FINANCIAL RATIOS AND SUMMARY OF KEY INFORMATION

Harleysville National Corporation and Subsidiaries

<TABLE>
<CAPTION>
                                                                                                    Year Ended December 31,
                                                                                     ----------------------------------------------
(Dollars in thousands, except per share data and average shares outstanding)               1999              1998              1997
                                                                                     ----------------------------------------------
<S>                                                                                        <C>               <C>               <C>
Per Share Information

Basic earnings* .................................................................    $     2.82         $     2.44       $     2.24
Diluted earnings* ...............................................................          2.82               2.44             2.24
Cash dividends paid* ............................................................          1.07               0.95             0.86
Book value ......................................................................         16.38              17.38            15.65

Market Value
Bid price of common stock (high)* ...............................................    $    38.09              41.43            40.00
Bid price of common stock (low)* ................................................         31.50              30.95            22.00
Average basic shares outstanding* ...............................................     7,913,540          7,902,962        7,878,752

Average Balance Sheet
Loans ...........................................................................    $  973,398         $  839,102       $  763,000
Earning assets ..................................................................     1,435,409          1,230,146        1,088,341
Total assets ....................................................................     1,509,248          1,284,706        1,146,573
Deposits ........................................................................     1,159,377          1,037,039          940,738
Interest-bearing liabilities plus demand deposits ...............................     1,351,234          1,134,271        1,011,805
Shareholders' equity ............................................................       130,689            124,684          111,306

Selected Operating Ratios
Return on average assets ........................................................          1.48%              1.50%            1.54%
Return on average shareholders' equity ..........................................         17.10%             15.48%           15.85%
Leverage (assets divided by shareholders' equity) ...............................         12.62              10.78            10.10
Average shareholders' equity as a percentage of:
   Average loans ................................................................         13.43%             14.86%           14.59%
   Average deposits .............................................................         11.27              12.02            11.83
   Average assets ...............................................................          8.66               9.71             9.71
   Average earning assets .......................................................          9.10              10.14            10.23
Dividend payout ratio ...........................................................         37.98              37.69            37.27
Average total loans as a percentage of average deposits and borrowed funds ......         72.04              73.98            75.41
Net interest margin on average earning assets:
   Interest income** ............................................................          7.75%              7.95%            8.17%
   Interest expense .............................................................         (3.27)             (3.27)           (3.32)
   Net interest margin ..........................................................          4.48               4.67             4.85
   Noninterest margin ...........................................................         (1.97)             (2.06)           (2.12)
</TABLE>

*Adjusted for 5% stock dividends effective 9/30/99 and 6/30/97.
**Tax-Equivalent Basis

PAGE 1

Description of Business

     Harleysville National Corporation, a Pennsylvania corporation (the
Corporation), was incorporated in June 1982. On January 1, 1983, the Corporation
became the parent bank holding company of Harleysville National Bank and Trust
Company (HNB), a wholly-owned subsidiary of the Corporation. On February 13,
1991, the Corporation acquired all of the outstanding common stock of The
Citizens National Bank (CNB). On June 1, 1992, the Corporation acquired all of
the outstanding stock of Summit Hill Trust Company (Summit Hill). On September
25, 1992, Summit Hill merged into CNB and is now operating as a branch office of
CNB. On July 1, 1994, the Corporation acquired all of the outstanding stock of
Security National Bank (SNB). On March 1, 1996, the Corporation acquired all of
the outstanding common stock of Farmers & Merchants Bank (F&M). F&M was merged
into CNB and is now operating as a branch office of CNB. On March 17, 1997, the
HNC Financial Company was incorporated as a Delaware Corporation. HNC Financial
Company's principal business function is to expand the investment opportunities
of the Corporation. On January 20, 1999, the Corporation acquired all of the
outstanding stock of Northern Lehigh Bancorp, Inc., parent company of Citizens
National Bank of Slatington. Citizens National Bank of Slatington was merged
into CNB.

     HNB, which was established in 1909, CNB, which was established in 1903, and
SNB, which was established in 1988, (collectively the Banks), are national
banking associations under the supervision of the Office of the Comptroller of
the Currency. The Corporation's and HNB's legal headquarters are located at 483
Main Street, Harleysville, Pennsylvania 19438. CNB's legal headquarters are
located at 13-15 West Ridge Street, Lansford, Pennsylvania 18232. SNB's legal
headquarters are located at One Security Plaza, Pottstown, Pennsylvania 19464.
HNC Financial Company's legal headquarters are located at 300 Delaware Avenue,
Suite 1704, Wilmington, Delaware 19801.

     As of December 31, 1999, the Banks had total assets of $1,635,679,000,
total shareholders' equity of $129,660,000 and total deposits of $1,231,265,000.

     The Banks engage in 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
trust services. Their deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) Bank Insurance Fund to the extent provided by law. The Banks
have 35 branch offices located in Montgomery, Bucks, Carbon, Wayne, Chester,
Lehigh, Northampton and Schuylkill Counties, Pennsylvania.

     On December 31, 1999, the Banks had 517 full-time equivalent employees.

Competition

     The Banks compete actively with other eastern Pennsylvania financial
institutions, many larger than the Banks, as well as with financial and
nonfinancial institutions headquartered elsewhere. The Banks are generally
competitive with all competing institutions in their service area with respect
to interest rates paid on time and savings deposits, service charges on deposit
accounts, interest rates charged on loans, and fees and charges for trust
services.

Supervision and Regulation

     The operations of the Banks are subject to federal, state and local
statutes applicable to banks chartered under the banking laws of the United
States, to members of the Federal Reserve System and to banks whose deposits are
insured by the FDIC. The Banks' operations are also subject to the regulations
of the Federal Reserve Board, the FDIC and the Office of the Comptroller of the
Currency (who regularly examines the Banks' areas such as asset quality,
investments, management practices and other aspects of bank operations).

     The Corporation is subject to federal and state securities laws, certain
rules and regulations of the Securities and Exchange Commission, to the
provisions of the Bank Holding Company Act of 1956, as amended, and to
supervision by the Federal Reserve Board.

Market Information

     The following table sets forth quarterly dividend information and the high
and low prices for the Corporation's common stock for 1999 and 1998. The
Corporation's stock is traded in the over-the-counter market under the symbol
"HNBC" and commonly quoted under NASDAQ National Market Issues.
--------------------------------------------------------------------------------

Price of Common Stock

1999                                Low Price   High Price    Dividend
-----------------------------------------------------------------------
First Quarter*                       $31.50      $38.09         $.24
Second Quarter*                       32.38       35.00          .25
Third Quarter                         33.09       35.25          .26
Fourth Quarter                        31.50       33.88          .32

1998                                Low Price   High Price    Dividend
-----------------------------------------------------------------------
First Quarter*                       $37.14      $41.43         $.23
Second Quarter*                       38.15       41.31          .23
Third Quarter*                        32.86       40.84          .24
Fourth Quarter*                       30.95       39.52          .25

*Adjusted for a 5% stock dividend effective 9/30/99.


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Harleysville National Corporation and Subsidiaries

To the Board of Directors and Shareholders, Harleysville National Corporation:

     We have audited the accompanying consolidated balance sheets of
Harleysville National Corporation and Subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, shareholders' equity
and comprehensive income and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. 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 following consolidated financial statements present
fairly, in all material respects, the consolidated financial position of
Harleysville National Corporation and Subsidiaries as of December 31, 1999 and
1998, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.


/s/ Grant Thornton LLP
---------------------------
Grant Thornton LLP
Philadelphia, Pennsylvania
January 7, 2000

PAGE 8

--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
Harleysville National Corporation and Subsidiaries

<TABLE>
<CAPTION>
(Dollars in thousands)                                         December 31
                                                         ----------------------
Assets                                                       1999        1998
                                                         ----------------------
<S>                                                      <C>         <C>
Cash and due from banks ............................     $   42,154  $   40,204
Federal funds sold .................................            --       13,426
                                                         ----------  ----------
   Total cash and cash equivalents .................         42,154      53,630
                                                         ----------  ----------

Interest-bearing deposits in banks .................          5,123       3,707
Investment securities available for sale ...........        450,959     390,438
Investment securities held to maturity
 (fair value $23,828 and $42,202, respectively) ....         24,271      41,520
Loans ..............................................      1,061,170     902,894
Less: Unearned income (deferred costs) .............            806      (2,584)
      Allowance for loan losses ....................        (14,208)    (13,706)
                                                         ----------  ----------
        Net loans ..................................      1,047,768     886,604
                                                         ----------  ----------
Bank premises and equipment, net ...................         20,356      19,542
Accrued interest receivable ........................         10,211       9,574
Other real estate owned ............................          1,436       1,131
Intangible assets, net .............................          2,006       1,936
Bank-owned life insurance ..........................         25,527          --
Other assets .......................................          5,868       4,008
                                                         ----------  ----------
        Total assets ...............................     $1,635,679  $1,412,090
                                                         ==========  ==========
Liabilities and Shareholders' Equity
Deposits:
   Noninterest-bearing .............................        201,475     192,156
   Interest-bearing:
        Checking accounts ..........................        149,562     139,134
        Money market accounts ......................        250,025     212,156
        Savings ....................................        143,414     140,797
        Time, under $100,000 .......................        359,110     329,605
        Time, $100,000 or greater .. ...............        127,679      90,468
                                                         ----------  ----------
        Total deposits .............................      1,231,265   1,104,316
Accrued interest payable ...........................         17,114      14,072
U.S. Treasury demand notes .........................          2,014       1,320
Federal funds purchased ............................          9,500      11,000
Federal Home Loan Bank (FHLB) borrowings ...........        130,250      93,500
Securities sold under agreements to repurchase .....        106,554      43,158
Other liabilities ..................................          9,322      13,772
                                                         ----------  ----------
        Total liabilities ..........................      1,506,019   1,281,138
                                                         ----------  ----------
Shareholders' equity:
   Series preferred stock, par value $1 per share;
    authorized 3,000,000 shares, none issued .......             --          --
   Common stock, par value $1 per share; authorized
     30,000,000 shares; issued and outstanding
     7,915,130 shares in 1999 and 7,535,683
     shares in 1998 ................................          7,915       7,536
   Additional paid in capital ......................         63,080      50,899
   Retained earnings ...............................         68,422      67,133
   Accumulated other comprehensive income (loss) ...         (9,757)      5,384
                                                          ---------- ----------
        Total shareholders' equity .................        129,660     130,952
                                                          ---------- ----------
        Total liabilities and shareholders' equity..     $1,635,679  $1,412,090
                                                         ==========  ==========

================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

PAGE 9

--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
Harleysville National Corporation and Subsidiaries

<TABLE>
<CAPTION>
(Dollars in thousands except weighted average number
 of common shares and per share information)

                                                              Year Ended December 31
                                                    --------------------------------------
                                                           1999        1998         1997
                                                    --------------------------------------
Interest Income
<S>                                                      <C>         <C>          <C>
Loans, including fees ..............................     $ 71,816    $ 65,679     $ 61,358
Lease financing ....................................        6,960       5,084        4,531
Investment securities:
   Taxable .........................................       17,427      13,722       12,825
   Exempt from federal taxes .......................        9,426       7,686        5,458
Federal funds sold .................................          339       1,116        1,244
Deposits in banks ..................................          149         205          411
                                                         --------    --------     --------
   Total interest income ...........................      106,117      93,492       85,827
                                                         --------    --------     --------

Interest Expense
Savings deposits ...................................       13,255      12,789       11,272
Time, under $100,000 ...............................       18,391      17,906       17,554
Time, $100,000 or greater ..........................        5,647       4,842        3,632
Borrowed funds .....................................        9,580       4,701        3,628
                                                         --------    --------     --------
   Total interest expense ..........................       46,873      40,238       36,086
                                                         --------    --------     --------
   Net interest income .............................       59,244      53,254       49,741
Provision for loan losses ..........................        1,907       2,230        2,590
                                                         --------    --------     --------
   Net interest income after provision for
    loan losses ....................................       57,337      51,024       47,151
                                                         --------    --------     --------
Other Operating Income
Service charges ....................................        3,572       3,287        2,930
Security gains, net ................................          471       1,543        1,757
Trust income .......................................        2,629       2,117        1,509
Bank-owned life insurance income ...................          527          --           --
Other income .......................................        2,893       3,061        1,395
                                                         --------    --------     --------
   Total other operating income ....................       10,092      10,008        7,591
                                                         --------    --------     --------
   Net interest income after provision for loan
    losses and other operating income ..............       67,429      61,032       54,742
                                                         --------    --------     --------
Other Operating Expenses
Salaries, wages and employee benefits ..............       20,436      18,876       16,452
Occupancy ..........................................        2,445       2,328        2,157
Furniture and equipment ............................        4,476       3,640        2,994
Other expenses .....................................       11,081      10,565        9,023
                                                         --------    --------     --------
   Total other operating expenses ..................       38,438      35,409       30,626
                                                         --------    --------     --------
   Income before income tax expense ................       28,991      25,623       24,116
Income tax expense .................................        6,644       6,316        6,473
                                                         --------    --------     --------
Net income .........................................   $   22,347  $   19,307   $   17,643
                                                       ==========  ==========   ==========
Weighted average number of common shares:*
   Basic ...........................................    7,913,540   7,902,962    7,878,752
                                                       ==========  ==========   ==========
   Diluted .........................................    7,925,384   7,918,337    7,885,847
                                                       ==========  ==========   ==========
Net income per share information:*
   Basic ...........................................   $     2.82  $     2.44   $     2.24
                                                       ==========  ==========   ==========
   Diluted .........................................   $     2.82  $     2.44   $     2.24
                                                       ==========  ==========   ==========
Cash dividends per share* ..........................   $     1.07  $     0.95   $     0.86
                                                       ==========  ==========   ==========
</TABLE>


*Adjusted for 5% stock dividends effective 9/30/99 and 6/30/97.


