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, 1994.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________ .
Commission file number 0-15237
HARLEYSVILLE NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2210237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
483 Main Street, Harleysville, Pennsylvania 19438
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 256-8851
Securities registered pursuant to Section 12(b) of the Act: N/A
Name of each exchange
Title of each class on which registered
N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
Title of Class
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X . No .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( )
Page 2
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.
$155,652,706 as of March 10, 1995
Indicate the number of shares outstanding of each class of
the registrant's classes of common stock, as of the latest
practicable date.
5,873,687 shares of Common Stock, $1 par value
per share, were outstanding as of March 10, 1995.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's Annual Report to Shareholders
for the fiscal year ended December 31, 1994 are incorporated by
reference into Parts I, II and IV of this report.
2. Portions of the Registrant's Definitive Proxy Statement
relating to the Annual Meeting of Shareholders to be held
April 11, 1995 are incorporated by reference into Part III
of this report.
Page 3
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-K REPORT
PAGE
I. PART I.
Item 1. Business. . . . . . . . . . . . . . . . . . 4
Item 2. Properties. . . . . . . . . . . . . . . . .16
Item 3. Legal Proceedings . . . . . . . . . . . . .17
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . .17
II. PART II.
Item 5. Market for Registrant's Common Stock and
Related Shareholder Matters. . . . . . . .18
Item 6. Selected Financial Data . . . . . . . . . .18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . .18
Item 8. Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . .18
Item 9. Changes in and Disagreements with Accoun-
tants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . .18
III. PART III.
Item 10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . .19
Item 11. Executive Compensation. . . . . . . . . . .20
Item 12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . .20
Item 13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . .20
IV. PART IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. . . . . . . . . .21
Signatures . . . . . . . . . . . . . . . . . . . . .23
Page 4
PART I
Item 1. Business.
History and Business:
Harleysville National Corporation ("Company"), a
Pennsylvania business corporation, was incorporated in June
1982. On January 1, 1983, the Company 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 Company. On February
13, 1991, the Company acquired all of the outstanding common
stock of The Citizens National Bank of Lansford ("Citizens"). On
June 1, 1992, the Company 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 Company acquired all of the outstanding stock of
Security National Bank ("Security"). The Company is a three-
bank holding company providing financial services through
its Bank subsidiaries. Since commencing operations, the
Company'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 Company 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, 1994, the Company had total consolidated
assets, deposits and shareholders' equity of $799,778,484,
$688,577,599 and $66,575,382 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 Company's and Harleysville's
legal headquarters is 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
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believes these competitive strengths are
reflected in the Company's results of operations.
The Banks have nineteen (19) offices located in
Montgomery, Bucks and Carbon Counties, ten of which are
owned by the Banks and nine of which are leased from third parties.
As of December 31, 1994, the Company and the Banks employed
approximately 318 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.
Competition:
The Banks compete actively with branch offices of other
Philadelphia area and Carbon County commercial banks, 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, 1994,
Harleysville's legal lending limit to a single customer was
$8,125,000 and Citizens' and Security's legal lending limit
to a single customer were $1,695,000 and $535,000,
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. The Bank Holding Company Act
prohibits acquisition by the Registrant of more than five
percent (5%) of the voting shares of, or interest in, all or
substantially all of the assets of, any bank located outside
Pennsylvania unless such acquisition is specifically
authorized by the laws of the state in which such a bank is
located.
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
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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 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.
While the types of permissible activities are subject
to change by the Federal Reserve Board, the principal
activities that presently may be conducted by a bank holding
company and may in the future be engaged by the Registrant
are:
1. Making, acquiring or servicing loans and other
extensions of credit for its own account or for the account
of others, such as would be made by the following types of
companies: consumer finance, credit card, mortgage
commercial finance and factoring.
2. Operating as an industrial bank, Morris Plan or
industrial loan company in the manner authorized by state
law so long as the institution does not both accept demand
deposits and make commercial loans.
3. Operating as a trust company in the manner
authorized by federal or state law so long as the
institution does not make certain types of loans or
investments or accept deposits, except as may be permitted
by the Federal Reserve Board.
4. Subject to certain limitations, acting as an
investment or financial advisor to investment companies and
other persons.
5. Leasing personal and real property or acting as
agent, broker, or advisor in leasing property, provided that
it is reasonably anticipated that the transaction will
compensate the lessor for not less than the lessor's full
investment in the property.
6. Making equity and debt investments in
corporations or projects designed primarily to promote
community welfare.
7. Providing to others financially oriented data
processing or bookkeeping services.
8. Subject to certain limitations, acting as an
insurance agent or broker in relation to insurance for
itself and its subsidiaries or
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for insurance directly related to extensions of credit by the
bank holding company system.
9. Subject to certain limitations, acting as
underwriter for credit life insurance and credit accident
and health insurance that is directly related to extensions
of credit by the bank holding company system.
10. Providing courier services of a limited
character.
11. Subject to certain limitation, providing
management consulting advice to nonaffiliated banks and
nonbank depository
institutions.
12. Selling money orders having a face value of
$1,000 or less, travelers' checks and United States savings
bonds.
13. Performing appraisals of real estate.
14. Subject to certain conditions, acting as
intermediary for the financing of commercial or industrial
income-producing real estate by arranging for the transfer
of the title, control and risk of such a real estate project
to one or more investors.
15. Providing securities brokerage services, related
securities credit activities pursuant to Federal Reserve
Board Regulation T and incidental activities such as
offering custodial services, individual retirement accounts
and cash management services, if the securities brokerage
services are restricted to buying and selling securities
solely as agent for the account of customers and do not
include securities underwriting or dealing or investment
advice or research services.
16. Underwriting and dealing in obligations of the
United States, general obligations of states and their
political subdivisions and other obligations such as
bankers' acceptances and certificates of deposits.
17. Subject to certain limitations, providing by any
means, general information and statistical forecasting with
respect to foreign exchange markets; advisory services
designed to assist customers in monitoring, evaluating and
managing their foreign exchange exposures; and certain
transactional services with respect to foreign exchange.
18. Subject to certain limitations, acting as a
futures commission merchant in the execution and clearance
on major commodity exchanges of futures contracts and
options on futures contracts for bullion, foreign exchange,
government securities certificates of deposit and other
money market instruments.
19. Performing personal property appraisals that
require expertise regarding all types of personal and
business property, including intangible property such as
corporate securities.
20. Subject to certain limitations, providing
commodity trading and futures commission merchant advice.
21. Providing consumer financial counseling that involves
Page 8
counseling, educational courses and distribution of
instructional materials to individuals on consumer-oriented financial
management matters, including debt consolidation, mortgage
applications, bankruptcy, budget management, real estate tax
shelters, tax planning, retirement and estate planning,
insurance and general investment management, so long as this
activity does not include the sale of specific products or
investments.
22. Providing tax planning and preparation advice such as
strategies designed to minimize tax liabilities and includes, for
individuals, analysis of the tax implications of retirement
plans, estate planning and family trusts. For corporations,
tax planning includes the analysis of the tax implications
of mergers and acquisitions, portfolio mix, specific
investments, previous tax payments and year-end tax
planning. Tax preparation involves the preparation of tax
forms and advice concerning liability based on records and
receipts supplied by the client.
23. Providing check guaranty services to subscribing
merchants.
24. Subject to certain limitations, operating a
collection agency and credit bureau.
25. Acquiring and operating thrift institutions,
including savings and loan associations, building and loan
associations and FDIC-insured savings banks.
Certain Provisions of Pennsylvania Banking Law:
Under the Pennsylvania Banking Code of 1965 as amended (the
"Code"), the Registrant has been permitted since March 4, 1990
to control an unlimited number of banks. However, the
Registrant would be required under the Bank Holding Company
Act to obtain the prior approval of the Federal Reserve
Board before it could acquire all or substantially all of
the assets of any bank, or acquire ownership or control of
any voting shares of any bank other than the bank, if, after
such acquisition, it would own or control more than five
percent (5%) of the voting shares of such bank. The Bank
Holding Company Act does not permit the Federal Reserve Board
to approve the acquisition by the Registrant or any subsidiary
of any voting shares of, or interest in, or all or substantially
all of the assets of, any bank located outside the Commonwealth of
Pennsylvania, unless the acquisition is specifically
authorized by the laws of the state in which the bank is located.
Also since March 4, 1990, the Code authorizes
reciprocal interstate banking without any geographic
limitation. Reciprocity between states exists when a
foreign state's law authorizes Pennsylvania bank holding
companies to acquire banks or bank holding companies located
in that state on terms and conditions substantially no more
restrictive than those applicable to such an acquisition by
a bank holding company located in that state. Currently, the state
banking statutes in Alaska, Delaware, Idaho, Indiana, Kentucky,
Maine, Maryland, Michigan, New Jersey, Ohio, New York,
Oregon, Rhode Island, Utah, Vermont, Washington, West
Virginia and Wyoming authorize interstate ownership of banks
and bank holding companies in each of those states and
Pennsylvania. Other states are also considering legislation
to authorize reciprocal interstate banking. Also Congress
has passed interstate banking
Page 9
legislation that will accelerate the authorization for interstate
banking after its effective date (see below).
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 subsidiary. 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.
On September 29, 1994, President Clinton signed into
law the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branch
Act"). The legislation permits interstate banking twelve
months after its enactment into law. Bank holding
companies, pursuant to an amendment to the Bank Holding
Company Act, can acquire a bank located in any state, as
long as the acquisition does not result in the bank holding
company controlling more than 10% of the deposits in the
United States, or 30% of the deposits in the target bank's
state. The legislation permits states to waive the
concentration limits and require that the target institution
be in existence for up to five years before it can be
acquired by an out-of-state bank or bank holding company.
Interstate branching and merging of existing banks is
permitted after three years from the enactment of the
Interstate Banking and Branching Act, if the bank is
adequately capitalized and demonstrates good management.
Branch merging will be permitted earlier if a state
undertakes to enact a law which allows it and states may
also enact a law to permit banks to branch de novo. 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.
On September 23, 1994 President Clinton signed into
law the Community Development/Regulatory Relief Bill (the
"CDRR Bill") which took effect on January 1, 1995. The CDRR
Bill provides $382 million over a four year period to fund
community development projects in low-and moderate-income
neighborhoods through banks and community development
financial institutions.
The Federal Reserve Board, the FDIC, and the Comptroller of
the Currency ("Comptroller") have issued certain risk-based capital
Page 10
guidelines, which supplement existing capital requirements. The guidelines
require all United States banks and bank holding companies to maintain a
minimum risk-based capital ratio of 8.0% (of which at least
4.0% must be in the form of common stockholders' equity).
Assets are assigned to five risk categories, with higher levels of capital
being required for the categories perceived as representing
greater risk. The required capital will represent equity
and (to the extent permitted) nonequity capital as a
percentage of total risk-weighted assets. The risk-based
capital rules are designed to make regulatory capital
requirements more sensitive to differences in risk profiles
among banks and bank holding companies and to minimize
disincentives for holding liquid assets. On the basis of an
analysis of the rules and the projected composition of the Registrant's
consolidated assets, it is not expected that such risk-based capital
rules will have a material effect on the Registrant's
business and capital plans. The Banks have capital ratios
exceeding the regulatory requirements. See also, page 44 of
Registrant's 1994 Annual Report, which is incorporated by
reference herein, for information concerning the
Registrant's capital ratios.
The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 or ("FIRREA") was enacted on August
19, 1989. This law was enacted primarily to improve the
supervision of savings associations by strengthening
capital, accounting and other supervisory standards. In
addition, FIRREA reorganizes the FDIC by creating two
deposit insurance funds to be administered by the FDIC - the
Savings Association Insurance Fund and the Bankers Insurance
Fund. The Banks' deposits are insured under the Bank
Insurance Fund. Customers' deposits held by the Bank are
insured under the Bank Insurance Fund. FIRREA also
regulates real estate appraisal standards and the
supervisory/enforcement powers and penalty provisions in
connection with the regulation of the Bank.
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. Set forth below are some of the
proposals advanced by the federal banking agencies.
In November, 1993, the federal banking agencies
published jointly a proposed rule regarding certain
standards of safety and soundness for depository
institutions and their holding companies. These standards
include a ratio of classified assets to capital, minimum
earnings, compensation standards for directors, officers and
employees and, to the extent possible, a minimum ratio of
market value to book value for publicly traded securities of
such institutions and their respective holding companies.
No further action has been taken as of the date of this
Prospectus on these proposed safety and soundness standards.
Page 11
In December, 1993, the federal banking agencies
published jointly a proposed rule that would replace the 12
Assessment Factors contained in the current Community
Reinvestment Act regulations with a performance based
evaluation system. If the proposed rule is adopted,
compliance may require certain revisions to the Bank's
operating procedures and impose additional cost which cannot
be accurately assessed at this time.
Management has no way of anticipating whether any of
these measures will be enacted or if enacted, their impact
on the Company's financial position and reported results of
operation. As a consequence of the extensive regulation of
commercial banking activities in the United States, the
Company's and the Bank's business is particularly
susceptible to being affected by federal and state
legislation and regulations that may increase the costs of
doing business.
Effects of Inflation:
Inflation has some impact on the Company's and the
Bank's operating costs. Unlike many industrial companies,
however, substantially all of the Bank's assets and
liabilities are monetary in nature. As a result, interest
rates have a more significant impact on the Company's and
the Bank's performance than the general level of inflation.
Over short periods of time, interest rates may not
necessarily move in the same direction or in the same
magnitude as prices of goods and services.
Effect of Government Monetary Policies:
The earnings of the 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 Bank is a member 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 Bank's
operations in the future. The effect of such policies and
regulations upon the future business and earnings of the
Company and the Bank 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 Company nor the Bank is
Page 12
a party to any pending legal proceeding pursuant to
any environmental statute, nor is the Company and the Bank
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 banks 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. Under
Pennsylvania law, the Bank may establish or acquire branch
offices, subject to certain limitations, in any county of
the state. National bank branches, however may be
established within the permitted area only after approval by
the Comptroller. The Comptroller is required to grant
approval only if it finds that there is a need for banking
services or facilities such as are contemplated by the
proposed branch. The Comptroller may disapprove the
application if the bank does not have the capital and
surplus deemed necessary by the Comptroller.
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 Bank) from engaging in any
activity that would be an unsafe and unsound banking
practice or would otherwise be in violation of the law.
Moreover, the Financial Institutions Regulatory and Interest
Rate Control Act of 1978 ("FIRA") generally expanded the
circumstances under which officers or directors of a bank
may be removed by the institution's federal supervisory
agency, restricts lending by a bank to its executive
officers, directors, principal shareholders or related
interests thereof and restricts management personnel of a bank from
Page 13
serving as directors or in other management positions with certain
depository institutions whose assets exceed a specified amount or which
have an office within a specified geographic area, and restricts management
personnel from borrowing from another institution that has a
correspondent relationship with their bank. Additionally,
FIRA requires that no person may require control of a bank
unless the appropriate federal supervisory agency has been
given sixty (60) days prior written notice and within that
time has not disapproved the acquisition or otherwise
extended the period for disapproval. Control for purposes
of FIRA, means the power, directly or indirectly, to direct
the management of policies or to vote twenty-five
percent(25%) or more of any class of outstanding stock of a
financial institution or its respective holding company. A
person or group holding revocable proxies to vote twenty-
five percent (25%) or more of the outstanding common stock
of a financial institution or holding company such as the
Company, would presumably be deemed to control the
institution for purposes of FIRA.
Garn-St Germain:
The Garn-St Germain Depository Institutions Act of 1982
("1982") removed certain restrictions on a bank's lending
powers and liberalized its depository capabilities. The
1982 Act also amended FIRA (see above) by eliminating the
statutory limits on lending by a bank to its executive
officers, directors, principal shareholders or related
interests thereof and by relaxing certain reporting
requirements. The 1982 Act, however, also tightened FIRA
provisions respecting management interlocks and
correspondent bank relationships involving a bank's
management personnel.
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.
Page 14
CEBA:
An omnibus federal banking bill, known as the
Competitive Equality Banking Act ("CEBA"), was signed into
law in August of 1987. Included in the legislation were
measures: (1) imposing certain restrictions on transactions
between banks and their affiliates; (2) expanding the powers
available to Federal bank regulators in assisting failed and
failing banks; (3) limiting the amount of time banks may
hold certain deposits prior to making such funds available
for withdrawal and any interest thereon; and (4) requiring
that any adjustable rate mortgage loan secured by a lien on
a one-to-four family dwelling include a limitation on the
maximum rate at which interest may accrue on the principal
balance during the term of such loan. The Bank does not
believe that this legislation will have a material adverse
effect on its anticipated operations or its competitive
position.
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*
Sign Undercapitalized < 6.0 <3.0 <3.0
Critically Undercapitalized <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 15
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
the Bank with total assets at the beginning of its fiscal
year of less than $500 million, such as Citizens and 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. LTV's 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.
Page 16
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 Bank. 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 33 through 46 of the Company's Annual
Report to Shareholders for the year ended December 31, 1994,
which is included as Exhibit (13) to this Form 10-K Report.
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 eight 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 building where the Summit Hill branch is located.
The principal executive offices of Security are located in
Pottstown, Pennsylvania in a building leased by Security.
Security also leases its branch, which is also located in
Pottstown.
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
Page 17
Marketplace Marketplace Shopping Leased
Lansdale Pa
Normandy Farms Morris Road Leased
Blue Bell Pa
Horsham Babylon Business Center Leased
Horsham Pa
Meadowood Route 73 Leased
Worcester Pa
Collegeville 364 Main Street Owned
Collegeville Pa
Sellersville 209 North Main St Owned
Sellersville Pa
Trainers Corner Trainers Corner Center Leased
Quakertown Pa
Quakertown Main 224 West Broad St Owned
Quakertown PA
Citizens 13-15 West Ridge Street Owned
Lansford PA
Summit Hill 2 East Ludlow Street Owned
Summit Hill PA
Pottstown One Security Plaza Leased
Pottstown PA
Pottstown 1450 East High Street 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 Company'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 Company 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 Company 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
1994 to a vote of holders of the Company's Common Stock.
