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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
PAGE 2
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.
PAGE 4
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
========== ===============
PAGE 5
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%
PAGE 19
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%
PAGE 20
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
- ------- --------------------------------
PAGE 23
(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.
PAGE 26