-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SaBQbW3+YjrWQ0z4622hL401qWReeL2lZWIoPytXkM+nnZftwhd8SGjtUeWVUH65 C/1UygakYMWLEGJ3t9yYyA== 0000702902-01-500013.txt : 20010514 0000702902-01-500013.hdr.sgml : 20010514 ACCESSION NUMBER: 0000702902-01-500013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARLEYSVILLE NATIONAL CORP CENTRAL INDEX KEY: 0000702902 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232210237 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15237 FILM NUMBER: 1629789 BUSINESS ADDRESS: STREET 1: 483 MAIN ST STREET 2: P O BOX 195 CITY: HARLEYSVILLE STATE: PA ZIP: 19438 BUSINESS PHONE: 2152568851 MAIL ADDRESS: STREET 1: 483 MAIN STREET CITY: HARLEYSVILLE STATE: PA ZIP: 19438 10-Q 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001. -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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)
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. --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ___. No ___. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 9,143,362 shares of Common Stock, $1.00 par value, outstanding on April 30, 2001. PAGE 1
HARLEYSVILLE NATIONAL CORPORATION INDEX TO FORM 10-Q REPORT Page ---- Part I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets - March 31, 2001 and December 31, 2000. . . . . . . . . . . . . . 3 Consolidated Statements of Income - Three Months Ended March 31, 2001 and 2000. . . . . . . . 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2001 and 2000. . . . . . 5 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . 20 Part II. Other Information Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Item 2. Change in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . 21 Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 21 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
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PART 1. FINANCIAL INFORMATION HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) March 31, 2001 December 31, 2000 ---------------- ------------------- ASSETS Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . $ 55,485 $ 52,018 Interest-bearing deposits in banks. . . . . . . . . . . . . . . . . 5,073 3,507 ---------------- ------------------- Total cash and cash equivalents . . . . . . . . . . . . . . . . 60,558 55,525 ---------------- ------------------- Investment securities available for sale. . . . . . . . . . . . . . 601,020 570,619 Investment securities held to maturity (market value $30,875 and $31,601, respectively) . . . . . . . . . 29,862 30,841 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,227,068 1,209,605 Less: Unearned income . . . . . . . . . . . . . . . . . . . . . . . 2,524 2,450 Allowance for loan losses. . . . . . . . . . . . . . . . . (15,295) (15,210) ---------------- ------------------- Net loans. . . . . . . . . . . . . . . . . . . . . . . 1,214,297 1,196,845 ---------------- ------------------- Bank premises and equipment, net. . . . . . . . . . . . . . . . . . 21,893 21,870 Accrued income receivable . . . . . . . . . . . . . . . . . . . . . 12,614 12,391 Other real estate owned . . . . . . . . . . . . . . . . . . . . . . 527 288 Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . . 1,628 1,697 Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . 38,162 37,471 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,671 7,666 ---------------- ------------------- Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 1,989,232 $ 1,935,213 ================ =================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing. . . . . . . . . . . . . . . . . . . . . . . $ 223,815 $ 227,446 Interest-bearing: Checking accounts. . . . . . . . . . . . . . . . . . . . . . . 162,442 163,807 Money market accounts. . . . . . . . . . . . . . . . . . . . . 360,186 333,622 Savings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 167,059 161,233 Time, under $100,000 . . . . . . . . . . . . . . . . . . . . . 441,450 430,074 Time, $100,000 or greater. . . . . . . . . . . . . . . . . . . 176,044 172,868 ---------------- ------------------- Total deposits. . . . . . . . . . . . . . . . . . . . . . 1,530,996 1,489,050 Accrued interest payable. . . . . . . . . . . . . . . . . . . . . . 24,486 22,346 U.S. Treasury demand notes. . . . . . . . . . . . . . . . . . . . . 2,015 2,055 Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . 22,500 44,500 Federal Home Loan Bank (FHLB) borrowings. . . . . . . . . . . . . . 115,750 110,750 Securities sold under agreements to repurchase. . . . . . . . . . . 84,384 74,083 Guaranteed preferred beneficial interest in Corporatation's subordinated debentures . . . . . . . . . . . . . . . . . . . . . 5,155 - Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 24,647 18,893 ---------------- ------------------- Total liabilities . . . . . . . . . . . . . . . . . . . . 1,809,933 1,761,677 ---------------- ------------------- Shareholders' Equity: Series preferred stock, par value $1 per share; authorized 3,000,000 shares, none issued . . . . . . . . . . - - Common stock, par value $1 per share; authorized 30,000,000 shares; issued and outstanding 9,254,062 shares in 2001 and 9,253,762 shares in 2000 . . . . . . . . . . . . . . . . . . 9,254 9,254 Additional paid in capital. . . . . . . . . . . . . . . . . . . 79,878 79,869 Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . 87,015 83,244 Treasury stock, at cost: 2001- 87,100; 2000 - 8,500 . . . . . . (3,111) (253) Accumulated other comprehensive income. . . . . . . . . . . . . 6,263 1,422 ---------------- ------------------- Total shareholders' equity. . . . . . . . . . . . . . . . 179,299 173,536 ---------------- ------------------- Total liabilities and shareholders' equity. . . . . . . . $ 1,989,232 $ 1,935,213 ================ =================== See accompanying notes to consolidated financial statements.
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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended (Dollars in thousands except weighted average number March 31, of common shares and per share information) --------- 2001 2000 ---------- ----------- INTEREST INCOME: Loans, including fees . . . . . . . . . . . . . . . . . . $ 22,570 $ 20,790 Lease financing . . . . . . . . . . . . . . . . . . . . . 2,504 2,027 Investment securities: Taxable. . . . . . . . . . . . . . . . . . . . . . . . 6,532 5,718 Exempt from federal taxes. . . . . . . . . . . . . . . 2,818 2,659 Federal funds sold. . . . . . . . . . . . . . . . . . . . 24 125 Deposits in banks . . . . . . . . . . . . . . . . . . . . 61 104 ---------- ----------- Total interest income . . . . . . . . . . . . . . . 34,509 31,423 ---------- ----------- INTEREST EXPENSE: Savings deposits. . . . . . . . . . . . . . . . . . . . . 5,160 3,969 Time, under $100,000. . . . . . . . . . . . . . . . . . . 6,321 5,474 Time, $100,000 or greater . . . . . . . . . . . . . . . . 2,821 2,497 Borrowed funds. . . . . . . . . . . . . . . . . . . . . . 3,056 3,140 ---------- ----------- Total interest expense. . . . . . . . . . . . . . . 17,358 15,080 ---------- ----------- Net interest income . . . . . . . . . . . . . . . . 17,151 16,343 Provision for loan losses . . . . . . . . . . . . . . . . 647 506 ---------- ----------- Net interest income after provision for loan losses 16,504 15,837 ---------- ----------- OTHER OPERATING INCOME: Service charges . . . . . . . . . . . . . . . . . . . . . 1,027 923 Security (losses) gains, net . . . . . . . . . . . . . . 721 (112) Trust income. . . . . . . . . . . . . . . . . . . . . . . 827 692 Bank-owned life insurance . . . . . . . . . . . . . . . . 691 347 Other Income. . . . . . . . . . . . . . . . . . . . . . . 926 803 ---------- ----------- Total other operating income. . . . . . . . . . . . 4,192 2,653 ---------- ----------- Net interest income after provision for loan losses and other operating income . . . . . . . . . . . 20,696 18,490 ---------- ----------- OTHER OPERATING EXPENSES: Salaries, wages and employee benefits . . . . . . . . . . 6,300 5,732 Occupancy . . . . . . . . . . . . . . . . . . . . . . . . 902 776 Furniture and equipment . . . . . . . . . . . . . . . . . 1,207 1,184 Other expenses. . . . . . . . . . . . . . . . . . . . . . 4,056 3,236 ---------- ----------- Total other operating expenses. . . . . . . . . . . 12,465 10,928 ---------- ----------- Income before income taxes. . . . . . . . . . . . . 8,231 7,562 Income tax expense. . . . . . . . . . . . . . . . . . . . 1,700 1,517 ---------- ----------- Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 6,531 $ 6,045 ========== =========== Weighted average number of common shares: Basic . . . . . . . . . . . . . . . . . . . . . . 9,205,802 9,275,363 ========== =========== Diluted . . . . . . . . . . . . . . . . . . . . . 9,373,698 9,285,955 ========== =========== Net income per share information: Basic . . . . . . . . . . . . . . . . . . . . . . $ 0.71 $ 0.65 ========== =========== Diluted . . . . . . . . . . . . . . . . . . . . . $ 0.70 $ 0.65 ========== =========== Cash dividends per share. . . . . . . . . . . . . . . . . $ 0.30 $ 0.26 ========== =========== See accompanying notes to consolidated financial statements.
