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 June 30, 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 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: 18,200,764 shares of Common Stock, $1.00 par value, outstanding on August 12, 2002. PAGE 1
HARLEYSVILLE NATIONAL CORPORATION INDEX TO FORM 10-Q REPORT PAGE ---- Part I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Income - Six Months and Three Months Ended June 30, 2002 and 2001. . . . 4 Consolidated Statements of Shareholders' Equity - Six Months Ended June 30, 2002 and Twelve Months. 5 Ended December 31, 2001 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2002 and 2001 . . . . . . . . . . 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 . . . . . . . . . . . . . . 23 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) June 30,2002 December 31,2001 ------------- ----------------- ASSETS Cash and due from banks. . . . . . . . . . . . . . . . . . . . . $ 64,685 $ 62,974 Fed funds sold . . . . . . . . . . . . . . . . . . . . . . . . . 7,725 12,500 Interest-bearing deposits in banks . . . . . . . . . . . . . . . 6,997 7,150 ------------- ----------------- Total cash and cash equivalents. . . . . . . . . . . . . . . 79,407 82,624 ------------- ----------------- Investment securities available for sale . . . . . . . . . . . . 765,207 706,371 Investment securities held to maturity . . . . . . . . . . . . . 22,925 26,099 (fair value $24,319 and $26,782, respectively) Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,344,112 1,313,934 Less: Deferred costs, net. . . . . . . . . . . . . . . . . . . . 2,176 2,675 Allowance for loan losses . . . . . . . . . . . . . . . (16,855) (15,558) ------------- ----------------- Net loans . . . . . . . . . . . . . . . . . . . . . 1,329,433 1,301,051 ------------- ----------------- Bank premises and equipment, net . . . . . . . . . . . . . . . . 21,045 21,439 Accrued income receivable. . . . . . . . . . . . . . . . . . . . 12,943 11,907 Net assets in foreclosure. . . . . . . . . . . . . . . . . . . . 658 609 Intangible assets, net . . . . . . . . . . . . . . . . . . . . . 1,775 1,360 Bank-owned life insurance. . . . . . . . . . . . . . . . . . . . 47,211 45,942 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 11,551 11,569 ------------- ----------------- Total assets. . . . . . . . . . . . . . . . . . . . . . $ 2,292,155 $ 2,208,971 ============= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . $ 256,407 $ 254,638 Interest-bearing: Checking accounts . . . . . . . . . . . . . . . . . . . . . 185,455 169,156 Money market accounts . . . . . . . . . . . . . . . . . . . 410,791 419,890 Savings . . . . . . . . . . . . . . . . . . . . . . . . . . 201,726 179,284 Time, under $100,000. . . . . . . . . . . . . . . . . . . . 525,893 489,345 Time, $100,000 or greater . . . . . . . . . . . . . . . . . 208,439 234,549 ------------- ----------------- Total deposits . . . . . . . . . . . . . . . . . . . . 1,788,711 1,746,862 Accrued interest payable . . . . . . . . . . . . . . . . . . . . 22,438 27,114 U.S. Treasury demand notes . . . . . . . . . . . . . . . . . . . 2,015 2,677 Federal Home Loan Bank (FHLB) borrowings . . . . . . . . . . . . 162,750 127,750 Securities sold under agreements to repurchase . . . . . . . . . 80,404 80,393 Guaranteed preferred beneficial interest in Corporation's subordinated debentures. . . . . . . . . . . . . . . . . . . . 5,000 5,000 Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . 32,684 29,826 ------------- ----------------- Total liabilities. . . . . . . . . . . . . . . . . . . 2,094,002 2,019,622 ------------- ----------------- Shareholders' Equity: Series preferred stock, par value $1 per share; authorized 8,000,000 shares, none issued. . . . . . . . . - - Common stock, par value $1 per share; authorized 75,000,000 shares; issued and outstanding 18,631,717 shares in 2002 and 18,570,971 shares in 2001 . . . . . . . . . . . . . . 18,632 18,571 Additional paid in capital . . . . . . . . . . . . . . . . . 72,152 71,419 Retained earnings. . . . . . . . . . . . . . . . . . . . . . 110,158 100,171 Treasury stock, at cost: 425,055 shares in 2002 and 287,440 shares in 2001. . . . . . . . . . . . . . . . (8,634) (5,346) Accumulated other comprehensive income . . . . . . . . . . . 5,845 4,534 ------------- ----------------- Total shareholders' equity . . . . . . . . . . . . . . 198,153 189,349 ------------- ----------------- Total liabilities and shareholders' equity . . . . . . $ 2,292,155 $ 2,208,971 ============= ================= See accompanying notes to consolidated financial statements.