Page 18
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 18 and 28 of the Company's Annual Report
to Shareholders for the year ended December 31, 1994, 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 33 and 46 of the Company's Annual Report
to Shareholders for the year ended December 31, 1994, 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 33 through 45 of the Company's Annual
Report to Shareholders for the year ended December 31, 1994,
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 18 through 32 of the Company's Annual
Report to Shareholders for the year ended December 31, 1994,
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:
None.
Page 19
PART III
Item 10. Directors and Executive Officers of the Registrant:
The information for this Item with respect to the
Company's directors is incorporated by reference to pages 3
through 7 of the Company's Definitive Proxy Statement
relating to the Annual Meeting of Shareholders to be held
April 11, 1995.
Executive Officers of Registrant
--------------------------------
Name Age Position
---- --- --------
Walter E. Daller, Jr. 55 President and Chief Executive Officer
of the Company and of Harleysville
James W. Hamilton 48 Senior Vice President and
Senior Trust Officer of Harleysville
Demetra M. Takes 44 Executive Vice President
and Chief Operating Officer of Harleysville
Frank J. Lochetto 47 Senior Vice President and
Senior Lending Officer of Harleysville
Vernon L. Hunsberger 46 Treasurer of the Company,
Senior Vice President/CFO and Cashier of
Harleysville
Fred C. Reim, Jr. 51 Senior Vice President of Harleysville
since August 1993; Senior Vice President
of First Valley Bank from December 1990 to
August 1993; Executive Vice President of
Liberty Bank from June 1990 to December
1990; Senior Vice President of NatWest NJ
from April 1986 to June 1990
Henry R. Gehman 59 Vice President of Harleysville
Pamela L. Hartenstine 46 Secretary of the Company
Dennis L. Detwiler 47 Vice President of Harleysville
Bruce D. Fellman 48 Vice President of Harleysville
Thomas L. Spence 48 Vice President of Harleysville
Robert L. Reilly 45 Vice President of Harleysville
David R. Crews 44 Vice President of Harleysville
Larry E. Nolt 49 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
Page 20
Name Age Position
---- --- --------
Mikkayla W. Walton 39 Vice President of Loan Administration of
Harleysville since July 1994; Vice
President of Security National Bank
September 1991 to June 1994; Assistant
Vice President of Mellon Bank January
1990 to August 1991
Gregg J. Wagner 34 Vice President and Comptroller of
Harleysville National Bank since December
1994; Senior Vice President of Security
National Bank March 1992 to November 1994;
Vice President and Comptroller of Bryn Mawr
Trust Company December 1989 to February
1992
Thomas D. Oleksa 41 President and Chief Executive Officer
of Citizens
Martha A. Rex 46 Vice President and Cashier of Citizens
Maurice Infante 55 Vice President of Consumer Lending of
Citizens since April 1994; Assistant Vice
President of Consumer Lending of Citizens
December 1991 to March 1994; Vice President
of Home Savings Association of Pennsylvania
January 1988 to November 1991
Raymond H. Melcher 43 President and Chief Executive Officer
of Security since November 1994; Executive
Vice President, Chief Operating Officer of
Hi-Tech Connections 1990 to 1994; Executive
Vice President of Keystone Financial 1988
to 1990
Item 11. Executive Compensation:
The information for this Item is incorporated by reference to pages
7 through 13 of the Company's Definitive Proxy Statement relating to the
Annual Meeting of Shareholders to be held April 11, 1995.
Item 12. Security Ownership of Certain Beneficial Owners and Management:
The information for this Item is incorporated by reference to pages
3 through 5 of the Company's Definitive Proxy Statement relating to the
Annual Meeting of Shareholders to be held April 11, 1995.
Item 13. Certain Relationships and Related Transactions:
The information for this Item is incorporated by
reference to page 16 of the Company's Definitive Proxy
Statement relating to the Annual Meeting of Shareholders to
be held April 11, 1995.
Page 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
Filed:
(1) Consolidated Financial Statements Page
Harleysville National Corporation and Subsidiary:
Consolidated Balance Sheets as of
December 31, 1994 and 1993 19*
Consolidated Statements of Income for the
Years Ended December 31, 1994, 1993
and 1992 20*
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1994,
1993 and 1992 21*
Consolidated Statements of Shareholders'
Equity for the Years Ended
December 31, 1994, 1993 and 1992 22*
Notes to Consolidated Financial Statements 23-32*
Independent Auditors' Report 18*
(2) Financial Statement Schedules 31*
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 1994 Annual Report to Shareholders. The
Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Auditor's Report thereon on pages
18 to 32 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 22
(3) Exhibits
Exhibit No. Description of Exhibits
---------- -----------------------
3(i)(A) Articles of incorporation as amended were previously
filed with the Commission on December 12, 1991 as Exhibit
3A to registration statement 33-37711 and is hereby
incorporated by reference
3(i)(B) Articles of Incorporation as amended on April 22, 1994
were previously filed with the Commission in the Form
10-Q for quarter ended June 30, 1994 and is hereby
incorporated by reference
3(ii)(A) Amended By-laws of the Registrant were previously filed
with the Commission on November 9, 1990 as Exhibit 3B to
registration statement 33-37711 and is hereby
incorporated by reference
3(ii)(B) Re-amended By-laws of the Registrant were previously
filed with the Commission on March 29, 1991 as
Exhibit 3C to the Form 10-K and is hereby incorporated
by reference
(13) 1994 Annual Report to Shareholders (this document is
filed only to the extent of pages 18 through 46 which are
incorporated by reference herein.)
(21) Subsidiaries of Registrant
(23) Consent of KPMG Peat Marwick LLP Independent Certified
Public Accountants
(b) Reports on Form 8-K
During the quarter ended December 31, 1994, the Registrant did not
file any reports on Form 8-K.
Page 23
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 22, 1995 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 22, 1995
John W. Clemens
/s/ Walter E. Daller, Jr. President, Chief March 22, 1995
Walter E. Daller, Jr. Executive Officer
and Director (Princi-
pal Executive Officer)
/s/ Martin E. Fossler Director March 22, 1995
Martin E. Fossler
/s/ Harold A. Herr Director March 22, 1995
Harold A. Herr
/s/ Vernon L. Hunsberger Treasurer (Princi- March 22, 1995
Vernon L. Hunsberger pal Financial and
Accounting Officer)
Page 24
Signatures Title Date
---------- ----- ----
/s/ Howard E. Kalis, III Director March 22, 1995
Howard E. Kalis, III
Director March, 1995
Richard M. Markley
/s/ Bradford W. Mitchell Director March 22, 1995
Bradford W. Mitchell
/s/ Walter F. Vilsmeier Director March 22, 1995
Walter F. Vilsmeier
/s/ William M. Yocum Director March 22, 1995
William M. Yocum
Page 25
EXHIBIT INDEX:
(13) 1994 Annual Report to Shareholders (this document is filed
only to the extent of pages 18 through 46 which are
incorporated by reference herein)
(21) Subsidiaries of Registrant
(23) Consent of KPMG Peat Marwick LLP Independent
Certified Public Accountants
EX-13
2
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 3
Team Profiles 6
Independent Auditors' Report 18
Consolidated Financial Statements 19
Management's Discussion and Analysis of Financial
Condition and Results of Operation 33
Financial Ratios and Summary of Key Information 46
Corporate Directory 47
FINANCIAL HIGHLIGHTS:
December 31, 1994 1993 % Increase
For the Year
Total interest income $ 54,614,016 $ 50,349,533 8.5%
Total interest expense 19,438,695 19,530,553 (0.5)
Net interest income 35,175,321 30,818,980 14.1
Net income 10,744,969 9,238,054 16.3
Per Share
Primary $ 1.84 $ 1.64 12.2%
Fully diluted 1.84 1.59 15.7
Cash dividends paid 0.61 0.49 24.5
Shareholders' equity 11.57 11.58 (0.1)
Average Balances
Loans $515,101,000 $451,057,000 14.2%
Total earning assets 721,880,000 670,667,000 7.6
Total assets 765,037,000 714,719,000 7.0
Total deposits 682,112,000 643,847,000 5.9
Shareholders' equity 66,716,000 59,597,000 11.9
Return on Average
Assets 1.40% 1.29% 8.5%
Shareholders' equity 16.11 15.50 3.9
Page 2
TO OUR SHAREHOLDERS:
Page 3
Strongest earnings ever:
In a financial marketplace where the competition has
never been tougher, Harleysville National Corporation once
again posted the strongest earnings in the history of our
company. Our financial goals for 1994 were aggressive and
demanding, but we believe that by drafting a plan, communicating
it, and empowering our people to implement it, we get results.
Net income for the year was $10,744,969, an increase of
16.3% over the $9,238,054 earned in 1993. Primary earnings
per share for the year increased to $1.84 from $1.64 the
previous year, while fully diluted increased to $1.84
compared with $1.59 a year ago.
Fourth quarter primary earnings per share at $.43 were up
16.2% from $.37 in the comparable period last year. Fully
diluted earnings for the final quarter were $.43, a 19.4%
increase over the previous year's $.36.
Improving key performance ratios:
As reported to you last year, our longer range plans-
building a larger asset base on which to generate earnings-
impacted short-term financial performance. While our 1993
return on assets (ROA) and return on equity (ROE) had been
somewhat less than what we achieved in the past, I am
particularly pleased to report healthy jumps in these two
benchmarks for performance during 1994. Our ROA of 1.40%
and ROE of 16.11% are achievements unrivaled by many in our
peer group and distinguish HNC as a manager of opportunities
with a penchant for performance. As planned, we have grown
the bank, controlled expenses, and increased earnings.
Significant loan growth benefits the bottom line:
As you are aware, most of our revenue comes from interest
on loans and investments. In 1994, our loan volumes
exceeded our best expectations. Our goal was to profitably
leverage our excess deposit liquidity, i.e., we needed to
grow the loan portfolio. And we were successful in our
efforts. While budgeting a 12.6% increase in loan footings,
we actually grew total loans by $90.1 million, an 18.4%
increase. Consumer loans were up 21.0%; commercial loans
increased 20.2%; and lease financing grew 27.6%. Our loan to
deposit ratio grew to 82.5% from 70.1% at the end
of 1993.
Total interest income for 1994 was $54,614,016, an 8.5%
increase over the 1993 level of $50,349,533. The net
interest income improved to $35,175,321 from $30,818,980
a year ago.
Asset quality and growth:
Total assets for 1994 increased 6.1% to $799,778,484 from
$753,940,699 at December 31, 1993. While loan volumes and
the resulting interest income are a large part of our total
revenues, it is the quality of these loans that really
impacts the bottom line. In 1994, we saw significant
improvements in loan quality. Net charge offs for the year
were $602,000 compared to $1,574,000 in 1993. The provision
for loan losses for 1994 was $2,650,000 compared to
$3,073,000 for 1993. The allowance for loan losses at
December 31,1994 was $7,934,385, or 1.40% of loans, an
improvement over last year's allowance of $5,886,427, or
1.23% of loans. This resulted in a ratio of allowance to non-
performing assets of 141.8% for 1994, compared to a ratio of
118.9% the previous year.
Making HNC the brand of choice:
Exceeding our loan goal in 1994 speaks to the ability of
our people to implement our strategic goals. Let's face it:
Bank products have become homogenized over the last several
years. When a consumer needs an installment loan or a
corporate customer needs a commercial loan,
Page 4
they can often find competitive rates and terms at a number of
institutions. Why then did so many choose one of "our"
banks? We believe it is because we have successfully built
HNC as a "local brand" in banking-a brand that breeds
confidence in the consumers that use it and one managed by
people intent on building relationships.
Seeking ways to improve noninterest income:
We hope to further benefit from our good name as we try
to bolster the noninterest income portion of our income
statement. We fall below peer averages in this area, which
is both a challenge and an opportunity to diversify our
product line and post an even healthier bottom line.
Our best resource for additional fee income continues to
be the Financial and Trust Services Division of our company.
As you will see in the graphs on page 11, they have achieved
significant growth, recording a 10.8% increase in fee income
for 1994 and a 40.2% increase in funds under management.
According to the Securities Industry Association, the
fastest growing household asset is mutual funds, which made
up 16.0% of household investments in 1994 compared with 4.0%
in 1980. Considering these statistics and the solid
reputation of our Financial and Trust Services Division, we
have begun to carefully plan our involvement in this growing
market. If more of our customers are seeking alternative
forms of investment, then we want to be the one to provide
it. We feel strongly that our customers would prefer to deal
with their local HNC banker.
When we commit to this product, our initial efforts will
be spent building the infrastructure-implementing new
technology, adding and training staff-so that the expansion
of our investment services is marked with competency and
quality. As always, our primary goal will be to build
relationships, not just account volumes.
Our campaign to cut costs:
Equally important as finding new sources of fee income is
containing costs wherever possible. Noninterest expense for
the year was $21,757,415 compared with $20,122,341 in 1993-a
modest increase considering the growth we have experienced.
Our efficiency ratio in 1994 was 54.0%, an improvement from
the 1993 ratio of 55.9%. The efficiency ratio measures
operating expenses (excludes interest expense, loan loss
provision, and amortization of core deposit intangible) as a
percentage of operating income (includes net interest income
and recurring noninterest income).
We ask our employees to keep a watchful eye on expenses.
In fact, we devote a monthly column in our employee
newsletter to this issue alone. Through job sharing, flexible
work hours, and an emphasis on cost effective staffing, our
Human Resources Department has helped contain benefit expenses while
creating opportunities for our employees and meeting the
needs of their demanding lifestyles.
Growing purposefully:
Harleysville National's style of growth is more
controlled than that of some of our larger competitors.
Three acquisitions in the past four years, our plans for
four new offices in 1995, and our relentless drive to expand
our customer base have not led to unwieldy layers of
bureaucracy. While many of our competitors have been forced
to trim the fat, we have remained lean, building muscle, not
mass.
Our acquisitions-Citizens National Bank of Lansford
(February 1991), Summit Hill Trust Company (June 1992, now
operating as a branch of Citizens National Bank), and
Security National Bank of Pottstown (July 1994) have brought
many fine people to the Harleysville National Corporation
family. This growth in manpower has broadened, not
heightened, our organizational chart. By encouraging our
subsidiaries to act independently, we have localized
decision making and kept these fine community bankers in
touch with their customers.
And this philosophy is working. Citizens National's
success has spurred the construction of a third office in
the Lehighton area, and the potential for growth at Security
National has prompted the construction of a new office in
the highly acclaimed Pottstown Center, which is predicted to
become Pottstown's premier
Page 5
shopping hub. Harleysville National will also expand its branch
network in 1995 with the opening of offices in Red Hill and Spring
House, which will extend the bank's reach into many new communities.
All of our new offices will be challenged to build a
solid base of core relationships in their new communities.
And while we will continue to scout expansion opportunities
for each of our subsidiaries in 1995 and beyond, our
strategy must ultimately complement our vision-to enhance
HNC's position as a high performing, quality, and customer-
driven financial entity.
Sharing our profits:
This year marked the 20th consecutive year of increased
dividends, which rose 24.5% to $.61 per share in 1994. This
included two special cash dividends declared in the second
and fourth quarters-the result of our strong earnings-and a
five percent stock dividend at year end. We are quite
pleased with the 32.0% gain our stock managed in 1994,
closing the year at $28.00 per share. As always, our actions-
market expansion, product development, technological
advancement-are aimed at building shareholder value.
Economic outlook:
The specter of inflation initiated a half-dozen rate
hikes by the Federal Reserve in 1994, resulting in short-
term rates increasing 250 basis points. Amid a volatile
stock and bond market, the economy expanded nicely in 1994,
growing about 4.0% while inflation remained in check.
Stability seems to be the word for 1995, with interest rates
expected to go just a bit higher; inflation to pick up, but
not significantly; and economic growth slowing, but not a
lot.
Focused on the future:
Our company is fast approaching an exciting, but
challenging phase in our history-the $1 billion mark. While
the strength of our past is quite satisfying, we must focus
on the future and the opportunities before us. We have used
the next few pages to highlight some of the fine teams at
HNC whose accomplishments show you how committed we are to
not just meet, but to exceed the expectations of our
customers, the community, and you, our valued shareholders.
You will read about how we have embraced technology to
improve operating efficiencies and customer service; how our
customers' needs and lifestyles drive our product mix; and
how our relationship with the community is indeed a
competitive edge.
In closing, I wish to extend my sincere thanks to our
board of directors whose vision and leadership talents have
guided us through another successful year. I want to commend
every employee of Harleysville National Corporation for
making our achievements possible. Our company and our
business are all about people and the rewards that come when
mutually beneficial relationships are nurtured.
Sincerely,
Walter E. Daller, Jr.
President and Chief Executive Officer
Page 6
CORPORATE SERVICES:
Technology, sales, and service:
The Corporate Services Depart-ment of Harleysville
National melds together professionals with diverse
backgrounds, yet each shares a common goal: to do what's
best for the customer. The strength of this team is its
synergy in supporting HNC's three banks. The decisions team
members make and the programs they initiate are based on a
combined thought process which blends technology,
creativity, and common sense.
Managing technology for efficiency and service:
A major undertaking begun in 1994 and spearheaded by
members of this team was the installation of a platform
automation system at all of our subsidiaries. This
technology has eliminated the shuffle of paperwork in the
opening of deposit and loan accounts, giving our customer
service staff more time to simply talk with their customers.
Page 7
HNC's bank by phone service is the perfect marriage of
technology with marketing. Usage volumes are soaring at each
bank, and our Corporate Services Department is exploring how
we can enable our customers to do more banking with the
touch of a few buttons.
As reflected on the graph to the left, our productivity
ratio reflects the strategic use of human and technological
resources. Growth management is always a challenge for our
Corporate Services Team as we are determined to maintain a
lean, but effective organization. By lean, we do not mean
replacing people with technology, but rather, using technology
to empower people.