================================================================================
See accompanying notes to consolidated financial statements.


PAGE 10

--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
Harleysville National Corporation and Subsidiaries


<TABLE>
<CAPTION>
(Dollars in thousands)                        Common Stock                                 Accumulated
                                            ----------------                                  Other
                                            Number of   Par       Additional    Retained  Comprehensive             Comprehensive
                                             Shares    Value   Paid in Capital  Earnings  Income (Loss)   Total     Income (loss)
                                            ---------------------------------------------------------------------------------------
<S>                                          <C>      <C>         <C>          <C>          <C>         <C>          <C>
Balance, January 1, 1997 ..................  6,657    $  6,657    $  40,316    $ 47,849     $  2,809    $ 97,631
Acquisition of Northern Lehigh Bancorp ....    371         371          751       5,973          (23)      7,072
Stock options .............................     29          29          187          --           --         216
Stock dividends ...........................    460         460        9,292      (9,768)          --         (16)
Stock awards ..............................      1           1           17         (18)          --          --
Net income for 1997 .......................     --          --           --      17,643           --      17,643     $ 17,643
Other comprehensive income,
   net of reclassifications and tax .......     --          --           --          --        1,676       1,676        1,676
Cash dividends ............................     --          --           --      (6,576)          --      (6,576)
                                            ----------------------------------------------------------------------------------------
Comprehensive income                                                                                                 $ 19,319
                                                                                                                     ========

Balance, December 31, 1997 ................  7,518       7,518       50,563      55,103        4,462     117,646
Stock options .............................     18          18          331          --           --         349
Stock awards ..............................     --          --            5          --           --           5
Net income for 1998 .......................     --          --           --      19,307           --      19,307     $ 19,307
Other comprehensive income,
   net of reclassifications and tax .......     --          --           --          --          922         922          922
Cash dividends ............................     --          --           --      (7,277)          --      (7,277)
                                            ----------------------------------------------------------------------------------------
Comprehensive income                                                                                                 $ 20,229
                                                                                                                     ========

Balance, December 31, 1998 ................  7,536       7,536       50,899      67,133        5,384     130,952
Stock options .............................      3           3           28          --           --          31
Stock dividends ...........................    376         376       12,145     (12,570)          --         (49)
Stock awards ..............................     --          --            8          --           --           8
Net income for 1999 .......................     --          --           --      22,347           --      22,347      $22,347
Other comprehensive loss,
   net of reclassifications and tax .......     --          --           --          --      (15,141)    (15,141)     (15,141)
Cash dividends ............................     --          --           --      (8,488)          --      (8,488)
                                            ----------------------------------------------------------------------------------------
Comprehensive income                                                                                                 $  7,206
                                                                                                                     ========

Balance, December 31, 1999 ................  7,915     $ 7,915    $  63,080    $ 68,422     $ (9,757)   $129,660
                                            ====================================================================
</TABLE>



================================================================================
See accompanying notes to consolidated financial statements.

PAGE 11

--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Harleysville National Corporation and Subsidiaries

<TABLE>
<CAPTION>
(Dollars in thousands)                                                            Year Ended December 31
                                                                         -------------------------------------
                                                                             1999        1998         1997
                                                                         -------------------------------------
Operating Activities
<S>                                                                      <C>          <C>          <C>
Net income .........................................................     $  22,347    $ 19,307     $ 17,643
Adjustments to reconcile net income to net
 cash provided by operating activities:
   Provision for loan losses .......................................         1,907       1,680        2,590
   Depreciation and amortization ...................................         2,717       2,254        1,877
   Net amortization of investment securities
    discount/premiums ..............................................           898         425          296
   Deferred income taxes ...........................................         3,646       1,475        1,373
   Net realized securities gain ....................................          (471)     (1,543)      (1,757)
   Increase in accrued income receivable ...........................          (636)     (1,503)        (974)
   Increase (decrease) in accrued interest payable .................         3,042        (527)         486
   Net (increase) decrease in other assets .........................        (1,861)     (1,263)          58
   Net increase (decrease) in other liabilities ....................            56       2,453         (757)
   Decrease in unearned income .....................................        (3,381)     (1,911)      (3,637)
   Write-down of other real estate owned ...........................           117          65           73
   Increase in intangible assets ...................................           (70)        (84)        (193)
                                                                          --------    --------     --------
     Net cash provided by operating activities .....................        28,311      20,828       17,078
                                                                          --------    --------     --------
Investing Activities
Proceeds from sales of investment securities
 available for sale ................................................        66,823      52,924       44,835
Proceeds, maturity or calls of investment
 securities held to maturity .......................................        10,803      20,170       22,674
Proceeds, maturity or calls of investment
 securities available for sale .....................................        64,032      34,024       30,539
Purchases of investment securities held to maturity ................       (10,632)    (13,083)      (4,900)
Purchases of investment securities available
 for sale ..........................................................      (198,019)   (211,821)    (117,305)
Net (increase) decrease in interest-bearing
 deposits in banks .................................................        (1,416)      1,867        2,901
Net increase in loans ..............................................      (161,876)   (101,903)     (60,380)
Net increase in premises and equipment .............................        (3,532)     (3,130)      (5,033)
Purchase of bank-owned life insurance ..............................       (25,527)         --          --
Proceeds from sales of other real estate ...........................         1,765       1,060        1,569
                                                                          --------    --------     --------
     Net cash used in investing activities .........................      (257,579)   (219,892)     (85,100)
                                                                          --------    --------     --------
Financing Activities
Net increase in deposits ...........................................       126,950     121,786       72,783
Increase (decrease) in U.S. Treasury demand notes ..................           694        (830)        (422)
(Decrease) increase in federal funds purchased .....................        (1,500)     (2,700)      13,700
Increase (decrease) in FHLB borrowings .............................        36,750      76,500      (18,000)
Increase in securities sold under agreement ........................        63,396      11,870        9,339
Cash dividends and fractional shares ...............................        (8,488)     (7,277)      (6,576)
Dividends reinvestment .............................................           (49)         --          (16)
Stock options ......................................................            39         354          126
                                                                          --------    --------     --------
     Net cash provided by financing activities .....................       217,792     199,703       70,934
                                                                          --------    --------     --------
Net (decrease) increase in cash and
 cash equivalents ..................................................       (11,476)        639        2,912
Cash and cash equivalents at beginning of year .....................        53,630      52,991       50,079
                                                                          --------    --------     --------
Cash and cash equivalents at end of year ...........................      $ 42,154    $ 53,630     $ 52,991
                                                                          ========    ========     ========
Cash paid during the year for:
   Interest ........................................................      $ 43,830    $ 40,572     $ 35,599
                                                                          ========    ========     ========
   Income taxes ....................................................         3,150       4,415        5,565
                                                                          ========    ========     ========
Supplemental disclosure of noncash investing
 and financing activities:
   Transfer of assets from loans to other
    real estate owned ..............................................      $  2,186    $  1,918     $  1,695
                                                                          ========    ========     ========
   Transfer of securities from investment
    securities held to maturity to
    investment securities available for sale .......................      $  7,530    $     --     $     --
                                                                          ========    ========     ========
</TABLE>

================================================================================
See accompanying notes to consolidated financial statements.

PAGE 12


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Harleysville National Corporation and Subsidiaries

1 - Summary of Significant
    Accounting Policies

Business
     Harleysville National Corporation (the Corporation) through its subsidiary
banks, Harleysville National Bank and Trust Company, Citizens National Bank, and
Security National Bank (collectively the Banks), provides a full range of
banking services to individual and corporate customers located in eastern
Pennsylvania. The Banks compete with other banking and financial institutions in
their primary market communities, including financial institutions with
resources substantially greater than their own. Commercial banks, savings banks,
savings and loan associations, credit unions and money market funds actively
compete for deposits and for various types of loans. Such institutions, as well
as consumer finance and insurance companies, may be considered competitors of
the Banks with respect to one or more of the services they render. In addition
to being subject to competition from other financial institutions, the Banks are
subject to federal and state laws and to regulations of certain federal
agencies, and, accordingly, they are periodically examined by those regulatory
authorities.

Basis of Financial Statement Presentation
     The accounting and reporting policies of the Corporation and its
Subsidiaries conform with generally accepted accounting principles applicable to
banks. All significant intercompany transactions are eliminated in consolidation
and certain reclassifications are made when necessary to conform with the
previous years' financial statements to the current year's presentation. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenditures
for the periods presented. Therefore, actual results could differ significantly
from those estimates.

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

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

     Investment securities expected to be held for an indefinite period of time
are classified as available for sale and are stated at fair value. Investment
securities expected to be held for an indefinite period of time include
securities that management intends to use as part of its asset/liability
strategy (other than securities that are intended to be held to maturity because
they offset core deposits that have demonstrated stability) or that may be sold
in response to changes in interest rates, changes in prepayment risks, the need
to increase regulatory capital or other similar factors. 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.

Loans
     Loans are stated at the principal amount outstanding. Net loans represent
the principal loan amount outstanding reduced by unearned income and allowance
for loan losses. Interest on loans is credited to income based on the principal
amount outstanding.

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

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

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

     The Corporation accounts for impaired loans under SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan-Income Recognition and Disclosures," on
January 1, 1995. This standard requires that a creditor measure impairment based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable.

     The Corporation adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," as amended by
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125 -- An Amendment of FASB Statement No. 125" on January 1, 1997.
SFAS No. 125 applies a control-oriented, financial components approach to
financial-asset-transfer transactions whereby the Corporation (1) recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
(2) derecognizes financial assets when control has been surrendered, and (3)
derecognizes liabilities once they are extinguished. Under SFAS No. 125, control
is considered to have been surrendered only if: (i) the transferred assets have
been isolated from the transferor and its creditors, even in bankruptcy or other
receivership (ii) the transferee has the right to pledge or exchange the
transferred assets, or, is a qualifying special purpose entity (as defined) and
the holders of beneficial interests in that

                                                                    (Continued)
PAGE 13

entity have the right to pledge or exchange those interests; and (iii) the
transferor does not maintain effective control over the transferred assets
through an agreement which both entitles and obligates it to repurchase or
redeem those assets prior to maturity, or through an agreement which both
entitles and obligates it to repurchase or redeem those assets if they were not
readily obtainable elsewhere. If any of these conditions are not met, the
Corporation accounts for the transfer as a secured borrowing.

     SFAS No. 125 also requires that the Corporation derecognize a liability if
and when it is extinguished. A liability is considered extinguished under SFAS
No. 125 if (1) the Corporation pays the creditor, and thus, is relieved of its
obligation for the liability, or (2) is legally released from being the primary
obligor under the liability, either judicially or by the creditor. The adoption
of this statement did not have a material impact on the Corporation's
consolidated financial position or results of operations.

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

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

     The Corporation adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of," which provides
guidance on when to recognize and how to measure impairment losses of long-lived
assets and certain identifiable intangibles and how to value long-lived assets
to be disposed of.

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

Intangible Assets
     Intangible assets consist of a core deposit intangible which represents the
present value of the difference in costs between the acquired core deposits and
the market alternative funding sources. Intangible assets also include mortgage
servicing rights. The core deposit intangibles are being amortized over a
10-year life on an accelerated basis. The amortization charged to income related
to the core deposit intangibles was $325,000, $325,000 and $309,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. The mortgage
servicing rights are amortized in proportion to and over the period of estimated
net servicing income.

Stock Options
     The Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. Alternatively, the
standard permits entities 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 make pro forma
disclosures of net income and earnings per share, as if the fair value-based
method of accounting defined in SFAS No. 123 had been applied. The Corporation's
employee stock option plan is accounted for under APB Opinion No. 25.

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

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

Advertising Costs
     The Corporation expenses advertising costs as incurred.

Restrictions on Cash and Due From Banks
     As of December 31, 1999, the Banks did not need to maintain reserves (in
the form of deposits with the Federal Reserve Bank) to satisfy federal
regulatory requirements.

Bank Owned Life Insurance (BOLI)
     During 1999, the corporation entered into a $25,000,000 investment of bank
owned life insurance (BOLI). BOLI involves the purchasing of life insurance by
the Corporation on a chosen group of employees. The corporation is the owner and
beneficiary of the policies. This pool of insurance, due to tax advantages to
the Banks, is profitable to the corporation. This profitability is used to
offset a portion of future benefit cost increases. Bank deposits fund BOLI and
the earnings from BOLI are recognized as other income.

Net Income Per Share
     The Corporation adopted the provisions of SFAS No. 128, "Earnings per
Share." SFAS No. 128 eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share (EPS) in
conjunction with the disclosure of the methodology used

                                                                     (Continued)
PAGE 14

in the computing such 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. Prior periods' earnings per share calculations have been
restated to reflect the adoption of SFAS No. 128.