PAGE 3 HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) Six months ended Three months ended (Dollars in thousands except weighted average number June 30, June 30, of common shares and per share information) --------- --------- 2002 2001 2002 2001 ----------- ----------- ------- ----------- INTEREST INCOME: Loans, including fees . . . . . . . . . . . . . . . . . . $ 42,780 $ 45,187 $21,457 $ 22,617 Lease financing . . . . . . . . . . . . . . . . . . . . . 4,289 4,937 2,107 2,433 Investment securities: Taxable. . . . . . . . . . . . . . . . . . . . . . . . 14,272 12,928 6,812 6,396 Exempt from federal taxes. . . . . . . . . . . . . . . 5,482 5,623 2,846 2,804 Federal funds sold. . . . . . . . . . . . . . . . . . . . 222 234 183 211 Deposits in banks . . . . . . . . . . . . . . . . . . . . 96 137 47 76 ----------- ----------- ------- ----------- Total interest income . . . . . . . . . . . . . . . 67,141 69,046 33,452 34,537 ----------- ----------- ------- ----------- INTEREST EXPENSE: Savings deposits. . . . . . . . . . . . . . . . . . . . . 5,842 9,769 2,953 4,609 Time, under $100,000. . . . . . . . . . . . . . . . . . . 11,923 12,716 5,924 6,395 Time, $100,000 or greater . . . . . . . . . . . . . . . . 3,785 5,673 1,731 2,853 Borrowed funds. . . . . . . . . . . . . . . . . . . . . . 4,533 5,678 2,394 2,622 ----------- ----------- ------- ----------- Total interest expense. . . . . . . . . . . . . . . 26,083 33,836 13,002 16,479 ----------- ----------- ------- ----------- Net interest income . . . . . . . . . . . . . . . . 41,058 35,210 20,450 18,058 Provision for loan losses . . . . . . . . . . . . . . . . 2,445 1,610 1,094 962 ----------- ----------- ------- ----------- Net interest income after provision for loan losses 38,613 33,600 19,356 17,096 ----------- ----------- ------- ----------- OTHER OPERATING INCOME: Service charges . . . . . . . . . . . . . . . . . . . . . 3,148 2,475 1,627 1,448 Security gains, net . . . . . . . . . . . . . . . . . . . 2,474 1,783 1,243 1,063 Trust income. . . . . . . . . . . . . . . . . . . . . . . 1,596 1,715 851 887 Bank-owned life insurance income. . . . . . . . . . . . . 1,269 1,284 631 593 Other Income. . . . . . . . . . . . . . . . . . . . . . . 3,155 2,056 1,767 1,130 ----------- ----------- ------- ----------- Total other operating income. . . . . . . . . . . . 11,642 9,313 6,119 5,121 ----------- ----------- ------- ----------- Net interest income after provision for loan losses and other operating income . . . . . . . . . . . 50,255 42,913 25,475 22,217 ----------- ----------- ------- ----------- OTHER OPERATING EXPENSES: Salaries, wages and employee benefits . . . . . . . . . . 15,081 12,905 7,396 6,605 Occupancy . . . . . . . . . . . . . . . . . . . . . . . . 2,058 1,665 821 763 Furniture and equipment . . . . . . . . . . . . . . . . . 2,607 2,466 1,319 1,258 Other expenses. . . . . . . . . . . . . . . . . . . . . . 9,447 8,669 5,178 4,614 ----------- ----------- ------- ----------- Total other operating expenses. . . . . . . . . . . 29,193 25,705 14,714 13,240 ----------- ----------- ------- ----------- Income before income tax expense. . . . . . . . . . 21,062 17,208 10,761 8,977 Income tax expense. . . . . . . . . . . . . . . . . . . . 4,871 3,556 2,383 1,856 ----------- ----------- ------- ----------- Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 16,191 $ 13,652 $ 8,378 $ 7,121 =========== =========== ======= =========== Weighted average number of common shares: Basic . . . . . . . . . . . . . . . . . . . . . . 18,246,138 18,345,238 18,221,567 18,279,600 =========== =========== =========== =========== Diluted . . . . . . . . . . . . . . . . . . . . . 18,762,420 18,709,276 18,743,968 18,643,640 =========== =========== =========== =========== Net income per share information: Basic . . . . . . . . . . . . . . . . . . . . . . $ 0.89 $ 0.74 $ 0.46 $ 0.39 =========== =========== =========== =========== Diluted . . . . . . . . . . . . . . . . . . . . . $ 0.86 $ 0.73 $ 0.45 $ 0.38 =========== =========== =========== =========== Cash dividends per share. . . . . . . . . . . . . . . . . $ 0.34 $ 0.30 $ 0.17 $ 0.15 =========== =========== =========== =========== * Adjusted for 100% stock dividend effective August 10, 2001. See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES SIX MONTHS ENDED JUNE 30, 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 . . . . . . . . . . . . 61 61 727 - - Stock awards. . . . . . . . . . . . . - - 6 - - Net income. . . . . . . . . . . . . . - - - 16,191 - Other comprehensive income, net of reclassifications and tax. . - - - - 1,311 Purchases of Treasury stock . . . . . (3,288) (3,288) Cash dividends. . . . . . . . . . . . - - - (6,204) - -------------- ----------------- ----------------- ---------- -------------- Comprehensive income. . . . . . . . . ============== Balance, June 30, 2002. . . . . . . . 18,632 $ 18,632 $ 72,152 $ 110,158 $ 5,845 ============== ================= ================= ========== ============== 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 ============== ================= ================= ========== ============== SIX MONTHS ENDED JUNE 30, 2002 (Dollars in thousands). . . . . . . . Treasury Comprehensive Stock Total Income ---------- --------------- ------- Balance, December 31, 2001. . . . . . $ (5,346) $ 189,349 Stock options . . . . . . . . . . . . - 788 Stock awards. . . . . . . . . . . . . - 6 Net income. . . . . . . . . . . . . . - 16,191 $16,191 Other comprehensive income, net of reclassifications and tax. . - 1,311 1,311 Purchases of Treasury stock Cash dividends. . . . . . . . . . . . - (6,204) ---------- --------------- Comprehensive income $17,502 ======= Balance, June 30, 2002. . . . . . . . $ (8,634) $ 198,153 ========== =============== FOR THE YEAR ENDED DECEMBER 31, 2001 Common Stock ------------------------------------- (Dollars in thousands). . . . . . . . Treasury Comprehensive Shares. . . . . . . . . . . . . . . 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) . . . . . . . . . . . . . . . . . . . . . . . . . . Six Months Ended June 30, OPERATING ACTIVITIES:. . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 2001 ----------------- ---------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,191 $ 13,652 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . 2,445 1,610 Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 1,224 1,323 Net amortization of investment securities discount/premiums . . . . . . . . . . . . . . . . . . . . 1,162 417 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . (705) 7,185 Net realized security gains. . . . . . . . . . . . . . . . . . . . . . (2,474) (1,783) Increase in accrued income receivable. . . . . . . . . . . . . . . . . (1,036) (54) (Decrease) increase in accrued interest payable. . . . . . . . . . . . (4,676) 2,927 Decrease (increase) in other assets. . . . . . . . . . . . . . . . . . 18 (141) Net increase (decrease) in other liabilities . . . . . . . . . . . . . 2,858 (2,978) Decrease (increase) in deferred cost, net. . . . . . . . . . . . . . . 499 (494) Write-down of other real estate owned. . . . . . . . . . . . . . . . . 10 - (Increase) decrease in intangible assets . . . . . . . . . . . . . . . (415) 193 ----------------- ---------- Net cash provided by operating activities . . . . . . . . . . . . . $ 15,101 $ 21,857 ---------------- ---------- INVESTING ACTIVITIES: Proceeds from sales of investment securities available for sale. . . . . $ 254,204 $ 164,393 Proceeds, maturity or calls of investment securities held to maturity. . 3,227 1,810 Proceeds, maturity or calls of investment securities available for sale. 111,080 46,075 Purchases of investment securities available for sale. . . . . . . . . . (420,848) (245,149) Net increase in loans. . . . . . . . . . . . . . . . . . . . . . . . . . (31,929) (68,306) Net increase in premises and equipment . . . . . . . . . . . . . . . . . (830) (883) Purchase of bank-owned life insurance. . . . . . . . . . . . . . . . . . (1,269) (1,284) Proceeds from sales of other real estate . . . . . . . . . . . . . . . . 547 725 ----------------- ---------- Net cash used in investing activities . . . . . . . . . . . . . . . $ (85,818) $(102,619) ----------------- ---------- FINANCING ACTIVITIES: Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . $ 41,849 $ 113,801 Decrease in U.S. Treasury demand notes . . . . . . . . . . . . . . . . . (662) 226 Decrease in federal funds purchased. . . . . . . . . . . . . . . . . . . - (44,500) Increase in FHLB borrowings. . . . . . . . . . . . . . . . . . . . . . . 35,000 25,000 Increase in securities sold under agreement. . . . . . . . . . . . . . . 11 5,324 Proceeds from issuance of guaranteed preferred beneficial interest in Corporation's subordinated debentures . . . . . . . . . . . . . . . - 5,000 Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,204) (5,500) Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . (3,288) (4,551) Stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 794 109 ----------------- ---------- Net cash provided by financing activities. . . . . . . . . . . . . . . $ 67,500 $ 94,909 ----------------- ---------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . $ (3,217) $ 14,147 Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 82,624 55,525 ----------------- ---------- Cash and cash equivalents at end of the period . . . . . . . . . . . . . . $ 79,407 $ 69,672 ================ ========== Cash paid during the period for: Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,758 $ 30,909 ================= ========== Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000 $ 2,500 ================= ========== Supplemental disclosure of noncash investing and financing activities: Transfer of assets from loans to other real estate owned. . . . . . $ 606 $ 753 ================= ========== 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 June 30, 2002, the results of its operations for six and three month periods ended June 30, 2002 and 2001 and the cash flows for the six month periods ended June 30, 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 six and three month periods ended June 30, 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:
Comprehensive Income --------------------- (Dollars in thousands) . . . . . . BEFORE TAX TAX NET OF TAX June 30, 2002. . . . . . . . . . . AMOUNT EXPENSE AMOUNT ---------------------------------- ----------- ------------ ----------- Unrealized losses on securities: Unrealized holding gains arising during period . . . $ 4,491 $ (1,572) $ 2,919 Less reclassification adjustment for gains realized in net income. . . 2,474 (866) 1,608 ----------- ------------ ----------- Other comprehensive income, net. $ 2,017 $ (706) $ 1,311 =========== ============ =========== BEFORE TAX TAX NET OF TAX June 30, 2001. . . . . . . . . . . AMOUNT EXPENSE AMOUNT ---------------------------------- ----------- ------------ ----------- Unrealized gains on securities: Unrealized holding gains arising during period . . . $ 5,947 $ (2,082) $ 3,865 Less reclassification adjustment for gains realized in net income. . . 1,783 (624) 1,159 ----------- ------------ ----------- Other comprehensive income, net. $ 4,164 $ (1,458) $ 2,706 =========== ============ ===========
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 increases in second quarter 2002 and year-to-date 2002 net income over comparable periods in 2001 of 17.7% and 18.6%, respectively. The improved quarter and year-to-date earnings were the result of a rise in earning assets, an increase in the net interest margin and a higher level of other income. The Corporation also experienced an improvement in loan quality during the first half of 2002. Second quarter 2002 diluted earnings per share of $.45, increased 18.4% over the second quarter 2001 diluted earnings per share of $.38. Second quarter basic earnings per share in 2002 of $.46 exceed the second quarter 2001 basic earnings per share of $.39 by 17.9%. Second quarter 2002 net income of $8,378,000 increased 17.7% over the second quarter 2001 net income of $7,121,000. Net income for the first six months of 2002 was $16,191,000, an 18.6% increase over the $13,652,000 for the comparable period in 2001. Diluted earnings per share of $.86 were up 17.8% from the $.73 in 2001. Basic earnings per share of $.89 for the first six months of 2002 were 20.3% higher than the $.74 year to date June 30, 2001. The Corporation's consolidated total assets were $2,292,155,000 at June 30, 2002, 11.5% above the June 30, 2001 level of $2,055,225,000. PAGE 9 The rise in net income during 2002, compared to 2001 is primarily attributed to higher net interest income levels. This increase was the result of an 11.4% rise in average earning asset levels and an 11 basis point increase in the net interest margin. Other income grew 25.0% during this period on the strength of higher service charges, security gains and other miscellaneous fees. Partially offsetting these increases were higher provision for loan losses and other operating expenses. For the six months ended June 30, 2002, the annualized return on average shareholder's equity and the annualized return on average assets were 16.81% and 1.47%, respectively. For the same period in 2001, the annualized return on average shareholder's equity was 15.45% and the annualized return on average assets was 1.38%. Excluding unrealized gains and losses on securities available for sale, the annualized return on average realized shareholder's equity for the first half of 2002 and 2001 were 17.08% and 15.71%, respectively. For the three months ended June 30, 2002, the annualized return on average shareholders' equity and the annualized return on average assets were 17.38% and 1.51%, respectively. For the same period in 2001, the annualized return on average realized shareholders' equity was 16.00% and the annualized return on average assets was 1.42%. Excluding unrealized gains and losses on securities available for sale, the annualized return on average realized shareholders equity for the second quarter of 2002 and 2001 were 17.54% and 16.30%, respectively. The quality of the loan portfolios is a primary focus of the banks. Nonperforming assets (nonaccruing loans and net assets in foreclosure) were .24% of total assets at June 30, 2002, compared to .32% at December 31, 2001 and .29% at June 30, 2001. As of June 30, 2002, aggregate loans past due 90 or more and still accruing interest were $1,005,000 compared to $1,926,000 at December 31, 2001 and $475,0000 at June 30, 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 ------------------------------------------------------------- Net interest income for the first six months of 2002 of $41,058,000 was $5,848,000, or 16.6% higher than the same period in 2001 net interest income of $35,210,000. As illustrated in the table below, this rise in net interest income was the result of higher earning asset volumes and a higher net interest margin. The Corporation has benefited from the lower interest rate environment experienced during the last year. Interest income was actually lower in 2002 compared to 2001, as a result of the impact of lower interest rates, partially offset by the increase in interest income related to higher earning asset volumes. The lower net interest income was more than offset by the lower interest expense related to the lower interest rates paid on deposits and other borrowings during 2002. The second quarter of 2002 net interest income of $20,450,000 increased $2,392,000, or 13.2%, over the second quarter of 2001. 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 six month and three month periods ended June 30, 2002 over June 30, 2001 by their rate and volume components. PAGE 10
Six Months Ended Three Months Ended June 30, 2002 June 30, 2002 Over/Under Over/Under June 30, 2001 June 30, 2001 Total Caused by: Total Caused by: ---------- ---------- Variance Rate Volume Variance Rate Volume ---------- --------- ------- ---------- -------- ------- Interest Income: Securities *. . . . . . . . . . . . . . . $ 851 $ (2,294) $ 3,145 $ 337 $ (993) $ 1,330 Money market instruments. . . . . . . . . (53) (224) 171 (57) (173) 116 Loans * . . . . . . . . . . . . . . . . . (3,057) (6,461) 3,404 (1,483) (3,111) 1,628 ---------- --------- ------- ---------- -------- ------- Total. . . . . . . . . . . . . . . . . (2,259) (8,979) 6,720 (1,203) (4,277) 3,074 ---------- --------- ------- ---------- -------- ------- Interest Expense: Savings deposits. . . . . . . . . . . . . (3,927) (4,617) 690 (1,656) (1,999) 343 Time deposits and certificates of deposit (2,681) (4,351) 1,670 (1,593) (2,238) 645 Other borrowings. . . . . . . . . . . . . (1,145) (1,417) 272 (228) (471) 243 ---------- --------- ------- Total . . . . . . . . . . . . . . . . (7,753) (10,385) 2,632 (3,477) (4,708) 1,231 ---------- --------- ------- ---------- -------- ------- Net Interest Income . . . . . . . . . . . . $ 5,494 $ 1,406 $ 4,088 $ 2,274 $ 431 $ 1,843 ========== ========= ======= ========== ======== ======= *Tax Equivalent Basis
Taxable-equivalent net interest income was $44,272,000 for the first six months of 2002, compared to $38,778,000 for the same period in 2001, a 14.2% or $5,494,000 increase. This rise in taxable-equivalent net interest income was primarily due to a $7,753,000 reduction in interest expense, which was in partially offset by a decrease in interest income, related to rate. Total taxable-equivalent interest income decreased $2,259,000, primarily the result of lower earning asset yields, partially offset by the higher volumes of earnings assets. Average year-to-date securities, loans and money market instrument volumes grew $100,333,000, $94,965,000 and $16,678,000, respectively at June 30, 2002, compared to the same period in 2001. The yield earned on earning assets decreased 102 basis points from 7.80% in the first six months of 2001 to 6.78% during the same period in 2002. The $7,753,000 reduction in interest expense is the result of a $10,385,000 decrease related to lower rates, partially offset by $2,632,000 related to higher deposit and other borrowing volumes. The average rate paid on deposits and other borrowings of 3.03% during the first six months of 2002 was 137 basis points lower than the 4.40% rate paid during the same period in 2001. The average balance of deposits and other borrowings grew $181,280,000 or 11.8% in the first half of 2002, compared to the first six months of 2001. The average year-to-date growth in time deposits and other borrowings were $75,332,000 and $14,168,000, respectively. The lower rate savings deposits, which include interest bearing checking accounts, savings accounts and money market accounts, were $91,780,000 or 13.4% higher than in the first half of 2002, compared to the same period in 2001. Other borrowings include federal funds purchased, FHLB borrowings, securities sold under agreements to repurchase, U. S. Treasury demand notes and junior subordinate deferrable interest debentures. The taxable-equivalent net interest income during the second quarter of 2002 of $22,126,000 was $2,274,000 or 11.5% higher than the second quarter of 2001 net interest income. The $1,203,000 decrease in interest income was more than offset by a $3,477,000 reduction in interest expense. The yield earned on average earning assets during the second quarter of 2002 of 6.70% was 97 basis points lower than the 7.67% earned during the second quarter of 2001. Average earning assets in the second quarter of 2002 were $201,026,000 or 10.6% higher than the second quarter of 2001. Loans, securities and money market instruments grew $91,514,000, $85,169,000 and $24,343,000 during this period. The rate paid on average deposits and other borrowings of 2.99% during the second quarter of PAGE 11 2002 was 123 basis points lower than the 4.22% rate paid during the second quarter of 2001. Average deposits and other borrowings grew $175,740,000 or 11.2% during this period. The largest gains were a $91,512,000 increase in savings deposits and a $59,604,000 rise in time deposits. NET INTEREST MARGIN --------------------- The net interest margin of 4.27% for the six-month period ended June 30, 2002, increased 11 basis points from the 4.16% net interest margin for the first six 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. During the first six months of 2002 the rate paid on interest-bearing deposits and other borrowings decreased 137 basis points, compared to a 102 basis point drop in the yield on earning assets. The rate paid on deposits was 3.03% during the first half of 2002, compared to 4.40% during the first half of 2001. The yield on earning assets of 6.78% earned during the first six months of 2002 was lower than the 7.80% earned during the first six months of 2001. The decrease in the yield earned and rate paid are due to the lower interest rate environment experienced during the first six months of 2002, compared to the same period in 2001. The second quarter of 2002 net interest margin of 4.22% was 3 basis points higher than the second quarter of 2001 net interest margin of 4.19% 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 June 30, 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.
(Dollars in thousands) CHANGE IN ASSET/LIABILITY MARKET VALUE MARKET VALUE PERCENTAGE APPROVED OF EQUITY OF EQUITY CHANGE PERCENT CHANGE ------------ ---------------- ----------- --------------- +300 Basis Points 222,078 (78,704) -26.17% +/- 45% +200 Basis Points 261,014 (39,768) -13.22% +/- 30% +100 Basis Points 291,008 (9,774) -3.25% +/- 15% Flat Rate . . . . 300,782 - 0.00% -100 Basis Points 286,855 (13,927) -4.63% +/- 15% -200 Basis Points 213,165 (87,617) -29.13% +/- 30% -300 Basis Points 229,912 (70,870) -23.56% +/- 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 PAGE 12 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. 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. PAGE 13 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 six months of 2002 the provision for loan losses was $2,445,000, compared to $1,610,000 for the same period in 2002. Net loans charged off was $1,148,000 for the six months ended June 30, 2002, compared to $2,112,000 for the six months ended June 30, 2001. The decrease in net charged off loans is attributed to the increase in the recoveries of charged off indirect consumer loans and a reduction in leases charged off . The ratio of the allowance for loan losses to nonperforming assets for June 30, 2002 of 303.9% was higher than the December 31, 2001 and the June 30, 2001 ratios of 223.4% and 249.4%, respectively. ALLOWANCE FOR LOAN LOSSES A summary of the allowance for loan losses is as follows:
(Dollars in thousands) JUNE 30, ------- 2002 2001 ----------- ----------- Average loans $1,328,070 $1,233,105 ----------- ----------- Allowance, beginning of period . . . $ 15,558 $ 15,210 ----------- ----------- Loans charged off: Commercial and industrial . . 24 40 Consumer. . . . . . . . . . . 1,441 1,388 Real estate . . . . . . . . . 276 328 Lease financing . . . . . . . 185 687 ----------- ----------- Total loans charged off 1,926 2,443 ----------- ----------- Recoveries: Commercial and industrial . . 70 3 Consumer. . . . . . . . . . . 508 202 Real estate . . . . . . . . . 146 83 Lease financing . . . . . . . 54 43 ----------- ----------- Total recoveries. . . . 778 331 ----------- ----------- Net loans charged off. . . . . . . . 1,148 2,112 ----------- ----------- Provision for loan losses. . . . . . 2,445 1,610 ----------- ----------- Allowance, end of period . . . . . . $ 16,855 $ 14,708 =========== =========== Ratio of net charge offs to average loans outstanding. . 0.09% 0.17% =========== ===========
PAGE 14
ANALYSIS OF CREDIT RISK JUNE 30, DECEMBER 31, JUNE 30, ----------------------- 2002 2001 2001 ---- ---- ---- Nonperforming Assets. . . . . . $5,546,000 $6,963,000 $5,897,000 90 + days past due. . . . . . . $1,005,000 $1,926,000 $ 475,000 Allowance for loan losses to nonperforming assets . . . . 303.9% 223.4% 249.4% Nonperforming assets to total loans and net assets acquired in foreclosure . . . . . . . 0.41% 0.53% 0.46% Allowance for loan losses to total loans . . . . . . . 1.25% 1.18% 1.15% Nonperforming assets to total assets. . . . . . . 0.24% 0.32% 0.29%
The following table sets forth an allocation of the allowance for loan losses by loan category:
