Form 8-K - Harleysville National Corp. 2nd Quarter Earnings

FOR IMMEDIATE RELEASE

CONTACT: Gregg J. Wagner, President and CEO

PHONE: 215-513-2391

HARLEYSVILLE NATIONAL CORPORATION REPORTS

SECOND QUARTER EARNINGS OF $9.3 MILLION

HARLEYSVILLE, PA (July 18, 2006) - Harleysville National Corporation (NASDAQ: HNBC), today announced second quarter 2006 diluted and basic earnings per share of $.33 compared to $.32 and $.33, respectively, for the first quarter of 2006 and $.35 diluted and basic earnings per share for the second quarter of 2005. Net income was $9.3 million for the second quarter of 2006 compared to $9.0 million during the first quarter of 2006 and $9.7 million for the second quarter of 2005.

For the six months ended June 30, 2006, diluted and basic earnings per share were $.65 and $.66, respectively, as compared to $.67 and $.68, respectively in the comparable period of 2005. Net income for the six-month period ended June 30, 2006, was $18.2 million compared to $18.9 million during the first half of 2005.

“The current interest rate environment continues to make 2006 a challenging year,” said Gregg J. Wagner, President and Chief Executive Officer. “We are, however, encouraged by the significant improvement in our fee-based businesses within our wealth management division and continue to experience growth in our core loan and deposit products.”

The Corporation’s consolidated total assets were $3.2 billion at June 30, 2006, an increase of 6.1% or $184.4 million over $3.0 billion in total assets reported at June 30, 2005. This increase was primarily attributable to loan growth of $140.9 million.

The financial results for 2006 include the favorable impact on operations from the acquisition of the Cornerstone Companies effective January 1, 2006, and the gain on the sale of

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the Bank’s credit card portfolio of $1.4 million during the second quarter. The results also reflect the issuance of 1,310,000 shares of the Corporation’s common stock for a 5% stock dividend payable September 15, 2005. All share and per share information has been restated to reflect this stock dividend.

DETAILED REVIEW OF FINANCIAL RESULTS

Net interest income on a tax equivalent basis in the second quarter of 2006 decreased $743,000 or 3.2% from the same period in 2005 and decreased $1.0 million or 2.2% from the six-month period ending June 30, 2005. These decreases during 2006 were mainly attributable to higher deposit and borrowing costs offset in part by higher loan rates. The net interest margin for the second quarter of 2006 was 3.04%, compared to 3.15% for the first quarter of 2006 and 3.34% for the second quarter of 2005. Due to market conditions, deposit and short-term borrowing rates have increased more quickly than loan rates resulting in a lower net interest margin. Average earning assets increased $182.1 million or 6.4% during the second quarter of 2006 versus the comparable period in 2005. Average loans grew by $127.7 million or 6.8% during the same period and investment securities increased $28.5 million or 3.2%.

Nonperforming assets (including nonaccrual loans, net assets in foreclosure and loans 90 days or more past due) were .36% of total assets at June 30, 2006, compared to .27% at December 31, 2005, and .15% at June 30, 2005. The increase in nonperforming assets at June 30, 2006, in relation to December 31, 2005, was mainly due to commercial mortgage loans for two borrowers totaling $2.2 million, which were placed on nonaccrual of interest during the first quarter of 2006, and commercial mortgage loans for another borrower totaling $811,000, which were placed on nonaccrual of interest during the second quarter of 2006. The increase in relation to June 30, 2005, was attributed to the previously aforementioned loans in addition to commercial mortgage loans for one borrower totaling $1.5 million and commercial business loans for two borrowers totaling $396,000, which were placed on nonaccrual of interest during the third and fourth quarters of 2005, respectively. The increase in the provision for the three and six-month periods ending June 30, 2006, compared to the same periods in 2005, of $250,000 and $700,000, respectively, was primarily a result of inherent risk related to loan growth and the increase in nonperforming loans.

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Total deposits increased 11.5% or $256.4 million to $2.48 billion at June 30, 2006, up from $2.22 billion at June 30, 2005. This was primarily attributable to growth in time deposits. Core deposits increased 2.3% or $36.8 million to $1.61 billion for the same periods.