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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands). . . . . . . . . . . . . . . . . . . . . . . . . . . Three Months Ended March 31, OPERATING ACTIVITIES: . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 2000 --------- --------- Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,531 $ 6,045 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . 647 506 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 646 666 Net amortization of investment securities discount/premiums. . . . . . . . . . . . . . . . . . . . . 90 159 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 7,185 3,647 Net realized security (gain) loss . . . . . . . . . . . . . . . . . . . (721) 112 Increase in accrued income receivable . . . . . . . . . . . . . . . . . (223) (988) Increase in accrued interest payable. . . . . . . . . . . . . . . . . . 2,140 248 Increase in other assets. . . . . . . . . . . . . . . . . . . . . . . . (1,004) (784) Net decrease in other liabilities . . . . . . . . . . . . . . . . . . . (4,037) (1,736) Increase in unearned income . . . . . . . . . . . . . . . . . . . . . . (74) (1,901) Write-down of other real estate owned . . . . . . . . . . . . . . . . . - 67 Decrease in intangible assets . . . . . . . . . . . . . . . . . . . . . 69 90 ----------- --------- Net cash provided by operating activities. . . . . . . . . . . . . . 11,249 $ 6,131 ----------- --------- INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale . . . . . $ 71,773 $ 20,300 Proceeds, maturity or calls of investment securities held to maturity . . 979 1,263 Proceeds, maturity or calls of investment securities available for sale . 22,707 3,807 Purchases of investment securities held to maturity . . . . . . . . . . . - (10,840) Purchases of investment securities available for sale . . . . . . . . . . (116,804) (37,112) Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . (18,607) (25,544) Net increase in premises and equipment. . . . . . . . . . . . . . . . . . (669) (893) Purchase of bank-owned life insurance . . . . . . . . . . . . . . . . . . (691) (346) Proceeds from sales of other real estate. . . . . . . . . . . . . . . . . 341 377 ---------- --------- Net cash used in investing activities. . . . . . . . . . . . . . . . $ (40,971) $(48,988) --------- --------- FINANCING ACTIVITIES: Net increase in deposits. . . . . . . . . . . . . . . . . . . . . . . . . $ 41,946 $ 83,250 (Decrease) increase in U.S. Treasury demand notes . . . . . . . . . . . . (40) 995 (Decrease) increase in federal funds purchased. . . . . . . . . . . . . . (22,000) 15,000 Increase in FHLB borrowings. . . . . . . . . . . . . . . . . . . . . . . 5,000 - Increase (decrease) in securities sold under agreement. . . . . . . . . . 10,301 (54,118) Proceeds from long-term debt. . . . . . . . . . . . . . . . . . . . . . . 5,155 Cash dividends & fractional shares. . . . . . . . . . . . . . . . . . . . (2,759) (2,438) Purchase of Treasury Stock. . . . . . . . . . . . . . . . . . . . . . . . (2,858) - Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 14 ---------- --------- Net cash provided by financing activities . . . . . . . . . . . . . . . $ 34,755 $ 42,703 ---------- --------- Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . $ 5,033 $ (154) Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . 55,525 63,491 ---------- --------- Cash and cash equivalents at end of the period. . . . . . . . . . . . . . . $ 60,558 $ 63,337 ========== ========= Cash paid during the period for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,219 $ 14,832 ========== ========= Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 3,348 ========== ========= Supplemental disclosure of non cash investing and financing activities: Transfer of assets from loans to other real estate owned . . . . . . $ 580 $ 411 ========== ========= See accompanying notes to consolidated financial statements.
PAGE 5 HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of Harleysville National Corporation (the "Corporation") and its wholly owned subsidiaries - Harleysville National Bank and Trust Company ("Harleysville"), Citizens National Bank ("Citizens"), Security National Bank ("Security") (collectively, the "Banks"), HNC Financial Company and HNC Reinsurance Company - as of March 31, 2001, the results of its operations for three month periods ended March 31, 2001 and 2000 and the cash flows for the three month periods ended March 31, 2001 and 2000. This quarterly report refers to the corporation's subsidiary banks, collectively as "the banks." It is suggested that these unaudited consolidated financial statements be read in conjunction with the audited consolidated financial statements of the corporation and the notes thereto set forth in the corporation's 2000 annual report. All prior period amounts were restated to reflect the acquisition of Northern Lehigh Bancorp. The results of operations for the three-month periods ended March 31, 2001 and 2000 are not necessarily indicative of the results to be expected for the full year. NOTE 2 - Income tax expense is less than the amount calculated using the statutory tax rate, primarily the result of tax exempt income earned from state and municipal securities and loans. NOTE 3 - The Corporation accounts for comprehensive income under the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards to provide prominent disclosure of comprehensive income items. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Other comprehensive income consists of net unrealized gains on investment securities available for sale. Comprehensive income for the first three months of 2001 was $11,372,000, compared to $3,787,000 for the first three months of 2000. NOTE 4 - The Corporation adopted the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate and their major customers. The company has one reportable segment, "Community Banking." All of the Corporation's activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Corporation supports the others. NOTE 5 - In June 1998, the Financial Accounting standard Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activity" as amended in June, 1999 by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and in June 2000, by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, " (collectively SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for changes in the fair value of derivative (gains and losses) depends on the intended use of the derivative and resulting designation. On January 1, 1999, the Corporation adopted SFAS No. 133. During July 2000, the Corporation reclassified $7,574,000 of investment securities from the held to maturity category to the available for sale category, due to its acquisition of Citizens Bank and Trust Company. As a result of the reclassification, the Corporation recorded $19,000 