, and expenses incurred in connection with holding such assets and any gains or losses upon their sale are included in other expenses. INTANGIBLE ASSETS Intangible assets consists of a core deposit intangible which represents the present value of the difference in costs between the acquired core deposits and the market alternative funding sources and a covenant not to compete. The intangibles are being amortized over a 10-year life on an accelerated basis. The amortization charged to income was $355,140, $617,500 and $345,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The FASB issued a new standard, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which provides guidance on when to recognize and how to measure impairment losses of long-lived assets and certain identifiable intangibles and how to value long-lived assets to be disposed of. The adoption of this new statement is not expected to have a material impact on the Corporation's liquidity, results of operations or capital resources. The Corporation is required to adopt this new standard on January 31, 1996. INCOME TAXES The Corporation adopted SFAS No. 109, "Accounting for Income Taxes" on January 1, 1993. Under the liability method specified by SFAS No. 109, deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The principal types of accounts, resulting in differences between assets and liabilities for financial statement and tax return purposes, are the allowance for possible credit losses, leased assets, deferred loan fees and compensation. The provisions of the statement were applied without restating prior years' financial statements. Adoption of SFAS No. 109 resulted in a reduction of the net deferred tax liability in the amount of $300,000 in 1993. The deferred method used in years prior to 1993 requires the Corporation to provide deferred tax expense based on certain items of income and expense which were reported in different years in the financial statements and the tax return as measured by the tax rate in effect for the year the difference occurred. PENSION PLAN The Corporation has certain employee benefit plans covering substantially all employees. The Corporation accrues service cost as incurred. RESTRICTIONS ON CASH AND DUE FROM BANKS Aggregate reserves (in the form of deposits with the Federal Reserve Bank) of $8,406,000 were maintained to satisfy federal regulatory requirements at December 31, 1995. NET INCOME PER SHARE Net income per share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the year, including the effects of dilutive stock options, and after giving retroactive effect to the following events: the shares issued when Security National Bank (1994) was merged into the Corporation and accounted for on a pooling-of-interests basis, the 5% stock dividend issued in 1994 and the two-for-one stock split in the form of a 100% stock dividend paid on December 31, 1993. STATEMENTS OF CASH FLOWS For purposes of the consolidated statements of cash flows, the Corporation considers cash, amounts due from banks and federal funds sold to be cash equivalents. Generally, federal funds are sold for one-day periods. Page 14 2-ACQUISITIONS On September 7, 1995, the Corporation, Citizens National Bank of Lansford ("Citizens") and Farmers and Merchants Bank ("Farmers") executed an Agreement and Plan of Reorganization and an Agreement and Plan of Merger (the Agreement). The Corporation wishes to acquire Farmers, and Farmers wishes to merge with and into Citizens. Under the terms of the agreement, each share of Farmers common stock will be converted into between 0.5915 and 0.6915 shares of the Corporation's common stock, subject to proportional adjustments; as specified in the agreement, resulting in the issuance of between 418,791 and 489,593 shares of the Corporation's Common Stock. This transaction is expected to be accounted for under the pooling-of-interests method of accounting. A summary of unaudited restated condensed consolidated financial information of the Corporation and Farmers follows:
Years Ended December 31, ------------------------- 1995 1994 1993 ------------------------- ------------ ------------ Operating results (unaudited): Net interest income $ 39,706,000 $ 37,279,000 $ 32,748,000 Noninterest income 4,437,000 4,747,000 4,964,000 Net income applicable to common stock 12,428,000 11,280,000 9,738,000 Per common share 1.96 1.79 1.60 Average number of common shares outstanding 6,347,526 6,301,665 6,097,444 Years Ended December 31, ------------------------- 1995 1994 1993 ------------------------- ------------ ------------ Balance sheet at year-end (unaudited): Assets 937,345,000 $862,668,000 $816,314,000 Loans, net of unearned discounts 628,738,000 594,755,000 498,139,000 Deposits 794,499,000 743,326,000 735,328,000 Common shareholders' equity 86,362,000 74,182,000 69,357,000 Book value per common share 13.64 11.95 11.85
On July 1, 1994, the Corporation completed a merger with Security National Bank ("Security"). Under the terms of the merger, each share of Security common stock was converted into 0.7483 shares of the Corporation's common stock, resulting in the issuance of 211,456 shares of the Corporation's common stock. This transaction was accounted for under the pooling-of-interests method of accounting and all prior periods have been restated to reflect the combination as follows:
Net (Dollars in thousands) Revenue Income (Loss) ------- ------------- Year Ended December 31, 1994 Harleysville National Corporation 57,783 11,023 Security National Bank, as of June 30, 1994 1,356 (278) ------- ------- Total 59,139 10,745 ======= ======= Year Ended December 31, 1993 Harleysville National Corporation 52,734 9,280 Security National Bank 2,483 (42) ------- ------- Total 55,217 9,238 ======= =======
3-SECURITIES The amortized cost, unrealized gains and losses, and the estimated market values of the Corporation's investment securities held to maturity and available for sale are as follows:
December 31, 1995 ------------------ Held to Maturity - -------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ------------------ ------------ ----------- Obligations of other U.S. Government agencies and corporations $34,494,123 $926,117 $(7,181) $35,413,059 Obligations of states and political subdivisions 25,466,163 756,129 (23,356) 26,198,936 Mortgage-backed securities 377,955 10,242 - 388,197 Other securities 6,511,822 199,901 - 6,711,723 ----------- ------------------ ------------ ----------- Totals $66,850,063 $ 1,892,389 $ (30,537) $68,711,915 =========== ================== ============ ===========
December 31, 1995 ------------------ Available for Sale - -------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ------------------ ------------ ------------ U.S. Treasury Notes $ 32,670,977 $ 248,483 $ (54,740) $ 32,864,720 Obligations of other U.S. Government agencies and corporations 6,253,928 - (65,567) 6,188,361 Obligations of states and political subdivisions 30,904,969 266,653 (567,052) 30,604,570 Mortgage-backed securities 67,336,406 521,041 (486,630) 67,370,817 Other securities 8,806,542 261,603 (14,478) 9,053,667 ------------ ------------------ ------------ ------------ Totals $145,972,822 $ 1,297,780 $(1,188,467) $146,082,135 ============ ================== ============ ============
December 31, 1994 ------------------ Held to Maturity - ---------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ------------------ ------------ ----------- U.S. Treasury Notes $ 2,562,102 $ - $ (74,287) $ 2,487,815 Obligations of other U.S. Government agencies and corporations 16,992,226 11,570 (828,838) 16,174,958 Obligations of states and political subdivisions 44,539,484 191,430 (1,891,508) 42,839,406 Mortgage-backed securities 617,285 - (22,420) 594,865 Other securities 18,155,906 17,588 (373,978) 17,799,516 ----------- ------------------ ------------ ----------- Totals $82,867,003 $ 220,588 $(3,191,031) $79,896,560 =========== ================== ============ ===========
December 31, 1994 ------------------ Available for Sale - ------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------ ------------------ ------------ ------------ U.S. Treasury Notes $ 32,320,868 $ 7,351 $(1,282,778) $ 31,045,441 Mortgage-backed securities 70,773,466 53,992 (3,992,676) 66,834,782 Other securities 4,212,915 136,384 (18,189) 4,331,110 ------------ ------------------ ------------ ------------ Totals $107,307,249 $ 197,727 $(5,293,643) $102,211,333 ============ ================== ============ ============
Page 15 There are no significant concentrations of securities (greater than 10% of shareholders' equity) in any individual security issuer. Securities with a carrying value of $44,541,000 and $32,925,000 at December 31, 1995 and 1994, respectively, were pledged to secure public funds and government deposits. The amortized cost and estimated market value of investment securities held to maturity and available for sale at December 31, 1995 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held To Maturity Available For Sale ----------------- ------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value ----------------- ------------- ------------------- ------------- Due in one year or less $ 8,282,639 $ 8,349,291 $ 23,697,746 $ 23,682,091 Due through one year through five years 53,708,109 55,291,257 44,100,000 42,731,375 Due through five years through ten years 4,231,360 4,431,490 7,086,958 7,108,827 Due after ten years 250,000 251,680 3,751,711 3,976,525 ----------------- ------------- ------------------- ------------- 66,472,108 68,323,718 78,636,415 77,498,818 Mortgage-backed securities 377,955 388,197 67,336,407 68,583,317 ----------------- ------------- ------------------- ------------- Totals $ 66,850,063 $ 68,711,915 $ 145,972,822 $ 146,082,135 ================= ============= =================== =============
There were no sales of investment securities held to maturity during 1995. Proceeds from sales of investment securities available for sale during 1995 were $10,886,479. Gross gains of $26,943 and gross losses of $199,259 were realized on these sales. There were no sales of investment securities held to maturity during 1994. Proceeds from sales of investment securities available for sale during 1994 were $41,674,091. Gross gains of $1,227,628 and gross losses of $725,039 were realized on these sales. Proceeds from sales of investment securities during 1993 were $742,295. Gross gains of $1,517 were realized on these sales. Proceeds from sales of investment securities available for sale during 1993 were $26,765,477. Gross gains of $459,891 and gross losses of $34,284 were realized on these sales. 4-LOANS Major classifications of loans are as follows:
December 31, ------------- 1995 1994 ------------- ------------ Real estate $ 207,818,780 $200,139,092 Commercial and industrial 163,677,259 154,319,013 Installment 155,012,074 143,782,888 Student Loans 6,263,904 5,879,578 Consumer loans 28,284,451 27,501,295 Lease financing 43,941,811 41,232,967 Other 6,627,201 5,208,406 ------------- ------------ Total loans 611,625,480 578,063,239 Less: Unearned income 9,204,942 9,804,357 Allowance for loan losses 9,673,948 7,934,385 ------------- ------------ Net Loans $ 592,746,590 $560,324,497 ============= ============
On December 31, 1995, nonaccrual loans were $8,992,715, loans 90 days or more past due were $1,459,763 and troubled debt restructured loans were $1,183,016. On December 31, 1994, nonaccrual loans were $2,457,526, loans 90 days or more past due were $2,145,109 and troubled debt restructured loans were $1,867,587. The balance of impaired loans was $9,278,000 at December 31, 1995. The Banks have identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The impaired loan balance included $8,095,000 of nonaccrual loans and $1,183,000 of troubled debt restructured loans. The allowance for loan loss associated with the $9,278,000 of impaired loans was $1,122,000 at December 31, 1995. The average impaired loan balance was $3,906,000 in 1995 and the income recognized on impaired loans during 1995 was $231,000. The Banks' policy for interest income recognition on impaired loans is to recognize income on restructured loans under the accrual method. The Banks recognize income on nonaccrual loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Banks. The Banks will not recognize income if these factors do not exist. The Banks have no concentration of loans to borrowers engaged in similar activities which exceeded 10% of total loans at December 31, 1995. The Banks continued to pursue new lending opportunities while seeking to maintain a portfolio that is diverse as to industry concentration, type and geographic distribution. The Banks' geographic lending area is primarily concentrated in Montgomery County, but also includes Bucks, Carbon, Chester and Berks counties. Loans to directors, executive officers and their associates, are made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. Activity of these loans is as follows:
Years Ended December 31, 1995 1994 1993 -------------------------- ------------ ------------ Balance, January 1 $ 11,618,389 $ 8,893,780 $ 9,281,111 New Loans 8,592,251 9,756,903 7,657,256 Repayments (7,624,928) (7,032,294) (8,044,587) -------------------------- ------------ ------------ Balance, December 31 $ 12,585,712 $11,618,389 $ 8,893,780 ========================== ============ ============
Page 16 5-ALLOWANCE FOR LOAN LOSSES Transactions in the allowance for loan losses are as follows:
Years Ended December 31, -------------------------- 1995 1994 1993 -------------------------- ------------ ------------ Balance, beginning of year $ 7,934,385 $ 5,886,427 $ 4,386,893 -------------------------- ------------ ------------ Provision charged to operating expenses 2,160,000 2,650,226 3,072,775 -------------------------- ------------ ------------ Loans charged off: Commercial and industrial (239,945) (490,589) (1,211,088) Installment (276,966) (386,477) (401,155) Real estate (116,639) (84,927) (211,708) Lease financing (38,775) (44,426) (92,186) -------------------------- ------------ ------------ Total charged off (672,325) (1,006,419) (1,916,137) -------------------------- ------------ ------------ Recoveries: Commercial and industrial 142,930 169,626 85,760 Installment 71,867 152,267 155,911 Real estate 1,211 55,735 76,530 Lease financing 35,880 26,523 24,695 -------------------------- ------------ ------------ Total recoveries 251,888 404,151 342,896 -------------------------- ------------ ------------ Balance, end of year $ 9,673,948 $ 7,934,385 $ 5,886,427 ========================== ============ ============
6-BANK PREMISES AND EQUIPMENT Bank premises and equipment consist of the following:
Estimated Useful December 31, Lives 1995 1994 ----------- ------------- ----------- Land $ 2,223,583 $ 1,687,083 Buildings 15-30 years 9,535,868 8,101,621 Furniture, fixtures and equipment 3-10 years 8,556,736 7,098,635 ------------- ----------- Total cost 20,316,187 16,887,339 Less accumulated depreciation and amortization 9,227,899 8,092,809 ------------- ----------- Bank premises and equipment, net $ 11,088,288 $ 8,794,530 ============= ===========
7-LONG-TERM DEBT Long-term debt consisted of the following:
December 31, Description 1995 1994 Maturity Interest Rate - ------------------------------ ------------- ---------- ------------- -------------- FHLB $ 2,000,000 $ - August 1997 6.12% FHLB 5,000,000 5,000,000 December 1997 6.45% FHLB 1,500,000 - October 1998 5.82% FHLB 500,000 - August 2000 6.49% ------------- ---------- $ 9,000,000 $5,000,000 ============= ========== Advances are made pursuant to several different credit programs offered from time to time by the Federal Home Loan Bank (FHLB).
