Item 1. Business. - -------
History and Business - ----------------------
Harleysville National Corporation, a Pennsylvania corporation (the Corporation), was incorporated in June 1982. On January 1, 1983, the Corporation became the parent bank holding company of Harleysville National Bank and Trust Company (HNB), a wholly owned subsidiary of the Corporation. On February 13, 1991, the Corporation acquired all of the outstanding common stock of The Citizens National Bank of Lansford (CNB). On June 1, 1992, the Corporation acquired all of the outstanding stock of Summit Hill Trust Company (Summit Hill). On September 25, 1992, Summit Hill merged into CNB and is now operating as a branch office of CNB. On July 1, 1994 the Corporation acquired all of the outstanding stock of Security National Bank (SNB). On March 1, 1996, the Corporation acquired all of the outstanding common stock of Farmers & Merchants Bank ("F & M"). F & M was merged into CNB and is now operating as a branch office of CNB. On March 17, 1997, the HNC Financial Company was incorporated as a Delaware Corporation. HNC Financial Company's principal business function is to expand the investment opportunities of the Corporation. The Corporation is primarily a bank holding company that provides financial services through its three bank subsidiaries. Since commencing operations, the Corporation's business has consisted primarily of managing HNB, CNB and SNB (collectively the Banks), and its principal source of income has been dividends paid by the Banks. The Corporation is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended.
HNB, which was established in 1909, CNB, which was established in 1903, and SNB, which was established in 1988, (collectively the Banks), are national banking associations under the supervision of the Office of the Comptroller of the Currency (the OCC). The Corporation and HNB's legal headquarters are located at 483 Main Street, Harleysville, Pennsylvania 19438. CNB's legal headquarters is located at 13-15 West Ridge Street, Lansford, Pennsylvania 18232. SNB's legal headquarters is located at One Security Plaza, Pottstown, Pennsylvania 19464. HNC Financial Company's legal headquarters is located at 300 Delaware Avenue, Suite 1704, Wilmington, Delaware 19801.
In addition to historical information, this Form 10-K contains forward-looking statements. We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of Harleysville National Corporation and its subsidiaries. When we use words such as "believes," "expects," "anticipates," or similar expressions, we are making forward-looking statements.
Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that we incorporate by reference, could affect the future financial results of Harleysville National Corporation and its subsidiaries and could cause those results to differ materially from those expressed in our forward-looking statements contained or incorporated by reference in this document. These factors include the following:
- - operating, legal and regulatory risks; - - economic, political and competitive forces affecting our banking, securities, asset management and credit services businesses; and - - the risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.
As of December 31, 1998, the Corporation had total assets of $1,332,389,000, total shareholders' equity of $122,811,000 and total deposits of $1,033,968,000.
The Banks engage in the full-service commercial banking and trust business, including accepting time and demand deposits, making secured and unsecured commercial and consumer loans, financing commercial transactions, making construction and mortgage loans and performing corporate pension and
personal trust services. Their deposits are insured by the Federal Deposit Insurance Corporation to the extent provided by law. The Banks have 30 branch offices located in Montgomery, Bucks, Carbon, Wayne, Chester and Schuylkill counties, Pennsylvania, 18 of which are owned by the Banks and 12 of which are leased from third parties.
The Banks enjoy a stable base of core deposits and are leading community banks in their service areas. The Banks believe they have gained their position as a result of a customer-oriented philosophy and a strong commitment to service. Senior management has made the development of a sales orientation throughout the Banks one of their highest priorities and emphasizes this objective with extensive training and sales incentive programs that the Company believes are unusual for community banks. The Banks maintain close contact with the local business community to monitor commercial lending needs and believe they respond to customer requests quickly and with flexibility. Management believes these competitive strengths are reflected in the Corporation's results of operations.
As of December 31, 1998, the Corporation and the Banks employed approximately 483 full-time equivalent employees. The Corporation provides a variety of employment benefits and considers its relationships with its employees to be satisfactory.
