form10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________

Form 10-Q

__________________

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

for the quarterly period ended September 30, 2008

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

for the transition period from ___________ to __________

Commission file number 0-15237

___________________

HARLEYSVILLE NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

___________________

Pennsylvania		23-2210237
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

483 Main Street

Harleysville, Pennsylvania 19438

(Address of principal executive office and zip code)

(215) 256-8851

(Registrant’s telephone number, including area code)

___________________

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

Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x

Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 31,441,280 shares of Common Stock, $1.00 par value, outstanding on November 3, 2008.

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HARLEYSVILLE NATIONAL CORPORATION


INDEX TO FORM 10-Q REPORT

	PAGE

Part I. Financial Information

Item 1. Financial Statements:

Consolidated Balance Sheets at September 30, 2008 (unaudited) and December 31, 2007	3

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2008 and 2007 (unaudited)	4

Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2008 and 2007 (unaudited)	5

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (unaudited)	6

Notes to Consolidated Financial Statements	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3. Quantitative and Qualitative Disclosures about Market Risk	33

Item 4. Controls and Procedures	33

Part II. Other Information	34

Item 1. Legal Proceedings	34

Item 1A. Risk Factors	34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3. Defaults Upon Senior Securities	34

Item 4. Submission of Matters to a Vote of Security Holders	34

Item 5. Other Information	35

Item 6. Exhibits	35

Signatures	36

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PART 1. FINANCIAL INFORMATION
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)	September 30, 2008			December 31, 2007
	(Unaudited)
Assets
Cash and due from banks	$	50,870		$	73,930
Federal funds sold and securities purchased under agreements to resell		100,600			131,600
Interest-bearing deposits in banks		3,366			3,873
Total cash and cash equivalents		154,836			209,403
Residential mortgage loans held for sale		1,222			1,140
Investment securities available for sale (at fair value)		912,099			910,367
Investment securities held to maturity (market value $52,652 and $57,518, respectively)		53,003			57,347
Federal Home Loan Bank stock, Federal Reserve Bank stock and other investments		18,247			15,201
Loans and leases		2,537,815			2,459,683
Less: Allowance for loan losses		(31,668	)		(27,328	)
Net loans		2,506,147			2,432,355
Premises and equipment, net		35,316			32,518
Accrued interest receivable		16,029			16,456
Goodwill		110,278			111,155
Intangible assets, net		12,877			13,340
Bank-owned life insurance		74,316			72,269
Other assets		55,360			31,450
Total assets	$	3,949,730		$	3,903,001
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing	$	343,308		$	358,258
Interest-bearing:
Checking		430,607			482,104
Money market		727,693			796,325
Savings		182,342			145,681
Time deposits		1,334,326			1,202,690
Total deposits		3,018,276			2,985,058
Federal funds purchased and short-term securities sold under agreements to repurchase		94,043			101,493
Other short-term borrowings		1,163			2,015
Long-term borrowings		368,755			321,785
Accrued interest payable		35,062			28,810
Subordinated debt		82,992			82,992
Other liabilities		38,445			41,538
Total liabilities		3,638,736			3,563,691
Shareholders' Equity:
Series preferred stock, par value $1 per share;
Authorized 8,000,000 shares, none issued		—			—
Common stock, par value $1 per share; authorized 75,000,000 shares,
issued 31,507,021 shares at September 30, 2008 and at December 31, 2007		31,507			31,507
Additional paid in capital		230,705			231,130
Retained earnings		84,762			82,311
Accumulated other comprehensive loss		(34,469	)		(2,566	)
Treasury stock, at cost: 85,887 shares at September 30, 2008 and
174,605 shares at December 31, 2007		(1,511	)		(3,072	)
Total shareholders' equity		310,994			339,310
Total liabilities and shareholders' equity	$	3,949,730		$	3,903,001

See accompanying notes to consolidated financial statements.

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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
	Three Months Ended					Nine Months Ended
	September 30,					September 30
(Dollars in thousands, except per share information)	2008		2007			2008		2007

Interest Income:
Loans and leases, including fees	$	37,106	$	36,853		$	112,747	$	106,941
Investment securities:
Taxable		9,518		8,769			28,894		25,821
Exempt from federal taxes		3,086		2,739			9,025		8,113
Federal funds sold and securities purchased under agreements to resell		212		557			963		2,325
Deposits in banks		20		104			82		228
Total interest income		49,942		49,022			151,711		143,428

Interest Expense:
Savings and money market deposits		5,780		12,276			19,536		37,212
Time deposits		12,976		9,652			40,414		28,670
Short-term borrowings		551		1,735			1,847		4,288
Long-term borrowings		5,338		4,495			15,221		12,402
Total interest expense		24,645		28,158			77,018		82,572

Net interest income		25,297		20,864			74,693		60,856
Provision for loan losses		2,580		2,525			7,647		6,075
Net interest income after provision for loan losses		22,717		18,339			67,046		54,781

Noninterest Income:
Service charges		3,424		2,460			9,849		6,820
Gain on sales of investment securities, net		-		(58	)		225		475
Wealth management		3,779		4,525			12,623		13,623
Bank-owned life insurance		706		648			2,047		1,833
Other income		2,536		2,190			8,129		6,416
Total noninterest income		10,445		9,765			32,873		29,167
Net interest income after provision for loan losses and
noninterest income		33,162		28,104			99,919		83,948

Noninterest Expense:
Salaries, wages and employee benefits		13,539		11,735			41,599		35,782
Occupancy		2,412		1,731			7,438		4,965
Furniture and equipment		1,074		897			3,251		2,890
Marketing		267		466			995		1,282
Merger charges		974		25			974		84
Other expense		6,887		4,002			19,072		12,773
Total noninterest expense		25,153		18,856			73,329		57,776

Income before income tax expense		8,009		9,248			26,590		26,172
Income tax expense		1,370		2,047			5,320		5,758
Net income	$	6,639	$	7,201		$	21,270	$	20,414

Net income per share information:
Basic	$	0.21	$	0.25		$	0.68	$	0.71
Diluted	$	0.21	$	0.25		$	0.67	$	0.70
Cash dividends per share	$	0.20	$	0.20		$	0.60	$	0.60
Weighted average number of common shares:
Basic		31,385,257		28,881,006			31,363,779		28,930,073
Diluted		31,551,026		29,107,274			31,531,942		29,183,811

See accompanying notes to consolidated financial statements.

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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars and share information in thousands)

Nine Months Ended September 30, 2008


	Common Stock		Treasury Stock					Additional						Accumulated Other
	Number of		Number of			Par		Paid			Retained			Comprehensive			Treasury						Comprehensive
	Shares		Shares			Value		In Capital			Earnings			Loss			Stock			Total			Income (Loss)

Balance, January 1, 2008		31,507		(174	)	$	31,507	$	231,130		$	82,311		$	(2,566	)	$	(3,072	)	$	339,310
Issuance of stock for stock options, net of excess tax benefits		-		88			-		(550	)		-			-			1,559			1,009
Issuance of stock awards		-		-			-		-			-			-			2			2
Stock based compensation expense		-		-			-		125			-			-			-			125
Net income		-		-			-		-			21,270			-			-			21,270		$	21,270
Other comprehensive loss, net of reclassifications and tax		-		-			-		-			-			(31,903	)		-			(31,903	)		(31,903	)
Cash dividends		-		-			-		-			(18,819	)		-			-			(18,819	)
Comprehensive loss																							$	(10,633	)
Balance, September 30, 2008		31,507		(86	)	$	31,507	$	230,705		$	84,762		$	(34,469	)	$	(1,511	)	$	310,994

Nine Months Ended September 30, 2007


	Common Stock		Treasury Stock					Additional						Accumulated Other
	Number of		Number of			Par		Paid			Retained			Comprehensive			Treasury						Comprehensive
	Shares		Shares			Value		In Capital			Earnings			Loss			Stock			Total			Income (Loss)

Balance, January 1, 2007		29,074		(109	)	$	29,074	$	194,713		$	79,339		$	(6,103	)	$	(2,272	)	$	294,751
Issuance of stock for stock options, net of tax and excess tax benefits		-		57			-		(266	)		-			-			1,060			794
Issuance of stock awards		-		-			-		(1	)		-			-			5			4
Stock based compensation expense		-		-			-		201			-			-			-			201
Net income		--		-			-		-			20,414			-			-			20,414		$	20,414
Other comprehensive loss, net of reclassifications and tax		-		-			-		-			-			(2,214	)		-			(2,214	)		(2,214	)
Purchase of treasury stock		-		(141	)		-		-			-			-			(2,196	)		(2,196	)
Cash dividends		-		-			-		-			(17,360	)		-			-			(17,360	)
Comprehensive income																							$	18,200
Balance, September 30, 2007		29,074		(193	)	$	29,074	$	194,647		$	82,393		$	(8,317	)	$	(3,403	)	$	294,394


See accompanying notes to consolidated financial statements.

