UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





___________________





Form 10-Q


__________________





x    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934





For the quarterly period ended September 30, 2003





Or





 ̈    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934





For the Transition Period From ___________ to __________





Commission file number 0-15237





___________________








(Exact name of registrant as specified in its charter)





___________________








Pennsylvania

23-2210237(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)





483 Main Street


Harleysville, Pennsylvania 19438


(Address of principal executive office and zip code)





(215) 256-8851


(Registrants telephone number, including area code)





___________________





Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.


Yes x No  ̈








Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


Yesx No ̈





Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  23,837,780  shares of Common Stock, $1.00 par value, outstanding on November 10, 2003.


1




HARLEYSVILLE NATIONAL CORPORATIONINDEX TO FORM 10-Q REPORTPAGEPart I. Financial InformationItem 1. Financial Statements:Consolidated Balance Sheets  September 30, 2003 and December 31, 2002
3Consolidated Statements of Income  Nine Months and Three Months Ended Sept. 30, 2003 and 2002
4Consolidated Statements of Shareholders Equity  Nine Months Ended September 30, 2003 and Year
5Ended December 31, 2002Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2003 and 2002
6Notes to Consolidated Financial Statements
7Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
11Item 3. Quantitative and Qualitative Disclosures about Market Risk
26Item 4. Controls and Procedures
27Part II. Other InformationItem 1. Legal Proceedings
28Item 2. Change in Securities and Use of Proceeds
28Item 3. Defaults Upon Senior Securities
28Item 4. Submission of Matters to a Vote of Security Holders
28Item 5. Other Information
28Item 6. Exhibits and Reports on Form 8-K
28Signatures
30





2





PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS(Unaudited)(Dollars in thousands)

September 30, 2003

December 31, 2002AssetsCash and due from banks
$
52,813
$
62,177Federal funds sold

88,500

33,500Interest-bearing deposits in banks

4,463

8,410Total cash and cash equivalents

145,776

104,087Residential mortgage loans held for sale

21,288

-Investment securities available for sale

895,126

949,056Investment securities held to maturity

20,706

22,411(fair value $22,365 and $23,650, respectively)Total loans and leases

1,356,394

1,333,292Less: Allowance for loan losses

(16,854)

(17,190)Net loans

1,339,540

1,316,102Bank premises and equipment, net

22,227

21,645Accrued interest receivable

10,921

13,140Net assets in foreclosure

893

390Intangible assets, net

2,526

1,798Bank-owned life insurance

50,013

48,631Other assets

13,986

13,604Total assets
$
2,523,002
$
2,490,864Liabilities and Shareholders' EquityDeposits:Noninterest-bearing
$
283,886
$
269,781Interest-bearing:Checking accounts

276,941

249,646Money market accounts

490,341

488,944Savings

217,969

202,003Time, under $100,000

506,976

526,885Time, $100,000 or greater

214,719

242,563Total deposits

1,990,832

1,979,822Accrued interest payable

20,761

21,991U.S. Treasury demand notes

1,963

2,015Long-term borrowings

168,750

162,750Securities sold under agreements to repurchase

88,115

84,141Guaranteed preferred beneficial interest in Corporation'ssubordinated debentures

5,000

5,000Other liabilities

28,703

28,939Total liabilities

2,304,124

2,284,658Shareholders' Equity:Series preferred stock, par value $1 per share;authorized 8,000,000 shares, none issued

-

-Common stock, par value $1 per share; authorized 75,000,000shares; issued and outstanding 24,655,569 shares at September30, 2003 and 19,597,290 shares at December 31, 2002

24,656

19,597Additional paid in capital

93,077

96,585Retained earnings

109,990

94,677Treasury stock, at cost: 822,633 shares in 2003and 569,107 shares in 2002

(13,861)

(11,590)Accumulated other comprehensive income

5,016

6,937Total shareholders' equity

218,878

206,206Total liabilities and shareholders' equity
$
2,523,002
$
2,490,864See accompanying notes to consolidated financial statements.


3





HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Unaudited)(Dollars in thousands except weighted average number of common shares and per share information)

Nine months ended Sept 30,

Three months ended Sept 30,2003

2002


2003

2002Interest Income:Loans, including fees
$
59,268
$
63,793

$
19,821
$
21,012Lease financing

5,097

6,476


1,517

2,188Investment securities:Taxable

12,931

20,827


3,387

6,555Exempt from federal taxes

11,376

8,748


3,602

3,266Federal funds sold

123

275


48

53Deposits in banks

118

140


64

44Total interest income

88,913

100,259


28,439

33,118Interest Expense:Savings deposits

6,030

8,923


1,585

3,081Time, under $100,000

14,513

17,905


4,641

5,982Time, $100,000 or greater

3,387

5,680


919

1,896Borrowed funds

6,756

7,014


2,071

2,480Total interest expense

30,686

39,522


9,216

13,439Net interest income

58,227

60,737


19,223

19,679Provision for loan losses

2,559

3,401


630

956Net interest income after provision for loan losses

55,668

57,336


18,593

18,723Other Operating Income:Service charges

5,774

4,993


2,007

1,846Security gains, net

6,449

3,193


359

719Trust and investment services income

2,820

2,809


954

896Bank-owned life insurance income

1,935

1,900


673

631Income on life insurance

1,119

-


-

-Other Income

4,325

4,188


1,259

1,349Total other operating income

22,422

17,083


5,252

5,441Net interest income after provision for loan lossesand other operating income

78,090

74,419


23,845

24,164Other Operating Expenses:Salaries, wages and employee benefits

23,655

22,631


7,938

7,550Occupancy

2,846

2,902


941

844Furniture and equipment

4,206

4,035


1,525

1,428Prepayment fee

2,594

-


-

-Other expenses

12,437

13,126


2,694

3,679Total other operating expenses

45,738

42,694


13,098

13,501Income before income tax expense

32,352

31,725


10,747

10,663Income tax expense

5,991

7,121


1,952

2,250Net income
$
26,361
$
24,604

$
8,795
$
8,413Weighted average number of common shares:Diluted

24,555,092

24,644,984
*

24,587,614

24,609,988*Basic

23,793,891

23,926,895
*

23,812,431

23,891,899*Net income per share information:Diluted
$
1.07
$
1.00
*
$
0.36
$
0.34*Basic
$
1.11
$
1.03
*
$
0.37
$
0.35*Cash dividends per share
$
0.464
$
0.396
*
$
0.160
$
0.137** Adjusted for a five-for-four common stock split effective 9/15/03.See accompanying notes to consolidated financial statements.


4













Consolidated Statements of Shareholders' EquityHarleysville National Corporation and Subsidiaries(Unaudited)(Dollars and share information in thousands)Nine Months Ended September 30, 2003Common StockNumber of shares

Par Value

Additional Paid in Capital

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Treasury Stock

Total

Comprehensive Income (Loss)Balance, January 1, 2003
19,597
$
19,597
$
96,585
$
94,677
$
6,937
$
(11,590)
$
206,206
$Stock options
130

130

1,415

-

-

-

1,545Stock Dividends
4,929

4,929

(4,929)

-

-

-

-Net income
-

-

-

26,361

-

-

26,361

26,361Stock awards
-

-

6

-

-

-

6Other comprehensive income,net of reclassifications and tax
-

-

-

-

(1,921)

-

(1,921)

(1,921)Purchases of Treasury stock
-

-

-

-

-

(2,271)

(2,271)Cash dividends
-

-

-

(11,048)

-

-

(11,048)Comprehensive income













$
24,440Balance, September 30, 2003
24,656
$
24,656
$
93,077
$
109,990
$
5,016
$
(13,861)
$
218,878For the Year Ended December 31, 2002Common StockNumber of shares

Par Value

Additional Paid in Capital

Retained Earnings

Accumulated Other Comprehensive Income

Treasury

Total

Comprehensive IncomeBalance, January 1, 2002
18,571
$
18,571
$
71,419
$
100,171
$
4,534
$
(5,346)
$
189,349
$Stock options
94

94

1,166

-

-

-

1,260Stock dividends
932

932

23,994

(24,942)

-

-

(16)Stock awards
-

-

6

-

-

-

6Net income
-

-

-

32,927

-

-

32,927

32,927Other comprehensive income,net of reclassifications and tax
-

-

-

-

2,403

-

2,403

2,403Purchases of Treasury stock
-

-

-

-

-

(6,244)

(6,244)Cash dividends
-

-

-

(13,479)

-

-

(13,479)Comprehensive income













$
35,330Balance, December 31, 2002
19,597
$
19,597
$
96,585
$
94,677
$
6,937
$
(11,590)
$
206,206See accompanying notes to consolidated financial statements.





