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 September 30, 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 . . . . . . . . . . IRS 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: 18,267,029 shares of Common Stock, $1.00 par value, outstanding on October 31, 2001. PAGE 1
HARLEYSVILLE NATIONAL CORPORATION INDEX TO FORM 10-Q REPORT PAGE ---- Part I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets - September 30, 2001 and December 31, 2000. . . . . . . . . . . . . . . 3 Consolidated Statements of Income - Nine Months and Three Months Ended September 30, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 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 . . . . . . . . . . . . . . 22 Part II. Other Information Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Item 2. Change in Securities and Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . 23 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . 23 Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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PART 1. FINANCIAL INFORMATION HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) September 30, 2001 December 31, 2000 -------------------- ------------------- ASSETS Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . $ 56,791 $ 52,018 Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . 17,000 0 Interest-bearing deposits in banks . . . . . . . . . . . . . . . . . 9,693 3,507 -------------------- ------------------- Total cash and cash equivalents. . . . . . . . . . . . . . . . . 83,484 55,525 -------------------- ------------------- Investment securities available for sale . . . . . . . . . . . . . . 688,101 570,619 Investment securities held to maturity (market value $27,945 and $31,601, respectively). . . . . . . . . . 26,845 30,841 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,302,928 1,209,605 Less: Unearned income. . . . . . . . . . . . . . . . . . . . . . . . 3,074 2,450 Allowance for loan losses . . . . . . . . . . . . . . . . . (15,348) (15,210) -------------------- ------------------- Net loans . . . . . . . . . . . . . . . . . . . . . . . 1,290,654 1,196,845 -------------------- ------------------- Bank premises and equipment, net . . . . . . . . . . . . . . . . . . 21,221 21,870 Accrued income receivable. . . . . . . . . . . . . . . . . . . . . . 13,388 12,391 Other real estate owned. . . . . . . . . . . . . . . . . . . . . . . 404 288 Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . 1,576 1,697 Bank-owned life insurance. . . . . . . . . . . . . . . . . . . . . . 39,289 37,471 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,554 7,666 -------------------- ------------------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . $ 2,172,516 $ 1,935,213 ==================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . 233,066 227,446 Interest-bearing: Checking accounts . . . . . . . . . . . . . . . . . . . . . . . 155,086 163,807 Money market accounts . . . . . . . . . . . . . . . . . . . . . 390,340 333,622 Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,729 161,233 Time, under $100,000. . . . . . . . . . . . . . . . . . . . . . 500,259 430,074 Time, $100,000 or greater . . . . . . . . . . . . . . . . . . . 253,228 172,868 -------------------- ------------------- Total deposits . . . . . . . . . . . . . . . . . . . . . . 1,707,708 1,489,050 Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . 26,281 22,346 U.S. Treasury demand notes . . . . . . . . . . . . . . . . . . . . . 2,484 2,055 Federal funds purchased. . . . . . . . . . . . . . . . . . . . . . . 0 44,500 Federal Home Loan Bank (FHLB) borrowings . . . . . . . . . . . . . . 127,750 110,750 Securities sold under agreements to repurchase . . . . . . . . . . . 85,639 74,083 Guaranteed preferred beneficial interest in Corporation's subordinated debentures. . . . . . . . . . . . . . . . . . . . . . 5,155 0 Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 28,746 18,893 -------------------- ------------------- Total liabilities. . . . . . . . . . . . . . . . . . . . . 1,983,763 1,761,677 -------------------- ------------------- Shareholders' Equity: Series preferred stock, par value $1 per share; authorized 3,000,000 shares, none issued. . . . . . . . . . . 0 0 Common stock, par value $1 per share; authorized 30,000,000 shares; issued and outstanding 18,554,469 shares in 2001 and 18,527,057 shares in 2000 . . . . . . . . . . . . . . . . . . 18,554 18,527 Additional paid in capital . . . . . . . . . . . . . . . . . . . 71,205 70,596 Retained Earnings. . . . . . . . . . . . . . . . . . . . . . . . 96,096 83,244 Treasury stock, at cost: 2001- 285,440; 2000 - 8,500 . . . . . . (5,301) (253) Accumulated other comprehensive income . . . . . . . . . . . . . 8,199 1,422 -------------------- ------------------- Total shareholders' equity . . . . . . . . . . . . . . . . 188,753 173,536 -------------------- ------------------- Total liabilities and shareholders' equity . . . . . . . . $ 2,172,516 $ 1,935,213 ==================== =================== See accompanying notes to consolidated financial statements.