Noninterest income of $10.0 million for the second quarter of 2006 reflects an increase of $2.3 million or 29.3% from the comparable period in 2005. For the six-month period ended June 30, 2006, noninterest income rose to $19.0 million, up $4.3 million or 29.0% from the same period in 2005. The acquisition of the Cornerstone Companies generated increases in wealth management income of $1.3 million during the second quarter of 2006 and $3.9 million for the six months ended June 30, 2006, over the comparable periods last year, partially offset by the sale of Cumberland Advisors, which was divested in the second quarter of 2005. During the second quarter of 2006, the Bank’s credit card portfolio of $15.3 million was sold for a pre-tax gain of $1.4 million. In addition, noninterest income during 2006 included increases in net revenue resulting from credit card operations. There were no gains on sales of investment securities during 2006 as compared to gains of $226,000 during the second quarter of 2005 and $1.1 million for the six-month period ended June 30, 2005. Noninterest income for the second quarter of 2005 included gains of $690,000 and $287,000 on the sales of Harleysville National Bank’s McAdoo branch and Cumberland Advisors, Inc., respectively.

Noninterest expense of $17.8 million for the second quarter of 2006 increased $882,000 or 5.2% from $16.9 million in the second quarter of 2005, and increased $2.5 million or 7.7% for the six months ended June 30, 2006, over the comparable period in 2005. Salaries and benefits expense increased $674,000 during the second quarter of 2006 and $1.7 million during the first six months of 2006 from the comparable periods in 2005, primarily related to the acquisition of the Cornerstone Companies, and compensation expense of $121,000 for the quarter and $249,000 for the six months resulting from recording the Corporation’s stock option expense in conformance with FAS 123(R), “Stock Based Compensation.” Other expense increased $301,000 for the second quarter of 2006 and $1.1 million for the first six months of 2006 mainly as a result of the Cornerstone Companies acquisition, as well as increased computer software expenses partially offset by decreased marketing expenses during 2006.

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Harleysville National Corporation, with assets in excess of $3.2 billion, is the holding company for Harleysville National Bank (HNB). Investment Management and Trust Services are provided through Millennium Wealth Management, a division of HNB, with assets under management in excess of $2.4 billion. Harleysville National Corporation stock is traded under the symbol "HNBC" and is commonly quoted under Nasdaq National Market Issues. For more information, visit the Harleysville National Corporation website at www.hncbank.com

This press release may contain 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 factors. Such factors include the possibility that increased demand or prices for the Corporation’s financial services and products may not occur, changing economic and competitive conditions, technological developments, and other risks and uncertainties, including those detailed in the Corporation’s filings with the Securities and Exchange Commission.

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Harleysville National Corporation
Consolidated Selected Financial Data ⁽¹⁾
(Dollars in thousands, except per share data)
June 30, 2006
(unaudited)

For the period:			Three Months Ended
		Jun. 30,		Mar. 31,		Dec. 31,		Sep. 30,		Jun. 30,
		2006		2006		2005		2005		2005
Interest Income	$	44,223	$	42,096	$	41,008	$	38,570	$	36,889
Interest Expense		22,947		20,625		19,148		16,826		15,042
Net Interest Income		21,276		21,471		21,860		21,744		21,847
Provision for Loan Losses		900		1,200		1,351		650		650
Net Interest Income after
Provision for Loan Losses		20,376		20,271		20,509		21,094		21,197

Service Charges		2,026		1,890		2,089		2,112		2,044
Gains on Sales of Investment Securities, Net		-		-		1,747		1,898		226
Gain on Sale of Credit Card Portfolio		1,444		-		-		-		-
Gain on Sale of Branch		-		-		-		-		690
Wealth Management Income		3,378		4,474		1,410		1,261		2,051
Bank-Owned Life Insurance Income		601		600		599		497		645
Income on Life Insurance		-		-		-		-		177
Other Income		2,571		1,969		1,720		1,962		1,919
Total Noninterest Income		10,020		8,933		7,565		7,730		7,752

Salaries, Wages and Employee Benefits		10,854		10,519		8,572		9,189		10,180
Occupancy		1,401		1,498		1,265		1,277		1,243
Furniture and Equipment		900		891		947		963		1,151
Other Expenses		4,620		4,217		3,986		3,884		4,319
Total Noninterest Expense		17,775		17,125		14,770		15,313		16,893