5










HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(Dollars in thousands)

Nine Months Ended September 30,Operating Activities:

2003

2002Net Income
$
26,361
$
24,604Adjustments to reconcile net income tonet cash provided by operating activities:Provision for loan losses

2,559

3,401Depreciation and amortization

2,189

1,961Net amortization of investmentsecurities discount/premiums

7,906

2,045Deferred income taxes

(2,080)

(2,642)Net realized security gains

(6,449)

(3,193)Decrease (increase) in accrued income receivable

2,219

(1,589)Net decrease in accrued interest payable

(1,230)

(4,976)Net increase in intangible assets

(728)

(288)Net increase in other assets

(382)

(599)Net increase in other liabilities

2,655

3,877Decrease in deferred cost, net

839

906Write-down of other real estate owned

-

68Net cash provided by operating activities

33,859

23,575Investing Activities:Proceeds from sales of investment securities available for sale

965,232

568,561Proceeds, maturity or calls of investment securities held to maturity

754

3,408Proceeds, maturity or calls of investment securities available for sale

522,035

184,988Purchases of investment securities available for sale

(1,436,573)

(961,328)Net increase in loans

(49,503)

(31,106)Net increase in premises and equipment

(2,771)

(2,163)Net increase in bank-owned life insurance

(1,382)

(1,900)Proceeds from sales of other real estate

875

857Net cash used by investing activities

(1,333)

(238,683)Financing Activities:Net increase in deposits

11,010

204,337Net decrease in U.S. Treasury demand notes

(52)

(662)Increase in FHLB borrowings

6,000

35,000Increase in securities sold under agreement

3,973

4,844Cash dividends

(11,048)

(9,480)Repurchase of common stock

(2,271)

(4,118)Stock options and stock awards

1,551

1,011Net cash used by financing activities

9,163

230,932Net increase in cash and cash equivalents

41,689

15,824Cash and cash equivalents at beginning of period

104,087

82,624Cash and cash equivalents at end of the period
$
145,776
$
98,448Cash paid during the period for:Interest
$
31,917
$
44,498Income taxes
$
7,400
$
9,000Supplemental disclosure of noncash investing and financing activities:Transfer of assets from loans to other real estate owned
$
1,378
$
789See accompanying notes to consolidated financial statements.


6





HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Note 1 - In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of Harleysville National Corporation (the "Corporation") and its wholly owned subsidiaries - Harleysville National Bank and Trust Company ("Harleysville"), Citizens National Bank ("Citizens"), Security National Bank (Security) (collectively, the Banks), HNC Financial Company and HNC Reinsurance Company - as of September 30, 2003, the results of its operations for the nine and three month periods ended September 30, 2003 and 2002 and the cash flows for the nine month periods ended September 30, 2003 and 2002. This quarterly report refers to the Corporations subsidiary banks, collectively as the banks. We recommend that you read these unaudited consolidated financial statements in conjunction with the audited consolidated financial statements of the Corporation and the notes thereto in the corporation's 2002 Annual Report on Form 10-K.





The results of operations for the nine and three-month periods ended September 30, 2003 and 2002 are not necessarily indicative of the results to be expected for the full year.





Note 2 - Income tax expense is less than the amount calculated using the statutory tax rate, primarily as a result of the Corporations tax-exempt income earned from state and municipal securities and loans.





Note 3 - 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 (losses) on investment securities available for sale. The components of other comprehensive income are as follows:





Comprehensive Income(Dollars in thousands)

Before tax

Tax

Net of taxSeptember 30, 2003

Amount

Expense

amountUnrealized gains on securities:Unrealized holding gainsArising during period
$
3,494
$
(1,222)
$
2,272Less reclassification foradjustment for gainsrealized in net income

6,449

(2,256)

4,193Other comprehensive income, net
$
(2,955)
$
1,034
$
(1,921)Before tax

Tax Benefit

Net of taxSeptember 30, 2002

Amount

(Expense)

amountUnrealized gains on securities:Unrealized holding lossesarising during period
$
14,424
$
(5,048)
$
9,376Less reclassification foradjustment for gainsrealized in net income

3,193

(1,117)

2,076Other comprehensive income, net
$
11,231
$
(3,931)
$
7,300





Note 4 - The Corporation follows SFAS No. 123, Accounting for Stock-Based Compensation, which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. The Corporation has chosen an alternative permitted by the standard to continue accounting for employee stock options and similar instruments under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.





7




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





The Corporation has four shareholder approved fixed stock option plans that allow the Corporation to grant options up to an aggregate of 2,158,019 shares of common stock to key employees and directors. At September 30, 2003, 1,827,973 stock options had been granted under the stock option plans. The options have a term of ten years when issued and vest over a five-year period. The exercise price of each option is the market price of the Corporations stock on the date of grant.





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 at September 30, 2003 and September 30, 2002, respectively: dividend yield of 2.50% and 2.73%; expected volatility of 5.35% and 5.55%; risk-free interest rate of 2.77% and 3.89%; and an expected life of 7.18 years and 7.04 years.





The Corporation recently adopted, and is providing interim period disclosures under SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share amounts).





Nine Months EndedSeptember 30, 2003

September 30, 2002Net IncomeAs reported
$
26,361
$
24,604Less: Stock-based compensation cost determinedunder fair value method for all awards

1,114

1,540Proforma
$
25,247
$
23,064Earnings per share (Diluted)As reported
$
1.07
$
1.00Proforma
$
1.03
$
0.94Earnings per share (Basic)As reported
$
1.11
$
1.03Proforma
$
1.06
$
0.96Three Months EndedSeptember 30, 2003

September 30, 2002Net IncomeAs reported
$
8,795
$
8,413Less: Stock-based compensation cost determinedunder fair value method for all awards

371

513Proforma
$
8,424
$
7,900Earnings per share (Diluted)As reported
$
0.36
$
0.34Proforma
$
0.34
$
0.32Earnings per share (Basic)As reported
$
0.37
$
0.35Proforma
$
0.35
$
0.33








8




Note 5 - The Corporation adopted FIN 45 Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others on January 1, 2003. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Corporation has performance letters of credit. Performance letters of credit require the Corporation to make payments if the customer fails to perform certain non-financial contractual obligations. The Corporation previously did not record a liability when guaranteeing obligations unless it became probable that the Corporation would have to perform under the guarantee. FIN 45 applies prospectively to guarantees the Corporation issues or modifies subsequent to December 31, 2002. The maximum potential undiscounted amount of future payments of these letters of credit as of September 30, 2003 are $13,378 , 000 and they expire through December 2006. Amounts due under these letters of credit would be reduced by any proceeds that the Corporation would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer.





Note 6  In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). On October 31, 2003, the FASB issued an Exposure Draft related to the consolidation of Variable Interest Entities, and the interpretation of FIN 46 (FIN 46 Interpretation). FIN 46 requires a variable interest entity to be consolidated by a company, if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns, or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements, as amended by FASB Staff Position (FSP) 46-6, Effective Date of FIN 46, apply to existing entities in the first fiscal year or interim period beginning after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Corporation is currently evaluating the impact that FIN 46 and FIN 46 Interpretation will have on its consolidated financial position and results of operations.





The Corporation has also evaluated the impact of FIN 46 on variable interest entities consolidated by the Corporation prior to the issuance of FIN 46. Management has determined that Harleysville Statutory Trust 1 qualifies as a variable interest entity under FIN 46. Harleysville Statutory Trust 1 issued mandatorily redeemable preferred stock to investors and loaned the proceeds to the Corporation. Harleysville Statutory Trust 1 holds, as its sole asset, subordinated debentures issued by the Corporation in 2001. The timing and amount of payments on the subordinated debentures are the same as the timing and amount of payments by Harleysville Statutory Trust 1 on the mandatorily redeemable preferred stock. Harleysville Statutory Trust 1 is currently included in the Corporations consolidated balance sheet and statements of income. Management believes that Harleysville Statutory Trust 1 should continue to be included in the Corporations consolidated financial statements after the effective date of FIN 46. However, as additional interpretations related to entities similar to Harleysville Statutory Trust 1 become available, management will reevaluate its conclusion that Harleysville Statutory Trust 1 should be included in the consolidated financial statements and its potential impact to its Tier I capital calculation under such interpretations.





