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, 2002. -------------- 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 or15(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: 18,233,107 shares of Common Stock, $1.00 par value, outstanding on April 30, 2002. 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, 2002 and December 31, 2001. . . . . . . . . . . . . . . . . 3 Consolidated Statements of Income - Three Months Ended March 31, 2002 and 2001. . . . . . . . . . . 4 Consolidated Statements of Shareholders' Equity - Three Months Ended March 31, 2002 and 2001. . . . 5 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2001 and 2000 . . . . . . . . 6 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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PART 1. FINANCIAL INFORMATION HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) March 31, 2002 December 31, 2001 ---------------- ------------------- ASSETS Cash and due from banks. . . . . . . . . . . . . . . . . . . . . $ 51,943 $ 62,974 Fed funds sold . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 12,500 Interest-bearing deposits in banks . . . . . . . . . . . . . . . 3,839 7,150 ---------------- ------------------- Total cash and cash equivalents. . . . . . . . . . . . . . . 67,782 82,624 ---------------- ------------------- Investment securities available for sale . . . . . . . . . . . . 672,907 706,371 Investment securities held to maturity (fair value $25,718 and $26,782, respectively). . . . . . . . . 24,813 26,099 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,326,780 1,313,934 Less: Deferred costs, net. . . . . . . . . . . . . . . . . . . . 2,291 2,675 Allowance for loan losses . . . . . . . . . . . . . . . (16,125) (15,558) ---------------- ------------------- Net loans . . . . . . . . . . . . . . . . . . . . . 1,312,946 1,301,051 ---------------- ------------------- Bank premises and equipment, net . . . . . . . . . . . . . . . . 21,064 21,439 Accrued income receivable. . . . . . . . . . . . . . . . . . . . 12,539 11,907 Net assets in foreclosure. . . . . . . . . . . . . . . . . . . . 459 609 Intangible assets, net . . . . . . . . . . . . . . . . . . . . . 1,688 1,360 Bank-owned life insurance. . . . . . . . . . . . . . . . . . . . 46,580 45,942 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 12,157 11,569 ---------------- ------------------- Total assets. . . . . . . . . . . . . . . . . . . . . . $ 2,172,935 $ 2,208,971 ================ =================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . $ 241,285 $ 254,638 Interest-bearing: Checking accounts . . . . . . . . . . . . . . . . . . . . . 175,527 169,156 Money market accounts . . . . . . . . . . . . . . . . . . . 404,572 419,890 Savings . . . . . . . . . . . . . . . . . . . . . . . . . . 192,152 179,284 Time, under $100,000. . . . . . . . . . . . . . . . . . . . 495,432 489,345 Time, $100,000 or greater . . . . . . . . . . . . . . . . . 198,463 234,549 ---------------- ------------------- Total deposits . . . . . . . . . . . . . . . . . . . . 1,707,431 1,746,862 Accrued interest payable . . . . . . . . . . . . . . . . . . . . 25,522 27,114 U.S. Treasury demand notes . . . . . . . . . . . . . . . . . . . 1,737 2,677 Federal Home Loan Bank (FHLB) borrowings . . . . . . . . . . . . 142,750 127,750 Securities sold under agreements to repurchase . . . . . . . . . 70,342 80,393 Guaranteed preferred beneficial interest in Corporation's subordinated debentures. . . . . . . . . . . . . . . . . . . . 5,000 5,000 Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . 31,285 29,826 ---------------- ------------------- Total liabilities. . . . . . . . . . . . . . . . . . . 1,984,067 2,019,622 ---------------- ------------------- 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 18,607,160 shares in 2002 and 18,570,971 shares in 2001 . . . . . . . . . . . . . . 18,607 18,571 Additional paid in capital . . . . . . . . . . . . . . . . . 71,902 71,419 Retained earnings. . . . . . . . . . . . . . . . . . . . . . 104,876 100,171 Treasury stock, at cost: 365,155 shares in 2002 and 287,440 shares in 2001. . . . . . . . . . . . . . . . (7,160) (5,346) Accumulated other comprehensive income . . . . . . . . . . . 643 4,534 ---------------- ------------------- Total shareholders' equity . . . . . . . . . . . . . . 188,868 189,349 ---------------- ------------------- Total liabilities and shareholders' equity . . . . . . $ 2,172,935 $ 2,208,971 ================ =================== See accompanying notes to consolidated financial statements.