Income Before Income Taxes		12,621		12,079		13,304		13,511		12,056
Income Tax Expense		3,336		3,128		3,493		3,349		2,366
Net Income	$	9,285	$	8,951	$	9,811	$	10,162	$	9,690

Per Common Share Data:
Weighted Average Common Shares - Basic		27,555,945		27,498,274		27,430,277		27,521,780		27,552,322
Weighted Average Common Shares - Diluted		27,953,890		27,980,829		27,935,571		28,075,455		28,113,870
Net Income Per Share - Basic	$	0.33	$	0.33	$	0.36	$	0.37	$	0.35
Net Income Per Share - Diluted	$	0.33	$	0.32	$	0.35	$	0.36	$	0.35
Cash Dividend Per Share	$	0.19	$	0.19	$	0.23	$	0.18	$	0.17
Book Value	$	10.06	$	10.15	$	9.96	$	10.04	$	10.00
Market Value	$	21.21	$	22.74	$	19.10	$	21.94	$	22.06


For the period:		Six Months Ended
		June 30,
		2006		2005
Interest Income	$	86,319	$	72,161
Interest Expense		43,572		28,644
Net Interest Income		42,747		43,517
Provision for Loan Losses		2,100		1,400
Net Interest Income after
Provision for Loan Losses		40,647		42,117

Service Charges		3,916		4,001
Gains on Sales of Investment Securities, Net		-		1,149
Gain on Sale of Credit Card Portfolio		1,444		-
Gain on Sale of Branch		-		690
Wealth Management Income		7,852		3,980
Bank-Owned Life Insurance Income		1,201		1,138
Income on Life Insurance		-		177
Other Income		4,540		3,560
Total Noninterest Income		18,953		14,695

Salaries, Wages and Employee Benefits		21,373		19,680
Occupancy		2,899		2,634
Furniture and Equipment		1,791		2,321
Other Expenses		8,837		7,761
Total Noninterest Expense		34,900		32,396

Income Before Income Taxes		24,700		24,416
Income Tax Expense		6,464		5,561
Net Income	$	18,236	$	18,855

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	Six Months Ended
		June 30,
Per Common Share Data:		2006			2005
Weighted Average Common Shares - Basic		27,527,269			27,555,887
Weighted Average Common Shares - Diluted		27,970,337			28,163,990
Net Income Per Share - Basic	$	0.66		$	0.68
Net Income Per Share - Diluted	$	0.65		$	0.67
Cash Dividend Per Share	$	0.38		$	0.34


		2006			2006			2005			2005			2005
Asset Quality Data:		2Q			1Q			4Q			3Q			2Q
Nonaccrual Loans	$	10,164		$	9,430		$	7,493		$	6,388		$	3,531
90 + Days Past Due Loans		1,279			1,093			846			1,125			679
Nonperforming Loans		11,443			10,523			8,339			7,513			4,210
Net Assets in Foreclosure		64			78			29			469			459
Nonperforming Assets	$	11,507		$	10,601		$	8,368		$	7,982		$	4,669
Loan Loss Reserve	$	20,617		$	19,895		$	19,865		$	19,205		$	18,890
Loan Loss Reserve / Loans		1.02	%		0.99	%		1.00	%		0.99	%		1.00	%
Loan Loss Reserve / Nonperforming Loans		180.2	%		189.1	%		238.2	%		255.6	%		448.7	%
Nonperforming Assets / Total Assets		0.36	%		0.33	%		0.27	%		0.26	%		0.15	%
Net Loan Charge-offs	$	178		$	1,170		$	691		$	335		$	484
Net Loan Charge-offs (annualized)
/ Average Loans		0.04	%		0.24	%		0.14	%		0.07	%		0.10	%


