##### 



(HARLEYSVILLE NATIONAL CORP LOGO)

HARLEYSVILLE NATIONAL CORPORATION

2002 ANNUAL REPORT

ON FORM 10-K




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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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Form 10-K

(Mark One)




|  |                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------
|þ | Annual report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934 
     for the fiscal year ended December 31, 2002.

OR



|  |                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|o | Transition report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934 [NO FEE REQUIRED] for the
    transition period
    from                         to                         .

Commission file number 0-15237

Harleysville National Corporation

(Exact name of registrant as specified in its
charter)


|                                                                                             |  |                                     
|-------------------------------------------------------------------------------------------- |  | ------------------------------------
|Pennsylvania                                                                                 |  | 23-2210237                          
|(State or other jurisdiction of
    incorporation
    or organization)                       |  | (I.R.S. Employer Identification No.)
|                                                                                            
|483 Main Street,
    Harleysville, Pennsylvania
    (Address of principal executive offices) |  | 19438
    (Zip Code)                

(215) 256-8851

Registrants telephone number, including
area code:


Securities registered pursuant to
Section 12(b) of the Act: N/A

|                    |  |                         
|------------------- |  | ------------------------
|                    |  | Name of each exchange on
|Title of each class |  | which registered        
|                    |  |                         
|N/A                 |  | N/A                     

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $1.00 par value

Title of Class


Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports) and
(2) has been subject to such filing requirements for the
past 90 days. Yes
þ No
o

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act.) Yes þ No
o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     o



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State the aggregate market value of the voting
stock held by nonaffiliates of the registrant. The aggregate
market value shall be computed by reference to the price at
which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to
the date of filing.

$427,670,000 as of February 21, 2003

Indicate the number of shares outstanding of each
class of the registrants classes of common stock, as of
the latest practicable date.

19,018,206 shares of Common Stock, $1 par
value per share,

were outstanding as of February 21, 2003


DOCUMENTS INCORPORATED BY REFERENCE:

1. Portions of the Registrants Annual
Report to Shareholders for the fiscal year ended
December 31, 2002 are incorporated by reference into
Part II of this report.

2. Portions of the Registrants
Definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held April 8, 2003 are incorporated by
reference into Part III of this report.

HARLEYSVILLE NATIONAL CORPORATION

Index

|                                                                                          |                                                            |      |    |           | 
|----------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ---- | -- | --------- | 
|                                                                                          |                                                            | Page
|                                                                                          |                                                            |     
|Form 10-K Cross Reference Sheet                                                           |                                                            |      | 2  |          
|Forward Looking Statements                                                                |                                                            |      | 3  |          
|Managements Discussion and Analysis of
    Financial Condition and Results of Operations |                                                            |      | 4  |          
|Five Year Summary of Selected Financial Data                                              |                                                            |      | 4  |          
|Harleysville National Corporation                                                         |                                                            |      | 5  |          
|Securities Listing, Prices and Dividends                                                  |                                                            |      | 21 |          
|Consolidated Financial Statements                                                         |                                                            |      | 22 |          
|Report of Independent Certified Public Accountants                                        |                                                            |      | 48 |          
|Managements Statement of Responsibility                                                  |                                                            |      | 63 |          
|                                                                                         
|Other Material Required by Form 10-K:                                                     |                                                            |      |    |          
|                                                                                          | Description of Business                                    |      |    | 49        | 
|                                                                                          | Properties                                                 |      |    | 53        | 
|                                                                                          | Exhibits, Financial Statements and Reports on
    Form 8-K |      |    | 56 and 58 | 
|                                                                                          | Signatures                                                 |      |    | 57        | 

1



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Form 10-K Cross Reference Sheet of
Material Incorporated by Reference

The following table shows the location in this
Annual Report on Form 10-K or the accompanying Proxy
Statement of the information required to be disclosed by the
United States Securities and Exchange Commission
(SEC) in Form 10-K. Where indicated below,
information has been incorporated by reference in this Report
from the Proxy Statement. Other portions of the Proxy Statement
are not included in this Report. This Report is not part of the
Proxy Statement. References are to pages in this report unless
otherwise indicated.

|           |  |                                                                                           |  |                                                                                                                                                                                                                                        
|---------- |  | ----------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |  | Item of Form 10-K                                                                         |  | Location                                                                                                                                                                                                                               
|           |  |                                                                                           |  |                                                                                                                                                                                                                                        
|PART I.    |  |                                                                                           |  |                                                                                                                                                                                                                                        
|Item 1.    |  | Business                                                                                  |  | Forward-Looking Statements on
    page 3 and Business on pages 26 and 49.                                                                                                                                                          
|Item 2.    |  | Properties                                                                                |  | Properties on pages 53 and 54                                                                                                                                                                                                        
|Item 3.    |  | Legal Proceedings                                                                         |  | Legal Proceedings on page 54.                                                                                                                                                                                                        
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                   |  | Not applicable. No matter was submitted to a vote
    of security holders during the fourth quarter of 2002.                                                                                                                           
|          
|PART II.   |  |                                                                                           |  |                                                                                                                                                                                                                                        
|Item 5.    |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  | Securities Listing, Prices, and
    Dividends on page 21.                                                                                                                                                                            
|Item 6.    |  | Selected Financial Data                                                                   |  | Five Year Summary of Selected Financial
    Data on page 4.                                                                                                                                                                          
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  | Forward-Looking Statements on
    page 3, Managements Discussion and Analysis of
    Financial Condition and Results of Operations on
    pages 4 through 21.                                                                     
|Item 7A.   |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |  | Market Risk Management on
    pages 16 through 18.                                                                                                                                                                                   
|Item 8.    |  | Financial Statements and Supplementary Data                                               |  | Pages 22 through 47.                                                                                                                                                                                                                   
|Item 9.    |  | Changes in and Disagreements with Accountants On
    Accounting and Financial Disclosure  |  | Not applicable. During the past two years or any
    subsequent period there has been no change in or reportable
    disagreement with the certifying accountants for Harleysville
    National Corporation or any of its subsidiaries.
|          
|PART III.  |  |                                                                                           |  |                                                                                                                                                                                                                                        
|Item 10.   |  | Directors and Executive Officers of the Registrant                                        |  | Information regarding Directors is included in
    the Proxy Statement on pages 6 through 9.
    Information regarding executive officers is included under the
    caption Executive Officers on page 55 of this
    Report.        
|Item 11.   |  | Executive Compensation                                                                    |  | Information regarding executive compensation is
    included in the Proxy Statement on pages 10 through 18.                                                                                                                            
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  | Information regarding security ownership of
    certain beneficial owners and management is included in the
    Proxy Statement on page 6.                                                                                             
|Item 13.   |  | Certain Relationships and Related Transactions                                            |  | Information regarding certain relationships and
    related transactions is included in the Proxy Statement on
    Page 21 and on page 35 of this Form 10-K.                                                                           
|Item 14.   |  | Controls and Procedures                                                                   |  | Pages 63 and 64                                                                                                                                                                                                                        
|          
|PART IV.   |  |                                                                                           |  |                                                                                                                                                                                                                                        
|Item 15.   |  | Exhibits, Financial Statement Schedules, And
    Reports on Form 8-K                      |  | Pages 56 and 58                                                                                                                                                                                                                        
|          
|Signatures |  |                                                                                           |  | Signatures on pages 57                                                                                                                                                                                                                 

2



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Forward-Looking Statements


In addition to historical information, this
document contains forward-looking statements. We have made
forward-looking statements in this document that are subject to
risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of
operations of Harleysville National Corporation and its
subsidiaries. When we use words such as believes,
expects, anticipates, or similar
expressions, we are making forward-looking statements.

Shareholders should note that many factors, some
of which are discussed elsewhere in this document and in the
documents that we incorporate by reference, could affect the
future financial results of the Corporation and its subsidiaries
and could cause those results to differ materially from those
expressed in our forward-looking statements contained or
incorporated by reference in this document. These factors
include the following:



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | operating, legal and regulatory risks;                                                                                                                    
|
| |  | economic, political and competitive forces
    affecting our banking, securities, asset management and credit
    services businesses and;                
|
| |  | the risk that our analysis of these risks and
    forces could be incorrect and/or that the strategies developed
    to address them could be unsuccessful

The SEC has not approved or disapproved this
Report or passed upon its accuracy or adequacy.

3



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Managements Discussion and Analysis
of Financial Condition and Results of Operations

HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES

CONSOLIDATED SUMMARY OF OPERATIONS

|                                                                                      |  |                         |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|                                                                                      |  |                        
|                                                                                      |  | Year Ended December 31,
|(Dollars in thousands, except per share data and                                      |  |                        
|average shares outstanding)                                                           |  | 2002                    |            | 2001 |  | 2000 |            | 1999 |  | 1998
|                                                                                      |  |                         |            |      |  |      |            |      |  |     
|Income and expense                                                                    |  |                         |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Interest income                                                                       |  | $                       | 132,630    |      |  | $    | 138,679    |      |  | $    | 131,811    |  |  | $ | 114,167    |  |  | $ | 102,005    | 
|Interest expense                                                                      |  |                         | 52,610     |      |  |      | 64,937     |      |  |      | 65,774     |  |  |   | 50,649     |  |  |   | 44,372     | 
|                                                                                      |  |                         |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Net interest income                                                                   |  |                         | 80,020     |      |  |      | 73,742     |      |  |      | 66,037     |  |  |   | 63,518     |  |  |   | 57,633     | 
|Provision for loan losses                                                             |  |                         | 4,370      |      |  |      | 3,930      |      |  |      | 2,312      |  |  |   | 2,153      |  |  |   | 2,288      | 
|                                                                                      |  |                         |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Net interest income after provision for loan
    losses                               |  |                         | 75,650     |      |  |      | 69,812     |      |  |      | 63,725     |  |  |   | 61,365     |  |  |   | 55,345     | 
|Noninterest income                                                                    |  |                         | 22,523     |      |  |      | 22,225     |      |  |      | 12,206     |  |  |   | 10,535     |  |  |   | 10,520     | 
|Noninterest expense                                                                   |  |                         | 56,297     |      |  |      | 55,043     |      |  |      | 44,677     |  |  |   | 41,976     |  |  |   | 38,446     | 
|                                                                                      |  |                         |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Income before income tax expense                                                      |  |                         | 41,876     |      |  |      | 36,994     |      |  |      | 31,254     |  |  |   | 29,924     |  |  |   | 27,419     | 
|Income tax expense                                                                    |  |                         | 8,949      |      |  |      | 8,174      |      |  |      | 5,650      |  |  |   | 6,686      |  |  |   | 6,661      | 
|                                                                                      |  |                         |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Net income                                                                            |  | $                       | 32,927     |      |  | $    | 28,820     |      |  | $    | 25,604     |  |  | $ | 23,238     |  |  | $ | 20,758     | 
|                                                                                      |  |                         |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Per Share*                                                                            |  |                         |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Diluted earnings                                                                      |  | $                       | 1.67       |      |  | $    | 1.46       |      |  | $    | 1.31       |  |  | $ | 1.19       |  |  | $ | 1.07       | 
|Basic earnings                                                                        |  |                         | 1.72       |      |  |      | 1.50       |      |  |      | 1.31       |  |  |   | 1.19       |  |  |   | 1.07       | 
|Cash dividends paid                                                                   |  |                         | 0.71       |      |  |      | 0.62       |      |  |      | 0.54       |  |  |   | 0.49       |  |  |   | 0.43       | 
|Diluted average shares outstanding                                                    |  |                         | 19,700,487 |      |  |      | 19,698,964 |      |  |      | 19,486,473 |  |  |   | 19,499,006 |  |  |   | 19,484,207 | 
|Basic average shares outstanding                                                      |  |                         | 19,121,778 |      |  |      | 19,221,254 |      |  |      | 19,464,230 |  |  |   | 19,474,134 |  |  |   | 19,451,920 | 
|Average balance sheet                                                                 |  |                         |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Loans                                                                                 |  | $                       | 1,333,300  |      |  | $    | 1,264,750  |      |  | $    | 1,166,684  |  |  | $ | 1,031,055  |  |  | $ | 894,758    | 
|Investments                                                                           |  |                         | 823,004    |      |  |      | 660,983    |      |  |      | 562,508    |  |  |   | 515,006    |  |  |   | 427,850    | 
|Other interest-earning assets                                                         |  |                         | 25,411     |      |  |      | 19,228     |      |  |      | 9,876      |  |  |   | 20,133     |  |  |   | 31,698     | 
|Total assets                                                                          |  |                         | 2,309,422  |      |  |      | 2,058,738  |      |  |      | 1,843,525  |  |  |   | 1,639,041  |  |  |   | 1,413,772  | 
|Deposits                                                                              |  |                         | 1,808,390  |      |  |      | 1,599,515  |      |  |      | 1,436,781  |  |  |   | 1,267,936  |  |  |   | 1,144,822  | 
|Guaranteed preferred beneficial interest in
    Corporations subordinated debentures |  |                         | 5,000      |      |  |      | 4,204      |      |  |      |           |  |  |   |           |  |  |   |           | 
|Other interest-bearing liabilities                                                    |  |                         | 242,221    |      |  |      | 222,043    |      |  |      | 218,811    |  |  |   | 194,887    |  |  |   | 99,416     | 
|Shareholders equity                                                                  |  |                         | 198,373    |      |  |      | 182,178    |      |  |      | 154,547    |  |  |   | 148,636    |  |  |   | 142,959    | 
|Balance sheet at year-end                                                             |  |                         |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Loans                                                                                 |  | $                       | 1,333,292  |      |  | $    | 1,316,609  |      |  | $    | 1,212,055  |  |  | $ | 1,118,816  |  |  | $ | 956,867    | 
|Investments                                                                           |  |                         | 971,467    |      |  |      | 732,470    |      |  |      | 601,460    |  |  |   | 530,895    |  |  |   | 491,942    | 
|Other interest-earning assets                                                         |  |                         | 41,910     |      |  |      | 19,650     |      |  |      | 3,507      |  |  |   | 13,837     |  |  |   | 23,886     | 
|Total assets                                                                          |  |                         | 2,490,864  |      |  |      | 2,208,971  |      |  |      | 1,935,213  |  |  |   | 1,767,667  |  |  |   | 1,541,449  | 
|Deposits                                                                              |  |                         | 1,979,822  |      |  |      | 1,746,862  |      |  |      | 1,489,050  |  |  |   | 1,341,437  |  |  |   | 1,211,326  | 
|Guaranteed preferred beneficial interest in
    Corporations subordinated debentures |  |                         | 5,000      |      |  |      | 5,000      |      |  |      |           |  |  |   |           |  |  |   |           | 
|Other interest-bearing liabilities                                                    |  |                         | 248,906    |      |  |      | 210,820    |      |  |      | 231,388    |  |  |   | 251,597    |  |  |   | 151,628    | 
|Shareholders equity                                                                  |  |                         | 206,206    |      |  |      | 189,349    |      |  |      | 173,536    |  |  |   | 146,663    |  |  |   | 149,572    | 



|  |                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------
|* | Adjusted for 5% stock dividends effective
    9/16/02, 11/9/00 and 9/30/99, and a 100% stock dividend
    effective 8/10/01

4



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HARLEYSVILLE NATIONAL CORPORATION

The following is managements discussion and
analysis of the significant changes in the results of
operations, capital resources and liquidity presented in its
accompanying consolidated financial statements for the
Corporation, the Banks, HNC Financial Company and HNC
Reinsurance Company. The Corporations consolidated
financial condition and results of operations consist almost
entirely of the Banks financial condition and results of
operations. Current performance does not guarantee, and may not
be indicative of, similar performance in the future.

Introduction

The Corporation recorded record earnings and
improved loan quality during a very difficult economic
environment in 2002. The earnings were primarily driven by the
growth in earning assets and our continued efforts to control
expenses. The net income in 2002 was 14.3% higher than 2001. The
2002 earnings continued our four-year record of achieving net
income growth greater than 10%. Improved credit quality was also
a highlight of 2002. Net loans charged off in 2002 were less
than 2001 and the level of nonperforming loans and leases also
decreased.

The Corporations net income of $32,927,000
in 2002, increased 14.3% compared to the $28,820,000 reported in
2001. Diluted earnings of $1.67 per share in 2002 increased
14.4% from $1.46 in 2001. Basic earnings per share in 2002 were
$1.72 compared to $1.50 in 2001. Net interest income grew
$6,278,000, as a result of the 12.2% rise in average earning
assets. Other operating income of $19,048,000 earned in 2002,
net of security gains, increased $1,452,000, or 8.3%, compared
to 2001, primarily due to both higher service charges and
bank-owned life insurance (BOLI) income. The 2002 other
operating expense grew only 2.3% compared to 2001.

The 2002 results were also reflected in the
Corporations loan quality. Key loan quality performance
ratios at December 31, 2002, reflected the improvement over
2001 performance ratios. The ratio of net charged off loans to
average loans outstanding for 2002 was 0.21%, compared to 0.28%
during 2001. The ratio of the allowance for loan losses to
nonperforming loans and leases of 272.8% at December 31,
2002, improved from the 187.9% at December 31, 2001.

Interest-Earning Assets and Interest-Bearing
Liabilities

The 2002 average interest-earning assets of
$2,181,715,000 in 2002, increased $236,754,000, or 12.2%,
compared to $1,944,961,000 in 2001. The increase was primarily
due to the growth in the average investment portfolio. During
2002, the average balance of investments increased $162,021,000,
or 24.5%, the average loan portfolio grew $68,550,000, or 5.4%
and average other earning assets grew $6,183,000, or 32.2%.
Average interest-earning assets were $1,739,068,000 in 2000.

The level of average interest-bearing liabilities
totaled $1,817,932,000 in 2002, an increase of $211,538,000, or
13.2%, compared to 2001. Contributing to this rise were
increases in savings deposits, time deposits and other
borrowings of $121,556,000, $69,008,000, and $20,974,000,
respectively. Average interest-bearing liabilities were
$1,450,814,000 in 2000.

Investment Securities

SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, requires, among other
things, that debt and equity securities classified as available
for sale be reported at fair value, with unrealized gains and
losses excluded from earnings and reported in other
comprehensive income. The net effect of unrealized gains or
losses, caused by marking an available for sale portfolio to
market, causes fluctuations in the level of shareholders
equity and equity-related financial ratios as market interest
rates cause the fair value of fixed-rate securities to fluctuate.

Investment securities grew 32.6% from
$732,470,000 at December 31, 2001 to $971,467,000 at
December 31, 2002. This rise was primarily driven by the
strong growth in deposits and the lower demand for loans in
2002. The investment securities available for sale increased
$242,685,000 and the investment

5



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##### 



securities held to maturity decreased $3,688,000.
During 2002, $897,327,000 of securities available for sale were
sold which generated a pretax gain of $3,475,000. In comparison,
$468,270,000 securities available for sale were sold during 2001
to generate a pretax gain of $4,629,000. The Corporation sells
investment securities available for sale to fund the purchase of
other securities in an effort to enhance the overall return of
the portfolio, and to reduce the interest rate risk within
different interest rate environments.


Table 1Investment
Portfolio

The following table shows the carrying value of
the Corporations investment securities held to maturity:

|                                                 |       |                        |        |        |  |      |        |        |  |   |        |        | 
|------------------------------------------------ | ----- | ---------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                 |       | 2002                   |        | 2001   |  | 2000
|                                                 |       |                        |        |        |  |     
|                                                 |       |                       
|                                                 |       | (Dollars in Thousands)
|U.S. Treasury notes                              |       | $                      |       |        |  | $    |       |        |  | $ | 500    |       
|Obligations of states and political subdivisions |       |                        | 20,410 |        |  |      | 22,997 |        |  |   | 25,803 |       
|Mortgage-backed securities                       |       |                        | 1,451  |        |  |      | 2,552  |        |  |   | 3,437  |       
|Other securities                                 |       |                        | 550    |        |  |      | 550    |        |  |   | 1,101  |       
|                                                 |       |                        |        |        |  |      |        |        |  |   |        |       
|                                                 | Total |                        | $      | 22,411 |  |      | $      | 26,099 |  |   | $      | 30,841 | 
|                                                 |       |                        |        |        |  |      |        |        |  |   |        |       

The following table shows the carrying value of
the Corporations investment securities available for sale:

|                                                                   |       |                        |         |         |  |      |         |         |  |   |         |         | 
|------------------------------------------------------------------ | ----- | ---------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                                                   |       | 2002                   |         | 2001    |  | 2000
|                                                                   |       |                        |         |         |  |     
|                                                                   |       |                       
|                                                                   |       | (Dollars in Thousands)
|U.S. Treasury notes                                                |       | $                      | 18,434  |         |  | $    | 31,093  |         |  | $ | 40,359  |        
|Obligations of other U.S. Government agencies and
    corporations |       |                        | 18,509  |         |  |      | 26,980  |         |  |   | 38,610  |        
|Obligations of states and political subdivisions                   |       |                        | 333,663 |         |  |      | 180,658 |         |  |   | 195,073 |        
|Mortgage-backed securities                                         |       |                        | 517,428 |         |  |      | 406,178 |         |  |   | 227,483 |        
|Other securities                                                   |       |                        | 61,022  |         |  |      | 61,462  |         |  |   | 69,094  |        
|                                                                   |       |                        |         |         |  |      |         |         |  |   |         |        
|                                                                   | Total |                        | $       | 949,056 |  |      | $       | 706,371 |  |   | $       | 570,619 | 
|                                                                   |       |                        |         |         |  |      |         |         |  |   |         |        

6



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Table 2There are no
significant concentrations of securities (greater than 10% of
shareholders equity) in any individual security issuer.
The maturity analysis of investment securities held to maturity,
including the weighted average yield for each category as of
December 31, 2002, is as follows:

|                                                  |                           |                        |   |       |   |       |   |          |   |       |   |       |   |  |   |   |   |  |  |              |  
|------------------------------------------------- | ------------------------- | ---------------------- | - | ----- | - | ----- | - | -------- | - | ----- | - | ----- | - |  | - | - | - |  |  | ------------ | -
|                                                  |                           | Under                  |   | 1-5   |   | 5-10  |   | Over     |   |      
|                                                  |                           | 1 year                 |   | Years |   | Years |   | 10 years |   | Total
|                                                  |                           |                        |   |       |   |       |   |          |   |      
|                                                  |                           |                       
|                                                  |                           | (Dollars in thousands)
|Obligations of states and political subdivisions: |                           |                        |   |       |   |       |   |          |   |       |   |       |   |  |   |   |   |  |  |             
|                                                  | Carrying value            |                        | $ | 488   |   |       | $ | 16,510   |   |       | $ | 3,412 |   |  | $ |  |   |  |  | $20,410      |  
|                                                  | Weighted average yield    |                        |   | 9.00  | % |       |   | 8.49     | % |       |   | 8.71  | % |  |   |  | % |  |  | 8.53         | %
|                                                  | Weighted average maturity |                        |   |       |   |       |   |          |   |       |   |       |   |  |   |   |   |  |  | 3 yrs 2 mos  |  
|Mortgage-backed securities:                       |                           |                        |   |       |   |       |   |          |   |       |   |       |   |  |   |   |   |  |  |             
|                                                  | Carrying value            |                        |   | 300   |   |       |   | 1,151    |   |       |   |      |   |  |   |  |   |  |  | 1,451        |  
|                                                  | Weighted average yield    |                        |   | 7.59  | % |       |   | 7.86     | % |       |   |      | % |  |   |  | % |  |  | 7.80         | %
|                                                  | Weighted average maturity |                        |   |       |   |       |   |          |   |       |   |       |   |  |   |   |   |  |  | 1 yr 9 mos   |  
|Other securities:                                 |                           |                        |   |       |   |       |   |          |   |       |   |       |   |  |   |   |   |  |  |             
|                                                  | Carrying value            |                        |   | 550   |   |       |   |         |   |       |   |      |   |  |   |  |   |  |  | 550          |  
|                                                  | Weighted average yield    |                        |   | 6.84  | % |       |   |         | % |       |   |      | % |  |   |  | % |  |  | 6.84         | %
|                                                  | Weighted average maturity |                        |   |       |   |       |   |          |   |       |   |       |   |  |   |   |   |  |  | 0 yrs 10 mos |  
|Total:                                            |                           |                        |   |       |   |       |   |          |   |       |   |       |   |  |   |   |   |  |  |             
|                                                  | Carrying value            |                        | $ | 1,338 |   |       | $ | 17,661   |   |       | $ | 3,412 |   |  | $ |  |   |  |  | $22,411      |  
|                                                  | Weighted average yield    |                        |   | 7.80  | % |       |   | 8.45     | % |       |   | 8.71  | % |  |   |  | % |  |  | 8.44         | %
|                                                  | Weighted average maturity |                        |   |       |   |       |   |          |   |       |   |       |   |  |   |   |   |  |  | 3 yrs 0 mos  |  

The maturity analysis of securities available for
sale, including the weighted average yield for each category, as
of December 31, 2002 is follows:

|                                                                    |                           |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |        |   |  |  |             |  
|------------------------------------------------------------------- | ------------------------- | ---------------------- | - | ------- | - | ----- | - | -------- | - | ----- | - | ------- | - |  | - | ------ | - |  |  | ----------- | -
|                                                                    |                           | Under                  |   | 1-5     |   | 5-10  |   | Over     |   |      
|                                                                    |                           | 1 year                 |   | Years   |   | years |   | 10 years |   | Total
|                                                                    |                           |                        |   |         |   |       |   |          |   |      
|                                                                    |                           |                       
|                                                                    |                           | (Dollars in thousands)
|U.S. Treasury notes:                                                |                           |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |        |   |  |  |            
|                                                                    | Amortized cost            |                        | $ | 17,967  |   |       | $ |         |   |       | $ |        |   |  | $ |       |   |  |  | $17,967     |  
|                                                                    | Weighted average yield    |                        |   | 6.11    | % |       |   |         | % |       |   |        | % |  |   |       | % |  |  | 6.11        | %
|                                                                    | Weighted average maturity |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |        |   |  |  | 0 yrs 6 mos |  
|Obligations of other U.S. Government
    agencies and corporations: |                           |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |        |   |  |  |            
|                                                                    | Amortized cost            |                        |   | 9,550   |   |       |   | 3,440    |   |       |   |        |   |  |   | 5,399  |   |  |  | 18,389      |  
|                                                                    | Weighted average yield    |                        |   | 4.10    | % |       |   | 5.31     | % |       |   |        | % |  |   | 5.17   | % |  |  | 4.64        | %
|                                                                    | Weighted average maturity |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |        |   |  |  | 4 yrs 5 mos |  
|Obligations of states and political subdivisions:                   |                           |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |        |   |  |  |            
|                                                                    | Amortized cost            |                        |   | 3,924   |   |       |   | 98,590   |   |       |   | 169,791 |   |  |   | 58,784 |   |  |  | 331,089     |  
|                                                                    | Weighted average yield    |                        |   | 6.98    | % |       |   | 7.48     | % |       |   | 7.10    | % |  |   | 6.96   | % |  |  | 7.18        | %
|                                                                    | Weighted average maturity |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |        |   |  |  | 6 yrs 3 mos |  
|Mortgage-backed securities:                                         |                           |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |        |   |  |  |            
|                                                                    | Amortized cost            |                        |   | 231,177 |   |       |   | 195,251  |   |       |   | 16,635  |   |  |   | 70,553 |   |  |  | 513,616     |  
|                                                                    | Weighted average yield    |                        |   | 2.64    | % |       |   | 4.32     | % |       |   | 4.39    | % |  |   | 4.74   | % |  |  | 3.63        | %
|                                                                    | Weighted average maturity |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |        |   |  |  | 4 yrs 2 mos |  

7



---



##### 



|                  |                           |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |         |   |  |  |             |  
|----------------- | ------------------------- | ---------------------- | - | ------- | - | ----- | - | -------- | - | ----- | - | ------- | - |  | - | ------- | - |  |  | ----------- | -
|                  |                           | Under                  |   | 1-5     |   | 5-10  |   | Over     |   |      
|                  |                           | 1 year                 |   | Years   |   | years |   | 10 years |   | Total
|                  |                           |                        |   |         |   |       |   |          |   |      
|                  |                           |                       
|                  |                           | (Dollars in thousands)
|Other securities: |                           |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |         |   |  |  |            
|                  | Amortized cost            |                        |   | 1,525   |   |       |   | 22,710   |   |       |   | 2,000   |   |  |   | 31,088  |   |  |  | 57,323      |  
|                  | Weighted average yield    |                        |   | 6.67    | % |       |   | 6.51     | % |       |   | 6.75    | % |  |   | 5.36    | % |  |  | 5.91        | %
|                  | Weighted average maturity |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |         |   |  |  | 8 yrs 2 mos |  
|Total:            |                           |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |         |   |  |  |            
|                  | Amortized cost            |                        | $ | 264,143 |   |       | $ | 319,991  |   |       | $ | 188,426 |   |  | $ | 165,824 |   |  |  | $938,384    |  
|                  | Weighted average yield    |                        |   | 3.02    | % |       |   | 3.49     | % |       |   | 6.86    | % |  |   | 5.21    | % |  |  | 4.34        | %
|                  | Weighted average maturity |                        |   |         |   |       |   |          |   |       |   |         |   |  |   |         |   |  |  | 5 yrs 7 mos |  

Loans

Total loans in 2002 grew a modest 1.4% as a
result of the continued slow down in the economy, the planned
runoff of indirect consumer loans and vehicle leases and the
reduction in the mortgage portfolio relating to refinancing.
These reductions in loans were offset by increases in commercial
loans and home equity loans.

Total loans grew $18,022,000 or 1.4%, from
$1,313,934,000 at December 31, 2001, to $1,331,956,000 at
December 31, 2002. The growth in loans was primarily the
result of increases in commercial, consumer and real estate
loans. During 2002, commercial loans, consumer and real estate
loans grew $26,891,000, $7,217,000 and $4,377,000 respectively.
The growth in real estate loans was in commercial mortgages,
partially offset by a reduction in residential mortgages. As a
result of the low mortgage rate-driven refinancing activity
during 2002, many of the higher rate mortgages in the
Banks portfolios were refinanced into lower rate
mortgages. In an effort to reduce interest rate risk, these
loans were sold and not added to our mortgage portfolio.
Residential mortgages sold during 2002 were $136,202,000
compared to $36,116,000 in 2001.

The growth in consumer loans was due to the
growth in home equity lines of credit, partially offset by a
reduction in direct consumer loans and indirect automobile
dealer loans. The reduction in indirect automobile dealer loans
was primarily related to the financing incentives offered by the
vehicle manufacturers and the overall increased competition in
this market segment during 2002.