     The reconciliation of the numerators and denominators of the basic and
diluted EPS follows:
<TABLE>
<CAPTION>
                                                       Year Ended December 31, 1999
                                                ------------------------------------------
                                                  Income        Shares          Per Share
                                                (Numerator)  (Denominator)        Amount
                                                ------------------------------------------
<S>                                             <C>            <C>                 <C>
Net income ...................................  $22,347,000
                                                ===========
Basic EPS
Income available to
common shareholders ..........................  $22,347,000    7,913,540           $2.82
                                                                                   =====
Effect of Dilutive Securities
Stock options ................................           --       11,844
                                                -----------    ---------
Diluted EPS
Income available to
common shareholders ..........................  $22,347,000    7,925,384           $2.82
                                                ===========    =========           =====

                                                       Year Ended December 31, 1998
                                                ----------------------------------------
Net income ...................................  $19,307,000
                                                ===========
Basic EPS
Income available to
common shareholders ..........................  $19,307,000    7,902,962           $2.44
                                                                                   =====
Effect of Dilutive Securities
Stock options ................................           --       15,375
                                                -----------    ---------
Diluted EPS
Income available to
common shareholders ..........................  $19,307,000    7,918,337           $2.44
                                                ===========    =========           =====

                                                       Year Ended December 31, 1997
                                                ----------------------------------------
Net income ...................................  $17,643,000
                                                ===========
Basic EPS
Income available to
common shareholders ..........................  $17,643,000    7,878,752           $2.24
                                                                                   =====
Effect of Dilutive Securities
Stock options ................................           --        7,095
                                                -----------    ---------
Diluted EPS
Income available to
common shareholders ..........................  $17,643,000    7,885,847           $2.24
                                                ===========    =========           =====
</TABLE>
Comprehensive Income
     On January 1, 1998, the Corporation adopted the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards to provide
prominent disclosure of comprehensive income items. Comprehensive income is the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. Other comprehensive
income consists of net unrealized gains on investment securities available for
sale. The components of other comprehensive income are as follows:

<TABLE>
<CAPTION>
(Dollars in thousands)                          Before tax          Tax benefit       Net of tax
December 31, 1999                                 amount             (expense)          amount
                                                -------------------------------------------------
<S>                                              <C>                 <C>                <C>
Unrealized gains on securities:
   Unrealized holding losses
     arising during period ....................  $(22,824)           $ 7,988            $(14,836)
   Less reclassification
     adjustment for losses
     realized in net income ...................       471               (166)                305
                                                 --------            -------            --------
Other comprehensive
   income, net ................................  $(23,295)           $ 8,154            $(15,141)
                                                 ========            =======            ========

(Dollars in thousands)                          Before tax          Tax benefit       Net of tax
December 31, 1998                                 amount             (expense)          amount
                                                -------------------------------------------------
Unrealized gains on securities:
   Unrealized holding gains
     arising during period ....................  $  2,958            $(1,033)           $  1,925
   Less reclassification
     adjustment for gains
     realized in net income ...................     1,543               (540)              1,003
                                                 --------            -------            --------
Other comprehensive
   income, net ................................  $  1,415            $  (493)           $    922
                                                 ========            =======            ========

(Dollars in thousands)                          Before tax          Tax benefit       Net of tax
December 31, 1997                                 amount             (expense)          amount
                                                -------------------------------------------------
Unrealized gains on securities:
   Unrealized holding gains
     arising during period ....................  $  4,326            $(1,508)           $  2,818
   Less reclassification
     adjustment for gains
     realized in net income ...................     1,757               (615)              1,142
                                                 --------            -------            --------
Other comprehensive
   income, net ................................  $  2,569            $  (893)           $  1,676
                                                 ========            =======            ========
</TABLE>

Other Information
     On January 1, 1998, the Corporation adopted the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 redefines how operating segments are determined and requires disclosures of
certain financial and descriptive information about a company's operating
segments. Management has determined that under current conditions, the
Corporation will report one business segment.

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of derivative (gains and
losses) depends on the intended use of the derivative and resulting designation.
On January 1, 1999, the Corporation adopted SFAS No. 133. Concurrent with the
adoption, the Corporation reclassified $7,530,000 of investment securities from
the held to maturity category to the available for sale category and recorded
$221,000 net of taxes of unrealized holding gains in accumulated other
comprehensive income.

                                                                     (Continued)

PAGE 15


2 - Acquisitions
     On December 28, 1999, the Corporation entered into a definitive Agreement
and Plan of Reorganization to acquire Citizens Bank and Trust Company. Under the
terms of the merger, accounted for as a pooling-of-interest, Citizens Bank and
Trust Company's shareholders will receive 166 shares of Harleysville National
Corporation common stock for each share of Citizens Bank and Trust Company
stock. The acquisition is subject to regulatory and shareholder approval. Upon
completion of the acquisition, Citizens Bank and Trust Company's banking
operations will be merged into those of Citizens National Bank, a wholly-owned
subsidiary of Harleysville National Corporation. A summary of pro-forma
unaudited condensed consolidated financial information of the Corporation and
Citizens Bank and Trust Company follows:

(Dollars in thousands except weighted average number of common shares
and per share information)
<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                -----------------------------------
                                                   1999        1998         1997
                                                -----------------------------------
<S>                                             <C>         <C>          <C>
Operating results (unaudited):
Net interest income ..........................  $   63,517  $   57,634   $   54,124
Noninterest income ...........................      10,535      10,519        7,962
Net income from
   continuing operations .....................      23,238      20,758       19,029
Net income per share:
   Basic .....................................        2.63        2.35         2.14
   Diluted ...................................        2.63        2.35         2.14
Weighted average number of common shares:
   Basic .....................................   8,838,010   8,838,870    8,874,752
   Diluted ...................................   8,845,854   8,854,245    8,881,847
</TABLE>

     On January 20, 1999, the Corporation consummated its acquisition of
Northern Lehigh Bancorp, Inc., parent company of Citizens National Bank of
Slatington. Northern Lehigh Bancorp, Inc. shareholders received 3.57 shares of
Harleysville National Corporation common stock for each share of Northern Lehigh
Bancorp common stock.

     The acquisition was effected by the merger of Northern Lehigh Bancorp, Inc.
with Harleysville National Corporation North, Inc., a bank holding company and
wholly-owned subsidiary of Harleysville National Corporation. Citizens National
Bank of Slatington merged with and into The Citizens National Bank of Lansford,
a national banking association and wholly-owned subsidiary of Harleysville
National Bank North, Inc., under the name Citizens National Bank. The merger was
accounted for on a pooling-of-interest basis, and all prior periods have been
restated to reflect the combination.

3 - Investment Securities

     The amortized cost, unrealized gains and losses, and the estimated market
values of the Corporation's investment securities held to maturity and available
for sale are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)                                                  December 31, 1999
                                                         ---------------------------------------------
                                                                        Gross      Gross     Estimated
                                                         Amortized   Unrealized  Unrealized    Market
Held to Maturity                                           Cost         Gains     (Losses)     Value
----------------                                         ---------------------------------------------
<S>                                                      <C>           <C>        <C>         <C>
U.S. Treasury notes ...................................  $  1,000      $    4     $     --    $  1,004
Obligations of states and
   political subdivisions .............................    21,450         164         (585)     21,029
Mortgage-backed
   securities .........................................       568          --           (4)        564
Other securities ......................................     1,253           4          (26)      1,231
                                                         --------      ------     --------    --------
   Totals .............................................  $ 24,271      $  172     $   (615)   $ 23,828
                                                         ========      ======     ========    ========

Available for Sale
------------------
U.S. Treasury notes ...................................  $ 46,457      $  134     $    (38)   $ 46,553
Obligations of other U.S.
   Government agencies
   and corporations ...................................    33,745          --         (830)     32,915
Obligations of states and
   political subdivisions .............................   157,532         659       (8,978)    149,213
Mortgage-backed
   securities .........................................   158,668         164       (3,891)    154,941
Other securities ......................................    69,569       1,542       (3,774)     67,337
                                                         --------      ------     --------    --------
   Totals .............................................  $465,971      $2,499     $(17,511)   $450,959
                                                         ========      ======     ========    ========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands)                                                  December 31, 1998
                                                         ---------------------------------------------
                                                                        Gross      Gross     Estimated
                                                         Amortized   Unrealized  Unrealized    Market
Held to Maturity                                           Cost         Gains     (Losses)     Value
----------------                                         ---------------------------------------------
<S>                                                      <C>           <C>        <C>         <C>
Obligations of other U.S.
   Government agencies
   and corporations ...................................  $  6,816     $    80     $     (3)   $  6,893
Obligations of states and
   political subdivisions .............................    17,093         544           (1)     17,636
Mortgage-backed
   securities .........................................     1,039          11           --       1,050
Other securities ......................................    16,572          62          (11)     16,623
                                                         --------      ------     --------    --------
   Totals .............................................  $ 41,520      $  697     $    (15)   $ 42,202
                                                         ========      ======     ========    ========

Available for Sale
U.S. Treasury notes ...................................  $ 43,008      $1,160     $     --    $ 44,168
Obligations of other U.S.
   Government agencies
   and corporations ...................................    44,651       1,017           --      45,668
Obligations of states and
   political subdivisions .............................   161,253       4,009       (1,036)    164,226
Mortgage-backed
   securities .........................................    87,818         487          (53)     88,252
Other securities ......................................    45,425       2,868         (169)     48,124
                                                         --------      ------     --------    --------
   Totals .............................................  $382,155      $9,541     $ (1,258)   $390,438
                                                         ========      ======     ========    ========
</TABLE>


                                                                     (Continued)
PAGE 16


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

     Securities with a carrying value of $368,142,000 and $156,571,000 at
December 31, 1999 and 1998, 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, 1999, by contractual maturities, are shown below. Actual maturities
will differ from contractual maturities because issuers and borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
(Dollars in thousands)                       Held to Maturity      Available for Sale
                                           ---------------------------------------------
                                                      Estimated                Estimated
                                           Amortized    Market    Amortized      Market
                                             Cost       Value        Cost        Value
                                           ---------------------------------------------
<S>                                        <C>        <C>          <C>         <C>
Due in one year or less .................  $ 1,521    $  1,538     $ 20,726    $ 20,740
Due after one year
   through five years ...................    2,099       2,082       37,880      37,821
Due after five years
   through ten years ....................    1,915       1,953       69,245      67,170
Due after ten years .....................   18,168      17,691      179,452     170,287
                                           -------    --------     --------    --------
                                            23,703      23,264      307,303     296,018
Mortgage-backed
   securities ...........................      568         564      158,668     154,941
                                           -------    --------     --------    --------
   Totals ...............................  $24,271    $ 23,828     $465,971    $450,959
                                           =======    ========     ========    ========
</TABLE>

     Proceeds from sales of investment securities available for sale during 1999
were $66,823,000. Gross gains of $721,000 and gross losses of $250,000 were
realized on these sales. Proceeds from sales of investment securities available
for sale during 1998 were $52,924,000. Gross gains of $1,544,000 and gross
losses of $1,000 were realized on these sales. Proceeds from sales of investment
securities available for sale during 1997 were $44,835,000. Gross gains of
$2,073,000 and gross losses of $316,000 were realized on these sales.

4 - Loans

    Major classifications of loans are as follows:

(Dollars in thousands)                                      December 31,
                                                       ----------------------
                                                          1999        1998
                                                       ----------------------
Real estate .........................................  $  337,260    $318,048
Commercial and industrial ...........................     280,136     245,648
Consumer loans ......................................     348,865     270,445
Lease financing .....................................      94,909      68,753
                                                       ----------    --------
   Total loans ......................................   1,061,170     902,894
Less:
   Unearned income
     (deferred costs) ...............................        (806)      2,584
   Allowance for loan losses ........................      14,208      13,706
                                                       ----------    --------
   Net loans ........................................  $1,047,768    $886,604
                                                       ==========    ========

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

     On December 31, 1999, nonaccrual loans were $3,690,000, loans 90 days or
more past due and still accruing interest were $269,000 and troubled debt
restructured loans were $465,000. On December 31, 1998, nonaccrual loans were
$3,696,000, loans 90 days or more past due and still accruing interest were
$1,350,000 and troubled debt restructured loans were $583,000.

     The balance of impaired loans was $2,582,000 at December 31, 1999, compared
to $2,096,000 at December 31, 1998. The Banks have identified a loan as impaired
when it is probable that interest and principal will not be collected according
to the contractual terms of the loan agreement. The December 31, 1999, impaired
loan balance included $2,117,000 of nonaccrual loans and $465,000 of troubled
debt restructured loans. The December 31, 1998, impaired loan balance included
$1,513,000 of nonaccrual loans and $583,000 of troubled debt restructured loans.
The allowance for loan loss associated with the impaired loans was $262,000 at
December 31, 1999, and $302,000 at December 31, 1998. The average impaired loan
balance was $3,046,000 in 1999, compared to $2,263,000 in 1998. The income
recognized on impaired loans during 1999 and 1998 was $132,000 and $103,000,
respectively. The Banks' policy for interest income recognition on impaired
loans is to recognize income on restructured loans under the accrual method. The
Banks recognize income on nonaccrual loans under the cash basis when the loans
are both current and the collateral on the loan is sufficient to cover the
outstanding obligation to the Banks. The Banks will not recognize income if
these factors do not exist.

     The Banks have no concentration of loans to borrowers which exceeded 10% of
total loans at December 31, 1999 and 1998. The Banks continued to pursue new
lending opportunities while seeking to maintain a portfolio that is diverse as
to industry concentration, type and geographic distribution. The Banks'
geographic lending area is primarily concentrated in Montgomery, Carbon, Bucks,
and Wayne counties, but also includes Chester, Berks, Lehigh, Northampton and
Schuylkill counties.

