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 June 30, 2003







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


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


Yes x No  ̈








Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  19,042,076  shares of Common Stock, $1.00 par value, outstanding on August 12, 2003.




1







**HARLEYSVILLE NATIONAL CORPORATION****INDEX TO FORM 10-Q REPORT****PAGE****Part I. Financial Information**Item 1. Financial Statements:Consolidated Balance Sheets  June 30, 2003 and December 31, 2002


3Consolidated Statements of Income  Six Months and Three Months Ended June 30, 2003 and 2002


4Consolidated Statements of Shareholders Equity  Six Months Ended June 30, 2003 and Twelve Months    Ended December 31, 2002


5Consolidated Statements of Cash Flows  Six Months Ended June 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


27Item 4. Controls and Procedures


27**Part II. Other Information**Item 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


28**Signatures**


30





2


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

(Unaudited)**June 30, 2003**
**December 31, 2002****Assets**Cash and due from banks

$
80,650

$
62,177Federal funds sold


32,200


33,500Interest-bearing deposits in banks


10,410


8,410Total cash and cash equivalents


123,260


104,087Residential mortgage loans held for sale


8,417


-Investment securities available for sale


845,418


949,056Investment securities held to maturity


20,773


22,411(fair value $22,674 and $23,650, respectively)Total loans and leases


1,327,502


1,333,292Less: Allowance for loan losses


(17,538
)

(17,190
)Net loans


1,309,964


1,316,102Bank premises and equipment, net


21,981


21,645Accrued interest receivable


10,768


13,140Net assets in foreclosure


729


390Intangible assets, net


2,034


1,798Bank-owned life insurance


49,340


48,631Other assets


13,448


13,604Total assets

$
2,406,132

$
2,490,864**Liabilities and Shareholders' Equity:**Deposits:Noninterest-bearing

$
291,454

$
269,781Interest-bearing:Checking accounts


218,200


249,646Money market accounts


483,326


488,944Savings


220,001


202,003Time, under $100,000


503,850


526,885Time, $100,000 or greater


156,387


242,563Total deposits


1,873,218


1,979,822Accrued interest payable


19,419


21,991U.S. Treasury demand notes


1,636


2,015Long-term borrowings


153,750


162,750Securities sold under agreements to repurchase


94,177


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


5,000


5,000Other liabilities


35,083


28,939Total liabilities


2,182,283


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


-


-Common stock, par value $1 per share; authorized 75,000,000shares; issued and outstanding 19,683,497 shares in 2003and 19,597,290 shares in 2002


19,683


19,597Additional paid in capital


97,576


96,585Retained earnings


105,018


94,677Treasury stock, at cost: 658,107 shares in 2003and 569,107 shares in 2002


(13,860
)

(11,590
)Accumulated other comprehensive income


15,432


6,937Total shareholders' equity


223,849


206,206Total liabilities and shareholders' equity

$
2,406,132

$
2,490,864See accompanying notes to consolidated financial statements.




3





**HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES**
******CONSOLIDATED STATEMENTS OF INCOME**(Unaudited)**Six months ended**
****
**Three months ended**(Dollars in thousands except weighted average number of common shares and per share information)

**June 30,**
****
**June 30,****2003**
**2002**
****
**2003**
**2002****Interest Income:**Loans, including fees

$
39,448

$
42,780




$
19,726

$
21,457Lease financing


3,580


4,289





1,731


2,107Investment securities:Taxable


9,543


14,272





4,463


6,812Exempt from federal taxes


7,774


5,482





3,913


2,846Federal funds sold


75


222





30


183Deposits in banks


54


96





26


47Total interest income


60,474


67,141





29,889


33,452**Interest Expense:**Savings deposits


4,444


5,842





1,851


2,953Time, under $100,000


9,872


11,923





4,780


5,924Time, $100,000 or greater


2,468


3,785





1,062


1,731Borrowed funds


4,686


4,533





2,391


2,394Total interest expense


21,470


26,083





10,084


13,002Net interest income


39,004


41,058





19,805


20,450Provision for loan losses


1,929


2,445





1,320


1,094Net interest income after provision for loan losses


37,075


38,613





18,485


19,356Other Operating Income:Service charges


3,767


3,148





1,937


1,627Security gains, net


6,090


2,474





4,774


1,243Trust and investment sevices income


1,866


1,914





978


1,031Bank-owned life insurance income


1,262


1,269





631


631Income on life insurance


1,119


-





-


-Other Income


3,066


2,837





1,639


1,587**Total other operating income:**


17,170


11,642





9,959


6,119Net interest income after provision for loan lossesand other operating income


54,245


50,255





28,444


25,475**Other Operating Expenses:**Salaries, wages and employee benefits


15,717


15,081





7,876


7,396Occupancy


1,905


2,058





882


821Furniture and equipment


2,681


2,607





1,376


1,319Prepayment fee


2,594


-





2,594


-Other expenses


9,743


9,447





4,399


5,178Total other operating expenses


32,640


29,193





17,127


14,714Income before income tax expense


21,605


21,062





11,317


10,761Income tax expense


4,039


4,871





2,216


2,383Net income

$
17,566

$
16,191




$
9,101

$
8,378Weighted average number of common shares:Diluted


19,624,823


19,734,455
*




19,632,518


19,653,576
*Basic


19,019,870


19,155,746
*




19,023,388


19,131,175
*Net income per share information:Diluted

$
0.90

$
0.82
*



$
0.46

$
0.42
*Basic

$
0.92

$
0.85
*



$
0.48

$
0.44
*Cash dividends per share

$
0.380

$
0.324
*



$
0.190

$
0.162
** Adjusted for 5% stock dividend effective 9/16/02.See accompanying notes to consolidated financial statements.


