SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000.
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from__________________to____________________.
Commission file number 0-15237
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HARLEYSVILLE NATIONAL CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2210237
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
483 Main Street, Harleysville, Pennsylvania 19438
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(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: 8,813,877 shares of Common
Stock, $1.00 par value, outstanding on October 31, 2000.
PAGE 1
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HARLEYSVILLE NATIONAL CORPORATION
INDEX TO FORM 10-Q REPORT
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Page
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Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 3
Consolidated Statements of Income - Nine Months and Three Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows - Nine Months Ended September 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 22
Part II. Other Information
Item 1. Legal Proceedings 23
Item 2. Change in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 25
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PAGE 2
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PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) (Unaudited)
<S> <C> <C>
September 30, 2000 December 31, 1999
-------------------- -------------------
ASSETS
Cash and due from banks $50,903 $49,654
Federal Funds sold - 6,600
-------------------- -------------------
Total cash and cash equivalents 50,903 56,254
-------------------- -------------------
Interest-bearing deposits in banks 4,191 7,237
Investment securities available for sale 550,858 505,360
Investment securities held to maturity
(market value $32,238 and $25,084, respectively) 32,497 25,535
Loans 1,188,872 1,118,244
Less: Unearned income 2,287 572
Allowance for loan losses (15,332) (14,887)
-------------------- -------------------
Net loans 1,175,827 1,103,929
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Bank premises and equipment, net 22,123 21,856
Accrued income receivable 12,819 11,044
Other real estate owned 358 1,436
Intangible assets, net 1,734 2,006
Bank-owned life insurance 36,829 25,527
Other assets 11,857 7,483
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Total assets $1,899,996 $1,767,667
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $217,852 $214,393
Interest-bearing:
Checking accounts 150,938 162,191
Money market accounts 325,326 259,015
Savings 163,145 163,010
Time, under $100,000 425,350 407,858
Time, $100,000 or greater 202,691 134,979
-------------------- -------------------
Total deposits 1,485,302 1,341,446
Accrued interest payable 20,361 17,544
U.S. Treasury demand notes 2,094 3,232
Federal funds purchased 21,000 9,500
Federal Home Loan Bank (FHLB) borrowings 110,750 130,250
Securities sold under agreements to repurchase 80,435 108,615
Other liabilities 18,456 10,417
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Total liabilities 1,738,398 1,621,004
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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 96,661 80,376
Treasury stock; 2000 - 25,398 shares at cost, 1999 - 0 shares (325) -
Accumulated other comprehensive income (7,218) (10,808)
-------------------- -------------------
Total shareholders' equity 161,598 146,663
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Total liabilities and shareholders' equity $1,899,996 $1,767,667
==================== ===================
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 3
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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) Nine months ended Three months ended
(Dollars in thousands except weighted average number September 30, September 30,
--------------- ---------------
of common shares and per share information)
<S> <C> <C> <C> <C>
2000 1999 2000 1999
----------- ---------- ---------- ----------
INTEREST INCOME:
Loans, including fees $64,480 $55,994 $22,258 $19,665
Lease financing 6,540 5,008 2,309 1,789
Investment securities:
Taxable 17,811 14,054 6,119 5,123
Exempt from federal taxes 8,017 7,982 2,768 2,688
Federal funds sold 216 472 52 77
Deposits in banks 295 181 87 76
----------- ---------- ---------- ----------
Total interest income 97,359 83,691 33,593 29,418
----------- ---------- ---------- ----------
INTEREST EXPENSE:
Savings deposits 13,154 10,479 4,823 3,694
Time, under $100,000 17,230 15,292 6,018 5,179
Time, $100,000 or greater 8,165 4,344 3,014 1,579
Borrowed funds 9,220 6,159 3,207 2,608
----------- ---------- ---------- ----------
Total interest expense 47,769 36,274 17,062 13,060
----------- ---------- --------- ---------
Net interest income 49,590 47,417 16,531 16,358
Provision for loan losses 1,636 1,469 581 489
----------- ---------- ---------- ----------
Net interest income after provision for loan losses 47,954 45,948 15,950 15,869
----------- ---------- ---------- ----------
OTHER OPERATING INCOME:
Service charges 2,814 2,755 943 952
Security (losses)gains, net (105) 501 87 8
Trust income 2,252 1,898 790 590
Bank-owned life insurance 1,302 170 576 170
Other Income 2,496 2,274 852 773
----------- ---------- ---------- ----------
Total other operating income 8,759 7,598 3,248 2,493
----------- ---------- ---------- ----------
Net interest income after provision for loan losses
and other operating income 56,713 53,546 19,198 18,362
----------- ---------- ---------- ----------
OTHER OPERATING EXPENSES:
Salaries, wages and employee benefits 17,474 16,078 5,891 5,440
Occupancy 2,201 2,033 726 704
Furniture and equipment 3,783 3,346 1,386 1,245
Other expenses 10,122 8,648 3,001 2,901
----------- ---------- --------- ----------
Total other operating expenses 33,580 30,105 11,004 10,290
----------- ---------- --------- ---------
Income before income taxes 23,133 23,441 8,194 8,072
Income tax expense 4,041 5,503 1,454 1,782
----------- ---------- ---------- ---------
Net income $19,092 $17,938 $6,740 $6,290
=========== ========== ========== ==========
Weighted average number of common shares:
Basic 9,274,743 9,273,670 9,271,135 9,275,834
=========== ========== ========== ==========
Diluted 9,284,198 9,285,514 9,280,590 9,287,678
=========== ========== ========== ==========
Net income per share information:
Basic $2.06 $1.93 $0.73 $0.68
=========== ========== ========== ==========
Diluted $2.06 $1.93 $0.73 $0.68
=========== ========== ========== ==========
Cash dividends per share $0.81 $0.71 $0.28 $0.25
=========== ========== ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
PAGE 4
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<CAPTION>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands) Nine Months Ended September 30,
OPERATING ACTIVITIES: 2000 1999
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<S> <C> <C>
Net Income $19,092 $17,938
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,636 1,469
Depreciation and amortization 2,177 2,028
Net amortization of investment
securities discount/premiums 383 698
Net realized security loss (gain) 105 (501)
Increase in accrued income receivable (1,775) (1,321)
Increase in accrued interest payable 2,817 2,464
Increase in other assets (4,374) (2,700)
Net increase in other liabilities 6,132 4,594
Increase in unearned income (1,714) (2,517)
Write-down of other real estate owned 83 81
Decrease (increase) in intangible assets 272 (148)
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Net cash provided by operating activities 24,834 22,085
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INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale 80,539 49,936
Proceeds, maturity or calls of investment securities held to maturity 5,213 10,340
Proceeds, maturity or calls of investment securities available for sale 20,816 61,974
Purchases of investment securities held to maturity (19,740) (3,703)
Purchases of investment securities available for sale (134,279) (189,186)
Decrease (increase) in interest-bearing deposits in banks 3,046 (1,052)
Net increase in loans (72,835) (129,032)
Net increase in premises and equipment (2,443) (2,957)
Purchase of bank-owned life insurance (11,302) (25,170)
Proceeds from sales of other real estate 2,010 1,556
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Net cash used in investing activities (128,975) (227,294)
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FINANCING ACTIVITIES:
Net increase in deposits 143,856 93,763
(Decrease) increase in U.S. Treasury demand notes (1,138) 285
Increase in federal funds purchased 11,500 51,000
(Decrease) increase in FHLB borrowings (19,500) 47,750
(Decrease) increase in securities sold under agreement (28,180) 15,944
Cash dividends & fractional shares (7,469) (6,668)
Purchase of Treasury Stock (325) (183)
Stock options 46 39
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Net cash provided by financing activities 98,790 201,930
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Net increase (decrease) in cash and cash equivalents (5,351) (3,279)
Cash and cash equivalents at beginning of period 56,254 61,710
------------------------------ ----------
Cash and cash equivalents at end of the period $50,903 $58,431
============================== ==========
Cash paid during the period for:
Interest $44,952 $33,812
============================== ==========
Income taxes $2,048 $3,130
============================== ==========
Supplemental disclosure of noncash investing and financing activities:
Transfer of assets from loans to other real estate owned $1,015 $708
============================== ==========
<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
September 30, 2000, the results of its operations for nine and three month
periods ended September 30, 2000 and 1999 and the cash flows for the nine month
periods ended September 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 nine and three month periods ended September
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 nine months
of 2000 was $22,682,000, compared to $4,357,000 for the first nine 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.