     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:

(Dollars in thousands)                            Year Ended December 31,
                                            ----------------------------------
                                              1999        1998          1997
                                            ----------------------------------
Balance, January 1 ......................   $  5,722    $  4,711     $  8,776
New loans ...............................     29,831      12,297        9,624
Repayments ..............................    (26,612)    (11,286)     (13,689)
                                            --------    --------     --------
Balance, December 31 ....................   $  8,941    $  5,722     $  4,711
                                            ========    ========     ========

                                                                     (Continued)
PAGE 17

5 - Allowance for Loan Losses

     Transactions in the allowance for loan losses are as follows:

(Dollars in thousands)                               Year Ended December 31,
                                           -------------------------------------
                                               1999         1998          1997
                                           -------------------------------------
Balance, beginning of year .............   $ 13,706      $ 12,592      $ 11,228
                                           --------      --------      --------
 Provision charged to
    operating expenses .................      1,907         2,230         2,590
                                           --------      --------      --------
 Loans charged off:
    Commercial
      and industrial ...................       (108)         (217)          (66)
    Consumer ...........................       (627)         (630)       (1,057)
    Real estate ........................       (723)         (424)         (544)
    Lease financing ....................       (226)         (145)          (78)
                                           --------      --------      --------
       Total charged off ...............     (1,684)       (1,416)       (1,745)
                                           --------      --------      --------

 Recoveries:
    Commercial
      and industrial ...................         28            94           113
    Consumer ...........................        105           100           124
    Real estate ........................         94            88           264
    Lease financing ....................         52            18            18
                                           --------      --------      --------
      Total recoveries .................        279           300           519
                                           --------      --------      --------

Balance, end of year ...................   $ 14,208      $ 13,706      $ 12,592
                                           ========      ========      ========


6 - Bank Premises and Equipment

     Bank premises and equipment consist of the following:


(Dollars in thousands)                    Estimated            December 31,
                                            Useful       ----------------------
                                            Lives           1999          1998
                                        ---------------------------------------
Land ................................                    $  3,042      $  3,006
Building ............................   15-39 years        19,007        17,669
Furniture, fixtures                      3-10 years
  and equipment                                            18,056        15,910
                                                         --------      --------
      Total cost ....................                      40,105        36,585
Less accumulated depreciation
  and amortization ..................                      19,749        17,043
                                                         --------      --------
      Total .........................                    $ 20,356      $ 19,542
                                                         ========      ========


7 - Deposits and Borrowings

     At December 31, 1999, scheduled maturities of certificates of deposit are
as follows:

   (Dollars in thousands)

   Year Ended December 31,                  Amount
   -----------------------------------------------
   2000 ..............................   $ 308,707
   2001 ..............................      85,552
   2002 ..............................      65,124
   2003 ..............................      19,475
   2004 ..............................       7,909
   Thereafter ........................          22
                                         ---------
   Total .............................   $ 486,789
                                         =========

     Federal Home Loan Bank (FHLB) advances at December 31, 1999 totaled
$130,250,000. The advances are collateralized by FHLB stock and certain first
mortgage loans and mortgage-backed securities. First mortgages used as
collateral for these advances totaled $52,312,000. These advances had a weighted
average interest rate of 5.46%. Advances are made pursuant to several different
credit programs offered from time to time by the FHLB. Unused lines of credit at
the FHLB were $188,657,000 at December 31, 1999, and $105,935,000 at December
31, 1998.

     Outstanding borrowings mature as follows (dollars in thousands):
     2000 ................................................    $  11,500
     2001 ................................................       15,000
     2002 ................................................        4,000
     2003 ................................................       10,000
     2004 and thereafter .................................       89,750
                                                              ---------
                                                              $ 130,250
                                                              =========

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

     These securities are held in a third party custodian's account, designated
by the Banks under a written custodial agreement that explicitly recognizes the
Banks' interest in the securities. At December 31, 1999, these agreements
matured within one year. The average balance of securities sold under agreements
to repurchase for 1999 was $56,612,000, and the maximum amounts outstanding at
any month-end during 1999 was $106,554,000.

8 - Federal Income Taxes

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

(Dollars in thousands)                             Year Ended December 31,
                                            ----------------------------------
                                                1999         1998        1997
                                            ----------------------------------
Current tax payable ....................    $  2,998      $ 4,908      $ 5,097
Deferred income tax ....................       3,646        1,408        1,376
                                            --------      -------      -------
   Tax expense .........................    $  6,644      $ 6,316      $ 6,473
                                            ========      =======      =======

     The effective income tax rates of 22.9% for 1999, 24.6% for 1998 and 26.8%
for 1997 were less than the applicable federal income tax rate of 35% for each
year. The reason for these differences follows:

(Dollars in thousands)                             Year Ended December 31,
                                            ----------------------------------
                                                1999         1998        1997
                                            ----------------------------------
Expected tax expense ...................    $ 10,147      $ 9,014      $ 8,199
Tax-exempt income net of
  expense disallowance .................      (3,528)      (2,786)      (1,954)
Other ..................................          25           88          228
                                            ---------     --------     --------
  Actual tax expense ...................    $  6,644      $ 6,316      $ 6,473
                                            =========     ========     ========

                                                                    (Continued)
PAGE 18

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

(Dollars in thousands)                       1999                  1998
                                     -------------------------------------------
                                         Asset   Liability    Asset    Liability
                                     -------------------------------------------
Allowance for
   credit losses .................   $  4,879    $     --    $ 4,703    $     --
Lease assets .....................         --      14,740         --      11,021
Deferred loan fees ...............        277          --        422          --
Deferred compensation ............        912          --        802          --
Unrealized gain
   on securities .................      5,254          --         --       2,907
Other ............................        148          --        216          --
                                     --------    --------    -------    --------
   Total deferred taxes ..........   $ 11,470    $ 14,740    $ 6,143    $ 13,928
                                     ========    ========    =======    ========

     The exercise of stock options which have been granted under the
Corporation's various stock option plans gives rise to compensation, which is
includable 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.

9 - Pension Plans

     The Corporation has two noncontributory defined benefit pension plans
covering substantially all employees. These plans are the Harleysville National
Corporation Pension Plan and the Northern Lehigh Bancorp Pension Plan. On
January 20, 1999, the Corporation consummated its acquisition of Northern Lehigh
Bancorp, Inc. These plans were not consolidated, as of December 31, 1999.

     The Harleysville National Corporation Pension Plans' Benefits are based on
years of service and the employee's average compensation during any five
consecutive years within the 10-year period preceding retirement. The
Harleysville National Corporation Pension Plans' funded status and amounts
recognized in the financial statements follow:

(Dollars in thousands)                                        1999        1998
                                                           ---------------------
Change in benefit obligation:
Benefit obligation at beginning of year ...............    $ 4,976      $ 4,382
Service cost ..........................................        365          264
Interest cost .........................................        291          297
Actual gain ...........................................        167          241
Benefits paid .........................................       (220)        (842)
Change in assumptions .................................         --          634
                                                           --------     --------
Benefits obligation at end of year ....................    $ 5,579      $ 4,976
                                                           ========     ========
Change in plan assets:
Fair value of plan assets
   at beginning of year ...............................    $ 5,974      $ 6,295
Actual return on plan assets ..........................        401          521
Employer contribution .................................         --           --
Benefits paid .........................................       (220)        (842)
                                                           --------     --------
Fair value of plan assets at end of year ..............    $ 6,155      $ 5,974
                                                           ========     ========
Funded status .........................................    $   575      $   998
Unrecognized transition liability (asset) .............       (189)        (207)
Unrecognized prior service cost .......................       (550)        (661)
Unrecognized net (gain) or loss .......................        703          527
                                                           --------     --------
Prepaid (accrued) benefit cost ........................    $   539      $   657
                                                           ========     ========


Weighted-average assumptions
  as of December 31,                                 1999      1998       1997
                                                   -----------------------------
Discount rate ..................................    6.00%      6.00%      7.00%
Expected return on plan assets .................    7.00%      7.00%      7.00%
Rate of compensation increase ..................    4.50%      4.50%      5.00%

Components of net periodic
  benefit cost                                      1999       1998       1997
                                                   -----------------------------
Service cost ...................................   $ 365      $ 264      $ 247
Interest cost ..................................     291        297        275
Expected return on plan assets .................    (410)      (431)      (394)
Amortization of prior service cost .............    (111)      (111)      (110)
Recognized net actuarial loss ..................     (17)       (17)        18
                                                   ------     ------     ------
  Net periodic benefit cost ....................   $ 118      $   2      $  36
                                                   ======     ======     ======

     As of December 31, 1999, the Harleysville National Corporation's Pension
Plan had an investment in the Corporation's stock with a market value of
$208,000.

     The Northern Lehigh Bancorp Pension Plan's Benefits are based primarily
upon years of service and compensation rates near retirement. The Northern
Lehigh Bancorp Pension Plan's funded status and amounts recognized in the
financial statements follows:

(Dollars in thousands)                                    1999             1998
                                                        ------------------------
Change in benefit obligation:
Benefit obligation at beginning of year .............   $  753           $  864
Service cost ........................................       55               54
Interest cost .......................................       51               59
Actual gain .........................................      (13)            (194)
Benefits paid .......................................      (24)             (30)
Effect of curtailment ...............................      (78)              --
                                                        -------          -------
Benefits obligation at end of year ..................   $  744           $  753
                                                        =======          =======
Change in plan assets:
Fair value of plan assets
   at beginning of year .............................   $  855           $  707
Actual return on plan assets ........................       67              140
Employer contribution ...............................       --               47
Plan expenses .......................................      (12)              (9)
Benefits paid .......................................      (24)             (30)
                                                        -------          -------
Fair value of plan assets at end of year ............   $  886           $  855
                                                        =======          =======
Funded status .......................................   $  143           $  101
Unrecognized transition liability (asset) ...........      (48)             (52)
Unrecognized prior service cost .....................       --                5
Unrecognized net (gain) or loss .....................     (262)            (270)
                                                        -------          -------
Prepaid (accrued) benefit cost ......................   $ (167)          $ (216)
                                                        =======          =======

Weighted-average assumptions
 as of December 31,                                 1999       1998        1997
                                                    ----------------------------
Discount rate ..................................    7.00%      7.00%      7.00%
Expected return on plan assets .................    8.00%      8.00%      8.00%
Rate of compensation increase ..................    5.00%      5.00%      6.00%


                                                                     (Continued)
PAGE 19

Components of net periodic
   benefit cost                                   1999        1998        1997
                                                  -----------------------------
Service cost ...................................  $ 55        $ 54        $  51
Interest cost ..................................    51          59           50
Expected return on plan assets .................   (67)        (57)        (133)
Amortization of prior service cost .............   (15)         (5)          82
                                                  ----        ----        -----
   Net periodic benefit cost ...................  $ 24        $ 51        $  50
                                                  ====        ====        =====

     A 401(k) deferred savings plan covers eligible employees of the Banks.
Employees may contribute up to a maximum of 15% of salary on a pre-tax basis
with a 50% employer match up to a maximum of 3% of salary. Contributions charged
to earnings were $284,000, $242,000, and $203,000 for 1999, 1998 and 1997,
respectively.

     The Corporation has a Supplemental Executive Retirement Plan (SERP) for
certain individuals. The SERP provides for payments based on a certain
percentage of salary for a period of 10 years after retirement. As of December
31, 1999, and 1998, the Corporation had accrued a liability of $1,528,000 and
$1,247,000, respectively, for the SERP.

10 - Shareholders' Equity
     On September 30, 1999, the Corporation paid a 5% stock dividend on its
common stock to shareholders of record as of September 17, 1999.

     On June 30, 1997, the Corporation paid a 5% stock dividend on its common
stock to shareholders of record as of June 13, 1997.

11 - Stock Options
     The Corporation has a fixed stock option plan that allows the Corporation
to grant options up to 781,243 shares of common stock to key employees and
directors. The options have a term of ten years when issued and are completely
vested over a five-year period. The exercise price of each option equals the
market price of the Corporation's stock on the date of grant.

     The Corporation has elected to account for its stock option plan under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost has been recognized for its stock option plan. Had
compensation cost for the plan been determined based on the fair value of the
options at the grant dates consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation," the Corporation's net income and
earnings per share would have been:
<TABLE>
<CAPTION>
                                                    1999           1998           1997
                                                  --------------------------------------
<S>                            <C>                   <C>             <C>            <C>
Net income                  As reported           $ 22,347        $19,307        $17,643
  (in thousands)            Pro forma             $ 21,238        $18,385        $16,828
Earnings per share          As reported           $   2.82        $  2.44        $  2.24
  (Basic)                   Pro forma             $   2.68        $  2.32        $  2.13
Earnings per share          As reported           $   2.82        $  2.44        $  2.24
  (Diluted)                 Pro forma             $   2.68        $  2.32        $  2.13
</TABLE>

     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 1999, 1998 and 1997, respectively: dividend yield
of 3.29%, 2.56% and 2.15%; expected volatility of 1.50%, 1.16% and 0.88%;
risk-free interest rate of 6.13%, 4.44% and 5.78%; and an expected life of 9.27
years, 9.30 years and 8.35 years.