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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended March 31, (Dollars in thousands except weighted average number --------- of common shares and per share information) 2002 2001 ----------- ----------- INTEREST INCOME: Loans, including fees . . . . . . . . . . . . . . . . . . $ 21,324 $ 22,570 Lease financing . . . . . . . . . . . . . . . . . . . . . 2,182 2,504 Investment securities: Taxable. . . . . . . . . . . . . . . . . . . . . . . . 7,461 6,532 Exempt from federal taxes. . . . . . . . . . . . . . . 2,635 2,818 Federal funds sold. . . . . . . . . . . . . . . . . . . . 39 24 Deposits in banks . . . . . . . . . . . . . . . . . . . . 48 61 ----------- ----------- Total interest income . . . . . . . . . . . . . . . 33,689 34,509 ----------- ----------- INTEREST EXPENSE: Savings deposits. . . . . . . . . . . . . . . . . . . . . 2,889 5,160 Time, under $100,000. . . . . . . . . . . . . . . . . . . 5,998 6,321 Time, $100,000 or greater . . . . . . . . . . . . . . . . 2,054 2,821 Borrowed funds. . . . . . . . . . . . . . . . . . . . . . 2,140 3,056 ----------- ----------- Total interest expense. . . . . . . . . . . . . . . 13,081 17,358 ----------- ----------- Net interest income . . . . . . . . . . . . . . . . 20,608 17,151 Provision for loan losses . . . . . . . . . . . . . . . . 1,351 647 ----------- ----------- Net interest income after provision for loan losses 19,257 16,504 ----------- ----------- OTHER OPERATING INCOME: Service charges . . . . . . . . . . . . . . . . . . . . . 1,521 1,027 Security gains, net . . . . . . . . . . . . . . . . . . . 1,231 721 Trust income. . . . . . . . . . . . . . . . . . . . . . . 744 827 Bank-owned life insurance income. . . . . . . . . . . . . 638 691 Other Income. . . . . . . . . . . . . . . . . . . . . . . 1,389 926 ----------- ----------- Total other operating income. . . . . . . . . . . . 5,523 4,192 ----------- ----------- Net interest income after provision for loan losses and other operating income . . . . . . . . . . . 24,780 20,696 ----------- ----------- OTHER OPERATING EXPENSES: Salaries, wages and employee benefits . . . . . . . . . . 7,685 6,300 Occupancy . . . . . . . . . . . . . . . . . . . . . . . . 1,237 902 Furniture and equipment . . . . . . . . . . . . . . . . . 1,288 1,207 Other expenses. . . . . . . . . . . . . . . . . . . . . . 4,270 4,056 ----------- ----------- Total other operating expenses. . . . . . . . . . . 14,480 12,465 ----------- ----------- Income before income tax expense. . . . . . . . . . 10,300 8,231 Income tax expense. . . . . . . . . . . . . . . . . . . . 2,488 1,700 ----------- ----------- Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 7,812 $ 6,531 =========== =========== Weighted average number of common shares: Basic . . . . . . . . . . . . . . . . . . . . . . 18,270,983 18,411,604 =========== =========== Diluted . . . . . . . . . . . . . . . . . . . . . 18,781,078 18,866,566 =========== =========== Net income per share information: Basic . . . . . . . . . . . . . . . . . . . . . . $ 0.43 $ 0.35 =========== =========== Diluted . . . . . . . . . . . . . . . . . . . . . $ 0.42 $ 0.35 =========== =========== Cash dividends per share. . . . . . . . . . . . . . . . . $ 0.17 $ 0.15 =========== =========== * Adjusted for 100% stock dividend effective 8/10/01. See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES THREE MONTHS ENDED MARCH 31, 2002 Accumulated Common Stock Other -------------- (Dollars in thousands) Number of Par Additional Retained Comprehensive Shares Value Paid in Capital Earnings Income -------------- ----------------- ----------------- ---------- --------------- Balance, December 31, 2001. . . . . . 18,571 $ 18,571 $ 71,419 $ 100,171 $ 4,534 Stock options . . . . . . . . . . . . 36 36 483 - - Net income. . . . . . . . . . . . . . - - - 7,812 - Other comprehensive income, net of reclassifications and tax. . - - - - (3,891) Purchases of Treasury stock . . . . . (1,814) (1,814) Cash dividends. . . . . . . . . . . . - - - (3,107) - -------------- ----------------- ----------------- ---------- --------------- Comprehensive income. . . . . . . . . Balance, March 31, 2002 . . . . . . . 18,607 $ 18,607 $ 71,902 $ 104,876 $ 643 ============== ================= ================= ========== =============== FOR THE YEAR ENDED DECEMBER 31, 2001 Accumulated Common Stock Other ------------ Dollars in thousands). . . . . . . . Number of Par Additional Retained Comprehensive Shares Value Paid in Capital Earnings Income ------------------------------------- -------------- ----------------- ----------------- ---------- --------------- Balance, December 31, 2000. . . . . . 9,254 $ 9,254 $ 79,869 $ 83,244 $ 1,422 Stock options . . . . . . . . . . . . 44 44 812 - - Stock dividends . . . . . . . . . . . 9,273 9,273 (9,273) - Stock awards. . . . . . . . . . . . . 11 11 Net income. . . . . . . . . . . . . . - - - 28,820 - Other comprehensive income, net of reclassifications and tax. . - - - - 3,112 Purchases of Treasury stock . . . . . (5,093) (5,093) Cash dividends. . . . . . . . . . . . - - - (11,893) - -------------- ----------------- ----------------- ---------- --------------- Comprehensive income. . . . . . . . . Balance, December 31, 2001. . . . . . 18,571 $ 18,571 $ 71,419 $ 100,171 $ 4,534 ============== ================= ================= ========== =============== (Dollars in thousands) Treasury Comprehensive Stock Total Income ---------- --------------- -------- Balance, December 31, 2001. . . . . . $ (5,346) $ 189,349 Stock options . . . . . . . . . . . . - 519 Net income. . . . . . . . . . . . . . - 7,812 $ 7,812 Other comprehensive income, net of reclassifications and tax. . - (3,891) (3,891) Purchases of Treasury stock Cash dividends. . . . . . . . . . . . - (3,107) ---------- --------------- Comprehensive income $ 3,921 ======== Balance, March 31, 2002 . . . . . . . $ (7,160) $ 188,868 ========== =============== FOR THE YEAR ENDED DECEMBER 31, 2001 ------------------------------------- (Dollars in thousands). . . . . . . . Treasury Comprehensive Stock Total Income ------------------------------------- ---------- --------------- Balance, December 31, 2000. . . . . . $ (253) $ 173,536 Stock options . . . . . . . . . . . . - 856 Stock dividends Stock awards Net income. . . . . . . . . . . . . . - 28,820 $28,820 Other comprehensive income, net of reclassifications and tax. . - 3,112 3,112 Purchases of Treasury stock Cash dividends. . . . . . . . . . . . - (11,893) ---------- --------------- Comprehensive income $31,932 ======== Balance, December 31, 2001. . . . . . $ (5,346) $ 189,349 ========== ===============
