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, 2000.
---------------
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: 8,839,275 shares of Common
Stock, $1.00 par value, outstanding on July 31, 2000.
PAGE 1
<TABLE>
<CAPTION>
HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-Q REPORT
<S> <C>
PAGE
----
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 . . . . . . . 3
Consolidated Statements of Income - Six Months and Three Months Ended
June 30, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
8
Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . 21
Part II. Other Information
Item 1. Legal Proceedings
22
Item 2. Change in Securities and Use of Proceeds
22
Item 3. Defaults Upon Senior Securities
22
Item 4. Submission of Matters to a Vote of Security Holders
22
Item 5. Other Information
22
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 22
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
PAGE 2
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) (Unaudited) June 30, 2000 December 31, 1999
--------------- -------------------
<S> <C> <C>
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . $ 60,025 $ 49,654
Federal Funds sold. . . . . . . . . . . . . . . . . . . . . . - 6,600
--------------- -------------------
Total cash and cash equivalents. . . . . . . . . . . . . . . 60,025 56,254
--------------- -------------------
Interest-bearing deposits in banks. . . . . . . . . . . . . . 4,213 7,237
Investment securities available for sale. . . . . . . . . . . 510,292 505,360
Investment securities held to maturity
(market value $38,160 and $25,084, respectively) . . . . . . 38,624 25,535
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,173,417 1,118,244
Less: Unearned income . . . . . . . . . . . . . . . . . . . . 1,930 572
Allowance for loan losses . . . . . . . . . . . . . . . . . . (15,248) (14,887)
--------------- -------------------
Net loans. . . . . . . . . . . . . . . . . . . . . . . . . . 1,160,099 1,103,929
--------------- -------------------
Bank premises and equipment, net. . . . . . . . . . . . . . . 22,165 21,856
Accrued income receivable . . . . . . . . . . . . . . . . . . 11,331 11,044
Other real estate owned . . . . . . . . . . . . . . . . . . . 1,017 1,436
Intangible assets, net. . . . . . . . . . . . . . . . . . . . 1,826 2,006
Bank-owned life insurance . . . . . . . . . . . . . . . . . . 36,254 25,527
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 7,184 7,483
--------------- -------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,853,030 $ 1,767,667
=============== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . $ 221,407 $ 214,393
Interest-bearing:
Checking accounts . . . . . . . . . . . . . . . . . . . . . . 156,636 162,191
Money market accounts . . . . . . . . . . . . . . . . . . . . 301,338 259,015
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,335 163,010
Time, under $100,000. . . . . . . . . . . . . . . . . . . . . 425,589 407,858
Time, $100,000 or greater . . . . . . . . . . . . . . . . . . 165,829 134,979
--------------- -------------------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . 1,443,134 1,341,446
Accrued interest payable. . . . . . . . . . . . . . . . . . . 18,684 17,544
U.S. Treasury demand notes. . . . . . . . . . . . . . . . . . 2,310 3,232
Federal funds purchased . . . . . . . . . . . . . . . . . . . 31,000 9,500
Federal Home Loan Bank (FHLB) borrowings. . . . . . . . . . . 129,250 130,250
Securities sold under agreements to repurchase. . . . . . . . 65,726 108,615
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 10,881 10,417
--------------- -------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 1,700,985 1,621,004
--------------- -------------------
Shareholders' Equity:
Series preferred stock,par value $1 per share;
authorized 3,000,000 shares, none issued . . . . . . . . . . - -
Common stock, par value $1 per share; authorized 30,000,000
shares; issued and outstanding 8,839,275 shares in 2000 and
8,835,012 shares in 1999 . . . . . . . . . . . . . . . . . . 8,839 8,835
Additional paid in capital . . . . . . . . . . . . . . . . . 63,641 68,260
Retained Earnings. . . . . . . . . . . . . . . . . . . . . . 92,477 80,376
Accumulated other comprehensive income . . . . . . . . . . . (12,912) (10,808)
--------------- -------------------
Total shareholders' equity . . . . . . . . . . . . . . . . . 152,045 146,663
--------------- -------------------
Total liabilities and shareholders' equity . . . . . . . . . $ 1,853,030 $ 1,767,667
=============== ===================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 3
<TABLE>
<CAPTION>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six months ended Three months ended
(Dollars in thousands except weighted June 30, June 30,
average number of common shares and per share
information) --------- ---------
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees. . . . . . . . . . . . . . . . $ 42,221 $ 36,329 $ 21,431 $ 18,475
Lease financing. . . . . . . . . . . . . . . . . . . 4,232 3,219 2,205 1,705
Investment securities:
Taxable. . . . . . . . . . . . . . . . . . . . . . . 11,692 8,932 5,974 4,653
Exempt from federal taxes. . . . . . . . . . . . . . 5,249 5,293 2,590 2,646
Federal funds sold . . . . . . . . . . . . . . . . . 164 395 39 237
Deposits in banks. . . . . . . . . . . . . . . . . . 208 105 104 66
----------- ---------- ----------- ----------
Total interest income. . . . . . . . . . . . . . . . 63,766 54,273 32,343 27,782
----------- ---------- ----------- ----------
INTEREST EXPENSE:
Savings deposits . . . . . . . . . . . . . . . . . . 8,331 6,785 4,245 3,476
Time, under $100,000 . . . . . . . . . . . . . . . . 11,211 10,113 5,840 5,088
Time, $100,000 or greater. . . . . . . . . . . . . . 5,151 2,766 2,668 1,461
Borrowed funds . . . . . . . . . . . . . . . . . . . 6,014 3,550 2,874 1,796
----------- ---------- ----------- ----------
Total interest expense . . . . . . . . . . . . . . . 30,707 23,214 15,627 11,821
----------- ---------- ----------- ----------
Net interest income. . . . . . . . . . . . . . . . . 33,059 31,059 16,716 15,961
Provision for loan losses. . . . . . . . . . . . . . 1,055 980 549 490
----------- ---------- ----------- ----------
Net interest income after provision for loan losses. 32,004 30,079 16,167 15,471
----------- ---------- ----------- ----------
OTHER OPERATING INCOME:
Service charges. . . . . . . . . . . . . . . . . . . 1,870 1,803 950 907
Security (losses)gains, net. . . . . . . . . . . . . (192) 493 (80) 345
Trust income . . . . . . . . . . . . . . . . . . . . 1,462 1,308 770 658
Bank-owned life insurance. . . . . . . . . . . . . . 727 - 381 -
Other Income . . . . . . . . . . . . . . . . . . . . 1,644 1,501 836 743
----------- ---------- ----------- ----------
Total other operating income . . . . . . . . . . . . 5,511 5,105 2,857 2,653
----------- ---------- ----------- ----------
Net interest income after provision for loan losses
and other operating income . . . . . . . . . . . . . 37,515 35,184 19,024 18,124
----------- ---------- ----------- ----------
OTHER OPERATING EXPENSES:
Salaries, wages and employee benefits. . . . . . . . 11,583 10,638 5,829 5,425
Occupancy. . . . . . . . . . . . . . . . . . . . . . 1,475 1,330 698 649
Furniture and equipment. . . . . . . . . . . . . . . 2,397 2,101 1,219 1,065
Other expenses . . . . . . . . . . . . . . . . . . . 7,121 5,746 3,901 2,863
----------- ---------- ----------- ----------
Total other operating expenses . . . . . . . . . . . 22,576 19,815 11,647 10,002
----------- ---------- ----------- ----------
Income before income taxes . . . . . . . . . . . . . 14,939 15,369 7,377 8,122
Income tax expense . . . . . . . . . . . . . . . . . 2,587 3,721 1,070 2,024
----------- ---------- ----------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . $ 12,352 $ 11,648 $ 6,307 $ 6,098
=========== ========== =========== ==========
Weighted average number of common shares:
Basic. . . . . . . . . . . . . . . . . . . . . . . . 8,835,873 8,831,877 8,836,268 8,832,237
=========== ========== =========== ==========
Diluted. . . . . . . . . . . . . . . . . . . . . . . 8,846,046 8,843,721 8,846,441 8,844,081