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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Nine months ended September 30, Three months ended September 30, (Dollars in thousands except weighted average number of common shares and per share information) 2001 2000 2001 2000 ----------- ------------ ----------- ----------- INTEREST INCOME: Loans, including fees . . . . . . . . . . . . . . . . . . $ 68,008 $ 64,480 $ 22,821 $ 22,258 Lease financing . . . . . . . . . . . . . . . . . . . . . 7,377 6,540 2,439 2,309 Investment securities: Taxable. . . . . . . . . . . . . . . . . . . . . . . . 19,820 17,811 6,893 6,119 Exempt from federal taxes. . . . . . . . . . . . . . . 8,174 8,017 2,551 2,768 Federal funds sold. . . . . . . . . . . . . . . . . . . . 449 216 215 52 Deposits in banks . . . . . . . . . . . . . . . . . . . . 227 295 90 87 ----------- ------------ ----------- ----------- Total interest income . . . . . . . . . . . . . . . 104,055 97,359 35,009 33,593 ----------- ------------ ----------- ----------- INTEREST EXPENSE: Savings deposits. . . . . . . . . . . . . . . . . . . . . 13,939 13,154 4,170 4,823 Time, under $100,000. . . . . . . . . . . . . . . . . . . 19,431 17,230 6,715 6,018 Time, $100,000 or greater . . . . . . . . . . . . . . . . 8,447 8,165 2,773 3,014 Borrowed funds. . . . . . . . . . . . . . . . . . . . . . 8,262 9,220 2,585 3,207 ----------- ------------ ----------- ----------- Total interest expense. . . . . . . . . . . . . . . 50,079 47,769 16,243 17,062 ----------- ------------ ----------- ----------- Net interest income . . . . . . . . . . . . . . . . 53,976 49,590 18,766 16,531 Provision for loan losses . . . . . . . . . . . . . . . . 2,962 1,636 1,353 581 ----------- ------------ ----------- ----------- Net interest income after provision for loan losses 51,014 47,954 17,413 15,950 ----------- ------------ ----------- ----------- OTHER OPERATING INCOME: Service charges . . . . . . . . . . . . . . . . . . . . . 3,878 2,814 1,403 943 Security gains (losses), net . . . . . . . . . . . . . . 3,923 (105) 2,140 87 Trust income. . . . . . . . . . . . . . . . . . . . . . . 2,541 2,252 826 790 Bank-owned life insurance . . . . . . . . . . . . . . . . 1,818 1,302 535 576 Other Income. . . . . . . . . . . . . . . . . . . . . . . 3,409 2,496 1,352 852 ----------- ------------ ----------- ----------- Total other operating income. . . . . . . . . . . . 15,569 8,759 6,256 3,248 ----------- ------------ ----------- ----------- Net interest income after provision for loan losses and other operating income . . . . . . . . . . . 66,583 56,713 23,669 19,198 ----------- ------------ ----------- ----------- OTHER OPERATING EXPENSES: Salaries, wages and employee benefits . . . . . . . . . . 19,644 17,474 6,739 5,891 Occupancy . . . . . . . . . . . . . . . . . . . . . . . . 2,457 2,201 792 726 Furniture and equipment . . . . . . . . . . . . . . . . . 3,776 3,783 1,310 1,386 Other expenses. . . . . . . . . . . . . . . . . . . . . . 13,572 10,122 4,903 3,001 ----------- ------------ ----------- ----------- Total other operating expenses. . . . . . . . . . . 39,449 33,580 13,744 11,004 ----------- ------------ ----------- ----------- Income before income taxes. . . . . . . . . . . . . 27,134 23,133 9,925 8,194 Income tax expense. . . . . . . . . . . . . . . . . . . . 5,859 4,041 2,302 1,454 ----------- ------------ ----------- ----------- Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 21,275 $ 19,092 $ 7,623 $ 6,740 =========== ============ =========== =========== Weighted average number of common shares: Basic . . . . . . . . . . . . . . . . . . . . . . 18,318,042 18,547,868 18,264,538 18,540,652 =========== ============ =========== =========== Diluted . . . . . . . . . . . . . . . . . . . . . 18,747,858 18,569,052 18,694,354 18,561,836 =========== ============ =========== =========== Net income per share information: Basic . . . . . . . . . . . . . . . . . . . . . . $ 1.16 $ 1.03 $ 0.42 $ 0.36 =========== ============ =========== =========== Diluted . . . . . . . . . . . . . . . . . . . . . $ 1.14 $ 1.03 $ 0.41 $ 0.36 =========== ============ =========== =========== Cash dividends per share. . . . . . . . . . . . . . . . . $ 0.46 $ 0.41 $ 0.16 $ 0.14 =========== ============ =========== =========== 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) . . . . . . . . . . . . . . . . . . . . . . . . . . Nine Months Ended September 30, OPERATING ACTIVITIES:. . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 2000 -------------------- -------------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,275 $ 19,092 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 2,962 1,636 Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 2,033 2,177 Net amortization of investment securities discount/premiums . . . . . . . . . . . . . . . . . . . . 692 383 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 2,091 3,647 Net realized security (gain) loss. . . . . . . . . . . . . . . . . . . (3,923) 105 Increase in accrued income receivable. . . . . . . . . . . . . . . . . (997) (1,775) Increase in accrued interest payable . . . . . . . . . . . . . . . . . 3,935 2,817 Decrease (increase) in other assets. . . . . . . . . . . . . . . . . . 113 (4,374) Increase in other liabilities. . . . . . . . . . . . . . . . . . . . . 4,113 2,485 Increase in unearned income. . . . . . . . . . . . . . . . . . . . . . (624) (1,714) Write-down of other real estate owned. . . . . . . . . . . . . . . . . 17 83 Decrease in intangible assets. . . . . . . . . . . . . . . . . . . . . 122 272 -------------------- -------------- Net cash provided by operating activities . . . . . . . . . . . . . 31,809 24,834 -------------------- -------------- INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale. . . . . 281,930 80,539 Proceeds, maturity or calls of investment securities held to maturity. . 4,051 5,213 Proceeds, maturity or calls of investment securities available for sale. 88,014 20,816 Purchases of investment securities held to maturity. . . . . . . . . . . 0 (19,740) Purchases of investment securities available for sale. . . . . . . . . . (473,824) (134,279) Net increase in loans. . . . . . . . . . . . . . . . . . . . . . . . . . (97,243) (72,835) Net increase in premises and equipment . . . . . . . . . . . . . . . . . (1,385) (2,443) Purchase of bank-owned life insurance. . . . . . . . . . . . . . . . . . (1,818) (11,302) Proceeds from sales of other real estate . . . . . . . . . . . . . . . . 963 2,010 -------------------- -------------- Net cash used in investing activities . . . . . . . . . . . . . . . (199,312) (132,021) -------------------- -------------- FINANCING ACTIVITIES: Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . 218,658 143,856 Increase (decrease) in U.S. Treasury demand notes. . . . . . . . . . . . 429 (1,138) (Decrease) increase in federal funds purchased . . . . . . . . . . . . . (44,500) 11,500 Increase (decrease) in FHLB borrowings . . . . . . . . . . . . . . . . . 17,000 (19,500) Increase (decrease) in securities sold under agreement . . . . . . . . . 11,556 (28,180) Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . 5,155 0 Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,423) (7,469) Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . (5,048) (325) Stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635 46 -------------------- -------------- Net cash provided by financing activities. . . . . . . . . . . . . . . 