8-FEDERAL INCOME TAXES Income tax expense from current operations is composed of the following:
Years Ended December 31, -------------------------------------- 1995 1994 1993 ------------- ---------- ----------- Current tax payable $ 3,652,334 $4,404,364 $3,927,930 Deferred income tax 423,930 143,717 (374,485) Charge in lieu of income tax 926,833 - - ------------ ---------- ----------- Tax expense $ 5,003,097 $4,548,081 $3,553,445 ============ ========== ===========
The effective income tax rates of 29.8% for 1995, 29.7% for 1994 and 28.4% for 1993 were less than the applicable federal income tax rate of 35% for each year. The reason for these differences follows:
Years Ended December 31, -------------------------- 1995 1994 1993 --------------- ----------- ----------- Expected tax expense $ 5,704,795 $5,352,568 $4,372,505 Tax-exempt income net of interest disallowance (944,217) (898,234) (882,016) Other 242,519 93,747 62,956 ----------------- ----------- ----------- Actual tax expense $ 5,003,097 $4,548,081 $3,553,445 ================= =========== ===========
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows:
1995 1994 ---------- ---------- Asset Liability Asset Liability ---------- ---------- ---------- ---------- Allowance for possible credit losses $3,374,483 $ - $2,700,807 $ - Lease assets - 6,382,556 - 5,404,702 Deferred loan fees 868,347 - 1,013,072 - Deferred compensation 459,563 - 413,308 - Other 222,830 - 244,112 - ---------- ---------- ---------- ---------- Total deferred taxes $4,925,223 $6,382,556 $4,371,299 $5,404,702 ========== ========== ========== ==========
Page 17 9-PENSION PLAN The Corporation has a noncontributory defined benefit pension plan covering substantially all employees. Benefits are based on years of service and the employee's average compensation during any five consecutive years within the 10-year period preceding retirement. The plan's funded status and amounts recognized in the financial statements are as follows:
1995 1994 ----------- ----------- Plan assets at fair value $2,721,007 $2,435,204 Projected benefit obligation (including an accumulated benefit obligation of $2,296,276 in 1995, $1,808,907 in 1994, and a vested benefit obligation of $2,169,256 in 1995, and $1,704,112 in 1994) 2,974,259 2,392,143 ----------- ----------- Plan assets in (deficit) excess of projected benefit obligation (253,252) 43,061 Unrecognized net gain from past experience being different from that which was assumed 449,619 496,504 Unrecognized prior service cost 32,998 36,665 Unrecognized net assets at January 1, 1987, being recognized over 15 years (104,201) (121,568) ----------- ----------- Prepaid pension cost $125,164 $454,662 =========== =========== Net pension cost for the years ended December 31, 1995, 1994 and 1993 included the following components: 1995 1994 1993 ---------- ----------- ----------- Service cost $ 333,099 $ 266,907 $ 232,652 Interest cost 168,943 137,329 122,950 Actual return on plan assets (316,452) (84,426) (171,996) Net amortization and deferral 143,908 (61,198) 45,318 ---------- ----------- ----------- Net periodic pension cost $ 329,498 $ 258,612 $ 228,924 ========== =========== ===========
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 6.75% and 5.0% for 1995 and 1994, and 6.75% and 3.0% for 1993, respectively; the expected long-term rate of return on assets was 7.5% for all years. The Banks have a profit-sharing plan for eligible employees. The continuation of the profit-sharing plan is voluntary on the part of the Banks. The Banks expressly reserve the right to amend or terminate the plan and to reduce, suspend or discontinue contributions at any time. Contributions charged to earnings were $1,081,068, $971,640 and $801,104 for 1995, 1994 and 1993, respectively. The Corporation has a Supplemental Executive Retirement Plan (SERP) for certain individuals. The SERP provides for payments based on a certain percentage of salary for a period of 10 years after retirement. As of December 31, 1995 and 1994, the Corporation had accrued a liability of $634,882 and $565,562, respectively, for the SERP. 10-SHAREHOLDERS' EQUITY On December 30, 1994, the Corporation paid a 5% stock dividend on its common stock to shareholders of record as of December 16, 1994. On December 31, 1993, the Corporation paid a two-for-one stock split on its common stock in the form of a 100% stock dividend, to shareholders of record as of December 17, 1993. 11-STOCK OPTIONS Under the Corporation's Equity Incentive Plan, 386,738 shares of common stock were reserved for issuance upon exercise of options granted to officers and key employees. The plan provides that the option price and exercise date will be set by a disinterested committee of the Board of Directors, but the option price will not be less than 100% of the fair value of the stock at date of grant. The plan also provides for stock appreciation rights, which enable the recipient on exercise to receive payment in cash of increases in the market value of the stock from the date of grant. Under the Corporation's stock option plan, the exercisable option prices ranged from $8.38 to $21.38 at December 31, 1995. The 1995 stock options granted are exercisable in February 1996, at $26.875 per share. An analysis of the activity in this plan for the last three years is as follows:
1995 1994 1993 --------- --------- -------- Number of Common Shares: Outstanding, January 1* 219,539 337,018 351,028 Granted 4,575 - - Exercised (158,942) (117,479) (14,010) --------- --------- -------- Outstanding, December 31 65,172 219,539 337,018 ========= ========= ======== Exercisable, December 31 60,597 219,539 337,018 ========= ========= ======== * Adjusted for stock splits and stock dividends.