During July 2000, the Corporation reclassified $7,574,000 of investment
securities from the held to maturity category to the available for sale
category, due to its acquisition of Citizens Bank and Trust Company.As a result
of the reclassification, the Corporation recorded $19,000 net of taxes
unrealized holding losses in accumulated other comprehensive income.
PAGE 6
NOTE 6 - On 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.
NOTE 7 -On October 12, 2000, the Board of Directors declared a 5% stock dividend
payable November 9, 2000, to shareholders of record October 26, 2000.All prior
period amounts were restated to reflect this 5% stock dividend.
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:
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<S> <C>
* 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.
</TABLE>
OVERVIEW
--------
The Corporation continued its strong earnings performance during the third
quarter of 2000.Net income increased 7.2% in the third quarter of 2000, compared
to the third quarter of 1999.The year-to-date net income grew 6.4% from the same
period in 1999.This performance was achieved through an increase in earning
assets, growth in other income and the continued strength in loan quality.This
performance was also achieved during a period when the Corporation successfully
completed the acquisition of Citizens Bank & Trust Co., a $130 million asset
community bank.
Consolidated net income for the first nine months of 2000 was $19,092,000, an
increase of $1,154,000, or 6.4%, over the first nine months of 1999 net income
of $17,938,000.Basic and diluted earning per share for the first nine months of
2000 of $2.06 increased 6.7%, over the first nine months of 1999 basic and
diluted earnings per share of $1.93.Consolidated net income for the third
quarter of 2000 was $6,740,000, an increase of $450,000, or 7.2%, over the third
quarter of 1999 net income of $6,290,000.For the quarter ended September 30,
2000, basic and diluted earnings per share at $.73 were up 7.4% from $.68 in the
comparable period last year.
The increase in net income during the first nine months of 2000, compared to
the same period in 1999, is the result of both higher net interest income and
other operating income, and lower income tax expenses.Net interest income grew
$2,173,000, primarily as a result of a 12.4% rise in average earning
assets.Other operating income rose $1,161,000, 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.
PAGE 8
For the nine months ended September 30, 2000, the annualized return on average
shareholders' equity and the annualized return on average assets were 16.84% and
1.40%, respectively.For the same period in 1999, the annualized return on
average shareholders' equity was 16.07% and the annualized return on average
assets was 1.49%.For the three months ended September 30, 2000, the annualized
return on average shareholders' equity and the annualized return on average
assets were 17.20% and 1.44%, respectively.For the third quarter in 1999, the
annualized return on average shareholders' equity was 17.07% and the annualized
return on average assets was 1.50%.
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 .31% of total assets at both September 30, 2000
and 1999.This ratio was .32% at December 31, 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 nine months of 2000 of $49,590,000 increased
$2,173,000, or 4.6%, over the same period in 1999 of which produced net interest
income of $47,417,000.As illustrated in the table below, the primary source of
this increase was a rise in interest income resulting from increase in loan
volumes in the first nine months of 2000, compared to the same period in
1999.The increase in interest income was partially offset by a rise in interest
expense, the result of both higher rates and volumes.The third quarter of 2000
net interest income increased 1.1%, compared to the same period in 1999.This
rise was primarily due to an increase in loan volumes, partially offset by
higher interest expense related to higher deposit volumes and deposit rates.The
third quarter 2000 net interest income was also affected by the funding cost of
bank-owned life insurance (BOLI).While bank deposits fund BOLI, the BOLI income
is recognized as other income.The average balance of BOLI in the third quarter
of 2000 was $36,468,0000, compared to $11,975,000 during the third quarter of
1999.
The rate-volume variance analysis set forth in the table below, which is
computed on a tax-equivalent basis (tax rate of 35%), analyzes changes in net
interest income for the nine months and three month periods ended September 30,
2000 over September 30, 1999 by their rate and volume components.