195,462 98,790 -------------------- -------------- Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . 27,959 (8,397) Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 55,525 63,491 -------------------- -------------- Cash and cash equivalents at end of the period . . . . . . . . . . . . . . $ 83,484 $ 55,094 ==================== ============== Cash paid during the period for: Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,144 $ 44,952 ==================== ============== Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,300 $ 2,048 ==================== ============== Supplemental disclosure of noncash investing and financing activities: Transfer of assets from loans to other real estate owned. . . . . . $ 1,096 $ 1,015 ==================== ============== 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 September 30, 2001, the results of its operations for nine and three month periods ended September 30, 2001 and 2000 and the cash flows for the nine month periods ended September 30, 2001 and 2000. This quarterly report refers to the Corporation's subsidiary Banks, collectively as "the Banks." We recommend that you read these unaudited consolidated financial statements 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 Citizens Bank and Trust Company. The results of operations for the nine and three month periods ended September 30, 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 nine months of 2001 was $28,052,000, compared to $22,682,000 for the first nine 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 June 29, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method of accounting. A plan of combination is considered to be initiated on the earlier of the date that a combining company (a) announces publicly or formally makes known to its shareholders the major terms of the plan, or (b) notifies its shareholders, in writing, of an exchange offer. SFAS No. 141 was adopted upon issuance. SFAS No. 142 prescribes accounting for all purchased goodwill and intangible assets. The SFAS supersedes APB Opinion 17, Intangible Assets, but carries over guidance related to internally developed intangible assets. SFAS No. 142 states that acquired goodwill is not amortized, but is tested for impairment at the reporting unit level annually and whenever an impairment indicator arises. A reporting unit is at the same level or one level below an operating segment as defined by SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Until the adoption of SFAS No. 142, existing goodwill continues to be amortized and tested for impairment under previously existing standards. The adoption of SFAS No. 141 and SFAS No. 142 is not expected to have a material impact on the Corporation's financial position, or results of operations. NOTE 7 - On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. SAB No. 102 provides guidance on the development, documentation, and application of a systematic methodology for determining allowances for loans and leases in accordance with US GAAP. The adoption of SAB No. 102 is not expected to have a material impact on the Corporation's financial position, or results of operations. NOTE 8 - 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 common stock of Citizens Bank and Trust Company. Upon the completion of the acquisition, Citizens Bank and Trust Company's banking operations merged into those of Citizens National Bank, a wholly owned subsidiary of Harleysville National Corporation. NOTE 9 - 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 10- On February 22, 2001, 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 11 - 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 12 - On December 14, 2000, the Board of Directors of Harleysville National Corporation approved a plan to repurchase up to 906,000 shares of its outstanding common stock. The repurchased shares will be used for general corporate purposes. NOTE 13 - On July 12, 2001, the Board of Directors of Harleysville National Corporation approved a 2-for-1 stock split of its Common Stock, effected in the form of a 100% stock dividend, payable August 10, 2001, to shareholders of record July 27, 2001. All prior period amounts were restated to reflect this 100% stock dividend. 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 the 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 the 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 analysis of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful OVERVIEW -------- The Corporation experienced record earnings during the third quarter of 2001. These earnings were driven by the growth in both net interest income and other income. Gains on the sales of securities were offset by a higher loan loss provision, necessitated by an increase in loans charged-off, and an increase in expenses related to the sale of off lease vehicles. While the Corporation has experienced an increase in charged-off loans during 2001, the September 30, 2001 nonperforming assets and loans 90 days or more past due improved from September 30, 2000 levels. Consolidated net income for the third quarter of 2001 was $7,623,000, an increase of $883,000, or 13.1%, over the third quarter of 2000 net income of $6,740,000. For the quarter ended September 30, 2001, basic earnings per share of $.42 were 16.7% higher than the $.36 earned during the third quarter of 2000 and diluted earnings per share at $.41 were up 13.9% from $.36 in the third quarter of last year. Consolidated net income for the first nine months of 2001 was $21,275,000, an increase of $2,183,000, or 11.4%, over the first nine months of 2000 net income of $19,092,000. Basic earnings per share for the first nine months of 2001 of $1.16 increased 12.6% from the $1.03 in the comparable period last year. Diluted earnings per share of $1.14 for the first nine months of 2001 were higher than the $1.03 year to date September 30, 2000. The 2001 year to date increase in net income, compared to the same period in 2000, is the result of both higher net interest income and other operating income, partially offset by a higher provision for loan losses and an increase in other operating expenses. Net interest income grew $4,386,000, primarily as a result of a 10.9% rise in average earning assets. Other operating income rose $6,810,000, due to higher deposit account service charge fees, trust fees, bank-owned life insurance and net gains on the sale of securities and mortgages. PAGE 8 For the nine months ended September 30, 2001, the annualized return on average shareholders' equity and the annualized return on average assets were 15.83% and 1.40%, respectively. For the same period in 2000, the annualized return on average shareholders' equity was 16.84% and the annualized return on average assets was 1.40%. For the three months ended September 30, 2001, the annualized return on average shareholders' equity and the annualized return on average assets were 16.58% and 1.45%, respectively. For the third quarter in 2000, the annualized return on average shareholders' equity was 17.20% and the annualized return on average assets was 1.44%. The reductions in the return on average shareholders' equity for both periods is due to the increase in the accumulated other comprehensive income during 2001, compared to 2000. The increase in accumulated other comprehensive income is related to the rise in