| HARLEYSVILLE NATIONAL CORP Item 1A Risk Factors The business of the Corporation and the Bank involve significant risks as described below |
| Additional risks may arise in the future or risks that are currently not considered significant may also impact the operations of the Corporation and the Bank |
| The Corporation may amend or supplement the risk factors 11 ______________________________________________________________________ described below from time to time by reports filed with the SEC in the future |
| Management’s ability to analyze and manage these and other risks could affect the future financial results of the Corporation |
| If any of the events or circumstances described in the following risks occur, the financial condition or results of operations of the Corporation could suffer and the trading price of the Corporation’s common stock could decline |
| Interest rate movements impact the earnings of the Corporation |
| The Corporation is exposed to interest rate risk, through the operations of its banking subsidiary, since substantially all of the Bank’s assets and liabilities are monetary in nature |
| Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and value of financial instruments |
| The Bank’s earnings, like that of most financial institutions, largely depends on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and investments, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings |
| In an increasing interest rate environment, the cost of funds is expected to increase more rapidly than the interest earned on the loans and securities because the primary source of funds are deposits with generally shorter maturities than the maturities on loans and investment securities |
| This causes the net interest rate spread to compress and negatively impacts the Bank’s profitability |
| 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 Corporation is exposed to risks in connection with loans the Bank makes and if the allowance for loan losses is not sufficient to cover actual loan losses, the Corporation’s earnings could decrease |
| A significant source of risk for the Corporation arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans |
| The Corporation has underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, that are believed to be adequate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying loan portfolios |
| Such policies and procedures, however, may not prevent unexpected losses that could adversely affect the Corporation’s results of operations |
| 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 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 |
| Strong competition within the Corporation’s market area may limit its growth and profitability |
| Competition in the banking and financial services industry is intense |
| The Bank competes actively with other eastern Pennsylvania financial institutions, many larger than the Bank, as well as with financial and non-financial institutions headquartered elsewhere |
| Commercial banks, savings banks, savings and loan associations, credit unions, and money market funds actively compete for deposits and loans |
| Such institutions, as well as consumer finance and insurance companies, may be considered competitors with 12 ______________________________________________________________________ respect to one or more services they render |
| The Bank is generally competitive with all competing institutions in its service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts, interest rates charged on loans and fees for trust and investment advisory services |
| Many of the institutions with which the Bank competes have substantially greater resources and lending limits and may offer certain services that the Bank does not or cannot provide |
| The Corporation’s profitability depends upon the Bank’s ability to successfully compete in its market area |
| An economic downturn in eastern Pennsylvania or a general decline in economic conditions could adversely affect the Corporation’s financial results |
| The Bank’s operations are concentrated in eastern Pennsylvania |
| As a result of this geographic concentration, the Corporation’s financial results may correlate to the economic conditions in this area |
| Deterioration in economic conditions in this market area, particularly in the industries on which this geographic areas depend, or a general decline in economic conditions may adversely affect the quality of the loan portfolio (including the level of non-performing assets, charge offs and provision expense) and the demand for products and services, and accordingly, the Corporation’s results of operations |
| Inflation has some impact on the Corporation’s and the Bank’s operating costs |
| The Corporation and the Bank are subject to extensive regulation, supervision and examination by certain state and federal agencies including the Pennsylvania State Department of Banking, the Federal Deposit Insurance Corporation, as insurer of the Bank’s deposits, the Board of Governors of the Federal Reserve System, as regulator of the holding company and the Office of the Comptroller of Currency |
| Such regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily to ensure the safety and soundness of financial institutions |
| Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of assets and determination of the level of the allowance for loan losses |
| Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on the Bank’s and the Corporation’s operations |