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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine Months Ended
(Dollars in thousands)	September 30,
	2008			2007
Operating Activities:
Net income	$	21,270		$	20,414
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		7,647			6,075
Depreciation and amortization		5,071			3,728
Net amortization of investment securities discounts/premiums		811			1,394
Deferred income tax benefit		(3,327	)		(1,513	)
Gain on sales of investment securities, net		(225	)		(475	)
Bank-owned life insurance income		(2,047	)		(1,833	)
Stock based compensation expense		125			201
Net decrease (increase) in accrued interest receivable		427			(767	)
Net increase (decrease) in accrued interest payable		6,252			(9,411	)
Net (increase) decrease in other assets		(2,121	)		1,339
Net (decrease) increase in other liabilities		(2,401	)		1,263
Other, net		26			5
Net cash provided by operating activities		31,508			20,420
Investing Activities:
Proceeds from sales of investment securities available for sale		115,331			90,529
Proceeds from maturity or calls of investment securities held to maturity		4,300			―
Proceeds from maturity or calls of investment securities available for sale		129,703			110,710
Proceeds, redemption Federal Home Bank stock and reduction in other investments		5,504			6,774
Purchases of investment securities available for sale		(296,542	)		(225,371	)
Purchases of Federal Home Bank stock, Federal Reserve Bank stock and other investments		(8,549	)		(3,570	)
Net increase in loans		(83,518	)		(54,776	)
Net cash paid due to acquisitions, net of cash acquired		(1,200	)		(2,500	)
Purchases of premises and equipment		(6,563	)		(9,451	)
Proceeds from sales of premises and equipment		675			2
Proceeds from sales of other real estate		685			13
Net cash used in investing activities		(140,174	)		(87,640	)
Financing Activities:
Net decrease in deposits		33,218			27,485
(Decrease) increase in federal funds purchased and short-term securities sold under agreements to repurchase		(7,450	)		18,988
(Decrease) increase in other short-term borrowings		(852	)		549
Advances of long-term borrowings		80,000			125,000
Repayments of long-term borrowings		(33,000	)		(55,000	)
Proceeds from subordinated debt issuance		–			23,196
Cash dividends		(18,819	)		(17,360	)
Repurchase of common stock		–			(2,196	)
Proceeds from the exercise of stock options		847			753
Excess tax benefits from stock based compensation		155			3
Net cash provided by financing activities		54,099			121,418
Net (decrease) increase in cash and cash equivalents		(54,567	)		54,198
Cash and cash equivalents at beginning of period		209,403			124,870
Cash and cash equivalents at end of the period	$	154,836		$	179,068

Cash paid during the period for:
Interest	$	71,248		$	92,005
Income taxes	$	16,367		$	4,061
Supplemental disclosure of noncash investing and financing activities:
Transfer of assets from loans to net assets in foreclosure	$	1,882		$	51

See accompanying notes to consolidated financial statements.

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HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

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 (the Bank), HNC Financial Company and HNC Reinsurance Company, as of September 30, 2008, the results of its operations for the three and nine month periods ended September 30, 2008 and 2007 and the cash flows for the nine month periods ended September 30, 2008 and 2007. East Penn Financial Corporation (East Penn Financial) and its banking subsidiary are included in the Corporation’s results effective November 16, 2007. Certain prior period amounts have been reclassified to conform to current year presentation. All significant intercompany accounts and transactions have been eliminated in consolidation. We recommend that you read these unaudited consolidated financial statements in conjunction with the audited consolidated financial statements of the Corporation and the accompanying notes in the Corporation's 2007 Annual Report on Form 10-K. The results of operations for the three and nine month periods ended September 30, 2008 and 2007 are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the balance sheets and revenues and expenditures for the periods presented. Actual results could differ from those estimates.

For additional information on other significant accounting policies, see Note 1 of the Consolidated Financial Statements of the Corporation’s 2007 Annual Report on Form 10-K.

Recent Accounting Pronouncements

In September 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.” This FSP requires more detailed disclosures about credit derivatives, including the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of the instruments and certain guarantees. The provisions amending SFAS 133 and FIN 45 are effective for reporting periods (annual or interim) ending after November 15, 2008. The FSP also clarifies that the requirements of SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities” should be met for a reporting period that begins after November 15, 2008. This FSP is not anticipated to have a material impact on the Corporation’s financial statements as the Corporation does not have any credit derivatives or guarantees within the scope of this pronouncement.

In June 2008, the FASB issued FSP EITF Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” This EITF states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. EIFT 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. This staff position is not expected to have a material impact on the Corporation’s financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The provisions of SFAS 162 did not have a significant impact on the Corporation’s current practice.

In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This FSP clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” and specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and is not anticipated to have a material impact on the Corporation’s financial statements.

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Note 1 – Summary of Significant Accounting Policies – Continued

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset and expands disclosures under SFAS No. 142, “Goodwill and Other Intangible Assets.” Effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. FAS 142-3 is not expected to have a significant impact on the Corporation’s financials statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” SFAS 161 requires enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. Specifically, it requires that objectives for using derivatives instruments be disclosed in terms of underlying risk and accounting designation, disclosing the fair values of derivative instruments and their gains and losses in a tabular format, disclosure about credit-risk-related contingent features and cross-referencing within the footnotes. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 is not anticipated to have a material impact on the Corporation’s financial statements, although it will result in expanded disclosures.

In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP specifies that a transferor and transferee shall not separately account for a transfer of a financial asset and a related repurchase financing unless (a) the two transactions have a valid and distinct business or economic purpose for being entered into separately and (b) the repurchase financing does not result in the initial transferor regaining control over the financial asset. The two transactions shall be considered linked unless they meet all of the specified criteria in this FSP. The linked transaction should be evaluated to determine whether it meets the requirements for sale accounting under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” If the linked transaction does not meet the requirements for sale accounting, it should be accounted for based on the economics of the combined transaction which generally represents a forward contract. FAS 140-3 is effective prospectively for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Early application is not permitted. FAS 140-3 is not expected to have a material impact on the Corporation’s financial statements.

In January 2008, the FASB cleared SFAS 133 Implementation Issue E23, “Clarification of the Application of the Shortcut Method (Issue E23). Issue E23 amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” by permitting interest rate swaps to have a non-zero fair value at inception, as long as the difference between the transaction price (zero) and the fair value (exit price), as defined by SFAS 157, “Fair Value Measurements” is solely attributable to a bid-ask spread. In addition, entities would not be precluded from assuming no ineffectiveness in a hedging relationship of interest rate risk involving an interest bearing asset or liability in situations where the hedged item is not recognized for accounting purposes until settlement date as long as the period between trade date and settlement date of the hedged item is consistent with generally established conventions in the marketplace. Issue E23 is effective for hedging relationships designated on or after January 1, 2008. The adoption of Issue E23 did not have a material impact on the Corporation’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 clarifies the definition of fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Statement requires the Corporation to apply valuation techniques that (1) place greater reliance on observable inputs and less reliance on unobservable inputs and (2) are consistent with the market approach, the income approach, and/or the cost approach. The definition and framework apply to both items recognized and reported at fair value in the financial statements and items disclosed at fair value in the notes to the financial statements. The Statement also requires expanded disclosure in interim and annual financial statements about how the Corporation uses fair value. The disclosures focus on items measured at fair value based on significant unobservable inputs and the effect of fair value measurements on earnings. The disclosures are only required for items recognized and reported at fair value in the financial statements. The Statement does not change existing accounting rules governing what can or what must be recognized and reported at fair value in the Corporation’s financial statements, or disclosed at fair value in the Corporation’s notes to the financial statements. As a result, the Corporation will not be required to recognize any new instruments at fair value. SFAS 157 was effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, although earlier application was encouraged. Prospective application of the provisions of SFAS 157 was required as of the beginning of the fiscal year in which it was initially applied. In March 2008, the FASB issued FSP FAS 157-2 to partially delay the effective implementation of SFAS 157 until fiscal years beginning after November, 15, 2008 for all nonfinancial assets and liabilities except those that are recognized or disclosed at fair value in financial statements on a recurring basis (at least annually). Assets and liabilities currently reported or disclosed at fair value on a recurring basis in the Corporation’s financial statements include investment securities and derivatives. Assets reported at fair value on a nonrecurring basis (lower of cost or market) are impaired loans, residential mortgage loans held for sale and mortgage servicing rights The partial adoption of FAS 157 for its fiscal year beginning January 1, 2008 did not have a material impact on its financial statements. The Corporation is in the process of assessing the impact of the adoption of SFAS 157 for its fiscal year beginning January 1, 2009 relating to nonfinancial assets and liabilities on the Corporation’s financial statements including goodwill, other intangible assets and net assets in foreclosure. See Note 10 – Fair Value Measurements for additional information.