4









**Consolidated Statements of Shareholders' Equity****Harleysville National Corporation and Subsidiaries**(Unaudited)(Dollars and share information in thousands)**Six Months Ended June 30, 2003**Common StockNumber of shares
Par Value
Additional Paid in Capital
Retained Earnings
Accumulated Other Comprehensive Income
Treasury Stock
Total
Comprehensive IncomeBalance, January 1, 2003

19,597
$19,597
$ 96,585
$ 94,677
$ 6,937
$(11,590)
$ 206,206Stock options

86
86
985
-
-
-
1,071Net income

-
-
-
17,566
-
-
17,566
$ 17,566Stock awards

-
-
6
-
-
-
6Other comprehensive income,net of reclassifications and tax

-
-
-
-
8,495
-
8,495
8,495Purchases of Treasury stock

-
-
-
-
-
(2,270)
(2,270)Cash dividends

-
-
-
(7,225)
-
-
(7,225)Comprehensive income








$ 26,061Balance, June 30, 2003

19,683
$19,683
$ 97,576
$ 105,018
$ 15,432
$(13,860)
$ 223,849**For the Year Ended December 31, 2002**Common StockNumber of shares
Par Value
Additional Paid in Capital
Retained Earnings
Accumulated Other Comprehensive Income
Treasury Stock
Total
Comprehensive IncomeBalance, January 1, 2002

18,571
$18,571
$ 71,419
$ 100,171
$ 4,534
$ (5,346)
$ 189,349Stock 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 SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited)(Dollars in thousands)

**Six Months Ended June 30,****Operating Activities:**

**2003**
**2002**Net Income

$
17,566

$
16,191Adjustments to reconcile net income tonet cash provided by operating activities:Provision for loan losses


1,929


2,445Depreciation and amortization


1,401


1,224Net amortization of investmentsecurities discount/premiums


5,247


1,162Deferred income taxes


(2,106
)

(705
)Net realized security gains


(6,090
)

(2,474
)Decrease (increase) in accrued income receivable


2,372


(1,036
)Net decrease in accrued interest payable


(2,572
)

(4,676
)Net increase in intangible assets


(236
)

(415
)Net decrease in other assets


156


18Net increase in other liabilities


3,132


2,858Decrease in deferred cost, net


609


499Write-down of other real estate owned


-


10Net cash provided by operating activities

$
21,408

$
15,101**Investing Activities:**Proceeds from sales of investment securities available for sale

$
832,079

$
254,204Proceeds, maturity or calls of investment securities held to maturity


704


3,227Proceeds, maturity or calls of investment securities available for sale


326,582


111,080Purchases of investment securities available for sale


(1,039,633
)

(420,848
)Net increase in loans


(5,801
)

(31,929
)Net increase in premises and equipment


(1,737
)

(830
)Net increase in bank-owned life insurance


(709
)

(1,269
)Proceeds from sales of other real estate


645


547Net cash provided by investing activities

$
112,130

$
(85,818
)**Financing Activities:**Net (decrease) increase in deposits

$
(106,604
)
$
41,849Net decrease in U.S. Treasury demand notes


(379
)

(662
)(Decrease) increase in FHLB borrowings


(9,000
)

35,000Increase in securities sold under agreement


10,036


11Cash dividends


(7,225
)

(6,204
)Repurchase of common stock


(2,270
)

(3,288
)Stock options and stock awards


1,077


794Net cash used by financing activities

$
(114,365
)
$
67,500Net increase (decrease) in cash and cash equivalents

$
19,173

$
(3,217
)Cash and cash equivalents at beginning of period


104,087


82,624Cash and cash equivalents at end of the period

$
123,260

$
79,407Cash paid during the period for:Interest

$
24,042

$
30,758Income taxes

$
4,600

$
5,000Supplemental disclosure of noncash investing and financing activities:Transfer of assets from loans to other real estate owned

$
984

$
606See 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 June 30, 2003, the results of its operations for the six and three month periods ended June 30, 2003 and 2002 and the cash flows for the six month periods ended June 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 six and three-month periods ended June 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 taxJune 30, 2003

amount
Expense
amountUnrealized gains on securities:Unrealized holding gainsArising during period

$
19,160

$
(6,706
)
$
12,454Less reclassification foradjustment for gainsrealized in net income


6,090


(2,131
)

3,959Other comprehensive income, net

$
13,070

$
(4,575
)
$
8,495





Before tax
Tax Benefit
Net of taxJune 30, 2002

amount
(Expense)
amountUnrealized gains on securities:Unrealized holding lossesarising during period

$
4,491

$
(1,572
)
$
2,919Less reclassification foradjustment for gainsrealized in net income


2,474


(866
)

1,608Other comprehensive income, net

$
2,017

$
(706
)
$
1,311





7





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.





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 1,742,415 shares of common stock to key employees and directors. At June 30, 2003, 1,478,359 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 June 30, 2003 and June 30, 2002, respectively: dividend yield of 2.80% and 2.53%; expected volatility of 5.39% and 5.60%; risk-free interest rate of 3.23% and 4.23%; and an expected life of 7.37 years and 7.22 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).





**Six Months Ended******
****
**June 30, 2003**
**June 30, 2002**Net IncomeAs reported

$
17,566

$
16,191Less: Stock-based compensation cost determinedunder fair value method for all awards


505


643Proforma

$
17,061

$
15,548Earnings per share (Diluted)As reported

$
0.90

$
0.82Proforma

$
0.87

$
0.79Earnings per share (Basic)As reported

$
0.92

$
0.85Proforma

$
0.90

$
0.81





**Three Months Ended******
****
**June 30, 2003**
**June 30, 2002**Net IncomeAs reported

$
9,101

$
8,378Less: Stock-based compensation cost determinedunder fair value method for all awards


252


322Proforma

$
8,849

$
8,056Earnings per share (Diluted)As reported

$
0.46

$
0.42Proforma

$
0.45

$
0.41Earnings per share (Basic)As reported

$
0.48

$
0.44Proforma

$
0.47

$
0.42





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 June 30, 2003 are $11,354,000 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").  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 apply to existing entities in the first fiscal year or interim period beginning after June 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 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 Capital 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 Financial Accounting Standards Board 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
 9
 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.