On April 13, 1993, the shareholders of the Corporation approved the 1993 Stock Incentive Plan. There are 163,425 shares of the Corporation's common stock available for issuance under the Plan. During 1995, 4,575 shares were granted under the 1993 Stock Incentive Plan at a price of $26.875 per share. Page 18 12-COMMITMENTS AND CONTINGENT LIABILITIES Management, based on consultation with the Corporation's legal counsel, is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Corporation. There are no proceedings pending other than the ordinary routine litigation incident to the business of the Corporation and its subsidiaries - Harleysville National Bank and Trust Company, Citizens National Bank of Lansford and Security National Bank. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation and the Banks by government authorities. Lease commitments for equipment and banking locations expire intermittently over the years through 2036. Most banking location leases require the lessor to pay insurance, maintenance costs and property taxes. Approximate minimum rental commitments for existing operating leases at December 31, are as follows:
Total Operating Leases 1996 $ 749,000 1997 459,000 1998 364,000 1999 300,000 2000 182,000 Thereafter 2,261,000 ---------- Total $4,315,000
Total lease expense amounted to $764,714 in 1995, $531,415 in 1994 and $313,505 in 1993. Security is committed to enter into a $475,000 ground lease for their Pottstown Center branch scheduled to open during 1996. This prepaid ground lease will be amortized over a 30-year period. The amortization for this lease will be approximately $12,000 during 1996. 13-FINANCIAL INSTRUMENTS The Banks have not entered into any interest rate swaps, caps, floors or collars and are not a party to any forward or futures transactions. However, the Banks are a party to various other financial instruments at December 31, 1995 and 1994 which are not included in the consolidated financial statements but are required in the normal course of business to meet the financing needs of its customers and to assist in managing its exposure to changes in interest rates. Management does not expect any material losses from these transactions, which include standby letters of credit of $5,629,000 and $7,133,000, respectively; commitments to extend credit of $19,819,000 and $18,412,000, respectively, for revolving home equity lines; $57,387,000 and $54,030,000, respectively, for commercial and real estate loans; and $17,462,000 and $16,537,000, respectively, for consumer loans. The Banks' exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amounts of those instruments. The Banks use the same stringent credit policies in extending these commitments as they do for recorded financial instruments and control their exposure to loss through credit approval and monitoring procedures. These commitments are generally issued for one year or less, often expire without being drawn upon, and often are secured with appropriate collateral. The Banks offer commercial, mortgage and consumer credit products to their customers in the normal course of business, which are detailed in note 4. These products represent a diversified credit portfolio and are generally issued to borrowers within the Banks' branch office systems in eastern Pennsylvania. The ability of the customers to repay their credits is, to some extent, dependent upon the economy in the Banks' market areas. 14-REGULATORY RESTRICTIONS The National Banking Laws require the approval of the Office of the Comptroller of the Currency if the total of all dividends declared by a national bank in any calendar year exceeds the net profits of the bank (as defined) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, the Banks may declare dividends in 1996 of approximately $14,400,000 plus an amount equal to the net profits of the Banks in 1996 up to the date of any such dividend declaration. Additionally, banking regulations limit the amount of investments, loans, extensions of credit and advances that one subsidiary bank can make to the Corporation at any time to 10% and in the aggregate 20% of the Banks' capital stock and surplus. These regulations also require that any such investment, loan, extension of credit or advance be secured by securities having a market value in excess of the amount thereof. At December 31, 1995, there were no investments, loans, extensions of credit or advances from any of the subsidiary banks to the Corporation. Page 19 15-FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 requires disclosure of the estimated fair value of an entity's assets and liabilities considered to be financial instruments. For the Corporation, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in SFAS No. 107. However, many such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Also, it is the Corporation's general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities, except for certain loans. Therefore, the Corporation had to use significant estimates and present value calculations to prepare this disclosure. Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity gives rise to a high degree of subjectivity in estimating financial instrument fair values. Estimated fair values have been determined by the Corporation using the best available data and an estimation methodology suitable for each category of financial instruments. The estimation methodologies used, the estimated fair values, and recorded book balances at December 31, 1995 and 1994 are outlined below. For cash and due from banks, interest-bearing deposits in banks and federal funds sold, the recorded book values of $47,134,000 and $35,596,000 at December 31, 1995 and 1994, respectively, approximate fair values. The estimated fair values of investment securities are based on quoted market prices, if available. Estimated fair values are based on quoted market prices of comparable instruments if quoted market prices are not available. The net loan portfolio at December 31, 1995 and 1994 has been valued using a present value discounted cash flow analysis where market prices were not available. The discount rate used in these calculations is the estimated current market rate adjusted for credit risk. The carrying value approximates its fair value. 1995 1994 ------------------------- ----------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Investment securities $212,932,000 $214,794,000 $185,078,000 $182,107,000 Loans, net $592,747,000 $599,646,000 $560,324,000 $523,885,000
The estimated fair values of demand deposits (i.e., interest and noninterest-bearing checking accounts, savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. The carrying amount of accrued interest payable approximates its fair value. 1995 1994 ------------------------- ------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Time deposits $303,349,000 $305,431,000 $243,826,000 $241,422,000
The fair values of short-term borrowings of $30,751,000 and $30,322,000 at December 31, 1995 and 1994, respectively, approximate their recorded book balances. There was no material difference between the notional amount and the estimated fair value of off-balance-sheet items which totaled approximately $100,297,000 and $96,112,000 at December 31, 1995 and 1994, respectively, and primarily comprised unfunded loan commitments which are generally priced at market at the time of funding. Page 20 16-CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY Condensed financial statements of Harleysville National Corporation, (parent company only) follow: CONDENSED BALANCE SHEETS
December 31, ------------- 1995 1994 ------------- ------------ Assets: Cash $ 1,544,398 $ 1,121,457 Investment in subsidiaries 75,567,583 65,107,347 Investment securities available for sale 853,539 764,895 ------------- ------------ Total assets $ 77,965,520 $66,993,699 ============= ============ Liabilities and shareholders' equity: Other liabilities $ 449,343 $ 418,317 ------------- ------------ Total liabilities 449,343 418,317 ------------- ------------ Shareholders' equity: Common Stock 5,878,082 5,753,294 Additional-paid-in-capital 27,601,451 24,415,932 Retained earnings 43,965,590 39,718,501 Net unrealized gains on investment securities available for sale 71,054 (3,312,345) ------------- ------------ Total shareholders' equity 77,516,177 66,575,382 ------------- ------------ Total liabilities and shareholders' equity $ 77,965,520 $66,993,699 ============= ============ CONDENSED STATEMENTS OF INCOME
Years Ended December 31, ------------------------- 1995 1994 1993 ------------------------- ----------- ---------- Dividends from banks $ 4,816,267 $ 3,463,133 $2,689,786 Other income - 1,058,809 - ------------------------- ----------- ---------- Total operating income 4,816,267 4,521,942 2,689,786 Operating expense - - - ------------------------- ----------- ---------- Income before income taxes and equity in undistributed net income of banks 4,816,267 4,521,942 2,689,786 Income taxes - 370,583 - ------------------------- ----------- ---------- Income before equity in undistributed net 4,816,267 4,151,359 2,689,786 income of banks Equity in undistributed net income of banks 6,959,454 6,593,610 6,548,268 ------------------------- ----------- ---------- Net income $ 11,775,721 $10,744,969 $9,238,054 ========================= =========== ========== CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, -------------------------- 1995 1994 1993 -------------------------- ------------ ------------ Operating activities: Net income $ 11,775,721 $10,744,969 $ 9,238,054 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of banks (6,959,454) (6,694,909) (6,885,786) Dividends reinvestment (279) 691,196 337,366 Realized gain on sale of securities - (1,058,809) - Net increase in other liabilities - 370,583 - -------------------------- ------------ ------------ Net cash provided by operating activities 4,815,988 4,053,030 2,689,634 -------------------------- ------------ ------------ Investing activities: Capital contributions made to banks (175,000) - - Proceeds from sales of securities - 1,083,807 - Purchase of securities available for sale - - (24,998) -------------------------- ------------ ------------ Net cash (used in) provided by investing activities (175,000) 1,083,807 (24,998) -------------------------- ------------ ------------ Financing activities: Cash dividends and fractional shares (4,641,267) (3,435,440) (2,664,788) Stock options and awards 423,220 (584,287) - -------------------------- ------------ ------------ Net cash used in financing activities: (4,218,047) (4,019,727) (2,664,788) -------------------------- ------------ ------------ Increase (decrease) in cash 422,941 1,117,110 (152) Cash at beginning of year 1,121,457 4,347 4,499 -------------------------- ------------ ------------ Cash at end of year $ 1,544,398 $ 1,121,457 $ 4,347 ========================== ============ ============
Page 21 17-QUARTERLY FINANCIAL DATA (UNAUDITED) The following summarized (unaudited) quarterly financial data of the Corporation which, in the opinion of management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation of the Corporation's results of operations:
Three Months Ended ------------------- 1995: March 31 June 30 Sept. 30 Dec. 31 ------------------- ----------- ----------- ----------- Interest income $ 15,309,577 $16,142,656 $16,327,964 $16,541,726 Net interest income 9,215,441 9,485,980 9,385,469 9,408,363 Provision for loan losses 532,500 515,000 595,000 517,500 Noninterest income 884,802 1,062,488 1,142,511 1,238,773 Operating expenses 5,531,203 5,693,685 5,829,839 5,830,282 Income before income taxes 4,036,540 4,339,783 4,103,141 4,299,354 Income taxes 1,190,211 1,293,562 1,194,749 1,324,575 ------------------- ----------- ----------- ----------- Net income $ 2,846,329 $ 3,046,221 $ 2,908,392 $ 2,974,779 =================== =========== =========== =========== Net income per share $ 0.49 $ 0.52 $ 0.49 $ 0.50 =================== =========== =========== =========== 1994:
Interest income $12,632,649 $13,237,218 $14,017,329 14,726,818 Net interest income 8,073,771 8,654,790 9,180,871 9,265,888 Provision for loan losses 534,326 945,900 527,500 642,500 Noninterest income 1,073,273 1,926,636 947,601 577,860 Operating expenses 4,885,929 5,398,769 5,803,114 5,669,602 Income before income taxes 3,726,789 4,236,757 3,797,858 3,531,646 Income taxes 1,095,190 1,307,682 1,119,780 1,025,429 ----------- ----------- ----------- ----------- Net income 2,631,599 2,929,075 2,678,078 2,506,217 =========== =========== =========== =========== Net income per share $ 0.43 $ 0.51 $ 0.47 $ 0.43 =========== =========== =========== ===========
Page 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED SUMMARY OF OPERATIONS (Dollars in thousands, except per share data)