Note 7 - In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149). SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. All provisions of this Statement shall be applied prospectively. Based on the Corporations current business operations, management expects that the provisions of SFAS No. 149 will not materially impact the Corporations financial condition, results of operations, or disclosures.





Note 8 - The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No. 150 changes the classification in the statement of financial position of certain common financial instruments from either equity or mezzanine presentation to liabilities and requires an issuer of those financial statements to recognize changes in fair value or redemption amount, as applicable, in earnings. SFAS No. 150 is effective for public companies for financial instruments entered into or modified after May 31, 2003 and is effective at the beginning of the first interim period beginning after June 15, 2003. Management has not entered into any financial instruments that would qualify under SFAS No. 150. The Company currently classifies its Guaranteed Preferred Beneficial Interest in the Companys Subordinated Debt as a liability. As a result, management does not anticipate the adoption of SFAS No. 150 to have a material impact on the Companys financial position or results of operations.





9


Note 9  On October 15, 2003, the Corporation entered into a Definitive Agreement and Plan of Reorganization to acquire Millennium Bank. The acquisition is subject to regulatory approval and the approval of the Millennium shareholders. Upon completion of the acquisition, Millennium Bank will be merged into Harleysville National Bank, a wholly-owned subsidiary of the Corporation.





Note 10  On September 15, 2003, the Corporation paid a five-for-four common stock split to shareholders of record as of September 2, 2003. On September 16, 2002, the Corporation paid a 5% stock dividend on its common stock to shareholders of record as of September 3, 2002. All prior period amounts were restated to reflect these stock dividends.





Note 11  Certain prior period numbers have been reclassified to conform with current year presentation.


10


Item 2 .





MANAGEMENT'S DISCUSSION AND ANALYSIS OF


RESULTS OF OPERATIONS AND FINANCIAL CONDITION





Results of Operations





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





In addition to historical information, this Form 10-Q contains forward-looking statements. We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of the Corporation and its subsidiaries. When we use words such as believes, expects, anticipates, or similar expressions, we are making forward-looking statements.





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








* Operating, legal and regulatory risks;





* Economic, political and competitive forces affecting our banking,


securities, asset management and credit services businesses; and





* The risk that our analyses of these risks and forces could be incorrect


and/or that the strategies developed to address them could be unsuccessful.








Basis of Financial Statement Presentation





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





The American Institute of Certified Public Accountants (AICPA) Accounting Standards Executive Committee has issued an exposure draft of a proposed Statement of Position (SOP), Allowance for Credit Losses . The proposed SOP addresses the recognition and measurement by creditors of the allowance for credit losses related to all loans, as that term is defined in Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 114,Accounting by Creditors for Impairment of a Loan , with certain exceptions. If adopted, the proposed SOP would apply to all creditors other than state and local governmental entities and federal governmental entities. The Corporation is currently reviewing the components of the proposed SOP and the impact it will have on its consolidated financial position and results of operations.




11




Overview





The Corporation earned record profits in the third quarter of 2003 and year-to-date 2003. Third quarter 2003 profits were 4.5% higher than the third quarter of 2002, and the 2003 year-to-date profits were 7.1% higher than the same period in 2002. Lower operating expenses, a reduction in the provision for loan losses, an increase in both deposit service charges and trust and investment services income contributed to the third quarter 2003 performance. Asset quality at September 30, 3003 also improved through a reduction in nonperforming loans, compared to both December 31, 2002 and September 30, 2002.








Third quarter 2003 diluted earnings per share of $.36 increased 5.9% over the third quarter 2002 diluted earnings per share of $.34. Third quarter basic earnings per share in 2003 of $.37 exceeded the third quarter 2002 basic earnings per share of $.35 by 5.7%. Third quarter 2003 net income of $8,795,000 increased 4.5% over the third quarter 2002 net income of $8,413,000. Net income for the first nine months of 2003 was $26,361,000, an 7.1% increase over the $24,604,000 for the comparable period in 2002. Diluted earnings per share of $1.07 were up 7.0% from the $1.00 in 2002. Basic earnings per share of $1.11 for the first nine months of 2003 were 7.8% higher than the $1.03 year-to-date September 30, 2002. The Corporations consolidated total assets were $2,523,002,000 at September 30, 2003, 2.1% above the September 30, 2002 level of $2,472,052,000.





For the nine months ended September 30, 2003, the annualized return on average shareholders equity and the annualized return on average assets were 16.32% and 1.44%, respectively. For the same period in 2002, the annualized return on average shareholders equity was 16.78% and the annualized return on average assets was 1.46%. Excluding accumulated other comprehensive income, the annualized return on average realized shareholders equity for the first nine months of 2003 and 2002 were 16.99% and 17.15%, respectively. For the three months ended September 30, 2003, the annualized return on average shareholders equity and the annualized return on average assets were 16.11% and 1.44%, respectively. For the same period in 2002, the annualized return on average shareholders' equity was 16.71% and the annualized return on average assets was 1.44%. Excluding accumulated other comprehensive income, the annualized return on average realized shareholders equity for the third quarters of 2003 and 2002 were 16.65% and 17.29%, respectively.








Asset quality continued to improve in this economy that is slowly beginning to strengthen, as reflected by the improvement in loan quality ratios at September 30, 2003. Nonperforming loans (nonaccruing loans and loans past due 90 days or more and still accruing interest) were .37% of total loans at September 30, 2003, compared to .47% at December 31, 2002 and .51% at September 30, 2002. The ratio of loan loss reserve to nonperforming loans was 326.5% at September 30, 2003, compared to 272.8% at December 31, 2002 and 248.2% at June 30, 2002. The annualized net loans charged-off to average loans was 0.39% during the third quarter of 2003, compared to 0.20% during the third quarter of 2002.





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 inherent losses on loans; other operating income, which is made up primarily of certain fees, trust income and gains and losses from sales of securities; other operating expenses, which consist primarily of salaries, employee benefits and other operating expenses; and income taxes. Each of these major elements will be reviewed in more detail in the following discussion.





Net Interest Income and Related Assets and Liabilities





Net interest income for the first nine months of 2003 of $58,227,000 was $2,510,000 or 4.1% lower than the same period in 2002 net interest income of $60,737,000. The third quarter 2003 net interest income of $19,223,000 was $456,000 or 2.3% less than the net interest income earned in the same quarter of 2002. As shown in the table below, this decrease in net interest income was primarily the result of the lower net interest margin, partially offset by higher earning asset volumes.  Interest income was lower in 2003 compared to 2002 as a result of the impact of lower interest rates and the effect of the growth in the investment portfolio outpacing the growth in the loan portfolio during this period. The yield earned on the investment portfolio is lower than the yield earned on the loan portfolio. The year-to-date and third quarter 2003 interest income was also impacted by the very high level of cash flow from mortgage refinance activity and accelerated premium amortization on mortgage backed securities. However, based on lower mortgage refinance applications received in August and September, refinance lending activity and related cash flows should slow in the fourth quarter. The lower interest income was partially offset by the decrease in interest expense related to the reduction in deposit and other borrowing rates.





12




The rate-volume variance analysis in the table below, which is computed on a tax-equivalent basis (tax rate of 35%), analyzes changes in net interest income for the nine and three months ended September 30, 2003 over September 30, 2002 by their rate and volume components.




