UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
Form 10-Q
__________________
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2009
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 incorporation or organization)
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|
(IRS Employer
Identification No.)
|
483 Main Street
Harleysville, Pennsylvania 19438
(Address of principal executive office and zip code)
(215) 256-8851
(Registrant’s telephone number, including area code)
___________________
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
¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
¨
No
¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated
filer
x
Non-accelerated filer
o
(Do not check if a smaller reporting company) Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
¨
No
x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 43,090,911
shares of Common Stock, $1.00 par value, outstanding on August 4, 2009.
HARLEYSVILLE NATIONAL CORPORATION
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INDEX TO FORM 10-Q REPORT
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PAGE
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Part I. Financial Information
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Item 1. Financial Statements:
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Consolidated Balance Sheets at June 30, 2009 (unaudited) and December 31, 2008
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3
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Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008 (unaudited)
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4
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Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2009 and 2008 (unaudited)
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5
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Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (unaudited)
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6
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Notes to Consolidated Financial Statements
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7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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31
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
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47
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Item 4. Controls and Procedures
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47
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Part II. Other Information
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48
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Item 1. Legal Proceedings
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48
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Item 1A. Risk Factors
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48
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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49
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Item 3. Defaults Upon Senior Securities
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49
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Item 4. Submission of Matters to a Vote of Security Holders
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49
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Item 5. Other Information
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49
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Item 6. Exhibits
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49
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Signatures
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50
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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(Dollars in thousands)
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June 30, 2009
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December 31, 2008
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(Unaudited)
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Assets
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Cash and due from banks
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$
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54,007
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$
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75,305
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Interest-bearing deposits in banks
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360,053
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27,221
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Total cash and cash equivalents
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414,060
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102,526
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Residential mortgage loans held for sale (at fair value)
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84,778
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17,165
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Investment securities available for sale
(amortized cost, $1,084,411 and $1,186,586, respectively)
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1,032,304
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1,141,948
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Investment securities held to maturity
(fair value $32,908 and $50,059, respectively)
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33,363
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50,434
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Federal Home Loan Bank stock, Federal Reserve Bank stock and other investments
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44,456
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39,279
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Loans and leases
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3,354,489
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3,668,079
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Less: Allowance for loan losses
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(70,341
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)
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(49,955
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)
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Net loans
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3,284,148
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3,618,124
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Premises and equipment, net
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50,027
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50,605
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Accrued interest receivable
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17,875
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21,120
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Goodwill
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27,031
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240,701
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Intangible assets, net
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24,424
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27,807
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Bank-owned life insurance
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88,631
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87,081
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Other assets
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109,230
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93,719
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Total assets
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$
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5,210,327
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$
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5,490,509
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Liabilities and Shareholders' Equity
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Deposits:
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Noninterest-bearing
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$
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517,108
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$
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479,469
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Interest-bearing:
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Checking
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597,831
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556,855
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Money market
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991,476
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1,042,302
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Savings
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317,196
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270,885
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Time deposits
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1,574,544
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1,588,921
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Total deposits
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3,998,155
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3,938,432
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Federal funds purchased and short-term securities sold under agreements to repurchase
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82,169
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136,113
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Other short-term borrowings
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2,014
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984
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Long-term borrowings
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694,586
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759,658
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Accrued interest payable
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37,653
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34,495
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Subordinated debt
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93,784
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93,743
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Other liabilities
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53,281
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52,377
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Total liabilities
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4,961,642
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5,015,802
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Shareholders' Equity:
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Series preferred stock, par value $1 per share;
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Authorized 8,000,000 shares, none issued
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—
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—
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Common stock, par value $1 per share; authorized 200,000,000 shares; issued 43,113,629 and 43,022,387 shares at June 30, 2009 and December 31, 2008, respectively
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43,114
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43,022
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Additional paid in capital
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379,951
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379,551
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(Accumulated deficit) retained earnings
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(140,305
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)
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82,295
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Accumulated other comprehensive loss
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(33,869
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)
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(29,017
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)
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Treasury stock, at cost: 22,718 and 76,635 shares at June 30, 2009 and December 31, 2008, respectively
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(206
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)
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(1,144
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)
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Total shareholders' equity
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248,685
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474,707
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Total liabilities and shareholders' equity
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$
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5,210,327
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$
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5,490,509
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See accompanying notes to consolidated financial statements.
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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(Dollars in thousands, except per share information)
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2009
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2008
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2009
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2008
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Interest Income:
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Loans and leases, including fees
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$
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46,033
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$
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36,644
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$
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94,189
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$
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75,641
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Investment securities:
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Taxable
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10,453
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9,622
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22,239
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19,376
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Exempt from federal taxes
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3,320
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2,968
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6,889
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5,939
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Federal funds sold and securities purchased under agreements to resell
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-
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93
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-
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751
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Deposits in banks
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239
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26
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366
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62
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Total interest income
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60,045
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49,353
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123,683
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101,769
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Interest Expense:
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Savings and money market deposits
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5,335
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5,661
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11,506
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13,756
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Time deposits
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13,936
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12,937
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28,629
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27,438
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Short-term borrowings
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125
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638
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253
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1,296
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Long-term borrowings
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7,196
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4,928
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14,538
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9,883
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Total interest expense
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26,592
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24,164
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54,926
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52,373
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Net interest income
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33,453
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25,189
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68,757
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49,396
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Provision for loan losses
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32,000
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|
|
3,107
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|
|
|
39,121
|
|
|
|
5,067
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|
Net interest income after provision for loan losses
|
|
|
1,453
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|
|
|
22,082
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|
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|
29,636
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44,329
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|
|
|
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Noninterest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Service charges
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4,304
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|
|
|
3,312
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|
|
|
8,498
|
|
|
|
6,425
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|
Gain on sales of investment securities, net
|
|
|
4,945
|
|
|
|
97
|
|
|
|
6,897
|
|
|
|
225
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|
Other-than-temporary impairment losses (“OTTI”) on available for sale securities
|
|
|
(2,709
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)
|
|
|
-
|
|
|
|
(9,305
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)
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|
-
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Portion of OTTI losses recognized in other comprehensive loss (before taxes)
|
|
|
2,179
|
|
|
|
-
|
|
|
|
7,431
|
|
|
|
-
|
|
Net OTTI losses recognized in operations on available for sale securities
|
|
|
(530
|
)
|
|
|
-
|
|
|
|
(1,874
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)
|
|
|
-
|
|
Gain on mortgage banking sales, net
|
|
|
2,703
|
|
|
|
219
|
|
|
|
4,401
|
|
|
|
426
|
|
Wealth management
|
|
|
4,975
|
|
|
|
4,615
|
|
|
|
9,297
|
|
|
|
8,894
|
|
Bank-owned life insurance
|
|
|
770
|
|
|
|
657
|
|
|
|
1,548
|
|
|
|
1,341
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|
Other income
|
|
|
4,544
|
|
|
|
2,696
|
|
|
|
9,103
|
|
|
|
5,117
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|
Total noninterest income
|
|
|
21,711
|
|
|
|
11,596
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|
|
|
37,870
|
|
|
|
22,428
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|
Net interest income after provision for loan losses and noninterest income
|
|
|
23,164
|
|
|
|
33,678
|
|
|
|
67,506
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|
|
|
66,757
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Noninterest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Salaries, wages and employee benefits
|
|
|
17,991
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|
|
|
14,201
|
|
|
|
38,270
|
|
|
|
28,060
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|
Occupancy
|
|
|
3,709
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|
|
|
2,441
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|
|
|
7,915
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|
|
|
5,026
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|
Furniture and equipment
|
|
|
1,483
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|
|
|
1,083
|
|
|
|
3,091
|
|
|
|
2,177
|
|
Intangibles expense
|
|
|
696
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|
|
|
631
|
|
|
|
1,644
|
|
|
|
1,319
|
|
FDIC deposit insurance
|
|
|
5,056
|
|
|
|
204
|
|
|
|
7,843
|
|
|
|
367
|
|
Goodwill impairment
|
|
|
214,536
|
|
|
|
-
|
|
|
|
214,536
|
|
|
|
-
|
|
Other expense
|
|
|
9,279
|
|
|
|
5,898
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|
|
|
18,072
|
|
|
|
11,227
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|
Total noninterest expense
|
|
|
252,750
|
|
|
|
24,458
|
|
|
|
291,371
|
|
|
|
48,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(229,586
|
)
|
|
|
9,220
|
|
|
|
(223,865
|
)
|
|
|
18,581
|
|
Income tax (benefit) expense
|
|
|
(7,083
|
)
|
|
|
1,893
|
|
|
|
(5,957
|
)
|
|
|
3,950
|
|
Net (loss) income
|
|
$
|
(222,503
|
)
|
|
$
|
7,327
|
|
|
$
|
(217,908
|
)
|
|
$
|
14,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
( 5.17
|
)
|
|
$
|
0.24
|
|
|
$
|
(5.06
|
)
|
|
$
|
0.47
|
|
Diluted
|
|
$
|
( 5.17
|
)
|
|
$
|
0.23
|
|
|
$
|
(5.06
|
)
|
|
$
|
0.46
|
|
Cash dividends per share
|
|
$
|
0.01
|
|
|
$
|
0.20
|
|
|
$
|
0.11
|
|
|
$
|
0.40
|
|
Weighted average number of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,080,849
|
|
|
|
31,359,011
|
|
|
|
43,035,945
|
|
|
|
31,352,922
|
|
Diluted
|
|
|
43,080,849
|
|
|
|
31,521,608
|
|
|
|
43,035,945
|
|
|
|
31,522,029
|
|
See accompanying notes to consolidated financial statements.
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars and share information in thousands)
Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
|
|
|
Additional
|
|
|
(Accumulated Deficit)
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Par
|
|
|
Paid
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Value
|
|
|
In Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Stock
|
|
|
Total
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2009
|
|
|
43,022
|
|
|
|
(76
|
)
|
|
$
|
43,022
|
|
|
$
|
379,551
|
|
|
$
|
82,295
|
|
|
$
|
(29,017
|
)
|
|
$
|
(1,144
|
)
|
|
$
|
474,707
|
|
|
|
|
Issuance of stock for stock options, net of excess tax benefits
|
|
|
27
|
|
|
|
36
|
|
|
|
27
|
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
545
|
|
|
|
607
|
|
|
|
|
Issuance of stock under dividend reinvestment and stock purchase plan
|
|
|
65
|
|
|
|
40
|
|
|
|
65
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
599
|
|
|
|
668
|
|
|
|
|
Conversion of Willow Financial Recognition and Retention Plan shares to treasury
|
|
|
-
|
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
206
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(206
|
)
|
|
|
-
|
|
|
|
|
Stock based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
155
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
155
|
|
|
|
|
Net (loss) income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(217,908
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(217,908
|
)
|
|
$
|
(217,908
|
)
|
Other comprehensive loss, net of reclassifications and tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,852
|
)
|
|
|
-
|
|
|
|
(4,852
|
)
|
|
|
(4,852
|
)
|
Cash dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,692
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,692
|
)
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(222,760
|
)
|
Balance, June 30, 2009
|
|
|
43,114
|
|
|
|
(23
|
)
|
|
$
|
43,114
|
|
|
$
|
379,951
|
|
|
$
|
(140,305
|
)
|
|
$
|
(33,869
|
)
|
|
$
|
(206
|
)
|
|
$
|
248,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Par
|
|
|
Paid
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Value
|
|
|
In Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Stock
|
|
|
Total
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2008
|
|
|
31,507
|
|
|
|
(174
|
)
|
|
$
|
31,507
|
|
|
$
|
231,130
|
|
|
$
|
82,311
|
|
|
$
|
(2,566
|
)
|
|
$
|
(3,072
|
)
|
|
$
|
339,310
|
|
|
|
|
Issuance of stock for stock options, net of excess tax benefits
|
|
|
-
|
|
|
|
40
|
|
|
|
-
|
|
|
|
(257
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
716
|
|
|
|
459
|
|
|
|
|
Issuance of stock awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
Stock based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,631
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,631
|
|
|
$
|
14,631
|
|
Other comprehensive loss, net of reclassifications and tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,035
|
)
|
|
|
-
|
|
|
|
(14,035
|
)
|
|
|
(14,035
|
)
|
Cash dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,542
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,542
|
)
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
596
|
|
Balance, June 30, 2008
|
|
|
31,507
|
|
|
|
(134
|
)
|
|
$
|
31,507
|
|
|
$
|
230,958
|
|
|
$
|
84,400
|
|
|
$
|
(16,601
|
)
|
|
$
|
(2,354
|
)
|
|
$
|
327,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
|
|
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(Unaudited)
|
|
|
|
Six Months Ended
|
|
(Dollars in thousands)
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Operating Activities:
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(217,908
|
)
|
|
$
|
14,631
|
|
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
39,121
|
|
|
|
5,067
|
|
Depreciation
|
|
|
3,278
|
|
|
|
2,051
|
|
Goodwill impairment
|
|
|
214,536
|
|
|
|
―
|
|
Intangibles expense
|
|
|
1,644
|
|
|
|
1,319
|
|
Net amortization of discounts/premiums on investments and borrowings
|
|
|
(2,442
|
)
|
|
|
569
|
|
Deferred income tax benefit
|
|
|
(1,952
|
)
|
|
|
(1,828
|
)
|
Gain on sales of investment securities, net
|
|
|
(6,897
|
)
|
|
|
(225
|
)
|
Other-than-temporary impairment on investments
|
|
|
1,874
|
|
|
|
―
|
|
Gain on mortgage banking sales, net
|
|
|
(4,401
|
)
|
|
|
(426
|
)
|
Originations of loans held for sale
|
|
|
(362,195
|
)
|
|
|
(38,077
|
)
|
Proceeds from sale of loans originated for sale
|
|
|
298,814
|
|
|
|
38,248
|
|
Bank-owned life insurance income
|
|
|
(1,548
|
)
|
|
|
(1,341
|
)
|
Stock based compensation expense
|
|
|
155
|
|
|
|
85
|
|
Net decrease in accrued interest receivable
|
|
|
3,245
|
|
|
|
836
|
|
Net increase in accrued interest payable
|
|
|
3,158
|
|
|
|
4,040
|
|
Net increase in other assets
|
|
|
(10,227
|
)
|
|
|
(4,410
|
)
|
Net increase in other liabilities
|
|
|
2,451
|
|
|
|
3,145
|
|
Other, net
|
|
|
(208
|
)
|
|
|
49
|
|
Net cash (used in) provided by operating activities
|
|
|
(39,502
|
)
|
|
|
23,733
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from sales of investment securities available for sale
|
|
|
319,655
|
|
|
|
115,331
|
|
Proceeds from maturity or calls of investment securities held to maturity
|
|
|
17,231
|
|
|
|
3,095
|
|
Proceeds from maturity or calls of investment securities available for sale
|
|
|
129,821
|
|
|
|
106,302
|
|
Proceeds, redemption Federal Home Bank stock and reduction in other investments
|
|
|
37
|
|
|
|
673
|
|
Purchases of investment securities available for sale
|
|
|
(342,467
|
)
|
|
|
(274,461
|
)
|
Purchases of Federal Home Bank stock, Federal Reserve Bank stock and other investments
|
|
|
(5,214
|
)
|
|
|
(4,228
|
)
|
Proceeds from sale of indirect and residential loans
|
|
|
117,158
|
|
|
|
―
|
|
Other net decrease (increase) in loans
|
|
|
176,981
|
|
|
|
(43,638
|
)
|
Net cash paid due to acquisitions, net of cash acquired
|
|
|
(877
|
)
|
|
|
(1,200
|
)
|
Purchases of premises and equipment
|
|
|
(3,350
|
)
|
|
|
(4,389
|
)
|
Proceeds from sales of premises and equipment
|
|
|
15
|
|
|
|
668
|
|
Proceeds from sales of other real estate
|
|
|
1,216
|
|
|
|
347
|
|
Net cash provided by (used in) investing activities
|
|
|
410,206
|
|
|
|
(101,500
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits
|
|
|
59,723
|
|
|
|
(119,910
|
)
|
(Decrease) increase in federal funds purchased and short-term securities sold under agreements to repurchase
|
|
|
(53,944
|
)
|
|
|
78,199
|
|
Increase (decrease) in other short-term borrowings
|
|
|
1,030
|
|
|
|
(868
|
)
|
Advances of long-term borrowings
|
|
|
―
|
|
|
|
50,000
|
|
Repayments of long-term borrowings
|
|
|
(62,562
|
)
|
|
|
(23,000
|
)
|
Cash dividends
|
|
|
(4,692
|
)
|
|
|
(12,542
|
)
|
Proceeds from the exercise of stock options
|
|
|
607
|
|
|
|
404
|
|
Proceeds from issuance of stock under dividend reinvestment and stock purchase plan
|
|
|
668
|
|
|
|
―
|
|
Excess tax benefits from stock based compensation
|
|
|
―
|
|
|
|
50
|
|
Net cash (used in) provided by financing activities
|
|
|
(59,170
|
)
|
|
|
(27,667
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
|
311,534
|
|
|
|
(105,434
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
102,526
|
|
|
|
209,403
|
|
Cash and cash equivalents at end of the period
|
|
$
|
414,060
|
|
|
$
|
103,969
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
54,807
|
|
|
$
|
48,706
|
|
Income taxes
|
|
$
|
2,058
|
|
|
$
|
12,840
|
|
Supplemental disclosure of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Transfer of assets from loans to net assets in foreclosure
|
|
$
|
1,516
|
|
|
$
|
1,508
|
|
See accompanying notes to consolidated financial statements.
|
|
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
– Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements of Harleysville National Corporation (the Corporation) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with instructions to Form 10-Q, and therefore,
do not include all of the information and footnotes necessary for a complete presentation of financial condition, results of operations, changes in shareholders’ equity and cash flows in conformity with GAAP. However, all normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements, have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements
and the accompanying notes in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008. The results of operations presented for the three and six month periods ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The Corporation has evaluated subsequent events for recognition and/or disclosure through August 7, 2009, the date the consolidated financial statements included in this Quarterly Report on Form 10-Q
were issued. See Note 14 – Subsequent Events for additional information
.
The consolidated financial statements include the Corporation and its
wholly owned subsidiaries-Harleysville National Bank (the Bank), HNC Financial Company and HNC Reinsurance Company. Willow Financial Corporation (Willow Financial) and its banking subsidiary are included in the Corporation’s
results effective after the market close on December 5, 2008. All significant intercompany accounts and transactions have been eliminated in consolidation and certain prior period amounts have been reclassified to conform to current year presentation.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and the income and expense in the income statements for the periods presented. Actual results could differ significantly
from those estimates. Critical estimates include the determination of the allowance for loan losses, goodwill and other intangible assets impairment, stock-based compensation, fair value measurement for investment securities available for sale, inclusive of other-than-temporary impairment, and deferred income taxes.
For additional information on other significant accounting policies, see Note 1 of the Consolidated Financial Statements of the Corporation’s 2008 Annual Report on Form 10-K.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, “The
FASB Accounting Standards Codification
TM
(the Codification) and
the Hierarchy of Generally Accepted Accounting Principles—a replacement of SFAS No. 162.” The Codification will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification
will supersede all existing accounting and reporting standards other than guidance issued by the SEC. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. FAS 168 is not expected to have a material impact on the Corporation’s financial statements, although references to specific guidance in financial statements and
future filings will be required to be referenced to the Codification.
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which changes the guidance for off-balance-sheet accounting of financial instruments including the way entities account for securitizations and special-purpose
entities. SFAS 166 requires more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk to the assets. It eliminates the concept of a “qualifying special purpose entity,” changes the requirement for derecognizing financial assets, and requires sellers of the assets to make additional disclosures about them. SFAS 167 alters how a company determines when an entity that is insufficiently capitalized or is not controlled through voting
should be consolidated. A company has to determine whether it should provide consolidated reporting of any entity based upon the entity’s purpose and design and the parent company’s ability to direct the entity’s actions. The standards are effective at the start of the first fiscal year beginning after November 15, 2009 and are not anticipated to have a material impact on the Corporation’s financial statements.
Note 1
– Summary of Significant Accounting Policies – Continued
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for interim and annual periods ending after June 15,
2009. The adoption of FAS 165 did not have any impact on the Corporation’s financial statements although it did result in expanded disclosure with regard to the date for which subsequent events have been evaluated. See Note 1 - Summary of Significant Accounting Policies, “Principles of Consolidation and Basis of Presentation” for additional information.
In April 2009, the FASB issued FASB Staff Positions No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions That Are Not Orderly,” No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments,” and No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” The FASB issued these three related Staff Positions to clarify the application of SFAS 157, “Fair Value Measurements” (SFAS 157) to fair value measurements in the current economic environment, modify the recognition of other-than-temporary impairments of debt securities, and require companies to disclose the fair values of financial instruments in interim periods. The final
Staff Positions are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, if all three Staff Positions or both the fair-value measurements and other-than-temporary impairment Staff Positions are adopted simultaneously. The Corporation adopted the provisions of these Staff Positions in its quarter ended June 30, 2009 and they did not have a material impact on the Corporation’s financial statements although they did result
in expanded disclosures.
Note 2 – Acquisition / Dispositions
During the second quarter of 2009, the Corporation sold loans held for investment of approximately $117.2 million for a net loss of $29,000. The sales consisted of first mortgage residential loans totaling $81.0 million and indirect consumer installment loans totaling $36.2 million. The loans were sold without recourse and subject to customary
sale conditions. The sales were part of the Corporation’s strategy to build capital. Additionally, the Corporation decided to exit from the indirect lending business effective June 30, 2009 in order to use capital to build relationship-based business with customers.
Acquisition of Willow Financial Bancorp, Inc.
Effective after the market close on December 5, 2008, the Corporation completed its acquisition of Willow Financial and its wholly owned subsidiary, Willow Financial Bank, a $1.6 billion savings bank with 29 branch offices in Southeastern Pennsylvania, was merged with and into the Bank. In conjunction with this transaction, the Corporation
also acquired BeneServ, Inc., a provider of employee benefits services. The Corporation acquired 100% of the outstanding shares of Willow Financial. The Corporation issued 11,515,366 shares of common stock, incurred $7.8 million in acquisition costs which were capitalized and converted stock options with a fair value of $2.0 million for a total purchase price of $168.6 million at the closing on December 5, 2008.
The acquisition of Willow Financial constituted a business combination under SFAS No. 141, “Business Combinations,” and was accounted for using the purchase method. Accordingly, the purchase price was allocated to the respective assets acquired and liabilities assumed based on their estimated fair values on the date
of acquisition. The excess of purchase price over the fair value of net assets acquired was recorded as goodwill. Goodwill of $129.9 million was recorded in this transaction with $126.8 million allocated to the Community Banking segment and $3.1 million allocated to the Wealth Management segment. The Corporation also recorded $11.9 million in core deposit intangibles and $2.9 million in other identifiable intangible assets which are being amortized over ten years using the sum of the year’s digits
amortization method. The $2.9 million of other identifiable intangibles were allocated to the Wealth Management segment. The purchase price allocation is subject to revision in future periods, including adjustments that may be necessary upon the filing of final tax returns for Willow Financial. The amount of goodwill recorded at December 31, 2008 was increased by $866,000 and the core deposit intangible was reduced by $2.2 million in the first six months of 2009 as a result of additional information obtained
for the valuation analysis. The results of operations of Willow Financial have been included in the Corporation’s results of operations since December 5, 2008, the date of acquisition.