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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:. . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 2001 ------------------------------ Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,812 $ 6,531 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 1,351 647 Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 587 646 Net amortization of investment securities discount/premiums . . . . . . . . . . . . . . . . . . . . 690 90 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . (725) 7,185 Net realized security gains. . . . . . . . . . . . . . . . . . . . . . (1,231) (721) Increase in accrued income receivable. . . . . . . . . . . . . . . . . (632) (223) Increase in accrued interest payable . . . . . . . . . . . . . . . . . (1,592) 2,140 Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . (588) (1,004) Net increase (decrease) in other liabilities . . . . . . . . . . . . . 4,279 (4,035) Increase (decrease) in unearned income . . . . . . . . . . . . . . . . 384 (74) Write-down of other real estate owned. . . . . . . . . . . . . . . . . 6 - (Increase) decrease in intangible assets . . . . . . . . . . . . . . . (328) 69 ----------- ---------- Net cash provided by operating activities . . . . . . . . . . . . . $ 10,013 $ 11,251 ----------- ---------- INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale. . . . . $ 117,295 $ 71,928 Proceeds, maturity or calls of investment securities held to maturity. . 1,295 979 Proceeds, maturity or calls of investment securities available for sale. 64,481 22,707 Purchases of investment securities available for sale. . . . . . . . . . (153,767) (116,804) Net increase in loans. . . . . . . . . . . . . . . . . . . . . . . . . . (13,827) (18,607) Net increase in premises and equipment . . . . . . . . . . . . . . . . . (212) (669) Purchase of bank-owned life insurance. . . . . . . . . . . . . . . . . . (638) (691) Proceeds from sales of other real estate . . . . . . . . . . . . . . . . 342 341 ----------- ---------- Net cash provided by (used in) investing activities . . . . . . . . $ 14,969 $ (40,816) ----------- ---------- FINANCING ACTIVITIES: Net (decrease) increase in deposits. . . . . . . . . . . . . . . . . . . $ (39,431) $ 41,946 Decrease in U.S. Treasury demand notes . . . . . . . . . . . . . . . . . (940) (40) Decrease in federal funds purchased. . . . . . . . . . . . . . . . . . . - (22,000) Increase in FHLB borrowings . . . . . . . . . . . . . . . . . . . . . . 15,000 5,000 (Decrease) increase in securities sold under agreement . . . . . . . . . (10,051) 10,301 Proceeds from issuance of guaranteed preferred beneficial interest in Corporation's subordinated debentures . . . . . . . . . . . . . . . - 5,000 Cash dividends & fractional shares . . . . . . . . . . . . . . . . . . . (3,107) (2,760) Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . (1,814) (2,858) Stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519 9 ---------- ---------- Net cash (used in) provided by financing activities. . . . . . . . . . $ (39,824) $ 34,598 ---------- ---------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . $ (14,842) $ 5,033 Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 82,624 55,525 ----------- ---------- Cash and cash equivalents at end of the period . . . . . . . . . . . . . . $ 67,782 $ 60,558 =========== ========== Cash paid during the period for: Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,673 $ 15,219 =========== ========== Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 750 $ - =========== ========== Supplemental disclosure of noncash investing and financing activities: Transfer of assets from loans to other real estate owned. . . . . . $ 198 $ 580 =========== ========== See accompanying notes to consolidated financial statements.
PAGE 6 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, 2002, the results of its operations for three month periods ended March 31, 2002 and 2001 and the cash flows for the three month periods ended March 31, 2002 and 2001. This quarterly report refers to the corporation's subsidiary banks, collectively as "the banks." We suggest 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 2001 annual report. The results of operations for the three-month periods ended March 31, 2002 and 2001 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 has adopted SFAS No. 130, "Reporting Comprehensive Income" which 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 (losses) on investment securities available for sale. The adoption of SFAS No. 130 did not have a material impact on the Corporation's financial position or results of operation. The components of other comprehensive income are as follows:
(Dollars in thousands) BEFORE TAX TAX NET OF TAX March 31, 2002 AMOUNT EXPENSE AMOUNT ---------------------------------- ------------ ------------ ------------ Unrealized losses on securities: Unrealized holding losses Arising during period . . . $ (4,755) $ 1,664 $ (3,091) Less reclassification Adjustment for gains Realized in net income. . . 1,231 (431) 800 ------------ ------------ ------------ Other comprehensive loss, net. . $ (5,986) $ 2,095 $ (3,891) ============ ============ ============ BEFORE TAX TAX NET OF TAX March 31, 2001 . . . . . . . . . . AMOUNT EXPENSE AMOUNT ---------------------------------- ------------ ------------ ------------ Unrealized gains on securities: Unrealized holding gains Arising during period . . . $ 8,169 $ (2,859) $ 5,310 Less reclassification Adjustment for gains Realized in net income. . . 721 (252) 469 ------------ ------------ ------------ Other comprehensive income, net. $ 7,448 $ (2,607) $ 4,841 ============ ============ ============
PAGE 7 NOTE 4 - 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 did not have a material impact on the Corporation's financial position, or results of operations. NOTE 5 - 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 did not have a material impact on the Corporation's financial position, or results of operations. NOTE 6- On January 1, 2002, the Corporation adopted Statement of Position (SOP) 01-6, Accounting by Certain Entities That Lend to or Finance the Activities of Others, which reconciles and conforms existing differences in the accounting and financial reporting guidance in the AICPA Audit and Accounting Guides, Banks and Savings Institutions, Audits of Credit Unions, and Audits of Finance Companies. It also carries forward accounting guidance for practices deemed to be unique to certain financial institutions. The adoption of this SOP had no impact on the Corporation's financial position or results of operations. NOTE 7 - On February 22, 2001, the Corporation issued $5,000,000 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 8 - 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 9 - 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 8 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, HNC Financial Company and HNC Reinsurance 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 analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful
OVERVIEW -------- The Corporation recorded a 20.0% increase in first quarter 2002 diluted earnings per share, compared to the first quarter of 2001. This strong performance was the result of an increase in the net interest margin, the growth in earning assets and a rise in other income. Loan quality also improved during the first quarter of 2002. First quarter 2002 diluted earnings per share of $.42, increased 20% over the first quarter 2001 diluted earnings per share of $.35. First quarter basic earnings per share in 2002 of $.43 exceed the first quarter 2001 basic earnings per share of $.35 by 22.9%. Net income of $7,812,000 increased 19.6% over the first quarter 2001 net income of $6,531,000. The Corporation's consolidated total assets were $2,172,935,000 at March 31, 2002, 9.2% above the March 31, 2001 level of $1,989,232,000. Contributing to the growth in net income during the first three months of 2002, compared to the same period in 2001, were higher net interest income and other operating income, which were partially offset by a higher provision for loan losses and an increase in other operating expenses. Net interest income grew $3,457,000, as a result of an increase in the net interest margin of 18 basis points and a 12.1% rise in average earning assets. Other operating income rose $1,331,000, due to higher service charge fees, bank-owned life insurance income, gains on the sale of securities and other fee based income. Offsetting these increases was a rise in other operating expenses related to the overall growth in the Corporation. For the three months ended March 31, 2002, the annualized return on average shareholders' equity and the annualized return on average assets were PAGE 9 16.24% and 1.43%, respectively. For the same period in 2001, the annualized return on average realized shareholders' equity was 14.89% and the annualized return on average assets was 1.35%. The average accumulated other comprehensive income at March 31, 2002 was a gain of $4,343,000, compared to a gain of $2,615,000 at March 31, 2001. This higher accumulated other comprehensive income is the result of the higher market value of investments available for sale at March 31, 2002, compared to March 31, 2001. Excluding unrealized gains and losses on securities available for sale, the annualized return on average realized shareholder's equity for March 31, 2002 and 2001 were 16.62% and 15.12%, respectively. The quality of the loan portfolios is a primary focus of the banks. Nonperforming assets (nonaccruing loans and net assets in foreclosure) were .27% of total assets at March 31, 2002, compared to .32% at December 31, 2001and .30% at March 31, 2001. As of March 31, 2002, aggregate loans past due 90 or more and still accruing interest were $649,000 compared to $1,926,000 at December 31, 2001 and $167,0000 at March 31, 2001. 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, employee benefits 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 ------------------------------------------------------------- The first quarter of 2002 net interest income of $20,608,000 increased $3,457,000, or 20.2%, over the same period in 2001, which produced net interest income of $17,151,000. As illustrated in the table below, the primary source of the increase in net interest income was the reduction in funding costs in the first quarter of 2002, compared to the same period in 2001. The lower deposit and other borrowing rates outpaced the reduction in earning asset yields related to the lower rate environment in the first quarter of 2002. The lower interest income level related to the reduction in earning asset yields was partially offset by higher earning asset levels. 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, 2002 over March 31, 2001 by their rate and volume components.
Three Months Ended March 31, 2002 Over/Under March 31, 2001 Total Caused by: ------------ Variance Rate Volume -------------------- ------------ ------- Interest Income: Securities *. . . . . . . . . . . . . . . $ 508 $ (1,310) $ 1,818 Money market instruments. . . . . . . . . 2 (55) 57 Loans * . . . . . . . . . . . . . . . . . (1,574) (3,327) 1,753 -------------------- ------------ ------- Total . . . . . . . . . . . . . . . . . . (1,064) (4,692) 3,628 -------------------- ------------ ------- Interest Expense: Savings deposits. . . . . . . . . . . . . (2,271) (2,619) 348 Time deposits and certificates of deposit (1,090) (2,126) 1,036 Other borrowings. . . . . . . . . . . . . (916) (945) 29 -------------------- ------------ ------- Total . . . . . . . . . . . . . . . . . . . (4,277) (5,690) 1,413 -------------------- ------------ ------- Net Interest Income . . . . . . . . . . . . $ 3,213 $ 998 $ 2,215 ==================== ============ ======= *Tax Equivalent Basis
PAGE 10 Taxable-equivalent net interest income was $22,138,000 for the first three months of 2002, compared to $18,925,000 for the same period in 2001, a 17.0% or $3,213,000 increase. This rise in taxable-equivalent net interest income was primarily due to a $4,277,000 reduction in interest expense, which was in part offset by a decrease in interest income, related to rate. Total taxable-equivalent interest income decreased $1,064,000, primarily the result of lower earning asset yields, partially offset by the higher volumes in both the security and loan earning asset categories. Average year-to-date loan and security volumes grew $97,054,000 and $115,686,000, respectively at March 31, 2002, compared to the same period in 2001. The yield earned on earning assets decreased 107 basis points from 7.93% in the first quarter of 2001 to 6.86% during the first quarter of 2002. Total interest expense decreased $4,277,000 during the first three months of 2002, compared to the same period in 2001. This reduction was the result of lower rates paid on deposits, partially offset by the added interest expense related to the higher deposit and other borrowing volumes. The rate paid on interest bearing deposits and other borrowings decreased 151 basis points from 4.58% during the first quarter of 2001 to 3.07% recorded in the first quarter of 2002. Average interest bearing deposits and other