the market value of the investment securities available for sale. The year to date 2001 annualized return on average shareholders' equity, net of the accumulated other comprehensive income, was 16.17% for 2001, compared to 15.58% in 2000. The adjusted ratios for the third quarter of 2001 and 2000 were 17.05% and 16.13%, 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 .27% of total assets at September 30, 2001, an improvement over .29% at December 31, 2000 and .31% at September 30, 2000. The Corporation did experience an increase in net loans charged off during the first nine months of 2001, compared to the same period in 2000. Net loans charged off year to date 2001 were $2,824,000, compared to $1,191,000 in the first nine months of 2000. This increase is primarily in the indirect consumer loan, commercial and lease portfolios. Loans 90 days or more past due improved from $951,000 at September 30, 2000, to $714,000 at September 30, 2001. Net income is affected by five major elements: (1) net interest income, or the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds; (2) the provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for future losses on loans; (3) other operating income, which is made up primarily of certain service fees and Investment Management and Trust Services income, and gains and losses from sales of securities and loans; (4) other operating expenses, which consist primarily of salaries and other operating expenses; and (5) 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 nine months of 2001 of $53,976,000 increased $4,386,000, or 8.8%, over the same period in 2000, which produced net interest income of $49,590,000. As illustrated in the table below, the primary source of this increase was a rise in interest income resulting from increases in earning asset volumes in the first nine months of 2001, compared to the same period in 2000. The increase in interest income was partially offset by a rise in interest expense, mainly the result of higher volumes. The third quarter of 2001 net interest income increased 13.5%, compared to the same period in 2000. This rise was due to an increase in earning asset volumes and lower interest expense related to deposit and other borrowing rates, partially offset by higher interest expense related to higher deposit volumes. 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 nine month and three month periods ended September 30, 2001 over September 30, 2000 by their rate and volume components. PAGE 9
Nine Months Ended Three Months Ended September 30, 2001 September 30, 2001 Over/Under Over/Under September 30, 2000 September 30, 2000 Total Caused by: Total Caused by: ----------- ------------ Variance Rate Volume Variance Rate Volume ---------- ----------- ------- ------------ -------- ------- Interest Income: Securities *. . . . . . . . . . . . . . . $ 2,250 ($1,932) $ 4,182 $ 440 ($1,289) $ 1,729 Money market instruments. . . . . . . . . 166 (120) 286 166 (65) 231 Loans * . . . . . . . . . . . . . . . . . 4,400 (1,470) 5,870 669 (1,430) 2,099 ---------- ----------- ------- ------------ -------- ------- Total. . . . . . . . . . . . . . . . . 6,816 (3,522) 10,338 1,275 (2,784) 4,059 ---------- ----------- ------- ------------ -------- ------- Interest Expense: Savings deposits. . . . . . . . . . . . . 785 (695) 1,480 (653) (1,066) 413 Time deposits and certificates of deposit 2,483 156 2,327 456 (725) 1,181 Other borrowings. . . . . . . . . . . . . (958) (1,334) 376 (622) (837) 215 ---------- ----------- ------- ------------ -------- ------- Total . . . . . . . . . . . . . . . . 2,310 (1,873) 4,183 (819) (2,628) 1,809 ---------- ----------- ------- ------------ -------- ------- Net interest income . . . . . . . . . . . . $ 4,506 ($1,649) $ 6,155 $ 2,094 ($156) $ 2,250 ========== =========== ======= ============ ======== ======= *Tax Equivalent Basis
Taxable-equivalent net interest income was $59,214,000 for the first nine months of 2001, compared to $54,708,000 for the same period in 2000, an 8.2% or $4,506,000 increase. This increase was primarily due to a $6,155,000 increase related to volume, which was partially offset by a reduction in net interest income, related to rate. Total taxable-equivalent interest income grew $6,816,000, the result of higher volumes, offset by lower rates of loans and securities related to the reduction in interest rates during 2001. Average year-to-date loans and securities grew $96,333,000 and $82,040,000, respectively at September 30, 2001, compared to September 30, 2000. Total interest expense grew $2,310,000 during the first nine months of 2001, compared to the same period in 2000. This growth was principally the result of higher volumes in all deposit categories and other borrowings. The average year-to-date growth in savings deposits and time deposits were $73,424,000 and $54,815,000, respectively. The primary increase in savings deposits was related to a rise in higher rate money market account products introduced during the last two years. Other borrowings grew 9.1% during this period. An increase in securities sold under agreements to repurchase was partially offset by decreases in FHLB borrowings and federal funds purchased. Other borrowings include federal funds purchased, FHLB borrowings, securities sold under agreements to repurchase and U. S. Treasury demand notes. Taxable-equivalent net interest income of $20,435,000 was $2,094,000 or 11.4% higher in the third quarter of 2001, compared to $18,341,000 for the same period in 2000. Interest income grew $1,275,000 during the period, due to a 13.5% rise in earning asset volumes. Interest expense actually decreased $819,000 as a result of lower rates, partially offset by higher deposit volumes. The rates paid on all deposit accounts and other borrowings decreased during this period. Non-accruing loans are included in the average balance yield calculation, but the average non-accruing loans had no material effect on the results. INTEREST RATE SENSITIVITY ANALYSIS The Corporation actively manages its interest rate sensitivity positions. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve consistent growth in net interest income. The Asset/Liability Committee, using policies and procedures approved by the Corporation's Boards of Directors, is responsible for managing the rate sensitivity position. The PAGE 10 Corporation manages interest rate sensitivity by changing mix and repricing characteristics of its assets and liabilities through their investment securities portfolios, its offering of loan and deposit terms and borrowings from the FHLB. The nature of the Corporation's current operations is such that it is not subject to foreign currency exchange or commodity price risk. The Corporation does not own trading assets and does not have any hedging transactions in place, such as interest rate swaps, caps or floors. The Corporation uses two principal reports to measure interest rate risk: asset/liability simulation 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 Corporation's net interest income is simulated by increasing and decreasing interest rates. This simulation is known as rate shocks. The September 30, 2001 report below forecasts changes in the Corporation's market value of equity under alternative interest rate environments. The market value of equity is defined as the net present value of the Corporation's existing assets and liabilities.
