Harleysville National Corporation Reports Second Quarter Results

Harleysville National Corporation (NASDAQ:HNBC) reported today a net loss of $8.0 million or $.18 per diluted share excluding the non-cash goodwill charge of $214.5 million for the second quarter of 2009. This compares to net income of $7.3 million, or $.23 per diluted share, for the second quarter of 2008. For the six months ended June 30, 2009, the net loss was $3.4 million or $.08 per diluted share excluding the non-cash goodwill charge compared to net income of $14.6 million or $.46 per diluted share during the comparable period in 2008. Reported net loss including the non-cash goodwill charge was $222.5 million or $5.17 per diluted share for the second quarter of 2009. For the six months ended June 30, 2009, reported net loss including the non-cash goodwill charge was $217.9 million or $5.06 per diluted share.

The second quarter loss was driven by a non-cash goodwill impairment charge of $214.5 million, resulting from the decrease in the market value of the company’s stock. This effectively constitutes the difference between the announced sale price of the company to First Niagara Financial Group for $5.50 per share, which was a 37.5% premium to the pre-announcement market price of the stock, and the company’s book value per share of $10.75 prior to the announcement of the sale of the company to First Niagara Financial Group. The impairment charge was evaluated as part of the company’s annual goodwill analysis. Also contributing to the loss was a provision for credit losses of $32.0 million and a one-time FDIC special assessment of $2.6 million, which were partially offset by a $4.9 million gain on the sale of investment securities.

Harleysville’s second quarter financial results were anticipated, were made known to First Niagara during due diligence and will not impact the exchange ratio as outlined in the merger agreement with First Niagara.

Paul D. Geraghty, President and CEO, Harleysville National Corporation, said, "Second quarter results were disappointing for Harleysville National Corporation. Credit quality continued to be a challenge in our commercial real estate and home equity portfolios, necessitating a significant increase in loan loss reserves. In addition, the announced sale of the company to First Niagara earlier this week resulted in the writeoff of goodwill. That said, we look optimistically to the future. Our merger with First Niagara will make Harleysville part of a $20 billion community bank with a strong franchise stretching from Upstate New York through the Philadelphia suburbs and west to the Pittsburgh region. First Niagara is well capitalized and profitable, and our partnership with them will bring additional products and services to benefit all of our customers.”

Mr. Geraghty continued, "As noted in our merger announcement, First Niagara does not plan to close any branches with the completion of the merger transaction, and is looking to leverage its acquisitions of Harleysville in the Philadelphia suburbs and National City branches in Pittsburgh as a springboard for growth throughout Pennsylvania.”

Mr. Geraghty added, "From a credit standpoint, the Willow loan portfolio has performed extremely well during the recession, and while legacy Willow loans represent 27.8% of our total loan portfolio at June 30, 2009, they represent only 2.11% of chargeoffs. The addition of the Willow franchise, its branches in high-value, high-growth markets, its strong fee-generating product portfolio, and its expertise in credit management and administration made Harleysville a better bank and a more attractive acquisition target for First Niagara.”

Provision for Loan Losses

During the second quarter of 2009, provision for loan losses was $32.0 million, compared to $3.1 million in the second quarter of 2008. The increase in provision for loan losses reflects an increase in nonperforming assets to $138.9 million at June 30, 2009, up from $89.5 million at March 31, 2009 and $39.1 million from a year ago.

Geraghty continued, "Our single biggest challenge over the past several quarters has been our exposure to the real estate markets, and in particular our legacy loans to commercial real estate developers as well as consumer home equity loans. We have taken several steps to triage and manage this exposure, but as the recession persisted, credit quality continued to deteriorate. We believe the loan loss reserves booked in the second quarter will position us to move forward as we work toward the completion of our merger with First Niagara.”

During the first quarter of 2009, the company reported that its Total Capital to Risk-Weighted Assets at December 31, 2008 fell below the well-capitalized level to adequately capitalized. As of June 30, 2009, this ratio increased to 9.39% 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 June 30, 2009, an increase of 34.2% or $1.3 billion over $3.9 billion at June 30, 2008. Willow Financial had assets of approximately $1.6 billion at the acquisition date of December 5, 2008.
• Loans increased $937.3 million and deposits grew $1.1 billion from June 30, 2008. Adjusted for the Willow Financial acquisition and non-recurring loan sales during the second quarter of 2009 totaling approximately $117.2 million, organic loan growth was approximately $83.6 million or 3.3%, and organic deposits grew by $183.6 million or 6.4%.
• Net interest income on a tax equivalent basis in the second quarter of 2009 increased $8.6 million or 31.6% from the same period in 2008 mainly as a result of the Willow Financial acquisition. The net interest margin for the second quarter of 2009 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 increased to 2.67% from 1.58% at March 31, 2009, and 1.01% at June 30, 2008. Net charge-offs were $14.7 million compared to $423,000 in the second quarter of 2008. The allowance for credit losses increased to $70.3 million at quarter end, compared to $53.1 million at March 31, 2009, and $31.2 million at June 30, 2008. Provision for loan losses increased to $32.0 million from $3.1 million during the second quarter of 2008. Total loans delinquent 30 to 89 days totaled $34.4 million at June 30, 2009 compared to $139.3 million at March 31, 2009 and $25.1 million at June 30, 2008. The company’s nonperforming assets combined with loans 30 to 89 days delinquent totaled $173.3 million at June 30, 2009. This is the measurement that corresponds to the Adjustment of Exchange Ratio included in the merger agreement.
• Quarterly noninterest income was up $10.1 million from the second quarter of 2008. Gains on sales of investment securities increased by $4.8 million over last year’s quarter. Service charges on deposits increased $1.0 million, or 30.0% mainly from the acquired Willow Financial deposit accounts. Wealth management fee growth was $.4 million or 7.8%. Gains from mortgage banking loan sales totaled $2.6 million, an increase of $2.4 million over last year’s quarter. Other income increased $1.9 million over the second 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.
• Quarterly noninterest expenses were up $228.3 million over the same period in the prior year, primarily due to the aforementioned goodwill impairment charge of $214.5 million and the Willow Financial acquisition. In addition, FDIC insurance assessments increased by $4.9 million inclusive of the $2.6 million one-time FDIC special assessment previously mentioned. Other expenses were $3.4 million higher during the second 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 $2.7 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 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.