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Note 2 – Acquisitions

On May 20, 2008, the Corporation entered into a definitive agreement to acquire Willow Financial Bancorp, Inc. and its wholly owned subsidiary, Willow Financial Bank, a $1.6 billion bank with 29 banking offices in Southeastern Pennsylvania. Headquartered in King of Prussia, PA, Willow Financial Bank branch offices are located in Philadelphia, Montgomery, Chester, and Bucks Counties. The total value of the transaction at the agreement date, if it closed, was estimated at $162 million or approximately $10.28 per share of Willow Financial Bancorp stock, although actual value will depend on several factors, including the price of the Corporation’s stock. Under terms of the Merger Agreement, each share of Willow Financial Bancorp, Inc. will be exchanged for 0.73 shares of the Corporation’s stock. Following the transaction, current shareholders of the Corporation will own approximately 73% and current Willow Financial Bancorp shareholders will own approximately 27% of the combined company. The merger was approved by the shareholders of Willow Financial and the Corporation on September 9, 2008. The transaction has been approved by the Office of the Comptroller of the Currency and the Pennsylvania Department of Banking. The Office of Thrift Supervision has also not objected to the transaction, and the Corporation expects to receive approval from the Federal Reserve Board in November 2008. The transaction is expected to close in early December 2008.

Effective November 16, 2007, the Corporation completed its acquisition of East Penn Financial Corporation (East Penn Financial) and its wholly owned subsidiary, East Penn Bank, a $451 million state chartered, FDIC insured bank, was merged with and into Harleysville National Bank. East Penn Financial’s results of operations are included in the Corporation’s results from the date of acquisition, November 16, 2007. The aggregate purchase price was $91.3 million in cash and stock. The Corporation acquired 100% of the outstanding shares of East Penn Financial and issued 2,432,771 shares of its common stock. Goodwill of $63.9 million and a core deposit intangible of $7.4 million were recorded in connection with the acquisition of East Penn Financial and allocated to the Community Banking segment. These numbers include the finalized allocation of the purchase price based upon third party valuation of goodwill and certain intangible assets which occurred during the first six months of 2008.

Note 3 – Goodwill and Other Intangibles

Goodwill and identifiable intangibles were $110.3 million and $10.0 million, respectively at September 30, 2008, and $111.2 million and $10.6 million, respectively at December 31, 2007. The goodwill and identifiable intangibles balances resulted from acquisitions. During the first six months of 2008, the Corporation recorded purchase accounting adjustments related to the East Penn Financial acquisition which increased the core deposit intangible by $940,000 and reduced goodwill by $948,000. For further information related to the acquisition of East Penn Financial which occurred during the fourth quarter of 2007, see Note 2 – Acquisition.

The changes in the carrying amount of goodwill by business segment were as follows:

	Community Banking			Wealth Management		Total
	(Dollars in thousands)
Balance, January 1, 2008	$	96,426		$	14,729	$	111,155
Purchase accounting adjustments for acquisitions		(948	)		71		(877	)
Balance, September 30, 2008	$	95,478		$	14,800	$	110,278

The gross carrying value and accumulated amortization related to core deposit intangibles and other identifiable intangibles at September 30, 2008 and December 31, 2007 are presented below:

	September 30,						December 31,
	2008						2007
	Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
	(Dollars in thousands)
Core deposit intangibles		$	9,144		$	2,099	$	8,351	$	1,061
Other identifiable intangibles			4,293			1,350		4,288		927
Total		$	13,437		$	3,449	$	12,639	$	1,988

Management performed its annual review of goodwill and identifiable intangibles at June 30, 2008 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Management determined there was no impairment of goodwill and other identifiable intangible assets.

The remaining weighted average amortization period of core deposit intangibles is four years, other identifiable intangibles are seven years and the combined intangibles are five years. The amortization of core deposit intangibles allocated to the Community Banking segment was $390,000 and $56,000 for the third quarter of 2008 and 2007, respectively, and $1.2 million and $175,000 for the nine months ended September 30, 2008 and 2007, respectively. Amortization of identifiable intangibles related to the Wealth Management segment totaled $130,000 and $121,000 for the third quarter of 2008 and 2007, respectively, and $422,000 and $358,000 for the nine months ended September 30, 2008 and 2007, respectively. The Corporation estimates that aggregate amortization expense for core deposit and other identifiable intangibles will be $2.1 million, $1.9 million, $1.8 million, $1.6 million and $1.2 million for 2008, 2009, 2010, 2011 and 2012, respectively.

-9-

Note 3 – Goodwill and Other Intangibles– Continued

Mortgage servicing rights of $2.9 million and $2.7 million at September 30, 2008 and December 31, 2007, respectively, are included on the Corporation’s balance sheet in other intangible assets and subsequently measured using the amortization method. The mortgage servicing rights had a fair value of $3.2 million and $3.3 million at September 30, 2008 and December 31, 2007, respectively. The Corporation’s mortgage servicing rights are not considered material to its financial statements and therefore additional disclosures are not provided.

Note 4 - Pension Plans

The Corporation had a non-contributory defined benefit pension plan covering substantially all employees. The plan’s benefits were based on years of service and the employee’s average compensation during any five consecutive years within the ten-year period preceding retirement. On October 31, 2007, the Corporation announced that it formally amended its pension plan to provide for its termination. Employees ceased to accrue additional pension benefits as of December 31, 2007 , and pension benefits are not being provided under a successor pension plan. All retirement benefits earned in the pension plan as of December 31, 2007, were preserved and all participants became fully vested in their benefit upon plan termination. On July 3, 2008, the Corporation purchased $896,000 of terminal funding annuity contracts for participants presently in pay status. During 2008, it is anticipated that the majority of assets will be distributed to those participants who elect lump sum payments and annuities will be purchased for all other participants.

The Corporation recorded a one-time pre-tax charge related to the pension plan curtailment of approximately $1.9 million in the fourth quarter of 2007. The curtailment charge was recorded in other expenses in the statement of income and impacted the Community Banking and Wealth Management segments.

The components of net periodic benefit pension expense for the nine months ended September 30, 2008 and 2007 were as follows:

(Dollars in thousands)	Nine Months Ended September 30,
	2008		2007
Net periodic benefit cost
Service cost	$	―	$	875
Interest cost		―		512
Expected return on plan assets		―		(450	)
Amortization of net actuarial loss		―		57
Net periodic benefit expense	$	―	$	994

The Corporation maintains a 401(k) defined contribution retirement savings plan which allows employees to contribute a portion of their compensation on a pre-tax and/or after-tax basis in accordance with specified guidelines. Prior to January 1, 2008, the Corporation matched 50% of pre-tax employee contributions up to a maximum of 3% of eligible earnings. Effective January 1, 2008, in addition to the company match of up to 3%, all eligible employees began receiving a company funded basic contribution to the 401(k) plan equal to 2% of eligible earnings. For the three and nine months ended September 30, 2008, the basic company funded 401(k) contribution was $185,000 and $589,000 respectively.