Note 9  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 10  Certain prior period numbers have been changed 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:


o
Operating, legal and regulatory risks;o
Economic, political and competitive forces affecting our banking,securities, asset management and credit services businesses; ando
The risk that our analyses of these risks and forces could be incorrectand/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 AICPA's Accounting Standards Executive Committee has issued an exposure draft of a proposed Statement of Position (SOP), 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,) 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. ental 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 recorded record profits in the second quarter of 2003 and year-to-date 2003. Second quarter 2003 profits were 8.6% higher than the second quarter of 2002 and the 2003 year-to-date profits were 8.5% higher than the same period in 2002. Gains on the sale of investments, balance sheet management and an increase in the net interest margin highlighted the performance during the second quarter. Loan quality also remained strong during this period.





Second quarter 2003 diluted earnings per share of $.46 increased 9.5% over the second quarter 2002 diluted earnings per share of $.42. Second quarter basic earnings per share in 2003 of $.48 exceeded the second quarter 2002 basic earnings per share of $.44 by 9.1%. Second quarter 2003 net income of  $9,101,000 increased 8.6% over the second quarter 2002 net income of $8,378,000. Net income for the first six months of 2003 was $17,566,000, an 8.5% increase over the $16,191,000 for the comparable period in 2002. Diluted earnings per share of $.90 were up 9.8% from the $.82 in 2002. Basic earnings per share of $.92 for the first six months of 2003 were 8.2% higher than the $.85 year-to-date June 30, 2002. The Corporations consolidated total assets were $2,406,132,000 at June 30, 2003, 5.0% above the June 30, 2002 level of $2,292,155,000.





For the six months ended June 30, 2003, the annualized return on average shareholders equity and the annualized return on average assets were 16.43% and 1.44%, respectively. For the same period in 2002, the annualized return on average shareholders equity was 16.81% and the annualized return on average assets was 1.47%. Excluding accumulated other comprehensive income, the annualized return on average realized shareholders equity for the first six months of 2003 and 2002 were 17.16% and 17.08%, respectively. For the three months ended June 30, 2003, the annualized return on average shareholders equity and the annualized return on average assets were 16.67% and 1.49%, respectively. For the same period in 2002, the annualized return on average shareholders equity was 17.38% and the annualized return on average assets was 1.51%. Excluding accumulated other comprehensive income, the annualized return on average realized shareholders equity for the second quarters of 2003 and 2002 were 17.53% and 17.54%, respectively.





During the second quarter of 2003, the Corporation continued to manage its balance sheet in an effort to position it for the long term.  The Corporation paid off $29 million of Federal Home Loan Bank borrowings with rates over 6.0% prior to their scheduled maturity dates. This provided the opportunity to lock in historically low rates on new long-term borrowings.  The early retirement of these borrowings resulted in a $2,594,000 prepayment fee. The $4,774,000 net security gains were partially used to offset these fees. The Corporation should begin to recognize the benefits of the early retirement of these borrowings during the third quarter of 2003. The second quarter of 2003 net interest margin of 3.82% was lower than the second quarter of 2002 net interest margin of 4.22%, however it was higher than the first quarter of 2003 and fourth quarter of 2002 net interest margins of 3.68% and 3.64%, respectively.





The quality of the loan portfolios is a key focus of the banks. The Corporation experienced an improvement in loan quality ratios at June 30, 2003 while experiencing an increase in net loans charged off during the first half of 2003, compared to the same period in 2002. Nonperforming loans (nonaccruing loans and loans past due 90 days or more and still accruing interest) were .44% of total loans at June 30, 2003, compared to .47% at December 31, 2002 and .44% at June 30, 2002. The ratio of loan loss reserve to nonperforming loans was 301.0% at June 30, 2003, compared to 272.8% at December 31, 2002 and 286.0% at June 30, 2002. The annualized net loans charged-off to average loans was 0.20% during the second quarter of 2003, compared to 0.11% during the second 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.





12




Net Interest Income and Related Assets and Liabilities





Net interest income for the first six months of 2003 of  $39,004,000 was $2,054,000 or 5.0% lower than the same period in 2002 net interest income of $41,058,000. The second quarter 2003 net interest income of $19,805,000 was $645,000 or 3.2% 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 lower interest income was partially offset by the decrease in interest expense related to the reduction in deposit and other borrowing rates.





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 six and three months ended June 30, 2003 over June 30, 2002 by their rate and volume components.







**Six Months Ended**
**Three Months Ended******

**June 30, 2003**
**June 30, 2003******

**Over/Under**
**Over/Under**(In thousands)

**June 30, 2002**
**June 30, 2002**Total Variance
Caused by:
Total Variance
Caused by:Rate
Volume

Rate
VolumeInterest Income:Securities *

$
(1,232
)
$
(6,622
)
$
5,390

$
(718
)
$
(3,348
)
$
2,630Money market instruments


(189
)

(96
)

(93
)

(174
)

(35
)

(139
)Loans *


(4,041
)

(4,299
)

258


(2,127
)

(2,163
)

36Total


(5,462
)

(11,017
)

5,555


(3,019
)

(5,546
)

2,527Interest Expense:Savings deposits


(1,398
)

(2,160
)

762


(1,102
)

(1,389
)

287Time deposits and certificates of deposit


(3,368
)

(3,651
)

283


(1,813
)

(1,713
)

(100
)Other borrowings


153


(342
)

495


(3
)

(278
)

275Total


(4,613
)

(6,153
)

1,540


(2,918
)

(3,380
)

462Net Interest Income

$
(849
)
$
(4,864
)
$
4,015

$
(101
)
$
(2,166
)
$
2,065*Tax Equivalent Basis




13







BALANCE SHEET ANALYSISThe table below presents the major asset and liability categories on an average daily basis for the periodspresented, 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)