Nine Months Ended
September 30, 2003
Over/Under
September 30, 2002

Three Months Ended
September 30, 2003
Over/Under
September 30, 2002(In thousands)Total

Caused by:

Total

Caused by:Variance

Rate

Volume

Variance

Rate

VolumeInterest Income:Securities *
$
(3,833)
$
(9,456)
$
5,623
$
(2,619)
$
(3,031)
$
412Money market instruments

(173)

(179)

6

15

(53)

68Loans *

(5,935)

(6,440)

505

(1,894)

(2,139)

245Total

(9,941)

(16,075)

6,134

(4,498)

(5,223)

725Interest Expense:Savings deposits

(2,893)

(3,853)

960

(1,496)

(1,710)

214Time deposits and certificates of deposit

(5,684)

(5,221)

(463)

(2,317)

(1,609)

(708)Other borrowings

(258)

(788)

530

(409)

(461)

52Total

(8,835)

(9,862)

1,027

(4,222)

(3,780)

(442)Net Interest Income
$
(1,106)
$
(6,213)
$
5,107
$
(276)
$
(1,443)
$
1,167*Tax Equivalent Basis


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:(Dollars in thousands)
Nine Months Ended Sept. 30, 2003
Nine Months Ended Sept. 30, 2002Average
Average



Average
AverageAssets

Balance
Rate

Interest

Balance
Rate

InterestInvestment securities:Taxable investments
$
613,133
2.81%
$
12,931
$
530,727
5.23%
$
20,827Nontaxable investments (1)

325,940
6.99

17,081

232,411
7.47

13,018Total investment securities

939,073
4.26

30,012

763,138
5.91

33,845Loans (1) (2)

1,342,174
6.47

65,173

1,331,766
7.12

71,108Other rate-sensitive assets

27,258
1.18

241

26,568
2.08

415Total earning assets

2,308,505
5.51

95,426

2,121,472
6.62

105,368Noninterest-earning assets

132,359
-

-

126,634
-

-Total assets
$
2,440,864
5.21%
$
95,426
$
2,248,106
6.25%
$
105,368Liabilities And Shareholders' EquityDeposits:Demand
$
260,712
-%
$
-
$
245,318
-%

-Savings

938,308
0.86

6,030

788,937
1.51

8,923Time

712,461
3.35

17,900

730,890
4.30

23,585Total

1,911,481
1.67

23,930

1,765,145
2.46

32,508Borrowings and otherInterest-bearing liabilities

262,483
3.43

6,756

241,883
3.87

7,014Other liabilities

51,533
-

-

45,525
-

-Total liabilities

2,225,497
1.84

30,686

2,052,553
2.57

39,522Shareholders' equity

215,367
-

-

195,553
-

-Total liabilities and shareholders' equity
$
2,440,864
1.68
$
30,686
$
2,248,106
2.34%

39,522Average effective rate oninterest-bearing liabilities
$
1,913,252
2.14%
$
30,686
$
1,761,710
2.99%

39,522Interest Income/Earning Assets
$
2,308,505
5.51%
$
95,426
$
2,121,472
6.62%

105,368Interest Expense/Earning Assets
$
2,308,505
1.77
$
30,686
$
2,121,472
2.48

39,522Effective Interest Differential


3.74%




4.14%








13




(Dollars in thousands)

Three Months Ended Sept. 30, 2003
Three Months Ended Sept. 30, 2002Assets


Average
Balance


Average
Rate


Interest


Average
Balance


Average
Rate


InterestInvestment securities:Taxable investments

$
589,321


2.30
%
$
3,388

$
593,451


4.42
%
$
6,555Nontaxable investments (1)


309,565


6.99


5,408


263,332


7.38


4,860Total investment securities


898,886


3.91


8,796


856,783


5.33


11,415Loans (1) (2)


1,354,394


6.38


21,604


1,339,041


7.02


23,498Other rate-sensitive assets


45,285


0.99


112


17,822


2.18


97Total earning assets


2,298,565


5.31


30,512


2,213,646


6.33


35,010Noninterest-earning assets


138,198


-


-


128,579


-


-Total assets

$
2,436,763


5.01%

$
30,512

$
2,342,225


5.98%

$
35,010Liabilities And Shareholders' EquityDeposits:Demand

$
278,267


-
%

-

$
242,568


-
%
$
-Savings


940,436


0.67


1,585


813,328


1.52


3,081Time


687,670


3.23


5,561


775,191


4.06


7,877Total


1,906,373


1.50


7,146


1,831,087


2.39


10,958Borrowings and otherInterest-bearing liabilities


260,383


3.18


2,071


253,855


3.91


2,481Other liabilities


51,611


-


-


55,880


-


-Total liabilities


2,218,367


1.66


9,217


2,140,822


2.51


13,439Shareholders' equity


218,396


-


-


201,403


-


-Total liabilities and shareholders' equity

$
2,436,763


1.51%

$
9,217

$
2,342,225


2.30
%
$
13,439Average effective rate oninterest-bearing liabilities

$
1,888,489


1.95
%
$
9,217

$
1,842,374


2.92
%
$
13,439Interest Income/Earning Assets

$
2,298,565


5.31
%
$
30,512

$
2,213,646


6.33
%
$
35,010Interest Expense/Earning Assets

$
2,298,565


1.60

$
9,217

$
2,213,646


2.43

$
13,439Effective Interest Differential





3.71
%







3.90
%





14


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


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





Taxable-equivalent net interest income was $64,740,000 for the first nine months of 2003, compared to $65,846,000 for the same period in 2002, a 1.7% or $1,106,000 decrease. The reduction in the taxable-equivalent net interest income was the result of the lower interest rate environment experienced during this time period and the higher growth in the investment portfolio, compared to loans. During the first nine months of 2003, the average investment portfolio represented 40.7% of total earning assets compared to 36.0% during the same period in 2002. Average total loans grew $10,408,000 compared to a $175,935,000 rise in average investments in the first nine months of 2003, compared to the first nine months of 2002. The growth in loans during 2003 was impacted by the planned declines in the indirect vehicle and auto leasing portfolios. The reduction in these portfolios was primarily related to the financing incentives offered by the vehicle manufacturers and the overall increased competition in this market segment. Net of these two products, average loans grew 9.1%, led by increases in both commercial related and home equity loans.





The year-to-date September 30, 2003 taxable-equivalent net interest income was lower than the same period in 2002 primarily due to a $9,941,000 reduction in interest income, which was partially offset by a decrease in interest expense of $8,835,000. The taxable-equivalent interest income decrease was the result of lower earning asset yields, in part offset by the higher volumes of earning assets. Average year-to-date earning assets grew $187,033,000, or 8.8% at September 30, 2003, compared to the same period in 2002. The yield earned on earning assets decreased 111 basis points from 6.62% in the first nine months of 2002 to 5.51% during the same period in 2003.





The year-to-date September 30, 2003 interest expense was $8,835,000 lower than the same period in 2002. This reduction is the result of a $9,862,000 decrease related to lower rates, partially offset by an increase of $1,027,000 associated with the higher deposit and other borrowing volumes. The average rate paid on interest bearing deposits and other borrowings of 2.14% during the first nine months of 2003 was 85 basis points lower than the 2.99% rate paid during the same period in 2002. The average balance of interest bearing deposits and other borrowings grew $151,542,000 or 8.6% in the first nine months of 2003, compared to the first nine months of 2002. Lower rate savings deposits, which include interest bearing checking accounts, savings accounts and money market accounts, accounted for $149,371,000 or 98.6% of the growth in interest bearing deposits and other borrowings. The average year-to-date higher rate time deposits decreased $18,429,000 or 2.5% during this period and other borrowings grew $20,600,000 or 8.5%. Other borrowings include federal funds purchased, Federal Home Loan Bank  (FHLB) borrowings, securities sold under agreements to repurchase, U. S. Treasury demand notes and junior subordinate deferrable interest debentures.





The taxable-equivalent net interest income during the third quarter of 2003 of $21,295,000 was $276,000 or 1.3% lower than the third quarter of 2002 net interest income. The $4,498,000 decrease in interest income was partially offset by a $4,222,000 reduction in interest expense. The yield earned on average earning assets during the third quarter of 2003 of 5.31% was 102 basis points lower than the 6.33% earned during the third quarter of 2002. The $42,103,000 growth in lower yielding investment securities outpaced the $15,353,000 growth in loans. The rate paid on average deposits and other borrowings of 1.95% during the third quarter of 2003 was 97 basis points lower than the 2.92% rate paid during the third quarter of 2002. Lower rate average savings deposits grew $127,108,000 and higher rate average time deposits decreased $87,521,000. Other borrowings increased $6,528,000 during this period.