Note 5 – Stock-Based Compensation

The Corporation has four shareholder approved fixed stock option plans that allow the Corporation to grant options up to an aggregate of 3,797,861 shares of common stock to key employees and directors. At September 30, 2008, 2,503,984 stock options had been granted under the stock option plans. The options have a term of ten years when issued and typically vest over a five-year period. The exercise price of each option is the market price of the Corporation’s stock on the date of grant. Additionally, at September 30, 2008, the Corporation had 25,480 assumed stock options from the East Penn Bank acquisition completed in 2007. The options have a term of ten years and are exercisable at prices ranging from $5.94 to $13.07.

The Corporation recognizes compensation expense for stock options in accordance with SFAS 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)) adopted at January 1, 2006 under the modified prospective application method of transition. Prior to January 1, 2006, the Corporation followed SFAS 123 and APB 25 with pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS 123 had been applied. The Corporation recognizes compensation expense for the portion of outstanding awards at January 1, 2006 for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 for pro forma disclosures. For the nine months ended September 30, 2008, there were no options granted.

For grants subject to a service condition that were awarded on or after January 1, 2006, the Corporation utilizes the Black-Scholes option-pricing model (as used under SFAS 123) to estimate the fair value of each option on the date of grant. The Black-Scholes model 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.

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Note 5 – Stock-Based Compensation– Continued

For grants subject to a market condition that were awarded in the third quarter of 2007, the Corporation utilized a Monte Carlo simulation to estimate the fair value and determine the derived service period. Compensation is recognized over the derived service period with any unrecognized compensation cost immediately recognized when the market condition is met. These awards vest when the Corporation’s common stock reaches targeted average trading prices for 30 days within five years from the grant date. Vesting cannot commence before six months from the grant date. The term and exercise price of the options are the same as previously mentioned. The fair value and derived service period (the median period in which the market condition is met) were determined using a Monte Carlo simulation with the following assumptions: weighted average dividend yield of 4.59% based on historical data, weighted-average expected volatility of 32.19% based on historical data, risk-free rate of 4.54% to 5.17%, weighted average expected life of 6.04 years and a uniform post-vesting exercise rate (mid-point of vesting and contractual term).

Expected volatility is based on the historical volatility of the Corporation’s stock over the expected life of the grant. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury strip rate in effect at the time of the grant. The life of the option is based on historical factors which include the contractual term, vesting period, exercise behavior and employee terminations.

In accordance with SFAS 123(R), stock-based compensation expense for the nine months ended September 30, 2008 and 2007 is based on awards that are ultimately expected to vest and therefore has been reduced for estimated forfeitures. The Corporation estimates forfeitures using historical data based upon the groups identified by management. Stock-based compensation expense was $40,000 and $13,000, net of tax for the third quarter of 2008 and $68,000 and $65,000, net of tax for the third quarter of 2007. Stock-based compensation expense was $125,000 and $88,000, net of tax for the nine-month period ending September 30, 2008 and $201,000 and $192,000, net of tax for the nine months ended September 30, 2007.

A summary of option activity under the Corporation’s stock option plans as of September 30, 2008, and changes during the nine months ended September 30, 2008 is presented in the following table. The number of shares and weighted-average share information have been adjusted to reflect stock dividends.

Options	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2008		1,113,499		$	15.74
Granted		—			—
Exercised		(88,592	)		9.46
Forfeited (unvested)		(9,275	)		21.08
Cancelled (vested)		(10,101	)		23.46

Outstanding at September 30, 2008		1,005,531		$	16.17		3.94	$	3,793

Exercisable at September 30, 2008		911,687		$	15.77		3.60	$	3,731

The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2008 and 2007 was $0 and $3.08, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2008 and 2007 was $490,000 and $398,000, respectively. Intrinsic value is measured using the fair market value price of the Corporation’s common stock less the applicable exercise price.

A summary of the status of the Corporation’s nonvested shares as of September 30, 2008 is presented below:

Nonvested Shares	Shares			Weighted-Average Grant-Date Fair Value

Nonvested at January 1, 2008		108,736		$	5.37

Granted		—			—

Vested		(5,615	)		6.07

Forfeited		(9,276	)		5.86

Nonvested at September 30, 2008		93,845		$	5.28

-11-

Note 5 – Stock-Based Compensation – Continued

As of September 30, 2008, there was a total of $202,000 of unrecognized compensation cost related to nonvested awards under stock option plans. This cost is expected to be recognized over a weighted-average period of 1.8 years. The total fair value of shares vested during the nine months ended September 30, 2008 and 2007 was $34,000 for each period. The tax benefit realized for the tax deductions from option exercises totaled $172,000 and $79,000 for the nine months ended September 30, 2008 and 2007, respectively.

Note 6 – Earnings Per Share

Basic earnings per share exclude dilution and are computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. All weighted average, actual shares and per share information in these financial statements have been adjusted retroactively for the effect of stock dividends.

The calculations of basic earnings per share and diluted earnings per share are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2008		2007		2008		2007

Basic earnings per share
Net income available to common shareholders	$	6,639	$	7,201	$	21,270	$	20,414
Weighted average common shares outstanding		31,385,257		28,881,006		31,363,779		28,930,073
Basic earnings per share	$	.21	$	.25	$	.68	$	.71

Diluted earnings per share
Net income available to common shareholders and assumed conversions	$	6,639	$	7,201	$	21,270	$	20,414
Weighted average common shares outstanding		31,385,257		28,881,006		31,363,779		28,930,073
Dilutive potential common shares (1), (2)		165,769		226,268		168,163		253,738
Total diluted weighted average common shares outstanding		31,551,026		29,107,274		31,531,942		29,183,811
Diluted earnings per share	$	.21	$	.25	$	.67	$	.70

(1)	Includes incremental shares from assumed conversions of stock options.

(2)

Antidilutive options have been excluded in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common stock. For the three months ended September 30, 2008 and 2007, there were 524,120 antidilutive options at an average price of $21.15 and 479,896 antidilutive options at an average price of $23.46, respectively. For the nine months ended September 30, 2008 and 2007, there were 524,120 antidilutive options at an average price of $21.15 and 465,425 antidilutive options at an average price of $23.66, respectively.

-12-

Note 7 – Comprehensive Loss and Accumulated Other Comprehensive Loss

The components of other comprehensive loss are as follows:

Comprehensive Loss

(Dollars in thousands)	Before tax			Tax Benefit			Net of tax
Nine months ended September 30, 2008	Amount			(Expense)			amount
Net unrealized losses on available for sale securities:
Net unrealized holding losses arising during period	$	(49,008	)	$	17,153		$	(31,855	)
Less reclassification adjustment for net gains realized in net income		225			(79	)		146
Net unrealized losses		(49,233	)		17,232			(32,001	)
Change in fair value of derivatives used for cash flow hedges		151			(53	)		98
Other comprehensive loss, net	$	(49,082	)	$	17,179		$	(31,903	)

(Dollars in thousands)	Before tax			Tax Benefit			Net of tax
Nine months ended September 30, 2007	Amount			(Expense)			Amount
Net unrealized losses on available for sale securities:
Net unrealized holding losses arising during period	$	(2,320	)	$	812		$	(1,508	)
Less reclassification adjustment for net gains realized in net income		475			(166	)		309
Net unrealized losses		(2,795	)		978			(1,817	)
Change in fair value of derivatives used for cash flow hedges		(611	)		214			(397	)
Other comprehensive loss, net	$	(3,406	)	$	1,192		$	(2,214	)

The components of other accumulated other comprehensive loss, net of tax, which is a component of shareholders’ equity were as follows:

(Dollars in Thousands)	Net Unrealized Losses on Available For Sale Securities			Net Change in Fair Value of Derivatives Used for Cash Flow Hedges			Net Change Related to Defined Benefit Pension Plan			Transition Asset Related to Defined Benefit Pension Plan		Accumulated Other Comprehensive Loss
Balance, January 1, 2007	$	(4,872	)	$	304		$	(1,579	)	$	44	$	(6,103	)
Net Change		(1,817	)		(397	)		-					(2,214	)
Balance, September 30, 2007	$	(6,689	)	$	(93	)	$	(1,579	)	$	44	$	(8,317	)

Balance, January 1, 2008	$	(2,452	)	$	(114	)	$	-		$	-	$	(2,566	)
Net Change		(32,001	)		98			-					(31,903	)
Balance, September 30, 2008	$	(34,453	)	$	(16	)	$	-		$	-	$	(34,469	)

Note 8 – Segment Information

The Corporation operates two main lines of business along with several other operating segments. SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for public business enterprises to report information about operating segments. Operating segments are components of an enterprise, which are evaluated regularly by the chief operating decision-maker in deciding how to allocate and assess resources and performance. The Corporation’s chief operating decision-maker is the President and Chief Executive Officer. The Corporation has applied the aggregation criteria set forth in SFAS No. 131 for operating segments establishing two reportable segments: Community Banking and Wealth Management.