Competition - -----------
The Banks compete actively with other eastern Pennsylvania financial institutions, many larger than the Banks, as well as with financial and non-financial institutions headquartered elsewhere. The Banks are generally competitive with all competing institutions in their service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts, interest rates charged on loans, and fees and charges for trust services. At December 31, 1998, HNB's legal lending limit to a single customer was $10,829,000 and CNB's and SNB's legal lending limits to a single customer were $3,484,000 and $1,152,000, respectively. Many of the institutions with which the Banks compete are able to lend significantly more than these amounts to a single customer.
Supervision and Regulation - The Registrant - ------------------------------------------------
The Corporation is a registered bank holding company subject to the provisions of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and to supervision by the Board of Governors of the Federal Reserve System. The Bank Holding Company Act requires the Registrant to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than 5% of the voting shares or substantially all of the assets of any institution, including another bank. In addition, the Bank Holding Company Act has been amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act which permits bank holding companies to acquire a bank located in any state subject to certain limitations and restrictions which are more fully described below.
A bank holding company is prohibited from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in non-banking activities unless the Federal Reserve, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the Federal Reserve considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects.
Federal law also prohibits acquisitions of control of a bank holding company without prior notice to certain federal bank regulators. Control is defined for this purpose as the power, directly or indirectly, to direct the management or policies of the bank or bank holding company or to vote 25% or more of any class of voting securities.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stock or other securities of the bank holding company and on taking of such stock or securities of the bank holding company as collateral for loans to any borrower.
Permitted Activities - ---------------------
The Federal Reserve permits bank holding companies to engage in certain activities so closely related to banking or managing or controlling banks as to be proper incident thereto. Other than making an equity investment in a low to moderate income housing limited partnership, the Corporation does not at this time engage in any other permissible activities, nor does the Corporation have any current plans to engage in any other permissible activities in the foreseeable future.
Legislation and Regulatory Changes - -------------------------------------
There are currently a number of issues before Congress that may affect the Corporation and its business operations, and the business operations of its subsidiaries. However, management does not believe these issues will have a material adverse effect on liquidity, capital resources or the results of operations.
Congress is currently considering legislative reforms to modernize the financial services industry. In addition to including repealing the Glass-Steagall Act, which prohibits commercial banks from engaging in various securities activities, the reforms would allow, if the legislation passes, banks to be involved in underwriting and selling insurance. The Corporation does not currently have plans for entering into these activities, but will continue to investigate business opportunities as they become available
The Corporation has analyzed the recently enacted changes to the federal tax law. The impact of such changes on liquidity, operating results, and capital should not be material.
From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Corporation and the Banks. We cannot predict whether the legislation will be enacted or, if enacted, how the legislation would affect the business of the Corporation and the Banks. As a consequence of the extensive regulation of commercial banking activities in the United States, the Corporation's and the Banks' business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business. Except as specifically described above, management believes that the effect of the provisions of the aforementioned legislation on liquidity, capital resources and results of operations of the Corporation will be immaterial.
Management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation, which if they were implemented, would have a material adverse effect upon the liquidity, capital resources, or results of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on the Corporation's results of operations.
Further, the business of the Corporation is also affected by the state of the financial services industry in general. As a result of legal and industry changes, management predicts that the industry will continue to experience an increase in consolidations and mergers as the financial services industry strives for greater cost efficiencies and market share. Management also expects increased diversification of financial products and services offered by the Banks and its competitors. Management believes that such consolidations and mergers, and diversification of products and services may enhance the Banks' competitive position.
Pending Legislation - --------------------
There are numerous proposals before Congress to modify the financial services industry and the way commercial banks and other financial institutions operate. Some of these proposals include changes to the ownership of financial companies and the types of products and services that may be offered by financial institutions. However, it is difficult to determine at this time what effect such provisions may have until they are enacted into law. Management believes that the effect of the provisions of the aforementioned legislation on the liquidity, capital resources, and results of operations of the Corporation will be immaterial. Management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation which, if they were implemented, would have a material adverse effect upon the liquidity,
capital resources, or results of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on the Corporation's results of operations.