(Dollars in thousands) CHANGE IN ASSET/LIABILITY MARKET VALUE MARKET VALUE PERCENTAGE APPROVED OF EQUITY OF EQUITY CHANGE PERCENT CHANGE ------------ ---------------- ----------- --------------- +300 Basis Points 225,380 (9,936) -4.22% +/- 45% +200 Basis Points 237,773 2,457 1.04% +/- 30% +100 Basis Points 236,375 1,059 0.45% +/- 15% Flat Rate . . . . 235,316 - 0.00% -100 Basis Points 194,179 (41,137) -17.48% +/- 15% -200 Basis Points 165,262 (70,054) -29.77% +/- 30% -300 Basis Points 173,144 (62,172) -26.42% +/- 45%
In the event the Corporation should experience an excessive decline in their market value of equity resulting from changes in interest rates, it has a number of options which it could utilize to remedy such a mismatch. The Corporation could restructure its investment portfolios through sale or purchase of securities with more favorable repricing attributes. It could also emphasize loan products with appropriate maturities or repricing attributes, or attract deposits or obtain borrowings with desired maturities. NET INTEREST MARGIN --------------------- The net interest margin of 4.14% for the nine-month period ended September 30, 2001, decreased from the 4.24% net interest margin for the first nine months of 2000. The decrease in the net interest margin is the result of a reduction in the yield earned on earning assets, partially offset by a decrease in funding cost. The yield on earning assets of 7.64% during the first nine months of 2001 was lower than the 7.95% earned during the same period in 2000. The decrease in the yield was due to lower yields earned in all earning asset categories, related to the impact of the decrease in interest rates during this period. From September 30, 2000 to September 30, 2001, the yield on loans decreased 17 basis points compared to a 400 basis points reduction in the prime rate. During the first nine months of 2001, the average interest rate paid on interest-bearing deposits and other borrowings of 4.14% was lower than the same period in 2000 rate of 4.24%. This decrease in rates paid on interest bearing deposits is due to the lower rates associated with money market and savings accounts. Year-to-date 2001 certificates of deposits rate was 3 basis points higher than the same period in 2000. The 2001 nine-month net interest margin has matched the entire year 2000 net interest margin of 4.14%. The third quarter of 2001 net interest margin of 4.10% was lower than the third quarter 2000 net interest margin of 4.18%. 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 PAGE 11 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 represent 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, via 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. 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. PAGE 12 For the first nine months of 2001, the provision for loan losses was $2,962,000, compared to $1,636,000, for the same period in 2000. The higher provision for loan losses during the nine months of 2001, compared to the same period in 2000 is attributed to an increase in net loans charged off and the growth in loans. Net loans charged off was $2,824,000 for the nine months ended September 30, 2001, compared to $1,191,000 for the nine months ended September 30, 2000. Net loans charged off in the third quarter of 2001 of $712,000 were higher than the $497,000 charged off in the third quarter of 2000. The increase in loans charged off was primarily due to indirect consumer related loans, leases and commercial loans. The ratio of nonperforming assets to total assets for September 30, 2001 of .27% was lower than the December 31, 2000 and September 30, 2000 ratios of .29% and .31%, respectively. Allowance for Loan Losses ---------------------------- Transactions in the allowance for loan losses are as follows:
2001 2000 ------------ ------------ Balance, beginning of year . . . . . . . . $15,210,000 $14,887,000 Provision charged to operating expenses 2,962,000 1,636,000 Loans charged off . . . . . . . . . . . (3,645,000) (1,717,000) Recoveries. . . . . . . . . . . . . . . 821,000 526,000 ------------ ------------ Balance, September 30. . . . . . . . . . . $15,348,000 15,332,000 ============ ============
Ratios: . . . . . . . . . . . . . . . . . . . . . Sept. 30, 2001 Dec. 31, 2000 Sept. 30, 2000 ------------------------------------------------- --------------- -------------- --------------- Allowance for loan losses to nonperforming assets 261.9% 268.3% 259.1% Nonperforming assets to total loans & net assets acquired in foreclosure . . . . . . . . . . . 0.45% 0.47% 0.50% Nonperforming assets to total assets. . . . . . . 0.27% 0.29% 0.31% Allowance for loan losses to total loans. . . . . 1.18% 1.25% 1.29%
The following table sets forth an allocation of the allowance for loan losses by loan category: September 30, 2001 ------------------- Percent Amount of Loans ------------------- --------- Commercial and industrial $ 5,161 26% Consumer loans. . . . . . 5,738 34% Real estate . . . . . . . 2,889 30% Lease financing . . . . . 1,560 10% ------------------- --------- Total . . . . . . . . . $ 15,348 100% =================== =========
Nonperforming assets (nonaccruing loans, net assets in foreclosure and troubled debt restructured loans) were 0.45% of total loans and net assets acquired in foreclosure at September 30, 2001, compared to 0.47% at December 31, 2000 and 0.50% at September 30, 2000. The ratio of the allowance for loan losses to loans at September 30, 2001 of 1.18% decreased from the December 31, 2000 and September 30, 2000 ratios of 1.25% and 1.29%, respectively. Nonaccruing loans at September 30, 2001 of $5,446,000 increased 1.4% from the December 31, 2000 level of $5,370,000, and grew 6.4% from the September 30, 2000 level of $5,119,000. The increase in nonaccruing loans at September 30, 2001, compared to September 30, 2000 was primarily the result of an increase in commercial nonaccruing loans. PAGE 13 Net assets in foreclosure totaled $404,000 as of September 30, 2001, an increase of $116,000 from the December 31, 2000 balance of $288,000. During the first nine months of 2001, transfers from loans to assets in foreclosure were $1,096,000; payments on foreclosed properties totaled $963,000. There was $17,000 in write-downs of assets in foreclosure during the first nine months of 2001. The loans transferred to assets in foreclosure included commercial loans of $140,000, mortgages of $53,000, consumer loans of $24,000 and leases of $879,000. The balance of net assets in foreclosure at September 30, 2000 was $358,000. 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. 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 September 30, 2001, loans past due 90 days or more and still accruing interest were $714,000, compared to $514,000 as of December 31, 2000 and $951,000 as of September 30, 2000. The decrease in loans past due 90 days at September 30, 2001, compared September 30, 2000 was primarily the result of a decrease in commercial loans past due 90 days. The increase in loans past due 90 days at September 30, 2001, compared to December 31, 2000 was the result of consumer loans and leases.