borrowings grew $186,339,000, or 12.3% during this period. The average year-to-date savings deposits increased $92,051,000 or 13.7%, primarily due to a $59,387,000 increase in money market accounts. This increase in money market accounts was due to higher average volumes in our higher rate public money market and treasury indexed accounts. Average year-to-date time deposits and other borrowings grew $91,234,000 and $3,054,000, respectively 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. NET INTEREST MARGIN --------------------- The net interest margin of 4.31% for the three-month period ended March 31, 2002, increased 18 basis points from the 4.13% net interest margin for the first three months of 2001. The higher net interest margin experienced in 2002 is related to the lower funding costs and the increase in earning asset levels. The yield on earning assets of 6.86% earned during the first three months of 2002 was lower than the 7.93% earned during the first three months of 2001. The decrease in the yield is due to lower interest environment during the first quarter of 2002, compared to the same period in 2001. This reduction in the yield earned on earning assets was more than offset by a reduction in the rate paid on deposits and other borrowings. The first quarter 2002 average interest rate paid on interest-bearing deposits and other borrowings of 3.07% was lower than the first three months of 2001 rate of 4.58%. 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 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 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 Corporation's net interest income is simulated by increasing and decreasing interest rates. This simulation is known as rate shocks. The March 31, 2002 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. The results of the March 31, 2002 rate shock simulations show that the Corporation is within all guidelines set by the Corporation's Asset/Liability policy. PAGE 11
(Dollars in thousands) CHANGE IN ASSET/LIABILITY MARKET VALUE MARKET VALUE PERCENTAGE APPROVED OF EQUITY OF EQUITY CHANGE PERCENT CHANGE ------------ ---------------- ----------- --------------- +300 Basis Points 173,504 (51,890) -23.02% +/- 45% +200 Basis Points 196,754 (28,640) -12.71% +/- 30% +100 Basis Points 217,937 (7,457) -3.31% +/- 15% Flat Rate . . . . 225,394 - 0.00% -100 Basis Points 198,128 (27,266) -12.10% +/- 15% -200 Basis Points 170,113 (55,281) -24.53% +/- 30% -300 Basis Points 191,555 (33,839) -15.01% +/- 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 that it could use 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. PROVISION FOR LOAN LOSSES ---------------------------- The Bank uses 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 Bank's allowance for loan losses. The OCC may require the Bank 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 Bank's 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 Bank's 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 Bank's 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. PAGE 12 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 Bank analyzes 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. 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 2002 the provision for loan losses was $1,351,000, compared to $647,000 for the same period in 2001. The higher provision for loan losses during the first quarter of 2002, compared to the same period in 2001 is attributed to the higher net charge offs and the growth in loans during this period. Net loans charged off was $784,000 for the three months ended March 31, 2002, compared to $562,000 for the three months ended March 31, 2001. The increase in net charged off loans is attributed to a rise in charged off indirect consumer loans and commercial real estate loans. The ratio of the allowance for loan losses to nonperforming assets for March 31, 2002 of 277.2% was higher than the December 31, 2001 and the March 31, 2001 ratios of 223.4% and 253.8%, respectively. PAGE 13
ALLOWANCE FOR LOAN LOSSES A summary of the allowance for loan losses is as follows: (Dollars in thousands) MARCH 31, ----------- 2002 2001 ----------- ----------- Average loans. . . . . . . . . . . . . . . . . . . . . . . $1,315,458 $1,217,005 ----------- ----------- Allowance, beginning of period . . . . . . . . . . . . . . $ 15,558 $ 15,210 ----------- ----------- Loans charged off: Commercial and industrial . . . . . . . . . . . . . . . . 8 24 Consumer. . . . . . . . . . . . . . . . . . . . . . . . . 803 449 Real estate . . . . . . . . . . . . . . . . . . . . . . . 264 37 Lease financing . . . . . . . . . . . . . . . . . . . . . 62 175 ----------- ----------- Total loans charged off . . . . . . . . . . . . . . . . . 1,137 685 ----------- ----------- Recoveries: Commercial and industrial . . . . . . . . . . . . . . . . 8 2 Consumer. . . . . . . . . . . . . . . . . . . . . . . . . 279 31 Real estate . . . . . . . . . . . . . . . . . . . . . . . 29 66 Lease financing . . . . . . . . . . . . . . . . . . . . . 37 24 ----------- ----------- Total recoveries. . . . . . . . . . . . . . . . . . . . . 353 123 ----------- ----------- Net loans charged off. . . . . . . . . . . . . . . . . . . 784 562 ----------- ----------- Provision for loan losses. . . . . . . . . . . . . . . . . 1,351 647 ----------- ----------- Allowance, end of period . . . . . . . . . . . . . . . . . $ 16,125 $ 15,295 =========== =========== Ratio of net charge offs to average loans outstanding. . . . . . . . . . . . . . . . 0.06% 0.05% =========== ===========
3/31/02 12/31/01 3/31/01 ----------- ----------- ----------- Nonperforming Assets. . . . . $5,817,000 $6,963,000 $6,027,000 90 + days past due. . . . . . $ 649,000 $1,926,000 $ 167,000 Allowance for loan losses to Nonperforming assets. . . . . 277.2% 223.4% 253.8% Nonperforming assets to total Loans and net assets acquired In foreclosure. . . . . . . . 0.44% 0.53% 0.49% Allowance for loan losses To total loans. . . . . . . . 1.21% 1.18% 1.24% Nonperforming assets To total assets . . . . . . . 0.27% 0.32% 0.30%
PAGE 14 The following table sets forth an allocation of the allowance for loan losses by loan category:
March 31, 2002 -------------- Percent Amount of Loans -------- --------- Commercial and industrial $ 5,177 32% Consumer loans. . . . . . 6,376 39% Real estate . . . . . . . 2,991 19% Lease financing . . . . . 1,581 10% -------- --------- Total . . . . . . . . . $ 16,125 100% ======== =========
