UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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Form 10-K

|(Mark One) |                                                                                                                                                   
|---------- | --------------------------------------------------------------------------------------------------------------------------------------------------
|ý          | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2004.                 
|OR        
|o          | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period
from            to            .

Commission file number 0-15237

Harleysville National Corporation(Exact name of registrant as specified in its charter)

|Pennsylvania(State or other jurisdiction of incorporation or organization)          |  | 23-2210237(I.R.S. Employer Identification No.)
|----------------------------------------------------------------------------------- |  | ----------------------------------------------
|483 Main Street,
Harleysville, Pennsylvania(Address of principal executive offices) |  | 19438(Zip Code)                               
|(215) 256-8851Registrant's telephone number, including area code:                  
|Securities registered pursuant to Section 12(b) of the Act: None                   
|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 ý    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

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



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The aggregate market value of the Registrant's Common Stock held by non-affiliates is $573,832,670 based on the June 30, 2004 closing price of the Registrant's Common
Stock of $24.38 per share (restated for stock dividend).

As
of February 23, 2005, there were 26,230,056 outstanding shares of the Registrant's Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE:

HARLEYSVILLE NATIONAL CORPORATION

FORM 10-K

INDEX

|         |            |    |                                                                                                              | Page
|-------- | ---------- | -- | ------------------------------------------------------------------------------------------------------------ | ----
|Part I   |            | 4 
|         | Item 1.    |    | Business                                                                                                     |     
|         | Item 2.    |    | Properties                                                                                                   |     
|         | Item 3.    |    | Legal Proceedings                                                                                            |     
|         | Item 4.    |    | Submission of Matters to a Vote of Security Holders                                                          |     
|Part II  |            | 12
|         | Item 5.    |    | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |     
|         | Item 6.    |    | Selected Financial Data                                                                                      |     
|         | Item 7.    |    | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |     
|         | Item 7A.   |    | Quantitative and Qualitative Disclosures About Market Risk                                                   |     
|         | Item 8.    |    | Financial Statements and Supplementary Data                                                                  |     
|         | Item 9.    |    | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |     
|         | Item 9A.   |    | Controls and Procedures                                                                                      |     
|Part III |            | 78
|         | Item 10.   |    | Directors and Executive Officers of the Registrant                                                           |     
|         | Item 11.   |    | Executive Compensation                                                                                       |     
|         | Item 12.   |    | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |     
|         | Item 13.   |    | Certain Relationships and Related Transactions                                                               |     
|         | Item 14.   |    | Principal Accounting Fees and Services                                                                       |     
|Part IV  |            | 79
|         | Item 15.   |    | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                             |     
|         | Signatures |    | 82                                                                                                          

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, and in
documents that we incorporate by reference, 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:



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

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PART I

Item 1.    Business

Harleysville National Corporation (the Corporation), a Pennsylvania 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 (the Bank or Harleysville National Bank), established in 1909, a wholly owned subsidiary of the Corporation. The
Corporation is registered as a bank holding company under the Bank Holding Company Act of 1956.

Since
commencing operations, the Corporation's business has consisted primarily of providing financial services through its subsidiaries and has acquired seven financial institutions
since 1991. The Corporation is also the parent holding company of HNC Financial Company and HNC Reinsurance Company. HNC Financial Company was incorporated on March 17, 1997 as a Delaware
Corporation and its principal business function is to expand the investment opportunities of the Corporation. HNC Reinsurance Company was incorporated on March 30, 2001 as an Arizona
Corporation and reinsures consumer loan credit life and accident and health insurance.

The
Bank is a national banking association under the supervision of the Office of the Comptroller of the Currency (the OCC). The Corporation's and the Bank's legal headquarters are
located at 483 Main Street, Harleysville, Pennsylvania 19438. 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.

The
Bank provides a full range of banking services including loans and deposits, investment management and trust and investment advisory services to individual and corporate customers
located in eastern Pennsylvania The Bank engages 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. Deposits are
insured by the Federal Deposit Insurance Corporation to the extent provided by law. The Bank has 45 branch offices located in Montgomery, Bucks, Chester, Berks, Carbon, Wayne, Monroe, Lehigh,
Northampton and Schuylkill counties, Pennsylvania. Cumberland Advisors, Inc. (Cumberland), a Registered Investment Advisor, has two offices located in New Jersey.

The
Bank enjoys a stable base of core deposits and is a leading community bank in its service areas. The Bank believes it has gained its 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 Bank one of their highest priorities and emphasizes this objective with
extensive training and sales incentive programs. The Bank maintains close contact with the local business community to monitor commercial lending needs and believes it responds to customer requests
quickly and with flexibility. Management believes these competitive strengths are reflected in the Corporation's results of operations.

On
April 30, 2004, the Corporation completed its acquisition of Millennium Bank, which was merged with and into Harleysville National Bank. Millennium Bank was based in Malvern,
Pennsylvania with four banking offices, specializing in commercial lending and client relationship banking along with Cumberland, a Registered Investment Advisor specializing in money management fixed
income and equities, using exchange traded funds.

Effective
March 29, 2004, the charters of the Corporation's subsidiary banks, Security National Bank and Citizens National Bank, were combined into the largest subsidiary,
Harleysville National Bank. In combining the three banks, the Corporation reorganized internally to improve efficiencies and productivity, thus realizing cost savings. Streamlined operations will
enable our employees to be more

4

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responsive
to our customers. Our customers will be able to bank at any one of our 45 offices throughout 10 counties in Eastern Pennsylvania, no matter where they live or travel in the area.

As
of December 31, 2004, the Corporation had total assets of $3.02 billion, total shareholders' equity of $270.5 million and total deposits of $2.21 billion.

As
of December 31, 2004, the Corporation and the Bank employed approximately 689 full-time equivalent employees. The Corporation provides a variety of employment
benefits and considers its relationships with its employees to be satisfactory.

Competition

The Bank competes actively with other eastern Pennsylvania financial institutions, many larger than the Bank, as well as with financial and
non-financial institutions headquartered elsewhere. Commercial banks, savings banks, savings and loan associations, credit unions, and money market funds actively compete for deposits and
loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors with respect to one or more services they render. The Bank is generally competitive with
all competing institutions in its service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts, interest rates charged on loans and fees for
trust and investment advisory services. At December 31, 2004, the Bank's legal lending limit to a single customer was $36.1 million. Many of the institutions with which the Bank competes
are able to lend significantly more than this amount 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 non-banking activities than 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
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 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 Bank's operating costs. Unlike many industrial companies, however, substantially all of the Bank's assets
and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation's and the Bank's

5

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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 to member bank deposits. These instruments are used in varying combinations to influence 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
Bank is a member 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 Bank's operations in the future. The effect of such policies and regulations upon the future business and earnings of the
Corporation and the Bank 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 Bank are a party to
any pending legal proceeding pursuant to any environmental statute, nor are the Corporation and the Bank aware of any circumstances that may give rise to liability under any such statute.

Supervision and RegulationBanks

The operations of the Bank 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 Bank's operations are also subject to regulations of the OCC, the Federal Reserve and the FDIC. The primary supervisory
authority of the Bank is the OCC, who regularly examines the Bank. 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.

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

As
a subsidiary bank of a bank holding company, the Bank is 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,

6

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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 Bank) 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.

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 Risk
Based
Ratio |   | Tier 1
Risk
Based
Ratio |   | Tier 1
Leverage
Ratio |      | Under a
Capital
Order or
Directive
|------------------------------ |  | ---------------------- | - | ----------------------- | - | --------------------- | ---- | ----------------------------------
|Capital category               |  |                        |   |                         |   |                       |      |                                   
|Well capitalized               |  | 3 10.0                 | % | 3 6.0                   | % | 3 5.0                 | %    | NO                                
|Adequately capitalized         |  | 3 8.0                  | % | 3 4.0                   | % | 3 4.0                 | %*   |                                   
|Undercapitalized               |  | < 8.0                  | % | < 4.0                   | % | < 4.0                 | %(1) |                                   
|Significantly undercapitalized |  | < 6.0                  | % | < 3.0                   | % | < 3.0                 | %    |                                   
|Critically undercapitalized    |  |                        |   |                         |   | < 2.0                 | %    |                                   

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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

7

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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 bank's 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.

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 Bank. It
cannot be predicted whether any such legislation will be adopted or, if adopted, how such legislation would affect the business of the Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, the Bank's business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business.

Additional Information

The Corporation's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on the Corporation's website
(www.hncbank.comunder "Investor Information") as soon as reasonably practicable after the Corporation electronically files such material with, or
furnishes it to the Securities and Exchange

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Commission.
These filings are also accessible on the Securities and Exchange Commission's website (www.sec.gov). In addition, the Corporation makes
available onwww.hncbank.comunder "Investor InformationCorporate Governance" the following: 1) Audit Committee Charter,
2) Code of Ethics, which applies to all directors and all employees, 3) Whistleblower Policy and 4) Nominating Committee Charter.

Item 2.  Properties

The principal executive offices of the Corporation and of the Bank are located in Harleysville, Pennsylvania in a two-story office building owned by
the Bank, built in 1929. The Bank also owns the buildings in which twenty-three of its branches are located and leases space for the other twenty-three branches from unaffiliated third parties under
leases expiring at various times through 2036. The Bank leases office space for commercial business development in Lansdale, Pennsylvania. HNC Investment Company leases an office in Wilmington,
Delaware. HNC Reinsurance Company leases an office in Phoenix, Arizona. Cumberland Advisors leases an office in Vineland, New Jersey and leases office

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space
in Livingston, New Jersey. HNB Auto Sales re-markets off lease vehicles at a Bank owned property in Harleysville, Pennsylvania.

|Office                |  | Office Location                                  |  | Owned/Leased
|--------------------- |  | ------------------------------------------------ |  | ------------
|Harleysville          |  | 483 Main Street, Harleysville, PA                |  | Owned       
|Harleysville          |  | 278 Main Street, Harleysville, PA                |  | Leased      
|Skippack              |  | 3893 Skippack Pike, Skippack, PA                 |  | Owned       
|Limerick              |  | 260 West Ridge Pike, Limerick, PA                |  | Owned       
|North Wales           |  | 1498 North Wales Road, North Wales, PA           |  | Owned       
|Gilbertsville         |  | 1050 East Philadelphia Avenue, Gilbertsville, PA |  | Leased      
|Hatfield              |  | 1632 Cowpath Road, Hatfield, PA                  |  | Leased      
|North Broad           |  | 1804 North Broad Street, Lansdale, PA            |  | Owned       
|Marketplace           |  | 1551 Valley Forge Road, Lansdale, PA             |  | Leased      
|Normandy Farms        |  | Morris Road & Route 202, Blue Bell, PA           |  | Leased      
|Horsham               |  | 955 Horsham Road, Horsham, PA                    |  | Leased      
|Meadowood             |  | 3205 Skippack Pike, Worcester, PA                |  | Leased      
|Collegeville          |  | 364 Main Street, Collegeville, PA                |  | Owned       
|Sellersville          |  | 209 North Main Street, Sellersville, PA          |  | Owned       
|Trainers Corner       |  | 120 North West End Boulevard, Quakertown, PA     |  | Leased      
|Quakertown Main       |  | 224 West Broad Street, Quakertown, PA            |  | Owned       
|Spring House          |  | 1017 North Bethlehem Pike, Spring House, PA      |  | Owned       
|Red Hill              |  | 400 Main Street, Red Hill, PA                    |  | Owned       
|Doylestown            |  | 500 East Farm Lane, Doylestown, PA               |  | Leased      
|Audubon               |  | 2624 Egypt Road, Norristown, PA                  |  | Owned(1)    
|Chalfont              |  | 251 West Butler Avenue, Chalfont, PA             |  | Leased      
|Royersford            |  | 440 W. Linfield-Trappe Road, Royersford, PA      |  | Owned(1)    
|Souderton             |  | 702 Route 113, Souderton, PA                     |  | Leased      
|Foulkeways            |  | 1120 Meetinghouse Road, Gwynedd, PA              |  | Leased      
|Malvern(2)            |  | 30 Valley Stream Parkway, Malvern, PA            |  | Leased      
|Malvern               |  | 83 Lancaster Avenue, Malvern, PA                 |  | Leased      
|Blue Bell(2)          |  | 721 Skippack Pike, Blue Bell, PA                 |  | Leased      
|Wyomissing(2)         |  | 2800 State Hill Road, Wyomissing, PA             |  | Owned       
|Lansford              |  | 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       
|Honesdale             |  | 1001 Main Street, Honesdale, PA                  |  | Owned       
|McAdoo                |  | 25 North Kennedy Drive, McAdoo, PA               |  | Owned       
|Slatington            |  | 502 Main Street, Slatington, PA                  |  | Owned       
|Slatington Handi-Bank |  | 701-705 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(2)          |  | 1602 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(1)    
|Pottstown             |  | 2 Glocker Way, Pottstown, PA                     |  | Leased      
|Boyertown             |  | Rt. 100 and Baus Road, Boyertown, PA             |  | Leased      
|Douglassville         |  | 1191 Ben Franklin Parkway, Douglassville, PA     |  | Leased      

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10

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In
management's opinion, all of the above properties are in good condition and are adequate for the Corporation's and the Bank's purposes.

Item 3.    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the 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 Bank by government authorities.

Item 4.    Submission of Matters to a Vote of Security Holders

No matter was submitted during the fourth quarter of 2004 to a vote of holders of the Corporation's Common Stock.

11

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The following table sets forth high and low closing sales prices for the Corporation's common stock and quarterly cash dividends paid per share for 2004 and 2003.
The Corporation's stock is traded under the symbol "HNBC" on the NASDAQ National Market Systems. All share information has been restated to reflect stock dividends and splits. For certain limitations
on the Bank's ability to pay dividends to the Corporation, see Item 1, "Supervision and RegulationBank" and Item 8, Note 18, "Notes to Consolidated Financial
StatementsRegulatory Capital."



|2004              |  | High Price |       | Low Price |   | Cash dividends per share
|----------------- |  | ---------- | ----- | --------- | - | ------------------------
|First Quarter(1)  |  | $          | 29.69 |           | $ | 24.80                   
|Second Quarter(1) |  |            | 27.87 |           |   | 22.49                   
|Third Quarter     |  |            | 25.74 |           |   | 21.24                   
|Fourth Quarter    |  |            | 28.45 |           |   | 23.86                   

|2003              |  | High Price |       | Low Price |   | Cash dividends per share
|----------------- |  | ---------- | ----- | --------- | - | ------------------------
|First Quarter(2)  |  | $          | 19.85 |           | $ | 18.54                   
|Second Quarter(2) |  |            | 22.17 |           |   | 19.04                   
|Third Quarter(1)  |  |            | 24.58 |           |   | 19.98                   
|Fourth Quarter(1) |  |            | 30.92 |           |   | 24.10                   

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At December 31, 2004, there were 3,617 shareholders of record, not including the number of persons or entities whose stock is held in
nominee or "street" name through various brokerage firms and banks.

Information
on the Corporation's equity compensation plans included under Item 8, Note 1, "Notes to Consolidated Financial StatementsStock Based Compensation,
Note 13, "Stock Options," and the 2005 Proxy Statement under the caption, "Equity Compensation Plan Information, is incorporated herein by reference.

The
Corporation has a stock repurchase program that permits the repurchase of up to five percent of its outstanding common stock. The repurchased shares will be used for general
corporate purposes. The following table presents the repurchase activity of the stock repurchase program during the fourth quarter of 2004:



|                    |       | Total Number of
Common Shares
Purchased |        | Weighted
Average
Price Paid
Per Share |       | Total Number of Shares Purchased as Part of Publicly Announced Plans |        | Maximum Number of
Shares that may
yet be
Purchased
under the Plans(1)
|------------------- | ----- | --------------------------------------- | ------ | ------------------------------------- | ----- | -------------------------------------------------------------------- | ------ | ---------------------------------------------------------------------
|October 1-31, 2004  |       | 3,100                                   |        | $                                     | 24.85 |                                                                      | 3,100  |                                                                      
|November 1-30, 2004 |       |                                        |        |                                       |      |                                                                      |       |                                                                      
|December 1-31, 2004 |       | 20,000                                  |        |                                       | 27.08 |                                                                      | 20,000 |                                                                      
|                    |       |                                         |        |                                       |       |                                                                      |        |                                                                      
|                    | Total |                                         | 23,100 |                                       | $     | 26.78                                                                |        | 23,100                                                               
|                    |       |                                         |        |                                       |       |                                                                      |        |                                                                      

---

12

---



Item 6.    Selected Financial Data

|                                                    |  | Year Ended December 31, |           
|--------------------------------------------------- |  | ----------------------- | ----------
|
|
|Income and expense                                  |  |                         |           
|Interest income                                     |  | $                       | 127,729   
|Interest expense                                    |  |                         | 42,638    
|                                                    |  |                         |           
|Net interest income                                 |  |                         | 85,091    
|Provision for loan losses                           |  |                         | 2,555     
|                                                    |  |                         |           
|Net interest income after provision for loan losses |  |                         | 82,536    
|Noninterest income                                  |  |                         | 28,158    
|Noninterest expense                                 |  |                         | 59,561    
|                                                    |  |                         |           
|Income before income tax expense                    |  |                         | 51,133    
|Income tax expense                                  |  |                         | 12,566    
|                                                    |  |                         |           
|Net income                                          |  | $                       | 38,567    
|                                                    |  |                         |           
|Per share information(1)                            |  |                         |           
|Basic earnings                                      |  | $                       | 1.49      
|Diluted earnings                                    |  |                         | 1.44      
|Cash dividends paid                                 |  |                         | 0.72      
|Basic average common shares outstanding             |  |                         | 25,855,230
|Diluted average common shares outstanding           |  |                         | 26,726,180
|Average balance sheet                               |  |                         |           
|Loans                                               |  | $                       | 1,625,419 
|Investments                                         |  |                         | 941,910   
|Other interest-earning assets                       |  |                         | 41,064    
|Total assets                                        |  |                         | 2,773,405 
|Deposits                                            |  |                         | 2,094,998 
|Borrowed funds                                      |  |                         | 372,141   
|Shareholders' equity                                |  |                         | 251,963   
|Balance sheet at year-end                           |  |                         |           
|Loans                                               |  | $                       | 1,845,802 
|Investments                                         |  |                         | 943,563   
|Other interest-earning assets                       |  |                         | 56,291    
|Total assets                                        |  |                         | 3,024,515 
|Deposits                                            |  |                         | 2,212,563 
|Borrowed funds                                      |  |                         | 488,182   
|Shareholders' equity                                |  |                         | 270,532   
|Performance ratios                                  |  |                         |           
|Return on average assets                            |  |                         | 1.39      
|Return on average equity                            |  |                         | 15.31     
|Average equity to average assets                    |  |                         | 9.08      
|Dividend payout ratio                               |  |                         | 48.16     

---

13

---



Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

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 Harleysville National Corporation (the Corporation), and its wholly owned subsidiariesHarleysville National Bank (the Bank), HNC
Financial Company and HNC Reinsurance Company. The Corporation's consolidated financial condition and results of operations consist almost entirely of the Bank's financial condition and results of
operations. Current performance does not guarantee, and may not be indicative of, similar performance in the future. The information in Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Corporation's consolidated financial statements and the accompanying footnotes under Item 8 of this report on Form 10-K.

Critical Accounting Estimates

The accounting and reporting policies of the Corporation and its subsidiaries conform to accounting principles generally accepted in the United States and general
practices with the financial services industry. The Corporation's significant accounting policies are described in Note 1of the consolidated financial statements and are essential in
understanding Management's Discussion and Analysis of Results of Operations and Financial Condition. In applying accounting policies and 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. Judgements and assumptions required by management, which have, or could have a material impact on the Corporation's financial
condition or results of operations are considered critical accounting estimates. The following is a summary of the policies the Corporation recognizes as involving critical accounting estimates:
Allowance for Loan Loss, Goodwill and Other Intangible Asset Impairment, Stock-Based Compensation, Unrealized Gains and Losses on Debt Securities Available for Sale, and Deferred Taxes.

Allowance
for Loan Losses: The Corporation maintains an allowance for loan losses at a level management believes is sufficient to absorb estimated probable credit losses. Management's
determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires
significant estimates by management. Consideration is given to a variety of factors in establishing these estimates including current and anticipated economic conditions, diversification of the loan
portfolio, delinquency
statistics, results of internal loan reviews, borrowers perceived financial and management strengths, the adequacy of underlying collateral, the dependence on collateral, or the strength of the
present value of future cash flows and other relevant factors. These factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional
provisions for loan losses may be required which may adversely affect the Corporation's results of operations in the future.