Table 3The
following table shows the composition of the Banks Loans:

|                          |             |                        |         |           |  |      |         |           |  |      |         |           |  |   |         |           |  |   |         |         | 
|------------------------- | ----------- | ---------------------- | ------- | --------- |  | ---- | ------- | --------- |  | ---- | ------- | --------- |  | - | ------- | --------- |  | - | ------- | ------- | 
|                          |             |                       
|                          |             | December 31,          
|                          |             |                       
|                          |             | 2002                   |         | 2001      |  | 2000 |         | 1999      |  | 1998
|                          |             |                        |         |           |  |      |         |           |  |     
|                          |             |                       
|                          |             | (Dollars in thousands)
|Real estate               |             | $                      | 422,268 |           |  | $    | 417,891 |           |  | $    | 369,831 |           |  | $ | 368,177 |           |  | $ | 338,332 |        
|Commercial and industrial |             |                        | 376,029 |           |  |      | 349,138 |           |  |      | 296,168 |           |  |   | 282,799 |           |  |   | 259,161 |        
|Consumer loans            |             |                        | 446,505 |           |  |      | 439,288 |           |  |      | 427,518 |           |  |   | 372,359 |           |  |   | 294,001 |        
|Lease financing           |             |                        | 87,154  |           |  |      | 107,617 |           |  |      | 116,088 |           |  |   | 94,909  |           |  |   | 68,753  |        
|                          |             |                        |         |           |  |      |         |           |  |      |         |           |  |   |         |           |  |   |         |        
|                          | Total loans |                        | $       | 1,331,956 |  |      | $       | 1,313,934 |  |      | $       | 1,209,605 |  |   | $       | 1,118,244 |  |   | $       | 960,247 | 
|                          |             |                        |         |           |  |      |         |           |  |      |         |           |  |   |         |           |  |   |         |        

8



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##### 



Table 4The
following table details maturities and interest sensitivity of
real estate, commercial and industrial, consumer loans and lease
financing at December 31, 2002:

|                                               |       |                        |         |         |  |         |         |         |  |   |        |        |  |   |         |           | 
|---------------------------------------------- | ----- | ---------------------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------ | ------ |  | - | ------- | --------- | 
|                                               |       | Within                 |         | 1-5     |  | Over    |         |        
|                                               |       | 1 year                 |         | Years   |  | 5 years |         | Total  
|                                               |       |                        |         |         |  |         |         |        
|                                               |       |                       
|                                               |       | (Dollars in thousands)
|Real estate                                    |       | $                      | 185,707 |         |  | $       | 189,374 |         |  | $ | 47,187 |        |  | $ | 422,268 |          
|Commercial and industrial                      |       |                        | 300,071 |         |  |         | 75,958  |         |  |   |       |        |  |   | 376,029 |          
|Consumer                                       |       |                        | 328,444 |         |  |         | 118,061 |         |  |   |       |        |  |   | 446,505 |          
|Lease financing                                |       |                        | 72,279  |         |  |         | 14,875  |         |  |   |       |        |  |   | 87,154  |          
|                                               |       |                        |         |         |  |         |         |         |  |   |        |        |  |   |         |          
|                                               | Total |                        | $       | 886,501 |  |         | $       | 398,268 |  |   | $      | 47,187 |  |   | $       | 1,331,956 | 
|                                               |       |                        |         |         |  |         |         |         |  |   |        |        |  |   |         |          
|Loans with variable or floating interest rates |       | $                      | 405,382 |         |  | $       | 62,928  |         |  | $ |       |        |  | $ | 468,310 |          
|Loans with fixed predetermined interest rates  |       |                        | 481,119 |         |  |         | 335,340 |         |  |   | 47,187 |        |  |   | 863,646 |          
|                                               |       |                        |         |         |  |         |         |         |  |   |        |        |  |   |         |          
|                                               | Total |                        | $       | 886,501 |  |         | $       | 398,268 |  |   | $      | 47,187 |  |   | $       | 1,331,956 | 
|                                               |       |                        |         |         |  |         |         |         |  |   |        |        |  |   |         |          

Table 5The
following table details those loans that were placed on
nonaccrual status, or were delinquent by 90 days or more
and still accruing interest:

|                 |       |                        |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       | 
|---------------- | ----- | ---------------------- | ----- | ----- |  | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                 |       |                       
|                 |       | December 31,          
|                 |       |                       
|                 |       | 2002                   |       | 2001  |  | 2000 |       | 1999  |  | 1998
|                 |       |                        |       |       |  |      |       |       |  |     
|                 |       |                       
|                 |       | (Dollars in thousands)
|Nonaccrual loans |       | $                      | 5,109 |       |  | $    | 6,354 |       |  | $    | 5,370 |       |  | $ | 3,690 |       |  | $ | 3,741 |      
|Delinquent loans |       |                        | 1,193 |       |  |      | 1,926 |       |  |      | 514   |       |  |   | 565   |       |  |   | 1,643 |      
|                 |       |                        |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |      
|                 | Total |                        | $     | 6,302 |  |      | $     | 8,280 |  |      | $     | 5,884 |  |   | $     | 4,255 |  |   | $     | 5,384 | 
|                 |       |                        |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |      

The Banks had no concentration of loans to
individual borrowers which exceeded 10% of total loans at
December 31, 2002 and 2001. The Banks actively monitor the
risk of this loan concentration. The Banks have no foreign
loans, and the impact of nonaccrual and delinquent loans on
total interest income was not material.

A loan is generally classified as nonaccrual when
principal or interest has consistently been in default for a
period of 90 days or more or because of a deterioration in
the financial condition of the borrower or payment in full of
principal or interest is not expected. Delinquent loans past due
90 days or more and still accruing interest are loans that
are generally well-secured and expected to be restored to a
current status in the near future.

The Corporation experienced an improvement in
asset quality in 2002, compared to 2001. Nonperforming assets
(nonaccruing loans, loans 90 days or more past due and net
assets in foreclosure) were 0.27% of total assets at
December 31, 2002, compared to 0.40% at December 31,
2001, and 0.32% at December 31, 2000. The ratio of the
allowance to nonperforming loans (nonaccruing loans and loans
90 days or more past due) was 272.8% at December 31,
2002, compared to 187.9% at December 31, 2001, and 258.5%
at December 31, 2000.

Nonaccruing loans of $5,109,000 at
December 31, 2002, decreased $1,245,000 from the
December 31, 2001, balance of $6,354,000. The decrease in
nonaccruing was across all loan categories. The
December 31, 2001, balance of nonaccrual loans was $984,000
more than the December 31, 2000, balance of $5,370,000.
During 2002, interest accrued on nonaccruing loans and not
recognized as interest income was $372,000, and interest paid on
nonaccruing loans of $15,000 was recognized as interest income.

Net assets in foreclosure totaled $390,000 as of
December 31, 2002, a decrease of $219,000 from the
December 31, 2001, balance of $609,000. During 2002, sales
of foreclosed properties totaled $1,212,000, transfers from
loans to assets in foreclosure were $1,091,000 and write-downs
of assets in foreclosure equaled $98,000. Efforts to liquidate
assets acquired in foreclosure are proceeding as quickly as
potential buyers can be located and legal constraints permit.
Generally accepted accounting principles require foreclosed
assets to be

9



---



##### 



carried at the lower of cost (lesser of carrying
value of asset or fair value at date of acquisition) or
estimated fair value, less selling costs.


Loans past due 90 days or more and still
accruing interest are loans that are generally well secured and
are in the process of collection. As of December 31, 2002,
loans past due 90 days or more and still accruing interest
were $1,193,000, compared to $1,926,000 as of December 31,
2001. This decrease was primarily the result of a reduction in
commercial real estate related loans past due 90 days.
Loans past due December 31, 2000 were $514,000.

The Banks use the reserve method of accounting
for credit losses. The balance in the allowance for loan and
lease losses is determined based on managements review and
evaluation of the loan portfolio in relation to past loss
experience, the size and composition of the portfolio, current
economic events and conditions, and other pertinent factors,
including managements assumptions as to future
delinquencies, recoveries and losses. Additions to the
allowances are charged to operations. The allowance for loan
losses grew 10.5% from $15,558,000 at December 31, 2001, to
$17,190,000 at December 31, 2002. The allowance for loan
losses to nonperforming loans at December 31, 2002 was
272.8%, compared to 187.9.3% at December 31, 2001.

Table 6Analysis of
Credit Risk

|                                                                          |                                      |              |           |              |  |              |           |           |  |   |           |           | 
|------------------------------------------------------------------------- | ------------------------------------ | ------------ | --------- | ------------ |  | ------------ | --------- | --------- |  | - | --------- | --------- | 
|                                                                          |                                      | December 31, |           | December 31, |  | December 31,
|                                                                          |                                      | 2002         |           | 2001         |  | 2000        
|                                                                          |                                      |              |           |              |  |             
|Non-accrual loans and leases                                              |                                      | $            | 5,109,000 |              |  | $            | 6,354,000 |           |  | $ | 5,370,000 |          
|Loans and leases 90 days or more past due                                 |                                      |              | 1,193,000 |              |  |              | 1,926,000 |           |  |   | 514,000   |          
|                                                                          |                                      |              |           |              |  |              |           |           |  |   |           |          
|                                                                          | Total nonperforming loans and leases |              |           | 6,302,000    |  |              |           | 8,280,000 |  |   |           | 5,884,000 | 
|Net assets in foreclosure                                                 |                                      |              | 390,000   |              |  |              | 609,000   |           |  |   | 288,000   |          
|                                                                          |                                      |              |           |              |  |              |           |           |  |   |           |          
|                                                                          | Total nonperforming assets           |              | $         | 6,692,000    |  |              | $         | 8,889,000 |  |   | $         | 6,172,000 | 
|                                                                          |                                      |              |           |              |  |              |           |           |  |   |           |          
|Allowance for loan and lease losses to
    nonperforming loans and leases |                                      |              | 272.8     | %            |  |              | 187.9     | %         |  |   | 258.5     | %        
|Nonperforming loans and leases to total net loans
    and leases          |                                      |              | 0.47      | %            |  |              | 0.63      | %         |  |   | 0.49      | %        
|Allowance for loan and lease losses to total
    loans and leases         |                                      |              | 1.29      | %            |  |              | 1.18      | %         |  |   | 1.25      | %        
|Nonperforming assets to total assets                                      |                                      |              | 0.27      | %            |  |              | 0.40      | %         |  |   | 0.32      | %        

10



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##### 



Allowance for
Loan Losses

Table 7A
summary of the allowance for loan losses is as follows:

|                                                          |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |       | 
|--------------------------------------------------------- | ------------------------- | ---------------------- | --------- | ----- |  | ---- | --------- | ----- |  | ---- | --------- | ----- |  | - | --------- | ----- |  | - | ------- | ----- | 
|                                                          |                           |                       
|                                                          |                           | December 31,          
|                                                          |                           |                       
|                                                          |                           | 2002                   |           | 2001  |  | 2000 |           | 1999  |  | 1998
|                                                          |                           |                        |           |       |  |      |           |       |  |     
|                                                          |                           |                       
|                                                          |                           | (Dollars in thousands)
|Average loans                                             |                           | $                      | 1,333,300 |       |  | $    | 1,264,750 |       |  | $    | 1,166,684 |       |  | $ | 1,031,055 |       |  | $ | 894,758 |      
|                                                          |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |      
|Allowance, beginning of period                            |                           |                        | 15,558    |       |  |      | 15,210    |       |  |      | 14,887    |       |  |   | 14,245    |       |  |   | 13,107  |      
|                                                          |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |      
|Loans charged off:                                        |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |      
|                                                          | Commercial and industrial |                        |           | 108   |  |      |           | 494   |  |      |           | 123   |  |   |           | 108   |  |   |         | 217   | 
|                                                          | Consumer                  |                        |           | 2,589 |  |      |           | 2,594 |  |      |           | 1,470 |  |   |           | 632   |  |   |         | 647   | 
|                                                          | Real estate               |                        |           | 352   |  |      |           | 498   |  |      |           | 610   |  |   |           | 833   |  |   |         | 442   | 
|                                                          | Lease financing           |                        |           | 828   |  |      |           | 1,075 |  |      |           | 450   |  |   |           | 226   |  |   |         | 145   | 
|                                                          |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |      
|                                                          | Total loans charged off   |                        |           | 3,877 |  |      |           | 4,661 |  |      |           | 2,653 |  |   |           | 1,799 |  |   |         | 1,451 | 
|                                                          |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |      
|Recoveries:                                               |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |      
|                                                          | Commercial and industrial |                        |           | 105   |  |      |           | 38    |  |      |           | 60    |  |   |           | 28    |  |   |         | 94    | 
|                                                          | Consumer                  |                        |           | 786   |  |      |           | 607   |  |      |           | 289   |  |   |           | 112   |  |   |         | 100   | 
|                                                          | Real estate               |                        |           | 163   |  |      |           | 328   |  |      |           | 274   |  |   |           | 96    |  |   |         | 89    | 
|                                                          | Lease financing           |                        |           | 85    |  |      |           | 106   |  |      |           | 41    |  |   |           | 52    |  |   |         | 18    | 
|                                                          |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |      
|                                                          | Total recoveries          |                        |           | 1,139 |  |      |           | 1,079 |  |      |           | 664   |  |   |           | 288   |  |   |         | 301   | 
|                                                          |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |      
|Net loans charged off                                     |                           |                        | 2,738     |       |  |      | 3,582     |       |  |      | 1,989     |       |  |   | 1,511     |       |  |   | 1,150   |      
|                                                          |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |      
|Provision for loan losses                                 |                           |                        | 4,370     |       |  |      | 3,930     |       |  |      | 2,312     |       |  |   | 2,153     |       |  |   | 2,288   |      
|                                                          |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |      
|Allowance, end of period                                  |                           | $                      | 17,190    |       |  | $    | 15,558    |       |  | $    | 15,210    |       |  | $ | 14,887    |       |  | $ | 14,245  |      
|                                                          |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |      
|Ratio of net charge offs to average loans
    outstanding |                           |                        | 0.21      | %     |  |      | 0.28      | %     |  |      | 0.17      | %     |  |   | 0.15      | %     |  |   | 0.13    | %    
|                                                          |                           |                        |           |       |  |      |           |       |  |      |           |       |  |   |           |       |  |   |         |      

Table 8The
following table sets forth an allocation of the allowance for
loan losses by category. The specific allocations in any
particular category may be reallocated in the future to reflect
then current conditions. Accordingly, management considers the
entire allowance to be available to absorb losses in any
category.

|                          |       |                        |       |          |  |        |    |          |   |        |       |          |  |        |    |          |   |        |       |          |  |  |    |     |   |   |       |        |  |  |    |     |   |   |       |        |  |  |    |     |  
|------------------------- | ----- | ---------------------- | ----- | -------- |  | ------ | -- | -------- | - | ------ | ----- | -------- |  | ------ | -- | -------- | - | ------ | ----- | -------- |  |  | -- | --- | - | - | ----- | ------ |  |  | -- | --- | - | - | ----- | ------ |  |  | -- | --- | -
|                          |       |                       
|                          |       | December 31,          
|                          |       |                       
|                          |       |                        |       |          |  |        |    |          |   |       
|                          |       | 2002                   |       | 2001     |  | 2000   |    | 1999     |   | 1998  
|                          |       |                        |       |          |  |        |    |          |   |       
|                          |       |                        |       | Percent  |  |        |    | Percent  |   |        |       | Percent  |  |        |    | Percent  |   |        |       | Percent 
|                          |       | Amount                 |       | of Loans |  | Amount |    | of Loans |   | Amount |       | of Loans |  | Amount |    | of Loans |   | Amount |       | of Loans
|                          |       |                        |       |          |  |        |    |          |   |        |       |          |  |        |    |          |   |        |       |         
|                          |       |                       
|                          |       | (Dollars in thousands)
|Real estate               |       | $                      | 2,980 |          |  |        | 33 | %        |   | $      | 2,874 |          |  |        | 32 | %        |   | $      | 3,116 |          |  |  | 31 | %   |   | $ | 2,661 |        |  |  | 33 | %   |   | $ | 3,059 |        |  |  | 35 | %  
|Commercial and industrial |       |                        | 5,248 |          |  |        | 27 | %        |   |        | 5,482 |          |  |        | 26 | %        |   |        | 7,021 |          |  |  | 24 | %   |   |   | 6,775 |        |  |  | 25 | %   |   |   | 5,999 |        |  |  | 27 | %  
|Consumer                  |       |                        | 7,392 |          |  |        | 33 | %        |   |        | 5,432 |          |  |        | 34 | %        |   |        | 4,450 |          |  |  | 35 | %   |   |   | 4,634 |        |  |  | 33 | %   |   |   | 4,635 |        |  |  | 31 | %  
|Lease financing           |       |                        | 1,570 |          |  |        | 7  | %        |   |        | 1,770 |          |  |        | 8  | %        |   |        | 623   |          |  |  | 10 | %   |   |   | 817   |        |  |  | 9  | %   |   |   | 552   |        |  |  | 7  | %  
|                          |       |                        |       |          |  |        |    |          |   |        |       |          |  |        |    |          |   |        |       |          |  |  |    |     |   |   |       |        |  |  |    |     |   |   |       |        |  |  |    |    
|                          | Total |                        | $     | 17,190   |  |        |    | 100      | % |        | $     | 15,558   |  |        |    | 100      | % |        | $     | 15,210   |  |  |    | 100 | % |   | $     | 14,887 |  |  |    | 100 | % |   | $     | 14,245 |  |  |    | 100 | %
|                          |       |                        |       |          |  |        |    |          |   |        |       |          |  |        |    |          |   |        |       |          |  |  |    |     |   |   |       |        |  |  |    |     |   |   |       |        |  |  |    |    

Allowance for
Credit Losses

The Banks use the reserve method of accounting
for credit losses. The balance in the allowance for loan and
lease losses is determined based on managements review and
evaluation of the loan portfolio in relation to past loss
experience, the size and composition of the portfolio, current
economic events and conditions, and

11



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##### 



other pertinent factors, including
managements assumptions as to future delinquencies,
recoveries and losses. Increases to the allowance for loan and
lease losses are made by charges to the provision for credit
losses. Credit exposures deemed to be uncollectible are charged
against the allowance for credit losses. Recoveries of
previously charged-off amounts are credited to the allowance for
credit losses.


While management considers the allowance for loan
and lease losses to be adequate based on information currently
available, future additions to the allowance may be necessary
due to changes in economic conditions or managements
assumptions as to future delinquencies, recoveries and losses
and managements intent with regard to the disposition of
loans and leases. In addition, the OCC, as an integral part of
their examination process, periodically reviews the Banks
allowance for loan losses. The OCC may require the Banks to
recognize additions to the allowance for credit losses based on
their judgements about information available to them at the time
of their examination.

The Banks allowance for loan and lease
losses is the accumulation of various components that are
calculated based on various independent methodologies. All
components of the allowance for credit losses are an estimation.
Management bases its recognition and estimation of each
allowance component on certain observable data that it believes
is the most reflective of the underlying credit losses being
estimated. The observable data and accompanying analysis is
directionally consistent, based upon trends, with the resulting
component amount for the allowance for loan and lease losses.
The Banks allowance for loan and lease losses components
include the following: historical loss estimation by loan
product type and by risk rating within each product type,
payment (past due) status, industry concentrations, internal and
external variables such as economic conditions, credit policy
and underwriting changes, competence of the loan review process
and other historical loss model imprecision. The Banks
historical loss component is the most significant component of
the allowance for loan and lease losses, and all other allowance
components are based on the inherent loss attributes that
management believes exist within the total portfolio that are
not captured in the historical loss component.

The historical loss components of the allowance
represents the results of analysis of historical charge-offs and
recoveries within pools of homogeneous loans, within each risk
rating and broken down further by segment, within the portfolio.
Criticized assets are further assessed based on trends,
expressed as percentages, relative to delinquency, risk rating
and non-accrual, by segment.

The historical loss components of the allowance
for commercial loans are based principally on current risk
ratings, historical loss rates adjusted, by adjusting the risk
window, to reflect current events and conditions, as well as
analysis of other factors that may have affected the
collectability of loans. The Banks analyze all commercial loans
that have been identified as having potential credit risk. The
review is accomplished via Watchlist Memorandum, and designed to
determine whether such loans are individually impaired, with
impairment measured by reference to the collateral coverage and/
or debt service coverage. The historical loss component of the
allowance for consumer loans is based principally on loan
payment status, retail classification and historical loss rates,
adjusted by adjusting the risk window, to reflect current events
and conditions.

The industry concentration component is
recognized as a possible factor in the estimation of credit
losses. Two industries represent possible concentrations:
commercial real estate and automobile dealers. No specific
loss-related observable data is recognized by management
currently, therefore no specific factor is calculated in the
reserve solely for the impact of these concentrations, although
management continues to carefully consider relevant data for
possible future sources of observable data.

The historic loss model includes an imprecision
component (soft factors and unallocated portion) that reflects
managements belief that there were additional inherent
credit losses based on loss attributes not adequately captured
in the lagging indicators. Furthermore, given that
past-performance indicators may not adequately capture current
risk levels, allowing for a real-time adjustment enhances the
validity of the loss recognition process. There are many credit
risk management reports that are synthesized by credit
management staff to assess the direction of credit risk and its
instant affect on losses. These reports include the exception
tracking reports, the credit bureau score distribution report,
the debt to income summary, etc. These are a few of the many
reports that drive the judgmental component. It is important to
continue to use

12



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experiential data to confirm risk as measurable
losses will continue to manifest themselves at higher than
normal levels even after the economic cycle has begun an upward
swing and lagging indicators begin to show improvement.


Deposits and Borrowings and Other
Interest-Bearing Liabilities

The primary funding sources of the Corporation
are deposits and other borrowings. During 2002, total deposits
of $1,979,822,000 at December 31, 2002, increased
$232,960,000, or 13.3%, from the $1,746,862,000 balance at
December 31, 2001. This increase was primarily the result
of a $187,406,000, or 18.3% rise in core deposits. Interest
bearing checking, money market deposits, savings and
non-interest bearing deposits grew $80,490,000, $69,054,000,
$22,719,000 and $15,143,000, respectively during 2002. Time
deposits under $100,000 increased $37,540,000 and time deposits
greater than $100,000 grew $8,014,000.

Deposit
Structure

Table 9The
following table is a distribution of average balances and
average rates paid on the deposit categories for the last three
years:

|                             |       |                        |         |           |  |        |      |      |  |        |         |           |  |  |      |   |  |   |         |           |  |  |      |   | 
|---------------------------- | ----- | ---------------------- | ------- | --------- |  | ------ | ---- | ---- |  | ------ | ------- | --------- |  |  | ---- | - |  | - | ------- | --------- |  |  | ---- | - | 
|                             |       |                       
|                             |       | December 31,          
|                             |       |                       
|                             |       |                        |         |           |  |       
|                             |       | 2002                   |         | 2001      |  | 2000  
|                             |       |                        |         |           |  |       
|                             |       | Amount                 |         | Rate      |  | Amount |      | Rate |  | Amount |         | Rate     
|                             |       |                        |         |           |  |        |      |      |  |        |         |          
|                             |       |                       
|                             |       | (Dollars in thousands)
|Demand  noninterest-bearing |       | $                      | 237,679 |           |  |        |     | %    |  | $      | 219,368 |           |  |  |     | % |  | $ | 204,778 |           |  |  |     | %
|Demand  interest-bearing    |       |                        | 200,215 |           |  |        | 0.87 | %    |  |        | 158,666 |           |  |  | 1.03 | % |  |   | 155,925 |           |  |  | 1.30 | %
|Money market and savings     |       |                        | 623,160 |           |  |        | 1.66 | %    |  |        | 543,153 |           |  |  | 2.88 | % |  |   | 470,003 |           |  |  | 3.47 | %
|Time  under $100,000        |       |                        | 514,782 |           |  |        | 4.57 | %    |  |        | 463,455 |           |  |  | 5.63 | % |  |   | 421,692 |           |  |  | 5.56 | %
|Time  $100,000 or greater   |       |                        | 232,554 |           |  |        | 3.27 | %    |  |        | 214,873 |           |  |  | 5.17 | % |  |   | 184,383 |           |  |  | 6.12 | %
|                             |       |                        |         |           |  |        |      |      |  |        |         |           |  |  |      |   |  |   |         |           |  |  |      |  
|                             | Total |                        | $       | 1,808,390 |  |        |      |      |  |        | $       | 1,599,515 |  |  |      |   |  |   | $       | 1,436,781 |  |  |      |   | 
|                             |       |                        |         |           |  |        |      |      |  |        |         |           |  |  |      |   |  |   |         |           |  |  |      |  

Table 10The
maturity distribution of certificates of deposit of $100,000 and
over as of December 31, 2002, 2001 and 2000, is as follows:

|                                 |       |                        |         |         |  |      |         |         |  |   |        |         | 
|-------------------------------- | ----- | ---------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------ | ------- | 
|                                 |       |                       
|                                 |       | December 31,          
|                                 |       |                       
|                                 |       | 2002                   |         | 2001    |  | 2000
|                                 |       |                        |         |         |  |     
|                                 |       |                       
|                                 |       | (Dollars in thousands)
|Three months or less             |       | $                      | 108,646 |         |  | $    | 111,896 |         |  | $ | 80,221 |        
|Over three months to six months  |       |                        | 84,297  |         |  |      | 76,491  |         |  |   | 45,877 |        
|Over six months to twelve months |       |                        | 28,286  |         |  |      | 21,369  |         |  |   | 21,626 |        
|Over twelve months               |       |                        | 21,334  |         |  |      | 24,793  |         |  |   | 25,144 |        
|                                 |       |                        |         |         |  |      |         |         |  |   |        |        
|                                 | Total |                        | $       | 242,563 |  |      | $       | 234,549 |  |   | $      | 172,868 | 
|                                 |       |                        |         |         |  |      |         |         |  |   |        |        

Other borrowings increased $38,086,000 from
$215,820,000 at December 31, 2001 to $253,906,000 at
December 31, 2002. This increase was primarily in Federal
Home Loan Bank (FHLB) borrowings which grew $35,000,000 in
an effort to match fund commercial mortgages. The remaining
increase in other borrowings was related to the $3,748,000 rise
in securities sold under agreements to repurchase, partially
offset by a $662,000 reduction in U.S. Treasury demand
notes. Borrowings and other interest-bearing liabilities include
federal funds purchased, FHLB borrowings, securities sold under
agreements to repurchase and U.S. Treasury demand notes.

Securities sold under agreements to repurchase
are generally overnight transactions. These borrowings had
balances of $84,141,000, $80,393,000 and $74,083,000 at
December 31, 2002, 2001 and 2000, respectively. Daily
average balances and weighted average interest rates for the
years ended December 31, 2002, 2001 and 2000 were
$83,750,000, $88,417,000 and $71,973,000 and 1.51%, 3.35% and
5.61%, respectively. The

13



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maximum amount outstanding at any month-end
during 2002, 2001, and 2000 were $96,665,000, $96,224,000, and
$84,888,000, respectively.


Income Statement Analysis



| |                      
| | ---------------------
| | Results of Operations

The 2002 net income of $32,927,000 increased
$4,107,000, or 14.3% from the 2001 net income of $28,820,000. On
a per share basis, diluted earnings were $1.67 in 2002 and $1.46
in 2001, a 14.4% increase. Basic earnings per share were $1.72
in 2002 compared to $1.50 in 2001. Net income increased in 2001
by $3,216,000, or 12.6% over 2000.

The return on average shareholders equity
of 16.60% for 2002, outpaced the 15.82% for 2001 and 16.57% in
2000. The 2002 return on average assets of 1.43% increased from
the 2001 return on average asset rate of 1.40%. The 2000 return
on average assets was 1.39%. Net income is affected by five
major elements: (1) net interest income, or the difference
between interest income earned on loans and investments and
interest expense paid on deposits and borrowed funds;
(2) the provision for loan losses, or the amount added to
the allowance for loan losses to provide reserves for future
losses on loans; (3) other operating income, which is made
up primarily of certain service fees and Investment Management
and Trust Services income; (4) other operating expenses,
which consist primarily of salaries and other operating
expenses; and (5) income taxes. Each of these major
elements is reviewed in more detail in the following discussion.

Net
Interest Income

Net interest income of $80,020,000 increased
$6,278,000, or 8.5%, from 2001 levels. Net interest income was
$73,742,000 in 2001, which was 11.7% higher than the $66,037,000
reported in 2000. The rise in net interest income during 2002 is
a result of a 12.2% increase in earning assets, partially offset
by a decrease in the net interest margin.

For analytical purposes, the following table
reflects tax-equivalent net interest income in recognition of
the income tax savings on tax-exempt items such as interest on
municipal securities and tax-exempt loans. Adjustments are made
using a statutory federal tax rate of 35%.