Nonperforming assets (nonaccruing loans and net assets in foreclosure) were 0.44% of total loans and net assets acquired in foreclosure at March 31, 2002, compared to 0.53% at December 31, 2001 and 0.49% at March 31, 2001. The ratio of the allowance for loan losses to loans at March 31, 2002 of 1.21% was higher than the December 31, 2001 ratio of 1.18% and lower than the March 31, 2000 ratio of 1.24%. Nonaccruing loans at March 31, 2002 of $5,817,000, decreased $1,146,000 from the December 31, 2001 level of $6,963,000, and decreased $210,000 from the March 31, 2001 level of $6,027,000.The decrease in nonaccruing loans at March 31, 2002, compared to both December 31, 2001 and March 31, 2000 was primarily the result of a decrease in commercial nonaccruing loans. Net assets in foreclosure were $459,000 as of March 31, 2002, a decrease of $150,000 from the December 31, 2001 balance of $609,000. During the first three months of 2002, transfers from loans to assets in foreclosure were $198,000, payments on foreclosed properties were $342,000 and the write-downs of assets in foreclosure were $6,000 during this period. The loans transferred to assets in foreclosure included vehicle leases of $136,000 and equipment leases of $62,000. The balance of net assets in foreclosure at March 31, 2001 was $527,000. 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 March 31, 2002, loans past due 90 days or more and still accruing interest were $649,000 compared to $1,926,000 as of December 31, 2001 and $167,000 as of March 31, 2001.The decrease in loans past due 90 days at March 31, 2002, compared December 31, 2001 was primarily the result of a decrease in commercial real estate loans past due 90 days. PAGE 15
The following information concerns impaired loans: March 31, 2002 Dec. 31, 2001 March 31, 2001 --------------- -------------- --------------- Impaired Loans . . . . . . . . . . . . . . . . . $ 2,835,000 $ 3,721,000 $ 3,269,000 =============== ============== =============== Average year-to-date impaired loans. . . . . . . $ 3,401,000 $ 3,505,000 $ 3,133,000 =============== ============== =============== Impaired loans with specific loss allowances . . $ 2,835,000 $ 3,721,000 $ 3,269,000 =============== ============== =============== Loss allowances reserved on impaired loans . . . $ 311,000 $ 429,000 $ 366,000 =============== ============== =============== Year-to-date income recognized on impaired loans $ 8,000 $ 78,000 $ 46,000 =============== ============== ===============
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 ------------------------ Three Months Ended March 31, --------------------------- 2002 2001 --------------- ------ (Dollars in thousands) Service charges . . . . . . . $ 1,521 $1,027 Security (losses) gains, net. 1,231 721 Trust income. . . . . . . . . 744 827 Bank-owned life insurance . . 638 691 Other income. . . . . . . . . 1,389 926 --------------- ------ Total other operating income. $ 5,523 $4,192 =============== ======
Other operating income for the first three months of 2002 increased $1,331,000, or 31.8%, from $4,192,000 at March 31, 2001 to $5,523,000 at March 31, 2002.This rise in other operating income is the result of increases in service charges, other income and security gains of $494,000, $463,000 and $510,000, respectively. Offsetting these gains were reductions in bank-owned life insurance (BOLI) income and trust income. The rise in other operating income was 23.7%, not inclusive of the securities gains and losses. Service charges grew $494,000 or 48.1% in the first three months of 2002, compared to the same period in 2001. 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 quarter of 2002 was $386,000, compared to the same period in 2001. The remaining increase is related to the growth in average transaction deposits and enhanced fee structures. The Corporation recorded net security gains on the sale of securities available for sale of $1,231,000 in the first quarter of 2002, compared to $721,000 during the first quarter of 2001. The Corporation sold the 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. PAGE 16 Income from the Investment Management and Trust Services Division decreased $83,000, or 10.0% in the first three months of 2002, compared to the same period in 2001.This decrease was the result of lower estate fees earned during this period. The Corporation's bank owned life insurance (BOLI) income decreased from $691,000 during the first quarter of 2001 to $638,000 in the first quarter of 2002. The lower income level during the first quarter of 2002 is related to the lower rate environment during this period. 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. Other income for the first three months of 2002 increased $463,000, or 50.0%, compared to the same period in 2001. Contributing to this rise were increases related to fees earned on the sale of alternative investment products including mutual funds and annuities, gains on the sale of residential mortgage loans and loan servicing fees.
OTHER OPERATING EXPENSES -------------------------- Three Months Ended March 31, --------------------------- 2002 2001 --------------- ------- (Dollars in thousands) Salaries . . . . . . . . . . . . $ 5,946 $ 5,215 Employee benefits. . . . . . . . 1,739 1,085 Occupancy expense. . . . . . . . 1,237 902 Furniture and equipment expense. 1,288 1,207 Other expenses . . . . . . . . . 4,270 4,056 ------------- ------ Total other operating expenses . $ 14,480 $12,465 ============= =======
The first quarter 2002 other operating expenses of $14,480,000 increased $2,015,000, or 16.2% from $12,465,000 for the same period in 2001. The rise in operating expenses was the result of both employee benefit costs and a one-time occupancy expense related to a closed branch. Employee salaries increased $731,000 or 14.0% from $5,215,000 for the first three months of 2001 to $5,946,000 for the same period in 2002. This increase reflects cost of living increases, merit increases, salaries related to the rise in the sale of alternative investment products and additional staff necessitated by the growth of the Banks. Employee benefits of $1,739,000 expensed in the first three months of 2002, were $654,000 higher than the $1,085,000 of employee benefits expensed during the same period in 2001. The increase in employee benefits is the result of higher pension expenses and employee medical insurance coverage. Net occupancy expense increased $335,000, or 37.1%, from $902,000 in the first three months of 2001 to $1,237,000 in the first three months of 2002. This increase was due to a $365,000 expense related to a branch closure, partially offset by a reduction in snow removal expenses. Furniture and equipment expense increased $81,000, or 6.7%, during the first three months of 2002, compared to the same period in 2001. This