Note 2 – Acquisition / Dispositions - Continued
The following are the unaudited pro forma consolidated results of operations of the Corporation for the three and six months ended June 30, 2008 as though Willow Financial had been acquired on January 1, 2008:
|
|
Three months ended
|
|
|
Six months ended
|
|
(Dollars in thousands, except for per share data)
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
70,481
|
|
|
$
|
146,035
|
|
Total interest expense
|
|
|
31,636
|
|
|
|
69,179
|
|
Net interest income
|
|
|
38,845
|
|
|
|
76,856
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
4,795
|
|
|
|
7,579
|
|
Net interest income after provision for loan losses
|
|
|
34,050
|
|
|
|
69,277
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
13,403
|
|
|
|
28,736
|
|
Total non-interest expense
|
|
|
40,005
|
|
|
|
80,122
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7,448
|
|
|
|
17,891
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (1)
|
|
|
1,628
|
|
|
|
4,591
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,820
|
|
|
$
|
13,300
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.14
|
|
|
$
|
0.31
|
|
Diluted earnings per share
|
|
$
|
0.14
|
|
|
$
|
0.31
|
|
(1)
|
Tax effects are reflected at an assumed rate of 35%
|
AICPA Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (SOP 03-3) addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer
if those differences are attributable, at least in part, to credit quality. It includes loans acquired in purchase business combinations. SOP 03-3 does not apply to loans originated by the Corporation. The Corporation’s assessment identified $14.4 million in acquired loans from Willow Financial to which the application of the provisions of SOP 03-3 was required. At June 30, 2009 and December 31, 2008, the Corporation acquired loans within the scope of SOP 03-3 had an unpaid principal balance
of $13.1 million and $14.4 million, respectively. At June 30, 2009 and December 31, 2008, these loans had a carrying value of $7.0 million and $8.1 million, respectively. As a result of the application of SOP 03-3, the Corporation’s loan balance reflects net purchase accounting adjustments resulting in a reduction in loans of $6.1 million related to acquired impaired loans at June 30, 2009. Income recognition under this SOP is dependent on having a reasonable expectation about the timing and amount
of cash flows expected to be collected. The loans deemed impaired under this SOP were considered collateral dependent, however the timing of the sale of loan collateral is indeterminate and as such the loans will remain on non-accrual status and will have no accretable yield. The Corporation is using the cash basis method of interest income recognition.
The following are the loans acquired from Willow Financial for which it was probable at June 30, 2009 that all contractually required payments would not be collected:
|
|
(Dollars in thousands)
|
|
Contractually required payments at June 30, 2009:
|
|
|
|
Real estate
|
|
$
|
6,958
|
|
Commercial and industrial
|
|
|
6,151
|
|
Total
|
|
$
|
13,109
|
|
Cash flows expected to be collected at June 30, 2009
|
|
$
|
7,003
|
|
The following is the carrying value by category as of June 30, 2009:
|
|
(Dollars in thousands)
|
|
Real estate
|
|
$
|
4,016
|
|
Commercial and industrial
|
|
|
2,987
|
|
Total carrying value
|
|
$
|
7,003
|
|
Note 3 – Investment Securities
The amortized cost, unrealized gains and losses, and the estimated fair value of the Corporation’s investment securities available for sale and held to maturity are as follows:
|
|
June 30, 2009
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated Fair Value
|
|
|
|
(Dollars in thousands)
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government agencies and corporations
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
500
|
|
Obligations of states and political subdivisions
|
|
|
283,117
|
|
|
|
5,635
|
|
|
|
(4,094
|
)
|
|
|
284,658
|
|
Residential mortgage-backed securities
|
|
|
720,077
|
|
|
|
8,469
|
|
|
|
(22,081
|
)
|
|
|
706,465
|
|
Trust preferred pools/collateralized debt obligations
|
|
|
49,055
|
|
|
|
354
|
|
|
|
(38,049
|
)
|
|
|
11,360
|
|
Corporate bonds
|
|
|
8,858
|
|
|
|
18
|
|
|
|
(617
|
)
|
|
|
8,259
|
|
Equity securities
|
|
|
22,804
|
|
|
|
103
|
|
|
|
(1,845
|
)
|
|
|
21,062
|
|
Total investment securities available for sale
|
|
$
|
1,084,411
|
|
|
$
|
14,579
|
|
|
$
|
(66,686
|
)
|
|
$
|
1,032,304
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
33,363
|
|
|
$
|
74
|
|
|
$
|
(529
|
)
|
|
$
|
32,908
|
|
Total investment securities held to maturity
|
|
$
|
33,363
|
|
|
$
|
74
|
|
|
$
|
(529
|
)
|
|
$
|
32,908
|
|
|
|
|
December 31, 2008
|
|
|
|
Amortized
Cost
|
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
Estimated Fair Value
|
|
|
|
(Dollars in thousands)
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government agencies and corporations
|
|
$
|
93,501
|
|
|
$
|
$ 419
|
|
|
$
|
(26
|
)
|
|
$
|
93,894
|
Obligations of states and political subdivisions
|
|
|
288,415
|
|
|
|
4,798
|
|
|
|
(6,338
|
)
|
|
|
286,875
|
Residential mortgage-backed securities
|
|
|
710,385
|
|
|
|
14,389
|
|
|
|
(19,291
|
)
|
|
|
705,483
|
Trust preferred pools/collateralized debt obligations
|
|
|
50,214
|
|
|
|
734
|
|
|
|
(35,084
|
)
|
|
|
15,864
|
Corporate bonds
|
|
|
21,073
|
|
|
|
286
|
|
|
|
(3,192
|
)
|
|
|
18,167
|
Equity securities
|
|
|
22,998
|
|
|
|
57
|
|
|
|
(1,390
|
)
|
|
|
21,665
|
Total investment securities available for sale
|
|
$
|
1,186,586
|
|
|
|
$20,683
|
|
|
$
|
(65,321
|
)
|
|
$
|
1,141,948
|
Held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government agencies and corporations
|
|
$
|
3,880
|
|
|
|
$ 122
|
|
|
$
|
—
|
|
|
$
|
4,002
|
Obligations of states and political subdivisions
|
|
|
46,554
|
|
|
|
119
|
|
|
|
(616
|
)
|
|
|
46,057
|
Total investment securities held to maturity
|
|
$
|
50,434
|
|
|
|
$ 241
|
|
|
$
|
(616
|
)
|
|
$
|
50,059
|
Note 3 – Investment Securities - Continued
The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at June 30, 2009 and December 31, 2008:
|
|
June 30, 2009
|
|
|
Less than 12 months
|
|
|
12 months of longer
|
|
|
Total
|
|
Description of
|
|
# of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
Fair
|
|
|
Unrealized
|
|
Securities
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
|
(Dollars in thousands)
|
Obligations of states and political subdivisions
|
|
|
186
|
|
|
$
|
138,150
|
|
|
$
|
(3,758
|
)
|
|
|
25
|
|
|
$
|
15,525
|
|
|
$
|
(865
|
)
|
|
|
211
|
|
|
$
|
153,675
|
|
|
$
|
(4,623
|
)
|
Residential mortgage-backed securities
|
|
|
34
|
|
|
|
234,922
|
|
|
|
(4,343
|
)
|
|
|
49
|
|
|
|
96,421
|
|
|
|
(17,738
|
)
|
|
|
83
|
|
|
|
331,343
|
|
|
|
(22,081
|
)
|
Trust preferred pools/collateralized debt obligations
|
|
|
5
|
|
|
|
596
|
|
|
|
(3,753
|
)
|
|
|
12
|
|
|
|
9,189
|
|
|
|
(34,296
|
)
|
|
|
17
|
|
|
|
9,785
|
|
|
|
(38,049
|
)
|
Corporate bonds
|
|
|
1
|
|
|
|
16
|
|
|
|
(41
|
)
|
|
|
2
|
|
|
|
6,724
|
|
|
|
(576
|
)
|
|
|
3
|
|
|
|
6,740
|
|
|
|
(617
|
)
|
Equity securities
|
|
|
10
|
|
|
|
19,283
|
|
|
|
(1,176
|
)
|
|
|
4
|
|
|
|
1,248
|
|
|
|
(669
|
)
|
|
|
14
|
|
|
|
20,531
|
|
|
|
(1,845
|
)
|
Totals
|
|
|
236
|
|
|
$
|
392,967
|
|
|
$
|
(13,071
|
)
|
|
|
92
|
|
|
$
|
129,107
|
|
|
$
|
(54,144
|
)
|
|
|
328
|
|
|
$
|
522,074
|
|
|
$
|
(67,215
|
)
|
|
|
December 31, 2008
|
|
|
Less than 12 months
|
|
|
12 months of longer
|
|
|
Total
|
|
Description of
|
|
# of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
# of
|
|
|
Fair
|
|
|
Unrealized
|
|
Securities
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
Securities
|
|
|
Value
|
|
|
Losses
|
|
|
|
(Dollars in thousands)
|
Obligations of U.S. government agencies and corporations
|
|
|
3
|
|
|
$
|
29,145
|
|
|
$
|
(26
|
)
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
3
|
|
|
$
|
29,145
|
|
|
$
|
(26
|
)
|
Obligations of states and political subdivisions
|
|
|
290
|
|
|
|
202,231
|
|
|
|
(6,715
|
)
|
|
|
11
|
|
|
|
5,416
|
|
|
|
(239
|
)
|
|
|
301
|
|
|
|
207,647
|
|
|
|
(6,954
|
)
|
Residential mortgage-backed securities
|
|
|
35
|
|
|
|
121,085
|
|
|
|
(16,303
|
)
|
|
|
36
|
|
|
|
48,851
|
|
|
|
(2,988
|
)
|
|
|
71
|
|
|
|
164,936
|
|
|
|
(19,291
|
)
|
Trust preferred pools/collateralized debt obligations
|
|
|
4
|
|
|
|
711
|
|
|
|
(4,349
|
)
|
|
|
11
|
|
|
|
9,999
|
|
|
|
(30,732
|
)
|
|
|
15
|
|
|
|
10,710
|
|
|
|
(35,081
|
)
|
Corporate bonds
|
|
|
4
|
|
|
|
9,417
|
|
|
|
(1,127
|
)
|
|
|
3
|
|
|
|
4,652
|
|
|
|
(1,801
|
)
|
|
|
7
|
|
|
|
14,069
|
|
|
|
(2,928
|
)
|
Equity securities
|
|
|
9
|
|
|
|
18,134
|
|
|
|
(528
|
)
|
|
|
6
|
|
|
|
2,956
|
|
|
|
(1,129
|
)
|
|
|
15
|
|
|
|
21,090
|
|
|
|
(1,657
|
)
|
Totals
|
|
|
345
|
|
|
$
|
380,723
|
|
|
$
|
(29,048
|
)
|
|
|
67
|
|
|
$
|
66,874
|
|
|
$
|
(36,889
|
)
|
|
|
412
|
|
|
$
|
447,597
|
|
|
$
|
(65,937
|
)
|
Management believes that the unrealized losses associated with the securities portfolio, are temporary in nature since they are not related to the underlying credit of the issuers, and the Corporation has the ability and intent to hold these investments for the time necessary to recover its cost which may be at maturity (i.e. these investments
have contractual maturities that, absent credit default, ensure a recovery of cost). In making its other-than temporary evaluation, management considered the fact that the expected cash flow is not affected by the underlying collateral or issuer. Other factors considered in evaluating the securities portfolio for other-than-temporary impairment are the length of time and the extent to which the fair value has been below the cost, analyst reports, analysis of the current interest rate environment, anticipated
volatility in the market and the underlying credit rating of the issuers. In certain cases where sufficient data is not available, a cash flow model is utilized.
The change in the unrealized losses on securities other than obligations of U.S. government agencies and corporations, which includes certain collateralized mortgage obligations and collateralized debt obligations were caused by changes in interest rates, credit spread and liquidity issues in the marketplace. As of June 30,
2009 and December 31, 2008, there were 92 and 67 individual securities, respectively, in a continuous unrealized loss position for twelve months or longer. The Corporation recognized other-than temporary impairment (OTTI) charges totaling $530,000 during the second quarter of 2009 as a result of deterioration in two collateralized mortgage obligation investments. As relevant observable inputs did not exist, a cash flow model was utilized to determine the fair value of the impaired securities.
Note 3 – Investment Securities - Continued
On a quarterly basis, the Corporation formally evaluates its investment securities for other than temporary impairment. OTTI losses on individual investment securities were recognized during the six months ended June 30, 2009 according to FSP FAS 115-2 and FAS 124-2. In accordance with this new guidance, credit related
OTTI is recognized in earnings and the noncredit portion on securities not expected to be sold is recognized in other comprehensive income. The credit related OTTI recognized in earnings during the three months and six months ended June 30, 2009 was $530,000 and $1.9 million, respectively. These impairment charges related to collateralized debt obligations, collateralized mortgage obligations and equity securities. Noncredit related OTTI recognized in OCI during the three months and six months ended
June 30, 2009 was $2.2 million and $7.4 million, respectively.
The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold:
(Dollars in thousands)
|
|
Debt Securities
|
|
|
|
|
|
Estimated credit losses as of January 1, 2009
|
|
$
|
—
|
|
Additions for credit losses not previously recognized
|
|
|
1,673
|
|
Estimated credit losses as of June 30, 2009
|
|
$
|
1,673
|
|
|
|
|
|
|
The Corporation utilizes a third party valuation specialist for those securities which have insufficient observable market data available to determine the fair value. All relevant data inputs and the appropriateness of key model assumptions are reviewed by management. These assumptions include, but were not limited to collateral
performance projections, historical and projected defaults, and discounted cash flow modeling.
On a quarterly basis, all pooled trust preferred security investments for which the fair value of the investment is less than its amortized cost basis are reviewed for OTTI. For those securities in a loss position, a detailed analysis is performed by management to assess them for OTTI as described below. Management
will also assess if the Corporation has the ability and intent to hold the security until the market recovers or maturity for all securities.
In evaluating the pooled trust preferred securities for credit related OTTI, the Corporation considered the following:
·
|
The length of time and the extent to which the fair value has been less than the amortized cost basis
|
·
|
Adverse conditions specifically related to the security, industry, or geographic area
|
·
|
The historical and implied volatility of the fair value of the security
|
·
|
The payment structure of the debt security
|
·
|
Failure of the underlying issuers to make scheduled interest or principal payments
|
·
|
Any changes to the rating of the security
|
·
|
Recoveries or additional declines in fair value subsequent to the balance sheet date.
|
After evaluating the criteria above, if certain ratios such as excess collateral, principal shortfall and interest shortfall conditions suggest an uncertainty of future recovery of principal and interest, a discounted cash flow model is obtained from the third party investment specialist.
For the collateralized mortgage obligation portfolio, a detailed analysis is performed involving a review of delinquency data in relation to projected current credit enhancement and coverage levels based upon certain stress factors. This analysis includes a review of third-party investment summary reports to assess the length
of time in a loss position and changes in credit ratings. If the calculated principal loss exceeds the current credit enhancement, additional evaluation is required to determine what, if any impairment would be recorded. In order to determine the existence of OTTI, related data such as foreclosures, bankruptcy and real estate owned is analyzed to calculate a default percentage. Based upon completion of the stressed discounted cash flow analysis performed on two collateralized mortgage obligation investments,
credit related OTTI charges on collateralized mortgage obligations totaling $530,000 and $683,000 were recorded for the three and six months ended June 30, 2009, respectively. The OTTI charges were recorded as the full contractual principal due is not expected to be recovered upon maturity of the security. The credit related OTTI charge was recorded for the portion deemed uncollectible.
For the other debt securities in the Corporation’s portfolio, while several are in an unrealized loss position, the analysis supports the Corporation’s assumption that future cashflows will not be impacted and the full amount of contractual principal and interest payments will be realized upon maturity.
Note 3 – Investment Securities – Continued
The following table provides additional information related to the Corporation’s trust preferred pools/collateralized debt obligations:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
Book Value
|
|
|
Fair Value
|
|
|
Unrealized (Loss) Gain
|
|
|
Deferral/Default as % of Collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single Issuer:
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA Rated
|
|
$
|
6,044
|
|
|
$
|
3,740
|
|
|
$
|
(2,304
|
)
|
|
|
n/a
|
|
A Rated
|
|
|
4,331
|
|
|
|
2,857
|
|
|
|
(1,474
|
)
|
|
|
n/a
|
|
Not Rated
|
|
|
419
|
|
|
|
522
|
|
|
|
103
|
|
|
|
n/a
|
|
Total Single Issuers
|
|
$
|
10,794
|
|
|
$
|
7,119
|
|
|
$
|
(3,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A Rated
|
|
$
|
418
|
|
|
$
|
493
|
|
|
$
|
75
|
|
|
|
2.6
|
%
|
B Rated
|
|
|
10,185
|
|
|
|
1,697
|
|
|
|
(8,488
|
)
|
|
|
12.0
|
%
|
Noninvestment grade
|
|
|
27,658
|
|
|
|
2,051
|
|
|
|
(25,607
|
)
|
|
|
14.5
|
%
|
Total Pooled
|
|
$
|
38
,261
|
|
|
$
|
4,241
|
|
|
$
|
(34,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Preferred Securities
|
|
$
|
49,055
|
|
|
$
|
11,360
|
|
|
$
|
(37,695
|
)
|
|
|
|
|
The pooled trust preferred security portfolios as of June 30, 2009 includes all Class B tranches except for one security which is in a Class C tranche. The number of banks in each pooled trust preferred security issuance at June 30, 2009 ranges from nine to sixty-five.
Securities with a carrying value of $797.9 million and $100.4 million at June 30, 2009 and December 31, 2008, respectively, were pledged to secure public funds, customer trust funds, government deposits and repurchase agreements.
Accrued interest receivable on investment securities was $6.9 million and $8.5 million at June 30, 2009 and December 31, 2008, respectively.
Note 3 –
Investment Securities - Continued
The amortized cost and estimated fair value of investment securities, at June 30, 2009, by contractual maturities are shown in the following table. Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
June 30, 2009
|
|
|
Held to Maturity
|
|
Available for Sale
|
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
|
(Dollars in thousands)
|
Due in one year or less:
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
$
|
—
|
|
$ —
|
|
$ 1,250
|
|
$ 1,251
|
Corporate bonds
|
|
|
—
|
|
—
|
|
1,001
|
|
1,009
|
Total due on one year or less
|
|
|
—
|
|
—
|
|
2,251
|
|
2,260
|
|
|
|
|
|
|
|
|
|
|
Due after one year through five years:
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government agencies and corporations
|
|
|
—
|
|
—
|
|
500
|
|
500
|
Obligations of states and political subdivisions
|
|
|
—
|
|
—
|
|
1,294
|
|
1,363
|
Corporate bonds
|
|
|
—
|
|
—
|
|
5,062
|
|
4,918
|
Total due after one year through five years
|
|
|
—
|
|
—
|
|
6,856
|
|
6,781
|
|
|
|
|
|
|
|
|
|
|
Due after five years through ten years:
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
9,836
|
|
9,771
|
|
86,361
|
|
86,418
|
Corporate bonds
|
|
|
—
|
|
—
|
|
2,738
|
|
2,316
|
Total due after five years through ten years
|
|
|
9,836
|
|
9,771
|
|
89,099
|
|
88,734
|
|
|
|
|
|
|
|
|
|
|
Due after ten years:
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
23,527
|
|
23,137
|
|
194,212
|
|
195,626
|
Trust preferred pools/collateralized debt obligations
|
|
|
—
|
|
—
|
|
49,055
|
|
11,360
|
Corporate bonds
|
|
|
—
|
|
—
|
|
57
|
|
16
|
Total due after ten years
|
|
|
23,527
|
|
23,137
|
|
243,324
|
|
207,002
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
—
|
|
—
|
|
720,077
|
|
706,465
|
Equity securities
|
|
|
—
|
|
—
|
|
22,804
|
|
21,062
|
Totals
|
|
$
|
33,363
|
|
$32,908
|
|
$1,084,411
|
|
$1,032,304
|
Proceeds from the sales of investment securities available for sale for the six months ended June 30, 2009 and 2008 were $319.7 million and $115.3 million, respectively. The components of net realized gains on sales of investment securities were as follows:
|
|
Six Months Ended
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Gross realized gains
|
|
$
|
8,120
|
|
|
$
|
509
|
|
|
Gross realized losses
|
|
|
(1,223
|
)
|
|
|
(284
|
)
|
|
Net realized gain on sales of investment securities
|
|
$
|
6,897
|
|
|
$
|
225
|
|
|
The Corporation also holds investments in the Federal Home Loan Bank of Pittsburgh (“FHLB”) stock totaling $31.3 million as of June 30, 2009 and December 31, 2008. The Corporation is required to maintain a minimum amount of FHLB stock as determined by its borrowing levels. As the FHLB stock is not a marketable instrument, it
does not have a readily marketable determinable fair value and is not accounted for in a similar manner to other investment securities. The Corporation accounts for the investment in FHLB stock in accordance with AICPA Statement of Position No. 01-6, “Accounting by Certain Entities that Lend to or Finance the Activities of Other.” According to SOP 01-6, FHLB stock is generally viewed as a long-term investment with its value based on the ultimate recoverability of the par value rather than by recognizing
temporary declines in value. The Corporation considers criteria as required by SOP 01-6 in determining the ultimate recoverability of the par value such as 1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted, 2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, 3) the impact of regulatory changes on the FHLB
and on its customer base, and 4) the liquidity position of the FHLB. The Corporation has considered the FHLB’s announcement on December 23, 2008 of the suspension of its dividend and capital stock repurchases in the assessment for impairment. Despite the significant decline in net assets of the FHLB and the corresponding decline in equity balances, the capital ratios for the FHLB remain above regulatory required levels. Liquidity levels of the FHLB appear appropriate and the future operating performance
is expected to support the anticipated level of common stock redemptions. In addition, FHLB institutions are generally not required to redeem membership stock until five years after the membership is terminated. Based upon review of the most recent financial statements of FHLB Pittsburgh, management believes it is unlikely that the stock would be redeemed in the future at a price below its par value and therefore management believes that no impairment is necessary related to the FHLB stock at June
30, 2009.