Years Ended December 31, 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- INCOME AND EXPENSE: Interest income $ 64,322 $ 54,614 $ 50,350 $ 48,547 $ 46,667 Interest expense 26,827 19,439 19,531 21,850 24,703 ---------- ---------- ---------- ---------- ---------- Net interest income 37,495 35,175 30,819 26,697 21,964 Provision for loan losses 2,160 2,650 3,073 2,299 1,306 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 35,335 32,525 27,746 24,398 20,658 Noninterest income 4,329 4,525 4,868 3,410 2,932 Noninterest expense 22,885 21,757 20,122 17,040 13,807 ---------- ---------- ---------- ---------- ---------- Income before income taxes and the cumulative effect of a change in accounting for income taxes 16,779 15,293 12,492 10,768 9,783 Income taxes 5,003 4,548 3,554 2,898 2,485 ---------- ---------- ---------- ---------- ---------- Income before the cumulative effect of a change in accounting for income taxes 11,776 10,745 8,938 7,870 7,298 Cumulative effect of a change in accounting for income taxes - - 300 92 - ---------- ---------- ---------- ---------- ---------- Net income $ 11,776 $ 10,745 $ 9,238 $ 7,962 $ 7,298 ========== ========== ========== ========== ========== PER SHARE*: Primary $ 2.00 $ 1.84 $ 1.64 $ 1.43 $ 1.31 Fully diluted 2.00 1.84 1.59 1.39 1.29 Cash dividends paid 0.79 0.61 0.49 0.43 0.37 Primary average shares outstanding 5,893,334 5,847,473 5,642,790 5,566,155 5,566,129 Diluted average shares outstanding 5,895,353 5,847,473 5,824,099 5,737,115 5,675,345 *Adjusted for a 5% percent stock dividend effective 12/30/94, a two-for-one stock split effective 12/31/93, and a 5% stock dividend effective 12/31/92. AVERAGE BALANCE SHEET: Loans $ 580,612 $ 515,101 $ 451,057 $ 393,323 $ 333,389 Investments 195,579 199,335 202,015 174,352 126,680 Other earning assets 10,541 7,444 17,595 25,997 30,399 Total assets 830,465 765,037 714,719 632,490 520,103 Deposits 706,357 682,112 643,847 568,100 460,276 Other interest-bearing liabilities 37,067 8,145 2,014 1,608 1,608 Shareholders' equity 73,537 66,716 59,597 52,635 46,845 BALANCE SHEET AT YEAR-END: Loans $ 602,421 $ 568,259 $ 476,721 $ 425,034 $ 359,948 Investments 212,932 185,078 218,172 206,037 131,653 Other earning assets 13,248 206 15,467 30,327 23,795 Total assets 874,146 799,779 753,941 707,559 546,988 Deposits 741,218 688,578 680,465 640,239 484,924 Other interest-bearing liabilities 39,751 35,322 2,415 2,828 2,052 Shareholders' equity 77,516 66,575 62,471 54,560 49,027
The following discussion and analysis should be read in conjunction with the detailed information and financial statements, including notes thereto, included elsewhere in this report. The consolidated financial condition and results of operations of the Corporation are essentially those of its subsidiaries, the Banks. Therefore, the analysis that follows is directed to the performance of the Banks. Such financial condition and results of operations are not intended to be indicative of future performance. Page 23 BALANCE SHEET ANALYSIS: The table below presents the major asset and liability categories on an average daily basis for the periods presented, along with interest income and expense, and key rates and yields. The assets showing the greatest increase were loans. On the liability side, the most significant source of new funds was time deposits. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY, INTEREST RATES AND INTEREST DIFFERENTIAL: Year Ended December 31,
(Dollars in thousands) 1995 1994 -------- -------- Average Average Average Average Average ASSETS Balance Rate Interest Balance Rate Interest Balance -------- -------- --------- -------- -------- --------- -------- Investment securities: Taxable investments $147,759 6.32% $ 9,345 $156,944 5.49% $ 8,611 $161,637 Nontaxable investments(1) 47,820 8.29 3,963 45,080 8.31 3,746 40,378 -------- -------- --------- -------- -------- --------- -------- Total securities 195,579 6.80 13,308 202,024 6.12 12,357 202,015 Money market instruments 10,541 5.97 629 7,444 4.41 328 17,640 Loans(2) 580,612 8.96 52,047 515,101 8.44 43,456 451,057 -------- -------- --------- -------- -------- --------- -------- Total earning assets 786,732 8.39 65,984 724,569 7.75 56,141 670,712 Noninterest-earning assets 43,733 - - 40,468 - - 44,007 -------- -------- --------- -------- -------- --------- -------- Total assets $830,465 7.95% $ 65,984 $765,037 7.34% $ 56,141 $714,719 ======== ======== ========= ======== ======== ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand $104,709 - % $ - $101,065 - % $ - $ 88,436 Savings 315,284 2.80 8,828 346,413 2.51 8,708 325,675 Time 286,364 5.53 15,830 234,634 4.40 10,330 229,736 -------- -------- --------- -------- -------- --------- -------- Total 706,357 3.49 24,658 682,112 2.79 19,038 643,847 Other borrowings 37,067 5.85 2,169 8,145 4.92 401 2,014 Other liabilities 13,504 - - 8,064 - - 9,261 -------- -------- --------- -------- -------- --------- -------- Total liabilities 756,928 3.54 26,827 698,321 2.78 19,439 655,122 Shareholders' equity 73,537 - - 66,716 - - 59,597 -------- -------- --------- -------- -------- --------- -------- Total liabilities and shareholders' equity $830,465 3.23% $ 26,827 $765,037 2.54% $ 19,439 $714,719 ======== ======== ========= ======== ======== ========= ======== Average effective rate on interest-bearing liabilities $638,715 4.20% $ 26,827 $589,192 3.30% $ 19,439 $557,425 ======== ======== ========= ======== ======== ========= ======== Interest Income/Earning Assets $786,732 8.39% $ 65,984 $724,569 7.75% $ 56,141 $670,712 Interest Expense/Earning Assets $786,732 3.41 $ 26,827 $724,569 2.68 $ 19,439 $670,712 -------- -------- Effective Interest Differential 4.98% 5.07% ======== ======== (Dollars in thousands) 1993 -------- Average ASSETS Rate Interest -------- --------- Investment securities: Taxable investments 5.76% $ 9,303 Nontaxable investments(1) 8.73 3,526 -------- --------- Total securities 6.35 12,829 Money market instruments 3.48 614 Loans(2) 8.51 38,414 -------- --------- Total earning assets 7.73 51,857 Noninterest-earning assets - - -------- --------- Total assets 7.26% $ 51,857 ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand - % $ - Savings 2.83 9,224 Time 4.46 10,249 -------- --------- Total 3.02 19,473 Other borrowings 2.88 58 Other liabilities - - -------- --------- Total liabilities 2.98 19,531 Shareholders' equity - - -------- --------- Total liabilities and shareholders' equity 2.73% $ 19,531 ======== ========= Average effective rate on interest-bearing liabilities 3.50% $ 19,531 ======== ========= Interest Income/Earning Assets 7.73% $ 51,857 Interest Expense/Earning Assets 2.91 $ 19,531 -------- Effective Interest Differential 4.82% ======== (1) The interest earned on nontaxable investment securities is shown on a tax equivalent basis. (2) Nonaccrual loans have been included in the appropriate average loan balance category, but interest on nonaccrual loans has not been included for purposes of determining interest income.
Page 24 and 25 INVESTMENT PORTFOLIO The following shows the carrying value of the Corporation's investment securities held to maturity:
December 31, (Dollars in Thousands) 1995 1994 1993 ------- ------- ------- U. S. Treasury notes $ - $ 2,562 $ 2,300 Obligations of other U.S. Government agencies and corporations 34,494 16,992 23,863 Obligations of states and political subdivisions 25,466 44,540 44,983 Mortgage-backed securities 378 617 - Other securities 6,512 18,156 25,458 ------- ------- ------- Total $66,850 $82,867 $96,604 ======= ======= ======= The following shows the carrying value of the Corporation's investment securities available for sale:
December 31, (Dollars in Thousands) 1995 1994 1993 -------- -------- -------- U. S. Treasury notes $ 32,865 $ 31,045 $ 40,530 Obligations of other U.S. Government agencies and corporations 6,188 - - Obligations of states and political subdivisions 30,604 - - Mortgage-backed securities 67,371 66,835 81,038 Other securities 9,054 4,331 - -------- -------- -------- Total $146,082 $102,211 $121,568 ======== ======== ========
The Corporation adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," (SFAS No. 115) on January 1, 1994, which requires, among other things, that debt and equity securities classified as available for sale be reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity, net of income taxes. The net effect of unrealized gains or losses, caused by marking an available- for-sale portfolio to market, causes fluctuations in the level of shareholders' equity and equity-related financial ratios as market interest rates cause the fair value of fixed-rate securities to fluctuate. The Financial Accounting Standards Board gave banks an opportunity to reassess the appropriateness of the classifications of all securities held and account for any resulting reclassifications at fair value no later than December 31, 1995. Reclassifications from the held-to-maturity category that result from this one-time reassessment will not call into question the intent of an enterprise to hold other debt securities to maturity in the future. After reassessing the investment security portfolio, the Corporation transferred $39,947,000 from investment securities held to maturity to investment securities available for sale on December 21, 1995. This transfer was the primary reason for both the decrease in the balance of investment securities held to maturity of $16,017,000 and the increase in investment securities available for sale of $43,871,000 from December 31, 1994 to December 31, 1995. Total investment securities at December 31, 1995 of $212,932,000 grew $27,854,000 over the December 31, 1994 balance of $185,078,000. This growth was funded primarily by the increase in time deposit balances during this period. From December 31, 1993 to the same date in 1994, the investment securities held to maturity decreased $13,737,000 and the investment securities available for sale decreased $19,357,000. Page 26 There are no significant concentrations of securities (greater than 10% of shareholders' equity) in any individual security issuer. The maturity analysis of investment securities held to maturity, including the weighted average for each category as of December 31, 1995, is as follows:
Under 1 - 5 5 - 10 Over 1 year years years 10 years Total -------- -------- -------- ---------- -------------- (Dollars in thousands) Obligations of other U.S. Government agencies and corporations: Carrying value $ 3,999 $30,495 $ - $ - $ 34,494 Weighted average yield. 7.93% 7.37% - % - % 7.44% Weighted average maturity 2 yrs 2 mos Obligations of states and political subdivisions: Carrying value 1,871 19,612 3,733 250 25,466 Weighted average yield. 9.98% 8.89% 9.24% 13.46% 9.07% Weighted average maturity 4 yrs 1 mos Mortgage-backed securities: Carrying value - - - 378 378 Weighted average yield. - % - % - % 7.42% 7.42% Weighted average maturity 12 yrs 8 mos Other securities: Carrying value 2,412 3,602 498 - 6,512 Weighted average yield. 6.73% 7.26% 6.81% - % 7.03% Weighted average maturity 2 yrs 8 mos Total: Carrying value 8,282 53,709 4,231 628 66,850 Weighted average yield. 8.04% 7.92% 8.96% 9.83% 8.02% Weighted average maturity 3 yrs 0 mos
The maturity analysis of securities available for sale, including the weighted average for each category as of December 31, 1995, is as follows:
Under 1 - 5 5 - 10 Over (Dollars in thousands) 1 year years years 10 years Total -------- -------- -------- ---------- -------------- U.S. Treasury notes: Amortized cost $14,178 $18,493 $ - $ - $ 32,671 Weighted average yield. 4.72% 5.67% - % - % 5.42% Weighted average maturity 1 yr 5 mos Obligations of other U.S. Government agencies and corporations: Amortized cost 4,000 2,254 - - 6,254 Weighted average yield. 5.64% 3.84% - % - % 4.99% Weighted average maturity 11 mos Obligations of states and political subdivisions: Amortized cost 2,268 20,232 5,480 2,925 30,905 Weighted average yield. 7.32% 7.53% 7.73% 7.97% 7.59% Weighted average maturity 3 yrs 4 mos Mortgage-backed securities: Amortized cost - 3,518 10,811 53,007 67,336 Weighted average yield. - % 6.35% 6.43% 6.81% 6.72% Weighted average maturity 21 yrs 2 mos Other securities: Amortized cost 2,507 2,248 300 3,752 8,807 Weighted average yield. 7.30% 6.33% 6.13% 5.26% 6.14% Weighted average maturity 4 yrs 3 mos Total: Amortized Cost 22,953 46,745 16,591 59,684 145,973 Weighted average yield. 5.42% 6.47% 6.85% 6.77% 6.47% Weighted average maturity 11 yrs 1mos
Weighted average yield is computed by dividing the annualized interest income, including the accretion of discounts and the amortization of premiums, by the carrying value. Tax-exempt securities were adjusted to a tax equivalent basis and are based on the federal statutory tax rate of 35%. Page 27 LOANS The following table shows the composition of the Banks' loans:
December 31, ------------- (Dollars in thousands) 1995 1994 1993 1992 1991 ------------- -------- -------- -------- -------- Real estate $ 207,819 $200,139 $175,530 $161,171 $117,438 Commercial and industrial. 163,677 154,319 128,388 112,539 115,851 Installment. 155,012 143,783 118,869 111,349 95,574 Lease financing 43,942 41,233 32,304 27,399 21,511 Other 41,176 38,589 32,957 28,574 30,153 ------------- -------- -------- -------- -------- Total $ 611,626 $578,063 $488,048 $441,032 $380,527 ============= ======== ======== ======== ========