increase is due to higher equipment maintenance and rental expenses, partially offset by lower depreciation cost. Other expenses increased $214,000, or 5.3%, from $4,056,000 in the first three months of 2001, compared to $4,270,000 in other expenses recorded during the same period in 2002. This increase was primarily due to higher expenses related to costs associated with the addition of employees to the supplemental executive retirement plan. PAGE 17 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 decreased $36,036,000, or 1.6%, from $2,208,971,000 at December 31, 2001 to $2,172,935,000 at March 31, 2002. This decrease was the result of lower investment securities available for sale, interest-bearing deposits in banks and cash and due from banks, partially offset by higher loan volumes. The higher year end 2001asset levels were funded by a large spike in deposit volumes at the end of 2001. Total assets at March 31, 2002 grew 9.2%, compared to March 31, 2001. The balance of securities available for sale at March 31, 2001 of $672,907,000 decreased $33,464,000 compared to the December 31, 2001 balance of $706,371,000. During the current quarter, $117,295,000 of securities available for sale were sold which generated a pretax gain of $1,231,000. In comparison, $71,928,000 securities available for sale were sold during the first quarter of 2001 to generate a pretax gain of $721,000. 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 $1,286,000 during the first quarter of 2002. Total loans grew $12,462,000 or 0.9% during the first quarter. This growth was primarily due to increases in both commercial loans and home equity loans, partially offset by lower indirect auto financing and vehicle leases. Total loans grew 8.1% at March 31, 2002, compared to March 31, 2001. Total deposits decreased $39,431,000, or 2.2% from $1,746,862,000 at December 31, 2001 to $1,707,431,000 at March 31, 2002. This decrease was related to lower time deposits over $100,000, noninterest-bearing deposits and money market deposits. The lower time deposits over $100,000 is due to the normal seasonal fluctuations of municipal deposits. The decrease in non-interest bearing deposits was also associated with normal fluctuations in business checking accounts during this period. The lower money market volumes is due to one large account deposited during December 2001and withdrawn during January of 2002. The March 31, 2002 total deposit balance grew 11.5%, compared to the March 31, 2001 total deposits. Savings accounts, interest bearing checking accounts and time deposits under $100,000 grew $12,868,000, $6,371,000 and $6,087,000, respectively.Time deposits over $100,000, money market accounts and non-interest bearing checking accounts decreased $36,086,000, $15,318,000 and $13,353,000, respectively. Other borrowings experienced an increase of $4,009,000 during the first quarter of 2002. An increase of $15,000,000 in Federal Home Loan Bank Borrowings was offset by a $10,051,000 decrease in securities sold under agreements to repurchase and a $940,000 reduction in U.S. Treasury demand notes. CAPITAL ------- Capital formation is important to the Corporation's well being and future growth. Capital for the period ending March 31, 2002 was $188,868,000, a decrease of $481,000 over the end of 2001. The decrease is the result of the retention of the Corporation's earnings, offset by the adjustment for the net unrealized gains on the investments securities available for sale and 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, 2002 was a gain of $643,000, compared to a gain of $4,534,000 at December 31, 2001. The corporation purchased $1,814,000 of treasury stock during the first quarter of 2002.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 18
(Dollars in thousands) For Capital As of March 31, 2002 Actual Adequacy Purposes ------------------------ Amount Ratio Amount Ratio -------- ------ -------- ------ Total Capital (to risk weighted assets): Corporation . . . . . . . . . . . . . . . $209,882 13.61% $123,311 8.00% Harleysville National Bank. . . . . . . . 122,964 10.97% 89,698 8.00% Citizens National Bank. . . . . . . . . . 40,232 14.09% 22,843 8.00% Security National Bank. . . . . . . . . . 15,567 12.77% 9,752 8.00% Tier 1 Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $192,833 12.50% $ 61,655 4.00% Harleysville National Bank. . . . . . . . 112,558 10.04% 44,849 4.00% Citizens National Bank. . . . . . . . . . 36,658 12.84% 11,421 4.00% Security National Bank. . . . . . . . . . 14,040 11.52% 4,876 4.00% Tier 1 Capital (to average assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $192,833 8.85% $ 87,123 4.00% Harleysville National Bank. . . . . . . . 112,558 7.18% 62,737 4.00% Citizens National Bank. . . . . . . . . . 36,658 8.35% 17,567 4.00% Security National Bank. . . . . . . . . . 14,040 8.23% 6,826 4.00%
To Be Well Capitalized Under Prompt Corrective Action Provision Amount Ratio ------------------------ ------ Total Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ - - Harleysville National Bank. . . . . . . . 112,122 10.00% Citizens National Bank. . . . . . . . . . 28,554 10.00% Security National Bank. . . . . . . . . . 12,190 10.00% Tier 1 Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ - - Harleysville National Bank. . . . . . . . 67,273 6.00% Citizens National Bank. . . . . . . . . . 17,132 6.00% Security National Bank. . . . . . . . . . 7,314 6.00% Tier 1 Capital (to average assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ - - Harleysville National Bank. . . . . . . . 78,421 5.00% Citizens National Bank. . . . . . . . . . 21,958 5.00% Security National Bank. . . . . . . . . . 8,533 5.00%
PAGE 19
(Dollars in thousands) For Capital As of December 31, 2001 Actual Adequacy Purposes ----------------------------------------- Amount Ratio Amount Ratio ------------ ---------- -------- ------ Total Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ 205,743 13.23% $124,445 8.00% Harleysville National Bank. . . . . . . . 118,782 10.46% 90,862 8.00% Citizens National Bank. . . . . . . . . . 39,888 13.91% 22,936 8.00% Security National Bank. . . . . . . . . . 15,132 12.53% 9,661 8.00% Tier 1 Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ 189,423 12.18% $ 62,222 4.00% Harleysville National Bank. . . . . . . . 108,939 9.59% 45,431 4.00% Citizens National Bank. . . . . . . . . . 36,297 12.66% 11,468 4.00% Security National Bank. . . . . . . . . . 13,622 11.28% 4,830 4.00% Tier 1 Capital (to average assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ 189,423 8.71% $ 87,040 4.00% Harleysville National Bank. . . . . . . . 108,939 6.91% 63,024 4.00% Citizens National Bank. . . . . . . . . . 36,297 8.45% 17,182 4.00% Security National Bank. . . . . . . . . . 13,622 8.44% 6,455 4.00%