Note 4 – Goodwill and Other Intangibles
Goodwill and identifiable intangibles were $27.0 million and $21.8 million, respectively at June 30, 2009, and $240.7 million and $26.2 million, respectively at December 31, 2008. The goodwill and identifiable intangibles balances resulted from acquisitions. During the first six months of 2009, the Corporation recorded purchase accounting
adjustments related to the Willow Financial acquisition which increased goodwill by $866,000 and reduced the core deposit intangible by $2.2 million. For further information related to acquisitions, see Note 2 – Acquisitions. Also, during the second quarter of 2009, the Corporation recorded a goodwill impairment charge of $214.5 million related to the Community Banking segment,
resulting from the decrease in market value arising in the second quarter of 2009
caused by underlying capital and credit concerns which was valued through the
Agreement and Plan of Merger dated July 26, 2009 between First Niagara Financial Group, Inc. (“First Niagara”) and the Corporation in which the Corporation will be merged into First Niagara. This impairment was determined based uon the announced sale price of the Corporation to First Niagara for $5.50 per share. For further information related to the merger, see Note 14 – Subsequent Events.
The changes in the carrying amount of goodwill by business segment were as follows:
|
|
Community Banking
|
|
Wealth Management
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Balance, January 1, 2009
|
|
$
|
222,381
|
|
|
$
|
18,320
|
|
|
$
|
240,701
|
|
|
Purchase accounting adjustments for acquisitions
|
|
|
866
|
|
|
|
—
|
|
|
|
866
|
|
|
Goodwill impairment
|
|
|
(214,536
|
)
|
|
|
—
|
|
|
|
(214,536
|
)
|
|
Balance, June 30, 2009
|
|
$
|
8,711
|
|
|
$
|
18,320
|
|
|
$
|
27,031
|
|
|
The gross carrying value and accumulated amortization related to core deposit intangibles and other identifiable intangibles at June 30, 2009 and December 31, 2008 are presented below:
|
|
June 30,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
|
|
|
|
(Dollars in thousands)
|
Core deposit intangibles
|
|
$
|
21,083
|
|
|
$
|
4,458
|
|
$
|
23,256
|
|
$
|
2,692
|
|
Other identifiable intangibles
|
|
|
7,209
|
|
|
|
2,049
|
|
|
7,209
|
|
|
1,524
|
|
Total
|
|
$
|
28,292
|
|
|
$
|
6,507
|
|
$
|
30,465
|
|
$
|
4,216
|
|
Management performs an annual review of goodwill and other identifiable intangibles in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Prior to the announcement of the merger agreement with First Niagara, the
annual impairment analysis had been completed during the second quarter and management was in the process of assessing potential triggering events that may have occurred subsequent to that annual measurement. The possible triggering events that were under evaluation included the continued decline of stock price accompanied by the communication of Individual Minimum Capital Ratio requirements from the Office of the Comptroller of the Currency. This analysis was superseded as the announced merger provided an actual
fair value for the Corporation. No impairment was identified relating to the Corporation’s Wealth Management segment or other identifiable intangible assets as a part of this annual review.
The amortization of core deposit intangibles allocated to the Community Banking segment was $767,000 and $390,000 for the second quarter of 2009 and 2008, respectively, and $1.8 million and $795,000 for the six months ended June 30, 2009 and 2008, respectively. Amortization of identifiable intangibles related to the Wealth Management segment
totaled $262,000 and $131,000 for the second quarter of 2009 and 2008, respectively, and $525,000 and $292,000 for the six months ended June 30, 2009 and 2008, respectively. The Corporation estimates that aggregate amortization expense for core deposit and other identifiable intangibles will be $3.7 million, $3.3 million, $2.7 million, $2.3 million and $2.6 million for 2009, 2010, 2011, 2012 and 2103, respectively.
Mortgage servicing rights of $2.6 million and $1.6 million at June 30, 2009 and December 31, 2008, respectively are included on the Corporation’s balance sheet in other intangible assets and subsequently measured using the amortization method. The mortgage servicing rights had a fair value of $2.7 million and $1.6 million at June
30, 2009 and December 31, 2008, respectively. In accordance with the provisions of SFAS No.156, “Amending Accounting for Separately Recognized Servicing Assets and Liabilities” and SFAS No.
140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” the Corporation recorded a reduction of intangibles expense related to the valuation of its mortgage servicing
on its consolidated statements of operations of $608,000 and $100,000 during the second quarter of 2009 and 2008, respectively, and $1.1 million and $12,000 for the six months ended June 30, 2009 and 2008, respectively. The Corporation recorded amortization of mortgage servicing rights in intangibles expense on its consolidated statements of operations of $274,000 and $123,000 for the second quarter of 2009 and 2008, respectively, and $448,000 and $245,000 for the six months ended June 30, 2009 and 2008, respectively.
|
Note 5
–
Trust Preferred Subordinated Debentures
|
As of June 30, 2009, the Corporation has six statutory trust affiliates (collectively, the Trusts). These trusts were formed to issue mandatorily redeemable trust preferred securities to investors and loan the proceeds to the Corporation for general corporate purposes. The Trusts hold, as their sole assets, subordinated debentures of the
Corporation totaling $105.5 million at June 30, 2009 and December 31, 2008. The trust preferred securities represent undivided beneficial interests in the assets of the Trusts. The financial statement carrying value of the trust preferred subordinated debentures, net of a purchase accounting fair value adjustment of approximately $15.0 million from the acquisition of Willow Financial, is $93.8 million at June 30, 2009 and $93.7 million at December 31, 2008. The Corporation owns all of the trust preferred
securities of the Trusts and has accordingly recorded $3.3 million in other assets on the consolidated balance sheets at June 30, 2009 and December 31, 2008 representing its investment in the common securities of the Trusts. As the shareholders of the trust preferred securities are the primary beneficiaries, the Trusts qualify as variable interest entities under FIN 46R and are not consolidated in the Corporation’s financial statements.
The trust preferred securities require quarterly distributions to the holders of the trust preferred securities at a rate per annum equal to the interest rate on the debentures held by that trust. The Corporation has the right to defer payment of interest on the debentures, at any time or from time to time for a period not exceeding five
years, provided that no extension period may extend beyond the stated maturity of the debentures. During any such extension period, distributions on the trust securities will also be deferred, and the Corporation shall not pay dividends or distributions on, or redeem, purchase or acquire any shares of its capital stock.
The trust preferred securities must be redeemed upon the stated maturity dates of the subordinated debentures. The Corporation may redeem the debentures, in whole but not in part, (except for Harleysville Statutory Trust II and Willow Grove Statutory Trust I which may be redeemed in whole or in part) at any time within 90 days at the specified
special event redemption price following the occurrence of a capital disqualification event, an investment company event or a tax event as set forth in the indentures relating to the trust preferred securities and in each case subject to regulatory approval. For HNC Statutory Trust II, III and IV, East Penn Statutory Trust I and Willow Grove Statutory Trust I, the Corporation also may redeem the debentures, in whole or in part, at the stated optional redemption dates (after five years from the issuance date)
and quarterly thereafter, subject to regulatory approval if required. The optional redemption price is equal to 100% of the principal amount of the debentures being redeemed plus accrued and unpaid interest on the debentures to the redemption date. For Harleysville Statutory Trust I, the Corporation may redeem the debt securities, in whole or in part, at the stated optional redemption date of February 22, 2011 and semi-annually thereafter, subject to regulatory approval if required. The redemption price
on February 22, 2011 is equal to 105.10% of the principal amount, and declines annually to 100.00% on February 22, 2021 and thereafter, plus accrued and unpaid interest on the debentures to the redemption date. The Corporation’s obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Corporation of the Trust’s obligations under the trust preferred securities.
The following table is a summary of the subordinated debentures as of June 30, 2009 as originated by the Corporation and assumed from the acquisitions of Willow Financial and East Penn Financial:
Trust Preferred Subordinated Debentures
|
|
Principal Amount of Subordinated Debentures
|
|
|
Principal Amount of Trust Preferred Securities
|
|
|
|
(Dollars in thousands)
|
|
Issued to Harleysville Statutory Trust I in February 2001, matures in February 2031, interest rate of 10.20% per annum
|
|
$
|
5,155
|
|
|
$
|
5,000
|
|
Issued to HNC Statutory Trust II in March 2004, matures in April 2034, interest rate of three-month London Interbank Offered Rate (LIBOR) plus 2.70% per annum
|
|
|
20,619
|
|
|
|
20,000
|
|
Issued to HNC Statutory Trust III in September 2005, matures in November 2035, bearing interest at 5.67% per annum through November 2010 and thereafter three-month LIBOR plus 1.40% per annum
|
|
|
25,774
|
|
|
|
25,000
|
|
Issued to HNC Statutory Trust IV in August 2007, matures in October 2037, bearing interest at 6.35% per annum through October 2012 and thereafter three-month LIBOR plus 1.28% per annum
|
|
|
23,196
|
|
|
|
22,500
|
|
Issued to East Penn Statutory Trust I in July 2003, matures in September 2033, interest rate of 6.80% per annum through September 2008 and thereafter at three-month LIBOR plus 3.10% per annum
|
|
|
8,248
|
|
|
|
8,000
|
|
Issued to Willow Grove Statutory Trust I in March 2006, matures in June 2036, interest rate of three-month LIBOR plus 1.31% per annum
|
|
|
25,774
|
|
|
|
25,000
|
|
Total
|
|
$
|
108,766
|
|
|
$
|
105,500
|
|
Note 6 - Pension Plans
The Corporation had a non-contributory defined benefit pension plan covering substantially all employees. The plan’s benefits were based on years of service and the employee’s average compensation during any five consecutive years within the ten-year period preceding retirement. On October 31, 2007, the Corporation announced
that it formally amended its pension plan to provide for its termination. Employees ceased to accrue additional pension benefits as of December 31, 2007, and pension benefits are not being provided under a successor pension plan. All retirement benefits earned in the pension plan as of December 31, 2007 were preserved and all participants became fully vested in their benefits upon plan termination.
The Corporation recorded a one-time pre-tax charge related
to the pension plan curtailment of approximately $1.9 million in 2007.
On July 3, 2008, the Corporation purchased $896,000 of terminal funding annuity contracts for participants in pay status at that time. During 2008, the majority of assets were distributed to those participants that elected lump sum payments.
In March 2009, the Corporation made a final contribution of $371,000 to the pension plan, which together with the remaining plan assets, was utilized to purchase $435,000 in terminal funding annuity contracts for any remaining participants entering pay status. No further contributions are required to this pension plan.
The Corporation maintains a 401(k) defined contribution retirement savings plan which allows employees to contribute a portion of their compensation on a pre-tax and/or after-tax basis in accordance with specified guidelines. The Corporation previously matched 50% of pre-tax employee contributions up to a maximum of 3% and additionally
all eligible employees previously received a company funded basic contribution to the 401(k) plan equal to 2% of eligible earnings. On March 12, 2009, the Corporation’s Board of Directors approved an amendment to the 401(k) plan providing for the suspension of the Corporation’s basic and matching contributions effective for the April 17, 2009 employee bi-weekly pay period until further notice by the Board of Directors. The Corporation expects suspension of employer contributions will result in retirement-related
expense savings of approximately $1.8 million during 2009. Contribution charged to earnings for the three months ended June 30, 2009 and 2008, were $97,000 and $446,000, respectively, and for the six months ended June 30, 2009 and 2008 were $685,000 and $882,000, respectively.
Willow Financial Bank Employee Stock Ownership Plan
In connection with the acquisition of Willow Financial on December 5, 2008, the Corporation assumed the Willow Financial Bank 401(k)/ Employee Stock Ownership Plan (ESOP). As of December 5, 2008, the 401(k)/ESOP was frozen with termination and final distributions pending approval by the appropriate regulatory authorities. No additional contributions
to the plan will be accepted, but loan repayments by participants are permitted. At December 5, 2008, the ESOP portion of the plan had two outstanding loans with a total principal balance of $4.2 million due to Willow Financial Bancorp, Inc. The shares originally purchased with the loan funds were held in a suspense account for allocation among the participants as the loans are repaid. Shares released from the loan collateral were in an amount proportional to repayment of the original ESOP loans. At June 30,
2009, there were 324,113 unallocated ESOP shares remaining to be utilized to pay down the remaining loan principal balance. Upon repayment of the loans, any remaining shares will be allocated to the participants.
Note 7 – Authorized Shares of Common Stock and Dividend Reinvestment and Stock Purchase Plan
On May 12, 2009, the Corporation amended its Articles of Incorporation to increase the number of authorized shares of the Corporation’s common stock, par value, $1.00 per share, from 75,000,000 to 200,000,000 shares. The amendment was previously approved and adopted by the Corporation’s shareholders at the annual meeting of
shareholders held on April 28, 2009.
On March 12, 2009, the Corporation’s Board of Directors approved amendments to the Corporation’s Dividend Reinvestment and Stock Purchase Plan (DRIP) designed to provide additional benefits for existing shareholders. Beginning April 6, 2009, shareholders could reinvest all or part of their dividends in additional shares of
common stock or make additional cash investments for a minimum of $100 and up to $100,000 per calendar quarter, an increase from the prior quarterly limitation of $5,000. In addition, beginning April 6, 2009, existing shareholders could receive a ten percent discount to the market price of the Corporation’s shares on the date shares are purchased. The ten percent discount to the market price was available for all investments made in the Corporation’s shares through the Corporation’s DRIP. This
action was part of the Corporation’s ongoing capital enhancement program. On April 28, 2009, the Board of Directors suspended the DRIP until further notice.
Note 8
–
Stock-Based Compensation
The Corporation has four shareholder approved fixed stock option plans that allow the Corporation to grant options up to an aggregate of 3,797,861 shares of common stock to key employees and directors. At June 30, 2009, 2,579,179
stock options had been granted under the stock
option plans. The options have a term of ten years when issued and typically vest over a five-year period. The options granted during 2008 have a term of seven years and vest over three years.
The exercise price of each option is the market price of the Corporation’s stock on the date of grant. Additionally, at June 30, 2009, the Corporation had 556,506 assumed stock options from the Willow Financial acquisition completed in 2008. The options have
a term of ten years and are exercisable at prices ranging from $5.19 to $22.34. Also, at June 30, 2009, the Corporation had 25,480 assumed stock options from the East Penn Financial acquisition completed in 2007. The options have a term of ten years and are exercisable at prices ranging from $5.94 to $13.07.
The Corporation recognizes compensation expense for stock options in accordance with SFAS 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)) adopted at January 1, 2006 under the modified prospective application method of transition. Prior to January 1, 2006, the Corporation followed SFAS 123 and Accounting Principles Board
(APB) 25 with
pro forma
disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS 123 had been applied. The Corporation recognizes compensation expense for the portion of outstanding awards at January 1, 2006 for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 for pro forma disclosures. For the six months ended June
30, 2009 and 2008, there were no options granted.
Grants subject to a service condition were awarded by the Corporation in 2008 and 2006 while grants subject to a market condition were awarded in 2007. For grants subject to a service condition that were awarded on or after January 1, 2006, the Corporation utilizes the Black-Scholes option-pricing model (as used under SFAS 123) to estimate
the fair value of each option on the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option.
For grants subject to a market condition that were awarded in 2007, the Corporation utilized a Monte Carlo simulation to estimate the fair value and determine the derived service period. Compensation is recognized over the derived service period with any unrecognized compensation cost immediately recognized when the market condition is
met. These awards vest when the Corporation’s common stock reaches targeted average trading prices for 30 days within five years from the grant date. Vesting cannot commence before six months from the grant date. The term and exercise price of the options are the same as previously mentioned. The fair value and derived service period (the median period in which the market condition is met) were determined using a Monte Carlo simulation taking into consideration the weighted average dividend yield based
on historical data, weighted-average expected volatility based on historical data, the risk-free rate, the weighted average expected life of the option and a uniform post-vesting exercise rate (mid-point of vesting and contractual term).
Expected volatility is based on the historical volatility of the Corporation’s stock over the expected life of the grant. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury strip rate in effect at the time of the grant. The life of the option is based on historical factors which include
the contractual term, vesting period, exercise behavior and employee terminations.
In accordance with SFAS 123(R), stock-based compensation expense is based on awards that are ultimately expected to vest and therefore has been reduced for estimated forfeitures. The Corporation estimates forfeitures using historical data based upon the groups identified by management. Stock-based compensation expense was $76,000 and $38,000
for the three months ended June 30, 2009 and 2008, respectively, and $155,000 and $85,000, for the six months ended June 30, 2009 and 2008, respectively.
A summary of option activity under the Corporation’s stock option plans as of June 30, 2009, and changes during the six months ended June 30, 2009 is presented in the following table. The number of shares and weighted-average share information have been adjusted to reflect stock dividends.
Options
|
|
Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average Remaining Contractual Term
(in years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at January 1, 2009
|
|
|
1,648,723
|
|
|
$
|
15.28
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
(63,495
|
)
|
|
|
9.10
|
|
|
|
|
|
|
|
Forfeited (unvested)
|
|
|
(2,354
|
)
|
|
|
19.61
|
|
|
|
|
|
|
|
Cancelled (vested)
|
|
|
(
103,956
|
)
|
|
|
16.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009
|
|
|
1,478
,
918
|
|
|
$
|
15.46
|
|
|
|
3.77
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009
|
|
|
1,
218
,490
|
|
|
$
|
15.60
|
|
|
|
3.17
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8
–
Stock-Based Compensation
– Continued
The total intrinsic value of options exercised during the six months ended June 30, 2009 and 2008 were $269,000 and $180,000, respectively.
Intrinsic value is measured using the fair market value price of the Corporation’s common stock less the applicable exercise price.
A summary of the status of the Corporation’s nonvested shares as of June 30, 2009 is presented below:
Nonvested Shares
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
|
|
|
|
|
|
|
Nonvested at January 1, 2009
|
|
|
263,664
|
|
|
$
|
3.74
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(882
|
)
|
|
|
5.42
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,354
|
)
|
|
|
5.25
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2009
|
|
|
260,
428
|
|
|
$
|
3.72
|
|
As of June 30, 2009, there was a total of $691,000 of unrecognized compensation cost related to nonvested awards under stock option plans. This cost is expected to be recognized over a weighted-average period of 2.3 years. The total fair value of shares vested during the six months ended June 30, 2009 and 2008 was $5,000 and $20,000, respectively.
The tax benefit realized for the tax deductions from option exercises totaled $40,000 and $63,000 for the six months ended June 30, 2009 and 2008, respectively.
Note 9
–
(Loss) Earnings Per Share
Basic (loss) earnings per share excludes dilution and are computed by dividing (loss) income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share take into account the potential dilution that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.
The calculations of basic and diluted (loss) earnings per share are as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(Dollars in thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders
|
|
$
|
(222,503
|
)
|
|
$
|
7,327
|
|
|
$
|
(217,908
|
)
|
|
$
|
14,631
|
|
Weighted average common shares outstanding
|
|
|
43,080,849
|
|
|
|
31,359,011
|
|
|
|
43,035,945
|
|
|
|
31,352,922
|
|
Basic (loss) earnings per share
|
|
$
|
(5.17
|
)
|
|
$
|
0.24
|
|
|
$
|
(5.06
|
)
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders and assumed conversions
|
|
$
|
(222,503
|
)
|
|
$
|
7,327
|
|
|
$
|
(217,908
|
)
|
|
$
|
14,631
|
|
Weighted average common shares outstanding
|
|
|
43,080,849
|
|
|
|
31,359,011
|
|
|
|
43,035,945
|
|
|
|
31,352,922
|
|
Dilutive potential common shares
(1), (2)
|
|
|
—
|
|
|
|
162,597
|
|
|
|
—
|
|
|
|
169,107
|
|
Total diluted weighted average common shares outstanding
|
|
|
43,080,849
|
|
|
|
31,521,608
|
|
|
|
43,035,945
|
|
|
|
31,522,029
|
|
Diluted (loss) earnings per share
|
|
$
|
(5.17
|
)
|
|
$
|
0.23
|
|
|
$
|
(5.06
|
)
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes incremental shares from assumed conversions of stock options.
|
(2)
|
Antidilutive options have been excluded in the computation of diluted (loss) earnings per share because the options’ exercise prices were greater than the average market price of the common stock. For the three and six months ended June 30, 2009, there were 1,423,227 antidilutive options at an average price of $15.86. For the three and six months
ended June 30, 2008, there were 529,916 antidilutive options at an average price of $21.15, respectively.
|
Note 10 – Comprehensive (Loss) Income and Accumulated Other Comprehensive (Loss) Income
The components of other comprehensive (loss) income are as follows:
Comprehensive (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Before tax
|
|
|
Tax Benefit
|
|
|
Net of tax
|
|
Six months ended June 30, 2009
|
|
Amount
|
|
|
(Expense)
|
|
|
amount
|
|
Net unrealized losses on available for sale securities:
|
|
|
|
|
|
|
|
|
|
Net unrealized holding losses arising during period
|
|
$
|
(2,446
|
)
|
|
$
|
856
|
|
|
$
|
(1,590
|
)
|
Less reclassification adjustment for net gains realized in net income
|
|
|
6,897
|
|
|
|
(2,414
|
)
|
|
|
4,483
|
|
Less reclassification adjustment for other-than-temporary impairment of available for sale securities recognized in net income
|
|
|
(1,874
|
)
|
|
|
656
|
|
|
|
(1,218
|
)
|
Net unrealized losses
|
|
|
(7,469
|
)
|
|
|
2,614
|
|
|
|
(4,855
|
)
|
Change in fair value of derivatives used for cash flow hedges
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
Other comprehensive loss, net
|
|
$
|
(7,466
|
)
|
|
$
|
2,614
|
|
|
$
|
(4,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands
)
|
|
Before tax
|
|
|
Tax Benefit
|
|
|
Net of tax
|
|
Six months ended June 30, 2008
|
|
Amount
|
|
|
(Expense)
|
|
|
amount
|
|
Net unrealized losses on available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding losses arising during period
|
|
$
|
(21,479
|
)
|
|
$
|
7,518
|
|
|
$
|
(13,961
|
)
|
Less reclassification adjustment for net gains realized in net income
|
|
|
225
|
|
|
|
(79
|
)
|
|
|
146
|
|
Net unrealized losses
|
|
|
(21,704
|
)
|
|
|
7,597
|
|
|
|
(14,107
|
)
|
Change in fair value of derivatives used for cash flow hedges
|
|
|
111
|
|
|
|
(39
|
)
|
|
|
72
|
|
Other comprehensive loss, net
|
|
$
|
(21,593
|
)
|
|
$
|
7,558
|
|
|
$
|
(14,035
|
)
|
The components of other accumulated other comprehensive loss, net of tax, which is a component of shareholders’ equity were as follows:
(Dollars in thousands)
|
|
Net Unrealized Losses on Available For Sale Securities
|
|
|
Net Change in Fair Value of Derivatives Used for Cash Flow Hedges
|
|
|
Accumulated Other Comprehensive Loss
|
|
Balance, January 1, 2008
|
|
$
|
(2,452
|
)
|
|
$
|
(114
|
)
|
|
$
|
(2,566
|
)
|
Net Change
|
|
|
(14,107
|
)
|
|
|
72
|
|
|
|
(14,035
|
)
|
Balance, June 30, 2008
|
|
$
|
(16,559
|
)
|
|
$
|
(42
|
)
|
|
$
|
(16,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2009
|
|
$
|
(29,014
|
)
|
|
$
|
(3
|
)
|
|
$
|
(29,017
|
)
|
Net Change
|
|
|
(4,855
|
)
|
|
|
3
|
|
|
|
(4,852
|
)
|
Balance, June 30, 2009
|
|
$
|
(33,869
|
)
|
|
$
|
—
|
|
|
$
|
(33,869
|
)
|
No
te 11 – Segment Information
The Corporation operates two main lines of business along with several other operating segments. SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for public business enterprises to report information about operating segments. Operating segments are components of an enterprise,
which are evaluated regularly by the chief operating decision-maker in deciding how to allocate and assess resources and performance. The Corporation’s chief operating decision-maker is the President and Chief Executive Officer. The Corporation has applied the aggregation criteria set forth in SFAS No. 131 for operating segments establishing two reportable segments: Community Banking and Wealth Management.