Three Months Ended June 30, 2003
Three Months Ended June 30, 2002Average
Average

Average
AverageAssets

Balance
Rate
Interest
Balance
Rate
InterestInvestment securities:Taxable investments

$
608,181


2.94
%
$
4,463

$
481,170


5.66
%
$
6,812Nontaxable investments (1)


340,601


6.89


5,866


226,098


7.49


4,235Total investment securities


948,782


4.35


10,329


707,268


6.25


11,047Loans (1) (2)


1,342,758


6.47


21,724


1,340,543


7.12


23,851Other rate-sensitive assets


14,050


1.59


56


48,256


1.91


230Total earning assets


2,305,590


5.57


32,109


2,096,067


6.70


35,128Noninterest-earning assets


129,990


-


-


125,801


-


-Total assets

$
2,435,580


5.27
%
$
32,109

$
2,221,868


6.32
%
$
35,128Liabilities And Shareholders' EquityDeposits:Demand

$
260,688


-
%
$
-

$
235,992


-
%
$
-Savings


933,158


0.79


1,851


788,580


1.50


2,953Time


695,817


3.36


5,842


707,725


4.33


7,655Total


1,889,663


1.63


7,693


1,732,297


2.45


10,608Borrowings and otherinterest-bearing liabilities


274,567


3.48


2,391


242,938


3.94


2,394Other liabilities


52,987


-


-


53,847


-


-Total liabilities


2,217,217


1.82


10,084


2,029,082


2.56


13,002Shareholders' equity


218,363


-


-


192,786


-


-Total liabilities and shareholders' equity

$
2,435,580


1.66
%
$
10,084

$
2,221,868


2.34
%
$
13,002Average effective rate oninterest-bearing liabilities

$
1,903,542


2.12
%
$
10,084

$
1,739,243


2.99
%
$
13,002Interest Income/Earning Assets

$
2,305,590


5.57
%
$
32,109

$
2,096,067


6.70
%
$
35,128Interest Expense/Earning Assets

$
2,305,590


1.75

$
10,084

$
2,096,067


2.48

$
13,002Effective Interest Differential





3.82
%







4.22
%






(Dollars in thousands)

Six Months Ended June 30, 2003
Six Months Ended June 30, 2002Average





Average





Average


AverageAssets


Balance


Rate


Interest


Balance


Rate


InterestInvestment securities:Taxable investments

$
625,236


3.05
%
$
9,543

$
498,844


5.72
%
$
14,272Nontaxable investments (1)


334,263


6.97


11,655


216,695


7.53


8,158Total investment securities


959,499


4.42


21,198


715,539


6.27


22,430Loans (1) (2)


1,335,963


6.52


43,567


1,328,070


7.17


47,608Other rate-sensitive assets


18,094


1.43


129


31,013


2.05


318Total earning assets


2,313,556


5.61


64,894


2,074,622


6.78


70,356Noninterest-earning assets


129,392


-


-


125,662


-


-Total assets

$
2,442,948


5.31
%
$
64,894

$
2,200,284


6.40
%
$
70,356Liabilities And Shareholders' EquityDeposits:Demand

$
251,791


-
%
$
-

$
231,582


-
%
$
-Savings


937,226


0.95


4,444


776,540


1.50


5,842Time


725,061


3.40


12,340


708,372


4.43


15,708Total


1,914,078


1.75


16,784


1,716,494


2.51


21,550Borrowings and otherinterest-bearing liabilities


263,550


3.56


4,686


235,798


3.84


4,533Other liabilities


51,493


-


-


55,394


-


-Total liabilities


2,229,121


1.93


21,470


2,007,686


2.60


26,083Shareholders' equity


213,827


-


-


192,598


-


-Total liabilities and shareholders' equity

$
2,442,948


1.76
%
$
21,470

$
2,200,284


2.37
%
$
26,083Average effective rate oninterest-bearing liabilities

$
1,925,837


2.23
%
$
21,470

$
1,720,710


3.03
%
$
26,083Interest Income/Earning Assets

$
2,313,556


5.61
%
$
64,894

$
2,074,622


6.78
%
$
70,356Interest Expense/Earning Assets

$
2,313,556


1.86

$
21,470

$
2,074,622


2.51

$
26,083Effective Interest Differential





3.75
%







4.27
%(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 onnonaccrual loans have not been included for purposes of determining interest income.




14


Taxable-equivalent net interest income was $43,424,000 for the first six months of 2003, compared to $44,273,000 for the same period in 2002, a 1.9% or $849,000 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 half of 2003, the average investment portfolio represented 41.5% of total earning assets compared to 34.5% during the first half of 2002. Average total loans grew $7,893,000 compared to a $243,960,000 rise in average investments in the first half of 2003, compared to the first half of 2002. The low growth in loans was primarily the result of the decline in both the indirect vehicle and vehicle 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 5.8%.





The year-to-date June 30, 2003 versus the June 30, 2002 decrease in taxable-equivalent net interest income was primarily due to a $5,462,000 reduction in interest income, which was partially offset by a decrease in interest expense of $4,613,000. The taxable-equivalent interest income decrease was the result of lower earning asset yields, in part offset by the higher volumes of earnings assets. Average year-to-date earning assets grew $238,934,000, or 11.5% at June 30, 2003, compared to the same period in 2002. The yield earned on earning assets decreased 117 basis points from 6.78% in the first six months of 2002 to 5.61% during the same period in 2003.