Goodwill
and Other Intangible Asset Impairment: Goodwill and other intangible assets are reviewed for potential impairment on an annual basis, or more often if events or circumstances
indicate that there may be impairment, in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Goodwill is tested for impairment at the reporting unit level and an impairment
loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Corporation employs general industry practices in evaluating the fair value of its goodwill and
other intangible assets. The Corporation calculates the fair value using a combination of the following valuations: deposit premiums based on market deals, current stock pricing tracking as a multiple
of book value, discounted cash flow of earnings with a terminal value and market multiple of earnings. No assurance can be given that future impairment tests will not result in a charge to earnings.

14

---



Stock-based
Compensation: Under SFAS No. 123 "Accounting for Stock-Based Compensation" (FAS 123), companies have a choice whether to adopt the fair value based method of
accounting for stock-based compensation or remain with the intrinsic value based method prescribed under APB Opinion No. 25, "Account for Stock Issued to Employees" (APB 25) but provide
pro-forma disclosure as if the fair value based method was applied. The Corporation chose the intrinsic value based method under APB 25 and provides pro-forma disclosure
required under FAS 123. In preparing the pro-forma disclosure, the Corporation estimates the fair value of employee stock options using a pricing model which takes into
consideration the exercise price and expected life of the options, the current price of the underlying stock and its expected volatility, the expected dividends on the stock and the current
risk-free interest rate for the expected life of the option. The Corporation's estimate of the fair value of a stock option is based on expectations derived from historical experience and
may not necessarily equate to its market value when fully vested. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" (FAS 123(R)). Under
FAS 123(R), all forms of share-based payments to employees, including employee stock options, will be treated the same as other forms of compensation by recognizing the related cost in the
income statement. Public entities (other than those filing as small business issuers) are required to apply the provisions of FAS 123(R) as of the first interim or annual reporting period that
begins after June 15, 2005. See Item 8, Note 1 "Notes to Consolidated Financial StatementsSummary of Significant Accounting Policies" for additional information.

Unrealized
Gains and Losses on Debt Securities Available for Sale: The Corporation receives estimated fair values of debt securities from independent valuation services and brokers. In
developing these fair values, the valuation services and brokers use estimates of cash flows based on historical performance of similar instruments in similar rate environments. Debt securities
available for sale are mostly comprised of mortgage-backed securities.

Deferred
Taxes: The Corporation recognizes deferred tax assets and liabilities for the future effects of temporary differences, net operating loss carryforwards, and tax credits.
Deferred tax assets are subject to management's judgment based upon available evidence that future realizations are likely. If management determines that the Corporation may not be able to realize
some or all of the net deferred tax asset in the future, a charge to income tax expense may be required to reduce the value of the net deferred tax asset to the expected realizable value.

The
Corporation has not substantively changed its application of the foregoing policies, and there have been no material changes in assumptions or estimation techniques used as compared
to prior periods.

Financial Overview

The Corporation achieved its 29th consecutive year of record earnings and the 30th consecutive year of dividend increases to
shareholders during 2004. Net income in 2004 exceeded 2003 net income by 9.2%. This increase in earnings was driven by an 11.8% growth in average earning assets and a persistent focus on controlling
expenses.

The
Corporation's 2004 net income of $38.6 million increased $3.2 million, or 9.2% from the 2003 net income of $35.3 million. Diluted earnings per share of $1.44 in
2004 were 5.1% higher than the $1.37 earned during 2003. Basic earnings per share of $1.49 for 2004 were up 5.7% from $1.41 in 2003. The financial results for 2004 include the impact of operations
from the acquisition of Millennium Bank effective April 30, 2004, and the related issuance of 946,000 (993,000 restated for stock dividend) common shares, as well as the issuance of 1,295,000
common shares for a 5% stock dividend paid on September 15, 2004. All share and per share information have been restated to reflect this stock dividend.

15

---



The
Corporation's consolidated total assets were $3.02 billion at December 31, 2004, an increase of 20.5%, or $513.6 million above the December 31, 2003 level
of $2.51 billion. Of this increase, 9.2% or $231.3 million, was attributable to the acquisition of Millennium Bank and 11.2% or $280.3 million was due to loan growth. The return
on average shareholders' equity was 15.31% in 2004 compared to 16.29% in 2003. The return on average assets was 1.39% in 2004 compared to 1.43% in 2003.

Net
interest income increased $6.0 million, or 7.5% primarily driven by higher loan levels from commercial mortgage and home equity loans. Partially offsetting these increases was
the impact of lower interest rates on loans. The net interest margin on a tax equivalent basis for 2004 was 3.55%
compared to 3.80% for 2003. Total noninterest income of $28.2 million and total noninterest expense of $59.6 million for 2004 remained relatively level compared to 2003.

The
quality of the loan portfolio is a key focus of the Corporation. Nonperforming assets, including nonaccrual loans, net assets in foreclosure and loans 90 days or more past due
was .20% of total assets at December 31, 2004, compared to .22% at December 31, 2003. The ratio of the allowance for loan losses to nonperforming loans (nonaccruing loans and loans
90 days or more past due) was 324.6% at December 31, 2004, compared to 371.7% at December 31, 2003. The provision for loan losses declined $645,000, to $2.6 million in 2004
compared to 2003. The lower provision is reflective of improved loan quality during the early part of the year and management's ongoing analysis of the loan portfolio.

Core
deposits increased 20.6% or $269.2 million, to $1.58 billion at December 31, 2004 from $1.31 billion at December 31, 2003. Of this increase, 4.6%
or $59.8 million was due to the acquisition of Millennium Bank. Total deposits increased $233.5 million for the same period, of which $151.2 million was attributable to the
acquisition of Millennium Bank. Average borrowings increased $101.8 million or 37.7%, primarily to support loan growth and the Millennium Bank acquisition.

At
March 26, 2004, the charters of the Corporation's subsidiary banks, Security National Bank and Citizens National Bank, were combined into the largest subsidiary, Harleysville
National Bank.

On
April 30, 2004, the Corporation completed the acquisition of Millennium Bank, Malvern, PA. Millennium Bank was merged into the Bank. This transaction was accounted for in
accordance with SFAS No. 141 "Business Combinations." Millennium Bank's shareholders received 946,000 (993,000 restated for stock dividend) shares of the Corporation's common stock and
$16.1 million in exchange for all outstanding common shares. Millennium Bank option holders received $2.3 million and options to acquire 284,000 shares (298,000 restated for stock
dividend) of the Corporation's common stock in exchange for all outstanding options.

For
a five-year summary of financial information, see Item 6, "Selected Financial Data," which is incorporated herein by reference.

For
quarterly information for 2004 and 2003, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of OperationsFourth Quarter 2004 Results,"
and Table 17, "Selected Quarterly Financial Data," which are incorporated herein by reference.

Investment Securities

SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" requires 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.

16

---



Investment
securities increased 2.02% to $943.6 million at December 31, 2004 from $924.9 million at December 31, 2003. The investment securities available for
sale decreased $30.1 million and the investment securities held to maturity increased $48.8 million. During 2004, $1.35 billion of securities available for sale were sold which
generated a pretax gain of $3.7 million. In comparison, $1.23 billion of securities available for sale were sold in 2003 which generated a pretax gain of $6.6 million. During the
fourth quarter of 2004, the Corporation transferred $50.0 million of obligations of states and political subdivisions from available for sale to held to maturity. The Bank intends to hold these
securities to maturity as these securities are an effective tool to lower the Corporation's effective tax rate. 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.

The
following table shows the carrying value of the Corporation's investment securities available for sale and held to maturity:



|                                          |                                                                | December 31,                                  
|----------------------------------------- | -------------------------------------------------------------- | ----------------------------------------------
|
|
|Investment securities available for sale: |                                                                |                                               
|                                          | U.S. Treasury notes                                            |                                               
|                                          | Obligations of other U.S. Government agencies and corporations |                                               
|                                          | Obligations of states and political subdivisions               |                                               
|                                          | Mortgage-backed securities                                     |                                               
|                                          | Other securities                                               |                                               
|                                          |                                                                |                                               
|                                          |                                                                | Total investment securities available for sale
|                                          |                                                                |                                               
|Investment securities held to maturity:   |                                                                |                                               
|                                          | Obligations of other U.S. Government agencies and corporations |                                               
|                                          | Obligations of states and political subdivisions               |                                               
|                                          | Mortgage-backed securities                                     |                                               
|                                          | Other securities                                               |                                               
|                                          |                                                                |                                               
|                                          |                                                                | Total investment securities held to maturity  
|                                          |                                                                |                                               

17

---



The maturity analysis of investment securities including the weighted average yield for each category as of December 31, 2004 is shown below. Actual maturities may differ from
contractual maturities because issuers and borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                                                |                           | December 31, 2004 |  
|--------------------------------------------------------------- | ------------------------- | ----------------- | -
|
|
|Investment securities available for sale                        |                           |                   |  
|Obligations of other U.S. Government agencies and corporations: |                           |                   |  
|                                                                | Fair value                |                   | $
|                                                                | Weighted average yield    |                   |  
|                                                                | Weighted average maturity |                   |  
|Obligations of states and political subdivisions:               |                           |                   |  
|                                                                | Fair value                |                   |  
|                                                                | Weighted average yield(1) |                   |  
|                                                                | Weighted average maturity |                   |  
|Mortgage-backed securities:                                     |                           |                   |  
|                                                                | Fair value                |                   |  
|                                                                | Weighted average yield    |                   |  
|                                                                | Weighted average maturity |                   |  
|Other securities:                                               |                           |                   |  
|                                                                | Fair value                |                   |  
|                                                                | Weighted average yield    |                   |  
|Weighted average maturity                                       |                           |                   |  
|Total investment securities available for sale                  |                           |                   |  
|                                                                | Fair value                |                   | $
|                                                                | Weighted average yield    |                   |  
|                                                                | Weighted average maturity |                   |  
|Investment securities held to maturity                          |                           |                   |  
|Obligations of other U.S. Government agencies and corporations: |                           |                   |  
|                                                                | Amortized cost            |                   | $
|                                                                | Weighted average yield    |                   |  
|Weighted average maturity                                       |                           |                   |  
|Obligations of states and political subdivisions:               |                           |                   |  
|                                                                | Amortized Cost            |                   |  
|                                                                | Weighted average yield(1) |                   |  
|                                                                | Weighted average maturity |                   |  
|Mortgage-backed securities:                                     |                           |                   |  
|                                                                | Amortized Cost            |                   |  
|                                                                | Weighted average yield    |                   |  
|                                                                | Weighted average maturity |                   |  
|Total investment securities held to maturity:                   |                           |                   |  
|                                                                | Amortized Cost            |                   | $
|                                                                | Weighted average yield    |                   |  
|                                                                | Weighted average maturity |                   |  

---

18

---



Loans

Loans increased $437.4 million, or 31.1% in 2004, primarily due to growth in real estate loans and consumer loans along with $157.1 million in loans
acquired in the acquisition of Millennium Bank. The growth in real estate loans was in commercial mortgages due to the Bank's strategy to be more aggressive in growing real estate loans in its primary
market. One of the Bank's strategic objectives is to increase its loan to deposit ratio by growing its loan portfolio at a faster pace than it deposits. Consumer loans grew primarily due to growth in
home equity loans and lines of credit. The planned reduction in lease financing was due to run-off and sales.

The
following table shows the composition of the Bank's loans:



|                          |       | December 31, |        
|------------------------- | ----- | ------------ | -------
|
|
|
|Real estate               |       | $            | 693,468
|Commercial and industrial |       |              | 473,514
|Consumer                  |       |              | 645,718
|Lease financing           |       |              | 33,102 
|                          |       |              |        
|                          | Total |              | $      
|                          |       |              |        

The following table details maturities and interest sensitivity of outstanding loans by type at December 31, 2004:



|                                               |       | December 31, 2004
|---------------------------------------------- | ----- | -----------------
|
|
|Real estate                                    |       | $                
|Commercial and industrial                      |       |                  
|Consumer                                       |       |                  
|Lease financing                                |       |                  
|                                               |       |                  
|                                               | Total |                  
|                                               |       |                  
|Loans with variable or floating interest rates |       | $                
|Loans with fixed predetermined interest rates  |       |                  
|                                               |       |                  
|                                               | Total |                  
|                                               |       |                  

19

---



The 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,
|------------------------------------------------ | ----- | ------------
|
|
|Nonaccrual loans                                 |       | $           
|Loans 90 days or more past due accruing interest |       |             
|                                                 |       |             
|                                                 | Total |             
|                                                 |       |             

The
Bank had no concentration of loans to individual borrowers which exceeded 10% of total loans at December 31, 2004 and 2003. The Bank actively monitors the risk of this loan
concentration. The Bank had 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, when there has been 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.

Nonperforming
assets, including nonaccrual loans, net assets in foreclosure and loans 90 days or more past due was .20% of total assets at December 31, 2004, compared to
0.22% at December 31, 2003 and 0.27% at December 31, 2002. The ratio of nonperforming loans and leases to total net loans and leases was 0.31% at December 31, 2004, compared to
0.32% at December 31, 2003 and 0.47% at December 31, 2002. These ratios reflect management's ongoing analysis of the loan portfolio.

Nonaccruing
loans increased $1.3 million to $4.7 million at December 31, 2004, as compared to December 31, 2003. The increase in nonaccruing loans was
primarily the result of increases in nonaccruing commercial real estate loans of $1.4 million and commercial and industrial loans of $514,000 partially offset by decreases in nonaccruing
residential real estate loans of $443,000. The increase in nonaccruing commercial real estate consists primarily of two loans to one borrower in the amount of $1.3 million. Nonaccruing loans
decreased $1.8 million to $3.3 million at December 31, 2003, as compared to December 31, 2002. All loan categories experienced decreases in nonaccrual loans during 2003.
The Bank's policy for interest income recognition on nonaccrual loans is to recognize income 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 Bank. The Bank will not recognize income if these factors do not exist. During 2004, interest accrued on nonaccruing loans and not recognized as interest income was
$238,000 and interest paid on nonaccruing loans of $47,000 was recognized as interest income. During 2003, interest accrued on nonaccruing loans and not recognized as interest income was $227,000, and
interest paid on nonaccruing loans of $29,000 was recognized as interest income.

Net
assets in foreclosure were $370,000 at December 31, 2004, a decrease of $565,000 from December 31, 2003. During 2004, transfers from loans to assets in foreclosure were
$586,000, disposals on foreclosed properties were $1.1 million, and charge offs of $66,000 were recorded. The December 31, 2003 net assets in foreclosure balance of $935,000, increased
$545,000 from December 31, 2002. During 2003, transfers from loans to assets in foreclosure were $1.8 million and disposals on foreclosed properties were $1.2 million. Efforts to
liquidate assets acquired in foreclosure proceed as quickly as potential buyers can be located and legal constraints permit. Foreclosed assets are

20

---



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

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, 2004, loans
past due 90 days or more and still accruing interest were $981,000, compared to $1.2 million at December 31, 2003 and $1.2 million at December 31, 2002. The decrease
in loans past due 90 days or more at December 31, 2004, compared to December 31, 2003 was due to a lower level of residential real estate loans partially offset by a higher level
of commercial real estate loans.

The
Bank uses the reserve method of accounting for loan 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 increased $1.7 million, or 10.2%, to $18.5 million
at December 31, 2004 as compared to December 31, 2003. The increase in the allowance was primarily due to loan growth and the increase in nonperforming loans of $1.3 million. The
allowance for loan losses decreased $437,000, or 2.6%, to $16.8 million at December 31, 2003, from December 31, 2002.



December 31,2004

2003

2002

2001

2000(Dollars in thousands)Nonaccrual loans

$
4,705

$
3,343

$
5,109

$
6,354

$
5,370Loans 90 days or more past due


981


1,164


1,193


1,926


514Total nonperforming loans


5,686


4,507


6,302


8,280


5,884Net assets in foreclosure


370


935


390


609


288Total nonperforming assets

$
6,056

$
5,442

$
6,692

$
8,889

$
6,172Allowance for loan losses to nonperforming loans


324.6
%

371.7
%

272.8
%

187.9
%

258.5
%Nonperforming loans to total loans


0.31
%

0.32
%

0.47
%

0.63
%

0.49
%Allowance for loan losses to total loans


1.00
%

1.19
%

1.29
%

1.18
%

1.25
%Nonperforming assets to total assets


0.20
%

0.22
%

0.27
%

0.40
%

0.32
%


21

---



Allowance for Loan Losses

A summary of the activity in the allowance for loan losses is as follows:



|                               |                                                       | December 31,            |          
|------------------------------ | ----------------------------------------------------- | ----------------------- | ---------
|
|
|Average loans                  |                                                       | $                       | 1,625,419
|                               |                                                       |                         |          
|Allowance, beginning of period |                                                       |                         | 16,753   
|                               |                                                       |                         |          
|Loans charged off:             |                                                       |                         |          
|                               | Commercial and industrial                             |                         |          
|                               | Consumer                                              |                         |          
|                               | Real estate                                           |                         |          
|                               | Lease financing                                       |                         |          
|                               |                                                       |                         |          
|                               |                                                       | Total loans charged off |          
|                               |                                                       |                         |          
|Recoveries:                    |                                                       |                         |          
|                               | Commercial and industrial                             |                         |          
|                               | Consumer                                              |                         |          
|                               | Real estate                                           |                         |          
|                               | Lease financing                                       |                         |          
|                               |                                                       |                         |          
|                               |                                                       | Total recoveries        |          
|                               |                                                       |                         |          
|                               | Net loans charged off                                 |                         |          
|                               | Reserve from Millennium Bank acquisition              |                         |          
|                               | Provision for loan losses                             |                         |          
|                               |                                                       |                         |          
|                               | Allowance, end of period                              |                         | $        
|                               |                                                       |                         |          
|                               | Ratio of net charge offs to average loans outstanding |                         |          
|                               |                                                       |                         |          

The 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, |      
|------------------------- | ----- | ------------ | -----
|
|
|
|Real estate               |       | $            | 4,923
|Commercial and industrial |       |              | 7,456
|Consumer                  |       |              | 5,515
|Lease financing           |       |              | 561  
|                          |       |              |      
|                          | Total |              | $    
|                          |       |              |      

22

---



Allowance for Loan Losses

The Bank uses the reserve method of accounting for loan losses. The balance in the allowance for loan 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. Increases to the allowance for loan and lease losses are made by charges to the provision for loan losses. Credit exposures
deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.

While
management considers the allowance for loan 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 Office of
the Comptroller of the Currency (the OCC), as an integral part of their examination process, periodically reviews the Bank's allowance for loan losses. The OCC may require the Bank to recognize
additions to the allowance for loan losses based on their judgements about information available to them at the time of their examination.

The
Bank's allowance for loan 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 loan 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
Bank's allowance for loan and lease losses components includes 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 Bank's 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 represent 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 collectibility of loans. The Bank analyzes 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 altering the risk window, to reflect current events and conditions.

The
industry concentration component is recognized as a possible factor in the estimation of loan 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.

23

---



The
historic loss model includes an imprecision component (soft factors) that reflects management's belief that there were additional inherent credit losses based on loss attributes not
adequately captured in the lagging indicators. There was a slight upward modification in the soft factors component to account for the significant growth in loan volume and size and the recognition
that credit quality statistics have shown some signs of deterioration. 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 effect 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 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. The judgmental component is allocated to the specific segments of the
portfolio based on the historic loss component.

Deposits and Borrowings

Deposits and borrowings are the primary funding sources of the Corporation. Starting in 2003, the Corporation defined a strategy to reduce higher costing time
deposits and grow lower costing core deposits (noninterest-bearing checking, interest-bearing checking, money market accounts and savings accounts.) Core deposits increased 20.6%, or
$269.2 million, to $1.58 billion at December 31, 2004 from $1.31 billion at December 31, 2003. Of this increase, 4.6% or $59.8 million was due to the
acquisition of Millennium Bank. During 2004, the largest growth in core deposits was in money market accounts. Total deposits increased $233.5 million for the same period, which was primarily
due to the growth in core deposits partially offset by a 5.3%, or $35.7 million decrease in time deposits in alignment with the Corporation's strategy.