The Community Banking segment provides financial services to consumers, businesses and governmental units primarily in southeastern Pennsylvania and the Lehigh Valley of Pennsylvania. These services include full-service banking, comprised of accepting time and demand deposits, making secured and unsecured commercial loans, mortgages, consumer
loans, and other banking services. The treasury function income is included in the Community Banking segment, as the majority of effort and activity of this function is related to this segment. Primary sources of income include net interest income and service fees on deposit accounts. Expenses include costs to manage credit and interest rate risk, personnel, and branch operational and technical support.
The Wealth Management segment includes: trust and investment management services, providing investment management, trust and fiduciary services, estate settlement and executor services, financial planning, and retirement plan and institutional investment services; employee benefits services; and the Cornerstone Companies, registered investment
advisors for high net worth, privately held business owners, wealthy families and institutional clients. Major revenue component sources include investment management and advisory fees, trust fees, estate and tax planning fees, brokerage fees, and insurance related fees. Expenses primarily consist of personnel and support
Note 11 – Segment Information – Continued
charges. Additionally, the Wealth Management segment includes an inter-segment credit related to trust deposits which are maintained within the Community Banking segment using a transfer pricing methodology.
The Corporation has also identified several other operating segments. These operating segments within the Corporation’s operations do not have similar characteristics to the Community Banking or Wealth Management segments and do not meet the quantitative thresholds requiring separate disclosure. These non-reportable segments include
HNC Reinsurance Company, HNC Financial Company, and the parent holding company and are included in the “Other” category.
Information about reportable segments and reconciliation of the information to the consolidated financial statements follows:
(Dollars in thousands)
|
|
Community Banking
|
|
|
Wealth Management
|
|
|
All Other
|
|
|
Consolidated Totals
|
|
Three Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense)
|
|
$
|
34,617
|
|
|
$
|
149
|
|
|
$
|
(1,313
|
)
|
|
$
|
33,453
|
|
Provision for loan losses
|
|
|
32,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,000
|
|
Noninterest income
|
|
|
16,690
|
|
|
|
4,979
|
|
|
|
42
|
|
|
|
21,711
|
|
Noninterest expense (1)
|
|
|
247,628
|
|
|
|
4,830
|
|
|
|
292
|
|
|
|
252,750
|
|
(Loss) income before income taxes
|
|
|
(228,321
|
)
|
|
|
298
|
|
|
|
(1,563
|
)
|
|
|
(229,586
|
)
|
Income tax (benefit) expense
|
|
|
(6,706
|
)
|
|
|
132
|
|
|
|
(509
|
)
|
|
|
(7,083
|
)
|
Net (loss) income
|
|
$
|
(221,615
|
)
|
|
$
|
166
|
|
|
$
|
(1,054
|
)
|
|
$
|
(222,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense)
|
|
$
|
26,284
|
|
|
$
|
144
|
|
|
$
|
(1,239
|
)
|
|
$
|
25,189
|
|
Provision for loan losses
|
|
|
3,107
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,107
|
|
Noninterest income
|
|
|
6,849
|
|
|
|
4,618
|
|
|
|
129
|
|
|
|
11,596
|
|
Noninterest expense
|
|
|
20,122
|
|
|
|
4,134
|
|
|
|
202
|
|
|
|
24,458
|
|
Income (loss) before income taxes
|
|
|
9,904
|
|
|
|
628
|
|
|
|
(1,312
|
)
|
|
|
9,220
|
|
Income taxes (benefit)
|
|
|
2,090
|
|
|
|
235
|
|
|
|
(432
|
)
|
|
|
1,893
|
|
Net income (loss)
|
|
$
|
7,814
|
|
|
$
|
393
|
|
|
$
|
(880
|
)
|
|
$
|
7,327
|
|
(Dollars in thousands)
|
|
Community Banking
|
|
|
Wealth Management
|
|
|
All Other
|
|
|
Consolidated Totals
|
|
Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense)
|
|
$
|
71,216
|
|
|
$
|
192
|
|
|
$
|
(2,651
|
)
|
|
$
|
68,757
|
|
Provision for loan losses
|
|
|
39,121
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,121
|
|
Noninterest income
|
|
|
28,521
|
|
|
|
9,400
|
|
|
|
(51
|
)
|
|
|
37,870
|
|
Noninterest expense (1)
|
|
|
281,262
|
|
|
|
9,665
|
|
|
|
444
|
|
|
|
291,371
|
|
(Loss) income before income taxes
|
|
|
(220,646
|
)
|
|
|
(73
|
)
|
|
|
(3,146
|
)
|
|
|
(223,865
|
)
|
Income tax (benefit) expense
|
|
|
(4,902
|
)
|
|
|
(8
|
)
|
|
|
(1,047
|
)
|
|
|
(5,957
|
)
|
Net (loss) income
|
|
$
|
(215,744
|
)
|
|
$
|
(65
|
)
|
|
$
|
(2,099
|
)
|
|
$
|
(217,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
5,168,889
|
|
|
$
|
34,784
|
|
|
$
|
6,654
|
|
|
$
|
5,210,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense)
|
|
$
|
51,785
|
|
|
$
|
149
|
|
|
$
|
(2,538
|
)
|
|
$
|
49,396
|
|
Provision for loan losses
|
|
|
5,067
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,067
|
|
Noninterest income
|
|
|
13,205
|
|
|
|
8,933
|
|
|
|
290
|
|
|
|
22,428
|
|
Noninterest expense
|
|
|
39,690
|
|
|
|
7,930
|
|
|
|
556
|
|
|
|
48,176
|
|
Income (loss) before income taxes
|
|
|
20,233
|
|
|
|
1,152
|
|
|
|
(2,804
|
)
|
|
|
18,581
|
|
Income taxes (benefit)
|
|
|
4,397
|
|
|
|
434
|
|
|
|
(881
|
)
|
|
|
3,950
|
|
Net income (loss)
|
|
$
|
15,836
|
|
|
$
|
718
|
|
|
$
|
(1,923
|
)
|
|
$
|
14,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
3,842,721
|
|
|
$
|
25,003
|
|
|
$
|
14,508
|
|
|
$
|
3,882,232
|
|
|
(1) Includes a $214.5 million goodwill impairment charge related to the Community Banking segment. See Note 4 – Goodwill and Other Intangibles for additional information.
|
The accounting policies of the segments are the same as those described in the summary of significant accounting policies disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008. Consolidating adjustments reflecting certain eliminations of inter-segment revenues, cash and investment in subsidiaries
are included in the “All Other” segment.
Note 12 – Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.
Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
As required by SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133, as amended), the Bank records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Bank has elected to
designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash
flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Bank may enter into derivative contracts that are intended to economically
hedge certain of its risks, even though hedge accounting does not apply or the Bank elects not to apply hedge accounting under SFAS 133.
The Bank’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amounts of those instruments. The Bank uses the same stringent credit policies in extending these commitments
as they do for recorded financial instruments and controls exposure to loss through credit approval and monitoring procedures. These commitments often expire without being drawn upon and often are secured with appropriate collateral; therefore, the total commitment amount does not necessarily represent the actual risk of loss or future cash requirements.
The approximate contract amounts are as follows:
|
|
Total Amount Committed at
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Financial instruments whose contract amounts represent credit risk:
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
853,253
|
|
|
$
|
995,125
|
|
Standby letters of credit and financial guarantees written
|
|
|
45,695
|
|
|
|
34,806
|
|
Financial instruments whose notional or contract amounts exceed the amount of credit risk:
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
|
198,078
|
|
|
|
124,214
|
|
Interest rate cap agreements
|
|
|
—
|
|
|
|
200,000
|
|
Note 12 – Financial Instruments with Off-Balance Sheet Risk – Continued
The table below presents the fair value of the Bank’s derivative financial instruments as well as their classification on the consolidated balance sheets as of June 30, 2009 and December 31, 2008:
|
Asset Derivatives
|
|
Liability Derivatives
|
|
(Dollars in thousands)
|
As of June 30, 2009
|
|
As of December 31, 2008
|
|
As of June 30, 2009
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Balance Sheet Classification
|
|
Fair Value
|
|
Derivatives designated as hedging instruments under SFAS 133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Products
|
Other Assets
|
|
$
|
—
|
|
Other Assets
|
|
$
|
—
|
|
Other Liabilities
|
|
$
|
195
|
|
Other Liabilities
|
|
$
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments under SFAS 133
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
195
|
|
|
|
$
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not
designated as hedging instruments under SFAS 133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Products
|
Other Assets
|
|
$
|
3,335
|
|
Other Assets
|
|
$
|
4,523
|
|
Other Liabilities
|
|
$
|
3,384
|
|
Other Liabilities
|
|
$
|
5,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
not
designated as hedging instruments under SFAS 133
|
|
|
$
|
3,335
|
|
|
|
$
|
4,523
|
|
|
|
$
|
3,384
|
|
|
|
$
|
5,294
|
|
The Bank is exposed to changes in the fair value of certain of its fixed rate assets due to changes in benchmark interest rates. The Bank uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges
involve the receipt of variable-rate amounts from a counterparty in exchange for the Bank making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2009, the Bank had a fair value hedge in the form of an interest rate swap with a current notional amount of $1.9 million which matures in 2017. In addition, four fair value hedges with current notional amounts totaling $7.2 million were acquired from Willow Financial with maturity dates ranging
from 2013 to 2016. These swaps do not qualify for hedge accounting treatment and thus all changes in the fair value of the derivatives is recorded in the consolidated statements of operations. As such, based on the increase in the market value of these interest rate swaps, the Corporation recognized a gain of $253,000 and $298,000 in other income in the consolidated statements of operations for the three and six months ended June 30, 2009, respectively.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Bank includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related
derivatives.
Derivatives not designated as hedges are not speculative and result from a service the Bank provides to certain customers. The Bank executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting
interest rate swaps that the Bank executes with a third party, such that the Bank
minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements of SFAS 133, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2009, the Bank had 46 interest
rate swaps with an aggregate current notional amount of $189.0 million related to this program with maturity dates ranging from 2010 to 2018.
Note 12 – Financial Instruments with Off-Balance Sheet Risk – Continued
The tables below present the effect of the Bank’s derivative financial instruments on the consolidated statements of operations for the three and six months ended June 30, 2009 and 2008:
Derivatives in SFAS 133 Fair Value Hedging Relationships
|
Classification of Gain/(Loss) Recognized on Derivative
|
|
Gain/(Loss) Recognized on Derivative
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(Dollars in thousands)
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Products
|
Interest income
|
|
$
|
(23
|
)
|
|
$
|
(27
|
)
|
|
$
|
(46
|
)
|
|
$
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
(23
|
)
|
|
$
|
(27
|
)
|
|
$
|
(46
|
)
|
|
$
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments Under SFAS 133
|
Classification of Gain/(Loss) Recognized on Derivative
|
|
Gain/(Loss) Recognized on Derivative
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(Dollars in thousands)
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Products
|
Interest income
|
|
$
|
(69
|
)
|
|
$
|
—
|
|
|
$
|
(150
|
)
|
|
$
|
—
|
|
|
Other income
|
|
|
455
|
|
|
|
112
|
|
|
|
723
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
386
|
|
|
$
|
112
|
|
|
$
|
573
|
|
|
$
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank is exposed to certain risks arising from both its business operations and economic conditions. The Bank principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Bank manages economic risks, including interest rate, liquidity, and credit risk,
primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Bank enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Bank’s derivative financial instruments are used to manage differences in the amount, timing, and duration of
the Bank’s known or expected cash receipts and its known or expected cash payments principally related to certain variable rate loan assets and variable rate borrowings.
The Bank has agreements with each of its derivative counterparties that contain a provision where if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations. The Bank has agreements
with some of its derivative counterparties that contain provisions that require the Bank’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the Bank’s credit rating is reduced below investment grade then, the Bank may be required to fully collateralize its obligations under the derivative instrument. Certain of the Bank's agreements with some of its derivative counterparties contain provisions where if a specified event or condition occurs that materially
changes the Bank's creditworthiness in an adverse manner, the Bank may be required to fully collateralize its obligations under the derivative instrument. The Bank has agreements with certain of its derivative counterparties that contain a provision where if the Bank fails to maintain its status as a well / adequate capitalized institution, then the Bank could be required to settle its obligation under the agreements.
As of June 30, 2009, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $3.8 million. As of June 30, 2009, the Bank has minimum collateral posting thresholds with certain of its derivative counterparties and has
posted collateral of $3.2 million against its obligations under these agreements.
Note 12 – Financial Instruments with Off-Balance Sheet Risk – Continued
The Bank also had commitments with customers to extend mortgage loans at a specified rate at June 30, 2009 and 2008 of $36.1 million and $360,000, respectively, and commitments to sell mortgage loans at a specified rate at June 30, 2009 and 2008 of $119.7 million and $175,000, respectively. The commitments are accounted for as a derivative
and recorded at fair value. The Bank estimates the fair value of these commitments by comparing the secondary market price at the reporting date to the price specified in the contract to extend or sell the loan initiated at the time of the loan commitment. At June 30, 2009, the Corporation had commitments with a positive fair value of $1.4 million and negative fair value of $205,000 which were recorded in other income on the consolidated statements of operations. At June 30, 2008, the Corporation had commitments
with a positive fair value of $2,000 which was recorded in other income on the consolidated statements of operations.
Note 13 – Fair Value Measurements
Effective January 1, 2008, the Corporation adopted SFAS No. 157, which defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction
between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement. There have been no material changes in
valuation techniques as a result of the adoption of SFAS No. 157.
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active for identical or similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term
of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and significant to the fair value of the assets or liabilities that are developed using the reporting entities’ estimates and assumptions, which reflect those that market participants would use.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
A description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the classification of the instruments pursuant to the valuation hierarchy, are as follows:
Securities Available for Sale
Securities classified as available for sale are reported using Level 1, Level 2 and Level 3 inputs. Level 1 instruments generally include equity securities valued based on quoted market prices in active markets. Level 2 instruments include U.S. government agency obligations, state and municipal bonds, mortgage-backed securities, collateralized
mortgage obligations and corporate bonds. For these securities, the Corporation obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. Level 3 instruments include certain collateralized debt obligations
and collateralized mortgage obligations that were valued using a discounted cash flow model prepared by third party investment valuation specialists. See Note 4 – Investment Securities for additional information.
Residential Mortgage Loans Held for Sale
Residential mortgage loans originated and intended for sale in the secondary market are carried at estimated fair value. The Corporation estimates the fair value of mortgage loans held for sale using current secondary loan market rates. The Corporation has determined that the inputs used to value its mortgage loans held for sale fall within
Level 2 of the fair value hierarchy.
Derivative Financial Instruments
Currently, the Corporation uses cash flow hedges, fair value hedges and interest rate caps to manage its interest rate
risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash
flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts)
are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
Note 13 – Fair Value Measurements
– Continued
The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below (rise above) the strike rate of the floors (caps). The variable interest rates used in the calculation of projected receipts on the floor (cap)
are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.
To comply with the provisions of SFAS No. 157, the Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance
risk, the Corporation has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its
counterparties. However, as of June 30, 2009, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The Corporation also has commitments with customers to extend mortgage loans at a specified rate and commitments to sell mortgage loans at a specified rate. These interest rate and forward contracts for mortgage loans originated and intended for sale in the secondary market are accounted for as derivatives and carried at estimated fair
value. The Corporation estimates the fair value of the contracts using current secondary loan market rates. The Corporation has determined that the inputs used to value its interest rate and forward contracts fall within Level 2 of the fair value hierarchy.
Assets and liabilities measured at fair value on a recurring basis are summarized below.
|
|
Fair Value Measurement Using
|
|
|
|
|
(Dollars in thousands)
|
|
Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Balance
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government agencies and corporations
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
500
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
284,658
|
|
|
|
—
|
|
|
|
284,658
|
|
Residential mortgage-backed securities
|
|
|
—
|
|
|
|
697,429
|
|
|
|
9,036
|
|
|
|
706,465
|
|
Trust preferred pools/collateralized debt obligations
|
|
|
—
|
|
|
|
11,139
|
|
|
|
221
|
|
|
|
11,360
|
|
Corporate bonds
|
|
|
—
|
|
|
|
8,259
|
|
|
|
—
|
|
|
|
8,259
|
|
Equity securities
|
|
|
21,062
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,062
|
|
Total investment securities available for sale:
|
|
|
21,062
|
|
|
|
1,001,985
|
|
|
|
9,257
|
|
|
|
1,032,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans held for sale
|
|
|
—
|
|
|
|
84,778
|
|
|
|
—
|
|
|
|
84,778
|
|
Derivatives
|
|
|
—
|
|
|
|
4,729
|
|
|
|
—
|
|
|
|
4,729
|
|
Total assets
|
|
$
|
21,062
|
|
|
$
|
1,091,492
|
|
|
$
|
9,257
|
|
|
$
|
1,121,811
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
—
|
|
|
$
|
3,783
|
|
|
$
|
—
|
|
|
$
|
3,783
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
3,783
|
|
|
$
|
—
|
|
|
$
|
3,783
|
|
Note 13 – Fair Value Measurements
– Continued
Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The table below presents a reconciliation of assets measured at fair value on a recurring basis for which the Corporate has utilized significant unobservable inputs (Level 3).
(Dollars in thousands)
|
|
Residential mortgage-backed securities
|
|
|
Trust preferred pools/
collateralized debt obligations
|
|
Total Investment Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2009
|
|
$
|
—
|
|
|
$
|
3,149
|
|
$
|
3,149
|
|
Transfers into Level 3
|
|
|
14,904
|
|
|
|
—
|
|
|
14,904
|
|
Total losses realized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings(1)
|
|
|
(683
|
)
|
|
|
(990
|
)
|
|
(1,673
|
)
|
Included in other comprehensive income
|
|
|
(4,824
|
)
|
|
|
(1,938
|
)
|
|
(6,762
|
)
|
Payments
|
|
|
(361
|
)
|
|
|
—
|
|
|
(361
|
)
|
Balance, June 30, 2009
|
|
$
|
9,036
|
|
|
$
|
221
|
|
$
|
9,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses included in earnings from January 1, 2009 to June 30, 2009 relating to assets still held at June 30, 2009
|
|
$
|
(683
|
)
|
|
$
|
(990
|
)
|
$
|
(1,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized losses relating to assets still held at June 30, 2009
|
|
|
(4,824
|
)
|
|
|
(1,938
|
)
|
|
(6,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The loss is reported in net other-than-temporary impairment losses recognized in earnings on investments securities available for sale in the consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Measured at Fair Value on a Nonrecurring Basis
A description of the valuation methodologies and classification levels used for financial instruments measured at fair value on a nonrecurring basis are listed below. These listed instruments are subject to fair value adjustments (impairment) as they are valued at the lower of cost or market.
Impaired Loans
Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Individually impaired loans are measured based on the fair value of the collateral for collateral dependent loans. The value of the collateral is determined based on an appraisal by qualified licensed appraisers
hired by the Corporation or other observable market data which is readily available in the marketplace. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. At June 30, 2009, impaired loans had a carrying amount of $151.1 million with a valuation allowance of $25.5 million. Impaired loans with a carrying amount of $147.8 million were evaluated during the six months of 2009 using the practical expedient fair value measurement which resulted
in an additional valuation allowance of $17.6 million as compared to December 31, 2008.
Goodwill and Other Identifiable Intangibles
The Corporation employs general industry practices in evaluating the fair value of its goodwill and other identifiable intangibles. The Corporation calculates the fair value, with the assistance of a third party specialist, using a combination of the following valuation methods: dividend discount analysis under the income approach, which
calculates the present value of all excess cash flows plus the present value of a terminal value and market multiples (pricing ratios) under the market approach. In 2009, management performed its annual review of goodwill and other identifiable intangibles in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Management performed its review by reporting unit and identified goodwill impairment
for the Community Banking segment of $214.5 million. This impairment resulted from the decrease in market value caused by underlying capital and credit concerns and was determined based upon the announced sale price of the Corporation to First Niagara for $5.50 per share. No impairment was identified relating to the Corporation’s Wealth Management segment or to other identifiable intangible assets as a part of this annual review. The provisions of FSP FAS 157-2 were applied to the Corporation’s fair
value measurement of its goodwill and identifiable intangibles commencing January 1, 2009. The application of this FSP did not have a material impact on the Corporation’s financial statements.
Note 13 – Fair Value Measurements
– Continued
Mortgage Servicing Rights
The Corporation estimates the fair value of mortgage servicing rights based upon the present value of future cash flows using a current market discount rate appropriate for each investor group. Some of the primary components in valuing a servicing portfolio are estimates of anticipated prepayment, current market yields for servicing, reinvestment
rate, servicing spread retained on the loans, and the cost to service each loan.
The Corporation’s entire portfolio consists of fixed rate loans with a remittance type of schedule/actual and a weighted average servicing fee of .25%. The market value calculation was based on long term prepayment assumptions obtained from Bloomberg for similar pools based on original term, remaining term, and coupon. Where prepayment
assumptions for loan pools could not be obtained, projections based on current prepayments, secondary loan market, and input from servicing buyers were used. The Corporation has determined that the inputs used to value its mortgage servicing rights fall within Level 2 of the fair value hierarchy. At June 30, 2009, the Corporation’s mortgage servicing rights had a carrying amount of $2.7 million. In accordance with the provisions of SFAS No.156, “Amending Accounting for Separately Recognized Servicing
Assets and Liabilities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” mortgage servicing rights are recorded at lower of cost or market.
Certain assets measured at fair value on a non-recurring basis are presented below:
|
|
Fair Value Measurement Using
|
|
(Dollars in thousands)
|
|
Quoted Prices in Active Markets for Identical Assets/Liabilities
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Balance
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
—
|
|
|
$
|
122,676
|
|
|
$
|
—
|
|
|
$
|
122,676
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
27,031
|
|
|
|
27,031
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
122,676
|
|
|
$
|
27,031
|
|
|
$
|
149,707
|
|
Disclosures about Fair Value of Financial Instruments
SFAS No. 107-1, “Interim Disclosures about Fair Values of Financial Instruments,” (SFAS 107) requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For the Corporation, as for most financial institutions, the majority of its assets and liabilities
are considered financial instruments as defined in SFAS 107. However, many such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Also, it is the Corporation’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities, except for certain loans and investments. Therefore, the Corporation had to use significant estimates and present value calculations to prepare
this disclosure.
