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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Commission file number 0-15237

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE:

1.

Portions of the Registrant's Definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held April 12, 2005 are incorporated by reference into Part II, Items 5 and 8 and Part III, Items 10-14 of this report.

HARLEYSVILLE NATIONAL CORPORATION

FORM 10-K

INDEX

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Forward-Looking Statements

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

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

•

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.

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

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PART I

Item 1.    Business

        Harleysville National Corporation (the Corporation), a Pennsylvania corporation, was incorporated in June, 1982. On January 1, 1983, the Corporation became the parent bank holding company of Harleysville National Bank and Trust Company (the Bank or Harleysville National Bank), established in 1909, a wholly owned subsidiary of the Corporation. The Corporation is registered as a bank holding company under the Bank Holding Company Act of 1956.

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

        The Bank is a national banking association under the supervision of the Office of the Comptroller of the Currency (the OCC). The Corporation's and the Bank's legal headquarters are located at 483 Main Street, Harleysville, Pennsylvania 19438. HNC Financial Company's legal headquarters is located at 2751 Centerville Road, Suite 3164, Wilmington, Delaware 19808. HNC Reinsurance Company's legal headquarters is located at 101 North First Avenue, Suite 2460, Phoenix, AZ 85003.

        The Bank provides a full range of banking services including loans and deposits, investment management and trust and investment advisory services to individual and corporate customers located in eastern Pennsylvania The Bank engages in the full-service commercial banking and trust business, including accepting time and demand deposits, making secured and unsecured commercial and consumer loans, financing commercial transactions, making construction and mortgage loans and performing corporate pension and personal investment and trust services. Deposits are insured by the Federal Deposit Insurance Corporation to the extent provided by law. The Bank has 45 branch offices located in Montgomery, Bucks, Chester, Berks, Carbon, Wayne, Monroe, Lehigh, Northampton and Schuylkill counties, Pennsylvania. Cumberland Advisors, Inc. (Cumberland), a Registered Investment Advisor, has two offices located in New Jersey.

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

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

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

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

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

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

Competition

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

Supervision and Regulation—The Registrant

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

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

Pending Legislation

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

Effects of Inflation

        Inflation has some impact on the Corporation's and the Bank's operating costs. Unlike many industrial companies, however, substantially all of the Bank's assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Corporation's and the Bank's

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performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as prices of goods and services.

Effect of Government Monetary Policies

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

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

Environmental Regulations

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

Supervision and Regulation—Banks

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

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

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

        As a subsidiary bank of a bank holding company, the Bank is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or its subsidiaries, or investments in the stock or other securities as collateral for loans. The Federal Reserve Act and Federal Reserve regulations also place certain limitations and reporting requirements on extensions of credit by a bank to principal shareholders of its parent holding company, among others,

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and to related interests of such principal shareholders. In addition, such legislation and regulations may affect the terms upon which any person becoming a principal shareholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship.

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

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

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

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

(1)

3.0 for those banks having the highest available regulatory rating.

        In the event an institution's capital deteriorates to the undercapitalized category or below, FDICIA prescribes an increasing amount of regulatory intervention, including: the institution of a capital restoration plan and a guarantee of the plan by a parent institution; and the placement of a hold on increases in assets, number of branches or lines of business. If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and, in critically undercapitalized situations, appointment of a receiver. For well capitalized institutions, FDICIA provides authority for regulatory intervention where the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity. All but well capitalized institutions are prohibited from accepting brokered deposits without prior

7

regulatory approval. Under FDICIA, financial institutions are subject to increased regulatory scrutiny and must comply with certain operational, managerial and compensation standards to be developed by Federal Reserve Board regulations. FDICIA also requires the regulators to issue new rules establishing certain minimum standards to which an institution must adhere including standards requiring a minimum ratio of classified assets to capital, minimum earnings necessary to absorb losses and minimum ratio of market value to book value for publicly held institutions. Additional regulations are required to be developed relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth and excessive compensation, fees and benefits.

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

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

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

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

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

Additional Information

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

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

Item 2.  Properties

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

9

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

(1)

Branch buildings are owned by the Bank and the land is leased.

(2)

Locations include Millennium Wealth Management and Private Banking offices.

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

Item 3.    Legal Proceedings

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

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

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

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PART II

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

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

Price of Common Stock and Cash Dividends

(1)

Adjusted for a five percent stock dividend effective 9/15/04.

(2)

Adjusted for a five percent stock dividend effective 9/15/04 and a five-for-four stock split effective 9/15/03.

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

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

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

Issuer Purchases of Common Stock

(1)

On December 14, 2000, the Board of Directors authorized a program to purchase up to 1,249,000 shares (restated for stock dividends and splits) of its common stock.

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Item 6.    Selected Financial Data

(1)

Adjusted for a five percent stock dividend effective 9/15/04, 9/16/02 and 11/9/00, a five-for-four stock split effective 9/15/03 and a one hundred percent stock dividend effective 8/10/01

(2)

The results of operations include the acquisition of Millennium Bank effective April 30, 2004

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

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

Critical Accounting Estimates

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

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

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

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

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

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

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

Financial Overview

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

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

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

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

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

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

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

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

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

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

Investment Securities

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

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

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

Table 1—Investment Portfolio

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

Table 2—Maturity and Tax-Equivalent Yield Analysis of Investment Securities

(1)

Weighted average yield on nontaxable investment securities is shown on a tax equivalent basis (tax rate of 35%).

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Loans

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

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

Table 3—Composition of Loan Portfolio

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

Table 4—Selected Loan Maturity Data

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

Table 5—Nonaccrual Loans and Loans 90 Days or more Past Due Accruing Interest

        The Bank had no concentration of loans to individual borrowers which exceeded 10% of total loans at December 31, 2004 and 2003. The Bank actively monitors the risk of this loan concentration. The Bank had no foreign loans, and the impact of nonaccrual and delinquent loans on total interest income was not material.

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

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

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

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

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

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

        The Bank uses the reserve method of accounting for loan losses. The balance in the allowance for loan and lease losses is determined based on management's review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management's assumptions as to future delinquencies, recoveries and losses. Additions to the allowances are charged to operations. The allowance for loan losses increased $1.7 million, or 10.2%, to $18.5 million at December 31, 2004 as compared to December 31, 2003. The increase in the allowance was primarily due to loan growth and the increase in nonperforming loans of $1.3 million. The allowance for loan losses decreased $437,000, or 2.6%, to $16.8 million at December 31, 2003, from December 31, 2002.

Table 6—Nonperforming Assets

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Allowance for Loan Losses

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

Table 7—Allowance for Loan Losses