The following information concerns impaired loans: Sept. 30, 2001 Dec. 31, 2000 Sept. 30, 2000 --------------- -------------- --------------- Impaired Loans . . . . . . . . . . . . . . . . . $ 3,468,000 $ 3,322,000 $ 4,295,000 =============== ============== =============== Average year-to-date impaired loans:. . . . . . $ 3,322,000 $ 2,965,000 $ 2,648,000 =============== ============== =============== Impaired loans with specific loss allowances: . $ 3,468,000 $ 3,322,000 $ 4,295,000 =============== ============== =============== Loss allowances reserved on impaired loans: . . $ 369,000 $ 377,000 $ 445,000 =============== ============== =============== Year-to-date income recognized on impaired loans $ 69,000 $ 128,000 $ 79,000 =============== ============== ===============
The Banks' policy for interest income recognition on impaired loans is to recognize income on restructured loans under the accrual method. The Banks recognize income on nonaccrual loans under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Banks. The Banks will not recognize income if these factors do not exist.
OTHER OPERATING INCOME ------------------------ Nine Months Ended Three Months Ended September 30, September 30, ------------------- ------------------- 2001 2000 2001 2000 ----------------------- ------- ------ ------ (Dollars in thousands) (Dollars in thousands) Service charges . . . . . . . . . . $ 3,878 $2,814 1,403 943 Security gains (losses), net. . . . 3,923 (105) 2,140 87 Trust income. . . . . . . . . . . . 2,541 2,252 826 790 Bank-owned life insurance . . . . . 1,818 1,302 535 576 Other income. . . . . . . . . . . . 3,409 2,496 1,352 852 ---------------------- ------ ------ ------ Total other operating income. $ 15,569 $8,759 $6,256 $3,248 ======================= ======= ====== ======
PAGE 14 Other operating income for the first nine months of 2001 increased $6,810,000, or 77.7%, from $8,759,000 at September 30, 2000 to $15,569,000 at September 30, 2001. A $4,028,000 increase in security gains contributed to this rise. The rise in other income was $2,782,000, or 31.4%, not inclusive of the securities gains and losses. This rise in other operating income is the result of a $1,064,000 increase in service charges, a $289,000 growth in trust income and a $913,000 increase in other income. Bank-owned life insurance (BOLI) income rose $516,000. The third quarter 2001 other income was 92.6% higher than the third quarter of 2000. A $2,053,0000 rise in security gains was the primary factor in this rise, along with increases in the all of the remaining other income categories. The rise in other income in the third quarter of 2001 was $955,000, or 30.2% higher than the third quarter of 2000, not inclusive of the securities gains and losses. Service charges grew $1,064,000 or 37.8% in the first nine months of 2001, compared to the same period in 2000. This rise is the result of an increase 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 driving force behind the increase in service charges was the introduction of a new overdraft product in March 2001. The growth in overdraft fees during the first nine months of 2001 was $917,000, compared to the same period in 2000. The remaining increase is related to the growth in average transaction deposits and enhanced fee structures. The 2001 third quarter service charge income of $1,403,000 increased $460,000 or 48.8% over the third quarter of 2000, primarily due to an increase in overdraft fees. The Corporation recorded net security gains on the sale of securities of $3,923,000 in the first nine months of 2001, compared to a $105,000 loss in the same period in 2000. The Corporation recorded net security gains on the sale of securities of $2,140,000 in the third quarter of 2001 and $87,000 in the third quarter of 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 grew $289,000, or 12.8% in the first nine months of 2001 and $36,000, or 4.6% in the third quarter of 2001, compared to the same periods in 2000. These increases were the result of both an increase in the book value of trust assets under management from September 30, 2000 to September 30, 2001, and the Corporation's continuing emphasis on marketing the Investment Management and Trust Services Division's products and services. The Corporation's average 2001 year to date investment in bank-owned life insurance (BOLI) of $38,378,000 exceeded the $29,585,000 averaged during the same period in 2000. The majority of this growth took place in June of 2000 when $10,000,000 of additional BOLI was purchased. This growth was the basis for the rise in BOLI income from $1,302,000 in the first half of 2000 to $1,818,000 for the same period in 2001. 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 $535,000 of BOLI income during the third quarter of 2001 and $576,000 during the third quarter of 2000. Other income for the first nine months of 2001 increased $913,000, or 36.6%, compared to the same period in 2000. The third quarter of 2001 other income of $1,352,000 grew $500,000, or 58.7%, over the third quarter of 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. Partially offsetting these increases was a reduction in the gains on the sale of off lease vehicles. PAGE 15
OTHER OPERATING EXPENSES -------------------------- Nine Months Ended Three Months Ended September 30, September 30, ------------------- --------------------- 2001 2000 2001 2000 ----------------------- ------- ------- ------- (Dollars in thousands) (Dollars in thousands) Salaries. . . . . . . . . . . . . . . $ 16,350 $14,560 $ 5,637 $ 4,928 Employee benefits . . . . . . . . . . 3,294 2,914 1,102 963 Occupancy expense . . . . . . . . . . 2,457 2,201 792 726 Furniture and equipment expense . . . 3,776 3,783 1,310 1,386 Other expenses. . . . . . . . . . . . 13,572 10,122 4,903 3,001 ----------------------- ------ -------- ----- Total other operating expenses. $ 39,449 $33,580 $13,744 $11,004 ======================= ======= ======= =======