Changes in the assumptions or methodologies used to estimate fair values may materially affect the estimated amounts. Also, management is concerned that there may not be reasonable comparability between institutions due to the wide range of permitted assumptions and methodologies in the absence of active markets. This lack of uniformity
gives rise to a high degree of subjectivity in estimating financial instrument fair values.
Estimated fair values have been determined by the Corporation using the best available data and an estimation methodology suitable for each category of financial instruments. The estimation methodologies used at June 30, 2009 and December 31, 2008 are outlined below. The methodologies for estimating the fair value of financial assets
and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed in the fair value measurements section above. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and financial liabilities are discussed below:
Short-term financial instruments
The carrying value of short-term financial instruments including cash and due from banks, federal funds sold and securities purchased under agreements to resell, interest-bearing deposits in banks and other short-term investments and borrowings, approximates the fair value of these instruments. These financial instruments generally expose
the Corporation to limited credit risk and have no stated maturities or have short-term maturities with interest rates that approximate market rates.
Note 13 – Fair Value Measurements
– Continued
Investment securities held to maturity
The estimated fair values of investment securities held to maturity are based on quoted market prices, provided by independent third parties that specialize in those investment sectors. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable instruments.
Loans
The loan portfolio, net of unearned income, has been valued by a third party specialist using quoted market prices, if available. When market prices were not available, a credit risk based present value discounted cash flow analysis was utilized. The primary assumptions utilized in this analysis are the discount rate based on the libor
curve, adjusted for credit risk, and prepayment estimates based on factors such as refinancing incentives, age of the loan and seasonality. These assumptions were applied by loan category and different spreads were applied based upon prevailing market rates by category.
Deposits
The estimated fair values of demand deposits (i.e., interest and noninterest-bearing checking accounts, savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair value for certificates of deposit was calculated by an independent third party
by discounting contractual cash flows using current market rates for instruments with similar maturities, using a credit based risk model. The carrying amount of accrued interest receivable and payable approximates fair value.
Long-term borrowings and subordinated debt
The amounts assigned to long-term borrowings and subordinated debt were based on quoted market prices, when available, or were based on discounted cash flow calculations using prevailing market interest rates for debt of similar terms.
|
The carrying and fair values of certain financial instruments were as follows:
|
|
|
|
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
|
Fair
Value
|
|
|
|
(Dollars in thousands)
|
Cash and cash equivalents
|
|
$
|
414,060
|
|
|
$
|
414,060
|
|
|
$
|
102,526
|
|
|
$
|
102,526
|
|
Investment securities available for sale
|
|
|
1,032,304
|
|
|
|
1,032,304
|
|
|
|
1,141,948
|
|
|
|
1,141,948
|
|
Investment securities held to maturity
|
|
|
33,363
|
|
|
|
32,908
|
|
|
|
50,434
|
|
|
|
50,059
|
|
Residential mortgage loans held for sale
|
|
|
84,778
|
|
|
|
84,778
|
|
|
|
17,165
|
|
|
|
17,165
|
|
Loans and leases, net
|
|
|
3,284,148
|
|
|
|
3,169,366
|
|
|
|
3,618,124
|
|
|
|
3,591,202
|
|
Bank-owned life insurance
|
|
|
88,631
|
|
|
|
88,631
|
|
|
|
87,081
|
|
|
|
87,081
|
|
Time deposits
|
|
|
1,574,544
|
|
|
|
1,592,390
|
|
|
|
1,588,921
|
|
|
|
1,613,684
|
|
Long-term borrowings
|
|
|
694,586
|
|
|
|
729,886
|
|
|
|
759,658
|
|
|
|
809,618
|
|
Subordinated debt
|
|
|
93,784
|
|
|
|
48,103
|
|
|
|
93,743
|
|
|
|
50,474
|
|
Note 14 – Subsequent Event
On July 27, 2009, the Corporation and First Niagara Financial Group, Inc. (“First Niagara”), the holding company for First Niagara Bank, announced that they had entered into an Agreement and Plan of Merger (“Merger Agreement”), dated July 26, 2009, which sets forth the terms and conditions pursuant to which the
Corporation will merge into First Niagara in a transaction valued at approximately $237 million. Under the terms of the Merger Agreement, stockholders of the Corporation will receive 0.474 shares of First Niagara stock for each share of common stock they own, representing a premium of about 37.5% based on the Corporation’s closing price on July 24, 2009 of $4.00 per share. The exchange ratio is based on First Niagara’s five-day average closing stock price of $11.60 on July 22, 2009. The exchange ratio
is subject to adjustment under certain circumstances if loan delinquencies at the Corporation exceed specified amounts. The Corporation recorded a goodwill impairment charge of $214.5 million,
resulting from the decrease in market value
caused by underlying capital and credit concerns which was valued through the merger agreement. The impairment effectively constituted the difference between the sale price of the Corporation to First Niagara for $5.50 per
share, which established the fair value of the Corporation, compared to the Corporation’s book value per share of $10.75 prior to the impairment charge with further evaluation through the Corporation’s step two goodwill analysis. See Note 4 – Goodwill and Other intangibles for further information.
Note 14 – Subsequent Event - Continued
The Board of Directors of the Corporation and First Niagara have approved the Merger Agreement, but the transaction remains subject to regulatory approval and other customary closing conditions, as well as the approval of the Corporation’s shareholders. The
merger is intended to qualify as reorganization for federal income tax purposes, such that shares of the Corporation exchanged for shares of First Niagara will be issued to the Corporation’s shareholders on a tax-free basis. It is expected that the transaction will be completed in the first quarter of 2010.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 Harleysville National Corporation (the Corporation) and its wholly owned subsidiaries-Harleysville National Bank (the Bank),
HNC Financial Company and HNC Reinsurance Company. The Corporation’s consolidated financial condition and results of operations consist almost entirely of the Bank’s financial condition and results of operations. Current performance does not guarantee, and may not be indicative, of similar performance in the future. These are unaudited financial statements and, as such, are subject to year-end audit review.
Within this Form 10-Q, management may make projections and forward-looking statements regarding events or the future financial performance of Harleysville National Corporation. We wish to caution you that these forward-looking statements involve certain risks and uncertainties, including a variety of factors that may cause Harleysville
National Corporation’s actual results to differ materially from the anticipated results expressed in these forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ include, but are not limited to, the following: inability to achieve merger-related synergies, the strategic initiatives and business plans may not be satisfactorily completed or executed, if at all; increased demand or prices for the Corporation’s financial services
and products may not occur; changing economic and competitive conditions; technological developments; the effectiveness of the Corporation’s business strategy due to changes in current or future market conditions; effects of deterioration of economic conditions on customers specifically the effect on loan customers to repay loans; inability of the Corporation to raise or achieve desired or required levels of capital; the effects of competition, and of changes in laws and regulations, including industry
consolidation and development of competing financial products and services; interest rate movements; relationships with customers and employees; challenges in establishing and maintaining operations; volatilities in the securities markets; and deteriorating economic conditions and other risks and uncertainties, including those detailed in the Corporation’s filing with the Securities and Exchange Commission.
When we use words such as “believes”, “expects”, “anticipates”, or similar expressions, we are making forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements and are also advised to review the risk factors that may affect Harleysville National
Corporation’s operating results in documents filed by Harleysville National Corporation with the Securities and Exchange Commission, including the Quarterly Report on Form 10-Q, the Annual Report on Form 10-K, and other required filings. Harleysville National Corporation assumes no duty to update the forward-looking statements made in this Form 10-Q.
Shareholders should note that many factors, some of which are discussed elsewhere in this report and in the documents that we incorporate by reference, could affect the future financial results of the Corporation and its subsidiaries and could cause those results to differ materially from those expressed or implied in our forward-looking
statements contained or incorporated by reference in this document
.
These factors include but are not limited to those described in Item 1A, “Risk Factors” in the Corporation’s 2008 Annual Report on Form 10-K and in this Form 10-Q.
Critical Accounting Estimates
The accounting and reporting policies of the Corporation and its subsidiaries conform with U.S. generally accepted accounting principles (GAAP). The Corporation’s significant accounting policies are described in Note 1 of the consolidated financial statements in this Form 10-Q and in the Corporation’s 2008 Annual Report
on Form 10-K and are essential in understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. In applying accounting policies and preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheets and the income and expense in the income statements for the periods presented. Therefore, actual results could differ significantly from
those estimates. Judgments and assumptions required by management, which have, or could have a material impact on the Corporation’s financial condition or results of operations are considered critical accounting estimates. The following is a summary of the policies the Corporation recognizes as involving critical accounting estimates: Allowance for Loan Loss, Goodwill and Other Intangible Asset Impairment, Stock-Based Compensation, Fair Value Measurement of Investment Securities Available for Sale, and
Deferred Taxes.
Allowance for Loan Losses: The Corporation maintains an allowance for loan losses at a level management believes is sufficient to absorb estimated probable credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation
is inherently subjective as it requires significant estimates by management. Consideration is given to a variety of factors in establishing these estimates including historical losses, current and anticipated economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers’ perceived financial and management strengths, the adequacy of underlying collateral, the dependence on collateral, or the strength of the present value of future cash flows
and other relevant factors. These factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required which may adversely affect the Corporation’s results of operations in the future.
Goodwill and Other Intangible Asset Impairment: Goodwill and other intangible assets are reviewed for potential impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment, in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets and SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets.” Goodwill is tested for impairment at the reporting unit level and an impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Corporation employs general industry practices in evaluating the fair value of its goodwill and other intangible assets. The Corporation calculates the fair value, with the assistance of a third party specialist, using a combination of the following valuation methods: dividend
discount analysis under the income approach, which calculates the present value of all excess cash flows plus the present value of a terminal value and market multiples (pricing ratios) under the market approach. In 2009, management performed its annual review of goodwill and other identifiable intangibles in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Management performed its review
by reporting unit and identified goodwill impairment for the Community Banking segment of $214.5 million. This impairment resulted from the decrease in market value caused by underlying capital and credit concerns and was determined based upon the announced sale price of the Company to First Niagara for $5.50 per share. As the Corporation’s annual analysis is performed using March 31 balances, the subsequent stock price decline and a June 2009 communication of Individual Minimum Capital Ratio
requirements from the Office of the Comptroller of the Currency resulted in a subsequent impairment evaluation. This analysis was superseded as the announced merger provided an actual fair value for the Company. No impairment was identified relating to the Corporation’s Wealth Management segment or other identifiable intangible assets as a part of this annual review. No assurance can be given that future impairment tests will not result in a charge to earnings.
Stock-based Compensation: The Corporation recognizes compensation expense for stock options in accordance with SFAS 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)) adopted at January 1, 2006 under the modified prospective application method of transition. The expense of the option is generally measured at fair value
at the grant date with compensation expense recognized over the service period, which is usually the vesting period. The Corporation utilizes the Black-Scholes option-pricing model (as used under SFAS 123) to estimate the fair value of each option on the date of grant. The Black-Scholes model takes into consideration the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current risk-free interest
rate for the expected life of the option. For grants subject to a market condition, the Corporation utilizes a Monte Carlo simulation to estimate the fair value and determine the derived service period. Compensation is recognized over the derived service period with any unrecognized compensation cost immediately recognized when the market condition is met. The Corporation’s estimate of the fair value of a stock option is based on expectations derived from historical experience and may not necessarily equate
to its market value when fully vested. In accordance with SFAS 123(R), the Corporation estimates the number of options for which the requisite service is expected to be rendered.
Fair Value Measurement of Investment Securities Available for Sale:
The Corporation receives estimated fair values of debt securities from independent valuation services and brokers. In developing these fair values, the valuation services and brokers use estimates of cash
flows based on historical performance of similar instruments in similar rate environments. Debt securities available for sale are mostly comprised of mortgage-backed securities as well as tax-exempt municipal bonds and U.S. government agency securities. The Corporation uses various indicators in determining whether a security is other-than-temporarily impaired, including for equity securities, if the market value is below its cost for an extended period of time with low expectation of recovery or for debt securities,
when it is probable that the contractual interest and principal will not be collected. The debt securities are monitored for changes in credit ratings, collateral adequacy, and the existence of deferrals or defaults. Adverse changes to any of these factors would affect the estimated cash flows of the underlying collateral or issuer. Effective for the three months ended June 30, 2009, for securities deemed to be other than temporarily impaired, the Corporation uses cash flow modeling to determine the credit related
portion of the loss. This credit portion is recognized through earnings while the remaining impairment amount is recognized through other comprehensive income. The Corporation recognized other-than-temporary impairment charges of $530,000 during the second quarter of 2009 as a result of deterioration in credit quality of two collateralized mortgage obligation investments. The unrealized losses associated with the securities portfolio, that management has the ability and intent to hold, are not considered to be
other-than temporary as of June 30, 2009 because the unrealized losses are primarily related to changes in interest rates and current market conditions, however, we do not see any negative effect on the expected cash flows of the underlying collateral or issuer. The unrealized losses are affecting all portfolio sectors with collateralized mortgage obligation securities and pooled trust preferred securities having the largest reductions.
Deferred Taxes: The Corporation recognizes deferred tax assets and liabilities for the future effects of temporary differences, net operating loss carryforwards, and tax credits. Deferred tax assets are subject to management’s judgment based upon available evidence that future realizations are likely. If management determines that
the Corporation may not be able to realize some or all of the net deferred tax asset in the future, a charge to income tax expense may be required to reduce the value of the net deferred tax asset to the expected realizable value.
The Corporation has not substantively changed its application of the foregoing policies, and there have been no material changes in assumptions or estimation techniques used as compared to prior periods.
Financial Overview
The Corporation reported a net loss of $222.5 million, or $5.17 per diluted share for the second quarter of 2009, which included a $214.5 million goodwill impairment charge. This compares to net income of $7.3 million, or $0.23 per diluted share for the second quarter of 2008. For the six months ended June 30, 2009, the net loss from operations
was $217.9 million or $5.06 per diluted share, compared to net income of $14.6 million or $.46 per diluted share during the comparable period in 2008.
The second quarter and year-to-date 2009 loss from operations was driven by a non-cash goodwill impairment charge of $214.5 million, resulting from the decrease in market value caused by underlying capital and credit concerns which was valued through the Agreement and Plan of Merger dated July 26, 2009 between First Niagara Financial Group,
Inc. (“First Niagara”) and the Corporation in which the Corporation will be merged into First Niagara. The impairment effectively constituted the difference between the sale price of the Corporation to First Niagara for $5.50 per share, which established the fair value of the Corporation, compared to the Corporation’s book value per share of $10.75 prior to the impairment charge with further evaluation through the Corporation’s step two goodwill analysis. Also contributing
to the quarterly loss was a provision for credit losses of $32.0 million; and a one-time FDIC special assessment of $2.6 million; partially offset by a $4.9 million gain on the sale of investment securities.
The 2009 year-to-date financial results include the impact on operations from the acquisition of Willow Financial effective December 5, 2008 and the related issuance of 11,515,366 shares of the Corporation’s common stock. The following is an overview of the key financial highlights:
Total assets were $5.2 billion at June 30, 2009, an increase of $1.3 billion or 34.2% from $3.9 billion at June 30, 2008. Loans were $3.4 billion, an increase of $937.3 million or 37.5% from $2.5 billion at June 30, 2008. Deposits were $4.0 billion, up $1.1 billion or 39.5% from $2.9 billion at June 30, 2008.
On
the acquisition date, Willow Financial had approximately $1.6 billion in assets, $1.1 billion in loans and $946.7 million in deposits. Total assets at June 30, 2009 decreased $280.2 million, or 5.1%, as compared to total assets reported at the year ended December 31, 2008. Loans decreased by $246.0 million and deposits increased by $59.7 million since year-end.
The annualized return on average shareholders’ equity was -186.57% for the second quarter of 2009 as compared to 8.79% for the same period in 2008. The annualized return on average assets was -15.92% during the second quarter of 2009 in comparison to 0.76% for the second quarter of 2008. The decrease in these ratios was primarily
due to the goodwill impairment charge and higher level of loan loss provision recognized during the second quarter of 2009.
Net interest income on a tax equivalent basis in the second quarter of 2009 increased $8.6 million or 31.7% from the same period in 2008 mainly as a result of the Willow Financial acquisition. Second quarter 2009 net interest margin was 2.82% compared to 3.06% for the same period in 2008.
Nonperforming assets were $138.9 million at June 30, 2009. Nonperforming assets as a percentage of total assets were 2.67% at June 30, 2009, compared to 1.43% at December 31, 2008 and 1.01% at June 30, 2008. Net charge-offs for the second quarter of 2009 were $14.7 million, compared to $423,000 in the same period of 2008. The allowance
for credit losses increased to $70.3 million at June 30, 2009, compared to $50.0 million at December 31, 2008, and $31.2 million at June 30, 2008.
Results of Operations
Net income is affected by five major elements: (1) net interest income, or the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds; (2) the provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for inherent losses on loans;
(3) noninterest income, which is made up primarily of certain fees, wealth management income and gains and losses from sales of securities or other transactions; (4) noninterest expense, which consists primarily of salaries, employee benefits and other operating expenses; and (5) income taxes. Each of these major elements will be reviewed in more detail in the following discussion.
Net Interest Income
Net interest income is the difference between interest earned on total interest-earning assets (primarily loans and investment securities), on a fully taxable equivalent basis, where appropriate, and interest paid on total interest-bearing liabilities (primarily deposits and borrowed funds). Fully taxable equivalent basis represents income
on total interest-earning assets that is either tax-exempt or taxed at a reduced rate, adjusted to give effect to the prevailing incremental federal tax rate, and adjusted for nondeductible carrying costs and state income taxes, where applicable. Yield calculations, where appropriate, include these adjustments. Net interest income depends on the volume and interest rate earned on interest-earning assets and the volume and interest rate paid on interest-bearing liabilities.
The rate volume variance analysis in the following table, which is computed on a tax-equivalent basis (tax rate of 35%), analyzes changes in net interest income for the three and six months ended June 30, 2009 compared to June 30, 2008 by their volume and rate components. The change attributable to both volume and rate has been allocated
proportionately.
Table 1—Analysis of Changes in Net Interest Income—Fully Taxable-Equivalent Basis
|
|
Three Months Ended
June 30, 2009 compared to
June 30, 2008
|
|
|
Six Months Ended
June 30, 2009 compared to
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Due to change in:
|
|
|
Total
|
|
|
Due to change in:
|
|
(Dollars in thousands)
|
|
Change
|
|
|
Volume
|
|
|
Rate
|
|
|
Change
|
|
|
Volume
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities *
|
|
$
|
1,408
|
|
|
$
|
2,213
|
|
|
$
|
(805
|
)
|
|
$
|
4,409
|
|
|
$
|
4,512
|
|
|
$
|
(103
|
)
|
Federal funds sold and deposits in banks
|
|
|
120
|
|
|
|
296
|
|
|
|
(176
|
)
|
|
|
(447
|
)
|
|
|
819
|
|
|
|
(1,266
|
)
|
Loans *
|
|
|
9,455
|
|
|
|
13,852
|
|
|
|
(4,397
|
)
|
|
|
18,708
|
|
|
|
30,648
|
|
|
|
(11,940
|
)
|
Total
|
|
|
10,983
|
|
|
|
16,361
|
|
|
|
(5,378
|
)
|
|
|
22,670
|
|
|
|
35,979
|
|
|
|
(13,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and money market deposits
|
|
|
(326
|
)
|
|
|
1,940
|
|
|
|
(2,266
|
)
|
|
|
(2,250
|
)
|
|
|
4,241
|
|
|
|
(6,491
|
)
|
Time deposits
|
|
|
999
|
|
|
|
4,599
|
|
|
|
(3,600
|
)
|
|
|
1,191
|
|
|
|
9,001
|
|
|
|
(7,810
|
)
|
Borrowed funds
|
|
|
1,755
|
|
|
|
3,098
|
|
|
|
(1,343
|
)
|
|
|
3,612
|
|
|
|
7,005
|
|
|
|
(3,393
|
)
|
Total
|
|
|
2,428
|
|
|
|
9,637
|
|
|
|
(7,209
|
)
|
|
|
2,553
|
|
|
|
20,247
|
|
|
|
(17,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net interest income
|
|
$
|
8,555
|
|
|
$
|
6,724
|
|
|
$
|
1,831
|
|
|
$
|
20,117
|
|
|
$
|
15,732
|
|
|
$
|
4,385
|
|
*Tax equivalent basis using a tax rate of 35%, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
1)
The interest earned on nontaxable investment securities and loans is shown on a tax equivalent basis,
|
net of deductions (tax rate of 35%).
(2)
Nonaccrual loans have been included in the appropriate average loan balance category, but interest
on nonaccrual loans has not been included for purposes of determining interest income.
The following table presents the major asset and liability categories on an average basis for the periods presented, along with interest income and expense, and key rates and yields.