Effects of Inflation - ----------------------
Inflation has some impact on the Corporation's and the Banks' operating costs. Unlike many industrial companies, however, substantially all of the Banks' assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation's and the Banks' performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.
Effect of Government Monetary Policies - ------------------------------------------
The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect rates charged on loans or paid for deposits.
The Banks are members of the Federal Reserve and, therefore, the policies and regulations of the Federal Reserve have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Banks' operations in the future. The effect of such policies and regulations upon the future business and earnings of the Corporation and the Banks cannot be predicted.
Environmental Regulations - --------------------------
There are several federal and state statutes which regulate the obligations and liabilities of financial institutions pertaining to environmental issues. In addition to the potential for attachment of liability resulting from its own actions, a bank may be held liable under certain circumstances for the actions of its borrowers, or third parties, when such actions result in environmental problems on properties that collateralize loans held by the bank. Further, the liability has the potential to far exceed the original amount of a loan issued by the bank. Currently, neither the Corporation nor the Banks are a party to any pending legal proceeding pursuant to any environmental statute, nor are the Corporation and the Banks aware of any circumstances that may give rise to liability under any such statute.
Supervision and Regulation - Banks - --------------------------------------
The operations of the Banks are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve and to banks whose deposits are insured by the FDIC. The Banks' operations are also subject to regulations of the OCC, the Federal Reserve and the FDIC. The primary supervisory authority of the Banks is the OCC, who regularly examines the Banks. The OCC has authority to prevent a national bank from engaging in unsafe or unsound practices in conducting its business.
Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, loans a bank makes and collateral it takes, the maximum interest rates a bank may pay on deposits, the activities of a bank with respect to mergers and consolidations and the establishment of branches.
As a subsidiary bank of a bank holding company, the Banks are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or its subsidiaries, or investments in the stock or other securities as collateral for loans. The Federal Reserve Act and Federal Reserve regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its
parent holding company, among others, and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship.
Under the Federal Deposit Insurance Act, the OCC possesses the power to prohibit institutions regulated by it (such as the Banks) from engaging in any activity that would be an unsafe and unsound banking practice or would otherwise be in violation of the law.
Under the Community Reinvestment Act of 1977, as amended ("CRA"), the OCC is required to assess the record of all financial institutions regulated by it to determine if these institutions are meeting the credit needs of the community (including low and moderate income neighborhoods) which they serve and to take this record into account in its evaluation of any application made by any of such institutions for, among other things, approval of a branch or other deposit facility, office relocation, a merger or an acquisition of bank shares. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 amended the CRA to require, among other things, that the OCC make publicly available the evaluation of a bank's record of meeting the credit needs of its entire community, including low and moderate income neighborhoods. This evaluation will include a descriptive rating ("outstanding", "satisfactory", "needs to improve" or "substantial noncompliance") and a statement describing the basis for the rating. These ratings are publicly disclosed.
Under the Bank Secrecy Act, banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions of which the bank is aware in any one day that aggregate in excess of $10,000. Civil and criminal penalties are provided under the Bank Secrecy Act for failure to file a required report, for failure to supply information required by the Bank Secrecy Act or for filing a false or fraudulent report.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires that institutions must be classified, based on their risk-based capital ratios into one of five defined categories, as illustrated below (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized).
In the event an institution's capital deteriorates to the undercapitalized category or below, FDICIA prescribes an increasing amount of regulatory intervention, including: (1) the institution of a capital restoration plan and a guarantee of the plan by a parent institution; and (2) the placement of a hold on increases in assets, number of branches or lines of business. If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and (in critically undercapitalized situations) appointment of a receiver. For well capitalized institutions, FDICIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity. All but well capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Under FDICIA, financial institutions are subject to increased regulatory
scrutiny and must comply with certain operational, managerial and compensation standards to be developed by Federal Reserve Board regulations. FDICIA also requires the regulators to issue new rules establishing certain minimum standards to which an institution must adhere including standards requiring a minimum ratio of classified assets to capital, minimum earnings necessary to absorb losses and minimum ratio of market value to book value for publicly held institutions. Additional regulations are required to be developed relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and excessive compensation, fees and benefits.