Table 10

|                          |  |                         |         |      |  |      |         |  |  |   |         | 
|------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                          |  |                        
|                          |  | Year Ended December 31,
|                          |  |                        
|                          |  | 2002                    |         | 2001 |  | 2000
|                          |  |                         |         |      |  |     
|                          |  |                        
|                          |  | (Dollars in thousands) 
|Interest income           |  | $                       | 132,630 |      |  | $    | 138,679 |  |  | $ | 131,811 | 
|Interest expense          |  |                         | 52,610  |      |  |      | 64,937  |  |  |   | 65,774  | 
|                          |  |                         |         |      |  |      |         |  |  |   |         | 
|Net interest income       |  |                         | 80,020  |      |  |      | 73,742  |  |  |   | 66,037  | 
|Tax equivalent adjustment |  |                         | 7,325   |      |  |      | 5,792   |  |  |   | 5,844   | 
|                          |  |                         |         |      |  |      |         |  |  |   |         | 
|Net interest income       |  | $                       | 87,345  |      |  | $    | 79,534  |  |  | $ | 71,881  | 
|                          |  |                         |         |      |  |      |         |  |  |   |         | 

14



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Table 11The
rate volume analysis set forth in the following table, which is
computed on a tax-equivalent basis (tax rate of 35%), analyzes
changes in net interest income for the last three years by their
rate and volume components.

|                               |                                                   |                        |       |                        |         |        |        |                   |         |      |       |        |        |   |       |        |       |   |        |        |        |   |       |       |        | 
|------------------------------ | ------------------------------------------------- | ---------------------- | ----- | ---------------------- | ------- | ------ | ------ | ----------------- | ------- | ---- | ----- | ------ | ------ | - | ----- | ------ | ----- | - | ------ | ------ | ------ | - | ----- | ----- | ------ | 
|                               |                                                   |                        |       |                       
|                               |                                                   | 2002 Over (Under) 2001 |       | 2001 Over (Under) 2000
|                               |                                                   |                        |       |                       
|                               |                                                   |                        |       |                        |         |        |        |                  
|                               |                                                   |                        |       | Due to Changes in      |         |        |        | Due to Changes in
|                               |                                                   | Net                    |       |                        |         | Net    |        |                  
|                               |                                                   | Change                 |       | Rate                   |         | Volume |        | Change            |         | Rate |       | Volume
|                               |                                                   |                        |       |                        |         |        |        |                   |         |      |       |       
|                               |                                                   |                       
|                               |                                                   | (Dollars in thousands)
|Interest Income:               |                                                   |                        |       |                        |         |        |        |                   |         |      |       |        |        |   |       |        |       |   |        |        |        |   |       |      
|Investment securities(1)       |                                                   | $                      | 2,617 |                        |         | $      | (6,322 | )                 |         | $    | 8,939 |        |        | $ | 2,621 |        |       | $ | (3,754 | )      |        | $ | 6,375 |      
|                               | Loans(1)                                          |                        |       | (6,875                 | )       |        |        | (11,708           | )       |      |       | 4,833  |        |   |       | 3,973  |       |   |        | (3,848 | )      |   |       | 7,821 |       
|                               | Other rate-sensitive assets                       |                        |       | (258                   | )       |        |        | (393              | )       |      |       | 135    |        |   |       | 222    |       |   |        | (174   | )      |   |       | 396   |       
|                               |                                                   |                        |       |                        |         |        |        |                   |         |      |       |        |        |   |       |        |       |   |        |        |        |   |       |      
|                               |                                                   | Total                  |       |                        | (4,516  | )      |        |                   | (18,423 | )    |       |        | 13,907 |   |       |        | 6,816 |   |        |        | (7,776 | ) |       |       | 14,592 | 
|                               |                                                   |                        |       |                        |         |        |        |                   |         |      |       |        |        |   |       |        |       |   |        |        |        |   |       |      
|Interest Expense:              |                                                   |                        |       |                        |         |        |        |                   |         |      |       |        |        |   |       |        |       |   |        |        |        |   |       |      
|                               | Savings deposits                                  |                        |       | (5,198                 | )       |        |        | (6,978            | )       |      |       | 1,780  |        |   |       | (1,079 | )     |   |        | (2,945 | )      |   |       | 1,866 |       
|                               | Time deposits                                     |                        |       | (6,110                 | )       |        |        | (8,982            | )       |      |       | 2,872  |        |   |       | 2,469  |       |   |        | (1,495 | )      |   |       | 3,964 |       
|                               | Borrowings and other interest bearing liabilities |                        |       | (1,019                 | )       |        |        | (1,820            | )       |      |       | 801    |        |   |       | (2,227 | )     |   |        | (2,571 | )      |   |       | 344   |       
|                               |                                                   |                        |       |                        |         |        |        |                   |         |      |       |        |        |   |       |        |       |   |        |        |        |   |       |      
|                               |                                                   | Total                  |       |                        | (12,327 | )      |        |                   | (17,780 | )    |       |        | 5,453  |   |       |        | (837  | ) |        |        | (7,011 | ) |       |       | 6,174  | 
|                               |                                                   |                        |       |                        |         |        |        |                   |         |      |       |        |        |   |       |        |       |   |        |        |        |   |       |      
|Changes in net interest income |                                                   | $                      | 7,811 |                        |         | $      | (643   | )                 |         | $    | 8,454 |        |        | $ | 7,653 |        |       | $ | (765   | )      |        | $ | 8,418 |      
|                               |                                                   |                        |       |                        |         |        |        |                   |         |      |       |        |        |   |       |        |       |   |        |        |        |   |       |      



---



|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(1) | The interest earned on nontaxable investment
    securities and loans is shown on a tax equivalent basis using a
    tax rate of 35%.

Tax-equivalent net interest income was
$87,345,000 for 2002, compared to $79,534,000 for 2001, an
increase of $7,811,000, or 9.8%. This increase in tax-equivalent
net interest income was primarily due to the net $8,454,000
increase related to volume, partially offset by a decrease
related to interest rates of $643,000. Total interest income
decreased $4,516,000, the result of lower rates earned within
each earning asset category, partially offset by higher volumes.
The 2002 average investment and loan volumes increased 24.5% and
5.4% respectively. The increase in investment securities was
funded by the strong growth in deposits during 2002.

Total interest expense decreased $12,327,000
during 2002 or 19.0%, compared to 2001. This decrease was the
result of the lower interest rate environment experienced during
2002, partially offset by increased volumes in all
interest-bearing liability categories. The average volumes of
savings deposits, time deposits and borrowings and other
interest-bearing liabilities grew 17.3%, 10.2% and 9.3%,
respectively. Borrowings and other interest-bearing liabilities
include federal funds purchased, FHLB borrowings, securities
sold under agreements to repurchase and U.S. Treasury notes.

The 2001 tax-equivalent net interest income was
$79,534,000, a $7,653,000 increase compared to $71,881,000 for
2000. This increase in tax-equivalent net interest income was
primarily due to the $8,418,000 increase related to volumes,
partially offset by the $765,000 decrease in net interest income
related to rates. The growth in earning asset volumes was
primarily due to loans and investment securities. The
interest-bearing deposit volume growth was related to increases
in all categories.

Net
Interest Margin

The Corporations net interest margin in
2002 of 4.00% was lower than the net interest margins for 2001
and 2000 of 4.09% and 4.14%, respectively. The decrease in the
net interest margin was the result of the reinvestment yields
being lower than the yields on maturing assets and the lower
loan demand experienced during 2002. The tax-equivalent yield on
total interest-earning assets decreased 102 basis points from
7.43% in

15



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##### 



2001 to 6.41% in 2002. The 2002 interest expense
to average earning assets ratio of 2.41%, decreased 93 basis
points from 2001. The 102 basis point drop in the yield on
earning assets, outpaced the 93 basis point drop in interest
expense to earnings assets ratio, resulting in the 9 basis
point drop in the 2002 net interest margin, compared to 2001.
The tax-equivalent yield on total interest-earnings assets in
2000 was 7.92% and the 2000 cost of interest-bearing liabilities
was 3.78%, resulting in a net interest margin of 4.14%.


Table 12Balance Sheet Analysis

The table below presents the major asset and
liability categories on an average daily basis for the periods
presented, along with interest income and expense, and key rates
and yields.

Distribution of Assets, Liabilities and
Shareholders Equity, Interest Rates and Interest
Differential:

|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |        |         | 
|---------------------------------------------------------- | --------------------------- | ------------------------------------------ | --------- | --------- | --------- | -------- | ---- | ------- | ---- | ------- | ------- | -------- | ------- | ------- | --------- | --------- | --------- | -------- | ---- | ---- | ---- | - | ------- | ------- | ------- | - | --------- | --------- | --------- |  | ---- | ---- | ---- | - | ------- | ------ | ------- | 
|                                                           |                             |                                           
|                                                           |                             | Year Ended December 31,                   
|                                                           |                             |                                           
|                                                           |                             |                                            |           |           |           |         
|                                                           |                             | 2002                                       |           | 2001      |           | 2000    
|                                                           |                             |                                            |           |           |           |         
|                                                           |                             | Average                                    |           | Average   |           |          |      | Average |      | Average |         |          |         | Average |           | Average   |           |         
|                                                           |                             | Balance                                    |           | Rate      |           | Interest |      | Balance |      | Rate    |         | Interest |         | Balance |           | Rate      |           | Interest
|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |         
|                                                           |                             |                                           
|                                                           |                             | (Dollars in thousands)                    
|Assets                                                     |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|Investment securities:                                     |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|                                                           | Taxable Investments         |                                            | $         | 567,969   |           |          |      | 4.68    | %    |         | $       | 26,599   |         |         | $         | 455,096   |           |          |      | 6.02 | %    |   | $       | 27,376  |         |   | $         | 348,560   |           |  |      | 6.94 | %    |   | $       | 24,205 |        
|                                                           | Nontaxable investments(1)   |                                            |           | 255,035   |           |          |      | 7.37    |      |         |         | 18,806   |         |         |           | 205,887   |           |          |      | 7.49 |      |   |         | 15,412  |         |   |           | 213,948   |           |  |      | 7.46 |      |   |         | 15,962 |        
|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|                                                           |                             | Total investment securities                |           |           | 823,004   |          |      |         | 5.52 |         |         |          | 45,405  |         |           |           | 660,983   |          |      |      | 6.47 |   |         |         | 42,788  |   |           |           | 562,508   |  |      |      | 7.14 |   |         |        | 40,167  | 
|                                                           | Loans(1)(2)                 |                                            |           | 1,333,300 |           |          |      | 7.05    |      |         |         | 93,994   |         |         |           | 1,264,750 |           |          |      | 7.98 |      |   |         | 100,869 |         |   |           | 1,166,684 |           |  |      | 8.31 |      |   |         | 96,896 |        
|                                                           | Other rate-sensitive assets |                                            |           | 25,411    |           |          |      | 2.19    |      |         |         | 556      |         |         |           | 19,228    |           |          |      | 4.23 |      |   |         | 814     |         |   |           | 9,876     |           |  |      | 5.99 |      |   |         | 592    |        
|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|                                                           |                             | Total earning assets                       |           |           | 2,181,715 |          |      |         | 6.41 |         |         |          | 139,955 |         |           |           | 1,944,961 |          |      |      | 7.43 |   |         |         | 144,471 |   |           |           | 1,739,068 |  |      |      | 7.92 |   |         |        | 137,655 | 
|Noninterest-earning assets                                 |                             |                                            | 127,707   |           |           |          |     |         |      |         |        |          |         |         | 113,777   |           |           |          |     |      |      |   |        |         |         |   | 104,457   |           |           |  |     |      |      |   |        |       
|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|                                                           |                             | Total assets                               |           | $         | 2,309,422 |          |      |         | 6.06 | %       |         | $        | 139,955 |         |           | $         | 2,058,738 |          |      |      | 7.02 | % |         | $       | 144,471 |   |           | $         | 1,843,525 |  |      |      | 7.47 | % |         | $      | 137,655 | 
|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|Liabilities and Shareholders
    Equity                   |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |          
|Deposits:                                                  |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|                                                           | Demand                      |                                            | $         | 237,679   |           |          |      |        | %    |         | $       |         |         |         | $         | 219,368   |           |          |      |     | %    |   | $       |        |         |   | $         | 204,778   |           |  |      |     | %    |   | $       |       |        
|                                                           | Savings                     |                                            |           | 823,375   |           |          |      | 1.46    |      |         |         | 12,060   |         |         |           | 701,819   |           |          |      | 2.46 |      |   |         | 17,258  |         |   |           | 625,928   |           |  |      | 2.93 |      |   |         | 18,337 |        
|                                                           | Time                        |                                            |           | 747,336   |           |          |      | 4.16    |      |         |         | 31,106   |         |         |           | 678,328   |           |          |      | 5.49 |      |   |         | 37,216  |         |   |           | 606,075   |           |  |      | 5.73 |      |   |         | 34,747 |        
|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|                                                           |                             | Total                                      |           |           | 1,808,390 |          |      |         | 2.39 |         |         |          | 43,166  |         |           |           | 1,599,515 |          |      |      | 3.41 |   |         |         | 54,474  |   |           |           | 1,436,781 |  |      |      | 3.69 |   |         |        | 53,084  | 
|Borrowings and other interest-bearing liabilities          |                             |                                            | 247,221   |           |           |          | 3.82 |         |      |         | 9,444   |          |         |         | 226,247   |           |           |          | 4.62 |      |      |   | 10,463  |         |         |   | 218,811   |           |           |  | 5.80 |      |      |   | 12,690  |       
|Other liabilities                                          |                             |                                            | 55,438    |           |           |          |     |         |      |         |        |          |         |         | 50,798    |           |           |          |     |      |      |   |        |         |         |   | 33,386    |           |           |  |     |      |      |   |        |       
|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|                                                           |                             | Total liabilities                          |           |           | 2,111,049 |          |      |         | 2.49 |         |         |          | 52,610  |         |           |           | 1,876,560 |          |      |      | 3.46 |   |         |         | 64,937  |   |           |           | 1,688,978 |  |      |      | 3.89 |   |         |        | 65,774  | 
|Shareholders equity                                       |                             |                                            | 198,373   |           |           |          |     |         |      |         |        |          |         |         | 182,178   |           |           |          |     |      |      |   |        |         |         |   | 154,547   |           |           |  |     |      |      |   |        |       
|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|                                                           |                             | Total liabilities and shareholders equity |           | $         | 2,309,422 |          |      |         | 2.28 | %       |         | $        | 52,610  |         |           | $         | 2,058,738 |          |      |      | 3.15 | % |         | $       | 64,937  |   |           | $         | 1,843,525 |  |      |      | 3.57 | % |         | $      | 65,774  | 
|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|Average effective rate on interest-bearing
    liabilities |                             | $                                          | 1,817,932 |           |           |          | 2.89 | %       |      | $       | 52,610  |          |         | $       | 1,606,394 |           |           |          | 4.04 | %    |      | $ | 64,937  |         |         | $ | 1,450,814 |           |           |  | 4.53 | %    |      | $ | 65,774  |       
|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|Interest Income/ Earning Assets                            |                             | $                                          | 2,181,715 |           |           |          | 6.41 | %       |      | $       | 139,955 |          |         | $       | 1,944,961 |           |           |          | 7.43 | %    |      | $ | 144,471 |         |         | $ | 1,739,068 |           |           |  | 7.92 | %    |      | $ | 137,655 |       
|Interest Expense/ Earning Assets                           |                             | $                                          | 2,181,715 |           |           |          | 2.41 |         |      | $       | 52,610  |          |         | $       | 1,944,961 |           |           |          | 3.34 |      |      | $ | 64,937  |         |         | $ | 1,739,068 |           |           |  | 3.78 |      |      | $ | 65,744  |       
|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       
|Effective Interest Differential                            |                             |                                            |           |           |           |          | 4.00 | %       |      |         |         |          |         |         |           |           |           |          | 4.09 | %    |      |   |         |         |         |   |           |           |           |  | 4.14 | %    |      |   |         |       
|                                                           |                             |                                            |           |           |           |          |      |         |      |         |         |          |         |         |           |           |           |          |      |      |      |   |         |         |         |   |           |           |           |  |      |      |      |   |         |       



---



|    |                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The interest earned on nontaxable investment
    securities and loans is shown on a tax equivalent basis.                                                                                            
|   
|(2) | 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.

Interest
Rate Sensitivity Analysis

The Corporation actively manages its interest
rate sensitivity position. The objectives of interest rate risk
management are to control exposure of net interest income to
risks associated with interest rate movements

16



---



##### 



and to achieve consistent growth in net interest
income. The Asset/ Liability Committee, using policies and
procedures approved by the Corporations Board of
Directors, is responsible for managing the rate sensitivity
position. The Corporation manages interest rate sensitivity by
changing the mix and repricing characteristics of its assets and
liabilities, through the management of its investment securities
portfolio, its offering of loan and deposit terms and through
borrowings from the FHLB. The nature of the Corporations
current operations is such that it is not subject to foreign
currency exchange or commodity price risk. The Corporation does
not own trading assets and it does not have any hedging
transactions in place such as interest rate swaps, caps or
floors.


The Corporation uses three principal reports to
measure interest rate risk: gap analysis reports; asset/
liability simulation reports; and net interest margin reports.
The Corporations interest rate sensitivity, as measured by
the repricing of its interest sensitive assets and liabilities
at December 31, 2002, is presented in table 13. The
data in the table was based in part on assumptions that are
regularly reviewed for accuracy. The table presents data at a
single point in time and includes management assumptions
estimating the prepayment rate and the interest rate environment
prevailing at December 31, 2002. The table indicates an
asset sensitive one-year cumulative gap position of 17.91% of
total earning assets. The one-year cumulative gap reversed from
a liability sensitive gap position at December 31, 2001,
due to a reduction in the duration of the investment and loan
portfolios.

Table 13

|                                   |       |                        |         |           |  |          |         |         |  |   |          |         |  |   |         |         | 
|---------------------------------- | ----- | ---------------------- | ------- | --------- |  | -------- | ------- | ------- |  | - | -------- | ------- |  | - | ------- | ------- | 
|                                   |       |                       
|                                   |       | December 31, 2002     
|                                   |       |                       
|                                   |       | 0 to 90                |         | 91 to 365 |  | >1 year  |         | Over 5 
|                                   |       | days                   |         | days      |  | <5 years |         | years  
|                                   |       |                        |         |           |  |          |         |        
|                                   |       |                       
|                                   |       | (Dollars in thousands)
|ASSETS                             |       |                        |         |           |  |          |         |         |  |   |          |         |  |   |         |        
|Other rate-sensitive assets        |       | $                      | 41,910  |           |  | $        |        |         |  | $ |         |         |  | $ |        |        
|Loans                              |       |                        | 429,414 |           |  |          | 457,087 |         |  |   | 400,822  |         |  |   | 45,969  |        
|Investment securities              |       |                        | 178,712 |           |  |          | 283,599 |         |  |   | 244,863  |         |  |   | 264,293 |        
|                                   |       |                        |         |           |  |          |         |         |  |   |          |         |  |   |         |        
|                                   | Total |                        |         | 650,036   |  |          |         | 740,686 |  |   |          | 645,685 |  |   |         | 310,262 | 
|                                   |       |                        |         |           |  |          |         |         |  |   |          |         |  |   |         |        
|LIABILITIES                        |       |                        |         |           |  |          |         |         |  |   |          |         |  |   |         |        
|Noninterest-bearing deposits       |       |                        | 269,777 |           |  |          |        |         |  |   |         |         |  |   |        |        
|Time deposits                      |       |                        | 219,481 |           |  |          | 257,256 |         |  |   | 359,684  |         |  |   | 61      |        
|Money market savings funds         |       |                        | 20,075  |           |  |          | 60,226  |         |  |   | 321,205  |         |  |   | 87,440  |        
|Interest-bearing checking accounts |       |                        | 4,565   |           |  |          | 13,696  |         |  |   | 73,046   |         |  |   | 91,308  |        
|Savings accounts                   |       |                        | 6,060   |           |  |          | 18,180  |         |  |   | 96,961   |         |  |   | 80,801  |        
|Other borrowings                   |       |                        | 101,156 |           |  |          |        |         |  |   | 69,000   |         |  |   | 83,750  |        
|                                   |       |                        |         |           |  |          |         |         |  |   |          |         |  |   |         |        
|                                   | Total |                        |         | 621,114   |  |          |         | 349,358 |  |   |          | 919,896 |  |   |         | 343,360 | 
|                                   |       |                        |         |           |  |          |         |         |  |   |          |         |  |   |         |        
|Incremental gap                    |       | $                      | 28,922  |           |  | $        | 391,328 |         |  | $ | (274,211 | )       |  | $ | (33,098 | )      
|                                   |       |                        |         |           |  |          |         |         |  |   |          |         |  |   |         |        
|Cumulative gap*                    |       | $                      | 28,922  |           |  | $        | 420,250 |         |  | $ | 146,039  |         |  | $ | 112,941 |        
|                                   |       |                        |         |           |  |          |         |         |  |   |          |         |  |   |         |        
|% of earning assets                |       |                        | 1.23    | %         |  |          | 17.91   | %       |  |   | 6.22     | %       |  |   | 4.81    | %      
|                                   |       |                        |         |           |  |          |         |         |  |   |          |         |  |   |         |        



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The information is based upon significant
    assumptions, including the following: loans and leases are
    repaid by contractual maturity and repricings; securities,
    except mortgage-backed securities, are repaid according to
    contractual maturity adjusted for call features; mortgage-backed
    security repricing is adjusted for estimated early paydowns;
    interest-bearing demand, regular savings, and money market
    savings deposits are estimated to exhibit some rate sensitivity
    based on managements analysis of deposit withdrawals; and
    time deposits are shown in the table based on contractual
    maturity.

Management also simulates possible economic
conditions and interest rate scenarios in order to quantify the
impact on net interest income. The effect that changing interest
rates have on the Corporations net interest income is
simulated by increasing and decreasing interest rates. This
simulation is known as rate

17



---



##### 



shocking. The report below forecasts changes in
the Corporations market value of equity under alternative
interest rate environments. The market value of equity is
defined as the net present value of the Corporations
existing assets and liabilities. The results of the
December 31, 2002, rate shock simulations show that the
Corporation is within all guidelines set by the
Corporations Asset/ Liability policy.


Table 15

|                  |  |              |         |              |  |            |         |                 |  |  |        |   |  |  |       |  
|----------------- |  | ------------ | ------- | ------------ |  | ---------- | ------- | --------------- |  |  | ------ | - |  |  | ----- | -
|                  |  |              |         | Change in    |  |            |         | Asset/Liability
|                  |  | Market Value |         | Market Value |  | Percentage |         | Approved       
|                  |  | of Equity    |         | of Equity    |  | Change     |         | Percent Change 
|                  |  |              |         |              |  |            |         |                
|+300 Basis Points |  |              | 305,359 |              |  |            | 16,678  |                 |  |  | 5.78   | % |  |  | +/-30 | %
|+200 Basis Points |  |              | 320,338 |              |  |            | 31,657  |                 |  |  | 10.97  | % |  |  | +/-30 | %
|+100 Basis Points |  |              | 314,607 |              |  |            | 25,926  |                 |  |  | 8.98   | % |  |  | +/-30 | %
|Flat Rate         |  |              | 288,681 |              |  |            |        |                 |  |  | 0.00   | % |  |  | +/-30 | %
|-100 Basis Points |  |              | 248,513 |              |  |            | (40,168 | )               |  |  | -13.91 | % |  |  | +/-30 | %
|-200 Basis Points |  |              | 233,852 |              |  |            | (54,829 | )               |  |  | -18.99 | % |  |  | +/-30 | %
|-300 Basis Points |  |              | 205,880 |              |  |            | (82,801 | )               |  |  | -28.68 | % |  |  | +/-30 | %

In the event the Corporation should experience a
mismatch in its desired gap ranges or an excessive decline in
its market value of equity resulting from changes in interest
rates, it has a number of options which it could utilize to
remedy such a mismatch. The Corporation could restructure its
investment portfolio through the sale or purchase of securities
with more favorable repricing attributes. It could also
emphasize growth in loan products with appropriate maturities or
repricing attributes, or attract deposits or obtain borrowings
with desired maturities.



| |                          
| | -------------------------
| | Provision for Loan Losses

The provision for 2002 of $4,370,000, reflected
an increase of $440,000, compared to the 2001 provision of
$3,930,000. The increase in the provision during 2002 is based
on managements analysis of the adequacy of the reserve for
losses in the loan portfolio. The allowance for loan losses to
nonperforming loans ratio for December 31, 2002, 2001 and
2000 were 272.8%, 187.9%, and 258.5%, respectively. Total net
loans charged off in 2002, 2001 and 2000 were $2,738,000,
$3,582,000 and $1,989,000, respectively.



| |                       
| | ----------------------
| | Other Operating Income

Other operating income of $19,048,000 earned in
2002, net of security gains, increased $1,452,000, or 8.3%,
compared to 2001. The rise in other operating income is the
result of increases in service charges, bank-owned life
insurance (BOLI) and trust and investment services income of
$1,453,000, $217,000 and $24,000, respectively. Partially
offsetting these increases was a reduction in other income. The
source of the reduction in other operating income was lower fees
generated from HNC Reinsurance Company. Net of the reduction in
fees generated by HNC Reinsurance Company, other operating
income grew $2,493,000, or 15.8%. The gains on the sale of
securities were $3,475,000 in 2002 compared to $4,629,000 in
2001.

Service charges on deposit accounts of $6,923,000
in 2002 increased $1,453,000, or 26.6%, from the 2001 income
from service charges on deposit accounts of $5,470,000. The
growth in service charges during 2002 is primarily attributed to
the overdraft Bounce Protection product introduced in March
2001. The growth in overdraft fees during 2002 was $1,113,000,
compared to 2001. This growth in service charges is also related
to the 15.2% growth in average fee earning deposits in 2002,
compared to 2001. The 2001 service charges grew 42.7% over 2000
service charges as a result of the Bounce Protection product and
higher fee producing deposit balances.

The Corporation recorded net security gains on
the sale of securities available for sale of $3,475,000 in 2002,
compared to $4,629,000 in 2001. The Corporation sold these
investment securities available for sale to fund the purchase of
other securities in an effort to enhance the overall return of
the portfolio and to reduce the risk within different interest
rate environments. The 2000 net security gains were $52,000.

18



---



##### 



Income from the Investment Management and Trust
Services Division of $3,764,000 increased $24,000 in 2002,
compared to 2001. This increase included higher investment
related fees partially offset by the lower fees associated with
the decrease in the market value of trust assets. The 2000
income from the Investment Management and Trust Services
Division was $2,983,000.

The Corporations bank owned life insurance
(BOLI) income increased $217,000, or 8.8%, to $2,689,000 during
2002, compared to $2,472,000 in 2001. This higher income level
was related to the higher volume of BOLI balances partially
offset by lower rates experienced during 2002. BOLI involves the
purchasing of life insurance by the Corporation on a chosen
group of employees. The Corporation is the owner and beneficiary
of the policies. This pool of insurance, due to tax advantages
to the Banks, is profitable to the Corporation. This
profitability is used to offset a portion of future employee
benefit cost increases. Bank deposits fund BOLI and the earnings
from BOLI are recognized as other income. The Corporation
recognized $1,944,000 of BOLI income in 2000.

Other income decreased $242,000 during 2002,
compared to 2001, as a result of lower fees generated by HNC
Reinsurance Company. HNC Reinsurance Company was formed during
2001 to generate fees through reinsuring consumer loan credit
life and accident and health insurance. During the first year of
operation in 2001, HNC Reinsurance Company recorded $1,772,000
of other income and $1,618,000 of other expenses for a net of
$154,000. The other income generated from HNC Reinsurance
Company during 2002 of $731,000 was offset by the $551,000 of
other expense for a net of $180,000. Net of the reduction in
fees generated by HNC Reinsurance Company, other income grew
$799,000 or 19.3%. This growth was the result of increases in
gains on the sale of residential mortgage loans, mortgage
servicing fees and ATM fees. Other income in 2000 was $3,395,000.



| |               
| | --------------
| | Other Expenses

The Corporations 2002 overhead expense as a
percentage of average assets of 2.44% decreased from the 2001
ratio of 2.67%. The ratio remains well below its peer ratio of
3.06% as of September 30, 2002. Other operating expenses
rose to $56,297,000 in 2002, a modest 2.3% increase over the
$55,043,000 recorded in 2001. Contributing to this increase were
increases in salaries and employee benefits and a one-time
occupancy expense associated with a closed branch. These
increases were partially offset by lower expenses related to HNC
Reinsurance Company and a reduction in off-lease vehicle
residual reserve expenses recorded during 2002.

Employee salaries and benefits increased
$3,145,000, or 11.8%, from $26,668,000 in 2001 to $29,813,000 in
2002. The increase in 2002 salaries was 10.0% and the rise in
benefits was 20.0%. The increase in salaries reflects additional
staff necessitated by the growth of the Corporation, and both
cost-of-living and merit increases. The rise in employee
benefits is the result of higher pension expenses and employee
medical insurance coverage. The higher pension expense is
related to the addition of new employees to the plan and the
overall performance of the plan. The 2001 salaries and benefits
expense increased 12.3% over the 2000 salary and benefits
expense of $23,745,000.

The 2002 net occupancy costs increased by
$535,000, or 16.2%, compared to the $367,000, or 12.5%, increase
in 2002. The 2002 increase was primarily due to a $365,000
expense related to a branch closure during the first quarter of
2002. Net of this branch closing related expense, occupancy
expenses grew 5.2%. Equipment expenses increased $291,000, or
5.5%, during 2002, compared to $110,000, or 2.1%, in 2001. The
2002 increase was the result of expenses related to new sales
and application processing systems for the branches.

Other expenses decreased $2,717,000, or 13.7%,
from $19,837,000 in 2001 to $17,120,000 in 2002. This decrease
was related to lower HNC Reinsurance Company expenses and a
reduction in off-lease vehicle residual reserve expenses
recorded during 2002. The Corporation reviews the off-lease
vehicles residual reserve on a quarterly basis and anticipates
continued expense contributions to the reserve in 2003. The
reduction in the HNC Reinsurance Company expenses was $1,067,000
and the off-lease vehicle residual reserve expenses were reduced
by $968,0000. Net of these two reductions, the 2002 other
expenses were still below 2001 other expenses by $682,000. This
remaining reduction in other expense was the result of a
reduction in loan related

19



---



##### 



expenses and marketing expenses. The 2001 other
expenses grew 54.1%, compared to 2000, primarily due to the HNC
Reinsurance Company expenses and the off-lease vehicle residual
reserve expense.




| |             
| | ------------
| | Income Taxes

The Corporation accounts for income taxes under
the liability method specified by SFAS No. 109,
Accounting for Income Taxes. Under SFAS
No. 109, deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on
deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date. The principal
types of accounts resulting in differences between assets and
liabilities for financial statement and tax return purposes are
the allowance for loan losses, leased assets, deferred loan fees
and compensation.



| |        
| | -------
| | Capital

Capital, at the end of 2002, was $206,206,000, an
increase of $16,857,000, or 8.9%, over the end of 2001. The
increase was due to the retention of the Corporations
earnings, and to the adjustment for the net realized gains
related to the available for sale investment securities. Net
unrealized gains and losses on available for sale investment
securities are recorded as accumulated other comprehensive
income (loss) in the equity section of the balance sheet.
The accumulated other comprehensive income at December 31,
2002 was a gain of $6,937,000, compared to a gain of $4,534,000
at December 31, 2001. The corporation purchased $6,244,000
of treasury stock during the 2002, compared to $5,093,000 in
2001. Management believes that the Corporations current
capital position and liquidity position are strong and that its
capital position is adequate to support its operations.
Management is not aware of any recommendation by any regulatory
authority, which, if it were to be implemented, would have a
material effect on the Corporations capital.

Pursuant to the federal regulators
risk-based capital adequacy guidelines, the components of
capital are called Tier 1 and Tier 2 capital. For the
Corporation, Tier 1 capital is shareholders equity
and Tier 2 capital is the allowance for loan losses. The
risk-based capital ratios are computed by dividing the
components of capital by risk-adjusted assets. Risk-adjusted
assets are determined by assigning credit risk-weighting factors
from 0% to 100% to various categories of assets and off-balance
sheet financial instruments. The minimum for the Tier 1
capital ratio is 4.0%, and the total capital ratio (Tier 1
plus Tier 2 capital divided by risk-adjusted assets)
minimum is 8.0%. At December 31, 2002, the
Corporations Tier 1 risk-adjusted capital ratio was
12.28%, and the total risk-adjusted capital ratio was 13.38%,
both well above regulatory requirements. The risk-based capital
ratios of each of the Corporations commercial banks also
exceeded regulatory requirements at the end of 2002.

To supplement the risk-based capital adequacy
guidelines, the Federal Reserve Board (FRB) established a
leverage ratio guideline. The leverage ratio consists of
Tier 1 capital divided by quarterly average total assets,
excluding intangible assets. The minimum leverage ratio
guideline is 3% for banking organizations that do not anticipate
significant growth and that have well-diversified risk,
excellent asset quality, high liquidity, good earnings and, in
general, are considered top-rated, strong banking organizations.
Other banking organizations are expected to have ratios of at
least 4% or 5%, depending upon their particular condition and
growth plans. Higher leverage ratios could be required by the
particular circumstances or risk profile of a given banking
organization. The Corporations leverage ratios were 8.19%
and 8.71% at December 31, 2002 and 2001, respectively.