Table 2—Average Balance Sheets and Interest Rates
¾
Fully Taxable-Equivalent Basis
(Dollars in thousands)
|
|
Three Months Ended June 30,
|
|
|
Three Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Assets
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investments
|
|
$
|
890,582
|
|
|
$
|
10,453
|
|
|
|
4.72
|
%
|
|
$
|
740,847
|
|
|
$
|
9,622
|
|
|
|
5.22
|
%
|
Nontaxable investments
(1)
|
|
|
309,015
|
|
|
|
4,957
|
|
|
|
6.45
|
|
|
|
288,655
|
|
|
|
4,380
|
|
|
|
6.10
|
|
Total investment securities
|
|
|
1,199,597
|
|
|
|
15,410
|
|
|
|
5.17
|
|
|
|
1,029,502
|
|
|
|
14,002
|
|
|
|
5.47
|
|
Federal funds sold, securities purchased under agreements to resell and deposits in banks
|
|
|
369,173
|
|
|
|
239
|
|
|
|
0.26
|
|
|
|
30,812
|
|
|
|
119
|
|
|
|
1.55
|
|
Loans
(1) (2)
|
|
|
3,511,623
|
|
|
|
46,522
|
|
|
|
5.33
|
|
|
|
2,491,894
|
|
|
|
37,067
|
|
|
|
5.98
|
|
Total earning assets
|
|
|
5,080,393
|
|
|
|
62,171
|
|
|
|
4.92
|
|
|
|
3,552,208
|
|
|
|
51,188
|
|
|
|
5.80
|
|
Noninterest-earning assets
|
|
|
525,082
|
|
|
|
|
|
|
|
|
|
|
|
304,692
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,605,475
|
|
|
|
|
|
|
|
|
|
|
$
|
3,856,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and money market
|
|
$
|
1,981,432
|
|
|
|
5,335
|
|
|
|
1.08
|
|
|
$
|
1,397,205
|
|
|
|
5,661
|
|
|
|
1.63
|
|
Time
|
|
|
1,646,969
|
|
|
|
13,936
|
|
|
|
3.40
|
|
|
|
1,162,516
|
|
|
|
12,937
|
|
|
|
4.48
|
|
Total interest-bearing deposits
|
|
|
3,628,401
|
|
|
|
19,271
|
|
|
|
2.14
|
|
|
|
2,559,721
|
|
|
|
18,598
|
|
|
|
2.92
|
|
Borrowed funds
|
|
|
919,121
|
|
|
|
7,321
|
|
|
|
3.20
|
|
|
|
554,799
|
|
|
|
5,566
|
|
|
|
4.04
|
|
Total interest bearing liabilities
|
|
|
4,547,522
|
|
|
|
26,592
|
|
|
|
2.35
|
|
|
|
3,114,520
|
|
|
|
24,164
|
|
|
|
3.12
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
493,142
|
|
|
|
|
|
|
|
|
|
|
|
340,802
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
86,473
|
|
|
|
|
|
|
|
|
|
|
|
66,267
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
579,615
|
|
|
|
|
|
|
|
|
|
|
|
407,069
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,127,137
|
|
|
|
|
|
|
|
|
|
|
|
3,521,589
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
478,338
|
|
|
|
|
|
|
|
|
|
|
|
335,311
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
5,605,475
|
|
|
|
|
|
|
|
|
|
|
$
|
3,856,900
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
2.57
|
|
|
|
|
|
|
|
|
|
|
|
2.68
|
|
Effect of noninterest-bearing sources
|
|
|
|
|
|
|
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
0.38
|
|
Net interest income/margin on earning assets
|
|
|
|
|
|
$
|
35,579
|
|
|
|
2.82
|
%
|
|
|
|
|
|
$
|
27,024
|
|
|
|
3.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less tax equivalent adjustment
|
|
|
|
|
|
|
2,126
|
|
|
|
|
|
|
|
|
|
|
|
1,835
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
33,453
|
|
|
|
|
|
|
|
|
|
|
$
|
25,189
|
|
|
|
|
|
(Dollars in thousands)
|
|
Six Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Assets
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable investments
|
|
$
|
888,214
|
|
|
$
|
22,239
|
|
|
|
5.04
|
%
|
|
$
|
747,157
|
|
|
$
|
19,376
|
|
|
|
5.22
|
%
|
Nontaxable investments
(1)
|
|
|
316,064
|
|
|
|
10,282
|
|
|
|
6.54
|
|
|
|
289,377
|
|
|
|
8,736
|
|
|
|
6.07
|
|
Total investment securities
|
|
|
1,204,278
|
|
|
|
32,521
|
|
|
|
5.43
|
|
|
|
1,036,534
|
|
|
|
28,112
|
|
|
|
5.45
|
|
Federal funds sold, securities purchased under
agreements to resell and deposits in banks
|
|
|
271,136
|
|
|
|
366
|
|
|
|
0.27
|
|
|
|
57,485
|
|
|
|
813
|
|
|
|
2.84
|
|
Loans
(1) (2)
|
|
|
3,588,754
|
|
|
|
95,180
|
|
|
|
5.33
|
|
|
|
2,477,569
|
|
|
|
76,472
|
|
|
|
6.21
|
|
Total earning assets
|
|
|
5,064,168
|
|
|
|
128,067
|
|
|
|
5.09
|
|
|
|
3,571,588
|
|
|
|
105,397
|
|
|
|
5.93
|
|
Noninterest-earning assets
|
|
|
528,687
|
|
|
|
|
|
|
|
|
|
|
|
302,341
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,592,855
|
|
|
|
|
|
|
|
|
|
|
$
|
3,873,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and money market
|
|
$
|
1,944,350
|
|
|
|
11,506
|
|
|
|
1.19
|
|
|
$
|
1,406,329
|
|
|
|
13,756
|
|
|
|
1.97
|
|
Time
|
|
|
1,664,903
|
|
|
|
28,629
|
|
|
|
3.46
|
|
|
|
1,199,999
|
|
|
|
27,438
|
|
|
|
4.60
|
|
Total interest-bearing deposits
|
|
|
3,609,253
|
|
|
|
40,135
|
|
|
|
2.24
|
|
|
|
2,606,328
|
|
|
|
41,194
|
|
|
|
3.18
|
|
Borrowed funds
|
|
|
936,038
|
|
|
|
14,791
|
|
|
|
3.18
|
|
|
|
526,932
|
|
|
|
11,179
|
|
|
|
4.27
|
|
Total interest bearing liabilities
|
|
|
4,545,291
|
|
|
|
54,926
|
|
|
|
2.43
|
|
|
|
3,133,260
|
|
|
|
52,373
|
|
|
|
3.36
|
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
482,970
|
|
|
|
|
|
|
|
|
|
|
|
332,460
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
85,188
|
|
|
|
|
|
|
|
|
|
|
|
68,854
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
568,158
|
|
|
|
|
|
|
|
|
|
|
|
401,314
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,113,449
|
|
|
|
|
|
|
|
|
|
|
|
3,534,574
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
479,406
|
|
|
|
|
|
|
|
|
|
|
|
339,355
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
5,592,855
|
|
|
|
|
|
|
|
|
|
|
$
|
3,873,929
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
2.66
|
|
|
|
|
|
|
|
|
|
|
|
2.57
|
|
Effect of noninterest-bearing sources
|
|
|
|
|
|
|
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
0.42
|
|
Net interest income/margin on earning assets
|
|
|
|
|
|
$
|
73,141
|
|
|
|
2.90
|
%
|
|
|
|
|
|
$
|
53,024
|
|
|
|
2.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less tax equivalent adjustment
|
|
|
|
|
|
|
4,384
|
|
|
|
|
|
|
|
|
|
|
|
3,628
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
68,757
|
|
|
|
|
|
|
|
|
|
|
$
|
49,396
|
|
|
|
|
|
(1)
|
The interest earned on nontaxable investment securities and loans is shown on a tax equivalent basis, net of deductions (tax rate of 35%).
|
(2)
|
Nonaccrual loans have been included in the appropriate average loan balance category, but interest on nonaccrual loans has not been included for purposes of determining interest income.
|
The dramatic decline in the credit and liquidity markets and overall economic conditions taking place in the fourth quarter of 2008 resulted in the Federal Open Market Committee reducing overnight rates by 175 basis points to effectively 0%. The total reduction in overnight rates during 2008 was 400 basis points. As discussed later, the
Federal Reserve and U.S. Treasury Department also initiated a wide array of programs to improve liquidity, stabilize the credit markets and stimulate economic growth. These initiatives are continuing into 2009. The Corporation’s lower cost of funds have resulted from the short-term and mid-term rate reductions throughout 2008 in response to the decline in the various market yield curves and resulting reduction in asset yields.
Net interest income on a tax equivalent basis in the second quarter of 2009 increased $8.6 million or 31.7% from the same period in 2008 mainly as a result of the Willow Financial acquisition as well as a decrease in customer deposit costs.
Interest income on a tax equivalent basis in the second quarter of 2009 increased $11.0 million, or 21.5% over the same period in 2008. This increase was primarily due to higher average loans of $1.0 billion and higher average investment securities of $170.1 million which was partially offset by a 65 basis points reduction in the average
rate earned on loans. The growth in average loans of 40.9% over the second quarter of last year was mainly as a result of the Willow Financial acquisition. Interest expense increased $2.4 million, or 10.0% during the second quarter of 2009 versus the comparable period in 2008 as a $1.4 billion increase in average interest-bearing liabilities primarily as a result of the Willow Financial acquisition was partially offset by a 78 basis point reduction in the average rate paid on deposits.
Net Interest Margin
The second quarter 2009 net interest margin was 2.82%, a decrease of 24 basis points compared to the second quarter of 2008. The decrease in the net interest margin during 2009 was primarily attributable to decreases in yields on interest-earning assets mainly reflected in the lower yielding cash balances being maintained for liquidity
purposes, which outpaced declines in the customer deposit costs.
Interest Rate Sensitivity Analysis
In the normal course of conducting business activities, the Corporation is exposed to market risk, principally interest rate risk through the operations of its banking subsidiary. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and value of financial instruments.
The Corporation actively manages its interest rate sensitivity positions. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve consistent growth in net interest income. The Asset/Liability Committee, using policies and procedures approved
by the Corporation’s Board of Directors, is responsible for managing the rate sensitivity position. The Corporation manages interest rate sensitivity by changing the mix and repricing characteristics of its assets and liabilities through the management of its investment securities portfolio, its offering of loan and deposit terms and through wholesale borrowings from several providers, but primarily the Federal Home Loan Bank (the FHLB). The nature of the Corporation’s current operations is such that
it is not subject to foreign currency exchange or commodity price risk.
The Corporation only utilizes derivative instruments for asset/liability management. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations and payments are based. The notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference
between the calculated amounts to be received and paid, if any. Interest rate swaps are contracts in which a series of interest-rate flows (fixed and floating) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged. Interest rate caps are purchased contracts that limit the exposure from the repricing of liabilities in a rising rate environment.
The Bank is exposed to changes in the fair value of certain of its fixed rate assets due to changes in benchmark interest rates. The Bank uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges
involve the receipt of variable-rate amounts from a counterparty in exchange for the Bank making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2009, the Bank had a fair value hedge in the form of an interest rate swap with a notional amount of $1.9 million which matures in 2017. In addition, four fair value hedges with current notional amounts totaling $7.2 million were acquired from Willow Financial with maturity dates ranging from
2013 to 2016. These swaps do not qualify for hedge accounting treatment and thus all changes in the fair value of the derivatives is recorded in the consolidated statements of operations. As such, based on the increase in the market value of these interest rate swaps, the Corporation recognized a gain of $253,000 and $298,000 in other income in the consolidated statement of operations for the three and six months ended June 30, 2009, respectively. The Corporation also recognized a reduction of interest income
of $69,000 and $150,000 for the three and six months ended June 30, 2009.
For derivatives designated and that qualify as fair value hedges, during the three months ended June 30, 2009 and 2008, the Bank recognized a reduction of interest income of $23,000 and $27,000, respectively, on the consolidated statements of operations. For the six months ended June 30, 2009 and 2008, the Bank recognized a reduction of
interest income of $46,000 and $43,000, respectively, on the consolidated statements of operations.
Derivatives not designated as hedges are not speculative and result from a service the Bank provides to certain customers. The Bank executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps
that the Bank executes with a third party, such that the Bank minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements of SFAS 133, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2009, the Bank had 46 interest rate swaps with an aggregate current notional amount of $189.0 million related to this program with maturity
dates ranging from 2010 to 2018. For these derivatives, during the three months ended June 30, 2009 and 2008, the Bank recognized gains of $386,000 and $112,000, respectively in other income on the consolidated statements of operations. For the six months ended June 30, 2009 and 2008, the Bank recognized gains of $573,000 and $145,000, respectively in other income on the consolidated statements of operations.
The Bank is exposed to certain risks arising from both its business operations and economic conditions. The Bank principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Bank manages economic risks, including interest rate, liquidity, and credit risk,
primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Bank enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Bank’s derivative financial instruments are used to manage differences in the amount, timing, and duration of
the Bank’s known or expected cash receipts and its known or expected cash payments principally related to certain variable rate loan assets and variable rate borrowings.
The Bank has agreements with each of its derivative counterparties that contain a provision where if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations. The
Bank has agreements with some of its derivative counterparties that contain provisions that require the Bank’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the Bank’s credit rating is reduced below investment grade then, the Bank may be required to fully collateralize its obligations under the derivative instrument. Certain of the Bank's agreements with some of its derivative counterparties contain provisions where if a specified event or condition
occurs that materially changes the Bank's creditworthiness in an adverse manner, the Bank may be required to fully collateralize its obligations under the derivative instrument. The Bank has agreements with certain of its derivative counterparties that contain a provision where if the Bank fails to maintain its status as a well / adequate capitalized institution, then the Bank could be required to settle its obligation under the agreements.
As of June 30, 2009, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $3.8 million. As of June 30, 2009, the Bank has minimum collateral posting thresholds with certain of its derivative counterparties and has
posted collateral of $3.2 million against its obligations under these agreements.
The Corporation uses three principal reports to measure interest rate risk: (1) asset/liability simulation reports; (2) gap analysis reports; and (3) net interest margin reports. Management also simulates possible economic conditions and interest rate scenarios in order to quantify the impact on net interest income. The effect that changing
interest rates have on the Corporation’s net interest income is simulated by increasing and decreasing interest rates. This simulation is known as rate shocking.
The results of the June 30, 2009 net interest income rate shock simulations show that the Corporation is within guidelines set by the Corporation's Asset/Liability Policy when modeled rates increase 100 or 200 basis points and decrease 100 and 200 basis points.
The Corporation constantly monitors this position and takes steps to minimize any reduction in net interest income.
The report below forecasts changes in the Corporation’s market value of equity under alternative interest rate environments as of June 30, 2009. The market value of equity is defined as the net present value of the Corporation’s existing assets and liabilities. The Corporation is within guidelines set by the Corporation’s
Asset/Liability Policy for the percentage change in the market value of equity when modeled rates decrease 100 or 200 basis points. When modeled rates increase 100 or 200 basis points, the Corporation is not within guidelines mainly due to the non-cash goodwill impairment write-off of $214.5 million, resulting from the decrease in market value related to the First Niagara merger agreement previously discussed.
Table 3—Market Value of Equity
|
|
|
|
|
Change in
|
|
|
|
|
|
Asset/Liability
|
|
|
|
Market Value
|
|
|
Market Value
|
|
|
Percentage
|
|
|
Approved
|
|
(Dollars in thousands)
|
|
of Equity
|
|
|
of Equity
|
|
|
Change
|
|
|
Percent Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+300 Basis Points
|
|
$
|
95,076
|
|
|
$
|
(165,044
|
)
|
|
|
-63.45
|
%
|
|
|
+/- 35
|
%
|
+200 Basis Points
|
|
|
152,040
|
|
|
|
(108,080
|
)
|
|
|
-41.55
|
%
|
|
|
+/- 25
|
|
+100 Basis Points
|
|
|
210,881
|
|
|
|
(49,239
|
)
|
|
|
-18.93
|
%
|
|
|
+/- 15
|
|
Flat Rate
|
|
|
260,120
|
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
|
|
-100 Basis Points
|
|
|
286,043
|
|
|
|
25,923
|
|
|
|
9.97
|
%
|
|
|
+/- 15
|
|
-200 Basis Points
|
|
|
289,545
|
|
|
|
29,425
|
|
|
|
11.31
|
%
|
|
|
+/- 25
|
|
-300 Basis Points
|
|
|
281,521
|
|
|
|
21,401
|
|
|
|
8.23
|
%
|
|
|
+/- 35
|
|
In the event the Corporation should experience a mismatch in its desired gap ranges or an excessive decline in their market value of equity resulting from changes in interest rates, it has a number of options that it could use to remedy the mismatch. The Corporation could restructure its investment portfolio through the sale or purchase
of securities with more favorable repricing attributes. It could also emphasize growth in loan products with appropriate maturities or repricing attributes, or attract deposits or obtain borrowings with desired maturities.
Provision for Loan Losses
The Corporation uses the reserve method of accounting for loan losses. The balance in the allowance for loan losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent
factors, including management’s assumptions as to future delinquencies, recoveries and losses. Increases to the allowance for loan losses are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.
While management considers the allowance for loan losses to be adequate based on information currently available, future additions to the allowance may be necessary due to changes in economic conditions or management’s assumptions as to future delinquencies, recoveries and losses and management’s intent with regard to the disposition
of loans. In addition, the Office of the Comptroller of the Currency (“OCC”), as an integral part of their examination process, periodically reviews the Corporation’s allowance for loan losses. The OCC may require the Corporation to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.
The Corporation performs periodic evaluations of the allowance for loan losses that include both historical, internal and external factors. The actual allocation of reserve is a function of the application of these factors to arrive at a reserve for each portfolio type and an additional component
of the reserve allocated against the portfolio as a whole. Management assigns historical factors and environmental factors to homogeneous groups of loans that are grouped by loan type and credit rating. Changes in concentrations and quality are captured in the analytical metrics used in the calculation of the reserve. The components of the allowance for credit losses consist of both historical losses and estimates. Management bases its recognition and estimation of each allowance component on certain observable
data that it believes is the most reflective of the underlying loan losses being estimated. The observable data and accompanying analysis is directionally consistent, based upon trends, with the resulting component amount for the allowance for loan losses. The Corporation’s allowance for loan losses components include the following: historical loss estimation by loan product type and by risk rating within each product type, payment (past due) status, industry concentrations, internal and external variables
such as economic conditions, credit policy and underwriting changes and results of the loan review process. The Corporation’s historical loss component is a significant component of the allowance for loan losses, and all other allowance components are based on the inherent loss attributes that management believes exist within the total portfolio that are not captured in the historical loss component as well as external factors impacting the portfolio taken as a whole
.
The historical loss components of the allowance represent the results of analyses of historical charge-offs and recoveries within pools of homogeneous loans, within each risk rating and broken down further by segment, within the portfolio. Criticized assets are further assessed based on trends, expressed as percentages, relative to delinquency,
risk rating and nonaccrual, by credit product.
The historical loss components of the allowance for commercial and industrial loans and commercial real estate loans (collectively “commercial loans”) are based principally on current risk ratings, historical loss rates adjusted, by adjusting the risk window, to reflect current events and conditions, as well as analyses of
other factors that may have affected the collectability of loans. All commercial loans with an outstanding balance over $500,000 are subject to review on an annual basis. A sample of commercial loans with a “pass” rating are individually reviewed annually. Commercial loans that management determines to be potential problem loans are individually reviewed at a minimum annually. The review is performed by a third party, and is designed to determine whether such loans are individually impaired, with
impairment measured by reference to the collateral coverage and/or debt service coverage. Consumer credit and residential real estate reviews are limited to those loans reflecting delinquent payment status or performed on loans otherwise deemed to be at risk of nonpayment. Homogeneous loan pools, including consumer and 1-4 family residential mortgages are not subject to individual review but are evaluated utilizing risk factors such as concentration of one borrower group. The historical loss component of the
allowance for these loans is based principally on loan payment status, retail classification and historical loss rates, adjusted by altering the risk window, to reflect current events and conditions.
The industry concentration component is recognized as a possible factor in the estimation of loan losses. Two industries represent possible concentrations: commercial real estate and consumer loans relying on residential home equity. No specific loss-related observable data is recognized by management currently, therefore no specific factor
is calculated in the reserve solely for the impact of these concentrations, although management continues to carefully consider relevant data for possible future sources of observable data.
The historic loss model includes two judgmental components (product level and portfolio level environmental factors) that reflect management’s belief that there are additional inherent credit losses based on loss attributes not adequately captured in the lagging indicators. The judgmental components are allocated to the specific
segments of the portfolio based on the historic loss component of each segment under review.
Portfolio level environmental factors included in management’s calculation entail the measurement of a wider array of both internal and external criteria impacting the portfolio as a whole. The portfolio level environmental factors are based upon management’s review of trends in the Corporation’s primary market area as
well as regional and national economic trends. Management utilizes various economic factors that could impact borrowers’ future ability to make loan payments such as changes in the interest rate environment, product supply shortages and negative industry specific events. Management utilizes relevant articles from newspapers and other publications that
describe the economic events affecting specific geographic areas and other published economic reports and data. Furthermore, given that past-performance indicators may not adequately capture current risk levels, allowing for a real-time adjustment enhances the validity of the loss recognition process. There are many credit risk management
reports that are synthesized by credit risk management staff to assess the direction of credit risk and its instant effect on losses. It is important to continue to use experiential data to confirm risk as measurable losses will continue to manifest themselves at higher than normal levels even after the economic cycle has begun an upward swing and lagging indicators begin to show improvement. The judgmental component is allocated to the entire portfolio based upon management’s evaluation of the factors
under review.
The provision for loan losses increased $28.9 million during the second quarter of 2009 compared to the second quarter of 2008 and $34.1 million for the first six months of 2009 compared to the same period in 2008 mostly as a result of the decrease in the overall quality of the loan portfolio which caused an increase in the amount of the
required reserve. Credit quality continued to be a challenge in the Bank’s commercial real estate and home equity portfolio in the second quarter of 2009. Nonperforming assets as a percentage of total assets were 2.67% at June 30, 2009, compared to 1.01% at June 30, 2008. Net loans charged-off increased $17.5 million for the first six months of 2009 compared to the same period in 2008 principally due to charge-offs related to several unrelated commercial and industrial and commercial real estate borrowers
and increased charge-offs of consumer loans, specifically home equity lines of credit and loans and other direct installment loans. The profile of the Bank’s customer base has remained relatively constant and management believes that the current deterioration in credit quality has been caused by the economic pressures being felt by borrowers due to general economic conditions and the continued recession. As the current economic conditions deteriorate, management continues to allocate dedicated resources
to continue to manage at-risk credits.
The allowance for loan losses increased $20.3 million to $70.3 million at June 30, 2009 from $50.0 million at December 31, 2008 and $31.2 million at June 30, 2008, respectively. The increase in the allowance at June 30, 2009 compared to December 31 2008 was primarily due to the decline in credit quality in
the current economic environment. The increase in the allowance at June 30, 2009 in comparison to June 30, 2008 was also partially due to the addition of the Willow Financial loan loss reserve of $12.9 million in December 2008, and the need to adjust for impacts on the portfolio in light of the current credit environment. Nonperforming loans have increased by $59.8 million as a result of these factors from June 30, 2009 compared to December 31, 2008 and by $98.7 million from June 30, 2008. The impact of the recession
continues to be felt as the Bank’s commercial real estate portfolio’s increase in allowance illustrates. It is expected that the negative trends in the real estate industry, both residential and commercial, will continue to affect credit quality throughout the remainder of 2009.
A summary of the activity in the allowance for loan losses is as follows:
Table 4—Allowance for Loans Losses
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Average loans
|
|
$
|
3,588,754
|
|
|
$
|
2,477,569
|
|
|
|
|
|
|
|
|
|
|
Allowance, beginning of period
|
|
$
|
49,955
|
|
|
|
27,328
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
14,744
|
|
|
|
626
|
|
Commercial and industrial
|
|
|
2,740
|
|
|
|
322
|
|
Consumer
|
|
|
1,748
|
|
|
|
883
|
|
Lease financing
|
|
|
13
|
|
|
|
—
|
|
Total loans charged off
|
|
|
19,245
|
|
|
|
1,831
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
138
|
|
|
|
324
|
|
Commercial and industrial
|
|
|
129
|
|
|
|
43
|
|
Consumer
|
|
|
243
|
|
|
|
239
|
|
Lease financing
|
|
|
—
|
|
|
|
4
|
|
Total recoveries
|
|
|
510
|
|
|
|
610
|
|
Net loans charged off
|
|
|
18,735
|
|
|
|
1,221
|
|
Provision for loan losses
|
|
|
39,121
|
|
|
|
5,067
|
|
Allowance, end of period
|
|
$
|
70,341
|
|
|
$
|
31,174
|
|
Ratio of net charge offs to average loans outstanding (annualized)
|
|
|
1.05
|
%
|
|
|
0.10
|
%
|
|
|
|
|
|
|
|
|
|
Table 5—Allocation of the Allowance for Loan Losses by Loan Type
The factors affecting the allocation of the allowance during the six-month period ended June 30, 2009 were decreases in credit quality primarily related to real estate construction loans and commercial and industrial loans. The allocation of the allowance for real estate loans at June 30, 2009 increased $11.5 million as compared to December
31, 2008 principally due to an increase in criticized real estate construction loans, a decline in collateral values related to construction loans and an increase in the loss ratio used to calculate the reserve for commercial mortgage, construction and residential loans. The allocation of the allowance for commercial and industrial loans at June 30, 2009 increased $8.6 million from December 31, 2008 mostly due to a decrease in credit quality and an increase in impairment related to commercial and industrial loans.