To Be Well Capitalized Under Prompt Corrective Action Provision Amount Ratio -------- ------ Total Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ - - Harleysville National Bank. . . . . . . . 113,578 10.00% Citizens National Bank. . . . . . . . . . 28,669 10.00% Security National Bank. . . . . . . . . . 12,076 10.00% Tier 1 Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ - - Harleysville National Bank. . . . . . . . 68,147 6.00% Citizens National Bank. . . . . . . . . . 17,202 6.00% Security National Bank. . . . . . . . . . 7,246 6.00% Tier 1 Capital (to average assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ - - Harleysville National Bank. . . . . . . . 78,780 5.00% Citizens National Bank. . . . . . . . . . 21,477 5.00% Security National Bank. . . . . . . . . . 8,069 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, 2002, the Corporation's Tier 1 risk-adjusted capital ratio was 12.50%, and the total risk-adjusted capital ratio was 13.61%, 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, 2002. PAGE 20 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 8.85% at March 31, 2002 and 8.71% at December 31, 2001. The year-to-date March 31, 2002 cash dividend per share of $.17 was 13.3% higher than the cash dividend for the same period in 2001 of $.15. The dividend payout ratio for the first three months of 2002 was 39.8%, compared to 41.3% for the twelve month period ended December 31, 2001. 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 2002. 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 used of funds for the next 120 days. The resulting projections as of March 31, 2002 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 $141,927,000, as of March 31, 2002. The Banks also have unused federal funds lines of credit of $50,000,000 and non-pledged investment securities available for sale of $296,258,000 as of March 31, 2002. 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. PAGE 21 Effects of Inflation ---------------------- Inflation has some impact on the Corporation and the Banks' operating costs. Unlike many industrial companies, however, substantially all of the Banks' assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation's and the Banks' performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services. Effect of Government Monetary Policies ------------------------------------------ The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect rates charged on loans or paid for deposits. The Banks are members of the Federal Reserve and, therefore, the policies and regulations of the Federal Reserve have a significant effect on its deposits, loans and investment growth, as well as the rate of interest earned and paid, and are expected to affect the Banks' operations in the future. The effect of such policies and regulations upon the future business and earnings of the Corporation and the Banks cannot be predicted. Environmental Regulations -------------------------- There are several federal and state statutes, which regulate the obligations and liabilities of financial institutions pertaining to environmental issues. In addition to the potential for attachment of liability resulting from its own actions, a bank may be held liable under certain circumstances for the actions of its borrowers, or third parties, when such actions result in environmental problems on properties that collateralize loans held by the bank. Further, the liability has the potential to far exceed the original amount of a loan issued by the bank. Currently, neither the Corporation nor the Banks are a party to any pending legal proceeding pursuant to any environmental statute, nor are the Corporation and the Banks aware of any circumstances that may give rise to liability under any such statute. Branching --------- The Corporation's subsidiaries currently plan to open at least one new branch. During the third quarter of 2002, Security National Bank plans to open a location in Douglassville. 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. 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 SEC Form 10-K for the period ended December 31, 2001. PAGE 22 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 2002 Annual Meeting of Shareholders was held at 9:30 a.m., on Tuesday, April 9, 2002, 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 ----------------------------------------------------------- ------------ Walter E. Daller, Jr. . . . . . . . . . . . . . . . . . . . 2006 Thomas S. McCready. . . . . . . . . . . . . . . . . . . . . 2006 The results of the voting for the directors are as follows: Walter E. Daller, Jr. . . . . . . . . . . . . . . . . . . . For . . . . . . . . . . . . . . . . . . . . . . . . . 13,925,981 Against . . . . . . . . . . . . . . . . . . . . . . . . . 1,023,266 Abstain . . . . . . . . . . . . . . . . . . . . . . . . . 0 Thomas S. McCready. . . . . . . . . . . . . . . . . . . . . For . . . . . . . . . . . . . . . . . . . . . . . . . 14,711,894 Against . . . . . . . . . . . . . . . . . . . . . . . . . 1,023,266 Abstain . . . . . . . . . . . . . . . . . . . . . . . . . 0 Directors whose term continued after the meeting: . . . . . Term Expires ------------ Harold A. Herr. . . . . . . . . . . . . . . . . . . . . . . 2003 Henry M. Pollak . . . . . . . . . . . . . . . . . . . . . . 2003 Palmer E. Retzlaff. . . . . . . . . . . . . . . . . . . . . 2004 LeeAnn Bergey . . . . . . . . . . . . . . . . . . . . . . . 2004 James A. Wimmer . . . . . . . . . . . . . . . . . . . . . . 2005 William M. Yocum. . . . . . . . . . . . . . . . . . . . . . 2005
PAGE 23 2. Approval and adoption of amendments to Article 5 of the Harleysville National Corporation Articles of Incorporation to increase the number of authorized shares of common stock from 30,000,000 shares to 75,000,000 shares and series preferred stock from 3,000,000 shares to 8,000,000 shares:
The result of the voting is as follows: For . . 11,000,183 Against 2,276,641 Abstain 105,270
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.) PAGE 24 (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 on Form 8-K Current Report on Form 8-K, dated January 10, 2002, filed with the Commission on February 15, 2002, reporting the Registrant's fourth quarter 2001 press release. PAGE 25 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, Treasurer (Principal financial and accounting officer) Date: May 4, 2002 PAGE26 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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