net of taxes unrealized holding losses in accumulated other comprehensive income. PAGE 6 NOTE 6 - On April 28, 2000, the Corporation consummated its acquisition of Citizens Bank and Trust Company. Under the terms of the merger, accounted for as a pooling-of-interest, Citizens Bank and Trust Company's shareholders will receive 166 shares of Harleysville National Corporation common stock for each share of common stock of Citizens Bank and Trust Company. Upon the completion of the acquisition, Citizens Bank and Trust Company's banking operations will be merged into those of Citizens National Bank, a wholly owned subsidiary of Harleysville National Corporation. NOTE 7 - On October 12, 2000, the Board of Directors declared a 5% stock dividend payable November 9, 2000, to shareholders of record October 26, 2000. All prior period amounts were restated to reflect this 5% stock dividend. NOTE 8 - The Corporation issued $5,155,000 of 10.2% junior subordinate deferrable interest debentures (the debentures) to Harleysville Statutory Trust 1 (the Trust), a Connecticut business trust, in which the Corporation owns all of the common equity. The debentures are the sole asset of the Trust. The Trust issued $5,000,000 of preferred securities to investors. The Corporation's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Corporation of the Trust's obligations under the preferred securities. The preferred securities must be redeemed upon maturity of the subordinate debentures on February 22, 2031. NOTE 9 - The Corporation incorporated HNC Reinsurance Company during March 2001. HNC Reinsurance Company is a reinsurer of consumer loan credit life and accident and health risks. Through the Reinsurance Company, the Corporation will assume a portion of the credit insurance risk in return for income from insurance premiums. NOTE 10 - On December 14, 2000, the Board of Directors of Harleysville National Corporation approved a plan to repurchase up to 453,000 shares of its outstanding common stock. The repurchased shares will be used for general corporate purposes. PAGE 7 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS - ----------------------- The following is management's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in its accompanying consolidated financial statements for the corporation, the banks and HNC Financial Company. The corporation's consolidated financial condition and results of operations consist almost entirely of the banks' financial condition and results of operations. Current performance does not guarantee, and may not be indicative of similar performance in the future. These are unaudited financial statements and, as such, are subject to year-end audit review. In addition to historical information, this Form 10-Q 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
OVERVIEW - -------- The Corporation's growth in earning assets, increase in other income, continued control of operating expenses and an emphasis on loan quality contributed to the favorable first quarter results. First quarter 2001 basic earnings per share of $.71, increased 9.2% over first quarter 2000 basic earnings per share of $.65. First quarter diluted earnings per share in 2001 and 2000 were $.70 and $.65, respectively. Net income of $6,531,000 increased 8.0% over the first quarter 2000 net income of $6,045,000. The Corporation's consolidated total assets were $1,989,232,000 at March 31, 2001, 9.6% above the March 31, 2000 level of $1,815,079,000. The increase in net income during the first three months of 2001, compared to the same period in 2000, is the result of both higher net interest income and other operating income, partially offset by higher other operating expenses. Net interest income grew $808,000, primarily as a result of an 8.2% rise in average earning assets. Other operating income rose $1,539,000, due to higher trust fees, bank-owned life insurance income and gains on the sale of PAGE 8 securities. A rise in other operating expenses, related to new fee based initiatives and to the overall growth in the Banks offset these increases. For the three months ended March 31, 2001, the annualized return on average shareholders' equity and the annualized return on average assets were 14.89% and 1.35%, respectively. For the same period in 2000, the annualized return on average shareholders' equity was 16.26% and the annualized return on average assets was 1.35%. The lower annualized return on average shareholder's equity was largely due to the increase in average capital related to the improvement in the net unrealized gains on the securities available for sale investment securities. The average accumulated other comprehensive income at March 31, 2001 was a gain of $2,615,000, compared to a loss at March 31, 2000 of $11,847,000. Excluding unrealized gains and losses on securities available for sale, the annualized return on average shareholder's equity for March 31, 2001 and 2000 were 15.11% and 15.06%, respectively. The banks continue to focus on the quality of their loan portfolios. Nonperforming assets, including nonaccrual loans, restructured loans and other real estate owned were .30% of total assets at March 31, 2001, compared to .29% at December 31, 2000 and .32% at March 31, 2000. As of March 31, 2001, loans past due 90 or more days and still accruing interest were $167,000 in the aggregate, compared to $514,000 at December 31, 2000 and $546,0000 at March 31, 2000. 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, trust income 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 will be reviewed in more detail in the following discussion. NET INTEREST INCOME AND RELATED ASSETS AND LIABILITIES - ------------------------------------------------------------- Net interest income, for the first three months of 2001, of $17,151,000 increased $808,000, or 4.9%, over the same period in 2000 which produced net interest income of $16,343,000. As illustrated in the table below, the primary source of this increase was a rise in interest income resulting from increases to earning asset volumes in the first three months of 2001, compared to the same period in 2000. The increase in interest income was partially offset by a rise in interest expense, the result of higher rates and volumes. The first quarter 2001 net interest income was also affected by the funding cost of bank-owned life insurance (BOLI). While bank deposits fund BOLI, the BOLI income is recognized as other income. The average balance of BOLI in the first quarter of 2001 was $37,792,000, compared to $25,646,000 during the first quarter of 2000. The rate-volume variance analysis set forth in the table below, which is computed on a tax-equivalent basis (tax rate of 35%), analyzes changes in net interest income for the three months ended March 31, 2001 over March 31, 2000 by their rate and volume components.