In addition, the allocation of the allowance for consumer loans at June 30, 2009 increased slightly by $304,000 primarily due to adjustments in the loss ratios as well as some increases in criticized consumer loans. There were no material changes in the allocation of the allowance for lease financing at June 30, 2009 compared to December 31, 2008. There were no significant changes in the estimation methods and assumptions including environmental factors, loan concentrations or terms that impacted the allowance
during the first six months of 2009. The interest rate environment as well as weakening in the commercial real estate market has moderately increased our allowance allocation in concert with the historical trends. It is expected that the negative trends in the real estate industry will continue to affect credit quality throughout 2009. The growth in the loan portfolio and the change in the mix will result in an adjustment to the amount of the allowance allocated to each category based upon historical loss trends
and other factors.
The following table sets forth an allocation of the allowance for loan losses by category. The specific allocations in any particular category may be reallocated in the future to reflect then current conditions. Accordingly, management considers the entire allowance to be available to absorb losses in any category.
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Allowance
|
|
|
Amount
|
|
|
Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
33,519
|
|
|
|
48
|
%
|
|
$
|
22,051
|
|
|
|
44
|
%
|
Commercial and industrial
|
|
|
29,518
|
|
|
|
42
|
%
|
|
|
20,898
|
|
|
|
42
|
%
|
Consumer
|
|
|
7,300
|
|
|
|
10
|
%
|
|
|
6,996
|
|
|
|
14
|
%
|
Lease financing
|
|
|
4
|
|
|
|
-
|
%
|
|
|
10
|
|
|
|
-
|
%
|
Total
|
|
$
|
70,341
|
|
|
|
100
|
%
|
|
$
|
49,955
|
|
|
|
100
|
%
|
Nonperforming Assets
Nonperforming assets include loans that are in nonaccrual status or 90 days or more past due and loans that are in the process of foreclosure. A loan is generally classified as nonaccrual when principal or interest has consistently been in default for a period of 90 days or more, when there has been deterioration in the financial
condition of the borrower, or payment in full of principal or interest is not expected. Delinquent 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.
Nonperforming assets were 2.67% of total assets at June 30, 2009, compared to 1.43% at December 31, 2008, and 1.01% at June 30, 2008. The increase in nonaccrual loans at June 30, 2009, in relation to December 31, 2008, of $57.5 million was mainly attributable to commercial and industrial, commercial real estate, construction and residential
real estate loans. The increase of nonaccrual loans in relation to June 30, 2008 of $96.3 million was largely due to an increase in the nonaccrual status of commercial and residential construction, commercial and industrial, residential first mortgage and commercial mortgage loans during 2008. In addition, the December 5, 2008 acquisition of Willow Financial Bank contributed $12.5 million in non-accrual loans. The borrowers associated with these nonaccrual loans are generally unrelated and are primarily located
in our market area and in most cases, for the residential real estate, our collateral is local land that has been subdivided for residential development in the growing counties of the Philadelphia suburbs and the Lehigh Valley. The Bank’s management understands these markets and is confident that it can manage the collateral, if necessary. In response to the situation, the Corporation increased its allowance for loan losses from approximately 1.36% of outstanding loans at December 31, 2008 to 2.05% at June
30, 2009. The Bank continues to evaluate appraisals, financial reviews and inspections. All mortgage loans within the Bank’s portfolio were booked with traditional bank customers through the branch network. The Bank has virtually no exposure to subprime borrowers. The Bank continues to take a conservative approach to its lending and loan review practices. With the expectation of continued economic pressures, management continues to provide more resources to resolve troubled credits including an increased
focus on earlier identification of potential problem loans and a more active approach to managing the level of criticized loans that have not reached nonaccrual status.
As of June 30, 2009, loans past due 90 days or more and still accruing interest were $4.1 million, compared to $1.8 million at December 31, 2008 and $1.7 million at June 30, 2008. The higher level of loans past due 90 days or more at June 30, 2009 was primarily driven by a few unrelated construction loans as well as several unrelated
residential mortgage loans which were well secured by collateral.
Net assets in foreclosure at June 30, 2009 were $2.2 million compared to $1.6 million at December 31, 2008 and $1.2 million at June 30, 2008. During the first six months of 2009, transfers from loans to assets in foreclosure were $1.7 million, disposals of foreclosed properties were $974,000, and no charge-offs were recorded. Efforts to
liquidate assets acquired in foreclosure proceed as quickly as potential buyers can be located and legal constraints permit. Foreclosed assets are carried at the lower of cost (lesser of carrying value of the asset or fair value at date of acquisition) or estimated fair value.
The following table presents information concerning nonperforming assets:
Table 6—Nonperforming Assets
(Dollars in thousands)
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
132,598
|
|
|
$
|
75,060
|
|
|
$
|
36,284
|
|
Loans 90 days or more past due
|
|
|
4,090
|
|
|
|
1,849
|
|
|
|
1,676
|
|
Total nonperforming loans
|
|
|
136,688
|
|
|
|
76,909
|
|
|
|
37,960
|
|
Net assets in foreclosure
|
|
|
2,168
|
|
|
|
1,626
|
|
|
|
1,189
|
|
Total nonperforming assets
|
|
$
|
138,856
|
|
|
$
|
78,535
|
|
|
$
|
39,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to nonperforming loans
|
|
|
51.5
|
%
|
|
|
65.00
|
%
|
|
|
82.1
|
%
|
Nonperforming loans to total net loans
|
|
|
4.06
|
%
|
|
|
2.12
|
%
|
|
|
1.54
|
%
|
Allowance for loan and lease losses to total loans
|
|
|
2.05
|
%
|
|
|
1.36
|
%
|
|
|
1.25
|
%
|
Nonperforming assets to total assets
|
|
|
2.67
|
%
|
|
|
1.43
|
%
|
|
|
1.01
|
%
|
Locally located real estate, most with loan to value ratios within company policy, secures many of the nonperforming loans.
The following table presents information concerning impaired loans. Impaired loans are loans for which it is probable that all principal and interest will not be collected according to the contractual terms of the loan agreement. Impaired loans are included in the nonaccrual loan total. The increase in impaired loans at June 30, 2009 compared
to December 31, 2008 and June 30, 2008 was mostly due to the previously aforementioned increases in nonaccrual commercial and residential construction, commercial and industrial, residential first mortgage and commercial mortgage loans.
Table 7—Impaired Loans
(Dollars in thousands)
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans
|
|
$
|
151,068
|
|
|
$
|
70,173
|
|
|
$
|
20,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average year-to-date impaired loans
|
|
$
|
80,404
|
|
|
$
|
23,469
|
|
|
$
|
13,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with specific loss allowances
|
|
$
|
100,110
|
|
|
$
|
38,354
|
|
|
$
|
20,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss allowances reserved on impaired loans
|
|
$
|
25,513
|
|
|
$
|
8,420
|
|
|
$
|
4,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date income recognized on impaired loans
|
|
$
|
582
|
|
|
$
|
151
|
|
|
$
|
42
|
|
The Bank’s policy for interest income recognition on impaired loans is to recognize income under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Bank. The Bank will not recognize income if these factors do not exist.
Noninterest Income
Noninterest income was $21.7 million for the second quarter of 2009, an increase of $10.1 million or 87.2% from $11.6 million in the second quarter of 2008. For the three months ended June 30, 2009, net gains on the sale of investment securities increased by $4.8 million over the same period in 2008. The net security gains were mostly
the result of the sale of mortgage-backed securities. Service charges on deposits increased $1.0 million, or 30.0% during the second quarter of 2009 over the comparable quarter of 2008 mainly from the acquired Willow Financial deposit accounts. Wealth management fee growth was $.4 million or 7.8% during the second quarter of 2009 as compared to the same quarter in 2008. In addition, as a result of the Willow Financial acquisition, gains from mortgage banking loan sales increased $2.4 million from the second quarter
of 2008. Other income increased $1.9 million during the second quarter of 2009 over the comparable quarter of 2008 primarily from increases in automated teller machine and point of sale revenue as well as fees and valuation adjustments on derivative instruments. A non-cash other-than-temporary impairment charge of $.5 million on two private label collateralized mortgage obligations was also recorded during the second quarter of 2009.
For the six months ended June 30, 2009, non-interest income was $37.9 million, an increase of $15.4 million, or 68.9% from the same period in 2008, primarily due to increases in net gains on the sale of investment securities of $6.7 million, service charges on deposits of $2.1 million, gains from mortgage banking loan sales of $4.0 million
and automated teller machine and point of sale revenue
as well as fees and valuation adjustments on derivative instruments which were previously discussed
. Other income also included a $1.7 million gain recorded in the first quarter of 2009 on the sale of the Bank’s merchant credit card business. A non-cash other-than-temporary impairment charge of $1.3 million on collateralized debt obligation investments in pooled trust preferred securities as well
as other investments was also recorded during the first quarter of 2009.
Noninterest Expense
Noninterest expense was $252.8 million for the second quarter of 2009, an increase of $228.3 million from $24.5 million in the second quarter of 2008 pr
imarily due to the previously aforementioned goodwill impairment charge of $214.5 million and the Willow Financial acquisition.
Salaries
and benefits expense rose $3.8 million during the second quarter of 2009 primarily due to higher staffing levels resulting from the Willow Financial acquisition. Occupancy expenses increased $1.3 million for the three months ended June 30, 2009 over the comparable period in 2008, mainly due to the addition of the Willow Financial branches. FDIC insurance assessments increased $4.9 million in the second quarter of 2009 mainly as a result of the FDIC approval of a final rule in May 2009 which raised assessment
rates uniformly by five basis points resulting in a one-time special assessment of $2.6 million. In addition, insurance premiums were higher as a result of the deposits from the Willow Financial acquisition. Other expense increased $3.4 million for the three months ended June 30, 2009 over the same period in 2008 mostly due to the Willow Financial acquisition, including additional professional, consulting and data processing expenses.
The FDIC proposes to assess an additional special assessment of up to 5 basis points later in 2009, but the amount is uncertain. The Bank expects that the assessment rates for the remainder of 2009 will continue to be significantly higher than in 2008.
For the six months ended June 30, 2009, noninterest expense was $291.4 million, an increase of $243.2 million from $48.2 million in the comparable period in 2008.
This increase was mainly due to the previously aforementioned goodwill impairment charge of $214.5 million and the Willow Financial
acquisition.
Increases for the six months ended June 30, 2009 included salaries and benefits of $10.2 million, occupancy of $2.9 million, FDIC insurance assessment of $7.5 million and other expenses of $6.8 million which were previously discussed.
Income Taxes
The effective income tax rates for the three and six months ended June 30, 2009 were 3.1% and 2.7%, respectively versus the applicable federal statutory rate of 35% and the applicable state tax rates. The effective income tax rates for the three and six months ended June 30, 2008 were 20.5% and 21.3%, respectively. The Corporation’s
effective rates during 2009 and 2008 were lower than the statutory tax rate primarily as a result of the $214.5 million goodwill impairment charge, which is not deductible for income tax purposes, as well as tax-exempt income earned from state and municipal securities, loans and bank-owned life insurance. The effective income tax rate for the first six months of 2009 was lower than the same period in 2008 primarily due to the $214.5 million goodwill impairment charge as well as a higher level of tax exempt income
during 2009.
Balance Sheet Analysis
Total assets at June 30, 2009 decreased $280.2 million, or 5.1%, from $5.5 billion at December 31, 2008 to $5.2 billion. Investment securities decreased by $126.7 million mainly due to sales of mortgage-backed securities and maturities of certain securities. Gross loans decreased by $313.6 million at June 30, 2009 since December 31, 2008
primarily due to the sale of first mortgage residential loans totaling $81.0 million and indirect consumer installment loans totaling $36.2 million for a net loss of $29,000 as well as lower loan levels in all categories resulting mainly from increased refinancing activity and reduced origination volume. The goodwill balance decreased by $213.7 million since December 31, 2008 primarily from the previously aforementioned impairment of goodwill during the second quarter of 2009. Cash and cash equivalents increased
by $311.5 million since December 31, 2008 primarily due to the sale of investment securities and loans held for investment as well as lower loan levels. Residential mortgage loans held for sale increased $67.6 million due to an increase in refinancing volume driven by historically low mortgage rates.
Total liabilities decreased slightly by $54.2 million, or 1.1%, from $5.0 billion at December 31, 2008. Deposits grew by $59.7 million since December 31, 2008 primarily due to increases in savings and checking accounts. Federal funds purchased and short-term securities sold under agreements to repurchase decreased by $53.9 million due
to maturities. Long-term borrowings decreased $65.1 million from December 31, 2008 due to maturities as increased cash levels reduced the Bank’s reliance on borrowings. Shareholder’s equity decreased by $226.0 million since year-end mainly as a result of the goodwill impairment charge of $214.5 million recognized during the second quarter of 2009.
Capital
Capital formation is important to the Corporation's well being and future growth. Total capital at June 30, 2009 was $248.7 million, a decrease of $226.0 million from the capital balance at December 31, 2008 of $474.7 million. The reduction in capital was primarily the result of a net loss of $217.9 million recorded during the six months
ended June 30, 2009. This loss was primarily due to a goodwill impairment charge of $214.5 million recorded in the three months ended June 30, 2009. Also contributing to the decrease in capital was a decrease of $4.9 million in other comprehensive income and cash dividends paid of $4.7 million during the six months ended June 30, 2009. Management continues to analyze and evaluate the Corporation’s current capital position relative to the Corporation’s ongoing business operations, current economic
conditions, the regulatory environment, including the higher minimum capital ratio requirements for the Bank established by the Office of the Comptroller of the Currency, and future capital requirements.
Table 8—Regulatory Capital
(Dollars in thousands)
|
|
|
|
|
|
|
|
For Capital
Adequacy Purposes
|
|
|
To Be Well Capitalized
Under Prompt Corrective
Action Program
|
|
As of June 30, 2009
|
|
Actual
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
$
|
379,697
|
|
|
|
9.39
|
%
|
|
$
|
323,345
|
|
|
|
8.00
|
%
|
|
$
|
404,181
|
|
|
|
10
|
%
|
Harleysville National Bank
|
|
|
361,487
|
|
|
|
8.95
|
%
|
|
|
322,951
|
|
|
|
8.00
|
%
|
|
|
403,688
|
|
|
|
10
|
%
|
Tier 1 Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
328,928
|
|
|
|
8.14
|
%
|
|
|
161,673
|
|
|
|
4.00
|
%
|
|
|
242,509
|
|
|
|
6
|
%
|
Harleysville National Bank
|
|
|
310,779
|
|
|
|
7.70
|
%
|
|
|
161,475
|
|
|
|
4.00
|
%
|
|
|
242,213
|
|
|
|
6
|
%
|
Tier 1 Capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
328,928
|
|
|
|
5.91
|
%
|
|
|
222,593
|
|
|
|
4.00
|
%
|
|
|
278,241
|
|
|
|
5
|
%
|
Harleysville National Bank
|
|
|
310,779
|
|
|
|
5.60
|
%
|
|
|
221,995
|
|
|
|
4.00
|
%
|
|
|
277,494
|
|
|
|
5
|
%
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
For Capital
Adequacy Purposes
|
|
|
To Be Well Capitalized
Under Prompt Corrective
Action Program
|
|
As of December 31, 2008
|
|
Actual
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
$
|
384,522
|
|
|
|
8.88
|
%
|
|
$
|
346,333
|
|
|
|
8.00
|
%
|
|
$
|
432,917
|
|
|
|
10
|
%
|
Harleysville National Bank
|
|
|
370,552
|
|
|
|
8.58
|
%
|
|
|
345,536
|
|
|
|
8.00
|
%
|
|
|
431,920
|
|
|
|
10
|
%
|
Tier 1 Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
334,467
|
|
|
|
7.73
|
%
|
|
|
173,167
|
|
|
|
4.00
|
%
|
|
|
259,750
|
|
|
|
6
|
%
|
Harleysville National Bank
|
|
|
320,497
|
|
|
|
7.42
|
%
|
|
|
172,768
|
|
|
|
4.00
|
%
|
|
|
259,152
|
|
|
|
6
|
%
|
Tier 1 Capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
|
334,467
|
|
|
|
8.19
|
%
|
|
|
163,315
|
|
|
|
4.00
|
%
|
|
|
204,144
|
|
|
|
5
|
%
|
Harleysville National Bank
|
|
|
320,497
|
|
|
|
7.88
|
%
|
|
|
162,689
|
|
|
|
4.00
|
%
|
|
|
203,361
|
|
|
|
5
|
%
|
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 generally common stockholder’s equity and retained earnings adjusted to exclude disallowed goodwill and identifiable intangibles as well as the inclusion
of qualifying trust preferred securities. Tier 2 capital for the Corporation is the allowance for loan losses.
In June 2009, the Bank was advised that the Office of the Comptroller of the Currency (“OCC”) has established higher minimum capital ratios for the Bank than the minimum and well capitalized ratios generally applicable to banks under current regulations. To be "well capitalized," banks generally must maintain a Tier 1 leverage
ratio of at least 5%, a Tier 1 risk based capital ratio of at least 6% and a total risk-based capital ratio of at least 10%. In the case of the Bank, however, the OCC has established individual minimum capital ratios requiring a Tier 1 leverage ratio of at least eight percent (8%) of adjusted total assets, a Tier 1 risk-based capital ratio of at least ten percent (10%) and a total risk-based capital ratio of at least twelve percent (12%). Currently, the Bank's capital levels are less than those required under
the OCC's newly required minimum individual capital ratios. The OCC advised the Bank that it must achieve these ratios by June 30, 2009. While these ratios were not achieved by the deadline, the merger agreement with First Niagara which was announced on July 28, 2009 should alleviate the capital concerns of the Bank upon effectiveness of the transaction.
At June 30, 2009, the Corporation’s Tier 1 risk-adjusted capital ratio was 8.14%
,
and the total risk-adjusted capital ratio was 9.39%. Both are above regulatory “adequately capitalized” requirements,
however, the Tier 1 risk-adjusted capital ratio and the total risk adjusted capital ratio are below the Bank’s new regulatory “well capitalized” standards of 10.00% and 12.00%, respectively. Purchase accounting adjustments related to the acquisition of Willow Financial in December 2008 contributed to the reduction of the Corporation’s total risk-based capital ratio below the regulatory threshold for a “well capitalized” bank Company at March 31, 2009 and December
31, 2008. The Corporation does not believe that these mark-to-market valuations reflect a reduction in the realizable value of Willow Financial’s assets and expects to recover the discount through amortization in 2009 and beyond. As of June 30, 2009, the total risk-adjusted capital ratio increased to 9.39% from 8.88% at December 31, 2008.
The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and identifiable intangibles. The Corporation’s leverage ratios were 5.91% at June 30, 2009 and 8.19% at December 31, 2008 which were higher than the OCC requirement of 5.00%. The lower leverage ratio of the Corporation at
June 30, 2009 was mainly due to an increase in average loans and average assets from the acquisition of Willow Financial as the acquisition occurred towards the end of the fourth quarter of 2008.
After a detailed analysis of dividend yields by the Corporation, the cash dividend paid in the first quarter of 2009 was reduced to $0.10 per share from $0.20 per share for the fourth quarter of 2008. The Corporation further reduced the second quarter 2009 cash dividend to $.01 per share, enabling the Corporation to conserve approximately
$3.9 million of capital per quarter. The Corporation believes it is prudent to build balance sheet strength and liquidity in response to the negative economic outlook for 2009 forecast by many leading economists, especially with respect to the credit markets.
Liquidity
Liquidity is a measure of the ability of the Corporation to meet its current cash 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 Bank arranges its mix of cash, money market investments, investment
securities and loans in order to match the volatility, seasonality, interest sensitivity and growth trends of its deposit funds. The Corporation’s decisions with regard to liquidity are based on projections of potential sources and uses of funds for the next 120 days under the Corporation’s asset/liability model.
The resulting projections as of June 30, 2009 show the potential sources of funds exceeding the potential uses of funds. The accuracy of this prediction can be affected by limitations inherent in the model and by the occurrence of future events not anticipated when the projections were made. The Corporation has external sources of funds
which can be drawn upon when funds are required. One source of external liquidity is an available line of credit with the FHLB. As of June 30, 2009, the Bank had borrowings outstanding with the FHLB of $475.1 million, all of which were long-term. At June 30, 2009, the Bank had a maximum borrowing capacity of $1.2 billion at the FHLB, unused FHLB lines of credit of $100.0 million and unused federal funds lines of credit of $55.0 million. In addition, the Corporation’s funding sources include investment and
loan portfolio cash flows, fed funds sold and short-term investments, as well as repurchase agreements. The Corporation has pledged available for sale investment securities with a carrying value of $777.6 million and held to maturity securities of $20.5 million. The Corporation could also increase its liquidity through its pricing on certificates of deposit products. During July 2009, the FHLB required the Corporation’s outstanding borrowings with the FHLB be fully collateralized and therefore obtained
a combination of available for sale investment securities and loans as collateral. Any future borrowings with the FHLB are also required to be fully collateralized. The Corporation believes it has adequate funding sources to maintain sufficient liquidity given its current business conditions.
Except as discussed herein, management believes there are no known trends or any known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in liquidity increasing or decreasing in any material way, although a significant portion of the Corporation’s time deposits mature within
the next twelve months. Despite the anticipated market volatility and rate environment for much of 2009, we expect to be able to retain most of these deposits. In the event that additional funds are required, the Corporation believes its short-term liquidity is adequate as outlined above.
Recent Developments
The global and U.S economies are experiencing significantly reduced business activity as a result of, among other factors, disruptions in the financial system in the past year. Dramatic declines in the housing market during the past year, with falling home prices and increasing foreclosures and unemployment, have resulted in significant
write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail.
In the third quarter of 2008, the Federal Reserve, the U.S. Treasury and the FDIC initiated measures to stabilize the financial markets and to provide liquidity for financial institutions. In response to the financial crisis, the United States government passed the Emergency Economic Stabilization Act of 2008, (the “EESA”)
on October 3, 2008 which provides the United States Treasury Department (the “Treasury”) with broad authority to implement certain actions to help restore stability and liquidity to the U.S. markets. Pursuant to the EESA, the Treasury has the ability to purchase or insure up to $700 billion in troubled assets held by financial institutions under the Troubled Asset Relief Program (“TARP”). On October 14, 2008, the Treasury announced it would purchase equity stakes in financial institutions
under a Capital Purchase Program (the “CPP”) of up to $250 billion of the $700 billion authorized under the TARP. The CPP provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. As a result of additional legislation passed in February 2009,
the CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the Treasury. For a period of three years, the consent of the U.S. Treasury will be required for participating institutions to increase their common stock dividend or repurchase their common stock, other than in connection with benefit plans consistent with past practice. The minimum subscription amount available to a participating institution is one percent of total risk-weighted assets. The maximum
subscription amount is three percent of risk-weighted assets.