The Community Banking segment provides financial services to consumers, businesses and governmental units primarily in southeastern Pennsylvania. These services include full-service banking, comprised of accepting time and demand deposits, making secured and unsecured commercial loans, mortgages, consumer loans, and other banking services. The treasury function income is included in the Community Banking segment, as the majority of effort of this function is related to this segment. Primary sources of income include net interest income and service fees on deposit accounts. Expenses include costs to manage credit and interest rate risk, personnel, and branch operational and technical support.

The Wealth Management segment includes: trust and investment management services, providing investment management, trust and fiduciary services, estate settlement and executor services, financial planning, and retirement plan and institutional investment services; and the Cornerstone Companies, registered investment advisors for high net worth, privately held business owners, wealthy families and institutional clients. Major revenue component sources include investment management and advisory fees, trust fees, estate and tax planning fees, brokerage fees, and insurance related fees. Expenses primarily consist of personnel and support charges. Additionally, the Wealth Management segment includes an inter-segment credit related to trust deposits which are maintained within the Community Banking segment using a transfer pricing methodology.

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Note 8 – Segment Information – Continued

The Corporation has also identified several other operating segments. These operating segments within the Corporation’s operations do not have similar characteristics to the Community Banking or Wealth Management segments and do not meet the quantitative thresholds requiring separate disclosure. These non-reportable segments include HNC Reinsurance Company, HNC Financial Company, and the parent holding company and are included in the “Other” category.

Information about reportable segments and reconciliation of the information to the consolidated financial statements follows:

(Dollars in thousands)	Community Banking		Wealth Management			All Other			Consolidated Totals
Three Months Ended September 30, 2008

Net interest income (expense)	$	26,365	$	169		$	(1,237	)	$	25,297
Provision for loan losses		2,580		-			-			2,580
Noninterest income		6,373		3,863			209			10,445
Noninterest expense		20,773		4,203			177			25,153
Income (loss) before income taxes (benefit)		9,385		(171	)		(1,205	)		8,009
Income taxes (benefit)		1,840		(49	)		(421	)		1,370
Net income (loss)	$	7,545	$	(122	)	$	(784	)	$	6,639

Three Months Ended September 30, 2007

Net interest income (expense)	$	21,348	$	117		$	(601	)	$	20,864
Provision for loan losses		2,525		-			-			2,525
Noninterest income		5,111		4,530			124			9,765
Noninterest expense		14,960		3,747			149			18,856
Income (loss) before income taxes (benefit)		8,974		900			(626	)		9,248
Income taxes (benefit)		1,974		332			(259	)		2,047
Net income (loss)	$	7,000	$	568		$	(367	)	$	7,201

(Dollars in thousands)	Community Banking		Wealth Management		All Other			Consolidated Totals
Nine Months Ended September 30, 2008

Net interest income (expense)	$	78,150	$	318	$	(3,775	)	$	74,693
Provision for loan losses		7,647		-		-			7,647
Noninterest income		19,578		12,796		499			32,873
Noninterest expense		60,463		12,133		733			73,329
Income (loss) before income taxes (benefit)		29,618		981		(4,009	)		26,590
Income taxes (benefit)		6,237		385		(1,302	)		5,320
Net income (loss)	$	23,381	$	596	$	(2,707	)	$	21,270

Assets	$	3,910,320	$	24,959	$	14,451		$	3,949,730

Nine Months Ended September 30, 2007

Net interest income (expense)	$	62,188	$	334	$	(1,666	)	$	60,856
Provision for loan losses		6,075		-		-			6,075
Noninterest income		15,021		13,631		515			29,167
Noninterest expense		46,005		11,001		770			57,776
Income (loss) before income taxes (benefit)		25,129		2,964		(1,921	)		26,172
Income taxes (benefit)		5,409		1,154		(805	)		5,758
Net income (loss)	$	19,720	$	1,810	$	(1,116	)	$	20,414

Assets	$	3,321,817	$	22,341	$	36,361		$	3,380,519

The accounting policies of the segments are the same as those described in the summary of significant accounting policies disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007. Consolidating adjustments reflecting certain eliminations of inter-segment revenues, cash and investment in subsidiaries are included in the “All Other” segment.

Note 9 – Financial Instruments with Off-Balance Sheet Risk

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

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Note 9 – Financial Instruments with Off-Balance Sheet Risk - Continued

The Bank’s maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amounts of those instruments. The Bank uses the same stringent credit policies in extending these commitments as they do for recorded financial instruments and controls exposure to loss through credit approval and monitoring procedures. These commitments often expire without being drawn upon and often are secured with appropriate collateral; therefore, the total commitment amount does not necessarily represent the actual risk of loss or future cash requirements.

The approximate contract amounts are as follows:

	Total Amount Committed at
Commitments	September 30, 2008		December 31, 2007
(Dollars in thousands)	September 30, 2008		December 31, 2007

Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	807,163	$	822,995
Standby letters of credit and financial guarantees written		34,698		23,473
Financial instruments whose notional or contract amounts exceed the amount of credit risk:
Interest rate swap agreements		116,944		58,928
Interest rate cap agreements		200,000		200,000

At September 30, 2008, the Corporation had a cash flow hedge with a notional amount of $5.0 million that has the effect of converting variable debt to a fixed rate. This swap matures in November of 2008. During the first quarter of 2008, cash flow hedges matured with a notional amount of $50.0 million that had the effect of converting rates on money market deposit accounts to a fixed-rate cost of funds. For both of these types of swaps, the Corporation recognized net interest expense of $31,000 and income of $73,000 for the three months ended September 30, 2008 and 2007, respectively and net interest expense of $177,000 and income of $325,000 for the nine months ended September 30, 2008 and 2007, respectively. Periodically, the Corporation may enter into fair value hedges to limit the exposure to changes in the fair value of loan assets. At September 30, 2008, the Corporation had a fair value hedge in the form of an interest rate swap with a notional amount of $1.9 million which matures in 2017. During the third quarter of 2008, the Corporation terminated a fair value hedge in the form of an interest rate swap with a notional amount of $2.0 million. The Corporation recognized net interest expense of $16,000 and income of $17,000 for the three months ended September 30, 2008 and 2007, respectively and $59,000 of net interest expense and income of $63,000 for the nine months ended September 30, 2008 and 2007, respectively related to these swaps. At September 30, 2008, the Corporation had swap agreements with a negative fair value of $144,000. At December 31, 2007, the Corporation had swap agreements with a positive fair value of $10,000 and with a negative fair value of $366,000. There was no hedge ineffectiveness recognized during the first nine months of 2008 and 2007.

During March 2007, the Corporation purchased one and three month Treasury bill interest rate cap agreements with notional amounts totaling $200 million to limit its exposure on variable rate NOW deposit accounts. The initial premium related to these caps was $73,000 which is being amortized to interest expense over the life of the cap based on the cap market value. The Corporation recognized amortization of $6,000 and $11,000 for the three and nine months ended September 30, 2008, respectively. At September 30, 2008 and December 31, 2007, these caps had a fair value of $0 and a positive fair value of $222, respectively. The caps mature in March 2009. Due to notional mismatch, $3,000 and $47,000 were recognized in other expense during the three and nine month periods ended September 30, 2008, respectively. There was no impact to earnings for the first nine months of 2007 related to the caps.