The year-to-date June 30, 2003 interest expense was $4,613,000 lower than the same period in 2002. This reduction is the result of a $6,153,000 decrease related to lower rates, partially offset by an increase of $1,540,000 associated with the higher deposit and other borrowing volumes. The average rate paid on interest bearing deposits and other borrowings of 2.23% during the first six months of 2003 was 80 basis points lower than the 3.03% rate paid during the same period in 2002. The average balance of interest bearing deposits and other borrowings grew $205,127,000 or 11.9% in the first six months of 2003, compared to the first six months of 2002. The majority of this growth was in lower rate savings deposits, which include interest bearing checking accounts, savings accounts and money market accounts, were $160,686,000 or 20.7% higher in the first six months of 2003, compared to the same period in 2002. The average year-to-date growth in higher rate time deposits and other borrowings were $16,689,000 and $27,752,000, respectively. Other borrowings include federal funds purchased, FHLB borrowings, securities sold under agreements to repurchase, U. S. Treasury demand notes and junior subordinate deferrable interest debentures.


15


The taxable-equivalent net interest income during the second quarter of 2003 of $22,025,000 was $101,000 or .5% lower than the second quarter of 2002 net interest income. The $3,019,000 decrease in interest income was partially offset by a $2,918,000 reduction in interest expense. The yield earned on average earnings assets during the second quarter of 2003 of 5.57% was 113 basis points lower than the 6.70% earned during the second quarter of 2002. The $241,514,000 growth in lower yielding investment securities outpaced the $2,215,000 growth in loans. The rate paid on average deposits and other borrowings of 2.12% during the second quarter of 2003 was 87 basis points lower than the 2.99% rate paid during the second quarter of 2002. Lower rate average savings deposits grew $144,578,000 and higher rate average time deposits decreased $11,908,000. Other borrowings increased $31,629,000 during this period.





Net Interest Margin





The net interest margins for the six-month periods ending June 30, 2003 and June 30, 2002 were 3.75% and 4.27%, respectively. The second quarter 2003 and 2002 net interest margins were 3.82% and 4.22%, respectively. However, the 2003 second quarter net interest margin continued the trend of increasing quarterly net interest margins, with the first quarter 2003 net interest margin at 3.68% and the fourth quarter of 2002 at 3.64%.





During the first six months of 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 of  $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%.





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 $353,000 at June 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. At June 30, 2003, the Corporation was paying a fixed rate of 2.88% and was receiving a variable rate of 1.10% based upon the three month United States Treasury Bill.


16


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 ra tes 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 June 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.




(Dollars in thousands)
Change in

Asset/LiabilityMarket Value
Market Value
Percentage
Approvedof Equity
of Equity
Change
Percent Change+300 Basis Points
295,232
(4,370)
-1.46%
+/-45%+200 Basis Points
327,180
27,578
9.20%
+/-30%+100 Basis Points
323,384
23,782
7.94%
+/-15%Flat Rate
299,602
-
0.00%-100 Basis Points
279,405
(20,197)
-6.74%
+/-15%-200 Basis Points
270,009
(29,593)
-9.88%
+/-30%-300 Basis Points
262,042
(37,560)
-12.54%
+/-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.


17


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.
  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 effect on losses. These reports include the exception tracking reports, the credit bureau score distribution report, the debt to income summary, etc. These are a few of the many reports that drive the judgmental component. It is important to continue to use experiential data to confirm risk as measurable losses will continue to manifest themselves at higher than normal levels even after the economic cycle has begun an upward swing and lagging indicators begin to show improvement.


18
  For the first six months of 2003 the provision for loan losses was $1,929,000, compared to $2,445,000 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 June 30, 2003 of 301.0% was higher than the December 31, 2002, and the June 30, 2002, ratios of 272.8% and 286.0%, respectively. The ratio of nonperforming loans and leases to total loans and leases was 0.44% at June 30, 2003 and June 30, 2002, and 0.47% at December 31, 2002. Net loans charged off was $1,582,000 for the six months ended June 30, 2003, compared to $1,148,000 for the six months ended June 30, 2002.





Allowance for Loan LossesA summary of the allowance for loan losses is as follows:(Dollars in thousands)

June 30,2003


2002Average loans

$
1,335,963

$
1,328,070Allowance, beginning of period

$
17,190

$
15,558Loans charged off:Commercial and industrial


439


24Consumer


1,065


1,441Real estate


312


276Lease financing


276


185Total loans charged off


2,092


1,926Recoveries:Commercial and industrial


8


70Consumer


434


508Real estate


15


146Lease financing


54


54Total recoveries


511


778Net loans charged off


1,581


1,148Provision for loan losses


1,929


2,445Allowance, end of period

$
17,538

$
16,855Ratio of net charge offs to averageloans outstanding (annualized)


0.24
%

0.17
%






Analysis of Credit Risk

June 30,
December 31,
June 30,(Dollars in thousands)

2003
2002
2002Non-accrual loan and leases

$
4,146

$
5,109

$
4,888Loans and leases 90 days past due


1,681


1,193


1,005Total nonperforming loans and leases


5,827


6,302


5,893Net assets in foreclosure


729


390


658Total nonperforming assets

$
6,556

$
6,692

$
6,551Allowance for loan and lease losses tononperforming loans and leases


301.0
%

272.8
%

286.0
%Nonperforming loans and leases to totaltotal loans and leases


0.44
%

0.47
%

0.44
%Allowance for loan and lease lossesto total loans and leases


1.31
%

1.29
%

1.25
%Nonperforming assetsto total assets


0.27
%

0.27
%

0.29
%





19




The following table sets forth an allocation of the allowance for loan losses by loan category:**June 30, 2003**Percent(Dollars in thousands)


Amount


of LoansCommercial and industrial

$
7,155


29%Consumer loans


6,085


34%Real estate


3,220


32%Lease financing


1,078


5%Total

$
17,538


100%





Nonperforming assets (nonaccruing loans, loans 90 days past due and net assets in foreclosure) were 0.27% of total assets at June 30, 2003 and December 31, 2002, and 0.29% at June 30, 2002. The ratio of the allowance for loan losses to loans at June 30, 2003 of 1.31% was higher than the December 31, 2002 and June 30, 2002 ratios of 1.29% and 1.25%, respectively.