15




Net Interest Margin





The net interest margins for the nine-month periods ending September 30, 2003 and September 30, 2002 were 3.74% and 4.14%, respectively. The third quarter 2003 and 2002 net interest margins were 3.71% and 3.90%, respectively. The third quarter 2003 net interest margin was higher than the first quarter of 2003 and fourth quarter of 2002 net interest margins of 3.68% and 3.64%, respectively. The second quarter of 2003 net interest margin of 3.82% was 11 basis points higher than the third quarter of 2003 net interest margin.





During 2003, the Corporation continued to manage its balance sheet in an effort to position it for the longer term. The Corporation entered into two interest-rate swaps with a notional value totaling $20.0 million during the first quarter of 2003. The purpose of these transactions was to fix the rate on variable rate money market accounts in an effort to reduce interest rate risk within a rising rate environment. During the second quarter of 2003, the Corporation paid off $29 million of Federal Home Loan Bank borrowings prior to their scheduled maturity dates. These borrowings carried rates over 6%. While the decline in the net interest margin impacted earnings during the third quarter of 2003, we have positioned the balance sheet to benefit from rising interest rates once the economy begins to improve.





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 Corporations Board of Directors, is responsible for managing the rate sensitivity position. The Corporation manages interest rate sensitivity by changing the mix and repricing characteristics of its assets and liabilities through the management of its investment securities portfolios, its offering of loan and deposit terms and through borrowings from the FHLB. The nature of the Corporations current operations is such that it is not subject to foreign currency exchange or commodity price risk.





The Corporation only utilizes derivative instruments for asset/liability management, specifically, to convert a variable rate debt to a fixed rate. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations and payments are based. The notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Interest rate swaps are contracts in which a series of interest-rate flows (fixed and floating) are exchanged over a prescribed period. The notional amounts on which the interest payments are based are not exchanged.





The Corporation entered into two interest-rate swaps with a notional value totaling $20.0 million and a negative fair value of $145,000 at September 30, 2003. The purpose of these transactions is to fix the rate on variable rate money market accounts in an effort to reduce interest rate risk within a rising rate environment.





The Corporation uses three principal reports to measure interest rate risk: asset/liability simulation reports; gap analysis reports; and net interest margin reports. Management also simulates possible economic conditions and interest rate scenarios in order to quantify the impact on net interest income. The effect that changing interest rates have on the Corporations net interest income is simulated by increasing and decreasing interest rates. This simulation is known as rate shocks. The results of the September 30, 2003 net interest income rate shock simulations show that the Corporation is within guidelines set by the Corporations Asset/Liability Policy when rates are shocked up 300 basis points, but is outside of guidelines when rates are shocked down over 200 basis points.





The report below forecasts changes in the Corporations market value of equity under alternative interest rate environments. The market value of equity is defined as the net present value of the Corporations existing assets and liabilities.





16




(Dollars in thousands)Asset/Liability Approved Percent ChangeMarket Value of Equity
Change in Market Value of Equity
Percentage Change+ Basis Points
342,082
5,848
1.74%
+/-  45%+ Basis Points
352,568
16,334
4.86%
+/-  30%+ Basis Points
349,870
13,636
4.06%
+/-  15%Flat Rate
336,234
-
0.00%-100 Basis Points
307,507
(28,727)
-8.54%
+/-  15%-200 Basis Points
284,692
(51,542)
-15.33%
+/-  30%-300 Basis Points
255,209
(81,025)
-24.10%
+/-  45%





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





Provision for Loan Losses





The Banks use the reserve method of accounting for credit losses. The balance in the allowance for loan and lease losses is determined based on managements review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including managements assumptions as to future delinquencies, recoveries and losses. Increases to the allowance for loan and lease losses are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.





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





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





The AICPA's Accounting Standards Executive Committee has issued an exposure draft of a proposed Statement of Position (SOP), Allowance for Credit Losses . The proposed SOP addresses the recognition and measurement by creditors of the allowance for credit losses related to all loans, as that term is defined in Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 114,Accounting by Creditors for Impairment of a Loan , with certain exceptions. If adopted, the proposed SOP would apply to all creditors other than state and local governmental entities and federal governmental entities. The Corporation is currently reviewing the components of the proposed SOP and the impact it will have on its consolidated financial position and results of operations.





17




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





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





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





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





For the first nine months of 2003 the provision for loan losses was $2,559,000, compared to $3,401,000 for the same period in 2002. This reduction in the provision for loan losses is reflective of the improvement in key loan quality related ratios. The ratio of the allowance for loan losses to nonperforming loans and leases for September 30, 2003 of 326.5% was higher than the December 31, 2002, and the September 30, 2002, ratios of 272.8% and 248.2%, respectively. The ratio of nonperforming loans and leases to total loans and leases was 0.37% at September 30, 2003, compared to 0.47% and 0.51% at December 31, 2002 and September 30, 2002, respectively. Net loans charged off was $2,895,000 for the nine months ended September 30, 2003, compared to $1,820,000 for the nine months ended September 30, 2002. The increase in the 2003 net charged off loans are related to commercial and industrial loans.





18




Allowance for Loan Losses




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





(Dollars in thousands)

September 30,2003
2002Average loans
$
1,342,174
$
1,331,766Allowance, beginning of period
$
17,190
$
15,558Loans charged off:Commercial and industrial

473

91Consumer

1,568

1,985Real estate

1,193

323Lease financing

371

396Total loans charged off

3,605

2,795Recoveries:Commercial and industrial

16

105Consumer

544

642Real estate

71

157Lease financing

79

71Total recoveries

710

975Net loans charged off

2,895

1,820Provision for loan losses

2,559

3,401Allowance, end of period
$
16,854
$
17,139Ratio of net charge offs to average loans outstanding (annualized)

0.29%

0.18%








Analysis of Credit Risk

September 30,

December 31,

September 30,(Dollars in thousands)

2003

2002

2002Non-accrual loan and leases
$
3,962
$
5,109
$
5,325Loans and leases 90 days past due

1,200

1,193

1,580Total nonperforming loans and leases

5,162

6,302

6,905Net assets in foreclosure

893

390

473Total nonperforming assets
$
6,055
$
6,692
$
7,378Allowance for loan and lease losses tononperforming loans and leases

326.5%

272.8%

248.2%Nonperforming loans and leases to totaltotal loans and leases

0.37%

0.47%

0.51%Allowance for loan and lease lossesto total loans and leases

1.22%

1.29%

1.28%Nonperforming assetsto total assets

0.24%

0.27%

0.30%





The following table sets forth an allocation of the allowance for loan losses by loan category:





September 30, 2003(Dollars in thousands)

Amount
Percent of LoansCommercial and industrial
$
4,605
27%Consumer loans

5,596
33%Real estate

5,837
35%Lease financing

816
5%Total
$
16,854
100%





19




Nonperforming assets (nonaccruing loans, loans 90 days past due and net assets in foreclosure) were 0.24% of total assets at September 30, 2003 and 0.27% and 0.30% at December 31, 2002 and September 30, 2002, respectively. The ratio of the allowance for loan losses to loans at September 30, 2003 of 1.22% was lower than the December 31, 2002 ratio of 1.29% and the September 30, 2002 ratios of 1.28.%.





Nonaccruing loans at September 30, 2003 of $3,962,000, decreased $1,147,000 from the December 31, 2002 level of $5,109,000, and decreased $1,363,000 from the September 30, 2002 level of $5,325,000. The decrease in nonaccruing loans at September 30, 2003, compared to both December 31, 2002 and September 30, 2002 was primarily the result of decreases in commercial real estate, commercial and consumer loans.





Net assets in foreclosure were $893,000 as of September 30, 2003, an increase of $503,000 from the December 31, 2002 balance of $390,000. During the first nine months of 2003, transfers from loans to assets in foreclosure were $1,378,000, payments on foreclosed properties were $875,000. There were no write-downs of assets in foreclosure during this period .The loans transferred to assets in foreclosure included vehicle leases of $539,000, equipment leases of $204,000, $163,000 of consumer loans and $473,000 of commercial loans. The balance of net assets in foreclosure at September 30, 2002 was $472,000. Efforts to liquidate assets acquired in foreclosure are proceeding as quickly as potential buyers can be located and legal constraints permit. Foreclosed assets are carried at the lower of cost (lesser of carrying value of asset or fair value at date of acquisition) or estimated fair value.