During 2008, the Company implemented a program to offer certain derivative products directly to qualified commercial borrowers. The Corporation economically hedges derivative transactions executed with commercial borrowers by entering into mirror-image, offsetting derivatives with a third party. Derivative transactions executed as part of this program are not designated in SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” as qualifying hedging relationships and are, therefore, marked-to-market through earnings each period. As of September 30, 2008, the fair value of the derivative assets and the fair value of the derivative liabilities were $854,000 and $715,000 respectively. The difference between the change in the fair value of the derivative assets and derivative liabilities of $139,000 which relates to the credit valuation adjustment in accordance with FAS 157, “Fair Value Measurements,” is recognized in other income.

The Bank also had commitments with customers to extend mortgage loans at a specified rate at September 30, 2008 and December 31, 2007 of $4.0 million and $3.4 million, respectively and commitments to sell mortgage loans at a specified rate at September 30, 2008 and December 31, 2007 of $1.6 million and $2.4 million, respectively. The commitments are accounted for as a derivative and recorded at fair value. The Bank estimates the fair value of these commitments by comparing the secondary market price at the reporting date to the price specified in the contract to extend or sell the loan initiated at the time of the loan commitment. At September 30, 2008, the Corporation had commitments with a positive fair value of $38,000 and a negative fair value of $4,000, the net amount which was recorded as other income. At December 31, 2007, the Corporation had commitments with a positive fair value of $19,000 and a negative fair value of $19,000.

-15-

Note 9 – Financial Instruments with Off-Balance Sheet Risk – Continued

During December 2004 and January 2005, the Bank sold lease financing receivables of $10.5 million. Of these leases, $1.2 million were sold with full recourse and the remaining leases were sold subject to recourse with a maximum exposure of ten percent of the outstanding receivable. The total recourse exposure at the time of the sale of the leases was $2.0 million. The Bank’s total recourse exposure at September 30, 2008 was $47,000. After the first anniversary of the sale agreement, and on a quarterly basis thereafter, upon written request by the Bank, the purchaser will review the portfolio performance and may reduce the total exposure to an amount equal to ten percent of the outstanding net book value. The Bank will be subject to the full and partial recourse obligations until all the lease financing receivables have been paid or otherwise been terminated and all equipment has been sold or disposed of. The final lease payment is due in 2010. The outstanding balance of these sold leases at September 30, 2008 was $307,000. At September 30, 2008 and December 31, 2007, the Bank had $3,000 and $17,000, respectively, on the balance sheet as a recourse liability.

Note 10 – Fair Value Measurements

Effective January 1, 2008, the Corporation adopted SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement. There have been no material changes in valuation techniques as a result of the adoption of SFAS No. 157.

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active for identical or similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and significant to the fair value of the assets or liabilities that are developed using the reporting entities’ estimates and assumptions, which reflect those that market participants would use.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

A description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis, as well as the classification of the instruments pursuant to the valuation hierarchy, are as follows:

Securities Available for Sale

Securities classified as available for sale are reported using Level 1 and Level 2 inputs. Level 1 instruments generally include equity securities valued based on quoted market prices in active markets. Level 2 instruments include U.S. government agency obligations, state and municipal bonds, mortgage-backed securities, collateralized mortgage obligations and corporate bonds. For these securities, the Corporation obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. Federal Home Loan Bank stock, Federal Reserve Bank stock and other investments which were classified as Level 3 securities available for sale in the Corporation’s previously issued financial statements were reclassified to a separate line item on the Corporation’s consolidated balance sheets as of December 31, 2007 and for September 30, 2008 since they do not have readily determinable fair values for purposes of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These investment securities are carried at cost and periodically evaluated for impairment. This presentation change is considered to be immaterial.

Derivative Financial Instruments

Currently, the Corporation uses cash flow hedges, fair value hedges and interest rate caps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

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Note 10 – Fair Value Measurements – Continued

The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below (rise above) the strike rate of the floors (caps). The variable interest rates used in the calculation of projected receipts on the floor (cap) are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of SFAS No. 157, the Corporation incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2008, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The Corporation also has commitments with customers to extend mortgage loans at a specified rate and commitments to sell mortgage loans at a specified rate. These interest rate and forward contracts for mortgage loans originated and intended for sale in the secondary market are accounted for as derivatives and carried at estimated fair value. The Corporation estimates the fair value of the contracts using current secondary loan market rates. The Corporation has determined that the inputs used to value its interest rate and forward contracts fall within Level 2 of the fair value hierarchy.

Assets and liabilities measured at fair value on a recurring basis are summarized below.

	Fair Value Measurement Using
(Dollars in thousands)	Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance September 30, 2008
Assets
Investment securities available for sale	$	13,525	$	898,574	$	—	$	912,099
Derivatives		—		893		—		893
Total assets	$	13,525	$	899,467	$	—	$	912,992
Liabilities
Derivatives	$	—	$	864	$	—	$	864
Total liabilities	$	—	$	864	$	—	$	864

Assets Measured at Fair Value on a Nonrecurring Basis

A description of the valuation methodologies and classification levels used for financial instruments measured at fair value on a nonrecurring basis are listed below. These listed instruments are subject to fair value adjustments (impairment) as they are valued at the lower of cost or market.

Mortgage Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. The Corporation estimates the fair value of mortgage loans held for sale using current secondary loan market rates. The Corporation has determined that the inputs used to value its mortgage loans held for sale fall within Level 2 of the fair value hierarchy. At September 30, 2008, loans held for sale were recorded at their carrying amount of $1.2 million. There were no write-downs for mortgage loans held for sale during the third quarter of 2008.

Impaired Loans

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Individually impaired loans are measured based on the fair value of the collateral for collateral dependent loans. The value of the collateral is determined based on an appraisal by qualified licensed appraisers hired by the Corporation or other observable market data which is readily available in the marketplace. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly. At September 30, 2008, impaired loans had a carrying amount of $21.5 million with a valuation allowance of $4.6 million. Impaired loans with a carrying amount of $19.8 million were evaluated during the first nine months of 2008 using the practical expedient fair value measurement which resulted in an additional valuation allowance of $2.8 million as compared to December 31, 2007.

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Note 10 – Fair Value Measurements – Continued

Mortgage Servicing Rights

The Corporation estimates the fair value of mortgage servicing rights based upon the present value of future cash flows using a current market discount rate appropriate for each investor group. Some of the primary components in valuing a servicing portfolio are estimates of anticipated prepayment, current market yields for servicing, reinvestment rate, servicing spread retained on the loans, and the cost to service each loan.

The Corporation’s entire portfolio consists of fixed rate loans with a remittance type of schedule/actual and a weighted average servicing fee of .25%. The market value calculation was based on long term prepayment assumptions obtained from Bloomberg for similar pools based on original term, remaining term, and coupon. Where prepayment assumptions for loan pools could not be obtained, projections based on current prepayments, secondary loan market, and input from servicing buyers were used. The Corporation has determined that the inputs used to value its mortgage servicing rights fall within Level 2 of the fair value hierarchy. At September 30, 2008, the Corporation’s mortgage servicing rights had a carrying amount of $2.9 million. In accordance with the provisions of SFAS No.156, “Amending Accounting for Separately Recognized Servicing Assets and Liabilities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” two pools of mortgage servicing rights with a carrying amount of $738,000 were written down to their fair value of $701,000 resulting in an impairment charge of $37,000 for the third quarter of 2008.

Certain assets measured at fair value on a non-recurring basis are presented below:

	Fair Value Measurement Using
(Dollars in thousands)	Balance September 30, 2008		Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Impaired loans	$	15,917	$	—	$	15,917	$	—
Mortgage servicing rights		701		—		701		—
Total assets	$	16,618	$	—	$	16,618	$	—

SFAS No. 157 Fair value measurement implementation for nonfinancial assets including goodwill and identifiable intangibles with balances of $110.3 million and $10.0 million, respectively at September 30, 2008 have been delayed until January 1, 2009 in accordance with SFAS No. 157-2.

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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. 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 within the meaning of the Private Securities Litigation Reform Act of 1995. We have made forward-looking statements in this report, 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,” “may,” “estimates,” or “intends” or similar expressions, we are making forward-looking statements. Forward-looking statements are representative only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement.