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Nine Months Ended Three Months Ended
September 30, 2000 September 30, 2000
Over/Under Over/Under
September 30, 1999 September 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Total Caused by: Total Caused by:
---------- ----------
Variance Rate Volume Variance Rate Volume
---------- --------- -------- ---------- ------- --------
Interest Income:
Securities * $3,811 $1,129 $2,682 $1,119 $540 $579
Money market instruments (142) 234 (376) (14) 105 (119)
Loans * 10,185 919 9,266 3,204 562 2,642
---------- --------- -------- ---------- ------- --------
Total 13,854 2,282 11,572 4,309 1,207 3,102
---------- --------- -------- ---------- ------- --------
Interest Expense:
Savings deposits 2,675 1,450 1,225 1,129 712 417
Time deposits and certificates of deposit 5,759 1,475 4,284 2,274 818 1,456
Other borrowings 3,062 1,150 1,912 598 492 106
---------- --------- -------- ---------- ------- --------
Total 11,496 4,075 7,421 4,001 2,022 1,979
---------- --------- -------- ---------- ------- --------
Net interest income $2,358 ($1,793) $4,151 $308 ($815) $1,123
========== ========= ======== ========== ======= ========
*Tax Equivalent Basis
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PAGE 9
Taxable-equivalent net interest income was $54,709,000 for the first nine
months of 2000, compared to $52,351,000 for the same period in 1999, a 4.5% or
$2,358,000 increase.This rise in taxable-equivalent net interest income was
primarily due to a $4,151,000 increase related to volume, which was partially
offset by a reduction in net interest income, related to rate.Total
taxable-equivalent interest income grew $13,854,000, primarily the result of
higher volumes and rates of loans and securities.Average year-to-date loans and
securities grew $147,004,000 and $49,233,000, respectively at September 30,
2000, compared to the same period in 1999.The increase in average 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 $11,496,000 during the first nine months of 2000,
compared to the same period in 1999.This growth was the result of both higher
rates and volumes in all deposit categories and other borrowings.The average
year-to-date growth in time deposits and savings deposits were $101,540,000 and
$57,579,000, 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 average
year-to-date 2000 other borrowings grew $44,750,000 or 26.2%, compared to the
first nine months of 1999.Included in the growth in other borrowings was the
funding required for the $25,000,000 capital leverage program.Deposits were used
to fund BOLI.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 $18,341,000 was $308,000 or 1.7%
higher in the third quarter of 2000, compared to $18,033,000 for the same period
in 1999.Interest income grew $4,309,000 during the period, primarily due to a
11.9% rise in loan volumes.The increase in interest income was partially offset
by a $4,001,000 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.
PAGE 10
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 September
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.
<TABLE>
<CAPTION>
(Dollars in thousands)
CHANGE IN ASSET/LIABILITY
MARKET VALUE MARKET VALUE PERCENTAGE APPROVED
OF EQUITY OF EQUITY CHANGE PERCENT CHANGE
------------ ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
+200 Basis Points 343,403 (27,006) -7.29% +/- 30%
+100 Basis Points 369,847 (562) -0.15% +/- 30%
Flat Rate 370,409 0 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 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 nine-month period ended September 30,
2000, decreased from the 4.60% net interest margin for the first nine 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 8.02% during the first nine months of
2000 was higher than the 7.79% earned during the first nine 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 nine months of 2000 average interest rate
paid on interest-bearing deposits and other borrowings of 4.44% was higher than
the first nine months of 1999 rate of 3.93%.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 third quarter of 2000 net interest margin of 4.22%
was lower than the third quarter 1999 net interest margin of 4.54%.
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.
PAGE 11
For the first nine months of 2000 the provision for loan losses was $1,636,000,
compared to $1,469,000 for the same period in 1999.The higher provision for loan
losses during the first nine months of 2000, compared to the same period in 1999
is attributed to the growth in loans during this period and an increase in net
loans charged off.Net loans charged-off was $1,191,000 for the nine months ended
September 30, 2000, compared to $781,000 for the nine months ended September 30,
1999.The increase in loans charged off was primarily due to consumer and real
estate related loans.The ratio of nonperforming assets to total assets for
September 30, 2000 of .31% was lower than the .32% at December 31, 1999, and it
did not change from the September 30, 1999 ratio.
