Harleysville National Corporation Reports Third Quarter Results

• Press Release
• Source: Harleysville National Corporation
• On 8:00 am EDT, Friday October 30, 2009

HARLEYSVILLE, Pa.--(BUSINESS WIRE)--Harleysville National Corporation (NASDAQ:HNBC - News) reported today a net loss of $4.4 million or $.10 per diluted share for the third quarter of 2009. This compares to net income of $6.6 million, or $.21 per diluted share, for the third quarter of 2008.

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Symbol	Price	Change
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For the nine months ended September 30, 2009, net loss was $222.3 million or $5.16 per diluted share. Excluding the non-cash goodwill charge of $214.5 million recorded in the second quarter, the net loss was $7.7 million or $.18 per diluted share, compared to net income of $21.3 million or $.68 per diluted share during the comparable period in 2008.

Third quarter results included a $14.8 million provision for credit losses; a $4.7 million non-cash other-than-temporary impairment (OTTI) charge on investment securities; as well as professional fees of $2.4 million associated with recent corporate finance activities, including the pending merger with First Niagara Financial Group, Inc. (“First Niagara”), which is expected to close during the first quarter of 2010.

Paul D. Geraghty, President and CEO, Harleysville National Corporation, said, “We are carefully managing our loan portfolio to preserve and protect the bank’s capital base, and minimize increases in delinquencies and non-performing assets, while also working hard to grow our franchise. To this end, during the third quarter we increased our penetration of retail and business accounts, grew non-municipal core deposits, and continued to expand sales of electronic banking services. We were also encouraged by the full payoffs of two nonperforming loans totaling $18 million after quarter end. The payoffs virtually offset the increase in nonperforming loans over the linked quarter.”

During the third quarter of 2009, provision for loan losses was $14.8 million, compared to $2.6 million in the third quarter of 2008 and $32.0 million in the second quarter of 2009. The increase in provision for loan losses reflects an increase in nonperforming assets to $153.7 million at September 30, 2009, up from $138.9 million at June 30, 2009 and $38.8 million from a year ago. Total Capital to Risk-Weighted Assets improved to 9.51% at September 30, 2009 from 8.88% at December 31, 2008.

Key Financial Metrics

The following is an overview of the key financial metrics for the quarter:

• Total assets were $5.2 billion at September 30, 2009, an increase of 30.7% or $1.2 billion over $3.9 billion at September 30, 2008, primarily the result of the Willow Financial Bancorp acquisition (“Willow Financial”), which had assets of approximately $1.6 billion at the acquisition date of December 5, 2008.
• Loans increased $711.1 million and deposits grew $923.6 million from September 30, 2008, primarily the result of the Willow Financial acquisition.
• Net interest income on a tax equivalent basis in the third quarter of 2009 increased $6.3 million or 23.3% from the same period in 2008 mainly as a result of the Willow Financial acquisition. The net interest margin for the third quarter of 2009 was 2.75% compared to 3.02% for the same period in 2008.
• Nonperforming assets were $153.7 million at September 30, 2009. Nonperforming assets as a percentage of total assets increased to 2.98% from 2.67% at June 30, 2009, and 0.98% at September 30, 2008. As noted above, subsequent to quarter end the bank benefited from the full payoff of two nonperforming loans totaling $18 million. Net charge-offs were $7.8 million compared to $14.7 million in the second quarter of 2009 and $2.1 million in the third quarter of 2008. The allowance for credit losses increased to $77.3 million at September 30, 2009, compared to $70.3 million at June 30, 2009, and $31.7 million at September 30, 2008. Provision for loan losses increased to $14.8 million from $2.6 million during the third quarter of 2008. Total loans delinquent 30 to 89 days totaled $31.8 million at September 30, 2009 compared to $34.4 million at June 30, 2009 and $27.5 million at September 30, 2008.
• The merger agreement with First Niagara, as filed with the SEC on July 28, 2009, calls for a downward adjustment to the merger consideration to be received by Harleysville National Corporation shareholders if the amount of our delinquent loans equals or exceeds $237.5 million as of any month end prior to the closing date of the merger. For purposes of this calculation, “delinquent loans” is defined as the sum of non-performing assets, loans 30 to 89 days delinquent, and cumulative charge-offs subsequent to the signing of the agreement. By this definition, at September 30, 2009, delinquent loans were $193.3 million.
• Quarterly noninterest income was up $1.8 million from the third quarter of 2008. Gains on sales of investment securities increased by $1.4 million over last year’s quarter. Gains from mortgage banking loan sales totaled $2.4 million; there were no gains in last year’s quarter. Service charges on deposits increased $.9 million or 27.4% mainly from the acquired Willow Financial deposit accounts. Other income increased $.9 million over the third quarter of 2008 primarily from increases in automated teller machine and point of sale revenue and an increase in the cash surrender value of keyman life insurance. These increases were partially offset by a non-cash OTTI charge of $4.7 million recorded during the third quarter of 2009 mainly on two collateralized debt obligation investments in pooled trust preferred securities.
• Quarterly noninterest expenses were up $15.1 million over the same period in the prior year, primarily due to the Willow Financial acquisition and the previously-mentioned professional fees of $2.4 million. In addition, FDIC insurance assessments increased by $2.7 million. Other expenses were $6.8 million higher during the third quarter of 2009 mostly due to Willow Financial including increased professional, consulting and data processing expenses.

Non-GAAP Measures

Net loss excluding a non cash goodwill charge is not a defined term under U.S. generally accepted accounting principles (non-GAAP measure). A Non-GAAP measure should not be considered in isolation or as a substitute for net loss prepared in accordance with GAAP and may not be comparable to calculations of similarly titled measures by other companies. Management of the company believes that net loss excluding a non cash goodwill charge is a useful measure and can be used to evaluate the company’s operations.

Harleysville National Corporation, with assets of $5.2 billion, is the holding company for Harleysville National Bank (HNB). Investment Management and Trust Services are provided through Millennium Wealth Management and Cornerstone, divisions of HNB, with assets under management of $3.1 billion. Harleysville National Corporation stock is traded under the symbol "HNBC" and is commonly quoted under NASDAQ Global Select Market^®. For more information, visit the Harleysville National Corporation website at www.hncbank.com.

This press release contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results and trends could differ materially from those set forth in such statements due to various risks, uncertainties and other factors. Such risks, uncertainties and other factors that could cause actual results and experience to differ include, but are not limited to, the following: the Corporation’s merger with First Niagara Financial Group, Inc. is subject to a number of conditions and approvals, including regulatory approvals, and the final consideration to be paid to Harleysville stockholders is subject to adjustment, the strategic initiatives may not be completed on satisfactory terms or 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 in new markets; volatilities in the securities markets; and deteriorating economic conditions and other risks and uncertainties, including those detailed under the caption “Forward-Looking Statements” in the Corporation’s Form 10-K Annual Report for the year ended December 31, 2008 and subsequent filings made with the Securities and Exchange Commission.

Harleysville National Corporation
Media Contact:
Gregory FCA Communications
Joseph J. Crivelli, 610-228-2100
or
Company Contact:
Paul D. Geraghty
President and CEO
215-513-2391