Shareholders should note that many factors, some of which are discussed elsewhere in this report 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 or implied in our forward-looking statements contained or incorporated by reference in this document. These factors include but are not limited to those described in Item 1A, “Risk Factors” in the Corporation’s 2007 Annual Report on Form 10-K and in this Form 10-Q.

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 1 of the consolidated financial statements in this Form 10-Q and in the Corporation’s 2007 Annual Report on Form 10-K 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. Judgments 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 historical losses, 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” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived 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 valuation methods: dividend discount analysis under the income approach, which calculates the present value of all excess cash flows plus the present value of a terminal value and market multiples (pricing ratios) under the market approach. Management performed its annual review of goodwill and other identifiable intangibles at June 30, 2008 and determined there was no impairment of goodwill or other identifiable intangibles. No assurance can be given that future impairment tests will not result in a charge to earnings.

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Stock-based Compensation: The Corporation recognizes compensation expense for stock options in accordance with SFAS 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)) adopted at January 1, 2006 under the modified prospective application method of transition. The expense of the option is generally measured at fair value at the grant date with compensation expense recognized over the service period, which is usually the vesting period. The Corporation utilizes the Black-Scholes option-pricing model (as used under SFAS 123) to estimate the fair value of each option on the date of grant. The Black-Scholes model 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. For grants subject to a market condition, the Corporation utilizes a Monte Carlo simulation to estimate the fair value and determine the derived service period. Compensation is recognized over the derived service period with any unrecognized compensation cost immediately recognized when the market condition is met. 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 accordance with SFAS 123(R), the Corporation estimates the number of options for which the requisite service is expected to be rendered.

Unrealized Gains and Losses on 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 as well as tax-exempt municipal bonds and U.S. government agency securities. The Corporation uses various indicators in determining whether a security is other-than-temporarily impaired, including for equity securities, if the market value is below its cost for an extended period of time with low expectation of recovery or for debt securities, when it is probable that the contractual interest and principal will not be collected. The debt securities are monitored for changes in credit ratings. Adverse changes in credit ratings would affect the estimated cash flows of the underlying collateral or issuer. The unrealized losses associated with the securities portfolio, that management has the ability and intent to hold, are not considered to be other-than temporary as of September 30, 2008 because the unrealized losses are primarily related to changes in interest rates and current market conditions, however, we do not see any negative effect on the expected cash flows of the underlying collateral or issuer. The unrealized losses are affecting all portfolio sectors with collateralized mortgage obligation securities and preferred securities having the largest reductions.

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’s net income for the third quarter of 2008 was $6.6 million, or $.21 per diluted share, for the third quarter of 2008, compared to $7.2 million or $.25 per diluted share for the third quarter of 2007. For the nine months ended September 30, 2008, net income was $21.3 million or $.67 per diluted share compared to $20.4 million or $.70 per diluted share during the comparable period in 2007. Net income for the third quarter and year to date 2008 included pre-tax merger costs of $974,000, or $.02 per diluted share related to the acquisition of Willow Financial Bancorp, Inc. expected to close during the fourth quarter of 2008. These charges include system conversion, integration consulting and severance expenses associated with the acquisition. Harleysville expects to incur additional merger-related expenses in the fourth quarter of 2008.

Despite the difficult economic environment and the turmoil in the financial markets, the Corporation’s third quarter 2008 performance was stable. Earnings, excluding merger costs, were level on a sequential basis. Loan and deposit growth from September 2008 compared to September 2007 was largely driven by a combination of organic loan growth of $111.7 million and deposit growth of $87.2 million along with the impact of the East Penn Financial acquisition, which closed in November 2007. The 2008 year-to-date financial results include the impact on operations from the acquisition of East Penn Financial effective November, 16, 2007 and the related issuance of 2,432,771 shares of the Corporation’s common stock. The following is an overview of the key financial highlights:

Total assets were $3.9 billion at September 30, 2008, an increase of 16.8% from $3.4 billion at September 30, 2007. Loans were $2.5 billion, an increase of 21.1% from $2.1 billion at September 30, 2007. Deposits were $3.0 billion, up 18.6% from $2.5 billion at September 30, 2007. Total assets at September 30, 2008 remained level with total assets reported at the year ended December 31, 2007. Loans grew by $78.1 million and deposits increased by $33.2 million since year-end.

The annualized return on average shareholders’ equity was 8.20% for the third quarter of 2008 as compared to 9.86% for the same period in 2007. The annualized return on average assets was 0.68% during the third quarter of 2008 in comparison to 0.86% for the third quarter of 2007.

Net interest income on a tax equivalent basis in the third quarter of 2008 increased $4.8 million or 21.6% from the same period in 2007 mainly as a result of a decrease in customer deposit costs and the East Penn acquisition as well as organic loan growth. Third quarter 2008 net interest margin was 3.02%, increasing 14 basis points year over year and decreasing 4 basis points sequentially.

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Nonperforming assets were $38.8 million at September 30, 2008. Nonperforming assets as a percentage of total assets were 0.98% at September 30, 2008, compared to 1.01% at June 30, 2008 and 0.46% at September 30, 2007. Net charge-offs for the third quarter of 2008 were $2.1 million, compared to $1.5 million in the same period of 2007. The allowance for credit losses increased to $31.7 million at September 30, 2008, compared to $31.2 million at June 30, 2008, and $22.6 million at September 30, 2007.

Results of Operations

Net income is affected by five major elements: (1) net interest income, or the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds; (2) the provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for inherent losses on loans; (3) noninterest income, which is made up primarily of certain fees, wealth management income and gains and losses from sales of securities or other transactions; (4) noninterest expense, which consists primarily of salaries, employee benefits and other operating expenses; and (5) income taxes. Each of these major elements will be reviewed in more detail in the following discussion.

Adoption of Fair Value Measurements Accounting Standard

As previously discussed in Note 1 – Summary of Significant Accounting Policies and Note 10– Fair Value Measurements, the Corporation adopted SFAS No. 157, “Fair Value Measurements” effective January 1, 2008. The adoption of SFAS 157 did not have a material impact on the Corporation’s financial statements, although it resulted in expanded disclosures as indicated in Note 1 and Note 10.

Net Interest Income

Net interest income on a tax equivalent basis in the third quarter of 2008 increased $4.8 million or 21.6% from the same period in 2007 and increased $14.9 million or 22.7% for the first nine months of 2008 from the comparable period in 2007 mainly as a result of a decrease in customer deposit costs and the East Penn acquisition as well as organic loan growth.

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 three and nine months ended September 30, 2008 compared to September 30, 2007 by their volume and rate components. The change attributable to both volume and rate has been allocated proportionately.

Table 1—Analysis of Changes in Net Interest Income—Fully Taxable-Equivalent Basis

	Three Months Ended September 30, 2008 compared to September 30, 2007									Nine Months Ended September 30, 2008 compared to September 30, 2007
(Dollars in thousands)
	Total			Due to change in:						Total			Due to change in:
	Change			Volume			Rate			Change			Volume			Rate
Increase (decrease) in interest income:
Investment securities *	$	1,299		$	946		$	353		$	4,514		$	3,568		$	946
Federal funds sold and deposits in banks		(429	)		(25	)		(404	)		(1,508	)		(357	)		(1,151	)
Loans *		447			6,933			(6,486	)		6,305			20,341			(14,036	)
Total		1,317			7,854			(6,537	)		9,311			23,552			(14,241	)

Increase (decrease) in interest expense:
Savings and money market deposits		(6,496	)		(119	)		(6,377	)		(17,676	)		65			(17,741	)
Time deposits		3,324			4,586			(1,262	)		11,744			13,537			(1,793	)
Borrowed funds		(341	)		913			(1,254	)		378			2,923			(2,545	)
Total		(3,513	)		5,380			(8,893	)		(5,554	)		16,525			(22,079	)

Net increase in net interest income	$	4,830		$	2,474		$	2,356		$	14,865		$	7,027		$	7,838
*Tax equivalent basis using a tax rate of 35%, net

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

Table 2—Average Balance Sheets and Interest Rates¾Fully Taxable-Equivalent Basis

(Dollars in thousands)	Three Months Ended September 30,							Three Months Ended September 30,
	2008							2007