Allowance for Loan Losses
----------------------------
Transactions in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
2000 1999
------------ -------------
Balance, Beginning of Year $14,887,000 $14,246,000
Provision charged to operating expenses 1,636,000 1,469,000
Loans charged off (1,717,000) (991,000)
Recoveries 526,000 210,000
---------------- ------------
Balance, September 30 15,332,000 14,934,000
================ ============
Ratios: Sept. 30, 2000 Dec. 31, 1999 Sept. 30, 1999
------------------------------------------------- -------------- ------------- --------------
Allowance for loan losses to nonperforming assets 259.1% 266.3% 277.0%
Nonperforming assets to total loans & net assets
acquired in foreclosure 0.50% 0.50% 0.50%
Nonperforming assets to total total assets 0.31% 0.32% 0.31%
Allowance for loan losses to total loans 1.29% 1.33% 1.37%
</TABLE>
The following table sets forth an allocation of the allowance for loan losses by
loan category:
<TABLE>
<CAPTION>
September 30, 2000
------------------
Percent
Amount of Loans
-------- ---------
<S> <C> <C>
Commercial and industrial $5,599 26%
Consumer loans 5,355 35%
Real estate 3,308 30%
Lease financing 1,070 9%
-------- --------
Total 15,332 100%
======== ========
</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 was the same at September 30, 2000, December 31, 1999 and September
30, 1999.The ratio of the allowance for loan losses to loans at September 30,
2000 of 1.29% decreased from the December 31, 1999 and September 30, 1999 ratios
of 1.33% and 1.37%, respectively.
Nonaccruing loans at September 30, 2000 of $5,119,000,000, increased $1,429,000
from the December 31, 1999 level of $3,690,000, and increased $404,000 from the
September 30, 1999 level of $4,715,000.The increase in nonaccruing loans at
September 30, 2000, compared to December 31, 1999 was primarily the result of an
increase in commercial nonaccruing loans.
PAGE 12
Net assets in foreclosure totaled $358,000 as of September 30, 2000, a decrease
of $1,078,000 from the December 31, 1999 balance of $1,436,000.During the first
nine months of 2000, transfers from loans to assets in foreclosure were
$1,015,000, payments on foreclosed properties totaled $2,010,000 and write-downs
of assets in foreclosure equaled $83,000.The loans transferred to assets in
foreclosure included leases of $731,000, mortgages of $141,000, commercial loans
of $121,000 and consumer loans of $22,000.The balance of net assets in
foreclosure at September 30, 1999 was $202,000.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 September 30, 2000, there were two unrelated borrowers with troubled debt
restructured loans totaling $441,000, compared with two unrelated borrowers with
a balance of $465,000 as of December 31,1999 and $473,000 at September 30, 1999.
The two customers were complying with the restructured terms as of September 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 September 30, 2000, loans past due 90 days or more and still
accruing interest were $951,000, compared to $565,000 as of December 31, 1999
and $2,676,000 as of September 30, 1999.The increase in loans past due 90 days
at September 30, 1999, compared December 31, 1999 was primarily the result of an
increase in commercial loans past due 90 days.