Nonaccruing loans at June 30, 2003 of $4,146,000, decreased $963,000 from the December 31, 2002 level of $5,109,000, and decreased $742,000 from the June 30, 2002 level of $4,888,000. The decrease in nonaccruing loans at June 30, 2003, compared to both December 31, 2002 and June 30, 2002 was primarily the result of decreases in commercial real estate, commercial and consumer loans.





Net assets in foreclosure were $729,000 as of June 30, 2003, an increase of $339,000 from the December 31, 2002 balance of $390,000. During the first six months of 2003, transfers from loans to assets in foreclosure were $984,000 and payments on foreclosed properties were $645,000. There were no write-downs of assets in foreclosure during this period. The loans transferred to assets in foreclosure included vehicle leases of $347,000, equipment leases of $94,000,  $163,000 of consumer loans and $380,000 of commercial loans. The balance of net assets in foreclosure at June 30, 2002 was $658,000. 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 June 30, 2003, loans past due 90 days or more and still accruing interest were $1,681,000 compared to $1,193,000 as of December 31, 2002 and $1,005,000 as of June 30, 2002. The increase in loans past due 90 days at June 30, 2003, compared to December 31, 2002 and June 30, 2002 was primarily the result of an increase in real estate and commercial loans past due 90 days.


20


The following information concerns impaired loans:**June 30, 2003**
**Dec. 31, 2002**
**June 30, 2002**Impaired Loans

$
2,213,000

$
3,153,000

$
2,697,000Average year-to-date impaired loans

$
2,424,000

$
2,836,000

$
3,128,000Impaired loans with specific loss allowances

$
2,213,000

$
3,153,000

$
2,697,000Loss allowances reserved on impaired loans

$
260,000

$
329,000

$
290,000Year-to-date income recognized on impaired loans

$
40,000

$
186,000

$
52,000





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.





Other Operating Income**Six Months Ended June 30,**
**Three Months Ended June 30,**2003


2002


2003


2002(Dollars in thousands)
(Dollars in thousands)Service charges

$
3,767

$
3,148

$
1,937

$
1,627Security gains, net


6,090


2,474


4,774


1,243Trust and investment services income


1,866


1,914


978


1,031Bank-owned life insurance income


1,262


1,269


631


631Income on Life Insurance


1,119


-


-


-Other income


3,066


2,837


1,639


1,587Total other operating income

$
17,170

$
11,642

$
9,959

$
6,119





The six months ending June 30, 2003 other operating income of $17,170,000 increased $5,528,000, or 47.5%, from $11,642,000 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 $3,616,000 and $1,119,000, respectively. Net of security gains and income on life insurance, other operating income grew $793,000 or 8.6%. Contributing to this growth were increases in service charges and other income of $619,000 and $229,000, respectively. Partially offsetting these increases were small decreases of $48,000 in trust and investment services and $7,000 in bank-owned life insurance income. The second quarter of 2003 other operating income was $3,840,000 or 62.8% higher than the second quarter of 2002, mainly due to the $4,774,000 increase in security gains. The rise in the second quarter 2003 other operating income was 6.3%, not inclusive of the security gains.





Service charges grew $619,000 or 19.7% in the first six 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 six months of 2003 contributed $484,000 of this increase. The remaining increase is related to the fees associated with the growth in average transaction deposit balances.





The Corporation recorded net security gains on the sale of securities available for sale of $6,090,000 in the first six months of 2003, compared to $2,474,000 during the same period in 2002. The net security gains were $4,774,000 in the second quarter of 2003 and $1,243,000 in the second 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 decreased $48,000 from $1,914,000 at June 30, 2002 to $1,866,000 at June 30, 2003. The 2003 second quarter Investment Management and Trust Services Division experienced a 5.1% reduction in income, compared to the second quarter of 2002. These lower fees were primarily due to the lower market value of trust assets at June 30, 2003, compared to June 30, 2002. These lower trust fees were partially offset by higher fees related to the sale of investments.


21


The Corporations bank owned life insurance (BOLI) income decreased $7,000 or 0.6% during the first six months of 2003, compared to the same period in 2002. This reduced income level was related to the lower rates experienced during 2003. BOLI involves the purchasing of life insurance by the Corporation on a chosen group of employees. The corporation is the owner and beneficiary of the policies. This pool of insurance, due to tax advantages to the Banks, is profitable to the Corporation. This profitability is used to offset a portion of future employee benefit cost increases. Bank deposits fund BOLI and the earnings from BOLI are recognized as other income.





Other income for the first six months of 2003 increased $229,000 or 8.1%, compared to the same period in 2002. The second quarter of 2003 other income was 3.3% higher than the same period in 2002. These increases were primarily associated with higher gains on the sale of residential mortgage loans, partially offset with lower income generated by HNC Reinsurance Company. The year-to-date gain on the sale of residential mortgages was $1,025,000 in 2003, compared to $418,000 in the same period in 2002.





Other Operating Expenses**Six Months Ended June 30,**

**Three Months Ended June 30,**2003


2002


2003


2002(Dollars in thousands)

(Dollars in thousands)Salaries

$
12,900

$
11,844

$
6,515

$
5,898Employee benefits


2,817


3,237


1,361


1,498Occupancy


1,905


2,058


882


821Furniture and equipment


2,681


2,607


1,376


1,319Prepayment fee


2,594


-


2,594


-Other expenses


9,743


9,447


4,399


5,178Total other operating expenses

$
32,640

$
29,193

$
17,127

$
14,714





The first six months of 2003 other operating expenses of $32,640,000 increased $3,447,000, or 11.8% from $29,193,000 for the same period in 2002. This rise was principally due to a $2,594,000 prepayment fee related to paying off Federal Home Loan Bank (FHLB) borrowings prior to their scheduled maturity date. Net of this prepayment fee, the year to date other operating expenses grew $853,000 or 2.9%. This rise was the result of higher salary, furniture and equipment and other expenses, partially offset by lower employee benefits and occupancy expenses. The second quarter 2003 other operating expenses, net of the FHLB prepayment penalty, decreased $181,000 or 1.2% from the second quarter of 2002. This reduction in expenses was primarily due to lower other expenses.