Under FDIC regulations, a well
capitalized institution must have a leverage ratio of at
least 5%, a Tier 1 risk-based capital ratio of at least 6%
and a total risk-based capital ratio of at least 10% and not be
subject to a capital directive order. To be considered
adequately capitalized an institution must generally
have a leverage ratio of at least 4%, a Tier 1 risk-based
capital ratio of at least 4% and a total risk-based capital
ratio of at least 8%. An institution is deemed to be
critically under capitalized if it has a tangible
equity ratio of 2% or less. As of December 31, 2002, the
Banks are above the regulatory minimum guidelines and meet the
criteria to be categorized as well capitalized
institutions.

20



---



##### 





| |          
| | ---------
| | Liquidity

Liquidity is a measure of the ability of the
Banks to meet their needs and obligations on a timely basis. For
a bank, liquidity requires the ability to meet the day-to-day
demands of deposit customers, and the ability to fulfill the
needs of borrowing customers. Generally, the Banks arrange their
mix of cash, money market investments, investment securities and
loans in order to match the volatility, seasonality, interest
sensitivity and growth trends of its deposit funds. The
liquidity measurement is based on the asset/ liability
models projection of potential sources and uses of funds
for the next 120 days. The resulting projections as of
December 31, 2002, show the potential sources of funds
exceeding the potential uses of funds. The Corporation has
external sources of funds, which can be drawn upon when funds
are required. The primary source of external liquidity is an
available line of credit with the FHLB of Pittsburgh. Unused
lines of credit at the FHLB of Pittsburgh were $292,813,000, as
of December 31, 2002. The Banks also have unused federal
funds lines of credit of $50,000,000 and non-pledged investment
securities available for sale of $451,530,000 as of
December 31, 2002.

There are no known trends or any known demands,
commitments, events or uncertainties that will result in, or
that are reasonably likely to result in liquidity increasing or
decreasing in any material way. Footnote number 12 contains
information concerning the approximate minimum rental
commitments for existing operating leases at December 31,
2002.

The commitment expiration periods for loan
commitments as of December 31, 2002, are as follows:

|                               |                        |                   |         |           |  |           |         |         |  |   |         |         | 
|------------------------------ | ---------------------- | ----------------- | ------- | --------- |  | --------- | ------- | ------- |  | - | ------- | ------- | 
|                               |                        |                  
|                               |                        | Commitment Period
|                               |                        |                  
|                               |                        | Total             |         |          
|                               |                        | Amount            |         | Less than |  |          
|Loan Commitments               |                        | Committed         |         | 1 Yr      |  | 1-3 Years
|                               |                        |                   |         |           |  |          
|Lines of Credit                |                        | $                 | 395,642 |           |  | $         | 227,343 |         |  | $ | 168,299 |        
|Unfunded Residential Mortgages |                        |                   | 18,485  |           |  |           | 18,485  |         |  |   |        |        
|Standby Letters of Credit      |                        |                   | 9,545   |           |  |           | 9,545   |         |  |   |        |        
|                               |                        |                   |         |           |  |           |         |         |  |   |         |        
|                               | Total Loan Commitments |                   | $       | 423,672   |  |           | $       | 255,373 |  |   | $       | 168,299 | 
|                               |                        |                   |         |           |  |           |         |         |  |   |         |        



| |                   
| | ------------------
| | Market Information

The following table sets forth quarterly dividend
information and the high and low prices for the
Corporations common stock for 2002 and 2001. The
Corporations stock is traded in the over-the-counter
market under the symbol HNBC and commonly quoted under NASDAQ
National Market Systems.

Table 15Price of
Common Stock

|                |  |           |       |            |  |          |       |  |  |   |      | 
|--------------- |  | --------- | ----- | ---------- |  | -------- | ----- |  |  | - | ---- | 
|2002            |  | Low Price |       | High Price |  | Dividend
|                |  |           |       |            |  |         
|First Quarter*  |  | $         | 20.95 |            |  | $        | 23.33 |  |  | $ | .162 | 
|Second Quarter* |  |           | 21.91 |            |  |          | 26.83 |  |  |   | .162 | 
|Third Quarter   |  |           | 21.49 |            |  |          | 27.25 |  |  |   | .171 | 
|Fourth Quarter  |  |           | 22.91 |            |  |          | 26.75 |  |  |   | .210 | 

|                 |  |           |       |            |  |          |       |  |  |   |      | 
|---------------- |  | --------- | ----- | ---------- |  | -------- | ----- |  |  | - | ---- | 
|2001             |  | Low Price |       | High Price |  | Dividend
|                 |  |           |       |            |  |         
|First Quarter**  |  | $         | 16.13 |            |  | $        | 18.75 |  |  | $ | .143 | 
|Second Quarter** |  |           | 17.27 |            |  |          | 21.31 |  |  |   | .143 | 
|Third Quarter*   |  |           | 18.95 |            |  |          | 25.42 |  |  |   | .152 | 
|Fourth Quarter*  |  |           | 19.95 |            |  |          | 24.58 |  |  |   | .181 | 



---



|   |                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------
|*  | Adjusted for a 5% stock dividend effective
    9/16/02.                                                         
|  
|** | Adjusted for a 5% stock dividend effective
    9/16/02 and adjusted for a 100% stock dividend effective 8/10/01.

21



---



##### 



HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS


|                                                                                         |                                                                                                                                                             |                           |                                            |         |         |           |           |         |         |           | 
|---------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ------- | ------- | --------- | --------- | ------- | ------- | --------- | 
|                                                                                         |                                                                                                                                                             |                          
|                                                                                         |                                                                                                                                                             | December 31              
|                                                                                         |                                                                                                                                                             |                          
|                                                                                         |                                                                                                                                                             | 2002                      |                                            | 2001   
|                                                                                         |                                                                                                                                                             |                           |                                            |        
|                                                                                         |                                                                                                                                                             |                          
|                                                                                         |                                                                                                                                                             | (Dollars in thousands)   
|Assets                                                                                   |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|Cash and due from banks                                                                  |                                                                                                                                                             | $                         | 62,177                                     |         |         | $         | 62,974    |        
|Federal funds sold                                                                       |                                                                                                                                                             |                           | 33,500                                     |         |         |           | 12,500    |        
|Interest-bearing deposits in banks                                                       |                                                                                                                                                             |                           | 8,410                                      |         |         |           | 7,150     |        
|                                                                                         |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|                                                                                         |                                                                                                                                                             |                           | Total cash and cash equivalents            |         |         | 104,087   |           |         |         | 82,624    | 
|Investment securities available for sale                                                 |                                                                                                                                                             |                           | 949,056                                    |         |         |           | 706,371   |        
|Investment securities held to maturity (fair
    value $23,650 and $26,782 respectively) |                                                                                                                                                             |                           | 22,411                                     |         |         |           | 26,099    |        
|Loans                                                                                    |                                                                                                                                                             |                           | 1,331,956                                  |         |         |           | 1,313,934 |        
|Less: Deferred costs, net                                                                |                                                                                                                                                             |                           | 1,336                                      |         |         |           | 2,675     |        
|Allowance for loan
    losses                                                            |                                                                                                                                                             |                           | (17,190                                    | )       |         |           | (15,558   | )      
|                                                                                         |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|                                                                                         |                                                                                                                                                             |                           | Net loans                                  |         |         | 1,316,102 |           |         |         | 1,301,051 | 
|                                                                                         |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|Bank premises and equipment, net                                                         |                                                                                                                                                             |                           | 21,645                                     |         |         |           | 21,439    |        
|Accrued interest receivable                                                              |                                                                                                                                                             |                           | 13,140                                     |         |         |           | 11,907    |        
|Net assets in foreclosure                                                                |                                                                                                                                                             |                           | 390                                        |         |         |           | 609       |        
|Bank-owned life insurance                                                                |                                                                                                                                                             |                           | 48,631                                     |         |         |           | 45,942    |        
|Other assets                                                                             |                                                                                                                                                             |                           | 15,402                                     |         |         |           | 12,929    |        
|                                                                                         |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|                                                                                         |                                                                                                                                                             |                           | Total assets                               |         | $       | 2,490,864 |           |         | $       | 2,208,971 | 
|                                                                                         |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|Liabilities and Shareholders
    Equity                                                 |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|Deposits                                                                                 |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|                                                                                         | Noninterest-bearing                                                                                                                                         |                           | $                                          | 269,781 |         |           | $         | 254,638 |        
|                                                                                         | Interest-bearing:                                                                                                                                           |                           |                                            |         |         |           |           |         |        
|                                                                                         |                                                                                                                                                             | Checking accounts         |                                            |         | 249,646 |           |           |         | 169,156 |          
|                                                                                         |                                                                                                                                                             | Money market accounts     |                                            |         | 488,944 |           |           |         | 419,890 |          
|                                                                                         |                                                                                                                                                             | Savings                   |                                            |         | 202,003 |           |           |         | 179,284 |          
|                                                                                         |                                                                                                                                                             | Time, under $100,000      |                                            |         | 526,885 |           |           |         | 489,345 |          
|                                                                                         |                                                                                                                                                             | Time, $100,000 or greater |                                            |         | 242,563 |           |           |         | 234,549 |          
|                                                                                         |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|                                                                                         |                                                                                                                                                             |                           | Total deposits                             |         | $       | 1,979,822 |           |         | $       | 1,746,862 | 
|Accrued interest payable                                                                 |                                                                                                                                                             |                           | 21,991                                     |         |         |           | 27,114    |        
|U.S. Treasury demand notes                                                               |                                                                                                                                                             |                           | 2,015                                      |         |         |           | 2,677     |        
|Long-term borrowings                                                                     |                                                                                                                                                             |                           | 162,750                                    |         |         |           | 127,750   |        
|Securities sold under agreements to repurchase                                           |                                                                                                                                                             |                           | 84,141                                     |         |         |           | 80,393    |        
|Guaranteed preferred beneficial interest in
    Corporations subordinated debentures    |                                                                                                                                                             |                           | 5,000                                      |         |         |           | 5,000     |        
|Other liabilities                                                                        |                                                                                                                                                             |                           | 28,939                                     |         |         |           | 29,826    |        
|                                                                                         |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|                                                                                         |                                                                                                                                                             |                           | Total liabilities                          |         | $       | 2,284,658 |           |         | $       | 2,019,622 | 
|                                                                                         |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|Shareholders equity:                                                                    |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|                                                                                         | Series preferred stock, par value $1 per share;
    authorized 8,000,000 shares, none issued                                                                |                           |                                            |        |         |           |           |        |        
|                                                                                         | Common stock, par value $1 per share; authorized
    75,000,000 shares; issued and outstanding shares 19,597,290 in
    2002 and 18,570,971 shares in 2001. |                           |                                            | 19,597  |         |           |           | 18,571  |        
|                                                                                         | Additional paid-in capital                                                                                                                                  |                           |                                            | 96,585  |         |           |           | 71,419  |        
|                                                                                         | Retained earnings                                                                                                                                           |                           |                                            | 94,677  |         |           |           | 100,171 |        
|                                                                                         | Treasury stock, at cost: 569,107 shares in
    2002 and 287,440 shares in 2001.                                                                             |                           |                                            | (11,590 | )       |           |           | (5,346  | )      
|                                                                                         | Accumulated other comprehensive income                                                                                                                      |                           |                                            | 6,937   |         |           |           | 4,534   |        
|                                                                                         |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|                                                                                         |                                                                                                                                                             |                           | Total shareholders equity                 |         |         | 206,206   |           |         |         | 189,349   | 
|                                                                                         |                                                                                                                                                             |                           |                                            |         |         |           |           |        
|                                                                                         |                                                                                                                                                             |                           | Total liabilities and shareholders equity |         | $       | 2,490,864 |           |         | $       | 2,208,971 | 
|                                                                                         |                                                                                                                                                             |                           |                                            |         |         |           |           |        

See accompanying notes to consolidated financial
statements.

22



---



##### 



HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME


|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |            |         | 
|------------------------------------------ | ------------------------- | ---------------------------------------------------------------------------------- | ------ | ---------- | ------- | ---- | ------ | ---------- | ------- | - | ------ | ---------- | ------- | 
|                                           |                           |                                                                                   
|                                           |                           | Year Ended December 31                                                            
|                                           |                           |                                                                                   
|                                           |                           | 2002                                                                               |        | 2001       |         | 2000
|                                           |                           |                                                                                    |        |            |         |     
|                                           |                           |                                                                                   
|                                           |                           | (Dollars in thousands except weighted average number of                           
|                                           |                           | common shares and per share information)                                          
|Interest income                            |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|Loans, including fees                      |                           | $                                                                                  | 84,408 |            |         | $    | 90,294 |            |         |   | 87,131 |           
|Lease financing                            |                           |                                                                                    | 8,448  |            |         |      | 9,717  |            |         |   | 9,013  |           
|Investment securities:                     |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|                                           | Taxable                   |                                                                                    |        | 26,599     |         |      |        | 27,376     |         |   |        | 24,205     |        
|                                           | Exempt from federal taxes |                                                                                    |        | 12,619     |         |      |        | 10,478     |         |   |        | 10,870     |        
|Federal funds sold                         |                           |                                                                                    | 331    |            |         |      | 511    |            |         |   | 219    |           
|Deposits in banks                          |                           |                                                                                    | 225    |            |         |      | 303    |            |         |   | 373    |           
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|                                           |                           | Total interest income                                                              |        |            | 132,630 |      |        |            | 138,679 |   |        |            | 131,811 | 
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|Interest expense                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|Savings deposits                           |                           |                                                                                    | 12,060 |            |         |      | 17,258 |            |         |   | 18,337 |           
|Time, under $100,000                       |                           |                                                                                    | 23,510 |            |         |      | 26,111 |            |         |   | 23,465 |           
|Time, $100,000 or greater                  |                           |                                                                                    | 7,596  |            |         |      | 11,105 |            |         |   | 11,282 |           
|Borrowed funds                             |                           |                                                                                    | 9,444  |            |         |      | 10,463 |            |         |   | 12,690 |           
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|                                           |                           | Total interest expense                                                             |        |            | 52,610  |      |        |            | 64,937  |   |        |            | 65,774  | 
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|                                           |                           | Net interest income                                                                |        |            | 80,020  |      |        |            | 73,742  |   |        |            | 66,037  | 
|Provision for loan losses                  |                           |                                                                                    | 4,370  |            |         |      | 3,930  |            |         |   | 2,312  |           
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|                                           |                           | Net interest income after provision for loan
    losses                            |        |            | 75,650  |      |        |            | 69,812  |   |        |            | 63,725  | 
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|Other operating income                     |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|Service charges                            |                           |                                                                                    | 6,923  |            |         |      | 5,470  |            |         |   | 3,832  |           
|Security gains, net                        |                           |                                                                                    | 3,475  |            |         |      | 4,629  |            |         |   | 52     |           
|Trust and investment services income       |                           |                                                                                    | 3,764  |            |         |      | 3,300  |            |         |   | 2,977  |           
|Bank-owned life insurance income           |                           |                                                                                    | 2,689  |            |         |      | 2,472  |            |         |   | 1,944  |           
|Other income                               |                           |                                                                                    | 5,672  |            |         |      | 6,354  |            |         |   | 3,401  |           
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|                                           |                           | Total other operating income                                                       |        |            | 22,523  |      |        |            | 22,225  |   |        |            | 12,206  | 
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|                                           |                           | Net interest income after provision for loan
    losses and other operating income |        |            | 98,173  |      |        |            | 92,037  |   |        |            | 75,931  | 
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|Other operating expenses                   |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|Salaries, wages and employee benefits      |                           |                                                                                    | 29,813 |            |         |      | 26,668 |            |         |   | 23,745 |           
|Occupancy                                  |                           |                                                                                    | 3,829  |            |         |      | 3,294  |            |         |   | 2,927  |           
|Furniture and equipment                    |                           |                                                                                    | 5,535  |            |         |      | 5,244  |            |         |   | 5,134  |           
|Other expenses                             |                           |                                                                                    | 17,120 |            |         |      | 19,837 |            |         |   | 12,871 |           
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|Total other operating expenses             |                           |                                                                                    | 56,297 |            |         |      | 55,043 |            |         |   | 44,677 |           
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|                                           |                           | Income before income tax expense                                                   |        |            | 41,876  |      |        |            | 36,994  |   |        |            | 31,254  | 
|                                           |                           | Income tax expense                                                                 |        |            | 8,949   |      |        |            | 8,174   |   |        |            | 5,650   | 
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|Net income                                 |                           | $                                                                                  | 32,927 |            |         | $    | 28,820 |            |         | $ | 25,604 |           
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|Weighted average number of common shares:* |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|                                           | Diluted                   |                                                                                    |        | 19,700,487 |         |      |        | 19,698,964 |         |   |        | 19,486,473 |        
|                                           | Basic                     |                                                                                    |        | 19,121,778 |         |      |        | 19,221,254 |         |   |        | 19,464,230 |        
|Net income per share information:*         |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|                                           | Diluted                   |                                                                                    | $      | 1.67       |         |      | $      | 1.46       |         |   | $      | 1.31       |        
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|                                           | Basic                     |                                                                                    | $      | 1.72       |         |      | $      | 1.50       |         |   | $      | 1.31       |        
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           
|Cash dividends per share*                  |                           | $                                                                                  | 0.71   |            |         | $    | 0.62   |            |         | $ | 0.54   |           
|                                           |                           |                                                                                    |        |            |         |      |        |            |         |   |        |           



|  |                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------
|* | Adjusted for 5% stock dividend effective 9/16/02,
    100% stock dividend effective 8/10/01 and 5% stock dividend
    effective 11/9/00.

See accompanying notes to consolidated financial
statements.

23



---



##### 



HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY


|                                                                 |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |       |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |        | 
|---------------------------------------------------------------- |  | -------------------------------------------- | ------ | ----- |  | --------------- | ------ | ----------- |  | ------------- | ------ | -------- |  | ----- | ------- | ------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------ | 
|                                                                 |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |      
|                                                                 |  | Common Stock                                 |        |       |  |                 |        | Accumulated |  |               |        |          |  |      
|                                                                 |  |                                              |        |       |  |                 |        | Other       |  |               |        |          |  |      
|                                                                 |  | Number                                       |        | Par   |  | Additional      |        | Retained    |  | Comprehensive |        | Treasury |  |       |         | Comprehensive
|                                                                 |  | of Shares                                    |        | Value |  | Paid in Capital |        | Earnings    |  | Income (Loss) |        | Stock    |  | Total |         | Income       
|                                                                 |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |       |         |              
|                                                                 |  |                                             
|                                                                 |  | (Dollars and share information in thousands)
|Balance January 1, 2000                                          |  |                                              | 8,835  |       |  | $               | 8,835  |             |  | $             | 68,260 |          |  | $     | 80,376  |               |  | $ | (10,808 | ) |  | $ |        |   |  | $ | 146,663 |   |  |   |        | 
|Stock options                                                    |  |                                              | 4      |       |  |                 | 4      |             |  |               | 30     |          |  |       |        |               |  |   |        |   |  |   |        |   |  |   | 34      |   |  |   |        | 
|Stock dividends                                                  |  |                                              | 415    |       |  |                 | 415    |             |  |               | 11,566 |          |  |       | (12,306 | )             |  |   |        |   |  |   | 325     |   |  |   |        |   |  |   |        | 
|Stock awards                                                     |  |                                              |       |       |  |                 |       |             |  |               | 13     |          |  |       |        |               |  |   |        |   |  |   |        |   |  |   | 13      |   |  |   |        | 
|Net income for 2000                                              |  |                                              |       |       |  |                 |       |             |  |               |       |          |  |       | 25,604  |               |  |   |        |   |  |   |        |   |  |   | 25,604  |   |  | $ | 25,604 | 
|Other comprehensive income, net of
    reclassifications and tax |  |                                              |       |       |  |                 |       |             |  |               |       |          |  |       |        |               |  |   | 12,230  |   |  |   |        |   |  |   | 12,230  |   |  |   | 12,230 | 
|Purchases of Treasury stock                                      |  |                                              |       |       |  |                 |       |             |  |               |       |          |  |       |        |               |  |   |        |   |  |   | (578    | ) |  |   | (578    | ) |  |   |        | 
|Cash dividends                                                   |  |                                              |       |       |  |                 |       |             |  |               |       |          |  |       | (10,430 | )             |  |   |        |   |  |   |        |   |  |   | (10,430 | ) |  |   |        | 
|                                                                 |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |       |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |        | 
|Comprehensive Income                                             |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |       |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  | $ | 37,834 | 
|                                                                 |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |       |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |        | 
|Balance December 31, 2000                                        |  |                                              | 9,254  |       |  |                 | 9,254  |             |  |               | 79,869 |          |  |       | 83,244  |               |  |   | 1,422   |   |  |   | (253    | ) |  |   | 173,536 |   |  |   |        | 
|Stock options                                                    |  |                                              | 44     |       |  |                 | 44     |             |  |               | 812    |          |  |       |        |               |  |   |        |   |  |   |        |   |  |   | 856     |   |  |   |        | 
|Stock dividends                                                  |  |                                              | 9,273  |       |  |                 | 9,273  |             |  |               | (9,273 | )        |  |       |        |               |  |   |        |   |  |   |        |   |  |   |        |   |  |   |        | 
|Stock awards                                                     |  |                                              |       |       |  |                 |       |             |  |               | 11     |          |  |       |        |               |  |   |        |   |  |   |        |   |  |   | 11      |   |  |   |        | 
|Net income for 2001                                              |  |                                              |       |       |  |                 |       |             |  |               |       |          |  |       | 28,820  |               |  |   |        |   |  |   |        |   |  |   | 28,820  |   |  | $ | 28,820 | 
|Other comprehensive income, net of
    reclassifications and tax |  |                                              |       |       |  |                 |       |             |  |               |       |          |  |       |        |               |  |   | 3,112   |   |  |   |        |   |  |   | 3,112   |   |  |   | 3,112  | 
|Purchases of Treasury stock                                      |  |                                              |       |       |  |                 |       |             |  |               |       |          |  |       |        |               |  |   |        |   |  |   | (5,093  | ) |  |   | (5,093  | ) |  |   |        | 
|Cash dividends                                                   |  |                                              |       |       |  |                 |       |             |  |               |       |          |  |       | (11,893 | )             |  |   |        |   |  |   |        |   |  |   | (11,893 | ) |  |   |        | 
|                                                                 |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |       |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |        | 
|Comprehensive income                                             |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |       |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  | $ | 31,932 | 
|                                                                 |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |       |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |        | 
|Balance December 31, 2001                                        |  |                                              | 18,571 |       |  |                 | 18,571 |             |  |               | 71,419 |          |  |       | 100,171 |               |  |   | 4,534   |   |  |   | (5,346  | ) |  |   | 189,349 |   |  |   |        | 
|Stock options                                                    |  |                                              | 94     |       |  |                 | 94     |             |  |               | 1,166  |          |  |       |        |               |  |   |        |   |  |   |        |   |  |   | 1,260   |   |  |   |        | 
|Stock dividends                                                  |  |                                              | 932    |       |  |                 | 932    |             |  |               | 23,994 |          |  |       | (24,942 | )             |  |   |        |   |  |   |        |   |  |   | (16     | ) |  |   |        | 
|Stock awards                                                     |  |                                              |       |       |  |                 |       |             |  |               | 6      |          |  |       |        |               |  |   |        |   |  |   |        |   |  |   | 6       |   |  |   |        | 
|Net Income for 2002                                              |  |                                              |       |       |  |                 |       |             |  |               |       |          |  |       | 32,927  |               |  |   |        |   |  |   |        |   |  |   | 32,927  |   |  | $ | 32,927 | 
|Other comprehensive income, net of
    reclassifications and tax |  |                                              |       |       |  |                 |       |             |  |               |       |          |  |       |        |               |  |   | 2,403   |   |  |   |        |   |  |   | 2,403   |   |  |   | 2,403  | 
|Purchase of Treasury stock                                       |  |                                              |       |       |  |                 |       |             |  |               |       |          |  |       |        |               |  |   |        |   |  |   | (6,244  | ) |  |   | (6,244  | ) |  |   |        | 
|Cash Dividends                                                   |  |                                              |       |       |  |                 |       |             |  |               |       |          |  |       | (13,479 | )             |  |   |        |   |  |   |        |   |  |   | (13,479 | ) |  |   |        | 
|                                                                 |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |       |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |        | 
|Comprehensive income                                             |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |       |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  | $ | 35,330 | 
|                                                                 |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |       |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |        | 
|Balance December 31, 2002                                        |  |                                              | 19,597 |       |  | $               | 19,597 |             |  | $             | 96,585 |          |  | $     | 94,677  |               |  | $ | 6,937   |   |  | $ | (11,590 | ) |  | $ | 206,206 |   |  |   |        | 
|                                                                 |  |                                              |        |       |  |                 |        |             |  |               |        |          |  |       |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |        | 

See accompanying notes to consolidated financial
statements.

24



---



##### 



HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |        |          |  
|--------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ----------------------------------------- | ---------- | ------ | -------- | ---- | -------- | ------ | -------- | - | -------- | ------ | -------- | -
|                                                                                                                |                                                                                                                    |                                          
|                                                                                                                |                                                                                                                    | Year Ended December 31,                  
|                                                                                                                |                                                                                                                    |                                          
|                                                                                                                |                                                                                                                    | 2002                                      |            | 2001   |          | 2000
|                                                                                                                |                                                                                                                    |                                           |            |        |          |     
|                                                                                                                |                                                                                                                    |                                          
|                                                                                                                |                                                                                                                    | (Dollars in thousands)                   
|Operating activities                                                                                            |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|Net income                                                                                                      |                                                                                                                    | $                                         | 32,927     |        |          | $    | 28,820   |        |          | $ | 25,604   |       
|Adjustments to reconcile net income to net cash
    provided by operating activities:                           |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|                                                                                                                | Provision for loan losses                                                                                          |                                           |            | 4,370  |          |      |          | 3,930  |          |   |          | 2,312  |         
|                                                                                                                | Depreciation and amortization                                                                                      |                                           |            | 2,922  |          |      |          | 2,866  |          |   |          | 3,043  |         
|                                                                                                                | Net amortization of investment securities
    discount/premiums                                                    |                                           |            | 5,252  |          |      |          | 1,046  |          |   |          | 391    |         
|                                                                                                                | Deferred income taxes                                                                                              |                                           |            | (2,012 | )        |      |          | 2,034  |          |   |          | 3,337  |         
|                                                                                                                | Net realized securities gains                                                                                      |                                           |            | (3,475 | )        |      |          | (4,629 | )        |   |          | (52    | )       
|                                                                                                                | (Increase) decrease in accrued income receivable                                                                   |                                           |            | (1,233 | )        |      |          | 484    |          |   |          | (1,347 | )       
|                                                                                                                | (Decrease) increase in accrued interest payable                                                                    |                                           |            | (5,123 | )        |      |          | 4,768  |          |   |          | 4,802  |         
|                                                                                                                | Net (increase) decrease in other assets                                                                            |                                           |            | (2,475 | )        |      |          | (3,566 | )        |   |          | 125    |         
|                                                                                                                | Net (decrease) increase in other liabilities                                                                       |                                           |            | (168   | )        |      |          | 7,223  |          |   |          | (1,431 | )       
|                                                                                                                | Decrease (increase) in deferred costs                                                                              |                                           |            | 1,339  |          |      |          | (225   | )        |   |          | (1,878 | )       
|                                                                                                                | Write-down of other real estate owned                                                                              |                                           |            | 98     |          |      |          | 44     |          |   |          | 86     |         
|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|                                                                                                                |                                                                                                                    | Net cash provided by operating activities |            |        | 32,422   |      |          |        | 42,795   |   |          |        | 34,992   |  
|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|Investing activities                                                                                            |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|Proceeds from sales of investment securities
    available for sale                                             |                                                                                                                    |                                           | 897,327    |        |          |      | 468,270  |        |          |   | 133,208  |       
|Proceeds, maturity or calls of investment
    securities held to maturity                                       |                                                                                                                    |                                           | 3,750      |        |          |      | 4,799    |        |          |   | 6,869    |       
|Proceeds, maturity or calls of investment
    securities available for sale                                     |                                                                                                                    |                                           | 385,226    |        |          |      | 150,555  |        |          |   | 32,238   |       
|Purchases of investment securities held to
    maturity                                                         |                                                                                                                    |                                           |           |        |          |      |         |        |          |   | (19,740  | )     
|Purchases of investment securities available for
    sale                                                       |                                                                                                                    |                                           | (1,523,379 | )      |          |      | (746,263 | )      |          |   | (204,688 | )     
|Net increase in loans                                                                                           |                                                                                                                    |                                           | (21,851    | )      |          |      | (109,625 | )      |          |   | (94,783  | )     
|Net increase in premises and equipment                                                                          |                                                                                                                    |                                           | (3,128     | )      |          |      | (2,435   | )      |          |   | (3,056   | )     
|Purchase of bank-owned life insurance                                                                           |                                                                                                                    |                                           | (2,689     | )      |          |      | (8,471   | )      |          |   | (11,944  | )     
|Proceeds from sales of other real estate                                                                        |                                                                                                                    |                                           | 1,212      |        |          |      | 1,349    |        |          |   | 2,495    |       
|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|                                                                                                                |                                                                                                                    | Net cash used in investing activities     |            |        | (263,532 | )    |          |        | (241,821 | ) |          |        | (159,401 | )
|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|Financing activities                                                                                            |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|Net increase in deposits                                                                                        |                                                                                                                    |                                           | 232,960    |        |          |      | 257,812  |        |          |   | 147,613  |       
|(Decrease) increase in U.S. Treasury demand notes                                                               |                                                                                                                    |                                           | (662       | )      |          |      | 622      |        |          |   | (1,177   | )     
|(Decrease) increase in federal funds purchased                                                                  |                                                                                                                    |                                           |           |        |          |      | (44,500  | )      |          |   | 35,000   |       
|Increase (decrease) in long-term borrowings                                                                     |                                                                                                                    |                                           | 35,000     |        |          |      | 17,000   |        |          |   | (19,500  | )     
|Increase (decrease) in securities sold under
    agreement                                                      |                                                                                                                    |                                           | 3,748      |        |          |      | 6,310    |        |          |   | (34,532  | )     
|Proceeds from issuance of guaranteed preferred
    beneficial interest in Corporations subordinated debentures |                                                                                                                    |                                           |           |        |          |      | 5,000    |        |          |   |         |       
|Cash dividends and fractional shares                                                                            |                                                                                                                    |                                           | (13,479    | )      |          |      | (11,893  | )      |          |   | (10,430  | )     
|Repurchase of common stock                                                                                      |                                                                                                                    |                                           | (6,244     | )      |          |      | (5,093   | )      |          |   | (578     | )     
|Stock options and awards                                                                                        |                                                                                                                    |                                           | 1,250      |        |          |      | 867      |        |          |   | 47       |       
|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|                                                                                                                |                                                                                                                    | Net cash provided by financing activities |            |        | 252,573  |      |          |        | 226,125  |   |          |        | 116,443  |  
|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|Net increase (decrease) in cash and cash
    equivalents                                                        |                                                                                                                    |                                           | 21,463     |        |          |      | 27,099   |        |          |   | (7,966   | )     
|Cash and cash equivalents at beginning of year                                                                  |                                                                                                                    |                                           | 82,624     |        |          |      | 55,525   |        |          |   | 63,491   |       
|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|Cash and cash equivalents at end of year                                                                        |                                                                                                                    | $                                         | 104,087    |        |          | $    | 82,624   |        |          | $ | 55,525   |       
|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|Cash paid during the year for:                                                                                  |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|                                                                                                                | Interest                                                                                                           |                                           | $          | 57,732 |          |      | $        | 60,169 |          |   | $        | 60,973 |         
|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|                                                                                                                |                                                                                                                    | Income taxes                              |            | $      | 11,500   |      |          | $      | 4,900    |   |          | $      | 3,348    |  
|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|Supplemental disclosure of noncash investing and
    financing activities:                                      |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|                                                                                                                | Transfer of assets from loans to other real
    estate owned                                                       |                                           | $          | 1,091  |          |      | $        | 1,714  |          |   | $        | 1,433  |         
|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       
|                                                                                                                | Transfer of securities from investment securities
    held to maturity to investment securities available for sale |                                           | $          |       |          |      | $        |       |          |   | $        | 7,574  |         
|                                                                                                                |                                                                                                                    |                                           |            |        |          |      |          |        |          |   |          |       

See accompanying notes to consolidated financial
statements.