=========== ========== =========== ==========
Net income per share information:
Basic. . . . . . . . . . . . . . . . . . . . . . . . $ 1.40 $ 1.32 $ 0.71 $ 0.69
=========== ========== =========== ==========
Diluted. . . . . . . . . . . . . . . . . . . . . . . $ 1.40 $ 1.32 $ 0.71 $ 0.69
=========== ========== =========== ==========
Cash dividends per share . . . . . . . . . . . . . . $ 0.56 $ 0.49 $ 0.28 $ 0.25
=========== ========== =========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 4
<TABLE>
<CAPTION>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands) Six Months Ended June 30,
OPERATING ACTIVITIES: 2000 1999
--------- ----------
<S> <C> <C>
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,352 $ 11,648
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . . 1,055 980
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 1,377 1,256
Net amortization of investment
Securities discount/premiums . . . . . . . . . . . . . . . . . . . . . . 294 357
Net realized security loss (gain). . . . . . . . . . . . . . . . . . . . 192 (493)
Increase in accrued income receivable. . . . . . . . . . . . . . . . . . (287) (888)
Increase in accrued interest payable . . . . . . . . . . . . . . . . . . 1,140 1,698
(Decrease) increase in other assets. . . . . . . . . . . . . . . . . . . 299 (2,512)
Net increase in other liabilities. . . . . . . . . . . . . . . . . . . . 1,621 2,435
Decrease in unearned income. . . . . . . . . . . . . . . . . . . . . . . (1,358) (1,564)
Write-down of other real estate owned. . . . . . . . . . . . . . . . . . 81 66
Decrease (increase) in intangible assets . . . . . . . . . . . . . . . . 180 (218)
--------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . . 16,946 12,765
--------- ----------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale. . . . . 46,196 34,612
Proceeds, maturity or calls of investment securities held to maturity. . 3,527 5,858
Proceeds, maturity or calls of investment securities available for sale. 13,762 51,588
Purchases of investment securities held to maturity. . . . . . . . . . . (16,656) -
Purchases of investment securities available for sale. . . . . . . . . . (68,597) (130,139)
Decrease (increase) in interest-bearing deposits in banks. . . . . . . . 3,024 (5,761)
Net increase in loans. . . . . . . . . . . . . . . . . . . . . . . . . . (56,513) (74,956)
Net increase in premises and equipment . . . . . . . . . . . . . . . . . (1,685) (2,485)
Purchase of bank-owned life insurance. . . . . . . . . . . . . . . . . . (10,727) -
Proceeds from sales of other real estate . . . . . . . . . . . . . . . . 984 1,266
--------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . . . . (86,685) (120,017)
--------- ----------
FINANCING ACTIVITIES:
Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . 101,688 72,493
(Decrease) increase in U.S. Treasury demand notes. . . . . . . . . . . . (922) 1,873
Increase in federal funds purchased. . . . . . . . . . . . . . . . . . . 21,500 12,000
(Decrease) increase in FHLB borrowings . . . . . . . . . . . . . . . . . (1,000) 2,750
(Decrease) increase in securities sold under agreement . . . . . . . . . (42,889) 13,470
Cash dividends & fractional shares . . . . . . . . . . . . . . . . . . . (4,913) (4,546)
Stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 39
--------- ----------
Net cash provided by financing activities. . . . . . . . . . . . . . . . 73,510 98,079
--------- ----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . 3,771 (9,173)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 56,254 61,710
--------- ----------
Cash and cash equivalents at end of the period . . . . . . . . . . . . . $ 60,025 $ 52,537
========= ==========
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,566 $ 21,515
========= ==========
Supplemental disclosure of noncash investing and financing activities:
Transfer of assets from loans to other real estate owned. . . . . . . . $ 646 $ 614
========= ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 5
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the consolidated financial
position of Harleysville National Corporation (the "Corporation") and its wholly
owned subsidiaries - Harleysville National Bank and Trust Company
("Harleysville"), Citizens National Bank ("Citizens"), Security National Bank
("Security") (collectively, the "Banks") and HNC Financial Company- as of June
30, 2000, the results of its operations for six and three month periods ended
June 30, 2000 and 1999 and the cash flows for the six month periods ended June
30, 2000 and 1999.This quarterly report refers to the corporation's subsidiary
banks, collectively as "the banks."We recommend that you read these unaudited
consolidated financial statements in conjunction with the audited
consolidated financial statements of the Corporation and the notes thereto set
forth in the corporation's 1999 annual report.All prior period amounts were
restated to reflect the acquisition of Citizens Bank and Trust Company.
The results of operations for the six and three month periods ended June 30,
2000 and 1999 are not necessarily indicative of the results to be expected for
the full year.
NOTE 2 - Income tax expense is less than the amount calculated using the
statutory tax rate, primarily the result of tax exempt income earned from state
and municipal securities and loans.
NOTE 3 - The Corporation accounts for comprehensive income under the Financial
Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive
Income."SFAS No. 130 establishes standards to provide prominent disclosure of
comprehensive income items.Comprehensive income is the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources.Other comprehensive income consists of net
unrealized gains on investment securities available for sale.Subsequent to the
adoption date, all prior-period amounts are required to be restated to conform
to the provision of SFAS No. 130.Comprehensive income for the first six months
of 2000 was $10,248,000, compared to $1,967,000 for the first six months of
1999.The adoption of SFAS No. 130 did not have a material impact on the
Corporation's financial position or results of operation.
NOTE 4 - The Corporation adopted the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information."SFAS No. 131 requires that public business enterprises report
certain information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements of interim
periods issued to shareholders.It also requires that public business enterprises
report certain information about their products and services, the geographic
areas in which they operate and their major customers.Management has determined
that under current conditions, the Corporation will report one business segment.
NOTE 5 - In June 1998, the Financial Accounting standard Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activity."SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities.It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.If
certain conditions are met, a derivative may be specifically designated as a
hedge.The accounting for changes in the fair value of derivative (gains and
losses) depends on the intended use of the derivative and resulting
designation.SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.Earlier application is permitted only as of the
beginning of any fiscal quarter.On January 1, 1999, the Corporation adopted SFAS
No. 133.Concurrent with the adoption, the Corporation reclassified $7,530,000 of
investment securities from the held to maturity category to the available for
sale category and recorded $221,000 net of taxes of unrealized holding gains in
accumulated other comprehensive income.
PAGE 6
NOTE 6- On April 28, 2000, the Corporation consummated its acquisition of
Citizens Bank and Trust Company.Under the terms of the merger, accounted for as
a pooling-of-interest, Citizens Bank and Trust Company's shareholders received
166 shares of Harleysville National Corporation common stock for each share of
Citizens Bank and Trust Company stock.Upon the completion of the acquisition,
Citizens Bank and Trust Company's banking operations merged into those of
Citizens National Bank, a wholly owned subsidiary of Harleysville National
Corporation.