Aligning sales with service:
Harleysville National Bank was a pioneer in
implementing an effective Sales and Incentive program. Its
success can be attributed to the fact that our sales and
service culture is one and the same. Our marketing
professionals in Corporate Services do not teach our people
to just sell, but to listen to their customers' needs and
pair them with the benefits of our products.
Our Sales/Service and Incentive program works for all
parties: our customers are served professionally; our
employees receive the guidance and motivation they need to
excel; and our corporate position is strengthened by the
interest and fee income generated.
Corporate Services is now laying the foundation for
what we hope to be equally successful programs at Citizens
and Security National. In terms of building market share, we
don't believe there's a mightier tool.
Service to the community:
The community relations arm of Corporate Services
furthered the educational theme of HNC's Kids Banking
program with the creation of "Books for Bucks." Rewarding
kids with $1 for every book they read, the program motivated
children to read over 11,000 books last summer. The positive
feedback we received from parents, educators, and kids
assured us that the program was a wise investment.
Service to our employees:
HNC is fortunate to have the kinds of employees who
view their relationship with our company not just as a job,
but a genuine commitment to the community. And while they
are rewarded with an attractive salary and benefits package,
training may be the single most important asset we provide.
The personnel, training, and branch administration
professionals in Corporate Services focus on giving our
employees the opportunity to advance within the company and
to develop personally and professionally. From stress
management to writing techniques to computer skills and
product knowledge, HNC's training is far from textbook.
The challenges ahead:
The Corporate Services Department sees communication as
one of the most critical issues of the next few years -
critical to maintaining excellent service and informed
employees and customers. The challenge lies in building a
high-tech, high-touch environment without sacrificing the
personal, flexible nature of our company. Corporate Services
is committed to attaining this balance.
"The success of HNC and the departments I supervise is
derived from listening to what our customers want and need.
Short and long-term, I see us continuing to take advantage
of all that technology has to offer so that we can serve
customers in all the ways they want to do their banking. We
are aggressively exploring new products, seeking input from
our customers, and supporting our employees with the
training to excel in what they do. HNC listens to the pulse
of its communities. And through open communication, a
vision, and just plain old grit, anything is possible."
Deb Takes
Executive Vice President and Chief Operating Officer
PICTURE: Corporate Services Team: From left to right:
Bob Reilly, vice president, human resources; Regina Stark,
banking officer and Our Gang manager; Dennis Detwiler, vice
president, information services; Debbie Sweet, assistant
vice president, customer support; Cathy Heckler, assistant
vice president, marketing; Kathleen Nugent, public relations
and advertising officer; Fred Reim, senior vice president,
branch administration; Deb Takes, executive vice president
and chief operating officer.
Page 8
BUSINESS DEVELOPMENT:
Page 9
Making small business big business:
Since the boom and bust of the 80's, much attention has
been paid to the small business market, which experts say is
the key to economic growth. Now, banks of all sizes are
aggressively courting this market, heating up the
competition, but also magnifying HNC's strongest business
banking qualities.
Our biggest advantage, of course, is our 85-year
history of service to small and medium size businesses. And
the establishment of our Business Development Department in
1992 reaffirmed our commitment to this burgeoning market.
Comprised of four of our most seasoned commercial lenders,
the Department's full-time job is helping our business
partners.
"Beating the streets" may seem like the old- fashioned
way of doing things, but our reputation gets our foot in the
door, and the knowledge and experience of our Business
Developers "sell" the bank. In fact, the Department has
exceeded its annual goals since its establishment.
This team spearheaded Harleysville National's increased
involvement in Small Business Administration (SBA) Lending,
booking over $2 million in SBA loans. Harleysville National
is now considered one of the top SBA lenders in Eastern
Pennsylvania, according to research conducted by the Eastern
Pennsylvania Business Journal.
Sharing knowledge and experience:
In addition to prospecting for new customers, our
Business Developers support HNC's branch managers in their
calling efforts. Their expertise in specialized lending and
extensive knowledge of specific industries augment the
strength of our local managers.
It didn't surprise us when an American Banker poll of
larger banks reported that community bankers are their
toughest competitors. The most common complaints from
business owners about their large bank relationships are
lack of service and poor response time from their account
officers. Our customers and prospects see HNC's size,
decentralized decision making, and flexibility as tremendous
benefits.
We foresee growth in the size and reach of our Business
Development effort. Our commitment to nurturing the local
economy by funding its needs ensures the strength of our own
future. When businesses in our market thrive, we thrive.
"Harleysville National has always recognized the impact
that the small to mid-size business market has on the
regional economy. And we have successfully carved a niche
for ourselves as bankers qualified and prepared to become
true business partners. I see HNC as growing to serve all
the financial needs of Eastern Pennsylvania with Business
Development in the forefront of this growth, building new
relationships and setting the standards for which successful
business/bank partnerships are measured."
David R. Crews
Vice President
PICTURE: From left to right: Anita Brown, assistant vice
president; Bob Kreamer, assistant vice president; Greg
Poehlmann, business development officer; and Dave Crews,
vice president.
Page 10
FINANCIAL & TRUST SERVICES:
The financial industry's changing landscape, sheer
demand in our marketplace, and our local reputation have
fostered rapid growth in HNC's Financial and Trust Services
Department. To ensure that our standards of quality and
performance are maintained, the Department has focused on
strengthening its services and fine operation:
. The size of the Department has nearly doubled over the
last five years and will continue to escalate as we
build HNC's team of financial planners, investment
managers, and administrative staff.
. The implementation of new software and hardware has
dramatically improved the Department's response time,
enhanced its product offerings, and paved the way for
more diversified services and convenient delivery
systems.
Page 11
. Knowledge sells, and our trust professionals have
committed themselves to furthering their education
through certification programs in financial planning.
They are continually sharpening their skills in the three
most crucial aspects of a family's or individual's
financial needs: educational, retirement, and estate
planning.
. Our trust and investment specialists have dramatically
increased their visibility throughout our entire office
network, sharing their specialized knowledge with HNC's
sales staff and making customers more aware of the scope
and variety of our services.
. Their skills and performance record in managing 401K
and other qualified employee retirement packages have
helped build HNC's portfolio of commercial accounts.
Exploring new opportunities:
Today, 3,300 of the nation's 13,000 plus banks and
thrifts sell mutual funds, and analysts anticipate that
number will double over the next five years. Our decision,
however, to gradually expand our line of alternative
investments is not a "me too" approach. Our excellent
track record as money managers, our intimate knowledge of
our customers, and our marketing goal to maintain life-long
relationships ideally position HNC to secure a share of this
market. Our customers will benefit from our experience,
and our bottom line will be bolstered by additional sources
of fee income.
We expect technology to play a major role in shaping
the delivery of our alternative investment services. While
the hallmark of our business will always be personal
relationships, we want to give our customers the
conveniences they seek- building investments through
automatic deduction from existing accounts and conducting
business by phone, fax, and computer.
What's ahead:
There is much talk about banks evolving into one-stop
financial supermarkets where consumers could purchase
everything from certificates of deposit to mutual funds and
insurance. Whether or not that is in the future of HNC,
growth is never a goal in and of itself. Our decision to
diversify product offerings will be guided by asking
ourselves the following questions: Will it help us serve our
customers better? Will it strengthen our bottom line?
The most important ingredient in the marketing mix is
the people. And our people understand and respect our
customers' attitudes toward risk and investments That is
how we have earned their trust and that is how we will keep
it.
"HNC is uniquely qualified to provide investment
services because of how intimately we know our customers.
It's not unusual for us to serve families from one
generation to the next. We earn their trust by listening to
their needs and earn their confidence with the performance
we have always delivered. Continued improvements in our
software, advancements in the education of our employees,
and a gradual build-up of our staff and product line will
allow the Financial and Trust Services Division of HNC to
outperform our competitors and fuel corporate earnings
through fee income."
Larry E. Nolt
Vice President & Trust Officer
PICTURE: From left to right: Jan Sloat, financial services
officer; Sandy Hurst, trust officer; Jim Hamilton, senior
vice president and senior trust officer; and Larry Nolt,
vice president and trust officer.
Page 12
LEASING:
Page 13
A growing profit center:
The success of Harleysville National's Leasing
Department is a perfect example of the benefits of strategic
planning. When the Department was established in 1986, auto
leasing had not yet caught on with the average consumer, and
not many banks, especially our size, were delving into this
product. Longer term, however, we saw tremendous potential
in terms of satisfying customers' needs and diversifying our
income stream.
Today, our Leasing Department manages thousands of auto
leases, representing about $41 million in outstandings.
Interest and fee income have risen significantly while
charge offs are negligible. A solid credit policy, strong
relationships with dealers in our markets, heightened demand
for the product, and a committed team of employees are all
factors in the Department's phenomenal achievements.
Market positioning:
While the competition in this market is steep, the size
and responsiveness of our Leasing Department and our
reputation for superior customer service have given HNC a
powerful edge. Most applications are processed within a few
hours, and many of our dealers tell us they prefer to do
business with a small team of professionals.
The Department has mapped out a creative marketing plan
for 1995 to further strengthen its relationship with the
dealers in our marketplace. Monthly volume discounts, lease
renewal discounts, and a special one-hour approval guarantee
are just a few of the programs the Department is
implementing.
In 1990, the Department expanded its services to
include equipment leasing, now a valuable tool to a growing
number of our business customers. While our portfolio is
still modest, we see an increased demand and expect the
product to play a larger role in our corporate calling
efforts.
We foresee continued success within this division of
our company. Our creativity and flexibility in product
delivery should facilitate our efforts to expand our
customer base and fuel net income.
"The continued success of the Leasing Department will
be achieved by providing a growing profit center to the
Corporation and a rewarding work experience for Department
employees. Our two focuses for the future are research and
education, which will ultimately translate into better, more
creative products for our customers and increased
profitability for the Corporation. HNC's vision is
communicated from top to bottom. Management's role is to
make all employees see how their functions are key to the
Corporation's performance and reputation, and I think this
is why our company is so successful."
Kenneth R. Stoudt
Assistant Vice President
PICTURE: From left to right: Judi Sassaman, leasing
administrator; Donna Bender, asistant manager; Lori Smith,
leasing clerk; and Ken Stoudt, assistant vice president.
Page 14
CITIZENS NATIONAL BANK:
A "Main Street" performer:
Some may have questioned HNC's foray into the Carbon
County market when we acquired Citizens National in February
1991. After all, the bank was quite a distance from our
existing service area, and the projections for growth in
Carbon County were moderate. But we saw an institution
reminiscent of Harleysville National years ago, managed by
people who valued the traditions of community banking. CNB's
track record since joining the HNC family certainly
justifies our decision.
. Citizens' commercial loan portfolio has grown 187% to
$12.1 million.*
. Consumer loans have increased 413% to $16.9 million.*
. Deposits increased 37.3% to $59 million.*
. Net income reached a healthy $1.3 million at December
31, 1994.
Page 15
While Citizens' growth over the years (and the merger of
the Summit Hill Trust Company into CNB) necessitated the
addition of several new staff members, CNB's overhead
expense as a percentage of average assets is well below peer
averages. Ninety-three percent of the banks in its peer
group have higher overhead expenses.
Peer comparison based on figures reported by the Federal
Reserve as of 9/30/94 for banks with assets under $300
million.
Citizens' tight hold on expenses can be attributed in part
to the resourcefulness of its staff. Many have been part of
CNB for more than a decade and have lived in Lansford or the
surrounding communities all of their lives. They know their
customers, are visible members of the community, and have
functioned in every banker's role - from teller to
bookkeeper to lender.
Hometown advantage:
A round of mergers and consolidations in 1994 caused
much flux in Carbon County's banking market, but solidified
CNB's positioning as the hometown bank. Citizens will
capitalize on its reputation as it expands its Lansford
facility in early 1995, making it more customer and sales
oriented. The bank will also begin renovations on a
neighboring property (the building of a former competitor),
which will centralize the bank's operations and support
areas.
Branching out:
CNB is now well-equipped to spread its winning
philosophy of community banking into new areas. In December
1994, the bank announced plans to build an office on a 1.47
acre property in Lehighton, Mahoning Township. Adjacent to a
popular supermarket and about a quarter mile from a Wal-
Mart, the site should produce healthy traffic, giving
Citizens the opportunity to build market share quickly.
We believe our success in Carbon County is a result of
a strategic combination-the deep roots of a hometown bank
fortified by the support of a holding company sharing the
same ideals. With Citizens National forging HNC's growth in
the North, we expect continued prosperity.
*Growth measured from 12/31/90 through 12/31/94. All figures
were restated to reflect the merger of the Summit Hill Trust
Company with Citizens National Bank in September 1992.
"With the support of HNC and our local reputation as
a solid, high performing bank, Citizens National is poised
for growth. We have mounted a campaign to build market share
through an aggressive calling program, creative marketing
and advertising, a sales incentive program for our
employees, and of course, the addition of our third office
in Lehighton, Mahoning Township. Citizens National is proud
to be affiliated with HNC because we play an integral part
in carrying out the company's vision - building
relationships with customers and the community based on
trust, quality, and knowledge."
Thomas D. Oleksa
President and Chief Executive Officer
PICTURE: From left to right: Monica Coccio, manager, Summit
Hill office; Joe O'Gurek, assistant vice president and
assistant trust officer; Maurice Infante, vice president;
Martha Rex, vice president, trust officer, and cashier; and
Thom Oleksa, president and chief executive officer.
Page 16
SECURITY NATIONAL BANK:
A new tradition in banking:
Security National officially joined the HNC family in
July 1994 and has already positioned itself to become a
major player in its market, melding nicely with HNC's
philosophy while maintaining a personality all its own.
Banking on kids:
To teach children the importance of saving for the
future, Security National launched the B.E.A.R. Club
(Banking Early Assures Rewards) in November 1994. Club
members receive a free statement savings account with no
minimum balance required, an official B.E.A.R. Club card,
which entitles them to discounts at local merchants, and the
chance to earn $1 for every "A" they receive on their report
cards. Combining banking, education, and pure fun, this
program has been warmly embraced by the community.
Page 17
Relationship marketing:
Security National's size and its emphasis on personal
relationships have allowed the bank to do something its
larger competitors envy- establish real customer dialogue.
This "closeness to the customer" and the support of HNC,
have fueled the expansion and enhancement of SNB's product
line:
. A new bank by phone service provides customers with
account access 24 hours a day, seven days a week from
their home or office.
. A flexible CD gives customers the option to change the
rate once during the term and has given SNB a valuable
edge in the fierce competition for time deposits.
. A new custom VISA card offers customers a competitive
rate and valuable benefits while giving the bank another
source for interest and fee income.
. Additional residential mortgage options have positioned
SNB to take advantage of the housing boom in the
surrounding Pottstown market.
. A small business package, which combines benefits to
owners and their employees, has reinforced SNB's
position as a creative, responsive corporate banker.
. During the first quarter, SNB will launch two
innovative financial packages targeting the highly
profitable 50+ market.
Strategic positioning:
What is predicted to become Pottstown's premier
shopping hub will be the site of SNB's third office,
expected to open in Fall 1995. Anchored by Wal-Mart and
supported by several other well-known retailers, the new
Pottstown Center should be a magnet for the consumers SNB is
so eager to serve.
"My vision for Security National Bank is to work with
my team of professionals to become the premier bank in our
market and to be a leader within HNC in earnings
contribution, personnel development, franchise enhancement,
and market leadership. At Security National, we are focused
on staff training, customer satisfaction measurement, and
employee empowerment so that we meet our goal of 100 percent
customer satisfaction. Being a community banker at Security
National gives me the opportunity to apply every day, with
every customer, on every transaction, my passion for
fulfilling people's financial needs with unmatched
flexibility, sensitivity, and speed."
Raymond H. Melcher, Jr.
President and Chief Executive Officer
PICTURE: From left to right: Roxanne Selwyn, assistant
vice president; Pat Hohl-Kuechler, senior customer service
representative; Kristin Williams, assistant manager; and Ray
Melcher, president and chief executive officer.
Page 18
Description of Business:
Harleysville National Corporation, a Pennsylvania
corporation ("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 is
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, 1994, the Banks had total assets of
$799,778,484, total shareholders' equity of $66,575,382 and
total deposits of $688,577,599.
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
nineteen (19) offices located in Montgomery, Bucks and Carbon Counties.
On December 31, 1994, the Banks had 318 full-time
equivalent employees.
Competition:
The Banks compete actively with other Philadelphia area
and Carbon County 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 such areas as reserves, loans,
investments, management practices and other aspects of bank
operations).
Harleysville National 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 the quarterly dividend
information and high and low prices for Harleysville
National Corporation common stock for 1994 and 1993.
Harleysville National Corporation 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:
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.
1993 Low Price* High Price*
Dividend*
__________________________________________________________
First Quarter $16.67 $18.10 $.119
Second Quarter 16.67 18.57 . 119
Third Quarter 16.90 19.05 .124
Fourth Quarter 18.10 21.19 .128
*Adjusted for a two-for-one stock split in the form of a 100
percent stock dividend effective 12/31/93, and a five
percent stock dividend effective 12/30/94.
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 each of the years in the three-year
period ended December 31, 1994. 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 each of the
years in the three-year period ended December 31, 1994.