June 30, 2002 ------------- Percent Amount of Loans -------- --------- Commercial and industrial $ 5,523 33% Consumer loans. . . . . . 7,095 42% Real estate . . . . . . . 2,752 16% Lease financing . . . . . 1,485 9% -------- --------- Total . . . . . . . . . $ 16,855 100% ======== =========
Nonperforming assets (nonaccruing loans and net assets in foreclosure) were 0.41% of total loans and net assets acquired in foreclosure at June 30, 2002, compared to 0.53% at December 31, 2001 and 0.46% at June 30, 2001. The ratio of the allowance for loan losses to loans at June 30, 2002 of 1.25% was higher than the December 31, 2001 ratio of 1.18% and the June 30, 2001 ratio of 1.15%. Nonaccruing loans at June 30, 2002 of $4,888,000, decreased $1,466,000 from the December 31, 2001 level of $6,354,000, and decreased $693,000 from the June 30, 2001 level of $5,581,000.The decrease in nonaccruing loans at June 30, 2002, compared to both December 31, 2001 and June 30, 2001 was primarily the result of a decrease in commercial real estate nonaccruing loans. Net assets in foreclosure were $658,000 as of June 30, 2002, an increase of $49,000 from the December 31, 2001 balance of $609,000. During the first six months of 2002, transfers from loans to assets in foreclosure were $606,000, payments on foreclosed properties were $547,000 and the write-downs of assets in foreclosure were $10,000 during this period. The loans transferred to assets in foreclosure included vehicle leases of $336,000, equipment leases of $205,000, a $15,000 commercial loan and a $50,000 mortgage . The balance of net assets in foreclosure at June 30, 2001 was $316,000. 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. PAGE 15 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 June 30, 2002, loans past due 90 days or more and still accruing interest were $1,005,000 compared to $1,926,000 as of December 31, 2001 and $475,000 as of June 30, 2001.The decrease in loans past due 90 days at June 30, 2002, compared December 31, 2001 was primarily the result of a decrease in commercial real estate loans past due 90 days. The following information concerns impaired loans:
June 30, 2002 Dec. 31, 2001 June 30, 2001 -------------- -------------- -------------- Impaired Loans . . . . . . . . . . . . . . . . . $ 2,697,000 $ 3,721,000 $ 3,714,000 ============== ============== ============== Average year-to-date impaired loans. . . . . . . $ 3,128,000 $ 3,505,000 $ 3,315,000 ============== ============== ============== Impaired loans with specific loss allowances . . $ 2,697,000 $ 3,721,000 $ 3,714,000 ============== ============== ============== Loss allowances reserved on impaired loans . . . $ 290,000 $ 429,000 $ 411,000 ============== ============== ============== Year-to-date income recognized on impaired loans $ 52,000 $ 78,000 $ 55,000 ============== ============== ==============
The banks' policy for interest income recognition on nonaccrual loans is to recognize income 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 ------------------------ Six Months Ended June 30, Three Months Ended June 30, ------------------------- -------------------------- 2002 2001 2002 2001 ------------- ------ ------ ------ (Dollars in thousands) (Dollars in thousands) Service charges . . . . . . . . . . $ 3,148 $2,475 $1,627 $1,448 Security gains, net . . . . . . . . 2,474 1,783 1,243 1,063 Trust income. . . . . . . . . . . . 1,596 1,715 851 887 Bank-owned life insurance income. . 1,269 1,284 631 593 Other income. . . . . . . . . . . . 3,155 2,056 1,767 1,130 ------------ ------ ------ ------ Total other operating income. $ 11,642 $9,313 $6,119 $5,121 ============= ====== ====== ======
The six month ending June 30, 2002 other operating income increased $2,329,000, or 25.0%, from $9,313,000 for the same period in 2001. This rise in other operating income is the result of increases in service charges, other income and security gains of $673,000, $1,099,000 and $691,000, respectively. Offsetting these gains were reductions in bank-owned life insurance (BOLI) income and trust income. The rise in other operating income was 21.8%, not inclusive of the securities gains. The second quarter other operating income grew 19.5%, compared to the second quarter 2001. Service charges grew $673,000 or 27.2% in the first six 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 half of 2002 was $534,000, compared to the same period in 2001. The remaining increase is related to the growth in average transaction deposits and enhanced fee structures. The second quarter 2002 service charges PAGE 16 grew $179,000 or 12.4% compared to the same period in 2001. This growth was primarily the result of higher overdraft fees. The Corporation recorded net security gains on the sale of securities available for sale of $2,474,000 in the first half of 2002, compared to $1,783,000 during the first half of 2001. Second quarter 2002 net security gains on the sale of securities were $1,243,000, compared to $1,063,000 in the second 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. Income from the Investment Management and Trust Services Division decreased $119,000 or 6.9% in the first six months of 2002 and $36,000 or 4.1% in the second quarter, compared to the same periods in 2001. These decreases were the result of lower estate fees earned during this period and the lower fees associated with the lower market value of trust assets. The Corporation's bank owned life insurance (BOLI) income decreased $15,000 or 1.2% during the first six months of 2002, compared to the same period in 2001. This lower income level was related to the lower rate environment experienced during 2002. 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 second quarter 2002 BOLI income was 6.4% higher than the second quarter of 2001. Other income for the first six months of 2002 increased $1,099,000 or 53.5%, compared to the same period in 2001. The second quarter other income grew $637,000 or 56.4% over the second quarter of 2001. Contributing to these increases were higher fees earned on the sale of alternative investment products including mutual funds and annuities, gains on the sale of residential mortgage loans, loan servicing fees and fees generated from HNC Reinsurance Company.