Loans past due 90 days or more and still accruing interest are loans that are generally well secured and expected to be restored to a current status in the near future. As of September 30, 2003, loans past due 90 days or more and still accruing interest were $1,200,000 compared to $1,193,000 as of December 31, 2002 and $1,580,000 as of September 30, 2002. The increase in loans past due 90 days at September 30, 2003, compared to December 31, 2002 was due to an increase in consumer loans past due 90 days or more. The reduction from September 30, 2002 is the result of the lower level of commercial real estate loans and commercial loans past due 90 days or more.





The following information concerns impaired loans:


Sept. 30, 2003

Dec. 31, 2002

Sept. 30, 2002Impaired Loans
$
2,016,000
$
3,153,000
$
3,015,000Average year-to-date impaired loans
$
2,322,000
$
2,836,000
$
2,909,000Impaired loans with specific loss allowances
$
2,016,000
$
3,153,000
$
3,015,000Loss allowances reserved on impaired loans
$
233,000
$
329,000
$
298,000Year-to-date income recognized on impaired loans
$
45,000
$
186,000
$
93,000





The Banks policy for interest income recognition on nonaccrual loans is to recognize income under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Banks. The Banks will not recognize income if these factors do not exist.





20




Other Operating IncomeNine Months Ended September 30,


Three Months Ended September 30,2003

2002


2003

2002(Dollars in thousands)


(Dollars in thousands)Service charges
$
5,774
$
4,993

$
2,007
$
1,846Security gains, net

6,449

3,193


359

719Trust and investment services income

2,820

2,809


954

896Bank-owned life insurance income

1,935

1,900


673

631Income on Life Insurance

1,119

-


-

-Other income

4,325

4,188


1,259

1,349Total other operating income
$
22,422
$
17,083

$
5,252
$
5,441





In the nine months ending September 30, 2003, other operating income of $22,422,000 increased $5,339,000, or 31.3%, from $17,083,000 for the same period in 2002. This rise in other operating income is primarily the result of increases in security gains and income on life insurance of $3,256,000 and $1,119,000, respectively. Net of security gains and income on life insurance, other operating income grew $964,000 or 6.9%. All other operating income categories contributed to this growth. In the third quarter of 2003, other operating income was $189,000 or 3.5% lower than the third quarter of 2002 as a result of lower security gains. Net of security gains, third quarter 2003 other operating income increased $171,000 or 3.6%, compared to the same period in 2002. The increase is primarily the result of higher fees related to deposits, trust and investment services, and bank-owned life insurance.





Service charges grew $781,000 or 15.6% in the first nine months of 2003, compared to the same period in 2002. This rise is the result of managements continued effort to institute equitable fees for services performed and to closely manage the collection of these fees. The growth in overdraft fees during the first nine months of 2003 contributed $622,000 of this increase. The remaining increase is related to the fees associated with the 15.9% growth in average fee generating deposit balances.





The Corporation recorded net security gains on the sale of securities available for sale of $6,449,000 in the first nine months of 2003, compared to $3,193,000 during the same period in 2002. The net security gains were $359,000 in the third quarter of 2003 and $719,000 in the third quarter of 2002. The Corporation sold the investment securities available for sale to fund the purchase of other securities in an effort to reduce the interest rate risk and market risk within different interest rate environments.





Income from the Investment Management and Trust Services Division increased $11,000 from $2,809,000 at September 30, 2002 to $2,820,000 at September 30, 2003. The 2003 third quarter Investment Management and Trust Services Division experienced a $58,000, or 6.5% increase in income, compared to the third quarter of 2002. These increases were the result of both the growth in trust assets and the higher market value of trust assets experienced during 2003, compared to 2002.








The Corporations bank owned life insurance (BOLI) income increased $35,000 or 1.8% during the first nine months of 2003, compared to the same period in 2002. BOLI involves the purchase of life insurance by the Corporation on a chosen group of employees. The corporation is the owner and beneficiary of the policies. This pool of insurance, due to tax advantages to the Banks, is profitable to the Corporation. This profitability is used to offset a portion of future employee benefit cost increases. Bank deposits fund BOLI and the earnings from BOLI are recognized as other income.





Other income for the first nine months of 2003 increased $137,000 or 3.3%, compared to the same period in 2002. This increase was primarily associated with larger gains on the sale of residential mortgages, partially offset with lower income generated by HNC Reinsurance Company. The year-to-date gain on the sale of residential mortgages was $1,167,000 in 2003, compared to $639,000 in the same period in 2002. The third quarter of 2003 other income was $90,000 lower than the same period in 2002, as a result of lower HNC Reinsurance Company income and a reduction in gains on the sale of residential mortgages.





21







Other Operating ExpensesNine Months Ended September 30,


Three Months Ended September 30,2003

2002


2003

2002(Dollars in thousands)


(Dollars in thousands)Salaries
$
19,497
$
18,050

$
6,596
$
6,206Employee benefits

4,158

4,581


1,342

1,344Occupancy

2,846

2,902


941

844Furniture and equipment

4,206

4,035


1,525

1,428Prepayment fee

2,594

-


-

-Other expenses

12,437

13,126


2,694

3,679Total other operating expenses
$
45,738
$
42,694

$
13,098
$
13,501





The first nine months of 2003 other operating expenses of $45,738,000 increased $3,044,000 or 7.1% from $42,694,000 for the same period in 2002. This rise was principally due to a $2,594,000 prepayment fee related to paying off FHLB borrowings prior to their scheduled maturity date during the second quarter of 2003. Net of this prepayment fee, the year to date other operating expenses grew $450,000 or 1.1%. This rise was the result of higher salary and furniture and equipment expenses, partially offset by lower employee benefits, occupancy expenses and other expenses. The third quarter 2003 other operating expenses decreased $403,000 or 3.0% from the third quarter of 2002. This reduction in expenses was primarily due to lower other expenses.





Employee salaries increased $1,447,000 or 8.0% from $18,050,000 for the first nine months of 2002 to $19,497,000 for the same period in 2003. This increase reflects cost of living increases, merit increases and additional staff necessitated by the growth of the Banks. Employee benefits of $4,158,000 expensed in the first nine months of 2003, were $423,000 or 9.2% lower than the $4,581,000 of employee benefits expensed during the same period in 2002. The decrease in employee benefits is the result of lower pension expense experienced during the first nine months of 2003, compared to the first nine months of 2002. The third quarter 2003 salary expense was 6.3% higher than the third quarter of 2002. Employee benefits were $2,000 lower in the third quarter of 2003, compared to the third quarter of 2002.





Net occupancy expense decreased $56,000 or 1.9%, from $2,902,000 in the first nine months of 2002 to $2,846,000 in the first nine months of 2003. This decrease was due to a $365,000 expense related to a branch closure during the first quarter of 2002. Net of the branch closure expense, occupancy expenses grew $309,000 or 12.2% during the first nine months of 2003, compared to the same period in 2002. This increase was primarily the result of the increase in snow removal expenses associated with the harsh winter of 2003 and higher rent expense. The third quarter of 2003 occupancy expense grew 11.5%, compared to the third quarter of 2002. Furniture and equipment expense increased $171,000 or 4.3%, during the first nine months of 2003, compared to the same period in 2002. The third quarter of 2003 furniture and equipment expenses grew 6.8% over the third quarter of 2002. Both of these increases were related to higher depreciation and maintenance expenses.





Other expenses decreased $689,000, or 5.2%, from $13,126,000 in the first nine months of 2002, compared to $12,437,000 in other expenses recorded during the same period in 2003. This decrease was largely due to the $889,000 reduction in expenses related to HNC Reinsurance Company and the net increase in the market value of mortgage servicing rights of $373,000. Net of these expense reductions, other expenses increased $573,000 or 4.6% during this period, primarily due to an increase in the off-lease vehicle residual reserve expense.  The year-to-date off-lease vehicle residual reserve expense in 2003 was $2,600,000 compared to $2,227,000 in 2002.  The $2,600,000 year-to-date 2003 off-lease vehicle reserve expense was posted entirely during the first six months of 2003.