Three Months Ended March 31, 2001 Over/Under March 31, 2000 Total Caused by: ----------- Variance Rate Volume ---------- ----------- -------- Interest Income: Securities *. . . . . . . . . . . . . . . $ 1,059 ($79) $ 1,138 Money market instruments. . . . . . . . . (144) 124 (268) Loans * . . . . . . . . . . . . . . . . . 2,265 390 1,875 ---------- ----------- -------- Total. . . . . . . . . . . . . . . . . 3,180 435 2,745 ---------- ----------- -------- Interest Expense: Savings deposits. . . . . . . . . . . . . 1,191 615 576 Time deposits and certificates of deposit 1,171 720 451 Other borrowings. . . . . . . . . . . . . (84) (91) 7 ---------- ----------- -------- Total . . . . . . . . . . . . . . . . 2,278 1,244 1,034 ---------- ----------- -------- Net interest income . . . . . . . . . . . . $ 902 ($809) $ 1,711 ========== =========== ======== *Tax Equivalent Basis
PAGE 9 Taxable-equivalent net interest income was $18,925,000 for the first three months of 2001, compared to $18,023,000 for the same period in 2000, a 5.0% or $902,000 increase. This rise in taxable-equivalent net interest income was primarily due to a $1,711,000 increase related to volume, which was partially offset by a reduction in net interest income, related to rate. Total taxable-equivalent interest income grew $3,180,000, primarily the result of the higher volumes in both the security and loan earning asset categories. Average year-to-date loans and securities grew $90,199,000 and $63,694,000, respectively at March 31, 2001, compared to the same period in 2000. Total interest expense grew $2,278,000 during the first three months of 2001, compared to the same period in 2000. This growth was principally the result of higher rates and volumes associated with savings deposits and time deposits. The average year-to-date savings deposits increased $75,020,000 or 12.6%, compared to the first three months of 2000. The primary increase in savings deposits was related to a rise in high rate money market account products introduced throughout 2000. Other borrowings grew less than 1% during this period. During the last year, the Corporation has utilized savings and time deposits to meet funding demands, rather than other borrowings, due to the lower rates experienced on savings and time deposits during this period. Other borrowings include federal funds purchased, FHLB borrowings, securities sold under agreements to repurchase, U. S. Treasury demand notes and junior subordinate deferrable interest debentures. The Corporation actively manages its interest rate sensitivity positions. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve consistent growth in net interest income. The Asset/Liability Committee, using policies and procedures approved by the Banks' Boards of Directors, is responsible for managing the rate sensitivity position. The Banks manage interest rate sensitivity by changing mix and repricing characteristics of their assets and liabilities through their investment securities portfolio, borrowings from the FHLB and their offering of loan and deposit terms. The nature of the Banks' current operations is such that is not subject to foreign currency exchange or commodity price risk. The Banks do not own trading assets and they do not have any hedging transactions in place such as interest rate swaps, caps or floors. The Banks utilize three principal reports to measure interest rate risk: asset/liability simulation reports, gap analysis reports and net interest margin reports. Management also simulates possible economic conditions and interest rate scenarios in order to quantify the impact on net interest income. The effect that changing interest rates have on the Banks' net interest income is simulated by increasing and decreasing interest rates. This simulation is known as rate shocking. The results of the March 31, 2001, rate shock simulations show that the Banks and consolidated Corporation are within all guidelines set by the Asset/Liability policy. NET INTEREST MARGIN - --------------------- The net interest margin of 4.13% for the three-month period ended March 31, 2001, decreased from the 4.26% net interest margin for the first three months of 2000. The lower net interest margin experienced in 2001 is related to the funding of the BOLI with deposits. The impact of funding the higher level of BOLI during the first quarter of 2001, compared to the first quarter of 2000, reduced the first quarter of 2001 net interest margin by 24 basis points. The yield on earning assets of 7.93% during the first three months of 2001 was higher than the 7.83% earned during the first three months of 2000. The increase in the yield is primarily due to higher loan yields experienced during the first quarter of 2001. The first quarter 2001 average interest rate paid on interest-bearing deposits and other borrowings of 4.58% was higher than the first three months of 2000 rate of 4.28%. This increase in rate is due to the overall higher cost of attracting new deposits. PAGE 10 PROVISION FOR LOAN LOSSES - ---------------------------- The Banks use the reserve method of accounting for credit losses. The balance in the allowance for loan and lease losses is determined based on management's review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management's assumptions as to future delinquencies, recoveries and losses. Increases to the allowance for loan and lease losses are made by charges to the provision for credit losses. Credit exposures deemed to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged-off amounts are credited to the allowance for credit losses. While management considers the allowance for loan and lease losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic conditions or management's assumptions as to future delinquencies, recoveries and losses and management's intent with regard to the disposition of loans and leases. In addition, the OCC as an integral part of their examination process, periodically review the Banks' allowance for loan losses. The OCC may require the Banks to recognize additions to the allowance for credit losses based on their judgements about information available to them at the time of their examination. The Banks' allowance for loan and lease losses is the accumulation of various components that are calculated based on various independent methodologies. All components of the allowance for credit losses are an estimation. Management bases its recognition and estimation of each allowance component on certain observable data that it believes is the most reflective of the underlying credit losses being estimated. The observable data and accompanying analysis is directionally consistent, based upon trends, with the resulting component amount for the allowance for loan and lease losses. The Banks' allowance for loan and lease losses components include the following: historical loss estimation by loan product type and by risk rating within each product type, payment (past due) status, industry concentrations, internal and external variables such as economic conditions, credit policy and underwriting changes, competence of the loan review process and other historical loss model imprecision. The Banks' historical loss component is the most significant component of the allowance for loan and lease losses, and all other allowance components are based on the inherent loss attributes that management believes exist within the total portfolio that are not captured in the historical loss component. The historical loss components of the allowance represents the results of analyses of historical charge-offs and recoveries within pools of homogeneous loans, within each risk rating and broken down further by segment, within the portfolio. The historical loss components of the allowance for commercial loans is based principally on current risk ratings, historical loss rates adjusted, by adjusting the risk window, to reflect current events and conditions, as well as analyses of other factors that may have affected the collectibility of loans in the commercial portfolio. The Banks analyze all commercial loans that are being monitored as potential credit problems, via Watchlist Memorandum, to determine whether such loans are individually impaired, with impairment measured by reference to the collateral coverage and / or debt service coverage. The historical loss component of the allowance for consumer loans is based principally on loan payment status, retail classification and historical loss rates adjusted, by adjusting the risk window, to reflect current events and conditions. The industry concentration component is recognized as a possible factor in the estimation of credit losses. Two industries represent possible concentrations: commercial real estate and automobile dealers. No specific loss-related observable data is recognized by management currently, therefore no specific factor is calculated in the reserve solely for the impact of these concentrations, although management continues to carefully consider relevant data for possible future sources of observable data. PAGE 11 The historic loss model imprecision