<TABLE>
<CAPTION>
The following information concerns impaired loans:
<S> <C> <C> <C>
Impaired Loans: Sept. 30, 2000 Dec. 31, 1999 Sept. 30, 1999
--------------- -------------- ---------------
Restructured Loans $441,000 $465,000 $473,000
Nonaccrual Loans $3,854,000 $2,117,000 $3,186,000
--------------- -------------- ---------------
Total Impaired Loans $4,295,000 $2,582,000 $3,659,000
=============== ============== ===============
Average year-to-date impaired loans: $2,648,000 $3,046,000 $2,859,000
=============== ============== ===============
Impaired loans with specific loss allowances: $4,295,000 $2,582,000 $3,659,000
=============== ============== ===============
Loss allowances reserved on impaired loans: $445,000 $262,000 $467,000
=============== ============== ===============
Year-to-date income recognized on impaired loans $79,000 $132,000 $106,000
=============== ============== ===============
</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
------------------------
Nine Months Ended Sept. 30, Three Months Ended Sept. 30,
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---------------------- ----- ----- -----
(Dollars in thousands)
Service charges 2,814 2,755 943 952
Securities (losses) gains, net (105) 501 87 8
Trust income 2,252 1,898 790 590
Bank-owned life insurance income 1,302 170 576 170
Other income 2,496 2,274 852 773
--------- ----- ----- -----
Total other operating income 8,759 7,598 3,248 2,493
====================== ===== ===== =====
</TABLE>
PAGE 13
Other operating income for the first nine months of 2000 increased $1,161,000,
or 15.3%, from $7,598,000 at September 30, 1999 to $8,759,000 at September 30,
2000.This rise in other operating income is the result of a $59,000 growth in
service charges, a $354,000 rise in trust income and a $222,000 increase in
other income.Bank-owned life insurance (BOLI) income contributed $1,302,000 to
other operating income during the first nine months of 2000, compared to
$170,000 during the same period in 1999.A $606,000 decrease in security gains
partially offset these increases.The rise in other operating income was 24.9%,
not inclusive of the securities gains and losses.The third quarter 2000 other
income was 30.3% higher than the third quarter of 1999.This increase was
primarily due to both the rise in BOLI income and the growth in Trust income
earned during the third quarter of 2000.
Service charges grew $59,000, or 2.1% in the first nine months of 2000,
compared to the same period in 1999.This growth was primarily the result of the
increase in service fees earned on retail customers and an increase in overdraft
fees, partially offset by lower service fees earned on business accounts.The
lower business service fee earned is the result of the impact of higher interest
rates on the account analysis credits.The higher account analysis credits offset
a greater portion of business service fees during 2000. The 2000 third quarter
service charge income of $943,000, decreased $9,000, or .9% over the third
quarter of 1999.This decrease is due to the lower fees earned on business
accounts.
The Corporation recorded net security losses on the sale of securities of
$105,000 in the first nine months of 2000 and a net security gain of $87,000 in
the third quarter of 2000.The Corporation recorded net security gains on the
sale of securities of $501,000 in the first nine months of 1999 and $8,000 in
the third 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
$354,000, or 18.7% in the first nine months of 2000 and $200,000, or 33.9% in
the third 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 23.9% from September 30, 1999 to September 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 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 $1,302,000 of BOLI income during the first nine months of
2000 and $576,000 during the third quarter of 2000.The corporation earned
$170,000 of BOLI income for both the third quarter of 1999 and for the first
nine months of 1999.
Other income for the first nine months of 2000 increased $222,000, or 9.8%,
compared to the same period in 1999.The third quarter of 2000 other income of
$852,000 grew $79,000, or 10.2%, over the third 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 nine months of 2000, compared to the same
period in 1999.
PAGE 14
<TABLE>
<CAPTION>
OTHER OPERATING EXPENSES
--------------------------
Nine Months Ended Sept. 30, Three Months Ended Sept. 30,
------------------------------- -----------------------------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---------------------- ------ ------ ------
(Dollars in thousands)
Salaries 13,276 12,092 4,512 4,152
Employee benefits 4,198 3,986 1,379 1,288
Occupancy expense 2,201 2,033 726 704
Furniture and equipment expense 3,783 3,346 1,386 1,245
Other expenses 10,122 8,648 3,001 2,901
------- ------ ------ ------
Total other operating expenses 33,580 30,105 11,004 10,290
====================== ====== ====== ======
</TABLE>
Other operating expenses for the first nine months of 2000 of $33,580,000
increased $3,475,000, or 11.5%, from $30,105,000 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 third
quarter other operating expenses increased 6.9% over the third quarter of
1999.This is a reduction from the second quarter 2000 16.4% increase over the
second quarter of 1999.The second quarter of 2000 included the Citizens Bank and
Trust Company merger related expenses.