The 2003 third quarter other expenses decreased 26.8%, compared to the third quarter of 2002, due to lower off-lease vehicle residual reserve expense, HNC Reinsurance Company expenses and the increase in the market value of mortgage servicing rights. Net of these reductions, other expenses grew 14.2% as a result of higher deferred compensation and marketing expenses. As a result of lower than projected off-lease vehicle residual losses experienced during the third quarter of 2003, the Corporation did not add to the off-lease vehicle residual reserve during the quarter. The lower third quarter losses were a result of enhanced processes to remarket the off-lease vehicles and an improvement in the value of used vehicles.  The third quarter of 2002 off-lease vehicle reserve expense was $500,000.  The Corporation reviews the off-lease vehicle residual reserve expense on a quarterly basis.





Income Taxes





Income tax expense is less than the amount calculated using the statutory tax rate primarily as a result of tax exempt income earned from state and municipal securities and loans.





22




Balance Sheet Analysis





Total assets increased $32,138,000, or 1.3%, from $2,490,864,000 at December 31, 2002 to $2,523,002,000 at September 30, 2003. This increase in assets was the result of a $41,689,000 increase in cash and cash equivalents, a $23,102,000 growth in loans and a $21,288,000 rise in residential mortgages held for sale. These increases were partially offset by a decrease in investment securities available for sale.





The balance of securities available for sale at September 30, 2003 of $895,126,000 decreased $53,930,000 compared to the December 31, 2002 balance of $949,056,000. During the first nine months of 2003, $965,232,000 of securities available for sale was sold which generated a pretax gain of $6,449,000. In comparison, $568,561,000 securities available for sale were sold during the same period in 2002 to generate a pretax gain of $3,193,000. The Corporation sells investment securities available for sale to fund the purchase of other securities in an effort to reduce the interest rate risk and market risk within different interest rate environments. The balance of investment securities held to maturity decreased $1,705,000 during the first nine months of 2003. Total loans and residential mortgage loans held for sale grew $44,390,000 or 3.3% through September 30, 2003. This growth was primarily due to increases in both commercial related loans and home equity loans, partially offset by lower indirect vehicle financing and vehicle leases. The loan growth net of both the indirect vehicle and vehicle leasing portfolios was 8.4% during this period.





Total deposits increased $11,010,000, or 0.6% from $1,979,822,000 at December 31, 2002 to $1,990,832,000 at September 30, 2003. During this period, core deposits grew $58,763,000 or 4.9% and certificates of deposits decreased $47,753,000 or 6.2%. The reduction in certificates of deposits was due to a planned run-off of higher costing deposits and the increase in core deposits (noninterest-bearing checking, interest-bearing checking, money market accounts and savings accounts) was the result of the strategy to increase lower costing funding. The September 30, 2003 total core deposit balances grew 11.0%, compared to the September 30, 2002 total core deposits.





Other borrowings increased $9,922,000 or 3.9% during the first nine months of 2003. This increase was the result of a $6,000,000 rise in long-term FHLB borrowings and a $3,974,000 increase in securities sold under agreement to repurchase, offset by lower U.S. Treasury demand notes of $52,000. Other borrowings grew $8,826,000 at September 30, 2003, compared to September 30, 2002. This growth was primarily in long-term FHLB borrowings.





Capital





Capital formation is important to the Corporation's well being and future growth. Capital for the period ending September 30, 2003 was $218,878,000, an increase of $12,672,000 over the end of 2002. The increase is the result of the retention of the Corporation's earnings, partially offset by a decrease in accumulated other comprehensive income and by the purchase of treasury stock during the first nine months of 2003. The accumulated other comprehensive income at September 30, 2003 was a gain of $5,016,000, compared to a gain of $6,937,000 at December 31, 2002. The corporation purchased $2,271,000 of treasury stock during the first nine months of 2003. Management believes that the Corporation's current capital and liquidity positions are adequate to support its operations. Management is not aware of any recommendations by any regulatory authority, which, if it were to be implemented, would have a material effect on the Corporation's capital.





23




(Dollars in thousands)For Capital Adequacy PurposesAs of September 30, 2003


ActualAmount


Ratio


Amount


RatioTotal Capital (to risk weighted assets):Corporation

$
236,959


13.49
%
$
140,518


8.00
%Harleysville National Bank


144,512


11.17
%

103,491


8.00
%Citizens National Bank


39,648


12.85
%

24,682


8.00
%Security National Bank


18,110


12.89
%

11,235


8.00
%Tier 1 Capital (to risk weighted assets):Corporation

$
218,535


12.44
%
$
70,259


4.00
%Harleysville National Bank


133,661


10.33
%

51,746


4.00
%Citizens National Bank


35,791


11.60
%

12,341


4.00
%Security National Bank


16,350


11.64
%

5,618


4.00
%Tier 1 Capital (to average assets):Corporation

$
218,535


8.97
%
$
97,457


4.00
%Harleysville National Bank


133,661


7.65
%

69,848


4.00
%Citizens National Bank


35,791


7.52
%

19,043


4.00
%Security National Bank


16,350


8.21
%

7,963


4.00
%








To Be Well Capitalized Under Prompt Corrective Action ProvisionAmount
RatioTotal Capital (to risk weighted assets):Corporation


$                      -
-Harleysville National Bank





129,364


10.00
%Citizens National Bank





30,852


10.00
%Security National Bank





14,044


10.00
%Tier 1 Capital (to risk weighted assets):Corporation




$
-


-Harleysville National Bank





77,619


6.00
%Citizens National Bank





18,511


6.00
%Security National Bank





8,427


6.00
%Tier 1 Capital (to average assets):Corporation




$
-


-Harleysville National Bank





87,310


5.00
%Citizens National Bank





23,804


5.00
%Security National Bank





9,953


5.00
%








(Dollars in thousands)For Capital Adequacy PurposesAs of December 31, 2002

ActualAmount
Ratio
Amount
RatioTotal Capital (to risk weighted assets):Corporation

$
222,217


13.38
%
$
132,866


8.00
%Harleysville National Bank


133,945


11.16
%

96,034


8.00
%Citizens National Bank


37,125


12.01
%

24,722


8.00
%Security National Bank


17,033


12.60
%

10,814


8.00
%Tier 1 Capital (to risk weighted assets):Corporation

$
203,896


12.28
%
$
66,433


4.00
%Harleysville National Bank


122,990


10.25
%

48,017


4.00
%Citizens National Bank


33,258


10.76
%

12,361


4.00
%Security National Bank


15,338


11.35
%

5,407


4.00
%Tier 1 Capital (to average assets):Corporation

$
203,896


8.19
%
$
99,640


4.00
%Harleysville National Bank


122,990


6.88
%

71,493


4.00
%Citizens National Bank


33,258


6.91
%

19,255


4.00
%Security National Bank


15,338


7.77
%

7,896


4.00
%







24




To Be Well Capitalized Under Prompt Corrective Action ProvisionAmount
RatioTotal Capital (to risk weighted assets):Corporation




$
-


-Harleysville National Bank





120,043


10.00
%Citizens National Bank





30,903


10.00
%Security National Bank





13,517


10.00
%Tier 1 Capital (to risk weighted assets):Corporation




$
-


-Harleysville National Bank





72,026


6.00
%Citizens National Bank





18,542


6.00
%Security National Bank





8,110


6.00
%Tier 1 Capital (to average assets):Corporation




$
-


-Harleysville National Bank





89,366


5.00
%Citizens National Bank





24,069


5.00
%Security National Bank





9,869


5.00
%





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 the shareholders equity and Tier 2 capital is the allowance for loan losses. The minimum for the Tier 1 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 September 30, 2003, the Corporations Tier 1 risk-adjusted capital ratio was 12.44% , and the total risk-adjusted capital ratio was 13.49%, both well above the regulatory requirements. The risk-based capital ratios of each of the Corporations commercial banks also exceeded regulatory requirements at September 30, 2003.





The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding intangible assets. Banking organizations are expected to have ratios of at least 4% and 5%, depending upon their particular condition and growth plans. Higher leverage ratios could be required by the particular circumstances or risk profile of a given banking organization. The Corporations leverage ratios were 8.97% at September 30, 2003 and 8.19% at December 31, 2002.





The year-to-date September 30, 2003 cash dividend per share of $.464 was 17.2% higher than the cash dividend for the same period in 2002 of $.396. The dividend payout ratio for the first nine months of 2003 was 41.9%, compared to 40.9% for the twelve month period ended December 31, 2002. Activity in both the Corporations dividend reinvestment and stock purchase plan and the stock option plan did not have a material impact on capital during the first nine months of 2003.