In November 2008, the Corporation filed an application to participate in the CPP as part of the TARP. The Executive Committee of the Corporation’s Board of Directors authorized management to apply for participation in the CPP up to the maximum of 3% of total risk-based assets, which was estimated at approximately $120 million. On April 28, 2009,
the Corporation notified its regulators that it has withdrawn its application.
The EESA included a provision for a temporary increase in the Federal Deposit Insurance (FDIC) from $100,000 to $250,000 per depositor effective October 3, 2008 through December 31, 2009. On May 20, 2009, the $250,000 FDIC insurance limit was extended through December 31, 2013. In addition, the FDIC announced the Temporary Liquidity Guarantee
Program effective October 14, 2008, enabling the FDIC to temporarily provide a 100% guarantee of newly issued senior unsecured debt of all FDIC-insured institutions and their holding companies issued before June 30, 2009, as well as deposits in non-interest bearing transaction deposit accounts through December 31, 2009. Coverage under the Temporary Liquidity Guarantee Program was available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points
per annum for non-interest bearing transaction deposits. The Corporation has determined it will continue to participate in the Temporary Liquidity Guarantee Program for non-interest bearing deposit accounts after the 30 day initial period but did not participate in the issuance of unsecured debt.
It is not clear at this time what impact these programs announced by the Treasury and other bank regulatory agencies and any additional programs that may be initiated in the future, will have on the Corporation or the financial markets as a whole.
Other Information
Pending Legislation
The Corporation continues to monitor and assess legislation and regulatory matters for their impact to the Corporation and their effect on capital, liquidity and the results of operations. Any future legislation or regulatory matters may affect the Corporation’s capital, liquidity and results of operations in a material adverse manner.
Effects of Inflation
Inflation has some impact on the Corporation and the Bank’s operating costs. Unlike many industrial companies, however, substantially all of the Bank’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation’s and the Bank’s 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 Bank is a member 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 Bank’s operations in the future. The effect of such policies and regulations
upon the future business and earnings of the Corporation and the Bank cannot be predicted.
Environmental Regulations
There are several federal and state statutes, which regulate the obligations and liabilities of financial institutions pertaining to environmental issues. In addition to the potential for attachment of liability resulting from its own actions, a bank may be held liable under certain circumstances for the actions of its borrowers, or third
parties, when such actions result in environmental problems on properties that collateralize loans held by the bank. Further, the liability has the potential to far exceed the original amount of a loan issued by the bank. Currently, neither the Corporation nor the Bank are a party to any pending legal proceeding pursuant to any environmental statute, nor are the Corporation and the Bank aware of any circumstances that may give rise to liability under any such statute.
Branching
During the first quarter of 2009, the Corporation opened a new branch in Conshohocken, Montgomery County. In conjunction with the expiration of its lease, the Bank consolidated the operations of its Warminster K-Mart Plaza branch into the nearby offices of Warminster Square and Warminster Johnsville Boulvard at the end of business on June
30, 2009.
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 subsidiary. 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 of the Corporation, using policies and procedures approved by the Bank’s Board of Directors, is responsible for managing the rate sensitivity position.
During the fourth quarter of 2008 through 2009, the economy has experienced a continued decline in the housing market, reductions in credit facilities, disruptions in the financial system, and volatility in the financial markets, all resulting in short-term rate reductions by the Federal Open Market Committee and the creation of programs
by Congress and the Treasury Department for the purpose of stabilizing and providing liquidity to the U.S. financial markets. This has created a challenging interest rate environment for the Corporation which has impacted our interest rate sensitivity exposure. A detailed discussion of market risk is provided on pages 37 and 38 of this Form 10-Q.
Item 4
–
Controls and Procedures
(i) Management’s Report on Disclosure Controls
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules, regulations and forms and are operating in an effective manner and that such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(ii) Changes in Internal Controls
In connection with the ongoing review of the Corporation’s internal controls over financial reporting as defined in rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, the Corporation regularly assesses the adequacy of its internal control over financial reporting and enhances its controls in response
to internal control assessments and internal and external audit and regulatory recommendations. There have been no changes in the Corporation’s internal control over financial reporting during the second quarter of 2009 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
As a result of the acquisition of Willow Financial, the Corporation recorded a liability in purchase accounting of $2.7 million, of which $1.6 million is remaining at June 30, 2009, in connection with certain legal contingencies which existed prior to the acquisition. The amount accrued represents estimated settlement and legal costs on
ongoing litigation assumed from Willow Financial. There can be no assurance that any of the outstanding legal proceedings to which the Corporation is a party as a successor in interest to Willow Financial will not be decided adversely to the Corporation’s interests and have a material effect on the financial condition and operations of the Corporation.
Management, based on consultation with the Corporation’s legal counsel, is not aware of any other litigation that would have a material adverse effect on the consolidated financial position of the Corporation. Except as noted above, there are no proceedings pending other than the ordinary routine litigation incident to the business
of the Corporation and its subsidiaries—the Bank, HNC Financial Company and HNC Reinsurance Company. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation and the Bank by government authorities.
Item 1A.
Risk Factors
Except for the addition of the risk factors detailed below, there have been no material changes in risk factors from those disclosed under Item 1A, “Risk Factors.” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008 and the Corporations Quarterly Report on Form 10-Q for the three months
ended March 31, 2009.
The value of the shares of First Niagara common stock that the Corporation’s shareholders receive upon the consummation of the merger may be less than the value of shares of First Niagara or the Corporation’s common stock as of the date the merger agreement was entered into or the date
of the special meetings.
The exchange ratio in the merger agreement is fixed and will not be adjusted in the event of any change in the stock prices of First Niagara or the Corporation prior to the merger, except as further discussed below. There also may be a period of time between the date when shareholders of each of First Niagara and the Corporation vote on
the merger agreement and the date when the merger is completed. The relative prices of First Niagara and the Corporation’s common stock may vary between the date of this Quarterly Report and the date of completion of the merger. The market price of First Niagara and the Corporation’s common stock may change as a result of a variety of factors, including general market and economic conditions, changes in its business, operations and prospects, and regulatory considerations. Many of these factors are
beyond the control of First Niagara or the Corporation, and are not necessarily related to a change in the financial performance or condition of First Niagara or the Corporation. In addition, the exchange ratio is subject to further reduction if loan delinquencies prior to closing are greater than $237.5 million. As First Niagara and the Corporation’s market share prices fluctuate, based on numerous factors, the value of the shares of First Niagara common stock that the Corporation’s shareholder will
receive will correspondingly fluctuate. In addition, it is impossible to predict accurately the market price of First Niagara common stock after completion of the merger. Accordingly, the current prices of First Niagara and the Corporation’s common stock may not be indicative of their prices immediately prior to completion of the merger and the price of First Niagara common stock after the merger is completed.
After the merger is completed, the Corporation’s shareholders will become First Niagara shareholders and will have different rights that may be less advantageous than their current rights.
Upon completion of the merger, the Corporation’s shareholders will become First Niagara shareholders. Differences in the Corporation’s articles of incorporation and bylaws and First Niagara’s articles of incorporation and bylaws will result in changes to the rights of the Corporation’s shareholders who become First
Niagara shareholders.
If the merger is not completed, the Corporation will have incurred substantial expenses without realizing the expected benefits.
The Corporation will incur substantial expenses in connection with the merger. The completion of the merger depends on the satisfaction of specified conditions and the receipt of regulatory approvals. The Corporation and First Niagara cannot guarantee that these conditions will be met. If the merger is not completed, these expenses could
have a material adverse impact on the financial condition of the Corporation because it would not have realized the expected benefits.
Failure to complete the merger in certain circumstances could require the Corporation to pay a termination fee.
If the merger should fail to occur in certain circumstances, the Corporation may be obligated to pay First Niagara $10.0 million as a termination fee.
The Corporation borrows from the Federal Home Loan Bank and the Federal Reserve, and there can be no assurance these programs will continue in their current manner.
The Corporation at times utilizes the Federal Home Loan Bank (“FHLB”) of Pittsburgh for overnight borrowings and term advances; the Corporation also has the ability to borrow from the Federal Reserve and from correspondent banks under our federal funds lines of credit. The amount loaned to the Corporation is generally dependent
on the value of the collateral pledged. These lenders could reduce the percentages loaned against various collateral categories, could eliminate certain types of collateral and could otherwise modify or even terminate their loan programs. In this regard, the FHLB of Pittsburgh has taken impairment charges and has suspended dividends and repurchases of capital stock. Any change or termination would have an adverse affect on the Corporation’s liquidity and profitability.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The Corporation did not repurchase any shares of its stock under the Corporation’s stock repurchase programs during the first six months of 2009. The maximum number of shares that may yet be purchased under the plans was 731,761 as of June 30, 2009. (1) The repurchased shares are used for general corporate purposes.
(1)
|
On May 12, 2005, the Board of Directors authorized a plan to purchase up to 1,416,712 shares (restated for five percent stock dividend paid on September 15, 2006 and September 15, 2005) or 4.9%, of its outstanding common stock. The Corporation is precluded from purchasing its outstanding common stock under the terms of the merger agreement with
First Niagara.
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Item 3.
Defaults Upon Senior Securities
Not applicable
Item 4.
Submission of Matters to a Vote of Security Holders
(a), (b), (c) The Registrant held its annual meeting of shareholders on April 28, 2009. The results of the meeting and information required by this item is incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 30, 2009.
Item 5.
Other Information
(b)
|
On June 16, 2009, the Corporation amended and restated its Bylaws with regard to the manner shareholders may recommend nominees to the Board of Directors as follows: Article 10, Section 10.1 to increase the number days prior to the anniversary of the record date of the preceding year’s shareholder meeting at which directors were elected that a shareholder
must provide notice to the Corporation in order for a shareholder to nominate a candidate for election to the board of directors from 45 to 60 days and Article 12, Section 12.2 to increase the maximum number of directors in addition to the Chairman of the Board and President of the Corporation on the Executive Committee to up to six directors and to eliminate the restriction that such other directors not be employees of the Corporation. The Corporation’s Amended and Restated Bylaws are incorporated by reference
to Exhibit 3(ii) of the Registrant’s Current Report on Form 8-K, filed with the Commission on June 18, 2009.
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Item 6.
Exhibits
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The exhibits listed on the Exhibit Index at the end of this Report are filed with or incorporated as part of this Report (as indicated in connection with each Exhibit).
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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
Date: August 7, 2009
/s/
Paul D. Geraghty
Paul D. Geraghty, President, Chief Executive Officer and
Director
(Principal executive officer)
Date: August 7, 2009
/s/
George S. Rapp
George S. Rapp, Executive Vice President and Chief Financial Officer
(Principal financial and accounting officer)
EXHIBIT INDEX
Exhibit No
|
Description of Exhibits
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(2.1)
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Purchase Agreement, dated as of November 15, 2005, by and among Harleysville National Bank and Trust Company, Cornerstone Financial Consultants, Ltd., Cornerstone Advisors Asset Management, Inc., Cornerstone Institutional Investors, Inc., Cornerstone Management Resources, Inc., John R. Yaissle, Malcolm L. Cowen, II, and Thomas J. Scalici.
(Incorporated by reference to Exhibit 2.1 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Commission on March 15, 2006. The schedules and exhibits to the Purchase Agreement are listed at the end of the Purchase Agreement but have been omitted from the exhibit to Form 10-K. The Registrant agrees to supplementally furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.)
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(2.2)
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Merger Agreement, dated as of May 15, 2007, by and among Harleysville National Corporation, East Penn Financial Corporation, East Penn Bank and HNC-EPF, LLC, as amended. (Incorporated by reference to Annex A of the Corporation’s Registration Statement No. 333-145820 on Form S-4/A, filed with the Commission on September 27, 2007. The
schedules and exhibits to the Merger Agreement are listed at the end of the Merger Agreement but have been omitted from the Annex to Form S-4. The Registrant agrees to supplementally furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.)
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(2.3)
|
Agreement for Purchase and Sale of Partnership Interests, dated as of December 27, 2007, by and among each of the applicable entities (“Buyer”) and 2007 PA HOLDINGS, LLC (“HNB”) and PA BRANCH HOLDINGS, LLC, (“Bank Branch”) (HNB and Bank Branch are referred to collectively as “Seller”). (Incorporated
by reference to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Commission on March 14, 2008. The schedules and exhibits to the Agreement for Purchase and Sale of Partnership Interests are listed at the end of the agreement but have been omitted from the Exhibit to Form 10-K. The Registrant agrees to supplementally furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.)
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(2.4)
|
Merger Agreement, dated as of May 20, 2008, by and among Harleysville National Corporation and Willow Financial Bancorp. (Incorporated by reference to Annex A of the Registrant’s Registration Statement No. 333-152007 on Form S-4, as amended, filed with the Commission on July 31, 2008. The schedules and exhibits to the Merger Agreement
are listed at the end of the Merger Agreement but have been omitted from the Annex to Form S-4. The Registrant agrees to supplementally furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.)
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(3.1)
|
Harleysville National Corporation Amended and Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K, filed with the Commission on May 13, 2009.)
|
(3.2)
|
Harleysville National Corporation Amended and Restated By-laws. (Incorporated by reference to Exhibit 3(ii) to the Corporation’s Current Report on Form 8-K, filed with the Commission on June 18, 2009.)
|
(10.1)
|
Harleysville National Corporation 1993 Stock Incentive Plan.** (Incorporated by reference to Exhibit 4.3 of Registrant’s Registration Statement No. 33-69784 on Form S-8, filed with the Commission on October 1, 1993.)
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(10.2)
|
Harleysville National Corporation Stock Bonus Plan.*** (Incorporated by reference to Exhibit 99A of Registrant’s Registration Statement No. 333-17813 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.)
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(10.4)
|
Walter E. Daller, Jr., Chairman and former President and Chief Executive Officer’s Employment Agreement dated October 26, 1998.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 25, 1999.)
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(10.5)
|
Consulting Agreement and General Release dated November 12, 2004 between Walter E. Daller, Jr., Harleysville National Corporation and Harleysville National Bank and Trust Company.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on November 16, 2004.)
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(10.6)
|
Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Walter E. Daller, Jr.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
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(10.7)
|
Employment Agreement dated October 26, 1998 by and among Harleysville National Corporation, Harleysville National Bank and Trust Company and Demetra M. Takes, President and Chief Executive Officer of Harleysville National Bank and Trust Company.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with
the Commission on March 25, 1999.)
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(10.8)
|
Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Demetra M. Takes, President and Chief Executive Officer of Harleysville National Bank and Trust Company.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed
with the Commission on March 14, 2005.)
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Exhibit No
|
Description of Exhibits
|
(10.9)
|
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.)
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(10.10)
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Harleysville National Corporation 1998 Independent Directors Stock Option Plan, as amended and restated effective February 8, 2001.** (Incorporated by reference to Appendix “A” of Registrant’s Definitive Proxy Statement, filed with the Commission on March 9, 2001.)
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(10.11)
|
Supplemental Executive Retirement Benefit Agreement dated February 23, 2004 between Michael B. High, former Executive Vice President and Chief Financial Officer, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on May 10,
2004.)
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(10.12)
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Employment Agreement effective April 1, 2005 between Michael B. High, former Executive Vice President and Chief Operating Officer of the Corporation, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on November 16, 2004.)
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(10.13)
|
Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Michael B. High, former Executive Vice President and Chief Operating Officer of the Corporation.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the
Commission on March 14, 2005.)
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(10.14)
|
Complete Settlement Agreement and General Release effective October 17, 2008 by and between Michael B. High, former Executive Vice President and Chief Operating Officer of the Corporation, and Harleysville National Corporation, Harleysville National Bank and Trust Company and Harleysville Management Services, LLC .* (Incorporated by reference
to Registrant’s Current Report on Form 8-K, filed with the Commission on October 23, 2008.)
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(10.15)
|
Harleysville National Corporation 2004 Omnibus Stock Incentive Plan, as amended and restated effective November 9, 2006.** (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on November 15, 2006).
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(10.16)
|
Employment Agreement dated August 23, 2004 between James F. McGowan, Jr., Executive Vice President & Chief Credit Officer and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on August 25, 2004.
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(10.17)
|
Supplemental Executive Retirement Benefit Agreement dated August 23, 2004 between James F. McGowan, Jr., Executive Vice President & Chief Credit Officer, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on August 25,
2004.)
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(10.18)
|
Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and James F. McGowan, Jr., Executive Vice President & Chief Credit Officer.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March
14, 2005.)
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(10.19)
|
Employment Agreement dated September 27, 2004 between John Eisele, former Executive Vice President & President of Millennium Wealth Management and Private Banking, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on September 29,
2004.)
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(10.20)
|
Supplemental Executive Retirement Benefit Agreement dated September 27, 2004 between John Eisele, former Executive Vice President & President of Millennium Wealth Management and Private Banking, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed
with the Commission on September 29, 2004.)
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(10.21)
|
Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and John Eisele, former Executive Vice President & President of Millennium Wealth Management and Private Banking.* (Incorporated by reference to Registrant’s Current Report on Form 8-K,
filed with the Commission on March 14, 2005.)
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(10.22)
|
Separation Agreement and Mutual Release dated June 15, 2007 and effective July 19, 2007 between John Eisele, former Executive Vice President & President of Millennium Wealth Management and Private Banking, Harleysville Management Services, LLC., Harleysville National Bank and Trust Company and Harleysville National Corporation.* (Incorporated
by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on July 19, 2007.)
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(10.23)
|
Employment Agreement effective January 1, 2005 between Gregg J. Wagner, the former President and Chief Executive Officer of the Corporation, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on November 16, 2004.)
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(10.24)
|
Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Gregg J. Wagner, the former President and Chief Executive Officer of the Corporation.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission
on March 14, 2005.)
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(10.25)
|
Complete Settlement Agreement and General Release dated November 29, 2006 and effective December 8, 2006 between Gregg J. Wagner and Harleysville National Corporation, Harleysville National Bank and Trust Company and Harleysville Management Services, LLC .* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed
with the Commission on December 13, 2006.)
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Exhibit No
|
Description of Exhibits
|
(10.26)
|
Employment Agreement dated May 18, 2005, between George S. Rapp, Senior Vice President and Chief Financial Officer, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on May 20, 2005.)
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(10.27)
|
Amended and Restated Declaration of Trust for HNC Statutory Trust III by and among Wilmington Trust Company, as Institutional Trustee and Delaware Trustee, Harleysville National Corporation, as Sponsor, and the Administrators named therein, dated as of September 28, 2005. (Incorporated by reference to Registrant’s Quarterly Report on
Form 10-Q/A, filed with the Commission on November, 9, 2005.)
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(10.28)
|
Indenture between Harleysville National Corporation, as Issuer, and Wilmington Trust Company, as Trustee, for Fixed/Floating Rate Junior Subordinated Debt Securities, dated as of September 28, 2005. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q/A, filed with the Commission on November, 9, 2005.)
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(10.29)
|
Guarantee Agreement between Harleysville National Corporation and Wilmington Trust Company, dated as of September 28, 2005. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q/A, filed with the Commission on November, 9, 2005.)
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(10.30)
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Employment Agreement effective July 12, 2006 between Lewis C. Cyr, Chief Lending Officer of the Corporation, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on July 12, 2006.)
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(10.31)
|
Employment Agreement dated July 12, 2007 between Paul D. Geraghty, President and Chief Executive Officer of the Corporation and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Commission on July 12, 2007.)
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(10.32)
|
Amended and Restated Declaration of Trust for HNC Statutory Trust IV by and among Wilmington Trust Company, as Institutional Trustee and Delaware Trustee, Harleysville National Corporation, as Depositor, and the Administrators named therein, dated as of August 22, 2007. (Incorporated by reference to Registrant’s Quarterly Report on Form
10-Q, filed with the Commission on November 8, 2007.)
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(10.33)
|
Indenture between Harleysville National Corporation, as Issuer, and Wilmington Trust Company, as Trustee, for Fixed/Floating Rate Junior Subordinated Debt Securities, dated as of August 22, 2007. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on November 8, 2007.)
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(10.34)
|
Guarantee Agreement between Harleysville National Corporation and Wilmington Trust Company, dated as of August 22, 2007. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on November 8, 2007.)
|
(10.35)
|
Employment Agreement dated November 16, 2007 between Brent L. Peters, Executive Vice President and President of the East Penn Bank Division of Harleysville National Bank and Trust Company, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Annual Report on Form 10-K for the year ended December 31,
2007, filed with the Commission on March 14, 2008.)
|
(10.36)
|
Employment Agreement dated April 17, 2008 between Joseph D. Blair, Executive Vice President and President of the Millennium Wealth Management Division of Harleysville National Bank and Trust Company, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed with
the Commission on August 8, 2008.)
|
(10.37)
|
Employment Agreement dated May 20, 2008 and effective December 5, 2008 between Donna M. Coughey, Executive Vice President of the Corporation and the Bank, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Commission on December 5, 2008.)
|
(10.38)
|
Willow Financial Bancorp, Inc. Amended and Restated 2002 Stock Option Plan. (Incorporated by reference to Exhibit 10.1 of Registrant’s Registration Statement No. 333-156956 on Form S-8, filed with the Commission on January 27, 2009.)
|
(10.39)
|
Willow Financial Bancorp, Inc. Amended and Restated 1999 Stock Option Plan. (Incorporated by reference to Exhibit 10.2 of Registrant’s Registration Statement No. 333-156956 on Form S-8, filed with the Commission on January 27, 2009.)
|
(10.40)
|
Chester Valley Bancorp, Inc. 1997 Stock Option Plan, as amended. (Incorporated by reference to Exhibit 10.3 of Registrant’s Registration Statement No. 333-156956 on Form S-8, filed with the Commission on January 27, 2009.)
|
(10.41)
|
Harleysville National Corporation Amended and Restated Dividend Reinvestment and Stock Purchase Plan (DRIP) effective April 6, 2009. (Incorporated by reference to Exhibit 99.1 of Registrant’s Registration Statement No. 333-158420 on Form S-3, filed with the Commission on April 6, 2009.) On April 28, 2009, the Board of
Directors suspended the DRIP until further notice.
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Exhibit No
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Description of Exhibits
|
(11)
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Computation of Earnings per Common Share, incorporated by reference to Part II, Item 8, Footnote 9, “Earnings Per Share,” of this Report on Form 10-Q.
|
(31.1)
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
|
(31.2)
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
|
(32.1)
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
|
(32.2)
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
|
*
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Management contract or compensatory plan arrangement.
|
**
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Shareholder approved compensatory plan pursuant to which the Registrant’s Common Stock may be issued to employees of the Corporation.
|
***
|
Non-shareholder approved compensatory plan pursuant to which the Registrant’s Common Stock may be issued to employees of the Corporation.
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