On January 20, 1999, the Corporation consummated its acquisition of Northern
Lehigh Bancorp, Inc., parent company of Citizens National Bank of
Slatington.Accounted for as a pooling-of-interest, Northern Lehigh Bancorp
shareholders received 3.57 shares of Harleysville National Corporation common
stock for each share of Northern Lehigh Bancorp common stock.The acquisition was
affected by the merger of Northern Lehigh Bancorp, Inc. with Harleysville
National Corporation North, Inc., a bank holding company and wholly owned
subsidiary of Harleysville National Corporation.Citizens National Bank of
Slatington merged with and into The Citizens National Bank of Lansford, a
national banking association and wholly owned subsidiary of Harleysville
National Corporation North, Inc., under the name Citizens National Bank.
The enclosed financial information for the periods presented include the
consolidated accounts of Northern Lehigh Bancorp, Inc. and Citizens Bank and
Trust Company
PAGE 7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
-----------------------
The following is management's discussion and analysis of the significant changes
in the results of operations, capital resources and liquidity presented in its
accompanying consolidated financial statements for the corporation, the banks
and HNC Financial Company.The corporation's consolidated financial condition and
results of operations consist almost entirely of the banks' financial condition
and results of operations.Current performance does not guarantee, and may not be
indicative of similar performance in the future.
In addition to historical information, this Form 10-Q contains forward-looking
statements.We have made forward-looking statements in this document, and in
documents that we incorporate by reference, that are subject to risks and
uncertainties.Forward-looking statements include the information concerning
possible or assumed future results of operations of Harleysville National
Corporation and its subsidiaries.When we use words such as "believes,"
"expects," "anticipates," or similar expressions, we are making forward-looking
statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document and in the documents that we incorporate by
reference, could affect the future financial results of Harleysville National
Corporation and its subsidiaries and could cause those results to differ
materially from those expressed in our forward-looking statements contained or
incorporated by reference in this document.These factors include the following:
- operating, legal and regulatory risks;
- economic, political and competitive forces affecting our banking,
securities, asset management and credit services businesses; and
- the risk that our analyses of these risks and forces could be incorrect
and/or that the strategies developed to address them could be unsuccessful.
OVERVIEW
--------
The Corporation recorded improved quarter and year-to-date earnings during a
period when it successfully completed the acquisition of Citizens Bank & Trust
Co., a $130 million asset community bank.An increase in other income and the
continued strength in loan quality contributed to the positive results.
Consolidated net income for the first six months of 2000 was $12,352,000,
an increase of $704,000, or 6.0%, over the first six months of 1999 net income
of $11,648,000.Basic and diluted earning per share for the first six months of
2000 of $1.40 increased 6.1%, over the first six months of 1999 basic and
diluted earnings per share of $1.32.Consolidated net income for the second
quarter of 2000 was $6,307,000, an increase of $209,000, or 3.4%, over the
second quarter of 1999 net income of $6,098,000.For the quarter ended June 30,
2000, basic and diluted earnings per share at $.71 were up 2.9% from $.69 in the
comparable period last year.
The increase in net income during the first six months of 2000, compared to the
same period in 1999, is the result of both higher net interest income and other
operating income. Net interest income grew $2,000,000, primarily as a result of
a 13.6% rise in average earning assets.Other operating income rose $406,000, due
primarily to higher trust fees and bank-owned life insurance, offset by net
losses on the sale of securities.Offsetting these increases was a rise in other
operating expenses, primarily related to the overall growth in the banks and
acquisition related expenses.
For the six months ended June 30, 2000, the annualized return on average
shareholders' equity and the annualized return on average assets were 16.65% and
1.37%, respectively.For the same period in 1999, the annualized return on
average shareholders' equity was 15.60% and the annualized return on average
PAGE 8
assets was 1.49%.For the three months ended June 30, 2000, the annualized return
on average shareholders' equity and the annualized return on average assets were
16.93% and 1.39%, respectively.For the second quarter in 1999, the annualized
return on average shareholders' equity was 16.35% and the annualized return on
average assets was 1.53%.
The banks continue to focus on the quality of their loan
portfolios.Nonperforming assets, including nonaccrual loans, restructured loans
and other real estate owned were .32% of total assets at June 30, 2000 and
December 31, 1999, compared to .33% at June 30, 1999.
Net income is affected by five major elements: net interest income, or the
difference between interest income earned on loans and investments and interest
expense paid on deposits and borrowed funds; the provision for loan losses, or
the amount added to the allowance for loan losses to provide reserves for future
losses on loans; other operating income, which is made up primarily of certain
fees, trust income and gains and losses from sales of securities; other
operating expenses, which consist primarily of salaries and other operating
expenses; and income taxes.Each of these major elements will be reviewed in more
detail in the following discussion.
NET INTEREST INCOME AND RELATED ASSETS AND LIABILITIES
-------------------------------------------------------------
Net interest income for the first six months of 2000 of $33,059,000
increased $2,000,000, or 6.4%, over the same period in 1999 of which produced
net interest income of $31,059,000.As illustrated in the table below, the
primary source of this increase was a rise in interest income resulting from
increases to earning asset volumes in the first half of 2000, compared to the
same period in 1999.The increase in interest income was partially offset by a
rise in interest expense, primarily the result of higher volumes.The second
quarter of 2000 net interest income increased 4.7%, compared to the same period
in 1999.This rise was primarily due to an increase in earning asset volumes,
partially offset by higher interest expense related to higher deposit volumes.
The rate-volume variance analysis set forth in the table below, which is
computed on a tax-equivalent basis (tax rate of 35%), analyzes changes in net
interest income for the six months and three month periods ended June 30, 2000
over June 30, 1999 by their rate and volume components.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, 2000 June 30, 2000
Over/Under Over/Under
June 30, 1999 June 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Total Caused by: Total Caused by:
------------ ------------
Variance Rate Volume Variance Rate Volume
---------- ------------ -------- ------------ ------- --------
Interest Income:
Securities *. . . . . . . . . . . . . . . $ 2,692 $ 587 $ 2,105 $ 1,235 $ 339 $ 896
Money market instruments. . . . . . . . . (128) 384 (512) (160) 206 (366)
Loans * . . . . . . . . . . . . . . . . . 6,980 422 6,558 3,485 238 3,246
---------- ------------ -------- ------------ ------- --------
Total. . . . . . . . . . . . . . . . . 9,544 1,393 8,151 4,560 783 3,776
---------- ------------ -------- ------------ ------- --------
Interest Expense:
Savings deposits. . . . . . . . . . . . . 1,546 740 806 769 373 396
Time deposits and certificates of deposit 3,483 657 2,826 1,959 544 1,415
Other borrowings. . . . . . . . . . . . . 2,464 705 1,759 1,078 411 668
---------- ------------ -------- ------------ ------- --------
Total . . . . . . . . . . . . . . . . 7,493 2,102 5,391 3,806 1,328 2,479
---------- ------------ -------- ------------ ------- --------
Net interest income . . . . . . . . . . . . $ 2,051 ($709) $ 2,760 $ 754 ($545) $ 1,297
========== ============ ======== ============ ======= ========
*Tax Equivalent Basis
</TABLE>
PAGE 9
Taxable-equivalent net interest income was $36,367,000 for the first six
months of 2000, compared to $34,316,000 for the same period in 1999, a 6.0% or
$2,051,000 increase.This rise in taxable-equivalent net interest income was
primarily due to a $2,760,000 increase related to volume, which was partially
offset by a reduction in net interest income, related to rate.Total
taxable-equivalent interest income grew $9,544,000, the result of higher volumes
and rates of loans and securities.Average year-to-date loans and securities grew
$159,598,000 and $58,196,000, respectively at June 30, 2000, compared to the
same period in 1999.The increase in securities included $25,000,000 in
securities purchased as part of a capital leverage program during the third
quarter of 1999.To more fully leverage its capital, the Corporation entered into
$25,000,000 of structured transactions in which the banks borrow funds from the
Federal Home Loan Bank (FHLB) and invests these borrowed funds into securities
that are priced to yield a spread over the FHLB borrowing rate.