		2006			2006			2005			2005			2005
Selected Ratios (annualized):		2Q			1Q			4Q			3Q			2Q
Return on Average Assets		1.16	%		1.15	%		1.25	%		1.32	%		1.29	%
Return on Average Shareholders' Equity		13.44	%		13.06	%		14.25	%		14.64	%		14.30	%
Yield on Earning Assets (FTE)		6.10	%		5.97	%		5.76	%		5.56	%		5.48	%
Cost of Interest Bearing Funds		3.60	%		3.34	%		3.09	%		2.79	%		2.57	%
Net Interest Margin (FTE)		3.04	%		3.15	%		3.16	%		3.23	%		3.34	%
Leverage Ratio		9.31	%		9.33	%		9.69	%		9.83	%		9.06	%

		2006			2005
Selected Ratios (annualized):		Year-to-date			Year-to-date
Return on Average Assets		1.15	%		1.27	%
Return on Average Shareholders' Equity		13.25	%		14.00	%
Yield on Earning Assets (FTE)		6.04	%		5.41	%
Cost of Interest Bearing Funds		3.47	%		2.47	%
Net Interest Margin (FTE)		3.09	%		3.36	%


Balance Sheet (Period End):		2006			2006			2005			2005			2005
		2Q			1Q			4Q			3Q			2Q
Assets	$	3,217,018		$	3,201,693		$	3,117,359		$	3,120,138		$	3,032,588
Earning Assets		2,991,628			2,979,595			2,924,156			2,920,126			2,837,263
Investment Securities		925,545			936,665			901,208			900,345			893,587
Loans		2,032,625			2,003,450			1,985,493			1,941,866			1,891,692
Other Earning Assets		33,458			39,480			37,455			77,915			51,984
Interest-Bearing Liabilities		2,541,713			2,534,165			2,441,185			2,464,440			2,349,820
Total Deposits		2,479,658			2,425,673			2,365,457			2,349,559			2,223,304
Noninterest-Bearing Deposits		356,043			345,118			363,440			335,614			360,695
Interest-Bearing Checking		419,312			382,199			387,374			399,482			331,201
Money Market		664,392			678,276			667,952			677,507			676,260
Savings		175,071			187,534			190,033			196,242			209,865
Time Deposits		864,840			832,546			756,658			740,714			645,283
Total Borrowed Funds		418,098			453,610			439,168			450,495			487,211
Federal Home Loan Bank		257,750			297,750			297,750			292,750			272,750
Other Borrowings		160,348			155,860			141,418			157,745			214,461
Shareholders' Equity		277,737			279,989			273,232			275,627			275,484

Balance Sheet (Average):		2006			2006			2005			2005			2005
		2Q			1Q			4Q			3Q			2Q
Assets	$	3,218,481		$	3,164,007		$	3,117,686		$	3,054,895		$	3,006,076
Earning Assets		3,005,888			2,963,541			2,925,231			2,866,964			2,823,832
Investment Securities		929,002			936,867			897,032			903,924			900,457
Loans		2,006,723			1,988,778			1,961,722			1,912,551			1,879,028
Other Earning Assets		70,163			37,896			66,477			50,489			44,347
Interest-Bearing Liabilities		2,555,544			2,504,301			2,458,400			2,388,883			2,344,504
Total Deposits		2,459,453			2,353,353			2,353,430			2,260,962			2,226,609
Noninterest-Bearing Deposits		342,654			338,666			338,768			343,658			339,234
Interest-Bearing Checking		415,426			375,470			385,985			350,425			342,133
Money Market		661,444			666,722			680,365			675,550			675,052
Savings		180,968			187,245			192,961			206,161			216,287
Time Deposits		858,961			785,250			755,351			685,168			653,903
Total Borrowed Funds		438,745			489,614			443,738			471,579			457,129
Federal Home Loan Bank		285,904			297,750			294,435			277,967			272,750
Other Borrowings		152,841			191,864			149,303			193,612			184,379
Shareholders' Equity		277,064			277,892			273,135			275,450			271,735

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Average Balance Sheets and Interest Rates - Fully-Taxable Equivalent Basis