     Information about stock options outstanding at December 31, 1999, is
summarized as follows:

                                                    Shares   Weighted-Average
                                                 Outstanding  Exercise Price
                                              ----------------------------------
Balance 1/1/97                                      76,575        $ 12.25
Granted                                                 --             --
Exercised                                          (36,264)          9.30
Cancelled                                               --             --
                                                   -------        -------
Balance 1/1/98                                      40,311          14.83
Granted                                             76,125          33.82
Exercised                                          (19,742)         19.01
Cancelled                                               --             --
                                                   -------        -------
Balance 1/1/99                                      96,694          28.86
Granted                                             37,542          32.69
Exercised                                           (3,749)          8.28
Cancelled                                           (2,100)         36.47
                                                   -------        -------
Balance 12/31/99                                   128,387         $30.46
                                                   =======         ======

     The weighted average fair value of options granted during 1999 and 1998
were $32.69 and $33.82, respectively. There were no options granted during 1997.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                        Options Outstanding
       Range of                                  Number      Weighted-Average         Weighted-Average    Number    Weighted-Average
    Exercise-Price                            Outstanding  Remaining Contractual Life  Exercise Price   Exercisable  Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>              <C>                    <C>             <C>           <C>
   $ 8.13 - $12.20                                14,996           2.0 years              $ 9.56           14,996        $ 9.56
   $20.33 - $24.40                                 1,824           5.6 years              $23.22            1,459        $23.22
   $32.53 - $36.59                               107,367           9.0 years              $33.11           71,524        $33.01
   $36.59 - $40.66                                 4,200           8.3 years              $40.50              840        $40.50
                                                 -------                                                   ------        ------
                                                 128,387                                                   88,819        $28.96
                                                 =======                                                   ======        ======
</TABLE>


12 - Commitments and Contingent Liabilities

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

Lease commitments for equipment and banking locations expire intermittently over
the years through 2036. Most banking location leases require the lessor to pay
insurance, maintenance costs and property taxes.

     Approximate minimum rental commitments for existing operating leases at
December 31, 1999, are as follows:


                                                         Total
                                                   Operating Leases
                                                   ----------------
   2000 .......................................        $1,489,000
   2001 .......................................         1,207,000
   2002 .......................................           656,000
   2003 .......................................           651,000
   2004 .......................................           546,000
   Thereafter .................................         4,476,000
                                                       ----------
   Total ......................................        $9,025,000
                                                       ==========

Total lease expense amounted to $1,738,000 in 1999, $1,620,000 in 1998 and
$1,363,000 in 1997.
                                                                     (Continued)

PAGE 20

13 - Financial Instruments with Off-Balance Sheet Risk

     The Banks have not entered into any interest rate swaps, caps, floors or
collars and are not a party to any forward or futures transactions. However, the
Banks are a party to various other financial instruments at December 31, 1999
and 1998, which are not included in the consolidated financial statements, but
are required in the normal course of business to meet the financing needs of its
customers and to assist in managing its exposure to changes in interest rates.
Management does not expect any material losses from these transactions, which
include standby letters of credit at December 31, 1999 and 1998, of $7,027,000
and $7,558,000, respectively; commitments to extend credit of $45,064,000 and
$37,981,000, respectively for revolving home equity lines; $99,966,000 and
$109,100,000, respectively for commercial and real estate loans; $27,116,000 and
$21,356,000, respectively, for consumer loans.

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

     The Banks offer commercial, mortgage and consumer credit products to their
customers in the normal course of business, which are detailed in note 4. These
products represent a diversified credit portfolio and are generally issued to
borrowers within the Banks' branch office systems in eastern Pennsylvania. The
ability of the customers to repay their credits is, to some extent, dependent
upon the economy in the Banks' market areas.
--------------------------------------------------------------------------------
14 - Regulatory Capital
<TABLE>
<CAPTION>
(Dollars in thousands)
                                                          Actual        For Capital Adequacy Purposes
As of December 31, 1999                           Amount          Ratio     Amount          Ratio
-----------------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>       <C>              <C>
Total Capital (to risk weighted assets):
Corporation ...................................  $152,815        12.64%    $96,739          8.00%
Harleysville National Bank ....................    93,993        10.23%     73,484          8.00%
Citizens National Bank ........................    21,466        11.62%     14,780          8.00%
Security National Bank ........................     9,593        10.57%      7,259          8.00%
Tier 1 Capital (to risk weighted assets):
Corporation ...................................  $138,273        11.43%    $48,369          4.00%
Harleysville National Bank ....................    83,222         9.06%     36,742          4.00%
Citizens National Bank ........................    19,155        10.37%      7,390          4.00%
Security National Bank ........................     8,532         9.40%      3,629          4.00%
Tier 1 Capital (to average assets):
Corporation ...................................  $138,273         8.52%    $64,901          4.00%
Harleysville National Bank ....................    83,222         6.76%     49,288          4.00%
Citizens National Bank ........................    19,155         7.14%     10,738          4.00%
Security National Bank ........................     8,532         7.05%      4,844          4.00%
</TABLE>
                              [RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
(Dollars in thousands)                                To Be Well Capitalized Under
                                                 Prompt Corrective Action Provision
As of December 31, 1999                                  Amount            Ratio
-----------------------------------------------------------------------------------
<S>                                                      <C>                <C>
Total Capital (to risk weighted assets):
Corporation ...................................             --               --
Harleysville National Bank ....................         $ 91,855           10.00%
Citizens National Bank ........................           18,475           10.00%
Security National Bank ........................            9,074           10.00%
Tier 1 Capital (to risk weighted assets):
Corporation ...................................         $   --               --
Harleysville National Bank ....................           55,113            6.00%
Citizens National Bank ........................           11,085            6.00%
Security National Bank ........................            5,444            6.00%
Tier 1 Capital (to average assets):
Corporation ...................................         $    --              --
Harleysville National Bank ....................           61,536            5.00%
Citizens National Bank ........................           13,423            5.00%
Security National Bank ........................            6,055            5.00%
</TABLE>

<TABLE>
<CAPTION>
(Dollars in thousands)
                                                          Actual        For Capital Adequacy Purposes
As of December 31, 1999                           Amount          Ratio     Amount          Ratio
-----------------------------------------------------------------------------------------------------
<S>                                                 <C>           <C>       <C>              <C>
Total Capital (to risk weighted assets):
Corporation ...................................  $137,371        13.77%    $79,823          8.00%
Harleysville National Bank ....................    70,733         9.70%     58,316          8.00%
Citizens National Bank ........................    32,040        17.90%     14,321          8.00%
Security National Bank ........................     7,629        10.74%      5,680          8.00%
Tier 1 Capital (to risk weighted assets):
Corporation ...................................  $124,039        12.43%    $39,911          4.00%
Harleysville National Bank ....................    61,603         8.45%     29,158          4.00%
Citizens National Bank ........................    29,868        16.69%      7,160          4.00%
Security National Bank ........................     6,741         9.49%      2,840          4.00%
Tier 1 Capital (to average assets):
Corporation ...................................  $124,039         9.05%    $54,817          4.00%
Harleysville National Bank ....................    61,603         6.11%     40,191          4.00%
Citizens National Bank ........................    29,868        11.64%     10,263          4.00%
Security National Bank ........................     6,741         7.10%      3,799          4.00%
-----------------------------------------------------------------------------------------------------
</TABLE>
                              [RESTUBED FOR ABOVE]
<TABLE>
<CAPTION>
(Dollars in thousands)                                To Be Well Capitalized Under
                                                 Prompt Corrective Action Provision
As of December 31, 1999                                  Amount            Ratio
-----------------------------------------------------------------------------------
<S>                                                      <C>                <C>
Total Capital (to risk weighted assets):
Corporation ...................................         $    --              --
Harleysville National Bank ....................           72,895           10.00%
Citizens National Bank ........................           17,901           10.00%
Security National Bank ........................            7,101           10.00%
Tier 1 Capital (to risk weighted assets):
Corporation ...................................         $    --              --
Harleysville National Bank ....................           43,737            6.00%
Citizens National Bank ........................           10,740            6.00%
Security National Bank ........................            4,260            6.00%
Tier 1 Capital (to average assets):
Corporation ...................................         $    --              --
Harleysville National Bank ....................           50,238            5.00%
Citizens National Bank ........................           12,828            5.00%
Security National Bank ........................            4,749            5.00%
-----------------------------------------------------------------------------------
</TABLE>

                                                                     (Continued)

PAGE 21

Regulatory Capital (continued)

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

     Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the
table) of total and Tier 1 capital to risk-weighted assets. Management believes,
as of December 31, 1999, that the Banks meet all capital adequacy requirements
to which they are subject. To be categorized as well capitalized, the Banks must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as
set forth in the table. There are no conditions or events which have occurred
that management believes have changed the institutions' category.

     The National Banking Laws require the approval of the Office of the
Comptroller of the Currency if the total of all dividends declared by a national
bank in any calendar year exceed the net profits of the bank (as defined) for
that year combined with its retained net profits for the preceding two calendar
years. Under this formula, the Banks may declare dividends in 2000 of
approximately $25,000,000 plus an amount equal to the net profits of the Banks
in 2000 up to the date of any such dividend declaration.

     Additionally, banking regulations limit the amount of investments, loans,
extensions of credit and advances that one subsidiary bank can make to the
Corporation at any time to 10% and in the aggregate 20% of the Banks' capital
stock and surplus. These regulations also require that any such investment,
loan, extension of credit or advance be secured by securities having a market
value in excess of the amount thereof. At December 31, 1999, there were no
investments, loans, extensions of credit or advances from any of the subsidiary
banks to the Corporation.

15 - 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.

     Estimated fair values have been determined by the Corporation using the
best available data and an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used, the estimated fair
values and recorded book balances at December 31, 1999 and 1998 are outlined
below.

     For cash and due from banks, interest-bearing deposits in banks and federal
funds sold, the recorded book values of $47,277,000 and $57,337,000 at December
31, 1999 and 1998, respectively, approximate fair values. The estimated fair
values of investment securities are based on quoted market prices, if available.
Estimated fair values are based on quoted market prices of comparable
instruments if quoted market prices are not available.

     The loan portfolio, net of unearned income, at December 31, 1999 and 1998,
has been valued using a present value discounted cash flow analysis where market
prices were not available. The discount rate used in these calculations is the
estimated current market rate adjusted for credit risk. The carrying value
approximates its fair value.

                                                            1999
                                             -----------------------------------
                                             Carrying                 Estimated
                                             Amount                   Fair Value
                                             -----------------------------------
Investment securities ...................    $  475,230,000       $  474,787,000
Loans, net ..............................    $1,061,976,000       $1,064,379,000

                                                            1998
                                             -----------------------------------
                                             Carrying                 Estimated
                                             Amount                   Fair Value
                                             -----------------------------------
Investment securities ...................    $ 431,958,000         $ 432,640,000
Loans, net ..............................    $ 900,310,000         $ 904,711,000

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

                                                            1999
                                             -----------------------------------
                                             Carrying                 Estimated
                                             Amount                   Fair Value
                                             -----------------------------------
Time deposits ...........................    $ 486,789,000         $ 490,503,000

                                                            1998
                                             -----------------------------------
                                             Carrying                 Estimated
                                             Amount                   Fair Value
                                             -----------------------------------
Time deposits ...........................    $ 420,073,000         $ 423,781,000

     The fair values of demand notes, borrowings, and securities sold under
agreements to repurchase of $248,318,000 and $148,978,000 at December 31, 1999
and 1998, respectively, approximate their recorded book balances.

     There was no material difference between the notional amount and the
estimated fair value of off-balance-sheet items which totaled approximately
$179,173,000 and $175,995,000 at December 31, 1999 and 1998, respectively, and
primarily comprised unfunded loan commitments which are generally priced at
market at the time of funding.