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
Philadelphia,
Pennsylvania
January 31, 1995
Page 19
CONSOLIDATED BALANCE SHEETS:
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
December 31,
_______________________________
1994 1993
___________ ___________
Assets
Cash and due from banks $ 35,390,357 $ 31,598,518
Federal Funds sold 0 13,886,000
Interest-bearing deposits in banks 205,719 1,581,381
Securities available for sale
(1994, at market value, cost
$107,307,249; 1993, at cost,
market value $123,075,880) 102,211,333 121,567,905
Investment securities
(market value $79,896,560 in
1994 and $100,047,986 in 1993) 82,867,003 96,603,878
Loans 578,063,239 488,047,899
Less: Unearned income (9,804,357) (11,326,849)
Allowance for loan losses (7,934,385) (5,886,427)
___________ ___________
Net loans 560,324,497 470,834,623
___________ ___________
Bank premises and equipment, net 8,794,530 8,661,366
Accrued income receivable 4,726,117 3,976,199
Other real estate owned 1,242,887 1,505,526
Intangible assets, net 2,315,000 2,932,500
Other assets 1,701,041 792,803
___________ ___________
Total assets $799,778,484 $753,940,699
___________ ___________
___________ ___________
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $110,502,583 $105,133,873
Interest-bearing:
NOW accounts 83,828,901 84,816,865
Money market accounts 162,219,289 175,853,411
Savings 88,200,527 85,337,630
Time under $100,000 224,598,588 218,776,562
Time $100,000 or greater 19,227,711 10,546,537
___________ ___________
Total deposits 688,577,599 680,464,878
Accrued interest payable 8,058,926 6,685,667
U.S. Treasury demand note 2,392,975 1,999,541
Federal Funds purchased 12,716,000 415,000
Federal Home Loan Bank (FHLB) borrowings 5,000,000 0
Securities sold under agreements to
repurchase 15,212,755 0
Other liabilities 1,244,847 1,904,324
___________ ___________
Total liabilities 733,203,102 691,469,410
___________ ___________
Shareholders' equity:
Series preferred stock, par
value $1 per share; authorized
3,000,000 shares, none issued 0 0
Common stock, par value $1 per
share; authorized 30,000,000
shares; issued and outstanding
5,753,294 shares in 1994 and
5,396,120 shares in 1993 5,753,294 5,396,120
Surplus 24,415,932 15,009,007
Undivided profits 39,718,501 42,066,162
Net unrealized losses on securities
available for sale, net of taxes (3,312,345) 0
___________ ___________
Total shareholders' equity 66,575,382 62,471,289
___________ ___________
Total liabilities and
shareholders' equity $799,778,484 $753,940,699
___________ ___________
___________ ___________
See accompanying notes to consolidated financial statements.
Page 20
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
_________________________________________
1994 1993 1992
__________ __________ __________
Interest Income:
Loans, including fees $40,502,191 $35,749,479 $34,015,607
Lease financing 2,737,357 2,390,767 2,218,781
Investment securities:
Taxable 8,611,300 9,302,765 9,055,163
Exempt from federal taxes 2,434,697 2,292,144 2,258,390
Federal Funds sold 247,094 490,975 839,315
Deposits in banks 81,377 123,403 160,147
__________ __________ __________
Total interest income 54,614,016 50,349,533 48,547,403
__________ __________ __________
Interest Expense:
Savings deposits 8,707,831 9,223,689 9,184,161
Time under $100,000 9,666,034 9,809,193 11,845,483
Time $100,000 or greater 664,197 440,101 758,727
Borrowed funds 400,633 57,570 61,918
__________ __________ __________
Total interest expense 19,438,695 19,530,553 21,850,289
__________ __________ __________
Net interest income 35,175,321 30,818,980 26,697,114
Provision for loan losses 2,650,226 3,072,775 2,299,000
__________ __________ __________
Net interest income
after provision for
loan losses 32,525,095 27,746,205 24,398,114
__________ __________ __________
Other Operating Income:
Service charges 2,313,799 2,346,799 2,096,896
Securities gains, net 530,286 397,315 55,776
Trust income 719,233 648,834 423,740
Other income 962,052 1,474,687 833,289
__________ __________ __________
Total other income 4,525,370 4,867,635 3,409,701
__________ __________ __________
Net interest income after
provision for loan losses
and other income 37,050,465 32,613,840 27,807,815
__________ __________ __________
Other Operating Expenses:
Salaries, wages and employee
benefits 10,982,434 9,938,701 8,613,138
Net occupancy 1,354,692 1,210,599 1,007,391
Furniture and equipment 1,487,443 1,224,712 1,090,997
FDIC premium 1,518,291 1,425,088 1,189,838
Other expenses 6,414,555 6,323,241 5,139,074
__________ __________ __________
Total other expenses 21,757,415 20,122,341 17,040,438
__________ __________ __________
Income before income
taxes and the cumulative
effect of a change in
accounting for income
taxes 15,293,050 12,491,499 10,767,377
Income tax expense 4,548,081 3,553,445 2,897,261
__________ __________ __________
Income before the cumulative
effect of a change in
accounting for income
taxes 10,744,969 8,938,054 7,870,116
__________ __________ __________
Cumulative effect of a change
in accounting for income taxes 0 300,000 91,903
__________ __________ __________
Net income $10,744,969 $ 9,238,054 $ 7,962,019
__________ __________ __________
__________ __________ __________
Weighted average number of common shares
Primary 5,847,473 5,642,790 5,566,155
Fully diluted 5,847,473 5,824,099 5,737,115
__________ __________ __________
__________ __________ __________
Net income per share information:
Primary:
Before cumulative effect
of a change in accounting
for income taxes $1.84 $1.58 $1.41
Cumulative effect of a
change in accounting for
income taxes 0 $0.06 $0.02
Net income $1.84 $1.64 $1.43
Fully diluted:
Before cumulative effect
of a change in accounting
for income taxes $1.84 $1.53 $1.37
Cumulative effect of a
change in accounting for
income taxes 0 $0.06 $0.02
__________ __________ ________
Net income $1.84 $1.59 $1.39
__________ __________ _________
__________ __________ _________
Cash dividends per share $0.61 $0.49 $0.43
__________ __________ _________
__________ __________ _________
See accompanying notes to consolidated financial statements.
Page 21
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
_______________________________________________
1994 1993 1992
___________ ___________ ___________
Operating Activities:
Net income $ 10,744,969 $ 9,238,054 $ 7,962,019
Adjustments to
provided by operating activities:
Provision for loan losses 2,650,226 3,072,775 2,299,000
Depreciation and amortization 980,319 1,117,128 984,384
Net (accretion) amortization of investment
securities' discount/premiums 611,135 421,493 (308,014)
Deferred income taxes 143,717 (374,485) (209,128)
Cumulative effect of a change in accounting
for income taxes 0 (300,000) (91,903)
Net realized securities gains (530,286) (447,315) (55,776)
Write down on investment 0 50,000 0
Realized gain on sale of loans 0 (469,091) 0
(Increase) decrease in accrued income receivable (749,918) 613,531 (590,193)
Increase (decrease) in accrued interest payable 1,373,259 (359,458) (1,694,768)
Net (increase) decrease in other assets (908,238) 341,516 124,890
Net increase (decrease) in other liabilities 980,377 (1,215,748) 1,742,274
Decrease in unearned income (1,522,492) (4,672,324) (4,579,302)
Write down of other real estate owned 61,268 111,670 197,000
(Increase) decrease in intangible assets 617,500 345,000 (3,277,500)
___________ ___________ ___________
Net cash provided by operating activities 14,451,836 7,472,746 2,502,983
___________ ___________ ___________
Investing Activities:
Proceeds from sales of investment securities 0 742,295 13,914,696
Proceeds from sales of securities available for sale 41,674,091 26,765,477 23,922,084
Proceeds from maturity or calls of investment
securities 22,724,787 63,039,778 61,487,628
Proceeds from maturity or calls of securities
available for sale 13,141,815 0 0
Purchases of investment securities (15,997,904) (25,397,611) (173,296,584)
Purchases of securities available for sale (33,626,107) (77,353,055) 0
Net decrease (increase) in short-term investments 1,375,662 (44,746) 1,417,183
Proceeds from sales of loans 0 15,360,878 0
Net increase in loans (91,476,770) (64,645,601) (64,633,778)
Purchases of premises and equipment (1,113,483) (741,058) (3,183,946)
Purchases of other real estate owned 0 0 (365,480)
Proceeds from sales of other real estate 1,060,533 2,120,614 0
Loan disbursements on in-substance foreclosed real
estate 0 (103,656) 0
___________ ___________ ___________
Net cash used in investing activities (62,237,376) (60,256,685) (140,738,197)
___________ ___________ ___________
Financing Activities:
Net increase in deposits 8,112,721 40,225,654 155,315,085
Increase (decrease) in U.S. Treasury demand note 393,434 72,002 (124,680)
Increase in Federal Funds purchased 12,301,000 415,000 0
Increase in FHLB borrowings 5,000,000 0 0
Increase in securities sold under agreement 15,212,755 0 0
Cash dividends and fractional shares (3,435,440) (2,664,788) (2,308,200)
Dividend reinvestment 691,196 337,366 0
Net proceeds from stock sale 0 1,001,321 0
Stock options (584,287) 0 (187,911)
___________ ___________ ___________
Net cash provided by financing activities 37,691,379 39,386,555 152,694,294
___________ ___________ ___________
Increase (decrease) in cash (10,094,161) (13,397,384) 14,459,080
Cash and cash equivalents at beginning of year 45,484,518 58,881,902 44,422,822
___________ ___________ ___________
Cash and cash equivalents at end of year $35,390,357 $45,484,518 $58,881,902
___________ ___________ ___________
___________ ___________ ___________
Cash paid during the year for:
Interest $18,065,436 $19,890,011 $23,545,057
Income taxes 4,086,921 4,709,613 2,357,013
___________ ___________ ___________
___________ ___________ ___________
Supplemental disclosure of noncash investing and
financing activities:
Transfer of assets from loans to foreclosed and
repossessed property $859,162 $1,165,114 $3,084,905
___________ ___________ ___________
___________ ___________ ___________
Net unrealized losses on securities available
for sale,
net of taxes of $1,783,571 $3,312,345 $ 0 $ 0
___________ ___________ ___________
___________ ___________ ___________
Transfer of securities from investment securities
to securities available for sale $6,029,113 $ 0 $ 0
___________ ___________ ___________
___________ ___________ ___________
See accompanying notes to consolidated financial statements.
Page 22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
__________________
Unrealized
Number of Par Undivided Losses on
Shares Value Surplus Profits Securities Total
__________ __________ __________ __________ __________ __________
Balance, January 1, 1992,
previously reported 2,453,846 $2,453,846 $8,882,005 $35,144,408 $(65,892) $46,414,367
Acquisition of Security
National Bank 140,094 140,094 2,846,900 (373,825) 0 2,613,169
Balance, January 1, 1992, _________ _________ __________ __________ _______ __________
restated 2,593,940 2,593,940 11,728,905 34,770,583 (65,892) 49,027,536
Stock dividends 122,298 122,298 4,449,201 (4,586,234) 0 (14,735)
Stock options 4,905 4,905 81,423 (274,239) 0 (187,911)
Net income for 1992 0 0 0 7,962,019 0 7,962,019
Cash dividends 0 0 0 (2,293,465) 0 (2,293,465)
Less: valuation allowance on
securities available for sale 0 0 0 0 65,8923 65,892
_________ __________ __________ __________ __________ __________
Balance, December 31, 1992 2,721,143 2,721,143 16,259,529 35,578,664 0 54,559,336
Stock options 2,248 2,248 81,490 (83,738) 0 0
Proceeds of stock offering 71,362 71,362 929,959 0 0 1,001,321
Stock awards 58 58 1,972 (2,030) 0 0
Dividend reinvestment 8,977 8,977 328,389 0 0 337,366
Stock split 2,592,332 2,592,332 (2,592,332) 0 0 0
Net income for 1993 0 0 0 9,238,054 0 9,238,054
Cash dividends 0 0 0 (2,664,788) 0 (2,664,788)
__________ __________ __________ __________ __________ __________
Balance, December 31, 1993 5,396,120 5,396,120 15,009,007 42,066,162 0 62,471,289
Stock options 58,264 58,264 1,653,328 (2,295,879) 0 (584,287)
Stock dividends 273,535 273,535 7,084,576 (7,369,331) 0 (11,220)
Stock awards 128 128 3,072 (3,200) 0 0
Dividend reinvestment 25,247 25,247 665,949 0 0 691,196
Net income for 1994 0 0 0 10,744,969 0 10,744,969
Cash dividends 0 0 0 (3,424,220) 0 (3,424,220)
Unrealized losses on securities
available for sale, net of taxes 0 0 0 0 (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
__________ __________ __________ __________ __________ __________
__________ __________ __________ __________ __________ __________
See accompanying notes to consolidated financial statements.
Page 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
1-Summary of Significant Accounting Policies
Business:
The Harleysville National Corporation ("Corporation")
through its subsidiary banks, Harleysville National Bank and
Trust Company, Citizens National Bank of Lansford, and
Security National Bank ("Banks"), provides a full range of
banking services to individual and corporate customers
through its branch banking systems 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
sheets 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:
Securities held for investment, which the Banks have
the ability and intent to hold to maturity, are carried at
cost, adjusted for amortization of premiums and accretion of
discounts.
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. 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
securities available for sale which are shown on the
consolidated statements of income.
On January 1, 1994, the Corporation adopted Statement
of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS
115"), 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. As of
December 31, 1994, the Corporation's securities classified
as available for sale had a market value less than cost of
$3,312,345.
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.
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.
In May 1993, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS 114"), as amended by "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures"
("SFAS 118"), which requires that impaired loans be measured
based on the present value of expected future cash flows
discounted at the loans' effective interest rate or, as a
practical expedient, at the loans' observable market price
or the fair value of the collateral if the loan is
collateral dependent. Based upon a preliminary analysis,
the Corporation does not expect that the adoption of SFAS
114 and SFAS 118, which are required for fiscal years
beginning after December 15, 1994, will have a material
effect on its net income, capital or liquidity.
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
Page 24
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.
Loan Fees:
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.
Bank Premises and Equipment:
Bank premises and equipment are stated at cost, less
accumulated depreciation. Depreciation is recorded using
the straight-line and accelerated depreciation methods over
the estimated useful life of the assets. Leasehold
improvements are amortized over the term of the lease or
estimated useful life, whichever is shorter.
The cost of maintenance and repairs is charged to
operating expenses as incurred, and the cost of major
additions and improvements is capitalized. Gains or losses
on disposition of premises and equipment are reflected in
operations.
Other Real Estate Owned:
Other real estate owned includes foreclosed and in-
substance foreclosed real estate which are 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 ten-year life on
an accelerated basis. The amortization charged to income
was $617,500, $345,000 and $172,500 for the years ended
December 31, 1994, 1993 and 1992.
Income Taxes:
In 1992, except for Security National Bank ("Security")
as discussed below, the provision for income taxes was based
on income as reported in the consolidated statements of
income after appropriate elimination of tax-free income and
nondeductible expenses. Deferred income taxes were provided
on significant timing differences between income as
determined for financial reporting and for federal income
tax purposes.
In February 1992, FASB issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires a change from the deferred
method under APB Opinion 11 to the asset and liability
method of accounting for income taxes. Under the asset and
liability method of SFAS 109, deferred income taxes are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases. 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 109, the
effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the
enactment date. SFAS 109 was adopted on January 1, 1993,
except for Security, as discussed below. The provisions of
the Statement were applied without restating prior years'
financial statements. Adoption of SFAS 109 resulted in a
reduction of the net deferred tax liability in the amount of
$300,000 in 1993.
In 1992, a net deferred tax liability of $91,903
resulted from Security adopting SFAS 109. These deferred
tax liabilities are reported separately as the cumulative
effect of a change in the method of accounting for income
taxes in the consolidated statements of income for the years
ending December 31, 1993 and 1992.
Pension Plan:
The Corporation funds accrued pension costs on its
noncontributory pension plan covering substantially all
employees. Prior service costs are amortized over fifteen
years.
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 Summit Hill
Trust Company (1992) and Security National Bank (1994) were
merged into the Corporation and accounted for on a pooling-
of-interests basis, the five percent stock dividends issued
in 1992 and 1994 and the two-for-one stock split in the form
of a 100 percent 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 25
2-Acquisitions:
On April 28, 1994, the shareholders of Security
approved the merger of Security with the Corporation. For
each share of Security common stock outstanding, 0.7483
shares of the Corporation's common stock were issued on the
closing date of July 1, 1994. As a result of the
transaction, 211,456 new shares were issued. The
combination was accounted for on a pooling-of-interests
basis, and all prior periods have been restated to reflect
the combination as follows:
Net
Revenue Income
_______ _______
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
_______ _______
_______ _______
Year Ended December 31, 1992
_________________________
Harleysville National Corporation $49,495 $7,809
Security National Bank 2,462 153
_______ _______
Total $51,957 $ 7,962
_______ _______
_______ _______
3-Restricted Cash Balances:
Aggregate reserves (in the form of deposits with the
Federal Reserve Bank) of $7,572,000 were maintained to
satisfy federal regulatory requirements at December 31,
1994.
4-Securities:
The amortized cost and estimated market values of
investment securities are as follows:
December 31, 1994
_________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
__________ _________ _________ __________
U.S. Treasury Notes $ 2,562,102 $ 0 $(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 0 (22,420) 594,865
Other securities 18,155,906 17,588 (373,978) 17,799,516
__________ __________ __________ __________
$82,867,003 $ 220,588 (3,191,031) $79,896,560
__________ __________ __________ __________
__________ __________ __________ __________
December 31, 1993
__________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
___________ ___________ ___________ ___________
U.S. Treasury Notes $2,299,511 $ 4,415 $ (2,872) $2,301,054
Obligations of other
U.S. Government
agencies and
corporations 23,862,550 219,335 (51,063) 24,030,822
Obligations of states
and political
subdivisions 44,982,803 1,593,267 (182,602) 46,393,468
Other securities 25,459,014 1,921,461 (57,833) 27,322,642
___________ ___________ __________ ___________
Totals $96,603,878 $3,738,478 $(294,370) $100,047,986
___________ ___________ ___________ ___________
___________ ___________ ___________ ___________
The amortized cost and estimated market values ofsecurities
available for sale are as follows:
December 31, 1994
__________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
___________ ___________ ___________ ___________
U.S. Treasury $ 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
___________ ___________ ___________ ___________
___________ ___________ ___________ ___________
December 31, 1993
__________________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
___________ ___________ ___________ ___________
U.S. Treasury $ 40,529,766 $ 531,424 $ (11,654) $ 41,049,536
Mortgage-backed
securities 81,038,139 1,241,950 (253,745) 82,026,344
___________ ___________ ___________ ___________
Totals $ 121,567,905 $1,773,374 $ (265,399) $123,075,880
___________ ___________ ___________ ___________
___________ ___________ ___________ ___________
There are no significant concentrations of securities
(greater than 10% of shareholders' equity) in any individual
security issuer.