Deposit Structure

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



|                           |                                 | December 31,   |        
|-------------------------- | ------------------------------- | -------------- | -------
|
|
|
|Demandnoninterest-bearing |                                 | $              | 312,963
|Demandinterest-bearing    |                                 |                | 289,611
|Money market and savings   |                                 |                | 824,123
|Timeunder $100,000        |                                 |                | 509,695
|Time$100,000 or greater   |                                 |                | 158,606
|                           |                                 |                |        
|                           | Total interest-bearing deposits |                |        
|                           |                                 |                |        
|                           |                                 | Total deposits |        
|                           |                                 |                |        

24

---



The
maturity distribution of certificates of deposit of $100,000 and over as of December 31, 2004 is as follows:



|(Dollars in thousands)           |       |  
|-------------------------------- | ----- | -
|Three months or less             |       | $
|Over three months to six months  |       |  
|Over six months to twelve months |       |  
|Over twelve months               |       |  
|                                 |       |  
|                                 | Total |  
|                                 |       |  

Borrowings

Borrowings increased $233.1 million to $488.2 million at December 31, 2004 from $255.1 million at December 31, 2003. This
increase was primarily to support loan growth and the Millennium acquisition. Federal Home Loan Bank (FHLB) advances increased $145.0 million of which $45.0 million was
short-term and $100.0 million was long-term. Fed funds purchased and securities sold under agreements to repurchase rose $67.2 million. Subordinated debt
increased $20.8 million from $5.0 million (previously classified as guaranteed preferred beneficial interest in Corporation's subordinated debentures) at December 31, 2003 to
$25.8 million at December 31, 2004. The increase is a result of Trust II completing an offering of $20.0 million of floating rate (three-month LIBOR plus a margin of 2.70%)
Capital Securities which represent undivided beneficial interests in the assets of Trust II on March 25, 2004. During 2003, the Corporation paid off $29 million of FHLB borrowings with
rates over 6.0% prior to their scheduled maturity dates. This provided the opportunity to lock in historically low rates on new long-term borrowings. The early retirement of these
borrowings resulted in a $2.6 million prepayment fee.

The
Bank, pursuant to a designated cash management agreement, utilizes 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 agreements to repurchase
are generally overnight transactions. These securities are held in a third-party custodian's account, designated by the Bank under a written custodial agreement that explicitly recognizes the Bank's
interest in the securities.



|                                      |  | At or for the year ended December 31, |        
|------------------------------------- |  | ------------------------------------- | -------
|
|
|
|Balance at year-end                   |  | $                                     | 84,945 
|Weighted average rate at year-end     |  |                                       | 1.51   
|Maximum month-end balance             |  | $                                     | 199,493
|Average balance during the year       |  | $                                     | 106,169
|Weighted average rate during the year |  |                                       | 0.93   

25

---



Results of Operations

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 inherent losses on loans;
(3) noninterest income, which is made up primarily of certain fees, trust income and gains and losses from sales of securities; (4) noninterest expense, which consists primarily of
salaries, employee benefits 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 on a tax equivalent basis in 2004 increased $3.8 million, or 4.3% to $92.5 million. The increase in 2004 was primarily the
result of loan growth partially offset by lower loan rates and a higher level of borrowings. The lower loan rates were largely attributable to the general decline in market interest rates. Net
interest income on a tax equivalent basis in 2003 increased $1.4 million, or 1.6% to $88.7 million. The increase in 2003 was primarily due to a higher level of investment securities
partially offset by the decrease in net interest income related to rates.

The
rate volume analysis 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 volume and rate components. The change attributable to both volume and rate has been allocated proportionately.



|                                         |                                            | 2004 compared to 2003 |   | 2003 compared to 2002 |      
|---------------------------------------- | ------------------------------------------ | --------------------- | - | --------------------- | -----
|
|
|
|
|Increase (decrease) in interest income:  |                                            |                       |   |                       |      
|                                         | Investment securities(1)                   |                       | $ | (658                  | )    
|                                         | Federal funds sold and deposits in banks   |                       |   | 176                   |      
|                                         | Loans(1)                                   |                       |   | 6,848                 |      
|                                         |                                            |                       |   |                       |      
|                                         |                                            | Total                 |   |                       | 6,366
|                                         |                                            |                       |   |                       |      
|Increase (decrease) in interest expense: |                                            |                       |   |                       |      
|                                         | Savings deposits                           |                       |   | 2,094                 |      
|                                         | Time deposits                              |                       |   | (2,401                | )    
|                                         | Borrowed funds                             |                       |   | 2,866                 |      
|                                         |                                            |                       |   |                       |      
|                                         |                                            | Total                 |   |                       | 2,559
|                                         |                                            |                       |   |                       |      
|                                         | Net increase (decrease) in interest income |                       | $ | 3,807                 |      
|                                         |                                            |                       |   |                       |      

---

Interest
income on a tax-equivalent basis in 2004 increased $6.4 million, or 4.9% to $135.2 million. This increase was mainly due to an increase in average
loans of $271.3 million, or 20.0% partially offset by a 65 basis point reduction in the average rates earned on loans. Loans totaling $157.1 million were acquired in the acquisition of
Millennium Bank which contributed to the increase in average loans. Interest expense increased $2.6 million, or 6.4% to $42.6 million during 2004 primarily due to a higher

26

---



level
of borrowings partially offset by lower rates paid on deposits. Average borrowings increased $101.8 million, or 37.7% during 2004 to support loan growth and the Millennium Bank
acquisition. The rate paid on average deposits during 2004 of 1.73% was 14 basis points lower than the 1.87% rate paid during 2003. This decrease was the result of the Corporation's strategy to reduce
higher costing time deposits and grow lower costing savings deposits. Lower rate average savings deposits grew $159.3 million and higher rate average time deposits decreased
$39.8 million during 2004. Savings deposits of $42.3 million and time deposits of $91.4 million were acquired from Millennium Bank.

Interest
income on a tax-equivalent basis in 2003 decreased $11.2 million, or 8.0% to $128.8 million. The decrease was primarily the result of lower rates
earned on investment securities and loans, partially offset by higher investment volume. Interest expense decreased $12.5 million, or 23.8% during 2003. This decrease was the result of the
lower interest rate environment experienced during 2003 and the Corporation's strategy to reduce higher costing time deposits and grow lower costing savings deposits.

Net Interest Margin

The 2004 net interest margin of 3.55% was lower than the net interest margins for 2003 and 2002 of 3.80% and 4.00%, respectively. The lower interest rate
environment during the last few years has impacted the net interest margin. The net interest margin percentage has decreased primarily due to the continuing decline in loan yields, although net
interest income has increased primarily as a result of higher earning assets volume.

During
2004, the Corporation continued to manage its balance sheet in an effort to position it for the longer term and potentially higher rates. The Corporation sold securities that
exhibit extension risk in a rising rate environment and purchased securities with more stable cash flows in such rate environment. As a result, the balance sheet is better positioned to minimize
market risk from rising rates.

27

---



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



|                                             |                            | Year Ended December 31,                  |                                      
|-------------------------------------------- | -------------------------- | ---------------------------------------- | -------------------------------------
|
|
|
|Assets                                       |                            |                                          |                                      
|Earning Assets:                              |                            |                                          |                                      
|                                             | Investment securities:     |                                          |                                      
|                                             |                            | Taxable Investments                      |                                      
|                                             |                            | Nontaxable investments(1)                |                                      
|                                             |                            |                                          |                                      
|                                             |                            |                                          | Total investment securities          
|                                             |                            | Federal funds sold and deposits in banks |                                      
|                                             |                            | Loans(1)(2)                              |                                      
|                                             |                            |                                          |                                      
|                                             |                            |                                          | Total earning assets                 
|Noninterest-earning assets                   |                            |                                          | 165,012                              
|                                             |                            |                                          |                                      
|                                             |                            |                                          |                                      
|                                             |                            |                                          |                                      
|Liabilities and Shareholders' Equity         |                            |                                          |                                      
|Interest-bearing liabilities:                |                            |                                          |                                      
|                                             | Interest-bearing deposits: |                                          |                                      
|                                             |                            | Savings                                  |                                      
|                                             |                            | Time                                     |                                      
|                                             |                            |                                          |                                      
|                                             |                            |                                          | Total interest-bearing deposits      
|                                             | Borrowed funds             |                                          |                                      
|                                             |                            |                                          |                                      
|                                             |                            |                                          | Total interest-bearing liabilities   
|Noninterest-bearing liabilities:             |                            |                                          |                                      
|                                             | Demand deposits            |                                          |                                      
|                                             | Other liabilities          |                                          |                                      
|                                             |                            |                                          |                                      
|                                             |                            |                                          | Total noninterest-bearing liabilities
|                                             |                            |                                          |                                      
|                                             |                            |                                          |                                      
|Shareholders' equity                         |                            |                                          | 251,963                              
|                                             |                            |                                          |                                      
|                                             |                            |                                          |                                      
|                                             |                            |                                          |                                      
|Net interest spread                          |                            |                                          |                                      
|Effect of noninterest-bearing sources        |                            |                                          |                                      
|                                             |                            |                                          |                                      
|Net interest income/margin on earning assets |                            |                                          |                                      
|                                             |                            |                                          |                                      
|Less tax equivalent adjustment               |                            |                                          |                                      
|                                             |                            |                                          |                                      
|Net interest income                          |                            |                                          |                                      
|                                             |                            |                                          |                                      

---

28

---



Interest Rate Sensitivity Analysis

In the normal course of conducting business activities, the Corporation is exposed to market risk, principally interest risk, through the operations of its
banking subsidiary. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and value of financial instruments.

The
Corporation actively manages its interest rate sensitivity positions. The objectives of interest rate risk management are to control exposure of net interest income to risks
associated with interest rate movements and to achieve consistent growth in net interest income. The 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 Federal Home Loan Bank. 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 only utilizes derivative instruments for asset/liability management, specifically, to convert variable rate debt and loans to a fixed rate. These transactions involve
both credit and market risk. The notional amounts are amounts on which calculations and payments are based. The notional amounts do not represent direct credit exposures. Direct credit exposure is
limited to the net difference between the calculated amounts to be received and paid, if any. Interest rate swaps are contracts in which a series of interest-rate flows (fixed and
floating) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged.

The
Corporation entered into three interest-rate swaps with a notional value totaling $45.0 million during 2003. As of December 31, 2004, these
interest-rate swaps have a positive fair market value of $53,000. During 2005, the Corporation terminated a swap with a notional value of $25.0 million. The Corporation estimates a
loss of $159,000 will be recorded during 2005 into net interest from accumulated other comprehensive income related to this swap.

The
Corporation uses three principal reports to measure interest rate risk: asset/liability simulation reports; gap analysis 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, 2004, is presented in Table 14. 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, 2004. The table indicates an asset sensitive one-year cumulative gap position of 10.23% of total earning assets.

29

---





December 31, 20040 to
90 days

91 to
365 days

After 1 year
through
5 years

Over
5 years

Total(Dollars in thousands)Earning assetsInvestment securities

$
154,551

$
299,819

$
252,065

$
237,128

$
943,563Federal funds sold and deposits in banks


56,291











56,291Loans


655,591


157,900


626,729


405,582


1,845,802Total earning assets

$
866,433

$
457,719

$
878,794

$
642,710

$
2,845,656Interest-bearing liabilitiesInterest-bearing checking accounts

$
55,180

$
76,872

$
173,532

$


$
305,584Money market funds


93,141


225,458


394,440





713,039Savings accounts


11,152


33,456


178,431





223,039Time deposits


118,471


189,102


329,762


50


637,385Borrowed funds


225,277





178,750


84,155


488,182Total interest-bearing liabilities

$
503,221

$
524,888

$
1,254,915

$
84,205

$
2,367,229Interest rate swaps

$
(5,000
)
$


$
5,000

$


$
Incremental gap

$
358,212

$
(67,169
)
$
(371,121
)
$
558,505Cumulative gap(1)

$
358,212

$
291,043

$
(80,078
)
$
478,427Cumulative gap as a percentage of earning assets


12.59
%

10.23
%

-2.81
%

16.81
%


---

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 shocking. The results of the December 31, 2004 net interest
income rate shock simulations show that the Corporation is within guidelines set by the Corporation's Asset/Liability Policy when rates are shocked up 300 basis points, but is outside of
guidelines when rates are shocked down over 100 basis points.

The
table below forecasts changes in the Corporation's market value of equity under alternative interest rate environments as of December 31, 2004. The market value of equity is
defined as the net

30

---



present
value of the Corporation's existing assets and liabilities. The Corporation is within guidelines set by the Corporation's Asset/Liability Policy for the percentage change in the market value
of equity.



|                  |  | December 31, 2004 |        
|----------------- |  | ----------------- | -------
|
|
|+300 Basis Points |  | $                 | 330,568
|+200 Basis Points |  |                   | 356,885
|+100 Basis Points |  |                   | 390,320
|Flat Rate         |  |                   | 403,996
|-100 Basis Points |  |                   | 395,757
|-200 Basis Points |  |                   | 374,061
|-300 Basis Points |  |                   | 333,052

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 that it could use to remedy the mismatch. The Corporation could restructure its investment portfolios 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 loan losses of $2.6 million for 2004, reflected a decrease of $645,000 compared to the 2003 provision of $3.2 million. The
decrease in the provision during 2004 is reflective of improved loan quality during the early part of the year and management's ongoing analysis of the loan portfolio. The allowance for loan losses to
nonperforming loans ratio for December 31, 2004, 2003 and 2002 were 324.6%, 371.7% and 272.8%, respectively. Total net loans charged off in 2004, 2003 and 2002 were $2.5 million,
$3.6 million and $2.7 million, respectively.

Noninterest Income

Noninterest income increased $520,000, or 1.9%, to $28.2 million for the year ended December 31, 2004, compared to 2003. This was mainly due to an
increase of $2.7 million in trust and investment advisory fees and an increase of $1.4 million in the gains related to the auto leasing portfolio, partially offset by a decrease of
$2.9 million in the gain on sales of investment securities and a decrease of $868,000 in gains related to the sale of residential mortgages. The increase in trust and investment advisory fees
of $2.7 million, or 71.6% during 2004, was primarily attributable to the Cumberland subsidiary acquired with the Millennium Bank acquisition, growth in trust assets and the higher market value
of equities in trust assets experienced in 2004, compared to 2003. Gains related to the auto leasing portfolio increased $1.4 million during 2004 mainly due to residual insurance fund
valuations. The gain on the sale of investment securities available for sale decreased $2.9 million during 2004 from 2003. The Corporation sells investment securities available for sale to fund
the purchase of other securities in an effort to reduce the interest rate risk and market risk within different interest rate environments. Gains related to the sale of residential mortgages decreased
$868,000 in 2004 primarily attributable to lower origination volume. The Corporation's bank-owned life insurance (BOLI) income decreased $209,000, or 8.0% during 2004 as compared to 2003.
The reduction is due to lower yields on the insurance contracts partially offset by higher amounts of BOLI insurance. BOLI involves the

31

---



purchase
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 Bank,
is profitable to the Corporation. This profitability is used to offset a portion of future employee benefit cost increases.

Noninterest
income increased $5.1 million, or 22.7%, to $27.6 million during 2003, compared to 2002, primarily due to increases in the gain on sale of investment securities
of $3.1 million and income on life insurance of $1.1 million.

Noninterest Expense

Noninterest expense remained level at $59.6 million for the year ended December 31, 2004, compared to 2003. Salary and employee benefits expense
increased $5.9 million in 2004 primarily due to the Millennium acquisition and higher pension and medical costs. Occupancy expense increased $787,000 during 2004 mostly due to the Millennium
acquisition and a new branch opening. Partially offsetting these variances was Federal Home Loan Bank borrowings prepayment fees which decreased $2.6 million and other expenses which decreased
$4.1 million in 2004. The decrease in other expenses was primarily due to lower off-lease vehicle residual reserve of $2.6 million, higher loan origination expense deferrals
amounting to $3.8 million mainly related to higher loan origination volume, partially offset by an increase in deferred compensation expense for directors and employees of $717,000.

Noninterest
expense rose $3.3 million, or 5.9%, to $59.6 million during 2003, compared to 2002. During 2003, the Corporation paid off approximately $29 million of
FHLB borrowings with rates over 6.0% prior to their scheduled maturity dates. This provided the opportunity to lock in historically low rates on new long-term borrowings. The early
retirement of these borrowings resulted in a $2.6 million prepayment fee. The increase in salaries and employee benefits expense of $1.4 million in 2003 from 2002 reflects additional
staff necessitated by the growth of the Corporation and higher medical insurance cost.

Federal Income Taxes

The effective income tax rate for 2004 was 24.4% versus the statutory rate of 35%. The Corporation's effective rate is lower than the statutory tax rate primarily
as a result of tax-exempt income earned from state and municipal securities and loans and bank-owned life insurance. The lower effective tax rate of 19.6% for 2003 was
primarily the result of higher non-taxable income on life insurance proceeds during 2003 as well as lower non-taxable investment securities income and higher taxable loan
interest during 2004. The effective income tax rate for 2002 was 21.4%.

Capital

Capital formation is important to the Corporation's well being and future growth. Capital, at the end of 2004, was $270.5 million, an increase of
$43.5 million, or 19.1%, over the end of 2003. The increase was primarily due to the acquisition of Millennium Bank and the retention of the Corporation's earnings partially offset by dividends
paid to shareholders and a decrease in accumulated other comprehensive income. The issuance of common stock for the acquisition of Millennium Bank resulted in an increase in capital of
$28.9 million. The accumulated other comprehensive income at December 31, 2004 was a gain of $1.2 million, compared to a gain of $8.1 million at December 31, 2003.
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

32

---



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, 2004, the Corporation's Tier 1 risk-adjusted capital ratio was 11.36%, and the total risk-adjusted capital ratio was 12.21%, both well above regulatory
requirements. The risk-based capital ratios of each of the Corporation's commercial bank also exceeded regulatory requirements at the end of 2004.

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 8.91% and 8.79% at December 31, 2004 and 2003, 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, 2004, the Bank is above the regulatory minimum guidelines and meets the criteria to be categorized as a "well capitalized"
institution.

Liquidity

Liquidity is a measure of the ability of the Bank to meet its 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 Bank arranges its 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, 2004, 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 Federal Home Loan Bank of Pittsburgh (the FHLB). As
of December 31, 2004, the Bank had borrowings outstanding with the FHLB of $345.8 million ($28.0 million in federal funds purchased, $45.0 million in short-term
borrowings and $272.8 million in long-term borrowings), other federal funds purchased of $29.5 million and pledged investment securities available for sale of
$436.4 million. At December 31, 2004, the Bank had unused lines of credit at the FHLB of $578.8 million, unused federal funds lines of credit with commercial banks of
$65.5 million and unpledged investment securities available for sale of $368.4 million.

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.

33

---



The
following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2004:



|                                                  |  | December 31, 2004
|------------------------------------------------- |  | -----------------
|
|
|Minimum annual operating leases                   |  | $                
|Remaining contractual maturities of time deposits |  |                  
|Long-term borrowings and subordinated debt        |  |                  
|Loan lines of credit                              |  |                  
|Unfunded residential mortgages                    |  |                  
|Standby letters of credit                         |  |                  
|                                                  |  |                  
|Total                                             |  | $                
|                                                  |  |                  

During
December 2004, the Bank sold lease financing receivables of $9.1 million. Of these leases, $1.2 million were sold with full recourse and the remaining leases
were sold subject to recourse with a maximum exposure of ten percent of the outstanding receivable. The total recourse exposure related to the sold leases is $2.0 million. After the first
anniversary of the sale agreement, and on a quarterly basis thereafter, upon written request by the Bank, the purchaser will review the portfolio performance and may reduce the total exposure to an
amount equal to ten percent of the outstanding net book value.

For
information on known uncertainties, see Item 1, "Business."

Fourth Quarter 2004 Results (Unaudited)

Net income for the fourth quarter of 2004 was $10.1 million, an increase of 12.7% over the fourth quarter of 2003. Diluted earnings per share of $.37
increased 5.7% over the $.35 earned during the fourth quarter of 2003, and basic earnings per share at $.38 increased 8.6% over $.35 earned in the fourth quarter of 2003.

Net
interest income on a fully tax-equivalent basis in the fourth quarter of 2004 increased $307,000 or 1.3% over the same period in 2003. This increase was primarily the
result of higher loan volume partially offset by lower loan rates. The net interest margin for the fourth quarter of 2004 was 3.34%, compared to 3.82% for the fourth quarter of 2003, the decline being
primarily due to lower loan yields and higher funding costs, particularly increased volumes in higher-rate money market accounts. Average earning assets increased $367.6 million or
15.3% during the fourth quarter of 2004 versus the comparable period in 2003, while average loans increased $404.3 million or 29.1% during the same period. Loans totaling $157.1 million
were acquired in the acquisition of Millennium Bank, which contributed to the increase in average loans.

34

---





Total noninterest income of $9.4 million for the fourth quarter of 2004 reflects an increase of $4.2 million from the comparable period in 2003, primarily due to increases
of $1.9 million in the gain on sales of investment securities, $982,000 in trust and investment advisory fees, $586,000 in life insurance income and $785,000 in gains related to the auto
leasing portfolio, partially offset by a $440,000 loss on the sale of equipment lease receivables.