(Continued)

PAGE 22

16 - Condensed Financial Information - Parent Company Only

Condensed financial statements of Harleysville National Corporation follow:
<TABLE>
<CAPTION>
                                CONDENSED BALANCE SHEETS
(Dollars in thousands)                                                       December 31,
                                                                 --------------------------------------
                                                                    1999                       1998
                                                                 --------------------------------------
Assets:
<S>                                                             <C>                      <C>
   Cash ..................................................      $          51            $         244
   Investments in subsidiaries ...........................            129,609                  131,155
                                                                -------------            -------------
      Total assets .......................................      $     129,660            $     131,399
                                                                =============            =============

Liabilities and shareholders' equity:
   Other liabilities .....................................      $          --            $         447
                                                                -------------            -------------
      Total liabilities ..................................      $          --            $         447
                                                                -------------            -------------

Shareholders' equity:
   Common stock ..........................................      $       7,915            $       7,536
   Additional paid in capital ............................             63,080                   50,899
   Retained earnings .....................................             68,422                   67,133
   Net unrealized gain on investment
     securities available for sale .......................             (9,757)                   5,384
                                                                -------------            -------------
      Total shareholders' equity .........................            129,660                  130,952
                                                                -------------            -------------
      Total liabilities and
       shareholders' equity ..............................      $     129,660            $     131,399
                                                                =============            =============

                                CONDENSED STATEMENTS OF INCOME
(Dollars in thousands)                                                  Year Ended December 31,
                                                                --------------------------------------
                                                                  1999          1998            1997
                                                                --------------------------------------
Dividends from banks .....................................      $20,763       $28,090         $ 8,577
Other income                                                         --            --              71
                                                                -------       -------         -------
   Total operating income ................................       20,763        28,090           8,648
                                                                -------       -------         -------
Operating expense ........................................           19             8              --
                                                                -------       -------         -------
Income before income tax
   expense and equity in
   undistributed net income
   of banks ..............................................       20,744        28,082           8,648
Income tax expense .......................................           (7)           (3)             24
                                                                 -------       -------         -------
Income before equity in
   undistributed net income
   of banks ..............................................        20,751       28,085           8,624
Equity in undistributed
   net income of banks ...................................         1,596       (8,778)          9,019
                                                                 -------       -------         -------
   Net income ............................................       $22,347       $19,307         $17,643
                                                                 =======       =======         =======
</TABLE>


<TABLE>
<CAPTION>
                                CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)                                                  Year Ended December 31,
                                                                --------------------------------------
                                                                  1999          1998            1997
                                                                --------------------------------------
Operating activities:
<S>                                                              <C>           <C>             <C>
   Net income ............................................       $22,347       $19,307         $17,643
   Adjustments to reconcile
      net income to net cash
      provided by operating
      activities:
   Equity in undistributed
      net income of banks ................................        (1,596)        8,778          (9,019)
   Realized gain on sale
      of securities ......................................            --            --              (6)
   Net increase in
      other liabilities ..................................          (446)           (3)             24
                                                                 -------       -------         -------
Net cash provided by
   operating activities ..................................        20,305        28,082           8,642
                                                                 -------       -------         -------

Investing activities:
   Capital contributions
      made to the banks ..................................       (12,000)      (21,663)         (3,944)
   Proceeds from sales
      of securities ......................................            --            --           1,874
                                                                 -------       -------         -------
Net cash (used in) provided
   by investing activities ...............................       (12,000)      (21,663)         (2,070)
                                                                 -------       -------         -------

Financing activities:
   Cash dividends and
      fractional shares ..................................        (8,488)       (7,277)         (6,593)
   Dividend reinvestment .................................           (49)           --             (16)
   Stock options and awards ..............................            39           354             232
                                                                 -------       -------         -------
Net cash used in
   financing activities ..................................        (8,498)       (6,923)         (6,377)
                                                                 -------       -------         -------
Net (decrease) increase in cash ..........................          (193)         (504)            195
Cash and cash equivalents at
   beginning of year .....................................           244           748             553
                                                                 -------       -------         -------
Cash and cash equivalents at
   end of year ...........................................       $    51       $   244         $   748
                                                                 =======       =======         =======
</TABLE>


                                                                     (Continued)

PAGE 23

17 - Quarterly Financial Data (Unaudited)

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

<TABLE>
<CAPTION>
(Dollars in thousands, except per share information)

                                                                        Three Months Ended
                                                          ---------------------------------------------
1999:                                                     March 31     June 30     Sept. 30     Dec. 31
                                                          ---------------------------------------------
<S>                                                       <C>         <C>          <C>         <C>
   Interest income .....................................  $24,468     $25,743      $27,388     $28,518
   Net interest income .................................   14,019      14,867       15,269      15,089
   Provision for losses ................................      477         477          476         477
   Noninterest income ..................................    2,315       2,541        2,380       2,856
   Operating expenses ..................................    9,021       9,178        9,449      10,790
   Income before income
      tax expense ......................................    6,836       7,753        7,724       6,678
   Income tax expense ..................................    1,647       2,001        1,766       1,230
                                                          -------     -------      -------     -------
   Net income ..........................................  $ 5,189     $ 5,752      $ 5,958     $ 5,448
                                                          =======     =======      =======     =======
   Net income per share
      Basic ............................................  $  0.65     $  0.73      $  0.75     $  0.69
                                                          =======     =======      =======     =======
      Diluted ..........................................  $  0.65     $  0.73      $  0.75     $  0.69
                                                          =======     =======      =======     =======

1998:
   Interest income .....................................  $22,345     $23,130      $23,656     $24,361
   Net interest income .................................   12,974      13,261       13,390      13,629
   Provision for losses ................................      565         565          550         550
   Noninterest income ..................................    1,903       2,236        2,944       2,925
   Operating expenses ..................................    8,349       8,584        8,517       9,959
   Income before income
      tax expense ......................................    5,963       6,348        7,267       6,045
   Income tax expense ..................................    1,486       1,558        1,979       1,293
                                                          -------     -------      -------     -------
   Net income ..........................................  $ 4,477     $ 4,790       $5,288     $ 4,752
                                                          =======     =======      =======     =======
   Net income per share
      Basic ............................................  $ 0.56      $  0.61       $ 0.67     $  0.60
                                                          =======     =======      =======     =======
      Diluted ..........................................  $ 0.56      $  0.61       $ 0.67     $  0.60
                                                          =======     =======      =======     =======
</TABLE>
PAGE 24


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Harleysville National Corporation and Subsidiaries


Consolidated Summary of Operations
<TABLE>
<CAPTION>
(Dollars in thousands, except per share                                   Year Ended December 31,
 data and average shares outstanding)                     1999         1998         1997         1996         1995
                                                      ----------   ----------   ----------   ----------   ----------
<S>                                                   <C>          <C>          <C>          <C>          <C>
Income And Expense
Interest income ...................................   $  106,117   $   93,492   $   85,827   $   78,926   $   73,500
Interest expense ..................................       46,873       40,238       36,086       33,011       30,804
                                                      ----------   ----------   ----------   ----------   ----------
Net interest income ...............................       59,244       53,254       49,741       45,915       42,696
Provision for loan losses .........................        1,907        2,230        2,590        2,197        2,242
                                                      ----------   ----------   ----------   ----------   ----------
Net interest income after provision for loan losses       57,337       51,024       47,151       43,718       40,454
Noninterest income ................................       10,092       10,008        7,591        5,311        4,737
Noninterest expense ...............................       38,438       35,409       30,626       27,842       26,186
                                                      ----------   ----------   ----------   ----------   ----------
Income before income tax expense ..................       28,991       25,623       24,116       21,187       19,005
Income tax expense ................................        6,644        6,316        6,473        5,920        5,646
                                                      ----------   ----------   ----------   ----------   ----------
Net income ........................................   $   22,347   $   19,307   $   17,643   $   15,267   $   13,359
                                                      ==========   ==========   ==========   ==========   ==========

--------------------------------------------------------------------------------------------------------------------
Per Share*
Basic earnings ....................................   $     2.82   $     2.44   $     2.24   $     1.94   $     1.71
Diluted earnings ..................................         2.82         2.44         2.24         1.94         1.70
Cash dividends paid ...............................         1.07         0.95         0.86         0.76         0.67
Basic average shares outstanding ..................    7,913,540    7,902,962    7,878,752    7,867,103    7,822,843
Diluted average shares outstanding ................    7,925,384    7,918,337    7,885,847    7,890,970    7,856,667
*Adjusted for 5% stock dividends effective 9/30/99,
 6/30/97 and 6/28/96

--------------------------------------------------------------------------------------------------------------------
Average Balance Sheet
Loans .............................................   $  973,398   $  839,102   $  763,000   $  704,032   $  651,955
Investments .......................................      451,750      365,678      296,249      268,678      238,955
Other interest-earning assets .....................       10,261       25,366       29,092       21,446       18,898
Total assets ......................................    1,509,248    1,284,706    1,146,573    1,046,915      959,068
Deposits ..........................................    1,159,377    1,037,039      940,738      881,859      818,995
Other interest-bearing liabilities ................      191,857       97,232       71,067       46,814       37,084
Shareholders' equity ..............................      130,689      124,684      111,306       98,515       87,926

--------------------------------------------------------------------------------------------------------------------
Balance Sheet At Year-End
Loans .............................................   $1,061,976   $  900,310   $  798,306   $  737,094   $  675,240
Investments .......................................      475,230      431,958      311,642      283,446      253,401
Other interest-earning assets .....................        5,123       17,133       18,020       16,615       25,785
Total assets ......................................    1,635,679    1,412,090    1,188,267    1,095,967    1,005,859
Deposits ..........................................    1,231,265    1,104,316      982,529      909,746      855,816
Other interest-bearing liabilities ................      248,318      148,978       64,138       59,521       39,751
Shareholders' equity ..............................      129,660      130,952      117,646      104,793       92,860
--------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                    (Continued)
PAGE 25

     Forward-looking statements may prove inaccurate. We have made
forward-looking statements in this document, that are subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of Harleysville National
Corporation and its Subsidiaries. When we use words such as "believes,"
"expects," "anticipates," or similar expressions, we are making forward-looking
statements.

     Shareholders should note that many factors, some of which are discussed
elsewhere in this document, could affect the future financial results of
Harleysville National Corporation and its Subsidiaries and could cause those
results to differ materially from those expressed in our forward-looking
statements contained in this document. These factors include the following:

     o  operating, legal and regulatory risks;

     o  economic, political and competitive forces affecting our banking,
        securities, asset management and credit services businesses; and

     o  the risk that our analysis of these risks and forces could be incorrect
        and/or that the strategies developed to address them could be
        unsuccessful.

Introduction

     The Corporation experienced record performance during 1999. This
performance was achieved through an increase in earning assets and continued
emphasis on controlling overhead expenses. The primary source of the increase in
assets was the growth in loans. The Corporation's emphasis on building the loan
portfolio with quality loans was underscored through the improvement in key loan
performance ratios.

     The Corporation's net income of $22,347,000 in 1999, increased 15.7%
compared to the $19,307,000 reported in 1998. Both basic and diluted earnings
per share increased 15.6% to $2.82 from $2.44 earned in 1998. The primary
sources of this increase in net income were the rise in earning assets,
continued growth in income from the Investment Management and Trust Division,
and the management of operating expenses. Average earning assets increased
$205,263,000, or 16.7%, from a year ago, compared to an 8.6% rise in other
operating expenses. Income from the Investment Management and Trust Division
grew 24.2% in 1999, compared to 1998.

     An improvement in asset quality in 1999 was reflected by an improvement in
key loan performance ratios. Nonperforming assets as a percentage of total loans
and net assets acquired in foreclosure at December 31, 1999 declined to 0.53%,
from 0.60% at December 31, 1998. At December 31, 1999, loans past due 90 days or
more were reduced by $1,081,000, to $269,000, compared to the December 31, 1998,
balance of $1,350,000.

Interest-Earning Assets and
Interest-Bearing Liabilities
     The level of average interest-earning assets was $1,435,409,000 in 1999, an
increase of $205,263,000, or 16.7%, compared to 1998. The increase was led by
strong growth in loans. During 1999, the average balance of the loan portfolio
increased $134,296,000, or 16.0%. Also contributing to the growth in average
interest-earning assets was an $86,072,000, or 23.5% rise in average investment
securities. Average interest-earning assets were $1,088,341,000 in 1997.

     Average interest-bearing liabilities totaled $1,170,087,000 in 1999, an
increase of $194,148,000, or 19.9%, compared to 1998. This increase was
attributable to increases in other borrowings, savings deposits, and time
deposits of $94,625,000, $58,328,000, and $41,195,000, respectively. Average
interest-bearing liabilities were $869,447,000 in 1997.

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

     The investment securities total at December 31, 1999, of $475,230,000 grew
$43,272,000, or 10.0%, over the December 31, 1998, balance of $431,958,000. This
increase included $25,000,000 in securities purchased as part of a capital
leverage program. The capital leverage program involves structured transactions
in which the banks borrow funds from the Federal Home Loan Bank (FHLB) and
invest these borrowed funds in securities that are priced to yield a spread over
the FHLB borrowing rate. The investment securities held to maturity decreased
$17,249,000 during 1999, as a result of maturities and calls. The investment
securities available for sale increased $60,521,000. The increase in the
investments available for sale, not inclusive of the $25,000,000 capital
leverage program, was funded by proceeds from the maturities and calls in the
investment securities portfolios and through the increase in deposits during
1999.

Loans
     The Corporation continued its strong growth in loans during 1999. Total
loans grew $158,276,000, from $902,894,000 at December 31, 1998, to
$1,061,170,000 at December 31, 1999. The Banks experienced growth in all loan
categories. During 1999, consumer loans, commercial loans, lease financing and
real estate loans grew $78,420,000, $34,488,000, $26,156,000, and $19,212,000,
respectively. The majority of the growth in consumer loans was related to the
growth in financing indirect automobile dealer loans during 1999. The
Corporation has maintained strong relationships with automobile dealers to
insure that we offer them the services and products to meet their financing
needs. Residential mortgages sold during 1999 were $38,215,000 compared to
$34,313,000 in 1998.

     At December 31, 1999, there were no loan concentrations over 10% of loans
outstanding in any one category or to any one borrower. The Banks have no
foreign loans, and the impact of nonaccrual, restructured troubled debt and
delinquent loans on total interest income was not material.