Securities with a carrying value of $32,925,000 at
December 31, 1994 were pledged to secure public funds and
government deposits.
The amortized cost and estimated market value of
investment securities, by contractual maturity, are shown on
the following page. 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.
Page 26
December 31,
__________________________________________________
1994 1993
________________________________________________
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
___________ ___________ ___________ ___________
Due in one year or
less $20,873,138 $20,510,230 $23,086,401 $23,401,872
Due after one year
through five years 50,681,107 48,656,718 54,531,348 56,284,094
Due after five years
through ten years 9,497,374 8,928,680 12,045,428 12,347,859
Due after ten years 1,198,099 1,206,067 3,964,706 5,036,332
___________ ___________ ___________ ___________
82,249,718 79,301,695 93,627,883 97,070,157
Mortgage-backed
securities 617,285 594,865 2,975,995 2,977,829
___________ ___________ ___________ ___________
Totals $82,867,003 $79,896,560 96,603,878 $100,047,986
___________ __________ ___________ ___________
___________ __________ ___________ ___________
The amortized cost and estimated market value of securities
available for sale, by contractual maturity, 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.
December 31,
__________________________________________________
1994 1993
_______________________________________________
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
___________ ___________ ___________ ___________
Due in one year or
less $ 3,498,257 $3,404,914 $10,252,017 $10,366,402
Due after one year
through five years 29,413,966 28,213,694 29,281,614 29,539,697
Due after five years
through ten years 0 0 996,135 1,143,437
Due after ten years 3,621,560 3,757,943 0 0
___________ ___________ ___________ ___________
36,533,783 35,376,551 40,529,766 41,049,536
Mortgage-backed
securities 70,773,466 66,834,782 81,038,139 82,026,344
___________ ___________ ___________ ___________
Totals $107,307,249 $102,211,333 $121,567,905 $123,075,880
___________ ___________ ___________ ___________
___________ ___________ ___________ ___________
There were no sales of investment securities during
1994. Proceeds from sales of investments 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 investments 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. In
addition, a security for $100,000 had been downgraded to
doubtful, and it was written down to $50,000 during 1993.
Proceeds from sales of investment securities during 1992
were $13,914,696. Gross gains of $119,836 and gross losses
of $118,676 were realized on these sales. Proceeds from
sales of securities available for sale during 1992 were
$23,922,084. Gross gains of $285,070 and gross losses of
$94,364 were realized on these sales. Proceeds from sales
of mutual funds during 1992 were $2,196,904. Gross losses
of $89,059 were realized on these sales.
5-Loans:
Major classifications of loans are as follows:
December 31,
___________________________
1994 1993
___________ ___________
Real estate $200,139,092 $175,530,041
Commercial and industrial 154,319,013 128,387,767
Installment 143,782,888 118,869,138
Student loans 5,879,578 3,878,952
Consumer loans 27,501,295 25,054,303
Lease financing 41,232,967 32,303,905
Other 5,208,406 4,023,793
___________ ___________
Total loans 578,063,239 488,047,899
Less:
Unearned income 9,804,357 11,326,849
Allowance for loan losses 7,934,385 5,886,427
___________ ___________
Net loans $560,324,497 $470,834,623
___________ ___________
___________ ___________
On December 31, 1994, nonaccrual loans were $2,457,526,
loans ninety days or more past due were $2,145,109 and
troubled debt restructured loans were $1,867,587. On
December 31, 1993, nonaccrual loans were $1,875,749, loans
ninety days or more past due were $1,729,000 and troubled
debt restructured loans were $1,548,483.
The Banks have no concentration of loans to borrowers
engaged in similar activities which exceeded 10% of total
loans at December 31, 1994. 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, which 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, amounted to
$11,618,389 at December 31, 1994. Activity of these loans
is as follows:
Years Ended December 31,
_________________________________________
1994 1993 1992
_________ __________ __________
Balance, January 1 $ 8,893,780 $ 9,281,111 $ 8,867,295
New loans 9,756,903 7,657,256 7,990,455
Repayments (7,032,294) (8,044,587) (7,576,639)
__________ __________ __________
Balance, December 31 $ 11,618,389 $ 8,893,780 $ 9,281,111
__________ __________ __________
__________ __________ __________
Page 27
6-Allowance for Loan Losses:
Transactions in the allowance for loan losses are as
follows:
Years Ended December 31,
________________________________________
1994 1993 1992
_________ _________ _________
Balance, beginning of year $ 5,886,427 $ 4,386,893 $ 3,915,525
_________ _________ _________
Provision charged to
operating expenses 2,650,226 3,072,775 2,299,000
Loans charged off:
Commercial and industrial (490,589) (1,211,088) (1,010,267)
Installment (386,477) (401,155) (689,927)
Real estate (84,927) (211,708) (90,403)
Lease financing (44,426) (92,186) (161,954)
_________ _________ _________
Total charged off (1,006,419) (1,916,137) (1,952,551)
_________ _________ _________
Recoveries:
Commercial and industrial 169,626 85,760 8,716
Installment 152,267 155,911 96,973
Real estate 55,735 76,530 0
Lease financing 26,523 24,695 19,230
_________ _________ _________
Total recoveries 404,151 342,896 124,919
_________ _________ _________
Balance, end of year $7,934,385 $5,886,427 $4,386,893
_________ _________ _________
_________ _________ _________
7-Bank Premises and Equipment:
Bank premises and equipment consist of:
Estimated
Useful December 31,
Lives 1994 1993
__________ _________ _________
Land $1,687,083 $1,432,083
Buildings 15-30 years 8,101,621 7,867,680
Furniture, fixtures and equipment 3-10 years 7,098,635 7,124,596
_________ _________
Total cost 16,887,339 16,424,359
Less accumulated depreciation and
amortization 8,092,809 7,762,993
_________ _________
Bank premises and equipment, net $8,794,530 $8,661,366
_________ _________
_________ _________
8-Long-Term Debt:
A three-year Federal Home Loan Bank (FHLB) advance of
$5,000,000, maturing December 15, 1997, was outstanding at
December 31, 1994. Pursuant to the terms of the agreement
with the FHLB, the advance was borrowed at an adjustable
rate, based on the United States Dollar Prime less 2.05%.
At a subsidiary bank, this borrowing is collateralized by
mortgage loans and FHLB stock. There were no outstanding
FHLB advances at December 31, 1993 and 1992. Advances are
made pursuant to several different credit programs offered
from time to time by the FHLB.
9-Federal Income Taxes:
Income tax expense from current operations is composed
of the following:
Years Ended December 31,
______________________________________
1994 1993 1992
_________ _________ _________
Current tax payable $4,404,364 $3,927,930 $3,106,389
Deferred income tax 143,717 (374,485) (209,128)
_________ _________ _________
Tax expense $4,548,081 $3,553,445 $2,897,261
_________ _________ _________
_________ _________ _________
As previously reported, the source of timing
differences and the resulting net deferred income tax effect
are as follows:
Year Ended December 31,
______________________
1992
________
Provision for loan losses $(64,835)
Other deferred items (7,596)
Deferred loan fees (213,990)
Lease financing 168,032
Start-up cost 11,226
Alternative minimum tax 61,482
________
Total $(45,681)
Valuation allowance $(39,224)
________
Total $(84,905)
________
________
The tax effect of temporary differences that give rise
to significant portions of deferred tax assets and liabilities at December
31, 1994 and 1993 are as follows:
1994 1993
_____________________ _____________________
Asset Liability Asset Liability
_________ _________ _________ _________
Allowance for possible
credit losses $2,700,807 $ 0 $1,892,799 $ 0
Lease assets 0 5,404,702 0 4,134,828
Deferred loan fees 1,013,072 0 961,790 0
Deferred compensation 413,308 0 298,897 0
Other 244,112 0 136,331 0
_________ _________ _________ _________
Gross deferred taxes 4,371,299 5,404,702 3,289,817 4,134,828
Valuation allowance 0 0 (44,674) 0
_________ _________ _________ _________
Net deferred taxes $4,371,299 $5,404,702 $3,245,143 $4,134,828
_________ _________ _________ _________
_________ _________ _________ _________
The effective income tax rates of 29.7% for 1994, 28.4% for
1993 and 26.9% for 1992 were less than the applicable
federal income tax rates of 35% for 1994 and 1993 and 34%
for 1992. The reason for these differences follows:
Years Ended December 31,
_____________________________________
1994 1993 1992
_________ __________ _________
Expected tax expense $5,352,568 $4,372,505 $3,660,909
Tax-exempt income net of
interest disallowance (898,234) (882,016) (916,880)
Other 93,747 62,956 153,232
_________ __________ _________
Actual tax expense $4,548,081 $3,553,445 $2,897,261
_________ __________ _________
_________ __________ _________
Page 28
10-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
ten-year period preceding retirement. The Board of Directors
of the Corporation has voted to terminate and liquidate the
defined benefit plan and replace it with a money purchase
plan. The defined benefit plan will be terminated at
December 31, 1994 after benefits for the year have been
paid; benefit accruals will be frozen before any employee
works 1,000 hours in 1995; and 60 days notice of the
termination will be given to employees prior to freezing
accruals. Management has evaluated the termination of the
plan and believes it will not have an adverse impact on
earnings.
Net pension cost for the years ended December 31, 1994,
1993 and 1992 included the following components:
1994 1993 1992
________ ________ ________
Service cost $266,907 $232,652 $206,393
Interest cost 137,329 122,950 125,299
Actual return on plan assets (84,426) (171,996) (177,658)
Net amortization and deferral (61,198) 45,318 38,622
________ ________ ________
Net periodic pension cost $258,612 $228,924 $192,656
________ ________ ________
________ ________ ________
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 1994, 6.75% and 3.0% for 1993 and
6.75% and 5.0% for 1992, respectively; the expected long-
term rate of return on assets was 7.5% for all years.
The following table sets forth the plan's funded status
and amounts recognized in Harleysville's financial
statements at December 31, 1994 and 1993:
1994 1993
_________ _________
Plan assets at fair value $2,435,204 $1,977,257
Projected benefit obligation
(including an accumulated benefit
obligation of $1,808,907 in 1994,
$1,628,011 in 1993, and a vested
benefit obligation of $1,704,112
in 1994, and $1,312,000 in 1993) 2,392,143 2,034,502
_________ _________
Plan assets in excess (deficit) of
projected benefit obligation 43,061 (57,245)
Unrecognized net gain from past
experience being different from
that which was assumed 496,504 449,006
Unrecognized prior service cost 36,665 40,332
Unrecognized net assets at January 1, 1987,
being recognized over 15 years (121,568) (138,935)
_________ _________
Prepaid pension cost $ 454,662 $ 293,158
_________ _________
_________ _________
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 $971,640, $801,104
and $716,308 for 1994, 1993 and 1992, 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 ten years after retirement. As of December 31,
1994, the Corporation has accrued a liability of $565,562
for the SERP.
In November 1992, FASB issued Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("SFAS 112"). SFAS 112 requires
employers to recognize any obligation to provide
postemployment (as differentiated from postretirement)
benefits (salary continuation, outplacement services, etc.)
by accruing the estimated liability through a charge to
expense. SFAS 112 was adopted as of January 1,1994. The
Corporation does not currently provide postemployment
benefits other than through the pension plan previously
noted, and accordingly, the adoption of SFAS 112 did not
have any impact on the Corporation's financial position.
11-Shareholders' Equity:
On December 30, 1994, the Corporation granted a five
percent stock dividend on its common stock, which was
distributed to shareholders of record as of December 16,
1994.
On December 31, 1993, the Corporation granted a two-for-
one stock split on its common stock in the form of a 100
percent stock dividend, which was distributed to
shareholders of record as of December 17, 1993.
On December 31, 1992, the Corporation granted a five
percent stock dividend on its common stock, which was
distributed to shareholders of record as of December 18,
1992.
12-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.
Options previously granted to directors and a former
officer of Security were converted into options to acquire
22,086 shares (included in the 386,738 shares mentioned
above) of the common stock of the Corporation, at $21.38, as
a result of the merger. These options are currently
exercisable and expire on September 28, 1998.
Under the Corporation's stock option plan, the
exercisable option prices ranged from $8.38 to $21.38 at
December 31, 1994. An analysis of the activity in this plan
for the last three years follows:
Page 29
1994 1993 1992
_______ _______ _______
Number of Common Shares:
Outstanding, January 1 337,018 351,028 386,738
Granted 0 0 0
Exercised* (117,479) (14,010) (35,710)
Lapsed 0 0 0
_______ _______ _______
Outstanding, December 31 219,539 337,018 351,028
_______ _______ _______
_______ _______ _______
Exercisable, December 31 219,539 337,018 351,028
_______ _______ _______
_______ _______ _______
*Adjusted for stock splits and stock dividends.
On April 13, 1993, the shareholders of the Corporation
approved the 1993 Stock Incentive Plan. There are 168,000
shares of the Corporation's common stock available for
issuance under the Plan. Currently, no shares have been
granted under the 1993 Stock Incentive Plan.
13-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 2012. Most
banking location leases require the lessor to pay insurance,
maintenance costs and property taxes. Total lease expense
amounted to $531,415 in 1994, $313,505 in 1993 and $247,727
in 1992. Security is committed to enter into a $475,000
ground lease for their Pottstown Center branch scheduled to
open during 1995. This prepaid ground lease will be
amortized over a thirty-year period. The amortization for
this lease will be approximately $8,000 during 1995.
Minimum rental commitments for existing operating
leases are as follows:
Total
Operating
Leases
_________
1995 $ 738,463
1996 351,664
1997 266,160
1998 190,635
1999 146,151
2000-2004 499,074
2005-2012 256,663
_________
Total $2,448,810
_________
_________
14-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,
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
$7,133,000 and commitments to extend credit of $18,412,000
for revolving home equity lines, $54,030,000 for commercial
and real estate loans and $16,537,000 for consumer loans.
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 5. 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.
15-Regulatory Restrictions:
The National Banking Laws require the approval 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 1995 of approximately $13,800,000 plus an amount equal to
the net profits of the Banks in 1995 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, 1994, there were no
investments, loans, extensions of credit, or advances from
any of the subsidiary banks to the Corporation.
16-Fair Value of Financial Instruments:
The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments"
("SFAS 107"), which requires the estimation of fair values
of financial instruments, as defined in SFAS 107.
Limitations: Estimates of fair value are made at a
specific point in time, based upon, where available,
relevant market prices and information about the financial
instrument. Such estimates do not include any premium or
discount that could result from offering for sale at one
time the Corporation's entire holdings of a particular financial
instrument. For a substantial portion of the Corporation's
financial instruments, no quoted market exists. Therefore, estimates
Page 30
of fair value are necessarily based on a number of
significant assumptions (many of which
involve events outside the control of management). Such
assumptions include assessments of current economic
conditions, perceived risks associated with these financial
instruments and their counterparties, future expected loss
experience and other factors. Given the uncertainties
surrounding these assumptions, the reported fair values
represent estimates only and therefore, cannot be compared
to the historical accounting model. Use of different
assumptions or methodologies are likely to result in
significantly different fair value estimates.
The estimated fair values presented neither include nor
give effect to the values associated with the Corporation's
banking, trust or other businesses, existing customer
relationships, extensive branch banking network, property,
equipment, goodwill or certain tax implications related to
the realization of unrealized gains or losses. Also, under
SFAS 107, the fair value of non-interest bearing demand
deposits, savings and NOW accounts, and money market deposit
accounts is equal to the carrying amount because these
deposits have no stated maturity. Obviously, this approach
to estimating fair value excludes the significant benefit
that results from the low-cost funding provided by such
deposit liabilities, as compared to alternative sources of
funding. As a consequence, SFAS 107 may distort the actual
fair value of a banking organization that is a going
concern.
The following methods and assumptions were used to
estimate the fair value of each major classification of
financial instruments at December 31, 1994:
Cash and short term investments: Current carrying
amounts approximate estimated fair value.
Securities: For securities at amortized cost and
securities at lower of cost or market, current quoted market
prices were used to determine fair value.
Loans: Fair values were estimated for portfolios of
loans with similar financial characteristics. Loans were
segregated by type and each loan category was further
segmented by fixed and adjustable rate interest terms. The
estimated fair value of the segregated portfolios was
calculated by discounting cash flows through the estimated
maturity and prepayment speeds while using estimated market
discount rates that reflected credit and interest risk
inherent in the loans. The estimate of the maturities and
prepayment speeds was based on the Bank's historical
experience. Cash flows were discounted using market rates
adjusted for portfolio differences.
Deposits with no stated maturity and short-term time
deposits: Current carrying amounts approximate estimated
fair value.
Time deposits: Fair value was estimated by discounting
the contractual cash flows using current market rates
offered in the Corporation's market area for deposits with
comparable terms and maturities.
Short-term borrowing: Current carrying amounts
approximate estimated fair value.
Commitments to extend credit and letters of credit:
The majority of the Corporation's commitments to extend
credit and letters of credit carry current market interest
rates if converted to loans. Because commitments to extend
credit and letters of credit are generally unassignable by
either the Corporation or the borrower, they only have value
to the Corporation and the borrower. The estimated fair
value approximates the recorded deferred fee amounts.
The estimated fair values of the Corporation's
financial instruments are as follows:
December 31, 1994
_____________________________
Carrying Estimated
Amount Fair
Value
___________ ___________
Financial assets:
Cash and short-term investments $ 35,596,076 $ 35,596,076
Securities 185,078,336 182,107,893
Loans:
Commercial and industrial 154,319,013
Real estate 200,139,092
Consumer and other loans 172,567,810
Less: Allowance for loan losses (7,795,385)
___________
Net loans $519,230,530 $523,884,913
Financial liabilities:
Deposits with no stated maturities $444,751,300 $444,751,300
Time deposits 243,826,299 241,421,593
Short-term borrowings 35,321,730 35,321,730
Notional
Unrecognized financial instruments: Amount
___________
Commitments to extend credit $ 88,978,852 $ 66,423
Letters of credit 7,133,188 55,736
In accordance with SFAS 107, disclosure of lease
financing receivables is not required and has not been
included above. The category of consumer and other loans at
December 31, 1994 excludes $41,232,967 in lease financing
receivables. The allowance for loan losses excludes
$139,000 allocated for the lease financing receivables. The
reserve for lease financing receivables has been allocated
only to present the information above on a comparable basis.