Noninterest
expense of $16.7 million increased $2.8 million or 20.0% from $13.9 million in the fourth quarter of 2003. The increase in noninterest expense was due to
a $2.7 million increase in salaries and benefits, primarily related to the acquisition of Millennium Bank, higher pension and healthcare costs and an increase in bonus expense related to the
Corporation's improved financial performance. In addition, deferred compensation expense for directors and employees was $874,000 higher during the fourth quarter of 2004 over the comparable period in
2003 while deferred loan origination expenses increased $1.3 million. Deferred compensation expense includes a one-time after tax expense amounting to $819,000 associated with the
retirement announcement of the Chief Executive Officer under the terms of his employment agreement.

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 Corporation's results of operations:



|                                                    |         | Three Months Ended 2004 |        | Three Months Ended 2003
|--------------------------------------------------- | ------- | ----------------------- | ------ | -----------------------
|
|
|Interest income                                     |         | $                       | 34,196 |                        
|Interest expense                                    |         |                         | 12,735 |                        
|                                                    |         |                         |        |                        
|Net interest income                                 |         |                         | 21,461 |                        
|Provision for loan losses                           |         |                         | 1,070  |                        
|                                                    |         |                         |        |                        
|Net interest income after provision for loan losses |         |                         | 20,391 |                        
|                                                    |         |                         |        |                        
|Noninterest income                                  |         |                         | 9,395  |                        
|Noninterest expense                                 |         |                         | 16,674 |                        
|                                                    |         |                         |        |                        
|Income before income tax expense                    |         |                         | 13,112 |                        
|Income tax expense                                  |         |                         | 2,999  |                        
|                                                    |         |                         |        |                        
|Net income                                          |         | $                       | 10,113 |                        
|                                                    |         |                         |        |                        
|Net income per share(1)                             |         |                         |        |                        
|                                                    | Basic   |                         | $      | 0.38                   
|                                                    |         |                         |        |                        
|                                                    | Diluted |                         | $      | 0.37                   
|                                                    |         |                         |        |                        

---

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Incorporated by reference to the discussion contained in Item 7, under the caption "Interest Rate Sensitivity," and Table 14, "Contractual Repricing Data of
Interest Sensitive Assets and Liabilities," and Table 15, "Market Value of Equity."

35

---



Item 8. Financial Statements and Supplementary Data

HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                                                                        |                                                                                                                                    | December 31,              |                                           
|--------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------
|
|
|Assets                                                                                  |                                                                                                                                    |                           |                                           
|Cash and due from banks                                                                 |                                                                                                                                    | $                         | 50,699                                    
|Federal funds sold and securities purchased under agreements to resell                  |                                                                                                                                    |                           | 52,000                                    
|Interest-bearing deposits in banks                                                      |                                                                                                                                    |                           | 4,291                                     
|                                                                                        |                                                                                                                                    |                           |                                           
|                                                                                        | Total cash and cash equivalents                                                                                                    |                           |                                           
|Residential mortgage loans held for sale                                                |                                                                                                                                    |                           | 1,236                                     
|Investment securities available for sale                                                |                                                                                                                                    |                           | 874,732                                   
|Investment securities held to maturity (market value $69,704 and $21,497, respectively) |                                                                                                                                    |                           | 68,831                                    
|Loans and leases                                                                        |                                                                                                                                    |                           | 1,844,566                                 
|Less: Allowance for loan losses                                                         |                                                                                                                                    |                           | (18,455                                   
|                                                                                        |                                                                                                                                    |                           |                                           
|                                                                                        | Net loans                                                                                                                          |                           |                                           
|                                                                                        |                                                                                                                                    |                           |                                           
|Premises and equipment, net                                                             |                                                                                                                                    |                           | 26,963                                    
|Accrued interest receivable                                                             |                                                                                                                                    |                           | 12,089                                    
|Net assets in foreclosure                                                               |                                                                                                                                    |                           | 370                                       
|Goodwill                                                                                |                                                                                                                                    |                           | 32,548                                    
|Intangible assets, net                                                                  |                                                                                                                                    |                           | 4,168                                     
|Bank-owned life insurance                                                               |                                                                                                                                    |                           | 52,109                                    
|Other assets                                                                            |                                                                                                                                    |                           | 18,368                                    
|                                                                                        |                                                                                                                                    |                           |                                           
|                                                                                        |                                                                                                                                    | Total assets              |                                           
|                                                                                        |                                                                                                                                    |                           |                                           
|Liabilities and Shareholders' Equity                                                    |                                                                                                                                    |                           |                                           
|Deposits                                                                                |                                                                                                                                    |                           |                                           
|                                                                                        | Noninterest-bearing                                                                                                                |                           | $                                         
|                                                                                        | Interest-bearing:                                                                                                                  |                           |                                           
|                                                                                        |                                                                                                                                    | Checking accounts         |                                           
|                                                                                        |                                                                                                                                    | Money market accounts     |                                           
|                                                                                        |                                                                                                                                    | Savings                   |                                           
|                                                                                        |                                                                                                                                    | Time, under $100,000      |                                           
|                                                                                        |                                                                                                                                    | Time, $100,000 or greater |                                           
|                                                                                        |                                                                                                                                    |                           |                                           
|                                                                                        |                                                                                                                                    |                           | Total deposits                            
|Federal funds purchased and securities sold under agreements to repurchase              |                                                                                                                                    |                           | 142,445                                   
|Other short-term borrowings                                                             |                                                                                                                                    |                           | 47,213                                    
|Long-term borrowings                                                                    |                                                                                                                                    |                           | 272,750                                   
|Accrued interest payable                                                                |                                                                                                                                    |                           | 26,613                                    
|Subordinated debt                                                                       |                                                                                                                                    |                           | 25,774                                    
|Guaranteed preferred beneficial interest in Corporation's subordinated debentures       |                                                                                                                                    |                           |                                          
|Other liabilities                                                                       |                                                                                                                                    |                           | 26,625                                    
|                                                                                        |                                                                                                                                    |                           |                                           
|                                                                                        |                                                                                                                                    |                           | Total liabilities                         
|                                                                                        |                                                                                                                                    |                           |                                           
|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 27,319,988 shares in 2004 and 24,667,707 shares in 2003 |                           |                                           
|                                                                                        | Additional paid-in capital                                                                                                         |                           |                                           
|                                                                                        | Retained earnings                                                                                                                  |                           |                                           
|                                                                                        | Accumulated other comprehensive income                                                                                             |                           |                                           
|                                                                                        | Treasury stock, at cost: 1,042,734 shares in 2004 and 822,633 shares in 2003                                                       |                           |                                           
|                                                                                        |                                                                                                                                    |                           |                                           
|                                                                                        |                                                                                                                                    |                           | Total shareholders' equity                
|                                                                                        |                                                                                                                                    |                           |                                           
|                                                                                        |                                                                                                                                    |                           | Total liabilities and shareholders' equity
|                                                                                        |                                                                                                                                    |                           |                                           

See accompanying notes to consolidated financial statements.

36

---





HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF INCOME

|                                                                       |                           | Year Ended December 31,  
|---------------------------------------------------------------------- | ------------------------- | -------------------------
|
|
|Interest income                                                        |                           |                          
|Loans, including fees                                                  |                           | $                        
|Lease financing                                                        |                           |                          
|Investment securities:                                                 |                           |                          
|                                                                       | Taxable                   |                          
|                                                                       | Exempt from federal taxes |                          
|Federal funds sold and securities purchased under agreements to resell |                           |                          
|Deposits in banks                                                      |                           |                          
|                                                                       |                           |                          
|                                                                       |                           | Total interest income    
|                                                                       |                           |                          
|Interest expense                                                       |                           |                          
|Savings deposits                                                       |                           |                          
|Time, under $100,000                                                   |                           |                          
|Time, $100,000 or greater                                              |                           |                          
|Short-term borrowings                                                  |                           |                          
|Long-term borrowings                                                   |                           |                          
|                                                                       |                           |                          
|                                                                       |                           | Total interest expense   
|                                                                       |                           |                          
|                                                                       |                           |                          
|Provision for loan losses                                              |                           |                          
|                                                                       |                           |                          
|                                                                       |                           |                          
|                                                                       |                           |                          
|Noninterest income                                                     |                           |                          
|Service charges                                                        |                           |                          
|Gains on sales of investment securities, net                           |                           |                          
|Trust, investment services and advisory income                         |                           |                          
|Bank-owned life insurance income                                       |                           |                          
|Income on life insurance                                               |                           |                          
|Other income                                                           |                           |                          
|                                                                       |                           |                          
|                                                                       |                           | Total noninterest income 
|                                                                       |                           |                          
|                                                                       |                           |                          
|                                                                       |                           |                          
|Noninterest expense                                                    |                           |                          
|Salaries, wages and employee benefits                                  |                           |                          
|Occupancy                                                              |                           |                          
|Furniture and equipment                                                |                           |                          
|Prepayment fee                                                         |                           |                          
|Other expense                                                          |                           |                          
|                                                                       |                           |                          
|                                                                       |                           | Total noninterest expense
|                                                                       |                           |                          
|Income before income tax expense                                       |                           |                          
|Income tax expense                                                     |                           |                          
|                                                                       |                           |                          
|Net income                                                             |                           | $                        
|                                                                       |                           |                          
|Net income per share information:                                      |                           |                          
|                                                                       | Basic                     |                          
|                                                                       |                           |                          
|                                                                       | Diluted                   |                          
|                                                                       |                           |                          
|Cash dividends per share                                               |                           | $                        
|                                                                       |                           |                          
|Weighted average number of common shares:                              |                           |                          
|                                                                       | Basic                     |                          
|                                                                       | Diluted                   |                          

See accompanying notes to consolidated financial statements.

37

---



HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

|                                                             |  | Common
Stock |  | Treasury
Stock |   | Common
Stock |        |  |   |         |   |   |         |   |   |        |   |   |        
|------------------------------------------------------------ |  | ------------ |  | -------------- | - | ------------ | ------ |  | - | ------- | - | - | ------- | - | - | ------ | - | - | -------
|
|
|
|Balance January 1, 2002                                      |  | 18,571       |  | (287           | ) | $            | 18,571 |  | $ | 71,419  |   | $ | 100,171 |   | $ | 4,534  |   | $ | (5,346 
|Issuance of stock for stock options                          |  | 94           |  |               |   |              | 94     |  |   | 1,166   |   |   |        |   |   |       |   |   |       
|Issuance of stock for stock awards                           |  |             |  |               |   |              |       |  |   | 6       |   |   |        |   |   |       |   |   |       
|Stock dividend                                               |  | 932          |  | (22            | ) |              | 932    |  |   | 23,994  |   |   | (24,942 | ) |   |       |   |   |       
|Net income                                                   |  |             |  |               |   |              |       |  |   |        |   |   | 32,927  |   |   |       |   |   |       
|Other comprehensive income, net of reclassifications and tax |  |             |  |               |   |              |       |  |   |        |   |   |        |   |   | 2,403  |   |   |       
|Purchases of treasury stock                                  |  |             |  | (260           | ) |              |       |  |   |        |   |   |        |   |   |       |   |   | (6,244 
|Cash dividends                                               |  |             |  |               |   |              |       |  |   |        |   |   | (13,479 | ) |   |       |   |   |       
|                                                             |  |              |  |                |   |              |        |  |   |         |   |   |         |   |   |        |   |   |        
|Comprehensive income                                         |  |              |  |                |   |              |        |  |   |         |   |   |         |   |   |        |   |   |        
|                                                             |  |              |  |                |   |              |        |  |   |         |   |   |         |   |   |        |   |   |        
|Balance December 31, 2002                                    |  | 19,597       |  | (569           | ) |              | 19,597 |  |   | 96,585  |   |   | 94,677  |   |   | 6,937  |   |   | (11,590
|Issuance of stock for stock options and tax benefits         |  | 142          |  |               |   |              | 142    |  |   | 2,055   |   |   |        |   |   |       |   |   |       
|Issuance of stock for stock awards                           |  |             |  |               |   |              |       |  |   | 6       |   |   |        |   |   |       |   |   |       
|Stock dividend                                               |  | 4,929        |  | (165           | ) |              | 4,929  |  |   |        |   |   | (4,942  | ) |   |       |   |   |       
|Net income                                                   |  |             |  |               |   |              |       |  |   |        |   |   | 35,333  |   |   |       |   |   |       
|Other comprehensive income, net of reclassifications and tax |  |             |  |               |   |              |       |  |   |        |   |   |        |   |   | 1,161  |   |   |       
|Purchases of treasury stock                                  |  |             |  | (89            | ) |              |       |  |   |        |   |   |        |   |   |       |   |   | (2,271 
|Cash dividends                                               |  |             |  |               |   |              |       |  |   |        |   |   | (15,566 | ) |   |       |   |   |       
|                                                             |  |              |  |                |   |              |        |  |   |         |   |   |         |   |   |        |   |   |        
|Comprehensive income                                         |  |              |  |                |   |              |        |  |   |         |   |   |         |   |   |        |   |   |        
|                                                             |  |              |  |                |   |              |        |  |   |         |   |   |         |   |   |        |   |   |        
|Balance December 31, 2003                                    |  | 24,668       |  | (823           | ) |              | 24,668 |  |   | 98,646  |   |   | 109,502 |   |   | 8,098  |   |   | (13,861
|Issuance of stock for stock options and tax benefits         |  | 411          |  |               |   |              | 411    |  |   | 4,832   |   |   |        |   |   |       |   |   |       
|Issuance of stock for stock awards                           |  |             |  |               |   |              |       |  |   | 7       |   |   |        |   |   |       |   |   |       
|Stock dividend                                               |  | 1,295        |  | (46            | ) |              | 1,295  |  |   | 28,456  |   |   | (29,764 | ) |   |       |   |   |       
|Net income                                                   |  |             |  |               |   |              |       |  |   |        |   |   | 38,567  |   |   |       |   |   |       
|Other comprehensive loss, net of reclassifications and tax   |  |             |  |               |   |              |       |  |   |        |   |   |        |   |   | (6,855 | ) |   |       
|Issuance of common stock for acquisition of Millennium Bank  |  | 946          |  |               |   |              | 946    |  |   | 27,974  |   |   |        |   |   |       |   |   |       
|Purchases of treasury stock                                  |  |             |  | (190           | ) |              |       |  |   | 399     |   |   |        |   |   |       |   |   | (4,214 
|Sale of treasury stock                                       |  |             |  | 16             |   |              |        |  |   | (275    | ) |   |        |   |   |       |   |   | 275    
|Cash dividends                                               |  |             |  |               |   |              |       |  |   |        |   |   | (18,575 | ) |   |       |   |   |       
|                                                             |  |              |  |                |   |              |        |  |   |         |   |   |         |   |   |        |   |   |        
|Comprehensive income                                         |  |              |  |                |   |              |        |  |   |         |   |   |         |   |   |        |   |   |        
|                                                             |  |              |  |                |   |              |        |  |   |         |   |   |         |   |   |        |   |   |        
|Balance December 31, 2004                                    |  | 27,320       |  | (1,043         | ) | $            | 27,320 |  | $ | 160,039 |   | $ | 99,730  |   | $ | 1,243  |   | $ | (17,800
|                                                             |  |              |  |                |   |              |        |  |   |         |   |   |         |   |   |        |   |   |        

See accompanying notes to consolidated financial statements.

38

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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                  |                                                                            | Year Ended December 31,                   |                                                    
|------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------
|
|
|Operating activities                                                                              |                                                                            |                                           |                                                    
|Net income                                                                                        |                                                                            | $                                         | 38,567                                             
|Adjustments to reconcile net income to net cash provided by operating activities:                 |                                                                            |                                           |                                                    
|                                                                                                  | Provision for loan losses                                                  |                                           |                                                    
|                                                                                                  | Depreciation and amortization                                              |                                           |                                                    
|                                                                                                  | Net amortization of investment securities discounts/premiums               |                                           |                                                    
|                                                                                                  | Deferred income expense (benefit)                                          |                                           |                                                    
|                                                                                                  | Gains on sales of investment securities, net                               |                                           |                                                    
|                                                                                                  | Net (increase) decrease in accrued interest receivable                     |                                           |                                                    
|                                                                                                  | Net increase (decrease) in accrued interest payable                        |                                           |                                                    
|                                                                                                  | Net (increase) decrease in other assets                                    |                                           |                                                    
|                                                                                                  | Net increase (decrease) in other liabilities                               |                                           |                                                    
|                                                                                                  | Other, net                                                                 |                                           |                                                    
|                                                                                                  |                                                                            |                                           |                                                    
|                                                                                                  |                                                                            | Net cash provided by operating activities |                                                    
|                                                                                                  |                                                                            |                                           |                                                    
|Investing activities                                                                              |                                                                            |                                           |                                                    
|Proceeds from sales of investment securities available for sale                                   |                                                                            |                                           | 1,348,441                                          
|Proceeds, maturity or calls of investment securities held to maturity                             |                                                                            |                                           | 5,040                                              
|Proceeds, maturity or calls of investment securities available for sale                           |                                                                            |                                           | 260,892                                            
|Purchases of investment securities held to maturity                                               |                                                                            |                                           | (3,826                                             
|Purchases of investment securities available for sale                                             |                                                                            |                                           | (1,607,251                                         
|Net increase in loans                                                                             |                                                                            |                                           | (283,337                                           
|Net cash paid due to acquisition, net of cash acquired                                            |                                                                            |                                           | (18,439                                            
|Net increase in premises and equipment                                                            |                                                                            |                                           | (5,244                                             
|Net increase in bank-owned life insurance                                                         |                                                                            |                                           | (1,416                                             
|Proceeds from sales of other real estate                                                          |                                                                            |                                           | 1,085                                              
|                                                                                                  |                                                                            |                                           |                                                    
|                                                                                                  |                                                                            | Net cash used in investing activities     |                                                    
|                                                                                                  |                                                                            |                                           |                                                    
|Financing activities                                                                              |                                                                            |                                           |                                                    
|Net increase (decrease) in deposits                                                               |                                                                            |                                           | 82,234                                             
|Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase |                                                                            |                                           | 55,633                                             
|Increase (decrease) in short-term borrowings                                                      |                                                                            |                                           | 42,198                                             
|Advances of long-term borrowings                                                                  |                                                                            |                                           | 83,000                                             
|Advances of long-term subordinated debt                                                           |                                                                            |                                           | 20,619                                             
|Cash dividends                                                                                    |                                                                            |                                           | (18,575                                            
|Repurchase of common stock                                                                        |                                                                            |                                           | (3,815                                             
|Proceeds from the exercise of stock options                                                       |                                                                            |                                           | 5,243                                              
|Other, net                                                                                        |                                                                            |                                           | (13                                                
|                                                                                                  |                                                                            |                                           |                                                    
|                                                                                                  |                                                                            |                                           | Net cash provided by (used in) financing activities
|                                                                                                  |                                                                            |                                           |                                                    
|Net increase (decrease) in cash and cash equivalents                                              |                                                                            |                                           | 12,133                                             
|Cash and cash equivalents at beginning of year                                                    |                                                                            |                                           | 94,857                                             
|                                                                                                  |                                                                            |                                           |                                                    
|Cash and cash equivalents at end of year                                                          |                                                                            | $                                         | 106,990                                            
|                                                                                                  |                                                                            |                                           |                                                    
|Cash paid during the year for:                                                                    |                                                                            |                                           |                                                    
|                                                                                                  | Interest                                                                   |                                           | $                                                  
|                                                                                                  |                                                                            |                                           |                                                    
|                                                                                                  | Income taxes                                                               |                                           | $                                                  
|                                                                                                  |                                                                            |                                           |                                                    
|Supplemental disclosure of noncash investing and financing activities:                            |                                                                            |                                           |                                                    
|                                                                                                  | Transfer of assets from loans to other real estate owned                   |                                           | $                                                  
|                                                                                                  |                                                                            |                                           |                                                    
|                                                                                                  | Transfer of investments available for sale to investments held to maturity |                                           |                                                    
|                                                                                                  |                                                                            |                                           |                                                    
|                                                                                                  | Acquisition of Millennium Bank, common stock issued                        |                                           |                                                    
|                                                                                                  |                                                                            |                                           |                                                    

See accompanying notes to consolidated financial statements.