Annual full-scope, on site regulatory examinations are required for all the FDIC-insured institutions except institutions with assets under $100 million which are well capitalized, well-managed and not subject to a recent change in control, in which case, the examination period is every 18 months. Banks with total assets of $500 million or more, as of the beginning of fiscal year 1993, are required to submit to their supervising federal and state banking agencies a publicly available annual audit report. The independent accountants of such bank are required to attest to the accuracy of management's report regarding the internal control structure of the bank. In addition, such banks also are required to have an independent audit committee composed of outside directors who are independent of management, to review with management and the independent accountants, the reports that must be submitted to the bank regulatory agencies. If the independent accountants resign or are dismissed, written notification must be given to the bank's supervising government banking agencies. These accounting and reporting reforms do not apply to an institution such as a bank with total assets at the beginning of its fiscal year of less than $500 million, such as CNB or SNB.
FDICIA also requires that banking agencies reintroduce loan-to-value ratio regulations which were previously repealed by the 1982 Act. Loan-to-values limit the amount of money a financial institution may lend to a borrower, when the loan is secured by real estate, to no more than a percentage, set by regulation, of the value of the real estate.
A separate subtitle within FDICIA, called the "Bank Enterprise Act of 1991", requires "truth-in-savings" on consumer deposit accounts so that consumers can make meaningful comparisons between the competing claims of banks with regard to deposit accounts and products. Under this provision, the Bank is required to provide information to depositors concerning the terms of their deposit accounts, and in particular, to disclose the annual percentage yield. The operational cost of complying with the Truth-In-Savings law had no material impact on liquidity, capital resources or reported results of operations.
While the overall impact of fully implementing all provisions of the FDICIA cannot be accurately calculated, Management believes that full implementation of the FDICIA had no material impact on liquidity, capital resources or reported results of operation in future periods.
From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restriction on, the business of the Banks. It cannot be predicted whether any such legislation will be adopted or, if adopted, how such legislation would affect the business of the Banks. As a consequence of the extensive regulation of commercial banking activities in the United States, the Banks' business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business.
Year 2000 - ----------
The following section contains forward-looking statements, which involve risks and uncertainties. The actual impact on the Corporation of the Year 2000 issue could materially differ from that which is anticipated in the forward-looking statements as a result of certain factors identified below.
Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming century date change. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000 (Y2K). The Year 2000 issue affects virtually all companies and organizations.
Corporation's State of Readiness:
The Corporation began addressing the Y2K issue in August 1997. Management has initiated an enterprise-wide program to prepare the Corporation's computer systems and applications for the Year 2000. The Corporation developed a Y2K plan to include assessing the impact of the Y2K issue on the Corporation, renovating systems to alleviate Y2K problems, validating the new systems and implementing them. The Corporation focused on information technology and non-information technology systems. A non-information system could be, for example, a microcontroller in an elevator, which may be subject to Y2K problems. The Corporation also reviewed Y2K issues related to material third parties.
The assessment phase of the Y2K plan included assigning accountabilities throughout the Corporation. An inventory was completed of mainframe and PC based applications, third-party relationships and non-information technology systems. The final step in the assessment phase was to identify non-compliant Y2K systems. The assessment phase was completed in November 1997.
The Corporation began the renovation phase of the Y2K plan in January 1998. The renovation phase included developing action plans to correct non-compliant Y2K systems. The action plans included either enhancing the current system to resolve the Y2K problem or purchasing a new system that is Y2K compliant. The renovation phase was completed in May 1998. The Corporation developed a remediation plan for the non-compliant systems. As of December 31, 1998, 88% of the remediation phase has been completed.