Total loans grew $33,563,000 from $578,063,000 at December 31, 1994 to $611,626,000 at December 31, 1995. The loan growth was distributed over all loan categories. Real estate loans increased $7,680,000, commercial and industrial loans grew $9,358,000 and installment loans rose $11,229,000. Lease financing and other loans grew $2,709,000 and $2,587,000, respectively. At December 31, 1995, there were no loan concentrations over 10% of loans outstanding in any one category or to any one borrower. The Banks have no foreign loans, and the impact of nonaccrual, restructured troubled debt and delinquent loans on total interest income was not material. Except as previously disclosed and discussed herein, management does not believe there are any trends or uncertainties which are reasonably expected to materially impact future operating results, liquidity or capital resources, and management is not aware of any information not previously disclosed or not disclosed herein which causes it to have serious doubts as to the ability of borrowers to comply with the loan repayment terms. The following table details maturities and interest sensitivity of real estate, commercial and industrial, installment loans and lease financing at December 31, 1995:
Within 1 - 5 Over (Dollars in thousands) 1 year years 5 years Total -------- -------- -------- -------- Real estate $ 15,152 $ 42,876 $149,791 $207,819 Commercial and industrial. 44,377 56,037 63,263 163,677 Installment. 32,540 80,329 42,143 155,012 Lease financing 11,169 32,773 - 43,942 -------- -------- -------- -------- Total $103,238 $212,015 $255,197 $570,450 ======== ======== ======== ======== Loans with variable or floating interest rates $ 82,881 $ 72,927 $ 80,543 $236,351 Loans with fixed predetermined interest rates. 20,357 139,088 174,654 334,099 -------- -------- -------- -------- Total $103,238 $212,015 $255,197 $570,450 ======== ======== ======== ========
A loan is generally classified as nonaccrual when principal or interest has consistently been in default for a period of 90 days or more or because of a deterioration in the financial condition of the borrower or payment in full of principal or interest is not expected. Delinquent loans past due 90 days or more and still accruing interest are loans that are generally well-secured and expected to be restored to a current status in the near future. The following table details those loans that were placed on nonaccrual status, were accounted for as troubled debt restructurings or were delinquent by 90 days or more:
December 31, ------------- (Dollars in thousands) 1995 1994 1993 1992 1991 ------------- ------ ------ ------ ------ Nonaccrual loans $ 8,993 $2,458 $1,876 $1,385 $3,688 Trouble debt restructurings 1,183 1,867 1,548 315 - Delinquent loans 1,459 2,145 1,729 1,192 2,086 ------------- ------ ------ ------ ------ Total $ 11,635 $6,470 $5,153 $2,892 $5,774 ============= ====== ====== ====== ======
Page 28 ALLOWANCE FOR LOAN LOSSES A summary of the allowance for loan losses is as follows:
December 31, -------------- (Dollars in thousands) 1995 1994 1993 1992 1991 -------------- --------- --------- --------- --------- Average loans $ 580,612 $515,101 $451,057 $393,323 $333,389 ============== ========= ========= ========= ========= Allowance, beginning of period $ 7,934 $ 5,886 $ 4,387 $ 3,916 $ 3,199 -------------- --------- --------- --------- --------- Loans charged off: Commercial and industrial 240 491 1,211 1,010 11 Installment and other. 277 387 401 690 495 Real estate 116 84 212 90 - Lease financing 39 44 92 162 165 -------------- --------- --------- --------- --------- Total loans charged off 672 1,006 1,916 1,952 671 -------------- --------- --------- --------- --------- Recoveries: Commercial and industrial 143 170 86 8 - Installment and other. 72 152 155 97 68 Real estate 1 56 76 - - Lease financing 36 26 25 19 13 -------------- --------- --------- --------- --------- Total recoveries 252 404 342 124 81 -------------- --------- --------- --------- --------- Net loans charged off 420 602 1,574 1,828 590 -------------- --------- --------- --------- --------- Provision for loan losses 2,160 2,650 3,073 2,299 1,307 -------------- --------- --------- --------- --------- Allowance, end of period $ 9,674 $ 7,934 $ 5,886 $ 4,387 $ 3,916 ============== ========= ========= ========= ========= Ratio of net charge offs to average loans outstanding 0.07% 0.12% 0.35% 0.46% 0.18% ============== ========= ========= ========= =========
The Banks' policy is to maintain allowances for loan losses at a level believed by management to be adequate to absorb potential losses. Management's determination of the adequacy of the allowance is determined monthly based on a continuing evaluation of the portfolio, past loss experience, current and anticipated economic conditions, and other factors deemed relevant. Additions to the allowances are charged to operations. The ratio of net charge- offs to average loans dropped from .12% in 1994 to .07% in 1995, as a result of lower net charge- offs along with increased loans outstanding. The 1994 ratio decreased from the 1993 ratio of 0.35%. Management believes that the ratio of 0.07% compares favorably with peer group ratios. The following table sets forth an allocation of the allowance for loan losses by category. In retrospect, the specific allocations in any particular category may prove excessive or inadequate and, consequently, may be reallocated in the future to reflect then current conditions. Accordingly, management considers the entire allowance to be available to absorb losses in any category.
December 31, ------------- 1995 1994 1993 1992 1991 ------------- ------- ------- ------- ------ (Dollars in thousands) Percent Percent Percent Percent Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount ------------- ---------- ------- ---------- ------- ---------- ------- ---------- ------ Commercial and industrial $ 3,952 28% $ 2,967 27% $ 2,821 26% $ 1,786 26% $ 1,177 Installment and other 885 31% 1,063 32% 990 31% 895 31% 1,198 Real estate 1,292 34% 1,010 34% 879 36% 1,163 37% 1,167 Lease financing 127 7% 139 7% 225 7% 81 6% 109 Unallocated 3,418 N/A 2,755 N/A 971 N/A 462 N/A 265 ------------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- Total $ 9,674 100% $ 7,934 100% $ 5,886 100% $ 4,387 100% $ 3,916 ============= ========== ======= ========== ======= ========== ======= ========== ======= (Dollars in thousands) Percent of Loans ---------- Commercial and industrial 30% Installment and other 33% Real estate 31% Lease financing 6% Unallocated N/A ---------- Total 100% ==========
Page 29 The allowance and the provision for loan losses are based on management's judgment after considering charge-off history, nonperforming loans and reserve levels relative to total loans in determining the allowance and the provision for loan losses. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks' allowance for loan losses. Such agencies may require the Banks to recognize additions to the allowance based on their judgment of information available to them at the time of their examination. The Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," on January 1, 1995. This new standard requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. The adoption of SFAS No. 114, as amended by SFAS No. 118, on January 1, 1995 did not have a material impact on the Corporation's liquidity, results of operations or capital resources. DEPOSIT STRUCTURE The following table is a distribution of average balances and average rates paid on the deposit categories for the last three years:
December 31, ------------- 1995 1994 1993 ------------- -------- -------- (Dollars in thousands) Amount Rate Amount Rate Amount Rate ------------- ----- -------- ----- -------- ----- Demand -- noninterest-bearing $ 104,709 --% $101,065 --% $ 88,436 --% Demand -- NOW 80,115 1.97 82,747 2.06 76,962 2.59 Money market and savings 235,169 3.08 263,666 2.66 248,713 2.90 Time -- under $100,000 258,170 5.52 218,233 4.43 216,587 4.54 Time -- $100,000 or greater 28,194 5.59 16,401 4.05 13,149 3.22 ------------- -------- -------- Total $ 706,357 $682,112 $643,847 ============= ======== ======== A maturity distribution of certificates of deposit of $100,000 and over is as follows:
December 31, ------------- (Dollars in thousands) 1995 1994 1993 ------------- ------- ------- Three months or less $ 14,095 $ 7,274 $ 5,598 Over three months to six months 3,848 7,809 1,623 Over six months to twelve months 7,619 1,943 901 Over twelve months 2,630 2,202 2,425 ------------- ------- ------- Total $ 28,192 $19,228 $10,547 ============= ======= =======
INCOME STATEMENT ANALYSIS: RESULTS OF OPERATIONS Consolidated net income for 1995 was $11,776,000, an increase of $1,031,000, or 9.6%, over 1994. On a per share basis, primary and fully diluted earnings were $2.00 in 1995, compared to primary and fully diluted earnings per share of $1.84 in 1994. Consolidated net income increased in 1994 by $1,507,000, a 16.3% increase over 1993. A change in accounting for income taxes increased the 1993 net income by $300,000 to a total of $9,238,000. Primary earnings per share in 1993 were $1.64, and fully diluted earnings per share were $1.59. Return on average assets was 1.42% for 1995, compared to 1.40% for 1994 and 1.29% for 1993, and return on average shareholders' equity was 16.01% for 1995, compared to 16.11% for 1994 and 15.50% for 1993. Net income is affected by five major elements: net interest income, or the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds; the provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for future losses on loans; other operating income, which is made up primarily of certain fees and gains and losses from sales of securities; other operating expenses, which consist primarily of salaries and other operating expenses; and income taxes. Each of these major elements is reviewed in more detail in the following discussion. NET INTEREST INCOME Net interest income for 1995 increased by $2,320,000, or 6.6%, to $37,495,000. Net interest income was $35,175,000 during 1994, which was 14.1% above the $30,819,000 reported in 1993. For analytical purposes, the following table reflects tax equivalent net interest income in recognition of the income tax savings on tax-exempt items such as interest on municipal securities and tax-exempt loans. Adjustments are made using a statutory federal tax rate of 35%.
Years ended December 31, ----------------------- (Dollars in thousands) 1995 1994 1993 ------------- ------- ------- Interest income $ 64,322 $54,614 $50,350 Interest expense 26,827 19,439 19,531 ------------- ------- ------- Net interest income 37,495 35,175 30,819 Tax equivalent adjustment 1,662 1,527 1,507 ------------- ------- ------- Net interest income (fully taxable equivalent) $ 39,157 $36,702 $32,326 ============= ======= =======
Page 30 CHANGES IN NET INTEREST INCOME The rate-volume analysis set forth in the following table, which is computed on a tax equivalent basis (tax rate of 35%), analyzes changes in net interest income for the last three years by their rate and volume components. Taxable-equivalent net interest income was $39,157,000 for 1995, compared to $36,702,000 for 1994, a 6.7% or $2,455,000 increase. This increase in taxable-equivalent net interest income was due to a $1,939,000 increase related to volume and a $516,000 increase related to interest rates. Total interest income grew $9,843,000, primarily the result of a rise in loan volumes. Total loan interest income increased $8,591,000, or 19.8%, in 1995, compared to 1994, primarily as a result of total average loans increasing $65,511,000, or 12.7%. The increase in loans was primarily the result of management's efforts to increase the loan portfolio. Interest income earned on commercial loans contributed $3,397,000 of this increase, and installment loans and real estate loans contributed $2,476,000 and $1,497,000, respectively. Total interest expense rose $7,388,000, principally as a result of higher time deposit rates and volumes. The volume of average time deposits increased $51,730,000, or 22.0% during 1995, compared to 1994. Other borrowings also contributed to the rise in interest expense by increasing $28,922,000, during this same period. Other borrowings include federal funds purchased, Federal Home Loans Bank borrowings, securities sold under agreements to repurchase and U.S. Treasury notes. For the year ended December 31, 1994 net interest income increased $4,376,000, primarily due to an increase in the volume of loans. Total loan interest income increased $5,042,000, or 13.1%, in 1994, compared to 1993, primarily as a result of total average loans increasing $64,044,000, or 14.2%. This increase in loans was funded by a decrease in money market instruments and an increase in other borrowings. The reduction in money market instruments volume caused a $449,000 decrease in interest income, and growth in the volume of other borrowings increased interest expense by $302,000. Nonaccruing loans are included in the average balance yield calculations, but the average nonaccruals were insignificant and had no material effect on the results. Variances attributable to both rate and volume are included in the volume column. The increase in interest rates did not have a material effect on net interest income during 1995 and 1994, as a result of management's ability to properly price earning assets and deposits. Interest rates tended to be stable during 1993.