39

---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES

Note 1Summary of Significant Accounting Policies

Harleysville National Corporation (the Corporation) through its subsidiary bank, Harleysville National Bank (the Bank), provides a full range of banking services
including loans and deposits, investment management, and trust and investment advisory 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. HNC Reinsurance
Company functions as a reinsurer of consumer loan credit life and accident and health insurance. At March 26, 2004, the charters of the Corporation's subsidiary banks, Security National Bank
and Citizens National Bank, were combined into the largest subsidiary, Harleysville National Bank.

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

A
summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the Corporation and its wholly owned subsidiaries, the Bank, HNC Financial Company, and HNC Reinsurance Company. All
significant intercompany accounts and transactions have been eliminated in consolidation and certain prior period amounts have been reclassified to conform to current year presentation. The accounting
and reporting policies of the Corporation and its subsidiaries conform with accounting principles generally accepted in the United States and general practices within the financial services industry.

The
preparation of financial statements in conformity with generally accepted accounting principles requires management 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. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, federal funds sold, securities purchased under agreements to resell and interest-bearing deposits in
banks with an original maturity of generally three months or less.

Investment Securities

The Corporation accounts for securities under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Debt securities, which management has the intent and ability to hold until maturity, are classified as held to maturity and reported at amortized cost, adjusted for amortization of
premiums and accretion of discounts using the interest method over the life of the securities. Debt and equity securities expected to be held for an indefinite period of time are classified as
available for sale and are stated at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of income taxes. The Corporation receives
estimated fair values of debt securities from independent valuation

40

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services
and brokers. In developing these fair values, the valuation services and brokers use estimates of cash flows based on historical performance of similar instruments in similar rate
environments.

Amortization
of premiums and accretion of discounts for investment securities available for sale and held to maturity are included in interest income. 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.

In
November 2003, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) issued EITF Abstract 03-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments" (EITF 03-1). The quantitative and qualitative disclosure provisions of EITF
03-1 were effective for years ending after December 15, 2003 and were included in the Corporation's 2003 Form 10-K. In March 2004, the EITF issued a
Consensus on Issue 03-1 requiring that the provisions of EITF 03-1 be applied for reporting periods beginning after June 15, 2004 to investments accounted for under
SFAS No. 115 and 124. EITF 03-1 establishes a three-step approach for determining whether an investment is considered impaired, whether that impairment is
other-than-temporary, and the measurement of an impairment loss. In September 2004, the FASB issued a proposed, Staff Position, EITF Issue
03-1-a, "Implementation Guidance for the Application of Paragraph 16 of EITF 03-1" (EITF 03-1-a). EITF 03-1-a
would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary
impairment under paragraph 16 of EITF 03-1. In September 2004, the FASB issued a Staff Position, "EITF Issue 03-1-1, Effective Date of Paragraphs
10-20 of EITF Issue No. 03-1" (EITF 03-1-1). EITF 03-1-1 delays the effective date for the measurement and recognition
guidance contained in paragraphs 10-20 of EITF 03-1." The delay of the effective date will be superseded concurrent with the final issuance of EITF
03-1-a. Upon final issuance, the Corporation will determine the impact that this EITF will have on its financial statements.

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 fees and costs, unearned income and 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. 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 the yield. The net loan origination
fees recognized as yield adjustments are reflected in loan interest income in the consolidated statements of income and the unamortized balance of the net loan origination fees is reported in loans
outstanding in the consolidated balance sheets.

Income
recognition of interest on loans is discontinued when, in the opinion of management, the collectibility of principal or 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

41

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deterioration
in the financial condition of the borrower, and payment in full of principal or interest is not expected. When a loan is placed on nonaccrual status, all accrued but uncollected interest
is reversed from income. The Corporation recognizes 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 Corporation. The Corporation will not recognize income if these factors do not exist. 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.

A
loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due, including principal and
interest, according to the contractual terms of the loan agreement. 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." Individually impaired loans are measured based on the present
value of expected future cash flows discounted at the loan's effective interest rate, a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.
Regardless of the measurement method, impairment is based on the fair value of the collateral when foreclosure is probable. If the recorded investment in impaired loans exceeds the measure of
estimated fair value, a specific allowance is established as a component of the allowance for loan losses. The Corporation's policy for interest income recognition on impaired loans is to recognize
income on restructured loans under the accrual method.

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."

The
Corporation adopted FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others"
(FIN 45), on January 1, 2003. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair
value of the obligation undertaken in issuing the guarantee.

In
October 2003, the American Institute of Certified Public Accountants issued Statement of Position (SOP) No. 03-3, "Accounting for Loans or Certain Debt
Securities Acquired in a Transfer" (SOP 03-3). SOP 03-3 applies to a loan with the evidence of deterioration of credit quality since origination acquired by completion of a
transfer for which it is probable at acquisition, that the Corporation will be unable to collect all contractually required payments receivable. SOP 03-3 is effective for loans acquired in
fiscal years beginning after December 15, 2004. Early adoption is permitted. The adoption of SOP 03-3 did not have a material affect on the Corporation's financial position or
results of operations.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level that management believes is sufficient to absorb estimated probable credit losses. The 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
determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However,

42

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this
evaluation is inherently subjective as it requires significant estimates by management. Consideration is given to a variety of factors in establishing these estimates including current and
anticipated economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan review, borrowers' perceived financial and management strengths, the adequacy
of underlying collateral, the dependence on collateral, or the strength of the present value of future cash flows and other relevant factors. These factors may be susceptible to significant change. To
the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required which may adversely affect the Corporation's results of operations in the future. In
addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require the Corporation to recognize
additions to the allowance based on their judgment of information available to them at the time of their examination.

Mortgage Servicing

The Corporation performs various servicing functions on loans owned by others. A fee, usually based on a percentage of the outstanding principal balance of the
loan, is received for these services.

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." The Corporation originates mortgages under a definitive plan to sell or securitize those loans and service the loans owned by the investor. Upon the transfer of the mortgage loans in a
sale or a securitization, the Corporation records the servicing assets retained in accordance with SFAS No. 140. The Corporation records mortgage servicing rights and the loans based on
relative fair values at the date of origination.

Mortgage
loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Gains and losses on sales of loans are also
accounted for in accordance with SFAS No. 134, "Accounting for Mortgage Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise".
This statement requires that an entity engaged in mortgage banking activities classify the retained mortgage-backed security or other interest, which resulted from the securitizations of a mortgage
loan held for sale, based upon its ability and intent to sell or hold these investments.

The
Corporation adopted SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," on July 1, 2003. Implementation issue C13, "When
a Loan Commitment Is Included in the Scope of Statement 133," is included in SFAS No. 149. SFAS No. 149 amends SFAS No. 133 to add a scope exception for borrowers
(all commitments) and lenders (all commitments except those relating to mortgage loans that will be held for sale). Statement 149 also amends SFAS No. 133 to require a lender to account for
loan commitments related to mortgage loans that will be held for sale as derivatives. The Corporation periodically enters into commitments with its customers, which it intends to sell in the future.

Premises and Equipment

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

43

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assets.
Leasehold improvements are amortized over the term of the lease or estimated useful lives, whichever is shorter.

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 and expenses incurred in connection with
holding such assets are recorded in other expenses. Any gain or loss upon the sale of real estate owned is charged to operations as incurred. 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.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable net assets acquired in accordance with the purchase
method of accounting. Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment, in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Goodwill is tested for impairment at the reporting unit level and an impairment
loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Core deposit intangibles are a measure of the value of checking and savings deposits acquired in
business combinations accounted for under the purchase method. Core deposit intangibles and other identified intangible assets with finite useful lives are amortized over their estimated lives and are
evaluated for impairment if events and circumstances indicate a possible impairment. The Corporation employs general industry practices in evaluating the fair value of its goodwill and other
intangible assets. The Corporation calculates the fair value using a combination of the following valuations: deposit premiums based on market deals, current stock pricing tracking as a multiple of
book value, discounted cash flow of earnings with a terminal value and market multiple of earnings. Any impairment loss related to goodwill and other intangible assets is reflected as other
noninterest expense in the statement of operations in the period in which the impairment was determined. No assurance can be given that future impairment tests will not result in a charge to earnings.
Amortization of intangible assets was $171,000 for the year ended December 31, 2004.

Derivatives

The Corporation accounts for derivatives in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended.
The statement requires the Corporation to recognize all derivative instruments at fair value as either assets or liabilities. Financial derivatives are reported at fair value in other assets or other
liabilities. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. For derivatives not
designated as hedges, the gain or loss is recognized in current earnings.

The
Corporation enters into interest rate swap contracts to modify the interest rate characteristics from variable to fixed in order to reduce the impact of interest rate changes on
future net interest income. Net amounts payable or receivable from these contracts are accrued as an adjustment to net

44

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interest.
The fair value of these derivatives is reported in other assets or other liabilities and offset in accumulated other comprehensive income for the effective portion of the derivatives.
Amounts reclassed into earnings, when the hedged transaction culminates, are included in net interest. Ineffectiveness of the strategy, as defined under SFAS No. 133, if any, is reported
in net interest. The Corporation performs an assessment, both at the inception of the hedge and quarterly thereafter, to determine whether these derivatives are highly effective in offsetting changes
in the value of the hedged items.

Stock Based Compensation

The Corporation follows 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 No. 25 are required to makepro formadisclosures of net
income and earnings per share as if the fair value-based method of accounting defined in SFAS No. 123 has been applied. In preparing the pro-forma disclosure, the Corporation
estimates the fair value of employee stock options using a pricing model which takes into consideration the exercise price and expected life of the options, the current price of the underlying stock
and its expected volatility, the expected dividends on the stock and the current risk-free interest rate for the expected life of the option. The Corporation's estimate of the fair value
of a stock option is based on expectations derived from historical experience and may not necessarily equate to its market value when fully vested.

The
Corporation has four shareholder approved fixed stock option plans that allow the Corporation to grant options up to an aggregate of 3,444,772 shares of common stock to key employees
and directors. At December 31, 2004, 2,210,711 stock options had been granted under the stock option plans. The options have a term of ten years when issued and typically vest over a
five-year period. The exercise price of each option is the market price of the Corporation's stock on the date of grant. Additionally, at December 31, 2004, the Corporation has an
additional 297,787 granted stock options, which were converted into the Corporation's options as a result of the Millennium Bank acquisition. The options have a term of ten years and are exercisable
at prices ranging from $10.20 to $15.22, at
December 31, 2004, except for 32,844 non-qualified stock options, which are performance based and exercisable at $12.94 per share after December 31, 2006.

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
2004, 2003 and 2002, respectively: dividend yield of 2.83%, 2.17% and 2.72%; expected volatility of 29.38%, 28.91% and 27.57%; risk-free interest rate of 4.06%, 4.08% and 3.55%; and an
expected life of 7.06 years, 7.41 years and 7.74 years. The options converted as a result of the Millennium Bank acquisition have been excluded from the valuation since they have
been included in goodwill under the purchase method of accounting.

45

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The
following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of SFAS No. 123, to
stock-based employee compensation. See Note 14, "Earnings Per Share," for calculation of earnings per share.

|                             |                                                                                        | Year ended December 31,
|---------------------------- | -------------------------------------------------------------------------------------- | -----------------------
|
|
|Net income                   |                                                                                        |                        
|                             | As reported                                                                            |                        
|                             | Less: Stock-based compensation costs determined under fair value method for all awards |                        
|                             |                                                                                        |                        
|                             | Pro forma                                                                              |                        
|                             |                                                                                        |                        
|Earnings per share (Basic)   |                                                                                        |                        
|                             | As reported                                                                            |                        
|                             | Pro forma                                                                              |                        
|Earnings per share (Diluted) |                                                                                        |                        
|                             | As reported                                                                            |                        
|                             | Pro forma                                                                              |                        

On
December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" (FAS 123(R)). FAS 123(R) replaces FAS No. 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." FAS 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or services and addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based
on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. FAS 123(R) focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. Under FAS 123(R), all forms of share-based payments to employees, including employee stock options, will be treated the
same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award will generally be measured at fair value at the grant date. Current accounting
guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. FAS 123(R) will eliminate
the ability to account for share-based compensation transactions using APB Opinion No. 25. Public entities (other than those filing as small business issuers) are required to apply the
provisions of FAS 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. The Corporation is currently evaluating this statement and its effects on its
results of operations.

Income Taxes

There are two components of income tax expense: current and deferred. Current income tax expense approximates cash to be paid or refunded for taxes for the
applicable period. Deferred tax assets and liabilities are recognized due to differences between the basis of assets and liabilities as measured by tax laws and their basis as reported in the
financial statements. Deferred tax assets are subject to management's judgment based upon available evidence that future realizations are likely. If

46

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management
determines that the Corporation may not be able to realize some or all of the net deferred tax asset in the future, a charge to income tax expense may be required to reduce the value of the
net deferred tax asset to the expected realizable value. 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. Deferred
tax expense or benefit is recognized for the change in deferred tax liabilities or assets between periods.

Pension Plans

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

Bank-Owned Life Insurance

The Corporation invests 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 Bank, is profitable to the Corporation. This profitability is used to
offset a portion of future benefit cost increases. The Bank's deposits fund BOLI and the earnings from BOLI are recognized as noninterest income.

Earnings 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. Proceeds assumed to have been received on such exercise or conversion are assumed to be used to
purchase shares of the Corporation's common stock at the average market price during the period, as required by the "treasury stock method" of accounting. The effects of securities or other contracts
to issue common stock are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive. All weighted average shares, actual shares and per share
information in the financial statements have been adjusted retroactively for the effect of stock dividends and splits.

Comprehensive Income

The Corporation records unrealized gains and losses on available for sale investment securities and gains and losses on cash flow hedges in other comprehensive
income in shareholders' equity. Gains and losses on available for sale investments securities are reclassified to net income as the gains or losses are realized upon sale of the securities.
Other-than-temporary impairment charges are reclassified to net income at the time of the charge. Gains or losses on derivatives are reclassified to net income as the hedged
item affects earnings. The Corporation follows SFAS No. 130, "Reporting Comprehensive Income," which establishes standards to provide prominent disclosure of comprehensive income items.

47

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Segment Information

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" 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 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 hold 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 Bank to fund itself with retail deposits and other borrowings and to manage
interest rate and credit risk. This 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, Cumberland and the Parent.

Variable Interest Entities

Management has determined that HNC Statutory Trust I ("Trust I") qualifies as a variable interest entity under FASB Interpretation 46 (FIN 46), "Consolidation of
Variable Interest Entities," as revised. Trust I issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Corporation. Trust I is included in the Corporation's
consolidated balance sheet and statements of income as of and for the year ended December 31, 2003. Subsequent to the issuance of FIN 46 in
January 2003, the FASB issued a revised interpretation, FIN 46(R), "Consolidation of Variable Interest Entities," the provisions of which were to be applied to certain variable interest
entities by March 31, 2004.

The
Corporation adopted the provisions under the revised interpretation in the first quarter of 2004. Accordingly, the Corporation no longer consolidates Trust I as of March 31,
2004. FIN 46(R) precludes consideration of the call option embedded in the preferred stock when determining if the Corporation has the right to a majority of Trust I's expected residual returns. The
deconsolidiation resulted in the investment in the common stock of Trust I to be included in other assets as of March 31, 2004 and the corresponding increase in outstanding debt of $155,000. In
addition, the income received on the Corporation's common stock investment is included in other income. The

48

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adoption
of FIN 46(R) did not have a material impact on the financial position or results of operations. The Federal Reserve has issued proposed guidance on the regulatory capital treatment for the
trust-preferred securities issued by Trust I as a result of the adoption of FIN 46(R). The proposed rule would retain the current maximum percentage of total capital permitted for Trust Preferred
Securities at 25%, but would enact other changes to the rules governing Trust Preferred Securities that affect their use as part of the collection of entities known as "restricted core capital
elements." The rule would take effect March 31, 2007; however, a three year transition period starting March 31, 2004 and leading up to that date would allow bank holding companies to
continue to count Trust Preferred Securities as Tier 1 Capital after applying FIN 46(R). Management has evaluated the effects of the proposed rule and does not anticipate a material impact on its
capital ratios when the proposed rule is finalized. On December 6, 2004, the FASB issued a proposed FASB Staff Position 46(R)-b, "Implicit Variable Interests Resulting from Related
Party Relationships under FIN 46." FSP 46(R)-b is intended to give guidance to a reporting enterprise on determining whether it has an implicit variable interest in a variable interest
entity, when specific conditions exist.

Note 2Acquisition

On April 30, 2004, the Corporation completed its acquisition of Millennium Bank which was merged with and into Harleysville National Bank. Millennium Bank
was based in Malvern, Pennsylvania with four banking offices, specializing in commercial lending and client relationship banking along with the wealth management unit, Cumberland Advisors, Inc.
Millennium Bank's results of operations are included in the Corporation's results beginning April 30, 2004 through December 31, 2004.

The
aggregate purchase price was $52.8 million in cash and stock which included $5.5 million in expenses associated with the acquisition. The Corporation acquired 100% of
the outstanding shares of Millennium Bank. Millennium Bank shares of 1,511,624 were exchanged at a conversion ratio of .6256 (.65688 restated*) for 945,672 (992,956 restated*) common shares of the
Corporation's common stock and Millennium Bank shares of 1,008,050 were exchanged for cash consideration of $16.1 million. Millennium Bank options of 302,250 were cashed out for consideration
of $2.3 million and options of
453,325 were exchanged at a conversion ratio of .6256 (.65688 restated*) to acquire 283,601 shares (297,787 restated*) of the Corporation's common stock (252,321 (264,943 restated*) options at an
exercise price of $10.71 to $15.98 ($10.20 to $15.22 restated*) and 31,280 (32,844 restated*) performance based options at an exercise price of $13.59 ($12.94 restated*)).

*  Restated
for stock dividend paid on September 15, 2004.

49

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The
following table summarizes the fair values of Millennium Bank's assets acquired and liabilities assumed at the date of acquisition. This transaction was accounted for using the
purchase method of accounting in accordance with SFAS No. 141, "Business Combinations."

|                                         |           | At April 30, 2004 |        
|---------------------------------------- | --------- | ----------------- | -------
|
|Assets:                                  |           |                   |        
|Cash and cash equivalents                |           | $                 | 5,460  
|Investment securities available for sale |           |                   | 35,345 
|Loans                                    |           |                   | 157,124
|Less: Allowance for loan losses          |           |                   | (1,677 
|                                         |           |                   |        
|                                         | Net loans |                   |        
|Other assets                             |           |                   | 8,011  
|                                         |           |                   |        
|                                         |           | Total assets      |        
|                                         |           |                   |        
|Liabilities:                             |           |                   |        
|Noninterest-bearing deposits             |           | $                 | 17,494 
|Interest-bearing deposits                |           |                   | 133,754
|Short-term borrowings                    |           |                   | 14,521 
|Long-term borrowings                     |           |                   | 17,000 
|Other liabilities                        |           |                   | 1,223  
|                                         |           |                   |        
|                                         |           | Total liabilities |        
|                                         |           |                   |        
|Net assets acquired(1)                   |           | $                 | 20,271 
|                                         |           |                   |        

Goodwill
of $32.5 million was recorded in connection with the acquisition of Millennium Bank. The following table provides the calculation of the goodwill:

(Dollars in thousands)Purchase Price:

$
47,323Expense associated with the acquisition


5,496Total purchase price


52,819Net Assets Acquired:Seller shareholders' equity, net of intangible assets


15,449Estimated adjustments to reflect assets acquired at fair value:Loans (seven year weighted average life)


1,432Core deposit intangible (eight year amortization)(2)


1,782Estimated amount allocated to liabilities assumed at fair value:Deposits (four year weighted average life)


(931
)Deferred tax and current taxes payable


2,539Net assets acquired


20,271Goodwill(1)

$
32,548


---

50

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Note 3Restrictions on Cash and Due From Banks

As of December 31, 2004, the Bank did not need to maintain reserves (in the form of deposits with the Federal Reserve Bank) to satisfy federal regulatory
requirements.