The next phase of the plan was to validate the Y2K compliance of all of the systems. This phase includes developing written test plans and completing the testing of the systems. The validation phase is scheduled to be completed by March 31, 1999. As of December 31, 1998, 74% of the computer applications, including all mission-critical systems, have been validated to be Y2K compliant.
The Corporation has reviewed the Y2K issues related to material third parties and completed an analysis on the loan portfolio. The Corporation's third parties include its vendors and commercial customers. Our material third party relationships are primarily our commercial borrowers. These borrowers may pose a credit risk to the Corporation if they are not Y2K compliant. We have contacted the material commercial customers and their responses were evaluated. We have also performed an analysis on the impact of Y2K issues on the remaining loan portfolio. The Corporation has allocated a portion of the allowance for loans losses as a result of the Y2K issues.
Because most computer systems are, by their very nature, interdependent, it is possible that noncompliant third-party computers could impact the Corporation's computer systems. The Corporation could be adversely affected by the Y2K problem if it or unrelated parties fail to successfully address the problem. The Corporation has taken steps to communicate with the unrelated parties with whom it deals to coordinate Year 2000 compliance. Additionally, we are dependent on external suppliers, such as, wire transfer systems, telephone systems, electric companies, and other utility companies for continuation of service.
Cost of Year 2000:
The Committee has prepared a Y2K budget and has tracked expenses related to the Y2K issue. As of December 31, 1998, the Corporation has expensed $117,000 and capitalized fixed assets of $54,000 related to the Y2K issue. The Corporation has estimated the future Y2K expenditures to be $60,000 and future capitalized fixed assets to be under $69,000. The Y2K project is being funded through operating cash flows.
The cost of the projects and the date on which the Corporation plans to complete both Year 2000 modifications and systems conversions are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties.
Risk of Year 2000:
At present, management believes its progress in remedying the proprietary programs and installing the Y2K compliant upgrades to the third-party vendor mainframe and PC based computer applications is on plan. The Y2K computer problem creates risk for the Corporation from unforeseen problems in its own computer systems and from third-party vendors who provide the majority of mainframe and PC based computer applications. Failure of third-party systems relative to the Y2K issue could have a material impact on the Corporation's ability to conduct business and on its financial position and results of operation.
Contingency Plans:
A contingency plan is being developed to handle the most reasonably likely Y2K worst-case scenario should it occur. The contingency plan will involve obtaining back-up service providers, working up contingency plans and assessing the potential adverse risks to the Corporation. The contingency plan is scheduled to be completed by March 31, 1999. The Corporation has also utilized an independent consulting firm to verify and validate the Corporation's Y2K plans.
Statistical Data - -----------------
The information for this item is listed below and is incorporated by reference to pages 24 through 32 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1998 which pages are included at Exhibit (13) to this Annual Report on Form 10-K.
INVESTMENT PORTFOLIO
The following shows the carrying value of the Corporation's investment securities held to maturity:
The following shows the carrying value of the Corporation's investment securities available for sale:
There are no significant concentrations of securities (greater than 10% of
shareholders' equity) in any individual security issuer. The maturity analysis of investment securities held to maturity, including the weighted average yield for each category as of December 31, 1998, is as follows:
The maturity analysis of securities available for sale, including the weighted average yield for each category, as of December 31, 1998 is as follows:
Weighted average yield is computed by dividing the annualized interest income, including the accretion of discounts and the amortization of premiums, by the carrying value. Tax-exempt securities were adjusted to a tax-equivalent basis and are based on the federal statutory tax rate of 35%.
LOANS The following table shows the composition of the Banks' loans:
The following table details maturities and interest sensitivity of real estate, commercial and industrial, consumer loans and lease financing at December 31, 1998.
The following table details those loans that were placed on nonaccrual status, were accounted for as troubled debt restructuring or were delinquent by 90 days or more and still accruing interest:
ALLOWANCE FOR LOAN LOSSES A summary of the activity in the allowance for loan losses is as follows:
The following table sets forth an allocation of the allowance for loan losses by category. The specific allocations in any particular category may be reallocated in the future to reflect then current conditions. Accordingly, management considers the entire allowance to be available to absorb losses in any category.