Other operating expenses for the first nine months of 2001 of $39,449,000 increased $5,869,000, or 17.5%, from $33,580,000 for the same period in 2000. Contributing to this rise in other operating expense was a $2,200,000 increase in the off lease vehicles residual reserve. Net of the increase in the off lease vehicle residual reserve expense, other operating expenses would have grown 11.0% during this period. Also contributing to this rise in other operating expenses were costs associated with the organization of a consumer loan reinsurance company and the introduction of alternative investment products including mutual funds and annuities during the last quarter of 2000. Employee salaries increased $1,790,000, or 12.3% from $14,560,000 for the first nine months of 2000 to $16,350,000 for the same period in 2001. Employee benefits of $3,294,000 expensed in the first nine months of 2001, were $380,000, or 13.0% higher than the $2,914,000 of employee benefits expensed during the same period in 2000. The third quarter 2001 salary and employee benefits exceeded the third quarter of 2000 levels both by 14.4%. The increase in salaries and employee benefits reflects merit increases, expenses related to the sale of alternative investment products and additional staff necessitated by the growth of the Banks. Also contributing to this increase was a special one-time bonus paid during the third quarter in recognition of the Corporation reaching the $2 billion in assets level. Net occupancy expense increased $256,000, or 11.6%, from $2,201,000 in the first nine months of 2000 to $2,457,000 in the first nine months of 2001. Net occupancy expenses grew 9.1% in the third quarter of 2001, compared to the third quarter of 2000. Contributing to this increase were higher energy costs, an increase in taxes and a reduction in rental income. Equipment expenses decreased $7,000 during the first nine months of 2001, compared to the same period in 2000. The third quarter equipment expenses decreased $76,000 or 5.5% over the third quarter of 2000. These decreases are related to lower depreciation expenses, partially offset by higher maintenance expense. Other expenses increased $3,450,000, or 34.1%, from $10,122,000 in the first nine months of 2000, compared to $13,572,000 in other expenses recorded during the same period in 2001. Third quarter 2001 other expenses of $4,903,000 were 63.4% higher than the third quarter of 2000 other expenses of $3,001,000. The rise in other operating expense was the result of a year-to-date $2,200,000 increase and a $1,051,000 third quarter increase in the off lease vehicles residual reserve. The Corporation reviews the off lease vehicles residual reserve account on a quarterly basis, and anticipates continued above normal expenses to the reserve for the fourth quarter of 2001 and continuing into 2002. Not inclusive of these two expenses, year to date September 30, 2001 and the third quarter other operating expense increased 12.6% and 28.9%, respectively, over the same periods during 2000. These increases are related to higher expenses related to marketing, advertising, internet banking, and the organization of a consumer loan reinsurance company. 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 tax-free loans. BALANCE SHEET ANALYSIS ------------------------ Total assets grew $237,303,000, or 12.3%, from $1,935,213,000 at December 31, 2000 to $2,172,516,000 at September 30, 2001. This growth was primarily the result of an increase in earning assets, which grew $230,619,000 PAGE 16 to $2,047,641,000 at September 30, 2001, from $1,817,022,000 at December 31, 2000. During the first nine months of 2001, loans grew $93,947,000, securities rose $113,486,000, federal funds sold increased $17,000,000, and interest-bearing deposits in banks grew $6,186,000. The balance of securities available for sale at September 30, 2001 of $688,101,000 increased $117,482,000 compared to the December 31, 2000 balance of $570,619,000. During the first nine months of 2001, $281,930,000 of securities were sold which generated a pretax profit of $3,923,000. In comparison, $80,539,000 of securities available for sale were sold during the first nine months of 2000 to generate a pretax loss of $105,000. 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 within different interest rate environments. The balance of investment securities held to maturity decreased $3,996,000 during the first nine months of 2001. Total loans grew $93,947,000 or 7.8% during the first nine months of 2001. The Banks realized gains in all loan categories, with the exception of leased vehicles. Total deposits increased $218,658,000, or 14.7% from $1,489,050,000 at December 31, 2000 to $1,707,708,000 at September 30, 2001. This increase was primarily due to the growth in both time deposits and money market accounts during this period. Time deposits over $100,000 increased $80,360,000 as a result of enhanced focus on municipal funds. Time deposits under $100,000 grew $70,185,000 due to the Banks' strategy to grow longer-term funding sources. Money market accounts grew $56,718,000 as a result of the growth in balances of higher rate money market account products. Savings deposits grew $14,496,000 and non-interest-bearing accounts rose $5,620,000. Interest-bearing checking accounts decreased $8,721,000. Other borrowings experienced a decrease of $10,360,000 during the first nine months of 2001. This decrease is the result of a $44,500,000 reduction in federal funds purchased. Offsetting this decrease were gains to FHLB borrowings, securities sold under agreements to repurchase and U.S. Treasury demand notes of $17,000,000, $11,556,000 and $429,000, respectively. The Corporation also issued $5,155,000 of 10.2% junior subordinate deferrable interest debentures during 2001. CAPITAL ------- Capital formation is important to the Corporation's well being and future growth. Capital for the period ending September 30, 2001 was $188,753,000, an increase of $15,217,000 over the end of 2000. The increase is the result of both the retention of the Corporation's earnings and an increase in the unrealized gains on investment securities available for sale, partially offset by the purchase of treasury stock during the first nine months of 2001. Net unrealized gains and losses on investment securities available for sale are recorded as accumulated other comprehensive income (loss) in the equity section of the balance sheet. The accumulated other comprehensive income at September 30, 2001 was a gain of $8,199,000, compared to a gain of $1,422,000 at December 31, 2000. As part of its plan to repurchase shares of outstanding common stock, the Corporation repurchased $5,048,000 of common stock during the first nine months 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. PAGE 17