Note 4Investment Securities

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

|                                                               |                                                | December 31, 2004
|-------------------------------------------------------------- | ---------------------------------------------- | -----------------
|
|
|Available for sale                                             |                                                |                  
|Obligations of other U.S. government agencies and corporations |                                                | $                
|Obligations of states and political subdivisions               |                                                |                  
|Mortgage-backed securities                                     |                                                |                  
|Other securities                                               |                                                |                  
|                                                               |                                                |                  
|                                                               | Total investment securities available for sale |                  
|                                                               |                                                |                  
|Held to maturity                                               |                                                |                  
|Obligations of other U.S. government agencies and corporations |                                                | $                
|Obligations of states and political subdivisions               |                                                |                  
|Mortgage-backed securities                                     |                                                |                  
|                                                               |                                                |                  
|                                                               | Total investment securities held to maturity   |                  
|                                                               |                                                |                  

December 31, 2003Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value(Dollars in thousands)Available for saleObligations of other U.S. Government agencies and corporations

$
32,526

$
111

$
(142
)
$
32,495Obligations of states and political subdivisions


231,508


9,455


(814
)

240,149Mortgage-backed securities


576,532


2,010


(2,754
)

575,788Other securities


51,405


5,047


(14
)

56,438Total investment securities available for sale

$
891,971

$
16,623

$
(3,724
)
$
904,870Held to maturityObligations of states and political subdivisions

$
19,568

$
1,460

$


$
21,028Mortgage-backed securities


436


33





469Total investment securities held to maturity

$
20,004

$
1,493

$


$
21,497


51

---



The
table below indicates the length of time individual securities have been in a continuous unrealized loss position at December 31, 2004:

|                                                               |        | December 31, 2004 |        
|-------------------------------------------------------------- | ------ | ----------------- | -------
|
|
|
|Obligations of other U.S. Government agencies and corporations |        | $                 | 136,246
|Obligations of states and political subdivisions               |        |                   | 85,736 
|Mortgage-backed securities                                     |        |                   | 277,251
|Other securities                                               |        |                   | 19,611 
|                                                               |        |                   |        
|                                                               | Totals |                   | $      
|                                                               |        |                   |        

The
unrealized losses associated with these securities that management has the ability and intent to hold, are not considered to be other-than-temporary because
the unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer. There were twenty-two individual securities
in a continuous unrealized loss position for twelve months or longer.

Securities
with a carrying value of $475.2 million and $457.6 million at December 31, 2004 and 2003, 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, 2004, by contractual maturities are shown in the following table. 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.

December 31, 2004Held to Maturity

Available for SaleAmortized
Cost

Fair
Value

Amortized
Cost

Fair
Value(Dollars in thousands)Due in one year or less

$
9,367

$
9,533

$
26,937

$
26,805Due after one year through five years


37,853


38,642


126,986


128,479Due after five years through ten years








208,320


211,547Due after ten years


21,272


21,162


53,459


53,17168,492


69,337


415,702


420,002Mortgage-backed securities


339


367


457,171


454,730Totals

$
68,831

$
69,704

$
872,873

$
874,732


52

---



The components of net realized gains on sales of investment securities were as follows:

|                                                     |  | Year Ended December 31, |       
|---------------------------------------------------- |  | ----------------------- | ------
|
|
|Gross realized gains                                 |  | $                       | 7,642 
|Gross realized losses                                |  |                         | (3,953
|                                                     |  |                         |       
|Net realized gains on sales of investment securities |  | $                       | 3,689 
|                                                     |  |                         |       

Note 5Loans

Major classification of loans are as follows:

December 31,2004

2003(Dollars in thousands)Real estate

$
694,536

$
499,672Commercial and industrial


471,415


385,187Consumer loans


643,340


461,692Lease financing


33,219


61,519Total loans


1,842,510


1,408,070Deferred costs, net


3,292


321Allowance for loan losses


(18,455
)

(16,753
)Net loans and loans held for sale

$
1,827,347

$
1,391,638


On
December 31, 2004, nonaccrual loans were $4.7 million and loans 90 days or more past due and still accruing interest were $981,000. On December 31, 2003,
nonaccrual loans were $3.3 million and loans 90 days or more past due and still accruing interest were $1.2 million. The Bank's policy for interest income recognition on
nonaccrual loans is to recognize income 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 Bank. The Bank will
not recognize income if these factors do not exist. During 2004, interest accrued on nonaccruing loans and not recognized as interest income was $238,000 and interest paid on nonaccruing loans of
$47,000 was recognized as interest income. During 2003, interest accrued on nonaccruing loans and not recognized as interest income was $227,000, and interest paid on nonaccruing loans of $29,000 was
recognized as interest income.

The
balance of impaired loans was $2.1 million at December 31, 2004 compared to $1.8 million at December 31, 2003. At December 31,2004 and 2003,
impaired loans with specific loss allowances were $2.1 million and $1.8 million and the related allowance for loan losses was $243,000 and $185,000, respectively. The average impaired
loan balance was $1.8 million in 2004, compared to $2.2 million and $2.8 million in 2003 and 2002, respectively. The income recognized on impaired loans during 2004, 2003 and 2002
was $2,000, $63,000 and $186,000, respectively.

The
Bank has no concentration of loans to individual borrowers which exceeded 10% of total loans at December 31, 2004 and 2003. The Bank actively monitors the risk of this loan
concentration.

53

---



The
Bank continued to pursue new lending opportunities while seeking to maintain a portfolio that is diverse as to industry concentration, type and geographic distribution. The Bank's geographic
lending area is primarily concentrated in Montgomery, Carbon, Bucks, Chester, Berks and Wayne counties, but also includes Lehigh, Monroe, Northhampton and Schuylkill counties.

At
December 31, 2004 and 2003, loans serviced for others totaled approximately $329.0 million and $339.3 million, respectively.

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 31,2004

2003

2002(Dollars in thousands)Balance, January 1

$
21,038

$
15,280

$
16,483New loans


70,711


65,528


61,157Repayments


(68,886
)

(59,770
)

(62,360
)Balance, December 31

$
22,863

$
21,038

$
15,280


Note 6Allowance for Loan Losses

The table below summarizes the changes in the allowance for loan losses:

Year Ended December 31,2004

2003

2002(Dollars in thousands)Balance, beginning of year

$
16,753

$
17,190

$
15,558Provision for loan losses


2,555


3,200


4,370Reserve from Millennium Bank acquisition


1,677





Loans charged off


(3,534
)

(4,555
)

(3,877
)Recoveries


1,004


918


1,139Balance, end of year

$
18,455

$
16,753

$
17,190


54

---



Note 7Premises and Equipment

Premises and equipment consist of the following:

December 31,Estimated
Useful Lives2004

2003(Dollars in thousands)Land

Indefinite

$
5,008

$
4,245Buildings

15-39 years


24,815


23,313Furniture, fixtures and equipment

3-7 years


31,027


27,079Total cost




60,850


54,637Less accumulated depreciation and amortization




(33,887
)

(31,308
)Premises and equipment, net



$
26,963

$
23,329


Depreciation
expense for the years ended December 31, 2004, 2003, and 2002 was $3.4 million, $3.1 million and $2.9 million, respectively.

Note 8Deposits

At December 31, 2004, scheduled maturities of certificates of deposit are as follows:

Amount(Dollars in thousands)2005

$
306,0702006


155,3262007


158,2632008


13,7952009


3,881Thereafter


50Total

$
637,385


55

---



Note 9Borrowings

Federal Funds Lines of Credit with Commercial Banks

Total federal funds lines of credit with commercial banks at December 31, 2004 are $95.0 million of which $65.5 million is unused. The
weighted average rate on the outstanding balance at December 31, 2004 is 2.43%. These lines of credit are available for overnight funds and the rate is based on the commercial bank's quoted
rate at the time of the transaction.

Federal Home Loan Bank Advances

Federal Home Loan Bank (FHLB) advances at December 31, 2004, totaled $317.8 million of which $272.8 million was long-term and
$45.0 million was short-term. The advances are collateralized by FHLB stock and certain first mortgage loans and mortgage-backed securities. The long-term advances had a
weighted average interest rate of 4.10%. Advances are made pursuant to several different credit programs offered from time to time by the FHLB. Unused lines of credit with the FHLB were
$578.8 million at December 31, 2004 and $291.2 million at December 31, 2003. During 2003, the Corporation paid off approximately $29 million of FHLB borrowings with
rates over 6.0% prior to their scheduled maturity dates. This provided the opportunity to lock in historically low rates on new long-term borrowings. The early retirement of these
borrowings resulted in a $2.6 million prepayment fee.

At
December 31, 2004, scheduled maturities of long-term borrowings with the FHLB are as follows:

Balance

Weighted
Average Rate(Dollars in thousands)2006


40,000

3.38
%2007


55,000

4.08
%2008


58,000

4.49
%2009


40,750

4.13
%2010


4,000

4.13
%Thereafter


75,000

4.18
%Total

$
272,750

4.10
%


Trust Preferred Securities

On March 25, 2004, HNC Statutory Trust II (Trust II), a Delaware statutory trust subsidiary of the Corporation, issued $20.0 million of floating
rate (three-month LIBOR plus a margin of 2.70%) trust preferred securities, which represent undivided beneficial interests in the assets of Trust II on March 25, 2004. Trust II issued mandatory
redeemable preferred stock to investors and loaned the proceeds to the Corporation. Trust II holds, as its sole asset, a subordinated debenture in the amount of $20.6 million issued by the
Corporation on March 25, 2004. Trust II qualifies as a variable interest entity under FIN 46. The trust preferred securities must be redeemed upon maturity of the subordinate debentures on
April 6, 2034. The Corporation may redeem the debentures prior to their stated maturity upon the occurrence of specified special events or at the specified optional redemption dates. The
Corporation may redeem the debentures, in whole or in part, at any time, within 90 days following

56

---



the
occurrence and continuation of a tax event, an investment company event or a capital treatment event as set forth in the indentures relating to the trust preferred securities and in each case
subject to regulatory approval if required. The Corporation also may redeem the debentures, in whole or in part, at the stated optional redemption date of April 7, 2009 and quarterly
thereafter, subject to regulatory approval if required. The special and optional redemption price is equal to 100% of the principal amount of the debentures being redeemed plus accrued and unpaid
interest on the debentures to the redemption date.

On
February 22, 2001, the Corporation issued $5.0 million of 10.2% junior subordinate deferrable interest debentures (the debentures) to Harleysville Statutory Trust I
(Trust I), a Connecticut business trust, in which the Corporation owns all of the common equity. Management has determined that Trust I qualifies as a variable interest entity under FIN 46, as
revised. Trust I issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Corporation. Trust I is included in the Corporation's consolidated balance sheet and
statements of income as of and for the year ended December 31, 2003. Subsequent to the issuance of FIN 46 in January 2003, the FASB issued a revised interpretation, FIN 46(R), the
provisions of which were to be applied to certain variable interest entities by March 31, 2004. The trust preferred securities must be redeemed upon maturity of the subordinate debentures on
February 22, 2031. The Corporation may redeem the debentures prior to their stated maturity upon the occurrence of specified special events or at the specified optional redemption dates. The
Corporation may redeem the debentures, in whole but not in part, at any time, within 90 days following the occurrence and continuation of a tax event, an investment company event or a capital
treatment event as set forth in the indentures relating to the trust preferred securities and in each case subject to regulatory approval if required. If the special redemption date is before
February 22, 2011, the special redemption price is the greater of (i) 100% of the principal amount of the debentures, plus accrued and unpaid interest on the debentures to the special
redemption date, or (ii) as determined by a quotation agent, the sum of (a) the present value of the principal amount of the debentures at 105.10% of the principal amount and the present
value of interest payable from the special redemption date to February 22, 2011, each discounted to the special redemption date on a semi-annual basis, plus (b) accrued and
unpaid interest on the debentures to the special redemption date. If the special redemption date is on February 22, 2011, the redemption price is 105.10% of the principal amount, and declines
annually to 100.00% on February 22, 2021 and thereafter, plus accrued and unpaid interest on the debentures to the redemption date. The Corporation also may redeem the debt securities, in whole
or in part, at the stated optional redemption date of February 22, 2011 and semi-annually thereafter, subject to regulatory approval if required. The redemption price on
February 22, 2011 is equal to 105.10% of the principal amount, and declines annually to 100.00% on February 22, 2021 and thereafter, plus accrued and unpaid interest on the debentures to
the redemption date.

The
Corporation adopted the provisions under the revised interpretation in the first quarter of 2004. Accordingly, the Corporation no longer consolidates Trust I as of March 31,
2004. FIN 46(R) precludes consideration of the call option embedded in the preferred stock when determining if the Corporation has the right to a majority of Trust I's expected residual returns. The
deconsolidiation resulted in the investment in the common stock of Trust I to be included in other assets as of March 31, 2004 and the corresponding increase in outstanding debt of $155,000. In
addition, the income received on the Corporation's common stock investment is included in other income.

57

---



The
Corporation's obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Corporation of Trust I's and Trust II's
obligations under the trust preferred securities.

Note 10Federal Income Taxes

Federal income tax expense from current operations is composed of the following:

|                    |                    | Year Ended December 31, |       
|------------------- | ------------------ | ----------------------- | ------
|
|
|Current tax payable |                    | $                       | 16,029
|Deferred income tax |                    |                         | (3,580
|                    |                    |                         |       
|                    | Income tax expense |                         | $     
|                    |                    |                         |       

The
effective income tax rates of 24.4% for 2004, 19.6% for 2003 and 21.4% for 2002 were less than the applicable federal income tax rate of 35% for each year. The reason
for these differences follows:

Year Ended December 31,2004

2003

2002(Dollars in thousands)Expected income tax expense

$
17,855

$
15,374

$
14,656Tax-exempt income net of interest disallowance


(5,365
)

(6,769
)

(5,717
)Other


(41
)

(8
)

10Actual income tax expense

$
12,449

$
8,597

$
8,949


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

2004

2003Asset

Liability

Asset

Liability(Dollars in thousands)Allowance for loan losses

$
6,274

$


$
5,724

$
Lease assets





9,683





16,440Deferred loan fees





1,810





12Deferred compensation


2,489





2,279


Pension





23


174


Depreciation





1,409





621Net operating loss carryforward


1,414








Unrealized gain on investment securities


433








4,514Net unrealized gain on derivative used for cash flow hedge





18





93Other





835





9Total deferred taxes

$
10,610

$
13,778

$
8,177

$
21,689


58

---



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.

As
a result of the acquisition of Millennium Bank, the Corporation acquired a net deferred tax asset of $1.7 million, which included a $2.1 million net operating loss
carryforward.

Note 11Pension Plans

Defined Benefit Pension Plan

The Corporation has a non-contributory 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 ten-year period preceding retirement. The plan's funded status and amounts recognized in the
financial statements follow:

2004

2003(Dollars in thousands)Change in benefit obligation:Benefit obligation at beginning of year

$
9,439

$
8,330Service cost


873


785Interest cost


564


488Actual loss


218


217Benefits paid


(465
)

(381
)Change in assumptions


292


Benefits obligation at end of year

$
10,921

$
9,439Change in plan assets:Fair value of plan assets at beginning of year

$
6,870

$
5,207Actual return on plan assets


564


1,044Employer contribution


1,500


1,000Benefits paid


(465
)

(381
)Fair value of plan assets at end of year

$
8,469

$
6,870Funded status

$
(2,452
)
$
(2,568
)Unrecognized transition (asset)


(103
)

(120
)Unrecognized prior service cost





(105
)Unrecognized net loss


2,624


3,123Minimum liability recognized





(459
)Accrued benefit cost

$
69

$
(129
)


2004

2003(Dollars in thousands)Amounts recognized in the statement of financial position consist of:Prepaid benefit cost

$
(390
)
$
330Accumulated other comprehensive income (loss)


459


(459
)Net amount recognized

$
69

$
(129
)


59

---



|                              |  | Year Ended
December 31, |  
|----------------------------- |  | ----------------------- | -
|
|
|Discount rate                 |  | 6.00                    | %
|Rate of compensation increase |  | 4.00                    | %

|                               |  | Year Ended
December 31, |  
|------------------------------ |  | ----------------------- | -
|
|
|Discount rate                  |  | 6.00                    | %
|Expected return on plan assets |  | 6.50                    | %
|Rate of compensation increase  |  | 4.00                    | %

|                                                  |                              | Year Ended
December 31, |     
|------------------------------------------------- | ---------------------------- | ----------------------- | ----
|
|
|
|Service cost                                      |                              | $                       | 873 
|Interest cost                                     |                              |                         | 564 
|Expected return on plan assets                    |                              |                         | (477
|Amortization of prior service cost                |                              |                         | (105
|Amortization of unrecognized net actuarial losses |                              |                         | 79  
|                                                  |                              |                         |     
|                                                  | Net periodic benefit expense |                         | $   
|                                                  |                              |                         |     

The
pension plan assets are invested in a growth and income strategy with a target asset allocation of 60% equity and 40% fixed income securities. The allocation range for equities is
between 55 to 65% and between 35 to 45% for fixed income. Long-term rate of return assumptions of the various asset classes are based primarily on empirical long-term
historical return data, adjusted for near-term expectations. To make the return expectations more conservative, our near-term expectations are for 8.0% equity and 4.5% fixed
income returns for the next 10 years. The expected 2005 employer contribution to the pension plan is $1.5 million.

As
of December 31, 2004, Harleysville National Corporation's Pension Plans had an investment in the Corporation's stock with a market value of $219,000.

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.

60

---



The Corporation's pension plan weighted-average asset allocations by asset category is as follows:

Percentage ofPlan Assets at
December 31,2004

2003Asset CategoryEquity securities

64.4
%
67.0
%Debt securities

31.8
%
32.9
%Other

3.8
%
.1
%Total

100.0
%
100.0
%


Supplemental Benefit Plans

The Corporation maintains a non-tax qualified, unfunded Supplemental Executive Retirement Plan (SERP) for certain of its executives to supplement the
benefit those executives will receive under the Corporation's 401(k) plan and defined benefit plans. The agreements provide for fixed lifetime benefits up to 70% of the executives' final compensation
commencing at their normal retirement age of 65. The agreements terminate upon the executives' termination of employment with the Corporation. The agreements also provide for survivor and certain
other benefits. The Corporation's liability under these agreements is being accrued over the participants' remaining service
period. The accrued benefit obligation as of December 31, 2004 and 2003 was $4.7 million and $4.7 million, respectively.

Defined Contribution Plan

The Corporation maintains a 401(k) defined contribution retirement savings plan which allows employees to contribute a portion of their compensation on a
pre-tax and/or after-tax basis in accordance with specified guidelines. The Corporation matches 50% of pre-tax employee contributions up to a maximum of 3%.
Contributions charged to earnings were $514,000, $471,000 and $519,000 for 2004, 2003 and 2002, respectively.

Note 12Stock Dividend/Split

The Corporation has a stock repurchase program that permits the repurchase of up to five percent of its outstanding common stock. The repurchased shares will be
used for general corporate purposes. As of December 31, 2004, the maximum number of shares that may yet be purchased under the plan is 188,567.

On
September 15, 2004, the Corporation paid a five percent stock dividend on its common stock to shareholders of record as of August 30, 2004.

On
September 15, 2003, the Corporation paid a five-for-four common stock split to shareholders of record as of September 2, 2003.

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

61

---



All
prior period amounts in the consolidated financial statements and footnotes have been restated to reflect these stock dividends/splits.

Note 13Stock Options

The Corporation has five shareholder approved fixed stock option plans that are maintained to advance the development, growth and financial condition of the
Corporation as described below. Additionally, in connection with the acquisition of Millennium Bank in 2004, the Corporation assumed all obligations under the Millennium Bank Stock Compensation
Program. All share information has been adjusted to reflect stock dividends and splits. For additional information on the accounting for stock based compensation plans and pro-forma
disclosures, see Note 1, "Significant Accounting PoliciesStock Based Compensation."

1998 Independent Directors Stock Option Plan:This plan provides that shares of the Corporation's stock be issued to
non-employee directors. During 2004, there were 38,591 shares granted under the plan. As of December 31, 2004, a total of 86,241 shares remained available for grant under the plan.
At December 31, 2004, there were 238,391 options outstanding under the plan.

1993 Stock Incentive Plan:This plan provides that shares of the Corporation's common stock be issued to certain employees of
the Corporation and the Bank. Awards can be made in the form of incentive stock options, non-qualified stock options, stock appreciation rights or restricted stock. No stock options remain
available for grant under the 1993 Stock Incentive Plan. At December 31, 2004, there were 80,011 options outstanding under the plan.

1998 Stock Incentive Plan:This plan provides that shares of the Corporation's common stock be issued to certain employees of
the Corporation and the Bank. Awards can be made in the form of incentive stock options, non-qualified stock options, stock appreciation rights or restricted stock. At December 31,
2004, a total of 90,214 stock options remain available for grant under the plan. During 2004, 143,963 stock options were granted. At December 31, 2004, there were 1,197,420 options outstanding
under the plan.

2004 Omnibus Stock Incentive:This plan provides that shares of the Corporation's common stock be issued to certain employees
and/or directors of the Corporation and the Bank. Awards can be made in the form of incentive stock options, non-qualified stock options, stock appreciation rights or restricted stock. No
shares have been granted under the 2004 Omnibus Stock Incentive Plan. 1,050,000 stock options were allocated and remain available for grant.