		Three Months Ended June 30, 2006						Three Months Ended June 30, 2005
		Average			Average			Average			Average
		Balance		Interest	Rate			Balance		Interest	Rate
Assets
Earning assets:
Investment securities
Taxable investments	$	673,545	$	7,552	4.50	%	$	628,696	$	5,630	3.59	%
Non-taxable investments⁽²⁾		255,457		3,904	6.13	%		271,761		4,353	6.42	%
Total investment securities		929,002		11,456	4.95	%		900,457		9,983	4.45	%
Federal funds sold and deposits in banks		70,163		855	4.89	%		44,347		307	2.78	%
Loans^{(2) (3)}		2,006,723		33,426	6.68	%		1,879,028		28,285	6.04	%
Total earning assets		3,005,888		45,737	6.10	%		2,823,832		38,575	5.48	%
Noninterest-earning assets		212,593						182,244
Total assets	$	3,218,481					$	3,006,076

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and money market	$	1,257,838		8,918	2.84	%	$	1,233,472		5,039	1.64	%
Time		858,961		8,965	4.19	%		653,903		5,660	3.47	%
Total interest-bearing deposits		2,116,799		17,883	3.39	%		1,887,375		10,699	2.27	%
Borrowed funds		438,745		5,064	4.63	%		457,129		4,343	3.81	%
Total interest-bearing liabilities		2,555,544		22,947	3.60	%		2,344,504		15,042	2.57	%
Noninterest-bearing liabilities:
Demand deposits		342,654						339,234
Other liabilities		43,219						50,603
Total noninterest-bearing liabilities		385,873						389,837
Total liabilities		2,941,417						2,734,341
Shareholders' equity		277,064						271,735
Total liabilities and shareholders' equity	$	3,218,481					$	3,006,076

Net interest spread					2.50	%					2.91	%
Effect of noninterest-bearing sources					0.54	%					0.43	%
Net interest income/margin on earning assets			$	22,790	3.04	%			$	23,533	3.34	%
Less tax equivalent adjustment				1,514						1,686
Net interest income			$	21,276					$	21,847

		Six Months Ended June 30, 2006						Six Months Ended June 30, 2005
		Average			Average			Average			Average
		Balance		Interest	Rate			Balance		Interest	Rate
Assets
Earning assets:
Investment securities
Taxable investments	$	681,829	$	14,874	4.40	%	$	640,440	$	11,684	3.68	%
Non-taxable investments⁽²⁾		251,084		7,681	6.17	%		265,250		8,485	6.45	%
Total investment securities		932,913		22,555	4.88	%		905,690		20,169	4.49	%
Federal funds sold and deposits in banks		54,119		1,280	4.77	%		44,885		576	2.59	%
Loans^{(2) (3)}		1,997,801		65,510	6.61	%		1,862,311		54,716	5.92	%
Total earning assets		2,984,833		89,345	6.04	%		2,812,886		75,461	5.41	%
Noninterest-earning assets		206,561						178,416
Total assets	$	3,191,394					$	2,991,302

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and money market	$	1,243,715		16,431	2.66	%	$	1,234,995		9,319	1.52	%
Time		822,309		16,609	4.07	%		646,064		10,967	3.42	%
Total interest-bearing deposits		2,066,024		33,040	3.22	%		1,881,059		20,286	2.17	%
Borrowed funds		464,039		10,532	4.58	%		455,522		8,358	3.70	%
Total interest-bearing liabilities		2,530,063		43,572	3.47	%		2,336,581		28,644	2.47	%
Noninterest-bearing liabilities:
Demand deposits		340,672						330,621
Other liabilities		43,183						52,464
Total noninterest-bearing liabilities		383,855						383,085
Total liabilities		2,913,918						2,719,666
Shareholders' equity		277,476						271,636
Total liabilities and shareholders' equity	$	3,191,394					$	2,991,302

Net interest spread					2.57	%					2.94	%
Effect of noninterest-bearing sources					0.52	%					0.42	%
Net interest income/margin on earning assets			$	45,773	3.09	%			$	46,817	3.36	%
Less tax equivalent adjustment				3,026						3,300
Net interest income			$	42,747					$	43,517

(1) Certain prior period amounts have been reclassified to conform to current period presentation.
(2) The interest earned on nontaxable investment securities and loans is shown on a tax equivalent basis (tax rate of 35%).
(3) 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.

Pennsylvania	0-15237	23-2210237
(State or other jurisdiction of incorporation or organization)	Commission File Number	(IRS Employer Identification No.)

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Exhibit 99.1 Press Release, dated July 18, 2006, of Harleysville National Corporation (filed pursuant to Item 2.02 hereof).	5