Employee salaries increased $1,056,000 or 8.9% from $11,844,000 for the first six months of 2002 to $12,900,000 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 $2,817,000 expensed in the first six months of 2003, were $420,000 or 13.0% lower than the $3,237,000 of employee benefits expensed during the same period in 2003. The decrease in employee benefits is the result of lower pension expense experienced during the first half of 2003, compared to the first half of 2002. The second quarter 2003 salary expense was 10.5% higher than the second quarter of 2002. Employee benefits were 9.1% lower in the second quarter of 2003, compared to the second quarter of 2002.





Net occupancy expense decreased $153,000, or 7.4%, from $2,058,000 in the first six months of 2002 to $1,905,000 in the first six 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 $212,000 or 12.5% during the first half 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. The second quarter of 2003 occupancy expense grew 7.4%, compared to the second quarter of 2002. Furniture and equipment expense increased $74,000 or 2.8%, during the first six months of 2003, compared to the same period in 2002. The second quarter of 2003 furniture and equipment expenses grew 4.3% over the second quarter of 2002. Both of these increases were related to higher depreciation and maintenance expenses.


22


Other expenses increased $296,000, or 3.1%, from $9,447,000 in the first six months of 2002, compared to $9,743,000 in other expenses recorded during the same period in 2003. This increase was largely due to the $873,000 rise in expenses related to the off-lease vehicle residual reserve, partially offset by lower expenses related to HNC Reinsurance Company. The Corporation reviews the off-lease vehicle residual reserve expense on a quarterly basis.  The 2003 second quarter other expenses decreased 15.0%, compared to the second quarter of 2002, due to both lower off-lease vehicle residual reserve expense and HNC Reinsurance Company expenses.





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.





Balance Sheet Analysis





Total assets decreased $84,732,000, or 3.4%, from $2,490,864,000 at December 31, 2002 to $2,406,132,000 at June 30, 2003. During the first half of 2003, the banks implemented a strategy to reduce high costing $100,000 or greater certificates of deposit balances due to the current high level of liquidity. Total $100,000 or greater certificates of deposits were reduced $86,176,000 during this period.  These deposits were school district deposits that fluctuate throughout the year.Total assets at June 30, 2003 grew 5.0%, compared to June 30, 2002.  This gain was primarily due to an increase in core deposits that was used to fund investment securities available for sale and loans.





The balance of securities available for sale at June 30, 2003 of $845,418,000 decreased $103,638,000 compared to the December 31, 2002 balance of $949,056,000. During the first half of 2003, $832,079,000 of securities available for sale was sold which generated a pretax gain of $6,090,000. In comparison, $254,204,000 securities available for sale were sold during the first half of 2002 to generate a pretax gain of $2,474,000. 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 $1,638,000 during the first six months of 2003. Total loans and residential mortgage loans held for sale grew $2,627,000 or 0.2% through June 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 3.4% during this period.





Total deposits decreased $106,604,000, or 5.4% from $1,979,822,000 at December 31, 2002 to $1,873,218,000 at June 30, 2003. This reduction was primarily due to planned run-off of higher costing certificates of deposits, which decreased $109,211,000 during this time period. Lower rate core deposits (noninterest-bearing checking, interest-bearing checking, money market accounts and savings accounts) grew a net $2,607,000, or 0.2% during this period. Net of a planned $47,972,000 reduction in public funds deposits, the increase in core deposits was 4.4%. The June 30, 2003 total core deposit balance grew 15.0%, compared to the June 30, 2002 total core deposits.





Other borrowings increased  $657,000 during the first six months of 2003. This increase was the result of a $10,036,000 rise in securities sold under agreements to repurchase, offset by lower long-term borrowings, U.S. Treasury demand notes of $9,000,000 and $379,000, respectively. Other borrowings grew $4,394,000 at June 30, 2003, compared to June 30, 2002. This growth was primarily in securities sold under agreements to repurchase, partially offset by lower long-term borrowings.





Capital





Capital formation is important to the Corporation's well being and future growth. Capital for the period ending June 30, 2003 was $223,849,000, an increase of $17,643,000 over the end of 2002. The increase is the result of the retention of the Corporation's earnings and the accumulated other comprehensive income, partially offset by the purchase of treasury stock during the first six months of 2003. The accumulated other comprehensive income at June 30, 2003 was a gain of $15,432,000, compared to a gain of $6,937,000 at December 31, 2002. The corporation purchased $2,270,000 of treasury stock during the first six 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 recommendation 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**As of June 30, 2003**

Actual

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

$
232,126


13.85
%
$
134,079


8.00
%Harleysville National Bank


141,295


11.60
%

97,405


8.00
%Citizens National Bank


39,044


12.69
%

24,615


8.00
%Security National Bank


17,839


12.89
%

11,075


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

$
213,133


12.72
%
$
67,040


4.00
%Harleysville National Bank


129,769


10.66
%

48,703


4.00
%Citizens National Bank


35,197


11.44
%

12,308


4.00
%Security National Bank


16,104


11.63
%

5,537


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

$
213,133


8.75
%
$
97,412


4.00
%Harleysville National Bank


129,769


7.40
%

70,154


4.00
%Citizens National Bank


35,197


7.55
%

18,647


4.00
%Security National Bank


16,104


8.29
%

7,770


4.00
%To Be Well CapitalizedUnder Prompt CorrectiveAction ProvisionAmount


RatioTotal Capital (to risk weighted assets):Corporation

$
-


-Harleysville National Bank


121,757


10.00
%Citizens National Bank


30,769


10.00
%Security National Bank


13,843


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

$
-


-Harleysville National Bank


73,054


6.00
%Citizens National Bank


18,462


6.00
%Security National Bank


8,306


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

$
-


-Harleysville National Bank


87,692


5.00
%Citizens National Bank


23,309


5.00
%Security National Bank


9,713


5.00
%





24




(Dollars in thousands)For Capital**As of December 31, 2002**

Actual

Adequacy PurposesAmount
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
%





To Be Well CapitalizedUnder Prompt CorrectiveAction 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 June 30, 2003, the Corporations Tier 1 risk-adjusted capital ratio was 12.72 % , and the total risk-adjusted capital ratio was 13.85 %, both well above the regulatory requirements. The risk-based capital ratios of each of the Corporations commercial banks also exceeded regulatory requirements at June 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 8.75% at June 30, 2003 and 8.19% at December 31, 2002.