Total interest expense grew $7,493,000 during the first six months of 2000,
compared to the same period in 1999.This growth was principally the result of
higher volumes in all deposit categories and other borrowings.The average
year-to-date growth in time deposits and savings deposits were $102,738,000 and
$58,986,000, respectively.The growth in time deposits was primarily due to
greater than $100,000 time deposits related to municipalities and one business
customer. As a result of our continued efforts to acquire municipality deposits,
municipal time deposits over $100,000 should continue to grow.The deposits
associated with the one business customer should decrease towards the end of the
year.The average year-to-date 2000 other borrowings grew $63,074,000 or 41.3%,
compared to the first six months of 1999.Included in the growth in other
borrowings was the funding required for the $25,000,000 capital leverage
program.The remaining increase in deposit and other borrowing volumes was used
to finance the earning asset growth.Other borrowings include federal funds
purchased, FHLB borrowings, securities sold under agreements to repurchase and
U. S. Treasury demand notes.
Taxable-equivalent net interest income of $18,344,000 was $754,000 or 4.3%
higher in the second quarter of 2000, compared to $17,590,000 for the same
period in 1999.Interest income grew $4,560,000 during the period, primarily due
to a 15.7% rise in loan volumes.The increase in interest income was partially
offset by a $3,806,000 rise in interest expense.Increases in all deposit
categories rates and volumes contributed to this rise.Non-accruing loans are
included in the average balance yield calculation, but the average non-accruing
loans had no material effect on the results.
INTEREST RATE SENSITIVITY ANALYSIS
The Corporation actively manages its interest rate sensitivity
positions.The objectives of interest rate risk management are to control
exposure of net interest income to risks associated with interest rate movements
and to achieve consistent growth in net interest income.The Asset/Liability
Committee, using policies and procedures approved by the Banks' Boards of
Directors, is responsible for managing the rate sensitivity position. The Banks
manage interest rate sensitivity by changing mix and repricing characteristics
of their assets and liabilities through their investment securities portfolios,
their offering of loan and deposit terms and borrowings from the FHLB. The
nature of the Banks' current operations is such that it is not subject to
foreign currency exchange or commodity price risk.The Banks do not own trading
assets and they do not have any hedging transactions in place such as interest
rate swaps, caps or floors.
The banks use two principal reports to measure interest rate risk:
asset/liability simulation reports; and net interest margin reports. Management
also simulates possible economic conditions and interest rate scenarios in order
to quantify the impact on net interest income.The effect that changing interest
rates have on the Banks' net interest income is simulated by increasing and
decreasing interest rates.This simulation is known as rate shocks.The June 30,
2000 report below forecasts changes in the Banks' market value of equity under
alternative interest rate environments.The market value of equity is defined as
the net present value of the Banks' existing assets and liabilities.
PAGE 10
<TABLE>
<CAPTION>
(Dollars in thousands)
CHANGE IN ASSET/LIABILITY
<S> <C> <C> <C> <C>
MARKET VALUE MARKET VALUE PERCENTAGE APPROVED
OF EQUITY OF EQUITY CHANGE PERCENT CHANGE
------------ ---------------- ----------- ---------------
+200 Basis Points 343,403 (27,006) -7.29% +/- 30%
+100 Basis Points 369,847 (562) -0.15% +/- 30%
Flat Rate . . . . 370,409 - 0.00% +/- 30%
-100 Basis Points 342,163 (28,246) -7.63% +/- 30%
-200 Basis Points 309,395 (61,014) -16.47% +/- 30%
</TABLE>
In the event the Banks should experience an excessive decline in their market
value of equity resulting from changes in interest rates, they have a number of
options which it they could utilize to remedy such a mismatch.The Banks could
restructure their investment portfolio through sale or purchase of securities
with more favorable repricing attributes.They could also emphasize loan products
with appropriate maturities or repricing attributes, or attract deposits or
obtain borrowings with desired maturities.
NET INTEREST MARGIN
---------------------
The net interest margin of 4.28% for the six-month period ended June 30,
2000, decreased from the 4.59% net interest margin for the first six months of
1999.The decrease in the net interest margin is due to both the capital leverage
program and the funding of the bank-owned life insurance (BOLI) with deposits,
and the high cost of attracting new deposits.The bank purchased $25,000,000 of
BOLI during the third quarter of 1999 and $10,000,000 during the second quarter
of 2000.Since the current competitive interest rate environment will continue to
place downward pressure on the net interest margin, the Banks expect to increase
net interest income through the continued growth in market share of loans and
deposits.The yield on earning assets of 7.90% during the first six months of
2000 was higher than the 7.70% earned during the first six months of 1999.The
increase in the yield is primarily due to the impact of the rise in interest
rates during this period. The first half of 2000 average interest rate paid on
interest-bearing deposits and other borrowings of 4.32% was higher than the
first six months of 1999 rate of 3.88%.The increase in the average interest rate
paid is the result of funding the capital leverage program with higher costing
FHLB borrowings, higher interest rates and the overall higher cost of attracting
new deposits. The second quarter of 2000 net interest margin of 4.28% was lower
than the second quarter 1999 net interest margin of 4.61%.
PROVISION FOR LOAN LOSSES
----------------------------
The provision is based on management's analysis of the adequacy of the
allowance for loan losses.In its evaluation, management considers past loan
experience, overall characteristics of the loan portfolio, current economic
conditions and other relevant factors.Based on the latest monthly evaluation of
potential loan losses, the allowance is adequate to absorb known and inherent
losses in the loan portfolio.Ultimately, however, the adequacy of the allowance
is largely dependent upon the economy, a factor beyond the Corporation's
control.With this in mind, additions to the allowance for loan losses may be
required in future periods, especially if economic trends worsen or certain
borrowers' ability to repay declines.
For the first six months of 2000 the provision for loan losses was $1,055,000,
compared to $980,000 for the same period in 1999.The higher provision for loan
losses during the first quarter of 2000, compared to the same period in 1999 is
attributed to the growth in loans during this period and an increase in net
PAGE 11
loans charged off.Net loans charged off was $694,000 for the six months ended
June 30, 2000, compared to $344,000 for the six months ended June 30, 1999.The
increase in loans charged off was primarily due to consumer related loans.The
ratio of nonperforming assets to total assets for June 30, 2000 of .32% did not
change from December 31, 1999, and was lower than the June 30, 1999 ratios of
.33%.
<TABLE>
<CAPTION>
Allowance for Loan Losses
----------------------------
Transaction in the allowance for loan losses are as follows:
<S> <C> <C>
2000 1999
--------- ---------
Balance, Beginning of Year $ 14,887,000 $14,246,000
Provision charged to operating expenses 1,055,000 980,000
Loans charged off (992,000) (436,000)
Recoveries 298,000 92,000
------------ -----------
Balance, June 30 15,248,000 14,882,000
=============== ============
Ratios: . . . . . . . . . . . . . . . . . . . . . June 30, 2000 Dec. 31, 1999 June 30, 1999
------------------------------------------------- ------------- ------------- ---------------
Allowance for loan losses to nonperforming assets 257.7% 266.3% 273.8%
Nonperforming assets to total loans & net assets
acquired in foreclosure 0.50% 0.50% 0.53%
Nonperforming assets to total total assets 0.32% 0.32% 0.33%
Allowance for loan losses to total loans 1.30% 1.33% 1.44%
</TABLE>
The following table sets forth an allocation of the allowance for loan losses by
loan category:
<TABLE>
<CAPTION>
June 30, 2000
-------------
Percent
<S> <C> <C>
Amount of Loans
-------- ---------
Commercial and industrial $ 6,894 26%
Consumer loans. . . . . . 4,800 35%
Real estate . . . . . . . 2,494 30%
Lease financing . . . . . 1,060 9%
-------- ---------
Total . . . . . . . . . 15,248 100%
======== =========
</TABLE>
Nonperforming assets (nonaccruing loans, net assets in foreclosure and
troubled debt restructured loans) were 0.50% of total loans and net assets
acquired in foreclosure at June 30, 2000, compared to 0.50% at December 31, 1999
and 0.53% at June 30, 1999.The ratio of the allowance for loan losses to loans
at June 30, 2000 of 1.30% decreased from the December 31, 1999 and June 30, 1999
ratios of 1.33% and 1.44%, respectively.