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 provides the means to meet the day-to-day demands of deposit customers and the needs of borrowing customers. Generally, the Banks arrange their mix of cash, money market investments, investment securities and loans in order to match the volatility, seasonality, interest sensitivity and growth trends of its deposit funds. The liquidity measurement is based on the asset/liability models projection of potential sources and uses of funds for the next 120 days. The resulting projections as of September 30, 2003 show the potential sources of funds exceeding the potential uses of funds. The Corporation has external sources of funds which can be drawn upon when funds are required. The primary source of external liquidity is an available line of credit with the FHLB of Pittsburgh. Unused lines of credit at the FHLB of Pittsburgh were $314,119,000, as of September 30, 2003. The Banks also have unused federal funds lines of credit of $60,000,000 and non-pledged investment securities available for sale of $403,727,000 as of September 30, 2003.





25




Other Information





Pending Legislation





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





Effects of Inflation





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








Effect of Government Monetary Policies





The earnings of the Corporation are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect rates charged on loans or paid for deposits.





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





Environmental Regulations





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





Branching





The Corporations subsidiaries currently plan to open at least one new branch. During the fourth quarter of 2003, Security National Bank plans to open a location in North Coventry Township, Chester County, Pennsylvania. This new branch site is contiguous to our current service area and was chosen to expand the Banks market area and market share of loans and deposits.





Item 3  Qualitative and Quantitative Disclosures About Market Risk





In the normal course of conducting business activities, the Corporation is exposed to market risk, principally interest risk, through the operations of its banking subsidiaries. Interest rate risk arises from market driven fluctuations in interest rates that affect cash flows, income, expense and values of financial instruments. The Asset/Liability Committee, using policies and procedures approved by the Banks Boards of Directors, is responsible for managing the rate sensitivity position.





26




No material changes in market risk strategy occurred during the current period. A detailed discussion of market risk is provided on pages 16 and 17 of this Form 10-Q.





Item 4  Controls and Procedures





We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, within 90 days prior to the filing date of this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic Securities and Exchange Commission filings. No significant changes were made to our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation.





27





PART II. OTHER INFORMATION








Item 1. Legal Proceedings





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





Item 2. Change in Securities and Use of Proceeds





Not applicable





Item 3. Defaults Upon Senior Securities





Not applicable





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





None.





Item 5. Other Information





None





Item 6. Exhibits and Reports on Form 8-K





The following exhibits are being filed as part of this Report:








Exhibit No. Description of Exhibits





(2)        Agreement and Plan of Merger dated October 15, 2003, by and among Harleysville National Corporation,


Harleysville National Bank and Trust Company and Millenium Bank.





(3.1) Harleysville National Corporation Articles of Incorporation, as amended. (Incorporated by reference


to Exhibit 3(a) to the Corporations Registration Statement No. 33-65021 on Form S-4, as filed on


December 14, 1995.)





(3.2) Harleysville National Corporation By-laws. (Incorporated by reference to Exhibit 3(b) to the


Corporations Registration Statement No. 33-65021 on Form S-4, as filed on December 14, 1995.)





(10.1) Harleysville National Corporation 1993 Stock Incentive Plan. (Incorporated by Reference to Exhibit


4.3 of Registrants Registration Statement No. 33-57790 on Form S-8, filed with the Commission on


October 1, 1993.)





(10.2) Harleysville National Corporation Stock Bonus Plan. (Incorporated by Reference to Exhibit 99A of


Registrants Registration Statement No. 33-17813 on Form S-8, filed with the Commission on


December 13, 1996.)





(10.3) Supplemental Executive Retirement Plan. (Incorporated by Reference to Exhibit 10.3 of


Registrants Annual Report in Form 10-K for the year ended December 31, 1997, filed with the


Commission on March 27, 1998.)





(10.4) Walter E. Daller, Jr., Chairman, President and Chief Executive Officers employment agreement.


Incorporated by Reference to Registrants Registration Statement on Form 8-K, filed with the


Commission on March 25, 1999.)





28





(10.5) Demetra M. Takes, President and Chief Operating Officer of Harleysville employment agreement.


(Incorporated by Reference to Registrants Registration Statement on Form 8-K, filed with the


Commission on March 25, 1999.)





(10.7) Harleysville National Corporation 1998 Stock Incentive Plan. (Incorporated by Reference to


Registrants Registration Statement No. 333-79971 on Form S-8 filed with the Commission on June


4, 1999.)





(10.8) Harleysville National Corporation 1998 Independent Directors Stock Option Plan. (Incorporated by


Reference to Registrants Registration Statement No. 333-79973 on Form S-8 filed with the


Commission on June 4, 1999.)





(11) Computation of Earnings per Common Share. The information for this Exhibit is incorporated by


reference to page 4 of this Form 10-Q.





(31) Section 302 Certification. Walter E. Daller, Jr. Chairman, President and Chief Executive Officer and


Gregg J. Wagner, Executive Vice President and Chief Financial Officer.





(32) Section 906 Certification. Walter E. Daller, Jr. Chairman, President and Chief Executive Officer and


Gregg J. Wagner, Executive Vice President and Chief Financial Officer.





(b) Reports on Form 8-K





During the quarter ended September 30, 2003, the Registrant filed a Form 8-K containing the second quarter of 2003 earnings press release.


29


SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.











HARLEYSVILLE NATIONAL CORPORATION














Walter E. Daller, Jr., Chairman, President and Chief Executive Officer


(Principal executive officer)







Gregg J. Wagner, Executive Vice President and Chief Financial Officer


(Principal financial and accounting officer)





30





EXHIBIT INDEX





Exhibit No.  Description of Exhibits




(2)        Agreement and Plan of Merger dated October 15, 2003, by and among Harleysville National Corporation,
 Harleysville National Bank and Trust Company and Millenium Bank.


(3.1) Harleysville National Corporation Articles of Incorporation, as amended. (Incorporated by reference


to Exhibit 3(a) to the Corporations Registration Statement No. 33-65021 on Form S-4, as filed on


December 14, 1995.)





(3.2) Harleysville National Corporation By-laws. (Incorporated by reference to Exhibit 3(b) to the


Corporations Registration Statement No. 33-65021 on Form S-4, as filed on December 14, 1995.)





(10.1) Harleysville National Corporation 1993 Stock Incentive Plan. (Incorporated by Reference to Exhibit


4.3 of Registrants Registration Statement No. 33-57790 on Form S-8, filed with the Commission on


October 1, 1993.)





(10.2) Harleysville National Corporation Stock Bonus Plan. (Incorporated by Reference to Exhibit 99A of


Registrants Registration Statement No. 33-17813 on Form S-8, filed with the Commission on


December 13, 1996.)





(10.3) Supplemental Executive Retirement Plan. (Incorporated by Reference to Exhibit 10.3 of


Registrants Annual Report in Form 10-K for the year ended December 31, 1997, filed with the


Commission on March 27, 1998.)





(10.4) Walter E. Daller, Jr., Chairman, President and Chief Executive Officers employment agreement.


Incorporated by Reference to Registrants Registration Statement on Form 8-K, filed with the


Commission on March 25, 1999.)





(10.5) Demetra M. Takes, President and Chief Operating Officer of Harleysville employment agreement.


(Incorporated by Reference to Registrants Registration Statement on Form 8-K, filed with the


Commission on March 25, 1999.)





(10.7) Harleysville National Corporation 1998 Stock Incentive Plan. (Incorporated by Reference to


Registrants Registration Statement No. 333-79971 on Form S-8 filed with the Commission on June


4, 1999.)





(10.8) Harleysville National Corporation 1998 Independent Directors Stock Option Plan. (Incorporated by


Reference to Registrants Registration Statement No. 333-79973 on Form S-8 filed with the


Commission on June 4, 1999.)





(11) Computation of Earnings per Common Share. The information for this Exhibit is incorporated by


reference to page 4 of this Form 10-Q.





(31) Section 302 Certification. Walter E. Daller, Jr. Chairman, President and Chief Executive Officer and


Gregg J. Wagner, Executive Vice President and Chief Financial Officer.





(32) Section 906 Certification. Walter E. Daller, Jr. Chairman, President and Chief Executive Officer and


Gregg J. Wagner, Executive Vice President and Chief Financial Officer.





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