DEPOSIT STRUCTURE The following table is a distribution of average balances and average rates paid on the deposit categories for the last three years:
NET INTEREST INCOME
For analytical purposes, the following table reflects tax-equivalent net interest income in recognition of the income tax savings on tax-exempt items such as interest on municipal securities and tax-exempt loans. Adjustments are made using a statutory federal tax rate of 35%.
The rate volume analysis set forth in the following table, which is computed on a tax-equivalent basis (tax rate of 35%), analyzes changes in net interest income for the last three years by their rate and volume components.
(1) The interest earned on nontaxable investment securities and loans is shown on a tax equivalent basis.
Tax-equivalent net interest income was $54,428,000 for 1998, compared to $49,682,000 for 1997, an increase of $4,746,000, or 9.6%. This increase in tax-equivalent net interest income was primarily due to the net $6,627,000 increase related to volume, partially offset by a decrease related to interest rates of $1,881,000. Total interest income increased $8,704,000, the result of higher volumes of interest-earning assets, in part offset by the lower rates experienced during 1998. Interest Income on loans grew 8.0% and investment interest income increased 20.2%. These increases were the result of the 1998 average loan and investment volumes increasing 10.6% and 23.2% respectively. The growth in loans is a result of persistent sales efforts and new branch openings. The increase in investment securities was due to both the institution of a capital leverage program during 1998 and the planned growth related to the increase in deposit funding.
Total interest expense grew $3,958,000 during 1998 or 11.7%, compared to 1997. This growth was the result of increases in all interest-bearing liability categories. The volumes of savings deposits, time deposits and borrowings and other interest-bearing liabilities grew 12.9%, 7.8% and 36.9%, respectively. Borrowings and other interest-bearing liabilities include federal funds purchased, FHLB borrowings, securities sold under agreements to repurchase and U.S. Treasury notes. The increase in borrowings and other interest-bearing liabilities was primarily due to the growth in FHLB borrowings related to the institution of a capital leverage program during 1998.
The 1997 tax-equivalent net interest income was $49,682,000, a $4,351,000 increase compared to $45,331,000 for 1996. This increase in tax-equivalent net interest income was primarily due to both the $7,253,000 increase related to earning asset volumes, partially offset by the $3,114,000 increase in interest expense related to interest-bearing liabilities volumes. The growth in earning asset volumes was primarily in investment securities and loans and the growth in interest-bearing liabilities was principally the result of higher time deposit and borrowing volumes.
Item 2.
Item 2. Properties. - --------------------
The principal executive offices of the Corporation and of HNB are located in Harleysville, Pennsylvania in a two-story office building owned by HNB, built in 1929. HNB also owns the buildings in which twelve of its branches are located and leases space for the other nine branches from unaffiliated third parties under leases expiring at various times through 2036. The principal executive offices of CNB are located in Lansford, Pennsylvania in a two-story office building owned by CNB. Citizens also owns the buildings where its branches are located. The principal executive offices of SNB are located in Pottstown, Pennsylvania, in a building leased by SNB. SNB leases its East End and North End branches, and owns its Pottstown Center branch. HNC Investment Company leases an office in Wilmington, Delaware.
In management's opinion, all of the above properties are in good condition and are adequate for the Registrant's and the Banks' purposes.
Item 3.
Item 3. Legal Proceedings. - ----------------------------
Management, based on consultation with the Corporation's legal counsel, is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Corporation. There are no proceedings pending other than the ordinary routine litigation incident to the business of the Corporation and its subsidiaries - Harleysville National Bank and Trust Company, The Citizens National Bank of Lansford, Security National Bank and HNC Financial Company. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation and the Banks by government authorities.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. - ---------------------------------------------------------------------
No matter was submitted during the fourth quarter of 1998 to a vote of holders of the Corporation's Common Stock. PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Shareholder - -------------------------------------------------------------------------------- Matters. - --------
The information required by this Item is incorporated by reference to pages 8, 19 and 20 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1998, which pages are included at Exhibit (13) to this Annual Report on Form 10-K.