Millennium Stock Compensation Program Converted to Harleysville Stock Options:In connection with the acquisition of
Millennium Bank in 2004, the Corporation assumed all obligations under the Millennium Bank Stock Compensation Program. The change in control accelerated the vesting of all outstanding stock options to
100%. Upon consummation of the merger, outstanding stock options were converted according to pro-ration parameters outlined in the merger agreement. 297,787 stock options were assumed on
the effective date of the merger. Since the effective date, 118,574 stock options have been exercised. A total of 179,213 stock options remain outstanding under the program. No further stock options
may be granted under the program.

62

---



The
following table presents a summary of the status of all stock option plans at December 31, 2004, 2003 and 2002, and the changes during the years then ended. The number of
options and option prices have been adjusted to reflect stock dividends and splits.

|                                |                                                       | Shares Under
Option |          | Weighted-Average
Exercise Price
|------------------------------- | ----------------------------------------------------- | ------------------- | -------- | -------------------------------
|Balance 1/1/02                  |                                                       | 1,822,149           |          | $                              
|                                | Granted                                               |                     | 53,091   |                                
|                                | Exercised                                             |                     | (128,804 | )                              
|                                | Cancelled                                             |                     | (4,961   | )                              
|                                |                                                       |                     |          |                                
|Balance 12/31/02                |                                                       | 1,741,475           |          | $                              
|                                |                                                       |                     |          |                                
|Options exercisable at 12/31/02 |                                                       | 985,409             |          | $                              
|                                |                                                       |                     |          |                                
|Balance 1/1/03                  |                                                       | 1,741,475           |          | $                              
|                                | Granted                                               |                     | 172,200  |                                
|                                | Exercised                                             |                     | (191,897 | )                              
|                                | Cancelled                                             |                     | (820     | )                              
|                                |                                                       |                     |          |                                
|Balance 12/31/03                |                                                       | 1,720,958           |          | $                              
|                                |                                                       |                     |          |                                
|Options exercisable at 12/31/03 |                                                       | 1,099,605           |          | $                              
|                                |                                                       |                     |          |                                
|Balance 1/1/04                  |                                                       | 1,720,958           |          | $                              
|                                | Granted                                               |                     | 182,554  |                                
|                                | Options from Millennium Bank acquisition (see note 2) |                     | 297,787  |                                
|                                | Exercised                                             |                     | (432,283 | )                              
|                                | Cancelled                                             |                     | (73,981  | )                              
|                                |                                                       |                     |          |                                
|Balance 12/31/04                |                                                       | 1,695,035           |          | $                              
|                                |                                                       |                     |          |                                
|Options exercisable at 12/31/04 |                                                       | 1,300,602           |          | $                              
|                                |                                                       |                     |          |                                

The
weighted average fair value of options granted during 2004, 2003 and 2002 were $7.48, $8.26 and $4.45, respectively.

63

---



The following table summarizes information about stock options outstanding as of December 31, 2004:

|             |  | Options as of December 31, 2004
|------------ |  | -------------------------------
|
|
|$9.05$12.07 |  | 1,184,057                      
|12.0715.09  |  | 110,608                        
|15.0918.11  |  | 44,298                         
|18.1121.13  |  | 51,716                         
|21.1324.14  |  | 5,250                          
|24.1427.16  |  | 87,000                         
|27.1630.18  |  | 212,106                        
|             |  |                                
|             |  | 1,695,035                      
|             |  |                                

Note 14Earnings Per Share

The calculation of basic earnings per share and diluted earnings per share is presented below. All weighted average shares, actual shares and per share
information in the financial statements have been adjusted retroactively for the effect of stock dividends and splits. See Note 1 of the consolidated financial statements for a discussion on
the calculation of earnings per share.

|                                                                    |  | Year Ended December 31,
|------------------------------------------------------------------- |  | -----------------------
|
|
|Basic earnings per share                                            |  |                        
|Net income available to common shareholders                         |  | $                      
|Weighted average common shares outstanding                          |  |                        
|Basic earnings per share                                            |  | $                      
|Diluted earnings per share                                          |  |                        
|Net income available to common shareholders and assumed conversions |  | $                      
|Weighted average common shares outstanding                          |  |                        
|Dilutive potential common shares(1),(2)                             |  |                        
|                                                                    |  |                        
|Total diluted weighted average common shares outstanding            |  |                        
|Diluted earnings per share                                          |  | $                      

---

64

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Note 15Comprehensive Income

The components of other comprehensive income (loss) are as follows:

|For the year ended December 31, 2004                    |                                                                       | Before
tax amount |   | Tax Benefit
(Expense) |   | Net of
tax amount |       
|------------------------------------------------------- | --------------------------------------------------------------------- | ----------------- | - | --------------------- | - | ----------------- | ------
|
|Net unrealized losses on available for sale securities: |                                                                       |                   |   |                       |   |                   |       
|                                                        | Net unrealized holding losses arising during period                   |                   | $ | (7,350                | ) | $                 | 2,573 
|                                                        | Less reclassification adjustment for net gains realized in net income |                   |   | 3,689                 |   |                   | (1,291
|                                                        |                                                                       |                   |   |                       |   |                   |       
|                                                        | Net unrealized losses                                                 |                   |   | (11,039               | ) |                   | 3,864 
|                                                        | Change in minimum pension liability                                   |                   |   | 459                   |   |                   |      
|                                                        | Change in fair value of derivatives used for cash flow hedges         |                   |   | (214                  | ) |                   | 75    
|                                                        |                                                                       |                   |   |                       |   |                   |       
|                                                        | Other comprehensive loss, net                                         |                   | $ | (10,794               | ) | $                 | 3,939 
|                                                        |                                                                       |                   |   |                       |   |                   |       

|For the year ended December 31, 2003                   |                                                                       | Before
tax amount |   | Tax
Expense |   | Net of
tax amount |       
|------------------------------------------------------ | --------------------------------------------------------------------- | ----------------- | - | ----------- | - | ----------------- | ------
|
|Net unrealized gains on available for sale securities: |                                                                       |                   |   |             |   |                   |       
|                                                       | Net unrealized holding gains arising during period                    |                   | $ | 8,839       |   | $                 | (3,094
|                                                       | Less reclassification adjustment for net gains realized in net income |                   |   | 6,613       |   |                   | (2,315
|                                                       |                                                                       |                   |   |             |   |                   |       
|                                                       | Net unrealized gains                                                  |                   |   | 2,226       |   |                   | (779  
|                                                       | Change in minimum pension liability                                   |                   |   | (459        | ) |                   |      
|                                                       | Change in fair value of derivatives used for cash flow hedges         |                   |   | 266         |   |                   | (93   
|                                                       |                                                                       |                   |   |             |   |                   |       
|                                                       | Other comprehensive income, net                                       |                   | $ | 2,033       |   | $                 | (872  
|                                                       |                                                                       |                   |   |             |   |                   |       

|For the year ended December 31, 2002                   |                                                                       | Before
tax amount |   | Tax
Expense |  | Net of
tax amount
|------------------------------------------------------ | --------------------------------------------------------------------- | ----------------- | - | ----------- |  | -----------------
|
|Net unrealized gains on available for sale securities: |                                                                       |                   |   |             |  |                  
|                                                       | Net unrealized holding gains arising during period                    |                   | $ | 7,171       |  | $                
|                                                       | Less reclassification adjustment for net gains realized in net income |                   |   | 3,475       |  |                  
|                                                       |                                                                       |                   |   |             |  |                  
|                                                       | Other comprehensive income, net                                       |                   | $ | 3,696       |  | $                
|                                                       |                                                                       |                   |   |             |  |                  

65

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Note 16Commitments and Contingent Liabilities

Lease Commitments

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 non-cancelable operating leases at December 31, 2004, are as follows:

Minimum Lease Payments(Dollars in thousands)For the year ending:2005

$
2,2482006


1,6532007


1,6362008


1,4222009


1,259Thereafter


7,399Total

$
15,617


Total
rent expense amounted to $2.2 million, $2.1 million and $2.0 million for the years ended December 31, 2004, 2003 and 2002, respectively.

Other

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. In addition, no material
proceedings are pending or are known to be threatened or contemplated against the Corporation by government authorities.

Note 17Financial Instruments with Off-Balance Sheet Risk

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.
Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of
those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

The
Bank's 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 Bank uses the same stringent credit policies in extending these commitments as they do for recorded financial instruments
and controls exposure to loss through credit approval and monitoring procedures. These commitments are generally

66

---



issued
for one year or less, often expire without being drawn upon, and often are secured with appropriate collateral.

The
Bank offers 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 Bank's 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
Bank's market areas.

Unless
noted otherwise, the Bank does not require collateral or other security to support financial instruments with credit risk. The approximate contract amounts are as follows:

|                                                                                           |                                                            | Total Amount Committed at
December 31,
|------------------------------------------------------------------------------------------ | ---------------------------------------------------------- | --------------------------------------
|
|
|
|Financial instruments whose contract amounts represent credit risk:                        |                                                            |                                       
|                                                                                           | Commitments to extend credit                               |                                       
|                                                                                           | Standby letters of credit and financial guarantees written |                                       
|Financial instruments whose notional or contract amounts exceed the amount of credit risk: |                                                            |                                       
|                                                                                           | Interest rate swap agreements                              |                                       

Standby
letters of credit expire as follows: $13.5 million in one year or less, $3.6 million after one year through three years, and $50,000 after three years through five
years. The interest rate swaps have the effect of converting the rates on money market deposit accounts to a more market-driven floating rate typical of the prime rate in order for the Bank to
recognize a more even interest rate spread on this business segment. This strategy will cause the Bank to recognize, in a rising rate environment, a lower overall interest rate spread than it
otherwise would have without the swaps in effect. Likewise, in a
falling rate environment, the Bank will recognize a larger interest rate spread than it otherwise would have without the swaps in effect.

The
Bank also had commitments with customers to extend mortgage loans at a specified rate at December 31, 2004 and 2003 of $5.1 million and $1.4 million,
respectively and commitments to sell mortgage loans at a specified rate at December 31, 2004 and 2003 of $2.2 million and $1.4 million, respectively. The commitments are accounted
for as a derivative and recorded at fair value. The Bank estimates the fair value of these commitments by comparing the secondary market price at the reporting date to the price specified in the
contract to extend or sell the loan initiated at the time of the loan commitment. At December 31, 2004 and 2003, the fair values of the loan commitments were $5,000 and $29,000, respectively,
which were recorded as other income.

During
December 2004, the Bank sold lease financing receivables of $9.1 million. Of these leases, $1.2 million were sold with full recourse and the remaining leases
were sold subject to recourse with a maximum exposure of ten percent of the outstanding receivable. The total recourse exposure related to the sold leases is $2.0 million. After the first
anniversary of the sale agreement, and on a quarterly basis thereafter, upon written request by the Bank, the purchaser will review the portfolio performance

67

---



and
may reduce the total exposure to an amount equal to ten percent of the outstanding net book value.

Note 18Regulatory Capital

|                                          |  |   |         |  |       | For Capital Adequacy Purposes |   | To Be Well Capitalized
Under Prompt Corrective
Action Provision | 
|----------------------------------------- |  | - | ------- |  | ----- | ----------------------------- | - | --------------------------------------------------------------- | 
|
|
|
|
|Total Capital (to risk weighted assets):  |  |   |         |  |       |                               |   |                                                                 | 
|Corporation                               |  | $ | 280,055 |  | 12.21 | %                             | $ | 183,436                                                         | 
|Harleysville National Bank                |  |   | 240,695 |  | 10.60 | %                             |   | 181,647                                                         | 
|Tier 1 Capital (to risk weighted assets): |  |   |         |  |       |                               |   |                                                                 | 
|Corporation                               |  |   | 260,480 |  | 11.36 | %                             |   | 91,718                                                          | 
|Harleysville National Bank                |  |   | 222,140 |  | 9.78  | %                             |   | 90,823                                                          | 
|Tier 1 Capital (to average assets):       |  |   |         |  |       |                               |   |                                                                 | 
|Corporation                               |  |   | 260,480 |  | 8.91  | %                             |   | 116,950                                                         | 
|Harleysville National Bank                |  |   | 222,140 |  | 7.70  | %                             |   | 115,439                                                         | 

|                                          |  |   |         |  |       | For Capital Adequacy Purposes |   | To Be Well Capitalized
Under Prompt Corrective
Action Provision | 
|----------------------------------------- |  | - | ------- |  | ----- | ----------------------------- | - | --------------------------------------------------------------- | 
|
|
|
|
|Total Capital (to risk weighted assets):  |  |   |         |  |       |                               |   |                                                                 | 
|Corporation                               |  | $ | 242,363 |  | 13.73 | %                             | $ | 141,260                                                         | 
|Harleysville National Bank                |  |   | 148,666 |  | 11.44 | %                             |   | 104,001                                                         | 
|Citizens National Bank(1)                 |  |   | 39,397  |  | 13.07 | %                             |   | 24,108                                                          | 
|Security National Bank(1)                 |  |   | 18,511  |  | 12.56 | %                             |   | 11,789                                                          | 
|Tier 1 Capital (to risk weighted assets): |  |   |         |  |       |                               |   |                                                                 | 
|Corporation                               |  | $ | 223,613 |  | 12.66 | %                             | $ | 70,630                                                          | 
|Harleysville National Bank                |  |   | 137,756 |  | 10.60 | %                             |   | 52,001                                                          | 
|Citizens National Bank(1)                 |  |   | 35,630  |  | 11.82 | %                             |   | 12,054                                                          | 
|Security National Bank(1)                 |  |   | 16,666  |  | 11.31 | %                             |   | 5,895                                                           | 
|Tier 1 Capital (to average assets):       |  |   |         |  |       |                               |   |                                                                 | 
|Corporation                               |  | $ | 223,613 |  | 8.79  | %                             | $ | 101,731                                                         | 
|Harleysville National Bank                |  |   | 137,756 |  | 7.45  | %                             |   | 73,989                                                          | 
|Citizens National Bank(1)                 |  |   | 35,630  |  | 7.49  | %                             |   | 19,033                                                          | 
|Security National Bank(1)                 |  |   | 16,666  |  | 7.90  | %                             |   | 8,435                                                           | 

---

68

---



The
Bank is 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 Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The Bank's 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 Bank 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, 2004, that the Bank meets all capital adequacy requirements to which it is subject. To be categorized as well
capitalized, the Bank 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 Bank's 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 Bank may declare dividends in 2005 of
approximately $39.8 million plus an amount equal to the net profits of the Bank in 2005 up to the date of any such dividend declaration.

Additionally,
banking regulations limit the amount of investments, loans, extensions of credit and advances that a subsidiary bank can make to an affiliate at any time to 10% and in the
aggregate, 20% of the Bank's 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, 2004, the Bank did not engage in any material transactions with affiliates.

Note 19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 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.

69

---



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 at December 31, 2004 and 2003 are outlined as follows:

Short-term financial instruments

The carrying value of short-term financial instruments including cash and due from banks, federal funds sold and securities purchased under agreements
to resell, interest-bearing deposits in banks and other short-term investments and borrowings, approximates the fair value of these instruments. These financial instruments generally
expose the Corporation to limited credit risk and have no stated maturities or have short-term maturities with interest rates that approximate market rates.

Investment securities

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.

Loans

The loan portfolio, net of unearned income, 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.

Deposits

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 fair value for deposits with stated maturities was calculated by discounting contractual cash flows using current
market rates for instruments with similar maturities. The carrying amount of accrued interest receivable and payable approximates fair value.

Long-term borrowings and subordinated debt

The amounts assigned to long-term borrowings and subordinated debt was based on quoted market prices, when available, or were based on discounted cash
flow calculations using prevailing market interest rates for debt of similar terms.

Off-balance sheet instruments

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.

70

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The
fair value of interest rate swaps are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current
interest rates and, when appropriate, the current creditworthiness of the counterparties. The fair value of the interest rate swap agreements are $53,000 at December 31, 2004 and $173,000 at
December 31, 2003.

The carrying and fair values of certain financial instruments were as follows:

|                                           |  | December 31,
|------------------------------------------ |  | ------------
|
|
|
|Investment securities                      |  | $           
|Loans, net                                 |  |             
|Time deposits                              |  |             
|Long-term borrowings and subordinated debt |  |             
|Bank-owned life insurance                  |  |             

Note 20Parent-Company Only Financial Information

Condensed financial statements of Harleysville National Corporation follow:

CONDENSED BALANCE SHEETS

|                                     |                                                                                   | December 31,                              
|------------------------------------ | --------------------------------------------------------------------------------- | ------------------------------------------
|
|
|Assets                               |                                                                                   |                                           
|                                     | Cash                                                                              |                                           
|                                     | Investments in subsidiaries                                                       |                                           
|                                     | Other investments                                                                 |                                           
|                                     | Other assets                                                                      |                                           
|                                     |                                                                                   |                                           
|                                     |                                                                                   | Total assets                              
|                                     |                                                                                   |                                           
|Liabilities and shareholders' equity |                                                                                   |                                           
|                                     | Subordinated debt                                                                 |                                           
|                                     | Guaranteed preferred beneficial interest in Corporation's subordinated debentures |                                           
|                                     | Other liabilities                                                                 |                                           
|                                     |                                                                                   |                                           
|                                     |                                                                                   | Total liabilities                         
|                                     | Shareholders' equity                                                              |                                           
|                                     |                                                                                   |                                           
|                                     |                                                                                   | Total liabilities and shareholders' equity
|                                     |                                                                                   |                                           

71

---



CONDENSED STATEMENTS OF INCOME

|                                                                                        |               | Year Ended December 31, |       
|--------------------------------------------------------------------------------------- | ------------- | ----------------------- | ------
|
|
|Dividends from subsidiaries                                                             |               | $                       | 18,575
|Investment income                                                                       |               |                         | 29    
|                                                                                        |               |                         |       
|                                                                                        | Total income  |                         |       
|                                                                                        |               |                         |       
|Interest on subordinated debt                                                           |               |                         | 1,249 
|Noninterest expense                                                                     |               |                         | 23    
|                                                                                        |               |                         |       
|                                                                                        | Total expense |                         |       
|                                                                                        |               |                         |       
|Income before income tax benefit and equity in undistributed net income of subsidiaries |               |                         | 17,332
|Income tax benefit                                                                      |               |                         | (426  
|                                                                                        |               |                         |       
|Income before equity in undistributed net income of subsidiaries                        |               |                         | 17,758
|Equity in undistributed net income of subsidiaries                                      |               |                         | 20,809
|                                                                                        |               |                         |       
|                                                                                        | Net income    |                         | $     
|                                                                                        |               |                         |       

72

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CONDENSED STATEMENTS OF CASH FLOWS

|                                                                                  |                                                | Year Ended December 31,                            |        
|--------------------------------------------------------------------------------- | ---------------------------------------------- | -------------------------------------------------- | -------
|
|
|Operating activities:                                                             |                                                |                                                    |        
|Net income                                                                        |                                                | $                                                  | 38,567 
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                |                                                    |        
|                                                                                  |                                                | Equity in undistributed net income of subsidiaries |        
|                                                                                  |                                                | Net (increase) decrease in assets                  |        
|                                                                                  |                                                | Net increase (decrease) in other liabilities       |        
|                                                                                  |                                                | Other, net                                         |        
|                                                                                  |                                                |                                                    |        
|Net cash provided by operating activities                                         |                                                |                                                    | 16,490 
|                                                                                  |                                                |                                                    |        
|Investing activities:                                                             |                                                |                                                    |        
|                                                                                  | Net cash paid due to acquisition               |                                                    |        
|                                                                                  | Capital contributions made to the subsidiaries |                                                    |        
|                                                                                  |                                                |                                                    |        
|Net cash used in investing activities                                             |                                                |                                                    | (18,403
|Financing activities:                                                             |                                                |                                                    |        
|                                                                                  | Advances of long-term subordinated debt        |                                                    |        
|                                                                                  | Cash dividends                                 |                                                    |        
|                                                                                  | Repurchase of common stock                     |                                                    |        
|                                                                                  | Proceeds from the exercise of stock options    |                                                    |        
|                                                                                  | Other, net                                     |                                                    |        
|                                                                                  |                                                |                                                    |        
|Net cash provided by (used in) financing activities                               |                                                |                                                    | 3,459  
|                                                                                  |                                                |                                                    |        
|Net increase (decrease) in cash                                                   |                                                |                                                    | 1,546  
|Cash and cash equivalents at beginning of year                                    |                                                |                                                    | 1,910  
|                                                                                  |                                                |                                                    |        
|Cash and cash equivalents at end of year                                          |                                                | $                                                  | 3,456  
|                                                                                  |                                                |                                                    |        

73

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Accountants and Business Advisors

LOGO

Report of Independent Registered Public Accounting Firm

Board
of Directors
Harleysville National Corporation

We
have audited the accompanying consolidated balance sheets of Harleysville National Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of its operations and its cash flows for the each of the three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Harleysville National Corporation's internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and our report dated March 9, 2005 expressed an unqualified opinion on management's assessment and an adverse opinion on internal control effectiveness due to
the effects of a material weakness identified in management's assessment process.