25



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES

Note 1  Summary of Significant
Accounting Policies

Business

Harleysville National Corporation (the
Corporation) through its subsidiary banks, Harleysville National
Bank and Trust Company, Citizens National Bank, and Security
National Bank (collectively the Banks), provides a full range of
banking services to individual and corporate customers located
in eastern Pennsylvania. HNC Financial Company and HNC
Reinsurance Company are wholly-owned subsidiaries of the
Corporation. HNC Financial Companys principal business
function is to expand the investment opportunities of the
Corporation. The Corporation incorporated HNC Reinsurance
Company during March 2001 to function as a reinsurer of consumer
loan credit life and accident and health insurance. A summary of
the significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial
statements follows.

The Corporation and the Banks are subject to
regulations of certain state and federal agencies and,
accordingly, these regulatory authorities periodically examine
the Corporation and the Banks. As a consequence of the extensive
regulation of commercial banking activities, the Corporation and
the Banks business is susceptible to being affected by
state and federal legislation and regulations.

Basis of
Financial Statement Presentation

The accounting and reporting policies of the
Corporation and its Subsidiaries conform with accounting
principles generally accepted in the United States of America
(US GAAP) applicable to banks. All significant inter-company
transactions are eliminated in consolidation and certain
reclassifications are made when necessary to conform with the
previous years financial statements to the current
years presentation. In preparing the consolidated
financial statements, management is required to make estimates
and assumptions that affect the reported amount of assets and
liabilities as of the dates of the balance sheets and revenues
and expenditures for the periods presented. Therefore, actual
results could differ significantly from those estimates.

Investment
Securities

The Corporation accounts for securities under
SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, which requires, among other things, that
debt and equity securities classified as available for sale be
reported at fair value with unrealized gains and losses excluded
from earnings and reported in other comprehensive income, net of
income taxes. The net effect of unrealized gains or losses,
caused by marking an available for sale portfolio to market,
could cause fluctuations in the level of shareholders
equity and equity-related financial ratios as changes in market
interest rates cause the fair value of fixed-rate securities to
fluctuate.

Investment securities are classified as held to
maturity when the Corporation and its subsidiaries have the
ability and intent to hold those securities to maturity. These
investment securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts.

Investment securities expected to be held for an
indefinite period of time are classified as available for sale
and are stated at fair value. Realized gains and losses on the
sale of investment securities are recognized using the specific
identification method and are included in the consolidated
statements of income.

During July 2000, the Corporation reclassified
$7,574,000 of investment securities from the held to maturity
category to the available for sale category, due to its
acquisition of Citizens Bank and Trust Company of Palmerton. As
a result of the reclassification, the Corporation recorded
$19,000 net of taxes unrealized holding losses in accumulated
other comprehensive income.

SFAS No. 119 Disclosure About
Derivative Financial Instruments and Fair Value of Financial
Instruments requires disclosures about financial
instruments, which are defined as futures, forwards, swap

26



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

and option contracts and other financial
instruments with similar characteristics. On the balance sheet,
receivables and payables are excluded from this definition. The
Corporation did not hold any derivative financial instruments as
defined by SFAS No. 119 at December 31, 2002 and 2001.

Loans

Loans that management intends to hold to maturity
are stated at the principal amount outstanding. Net loans
represent the principal loan amount outstanding net of deferred
cost and unearned income and reduced by the allowance for loan
losses. Interest on loans is credited to income based on the
principal amount outstanding.

Lease financing represents automobile and
equipment leasing. The lease financing receivable included in
loans is stated at the gross amount of lease payments
receivable, plus the residual value, less income to be earned
over the life of the leases. Such income is recognized over the
term of the leases using the level yield method.

Loan origination fees and direct loan origination
costs of completed loans are deferred and recognized over the
life of the loan as an adjustment to yield. The net loan
origination fees recognized as yield adjustments are reflected
in total interest income in the consolidated statements of
income, and the unamortized balance of such net loan origination
fees is reported in the consolidated balance sheets as part of
deferred costs, net.

Income recognition of interest is discontinued
when, in the opinion of management, the collectibility of such
interest becomes doubtful. A loan is generally classified as
nonaccrual when principal or interest has consistently been in
default for a period of 90 days or more or because of a
deterioration in the financial condition of the borrower, and
payment in full of principal or interest is not expected. Loans
past due 90 days or more and still accruing interest are
loans that are generally well-secured and expected to be
restored to a current status in the near future.

The Corporation accounts for impaired loans under
SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures.
This standard requires that a creditor measure impairment based
on the present value of expected future cash flows discounted at
the loans effective interest rate, except that as a
practical expedient, a creditor may measure impairment based on
a loans observable market price, or the fair value of the
collateral if the loan is collateral dependent. Regardless of
the measurement method, a creditor must measure impairment based
on the fair value of the collateral when the creditor determines
that foreclosure is probable.

The Corporation accounts for its transfers and
servicing financial assets in accordance with SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 140 revises the
standards for accounting for the securitizations and other
transfers of financial assets and collateral.

Allowance
for Loan Losses

The allowance for loan losses is maintained at a
level that management considers adequate to provide for
potential losses based upon an evaluation of known and inherent
risks in the loan portfolio. Allowance for loan losses is based
on estimated net realizable value unless it is probable that
loans will be foreclosed, in which case allowance for loan
losses is based on fair value less selling costs.
Managements periodic evaluation is based upon evaluation
of the portfolio, past loss experience, current economic
conditions and other relevant factors. While management uses the
best information available to make such evaluations, future
adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in
making the evaluation. In addition, various regulatory agencies,
as an integral part of their examination

27



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

process, periodically review the Banks
allowances for loan losses. Such agencies may require the Banks
to recognize additions to the allowance based on their judgment
of information available to them at the time of their
examination.

In July 2001, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB)
No. 102, Selected Loan Loss Allowance Methodology and
Documentation Issues. SAB No. 102 provides guidance on the
development, documentation, and application of a systematic
methodology for determining allowances for loans and leases in
accordance with US GAAP. The adoption of SAB No. 102 did
not have a material impact on the Corporations financial
position, or results of operations.

Bank
Premises and Equipment

Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is recorded using
the straight-line and accelerated depreciation methods over the
estimated useful lives of the assets. Leasehold improvements are
amortized over the term of the lease or estimated useful lives,
whichever is shorter.

On January 1, 2002, the Corporation adopted
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144). SFAS
No. 144 supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, but it retains many of the fundamental
provisions of that Statement. The adoption did not have a
material effect on our financial statements.

Net
Assets in Foreclosure

Net assets in foreclosure include foreclosed real
estate which is carried at the lower of cost (lesser of carrying
value of loan or fair value at date of acquisition) or estimated
fair value less selling costs. Any write-down, at or prior to
the dates the real estate is considered foreclosed, is charged
to the allowance for loan losses. Subsequent write-downs are
recorded in other expenses, and expenses incurred in connection
with holding such assets and any gains or losses upon their sale
are included in other income and expenses. Net assets in
foreclosure also includes foreclosed leases which are carried at
lower of cost (lesser of carrying value of loan or fair value at
date of acquisition) or estimated fair value less selling costs.

Stock
Based Compensation

The Corporation adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which
contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which
is usually the vesting period. The Corporation has chosen an
alternative permitted by the standard to continue accounting for
employee stock options and similar instruments under Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees.

Entities that continue to account for stock
options using APB Opinion 25 are required to make pro forma
disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123
has been applied.

The Corporation has five shareholder approved
fixed stock options plans that allow the Corporation to grant
options up to an aggregate of 1,783,745 shares of common
stock to key employees and directors. At December 31, 2002,
1,486,089 stock options had been granted under the stock option
plans. The options have a term of ten years when issued and are
completely vested over a five-year period. The exercise price of
each option equals the market price of the Corporations
stock on the date of grant.

28



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for
grants in 2002, 2001 and 2000, respectively: dividend yield of
2.72%, 3.00% and 3.26%; expected volatility of 2.37%, 3.61% and
2.58%; risk-free interest rate of 3.55%, 4.90% and 5.96%; and an
expected life of 7.74 years, 8.55 years and 9.82 years.

The following table illustrates the effect on net
income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123, to
stock-based employee compensation (in thousands, except per
share amounts).

|                             |                                                                                     |                |   |        |  |      |   |        |  |  |   |        | 
|---------------------------- | ----------------------------------------------------------------------------------- | -------------- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|                             |                                                                                     | 2002           |   | 2001   |  | 2000
|                             |                                                                                     |                |   |        |  |     
|                             |                                                                                     |               
|                             |                                                                                     | (In thousands)
|Net income                   |                                                                                     |                |   |        |  |      |   |        |  |  |   |       
|                             | As reported                                                                         |                | $ | 32,927 |  |      | $ | 28,820 |  |  | $ | 25,604 | 
|                             | Stock-based compensation cost determined under
    fair value method for all awards |                |   | 893    |  |      |   | 1,552  |  |  |   | 2,368  | 
|                             |                                                                                     |                |   |        |  |      |   |        |  |  |   |       
|                             | Pro forma                                                                           |                | $ | 32,034 |  |      | $ | 27,268 |  |  | $ | 23,236 | 
|                             |                                                                                     |                |   |        |  |      |   |        |  |  |   |       
|Earnings per share (Diluted) |                                                                                     |                |   |        |  |      |   |        |  |  |   |       
|                             | As reported                                                                         |                | $ | 1.67   |  |      | $ | 1.46   |  |  | $ | 1.31   | 
|                             | Pro forma                                                                           |                | $ | 1.63   |  |      | $ | 1.38   |  |  | $ | 1.19   | 
|Earnings per share (Basic)   |                                                                                     |                |   |        |  |      |   |        |  |  |   |       
|                             | As reported                                                                         |                | $ | 1.72   |  |      | $ | 1.50   |  |  | $ | 1.31   | 
|                             | Pro forma                                                                           |                | $ | 1.68   |  |      | $ | 1.42   |  |  | $ | 1.20   | 

Income
Taxes

The Corporation accounts for income taxes under
the liability method whereby deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. The principal types of
accounts, resulting in differences between assets and
liabilities for financial statement and tax return purposes, are
the allowance for possible loan losses, leased assets, deferred
loan fees and compensation.

Pension
Plans

The Corporation has certain employee benefit
plans covering substantially all employees. The Corporation
accrues service cost as incurred.

Restrictions
on Cash and Due From Banks

As of December 31, 2002, the Banks did not
need to maintain reserves (in the form of deposits with the
Federal Reserve Bank) to satisfy federal regulatory requirements.

Bank
Owned Life Insurance (BOLI)

During 2001 and 2000 the Corporation invested in
bank owned life insurance (BOLI). BOLI involves the purchasing
of life insurance by the Corporation on a chosen group of
employees. The Corporation is the owner and beneficiary of the
policies. This pool of insurance, due to tax advantages to the
Banks, is profitable to the Corporation. This profitability is
used to offset a portion of future benefit cost increases.
Banks deposits fund BOLI and the earnings from BOLI are
recognized as other income.

29



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

Advertising
Costs

The Corporation expenses advertising costs as
incurred.

Net
Income Per Share

The Corporation follows the provisions of SFAS
No. 128, Earnings per Share. Basic earnings per
share excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average common
shares outstanding during the period. Diluted earnings per share
take into account the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised and converted into common stock.

The reconciliation of the numerators and
denominators of the basic and diluted EPS follows:

|                                        |  |                              |            |               |  |           |            |  |  |   |      |  
|--------------------------------------- |  | ---------------------------- | ---------- | ------------- |  | --------- | ---------- |  |  | - | ---- | -
|                                        |  |                             
|                                        |  | Year Ended December 31, 2002
|                                        |  |                             
|                                        |  | Income                       |            | Shares        |  | Per Share
|                                        |  | (Numerator)                  |            | (Denominator) |  | Amount   
|                                        |  |                              |            |               |  |          
|Basic EPS                               |  |                              |            |               |  |           |            |  |  |   |      |  
|Income available to common shareholders |  | $                            | 32,927,000 |               |  |           | 19,121,778 |  |  | $ | 1.72 |  
|Effect of Dilutive Securities           |  |                              |            |               |  |           |            |  |  |   |      |  
|Stock options                           |  |                              |           |               |  |           | 578,709    |  |  |   | (.05 | )
|                                        |  |                              |            |               |  |           |            |  |  |   |      |  
|Diluted EPS                             |  |                              |            |               |  |           |            |  |  |   |      |  
|Income available to common shareholders |  | $                            | 32,927,000 |               |  |           | 19,700,487 |  |  | $ | 1.67 |  
|                                        |  |                              |            |               |  |           |            |  |  |   |      |  

Options to purchase 10,000 shares of common
stock at $24.42 per share have been excluded in the computation
of 2002 diluted EPS because the options exercise price was
greater than the average market price of the common stock.

|                                        |  |                              |            |  |  |  |            |  |  |   |      |  
|--------------------------------------- |  | ---------------------------- | ---------- |  |  |  | ---------- |  |  | - | ---- | -
|                                        |  |                             
|                                        |  | Year Ended December 31, 2001
|                                        |  |                             
|Basic EPS                               |  |                              |            |  |  |  |            |  |  |   |      |  
|Income available to common shareholders |  | $                            | 28,820,000 |  |  |  | 19,221,254 |  |  | $ | 1.50 |  
|Effect of Dilutive Securities           |  |                              |            |  |  |  |            |  |  |   |      |  
|Stock options                           |  |                              |           |  |  |  | 477,710    |  |  |   | (.04 | )
|                                        |  |                              |            |  |  |  |            |  |  |   |      |  
|Diluted EPS                             |  |                              |            |  |  |  |            |  |  |   |      |  
|Income available to common shareholders |  | $                            | 28,820,000 |  |  |  | 19,698,964 |  |  | $ | 1.46 |  
|                                        |  |                              |            |  |  |  |            |  |  |   |      |  

There were no anti-dilutive weighted shares
excluded in the computation of 2001 diluted EPS since all
options exercise prices were less than the average market
price of the common stock.

|                                        |  |                              |            |  |  |  |            |  |  |   |      | 
|--------------------------------------- |  | ---------------------------- | ---------- |  |  |  | ---------- |  |  | - | ---- | 
|                                        |  |                             
|                                        |  | Year Ended December 31, 2000
|                                        |  |                             
|Basic EPS                               |  |                              |            |  |  |  |            |  |  |   |      | 
|Income available to common shareholders |  | $                            | 25,604,000 |  |  |  | 19,464,230 |  |  | $ | 1.31 | 
|Effect of Dilutive Securities           |  |                              |            |  |  |  |            |  |  |   |      | 
|Stock options                           |  |                              |           |  |  |  | 22,243     |  |  |   |     | 
|                                        |  |                              |            |  |  |  |            |  |  |   |      | 
|Diluted EPS                             |  |                              |            |  |  |  |            |  |  |   |      | 
|Income available to common shareholders |  | $                            | 25,604,000 |  |  |  | 19,486,473 |  |  | $ | 1.31 | 
|                                        |  |                              |            |  |  |  |            |  |  |   |      | 

Options to purchase 252,963 shares of common
stock at $14.77 to $18.44 per share have been excluded in the
computation of 2000 diluted EPS because the options
exercise price was greater than the average market price of the
common stock.

30



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

Comprehensive
Income

The Corporation follows SFAS No. 130,
Reporting Comprehensive Income, which establishes
standards to provide prominent disclosure of comprehensive
income items.

The components of other comprehensive income are
as follows:

|                                                                      |  |                        |       |         |  |        |        |   |  |   |       | 
|--------------------------------------------------------------------- |  | ---------------------- | ----- | ------- |  | ------ | ------ | - |  | - | ----- | 
|                                                                      |  | Before                 |       |         |  | Net of
|                                                                      |  | Tax                    |       | Tax     |  | Tax   
|December 31, 2002                                                     |  | Amount                 |       | Expense |  | Amount
|                                                                      |  |                        |       |         |  |       
|                                                                      |  |                       
|                                                                      |  | (Dollars in thousands)
|Unrealized gains on securities:                                       |  |                        |       |         |  |        |        |   |  |   |       | 
|Unrealized holding gains arising during
    period                    |  | $                      | 7,171 |         |  | $      | (2,508 | ) |  | $ | 4,663 | 
|Less reclassification adjustment for gains
    realized in net income |  |                        | 3,475 |         |  |        | (1,215 | ) |  |   | 2,260 | 
|                                                                      |  |                        |       |         |  |        |        |   |  |   |       | 
|Other comprehensive income, net                                       |  | $                      | 3,696 |         |  | $      | (1,293 | ) |  | $ | 2,403 | 
|                                                                      |  |                        |       |         |  |        |        |   |  |   |       | 

|                                                                      |  |                        |       |         |  |        |        |   |  |   |       | 
|--------------------------------------------------------------------- |  | ---------------------- | ----- | ------- |  | ------ | ------ | - |  | - | ----- | 
|                                                                      |  | Before                 |       |         |  | Net of
|                                                                      |  | Tax                    |       | Tax     |  | Tax   
|December 31, 2001                                                     |  | Amount                 |       | Expense |  | Amount
|                                                                      |  |                        |       |         |  |       
|                                                                      |  |                       
|                                                                      |  | (Dollars in thousands)
|Unrealized gains on securities:                                       |  |                        |       |         |  |        |        |   |  |   |       | 
|Unrealized holding gains arising during period                        |  | $                      | 9,416 |         |  | $      | (3,295 | ) |  | $ | 6,121 | 
|Less reclassification adjustment for gains
    realized in net income |  |                        | 4,629 |         |  |        | (1,620 | ) |  |   | 3,009 | 
|                                                                      |  |                        |       |         |  |        |        |   |  |   |       | 
|Other comprehensive income, net                                       |  | $                      | 4,787 |         |  | $      | (1,675 | ) |  | $ | 3,112 | 
|                                                                      |  |                        |       |         |  |        |        |   |  |   |       | 

|                                                                      |  |                        |        |         |  |        |        |   |  |   |        | 
|--------------------------------------------------------------------- |  | ---------------------- | ------ | ------- |  | ------ | ------ | - |  | - | ------ | 
|                                                                      |  | Before                 |        |         |  | Net of
|                                                                      |  | Tax                    |        | Tax     |  | Tax   
|December 31, 2000                                                     |  | Amount                 |        | Expense |  | Amount
|                                                                      |  |                        |        |         |  |       
|                                                                      |  |                       
|                                                                      |  | (Dollars in thousands)
|Unrealized gains on securities:                                       |  |                        |        |         |  |        |        |   |  |   |        | 
|Unrealized holding gains arising during period                        |  | $                      | 18,845 |         |  | $      | (6,581 | ) |  | $ | 12,264 | 
|Less reclassification adjustment for gains
    realized in net income |  |                        | 52     |         |  |        | (18    | ) |  |   | 34     | 
|                                                                      |  |                        |        |         |  |        |        |   |  |   |        | 
|Other comprehensive income, net                                       |  | $                      | 18,793 |         |  | $      | (6,563 | ) |  | $ | 12,230 | 
|                                                                      |  |                        |        |         |  |        |        |   |  |   |        | 

Segment
Information

SFAS No. 131 establishes standards for the
way public business enterprises report information about
operating segments in annual financial statements and requires
that those enterprises report selected information about
operating segments in subsequent interim financial reports
issued to shareholders. It also establishes standards for
related disclosure about products and services, geographic
areas, and major customers. Operating segments are components of
an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and assess
performance. The statement also requires that public enterprises
report a measure of segment profit or loss, certain specific
revenue and expense items and segment assets. It also requires
that information be reported about revenues derived from the
enterprises products or services, or about the countries
in which the enterprises earn revenues and holds assets, and
about major customers, regardless of whether the information is
used in making operating decisions.

The Corporation has one reportable segment,
Community Banking. All of the Corporations
activities are interrelated, and each activity is dependent and
assessed based on how each of the activities of the Corporation
supports the others. For example, commercial lending is
dependent upon the ability of the Banks to fund themselves with
retail deposits and other borrowings and to manage interest rate
and credit risk. This

31



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

situation is also similar for consumer and
residential mortgage lending. Accordingly, all significant
operating decisions are based upon analysis of the Corporation
as one operating segment or unit.

The Corporation has also identified several
operating segments. These operating segments within the
Corporations operations do not have similar
characteristics to the community banking operations and do not
meet the quantitative thresholds requiring separate disclosure.
These nonreportable segments include HNC Financial Company, HNC
Reinsurance Company and the Parent.

Note 2  Acquisitions

On April 28, 2000, the Corporation
consummated its acquisition of Citizens Bank and Trust Company
of Palmerton. Under the terms of the merger, accounted for as a
pooling-of-interest, Citizens Bank and Trust Companys
shareholders received 166 shares of Harleysville National
Corporation common stock for each share of common stock of
Citizens Bank and Trust Company. Upon the completion of the
acquisition, Citizens Bank and Trust Companys banking
operations merged into those of Citizens National Bank, a
wholly-owned subsidiary of Harleysville National Corporation.

Note 3  Investment
Securities

The amortized cost, unrealized gains and losses,
and the estimated market value of the Corporations
investment securities held to maturity and available for sale
are as follows:

|                                                                   |        |                        |         |            |  |            |       |            |  |   |        |        |   |   |         |         | 
|------------------------------------------------------------------ | ------ | ---------------------- | ------- | ---------- |  | ---------- | ----- | ---------- |  | - | ------ | ------ | - | - | ------- | ------- | 
|                                                                   |        |                       
|                                                                   |        | December 31, 2002     
|                                                                   |        |                       
|                                                                   |        |                        |         | Gross      |  | Gross      |       |           
|                                                                   |        | Amortized              |         | Unrealized |  | Unrealized |       |           
|                                                                   |        | Cost                   |         | Gains      |  | (Losses)   |       | Fair Value
|                                                                   |        |                        |         |            |  |            |       |           
|                                                                   |        |                       
|                                                                   |        | (Dollars in thousands)
|Held to maturity                                                   |        |                        |         |            |  |            |       |            |  |   |        |        |   |   |         |        
|Obligation of states and political subdivisions                    |        | $                      | 20,410  |            |  | $          | 1,126 |            |  | $ |       |        |   | $ | 21,536  |        
|Mortgage-backed securities                                         |        |                        | 1,451   |            |  |            | 102   |            |  |   |       |        |   |   | 1,553   |        
|Other securities                                                   |        |                        | 550     |            |  |            | 11    |            |  |   |       |        |   |   | 561     |        
|                                                                   |        |                        |         |            |  |            |       |            |  |   |        |        |   |   |         |        
|                                                                   | Totals |                        | $       | 22,411     |  |            | $     | 1,239      |  |   | $      |       |   |   | $       | 23,650  | 
|                                                                   |        |                        |         |            |  |            |       |            |  |   |        |        |   |   |         |        
|Available for sale                                                 |        |                        |         |            |  |            |       |            |  |   |        |        |   |   |         |        
|U.S. Treasury Notes                                                |        | $                      | 17,967  |            |  | $          | 467   |            |  | $ |       |        |   | $ | 18,434  |        
|Obligations of other U.S. government agencies and
    corporations |        |                        | 18,389  |            |  |            | 142   |            |  |   | (22    | )      |   |   | 18,509  |        
|Obligations of states and political subdivisions                   |        |                        | 331,089 |            |  |            | 4,324 |            |  |   | (1,750 | )      |   |   | 333,663 |        
|Mortgage-backed securities                                         |        |                        | 513,616 |            |  |            | 5,108 |            |  |   | (1,296 | )      |   |   | 517,428 |        
|Other securities                                                   |        |                        | 57,323  |            |  |            | 3,943 |            |  |   | (244   | )      |   |   | 61,022  |        
|                                                                   |        |                        |         |            |  |            |       |            |  |   |        |        |   |   |         |        
|                                                                   | Totals |                        | $       | 938,384    |  |            | $     | 13,984     |  |   | $      | (3,312 | ) |   | $       | 949,056 | 
|                                                                   |        |                        |         |            |  |            |       |            |  |   |        |        |   |   |         |        

32



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##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

|                                                                   |        |                   |         |            |  |            |       |            |  |   |        |        |   |   |         |         | 
|------------------------------------------------------------------ | ------ | ----------------- | ------- | ---------- |  | ---------- | ----- | ---------- |  | - | ------ | ------ | - | - | ------- | ------- | 
|                                                                   |        |                  
|                                                                   |        | December 31, 2001
|                                                                   |        |                  
|                                                                   |        |                   |         | Gross      |  | Gross      |       |           
|                                                                   |        | Amortized         |         | Unrealized |  | Unrealized |       |           
|                                                                   |        | Cost              |         | Gains      |  | (Losses)   |       | Fair Value
|                                                                   |        |                   |         |            |  |            |       |           
|Held to maturity                                                   |        |                   |         |            |  |            |       |            |  |   |        |        |   |   |         |        
|Obligations of states and political subdivisions                   |        | $                 | 22,997  |            |  | $          | 582   |            |  | $ | (3     | )      |   | $ | 23,576  |        
|Mortgage-backed securities                                         |        |                   | 2,552   |            |  |            | 94    |            |  |   |       |        |   |   | 2,646   |        
|Other securities                                                   |        |                   | 550     |            |  |            | 10    |            |  |   |       |        |   |   | 560     |        
|                                                                   |        |                   |         |            |  |            |       |            |  |   |        |        |   |   |         |        
|                                                                   | Totals |                   | $       | 26,099     |  |            | $     | 686        |  |   | $      | (3     | ) |   | $       | 26,782  | 
|                                                                   |        |                   |         |            |  |            |       |            |  |   |        |        |   |   |         |        
|Available for sale                                                 |        |                   |         |            |  |            |       |            |  |   |        |        |   |   |         |        
|U.S. Treasury notes                                                |        | $                 | 29,832  |            |  | $          | 1,261 |            |  | $ |       |        |   | $ | 31,093  |        
|Obligations of other U.S. Government agencies and
    corporations |        |                   | 26,448  |            |  |            | 532   |            |  |   |       |        |   |   | 26,980  |        
|Obligations of states and political subdivisions                   |        |                   | 181,443 |            |  |            | 1,175 |            |  |   | (1,960 | )      |   |   | 180,658 |        
|Mortgage-backed securities                                         |        |                   | 401,763 |            |  |            | 5,170 |            |  |   | (755   | )      |   |   | 406,178 |        
|Other securities                                                   |        |                   | 59,910  |            |  |            | 2,251 |            |  |   | (699   | )      |   |   | 61,462  |        
|                                                                   |        |                   |         |            |  |            |       |            |  |   |        |        |   |   |         |        
|                                                                   | Totals |                   | $       | 699,396    |  |            | $     | 10,389     |  |   | $      | (3,414 | ) |   | $       | 706,371 | 
|                                                                   |        |                   |         |            |  |            |       |            |  |   |        |        |   |   |         |        

There are no significant concentrations of
securities (greater than 10% of shareholders equity) in
any individual security issuer.

Securities with a carrying value of $481,989,000
and $457,964,000 at December 31, 2002 and 2001,
respectively, were pledged to secure public funds, government
deposits and repurchase agreements.

The amortized cost and estimated market value of
investment securities, at December 31, 2002, by contractual
maturities, are shown below. Actual maturities will differ from
contractual maturities because issuers and borrowers may have
the right to call or prepay obligations with or without call or
prepayment penalties.

|                                       |        |                        |        |                    |  |           |        |        |  |   |         |         |  |   |         |         | 
|-------------------------------------- | ------ | ---------------------- | ------ | ------------------ |  | --------- | ------ | ------ |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                       |        |                        |        |                   
|                                       |        | Held to Maturity       |        | Available for Sale
|                                       |        | Estimated              |        | Estimated         
|                                       |        |                        |        |                   
|                                       |        | Amortized              |        | Fair               |  | Amortized |        | Fair  
|                                       |        | Cost                   |        | Value              |  | Cost      |        | Value 
|                                       |        |                        |        |                    |  |           |        |       
|                                       |        |                       
|                                       |        | (Dollars in thousands)
|Due in one year or less                |        | $                      | 1,038  |                    |  | $         | 1,081  |        |  | $ | 32,966  |         |  | $ | 33,595  |        
|Due after one year through five years  |        |                        | 16,510 |                    |  |           | 15,333 |        |  |   | 124,740 |         |  |   | 127,220 |        
|Due after five years through ten years |        |                        | 3,412  |                    |  |           | 3,683  |        |  |   | 171,791 |         |  |   | 173,294 |        
|Due after ten years                    |        |                        |       |                    |  |           |       |        |  |   | 95,271  |         |  |   | 97,519  |        
|                                       |        |                        |        |                    |  |           |        |        |  |   |         |         |  |   |         |        
|                                       |        |                        | 20,960 |                    |  |           | 20,097 |        |  |   | 424,768 |         |  |   | 431,628 |        
|Mortgage-backed securities             |        |                        | 1,451  |                    |  |           | 1,553  |        |  |   | 513,616 |         |  |   | 517,428 |        
|                                       |        |                        |        |                    |  |           |        |        |  |   |         |         |  |   |         |        
|                                       | Totals |                        | $      | 22,411             |  |           | $      | 21,650 |  |   | $       | 938,384 |  |   | $       | 949,056 | 
|                                       |        |                        |        |                    |  |           |        |        |  |   |         |         |  |   |         |        

Proceeds from sales of investment securities
available for sale during 2002 were $897,327,000. Gross gains of
$4,902,000 and gross losses of $1,427,000 were realized on these
sales. Proceeds from sales of investment securities available
for sale during 2001 were $468,270,000. Gross gains of
$5,415,000 and gross losses of $786,000 were realized on these
sales. Proceeds of sales of investment securities available for
sale during 2000 were $133,208,000. Gross gains of $953,000 and
gross losses of $901,000 were realized on these sales.