1995 over/(under) 1994 1994 over/(under) 1993 ----------------------- ---------------------- due to changes in ------------------- (Dollars in thousands) Net Net Change Rate Volume Change ----------------------- ------------------- -------- ------------------------ INTEREST INCOME: Securities(1) $ 951 $ 1,390 $ (439) $ (472) Money market instruments 301 116 185 (286) Loans 8,591 2,718 5,873 5,042 ----------------------- ------------------- -------- ------------------------ Total 9,843 4,224 5,619 4,284 ----------------------- ------------------- -------- ------------------------ INTEREST EXPENSE: Savings deposits 120 992 (872) (516) Time deposits and certificates of deposit 5,500 2,640 2,860 81 Other borrowings 1,768 76 1,692 343 ----------------------- ------------------- -------- ------------------------ Total 7,388 3,708 3,680 (92) ----------------------- ------------------- -------- ------------------------ Changes in net interest income $ 2,455 $ 516 $ 1,939 $ 4,376 ======================= =================== ======== ======================== due to changes in -------------------- (Dollars in thousands) Rate Volume -------------------- -------- INTEREST INCOME: Securities(1) $ (473) $ 1 Money market instruments 163 (449) Loans (352) 5,394 -------------------- -------- Total (662) 4,946 -------------------- -------- INTEREST EXPENSE: Savings deposits (1,037) 521 Time deposits and certificates of deposit (135) 216 Other borrowings 41 302 -------------------- -------- Total (1,131) 1,039 -------------------- -------- Changes in net interest income $ 469 $ 3,907 ==================== ======== (1) The interest earned on nontaxable investment securities is shown on a tax equivalent basis.
Page 31 INTEREST RATE SENSITIVITY The Banks actively manage their interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve consistent growth in net interest income. The Asset/Liability Committee, using policies and procedures set by senior management, is responsible for managing the Banks' rate sensitivity position. The Banks manage interest rate sensitivity by changing mix and repricing characteristics of their assets and liabilities through their investment securities portfolios and their offering of loan and deposit terms. The Banks utilize three principal reports to measure interest rate risk - gap analysis reports, net interest margin reports and asset/liability simulation reports. The table below shows the interest rate sensitivity gap position, as of December 31, 1995. The table presents data at a single point of time. Savings and NOW accounts have always been considered a stable source of funds, and although the rates are subject to change, rates on these accounts historically have not changed as quickly or as often as the other deposits included in the following analysis. The 0 to 365 day gap was 7.01% of earning assets at December 31, 1995, compared to 4.96% at December 31, 1994.
December 31, 1995 ------------------- 0 to 90 91 to 180 181 to 365 1 - 5 Over 5 (Dollars in thousands) days days days years years ------------------- ----------- ------------ --------- --------- ASSETS Money market instruments $ 13,058 $ - $ - $ 90 $ 100 Loans 204,981 25,167 58,918 187,690 134,869 Investment securities 21,946 28,974 26,594 111,317 23,992 ------------------- ----------- ------------ --------- --------- Total rate sensitive assets $ 239,985 $ 54,141 $ 85,512 $299,097 $158,961 =================== =========== ============ ========= ========= LIABILITIES Certificates of deposit, $100,000 or greater $ 14,095 $ 3,348 $ 7,619 $ 2,630 $ 500 All other certificates of deposit 47,192 37,007 60,923 129,683 352 Money market savings funds 58,797 - - - 92,699 NOW accounts 26,887 - - - 60,054 Savings accounts 29,108 - - - 56,802 U.S. Treasury notes 1,837 - - - - Other borrowings 30,914 3,000 - 4,000 - ------------------- ----------- ------------ --------- --------- Total rate sensitive liabilities $ 208,830 $ 43,355 $ 68,542 $136,313 $210,407 =================== =========== ============ ========= ========= Incremental gap $ 31,155 $ 10,786 $ 16,970 $162,784 $(51,446) Cumulative gap $ 31,155 $ 41,941 $ 58,911 $221,695 $170,249 3.72% 5.01% 7.03% 26.46% 20.32%
NET INTEREST MARGIN The 1995 net interest margin of 4.98% decreased from the 1994 net interest margin of 5.07%. The decrease in the net interest margin is primarily the result of higher rates paid on time deposits during 1995, compared to 1994. The net interest margin in 1994 was higher than the 4.82% net interest margin in 1993. The Banks have been able to effectively match assets and liabilities and maintain a consistent percentage of earning assets to total assets. PROVISION FOR LOAN LOSSES The provision is based on management's analysis of the adequacy of the allowance for loan losses. In its evaluation, management considers past loan experience, overall characteristics of the loan portfolio, current economic conditions and other relevant factors. Based on the latest monthly evaluation of potential loan losses, the allowance is adequate to absorb known and inherent losses in the loan portfolio. Ultimately however, the adequacy of the allowance is largely dependent upon the economy, a factor beyond the Corporation's control. With this in mind, additions to the allowance for loan losses may be required in future periods, especially if economic trends worsen or certain borrowers' abilities to repay decline. The provision in 1995 was $2,160,000, a decrease of $490,000, or 18.5%, compared to the 1994 provision of $2,650,000. The growth in the loan loss reserve from December 31, 1994 to December 31, 1995 of 21.9% was greater than the 6.0% growth of loans during this period. Net loans charged-off of $420,000 in 1995 were lower than the net loans charged-off of $602,000 in 1994. Net charge-offs in 1993 were $1,574,000. The Corporation has made an allocation of its reserve giving consideration to management's evaluation of risk in the portfolio. The ratio of the allowance for loan losses to loans of 1.61% at December 31, 1995 increased from the December 31, 1994 ratio of 1.40%. The 1993 provision was $3,073,000 and the ratio of the allowance for loan losses to loans was 1.23% at December 31, 1993. Included in the charge-offs in 1993 were two commercial loans totaling $907,000. These two charged-off commercial loans were to two unrelated borrowers. Nonperforming assets (nonaccruing loans, net assets in foreclosure and troubled debt restructured loans), were 1.85% of total loans and net assets acquired in foreclosure at December 31, 1995 compared to 0.97% at December 31, 1994 and 1.01% at December 31, 1993. The ratio of the allowance to nonperforming assets was 86.4% at December 31, 1995, compared to 141.8% at December 31, 1994 and 118.9% at December 31, 1993. Nonaccruing loans of $8,993,000 at December 31, 1995, increased $6,535,000 from the December 31, 1994 balance of $2,458,000. Approximately $6,972,000, or 77.5%, of total nonaccruing loans are attributable to two unrelated borrowers at December 31, 1995. One borrower has four loans in the aggregate principal amount of $5,070,000. These four loans are well-secured principally by real estate. These loans relate to a real estate development project. The other borrower has two loans in the aggregate principal amount of $1,902,000. These two loans are well-secured principally by real estate. These two loans are associated with a restaurant. Management is proceeding as quickly as administrative and legal constraints permit to work out each of these loans. Net assets in foreclosure totaled $1,016,000 as of December 31, 1995, a decrease of $253,000, or 19.9%, from the December 31, 1994 balance. During 1995, sales of foreclosed properties totaled $1,307,000, transfers from loans to assets in foreclosure were $1,247,000 and write-downs of assets in foreclosure equaled $193,000. Efforts to liquidate assets acquired in foreclosure are proceeding as quickly as potential buyers can be located and legal constraints permit. Generally accepted accounting principles require foreclosed assets to be carried at the lower of cost (lesser of carrying value of asset or fair value at date of acquisition) or estimated fair value. Page 32 Loans past due 90 days or more and still accruing interest are loans that are generally well-secured and expected to be restored to a current status in the near future. As of December 31, 1995, loans past due 90 days or more and still accruing interest were $1,460,000, compared to $2,145,000 as of December 31, 1994. As of December 31, 1995, there were three unrelated commercial borrowers with troubled debt restructured loans totaling $1,183,000. All three customers were complying with the restructured terms as of December 31, 1995. The Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," on January 1, 1995. This new standard requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. The balance of impaired loans was $9,278,000 at December 31, 1995. The Banks have identified a loan as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement. The impaired loan balance included $8,095,000 of nonaccrual loans and $1,183,000 of troubled debt restructured loans. The allowance for loan loss associated with the $9,278,000 of impaired loans was $1,122,000 at December 31, 1995. The average impaired loan balance was $3,906,000 in 1995 and the income recognized on impaired loans during 1995 was $231,000. The Banks' policy for interest income recognition on impaired loans is to recognize income on restructured loans under the accrual method. The Banks recognize income on nonaccrual loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Banks. The Banks will not recognize income if these factors do not exist. OTHER OPERATING INCOME
Years ended December 31, ------------------------- (Dollars in thousands) 1995 1994 1993 -------------- ------ ------ Service charges $ 2,313 $2,314 $2,347 Securities (losses) gains, net (172) 530 398 Trust income 1,055 719 649 Other 1,133 962 1,474 -------------- ------ ------ Total other operating income $ 4,329 $4,525 $4,868 ============== ====== ======
Other operating income for 1995 decreased $196,000, or 4.3%, compared to 1994, and other operating income for 1994 decreased $343,000, or 7.0%, over 1993. Income from service charges on deposit accounts of $2,313,000 in 1995 was almost even with the $2,314,000 of service charges on deposit accounts earned in 1994 and lower than the $2,347,000 earned in 1993. The decrease in service charges during 1995 and 1994 is attributed to lower service charges on business accounts. This was the result of an increase in the earnings credit, attributable to the rise in interest rates, which is used to offset service charges. The Corporation recorded a $172,000 net security loss in 1995, compared to a net security gain of $530,000 in 1994. The $172,000 net security loss in 1995 is the result of selling low yielding investment securities available-for-sale. From time to time, the Corporation sells securities to fund the purchase of other securities in an effort to enhance the overall return on the portfolio and to fund loan demand. During 1994, the Corporation realized a securities gain of approximately $1,058,000 as a result of the Corporation selling over 40,000 shares of First Eastern Bank stock which was purchased by PNC Corporation on June 24, 1994. Investment securities available for sale were sold during 1994 to help fund growth in loans and resulted in a net loss of approximately $556,000. Eighteen mortgage-backed securities that were held in the available for sale account were sold during 1993 due to the faster-than-expected repayments. This resulted in a gain of $388,000, or 97.5%, of the total net securities gains for 1993. Income from the Trust and Financial Services Department in 1995 of $1,055,000 increased $336,000, or 46.7%, in 1995, compared to the $719,000 recorded in 1994. This increase was the result of both an increase in the book value of trust assets of 25.7% from December 31, 1994 to December 31, 1995 and the Corporation's continuing emphasis on marketing the Trust and Financial Services Department's products and services. The 1993 Trust and Financial Services Department income was $649,000. Other income increased $171,000 during 1995, from $962,000 in 1994 to $1,133,000 in 1995. This increase is due to higher fees earned on credit cards and a rise in fees associated with the sale of insurance policies on new loans. Other income in 1993 of $1,474,000, included a $469,000 gain realized when management decided to sell fixed-rate mortgages totaling approximately $15,000,000 on the secondary market. OTHER OPERATING EXPENSES