component (soft factors and unallocated portion) reflects management's belief that there are additional inherent credit losses based on loss attributes not adequately captured in the statistical / historical loss component and is an assessment of information delay and its impact on the timeliness of the risk rating process and loss recognition. The principal observable data utilized by management as the driver of the loss recognition and measurement of this component is an internal management measure of the age of financial information used in the borrower debt service analysis. This is also a key judgmental component, as experiential data confirms that measurable losses lag the empirical model as a downward credit cycle begins. For the first three months of 2001 the provision for loan losses was $647,000, compared to $506,000 for the same period in 2000. The higher provision for loan losses during the first quarter of 2001, compared to the same period in 2000 is primarily attributed to the growth in loans during this period. Net loans charged off was $562,000 for the three months ended March 31, 2001, compared to $149,000 for the three months ended March 31, 2000. The increase in net charged off loans is attributed to a rise in consumer loan charge offs. The ratio of the allowance for loans losses to nonperforming assets for March 31, 2001 of 253.8% was lower than the December 31, 2000 and the March 31, 2000 ratios of 268.3% and 261.3.%, respectively. Allowance for Loan Losses - ---------------------------- Transaction in the allowance for loan losses are as follows:
2001 2000 -------- -------- Balance, Beginning of Year . . . . . . . . $15,210 $14,887 Provision charged to operating expenses 647 506 Loans charged off . . . . . . . . . . . (684) (336) Recoveries. . . . . . . . . . . . . . . 122 187 -------- -------- Balance, March 31. . . . . . . . . . . . . 15,295 15,244 ======== ========
Ratios: . . . . . . . . . . . . . . . . . . . . . March 31, 2001 Dec. 31, 2000 March 31, 2000 - ------------------------------------------------- --------------- -------------- --------------- Allowance for loan losses to nonperforming assets 253.8% 268.3% 261.3% Nonperforming assets to total loans & net assets Acquired in foreclosure. . . . . . . . . . . . 0.49% 0.47% 0.51% Nonperforming assets to total assets. . . . . . . 0.30% 0.29% 0.32% Allowance for loan losses to total loans. . . . . 1.24% 1.25% 1.33%
The following table sets forth an allocation of the allowance for loan losses by loan category:
March 31, 2001 --------------- Percent Amount of Loans --------------- --------- Commercial and industrial $ 5,286 25% Consumer loans. . . . . . 5,542 35% Real estate . . . . . . . 3,018 30% Lease financing . . . . . 1,449 10% --------------- --------- Total . . . . . . . . . 15,295 100% =============== =========
PAGE 12 Nonperforming assets (nonaccruing loans, net assets in foreclosure and troubled debt restructured loans) were 0.49% of total loans and net assets acquired in foreclosure at March 31, 2001, compared to 0.47% at December 31, 2000 and 0.51% at March 31, 2000. The ratio of the allowance for loan losses to loans at March 31, 2001of 1.24% was lower than the December 31, 2000 and the March 31, 2000 ratios of 1.25% and 1.33%, respectively. Nonaccruing loans at March 31, 2001 of $5,500,000, increased $130,000 from the December 31, 2000 level of $5,370,000, and increased $1,525,000 from the March 31, 2000 level of $3,975,000. The increase in nonaccruing loans at March 31, 2001, compared to March 31, 2000 was primarily the result of an increase in commercial and consumer nonaccruing loans. Net assets in foreclosure totaled $527,000 as of March 31, 2001, an increase of $239,000 from the December 31, 2000 balance of $288,000. During the first three months of 2000, transfers from loans to assets in foreclosure were $580,000, payments on foreclosed properties totaled $341,000 and there were no write-downs of assets in foreclosure during this period. The loans transferred to assets in foreclosure included commercial loans of $140,000, consumer loans of $24,000 and leases of $416,000. The balance of net assets in foreclosure at March 31, 2000 was $1,403,000. Efforts to liquidate assets acquired in foreclosure are proceeding as quickly as potential buyers can be located and legal constraints permit. Generally accepted accounting principles require foreclosed assets to be carried at the lower of cost (lesser of carrying value of asset or fair value at date of acquisition) or estimated fair value. As of March 31, 2001 and December 31, 2000, there was one borrower with a troubled debt restructured loan totaling $11,000. This customer was complying with the restructured terms as of March 31, 2001. Loans past due 90 days or more and still accruing interest are loans that are generally well secured and expected to be restored to a current status in the near future. As of March 31, 2001, loans past due 90 days or more and still accruing interest were $167,000, compared to $514,000 as of December 31, 2000 and $546,000 as of March 31, 2000. The decrease in loans past due 90 days at March 31, 2001, compared March 31, 2000 was primarily the result of a decrease in commercial real estate loans past due 90 days.
The following information concerns impaired loans: Impaired Loans: March 31, 2001 Dec. 31, 2000 March 31, 2000 --------------- -------------- --------------- Restructured Loans. . . . . . . . . . . . . . $ 11,000 $ 11,000 $ 457,000 Nonaccrual Loans. . . . . . . . . . . . . . . $ 3,258,000 $ 3,311,000 $ 2,431,000 --------------- -------------- --------------- Total Impaired Loans . . . . . . . . . . . $ 3,269,000 $ 3,322,000 $ 2,888,000 =============== ============== =============== Average year-to-date impaired loans: . . . . . . $ 3,133,000 $ 2,965,000 $ 2,598,000 =============== ============== =============== Impaired loans with specific loss allowances:. . $ 3,269,000 $ 3,322,000 $ 2,888,000 =============== ============== =============== Loss allowances reserved on impaired loans:. . . $ 366,000 $ 377,000 $ 305,000 =============== ============== =============== Year-to-date income recognized on impaired loans $ 46,000 $ 128,000 $ 18,000 =============== ============== ===============
PAGE 13 The banks' policy for interest income recognition on impaired loans is to recognize income on restructured loans under the accrual method. The banks recognize income on nonaccrual loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the banks. The banks will not recognize income if these factors do not exist.
OTHER OPERATING INCOME - ------------------------ Three Months Ended March 31, ---------------------------- 2001 2000 ----- ------ (Dollars in thousands) Service charges . . . . . . . . . 1,027 923 Security (losses) gains, net. . . 721 (112) Trust income. . . . . . . . . . . 827 692 Bank-owned life insurance . . . . 691 347 Other income. . . . . . . . . . . 926 803 ----- ------ Total other operating income. 4,192 2,653 ===== ======
Other operating income for the first three months of 2001 increased $1,539,000, or 58.0%, from $2,653,000 at March 31, 2000 to $4,192,000 at March 31, 2001. This rise in other operating income is the result of a $104,000 growth in service charges, a $135,000 rise in trust income and a $123,000 increase in other income. Bank-owned life insurance (BOLI) income contributed $344,000 to other operating income during the first quarter of 2001, compared to the same period in 2000. A $833,000 increase in security gains also contributed to the rise in other income. The rise in other operating income was 25.5%, not inclusive of the securities gains and losses. The $104,000, or 11.3% increase in service charges is primarily the result of a rise in fees charged on transaction deposit accounts, attributed to the increase in average deposit transaction accounts and through the Corporation's strategies to enhance fee income. The Corporation recorded a net security gain on the sale of securities of $721,000 in the first three months of 2001, compared to a $112,000 loss in the same period in 2000. The Corporation sells investment securities available for sale to fund the purchase of other securities in an effort to enhance the overall return of the portfolio, and to reduce the risk within different interest rate environments. Income from the Investment Management and Trust Services Division increased $135,000, or 19.5% in the first three months of 2001, compared to the same period in 2000. This increase was the result of both a rise in the book value of trust assets under management of 14.1% from March 31, 2000 to March 31, 2001, and the emphasis on offering Investment Management and Trust Services products that generate higher fees. The Corporation's average year-to-date investment in bank-owned life insurance (BOLI) in the first quarter of 2001 of $37,792,000 exceeded the $25,646,000 averaged during the same period in 2000. BOLI involves the purchasing of life insurance by the Corporation on a chosen group of employees. The corporation is the owner and beneficiary of the policies. This pool of insurance, due to tax advantages to the Banks, is profitable to the Corporation. This profitability is used to offset a portion of future employee benefit cost increases. Bank deposits fund BOLI and the earnings from BOLI are recognized as other income. The corporation recognized BOLI income during the first quarter of 2001and 2000 of $691,000 and $347,000, respectively. Other income for the first three months of 2001 increased $123,000, or 15.3%, compared to the same period in 2000. Contributing to this rise were increases related to fees earned on the sale of alternative investment products including mutual funds and annuities and gains on the sale of residential mortgage loans. The Corporation introduced the sale of alternative investment products during the fourth quarter of 2000. PAGE 14