Nonaccruing loans at June 30, 2000 of $4,450,000,000, increased $760,000
from the December 31, 1999 level of $3,690,000, and decreased $91,000 from the
June 30, 1999 level of $4,541,000. The increase in nonaccruing loans at June 30,
2000, compared to December 31, 1999 was primarily the result of an increase in
commercial nonaccruing loans.
Net assets in foreclosure totaled $1,017,000 as of June 30, 2000, a decrease of
$419,000 from the December 31, 1999 balance of $1,436,000.During the first six
months of 2000, transfers from loans to assets in foreclosure were $646,000,
payments on foreclosed properties totaled $984,000 and write-downs of assets in
foreclosure equaled $81,000.The loans transferred to assets in foreclosure
included commercial loans of $121,000, mortgages of $52,000 and leases of
$473,000.The balance of net assets in foreclosure at June 30, 1999 was
PAGE 12
$413,000.Efforts to liquidate assets acquired in foreclosure are proceeding as
quickly as potential buyers can be located and legal constraints
permit.Generally accepted accounting principles require foreclosed assets to be
carried at the lower of cost (lesser of carrying value of asset or fair value at
date of acquisition) or estimated fair value.
As of June 30, 2000, there were two unrelated borrowers with troubled debt
restructured loans totaling $449,000, compared with two unrelated borrowers with
a balance of$465,000 as of December 31, 1999 and $481,000 at June 30, 1999. The
two customers were complying with the restructured terms as of June 30, 2000.
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, 2000, loans past due 90 days or more and still
accruing interest were $1,172,000, compared to $565,000 as of December 31, 1999
and $970,000 as of June 30, 1999. The increase in loans past due 90 days at June
30, 1999,compared to December 31,1999 was primarily the result of an increase in
real estate loans past due 90 days.
<TABLE>
<CAPTION>
The following information concerns impaired loans:
<S> <C> <C> <C>
Impaired Loans:. . . . . . . . . . . . . . . . . . June 30, 2000 Dec. 31, 1999 June 30, 1999
-------------- -------------- --------------
Restructured Loans. . . . . . . . . . . . . . . . $ 449,000 $ 465,000 $ 481,000
Nonaccrual Loans. . . . . . . . . . . . . . . . . $ 2,691,000 $ 2,117,000 $ 2,766,000
-------------- -------------- --------------
Total Impaired Loans . . . . . . . . . . . . . . . $ 3,140,000 $ 2,582,000 $ 3,247,000
============== ============== ==============
Average year-to-date impaired loans: . . . . . . . $ 2,605,000 $ 3,046,000 $ 2,612,000
============== ============== ==============
Impaired loans with specific loss allowances:. . . $ 3,140,000 $ 2,582,000 $ 3,247,000
============== ============== ==============
Loss allowances reserved on impaired loans:. . . . $ 347,000 $ 262,000 $ 433,000
============== ============== ==============
Year-to-date income recognized on impaired loans. $ 37,000 $ 132,000 $ 23,000
============== ============== ==============
</TABLE>
The banks' policy for interest income recognition on impaired loans is to
recognize income on restructured loans under the accrual method.The banks
recognize income on nonaccrual loans under the cash basis when the loans are
both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the banks.The banks will not recognize income if these
factors do not exist.
<TABLE>
<CAPTION>
OTHER OPERATING INCOME
------------------------
Six Months Ended Three Months Ended
June 30, June 30,
----------------- ---------------------
2000 1999 2000 1999
----- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Service charges . . . . . . . . . 1,870 1,803 950 907
Securities (losses) gains, net. . (192) 493 (80) 345
Trust income. . . . . . . . . . . 1,462 1,308 770 658
Bank-owned life insurance income. 727 - 381 -
Other income. . . . . . . . . . . 1,644 1,501 836 743
Total other operating income. . . 5,511 5,105 2,857 2,653
===== ===== ====== =====
</TABLE>
PAGE 13
Other operating income for the first six months of 2000 increased $406,000,
or 8.0%, from $5,105,000 at June 30, 1999 to $5,511,000 at June 30, 2000. This
rise in other operating income is the result of a $67,000 growth in service
charges, a $154,000 rise in trust income and a $143,000 increase in other
income.Bank-ownedlife insurance (BOLI) income contributed $727,000 to other
operating income during the first half of 2000.A $685,000 decrease in security
gains partially offset these increases.The rise in other operating income was
23.7%, not inclusive of the securities gains and losses.The second quarter 2000
other income was 7.7% higher than the second quarter of 1999.This increase was
primarily due to the BOLI income earned during the second quarter of 2000.
Service charges grew $67,000, or 3.7% in the six months of 2000, compared
to the same period in 1999. This growth was primarily the result of the increase
in average deposit transaction accounts, from the first six months of 1999 to
the first six months in 2000.The 2000 second quarter service charge income of
$950,000, increased $43,000, or 4.7% over the second quarter of 1999.
The Corporation recorded net security losses on the sale of securities of
$192,000 in the first six months of 2000 and $80,000 in the second quarter of
2000.The Corporation recorded net security gains on the sale of securities of
$493,000 in the first six months of 1999 and $345,000 in the second quarter of
1999. From time to time, 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.
Income from the Investment Management and Trust Services Division increased
$154,000, or 11.8% in the first six months of 2000 and $112,000, or 17.0% in the
second quarter of 2000, compared to the same periods in 1999. These increase was
the result of both an increase in the book value of trust assets under
management of 22.3% from June 30, 1999 to June 30, 2000, and the Corporation's
continuing emphasis on marketing the Investment Management and Trust Services
Division's products and services.
During the third quarter of 1999, the corporation entered into a $25,000,000
investment of bank-owned life insurance (BOLI).The corporation entered into an
additional $10,000,000 investment of BOLI during the second quarter of 2000.
BOLI involves the corporation purchasing of life insurance 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 profit offsets a portion of future benefit cost increases.Bank
deposits fund BOLI and the earnings from BOLI are recognized as other income.The
corporation recognized $727,000 of BOLI income during the first six months of
2000 and $381,000 during the second quarter of 2000.
Other income for the first six months of 2000 increased $143,000, or 9.5%,
compared to the same period in 1999.The second quarter of 2000 other income of
$836,000 grew $93,000, or 12.5%, over the second quarter of 1999. Contributing
to this rise were increases related to loan servicing fees, loan insurance fees
and ATM/Debit card fees.These increases were partially offset by a decrease in
gains on the sale of residential mortgages, resulting from a decrease in new
mortgage volumes experienced during the first half of 2000, compared to the same
period in 1999.