OTHER OPERATING EXPENSES -------------------------- Six Months Ended June 30, Three Months Ended June 30, ------------------------ -------------------------- 2002 2001 2002 2001 ------------- ------- ------- ------- (Dollars in thousands) (Dollars in thousands) Salaries. . . . . . . . . . . . . . . $ 11,844 $10,712 $ 5,898 $ 5,498 Employee benefits . . . . . . . . . . 3,237 2,193 1,498 1,107 Occupancy . . . . . . . . . . . . . . 2,058 1,665 821 763 Furniture and equipment . . . . . . . 2,607 2,466 1,319 1,258 Other expenses. . . . . . . . . . . . 9,447 8,669 5,178 4,614 ------------ ------- ------- ------- Total other operating expenses. $ 29,193 $25,705 $14,714 $13,240 ============= ======= ======= =======
The first six months of 2002 other operating expenses of $29,193,000 increased $3,488,000 or 13.6% from $25,705,000 for the same period in 2001. The second quarter 2002 other operating expenses grew $1,474,000 or 11.1% compared to the second quarter of 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 $1,132,000 or 10.7% from $10,712,000 for the first six months of 2001 to $11,844,000 for the same period in 2002. Employee salaries increased $400,000 or 7.3% during the second quarter of 2002, compared to the second quarter of 2001. These increases 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 $3,237,000 expensed in the first six months of 2002, were $1,044,000 or 47.6% higher than the $2,193,000 of employee benefits expensed during the same period in 2001. Second quarter 2002 employee benefits of $1,498,000 were 35.3% higher than the second quarter 2001 expense of PAGE 17 $1,107,000. The increase in employee benefits is the result of higher pension expenses and employee medical insurance coverage. The higher pension expense is related to the addition of new employees to the plan and the overall performance of the plan. Net occupancy expense increased $393,000, or 23.6%, from $1,665,000 in the first six months of 2001 to $2,058,000 in the first six months of 2002. This increase was primarily due to a $365,000 expense related to a branch closure during the first quarter of 2002. Net occupancy expenses grew $58,000 or 7.6% during the second quarter of 2002, compared to the second quarter of 2001. Furniture and equipment expense increased $141,000 or 5.7%, during the first six months of 2002, compared to the same period in 2001. The increase in the second quarter of 2002 was 4.8% over the second quarter of 2001. These increases are due to higher equipment maintenance and rental expenses, partially offset by lower depreciation cost. Other expenses increased $778,000, or 9.0%, from $8,669,000 in the first six months of 2001, compared to $9,447,000 in other expenses recorded during the same period in 2002. The increase during the second quarter of 2002 compared to the second quarter in 2001 was $564,000 or 12.2%. This increase was primarily due to higher expenses related to costs associated with the addition of employees to the supplemental executive retirement plan and a $437,000 year-to-date rise in the off-lease vehicles residual reserve expense. The Corporation reviews the off-lease vehicles residual reserve on a quarterly basis and anticipates a lower residual reserve expenses during the last half of 2002, compared to the first half of 2002 and the last two quarters of 2001. The total 2002 projected residual reserve expense should be lower than the total 2001 actual residual reserve expense of $3,705,000. 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 increased $83,184,000, or 3.8%, from $2,208,971,000 at December 31, 2001 to $2,292,155,000 at June 30, 2002. This increase was the result of both higher investment securities available for sale and loans. Partially offsetting these increases was a decrease in fed funds sold. Total assets at June 30, 2002 grew 11.5%, compared to June 30, 2001. This gain was primarily due to increases in both investment securities available for sale and loans. The balance of securities available for sale at June 30, 2001 of $765,207,000 increased $58,836,000 compared to the December 31, 2001 balance of $706,371,000. During the first two quarters of 2002, $254,204,000 of securities available for sale were sold which generated a pretax gain of $2,474,000. In comparison, $164,393,000 securities available for sale were sold during the first half of 2001 to generate a pretax gain of $1,783,000. 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 $3,174,000 during the first half of 2002. Total loans grew $29,679,000 or 2.3% during the two quarters of 2002. 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 5.3% at June 30, 2002, compared to June 30, 2001. Total deposits grew $41,849,000, or 2.4% from $1,746,862,000 at December 31, 2001 to $1,788,711,000 at June 30, 2002. This growth was due to higher noninterest-bearing deposits, interest-bearing checking accounts, savings accounts and time deposits under $100,000. Offsetting these increases were lower money market accounts and time deposits over $100,000. The lower money market volume is due to one large account deposited during December 2001 and withdrawn during January of 2002. The lower time deposits over $100,000 is due to our low demand for short-term funding at the end of the second quarter of 2002. The June 30, 2002 total deposit balance grew 11.6%, compared to the June 30, 2001 total deposits. PAGE 18 Time deposits under $100,000, savings accounts, interest bearing checking accounts and non-interest bearing deposits grew $36,548,000, $22,442,000, $16,299,000 and $1,769,000, respectively. Time deposits over $100,000 and money market accounts decreased $26,110,000 and $9,099,000, respectively. Other borrowings experienced an increase of $34,349,000 during the six months of 2002. A $35,000,000 increase in Federal Home Loan Bank Borrowings was slightly offset by a $662,000 reduction in U.S. Treasury demand notes. Securities sold under agreements to repurchase increased by $11,000. CAPITAL ------- Capital formation is important to the Corporation's well being and future growth. Capital for the period ending June 30, 2002 was $198,153,000, an increase of $8,804,000 over the end of 2001. The increase 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 six months of 2002. 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 June 30, 2002 was a gain of $5,845,000, compared to a gain of $4,534,000 at December 31, 2001. The corporation purchased $3,288,000 of treasury stock during the first six months 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.