33



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

During July 2000, the Corporation reclassified
$7,574,000 of investment securities from the held to maturity
category to the available for sale category, due to its
acquisition of Citizens Bank and Trust Company. As a result of
the reclassification, the Corporation recorded $19,000 net of
taxes unrealized holding losses in accumulated other
comprehensive income.

Note 4  Loans

Major classification of loans are as follows:

|                          |             |                        |         |           |  |   |         |           | 
|------------------------- | ----------- | ---------------------- | ------- | --------- |  | - | ------- | --------- | 
|                          |             |                       
|                          |             | December 31,          
|                          |             |                       
|                          |             | 2002                   |         | 2001     
|                          |             |                        |         |          
|                          |             |                       
|                          |             | (Dollars in thousands)
|Real estate               |             | $                      | 422,268 |           |  | $ | 417,891 |          
|Commercial and industrial |             |                        | 376,029 |           |  |   | 349,138 |          
|Consumer loans            |             |                        | 446,505 |           |  |   | 439,288 |          
|Lease financing           |             |                        | 87,154  |           |  |   | 107,617 |          
|                          |             |                        |         |           |  |   |         |          
|                          | Total loans |                        |         | 1,331,956 |  |   |         | 1,313,934 | 
|Deferred costs, net       |             |                        | 1,336   |           |  |   | 2,675   |          
|Allowance for loan losses |             |                        | (17,190 | )         |  |   | (15,558 | )        
|                          |             |                        |         |           |  |   |         |          
|                          | Net loans   |                        | $       | 1,316,102 |  |   | $       | 1,301,051 | 
|                          |             |                        |         |           |  |   |         |          

On December 31, 2002, nonaccrual loans were
$5,109,000 and loans 90 days or more past due and still
accruing interest were $1,193,000. On December 31, 2001,
nonaccrual loans were $6,354,000 and loans 90 days or more
past due and still accruing interest were $1,926,000.

The balance of impaired loans was $3,153,000 at
December 31, 2002, compared to $3,721,000 at
December 31, 2001. The Banks have identified a loan as
impaired when it is probable that interest and principal will
not be collected according to the contractual terms of the loan
agreement.

The allowance for loan loss associated with the
impaired loans was $329,000 at December 31, 2002, and
$429,000 at December 31, 2001. The average impaired loan
balance was $2,836,000 in 2002, compared to $3,505,000 in 2001.
The income recognized on impaired loans during 2002, 2001 and
2000 was $186,000, $78,000 and $128,000, respectively. The
Banks policy for interest income recognition on impaired
loans is to recognize income on restructured loans under the
accrual method. The Banks recognize income on nonaccrual loans
under the cash basis when the loans are both current and the
collateral on the loan is sufficient to cover the outstanding
obligation to the Banks. The Banks will not recognize income if
these factors do not exist.

The Banks have no concentration of loans to
individual borrowers which exceeded 10% of total loans at
December 31, 2002 and 2001. The Banks actively monitor the
risk of this loan concentration. The Banks continued to pursue
new lending opportunities while seeking to maintain a portfolio
that is diverse as to industry concentration, type and
geographic distribution. The Banks geographic lending area
is primarily concentrated in Montgomery, Carbon, Bucks, and
Wayne counties, but also includes Chester, Berks, Lehigh,
Monroe, Northhampton and Schuylkill counties.

34



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

Loans to directors, executive officers and their
associates, are made in the ordinary course of business and on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with others. Activity of these loans is as follows:

|                     |  |                         |         |      |  |      |         |   |  |   |         |  
|-------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                     |  |                        
|                     |  | Year Ended December 31,
|                     |  |                        
|                     |  | 2002                    |         | 2001 |  | 2000
|                     |  |                         |         |      |  |     
|                     |  |                        
|                     |  | (Dollars in thousands) 
|Balance, January 1   |  | $                       | 16,483  |      |  | $    | 8,344   |   |  | $ | 9,411   |  
|New loans            |  |                         | 61,157  |      |  |      | 68,011  |   |  |   | 68,009  |  
|Repayments           |  |                         | (62,360 | )    |  |      | (59,872 | ) |  |   | (69,076 | )
|                     |  |                         |         |      |  |      |         |   |  |   |         |  
|Balance, December 31 |  | $                       | 15,280  |      |  | $    | 16,483  |   |  | $ | 8,344   |  
|                     |  |                         |         |      |  |      |         |   |  |   |         |  

Note 5  Allowance for Loan
Losses

Transactions in the allowance for loan losses are
as follows:

|                           |                                         |                         |        |        |        |      |        |        |        |   |        |        |        |  
|-------------------------- | --------------------------------------- | ----------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                           |                                         |                        
|                           |                                         | Year Ended December 31,
|                           |                                         |                        
|                           |                                         | 2002                    |        | 2001   |        | 2000
|                           |                                         |                         |        |        |        |     
|                           |                                         |                        
|                           |                                         | (Dollars in thousands) 
|Balance, beginning of year |                                         | $                       | 15,558 |        |        | $    | 15,210 |        |        | $ | 14,887 |       
|                           |                                         |                         |        |        |        |      |        |        |        |   |        |       
|                           | Provision charged to operating expenses |                         |        | 4,370  |        |      |        | 3,930  |        |   |        | 2,312  |       
|                           |                                         |                         |        |        |        |      |        |        |        |   |        |       
|Loans charged off:         |                                         |                         |        |        |        |      |        |        |        |   |        |       
|                           | Commercial and industrial               |                         |        | (108   | )      |      |        | (494   | )      |   |        | (123   | )     
|                           | Consumer                                |                         |        | (2,589 | )      |      |        | (2,594 | )      |   |        | (1,470 | )     
|                           | Real estate                             |                         |        | (352   | )      |      |        | (498   | )      |   |        | (610   | )     
|                           | Lease financing                         |                         |        | (828   | )      |      |        | (1,075 | )      |   |        | (450   | )     
|                           |                                         |                         |        |        |        |      |        |        |        |   |        |       
|                           |                                         | Total charged off       |        |        | (3,877 | )    |        |        | (4,661 | ) |        |        | (2,653 | )
|                           |                                         |                         |        |        |        |      |        |        |        |   |        |       
|Recoveries:                |                                         |                         |        |        |        |      |        |        |        |   |        |       
|                           | Commercial and industrial               |                         |        | 105    |        |      |        | 38     |        |   |        | 60     |       
|                           | Consumer                                |                         |        | 786    |        |      |        | 607    |        |   |        | 289    |       
|                           | Real estate                             |                         |        | 163    |        |      |        | 328    |        |   |        | 274    |       
|                           | Lease financing                         |                         |        | 85     |        |      |        | 106    |        |   |        | 41     |       
|                           |                                         |                         |        |        |        |      |        |        |        |   |        |       
|                           |                                         | Total recoveries        |        |        | 1,139  |      |        |        | 1,079  |   |        |        | 664    |  
|                           |                                         |                         |        |        |        |      |        |        |        |   |        |       
|Balance, end of year       |                                         | $                       | 17,190 |        |        | $    | 15,558 |        |        | $ | 15,210 |       
|                           |                                         |                         |        |        |        |      |        |        |        |   |        |       

35



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

Note 6  Bank Premises and
Equipment

Bank premises and equipment consist of the
following:

|                                               |            |              |  |                        |        |        |  |   |        |        | 
|---------------------------------------------- | ---------- | ------------ |  | ---------------------- | ------ | ------ |  | - | ------ | ------ | 
|                                               |            |              |  |                       
|                                               |            |              |  | December 31,          
|                                               |            | Estimated    |  |                       
|                                               |            | Useful Lives |  | 2002                   |        | 2001  
|                                               |            |              |  |                        |        |       
|                                               |            |              |  |                       
|                                               |            |              |  | (Dollars in thousands)
|Land                                           |            | Indefinite   |  | $                      | 4,230  |        |  | $ | 3,190  |       
|Buildings                                      |            | 15-39 years  |  |                        | 20,862 |        |  |   | 22,215 |       
|Furniture, fixtures and equipment              |            | 3-7 years    |  |                        | 24,851 |        |  |   | 21,742 |       
|                                               |            |              |  |                        |        |        |  |   |        |       
|                                               | Total cost |              |  |                        |        | 49,943 |  |   |        | 47,147 | 
|Less accumulated depreciation and amortization |            |              |  |                        | 28,298 |        |  |   | 25,708 |       
|                                               |            |              |  |                        |        |        |  |   |        |       
|                                               | Total      |              |  |                        | $      | 21,645 |  |   | $      | 21,439 | 
|                                               |            |              |  |                        |        |        |  |   |        |       

Note 7  Deposits

At December 31, 2002, scheduled maturities
of certificates of deposit are as follows:

|                        |       |        |         |         | 
|----------------------- | ----- | ------ | ------- | ------- | 
|Year Ended December 31, |       | Amount
|                        |       |       
|2003                    |       | $      | 409,713 |        
|2004                    |       |        | 124,825 |        
|2005                    |       |        | 101,607 |        
|2006                    |       |        | 75,492  |        
|2007                    |       |        | 57,757  |        
|Thereafter              |       |        | 54      |        
|                        |       |        |         |        
|                        | Total |        | $       | 769,448 | 
|                        |       |        |         |        

Note 8  Borrowings

Long-Term
Borrowings

Federal Home Loan Bank (FHLB) advances at
December 31, 2002, totaled $162,750,000. The advances are
collateralized by FHLB stock and certain first mortgage loans
and mortgage-backed securities. First mortgages used as
collateral for these advances totaled $65,336,000. These
advances had a weighted average interest rate of 4.79%. Advances
are made pursuant to several different credit programs offered
from time to time by the FHLB. Unused lines of credit were
$292,813,000 at December 31, 2002 and $112,436,000 at
December 31, 2001.

The following table is a summary of long-term
borrowings with the Federal Home Loan Bank:

|                    |       |         |         |              |  |         |      |              |   |   |         |         |  |  |      |      |  
|------------------- | ----- | ------- | ------- | ------------ |  | ------- | ---- | ------------ | - | - | ------- | ------- |  |  | ---- | ---- | -
|                    |       |         |         |             
|                    |       | 2002    |         | 2001        
|                    |       |         |         |             
|                    |       | Balance |         | Average Rate |  | Balance |      | Average Rate
|                    |       |         |         |              |  |         |      |             
|2003                |       | $       |        |              |  |         |     | %            |   | $ |        |         |  |  |     | %   
|2004                |       |         | 24,000  |              |  |         | 6.07 | %            |   |   | 24,000  |         |  |  | 6.07 | %   
|2005                |       |         |        |              |  |         |     |              |   |   |        |         |  |  |     |     
|2006                |       |         | 20,000  |              |  |         | 3.42 | %            |   |   |        |         |  |  |     |     
|2007 and thereafter |       |         | 118,750 |              |  |         | 4.76 | %            |   |   | 103,750 |         |  |  | 4.71 | %   
|                    |       |         |         |              |  |         |      |              |   |   |         |         |  |  |      |     
|                    | Total |         | $       | 162,750      |  |         |      | 4.79         | % |   | $       | 127,750 |  |  |      | 4.96 | %
|                    |       |         |         |              |  |         |      |              |   |   |         |         |  |  |      |     

36



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

The Banks, pursuant to a designated cash
management agreement, utilize securities sold under agreements
to repurchase as vehicles for customers sweep and term
investment products. Securitization under these cash management
agreements are in U.S. Treasury Securities and obligations of
states and political subdivisions securities.

Securities
sold under agreement to repurchase

These securities are held in a third-party
custodians account, designated by the Banks under a
written custodial agreement that explicitly recognizes the
Banks interest in the securities. At December 31,
2002, these agreements matured within one year. The average
balance of securities sold under agreements to repurchase for
2002 was $83,750,000, the maximum amounts outstanding at any
month-end during 2002 was $96,665,000 and the average weighted
rate paid was 1.51%.

Guaranteed
Preferred Beneficial Interest in Corporations Subordinated
Debentures

On February 22, 2001, the Corporation issued
$5,000,000 of 10.2% junior subordinate deferrable interest
debentures (the debentures) to Harleysville Statutory
Trust 1 (the Trust), a Connecticut business trust, in which
the Corporation owns all of the common equity. The debentures
are the sole asset of the Trust. The Trust issued $5,000,000 of
preferred securities to investors. The Corporations
obligations under the debentures and related documents, taken
together, constitute a full and unconditional guarantee by the
Corporation of the Trusts obligations under the preferred
securities. The preferred securities must be redeemed upon
maturity of the subordinate debentures on February 22, 2031.

Note 9  Federal Income
Taxes

Income tax expense from current operations is
composed of the following:

|                    |             |                         |        |       |  |      |       |       |  |   |       |       | 
|------------------- | ----------- | ----------------------- | ------ | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                    |             |                        
|                    |             | Year Ended December 31,
|                    |             |                        
|                    |             | 2002                    |        | 2001  |  | 2000
|                    |             |                         |        |       |  |     
|                    |             |                        
|                    |             | (Dollars in thousands) 
|Current tax payable |             | $                       | 10,940 |       |  | $    | 6,847 |       |  | $ | 2,379 |      
|Deferred income tax |             |                         | (1,991 | )     |  |      | 1,327 |       |  |   | 3,271 |      
|                    |             |                         |        |       |  |      |       |       |  |   |       |      
|                    | Tax expense |                         | $      | 8,949 |  |      | $     | 8,174 |  |   | $     | 5,650 | 
|                    |             |                         |        |       |  |      |       |       |  |   |       |      

The effective income tax rates of 21.4% for 2002,
22.1% for 2001 and 18.1% for 2000 were less than the applicable
federal income tax rate of 35% for each year. The reason for
these differences follows:

|                                               |                    |                         |        |       |  |      |        |       |  |   |        |       | 
|---------------------------------------------- | ------------------ | ----------------------- | ------ | ----- |  | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                               |                    |                        
|                                               |                    | Year Ended December 31,
|                                               |                    |                        
|                                               |                    | 2002                    |        | 2001  |  | 2000
|                                               |                    |                         |        |       |  |     
|                                               |                    |                        
|                                               |                    | (Dollars in thousands) 
|Expected tax expense                           |                    | $                       | 14,656 |       |  | $    | 12,946 |       |  | $ | 10,939 |      
|Tax-exempt income net of interest disallowance |                    |                         | (5,717 | )     |  |      | (4,749 | )     |  |   | (5,432 | )    
|Other                                          |                    |                         | 10     |       |  |      | (23    | )     |  |   | 143    |      
|                                               |                    |                         |        |       |  |      |        |       |  |   |        |      
|                                               | Actual tax expense |                         | $      | 8,949 |  |      | $      | 8,174 |  |   | $      | 5,650 | 
|                                               |                    |                         |        |       |  |      |        |       |  |   |        |      

37



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

The tax effect of temporary differences that give
rise to significant portions of deferred tax assets and
liabilities are as follows:

|                              |  |                        |       |           |  |       |        |           |  |   |       |  |  |   |        | 
|----------------------------- |  | ---------------------- | ----- | --------- |  | ----- | ------ | --------- |  | - | ----- |  |  | - | ------ | 
|                              |  |                        |       |          
|                              |  | 2002                   |       | 2001     
|                              |  |                        |       |          
|                              |  | Asset                  |       | Liability |  | Asset |        | Liability
|                              |  |                        |       |           |  |       |        |          
|                              |  |                       
|                              |  | (Dollars in thousands)
|Allowance for credit losses   |  | $                      | 5,877 |           |  | $     |       |           |  | $ | 5,306 |  |  | $ |       | 
|Lease assets                  |  |                        |      |           |  |       | 19,966 |           |  |   |      |  |  |   | 20,985 | 
|Deferred loan fees            |  |                        |      |           |  |       | 12     |           |  |   |      |  |  |   | 12     | 
|Deferred compensation         |  |                        | 1,986 |           |  |       |       |           |  |   | 1,598 |  |  |   |       | 
|Unrealized gain on securities |  |                        |      |           |  |       | 3,735  |           |  |   |      |  |  |   | 2,442  | 
|Other                         |  |                        | 295   |           |  |       |       |           |  |   | 282   |  |  |   |       | 
|                              |  |                        |       |           |  |       |        |           |  |   |       |  |  |   |        | 
|Total deferred taxes          |  | $                      | 8,158 |           |  | $     | 23,713 |           |  | $ | 7,186 |  |  | $ | 23,439 | 
|                              |  |                        |       |           |  |       |        |           |  |   |       |  |  |   |        | 

The exercise of stock options which have been
granted under the Corporations various stock option plans
gives rise to compensation, which is includible in the taxable
income of the applicable employees and deductible by the
Corporation for income tax purposes. Compensation resulting from
increases in the fair market value of the Corporations
common stock subsequent to the date of grant of the applicable
exercised stock options is not recognized, in accordance with
APB Opinion No. 25, as an expense for financial accounting
purposes and the related tax benefits are taken directly to
additional paid in capital.

Note 10  Pension
Plans

Defined
Benefit Pension Plan

The Corporation has a noncontributory defined
benefit pension plan covering substantially all employees. The
plans benefits are based on years of service and the
employees average compensation during any five consecutive
years within the 10-year period preceding retirement. The
plans funded status and amounts recognized in the
financial statements follow:

|                                               |  |   |       |                        |  |      |       |   |  |  |  | 
|---------------------------------------------- |  | - | ----- | ---------------------- |  | ---- | ----- | - |  |  |  | 
|                                               |  |   |       | 2002                   |  | 2001
|                                               |  |   |       |                        |  |     
|                                               |  |   |       |                       
|                                               |  |   |       | (Dollars in thousands)
|Change in benefit obligation:                  |  |   |       |                        |  |      |       |   |  |  |  | 
|Benefit obligation at beginning of year        |  | $ | 7,487 |                        |  | $    | 6,367 |  
|Service cost                                   |  |   | 593   |                        |  |      | 524   |  
|Interest cost                                  |  |   | 437   |                        |  |      | 364   |  
|Actual gain                                    |  |   | (475  | )                      |  |      | 799   |  
|Benefits paid                                  |  |   | (414  | )                      |  |      | (567  | )
|Change in assumptions                          |  |   | 702   |                        |  |      |      |  
|                                               |  |   |       |                        |  |      |       |  
|Benefits obligation at end of year             |  | $ | 8,330 |                        |  | $    | 7,487 |  
|                                               |  |   |       |                        |  |      |       |  
|Change in plan assets:                         |  |   |       |                        |  |      |       |   |  |  |  | 
|Fair value of plan assets at beginning of year |  | $ | 5,373 |                        |  | $    | 5,744 |  
|Actual return on plan assets                   |  |   | (552  | )                      |  |      | (271  | )
|Employer contribution                          |  |   | 800   |                        |  |      | 467   |  
|Benefits paid                                  |  |   | (414  | )                      |  |      | (567  | )
|                                               |  |   |       |                        |  |      |       |  
|Fair value of plan assets at end of year       |  | $ | 5,207 |                        |  | $    | 5,373 |  
|                                               |  |   |       |                        |  |      |       |  

38



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

|                                |  |   |        |                        |  |      |        |   |  |  |  | 
|------------------------------- |  | - | ------ | ---------------------- |  | ---- | ------ | - |  |  |  | 
|                                |  |   |        | 2002                   |  | 2001
|                                |  |   |        |                        |  |     
|                                |  |   |        |                       
|                                |  |   |        | (Dollars in thousands)
|Funded status                   |  | $ | (3,123 | )                      |  | $    | (2,114 | )
|Unrecognized transition (asset) |  |   | (138   | )                      |  |      | (155   | )
|Unrecognized prior service cost |  |   | (217   | )                      |  |      | (328   | )
|Unrecognized net loss           |  |   | 3,806  |                        |  |      | 2,898  |  
|Minimum liability recognized    |  |   | (1,289 | )                      |  |      | (1,115 | )
|                                |  |   |        |                        |  |      |        |  
|(Accrued) prepaid benefit cost  |  | $ | (961   | )                      |  | $    | (814   | )
|                                |  |   |        |                        |  |      |        |  

|                                                |  |      |      |      |  |      |      |   |  |  |      |  
|----------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                |  | 2002 |      | 2001 |  | 2000
|Weighted-average assumptions as of December 31, |  |      |      |      |  |     
|Discount rate                                   |  |      | 6.00 | %    |  |      | 6.00 | % |  |  | 6.00 | %
|Expected return on plan assets                  |  |      | 7.00 | %    |  |      | 7.00 | % |  |  | 7.00 | %
|Rate of compensation increase                   |  |      | 4.00 | %    |  |      | 4.50 | % |  |  | 4.50 | %

|                                        |                           |      |      |      |  |      |      |     |  |   |      |     | 
|--------------------------------------- | ------------------------- | ---- | ---- | ---- |  | ---- | ---- | --- |  | - | ---- | --- | 
|                                        |                           | 2002 |      | 2001 |  | 2000
|Components of net periodic benefit cost |                           |      |      |      |  |     
|Service cost                            |                           | $    | 593  |      |  | $    | 524  |     |  | $ | 447  |    
|Interest cost                           |                           |      | 437  |      |  |      | 364  |     |  |   | 326  |    
|Expected return on plan assets          |                           |      | (398 | )    |  |      | (402 | )   |  |   | (421 | )  
|Amortization of prior service cost      |                           |      | (111 | )    |  |      | (111 | )   |  |   | (111 | )  
|Recognized net actuarial loss (gain)    |                           |      | 251  |      |  |      | 95   |     |  |   | (6   | )  
|                                        |                           |      |      |      |  |      |      |     |  |   |      |    
|                                        | Net periodic benefit cost |      | $    | 772  |  |      | $    | 470 |  |   | $    | 235 | 
|                                        |                           |      |      |      |  |      |      |     |  |   |      |    

As of December 31, 2002, Harleysville
National Corporations Pension Plans had an investment in
the Corporations stock with a market value of $166,000.

On January 20, 1999, the Corporation
consummated its acquisition of Northern Lehigh Bancorp. Northern
Lehigh Bancorp had a noncontributory defined benefit pension
plan covering substantially all employees. During 2002, the
Northern Lehigh Bancorp Pension Benefit Plan was terminated. All
liabilities of this plan were satisfied prior to
December 31, 2002. As of December 31, 2001, the
benefits obligation was $854,000, the fair value of plan assets
was $725,000 and the accrued benefit cost was $129,000.

Supplemental
Benefit Plans

The Corporation maintains a non-tax qualified
plan for certain of its executives (SERP) to
supplement the benefit these executives can receive under the
Companys 401(k) plan and defined benefit plans. The SERP
plans funded status follows:

|                              |                                         |                        |   |        |   |  |   |        |  
|----------------------------- | --------------------------------------- | ---------------------- | - | ------ | - |  | - | ------ | -
|                              |                                         | 2002                   |   | 2001  
|                              |                                         |                        |   |       
|                              |                                         |                       
|                              |                                         | (Dollars in thousands)
|Change in benefit obligation: |                                         |                        |   |        |   |  |   |       
|                              | Benefit obligation at beginning of year |                        | $ | 2,580  |   |  | $ | 1,653  |  
|                              | Service cost                            |                        |   | 998    |   |  |   | 927    |  
|                              |                                         |                        |   |        |   |  |   |       
|                              | Benefits obligation at end of year      |                        | $ | 3,578  |   |  | $ | 2,580  |  
|                              |                                         |                        |   |        |   |  |   |       
|                              | Funded status                           |                        | $ | (3,578 | ) |  | $ | (2,580 | )
|                              |                                         |                        |   |        |   |  |   |       
|                              | Accrued benefit cost                    |                        | $ | (3,578 | ) |  | $ | (2,580 | )
|                              |                                         |                        |   |        |   |  |   |       

39



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

|                                                |               |                           |   |      |     |      |   |      |     |  |   |      |     | 
|----------------------------------------------- | ------------- | ------------------------- | - | ---- | --- | ---- | - | ---- | --- |  | - | ---- | --- | 
|                                                |               | 2002                      |   | 2001 |     | 2000
|                                                |               |                           |   |      |     |     
|Weighted-average assumptions as of December 31: |               |                           |   |      |     |      |   |      |     |  |   |     
|                                                | Discount rate |                           |   | 6.00 | %   |      |   | 6.00 | %   |  |   | 6.00 | %  
|Components of net benefit cost:                 |               |                           |   |      |     |      |   |      |     |  |   |     
|                                                | Service cost  |                           | $ | 998  |     |      | $ | 927  |     |  | $ | 337  |    
|                                                |               |                           |   |      |     |      |   |      |     |  |   |     
|                                                |               | Net periodic benefit cost |   | $    | 998 |      |   | $    | 927 |  |   | $    | 337 | 
|                                                |               |                           |   |      |     |      |   |      |     |  |   |     

The SERP provides for payments based on a certain
percentage of salary for a period of 10 years after
retirement. As of December 31, 2002, and 2001, the
Corporation had accrued a liability of $3,781,000 and
$2,440,000, respectively, for the SERP.

Defined
Contribution Plan

A 401(k) deferred savings plan covers eligible
employees of the Banks. Employees may contribute up to a maximum
of 15% of salary on a pretax basis with a 50% employer match up
to a maximum of 3% of salary. Contributions charged to earnings
were $519,000, $371,000, and $353,000 for 2002, 2001 and 2000,
respectively.

Note 11  Shareholders
Equity

On September 16, 2002, the Corporation paid
a 5% stock dividend on its common stock to shareholders of
record as of September 3, 2002.

On August 10, 2001, the Corporation paid a
two-for-one stock split on its common stock in the form of a
100% stock dividend to shareholders of record July 27, 2001.

On November 9, 2000, the Corporation paid a
5% stock dividend on its common stock to shareholders of record
as of October 26, 2000.

Note 12  Stock Options

Information about stock options outstanding at
December 31, 2002, is summarized as follows:

|                 |           |             |           |                  |   |   |       |       | 
|---------------- | --------- | ----------- | --------- | ---------------- | - | - | ----- | ----- | 
|                 |           |             |           | Weighted-Average
|                 |           | Outstanding |           | Exercise Price  
|                 |           |             |           |                 
|Balance 1/1/00   |           |             | 283,099   |                  |   | $ | 13.82 |      
|                 | Granted   |             |           | 1,245,684        |   |   |       | 13.30 | 
|                 | Exercised |             |           | (8,266           | ) |   |       | 4.04  | 
|                 | Cancelled |             |           | (3,473           | ) |   |       | 15.11 | 
|                 |           |             |           |                  |   |   |       |      
|Balance 12/31/00 |           |             | 1,517,044 |                  |   |   | 13.45 |      
|                 | Granted   |             |           | 9,257            |   |   |       | 16.45 | 
|                 | Exercised |             |           | (66,279          | ) |   |       | 13.02 | 
|                 | Cancelled |             |           | (71,718          | ) |   |       | 13.30 | 
|                 |           |             |           |                  |   |   |       |      
|Balance 12/31/01 |           |             | 1,388,304 |                  |   |   | 13.49 |      
|                 | Granted   |             |           | 40,450           |   |   |       | 22.65 | 
|                 | Exercised |             |           | (98,136          | ) |   |       | 12.84 | 
|                 | Cancelled |             |           | (3,780           | ) |   |       | 13.21 | 
|                 |           |             |           |                  |   |   |       |      
|Balance 12/31/02 |           |             | 1,326,838 |                  |   | $ | 13.82 |      
|                 |           |             |           |                  |   |   |       |      

40



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

The weighted average fair value of options
granted during 2002, 2001 and 2000 were $22.65, $16.45 and
$13.30, respectively.

The following table summarizes information about
options as of December 31, 2002:

|                |  |                                 |           |                     |  |           |           |             |  |           |       |  |  |  |         |  |  |   |       | 
|--------------- |  | ------------------------------- | --------- | ------------------- |  | --------- | --------- | ----------- |  | --------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                |  |                                
|                |  | Options as of December 31, 2002
|                |  |                                
|                |  |                                 |           |                    
|                |  | Options Outstanding             |           | Options Exercisable
|                |  |                                 |           |                    
|                |  |                                 |           | Weighted-           |  | Weighted- |           |             |  | Weighted-
|                |  |                                 |           | Average             |  | Average   |           |             |  | Average  
|Range of        |  | Number                          |           | Remaining           |  | Exercise  |           | Number      |  | Exercise 
|Exercise price  |  | Outstanding                     |           | Contractual Life    |  | Price     |           | Exercisable |  | Price    
|                |  |                                 |           |                     |  |           |           |             |  |          
|$ 3.50  $ 4.88 |  |                                 | 8,266     |                     |  |           | 0.5 Years |             |  | $         | 4.64  |  |  |  | 8,266   |  |  | $ | 4.64  | 
|12.21  14.65   |  |                                 | 1,017,248 |                     |  |           | 7.9 Years |             |  | $         | 13.21 |  |  |  | 455,029 |  |  | $ | 13.21 | 
|14.65  17.09   |  |                                 | 251,611   |                     |  |           | 6.4 Years |             |  | $         | 14.97 |  |  |  | 250,684 |  |  | $ | 14.97 | 
|17.09  19.54   |  |                                 | 9,263     |                     |  |           | 5.3 Years |             |  | $         | 18.37 |  |  |  | 7,409   |  |  | $ | 18.37 | 
|21.98  24.42   |  |                                 | 40,450    |                     |  |           | 9.2 Years |             |  | $         | 22.65 |  |  |  | 29,400  |  |  | $ | 22.07 | 
|                |  |                                 |           |                     |  |           |           |             |  |           |       |  |  |  |         |  |  |   |       | 
|                |  |                                 | 1,326,838 |                     |  |           |           |             |  |           |       |  |  |  | 750,788 |  |  | $ | 14.10 | 
|                |  |                                 |           |                     |  |           |           |             |  |           |       |  |  |  |         |  |  |   |       | 

Note 13  Commitments and
Contingent Liabilities

Based on consultation with the Corporations
legal counsel, management is not aware of any litigation that
would have a material adverse effect on the consolidated
financial position of the Corporation. There are no proceedings
pending other than the ordinary routine litigation incident to
the business of the Corporation and its Subsidiaries. In
addition, no material proceedings are pending or are known to be
threatened or contemplated against the Corporation or its
Subsidiaries by government authorities.