LOGO

Philadelphia,
Pennsylvania
March 9, 2005

Suite
3100
Two Commerce Square
2001 Market Street
Philadelphia, PA 19103-7080 T215.561.4200 F215.561.1066 Wwww.grantthorton.com

Grant Thornton, LLP
US Member of Grant Thornton International

74

---





Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A.    Controls and Procedures



Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15(d)-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and regulations and
are operating in an effective manner.

During
the second quarter of 2004, management uncovered a defalcation in the pre-tax amount of $699,000. The Corporation determined the defalcation was the result of
unauthorized activities by an officer of the Bank who was immediately terminated. Restitution has been made in full. The appropriate regulatory and governmental authorities were notified in a timely
manner.

The
Corporation has conducted a review of its controls and procedures, which has resulted in certain changes related to processing of employee personal accounts, account reconciliation
procedures, and
approvals related thereto. The Office of the Comptroller of the Currency (OCC) has also conducted a preliminary review in connection with the defalcation noted above and identified certain weaknesses
in the Bank's internal controls and procedures. They suggested certain corrective actions which the Bank has responded to in order to reduce the potential for internal fraud.



Management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the
Corporation's principal executive and principal financial officers and effected by the Corporation's board of directors, management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and
procedures that:



Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A
material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 2), or a combination of significant deficiencies,
that results in there being more than a remote likelihood that a material misstatement of the annual or interim

75

---



financial
statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.

Management
assessed the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2004. Management's assessment identified the following
material weakness in the Corporation's internal control over financial reporting:



In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal
Control-Integrated Framework.Because of the material weakness described above, management believes that, as of December 31, 2004, the Corporation's internal control
over financial reporting was not effective.

Post year-end remediation to address the material weakness is as follows:



The
Corporation's independent registered Public Accounting Firm has issued an audit report on management's assessment of the Corporation's internal control over financial reporting. This
report appears herein on page 76.

There
have been no changes in the Corporation's internal control over financial reporting during the most recent fiscal year that have materially affected, or reasonably likely to
materially affect, the Corporation's internal control over financial reporting except as disclosed in item 9A(i) on page 75 herein.



Board
of Directors and Shareholders

We
have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Harleysville National Corporation did not
maintain effective internal control over financial reporting as of December 31, 2004, because of the effect of material weakness identified in management's
assessment,based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Harleysville National Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and evaluating the design and

76

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operating
effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A
material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The following material weakness has been identified and included in management's assessment. There were ineffective controls over employee
access to the computer system which were identified in the areas of general ledger, deposits, loans, customer information files, and the Bank's Automated Clearing House. The purpose of these controls
is to ensure proper segregation of duties within the identified functional areas. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our
audit of the 2004 financial statements, and this report does not affect our report dated March 9, 2005 on those financial statements.

In
our opinion, management's assessment that Harleysville National Corporation did not maintain effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Also in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Harleysville National Corporation
has not maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Harleysville National
Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2004 and our report dated March 9, 2005 expressed an unqualified opinion on those financial statements.

We
do not express an opinion or any other form of assurance on management's statement referring to post year-end remediation to address the material weaknesses.

LOGO

Philadelphia,
Pennsylvania
March 9, 2005

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PART III

Item 10.    Directors and Executive Officers of Registrant

The Corporation has adopted a Code of Ethics for directors, officers and employees of the corporation. It is intended to promote honest and ethical conduct, full
and accurate reporting, and compliance with laws as well as other matters.

The
SEC recently adopted a rule requiring disclosure concerning the presence of at least one "audit committee financial expert" on the Audit Committee. During 2004, Walter R.
Bateman, II was the committee's independent financial expert, as defined by SEC regulations, and chaired the committee.

Additional
information regarding directors and executives is included under the following captions in the Corporation's proxy statement relating to its 2005 annual meeting of
shareholders (the "2005 Proxy Statement") and is incorporated herein by reference:

"Directors"
"Executive Officers"
"Executive Compensation and Plan InformationExecutive Employment Agreements"
"Corporate Governance"
"Meetings and Committees of the Board of Directors"
"Section 16(a) Beneficial Ownership Reporting Compliance"

In
addition, the Corporation makes available onwww.hncbank.com(under "Investor InformationCorporate Governance") the
following: 1) Audit Committee Charter, 2) Code of Ethics, 3) Whistleblower Policy and 4) Nominating Committee Charter.

Item 11.    Executive Compensation

Information regarding executive compensation included under the following captions in the 2005 Proxy Statement is incorporated herein by reference:

"Directors"
"Meetings and Committees of the Board of Directors"
"Compensation of Directors"
"Executive Compensation and Plan Information"

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information included under the captions, "Equity Compensation Plan Information" and "Beneficial Ownership," in the 2005 Proxy Statement is incorporated herein by
reference.

Item 13.    Certain Relationships and Related Transactions

Information included in Part II, Item 8, Footnote 5 "Loans" of this Report on Form 10-K is incorporated herein by
reference.

Information
included under the caption, "Executive Compensation and Plan InformationCertain Transactions," in the 2005 Proxy Statement is incorporated herein by reference.

Item 14.    Principal Accounting Fees and Services

Information included under the caption, "Independent Registered Public Accounting Firm," in the 2005 Proxy Statement is incorporated herein by reference.

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PART IV

Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K

Exhibits

|Exhibit
No. |  | Description of Exhibits                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3.1)       |  | Harleysville National Corporation Amended and Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Corporation's Registration Statement No. 333-111709 on Form S-4, as filed on
January 5, 2004.)                                                                                                                                                                      
|(3.2)       |  | Harleysville National Corporation Amended and Restated By-laws. (Incorporated by reference to Exhibit 3.2 to the Corporation's Registration Statement No. 333-111709 on Amendment No. 1 to Form S-4, as filed on February 6,
2004.)                                                                                                                                                                    
|(10.1)      |  | Employment Agreement by and among Harleysville National Corporation, Harleysville National Bank and Trust Company and David E. Sparks, dated as of October 15, 2003. (Incorporated by reference to Appendix A to the proxy
statement/prospectus on the Corporation's Registration Statement No. 333-111709 on Form S-4, as filed on January 5, 2004.)                                                  
|(10.2)      |  | Complete Settlement Agreement and General Release by and between David E. Sparks, Harleysville National Corporation and Harleysville National Bank (incorporated by reference to Exhibit 99.2 to the Corporation's current report on
Form 8-K, as filed on June 22, 2004.)                                                                                                                             
|(10.3)      |  | Amendment to Employment Agreement by and among David R. Kotok, Millennium Bank, Cumberland Advisors, Inc., Harleysville National Corporation and Harleysville National Bank and Trust Company dated October 15, 2003 (incorporated by
reference to Appendix "A" to the proxy statement/prospectus on the Corporation's Registration Statement No. 333-111709 on Form S-4, as filed on January 5, 2004.)
|(10.4)      |  | Harleysville National Corporation 1993 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.3 of Registrant's Registration Statement No. 33-69784 on Form S-8, filed with the Commission on October 1, 1993.)                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                        

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|(10.5)  |  | Harleysville National Corporation Stock Bonus Plan. (Incorporated by reference to Exhibit 99A of Registrant's Registration Statement No. 333-17813 on Form S-8, filed with the Commission on December 13, 1996.)                                                                                                                                                          
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10.6)  |  | 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.)                                                                                                                                                         
|(10.7)  |  | Walter E. Daller, Jr., Chairman, President and Chief Executive Officer's Employment Agreement. (Incorporated by reference to Registrant's Current Report on Form 8-K, filed with the Commission on March 25, 1999.)                                                                                                                                                       
|(10.8)  |  | Consulting Agreement and General Release dated November 12, 2004 between Walter E. Daller, Jr., Harleysville National Corporation and Harleysville National Bank and Trust Company. (Incorporated by reference to Registrant's Current
Report on Form 8-K, filed with the Commission on November 16, 2004.)                                                               
|(10.9)  |  | Employment Agreement dated October 26, 1998 by and among Harleysville National Corporation, Harleysville National Bank and Trust Company and Demetra M. Takes, President and Chief Executive Officer of Harleysville National Bank and Trust
Company. (Incorporated by reference to Registrant's Current Report on Form 8-K, filed with the Commission on March 25, 1999.)
|(10.10) |  | 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.)                                                                                                                                                                     
|(10.11) |  | 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.)                                                                                                                                                  
|(10.12) |  | Employment Agreement dated February 23, 2004 between Michael B. High, Executive Vice President & Chief Financial Officer and Harleysville Management Services, LLC. (Incorporated by reference to Registrant's Quarterly Report on
Form 10-Q, filed with the Commission on May 10, 2004.)                                                                                 
|(10.13) |  | Employment Agreement effective April 1, 2005 between Michael B. High, the current Executive Vice President and Chief Financial Officer of the Corporation, and Harleysville Management Services, LLC. (Incorporated by reference to
Registrant's Current Report on Form 8-K, filed with the Commission on November 16, 2004.)                                             
|(10.14) |  | Supplemental Executive Retirement Benefit Agreement dated February 23, 2004 between Michael B. High, Executive Vice President & Chief Financial Officer and Harleysville Management Services, LLC. (Incorporated by reference to
Registrant's Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2004.)                                                  
|(10.15) |  | Employment Agreement dated March 9, 2004 between Mikkalya Murray, Executive Vice President and Harleysville Management Services, LLC. (Incorporated by reference to Registrant's Quarterly Report on Form 10-Q, filed with the Commission
on May 10, 2004.)                                                                                                               
|(10.16) |  | Employment Agreement dated August 23, 2004 between James F. McGowan, Jr., Executive Vice President & Chief Credit Officer and Harleysville Management Services, LLC. (Incorporated by reference to Registrant's Current Report on
Form 8-K, filed with the Commission on August 25, 2004.)                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                           

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|(10.17) |  | Supplemental Executive Retirement Benefit Agreement dated August 23, 2004 between James F. McGowan, Jr., Executive Vice President & Chief Credit Officer, and Harleysville Management Services, LLC. (Incorporated by reference to
Registrant's Current Report on Form 8-K, filed with the Commission on August 25, 2004.)                                     
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10.18) |  | Employment Agreement dated September 27, 2004 between John Eisele, Executive Vice President & President of Millennium Wealth Management and Private Banking, and Harleysville Management Services, LLC. (Incorporated by reference to
Registrant's Current Report on Form 8-K, filed with the Commission on September 29, 2004.)                               
|(10.19) |  | Supplemental Executive Retirement Benefit Agreement dated September 27, 2004 between John Eisele, Executive Vice President & President of Millennium Wealth Management and Private Banking, and Harleysville Management Services, LLC.
(Incorporated by reference to Registrant's Current Report on Form 8-K, filed with the Commission on September 29, 2004.)
|(10.20) |  | Employment Agreement effective January 1, 2005 between Gregg J. Wagner, the current t President and Chief Operating Officer of the Corporation, and Harleysville Management Services, LLC. (Incorporated by reference to Registrant's
Current Report on Form 8-K, filed with the Commission on November 16, 2004.)                                             
|(10.21) |  | Harleysville National Corporation 2004 Omnibus Stock Incentive Plan. (Incorporated by reference to Exhibit 4 of Registrant's Registration Statement No. 333-116183 on Form S-8, filed with the Commission on June 4, 2004).                                                                                                                                    
|(11)    |  | Computation of Earnings per Common Share, incorporated by reference to Part II, Item 8, Footnote 14, "Earnings Per Share," of this Report on Form 10-K                                                                                                                                                                                                         
|(21)    |  | Subsidiaries of Registrant                                                                                                                                                                                                                                                                                                                                     
|(23)    |  | Consent of Grant Thornton LLP, Independent Registered Public Accounting firm                                                                                                                                                                                                                                                                                   
|(31.1)  |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                         
|(31.2)  |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                         
|(32.1)  |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                          
|(32.2)  |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                          

On
November 15, 2004, the Corporation filed a Current Report on Form 8-K announcing the 4th quarter dividend and a special cash dividend.

On
November 16, 2004, the Corporation filed a Current Report on Form 8-K announcing executive changes and the retirement of Walter E. Daller, Jr.
as President and Chief Executive Officer of Harleysville National Corporation

On
December 17, 2004, the Corporation filed a Current Report on Form 8-K, announcing the sale of its McAdoo, Pennsylvania branch to The Legacy Bank.

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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.
Chief Executive Officer

Date:
March 3, 2005

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                                                                                          |  | March 3, 2005
|/s/LEEANN BERGEYLeeAnn Bergey                 |  | Director                                                                                          |  | March 3, 2005
|/s/WALTER E. DALLER, JR.Walter E. Daller, Jr. |  | Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)         |  | March 3, 2005
|/s/HAROLD A. HERRHarold A. Herr               |  | Director                                                                                          |  | March 3, 2005
|/s/MICHAEL B. HIGHMichael B. High             |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 3, 2005
|/s/STEPHANIE S. MITCHELLStephanie S. Mitchell |  | Director                                                                                          |  | March 3, 2005
|/s/THOMAS C. LEAMERThomas C. Leamer           |  | Director                                                                                          |  | March 3, 2005
|                                              |  |                                                                                                   |  |              

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|/s/VINCENT P. SMALL, JR.Vincent P. Small, Jr. |  | Director                                        |  | March 3, 2005
|--------------------------------------------- |  | ----------------------------------------------- |  | -------------
|/s/DEMETRA M. TAKESDemetra M. Takes           |  | Director and Executive Vice President           |  | March 3, 2005
|/s/GREGG J WAGNERGregg J. Wagner              |  | President, Chief Operating Officer and Director |  | March 3, 2005
|/s/JAMES A. WIMMERJames A. Wimmer             |  | Director                                        |  | March 3, 2005
|/s/WILLIAM M. YOCUMWilliam M. Yocum           |  | Director                                        |  | March 3, 2005

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EXHIBIT INDEX

|Exhibit
No. |  | Description of Exhibits                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3.1)       |  | Harleysville National Corporation Amended and Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Corporation's Registration Statement No. 333-111709 on Form S-4, as filed
on January 5, 2004.)                                                                                                                                                                      
|(3.2)       |  | Harleysville National Corporation Amended and Restated By-laws. (Incorporated by reference to Exhibit 3.2 to the Corporation's Registration Statement No. 333-111709 on Amendment No. 1 to Form S-4, as filed on February 6,
2004.)                                                                                                                                                                    
|(10.1)      |  | Employment Agreement by and among Harleysville National Corporation, Harleysville National Bank and Trust Company and David E. Sparks, dated as of October 15, 2003. (Incorporated by reference to Appendix A to the proxy
statement/prospectus on the Corporation's Registration Statement No. 333-111709 on Form S-4, as filed on January 5, 2004.)                                                  
|(10.2)      |  | Complete Settlement Agreement and General Release by and between David E. Sparks, Harleysville National Corporation and Harleysville National Bank (incorporated by reference to Exhibit 99.2 to the Corporation's current report on
Form 8-K, as filed on June 22, 2004.)                                                                                                                             
|(10.3)      |  | Amendment to Employment Agreement by and among David R. Kotok, Millennium Bank, Cumberland Advisors, Inc., Harleysville National Corporation and Harleysville National Bank and Trust Company dated October 15, 2003 (incorporated by reference
to Appendix "A" to the proxy statement/prospectus on the Corporation's Registration Statement No. 333-111709 on Form S-4, as filed on January 5, 2004.)
|(10.4)      |  | Harleysville National Corporation 1993 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.3 of Registrant's Registration Statement No. 33-69784 on Form S-8, filed with the Commission on October 1, 1993.)                                                                                                                                                                                 
|(10.5)      |  | Harleysville National Corporation Stock Bonus Plan. (Incorporated by reference to Exhibit 99A of Registrant's Registration Statement No. 333-17813 on Form S-8, filed with the Commission on December 13, 1996.)                                                                                                                                                                                       
|(10.6)      |  | 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.)                                                                                                                                                                                      
|(10.7)      |  | Walter E. Daller, Jr., Chairman, President and Chief Executive Officer's Employment Agreement. (Incorporated by reference to Registrant's Current Report on Form 8-K, filed with the Commission on March 25, 1999.)                                                                                                                                                                                    
|(10.8)      |  | Consulting Agreement and General Release dated November 12, 2004 between Walter E. Daller, Jr., Harleysville National Corporation and Harleysville National Bank and Trust Company. (Incorporated by reference to Registrant's Current
Report on Form 8-K, filed with the Commission on November 16, 2004.)                                                                                            
|(10.9)      |  | Employment Agreement dated October 26, 1998 by and among Harleysville National Corporation, Harleysville National Bank and Trust Company and Demetra M. Takes, President and Chief Executive Officer of Harleysville National Bank and Trust Company.
(Incorporated by reference to Registrant's Current Report on Form 8-K, filed with the Commission on March 25, 1999.)                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                        

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|(10.10) |  | 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.)                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10.11) |  | 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.)                                                                                                                                       
|(10.12) |  | Employment Agreement dated February 23, 2004 between Michael B. High, Executive Vice President & Chief Financial Officer and Harleysville Management Services, LLC. (Incorporated by reference to Registrant's Quarterly Report on
Form 10-Q, filed with the Commission on May 10, 2004.)                                                                      
|(10.13) |  | Employment Agreement effective April 1, 2005 between Michael B. High, the current Executive Vice President and Chief Financial Officer of the Corporation, and Harleysville Management Services, LLC. (Incorporated by reference to
Registrant's Current Report on Form 8-K, filed with the Commission on November 16, 2004.)                                  
|(10.14) |  | Supplemental Executive Retirement Benefit Agreement dated February 23, 2004 between Michael B. High, Executive Vice President & Chief Financial Officer and Harleysville Management Services, LLC. (Incorporated by reference to
Registrant's Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2004.)                                       
|(10.15) |  | Employment Agreement dated March 9, 2004 between Mikkalya Murray, Executive Vice President and Harleysville Management Services, LLC. (Incorporated by reference to Registrant's Quarterly Report on Form 10-Q, filed with the Commission
on May 10, 2004.)                                                                                                    
|(10.16) |  | Employment Agreement dated August 23, 2004 between James F. McGowan, Jr., Executive Vice President & Chief Credit Officer and Harleysville Management Services, LLC. (Incorporated by reference to Registrant's Current Report on
Form 8-K, filed with the Commission on August 25, 2004.)                                                                     
|(10.17) |  | Supplemental Executive Retirement Benefit Agreement dated August 23, 2004 between James F. McGowan, Jr., Executive Vice President & Chief Credit Officer, and Harleysville Management Services, LLC. (Incorporated by reference to
Registrant's Current Report on Form 8-K, filed with the Commission on August 25, 2004.)                                     
|(10.18) |  | Employment Agreement dated September 27, 2004 between John Eisele, Executive Vice President & President of Millennium Wealth Management and Private Banking, and Harleysville Management Services, LLC. (Incorporated by reference to
Registrant's Current Report on Form 8-K, filed with the Commission on September 29, 2004.)                               
|(10.19) |  | Supplemental Executive Retirement Benefit Agreement dated September 27, 2004 between John Eisele, Executive Vice President & President of Millennium Wealth Management and Private Banking, and Harleysville Management Services, LLC.
(Incorporated by reference to Registrant's Current Report on Form 8-K, filed with the Commission on September 29, 2004.)
|(10.20) |  | Employment Agreement effective January 1, 2005 between Gregg J. Wagner, the current President and Chief Operating Officer of the Corporation, and Harleysville Management Services, LLC. (Incorporated by reference to Registrant's Current
Report on Form 8-K, filed with the Commission on November 16, 2004.)                                               
|(10.21) |  | Harleysville National Corporation 2004 Omnibus Stock Incentive Plan. (Incorporated by reference to Exhibit 4 of Registrant's Registration Statement No. 333-116183 on Form S-8, filed with the Commission on June 4, 2004).                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                

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|(11)   |  | Computation of Earnings per Common Share, incorporated by reference to Part II, Item 8, "Earnings Per Share" of this Report on Form 10K               
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(21)   |  | Subsidiaries of Registrant                                                                                                                            
|(23)   |  | Consent of Grant Thornton LLP, Independent Registered Public Accounting firm                                                                          
|(31.1) |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                
|(31.2) |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                
|(32.1) |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
|(32.2) |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 

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