December 31, 1993
_____________________________
Carrying Estimated
Amount Fair
Value
___________ ___________
Financial assets:
Cash and short-term investments $ 47,065,899 $ 47,065,899
Securities 218,171,783 223,123,866
Loans:
Commercial and industrial 128,387,767
Real estate 175,530,041
Consumer and other loans 140,499,337
Less: Allowance for loan losses (5,661,427)
___________
Net loans $ 438,755,718 $ 454,763,245
Financial liabilities:
Deposits with no stated maturities $ 451,141,779 $ 451,141,779
Time deposits 229,323,099 231,974,710
Short-term borrowings 2,414,541 2,414,541
Notional
Unrecognized financial instruments: Amount
___________
Commitments to extend credit $ 72,127,950 $ 52,732
Letters of credit 5,047,896 27,978
In accordance with SFAS 107, disclosure of lease
financing receivables is not required and has not been
included above. The category of consumer and other loans at
December 31, 1993 excludes $32,303,905 in lease financing
receivables. The allowance for loan losses excludes
$225,000 allocated for the lease financing receivables. The
reserve for lease financing receivables has been allocated
only to present the information above on a comparable basis.
Page 31
17-Condensed Financial Information - Parent Company Only:
HARLEYSVILLE NATIONAL CORPORATION
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
December 31,
____________________________
1994 1993
__________ __________
Assets:
Cash $ 1,121,457 $ 4,347
Investment in subsidiaries 65,107,347 61,813,433
Investments 764,895 653,509
__________ __________
$ 66,993,699 $ 62,471,289
__________ __________
__________ __________
Liabilities and shareholders' equity:
Other liabilities $ 418,317 $ 0
__________ __________
Total liabilities 418,317 0
__________ __________
Shareholders' equity:
Common stock 5,753,294 5,396,120
Capital surplus 24,415,932 15,009,007
Undivided profits 36,317,506 42,066,162
Unrealized gains on securities
available for sale, net of taxes 88,650 0
__________ __________
Total shareholders' equity 66,575,382 62,471,289
__________ __________
Total liabilities and
shareholders' equity $ 66,993,699 $ 62,471,289
__________ __________
__________ __________
CONDENSED STATEMENTS OF INCOME AND UNDIVIDED PROFITS
Years Ended December 31,
_________________________________________
1994 1993 1992
__________ __________ __________
Revenue:
Dividend from subsidiaries $ 3,463,133 $ 2,689,786 $ 2,582,704
Equity in undistributed net
income from subsidiaries 6,694,909 6,885,786 5,379,315
Dividend reinvestment (691,196) (337,366) 0
Stock options 590,153 0 0
Securities gain, net of taxes 688,226 0 0
Other (256) (152) 0
__________ __________ __________
Net income 10,744,969 9,238,054 7,962,019
Undivided profits:
Beginning of year 42,066,162 35,578,664 34,704,691
Cash and stock dividends (10,793,551) (2,664,788) (6,879,699)
Stock options and awards (2,299,079) (85,768) (274,239)
Valuation allowance for
investment securities (3,312,345) 0 65,892
__________ __________ __________
End of year $36,406,156 $42,066,162 $35,578,664
__________ __________ __________
__________ __________ __________
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
_________________________________________
1994 1993 1992
__________ __________ __________
Operating activities:
Net income $10,744,969 $9,238,054 $7,962,019
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Increase in investment in
subsidiaries (6,694,909) (6,885,786) (5,379,315)
Dividend reinvestment 691,196 337,366 0
Realized gain on sale
of securities (1,058,809) 0 0
Net increase in
other liabilities 370,583 0 0
__________ __________ __________
Net cash provided by
operating activities: 4,053,030 2,689,634 2,582,704
__________ __________ __________
Cash used in investing activities:
Proceeds from sales of
securities 1,083,807 0 0
Purchase of securities
available for sale 0 (24,998) 0
__________ __________ __________
Net cash provided by (used in)
investing activities 1,083,807 (24,998) 0
__________ __________ __________
Cash used in financing activities:
Cash dividends and
fractional shares (3,435,440) (2,664,788) (2,308,200)
Stock options and awards (584,287) 0 (274,239)
__________ __________ __________
Net cash provided by (used
in) financing activities (4,019,727) (2,664,788) (2,582,439)
__________ __________ __________
Increase (decrease) in cash 1,117,110 (152) 265
Cash at beginning of year 4,347 4,499 4,234
__________ __________ __________
Cash at end of year $ 1,121,457 $ 4,347 $ 4,499
__________ __________ __________
__________ __________ __________
Supplemental disclosure of
noncash investing and
financing activities:
Unrealized gain on
securities available for
sale, net of taxes of $47,734 $ 88,650 $ 0 $ 0
__________ __________ __________
__________ __________ __________
Page 32
18-Quarterly Financial Data (Unaudited):
Summarized (unaudited) quarterly financial data for
1994 and 1993 follows:
Three Months Ended
_________________________________________________
March 31 June 30 Sept. 30 Dec. 31
__________ __________ __________ __________
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 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
tax expense 3,726,789 4,236,757 3,797,858 3,531,646
Income tax expense 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
__________ __________ __________ __________
__________ __________ __________ __________
1993:
Interest income $12,372,573 $12,698,589 $12,637,149 $12,641,222
Net interest income 7,451,681 7,760,898 7,723,254 7,883,147
Provision for losses 895,275 727,500 732,500 717,500
Noninterest income 1,023,847 1,092,547 1,621,989 1,129,252
Operating expenses 4,466,902 4,790,515 5,388,183 5,476,741
Income before income
tax expense 3,113,351 3,335,430 3,224,560 2,818,158
Income tax expense 880,078 961,145 1,013,357 698,865
__________ __________ __________ __________
Income before the
cumulative effect of
a change in
accounting for
income taxes 2,233,273 2,374,285 2,211,203 2,119,293
__________ __________ __________ __________
Cumulative effect of a
change in accounting
for income taxes 300,000 0 0 0
__________ __________ __________ __________
Net income $ 2,533,273 $ 2,374,285 $2,211,203 $ 2,119,293
__________ __________ __________ __________
__________ __________ __________ __________
Net income per share $ 0.46 $ 0.42 $ 0.40 $ 0.36
__________ __________ __________ __________
__________ __________ __________ __________
Page 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS:
CONSOLIDATED SUMMARY OF OPERATIONS:
Years Ended December 31,
___________________________________________________________
(Dollars in thousands, except per share data)
1994 1993 1992 1991 1990
_________ _________ _________ _________ _________
INCOME AND EXPENSE:
Interest income $ 54,614 $ 50,350 $ 48,547 $ 46,667 44,617
Interest expense 19,439 19,531 21,850 24,703 24,854
_________ _________ _________ _________ _________
Net interest income 35,175 30,819 26,697 21,964 19,763
Loan loss provision 2,650 3,073 2,299 1,306 921
_________ _________ _________ _________ _________
Net interest income after
loan loss provision 32,525 27,746 24,398 20,658 18,842
Noninterest income 4,525 4,868 3,410 2,932 2,154
Noninterest expense 21,757 20,122 17,040 13,807 12,285
_________ _________ _________ _________ _________
Income before income taxes
and the cumulative effect
of a change in accounting
for income taxes 15,293 12,492 10,768 9,783 8,711
Income taxes 4,548 3,554 2,898 2,485 2,075
_________ _________ _________ _________ _________
Income before the cumulative
effect of a change in
accounting for income taxes 10,745 8,938 7,870 7,298 6,636
Cumulative effect of a change
in accounting for income taxes 0 300 92 0 0
_________ _________ _________ _________ _________
Net income $ 10,745 $ 9,238 $ 7,962 $ 7,298 $ 6,636
_________ _________ _________ _________ _________
_________ _________ _________ _________ _________
PER SHARE*:
Primary. $ 1.84 $ 1.64 $ 1.43 $ 1.31 $ 1.19
Fully diluted 1.84 1.59 1.39 1.29 1.18
Cash dividends paid 0.61 0.49 0.43 0.37 0.31
Primary average shares
outstanding 5,847,473 5,642,790 5,566,155 5,566,129 5,566,129
Diluted average shares
outstanding 5,847,473 5,824,099 5,737,115 5,675,345 5,607,079
*Adjusted for a five percent stock dividend effective 12/30/94, a two-for-one
stock split effective 12/31/93 and a five percent stock dividend effective
12/31/92.
AVERAGE BALANCE SHEET:
Loans $ 515,101 $ 451,057 $ 393,323 $ 333,389 $ 303,351
Investments 199,335 202,015 174,352 126,680 96,590
Other earning assets 7,444 17,595 25,997 30,399 32,634
Total assets 765,037 714,719 632,490 520,103 461,215
Deposits 682,112 643,847 568,100 460,276 406,751
Other interest-bearing
liabilities 8,145 2,014 1,608 1,608 1,520
Shareholders' equity 66,716 59,597 52,635 46,845 41,602
BALANCE SHEET AT YEAR-END:
Loans $ 568,259 $ 476,721 $ 425,034 $ 359,948 $ 323,518
Investments 185,078 218,172 206,037 131,653 106,312
Other earning assets 206 15,467 30,327 23,795 30,811
Total assets 799,779 753,941 707,559 546,988 490,176
Deposits 688,578 680,465 640,239 484,924 433,010
Other interest-bearing
liabilities 35,322 2,415 2,828 2,052 2,022
Shareholders' equity 66,575 62,471 54,560 49,027 43,670
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 34 & 35
Balance Sheet Analysis:
The table below presents the major asset and liability
categories on an average basis for the past three years,
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 savings.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY, INTEREST RATES AND
INTEREST DIFFERENTIAL:
Year Ended December 31, 1994 Year Ended December 31, 1993 Year Ended December 31, 1992
____________________________________________________________________________________________________________________________________
Average Annual Total Average Annual Total Average Annual Total
(Dollars in thousands) Balance Rate Income/ Balance Rate Income/ Balance Rate Income/
Expense Expense Expense
_________ _________ _________ _________ _________ _________ _________ _________ _______
ASSETS
Securities:
Taxable investments $156,944 5.49% $8,611 $161,637 5.76% $ 9,303 $138,918 6.52% $ 9,055
Non-taxable investments* 45,080 8.31 3,746 40,378 8.73 3,526 35,434 9.66 3,422
_________ _________ _________ _________ _________ _________ _________ _________ _______
Total securities* 202,024 6.12 12,357 202,015 6.35 12,829 174,352 7.16 12,477
Money market instruments 7,444 4.41 328 17,640 3.48 614 25,997 3.85 1,000
Loans* 515,101 8.44 43,456 451,057 8.51 38,414 393,323 9.31 36,643
_________ _________ _________ _________ _________ _________ _________ _________ _______
Total earning assets* 724,569 7.75 56,141 670,712 7.73 51,857 593,672 8.44 50,120
Noninterest earning assets 40,468 0 0 44,007 0 0 38,818 0 0
_________ _________ _________ _________ _________ _________ _________ _________ _______
Total assets* $765,037 7.34% $56,141 $714,719 7.26% $51,857 $632,490 7.92% $50,120
_________ _________ _________ _________ _________ _________ _________ _________ _______
_________ _________ _________ _________ _________ _________ _________ _________ _______
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand deposits $101,065 -- % $ 0 $ 88,436 -- % $ 0 $ 73,824 -- % $ 0
Savings deposits 346,413 2.51 8,708 325,675 2.83 9,224 259,562 3.54 9,184
Time deposits and
certificates of
deposit 234,634 4.40 10,330 229,736 4.46 10,249 234,714 5.37 12,605
_________ _________ _________ _________ _________ _______ _________ _________ _________
Total deposits 682,112 2.79 19,038 643,847 3.02 19,473 568,100 3.84 21,789
Other borrowings 8,145 4.92 401 2,014 2.88 58 1,608 3.79 61
Other liabilities 8,064 0 0 9,261 0 0 10,147 0 0
_________ _________ _________ _________ _________ _________ _________ _________ _______
Total liabilities 698,321 2.78 19,439 655,122 2.98 19,531 579,855 3.77 21,850
Shareholders' equity 66,716 0 0 59,597 0 0 52,635 0 0
_________ _________ _________ _________ _________ _________ _________ _________ _______
Total liabilities
and shareholders' equity $765,037 2.54% $ 19,439 $714,719 2.73% $ 19,531 $632,490 3.45% $21,850
_________ _________ _________ _________ _________ _________ _________ _________ _______
_________ _________ _________ _________ _________ _________ _________ _________ _______
Average effective rate on
interest-bearing liabilities $589,192 3.30% $ 19,439 $557,425 3.50% $ 19,531 $495,884 4.41% $21,850
_________ _________ _________ _________ _________ _________ _________ _________ _______
_________ _________ _________ _________ _________ _________ _________ _________ _______
_______________________________________________________________________________________________________________________________
_______________________________________________________________________________________________________________________________
Interest Income/Earning Assets $724,569 7.75% $ 56,141 $670,712 7.73% $ 51,857 $593,672 8.44% $50,120
Interest Expense/Earning Assets $724,569 2.68 $ 19,439 $670,712 2.91 $ 19,531 $593,672 3.68 $21,850
_________ _________ _________
Effective Interest Differential 5.07% 4.82% 4.76%
_________ _________ _________
_________ _________ _________
*Tax Equivalent Basis
Page 36
Investment Portfolio:
The following shows the carrying value of the
Corporation's investment securities:
December 31,
_________________________________________
(Dollars in thousands) 1994 1993 1992
________ ________ ________
U.S. Treasury $ 2,562 $ 2,300 $ 2,753
Obligations of other U.S.
Government agencies and
corporations 16,992 23,863 25,388
Obligations of states and
political subdivisions 44,540 44,983 39,181
Mortgage-backed securities 617 0 0
Other securities 18,156 25,458 28,241
________ ________ ________
Total $ 82,867 $ 96,604 $ 95,563
________ ________ ________
________ ________ ________
The following shows the carrying value of the
Corporation's securities available for sale:
December 31,
_________________________________________
(Dollars in thousands) 1994 1993 1992
________ ________ ________
U.S. Treasury $ 31,045 $ 40,530 $ 41,796
Mortgage-backed securities 66,835 81,038 68,678
Other securities 4,331 0 0
________ ________ ________
Total $ 102,211 $121,568 $110,474
________ ________ ________
________ ________ ________
On January 1, 1994, the Corporation adopted
Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"), 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. As of
December 31, 1994, the adoption of SFAS 115 resulted in an
unrealized loss on securities available for sale, net of
taxes, of $3,312,345.
The reduction in both the Corporation's investment
security portfolio and the securities available for sale
portfolio during 1994 is the result of the Corporation
using the proceeds from security sales, calls and
maturities, to fund loan growth. The investment security
portfolio decreased $13,737,000 in 1994, primarily due to
reductions to U.S. Government agencies and corporations and
other securities, of $6,871,000 and $7,302,000 respectively.
Equity securities totalling $3,642,121 included in the other
securities section of the investment portfolio and
obligations of states and political subdivisions totalling
$2,386,992 were reclassified as securities available for
sale as of January 1, 1994. As a result of management's
decision to take advantage of its tax position and buy
relatively short-term securities that have tax equivalent
yields above that of U.S. Treasury obligations, the
obligations of states and political subdivisions securities
remained relatively unchanged during 1994. The securities
available for sale portfolio decreased $19,357,000 during
1994. From December 31, 1992 to the same date in 1993, the
investment security portfolio increased $1,041,000, and the
securities available for sale portfolio increased $11,094,000.
Page 37
There are no significant concentrations of securities
(greater than 10% of shareholders' equity) in any individual
security issuer.
The maturity analysis of investment securities,
including the weighted average for each category as of
December 31, 1994, is as follows:
Under 1 - 5 5 - 10 Over
(Dollars in thousands) 1 year years years 10 years Total
______ ______ _______ _______ ______
U.S. Treasury:
Carrying value $1,005 $1,557 $ 0 $ 0 $ 2,562
Weighted average yield 3.96% 4.39% 0% 0% 4.22%
Weighted average maturity 1 yr 0 mos
Obligations of other U.S.
