Under pressure from Feds, Harleysville Nat’l selling self

Under pressure from federal regulators to raise extra capital because of its heavy reliance on the troubled home-mortgage business, the parent company of Harleysville National Bank has agreed to be acquired by First Niagara Financial Group Inc., a Buffalo-based bank holding company.

The acquisition was announced today by Harleysville National and by First Niagara, which said it would pay about $237 million for Harleysville National Corp. in an all-stock transaction, based on share values recorded last week.

If the deal goes through, it will end a century of local ownership for Harleysville National, which was founded in 1909.

A spokesman said Harleysville National now ranks as the Philadelphia region's largest locally owned bank by deposits, thanks to a series of earlier mergers and acquisitions that swallowed its larger competitors.

Harleysville National, based in Harleysville, Montgomery County, has continued to grow, both by opening new branches and through acquisitions that included the 2007 purchase of East Penn Financial Corp. and last year's of Willow Financial Bancorp Inc. Harleysville National now operates 83 branches in nine Eastern Pennsylvania counties.

However, Harleysville National's large reliance on residential real estate loans caused concern among bank regulators as housing prices fell and the recession deepened. In June, Harleysville National disclosed that it had been ordered by the Office of the Comptroller of the Currency to raise an additional $65 million to $120 million by June 30 to maintain its status as "well-capitalized" under the regulatory agency's standards.

Harleysville National warned investors that it did not expect to meet that deadline, and it did not, said Joe Crivelli of Gregory/FCA Communications, a spokesman for the bank. Crivelli said Harleysville has worked since last month to evaluate proposals from private-equity firms as well as other opportunities to meet its capital needs.

"At the end of the day, this was determined to be the best path forward - to partner with a strong bank that has presence in markets very similar to Harleysville's and that had a keen interest in building its presence in Pennsylvania," Crivelli said.

John R. Koelmel, First Niagara's president and chief executive officer, voiced similar sentiments during a telephone conference call and interview.

Koelmel said Harleysville National "just got caught in this perfect storm that many in our industry are struggling with." He said that Harleysville National operates in "a wonderful market," and that the acquisition would allow First Niagara to build on the foothold it recently established in Pennsylvania.

In April, First Niagara acquired 57 branches of National City Bank as that institution was taken over by Pittsburgh-based PNC Financial Services Group Inc., parent of PNC Bank.

"The communities served by Harleysville are perfect complements to First Niagara's stable and resilient markets in Upstate New York and Western Pennsylvania," Koelmel said.

Koelmel said First Niagara recently repaid $184 million in federal money from the Troubled Asset Relief Program, including about $6 million in dividends and warrant buybacks that he said equaled an 8 percent annualized return.

He said the bank paid back the TARP funds using money that it had raised last year and this year from private investors.

"Right now, we're in a pretty unique position in that we're dealing from a position of strength," Koelmel said.

Harleysville's troubles were plainly a result of the nationwide collapse in housing prices.

Forty-four percent of all its loans were in single-family homes - the highest percentage among the 10 biggest banks with headquarters in the Philadelphia region, according to an analysis of bank data.

Koelmel said: "Harleysville wasn't a broken business - it wasn't a bad business. It just didn't have sufficient capital, as far as the regulators were concerned."

With the acquisition of Harleysville National, First Niagara said it would be adding $5.6 billion in assets, including $4.1 billion in deposits.

Under the terms of the purchase agreement, Harleysville National shareholders will receive 0.474 shares of First Niagara common stock for each Harleysville National share. First Niagara said that represented a premium of about 37.5 percent based on Harleysville National's closing price on Friday July 24, 2009of $4 per share and a Niagara share price of $11.60, a value set last Wednesday based on a five-day average of the stock's closing prices.

The deal is subject to adjustment under certain circumstances if loan delinquencies at Harleysville National exceed specified amounts, Niagara said.

First Niagara said it intended to maintain all Harleysville National and East Penn branches, and to build on the Pennsylvania company's growing commercial banking and wealth-management business. Harleysville National currently employs more than 1,100 people.

Crivelli said Harleysville National's branches would eventually be renamed. "It will change to 'First Niagara' over time," he said.

First Niagara said the transaction had been approved by both holding companies' boards of directors, but remained subject to regulatory approval and other conditions, including the approval of Harleysville National shareholders.

Contact staff writer Jeff Gelles at 215-854-2776 or jgelles@phillynews.com.