(Dollars in thousands) For Capital As of September 30, 2001 Actual Adequacy Purposes ------------------------ Amount Ratio Amount Ratio ------------ --------- --------- ------ Total Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ 201,005 12.69% $ 126,745 8.00% Harleysville National Bank. . . . . . . . 115,857 9.82% 94,345 8.00% Citizens National Bank. . . . . . . . . . 39,244 14.38% 21,829 8.00% Security National Bank. . . . . . . . . . 14,613 12.71% 9,198 8.00% Tier 1 Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ 184,950 11.67% $ 63,372 4.00% Harleysville National Bank. . . . . . . . 105,911 8.98% 47,172 4.00% Citizens National Bank. . . . . . . . . . 35,825 13.13% 10,915 4.00% Security National Bank. . . . . . . . . . 13,245 11.52% 4,599 4.00% Tier 1 Capital (to average assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ 184,950 8.77% $ 84,309 4.00% Harleysville National Bank. . . . . . . . 105,911 6.98% 60,735 4.00% Citizens National Bank. . . . . . . . . . 35,825 8.37% 17,118 4.00% Security National Bank. . . . . . . . . . 13,245 8.78% 6,034 4.00%
To Be Well Capitalized Under Prompt Corrective Action Provision Amount Ratio ------------------------ ------ Total Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ - - Harleysville National Bank. . . . . . . . 117,931 10.00% Citizens National Bank. . . . . . . . . . 27,827 10.00% Security National Bank. . . . . . . . . . 11,498 10.00% Tier 1 Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ - - Harleysville National Bank. . . . . . . . 70,759 6.00% Citizens National Bank. . . . . . . . . . 16,372 6.00% Security National Bank. . . . . . . . . . 6,899 6.00% Tier 1 Capital (to average assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ - - Harleysville National Bank. . . . . . . . 75,919 5.00% Citizens National Bank. . . . . . . . . . 21,397 5.00% Security National Bank. . . . . . . . . . 7,543 5.00%
(Dollars in thousands) For Capital As of December 31, 2000 Actual Adequacy Purposes ------------------------ 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% 20,995 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%
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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 includes 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 September 30, 2001, the Corporation's Tier 1 risk-adjusted capital ratio was 11.67%, and the total risk-adjusted capital ratio was 12.69%, both well above the regulatory requirements. The risk-based capital ratios of each of the Corporation's commercial banks also exceeded regulatory requirements at September 30, 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 8.77% at September 30, 2001 and 8.97% at December 31, 2000. The year-to-date September 30, 2001 cash dividend per share of $.46 was 12.2% higher than the cash dividend for the same period in 2000 of $.41. The dividend payout ratio for the first nine months of 2001 was 39.6%, 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 nine months of 2001. 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. The liquidity measurement is based on the asset/liability model's projection of potential sources and uses of funds for the next 120 days. The resulting projections as of September 30, 2001 show the potential sources of funds exceeding the potential uses of funds. The Corporation has external sources of funds, which can be drawn upon when funds are required. The primary source of external liquidity is an available line of credit with the FHLB of Pittsburgh. Unused lines of credit at the FHLB of Pittsburgh were $85,438,000, as of September 30, 2001. The Banks also have unused federal funds lines of credit of $45,000,000 and non-pledged investment securities available for sale of $164,613,000 as of September 30, 2001. PAGE 19 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 holding 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 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. PAGE 20 Environmental Regulations -------------------------- There are several federal and state statutes that 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 proceedings 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 first quarter of 2002, Harleysville National Bank plans to open a location in Souderton, Pennsylvania. 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. During the second quarter of 2001, Harleysville National Bank closed its Spring City branch and moved the customer relationships to their Royersford branch. Also during the second quarter of 2001, Citizens National Bank closed its Walnutport office and moved the customer relationships to their Slatington office. 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 common stock of Citizens Bank and Trust Company. Upon the completion of the acquisition, Citizens Bank and Trust Company's banking operations 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 21 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 ----------------- --------------------------------------------------- None. 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.) PAGE 22 (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 4, 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. (b) Reports of Form 8-K Current Report on Form 8-K, dated July 12, 2001, filed with the Commission on July 13, 2001, reporting the Registrant's second quarter 2001 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/ Gregg J. Wagner ________________________ Gregg J. Wagner, Executive Vice President - Finance (Principal financial and accounting officer) Date: November 14, 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 4, 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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