Government agencies and
corporations:
Carrying value 8,236 6,757 1,999 0 16,992
Weighted average yield 6.19% 5.34% 7.61% 0% 6.02%
Weighted average maturity 2 yrs 0 mos
Obligations of states and
political subdivisions:
Carrying value 5,125 32,265 6,450 700 44,540
Weighted average yield 10.06% 8.05% 8.15% 9.95% 8.31%
Weighted average maturity 3 yrs 7 mos
Mortgage-backed securities:
Carrying value 0 0 231 386 617
Weighted average yield 0% 0% 6.60% 5.72% 6.05%
Weighted average maturity 10 yrs 10 mos
Other securities:
Carrying value 6,507 10,103 1,048 498 18,156
Weighted average yield 6.48% 7.07% 7.16% 7.36% 6.87%
Weighted average maturity 2 yrs 4 mos
Total:
Carrying value 20,873 50,682 9,728 1,584 82,867
Weighted average yield 7.12% 7.38% 7.89% 8.10% 7.21%
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, 1994, is as follows:
Under 1 - 5 5 - 10 Over
(Dollars in thousands) 1 year years years 10 years Total
______ _____ ______ _______ _______
U.S. Treasury:
Carrying value $3,498 $28,823 $ 0 $ 0 $32,321
Weighted average yield 3.96% 5.35% 0% 0% 5.20%
Weighted average maturity 1 yr 11 mos
Mortgage-backed securities:
Carrying value 0 6,300 3,810 60,663 70,773
Weighted average yield 0% 6.58% 6.31% 5.81% 5.63%
Weighted average maturity 23 yrs 1 mos
Other securities:
Carrying value 0 591 0 3,622 4,213
Weighted average yield 0% 4.59% 0% 4.24% 4.29%
Weighted average maturity 9 yrs 1 mos
Total:
Carrying value 3,498 35,714 3,810 64,285 107,307
Weighted average yield 3.96% 5.55% 6.31% 5.73% 5.63%
Weighted average maturity 16 yrs 2 mos
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 38
Loans:
The following table shows the composition of the Banks'
loans:
December 31,
__________________________________________
(Dollars in thousands)
1994 1993 1992 1991 1990
________ _______ _______ _______ ________
Real estate $200,139 $175,530 $161,171 $117,438 $100,357
Commercial and
industrial 154,319 128,388 112,539 115,851 88,311
Installment 143,783 118,869 111,349 95,574 101,175
Lease financing 41,233 32,304 27,399 21,511 24,318
Other 38,589 32,957 28,574 30,153 29,510
________ _______ ______ _____ _______
Total $578,063 $488,048 $441,032 $380,527 $343,671
________ _______ ______ ______ _______
________ _______ ______ ______ _______
Total loans grew $90,015,000 from $488,048,000 at
December 31, 1993 to $578,063,000 at December 31, 1994. The
loan growth during 1994 was spread proportionately among the
three major loan groups. Real estate loans increased
$24,609,000, commercial and industrial loans grew
$25,931,000 and installment loans rose $24,914,000.
At December 31, 1994, 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.
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 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, 1994:
Within 1 - 5 Over
(In thousands) 1 year years 5 years Total
________ ________ ________ ________
Real estate $ 341 $ 4,071 $195,727 $200,139
Commercial and
industrial 31,872 70,539 51,908 154,319
Installment 2,520 80,661 60,602 143,783
Lease financing 2,827 38,406 0 41,233
________ ________ ________ ________
Total $ 37,560 $193,677 $308,237 $539,474
________ ________ ________ ________
________ ________ ________ ________
Loans with variable
or floating
interest rates $ 25,358 $ 59,062 $107,064 $191,484
Loans with fixed
predetermined
interest rates 12,202 134,615 201,173 347,990
________ ________ ________ ________
Total $ 37,560 $ 193,677 $308,237 $539,474
________ ________ ________ ________
________ ________ ________ ________
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, 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 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) 1994 1993 1992 1991 1990
______ ______ ______ ______ ______
Nonaccrual loans $2,458 $1,876 $1,385 $3,688 $405
Troubled debt
restructurings 1,867 1,548 315 0 0
Delinquent loans 2,145 1,729 1,192 2,086 1,412
______ ______ ______ ______ ______
Total $6,470 $5,153 $2,892 $5,774 $1,817
______ ______ ______ ______ ______
______ ______ ______ ______ ______
Page 39
Allowance for Loan Losses:
A summary of the allowance for loan losses is as follows:
December 31,
________________________________________________
(Dollars in thousands) 1994 1993 1992 1991 1990
________ ________ ________ ________ ________
Average loans $515,101 $451,057 $393,323 $333,389 $303,351
________ ________ ________ _______ ________
________ ________ ________ _______ ________
Allowance, beginning of
period $ 5,886 $ 4,387 $ 3,916 $ 3,199 $ 2,770
________ ________ ________ ________ ________
Loans charged off:
Commercial and industrial 491 1,211 1,010 11 27
Installment 387 401 690 495 469
Real estate 84 212 90 0 0
Lease financing 44 92 162 165 47
________ ________ ________ ________ ________
Total loans charged off 1,006 1,916 1,952 671 543
________ ________ ________ ________ ________
Recoveries:
Commercial and industrial 170 86 8 0 0
Installment 152 155 97 68 45
Real estate 56 76 0 0 0
Lease financing 26 25 19 13 6
________ ________ ________ ________ ________
Total recoveries 404 342 124 81 51
________ ________ ________ ________ ________
Net loans charged off 602 1,574 1,828 590 492
________ ________ ________ ________ ________
Provision for loan losses 2,650 3,073 2,299 1,307 921
________ ________ ________ ________ ________
Allowance, end of period $ 7,934 $ 5,886 $ 4,387 $ 3,916 $ 3,199
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Ratio of net charge offs to
average loans outstanding 0.12% 0.35% 0.46% 0.18% 0.16%
________ ________ ________ ________ ________
________ ________ ________ ________ ________
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.
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. Following a regulatory
examination during the second quarter of 1992, Harleysville
wrote off approximately $835,000, primarily in commercial
and installment loans. Regulatory examinations performed
during 1994 and 1993 found the allowance for loan losses to
be adequate. Because of the Corporation's earnings during
1994, 1993 and 1992, the Corporation was able to absorb the
additional allowance and write-offs and still post increases
in net income over the prior years. The ratio of net charge
offs to average loans dropped from .35% in 1993 to .12% in
1994, as a result of lower net charge offs along with
increased loans outstanding. The 1993 ratio decreased from
the 1992 ratio of .46%, due to the $835,000 in write-offs
mentioned above and management's decisions to charge off
other nonperforming assets throughout the year. Management
believes that the ratio of .12% compares favorably with peer
group ratios.
December 31,
_________________________________________________________________________________________________________
(Dollars in thousands) 1994 1993 1992 1991 1990
_______________ ______________ _________________ _________________ ________________
Percent Percent Percent Percent Percent
of of of of of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
______ ______ ______ ______ ______ ______ ______ ______ ______ ______
Commercial
and industrial $ 2,967 27% $ 2,821 26% $1,786 26% $1,177 30% $ 287 26%
Installment
and other 1,063 32 990 31 895 31 1,198 33 1,508 38
Real estate 1,010 34 879 36 1,163 37 1,167 31 750 29
Lease financing 139 7 225 7 81 6 109 6 345 7
Unallocated 2,755 N/A 971 N/A 462 N/A 265 N/A 309 N/A
______ ______ ______ ______ ______ ______ _____ _____ ______ ______
Total $ 7,934 100% $ 5,886 100% $4,387 100% $3,916 100% $3,199 100%
______ ______ ______ ______ ______ ______ _____ ____ ______ ______
______ ______ ______ ______ ______ ______ _____ ____ ______ ______
Page 40
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.
In May 1993, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS 114"), as amended by "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures,"
("SFAS 118"), which requires that impaired loans be measured
based on the present value of expected future cash flows
discounted at the loans' observable market price or the fair
value of the collateral if the loan is collateral dependent.
Based upon a preliminary analysis, the Corporation does not
expect that the adoption of SFAS 114 and SFAS 118, which are
required for fiscal years beginning after December 15, 1994,
will have a material effect on its net income, capital or
liquidity.
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,
___________________________________________________
1994 1993 1992
_______________ ______________ _______________
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
________ ____ ________ ____ ________ ____
Demand -
noninterest-bearing $101,065 - % $ 88,436 - % $ 73,824 - %
Demand -
interest-bearing 82,747 2.06 76,962 2.59 64,543 3.40
Savings and
money market 263,666 2.66 248,713 2.90 195,019 3.58
Time 218,233 4.43 216,587 4.54 217,085 5.46
Time - $100,000
and over 16,401 4.05 13,149 3.22 17,629 4.31
________ ________ ________
Total $682,112 $643,847 $568,100
________ ________ ________
________ ________ ________
A maturity distribution of certificates of deposit of
$100,000 and over is as follows:
December 31,
_________________________________________
(Dollars in thousands) 1994 1993 1992
_______ _______ _______
Three months or less $ 7,274 $ 5,598 $ 8,217
Over three months to six months 7,809 1,623 2,692
Over six months to twelve months 1,943 901 2,672
Over twelve months 2,202 2,425 1,045
_______ _______ _______
Total $19,228 $10,547 $14,626
_______ _______ _______
_______ _______ _______
INCOME STATEMENT ANALYSIS:
Results of Operations:
Prior to the cumulative effect of a change in
accounting for income taxes, consolidated net income for
1994 was $10,745,000, an increase of $1,807,000, or 20.2%,
over 1993. On a per share basis, primary and fully diluted
earnings were $1.84 in 1994, compared to primary earnings
per share of $1.58 and fully diluted earnings per share of
$1.53 in 1993, prior to the cumulative effect of a change in
accounting for income taxes. The change in accounting for
income taxes increased the 1993 net income by $300,000 to a
total of $9,238,000. This change increased 1993 primary
earnings per share to $1.64 and the fully diluted earnings
per share to $1.59. Consolidated net income increased in
1993 by $1,276,000, a 16.0% increase over 1992. Primary
earnings per share in 1992 were $1.43, and fully diluted
earnings per share were $1.39.
Return on average assets was 1.40% for 1994, compared
to 1.29% for 1993 and 1.26% for 1992, and return on average
shareholders' equity was 16.11% for 1994, compared to 15.50%
for 1993 and 15.13% for 1992.
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 1994 increased by $4,356,000,
or 14.1%, to $35,175,000. Net interest income was
$30,819,000 during 1993, which was 15.4% above the
$26,697,000 reported in 1992.
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% for 1994 and
1993, and 34% for 1992.
Years Ended December 31,
______________________________________
(Dollars in thousands) 1994 1993 1992
_______ _______ _______
Interest income $ 54,614 $ 50,350 $ 48,547
Interest expense 19,439 19,531 21,850
_______ _______ _______
Net interest income 35,175 30,819 26,697
Tax equivalent adjustment 1,527 1,507 1,573
_______ _______ _______
Net interest income
(fully taxable
equivalent) $ 36,702 $ 32,326 $ 28,270
_______ _______ _______
_______ _______ _______
Page 41
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% for 1994 and 1993, and 34% for 1992), analyzes
changes in net interest income for the last three years by
their rate and volume components.
The overall favorable change for the year ended
December 31, 1994 was primarily caused by the increase in
the volume of loans. Total loan interest income increased
$5,043,000, or 13.1%, in 1994, compared to 1993, primarily
as a result of total average loans increasing $64,044,000,
or 14.2%. The increase in loans was primarily the result of
management's efforts to increase the loan portfolio.
Interest income earned on commercial loans contributed
$2,703,000 of this increase, and installment loans and real
estate loans contributed $1,096,000 and $554,000,
respectively. This increase in loans was funded by a
decrease in money market instruments and an increase in
other borrowings. The reduction in the money market
instruments volume caused a $449,000 decrease in interest
income, and the increase in the volume of other borrowings
increased interest expense by $302,000. Other borrowings
include Federal Funds purchased, Federal Home Loan Bank
(FHLB) borrowings, securities sold under agreements to
repurchase and U.S. Treasury demand notes. The overall
favorable change for the year ended December 31, 1993
primarily resulted from management's efforts to increase the
volume of the U.S. Agency portfolio and the mortgage loan
portfolio. Interest income on U.S. Government Agency
securities increased $1,548,000 over 1992, and income on
mortgage loans increased $1,534,000 over 1992. 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 1994, as a result of
management's ability to properly price earning assets and
deposits. Net interest income was positively affected by
the downward trend in market interest rates during 1992, and
such rates tended to stabilize at relatively low levels in
1993.
1994 over/(under) 1993 1993 over/(under) 1992
____________________________________________________________
caused by caused by
___________________ __________________
(Dollars in thousands) Total Total
Change Rate Volume Change Rate Volume
______ ______ ______ ______ ______ ______
Interest Income:
Securities* $(472) $(473) $ 1 $ 354 $(1,612) $1,966
Money market instruments (286) 163 (449) (388) (82) (306)
Loans* 5,042 (352) 5,394 1,771 (3,604) 5,375
______ ______ ______ ______ ______ ______
Total 4,284 (662) 4,946 1,737 (5,298) 7,035
______ ______ ______ ______ ______ ______
Interest Expense:
Savings deposits (516) (1,037) 521 40 (2,304) 2,344
Time deposits and
certificates of deposit 81 (135) 216 (2,357) (2,081) (276)
Other borrowings 343 41 302 (2) (15) 13
______ ______ ______ ______ ______ ______
Total (92) (1,131) 1,039 (2,319) (4,400) 2,081
______ ______ ______ ______ ______ ______
Net interest income $4,376 $ 469 $3,907 $4,056 $ (898) $4,954
______ ______ ______ ______ ______ ______
______ ______ ______ ______ ______ ______
*Tax Equivalent Basis
Page 42
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 (ALCO), using policies and
procedures set by senior management, is responsible for
managing the Banks' rate sensitivity position. The Banks
utilize two principal reports to measure interest rate risk
- gap analysis report and net interest margin report. The
table below shows the interest rate sensitivity gap
position. 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 (6.40)% of earning assets at December 31, 1994 as
compared to (0.07)% at December 31, 1993.
December 31, 1994
___________________________________________________
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 $ 16 $ 0 $ 0 $ 90 $ 100
Loans 209,826 19,434 41,517 179,848 127,438
Securities 17,927 10,274 27,847 78,007 51,023
________ ________ ________ ________ ________
Total rate sensitive
assets $ 227,769 $ 29,708 $ 69,364 $ 257,945 $ 178,561
________ ________ ________ ________ ________
________ ________ ________ ________ ________
LIABILITIES
Certificates of deposit,
$100,000 and over $ 7,274 $ 7,809 $ 1,943 $ 2,202 $ 0
All other certificates
of deposit 35,818 34,963 45,158 108,152 507
Money market
savings funds 64,888 0 0 0 97,331
NOW accounts 29,340 0 0 0 54,489
Savings accounts 26,460 0 0 0 61,741
U.S. Treasury demand note 2,393 0 0 0 0
Other borrowings 32,929 0 0 0 0
________ ________ ________ ________ ________
Total rate sensitive
liabilities $ 199,102 $ 42,772 $ 47,101 $ 110,354 $ 214,068
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Incremental gap $ 28,667 $(13,064) $ 22,263 $ 147,591 $ (35,507)
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Cumulative gap $ 28,667 $ 15,603 $ 37,866 $ 185,457 $ 149,950
________ ________ ________ ________ ________
________ ________ ________ ________ ________
% of earning assets 3.76% 2.04% 4.96% 24.30% 19.64%
________ ________ ________ ________ ________
________ ________ ________ ________ ________
Net Interest Margin:
The 1994 net interest margin of 5.07% increased over
1993 and 1992 net interest margins of 4.84% and 4.76%,
respectively. The net interest margin increase during 1994
was attributed to an increase in the volume of the lower
rate core deposits. 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. In addition,
various regulatory agencies, as an integral part of their
examination process, periodically review the Banks'
allowance for loan losses. Such agencies may require the
Banks to recognize additions to the allowance based on their
judgment of information available to them at the time of
their examinations.
The provision in 1994 was $2,650,000, a decrease of
$423,000, or 13.8%, compared to the 1993 provision of
$3,073,000. Net loans charged off of $602,000 in 1994 were
lower than the net charged off loans of $1,574,000 in 1993.
Net charge offs in 1992 were $1,828,000. During 1994, it
was management's intention to increase loan volumes in order
to increase net interest income. 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 1.40% at
December 31, 1994 increased from the December 31, 1993 ratio
of 1.23%. The 1992 provision of $2,299,000 included the
effect of the charge off of $835,000 loans following the
regulatory examination discussed under "Allowance for Loan
Losses". The ratio of the allowance for loan losses to
loans was 1.0% at December 31, 1992.
Included in the charge offs of 1993 was a commercial
loan for $633,000 charged off on March 31, 1993 and a
commercial loan for $274,000 charged off on September 9,
1993. 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 0.97%
of total loans and net assets acquired in foreclosure at
December 31, 1994 compared to 1.01% at December 31, 1993 and
0.96% at December 31, 1992. The ratio of the allowance to
nonperforming assets was 141.8% at December 31, 1994
compared to 118.9% at December 31, 1993 and 103.3% at
December 31, 1992.
Nonaccruing loans increased $582,000, or 31.0%, during
1994 to their current level of $2,458,000. Efforts to
liquidate or work-out individual accounts are proceeding as
quickly as potential buyers can be located and legal
constraints permit.
Net assets in foreclosure totalled $1,269,000 as of
December 31, 1994, a decrease of $258,000, or 16.9%, from
the December 31, 1993 balance. Sales of foreclosed
properties during 1994 totalled $1,061,000. Net assets in
foreclosure consist primarily of real estate from five
unrelated existing or former loan customers. Efforts to
liquidate assets acquired in foreclosure are proceeding as
quickly as potential buyers can be located and legal
constraints permit.
As of December 31, 1994, there were three unrelated
commercial borrowers with troubled debt restructured loans
totalling $1,868,000. All three customers were complying
with the restructured terms as of December 31, 1994.
Generally accepted accounting principles require
foreclosed assets to be carried at the lower of cost (lesser
of carrying value of
Page 43
asset or fair value at date of acquisition) or
estimated fair value less selling costs.
Accordingly, the Corporation charged off $109,000 during
1994 and $40,000 during 1993 against the allowance for loan
losses, previously established for that purpose, and $61,000
during 1994 and $112,000 during 1993 against current
earnings for selected assets previously acquired to reflect
a permanent decline in fair value. From the 1994 sales of
foreclosed assets, the Corporation was able to recover
$22,000 that was previously charged against the allowance
for loan losses.
Other Operating Income:
Years Ended December 31,
_____________________________________
(Dollars in thousands) 1994 1993 1992
______ ______ ______
Service charges $ 2,314 $ 2,347 $ 2,097
Securities gains, net 530 398 56
Trust income 719 649 424
Other. 962 1,474 833
______ ______ ______
Total other operating income $ 4,525 $ 4,868 $ 3,410
______ ______ ______
______ ______ ______
Other operating income for 1994 decreased $343,000, or
7.0%, compared to 1993, while other operating income for
1993 increased $1,458,000, or 42.8%, over 1992.