<TABLE>
<CAPTION>
OTHER OPERATING EXPENSES
--------------------------
Six Months Ended Three Months Ended
June 30, June 30,
---------------- ------------------
2000 1999 2000 1999
------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Salaries. . . . . . . . . . . . 8,765 7,940 4,452 4,119
Employee benefits . . . . . . . 2,818 2,698 1,377 1,306
Net occupancy expense . . . . . 1,475 1,330 698 649
Equipment expense . . . . . . . 2,397 2,101 1,219 1,065
Other Expenses. . . . . . . . . 7,121 5,746 3,901 2,863
Total other operating expenses. 22,576 19,815 11,647 10,002
======= ====== ====== ======
</TABLE>
PAGE 14
Other operating expenses for the first six months of 2000 of $22,576,000
increased $2,761,000, or 13.9%, from $19,815,000 for the same period in 1999.The
rise in operating expenses was the result of costs related to technology
enhancements to be used to improve both the Banks productivity and products
offered to customers, cost related to the merger of Citizens Bank and Trust
Company and other expenses related to the overall growth of the banks.The second
quarter other operating expenses increased 36.3% over the second quarter of
1999.
Employee salaries increased $825,000, or 10.4% from $7,940,000 for the first
six months of 1999 to $8,765,000 for the same period in 2000.Employee benefits
of $2,818,000 expensed in the first six months of 2000, were $120,000, or 4.4%
higher than the $2,698,000 of employee benefits expensed during the same period
in 1999.The second quarter 2000 salary and employee benefits exceeded the second
quarter of 1999 levels by 8.1% and 5.4%, respectively.The increase in salaries
and employee benefits reflects cost of living increases, merit increases and
additional staff necessitated by the growth of the Banks.
Net occupancy expense increased $145,000, or 10.9%, from $1,330,000 in the
first six months of 1999 to $1,475,000 in the first six months of 2000.Net
occupancy expenses grew 7.6% in the second quarter of 2000, compared to the
second quarter of 1999.Contributing to this increase was the opening of a new
branch, higher than normal snow removal expenses, and repair and maintenance
expenses.Equipment expense increased$296,000, or 14.1%, during the first six
months of 2000, compared to the same period in 1999.The second quarter equipment
expenses grew $154,000, or 14.5% over the second quarter of 1999.These increases
are due to both equipment depreciation and maintenance associated with planned
increased technology capabilities used to manage the growth of the Corporation
and to enhanced the products offered to customers.
Other expenses increased $1,375,000, or 23.9%, from $5,746,000 in the first six
months of 1999, compared to $7,121,000 in other expenses recorded during the
same period in 2000.Second quarter 2000 other expenses of $3,901,000 were 36.3%
higher than the second quarter of 1999 other expenses of $2,863,000.This
increase is the result of higher expenses associated with the overall growth of
the Banks, and the merger of Citizens Bank and Trust Company.
INCOME TAXES
-------------
Income tax expense is less than the amount calculated using the statutory
tax rate primarily as a result of tax exempt income earned from state and
municipal securities and loans.
BALANCE SHEET ANALYSIS
------------------------
Total assets grew $85,363,000, or 4.8%, from $1,767,667,000 at December 31, 1999
to $1,853,030,000 at June 30, 2000.This growth was the primarily result of an
increases in earning assets and BOLI of $63,570,000 and $10,727,000,
respectively.During the first six months of 2000, loans grew $55,173,000 and
securities rose $18,021,000.These earning asset increases were offset by
decreases to federal funds sold and interest-bearing deposits in banks of
$6,600,000 and $3,024,000, respectively.
The balance of securities available for sale at June 30, 2000 of $510,292,000
increased $4,932,000 compared to the December 31, 1999 balance of
$505,360,000.During the first six months of 2000, $46,196,000 of securities were
sold which generated a pretax loss of $192,000.In comparison, $34,612,000
securities available for sale were sold during the first half of 1999 to
generate a pretax gain of $493,000.From time to time, 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.The
balance of investment securities held to maturity grew $13,089,000 during the
first half of 2000.
PAGE 15
Total loans grew $55,173,000 or 4.9% during the first six months of
2000.Contributing to this increase were consumer loans, leasing and commercial
loans which grew $32,471,000, $13,710,000 and $9,347,000, respectively.The
growth in consumer loans was primarily in financing indirect automobile dealer
loans.Real estate loans decreased $355,000 during this period reflecting the
slow down in the residential mortgage market.
Total deposits increased $101,688,000, or 7.6% from $1,341,446,000 at
December 31, 1999 to $1,443,134,000 at June 30, 2000.This increase was primarily
due to the growth in money market accounts and time deposits during this
period.Money market accounts grew $42,323,000 as a result of the growth in
municipal and trust deposits.Time deposits under $100,000 increased $17,731,000
and time deposits greater than $100,000 grew $30,850,000.The primary source of
the rise in the greater than $100,000 time deposits came from municipal
customers.Savings accounts and noninterest-bearing checking accounts increased
by $9,325,000 and $7,014,000, respectively.Interest bearing deposits decreased
$5,555,000.Other borrowings experienced a decrease of $23,311,000 during the
first six months of 2000.A decrease in securities sold under agreements to
repurchase of $42,889,000, was partially offset by increases in federal funds
purchased of $21,500,000.The decrease in securities sold under agreements to
repurchase was primarily the result of a business customer withdrawing funds and
transferring funds to greater than $100,000 time deposits during the first half
of 2000.U. S. treasury demand notes and Federal Home Loan Bank borrowings
decreased $922,000 and $1,000,000, respectively during this period.
CAPITAL
-------
Capital formation is important to the Corporation's well being and future
growth.Capital for the period ending June 30, 2000 was $152,045,000, an increase
of$5,382,000 over the end of 1999.The increase is the result of the retention of
the Corporation's earnings, partially offset by the adjustment for the net
unrealized losses on the investment securities available for sale.Net unrealized
gains and losses on available for sale investment securities are recorded as
accumulated other comprehensive income (loss) in the equity section of the
balance sheet.The accumulated other comprehensive income at June 30, 2000 was a
loss of $12,912,000, compared to a loss of $10,808,000 at December 31,
1999.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.