The year-to-date June 30, 2003 cash dividend per share of $.380 was 17.3% higher than the cash dividend for the same period in 2002 of $.324. The dividend payout ratio for the first six months of 2003 was 41.1%, 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 six months of 2003.








25




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 June 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 $332,770,000, as of June 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 $465,379,000 as of June 30, 2003.





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.





26




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.





No material changes in market risk strategy occurred during the current period. A detailed discussion of market risk is provided on pages 15 and 16 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 unde r 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 ProceedsNot applicable**Item 3.**
Defaults Upon Senior SecuritiesNot applicable**Item 4**.
Submission of Matters to a Vote of Security HoldersNone.**Item 5.**
Other InformationNone**Item 6.**
Exhibits and Reports on Form 8-K(a) Exhibits:The following exhibits are being filed as part of this Report:**Exhibit No.**
**Description of Exhibits**(3.1)
Harleysville National Corporation Articles of Incorporation, as amended. (Incorporated by referenceto Exhibit 3(a) to the Corporations Registration Statement No. 33-65021 on Form S-4, as filed onDecember 14, 1995.)(3.2)
Harleysville National Corporation By-laws. (Incorporated by reference to Exhibit 3(b) to theCorporation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 Exhibit4.3 of Registrants Registration Statement No. 33-57790 on Form S-8, filed with the Commission onOctober 1, 1993.)(10.2)
Harleysville National Corporation Stock Bonus Plan. (Incorporated by Reference to Exhibit 99A ofRegistrants Registration Statement No. 33-17813 on Form S-8, filed with the Commission onDecember 13, 1996.)(10.3)
Supplemental Executive Retirement Plan. (Incorporated by Reference to Exhibit 10.3 ofRegistrants Annual Report in Form 10-K for the year ended December 31, 1997, filed with theCommission on March 27, 1998.)28(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 theCommission 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 theCommission on March 25, 1999.)(10.7)
Harleysville National Corporation 1998 Stock Incentive Plan. (Incorporated by Reference toRegistrants Registration Statement No. 333-79971 on Form S-8 filed with the Commission on June4, 1999.)(10.8)
Harleysville National Corporation 1998 Independent Directors Stock Option Plan. (Incorporated byReference to Registrants Registration Statement No. 333-79973 on Form S-8 filed with theCommission on June 4, 1999.)(11)
Computation of Earnings per Common Share. The information for this Exhibit is incorporated byreference 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 andGregg J. Wagner, Executive Vice President and Chief Financial Officer.(b) Reports on Form 8-KDuring the quarter ended June 30, 2003, the Registrant filed a Form 8-K containing the first quarter of 2003 earnings press release.








29









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.







SIGNATURES




HARLEYSVILLE NATIONAL CORPORATION
 
 
 By:
 
 
 
 Walter E. Daller, Jr., Chairman, President and Chief Executive Officer
 (Principal executive officer)
 
 
 
 By:
 
 
 
  Gregg J. Wagner, Executive Vice President and Chief Financial Officer
 (Principal financial and accounting officer)
 
 
 
 
 
 30 **EXHIBIT INDEX**
 
 **Exhibit No.**
**Description of Exhibits**(3.1)
Harleysville National Corporation Articles of Incorporation, as amended. (Incorporated by referenceto Exhibit 3(a) to the Corporations Registration Statement No. 33-65021 on Form S-4, as filed onDecember 14, 1995.)(3.2)
Harleysville National Corporation By-laws. (Incorporated by reference to Exhibit 3(b) to theCorporation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 Exhibit4.3 of Registrants Registration Statement No. 33-57790 on Form S-8, filed with the Commission onOctober 1, 1993.)(10.2)
Harleysville National Corporation Stock Bonus Plan. (Incorporated by Reference to Exhibit 99A ofRegistrants Registration Statement No. 33-17813 on Form S-8, filed with the Commission onDecember 13, 1996.)(10.3)
Supplemental Executive Retirement Plan. (Incorporated by Reference to Exhibit 10.3 ofRegistrants Annual Report in Form 10-K for the year ended December 31, 1997, filed with theCommission 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 theCommission 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 theCommission on March 25, 1999.)(10.7)
Harleysville National Corporation 1998 Stock Incentive Plan. (Incorporated by Reference toRegistrants Registration Statement No. 333-79971 on Form S-8 filed with the Commission on June4, 1999.)(10.8)
Harleysville National Corporation 1998 Independent Directors Stock Option Plan. (Incorporated byReference to Registrants Registration Statement No. 333-79973 on Form S-8 filed with theCommission on June 4, 1999.)(11)
Computation of Earnings per Common Share. The information for this Exhibit is incorporated byReference to page 4 of this Form 10-Q.(31)
Section 302 Certification. Walter E. Daller, Jr., Chairman, President and Chief Executive Officer andGregg J. Wagner, Executive Vice President and Chief Financial Officer.(32)
Section 906 Certification. Walter E. Daller, Jr., Chairman, President and Chief Executive Officer andGregg J. Wagner, Executive Vice President and Chief Financial Officer. 
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