Lease commitments for equipment and banking
locations expire intermittently over the years through 2036.
Most banking location leases require the lessor to pay
insurance, maintenance costs and property taxes. Approximate
minimum rental commitments for existing operating leases at
December 31, 2002, are as follows:

|           |       |           |           |            | 
|---------- | ----- | --------- | --------- | ---------- | 
|           |       | Total    
|           |       | Operating
|           |       | Leases   
|           |       |          
|2003       |       | $         | 2,055,000 |           
|2004       |       |           | 1,768,000 |           
|2005       |       |           | 1,310,000 |           
|2006       |       |           | 738,000   |           
|2007       |       |           | 714,000   |           
|Thereafter |       |           | 3,826,000 |           
|           |       |           |           |           
|           | Total |           | $         | 10,411,000 | 
|           |       |           |           |           

Total lease expense amounted to $2,090,000 in
2002, $2,109,000 in 2001 and $1,889,000 in 2000.

Note 14  Financial Instruments with
Off-Balance Sheet Risk

The Banks have not entered into any interest rate
swaps, caps, floors or collars and are not a party to any
forward or futures transactions. However, the Banks are a party
to various other financial instruments at December 31, 2002
and 2001, which are not included in the consolidated financial
statements, but are required in the normal course of business to
meet the financing needs of its customers and to assist in
managing its exposure to changes in interest rates.

41



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

The Banks exposure to credit loss in the
event of nonperformance by the other party to the financial
instrument for commitments to extend credit and standby letters
of credit is represented by the contractual or notional amounts
of those instruments. The Banks use the same stringent credit
policies in extending these commitments as they do for recorded
financial instruments and control their exposure to loss through
credit approval and monitoring procedures. These commitments are
generally issued for one year or less, often expire without
being drawn upon, and often are secured with appropriate
collateral.

The Banks offer commercial, mortgage and consumer
credit products to their customers in the normal course of
business. These products represent a diversified credit
portfolio and are generally issued to borrowers within the
Banks branch office systems in eastern Pennsylvania. The
ability of the customers to repay their credits is, to some
extent, dependent upon the economy in the Banks market
areas.

Note 15  Regulatory
Capital

|                                              |                                         |                        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |       |  
|--------------------------------------------- | --------------------------------------- | ---------------------- | - | ----------------- |  | ----------------- |  | ----------------- | - | ---------- | - | ------- |  |  |  | ---- | - |  | - | ------- |  |  |  | ----- | -
|                                              |                                         |                        |   |                   |  |                   |  |                   |   |           
|                                              |                                         |                        |   |                   |  |                   |  |                   |   | To Be Well
|                                              |                                         |                        |   |                   |  |                   |  | Capitalized Under
|                                              |                                         |                        |   | For Capital       |  | Prompt Corrective
|                                              |                                         | Actual                 |   | Adequacy Purposes |  | Action provision 
|                                              |                                         |                        |   |                   |  |                  
|As of December 31, 2002                       |                                         | Amount                 |   | Ratio             |  | Amount            |  | Ratio             |   | Amount     |   | Ratio  
|                                              |                                         |                        |   |                   |  |                   |  |                   |   |            |   |        
|                                              |                                         |                       
|                                              |                                         | (Dollars in thousands)
|Total Capital (to risk weighted
    assets):  |                                         |                        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                                              | Corporation                             |                        | $ | 222,217           |  |                   |  | 13.38             | % |            | $ | 132,866 |  |  |  | 8.00 | % |  | $ |        |  |  |  |      |  
|                                              | Harleysville National Bank and Trust Co |                        |   | 133,945           |  |                   |  | 11.16             | % |            |   | 96,034  |  |  |  | 8.00 | % |  |   | 120,043 |  |  |  | 10.00 | %
|                                              | Citizens National Bank                  |                        |   | 37,125            |  |                   |  | 12.01             | % |            |   | 24,722  |  |  |  | 8.00 | % |  |   | 30,903  |  |  |  | 10.00 | %
|                                              | Security National Bank                  |                        |   | 17,033            |  |                   |  | 12.60             | % |            |   | 10,814  |  |  |  | 8.00 | % |  |   | 13,517  |  |  |  | 10.00 | %
|Tier 1 Capital (to risk weighted
    assets): |                                         |                        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                                              | Corporation                             |                        | $ | 203,896           |  |                   |  | 12.28             | % |            | $ | 66,433  |  |  |  | 4.00 | % |  | $ |        |  |  |  |      |  
|                                              | Harleysville National Bank and Trust Co |                        |   | 122,990           |  |                   |  | 10.25             | % |            |   | 48,017  |  |  |  | 4.00 | % |  |   | 72,026  |  |  |  | 6.00  | %
|                                              | Citizens National Bank                  |                        |   | 33,258            |  |                   |  | 10.76             | % |            |   | 12,361  |  |  |  | 4.00 | % |  |   | 18,542  |  |  |  | 6.00  | %
|                                              | Security National Bank                  |                        |   | 15,338            |  |                   |  | 11.35             | % |            |   | 5,407   |  |  |  | 4.00 | % |  |   | 8,110   |  |  |  | 6.00  | %
|Tier 1 Capital (to average assets):           |                                         |                        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                                              | Corporation                             |                        | $ | 203,896           |  |                   |  | 8.19              | % |            | $ | 99,640  |  |  |  | 4.00 | % |  | $ |        |  |  |  |      |  
|                                              | Harleysville National Bank and Trust Co |                        |   | 122,990           |  |                   |  | 6.88              | % |            |   | 71,493  |  |  |  | 4.00 | % |  |   | 89,366  |  |  |  | 5.00  | %
|                                              | Citizens National Bank                  |                        |   | 33,258            |  |                   |  | 6.91              | % |            |   | 19,255  |  |  |  | 4.00 | % |  |   | 24,069  |  |  |  | 5.00  | %
|                                              | Security National Bank                  |                        |   | 15,338            |  |                   |  | 7.77              | % |            |   | 7,896   |  |  |  | 4.00 | % |  |   | 9,869   |  |  |  | 5.00  | %

|                                             |                                         |                        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |       |  
|-------------------------------------------- | --------------------------------------- | ---------------------- | - | ----------------- |  | ----------------- |  | ----------------- | - | ---------- | - | ------- |  |  |  | ---- | - |  | - | ------- |  |  |  | ----- | -
|                                             |                                         |                        |   |                   |  |                   |  |                   |   |           
|                                             |                                         |                        |   |                   |  |                   |  |                   |   | To Be Well
|                                             |                                         |                        |   |                   |  |                   |  | Capitalized Under
|                                             |                                         |                        |   | For Capital       |  | Prompt Corrective
|                                             |                                         | Actual                 |   | Adequacy Purposes |  | Action provision 
|                                             |                                         |                        |   |                   |  |                  
|As of December 31, 2001                      |                                         | Amount                 |   | Ratio             |  | Amount            |  | Ratio             |   | Amount     |   | Ratio  
|                                             |                                         |                        |   |                   |  |                   |  |                   |   |            |   |        
|                                             |                                         |                       
|                                             |                                         | (Dollars in thousands)
|Total Capital (to risk weighted
    assets): |                                         |                        |   |                   |  |                   |  |                   |   |            |   |         |  |  |  |      |   |  |   |         |  |  |  |      
|                                             | Corporation                             |                        | $ | 205,743           |  |                   |  | 13.23             | % |            | $ | 124,445 |  |  |  | 8.00 | % |  | $ |        |  |  |  |      |  
|                                             | Harleysville National Bank and Trust Co |                        |   | 118,782           |  |                   |  | 10.46             | % |            |   | 90,862  |  |  |  | 8.00 | % |  |   | 113,578 |  |  |  | 10.00 | %
|                                             | Citizens National Bank                  |                        |   | 39,888            |  |                   |  | 13.91             | % |            |   | 22,936  |  |  |  | 8.00 | % |  |   | 28,669  |  |  |  | 10.00 | %
|                                             | Security National Bank                  |                        |   | 15,132            |  |                   |  | 12.53             | % |            |   | 9,661   |  |  |  | 8.00 | % |  |   | 12,076  |  |  |  | 10.00 | %

42



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

|                                              |                                         |                        |   |                   |  |                   |  |                   |   |            |   |        |  |  |  |      |   |  |   |        |  |  |  |      |  
|--------------------------------------------- | --------------------------------------- | ---------------------- | - | ----------------- |  | ----------------- |  | ----------------- | - | ---------- | - | ------ |  |  |  | ---- | - |  | - | ------ |  |  |  | ---- | -
|                                              |                                         |                        |   |                   |  |                   |  |                   |   |           
|                                              |                                         |                        |   |                   |  |                   |  |                   |   | To Be Well
|                                              |                                         |                        |   |                   |  |                   |  | Capitalized Under
|                                              |                                         |                        |   | For Capital       |  | Prompt Corrective
|                                              |                                         | Actual                 |   | Adequacy Purposes |  | Action provision 
|                                              |                                         |                        |   |                   |  |                  
|As of December 31, 2001                       |                                         | Amount                 |   | Ratio             |  | Amount            |  | Ratio             |   | Amount     |   | Ratio 
|                                              |                                         |                        |   |                   |  |                   |  |                   |   |            |   |       
|                                              |                                         |                       
|                                              |                                         | (Dollars in thousands)
|Tier 1 Capital (to risk weighted
    assets): |                                         |                        |   |                   |  |                   |  |                   |   |            |   |        |  |  |  |      |   |  |   |        |  |  |  |     
|                                              | Corporation                             |                        | $ | 189,423           |  |                   |  | 12.18             | % |            | $ | 62,222 |  |  |  | 4.00 | % |  | $ |       |  |  |  |     |  
|                                              | Harleysville National Bank and Trust Co |                        |   | 108,939           |  |                   |  | 9.59              | % |            |   | 45,431 |  |  |  | 4.00 | % |  |   | 68,147 |  |  |  | 6.00 | %
|                                              | Citizens National Bank                  |                        |   | 36,297            |  |                   |  | 12.66             | % |            |   | 11,468 |  |  |  | 4.00 | % |  |   | 17,202 |  |  |  | 6.00 | %
|                                              | Security National Bank                  |                        |   | 13,622            |  |                   |  | 11.28             | % |            |   | 4,830  |  |  |  | 4.00 | % |  |   | 7,246  |  |  |  | 6.00 | %
|Tier 1 Capital (to average assets):           |                                         |                        |   |                   |  |                   |  |                   |   |            |   |        |  |  |  |      |   |  |   |        |  |  |  |     
|                                              | Corporation                             |                        | $ | 189,423           |  |                   |  | 8.71              | % |            | $ | 87,040 |  |  |  | 4.00 | % |  | $ |       |  |  |  |     |  
|                                              | Harleysville National Bank and Trust Co |                        |   | 108,939           |  |                   |  | 6.91              | % |            |   | 63,024 |  |  |  | 4.00 | % |  |   | 78,780 |  |  |  | 5.00 | %
|                                              | Citizens National Bank                  |                        |   | 36,297            |  |                   |  | 8.45              | % |            |   | 17,182 |  |  |  | 4.00 | % |  |   | 21,477 |  |  |  | 5.00 | %
|                                              | Security National Bank                  |                        |   | 13,622            |  |                   |  | 8.44              | % |            |   | 6,455  |  |  |  | 4.00 | % |  |   | 8,069  |  |  |  | 5.00 | %

The Banks are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material affect on the Corporations financial statements.
Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Banks must meet specific
capital guidelines that involve quantitative measures of the
Banks assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Banks capital amounts and classification are also subject
to qualitative judgments by the regulators about components,
risk weightings, and other factors.

Quantitative measures established by regulation
to ensure capital adequacy require the Banks to maintain minimum
amounts and ratios (set forth in the table) of total and
Tier 1 capital to risk-weighted assets. Management
believes, as of December 31, 2002, that the Banks meet all
capital adequacy requirements to which they are subject. To be
categorized as well capitalized, the Banks must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no
conditions or events that have occurred that management believes
have changed the institutions category.

The National Banking Laws require the approval of
the Office of the Comptroller of the Currency if the total of
all dividends declared by a national bank in any calendar year
exceed the net profits of the bank (as defined) for that year
combined with its retained net profits for the preceding two
calendar years. Under this formula, the Banks may declare
dividends in 2003 of approximately $36,000,000 plus an amount
equal to the net profits of the Banks in 2003 up to the date of
any such dividend declaration.

Additionally, banking regulations limit the
amount of investments, loans, extensions of credit and advances
that one subsidiary bank can make to the Corporation at any time
to 10% and in the aggregate 20% of the Banks capital stock
and surplus. These regulations also require that any such
investment, loan, extension of credit or advance be secured by
securities having a market value in excess of the amount
thereof. At December 31, 2002, there were no investments,
loans, extensions of credit or advances from any of the Banks to
the Corporation.

Note 16  Fair Value of
Financial Instruments

SFAS No. 107 Disclosures about
Fair Values of Financial Instruments, requires disclosure
of the estimated fair value of an entitys assets and
liabilities considered to be financial instruments. For the
Corporation, as for most financial institutions, the majority of
its assets and liabilities are considered financial

43



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

instruments as defined in SFAS No. 107.
However, many such instruments lack an available trading market,
as characterized by a willing buyer and seller engaging in an
exchange transaction. Also, it is the Corporations general
practice and intent to hold its financial instruments to
maturity and not to engage in trading or sales activities,
except for certain loans and investments. Therefore, the
Corporation had to use significant estimates and present value
calculations to prepare this disclosure.

Changes in the assumptions or methodologies used
to estimate fair values may materially affect the estimated
amounts. Also, management is concerned that there may not be
reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence
of active markets. This lack of uniformity gives rise to a high
degree of subjectivity in estimating financial instrument fair
values.

Estimated fair values have been determined by the
Corporation using the best available data and an estimation
methodology suitable for each category of financial instruments.
The estimation methodologies used, the estimated fair values and
recorded book balances at December 31, 2002 and 2001 are
outlined as follows:

For cash and due from banks, interest-bearing
deposits in banks and federal funds sold, the recorded book
values of $104,087,000 and $82,624,000 at December 31, 2002
and 2001, respectively, approximate fair values. The estimated
fair values of investment securities are based on quoted market
prices, if available. Estimated fair values are based on quoted
market prices of comparable instruments if quoted market prices
are not available.

The loan portfolio, net of unearned income, at
December 31, 2002 and 2001, has been valued using a present
value discounted cash flow analysis where market prices were not
available. The discount rate used in these calculations is the
estimated current market rate adjusted for credit risk. The
carrying value approximates its fair value.

|                      |  |                 |               |            |  |                 |               |            |  |   |               |  |  |   |               | 
|--------------------- |  | --------------- | ------------- | ---------- |  | --------------- | ------------- | ---------- |  | - | ------------- |  |  | - | ------------- | 
|                      |  |                 |               |           
|                      |  | 2002            |               | 2001      
|                      |  |                 |               |           
|                      |  | Carrying Amount |               | Fair Value |  | Carrying Amount |               | Fair Value
|                      |  |                 |               |            |  |                 |               |           
|Investment Securities |  | $               | 971,467,000   |            |  | $               | 972,706,000   |            |  | $ | 732,470,000   |  |  | $ | 733,153,000   | 
|Loans, Net            |  | $               | 1,333,292,000 |            |  | $               | 1,348,922,000 |            |  | $ | 1,316,609,000 |  |  | $ | 1,353,400,000 | 

The estimated fair values of demand deposits
(i.e., interest and noninterest-bearing checking accounts,
savings and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The carrying
amounts of variable rate, fixed-term money market accounts and
certificates of deposit approximate their fair values at the
reporting date. The carrying amount of accrued interest
receivable and payable approximates fair value.

|              |  |                 |             |            |  |                 |             |            |  |   |             |  |  |   |             | 
|------------- |  | --------------- | ----------- | ---------- |  | --------------- | ----------- | ---------- |  | - | ----------- |  |  | - | ----------- | 
|              |  |                 |             |           
|              |  | 2002            |             | 2001      
|              |  |                 |             |           
|              |  | Carrying Amount |             | Fair Value |  | Carrying Amount |             | Fair Value
|              |  |                 |             |            |  |                 |             |           
|Time Deposits |  | $               | 769,448,000 |            |  | $               | 859,647,000 |            |  | $ | 723,894,000 |  |  | $ | 744,810,000 | 

The fair values of demand notes, borrowings, and
securities sold under agreements to repurchase of $248,906,000
and $210,820,000 at December 31, 2002 and 2001,
respectively, approximate their recorded book balances.

The fair value of commitments to extend credit is
estimated based on the amount of unamortized deferred loan
commitment fees. The fair value of letters of credit is based on
the amount of unearned fees plus the estimated cost to terminate
the letters of credit. Fair values of unrecognized financial
instruments including commitments to extend credit and the fair
value of letters of credit are considered immaterial.

44



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

Note 17  Condensed Financial
Information Parent-Company Only

Condensed financial statements of Harleysville
National Corporation follow:

CONDENSED BALANCE SHEETS

|                                          |                                                                                       |                                            |   |         |         |  |   |         |         | 
|----------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------- | ------- |  | - | ------- | ------- | 
|                                          |                                                                                       |                                           
|                                          |                                                                                       | December 31,                              
|                                          |                                                                                       |                                           
|                                          |                                                                                       | 2002                                       |   | 2001   
|                                          |                                                                                       |                                            |   |        
|                                          |                                                                                       |                                           
|                                          |                                                                                       | (Dollars in thousands)                    
|Assets:                                   |                                                                                       |                                            |   |         |         |  |   |        
|                                          | Cash                                                                                  |                                            | $ | 2,031   |         |  | $ | 1,526   |        
|                                          | Investments in subsidiaries                                                           |                                            |   | 209,204 |         |  |   | 192,821 |        
|                                          | Other assets                                                                          |                                            |   | 136     |         |  |   | 144     |        
|                                          |                                                                                       |                                            |   |         |         |  |   |        
|                                          |                                                                                       | Total assets                               |   | $       | 211,371 |  |   | $       | 194,491 | 
|                                          |                                                                                       |                                            |   |         |         |  |   |        
|Liabilities and shareholders
    equity: |                                                                                       |                                            |   |         |         |  |   |        
|                                          | Guaranteed preferred beneficial interest in
    Corporations subordinated debentures |                                            | $ | 5,000   |         |  | $ | 5,000   |        
|                                          | Other liabilities                                                                     |                                            |   | 165     |         |  |   | 142     |        
|                                          |                                                                                       |                                            |   |         |         |  |   |        
|                                          |                                                                                       | Total liabilities                          |   |         | 5,165   |  |   |         | 5,142   | 
|                                          |                                                                                       |                                            |   |         |         |  |   |        
|Shareholders equity:                     |                                                                                       |                                            |   |         |         |  |   |        
|                                          | Common stock                                                                          |                                            |   | 19,597  |         |  |   | 18,571  |        
|                                          | Additional paid in capital                                                            |                                            |   | 96,585  |         |  |   | 71,419  |        
|                                          | Retained earnings                                                                     |                                            |   | 94,677  |         |  |   | 100,171 |        
|                                          | Treasury stock                                                                        |                                            |   | (11,590 | )       |  |   | (5,346  | )      
|                                          | Net unrealized gain on investment securities
    available for sale                   |                                            |   | 6,937   |         |  |   | 4,534   |        
|                                          |                                                                                       |                                            |   |         |         |  |   |        
|                                          |                                                                                       | Total shareholders equity                 |   |         | 206,206 |  |   |         | 189,349 | 
|                                          |                                                                                       |                                            |   |         |         |  |   |        
|                                          |                                                                                       | Total liabilities and shareholders equity |   | $       | 211,371 |  |   | $       | 194,491 | 
|                                          |                                                                                       |                                            |   |         |         |  |   |        

CONDENSED STATEMENTS OF INCOME

|                                                                                            |                          |                         |        |        |  |      |        |        |  |   |        |        | 
|------------------------------------------------------------------------------------------- | ------------------------ | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                                            |                          |                        
|                                                                                            |                          | Year Ended December 31,
|                                                                                            |                          |                        
|                                                                                            |                          | 2002                    |        | 2001   |  | 2000
|                                                                                            |                          |                         |        |        |  |     
|                                                                                            |                          |                        
|                                                                                            |                          | (Dollars in thousands) 
|Dividends from subsidiaries                                                                 |                          | $                       | 19,879 |        |  | $    | 12,293 |        |  | $ | 14,575 |       
|Investment income                                                                           |                          |                         | 16     |        |  |      | 8      |        |  |   |       |       
|                                                                                            |                          |                         |        |        |  |      |        |        |  |   |        |       
|                                                                                            | Total operating income   |                         |        | 19,895 |  |      |        | 12,301 |  |   |        | 14,575 | 
|                                                                                            |                          |                         |        |        |  |      |        |        |  |   |        |       
|Interest on subordinated debt                                                               |                          |                         | 517    |        |  |      | 451    |        |  |   |       |       
|Other expenses                                                                              |                          |                         | 10     |        |  |      | 22     |        |  |   | 14     |       
|                                                                                            |                          |                         |        |        |  |      |        |        |  |   |        |       
|                                                                                            | Total operating expenses |                         |        | 527    |  |      |        | 473    |  |   |        | 14     | 
|                                                                                            |                          |                         |        |        |  |      |        |        |  |   |        |       
|Income before income tax expense and equity in
    undistributed net income of subsidiaries |                          |                         | 19,368 |        |  |      | 11,828 |        |  |   | 14,561 |       
|Income tax expense                                                                          |                          |                         | (179   | )      |  |      | (163   | )      |  |   | (5     | )     
|                                                                                            |                          |                         |        |        |  |      |        |        |  |   |        |       

45



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

|                                                                     |            |                         |        |        |  |      |        |        |  |  |        |        | 
|-------------------------------------------------------------------- | ---------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  |  | ------ | ------ | 
|                                                                     |            |                        
|                                                                     |            | Year Ended December 31,
|                                                                     |            |                        
|                                                                     |            | 2002                    |        | 2001   |  | 2000
|                                                                     |            |                         |        |        |  |     
|                                                                     |            |                        
|                                                                     |            | (Dollars in thousands) 
|Income before equity in undistributed net income
    of subsidiaries |            |                         | 19,547 |        |  |      | 11,991 |        |  |  | 14,566 |       
|Equity in undistributed net income of subsidiaries                   |            |                         | 13,380 |        |  |      | 16,829 |        |  |  | 11,038 |       
|                                                                     |            |                         |        |        |  |      |        |        |  |  |        |       
|                                                                     | Net income |                         | $      | 32,927 |  |      | $      | 28,820 |  |  | $      | 25,604 | 
|                                                                     |            |                         |        |        |  |      |        |        |  |  |        |       

CONDENSED STATEMENTS OF CASH FLOWS

|                                                        |                                                                                       |                                              |         |         |         |      |         |         |         |   |         |         |         |  
|------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                        |                                                                                       |                                             
|                                                        |                                                                                       | Year Ended December 31,                     
|                                                        |                                                                                       |                                             
|                                                        |                                                                                       | 2002                                         |         | 2001    |         | 2000
|                                                        |                                                                                       |                                              |         |         |         |     
|                                                        |                                                                                       |                                             
|                                                        |                                                                                       | (Dollars in thousands)                      
|Operating activities:                                   |                                                                                       |                                              |         |         |         |      |         |         |         |   |         |        
|                                                        | Net income                                                                            |                                              | $       | 32,927  |         |      | $       | 28,820  |         |   | $       | 25,604  |        
|                                                        | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                              |         |         |         |      |         |         |         |   |         |         |        
|                                                        |                                                                                       | Equity in undistributed net income of banks  |         |         | (13,380 | )    |         |         | (16,829 | ) |         |         | (11,038 | )
|                                                        |                                                                                       | Net decrease (increase) in assets            |         |         | 8       |      |         |         | (144    | ) |         |         |        |  
|                                                        |                                                                                       | Net increase (decrease) in other liabilities |         |         | 23      |      |         |         | 147     |   |         |         | (5      | )
|                                                        |                                                                                       |                                              |         |         |         |      |         |         |         |   |         |        
|Net cash provided by operating activities               |                                                                                       |                                              | 19,578  |         |         |      | 11,994  |         |         |   | 14,561  |        
|                                                        |                                                                                       |                                              |         |         |         |      |         |         |         |   |         |        
|Investing activities:                                   |                                                                                       |                                              |         |         |         |      |         |         |         |   |         |        
|Capital contributions made to the subsidiaries          |                                                                                       |                                              | (600    | )       |         |      |        |         |         |   | (3,000  | )      
|                                                        |                                                                                       |                                              |         |         |         |      |         |         |         |   |         |        
|Net cash (used in) provided by investing
    activities |                                                                                       |                                              | (600    | )       |         |      |        |         |         |   | (3,000  | )      
|                                                        |                                                                                       |                                              |         |         |         |      |         |         |         |   |         |        
|Financing activities:                                   |                                                                                       |                                              |         |         |         |      |         |         |         |   |         |        
|                                                        | Proceeds from issuance of long-term debt                                              |                                              |         |        |         |      |         | 5,000   |         |   |         |        |        
|                                                        | Cash dividends and fractional shares                                                  |                                              |         | (13,495 | )       |      |         | (11,893 | )       |   |         | (10,430 | )      
|                                                        | Repurchase of common stock                                                            |                                              |         | (6,244  | )       |      |         | (5,093  | )       |   |         | (578    | )      
|                                                        | Stock options and awards                                                              |                                              |         | 1,266   |         |      |         | 867     |         |   |         | 47      |        
|                                                        |                                                                                       |                                              |         |         |         |      |         |         |         |   |         |        
|Net cash used in financing activities                   |                                                                                       |                                              | (18,473 | )       |         |      | (11,119 | )       |         |   | (10,961 | )      
|                                                        |                                                                                       |                                              |         |         |         |      |         |         |         |   |         |        
|Net increase in cash                                    |                                                                                       |                                              | 505     |         |         |      | 875     |         |         |   | 600     |        
|Cash and cash equivalents at beginning of year          |                                                                                       |                                              | 1,526   |         |         |      | 651     |         |         |   | 51      |        
|                                                        |                                                                                       |                                              |         |         |         |      |         |         |         |   |         |        
|Cash and cash equivalents at end of year                |                                                                                       | $                                            | 2,031   |         |         | $    | 1,526   |         |         | $ | 651     |        
|                                                        |                                                                                       |                                              |         |         |         |      |         |         |         |   |         |        

46



---



##### 



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


HARLEYSVILLE NATIONAL CORPORATION AND
SUBSIDIARIES  (Continued)

Note 18  Quarterly Financial
Data (Unaudited)

The following is the summarized
(unaudited) consolidated quarterly financial data of the
Corporation which, in the opinion of management, reflects all
adjustments, consisting only of normal recurring adjustments,
necessary for fair presentation of the Corporations
results of operations:

(Dollars in thousands, except per share
information)

|                                 |         |                         |        |         |  |          |        |         |  |   |        |      |  |   |        |      | 
|-------------------------------- | ------- | ----------------------- | ------ | ------- |  | -------- | ------ | ------- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                 |         |                        
|                                 |         | Three Months Ended 2002
|                                 |         |                        
|                                 |         | March 31                |        | June 30 |  | Sept. 30 |        | Dec. 31
|                                 |         |                         |        |         |  |          |        |        
|Interest income                  |         | $                       | 33,689 |         |  | $        | 33,452 |         |  | $ | 33,118 |      |  | $ | 32,371 |     
|Net interest income              |         |                         | 20,608 |         |  |          | 20,450 |         |  |   | 19,679 |      |  |   | 19,283 |     
|Provision for losses             |         |                         | 1,351  |         |  |          | 1,094  |         |  |   | 956    |      |  |   | 969    |     
|Noninterest income               |         |                         | 5,523  |         |  |          | 6,119  |         |  |   | 5,441  |      |  |   | 5,440  |     
|Operating expenses               |         |                         | 14,479 |         |  |          | 14,714 |         |  |   | 13,501 |      |  |   | 13,603 |     
|Income before income tax expense |         |                         | 10,301 |         |  |          | 10,761 |         |  |   | 10,663 |      |  |   | 10,151 |     
|Income tax expense               |         |                         | 2,488  |         |  |          | 2,383  |         |  |   | 2,250  |      |  |   | 1,828  |     
|                                 |         |                         |        |         |  |          |        |         |  |   |        |      |  |   |        |     
|Net income                       |         | $                       | 7,813  |         |  | $        | 8,378  |         |  | $ | 8,413  |      |  | $ | 8,323  |     
|                                 |         |                         |        |         |  |          |        |         |  |   |        |      |  |   |        |     
|Net income per share             |         |                         |        |         |  |          |        |         |  |   |        |      |  |   |        |     
|                                 | Diluted |                         | $      | 0.40    |  |          | $      | 0.42    |  |   | $      | 0.43 |  |   | $      | 0.42 | 
|                                 |         |                         |        |         |  |          |        |         |  |   |        |      |  |   |        |     
|                                 | Basic   |                         | $      | 0.41    |  |          | $      | 0.44    |  |   | $      | 0.44 |  |   | $      | 0.43 | 
|                                 |         |                         |        |         |  |          |        |         |  |   |        |      |  |   |        |     

|                                 |         |                         |        |         |  |          |        |         |  |   |        |      |  |   |        |      | 
|-------------------------------- | ------- | ----------------------- | ------ | ------- |  | -------- | ------ | ------- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                 |         |                        
|                                 |         | Three Months Ended 2001
|                                 |         |                        
|                                 |         | March 31                |        | June 30 |  | Sept. 30 |        | Dec. 31
|                                 |         |                         |        |         |  |          |        |        
|Interest income                  |         | $                       | 34,509 |         |  | $        | 34,537 |         |  | $ | 35,009 |      |  | $ | 34,624 |     
|Net interest income              |         |                         | 17,151 |         |  |          | 18,058 |         |  |   | 18,766 |      |  |   | 19,767 |     
|Provision for losses             |         |                         | 647    |         |  |          | 962    |         |  |   | 1,353  |      |  |   | 968    |     
|Noninterest income               |         |                         | 4,192  |         |  |          | 5,121  |         |  |   | 6,256  |      |  |   | 6,656  |     
|Operating expenses               |         |                         | 12,465 |         |  |          | 13,240 |         |  |   | 13,744 |      |  |   | 15,594 |     
|Income before income tax expense |         |                         | 8,231  |         |  |          | 8,977  |         |  |   | 9,925  |      |  |   | 9,861  |     
|Income tax expense               |         |                         | 1,700  |         |  |          | 1,856  |         |  |   | 2,302  |      |  |   | 2,316  |     
|                                 |         |                         |        |         |  |          |        |         |  |   |        |      |  |   |        |     
|Net income                       |         | $                       | 6,531  |         |  | $        | 7,121  |         |  | $ | 7,623  |      |  | $ | 7,545  |     
|                                 |         |                         |        |         |  |          |        |         |  |   |        |      |  |   |        |     
|Net income per share             |         |                         |        |         |  |          |        |         |  |   |        |      |  |   |        |     
|                                 | Diluted |                         | $      | 0.33    |  |          | $      | 0.36    |  |   | $      | 0.39 |  |   | $      | 0.38 | 
|                                 |         |                         |        |         |  |          |        |         |  |   |        |      |  |   |        |     
|                                 | Basic   |                         | $      | 0.34    |  |          | $      | 0.37    |  |   | $      | 0.40 |  |   | $      | 0.39 | 
|                                 |         |                         |        |         |  |          |        |         |  |   |        |      |  |   |        |     

47



---



##### 



Accountants and
Business Advisors




Report of Independent Certified Public
Accountants

Board of Directors
and Shareholders

Harleysville National Corporation


We have audited the accompanying consolidated
balance sheets of Harleysville National Corporation and
Subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in
shareholders equity and cash flows for each of the three
years in the period ended December 31, 2002. These
financial statements are the responsibility of the
Corporations management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Harleysville National
Corporation as of December 31, 2002 and 2001, and the
consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.



| |                       
| | ----------------------
| | -s- Grant Thornton LLP

Philadelphia, Pennsylvania

January 9, 2003


Suite 3100

Two Commerce Square


2001 Market Street


Philadelphia, PA 19103-7080


T 215.561-4200


F 215.561.1066


W www.grantthorton.com


Grant Thornton
LLP

US Member of Grant
Thornton International


48



---



##### 



Other Material Required by
Form 10-K

History and Business

Harleysville National Corporation, a Pennsylvania
corporation (the Corporation), was incorporated in June, 1982.
On January 1, 1983, the Corporation became the parent bank
holding company of Harleysville National Bank and Trust Company
(HNB), established in 1909, a wholly owned subsidiary of the
Corporation. On February 13, 1991, the Corporation acquired
all of the outstanding common stock of Citizens National Bank
(CNB), established in 1903. On June 1, 1992, the
Corporation acquired all of the outstanding stock of Summit Hill
Trust Company (Summit Hill). On September 25, 1992, Summit
Hill merged into CNB and is now operating as a branch office of
CNB. On July 1, 1994 the Corporation acquired all of the
outstanding stock of Security National Bank (SNB), established
in 1988. On March 1, 1996, the Corporation acquired all of
the outstanding common stock of Farmers & Merchants Bank
(F & M). F & M was merged into CNB and is now
operating as a branch office of CNB. On March 17, 1997, the
HNC Financial Company was incorporated as a Delaware
Corporation. HNC Financial Companys principal business
function is to expand the investment opportunities of the
Corporation. On January 20, 1999, the Corporation acquired
all of the outstanding stock of Northern Lehigh Bancorp, Inc.,
parent company of Citizens National Bank of Slatington. Citizens
National Bank of Slatington was merged into CNB. On
April 28, 2000, the Corporation acquired all of the
outstanding common stock of Citizens Bank and Trust Company of
Palmerton (CB & T). CB & T was merged into
CNB. On March 30, 2001, HNC Reinsurance Company was
incorporated as an Arizona Corporation. HNC Reinsurance Company
functions as a reinsurer of consumer loan credit life and
accident and health insurance. The Corporation is primarily a
bank holding company that provides financial services through
its three bank subsidiaries. Since commencing operations, the
Corporations business has consisted primarily of managing
HNB, CNB and SNB (collectively the Banks), and its principal
source of income has been dividends paid by the Banks. The
Corporation is registered as a bank holding company under the
Bank Holding Company Act of 1956.