Income from service charges on deposit accounts
decreased 1.4% in 1994 and increased 11.9% in 1993, over
1992 levels. The decrease in service charges during 1994
is attributed to lower business service charges. The lower
business service charges are a result of the increase in the
earnings credit, resulting from the rise in interest rates,
which is used to offset service charges.
Net securities gains rose $132,000 to $530,000 in 1994,
compared to net securities gains of $398,000 in 1993.
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.
Securities that were held in the available for sale account
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. In addition, a security for $100,000 was downgraded
to doubtful and written down to $50,000 during 1993.
Income from the Trust Department in 1994 increased
$70,000, or 10.8%, over 1993 Trust Department income of
$649,000. The 1993 Trust Department income increased
$225,000, or 53.1%, over 1992. This growth in Trust
Department income was primarily due to the Corporation's
recent emphasis on marketing the Trust Department's products
and the results of such efforts.
Other income decreased $512,000 during 1994, from
$1,474,000 in 1993 to $962,000 in 1994. This decrease was
primarily a result of a $469,000 gain realized in 1993, when
management decided to sell fixed rate mortgages totalling
approximately $15,000,000 on the secondary market.
Other Operating Expenses:
Years Ended December 31,
______________________________________
(Dollars in thousands) 1994 1993 1992
_______ _______ _______
Salaries $ 8,048 $ 7,238 $ 6,395
Employee benefits 2,934 2,701 2,218
Net occupancy expense 1,355 1,210 1,008
Equipment expense 1,487 1,225 1,091
FDIC premiums 1,518 1,425 1,190
Other expenses 6,415 6,323 5,138
_______ _______ _______
Total other operating expenses $21,757 $ 20,122 $17,040
_______ _______ _______
_______ _______ _______
Other operating expenses rose to $21,757,000 for 1994,
a 5.0% increase over the $20,122,000 for 1993. The 1993
amount was 18.1% above the $17,040,000 for 1992. The rise
in operating expenses has largely been due to the Banks'
growth which resulted in higher personnel costs and also
because of "other expenses" detailed below.
Salaries rose 11.2% in 1994 and 13.2% in 1993. The
increases reflect cost of living increases, merit increases
and additional staff necessitated by an increase in average
assets of 7.0% in 1994 and 13.0% in 1993.
Employee benefits increased by $233,000, or 8.6%,
during 1994, compared with an increase of $483,000, or
21.8%, during 1993. In 1994, profit sharing expenses
represented $171,000 of the increase in employee benefits,
as a result of the Citizens' and Security's employees
becoming eligible to participate in profit sharing. The
remaining increase in 1994 was attributed to an increase in
medical expenses of $68,000, or 10.3%. Contributing to the
rise in 1993, compared to 1992, were increases in medical
insurance, pension plan expenses, profit sharing expenses
and FICA of $168,000, $88,000, $85,000 and $64,000,
respectively.
In November 1992, FASB issued Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("SFAS 112"). That statement
requires employers to recognize any obligation to provide
postemployment (as differentiated from postretirement)
benefits (salary continuation, outplacement services, etc.)
by accruing the estimated liability through a charge to
expense. SFAS 112 was adopted as of January 1, 1994. The
Corporation does not currently provide postemployment
benefits other than through the pension plan, and
accordingly, the adoption of SFAS 112 did not have any
impact on the Corporation's financial position.
Net occupancy costs increased by $145,000, or 12.0%, in
1994, compared with a $202,000, or 20.0%, increase in 1993.
Approximately $50,000 of the 1994 increase is the rent on a
new branch that was opened in August 1993, and the increase
in 1993 is related to a full year of costs associated with
the four branches purchased in May 1992. Equipment expenses
increased by $262,000, or 21.4%, during 1994, and $134,000,
or 12.3%, in 1993. 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.
Federal Deposit Insurance Corporation (FDIC) premiums
increased in 1994 and 1993, by 6.5% and 19.7%, respectively.
These increases were the result of an increase in the
deposits of the Corporation.
Other expenses increased by $92,000, or 1.5%, during
1994, compared with an $1,185,000, or 23.1%, increase during 1993. A
Page 44
$273,000 rise in intangible asset expense during
1994 was offset by a $162,000 reduction in cost associated
with the liquidation of the assets in foreclosure and the
collection of past due loans. Major increases in 1993
included amortization of core deposit intangible, up
$172,000, funding the Supplemental Executive Retirement Plan
and the Directors Fee Deferral Plan, up $400,000, and costs
associated with the liquidation of the assets in foreclosure
and the collection of past due loans, up $279,000.
Income Taxes:
Years Ended December 31,
_____________________________________
(Dollars in thousands) 1994 1993 1992
______ ______ ______
Expected tax expense $5,353 $4,373 $3,661
Tax exempt income net of
interest disallowance (898) (882) (917)
Other 93 63 153
______ ______ ______
Actual tax expense $4,548 $3,554 $2,897
______ ______ ______
______ ______ ______
Early in 1992, FASB issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"), which requires an asset and liability approach
in accounting for the effect of income taxes for financial
reporting purposes. This pronouncement is effective for tax
years beginning after December 15, 1992.
SFAS 109 was adopted on January 1, 1993, except for
Security National Bank, as discussed below. The provisions
of the Statement were applied without restating prior years'
financial statements. Adoption of SFAS 109 resulted in a
reduction of the net deferred tax liability in the amount of
$300,000 in 1993.
In 1992, a net deferred tax liability of $91,903
resulted from Security National Bank adopting SFAS 109.
These deferred tax liabilities are reported separately as
the cumulative effect of a change in the method of
accounting for income taxes in the consolidated statements
of income for the years ending December 31, 1993 and 1992.
CAPITAL:
Capital formation is critical to the Corporation's well-
being and future growth. Capital at the end of 1994 was
$66,575,000, an increase of $4,104,000, or 6.57%, over the
end of 1993. The increase came as a result of the retention
of the Corporation's earnings and from the dividend
reinvestment plan. Capital was also adjusted for the net
unrealized holding losses on the available for sale
securities. 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 8.96% at December
31, 1994 compared with 8.64% at December 31, 1993. Because
the Corporation's only capital is primary capital, the total
capital ratios are the same as the primary capital ratios.
Federal regulators have adopted 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.
Required minimum levels of risk-adjusted capital are
being phased in. 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, 1994, the Corporation's Tier 1 risk-adjusted
capital ratio was 11.25%, and the total risk-adjusted
capital ratio was 12.40%, both well above the 1994
requirements. The risk-based capital ratios of each of the
Corporation's commercial banks also exceeded regulatory
requirements at the end of 1994. The following table
presents a summary of the components of risk-based capital
at December 31, 1994 and the changes in capital that
occurred during 1994.
To supplement the risk-based capital adequacy
guidelines, the Federal Reserve Board (the "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 8.59% at December 31,
1994 and 8.11% at December 31, 1993.
Page 45
Risk-Based Capital:
(Dollars in thousands) Amount
_______
Risk-based capital at
January 1, 1994 $65,425
Net income for the year 10,745
Common stock dividends declared (3,424)
Stock options (585)
Stock dividends (11)
Increase in allowance for loan losses, net 2,048
Purchase of stock under dividend
reinvestment plan 691
Decrease in intangible assets and
other transactions, net 618
_______
Risk-based capital
at December 31, 1994 $75,507
(1)
_______
_______
(1) Composed of:
Tier 1 capital
Common stock $5,753
Surplus 24,416
Undivided profits 39,719
Less intangible assets not allowed (2,315)
_______
Total $67,573
_______
Tier 2 capital
Allowance for loan losses 7,934
_______
Total 7,934
_______
Total risk-based capital $75,507
_______
_______
Capital in excess of
regulatory requirement
at December 31, 1994 $26,801
_______
_______
The Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was signed into law on December 19,
1991. Regulations implementing the prompt corrective action
provisions of FDICIA became effective on December 19, 1992.
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, 1994.
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
$6,512,000 during 1994, and securities available for sale
averaged $110,013,000 during 1994, 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 FHLB, of which Harleysville is a member and to
which Citizens has applied for membership.
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 Riegle-Neal Community Development and Regulatory
Improvement Act was signed into law on September 23, 1994.
This law included a reduction in the regulatory burden of
the banking industry. On September 29, 1994, the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 was
signed into law. The legislation permits interstate banking
twelve months after its enactment into law.
Management believes that the effect of the provisions
of this legislation on liquidity, capital resources and the
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 it were implemented, would have a
material adverse effect upon the liquidity, capital
resources or results of operations, although the general
cost of compliance with numerous and multiple federal and
state laws and regulations does have and in the future may
have a negative impact on the Corporation's results of
operations.
Page 46
FINANCIAL RATIOS AND SUMMARY OF KEY INFORMATION:
Years Ended December 31,
__________________________________________
(Dollars in thousands, except per share data)
1994 1993 1992
__________ __________ __________
Per Share Information*:
Primary . . $ 1.84 $ 1.64 $ 1.43
Fully diluted 1.84 1.59 1.39
Cash dividends paid 0.61 0.49 0.43
Book value (at year-end) 11.57 11.58 9.66
Market Value*:
Bid price of common stock (high) 31.43 21.19 18.14
Bid price of common stock (low) 20.00 16.67 12.25
Average shares outstanding 5,847,473 5,642,790 5,566,155
Average Balance Sheet:
Loans . . . . . $ 515,101 $ 451,057 $ 393,323
Earning assets 721,880 670,667 593,672
Total assets 765,037 714,719 632,490
Deposits 682,112 643,847 568,100
Interest-bearing liabilities
plus demand deposits. 690,257 645,861 569,708
Shareholders' equity 66,716 59,597 52,635
Selected Operating Ratios:
Return on average assets 1.40% 1.29% 1.26%
Return on average shareholders'
equity 16.11% 15.50% 15.13%
Leverage (assets divided by
shareholders' equity) 11.47X 11.99X 12.02X
Average shareholders' equity
as a percentage of:
Average loans 12.95% 13.21% 13.38%
Average deposits 9.78 9.26 9.27
Average assets 8.72 8.34 8.32
Average earning assets 9.24 8.89 8.87
Dividend payout ratio 31.87 28.84 28.79
Average total loans as a
percentage of average
deposits and borrowed funds 74.62 69.84 69.04
Net interest margin on average
earning assets:
Interest income** 7.75% 7.73% 8.44%
Interest expense (2.68) (2.91) (3.68)
Net interest margin 5.07 4.82 4.76
Noninterest margin (2.39) (2.27) (2.30)
*Adjusted for a five percent stock dividend effective
12/30/94, a two-for-one stock split effective 12/31/93 and a
five percent stock dividend effective 12/31/92.
**Tax Equivalent Basis
Page 47
CORPORATE DIRECTORY:
HARLEYSVILLE NATIONAL CORPORATION
483 MAIN STREET, P.O. BOX 195
HARLEYSVILLE, PA 19438
PHONE (215) 256-8851
THE BOARD OF DIRECTORS OF HARLEYSVILLE NATIONAL CORPORATION*
John W. Clemens
Walter E. Daller, Jr.
Richard M. Markley
Bradford W. Mitchell
Martin E. Fossler
William M. Yocum
Harold A. Herr
Walter F. Vilsmeier
Howard E. Kalis, III
THE BOARD OF DIRECTORS OF THE CITIZENS NATIONAL BANK OF LANSFORD
Thomas S. McCready
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 THE SECURITY NATIONAL BANK
Howard E. Kalis, III
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 THE 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
James W. Hamilton Senior Vice President and
Senior Trust Officer
Vernon L. Hunsberger** Senior Vice President and
Chief Financial Officer
Frank J. Lochetto Senior Vice President
Fred C. Reim, Jr. Senior Vice President
David R. Crews Vice President
Dennis L. Detwiler Vice President
Bruce D. Fellman Vice President
Henry R. Gehman Administrative Vice President
and Compliance Officer
Larry E. Nolt Vice President and Trust Officer
Robert L. Reilly Vice President
Thomas L. Spence Vice President
Gregg J. Wagner Vice President and Comptroller
Mikkalya W. Walton 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
Robert H. Kreamer Assistant Vice President
Blair T. Reiley Assistant Vice President
Kenneth R. Stoudt Assistant Vice President
Deborah L. Sweet Assistant Vice President
Harry T. Weierbach Assistant Vice President
Tina K. Borrelli Consumer Loan Officer
James R. Caldwell Banking Officer
Jennifer G. Erb Consumer Loan Officer
Faye Frederick Banking Officer
Pamela L. Hartenstine** Banking Officer and Corporate Secretary
John E. Hartle Audit Director
Elaine H. Hegh Banking Officer
Chris L. Holzer Banking Officer
Sandra M. Hurst Trust Officer
Patricia A. Longcoy Banking Officer
Sue Ellen Nolan Banking Officer
Kathleen Hibbard Nugent Banking Officer
Gregory F. Poehlmann Business Development Officer
Aileen Rolin Mortgage Officer
Patricia H. Rosenberger Trust Officer
Jan Marie Sloat Financial Services Officer
Regina A. Stark Banking Officer
Joan F. Whiteley Commercial Loan Review Officer
Ann P. Wilson Banking Officer
Betty Ruth Yerger Trust Officer
Tracie Young Senior Audit Manager
Page 48
HARLEYSVILLE NATIONAL BANK AND TRUST COMPANY OFFICE MANAGERS
Harleysville Office Antoinette M. Smith
Assistant Vice President and Manager
Skippack Office H. Steen Woodland
Banking Officer and Manager
Limerick Office Joseph A. Giunta
Assistant Vice President and Manager
North Penn Office (North Wales)
Lee-ann Kovac
Banking Officer and Manager
Gilbertsville Office Christine Schondelmaier
Banking Officer and Manager
Hatfield Office Craig E. Morrow
Banking Officer and Manager
North Broad Office (Lansdale) Geoffrey D. Brandon
Banking Officer and Manager
Marketplace Office (Lansdale) Christine M. Matsinko
Banking Officer and Manager
Horsham Office Joseph Chirik, Jr.
Assistant Vice President and Manager
Normandy Farms/Meadowood Offices (Blue Bell and Worcester)
Kay A. Gordon
Banking Officer and Manager
Collegeville Office Timothy B. Canfield
Banking Officer and Manager
Sellersville Office Grace H. Myers
Banking Officer and Manager
Quakertown Offices Nancy F. Kistler
Banking Officer and Manager
THE OFFICERS OF THE CITIZENS NATIONAL BANK OF LANSFORD
Thomas D. Oleksa President and Chief Executive Officer
Martha A. Rex Vice President, Trust Officer, and Cashier
Maurice Infante Vice President and Manager, Consumer Lending
Joseph J. O'Gurek Assistant Vice President and Assistant
Trust Officer
THE OFFICERS OF THE SECURITY NATIONAL BANK
Raymond H. Melcher, Jr. President and Chief Executive Officer
Nicholas Lozorak, Jr. Assistant Vice President
Roxanne S. Selwyn Assistant Vice President
Shirley A. Yost Branch Manager
*Also members of the Board of Directors of Harleysville
National Bank and Trust Company.
**Also an Officer of Harleysville National Corporation.
MEMBER FDIC
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:
Pamela L. Hartenstine, Corporate Secretary
483 Main Street, PO Box 195
Harleysville, PA 19438
Annual Meeting:
The 1995 Annual Meeting of Shareholders of Harleysville
National Corporation will be held at the Presidential
Caterers, Norristown, PA on Tuesday, April 11, 1995 at 9:30
a.m.
NASDAQ Market Makers:
As of December 31, 1994, the following firms made a market
in the Corporation'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, 1994, there were 2,001
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, PO Box 195
Harleysville, PA 19438
(215) 256-8851, or 800 423-3955.
HARLEYSVILLE NATIONAL CORPORATION GRAPHS:
Page - 7. Total Overhead Expense as a Percentage of Average
Assets:
HNC Peer
------ ------
2.92% 3.48%
Peer comparison based on figures reported by the
Federal Reserve as of 9/30/94 for bank holding
companies with assets between $500 million -
$1 billion.
Page - 9. Commercial Loans (scale in millions):
1990 1991 1992 1993 1994
----- ---- ---- ---- ----
$88.3 $115.9 $112.5 $128.4 $154.3
Page - 11. Trust Assets (scale in millions):
1990 1991 1992 1993 1994
----- ---- ---- ---- ----
$42.3 $67.2 $99.4 $139.2 $195.1
Page - 11. Trust Income (scale in millions):
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
$.21 $.30 $.42 $.65 $.72
Page - 12. Lease Volume (scale in millions):
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
$24.3 $21.5 $27.4 $32.3 $41.2
Page - 13. Lease Interest Income (scale in millions):
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
$2.3 $2.2 $2.2 $2.4 $2.7
Page - 15 . Citizens National Bank (CNB) Net Income (scale
in millions):
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
$.88 $.89 $1.07 $1.18 $1.30
Page - 15. Citizens National Bank (CNB) Total Overhead
Expense as a Percentage of Average Assets (scale in
millions):
CNB Peer
----- ------
2.27% 3.48%
Peer comparison based on figures reported by the
Federal Reserve as of 9/30/94 for banks with
assets under $300 million.
Printed on Recycled Paper
Design: Shirley Epps Artwork, Inc.
Photography: Studio 103
Printing: Taggart Printing
EX-27
3
9
YEAR
DEC-31-1994
DEC-31-1994
35390357
205719
0
0
102211333
82867003
79896560
568258882
7934385
799778484
688577599
30321730
9303773
5000000
5753294
0
0
60822088
799778484
43239548
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0
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19438695
35175321
2650226
530286
21757415
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10744969
0
0
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1.84
5.07
2457526
2145109
1867587
0
5886427
1006419
404151
7934385
7934385
0
2755000
EX-21
4
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, Harleysvill, 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
5
Exhibit 23
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, cash flows,
and changes in shareholders' equity for each of the years in the three year
period ended December 31, 1994, which report appears in the December 31, 1994
annual report on Form 10-K of Harleysville National Corporation. Our report
contains an explanatory paragraph which discusses that the Company adopted
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" in 1994 and No. 109, "Accounting for Income
Taxes" in 1993.
/s/ KPMG Peat Marwick LLP
March 27, 1995