OTHER OPERATING EXPENSES - -------------------------- Three Months Ended March 31, ---------------------------- 2001 2000 ------ ------ (Dollars in thousands) Salaries . . . . . . . . . . . . . 5,215 4,743 Employee benefits. . . . . . . . . 1,085 989 Occupancy expense. . . . . . . . . 902 776 Furniture and equipment expense. . 1,207 1,184 Other expenses . . . . . . . . . . 4,056 3,236 ------ ------ Total other operating expenses. 12,465 10,928 ====== ======
Other operating expenses for the first three months of 2001 of $12,465,000 increased $1,537,000, or 14.1% from $10,928,000 for the same period in 2000. The rise in operating expenses was the result of costs related to a one-time expense related to the organization of a consumer loan reinsurance company of $357,000. Excluding this one-time charge, other operating expenses grew 10.8%. Also contributing to this rise in other operating expenses were costs associated with an increase in lease residual losses and the introduction of sales of alternative investment products including mutual funds and annuities during the last quarter of 2000. Employee salaries increased $472,000, or 10.0% from $4,743,000 for the first three months of 2000 to $5,215,000 for the same period in 2001. Employee benefits of $1,085,000 expensed in the first three months of 2001, were $96,000, or 9.7% higher than the $989,000 of employee benefits expensed during the same period in 2000. The increase in salaries and employee benefits reflects cost of living increases, merit increases, expenses related to the sale of alternative investment products and additional staff necessitated by the growth of the Banks. Net occupancy expense increased $126,000, or 16.2%, from $776,000 in the first three months of 2000 to $902,000 in the first three months of 2001. Contributing to this increase were higher energy costs and higher than normal snow removal expenses. Equipment expense increased $23,000, or 1.9%, during the first three months of 2001, compared to the same period in 2000. This increase is due to higher equipment maintenance and rental expenses, partially offset by lower depreciation cost. Other expenses increased $820,000, or 25.3%, from $3,236,000 in the first three months of 2000, compared to $4,056,000 in other expenses recorded during the same period in 2001. Contributing to this increase was the one-time $357,000 organization expenses associated with the consumer loan Reinsurance Company. The rise in other operating expense was 14.3%, not inclusive of these organization costs. Also contributing to the rise in other operating expenses was an increase of $368,000 in expenses related to lease residual losses. INCOME TAXES - ------------- Income tax expense is less than the amount calculated using the statutory tax rate primarily as a result of tax exempt income earned from state and municipal securities and loans. BALANCE SHEET ANALYSIS - ------------------------ Total assets grew $54,019,000, or 2.8%, from $1,935,213,000 at December 31, 2000 to $1,989,232,000 at March 31, 2001. This growth was the result of a rise in earning assets, which grew $48,525,000 to $1,865,547,000 at March 31, 2001, from $1,817,022,000 at December 31, 2000. During the first three months of 2000, interest-bearing deposits in banks, securities and loans grew $1,566,000, $29,422,000 and $17,537,000, respectively. PAGE 15 The balance of securities available for sale at March 31, 2001 of $601,020,000 increased $30,401,000 compared to the December 31, 2000 balance of $570,619,000. During the current quarter, $71,773,000 of securities available for sale were sold which generated a pretax gain of $721,000. In comparison, $20,300,000 securities available for sale were sold during the first quarter of 2000 to generate a pretax loss of $112,000. The Corporation sells investment securities available for sale to fund the purchase of other securities in an effort to enhance the overall return of the portfolio, and to reduce the risk associated within different interest rate environments. The balance of investment securities held to maturity decreased $979,000 during the first quarter of 2001. Total loans grew $17,537,000 or 1.4% during the first quarter. This growth was primarily due to increases in the commercial loans. Indirect auto financing and equipment leases also contributed to this growth. Total deposits grew $41,946,000, or 2.8% from $1,489,050,000 at December 31, 2000 to $1,530,996,000 at March 31, 2001. This increase was primarily due to the growth in money market accounts and time deposits during this period. Money market accounts grew $26,564,000 due to the growth in balances of higher rate money market account products introduced throughout 2000. Time deposits under $100,000 increased $11,376,000 and time deposits greater than $100,000 grew $3,176,000. Savings accounts also contributed $5,826,000 to the rise in deposits. Partially offsetting these gains were decreases in noninterest-bearing checking and interest-bearing checking accounts of $3,631,000 and $1,365,000, respectively. Other borrowings experienced a decrease of $1,584,000 during the first quarter. Federal funds purchased declined $22,000,000 and U.S. Treasury demand notes decreased $40,000. Securities sold under agreements to repurchase increased $10,301,000 and Federal Home Loan Bank Borrowings grew $5,000,000. The corporation also issued $5,155,000 of 10.2% junior subordinate deferrable interest debentures during the first quarter of 2001. CAPITAL - ------- Capital formation is important to the Corporation's well being and future growth. Capital for the period ending March 31, 2001 was $179,299,000, an increase of $5,763,000 over the end of 2000. The increase is the result of the retention of the Corporation's earnings and the adjustment for the net unrealized gains on the investments securities available for sale, partially offset by the purchase of treasury stock during the first quarter of 2001. Net unrealized gains and losses on available for sale investment securities are recorded as accumulated other comprehensive income in the equity section of the balance sheet. The accumulated other comprehensive income at March 31, 2001 was a gain of $6,263,000, compared to a gain of $1,422,000 at December 31, 2000. The corporation purchased $2,858,000 of treasury stock during the first quarter of 2001. Management believes that the Corporation's current capital and liquidity positions are adequate to support its operations. Management is not aware of any recommendations by any regulatory authority, which, if it were to be implemented, would have a material effect on the Corporation's capital.
(Dollars in thousands) To be Well Capitalized Under For Capital Adequacy Prompt Corrective Action Purposes Provision As of March 31, 2001 - ----------------------------------------- Amount Ratio Amount Ratio -------- ------ -------- ------ Total Capital (to risk weighted assets): - ----------------------------------------- Corporation . . . . . . . . . . . . . . . $193,560 13.50% $114,689 8.00% Harleysville National Bank. . . . . . . . 109,836 10.53% 83,416 8.00% Citizens National Bank. . . . . . . . . . 37,837 14.30% 21,171 8.00% Security National Bank. . . . . . . . . . 13,857 12.77% 8,684 8.00% Tier 1 Capital (to risk weighted assets): - ----------------------------------------- Corporation . . . . . . . . . . . . . . . $178,192 12.43% $ 57,345 4.00% Harleysville National Bank. . . . . . . . 99,353 9.53% 41,708 4.00% Citizens National Bank. . . . . . . . . . 34,522 13.05% 10,585 4.00% Security National Bank. . . . . . . . . . 12,809 11.80% 4,342 4.00% Tier 1 Capital (to average assets): - ----------------------------------------- Corporation . . . . . . . . . . . . . . . $178,192 9.19% $ 77,581 4.00% Harleysville National Bank. . . . . . . . 99,353 7.23% 54,996 4.00% Citizens National Bank. . . . . . . . . . 34,522 8.51% 16,231 4.00% Security National Bank. . . . . . . . . . 12,809 8.77% 5,841 4.00%