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

     The Banks continued to maintain a high quality loan portfolio during 1999.
Nonperforming assets (nonaccruing loans, net

                                       (Continued after Balance Sheet Analysis)
PAGE 26


BALANCE SHEET ANALYSIS

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

Distribution Of Assets, Liabilities And Shareholders' Equity,
Interest Rates And Interest Differential
<TABLE>
<CAPTION>
                                                                                                       Year Ended December 31,
                                           -----------------------------------------------------------------------------------------
                                                               1999                                             1998
                                           -----------------------------------------------------------------------------------------
                                              Average          Average                           Average        Average
(Dollars in thousands)                        Balance          Rate             Interest         Balance        Rate        Interest
                                           -----------------------------------------------------------------------------------------
Assets

Investment securities:
<S>                                          <C>               <C>              <C>              <C>            <C>          <C>
  Taxable investments ..................     $266,477          6.54%            $17,427          $218,523       6.28%        $13,723
  Nontaxable investments (1) ...........      185,273          7.51              13,923           147,155       7.71          11,353
                                           ----------          ----             -------         ---------       ----         -------

    Total investment securities ........      451,750          6.94              31,350           365,678       6.86          25,076
Loans (1) (2) ..........................      973,398          8.15              79,370           839,102       8.50          71,344
Other rate-sensitive assets ............       10,261          4.76                 488            25,366       5.21           1,321
                                           ----------          ----             -------         ---------       ----         -------

    Total earning assets ...............    1,435,409          7.75             111,208         1,230,146       7.95          97,741
Noninterest-earning assets .............       73,839            --                  --            54,560         --              --
                                           ----------          ----             -------         ---------       ----         -------

    Total assets .......................   $1,509,248          7.37%           $111,208        $1,284,706       7.61%        $97,741
                                           ==========          =====           ========        ==========       =====        =======

Liabilities And Shareholders' Equity
Deposits:
  Demand ...............................   $  181,147            --%           $     --         $ 158,332         --%        $    --
  Savings ..............................      524,155          2.53              13,255           465,827       2.75          12,789
  Time .................................      454,075          5.29              24,038           412,880       5.51          22,748
                                           ----------          ----             -------         ---------       ----         -------

    Total ..............................    1,159,377          3.22              37,293         1,037,039       3.43          35,537
Borrowings and other
  interest-bearing liabilities .........      191,857          4.99               9,580            97,232       4.83           4,701
Other liabilities ......................       27,325            --                  --            25,751         --              --
                                           ----------          ----             -------         ---------       ----         -------

    Total liabilities ..................    1,378,559          3.40             46,873         1,160,022        3.47         40,238
Shareholders' equity ...................      130,689            --                 --           124,684          --             --
                                           ----------          ----             -------         ---------       ----         -------

    Total liabilities and
     shareholders' equity ..............   $1,509,248          3.11%           $46,873        $1,284,706        3.13%       $40,238
                                           ==========          =====           ========        ==========       =====        =======

Average effective rate on
  interest-bearing liabilities .........   $1,170,087          4.01%           $46,873        $  975,939        4.12%       $40,238
                                           ==========          =====           ========       ==========        =====       =======

====================================================================================================================================





Interest Income/Earning Assets .........   $1,435,409          7.75%           $111,208       $1,230,146       7.95%       $97,741
Interest Expense/Earning Assets ........   $1,435,409          3.27            $ 46,873       $1,230,146       3.27        $40,238
                                                               -----                                           -----

Effective Interest Differential ........                       4.48%                                           4.67%
                                                               =====                                           =====
</TABLE>


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

(2)  Nonaccrual loans have been included in the appropriate average loan balance
     category, but interest on nonaccrual loans has not been included for
     purposes of determining interest income.

--------------------------------------------------------------------------------

                                                                     (Continued)


<TABLE>
<CAPTION>
                                        --------------------------------------------
                                                              1997
                                        --------------------------------------------
                                                Average       Average
(Dollars in thousands)                          Balance       Rate          Interest
                                        --------------------------------------------
Assets

Investment securities:
<S>                                             <C>            <C>           <C>
  Taxable investments ..................        $195,557       6.56%         $12,832
  Nontaxable investments (1) ...........         100,692       8.01            8,062
                                              ----------       ----          -------

    Total investment securities ........         296,249       7.05           20,894
Loans (1) (2) ..........................         763,000       8.70           66,378
Other rate-sensitive assets ............          29,092       5.66            1,648
                                              ----------       ----          -------

    Total earning assets ...............       1,088,341       8.17           88,920
Noninterest-earning assets .............          58,232         --               --
                                              ----------       ----          -------

    Total assets .......................      $1,146,573       7.76%         $88,920
                                              ==========       =====         =======

Liabilities And Shareholders' Equity
Deposits:
  Demand ...............................         $142,358         --%        $    --
  Savings ..............................          415,488        2.71         11,272
  Time .................................          382,892        5.53         21,186
                                              ----------       ----          -------

    Total ..............................          940,738        3.45         32,458
Borrowings and other
  interest-bearing liabilities .........           71,067        5.11          3,628
Other liabilities ......................           23,462          --             --
                                               ----------        ----        -------

    Total liabilities ..................        1,035,267        3.49         36,086
Shareholders' equity ...................          111,306          --             --
                                               ----------        ----        -------

    Total liabilities and
     shareholders' equity ..............       $1,146,573        3.15%       $36,086
                                              ==========        =====        =======

Average effective rate on
  interest-bearing liabilities .........         $869,447        4.15%       $36,086
                                               ==========       =====        =======

====================================================================================





Interest Income/Earning Assets .........      $1,088,341        8.17%        $88,920
Interest Expense/Earning Assets ........      $1,088,341         3.32        $36,086
                                                                -----

Effective Interest Differential ........                         4.85%
                                                                 =====
-------------------------------------------------------------------------------------
</TABLE>


PAGE 27


assets in foreclosure and troubled debt restructured loans) were 0.53% of total
loans and net assets acquired in foreclosure at December 31, 1999, compared to
0.60% at December 31, 1998, and 0.73% at December 31, 1997. The ratio of the
allowance to nonperforming assets was 254.1% at December 31, 1999, compared to
253.3% at December 31, 1998 and 215.6% at December 31, 1997.

  The balance of nonaccruing loans of $3,690,000 at December 31, 1999, decreased
$6,000 from the December 31, 1998, balance of $3,696,000. A decrease in
nonaccruing commercial loans was partially offset by an increase in real estate
nonaccruing loans. The December 31, 1998, balance of nonaccrual loans was
$34,000 less than the December 31, 1997, balance of $3,730,000.

  Net assets in foreclosure totaled $1,436,000 as of December 31, 1999, an
increase of $304,000 from the December 31, 1998 balance. During 1999, sales of
foreclosed properties totaled $1,765,000, transfers from loans to assets in
foreclosure were $2,186,000 and write-downs of assets in foreclosure equaled
$117,000. Efforts to liquidate assets acquired in foreclosure are proceeding as
quickly as potential buyers can be located and legal constraints permit.
Generally accepted accounting principles require foreclosed assets to be carried
at the lower of cost (lesser of carrying value of asset or fair value at date of
acquisition) or estimated fair value, less selling costs.

  During 1999, strong loan collection efforts by the Banks significantly reduced
loans past due 90 days or more. 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, 1999, loans past due 90 days or more
and still accruing interest were $269,000, compared to $1,350,000 as of December
31, 1998. This decrease was a result of a reduction in real estate loans and
consumer loans past due 90 days at December 31, 1999.

  As of December 31, 1999, there were two unrelated commercial borrowers with
troubled debt restructured loans totaling $465,000. These customers were
complying with the restructured terms as of December 31, 1999.

  The Banks' policy is to maintain allowances for loan losses at a level
believed by management to be adequate to absorb potential losses. Management's
determination of the adequacy of the allowance is determined monthly based on a
continuing evaluation of the portfolio, past loss experience, current and
anticipated economic conditions and other factors deemed relevant. Additions to
the allowances are charged to operations. The allowance for loan losses grew
3.7% from $13,706,000 at December 31, 1998, to $14,208,000 at December 31, 1999.
The allowance for loan losses to nonperforming assets at December 31, 1999, of
254.1% increased from the 253.3% at December 31, 1998.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                           Year Ended December 31,
                                                -----------------------------------------------
                                                   1999                1998              1997
                                                -----------------------------------------------
<S>                                             <C>               <C>               <C>
Nonperforming assets .........................   $5,591,000        $5,410,000        $5,841,000
Allowance for loan losses to
         nonperforming assets ................       254.1%            253.3%           215.6%
Nonperforming assets to total loans and
         net assets acquired in foreclosure ..        0.53%             0.60%            0.73%
Allowance for loan losses
         to total loans ......................        1.34%             1.52%            1.58%
----------------------------------------------------------------------------------------------
</TABLE>



Deposits and Borrowings and Other Interest-Bearing Liabilities

  The primary funding sources of the Corporation are deposits and other
borrowings. The Banks have seen significant increases in other borrowings during
the last few years as a result of the capital leverage program and an increase
in competition for deposits. Total deposits of $1,231,265,000 at December 31,
1999, increased $126,949,000, or 11.5%, from the $1,104,316,000 balance at
December 31, 1998. All deposit categories increased during this period. Other
borrowings of $248,318,000 at December 31, 1999, grew $99,340,000, or 66.7%,
compared to the December 31, 1998, balance. This increase included $25,000,000
in FHLB borrowings related to the capital leverage program. Borrowings and other
interest-bearing liabilities include federal funds purchased, FHLB borrowings,
securities sold under agreements to repurchase and U.S. Treasury notes.


--------------------------------------------------------------------------------
INCOME STATEMENT ANALYSIS

Results of Operations

  The 1999 net income of $22,347,000 increased $3,040,000, or 15.7% from the
1998 net income of $19,307,000. On a per share basis, basic and diluted earnings
were $2.82 in 1999, compared to basic and diluted earnings per share of $2.44 in
1998. Net income increased in 1998 by $1,664,000, or 9.4% over 1997.

  The return on average shareholders' equity was 17.10% for 1999, compared to
15.48% for 1998 and 15.85% in 1997. The 1999 return on average assets of 1.48%
decreased from the 1998 return on average asset rate of 1.50% as a result of the
strong asset growth experienced during 1999. The 1997 return on average assets
was 1.54%.

  Net income is affected by five major elements: net interest income, or the
difference between interest income earned on loans and investments and interest
expense paid on deposits and borrowed funds; the provision for loan losses, or
the amount added to the allowance for loan losses to provide reserves for future
losses on loans; other operating income, which is made up primarily of certain
service fees and Investment Management and Trust Services income; other
operating expenses, which consist primarily of salaries and other operating
expenses; and income taxes. Each of these major elements is reviewed in more
detail in the following discussion.

Net Interest Income

  The 1999 net interest income of $59,244,000 increased $5,990,000, or 11.2%,
from 1998 levels. Net interest income was $53,254,000 in 1998, which was 7.1%
higher than the $49,741,000 reported in 1997.

  Interest income at December 31, 1999, of $106,117,000 grew $12,625,000, or
13.5%, from the $93,492,000 balance at December 31, 1998. The increase in
interest income is the result of the growth in both average loans and investment
securities during this period. This growth in interest income was partially
offset by the $6,635,000, or 16.5%, increase in interest expense at December 31,
1999, compared to December 31, 1998. This rise in interest expense was the
result of the increase in both average interest-bearing deposits and borrowings
during this period. The higher rate of growth in interest expense, compared to
the interest income growth, is the result of funding bank

                                                                     (Continued)
PAGE 28

owned life insurance (BOLI) with deposits during 1999. Income generated from
BOLI is recorded as other operating income.

Net Interest Margin

  The net interest margin for 1999 of 4.48% was lower than both the net interest
margins for 1998 and 1997 of 4.67% and 4.85%, respectively. The lower net
interest margin experienced in 1999 is related to the high cost of attracting
new deposits, the impact of the additional capital leverage program, and the
funding of the BOLI. The tax-equivalent yield on total interest-earning assets
decreased 20 basis points from 7.95% in 1998 to 7.75% in 1999. This decrease is
the result of an increase in lower yielding investment securities related to the
capital leverage program, and lower loan yields. The Banks' 11 basis point
reduction in the cost of interest-bearing liabilities did not match the drop in
the tax-equivalent yield on total interest earning assets. The 1999 cost of
interest-bearing liabilities was 4.01% in 1999 and 4.12% in 1998.

  In an effort to more fully leverage its capital, the Corporation entered into
structured transactions in which the Banks borrow funds from the FHLB and invest
these borrowed funds into securities that are priced to yield a spread over the
FHLB borrowing rate. The Banks' capital leverage program balance at December 31,
1999, was $74,818,000. The actual leverage program yield spread earned during
1999 was 1.66%. Since the current competitive interest rate environment will
continue to place downward pressure on the net interest margin, the Banks will
increase net interest income through the continued growth in market share of
loans and deposits.

  The 1997 tax-equivalent yield on total interest-earning assets, cost of
interest-bearing liabilities and net interest margin were 8.17%, 4.15% and
4.85%, respectively.

Interest Rate Sensitivity Analysis

  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 Banks' Boards of Directors, is
responsible for managing the rate sensitivity position. The Banks manage
interest rate sensitivity by changing mix and repricing characteristics of their
assets and liabilities through their investment securities portfolios,
borrowings from the FHLB and their offering of loan and deposit terms. The
nature of the Banks' current operations is such that it is not subject to
foreign currency exchange or commodity price risk. The Banks do not own trading
assets and they do not have any hedging transactions in place such as interest
rate swaps, caps or floors.

  The Banks utilize three principal reports to measure interest rate risk:
asset/liability simulation reports; gap analysis reports; and net interest
margin reports. The table below shows the interest rate sensitivity gap position
as of December 31, 1999. 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, 1999. Money market, interest-bearing
checking, and savings accounts are considered stable sources of funds, and
although the rates are subject to change, rates on these accounts historically
have not changed as quickly or as often as the other deposits included in the
following analysis. On a cumulative basis over the next 12 months, the Banks are
in a negative gap position of (8.87)% of earning assets at December 31, 1999.
This gap position is within the guidelines set by the Banks' Asset/ Liability
policy.

