Even at a time when community bank stocks have fallen somewhat out of favor, the sharp drop in Harleysville National Corp.'s stock since the start of 2005 is puzzling.
True, the Pennsylvania company's longtime chief executive officer, Walter E. Daller, retired last month, and management transitions typically make some investors skittish.
But as handoffs go, observers say, this one was smooth. The new CEO, Gregg J. Wagner, promoted from president and chief operating officer, has been with the $3 billion-asset company for 10 years.
Moreover, Harleysville had just reported its 29th consecutive year of record earnings and its asset quality is among the best for banks its size.
Yet since Dec. 30, Harleysville's shares have plummeted 25%, to $20.71 late Monday. The America's Community Bankers Nasdaq stock index has fallen about 9% during that period.
John Blaylock, a senior analyst with Alex Sheshunoff & Co. in Austin, said that given the company's strong performance, his only explanation for the pummeling its stock has taken is Mr. Daller's departure.
But one problem with that explanation, he said, is that Harleysville handled the management transition so well. Mr. Wagner's appointment was announced on the same day, Nov. 15, that Mr. Daller disclosed his retirement plans. Chief financial officer Michael High succeeded Mr. Wagner as chief operating officer, with Mr. Wagner retaining the title of president.
"They have good people and they made a clear announcement," Mr. Blaylock said. "So why did the market react the way it did?"
Investors seem to be ignoring Harleysville's potential as a takeover target, he said. The company operates in southeastern and central Pennsylvania, markets that have proven to be very attractive to larger banks.
"That alone should have given the stock some extra pop," Mr. Blaylock said. He added that Harleysville's shares are trading at about 14 times 2004 earnings, versus a multiple of 17 for most other small community banks.
Along with reporting increased profits for 29 straight years, Harleysville has raised its dividend every year since 1974. As for asset quality, it ended 2004 with $5.8 million of nonperforming loans - 0.31% of its portfolio. The average for companies Harleysville's size is 0.71%, according to the Federal Deposit Insurance Corp.
Robert Kafafian, the president and CEO of Kafafian Group Inc. in Parsippany, N.J., called Harleysville a "high-performance bank" but said investors have adopted a wait-and-see attitude toward Mr. Wagner.
A lack of analyst coverage probably contributed to the stock's slide, Mr. Kafafian said. A management change usually leads to a wave of analysts' reports, but with no one covering Harleysville, investors know little about Mr. Wagner's plans, he said.
"If you don't have any analysts, then nobody is touting your stock," Mr. Kafafian said.
Mr. Wagner says no significant changes are in the works. In an interview Friday, he said the company will continue to build up its wealth management and private banking business; continue opening new branches in Montgomery and Chester counties and in the Lehigh Valley; and keep looking for reasonably priced, accretive acquisitions.
Indeed, far from seeking to alter Mr. Daller's management formula, Mr. Wagner said it was a privilege to have been able to work so closely with him during the year he spent as president and chief operating officer. He said he learned an enormous amount by watching how Mr. Daller treated people and the "disciplined" way he approached issues.
"Walter has laid down some real core values, a real great foundation for the future of the bank, and we intend to continue that," Mr. Wagner said. "We're not going to change any of our core strategies."
Richard D. Weiss, an analyst at Janney Montgomery Scott LLC in Philadelphia, said Mr. Daller, who had been CEO for 24 years, discouraged coverage.
"He seemed like a nice guy. He was never rude, but he never wanted any research coverage," Mr. Weiss said. "He was indifferent, and since there are so many other companies that want coverage, analysts tend to focus on them."
Mr. Daller "figured our performance spoke for itself," Mr. Wagner said. He added that he has no immediate plan to change the policy on analyst coverage, though he said he might review it at some point.