Item 6.
Item 6. Selected Financial Data. - ------------------------------------
The information required by this Item is incorporated by reference to page 24 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1998, which pages are included at Exhibit (13) to this Annual Report on Form 10-K.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations. - --------------
The information required by this Item is incorporated by reference to pages 24 through 32 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1998, which pages are included at Exhibit (13) to this Annual Report on Form 10-K.
Item 7.A. Quantitative and Qualitative Disclosure about Market Risk. - ----------------------------------------------------------------------------
The information required by this Item is incorporated by reference to pages 28 and 29 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1998, which pages are included at Exhibit (13) to this Annual Report on Form 10-K.
Item 8.
Item 8. Financial Statements and Supplementary Data. - ---------------------------------------------------------
The information required by this Item is incorporated by reference to pages 8 through 23 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1998, which pages are included at Exhibit (13) to this Annual Report on Form 10-K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure. - ---------------------
None. PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant. - -------------------------------------------------------------------
The information required by this Item with respect to the Corporation's directors is incorporated by reference to pages 15 through 18 of the Corporation's Proxy Statement relating to the Annual Meeting of Shareholders to be held April 13, 1999.
Item 11.
Item 11. Executive Compensation. - ----------------------------------
The information required by this Item is incorporated by reference to pages 19 through 24 of the Corporation's Proxy Statement relating to the Annual Meeting of Shareholders to be held April 13, 1999.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. - -------------------------------------------------------------------------------
The information required by this Item is incorporated by reference to pages 15 through 16 of the Corporation's Proxy Statement relating to the Annual Meeting of Shareholders to be held April 13, 1999.
Item 13.
Item 13. Certain Relationships and Related Transactions. - -------------------------------------------------------------
The information required by this Item is incorporated by reference to page 28 of the Corporation's Proxy Statement relating to the Annual Meeting of Shareholders to be held April 13, 1999, and to page 17 of the Corporation's Annual Report to Shareholders for the year ended December 31, 1998, which page is included at Exhibit (13) to this Annual Report on Form 10-K.
PART IV -------
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. - ---------------------------------------------------------------------- --------
(a) Financial Statements, Financial Statement Schedules and Exhibits Filed:
(1) Consolidated Financial Statements Page ---- Harleysville National Corporation and Subsidiary: Consolidated Balance Sheets as of December 31, 1998 and 1997 9* Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 10* Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 11* Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 12* Notes to Consolidated Financial Statements 13-23* Independent Auditors' Report 8*
(2) Financial Statement Schedules
Financial Statements Schedules are omitted because the required information is either not applicable, not required, or the information is included in the consolidated financial statements or notes thereto.
- -------------------------------------------------------------------------------- *Refers to the respective page of the Annual Report to Shareholders. The Consolidated Financial Statements and Notes to Consolidated Financial Statements and Auditor's Report thereon on pages 8 to 23 of the Annual Report to Shareholders, are incorporated herein by reference and attached at Exhibit 13 to this Annual Report on Form 10-K. With the exception of the portions of such Annual Report specifically incorporated by reference in this Item and in Items 1, 5, 6, 7 and 8, such Annual Report shall not be deemed filed as part of this Annual Report on Form 10-K or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934.
(3) Exhibits
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HARLEYSVILLE NATIONAL CORPORATION
Date: March 11, 1999 By:/s/ Walter Daller, Jr. -------------------------- Walter E. Daller, Jr. President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX - --------------
Exhibit -------
(10.3) Supplemental Executive Retirement Plan.
(13) Excerpts from the Corporation's 1998 Annual Report to Shareholders (This excerpt includes only page 1 and pages 8 through 32, which are incorporated in this Report by reference.)
(21) Subsidiaries of Registrant
(23) Consent of Grant Thornton LLP, Independent Certified Public Accountants
(99) Additional Exhibits
None.