(Dollars in thousands) For Capital As of June 30, 2002 Actual Adequacy Purposes ----------------------- Amount Ratio Amount Ratio -------- ------ -------- ------ Total Capital (to risk weighted assets): Corporation . . . . . . . . . . . . . . . $214,890 13.35% $128,765 8.00% Harleysville National Bank. . . . . . . . 126,921 10.89% 93,204 8.00% Citizens National Bank. . . . . . . . . . 36,067 12.11% 23,827 8.00% Security National Bank. . . . . . . . . . 16,137 12.59% 10,252 8.00% Tier 1 Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $197,089 12.24% $ 64,382 4.00% Harleysville National Bank. . . . . . . . 116,074 9.96% 46,602 4.00% Citizens National Bank. . . . . . . . . . 32,339 10.86% 11,913 4.00% Security National Bank. . . . . . . . . . 14,531 11.34% 5,126 4.00% Tier 1 Capital (to average assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $197,089 8.87% $ 88,866 4.00% Harleysville National Bank. . . . . . . . 116,074 7.36% 63,077 4.00% Citizens National Bank. . . . . . . . . . 32,339 7.16% 18,074 4.00% Security National Bank. . . . . . . . . . 14,531 8.24% 7,055 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. . . . . . . . 116,505 10.00% Citizens National Bank. . . . . . . . . . 29,783 10.00% Security National Bank. . . . . . . . . . 12,816 10.00% Tier 1 Capital (to risk weighted assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ - - Harleysville National Bank. . . . . . . . 69,903 6.00% Citizens National Bank. . . . . . . . . . 17,870 6.00% Security National Bank. . . . . . . . . . 7,689 6.00% Tier 1 Capital (to average assets): ----------------------------------------- Corporation . . . . . . . . . . . . . . . $ - - Harleysville National Bank. . . . . . . . 78,847 5.00% Citizens National Bank. . . . . . . . . . 22,592 5.00% Security National Bank. . . . . . . . . . 8,819 5.00%
(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%
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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. . . . . . . . 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 June 30, 2002, the Corporation's Tier 1 risk-adjusted capital ratio was 12.24%, and the total risk-adjusted capital ratio was 13.35%, both well above the regulatory requirements. The risk-based capital ratios of each of the Corporation's commercial banks also exceeded regulatory requirements at June 30, 2002. 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 8.87% at June 30, 2002 and 8.71% at December 31, 2001. The year-to-date June 30, 2002 cash dividend per share of $.34 was 13.3% higher than the cash dividend for the same period in 2001 of $.30. The dividend payout ratio for the first six months of 2002 was 38.3%, 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 June 30, 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 $113,419,000, as of June 30, 2002. The Banks also have unused federal funds lines of credit of $50,000,000 and non-pledged investment securities available for sale of $323,889,000 as of June 30, 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 PAGE 21 to engage in a substantially broader range of nonbanking activities than was permissible before enactment, including underwriting insurance and making merchant banking investments in commercial and financial companies. It allows insurers and other financial services companies to acquire banks; removes various restrictions that currently apply to bank holing company ownership of securities firms and mutual fund advisory companies; and establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. The Corporation currently believes it meets the requirements for the broader range of activities that will be permitted by the Modernization Act. The Modernization Act also modifies current law related to financial privacy and community reinvestment. The new privacy provisions will generally prohibit financial institutions, including the Corporation, from disclosing nonpublic financial information to nonaffiliated third parties unless customers have the opportunity to "opt out" of the disclosure. Pending Legislation -------------------- Management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation which, if they were implemented, would have a material adverse effect upon the liquidity, capital resources, or results of operations, although the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on the Corporation's results of operations. Effects of Inflation ---------------------- Inflation has some impact on the Corporation 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. PAGE 22 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, 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. 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 on page 12 of this Form 10-Q and in SEC Form 10-K for the period ended December 31, 2001. 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 ------- --------------------------------
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(a) Exhibits: -------------- The following exhibits are being filed as part of this Report: Exhibit No. Description of Exhibits ------------ --------------------------------------------------------------------------------------------------- (3.1) Harleysville National Corporation Articles of Incorporation, as amended. (Incorporated by reference to Exhibit 3(a) to the Corporation's Registration Statement No. 33-65021 on Form S-4, as filed on December 14, 1995.) (3.2) Harleysville National Corporation By-laws. (Incorporated by reference to Exhibit 3(b) to the Corporation's Registration Statement No. 33-65021 on Form S-4, as filed on December 14, 1995.) (10.1) Harleysville National Corporation 1993 Stock Incentive Plan. (Incorporated by Reference to Exhibit 4.3 of Registrant's Registration Statement No. 33-57790 on Form S-8, filed with the Commission on October 1, 1993.) (10.2) Harleysville National Corporation Stock Bonus Plan. (Incorporated by Reference to Exhibit 99A of Registrant's Registration Statement No. 33-17813 on Form S-8, filed with the Commission on December 13, 1996.) (10.3) Supplemental Executive Retirement Plan. (Incorporated by Reference to Exhibit 10.3 of Registrant's Annual Report in Form 10-K for the year ended December 31, 1997, filed with the Commission on March 27, 1998.) (10.4) Walter E. Daller, Jr., Chairman, President and Chief Executive Officer's employment agreement. (Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the Commission on March 25, 1999.) (10.5) Demetra M. Takes, President and Chief Operating Officer of Harleysville employment agreement. (Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the Commission on March 25, 1999.) (10.6) Vernon L. Hunsberger, Senior Vice President/CFO and Cashier's employment agreement. (Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the Commission on March 25, 1999.) (10.7) Harleysville National Corporation 1998 Stock Incentive Plan. (Incorporated by Reference to Registrant's Registration Statement No. 333-79971 on Form S-8 filed with the Commission on June 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 April 9, 2002, filed with the Commission on April 17, 2002, reporting the Registrant's first quarter 2002 press release. Current Report on Form 8-K, dated May 30, 2002, filed with the Commission on June 11, 2002, reporting the Registrant's appointment of two new directors. Current Report on Form 8-K, dated July 10, 2002, filed with the Commission on July 26, 2002, reporting the Registrant's second quarter 2002 press release. PAGE 24 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., Chairman, President and Chief Executive Officer (Principal executive officer) /s/ Gregg J. Wagner -------------------- Gregg J. Wagner, Treasurer (Principal financial and accounting officer)
Date: August 12, 2002 PAGE 25 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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