  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 Banks' net interest income is simulated
by increasing and decreasing interest rates. This simulation is known as rate
shocks. The report on the following page forecasts changes in the Banks' market
value of equity under alternative interest rate environments. The market value
of equity is defined as the net present value of the Banks' existing assets and
liabilities. The results of the December 31, 1999, rate shock simulations show
that the Banks are within all guidelines set by the Banks' Asset/Liability
policy.


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(Dollars in thousands)                                                            December 31, 1999
                                                    ---------------------------------------------------------------------
                                                      0 to 90      91 to 365   >1 year         >3 years         Over 5
                                                        days         days      <3 years        <5 years         years
                                                    ---------------------------------------------------------------------
Assets
<S>                                                 <C>            <C>          <C>            <C>            <C>
Other rate-sensitive assets .....................   $  3,523       $1,500       $    100       $     --       $     --
Loans ...........................................    228,012      110,943        310,965        171,511        240,545
Investment securities ...........................     25,797       45,361         51,392         49,290        318,402
                                                    --------    ---------       --------       --------       --------
Total rate-sensitive assets .....................    257,332      157,804        362,457        220,801        558,947
                                                    --------    ---------       --------       --------       --------

Liabilities
Time deposits ...................................    142,698      164,582        150,676         28,811             22
Money market accounts ...........................      9,279       30,198         55,748         19,921        134,879
Interest-bearing checking accounts ..............      4,936       16,315         35,749         12,778         79,784
Savings accounts ................................      5,460       14,175         31,097         17,887         74,795
Other borrowings ................................    153,068       12,500         47,750         23,000         12,000
                                                    --------    ---------       --------       --------       --------
Total rate-sensitive liabilities ................   $315,441    $237,770        $321,020       $102,397       $301,480
                                                    --------    ---------       --------       --------       --------
Incremental gap .................................   $(58,109)   $(79,966)       $ 41,437       $118,404       $257,467
                                                    ========    =========       ========       ========       ========
Cumulative gap ..................................   $(58,109)   $(138,075)      $(96,638)      $ 21,766       $279,233
                                                    ========    =========       ========       ========       ========
% of earning assets .............................      (3.73)%      (8.87)%        (6.21)%         1.40%         17.93%
                                                    ========    =========       ========       ========       ========
</TABLE>


                                                                    (Continued)
PAGE 29


<TABLE>
<CAPTION>
                                                                                      Asset/Liability
                                                        Change in                          Policy
                                    Market Value      Market Value     Percentage         Approved
                                     of Equity         of Equity        Change         Percent Change
                                   -------------------------------------------------------------------
<S>                                   <C>               <C>              <C>                  <C>
+200 Basis Points ...............     264,676           (42,407)        -13.81%            +/-30%
+150 Basis Points ...............     274,984           (32,099)        -10.45%            +/-30%
+100 Basis Points ...............     285,504           (21,579)         -7.03%            +/-30%
+50 Basis Points ................     296,161           (10,922)         -3.56%            +/-30%
Flat Rate .......................     307,083                --           0.00%            +/-30%
-50 Basis Points ................     317,030             9,947           3.24%            +/-30%
-100 Basis Points ...............     325,920            18,837           6.13%            +/-30%
-150 Basis Points ...............     329,874            22,791           7.42%            +/-30%
-200 Basis Points ...............     330,367            23,284           7.58%            +/-30%

------------------------------------------------------------------------------------------------------
</TABLE>

  In the event the Banks should experience a mismatch in their desired GAP
ranges or an excessive decline in their market value of equity resulting from
changes in interest rates, they have a number of options which they could
utilize to remedy such a mismatch. The Banks could restructure their investment
portfolio through the sale or purchase of securities with more favorable
repricing attributes. They could also emphasize 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 is based on management's analysis of the
adequacy of the allowance for loan losses. In its evaluation, management
considers past loan experience, overall characteristics of the loan portfolio,
current economic conditions and other relevant factors. Based on the latest
monthly evaluation of potential loan losses, the allowance is adequate to absorb
known and inherent losses in the loan portfolio. Ultimately however, the
adequacy of the allowance is largely dependent upon the economy, a factor beyond
the Corporation's control. With this in mind, additions to the allowance for
loan losses may be required in future periods, especially if economic trends
worsen or certain borrowers' abilities to repay decline.

  The 1999 provision of $1,907,000, reflected a decrease of $323,000, or 14.4%,
compared to the 1998 provision of $2,230,000. The decrease in the provision
during 1999 is related to the improvement in the ratio of the allowance for loan
losses to nonperforming assets ratio. The allowance for loan losses to
nonperforming assets ratio for December 31, 1999, 1998 and 1997 were 254.1%,
253.3%, and 215.6%, respectively. Total loans charged off increased 18.9% from
$1,416,000 in 1998 to $1,684,000 in 1999. The increase in the loans charged off
was primarily due to real estate related loans. Recoveries of $279,000 during
1999 decreased from the 1998 recoveries of $300,000. The charged off loans and
recoveries for 1997 were $1,745,000 and $519,000, respectively.


Other Income

 The 1999 other operating income of $10,092,000 increased $84,000, compared to
the 1998 level of $10,008,000. This minor growth was the result of a $1,072,000
decrease in security gains earned in 1999 compared to 1998. The 1999 other
operating income net of security gains increased $1,156,000, or 13.7%, over the
1998 other operating income net of security gains. Contributing to this increase
were a $512,000 rise in trust income, a $285,000 growth in service charges and a
$527,000 increase in BOLI income. These increases were offset by a $168,000
decrease in other income.

 Income from service charges on deposit accounts of $3,572,000 in 1999 increased
$285,000, or 8.7%, from the 1998 income from service charges on deposit accounts
of $3,287,000. The increase in service charges during 1999 is attributed to the
13.0% rise in average fee earning deposits. The 1998 service charges grew 9.8%
over 1997 service charges.

  The $471,000 net security gain in 1999 was lower than the 1998 and 1997 net
security gains of $1,543,000 and $1,757,000, respectively. The majority of the
security gains in 1998 and 1997 were the result of the sale of equity securities
held at HNC Financial Company. HNC Financial Company did not sell any securities
during 1999. From time to time, the Corporation sells investment securities
available for sale to fund the purchase of other securities in an effort to
enhance the overall return on the portfolio.

  Income from the Corporation's Investment Management and Trust Division of
$2,629,000 increased $512,000, or 24.2%, compared to the $2,117,000 recorded in
1998. This increase was primarily the result of a 24.7% increase in the book
value of trust assets from December 31, 1998 to December 31, 1999. The 1997
Investment Management and Trust Division income was $1,509,000.

  During 1999, the corporation entered into a $25,000,000 investment of bank
owned life insurance (BOLI). BOLI involves the purchasing of life insurance by
the Corporation on a chosen group of employees. The corporation is the owner and
beneficiary of the policies. This pool of insurance, due to tax advantages to
the Banks, is profitable to the corporation. This profitability is used to
offset a portion of future benefit cost increases. Bank deposits fund BOLI and
the earnings from BOLI are recognized as other income. The corporation
recognized $527,000 of BOLI income during 1999.

  Other income decreased $168,000 during 1999, from $3,061,000 in 1998 to
$2,893,000 in 1999. This decrease was due to a $388,000 reduction in gains on
the sale of residential mortgages, from $716,000 in 1998, to $328,000 in 1999.
Net of gains on the sale of residential mortgages, other income increased
$220,000, or 9.4%, in 1999, compared to 1998. This increase was the result of a
rise in gains on the sale of off-lease vehicles and equipment and the growth in
debit card fees. Other income in 1997 was $1,395,000.

Other Expenses

  The Corporation's total overhead expense as a percentage of average assets of
2.51% was well below its peer banks' ratio of 3.02% as of September 30, 1999.
Other operating expenses rose to $38,438,000 for 1999, an 8.6% increase over the
$35,409,000 for 1998. This increase improved from the 15.6% increase in other
operating expenses experienced from 1997 to 1998. The Corporation's constant
focus on controlling expenses and improving efficiencies has held the growth of
its other operating expenses much lower than its 15.8%

                                                                    (Continued)
PAGE 30

growth in total assets during 1999. Employee salaries and benefits increased
$1,560,000, or 8.3%, from $18,876,000 in 1998 to $20,436,000 in 1999. The
increase in salaries and benefits reflects cost-of-living increases, merit
increases and additional staff necessitated by current and planned growth. The
1998 salaries and benefits expense increased 14.7% over the 1997 salary and
benefits expense of $16,452,000.

  Net occupancy costs increased by $117,000, or 5.0%, in 1999, compared with a
$171,000, or 7.9%, increase in 1998. These increases are primarily related to
the additional occupancy expense related to the opening of new branches during
these periods. Equipment expenses increased by $836,000, or 23.0%, during 1999,
and $646,000, or 21.6%, in 1998. These increases are due to equipment
depreciation, rental and maintenance associated with planned increases in data
processing capabilities used to manage the rise in volume related to the growth
of the Corporation and to enhance the products offered to its customers.

  Other expenses grew $516,000, or 4.9%, from $10,565,000 in 1998 to $11,081,000
in 1999. The 1998 other expenses increased 17.1%, compared to 1997. These
increases are the result of expenses associated with the overall growth of the
Banks.

Income Taxes

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

  The effective income tax rates of 22.9% for 1999, 24.6% for 1998 and 26.8% for
1997 were less than the applicable federal income tax rate of 35.0%, as a result
of tax-exempt income.

CAPITAL

  Capital, at the end of 1999, was $129,660,000, a decrease of $1,292,000, or
1.0%, over the end of 1998. The decrease was due to the adjustment for the net
unrealized losses on the available for sale investment securities, partially
offset by the retention of the Corporation's earnings. The accumulated other
comprehensive income at December 31, 1999, was a loss of $9,757,000, compared to
a gain of $5,384,000 at December 31, 1998. 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. Except as
previously discussed, 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.

  The Corporation's capital ratios exceed regulatory requirements. Existing
minimum regulatory capital ratio requirements are 5.0% for primary capital and
6.0% for total capital. The primary capital ratio was 9.29% December 31, 1999,
compared with 9.80% at December 31, 1998. Since the Corporation's only capital
is primary capital, the total capital ratios are the same as the primary capital
ratios.

  Pursuant to the federal regulators' risk-based capital adequacy guidelines,
the components of capital are called Tier 1 and Tier 2 capital. For the
Corporation, Tier 1 capital is shareholders' equity, and Tier 2 capital is the
allowance for loan losses. The risk-based capital ratios are computed by
dividing the components of capital by risk-adjusted assets. Risk-adjusted assets
are determined by assigning credit risk-weighting factors from 0% to 100% to
various categories of assets and off-balance-sheet financial instruments. The
minimum for the Tier 1 capital ratio is 4.0%, and the total capital ratio (Tier
1 plus Tier 2 capital divided by risk-adjusted assets) minimum is 8.0%. At
December 31, 1999, the Corporation's Tier 1 risk-adjusted capital ratio was
11.43%, and the total risk-adjusted capital ratio was 12.64%, both well above
regulatory requirements. The risk-based capital ratios of each of the
Corporation's commercial banks also exceeded regulatory requirements at the end
of 1999.

  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 bank organization. The Corporation's leverage ratios were 8.52% and 9.05%
at December 31, 1999 and 1998, 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 undercapitalized" if it has a tangible
equity ratio of 2% or less. As of December 31, 1999, the banks are above the
regulatory minimum guidelines and meet the criteria to be categorized as "well
capitalized" institutions.
                                                                     (Continued)

PAGE 31

Liquidity

  Liquidity is a measure of the ability of the Banks to meet their needs and
obligations on a timely basis. For a bank, liquidity requires the ability to
meet the day-to-day demands of deposit customers, along with the ability to
fulfill the needs of borrowing customers. Generally, the Banks arrange their mix
of cash, money market investments, investment securities and loans in order to
match the volatility, seasonality, interest sensitivity and growth trends of its
deposit funds. Federal funds sold averaged $7,010,000 during 1999, and
investment securities available for sale averaged $432,342,000 during 1999; both
are more than sufficient to match normal fluctuations in loan demand or deposit
fund supplies. Backup sources of liquidity are provided by federal fund lines of
credit established with correspondent banks. Additional liquidity could be
generated through borrowings from the Federal Reserve Bank of Philadelphia, of
which Harleysville, Citizens and Security are members, and from the Federal Home
Loan Bank of Pittsburgh, of which Harleysville, Citizens and Security are
members. Unused lines of credit at the FHLB were $188,657,000 as of December 31,
1999.

  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.

Year 2000

  The following section contains forward-looking statements, which involve risks
and uncertainties. The actual impact on the Corporation of the Year 2000 issue
could materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.

  Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000
(Y2K). The Year 2000 issue affects virtually all companies and organizations.

  The Corporation did not experience problems associated with the Y2K issue and
has not found Y2K problems with its related third parties, as of January 31,
2000. The Corporation's third parties include its vendors and commercial
customers. The Corporation continues to monitor its own computer systems for Y2K
problems and will continue to investigate any potential problems with its
related third parties.

  The Corporation prepared a Y2K budget and has tracked expenses related to the
Y2K issue. As of December 31, 1999, the corporation has expensed $381,000 and
capitalized fixed assets of $116,000 during the last three years to address the
Y2K issue.

PAGE 32