The Banks are national banking associations under
the supervision of the Office of the Comptroller of the
Currency. The Corporations and HNBs legal
headquarters are located at 483 Main Street, Harleysville,
Pennsylvania 19438. CNBs legal headquarters is located at
13-15 West Ridge Street, Lansford, Pennsylvania 18232.
SNBs legal headquarters is located at One Security Plaza,
Pottstown, Pennsylvania 19464. HNC Financial Companys
legal headquarters is located at 2751 Centerville Road,
Suite 3164, Wilmington, Delaware 19808. HNC Reinsurance
Companys legal headquarters is located at 101 North
First Avenue, Suite 2460, Phoenix, AZ 85003.

As of December 31, 2002, the Corporation had
total assets of $2,490,864,000, total shareholders equity
of $206,206,000 and total deposits of $1,979,822,000.

The Banks engage in the full-service commercial
banking and trust business, including accepting time and demand
deposits, making secured and unsecured commercial and consumer
loans, financing commercial transactions, making construction
and mortgage loans and performing corporate pension and personal
investment and trust services. Their deposits are insured by the
Federal Deposit Insurance Corporation to the extent provided by
law. The Banks have 40 branch offices located in
Montgomery, Bucks, Chester, Berks, Carbon, Wayne, Monroe,
Lehigh, Northampton and Schuylkill counties, Pennsylvania, 22 of
which are owned by the Banks and 18 of which are leased from
third parties.

The Banks enjoy a stable base of core deposits
and are leading community banks in their service areas. The
Banks believe they have gained their position as a result of a
customer-oriented philosophy and a strong commitment to service.
Senior management has made the development of a sales
orientation throughout the Banks one of their highest priorities
and emphasizes this objective with extensive training and sales
incentive programs. The Banks maintain close contact with the
local business community to monitor commercial lending needs and
believe they respond to customer requests quickly and with
flexibility. Management believes these competitive strengths are
reflected in the Corporations results of operations.

49



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As of December 31, 2002, the Corporation and
the Banks employed approximately 598 full-time equivalent
employees. The Corporation provides a variety of employment
benefits and considers its relationships with its employees to
be satisfactory.

Competition

The Banks compete actively with other eastern
Pennsylvania financial institutions, many larger than the Banks,
as well as with financial and non-financial institutions
headquartered elsewhere. The Banks are generally competitive
with all competing institutions in their 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 and charges for trust services. At
December 31, 2002, HNBs legal lending limit to a
single customer was $20,094,000 and CNBs and SNBs
legal lending limits to a single customer were $5,622,000 and
$2,616,000, respectively. Many of the institutions with which
the Banks compete are able to lend significantly more than these
amounts to a single customer.

Supervision and Regulation  The
Registrant

In November, 1999, the Gramm-Leach-Bliley
Financial Modernization Act of 1999 (Modernization Act) became
law. The Modernization Act allows bank holding companies meeting
management, capital and Community Reinvestment Act standards to
engage in a substantially broader range of nonbanking activities
than was permissible before enactment, including underwriting
insurance and making merchant banking investments in commercial
and financial companies. It allows insurers and other financial
services companies to acquire banks, removes various
restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory
companies, and establishes the overall regulatory structure
applicable to bank holding companies that also engage in
insurance and securities operations. The Corporation currently
believes it meets the requirements for the broader range of
activities that will be permitted by the Modernization Act.

The Modernization Act also modified law related
to financial privacy and community reinvestment. The privacy
provisions generally prohibit financial institutions, including
the Corporation, from disclosing nonpublic financial information
to nonaffiliated third parties unless customers have the
opportunity to opt out of the disclosure.

Pending Legislation

Management is not aware of any other current
specific recommendations by regulatory authorities or proposed
legislation which, if they were implemented, would have a
material adverse effect upon the liquidity, capital resources,
or results of operations, although the general cost of
compliance with numerous and multiple federal and state laws and
regulations does have, and in the future may have, a negative
impact on the Corporations results of operations.

Effects of Inflation

Inflation has some impact on the
Corporations and the Banks operating costs. Unlike
many industrial companies, however, substantially all of the
Banks assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on the
Corporations and the Banks performance than the
general level of inflation. Over short periods of time, interest
rates may not necessarily move in the same direction or in the
same magnitude as prices of goods and services.

Effect of Government Monetary
Policies

The earnings of the Corporation are and will be
affected by domestic economic conditions and the monetary and
fiscal policies of the United States government and its
agencies. An important function of the Federal Reserve is to
regulate the money supply and interest rates. Among the
instruments used to implement those objectives are open market
operations in United States government securities and changes in
reserve requirements against member bank deposits. These
instruments are used in varying combinations to influence

50



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overall growth and distribution of bank loans,
investments and deposits, and their use may also affect rates
charged on loans or paid for deposits.


The Banks are members of the Federal Reserve and,
therefore, the policies and regulations of the Federal Reserve
have a significant effect on its deposits, loans and investment
growth, as well as the rate of interest earned and paid, and are
expected to affect the Banks operations in the future. The
effect of such policies and regulations upon the future business
and earnings of the Corporation and the Banks cannot be
predicted.

Environmental Regulations

There are several federal and state statutes
which regulate the obligations and liabilities of financial
institutions pertaining to environmental issues. In addition to
the potential for attachment of liability resulting from its own
actions, a bank may be held liable under certain circumstances
for the actions of its borrowers, or third parties, when such
actions result in environmental problems on properties that
collateralize loans held by the bank. Further, the liability has
the potential to far exceed the original amount of a loan issued
by the bank. Currently, neither the Corporation nor the Banks
are a party to any pending legal proceeding pursuant to any
environmental statute, nor are the Corporation and the Banks
aware of any circumstances that may give rise to liability under
any such statute.

Supervision and Regulation 
Banks

The operations of the Banks are subject to
federal and state statutes applicable to banks chartered under
the banking laws of the United States, to members of the Federal
Reserve and to banks whose deposits are insured by the FDIC. The
Banks operations are also subject to regulations of the
OCC, the Federal Reserve and the FDIC. The primary supervisory
authority of the Banks is the OCC, who regularly examines the
Banks. The OCC has authority to prevent a national bank from
engaging in unsafe or unsound practices in conducting its
business.

Federal and state banking laws and regulations
govern, among other things, the scope of a banks business,
the investments a bank may make, the reserves against deposits a
bank must maintain, loans a bank makes and collateral it takes,
the activities of a bank with respect to mergers and
consolidations and the establishment of branches.

As a subsidiary bank of a bank holding company,
the Banks are subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to the bank
holding company or its subsidiaries, or investments in the stock
or other securities as collateral for loans. The Federal Reserve
Act and Federal Reserve regulations also place certain
limitations and reporting requirements on extensions of credit
by a bank to principal shareholders of its parent holding
company, among others, and to related interests of such
principal shareholders. In addition, such legislation and
regulations may affect the terms upon which any person becoming
a principal shareholder of a holding company may obtain credit
from banks with which the subsidiary bank maintains a
correspondent relationship.

Under the Federal Deposit Insurance Act, the OCC
possesses the power to prohibit institutions regulated by it
(such as the Banks) from engaging in any activity that would be
an unsafe and unsound banking practice or would otherwise be in
violation of the law.

Under the Community Reinvestment Act of 1977, the
OCC is required to assess the record of all financial
institutions regulated by it to determine if these institutions
are meeting the credit needs of the community, including low and
moderate income neighborhoods, which they serve and to take this
record into account in its evaluation of any application made by
any of such institutions for, among other things, approval of a
branch or other deposit facility, office relocation, a merger or
an acquisition of bank shares. The Financial Institutions
Reform, Recovery and Enforcement Act of 1989 amended the CRA to
require, among other things, that the OCC make publicly
available the evaluation of a banks record of meeting the
credit needs of its entire community, including low and moderate
income neighborhoods. This evaluation will include a descriptive
rating like outstanding, satisfactory,
needs to improve or substantial
noncompliance and a statement describing the basis for the
rating. These ratings are publicly disclosed.

51



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Under the Bank Secrecy Act, banks and other
financial institutions are required to report to the Internal
Revenue Service currency transactions of more than $10,000 or
multiple transactions of which a bank is aware in any one day
that aggregate in excess of $10,000. Civil and criminal
penalties are provided under the Bank Secrecy Act for failure to
file a required report, for failure to supply information
required by the Bank Secrecy Act or for filing a false or
fraudulent report.

The Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) requires that institutions be
classified, based on their risk-based capital ratios into one of
five defined categories, as illustrated below: well capitalized,
adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.

|                 |                                |       |  |        |  |          |  |           |  |  |  |      |   |  |  |    | 
|---------------- | ------------------------------ | ----- |  | ------ |  | -------- |  | --------- |  |  |  | ---- | - |  |  | -- | 
|                 |                                | Total |  | Tier 1 |  |          |  | Under a  
|                 |                                | Risk  |  | Risk   |  | Tier 1   |  | Capital  
|                 |                                | Based |  | Based  |  | Leverage |  | Order or 
|                 |                                | Ratio |  | Ratio  |  | Ratio    |  | Directive
|                 |                                |       |  |        |  |          |  |          
|Capital Category |                                |       |  |        |  |          |  |           |  |  |  |      |   |  |  |   
|                 | Well capitalized               |       |  | 310.0  |  |          |  | 36.0      |  |  |  | 35.0 |   |  |  | NO | 
|                 | Adequately capitalized         |       |  | 3 8.0  |  |          |  | 34.0      |  |  |  | 34.0 | * |  |  |    | 
|                 | Undercapitalized               |       |  | < 8.0  |  |          |  | <4.0      |  |  |  | <4.0 | * |  |  |    | 
|                 | Significantly undercapitalized |       |  | < 6.0  |  |          |  | <3.0      |  |  |  | <3.0 |   |  |  |    | 
|                 | Critically undercapitalized    |       |  |        |  |          |  |           |  |  |  | <2.0 |   |  |  |    | 



---



|  |                                                                        
|- | -----------------------------------------------------------------------
|* | 3.0 for those banks having the highest available
    regulatory rating.

In the event an institutions capital
deteriorates to the undercapitalized category or below, FDICIA
prescribes an increasing amount of regulatory intervention,
including: the institution of a capital restoration plan and a
guarantee of the plan by a parent institution; and the placement
of a hold on increases in assets, number of branches or lines of
business. If capital has reached the significantly or critically
undercapitalized levels, further material restrictions can be
imposed, including restrictions on interest payable on accounts,
dismissal of management and, in critically undercapitalized
situations, appointment of a receiver. For well capitalized
institutions, FDICIA provides authority for regulatory
intervention where the institution is deemed to be engaging in
unsafe or unsound practices or receives a less than satisfactory
examination report rating for asset quality, management,
earnings or liquidity. All but well capitalized institutions are
prohibited from accepting brokered deposits without prior
regulatory approval. Under FDICIA, financial institutions are
subject to increased regulatory scrutiny and must comply with
certain operational, managerial and compensation standards to be
developed by Federal Reserve Board regulations. FDICIA also
requires the regulators to issue new rules establishing certain
minimum standards to which an institution must adhere including
standards requiring a minimum ratio of classified assets to
capital, minimum earnings necessary to absorb losses and minimum
ratio of market value to book value for publicly held
institutions. Additional regulations are required to be
developed relating to internal controls, loan documentation,
credit underwriting, interest rate exposure, asset growth and
excessive compensation, fees and benefits.

Annual full-scope, on site regulatory
examinations are required for all the FDIC-insured institutions
except institutions with assets under $100 million which
are well capitalized, well-managed and not subject to a recent
change in control, in which case, the examination period is
every 18 months. Banks with total assets of
$500 million or more, as of the beginning of fiscal year
1993, are required to submit to their supervising federal and
state banking agencies a publicly available annual audit report.
The independent accountants of such banks are required to attest
to the accuracy of managements report regarding the
internal control structure of the bank. In addition, such banks
also are required to have an independent audit committee
composed of outside directors who are independent of management,
to review with management and the independent accountants, the
reports that must be submitted to the bank regulatory agencies.
If the independent accountants resign or are dismissed, written
notification must be given to the Banks supervising
government banking agencies. These accounting and reporting
reforms do not apply to an institution such as a bank with total
assets at the beginning of its fiscal year of less than
$500 million, such as CNB or SNB.

52



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FDICIA also requires that banking agencies
reintroduce loan-to-value ratio regulations which were
previously repealed by the 1982 Act. Loan-to-values limit the
amount of money a financial institution may lend to a borrower,
when the loan is secured by real estate, to no more than a
percentage, set by regulation, of the value of the real estate.

A separate subtitle within FDICIA, called the
Bank Enterprise Act of 1991, requires
truth-in-savings on consumer deposit accounts so
that consumers can make meaningful comparisons between the
competing claims of banks with regard to deposit accounts and
products. Under this provision, a bank is required to provide
information to depositors concerning the terms of their deposit
accounts, and in particular, to disclose the annual percentage
yield. The operational cost of complying with the
Truth-In-Savings law had no material impact on liquidity,
capital resources or reported results of operations.

While the overall impact of fully implementing
all provisions of the FDICIA cannot be accurately calculated,
Management believes that full implementation of the FDICIA had
no material impact on liquidity, capital resources or reported
results of operation in future periods.

From time to time, various types of federal and
state legislation have been proposed that could result in
additional regulation of, and restriction on, the business of
the Banks. It cannot be predicted whether any such legislation
will be adopted or, if adopted, how such legislation would
affect the business of the Banks. As a consequence of the
extensive regulation of commercial banking activities in the
United States, the Banks business is particularly
susceptible to being affected by federal legislation and
regulations that may increase the costs of doing business.



|        |           
|------- | ----------
|Item 2. | Properties

The principal executive offices of the
Corporation and of HNB are located in Harleysville, Pennsylvania
in a two-story office building owned by HNB, built in 1929. HNB
also owns the buildings in which twelve of its branches are
located and leases space for the other eleven branches from
unaffiliated third parties under leases expiring at various
times through 2036. The principal executive offices of CNB are
located in Lansford, Pennsylvania in a two-story office building
owned by CNB. Citizens owns nine of the buildings where its
branches are located and leases two branches. The principal
executive offices of SNB are located in Pottstown, Pennsylvania,
in a building leased by SNB. SNB leases five branches, and owns
its Pottstown Center branch. HNC Investment Company leases an
office in Wilmington, Delaware. HNC Reinsurance Company leases
an office in Phoenix, Arizona.

|                |  |                                                  |  |              |        | 
|--------------- |  | ------------------------------------------------ |  | ------------ | ------ | 
|Office          |  | Office Location                                  |  | Owned/Leased
|                |  |                                                  |  |             
|Harleysville    |  | 483 Main Street, Harleysville, PA                |  |              | Owned  | 
|Skippack        |  | Route 73, Skippack, PA                           |  |              | Owned  | 
|Limerick        |  | Ridge Pike, Limerick, PA                         |  |              | Owned  | 
|North Penn      |  | Welsh & North Wales Rd., North Wales, PA         |  |              | Owned  | 
|Gilbertsville   |  | Gilbertsville Shopping Center, Gilbertsville, PA |  |              | Leased | 
|Hatfield        |  | Snyder Square, Hatfield, PA                      |  |              | Leased | 
|North Broad     |  | North Broad Street, Lansdale, PA                 |  |              | Owned  | 
|Marketplace     |  | Marketplace Shopping Center, Lansdale, PA        |  |              | Leased | 
|Normandy Farms  |  | Morris Road, Blue Bell, PA                       |  |              | Leased | 
|Horsham         |  | Babylon Business Center, Horsham, PA             |  |              | Leased | 
|Meadowood       |  | Route 73, Worcester, PA                          |  |              | Leased | 
|Collegeville    |  | 364 Main Street, Collegeville, PA                |  |              | Owned  | 
|Sellersville    |  | 209 North Main Street, Sellersville, PA          |  |              | Owned  | 
|Trainers Corner |  | Trainers Corner Center, Quakertown, PA           |  |              | Leased | 
|Quakertown Main |  | 224 West Broad Street, Quakertown, PA            |  |              | Owned  | 
|Spring House    |  | 1017-1031 N. Bethlehem Pike, Spring House, PA    |  |              | Owned  | 

53



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##### 



|                      |  |                                              |  |              |        | 
|--------------------- |  | -------------------------------------------- |  | ------------ | ------ | 
|Office                |  | Office Location                              |  | Owned/Leased
|                      |  |                                              |  |             
|Red Hill              |  | 400 Main Street, Red Hill, PA                |  |              | Owned  | 
|Doylestown            |  | 500 East State Road, Doylestown, PA          |  |              | Leased | 
|Audubon               |  | 2624 Egypt Road, Audubon, PA                 |  |              | Owned* | 
|Chalfont              |  | 251 West Butler Avenue, Chalfont, PA         |  |              | Leased | 
|Royersford            |  | 440 W. Linfield-Trappe Road, Royersford, PA  |  |              | Owned* | 
|Souderton             |  | 702 Route 113, Souderton, PA                 |  |              | Leased | 
|Foulkeways            |  | 1120 Meetinghouse Road, Gwynedd, PA          |  |              | Leased | 
|Citizens              |  | 13-15 West Ridge Street, Lansford, PA        |  |              | Owned  | 
|Summit Hill           |  | 2 East Ludlow Street, Summit Hill, PA        |  |              | Owned  | 
|Lehighton             |  | 904 Blakeslee Blvd, Lehighton, PA            |  |              | Owned  | 
|Farmers & Merchants   |  | 1001 Main Street, Honesdale, PA              |  |              | Owned  | 
|McAdoo                |  | 25 North Kennedy Drive, McAdoo, PA           |  |              | Owned  | 
|Slatington            |  | 502 Main Street, Slatington, PA              |  |              | Owned  | 
|Slatington Handi-Bank |  | 705 Main Street, Slatington, PA              |  |              | Owned  | 
|Lehigh Township       |  | 4421 Lehigh Drive, Walnutport, PA            |  |              | Owned  | 
|Palmerton             |  | 372 Delaware Avenue, Palmerton, PA           |  |              | Owned  | 
|Kresgeville           |  | Route 209, Kresgeville, PA                   |  |              | Leased | 
|Allentown             |  | 1602-1604 Allen Street, Allenton, PA         |  |              | Leased | 
|Pottstown             |  | One Security Plaza, Pottstown, PA            |  |              | Leased | 
|Pottstown             |  | 1450 East High Street, Pottstown, PA         |  |              | Leased | 
|Pottstown             |  | 930 North Charlotte Street, Pottstown, PA    |  |              | Leased | 
|Pottstown             |  | Rt. 100 and Shoemaker Road, Pottstown, PA    |  |              | Owned* | 
|Boyertown             |  | Rt. 100 and Baus Road, Boyertown, PA         |  |              | Leased | 
|Douglassville         |  | 1191 Ben Franklin Parkway, Douglassville, PA |  |              | Leased | 



---



|  |                                                                    
|- | -------------------------------------------------------------------
|* | Branch buildings are owned by the Banks and the
    land is leased.

In managements opinion, all of the above
properties are in good condition and are adequate for the
Registrants and the Banks purposes.

Legal Proceedings

Management, based on consultation with the
Corporations legal counsel, is not aware of any litigation
that would have a material adverse effect on the consolidated
financial position of the Corporation. There are no proceedings
pending other than the ordinary routine litigation incident to
the business of the Corporation and its subsidiaries 
Harleysville National Bank and Trust Company, Citizens National
Bank, Security National Bank, HNC Financial Company and HNC
Reinsurance Company. In addition, no material proceedings are
pending or are known to be threatened or contemplated against
the Corporation and the Banks by government authorities.

Submission of Matters to a Vote of Security
Holders

No matter was submitted during the fourth quarter
of 2002 to a vote of holders of the Corporations Common
Stock.

Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure

None.

54



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##### 



Executive Officers of Registrant


The following listing sets forth the name, age
(as of February 28, 2003) and principal position regarding
the Executive Officers of the Corporation

|                      |  |     |    |          |  |                                                                                                                                                    
|--------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Name                  |  | Age |    | Position
|                      |  |     |    |         
|Walter E. Daller, Jr. |  |     | 63 |          |  | Chairman of the Board, President and Chief
    Executive Officer of the Corporation.                                                               
|Demetra M. Takes      |  |     | 52 |          |  | President and Chief Executive Officer of
    Harleysville since 1999, prior position was President and Chief
    Operating Officer of Harleysville.
|Thomas D. Oleksa      |  |     | 49 |          |  | President and Chief Executive Officer of Citizens
    National Bank.                                                                               
|Fred C. Reim, Jr.     |  |     | 59 |          |  | President and Chief Executive Officer of Security
    National Bank since 1998, prior position was Senior Vice
    President of Harleysville.      
|Gregg J. Wagner       |  |     | 42 |          |  | Executive Vice President and Chief Financial
    Officer since 2000, prior position was Senior Vice President of
    Finance.                      
|Mikkalya B. Murray    |  |     | 47 |          |  | Executive Vice President and Chief Credit Officer
    since 2000, prior position was Senior Vice President of Loan
    Administration.             

The rules of the Securities and Exchange
Commission require that the corporation disclose late filings of
reports of stock ownership (and changes in stock ownership) by
its directors and executive officers. To the best of the
corporations knowledge, the following persons
inadvertently missed Form 4 filing deadlines:.



| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Walter R. Bateman, II failed to timely file a
    report for the purchase of 500 shares during May 2002.                                                      
|
| |  | Stephanie S. Mitchell failed to timely file a
    report for the purchase of 3,175 shares by her company,
    R.C. Smith Industries, Inc., for September 2002.

55



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Exhibits

|        |        |                         |  |                                                                                                                                                                                                                                            
|------- | ------ | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                        
|No.     |        | Description of Exhibits
|        |        |                        
|        | (3.1)  |                         |  | Harleysville National Corporation Articles of
    Incorporation, as amended. (Incorporated by reference to
    Exhibit 3(a) to the Corporations Registration
    Statement No. 33-65021 on Form S-4, as filed on
    December 14, 1995.)  
|        | (3.2)  |                         |  | Harleysville National Corporation By-laws.
    (Incorporated by reference to Exhibit 3(b) to the
    Corporations Registration Statement No. 33-65021 on
    Form S-4, as filed on December 14, 1995.)                                    
|        | (10.1) |                         |  | Harleysville National Corporation 1993 Stock
    Incentive Plan. (Incorporated by Reference to Exhibit 4.3
    of Registrants Registration Statement No. 33-57790 on
    Form S-8, filed with the Commission on October 1,
    1993.)     
|        | (10.2) |                         |  | Harleysville National Corporation Stock Bonus
    Plan. (Incorporated by Reference to Exhibit 99A of
    Registrants Registration Statement No. 33-17813 on
    Form S-8, filed with the Commission on December 13,
    1996.)            
|        | (10.3) |                         |  | Supplemental Executive Retirement Plan.
    (Incorporated by Reference to Exhibit 10.3 of
    Registrants Annual Report in Form 10-K for the year
    ended December 31, 1997, filed with the Commission on
    March 27, 1998.)          
|        | (10.4) |                         |  | Walter E. Daller, Jr., Chairman, President and
    Chief Executive Officers employment agreement.
    (Incorporated by Reference to Registrants Registration
    Statement on Form 8-K, filed with the Commission on
    March 25, 1999.)
|        | (10.5) |                         |  | Demetra M. Takes, President and Chief Executive
    Officer of Harleysville employment agreement. (Incorporated by
    Reference to Registrants Registration Statement on
    Form 8-K, filed with the Commission on March 25, 1999.)     
|        | (10.6) |                         |  | Vernon L. Hunsberger, Senior Vice President/CFO
    and Cashiers employment agreement. (Incorporated by
    Reference to Registrants Registration Statement on
    Form 8-K, filed with the Commission on March 25, 1999.)               
|        | (10.7) |                         |  | Harleysville National Corporation 1998 Stock
    Incentive Plan. (Incorporated by Reference to Registrants
    Registration Statement No. 333-79971 on Form S-8 filed
    with the Commission on June 4, 1999.)                           
|        | (10.8) |                         |  | Harleysville National Corporation 1998
    Independent Directors Stock Option Plan. (Incorporated by
    Reference to Registrants Registration Statement
    No. 333-79973 on Form S-8 filed with the Commission on
    June 4, 1999.)    
|        | (21)   |                         |  | Subsidiaries of Registrant.                                                                                                                                                                                                                
|        | (23)   |                         |  | Consent of Grant Thornton LLP, Independent
    Certified Public Accountants.                                                                                                                                                               
|        | (b)    |                         |  | Reports on Form 8-K During the quarter ended
    December 31, 2002, the Registrant filed a Form 8-K
    containing the third quarter of 2002 earnings press release.                                                                       
|        | (99.1) |                         |  | Certification. Walter E. Daller, Jr., Chairman,
    President and Chief Executive Officer.                                                                                                                                                 
|        | (99.2) |                         |  | Certification. Gregg J. Wagner, Executive Vice
    President and Chief Financial Officer.                                                                                                                                                  
|        | (99.3) |                         |  | Managements Statement of Responsibility.                                                                                                                                                                                                  

56



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SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.



| |                                  
| | ---------------------------------
| | HARLEYSVILLE NATIONAL CORPORATION



| |     |                         
| | --- | ------------------------
| | By: | /s/WALTER E. DALLER, JR.

| |                      
| | ---------------------
| |                      
| | Walter E. Daller, Jr.
| | President            

Date: February 28, 2003

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                               |  |                                                                                                             |  |                  
|---------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | -----------------
|Signature                                      |  | Title                                                                                                       |  | Date             
|                                               |  |                                                                                                             |  |                  
|/s/ WALTER R. BATEMAN IIWalter R. Bateman II   |  | Director                                                                                                    |  | February 28, 2003
|                                              
|/s/ LEEANN BERGEYLeeAnn Bergey                 |  | Director                                                                                                    |  | February 28, 2003
|                                              
|/s/ WALTER E. DALLER, JR.Walter E. Daller, Jr. |  | Chairman of the Board, President and Chief
    Executive Officer and Director (Principal Executive Officer) |  | February 28, 2003
|                                              
|/s/ HAROLD A. HERRHarold A. Herr               |  | Director                                                                                                    |  | February 28, 2003
|                                              
|/s/ GREGG J. WAGNERGregg J. Wagner             |  | Treasurer (Principal Financial and Accounting
    Officer)                                                  |  | February 28, 2003
|                                              
|Stephanie S. Mitchell                          |  | Director                                                                                                    |  | February 28, 2003
|                                              
|/s/ HENRY M. POLLAKHenry M. Pollak             |  | Director                                                                                                    |  | February 28, 2003
|                                              
|/s/ PALMER E. RETZLAFFPalmer E. Retzlaff       |  | Director                                                                                                    |  | February 28, 2003
|                                              
|/s/ JAMES A. WIMMERJames A. Wimmer             |  | Director                                                                                                    |  | February 28, 2003
|                                              
|/s/ WILLIAM M. YOCUMWilliam M. Yocum           |  | Director                                                                                                    |  | February 28, 2003

57



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##### 



EXHIBIT INDEX

| |        |         |  |                                                                                           
| | ------ | ------- |  | ------------------------------------------------------------------------------------------
| |        | Exhibit
| |        |        
| | (13)   |         |  | Excerpts from the Corporations 2002 Annual
    Report to Shareholders                    
| | (21)   |         |  | Subsidiaries of Registrant.                                                               
| | (23)   |         |  | Consent of Grant Thornton LLP, Independent
    Certified Public Accountants.              
| | (99.1) |         |  | Certification. Walter E. Daller, Jr., Chairman,
    President and Chief Executive Officer.
| | (99.2) |         |  | Certification. Gregg J. Wagner, Executive Vice
    President and Chief Financial Officer. 
| | (99.3) |         |  | Managements Statement of Responsibility.                                                 

58