Employee salaries increased $1,184,000, or 9.8% from $12,092,000 for the first
nine months of 1999 to $13,276,000 for the same period in 2000.Employee benefits
of $4,198,000 expensed in the first nine months of 2000, were $212,000, or 5.3%
higher than the $3,986,000 of employee benefits expensed during the same period
in 1999.The third quarter 2000 salary and employee benefits exceeded the second
quarter of 1999 levels by 8.7% and 7.1%, 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 $168,000, or 8.3%, from $2,033,000 in the first
nine months of 1999 to $2,201,000 in the first nine months of 2000.Net occupancy
expenses grew 3.1% in the third quarter of 2000, compared to the third quarter
of 1999.Contributing to this increase was the opening of a new branch and an off
lease vehicle sales center, and repair and maintenance expenses.Equipment
expense increased $437,000, or 13.1%, during the first nine months of 2000,
compared to the same period in 1999.The third quarter equipment expenses grew
$141,000, or 11.3% over the third 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
enhance the products offered to customers.
Other expenses increased $1,474,000, or 17.0%, from $8,648,000 in the first
nine months of 1999, compared to $10,122,000 in other expenses recorded during
the same period in 2000. 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.The 2000 merger related other expenses were recorded during
the first six months of the year.Third quarter 2000 other expenses of $3,001,000
were 3.4% higher than the third quarter of 1999 other expenses of $2,901,000.
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 grew $132,329,000, or 7.5%, from $1,767,667,000 at December 31,
1999 to $1,899,996,000 at September 30, 2000.This growth was the primarily
result of an increases in earning assets and BOLI of $113,442,000 and
$11,302,000, respectively.During the first nine months of 2000, loans grew
$70,628,000 and securities rose $52,460,000.These earning asset increases were
offset by decreases to federal funds sold and interest-bearing deposits in banks
of $6,600,000 and $3,046,000, respectively.
PAGE 15
The balance of securities available for sale at September 30, 2000 of
$550,858,000 increased $45,498,000 compared to the December 31, 1999 balance of
$505,360,000.During the first nine months of 2000, $80,539,000 of securities
were sold which generated a pretax loss of $105,000.In comparison, $49,936,000
securities available for sale were sold during the first nine months of 1999 to
generate a pretax gain of $501,000.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 $6,962,000 during the
first nine months of 2000.
Total loans grew $70,628,000 or 6.3% during the first nine months of
2000.Contributing to this increase were consumer loans, leases, real estate and
commercial loans which grew $44,070,000, $17,549,000, $4,594,000 and $4,415,000,
respectively.The growth in consumer loans was primarily in financing indirect
automobile dealer loans.
Total deposits increased $143,856,000, or 10.7% from $1,341,446,000 at December
31, 1999 to $1,485,302,000 at September 30, 2000.This increase was primarily due
to the growth in money market accounts and time deposits during this
period.Money market accounts grew $66,311,000, primarily as a result of the
growth in municipal and trust deposits.Time deposits under $100,000 increased
$17,492,000 and time deposits greater than $100,000 grew $67,712,000.The primary
source of the rise in the greater than $100,000 time deposits came from
municipal customers.The growth in the time deposits over $100,000 provided the
banks with a lower cost-funding alternative in the first nine months of 2000,
compared to the higher level of other borrowings during 1999.Noninterest-bearing
checking accounts grew $3,459,000 and savings accounts increased
$135,000.Interest bearing deposits decreased $11,253,000.Other borrowings
experienced a decrease of $37,318,000 during the first nine months of 2000.A
decrease in securities sold under agreements to repurchase of $28,180,000, was
partially offset by increases in federal funds purchased of $11,500,000.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 nine months of 2000.U. S.
treasury demand notes and Federal Home Loan Bank borrowings decreased $1,138,000
and $19,500,000, respectively during this period.