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C> <C>
As of June 30, 2000 Actual Actual
------------------- Amount Ratio
------- -------
Total Capital (to risk weighted assets):
-----------------------------------------
Corporation . . . . . . . . . . . . . . . 179,100 13.22%
Harleysville National Bank. . . . . . . . 100,367 10.19%
Citizens National Bank. . . . . . . . . . 37,409 14.55%
Security National Bank. . . . . . . . . . 13,081 13.10%
Tier 1 Capital (to risk weighted assets):
-----------------------------------------
Corporation . . . . . . . . . . . . . . . 163,976 12.10%
Harleysville National Bank. . . . . . . . 89,697 9.11%
Citizens National Bank. . . . . . . . . . 34,194 13.30%
Security National Bank. . . . . . . . . . 12,018 12.04%
Tier 1 Capital (to average assets):
-----------------------------------------
Corporation . . . . . . . . . . . . . . . 163,976 9.06%
Harleysville National Bank. . . . . . . . 89,697 7.06%
Citizens National Bank. . . . . . . . . . 34,194 8.62%
Security National Bank. . . . . . . . . . 12,018 8.96%
</TABLE>
PAGE 16
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
As of June 30, 2000 Adequacy Purposes Action Provision
-------------------
Amount Ratio Amount Ratio
------- ------ ------ ------
<S> <C> <C> <C> <C>
Total Capital (to risk weighted assets):
Corporation . . . . . . . . . . . . . . . 108,410 8.00% - -
Harleysville National Bank. . . . . . . . 78,769 8.00% 98,461 10.00%
Citizens National Bank. . . . . . . . . . 20,567 8.00% 25,709 10.00%
Security National Bank. . . . . . . . . . 7,988 8.00% 9,985 10.00%
Tier 1 Capital (to risk weighted assets):
-----------------------------------------
Corporation . . . . . . . . . . . . . . . 54,205 4.00% - -
Harleysville National Bank. . . . . . . . 39,384 4.00% 59,077 6.00%
Citizens National Bank. . . . . . . . . . 10,284 4.00% 15,425 6.00%
Security National Bank. . . . . . . . . . 3,994 4.00% 5,991 6.00%
Tier 1 Capital (to average assets):
-----------------------------------------
Corporation . . . . . . . . . . . . . . . 72,384 4.00% - -
Harleysville National Bank. . . . . . . . 50,807 4.00% 63,508 5.00%
Citizens National Bank. . . . . . . . . . 15,866 4.00% 19,832 5.00%
Security National Bank. . . . . . . . . . 5,363 4.00% 6,704 5.00%
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C> <C>
As of December 31, 1999. . . . . . . . . . Actual Actual
Amount Ratio
------- -------
Total Capital (to risk weighted assets):
------------------------------------------
Corporation. . . . . . . . . . . . . . . . 171,548 13.48%
Harleysville National Bank . . . . . . . . 93,993 10.23%
Citizens National Bank . . . . . . . . . . 40,305 16.27%
Security National Bank . . . . . . . . . . 9,593 10.57%
Tier 1 Capital (to risk weighted assets):
------------------------------------------
Corporation. . . . . . . . . . . . . . . . 156,326 12.29%
Harleysville National Bank . . . . . . . . 83,222 9.06%
Citizens National Bank . . . . . . . . . . 37,208 15.02%
Security National Bank . . . . . . . . . . 8,532 9.40%
Tier 1 Capital (to average assets):
------------------------------------------
Corporation. . . . . . . . . . . . . . . . 156,326 8.92%
Harleysville National Bank . . . . . . . . 83,222 6.76%
Citizens National Bank . . . . . . . . . . 37,208 9.35%
Security National Bank . . . . . . . . . . 8,532 7.05%
</TABLE>
PAGE 17
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
As of December 31, 1999 Adequacy Purposes Action Provision
Amount Ratio Amount Ratio
------- ------ ------ ------
<S> <C> <C> <C> <C>
Total Capital (to risk weighted assets):
Corporation . . . . . . . . . . . . . . . 101,772 8.00% - -
Harleysville National Bank. . . . . . . . 73,484 8.00% 91,855 10.00%
Citizens National Bank. . . . . . . . . . 19,822 8.00% 24,777 10.00%
Security National Bank. . . . . . . . . . 7,259 8.00% 9,074 10.00%
Tier 1 Capital (to risk weighted assets):
-----------------------------------------
Corporation . . . . . . . . . . . . . . . 50,886 4.00% - -
Harleysville National Bank. . . . . . . . 36,742 4.00% 55,113 6.00%
Citizens National Bank. . . . . . . . . . 9,911 4.00% 14,866 6.00%
Security National Bank. . . . . . . . . . 3,629 4.00% 5,444 6.00%
Tier 1 Capital (to average assets):
-----------------------------------------
Corporation . . . . . . . . . . . . . . . 70,081 4.00% - -
Harleysville National Bank. . . . . . . . 49,228 4.00% 61,536 5.00%
Citizens National Bank. . . . . . . . . . 15,918 4.00% 19,898 5.00%
Security National Bank. . . . . . . . . . 4,844 4.00% 6,055 5.00%
</TABLE>
The Corporation's capital ratios exceed regulatory requirements.Existing
minimum regulatory capital ratio requirements are 5.0% for primary capital and
6.0% for total capital.The Corporation's primary capital ratio was 9.60% at June
30, 2000, compared with 9.66% at December 31, 1999.Since the Corporation's only
capital is primary capital, the total capital ratios are the same as the primary
capital ratios.
Pursuant to the federal regulators' risk-based capital adequacy guidelines,
the components of capital are called Tier 1 and Tier 2 capital.For the
Corporation, Tier 1 capital is the shareholders' equity, and Tier 2 capital
includes the allowance for loan losses.The minimum for the Tier 1 ratio is 4.0%,
and the total capital ratio (Tier 2) minimum is 8.0%.At June 30, 2000, the
Corporation's Tier 1 risk-adjusted capital ratio was 12.10%, and the total
risk-adjusted capital ratio was 13.22%, 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, 2000.
The leverage ratio consists of Tier 1 capital divided by quarterly average
total assets, excluding intangible assets.Banking organizations are expected to
have ratios of at least 4% and 5%, depending upon their particular condition and
growth plans.Higher leverage ratios could be required by the particular
circumstances or risk profile of a given banking organization.The Corporation's
leverage ratios were 9.06% at June 30, 2000 and 8.92% at December 31, 1999.
The year-to-date June 30, 2000 cash dividend per share of $.56 was 14.3%
higher than the cash dividend for the same period in 1999 of $.49.The dividend
payout ratio for the first three months of 2000 was 37.98%, compared to 40.34%
PAGE 18
for the twelve month period ended December 31, 1999.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 six months of
2000.
LIQUIDITY
---------
Liquidity is a measure of the ability of the Banks to meet their needs and
obligations on a timely basis.For a bank, liquidity provides the means to meet
the day-to-day demands of deposit customers and the needs of borrowing
customers.Generally, the Banks arrange their mix of cash, money market
investments, investment securities and loans in order to match the volatility,
seasonality, interest sensitivity and growth trends of its deposit funds.Federal
Funds sold averaged$5,839,000 during the first six months of 2000 and securities
available for sale averaged $510,083,000 during the first six months of 2000,
more than sufficient to meet normal fluctuations in loan demand or deposit
funding.Federal fund lines of credit established with correspondent banks
provide backup sources of liquidity. Additional liquidity could be generated
through borrowings from the Federal Reserve Bank of Philadelphia and the FHLB of
Pittsburgh, of which the Banks are members.Unused lines of credit at the FHLB of
Pittsburgh were $70,551,000, as of June 30, 2000.
OTHER ITEMS
------------
LEGISLATIVE & REGULATORY
--------------------------
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act of 1999, the Financial Services Modernization Act.The Financial Services
Modernization Act repeals the two affiliation provisions of the Glass-Steagall
Act:
*Section 20, which restricted the affiliation of Federal Reserve Member
Banks with firms "engaged principally" in specified securities activities; and
*Section 32, which restricts officer, director or employee interlocks
between a member bank and any company or person "primarily engaged" in specified
securities activities.
In addition, the Financial Services Modernization Act also contains provisions
that expressly preempt any state law insurance.The general effect of the law is
to establish a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers by revising and expanding the Bank Holding Company Act framework to
permit a holding company system to engage in a full range of financial
activities through a new entity known as Financial Holding Company. "Financial
activities" is broadly defined to include not only banking, insurance and
securities activities, but also merchant banking and additional activities that
the Federal Reserve, in consultation with the Secretary of Treasury, determines
to be financial in nature, incidental to such financial activities, or
complementary activities that do not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally.