To be Well Capitalized Under Prompt Corrective Action Provision Amount Ratio ------- ------ Total Capital (to risk weighted assets): - ----------------------------------------- Corporation . . . . . . . . . . . . . . . - - Harleysville National Bank. . . . . . . . 104,271 10.00% Citizens National Bank. . . . . . . . . . 26,464 10.00% Security National Bank. . . . . . . . . . 10,855 10.00% Tier 1 Capital (to risk weighted assets): - ----------------------------------------- Corporation . . . . . . . . . . . . . . . - - Harleysville National Bank. . . . . . . . 62,562 6.00% Citizens National Bank. . . . . . . . . . 15,878 6.00% Security National Bank. . . . . . . . . . 6,513 6.00% Tier 1 Capital (to average assets): - ----------------------------------------- Corporation . . . . . . . . . . . . . . . - - Harleysville National Bank. . . . . . . . 68,745 5.00% Citizens National Bank. . . . . . . . . . 20,288 5.00% Security National Bank. . . . . . . . . . 7,301 5.00%
PAGE 16
(Dollars in thousands) To be Well Capitalized Under For Capital Adequacy Prompt Corrective Action Purposes Provision As of December 31, 2000 - ----------------------------------------- Amount Ratio Amount Ratio -------- ------ -------- ------ Total Capital (to risk weighted assets): - ----------------------------------------- Corporation . . . . . . . . . . . . . . . $186,989 13.35% $112,063 8.00% Harleysville National Bank. . . . . . . . 106,549 10.46% 81,461 8.00% Citizens National Bank. . . . . . . . . . 37,622 14.36% 20,955 8.00% Security National Bank. . . . . . . . . . 13,553 12.65% 8,572 8.00% Tier 1 Capital (to risk weighted assets): - ----------------------------------------- Corporation . . . . . . . . . . . . . . . $171,226 12.22% $ 56,031 4.00% Harleysville National Bank. . . . . . . . 95,980 9.43% 40,731 4.00% Citizens National Bank. . . . . . . . . . 34,344 13.11% 10,477 4.00% Security National Bank. . . . . . . . . . 12,509 11.67% 4,286 4.00% Tier 1 Capital (to average assets): - ----------------------------------------- Corporation . . . . . . . . . . . . . . . $171,226 8.97% $ 76,313 4.00% Harleysville National Bank. . . . . . . . 95,980 7.12% 53,932 4.00% Citizens National Bank. . . . . . . . . . 34,344 8.51% 16,147 4.00% Security National Bank. . . . . . . . . . 12,509 8.70% 5,754 4.00%
PAGE 17
To Be Well Capitalized Under Prompt Corrective Action Provision Amount Ratio ------- ------ Total Capital (to risk weighted assets): - ----------------------------------------- Corporation . . . . . . . . . . . . . . . - - Harleysville National Bank. . . . . . . . 101,826 10.00% Citizens National Bank. . . . . . . . . . 26,193 10.00% Security National Bank. . . . . . . . . . 10,715 10.00% Tier 1 Capital (to risk weighted assets): - ----------------------------------------- Corporation . . . . . . . . . . . . . . . - - Harleysville National Bank. . . . . . . . 61,096 6.00% Citizens National Bank. . . . . . . . . . 15,716 6.00% Security National Bank. . . . . . . . . . 6,429 6.00% Tier 1 Capital (to average assets): - ----------------------------------------- Corporation . . . . . . . . . . . . . . . - - Harleysville National Bank. . . . . . . . 67,415 5.00% Citizens National Bank. . . . . . . . . . 20,183 5.00% Security National Bank. . . . . . . . . . 7,193 5.00%
Pursuant to the federal regulators' risk-based capital adequacy guidelines, the components of capital are called Tier 1 and Tier 2 capital. For the Corporation, Tier 1 capital is the shareholders' equity, and Tier 2 capital is the allowance for loan losses. The minimum for the Tier 1 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 March 31, 2001, the Corporation's Tier 1 risk-adjusted capital ratio was 12.43%, and the total risk-adjusted capital ratio was 13.50%, both well above the regulatory requirements. The risk-based capital ratios of each of the Corporation's commercial banks also exceeded regulatory requirements at March 31, 2001. The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding intangible assets. Banking organizations are expected to have ratios of at least 4% and 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 banking organization. The Corporation's leverage ratios were 9.19% at March 31, 2001 and 8.97% at December 31, 2000. The year-to-date March 31, 2001 cash dividend per share of $.30 was 15.4% higher than the cash dividend for the same period in 2000 of $.26. The dividend payout ratio for the first three months of 2000 was 42.3%, compared to 40.7% for the twelve month period ended December 31, 2000. Activity in both the Corporation's dividend reinvestment and stock purchase plan and the stock option plan did not have a material impact on capital during the first three months of 2001. PAGE 18 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 provides the means to meet the day-to-day demands of deposit customers and 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 $1,766,000 during the first three months of 2001 and securities available for sale averaged $585,820,000 during the first three months of 2001, more than sufficient to meet normal fluctuations in loan demand or deposit funding. 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 and the FHLB of Pittsburgh, of which the Banks are members. Unused lines of credit at the FHLB of Pittsburgh were $105,528,000, as of March 31, 2001. OTHER ITEMS - ------------ Legislative & Regulatory - -------------------------- In November, 1999, the Gramm-Leach-Bliley Financial Modernization Act of 1999 (Modernization Act) became law. The Modernization Act allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of nonbanking activities than was permissible before enactment, including underwriting insurance and making merchant banking investments in commercial and financial companies. It allows insurers and other financial services companies to acquire banks; removes various restrictions that currently apply to bank holing company ownership of securities firms and mutual fund advisory companies; and establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. The Corporation currently believes it meets the requirements for the broader range of activities that will be permitted by the Modernization Act. The Modernization Act also modifies current law related to financial privacy and community reinvestment. The new privacy provisions will generally prohibit financial institutions, including the Corporation, from disclosing nonpublic financial information to nonaffiliated third parties unless customers have the opportunity to "opt out" of the disclosure. Pending Legislation - -------------------- Management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation which, if they were implemented, would have a material adverse effect upon the liquidity, capital resources, or results of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on the Corporation's results of operations. Effects of Inflation - ---------------------- Inflation has some impact on the Corporation's and the Banks' operating costs. Unlike many industrial companies, however, substantially all of the Banks' assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation's and the Banks' performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services. Effect of Government Monetary Policies - ------------------------------------------ The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve is to regulate the money supply and interest rates. Among the instruments used to PAGE 19 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. Branching - --------- The Corporation's subsidiaries currently plan to open at least one new branch. During the third quarter of 2001, Harleysville National Bank plans to open a location in Souderton. This new branch site is contiguous to our current service area and was chosen to expand the Banks' market area and market share of loans and deposits. Acquisition - ----------- On April 28, 2000, the Corporation consummated its acquisition of Citizens Bank and Trust Company. Under the terms of the merger, accounted for as a pooling-of-interest, Citizens Bank and Trust Company's shareholders received 166 shares of Harleysville National Corporation common stock for each share of Citizens Bank and Trust Company stock. Upon the completion of the acquisition, Citizens Bank and Trust Company's banking operations were merged into those of Citizens National Bank, a wholly-owned subsidiary of Harleysville National Corporation. ITEM 3 - Qualitative and Quantitative Disclosures about Market Risk In the normal course of conducting business activities, the Corporation is exposed to market risk, principally interest risk, through the operations of its banking subsidiaries. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and values of financial instruments. The Asset/Liability Committee, using policies and procedures approved by the Banks' Boards of Directors, is responsible for managing the rate sensitivity position. No material changes in market risk strategy occurred during the current period. A detailed discussion of market risk is provided in the Annual Report on Form 10-K filed with the SEC for the period ended December 31, 2000. PAGE 20 PART II. OTHER INFORMATION
Item 1. Legal Proceedings - ------- -----------------
Management, based upon discussions 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, Security National Bank, HNC Financial Company and HNC Reinsurance Company. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation and its subsidiaries by government authorities.