CAPITAL
-------
Capital formation is important to the Corporation's well being and future
growth.Capital for the period ending September 30, 2000 was $161,598,000, an
increase of $14,935,000 over the end of 1999.The increase is the result of the
retention of the Corporation's earnings and 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 September 30, 2000
was a loss of $7,218,000, 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)
As of September 30, 2000 Actual Actual
------------------------
Amount Ratio
<S> <C> <C>
Total Capital (to risk weighted assets):
Corporation 183,260 13.30%
Harleysville National Bank 103,746 10.34%
Citizens National Bank 37,623 14.70%
Security National Bank 13,317 12.96%
Tier 1 Capital (to risk weighted assets):
Corporation 167,921 12.18%
Harleysville National Bank 93,087 9.27%
Citizens National Bank 34,421 13.45%
Security National Bank 12,256 11.93%
Tier 1 Capital (to average assets):
Corporation 167,921 8.99%
Harleysville National Bank 93,087 7.05%
Citizens National Bank 34,421 8.72%
Security National Bank 12,256 8.90%
</TABLE>
PAGE 16
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
As of September 30, 2000 Adequacy Purposes Action Provision
------------------------
Amount Ratio Amount Ratio
------- ------ ------- ------
<S> <C> <C> <C> <C>
Total Capital (to risk weighted assets):
Corporation 110,256 8.00% - -
Harleysville National Bank 80,299 8.00% 100,374 10.00%
Citizens National Bank 20,478 8.00% 25,597 10.00%
Security National Bank 8,217 8.00% 10,272 10.00%
Tier 1 Capital (to risk weighted assets):
Corporation 55,128 4.00% - -
Harleysville National Bank 40,150 4.00% 60,225 6.00%
Citizens National Bank 10,239 4.00% 15,358 6.00%
Security National Bank 4,109 4.00% 6,163 6.00%
Tier 1 Capital (to average assets):
Corporation 74,685 4.00% - -
Harleysville National Bank 52,806 4.00% 66,007 5.00%
Citizens National Bank 15,797 4.00% 19,747 5.00%
Security National Bank 5,510 4.00% 6,888 5.00%
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)
As of December 31, 1999 Actual Actual
-----------------------
Amount Ratio
------- ------
<S> <C> <C>
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 9.59% at
September 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 September 30, 2000, the
Corporation's Tier 1 risk-adjusted capital ratio was 12.18%, and the total
risk-adjusted capital ratio was 13.30%, both well above the regulatory
requirements.The risk-based capital ratios of each of the Corporation's
commercial banks also exceeded regulatory requirements at September 30, 2000.
PAGE 18
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 8.99% at September 30, 2000 and 8.92% at December 31, 1999.
The year-to-date September 30, 2000 cash dividend per share of $.81 was 14.1%
higher than the cash dividend for the same period in 1999 of $.71.The dividend
payout ratio for the first nine months of 2000 was 37.96%, compared to 40.34%
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 $4,850,000 during the first nine months of 2000 and
securities available for sale averaged $520,277,000 during the first nine 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 $164,624,000, as of September 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:
PAGE 19
* 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.
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
banks 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.
PAGE 20
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 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 one new
branch.Harleysville National Bank is pursuing a location in Souderton.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.
PAGE 21
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.
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:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
---------- -------------------------
<S> <C>
(3.1) Harleysville National Corporation Articles of Incorporation, as amended. (Incorporated by reference
to Exhibit 3(a) to the Corporation's Registration Statement No. 33-65021 on Form S-4, as filed on
December 14, 1995.)
(3.2) Harleysville National Corporation By-laws. (Incorporated by reference to Exhibit 3(b) to the
Corporation's Registration Statement No. 33-65021 on Form S-4, as filed on December 14, 1995.)
(10.1) Harleysville National Corporation 1993 Stock Incentive Plan. (Incorporated by Reference to Exhibit
4.3 of Registrant's Registration Statement No. 33-57790 on Form S-8, filed with the Commission on
October 1, 1993.)
(10.2) Harleysville National Corporation Stock Bonus Plan.(Incorporated by Reference to Exhibit 99A of
Registrant's Registration Statement No. 33-17813 on Form S-8, filed with the Commission on
December 13, 1996.)
(10.3) Supplemental Executive Retirement Plan.(Incorporated by Reference to Exhibit 10.3 of
Registrant's Annual Report in Form 10-K for the year ended December 31, 1997, filed with the
Commission on March 27, 1998.)
(10.4) Walter E. Daller, Jr., Chairman, President and Chief Executive Officer's employment agreement.
(Incorporated by Reference to Registrant's Registration Statement on Form 8-K, filed with the
Commission on March 25, 1999.)
PAGE 23
(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
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.
Current Report on Form 8-K, dated October 12, 2000, filed with the Commission on October 16,
2000, reporting the Registrant's third quarter 2000 press release.
</TABLE>
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:November 14, 2000
PAGE 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
---------- -------------------------
<S> <C>
(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
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
</TABLE>
PAGE 26