Years ended December 31, ------------------------ (Dollars in thousands) 1995 1994 1993 ------------- ------- ------- Salaries $ 9,294 $ 8,048 $ 7,238 Employee benefits 3,140 2,934 2,701 Occupancy 1,432 1,355 1,210 Equipment expense 1,847 1,487 1,225 FDIC premiums 798 1,518 1,425 Other expenses 6,374 6,415 6,323 ------------- ------- ------- Total other operating expenses $ 22,885 $21,757 $20,122 ============= ======= =======
Other operating expenses rose to $22,885,000 for 1995, a 5.2% increase over the $21,757,000 for 1994. The 1994 amount was 8.1% above the $20,122,000 for 1993. The rise in operating expenses was largely due to both higher salary and employee benefits costs directly related to the Corporation's growth and planned salary increases. These increases were generally offset by a reduction in the Federal Deposit Insurance Corporation (FDIC) premium. Employee salaries increased $1,246,000, or 15.5%, from $8,048,000 in 1994 to $9,294,000 in 1995. This increase reflects cost-of-living increases, merit increases and additional staff necessitated by current and planned future growth. Employee benefits grew $206,000, or 7.0%, to $3,140,000 in 1995, from the $2,934,000 in employee benefits during 1994. The rise in employee benefits is directly related to the increase in salary expenses. The 1994 salary expenses and fringe benefits expenses increased 11.2% and 8.6%, respectively, compared to 1993 expenses. Page 33 Net occupancy costs increased by $77,000, or 5.7%, in 1995, compared with a $145,000, or 12.0%, increase in 1994. The increase in 1995 is related to the cost of the three new branches opened during 1995. Approximately $50,000 of the 1994 increase is the rent on a new branch that was opened in August 1993. Equipment expenses increased by $360,000, or 24.2%, during 1995, and $262,000, or 21.4%, in 1994. The majority of the rise in 1995 is due to depreciation, maintenance and equipment rental expenses associated with planned increased data processing capabilities. The increased data processing capabilities include modernizing our branches through platform automation and teller terminals, and the ongoing updating of data processing equipment to manage the rise in volume related to the growth of the Corporation. Approximately $144,000 of the increase in 1994 is the result of Harleysville selling its existing IBM AS/400 computer system in the first quarter of 1994 and signing a two-year lease for a more powerful IBM AS/400 computer system. During the third quarter of 1995, the FDIC confirmed that the Bank Insurance Fund was fully recapitalized at the end of May 1995. As a result, the new lower premium rates were made retroactive to June 1, 1995. In the month of September, the FDIC refunded insurance premium overpayments for the four months of June through September. The FDIC-reduced premiums resulted in a $720,000, or 47.4%, reduction in FDIC premiums during 1995, compared to 1994. The 1994 FDIC premium was $93,000 higher than the 1993 FDIC premium due to an increase in deposits of the Corporation. Other expenses decreased $41,000, from $6,415,000 in 1994 to $6,374,000 in 1995. The reduction in other expenses included a decrease in intangible asset expense of $262,000 and a $134,000 reduction in legal expenses. The reduction in legal expenses is related to both the 1994 legal expenses associated with the Security National Bank merger and to the recovery of legal expenses in 1995 related to nonperforming assets that were expensed in prior periods. These reductions in other expenses were partially offset by an increase in printing and stationery supply expenses related to bank automation, increases in paper costs and the opening of the three new branches during 1995 and the normal increases in expenses related to the overall growth of the Corporation. Other expenses increased by $92,000, or 1.5%, during 1994, compared to 1993. A $273,000 rise in intangible asset expense during 1994 was offset by a $162,000 reduction in costs associated with the liquidation of the assets in foreclosure and the collection of past due loans. INCOME TAXES
Years ended December 31, ------------------------ (Dollars in thousands) 1995 1994 1993 -------------- ------- ------- Expected tax expense $ 5,705 $5,353 $4,373 Tax-exempt income net of interest disallowance (944) (898) (882) Other 242 93 63 -------------- ------- ------- Actual tax expense $ 5,003 $4,548 $3,554 ============== ======= =======
The Corporation adopted SFAS No. 109, "Accounting for Income Taxes," on January 1, 1993. Under the liability method specified by SFAS No. 109, deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The principal types of accounts resulting in differences between assets and liabilities for financial statement and tax return purposes are the allowance for loan losses, leased assets, deferred loan fees and compensation. The provisions of the statement were applied without restating prior years' financial statements. Adoption of SFAS No. 109 resulted in a reduction of the net deferred tax liability in the amount of $300,000 in 1993. The deferred method used in years prior to 1993 required the Corporation to provide deferred tax expense based on certain items of income and expense which were reported in different years in the financial statements and the tax return as measured by the tax rate in effect for the year the difference occurred. The effective income tax rates of 29.8% for 1995, 29.7% for 1994 and 28.4% for 1993 were less than the applicable federal income tax rate of 35.0%, as a result of tax-exempt income. CAPITAL Capital formation is critical to the Corporation's well-being and future growth. Capital at the end of 1995 was $77,516,000, an increase of $10,941,000, or 16.4%, over the end of 1994. The increase came as a result of the retention of the Corporation's earnings and from the adjustment for the net unrealized gains (losses) on the investment securities available for sale. Management believes that the Corporation's current capital positions and liquidity positions are strong and that their capital positions are adequate to support their operations. Management is not aware of any recommendation by any regulatory authority which, if it were to be implemented, would have a material effect on the Corporation's capital. The Corporation's capital ratios exceed regulatory requirements. Existing minimum regulatory capital ratio requirements are 5.5% for primary capital and 6.0% for total capital. The primary capital ratio was 9.66% at December 31, 1995, compared with 8.96% at December 31, 1994. Because the Corporation's only capital is primary capital, the total capital ratios are the same as the primary capital ratios. Pursuant to the federal regulators' risk-based capital adequacy guidelines, the components of capital are called Tier 1 and Tier 2 capital. For the Corporation, Tier 1 capital is the shareholders' equity, and Tier 2 capital is the allowance for loan losses. The risk-based capital ratios are computed by dividing the components of capital by risk-adjusted assets. Risk-adjusted assets are determined by assigning credit risk-weighing factors from 0% to 100% to various categories of assets and off-balance-sheet financial instruments. The minimum for the Tier 1 capital ratio is 4.0%, and the total capital ratio (Tier 1 plus Tier 2 capital divided by risk-adjusted assets) minimum is 8.0%. At December 31, 1995, the Corporation's Tier 1 risk-adjusted capital ratio was 11.80%, and the total risk-adjusted capital ratio was 13.05%, both well above regulatory requirements. The risk-based capital ratios of each of the Corporation's commercial banks also exceeded regulatory requirements at the end of 1995. To supplement the risk-based capital adequacy guidelines, the Federal Reserve Board (FRB) established a leverage ratio guideline. The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding intangible assets. The minimum leverage ratio guideline is 3% for banking organizations that do not anticipate significant growth and that have well-diversified risk, excellent asset quality, high liquidity, good earnings and, in general, are considered top-rated, strong banking organizations. Other banking organizations are expected to have ratios of at least 4% or 5%, depending upon their particular condition and growth plans. Higher leverage ratios could be required by the particular circumstances or risk profile of a given bank organization. The Corporation's leverage ratios were 8.79% and 8.59% at December 31, 1995 and 1994, respectively. Page 34
Tier 1 Capital to Leverage Ratio (1) Risk-Weighted Assets Ratio ------------------ --------------------------- December 31, December 31, December 31, December 31, 1995 1994 1995 1994 ------------------ ------------- --------------------------- ------------- ENTITY: Corporation 8.79% 8.59% 11.80% 11.25% Harleysville National Bank 7.99 7.65 10.53 9.79 Citizens National Bank 14.15 15.00 21.20 22.64 Security National Bank 8.32 8.70 11.89 12.76 "Well Capitalized" institution (under FDIC regulations) 5.00 5.00 6.00 6.00 Total Capital to Risk- Weighted Asset Ratio ----------------------- December 31, December 31, 1995 1994 ----------------------- ------------- ENTITY: Corporation 13.05% 12.40% Harleysville National Bank 11.78 11.09 Citizens National Bank 22.45 24.08 Security National Bank 13.14 14.28 "Well Capitalized" institution (under FDIC regulations) 10.00 10.00 (1) Accordingly, at December 31, 1995, both the Corporation and its subsidiary banks were "well capitalized" under FDIC regulations.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the FRB, the Office of the Comptroller of the Currency and the FDIC adopted regulations setting forth prompt corrective action requirements. In addition to the prompt corrective action requirements, FDICIA included significant changes to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning internal controls, accounting and operations. The prompt corrective action regulations define specific capital categories based on an institution's capital ratios. The capital categories, in declining order, are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Institutions categorized as "undercapitalized" or worse are subject to certain restrictions, including the requirement to file a capital plan with its primary federal regulator, prohibitions on the payment of dividends and management fees, restrictions on executive compensation and increased supervisory monitoring, among other things. Other restrictions may be imposed on the institution either by its primary federal regulator or by the FDIC, including requirements to raise additional capital, sell assets or sell the entire institution. Once an institution becomes "critically undercapitalized" it must generally be placed in receivership or conservatorship within 90 days. Under the regulations, a "well capitalized" institution must have a leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6% and a total risk-based capital ratio of at least 10% and not be subject to a capital directive order. To be considered "adequately capitalized," an institution must generally have a leverage ratio of at least 4%, a Tier 1 risk-based capital ratio of at least 4% and a total risk-based capital ratio of at least 8%. An institution is deemed to be "critically undercapitalized" if it has a tangible equity ratio of 2% or less. The Banks are above the regulatory minimum guidelines and meet the criteria to be categorized as "well capitalized" institutions at December 31, 1995. LIQUIDITY Liquidity is a measure of the ability of the Banks