Item 2.. Change in Securities and Use of Proceeds - ---------------- --------------------------------------------------- Not applicable Item 3.. . Defaults Upon Senior Securities - ---------------- --------------------------------------------------- Not applicable Item 4.. . Submission of Matters to a Vote of Security Holders - ---------------- ---------------------------------------------------
(a) The 2001 Annual Meeting of Shareholders was held at 9:30 a.m., on Tuesday, April 10, 2001, at Presidential Caterers, 2910 DeKalb Pike, Norristown, Pennsylvania 19401.
(b), (c) Two matters were voted upon as follows: 1. Two directors were elected, as below: Elected . . . . . . . . . . . . . . . . . . . . . . . . . . Term Expires - ----------------------------------------------------------- ------------ James A. Wimmer . . . . . . . . . . . . . . . . . . . . . . 2005 William M. Yocum. . . . . . . . . . . . . . . . . . . . . . 2005 The results of the voting for the directors are as follows: James A. Wimmer:. . . . . . . . . . . . . . . . . . . . . . For 7,692,228 Against . . . . . . . . . . . . . . . . . . . . . . . . . 63,481 Abstain . . . . . . . . . . . . . . . . . . . . . . . . . 0 William M. Yocum: . . . . . . . . . . . . . . . . . . . . . For 7,693,914 Against . . . . . . . . . . . . . . . . . . . . . . . . . 61,795 Abstain . . . . . . . . . . . . . . . . . . . . . . . . . 0 Directors whose term continued after the meeting: . . . . . Term Expires ------------ Walter E. Daller, Jr. . . . . . . . . . . . . . . . . . . . 2002 Thomas S. McCready. . . . . . . . . . . . . . . . . . . . . 2002 Walter F. Vilsmeier . . . . . . . . . . . . . . . . . . . . 2003 Harold A. Herr. . . . . . . . . . . . . . . . . . . . . . . 2003 Henry M. Pollak . . . . . . . . . . . . . . . . . . . . . . 2003 Palmer E. Retzlaff. . . . . . . . . . . . . . . . . . . . . 2004 LeeAnn Bergey . . . . . . . . . . . . . . . . . . . . . . . 2004
PAGE 21 2. Approval and adoption of amendments to the Harleysville National Corporation 1998 Independent Directors Stock Option Plan:
The result of the voting is as follows: For . . 7,371,995 Against 295,531 Abstain 88,183
Item 5. Other Information - ------- -------------------------------- None Item 6. Exhibits and Reports on Form 8-K - ------- --------------------------------
(a) Exhibits: -------------- The following exhibits are being filed as part of this Report: Exhibit No. Description of Exhibits - ------------ ------------------------------------------------------------------------------------------------------ (3.1) Harleysville National Corporation Articles of Incorporation, as amended. (Incorporated by reference to Exhibit 3(a) to the Corporation's Registration Statement No. 33-65021 on Form S-4, as filed on December 14, 1995.) (3.2) Harleysville National Corporation By-laws. (Incorporated by reference to Exhibit 3(b) to the Corporation's Registration Statement No. 33-65021 on Form S-4, as filed on December 14, 1995.) (10.1) Harleysville National Corporation 1993 Stock Incentive Plan. (Incorporated by Reference to Exhibit 4.3 of Registrant's Registration Statement No. 33-57790 on Form S-8, filed with the Commission on October 1, 1993.) (10.2) Harleysville National Corporation Stock Bonus Plan. (Incorporated by Reference to Exhibit 99A of Registrant's Registration Statement No. 33-17813 on Form S-8, filed with the Commission on December 13, 1996.) (10.3) Supplemental Executive Retirement Plan. (Incorporated by Reference to Exhibit 10.3 of Registrant's Annual Report in Form 10-K for the year ended December 31, 1997, filed with the Commission on March 27, 1998.) (10.4) Walter E. Daller, Jr., Chairman, President and Chief Executive Officer's employment agreement. (Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the Commission on March 25, 1999.) (10.5) Demetra M. Takes, President and Chief Operating Officer of Harleysville employment agreement. (Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the Commission on March 25, 1999.) (10.6) Vernon L. Hunsberger, Senior Vice President/CFO and Cashier's employment agreement. (Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the Commission on March 25, 1999.) (10.7) Harleysville National Corporation 1998 Stock Incentive Plan. (Incorporated by Reference to Registrant's Registration Statement No. 333-79971 on Form S-8 filed with the Commission on June 1999.) PAGE 22 (10.8) Harleysville National Corporation 1998 Independent Directors Stock Option Plan. (Incorporated by Reference to Registrant's Registration Statement No. 333-79973 on Form S-8 filed with the Commission on June 4, 1999.) (11) Computation of Earnings per Common Share. The information for this Exhibit is incorporated by reference to page 4 of this Form 10-Q.
(b) Reports on Form 8-K Current Report on Form 8-K, dated January 10, 2001, filed with the Commission on January 18, 2001, reporting the Registrant's fourth quarter 2000 press release. PAGE 23 SIGNATURES Pursuant to the requirements 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 /s/ Walter E. Daller, Jr. ________________________ Walter E. Daller, Jr., President and Chief Executive Officer (Principal executive officer) /s/ Vernon L. Hunsberger ________________________ Vernon L. Hunsberger, Treasurer (Principal financial and accounting officer)
Date: May 11, 2001 PAGE 24 EXHIBIT INDEX
Exhibit No. Description of Exhibits - ----------- ------------------------- (3.1) Harleysville National Corporation Articles of Incorporation, as amended. (Incorporated by reference to Exhibit 3(a) to the Corporation's Registration Statement No. 33-65021 on Form S-4, as filed on December 14, 1995.) (3.2) Harleysville National Corporation By-laws. (Incorporated by reference to Exhibit 3(b) to the Corporation's Registration Statement No. 33-65021 on Form S-4, as filed on December 14, 1995.) (10.1) Harleysville National Corporation 1993 Stock Incentive Plan. (Incorporated by Reference to Exhibit 4.3 of Registrant's Registration Statement No. 33-57790 on Form S-8, filed with the Commission on October 1, 1993.) (10.2) Harleysville National Corporation Stock Bonus Plan. (Incorporated by Reference to Exhibit 99A of Registrant's Registration Statement No. 33-17813 on Form S-8, filed with the Commission on December 13, 1996.) (10.3) Supplemental Executive Retirement Plan. (Incorporated by Reference to Exhibit 10.3 of Registrant's Annual Report in Form 10-K for the year ended December 31, 1997, filed with the Commission on March 27, 1998.) (10.4) Walter E. Daller, Jr., Chairman, President and Chief Executive Officer's employment agreement. (Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the Commission on March 25, 1999.) (10.5) Demetra M. Takes, President and Chief Operating Officer of Harleysville employment agreement. (Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the Commission on March 25, 1999.) (10.6) Vernon L. Hunsberger, Senior Vice President/CFO and Cashier's employment agreement. (Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the Commission on March 25, 1999.) (10.7) Harleysville National Corporation 1998 Stock Incentive Plan. (Incorporated by Reference to Registrant's Registration Statement No. 333-79971 on Form S-8 filed with the Commission on June 1999.) (10.8) Harleysville National Corporation 1998 Independent Directors Stock Option Plan. (Incorporated by Reference to Registrant's Registration Statement No. 333-79973 on Form S-8 filed with the Commission on June 4, 1999.) (11) Computation of Earnings per Common Share. The information for this Exhibit is incorporated by reference to page 4 of this Form 10-Q.
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