Generally, the Financial Services Modernization Act:
*Repeals historical restrictions on, and eliminates many federal and state
law barriers to, affiliations among banks, securities firms, insurance
companies, and other financial service providers
*Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
*Broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies, and their financial subsidiaries;
*Provides an enhanced framework for protecting the privacy of consumer
information;
*Adopts a number of provisions related to the capitalization, membership,
corporate governance and the other measures designed to modernize the Federal
Home Loan Bank system;
*Modifies the laws governing the implementation of the Community
Reinvestment Act; and
*Addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
PAGE 19
In order for the Corporation to take advantage of the ability to affiliate with
other financial service providers, the Corporation must become a "Financial
Holding Company" as permitted under an amendment to the Bank Holding Company
Act.To become a Financial Holding Company, the Corporation would file a
declaration with the Federal Reserve, electing to engage in activities
permissible for Financial Holding Companies and certifying that it is eligible
to do so because all of its insured depository institution subsidiaries are
well-capitalized and well-managed.In addition, the Federal Reserve must
determine that each insured depository institution subsidiary of the Corporation
has at least a satisfactory CRA rating.The Corporation currently meets the
requirements to make an election to become a Financial Holding Company.The
Corporation's management has not determined at this time whether it will seek an
election to become a Financial Holding Company.The Corporation is examining its
strategic business plan to determine whether, based on market conditions, the
relative financial conditions of the Corporation and its subsidiaries,
regulatory requirements, general economic conditions, and other factors, the
Corporation desires to utilize any of its expanded powers provided in the
Financial Service Modernization Act.
The Financial Services Modernization Act also permits national banks to engage
in expanded activities through the formation of financial subsidiaries.A
national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company.Financial activities include all activities permitted
under new sections of the Bank Holding Company Act or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized" and
"well-managed."The total assets of all financial subsidiaries may not exceed the
lesser of 45% of a bank's total assets or $50 billion.A national bank must
exclude from its assets and equity all equity investments, including retained
earnings, in a financial subsidiary.The assets of the subsidiary may not be
consolidated with risk and protect the bank from such risks and potential
liabilities.
The Corporation and the Banks do not believe that the Financial Services
Modernization Act will have a material adverse effect on our operations in the
near-term.However, to the extent that it permits banks, securities firms, and
insurance companies to affiliate, the financial services industry may experience
further consolidation.The Financial Services Modernization Act is intended to
grant to community banks certain powers as a matter of right that larger
institutions have accumulated on an ad hoc basis.Nevertheless, this act may have
the result of increasing the amount of competition that the company and the bank
face from larger institutions and other types of companies offering financial
products, many of which may have substantially more financial resources than the
company bank.
Pending Legislation
--------------------
Management is not aware of any other current specific recommendations by
regulatory authorities or proposed legislation which, if they were implemented,
would have a material adverse effect upon the liquidity, capital resources, or
results of operations, although the general cost of compliance with numerous and
multiple federal and state laws and regulations does have, and in the future may
have, a negative impact on the Corporation's results of operations.
PAGE 20
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 that regulate the obligations and
liabilities of financial institutions pertaining to environmental issues.In
addition to the potential for attachment of liability resulting from its own
actions, a bank may be held liable under certain circumstances for the actions
of its borrowers, or third parties, when such actions result in environmental
problems on properties that collateralize loans held by the bank.Further, the
liability has the potential to far exceed the original amount of a loan issued
by the bank.Currently, neither the Corporation nor the Banks are a party to any
pending legal 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.
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulation of, and restriction on, the
business of the Banks.It cannot be predicted whether any such legislation will
be adopted or, if adopted, how such legislation would affect the business of the
Banks.As a consequence of the extensive regulation of commercial banking
activities in the United States, the Banks' business is particularly susceptible
to being affected by federal legislation and regulations that may increase the
costs of doing business.
BRANCHING
---------
The Corporation's subsidiaries currently plan to open at least two new
branches.During the third quarter of 2000, Citizens National Bank will open a
branch in Allentown.Harleysville National Bank is pursuing a location in
Souderton.These new branch sites are contiguous to our current service area and
were chosen to expand the Banks' market area and market share of loans and
deposits.
ACQUISITION
-----------
On April 28, 2000, the Corporation consummated its acquisition of Citizens Bank
and Trust Company.Under the terms of the merger, accounted for as a
pooling-of-interest, Citizens Bank and Trust Company's shareholders received 166
shares of Harleysville National Corporation common stock for each share of
Citizens Bank and Trust Company stock.Upon the completion of the acquisition,
Citizens Bank and Trust Company's banking operations merged into those of
Citizens National Bank, a wholly owned subsidiary of Harleysville National
Corporation.
PAGE 21
ITEM 3 - Qualitative and Quantitative Disclosures About Market Risk
In the normal course of conducting business activities, the Corporation is
exposed to market risk, principally interest risk, through the operations of its
banking subsidiaries.Interest rate risk arises from market driven fluctuations
in interest rates that affect cash flows, income, expense and values of
financial instruments.The Asset/Liability Committee, using policies and
procedures approved by the Banks' Boards of Directors, is responsible for
managing the rate sensitivity position.
No material changes in market risk strategy occurred during the current period.A
detailed discussion of market risk is provided in the SEC Form 10-K for the
period ended December 31, 1999.
PAGE 22
PART II.OTHER INFORMATION
Item 1. Legal Proceedings.
-------- -------------------
Management, based upon discussions with the Corporation's legal counsel, is
not aware of any litigation that would have a material adverse effect on the
consolidated financial position of the Corporation.There are no proceedings
pending other than the ordinary routine litigation incident to the business of
the Corporation and its subsidiaries - Harleysville National Bank and Trust
Company, Citizens National Bank, Security National Bank and HNC Financial
Company.In addition, no material proceedings are pending or are known to be
threatened or contemplated against the Corporation and its subsidiaries by
government authorities.
Item 2. Change in Securities and Use of Proceeds
-------- ----------------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities.
-------- -----------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
-------- ------------------------------------------------------------
None.
Item 5. Other Information.
-------- -------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
-------- --------------------------------------
(a)Exhibits:
The following exhibits are being filed as part of this Report:
Exhibit No.Description of Exhibits
----------- -------------------------
(3.1) Harleysville National Corporation Articles of Incorporation, as amended.
(Incorporated by reference to Exhibit 3(a) to the Corporation's
Registration Statement No.33-65021 on Form S-4, as filed on December 14,
1995.)
(3.2) Harleysville National Corporation By-laws. (Incorporated by reference to
Exhibit 3(b) to the Corporation's Registration Statement No. 33-65021
on Form S-4, as filed on December 14, 1995.)
(10.1) Harleysville National Corporation 1993 Stock Incentive Plan.
(Incorporated by Reference to Exhibit 4.3 of Registrant's Registration
Statement No. 33-57790 on Form S-8,filed with the Commission on October 1,
1993.)
(10.2) Harleysville National Corporation Stock Bonus Plan.(Incorporated by
Reference to Exhibit 99A of Registrant's Registration Statement No. 33-17813
on Form S-8, filed with the Commission on December 13, 1996.)
(10.3) Supplemental Executive Retirement Plan.(Incorporated by Reference to
Exhibit 10.3 ofRegistrant's Annual Report in Form 10-K for the year ended
December 31, 1997, filed with the Commission on March 27, 1998.)
PAGE 23
(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.
(27) Financial Data Schedule.
(b)Reports on Form 8-K:
Current Report on Form 8-K, dated April 28, 2000, filed with the Commission on
May 2, 2000, reporting, at Item 5, the Registrant's completion of Citizens
Bank and Trust Company.
Current Report on Form 8-K, dated July 13, 2000, filed with the Commission on
July 19,2000, reporting the Registrant's second quarter 2000 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., President
and Chief Executive Officer
(Principal executive officer)
/s/ Vernon L. Hunsberger
_________________________
Vernon L. Hunsberger, Treasurer
(Principal financial and accounting officer)
Date: August 14, 2000
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.
(27) Financial Data Schedule.
PAGE 26