to meet their needs and obligations on a timely basis. For a bank, liquidity requires the ability to meet the day-to-day demands of deposit customers, along with the ability to fulfill the needs of borrowing customers. Generally, the Banks arrange their mix of cash, money market investments, investment securities and loans in order to match the volatility, seasonality, interest sensitivity and growth trends of its deposit funds. Federal funds sold averaged $10,200,000 during 1995, and investment securities available for sale averaged $96,933,000 during 1995, more than sufficient to match normal fluctuations in loan demand or deposit fund supplies. Backup sources of liquidity are provided by federal fund lines of credit established with correspondent banks. Additional liquidity could be generated through borrowings from the Federal Reserve Bank of Philadelphia, of which Harleysville, Citizens and Security are members, and from the Federal Home Loan Bank of Pittsburgh, of which Harleysville and Citizens are members. There are no known trends or any known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. OTHER ITEMS The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the Riegle Community Development and Regulatory Improvement Act may have a significant impact upon the Corporation. The key provisions pertain to interstate banking and interstate branching as well as a reduction in the regulatory burden on the banking industry. Since September 1995, bank holding companies may acquire banks in other states without regard to state law. In addition, banks can merge with other banks in another state beginning in June 1997. States may adopt laws preventing interstate branching but, if so, no out-of-state bank can establish a branch in such state and no bank in such state may branch outside the state. Pennsylvania recently amended the provisions of its banking code to authorize full interstate banking and branching under Pennsylvania law and to facilitate the operations of interstate banks in Pennsylvania. As a result of legal and industry changes, management predicts that consolidation will continue as the financial Page 35 services industry strives for greater cost efficiencies and market share. Management believes that such consolidation may enhance its competitive position as a community bank. There are numerous proposals before Congress to modify the financial services industry and the way commercial banks operate. However, it is difficult to determine at this time what effect such provisions may have until they are enacted into law. Except as specifically described on page 35, management believes that the effect of the provisions of the aforementioned legislation on the liquidity, capital resources, and results of operations of the Corporation will be immaterial. Management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation which, if they were implemented, would have a material adverse effect upon the liquidity, capital resources, or results of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on the Corporation's results of operations. In September 1995, the Corporation announced its fifth acquisition. Located in Honesdale, Wayne County, Pennsylvania, Farmers & Merchants Bank ("Farmers") is a $65 million community bank. While Farmers will retain its name, its operations and charter will be integrated into Citizens National Bank. This will accomplish two key objectives: maintaining Farmers' hometown, personalized image, while achieving operating efficiencies. The merger should be completed during the first quarter of 1996. A summary of unaudited restated consolidated financial information of the Corporation and Farmers is located in note number 2 of the notes to consolidated financial statements. The Corporation plans to open four new branches during 1996. Security National Bank plans to open an additional new office in the premier Pottstown Center Shopping Complex on Route 100 in Pottstown. Harleysville National Bank is pursuing locations in Doylestown, Spring House, and Audubon. These new branch sites are contiguous to our current service area and were chosen due to the demand for additional delivery locations by our customers. These new branches should not adversely impact capital, however, they may adversely impact short term results of operations. Page 36 FINANCIAL RATIOS AND SUMMARY OF KEY INFORMATION HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Years Ended December 31, ------------------------- (Dollars in thousands, except per share data) 1995 1994 1993 ------------- ----------- ----------- PER SHARE INFORMATION*: Primary $ 2.00 $ 1.84 $ 1.64 Fully diluted 2.00 1.84 1.59 Cash dividends paid 0.79 0.61 0.49 Book value (at year-end) 13.19 11.57 11.58 MARKET VALUE*: Bid price of common stock (high) 28.50 31.43 21.19 Bid price of common stock (low) 25.00 20.00 16.67 Average shares outstanding 5,893,334 5,847,473 5,642,790 AVERAGE BALANCE SHEET: Loans $ 580,612 $ 515,101 $ 451,057 Earning assets 786,732 721,880 670,667 Total assets 830,465 765,037 714,719 Deposits 706,357 682,112 643,847 Interest-bearing liabilities plus demand deposits 743,424 690,257 645,861 Shareholders' equity 73,537 66,716 59,597 SELECTED OPERATING RATIOS: Return on average assets 1.42% 1.40% 1.29% Return on average shareholders' equity 16.01% 16.11% 15.50% Leverage (assets divided by shareholders' equity) 11.29X 11.47X 11.99X Average shareholders' equity as a percentage of: Average loans 12.67% 12.95% 13.21% Average deposits 10.41 9.78 9.26 Average assets 8.85 8.72 8.34 Average earning assets 9.35 9.24 8.89 Dividend payout ratio 39.41 31.87 28.84 Average total loans as a percentage of average deposits and borrowed funds 78.10 74.62 69.84 Net interest margin on average earning assets: Interest income** 8.39% 7.75% 7.73% Interest expense (3.41) (2.68) (2.91) Net interest margin 4.98 5.07 4.82 Noninterest margin (2.36) (2.39) (2.27) *Adjusted for a 5% stock dividend effective 12/30/94, and a two-for-one stock split in the form of a 100% stock dividend effective 12/31/93. **Tax Equivalent Basis.
Page 37 THE BOARD OF DIRECTORS OF HARLEYSVILLE NATIONAL CORPORATION* John W. Clemens Walter E. Daller, Jr., Chairman Bradford W. Mitchell Martin E. Fossler William M. Yocum Harold A. Herr Walter F. Vilsmeier Howard E. Kalis, III THE BOARD OF DIRECTORS OF CITIZENS NATIONAL BANK OF LANSFORD Thomas S. McCready, Chairman John J. Trojan Joseph M. Porvaznik William H. Fegley, Sr. Walter E. Kruczek Joseph J. Velitsky James D. McMahon Walter E. Daller, Jr. D. M. Takes Frank J. Lochetto Thomas D. Oleksa THE BOARD OF DIRECTORS OF SECURITY NATIONAL BANK Howard E. Kalis, III, Chairman Robert K. Hartenstine Joseph M. Wheeler, Jr. James F. Meade Ronald A. Dinnocenti S. Albert Kutz John L. McGowan Henry M. Pollak Robert C. Smith James J. Lennon, Consultant to the Board Walter E. Daller, Jr. Bruce D. Fellman D. M. Takes Raymond H. Melcher, Jr. THE OFFICERS OF HARLEYSVILLE NATIONAL BANK AND TRUST COMPANY Walter E. Daller, Jr.** President and Chief Executive Officer D. M. Takes** Executive Vice President and Chief Operating Officer Vernon L. Hunsberger** Senior Vice President and Chief Financial Officer James W. Hamilton Senior Vice President and Senior Trust Officer Frank J. Lochetto Senior Vice President and Senior Lender Fred C. Reim, Jr. Senior Vice President and Branch Administrator Jo Ann M. Bynon** Corporate Secretary John E. Hartle Audit Director David R. Crews Vice President Dennis L. Detwiler Vice President Bruce D. Fellman Vice President Henry R. Gehman Vice President Larry E. Nolt Vice President Robert L. Reilly Vice President Thomas L. Spence Vice President Gregg J. Wagner Vice President Mikkalya W. Walton Vice President Harry T. Weierbach Vice President Tina K. Borrelli Assistant Vice President Ruth A. Dietterich Assistant Vice President Mary K. Eckart Assistant Vice President Tamra T. Garber Assistant Vice President Cathy Peifer Heckler Assistant Vice President Page 38 Robert H. Kreamer Assistant Vice President Nicholas Lozorak Assistant Vice President Jennifer G. Morris Assistant Vice President Sue Ellen Nolan Assistant Vice President Dale O. Smith Assistant Vice President Kenneth R. Stoudt Assistant Vice President Deborah L. Sweet Assistant Vice President Ann M. Dreyer Banking Officer Faye Frederick Banking Officer Arlene M. Gregory Banking Officer Elaine H. Hegh Banking Officer Dianne C. Herron Banking Officer Chris L. Holzer Banking Officer Sandra M. Hurst Banking Officer Patricia A. Longcoy Banking Officer Aileen E. Rolin Banking Officer Patricia H. Rosenberger Banking Officer Jan Marie Sloat Banking Officer Regina A. Stark Banking Officer Joan F. Whiteley Banking Officer Ann P. Wilson Banking Officer Betty Ruth Yerger Banking Officer Tracie A. Young Banking Officer THE OFFICE MANAGERS Antoinette M. Smith Assistant Vice President, Harleysville H. Steen Woodland Assistant Vice President, Skippack Joseph A. Giunta Assistant Vice President, Limerick Lee-ann C. Kovac Assistant Vice President, North Penn Christine Schondelmaier Banking Officer, Gilbertsville Craig E. Morrow Banking Officer, Hatfield Geoffrey D. Brandon Assistant Vice President, North Broad Christine M. Matsinko Banking Officer, Marketplace Joseph Chirik, Jr. Assistant Vice President, Horsham Kay A. Gordon Banking Officer, Normandy Farms/Meadowood James R. Caldwell Banking Officer, Collegeville Grace H. Myers Banking Officer, Sellersville Nancy F. Kistler Banking Officer, Quakertown/Trainers Robert S. Jones Banking Officer, Red Hill THE OFFICERS OF CITIZENS NATIONAL BANK OF LANSFORD Thomas D. Oleksa President and Chief Executive Officer Martha A. Rex Vice President Maurice J. Infante Vice President Joseph J. O 'Gurek Assistant Vice President Kay A. Bock Banking Officer, Lehighton THE OFFICERS OF SECURITY NATIONAL BANK Raymond H. Melcher, Jr. President and Chief Executive Officer Allen R. Loeb Vice President Roxanne S. Selwyn Assistant Vice President Timothy B. Canfield Assistant Vice President, Train Station Linda L. Neiman Assistant Vice President, Pottstown Center/ East End Angela M. Spotts Banking Officer, North End *Also members of the Board of Directors of Harleysville National Bank and Trust Company. **Also an Officer of Harleysville National Corporation. MEMBER FDIC Page 39 CORPORATE INFORMATION Copies of the Corporation 's Annual Report to the Securities and Exchange Commission (Form 10-K) are available, without charge to shareholders, by writing: Jo Ann M. Bynon, Corporate Secretary 483 Main Street, P. O. Box 195 Harleysville, PA 19438 ANNUAL MEETING The 1996 Annual Meeting of Shareholders of Harleysville National Corporation will be held at the Presidential Caterers, Norristown, PA on April 9, 1996 at 9:30 a.m. NASDAQ MARKET MAKERS As of December 31 ,1995, the following firms made a market in the Corpora- tion's common stock: F.J. Morrissey & Co., Inc. Fahnestock & Co., Inc. Legg Mason Wood Walker, Inc. Janney Montgomery Scott, Inc. Herzog, Heine, Geduld, Inc. Ryan Beck & Co., Inc. COMMON STOCK Harleysville National Corporation common stock is traded over the counter under the symbol HNBC. The stock is commonly quoted under NASDAQ National Market Issues. At the close of business on December 31, 1995, there were 2,172 shareholders of record. DIVIDEND REINVESTMENT PLAN The Corporation has a Dividend Reinvestment and Stock Purchase Plan. Interested stockholders can obtain more information regarding the Plan by contacting the Plan Administrator at (215) 256-8851, or 800 423-3955. TRANSFER AGENT AND SHAREHOLDER SERVICES Harleysville National Bank & Trust Company 483 Main Street, P. O. Box 195 Harleysville, PA 19438 (215) 256-8851, or 800 423-3955. Printed on Recycled Paper Design: Shirley Epps Artwork, Inc. Photography: Dave Plank Printing: Taggart Printing Page 40 EX-27 6
9 1000 YEAR DEC-31-1995 DEC-31-1995 33887 348 12900 0 146082 66850 68712 602421 9674 874146 741218 30751 15660 9000 0 0 5878 71638 874146 51773 11920 629 64322 24658 26827 37495 2160 (172) 22885 16779 16779 0 0 11776 2.00 2.00 4.98 8993 1460 1183 0 7934 672 252 9674 9674 0 3418
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