	Average				Average			Average				Average
Assets	Balance		Interest		Rate			Balance		Interest		Rate
Earning assets:
Investment securities:
Taxable investments	$	701,626	$	9,518		5.40	%	$	669,051	$	8,769		5.20	%
Nontaxable investments (1)		301,275		4,554		6.01			264,621		4,004		6.00
Total investment securities		1,002,901		14,072		5.58			933,672		12,773		5.43
Federal funds sold and deposits in banks		55,519		232		1.66			57,841		661		4.53
Loans (1) (2)		2,522,034		37,541		5.91			2,090,440		37,094		7.04
Total earning assets		3,580,454		51,845		5.76			3,081,953		50,528		6.50
Noninterest-earning assets		319,139							227,563
Total assets	$	3,899,593						$	3,309,516

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and money market	$	1,350,412		5,780		1.70		$	1,363,803		12,276		3.57
Time		1,225,220		12,976		4.21			801,334		9,652		4.78
Total interest-bearing deposits		2,575,632		18,756		2.90			2,165,137		21,928		4.02
Borrowed funds		582,832		5,889		4.02			501,752		6,230		4.93
Total interest bearing liabilities		3,158,464		24,645		3.10			2,666,889		28,158		4.19
Noninterest-bearing liabilities:
Demand deposits		348,183							312,123
Other liabilities		70,869							40,676
Total noninterest-bearing liabilities		419,052							352,799
Total liabilities		3,577,516							3,019,688
Shareholders' equity		322,077							289,828
Total liabilities and shareholders' equity	$	3,899,593						$	3,309,516
Net interest spread						2.66							2.31
Effect of noninterest-bearing sources						0.36							0.57
Net interest income/margin on earning assets			$	27,200		3.02	%			$	22,370		2.88	%

Less tax equivalent adjustment				1,903							1,506
Net interest income			$	25,297						$	20,864

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(Dollars in thousands)	Nine Months Ended September 30,							Nine Months Ended September 30,
	2008							2007

	Average				Average			Average				Average
Assets	Balance		Interest		Rate			Balance		Interest		Rate
Earning assets:
Investment securities:
Taxable investments	$	731,870	$	28,894		5.27	%	$	676,787	$	25,821		5.10	%
Nontaxable investments (1)		293,371		13,290		6.05			261,458		11,849		6.06
Total investment securities		1,025,241		42,184		5.50			938,245		37,670		5.37
Federal funds sold and deposits in banks		56,825		1,045		2.46			67,548		2,553		5.05
Loans (1) (2)		2,492,498		114,013		6.11			2,070,931		107,708		6.95
Total earning assets		3,574,564		157,242		5.88			3,076,724		147,931		6.43
Noninterest-earning assets		307,982							221,173
Total assets	$	3,882,546						$	3,297,897

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and money market	$	1,387,554		19,536		1.88		$	1,385,133		37,212		3.59
Time		1,208,467		40,414		4.47			806,638		28,670		4.75
Total interest-bearing deposits		2,596,021		59,950		3.08			2,191,771		65,882		4.02
Borrowed funds		545,701		17,068		4.18			458,523		16,690		4.87
Total interest bearing liabilities		3,141,722		77,018		3.27			2,650,294		82,572		4.17
Noninterest-bearing liabilities:
Demand deposits		337,739							311,491
Other liabilities		69,531							43,915
Total noninterest-bearing liabilities		407,270							355,406
Total liabilities		3,548,992							3,005,700
Shareholders' equity		333,554							292,197
Total liabilities and shareholders' equity	$	3,882,546						$	3,297,897
Net interest spread						2.61							2.26
Effect of noninterest-bearing sources						0.39							0.58
Net interest income/margin on earning assets			$	80,224		3.00	%			$	65,359		2.84	%

Less tax equivalent adjustment				5,531							4,503
Net interest income			$	74,693						$	60,856

(1)	The interest earned on nontaxable investment securities and loans is shown on a tax equivalent basis, net of deductions (tax rate of 35%).

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

Interest income on a tax equivalent basis in the third quarter of 2008 increased $1.3 million, or 2.6% over the same period in 2007. This increase was primarily due to higher average loans of $431.6 million and higher average investment securities of $69.2 million partially offset by a 113 basis points reduction in the average rate earned on loans. The growth in average loans of 20.6% over the third quarter of last year was mainly as a result of the East Penn Financial acquisition as well as organic loan growth. Loan rates have declined from the third quarter of 2007 to the third quarter of 2008 due to market credit and liquidity conditions resulting in the Federal Open Market Committee reducing overnight rates 275 basis points and the subsequent change in the yield curve. Interest expense decreased $3.5 million, or 12.5% during the third quarter of 2008 versus the comparable period in 2007 mainly attributed to a 112 basis point reduction in the average rate paid on deposits partially offset by higher deposit volume from the East Penn Financial acquisition. The Corporation’s lower cost of funds have resulted from the short-term rate reductions during the fourth quarter of 2007 and the first quarter of 2008 by the Federal Open Market Committee as well as the Corporation’s continued emphasis on lower rate deposit products.

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Net Interest Margin

The third quarter 2008 net interest margin was 3.02%, an increase of 26 basis points compared to the fourth quarter of 2007 and 14 basis points over the third quarter of 2007. Decreases in customer deposit costs have outpaced yield decreases in loans. The steepening of the yield curve and the acquisition of East Penn Bank have contributed to the improved margin.

Interest Rate Sensitivity Analysis

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

The Corporation actively manages its interest rate sensitivity positions. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve consistent growth in net interest income. The Asset/Liability Committee, using policies and procedures approved by the Corporation’s Board of Directors, is responsible for managing the rate sensitivity position. The Corporation manages interest rate sensitivity by changing the mix and repricing characteristics of its assets and liabilities through the management of its investment securities portfolio, its offering of loan and deposit terms and through wholesale borrowings from several providers, but primarily the Federal Home Loan Bank (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. 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. Interest rate caps are purchased contracts that limit the exposure from the repricing of liabilities in a rising rate environment.

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The Corporation uses three principal reports to measure interest rate risk: (1) asset/liability simulation reports; (2) gap analysis reports; and (3) net interest margin reports. Management also simulates possible economic conditions and interest rate scenarios in order to quantify the impact on net interest income. The effect that changing interest rates have on the Corporation’s net interest income is simulated by increasing and decreasing interest rates. This simulation is known as rate shocking. The results of the September 30, 2008 net interest income rate shock simulations show that the Corporation is within guidelines set by the Corporation's Asset/Liability Policy when modeled rates increase 100 or 200 basis points and decrease 100 basis points. In rates shocked down 200 basis points, net interest income is projected to be -10.56%, respectively, which is outside the policy guideline of -8.00%. This is due to the low current interest rate environment. When rates are shocked down 200 basis points, the rates on core deposits hit internally established minimums and are unable to reprice down the full 200 basis points, while interest earning assets can reprice down the full 200 basis points. The Corporation constantly monitors this position and takes steps to minimize any reduction in net interest income.

The report below forecasts changes in the Corporation’s market value of equity under alternative interest rate environments as of September 30, 2008. The market value of equity is defined as the net present value of the Corporation’s existing assets and liabilities. The Corporation is within guidelines set by the Corporation’s Asset/Liability Policy for the percentage change in the market value of equity.

Table 3—Market Value of Equity

			Change in						Asset/Liability
	Market Value		Market Value			Percentage			Approved
(Dollars in thousands)	of Equity		Of Equity			Change			Percent Change

+300 Basis Points	$	228,458	$	(107,114	)		-31.92	%		+/- 35	%
+200 Basis Points		268,218		(67,354	)		-20.07	%		+/- 25
+100 Basis Points		305,474		(30,098	)		-8.97	%		+/- 15
Flat Rate		335,572		-			0.00	%
-100 Basis Points		342,937		7,365			2.19	%		+/- 15
-200 Basis Points		324,152		(11,420	)		-3.40	%		+/- 25
-300 Basis Points		294,353		(41,219	)		-12.28	%		+/- 35

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 portfolio through the sale or purchase of securities with more favorable repricing attributes. It could also emphasize growth in loan products with appropriate maturities or repricing attributes, or attract deposits or obtain borrowings with desired maturities.

Provision for Loan Losses

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

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The Corporation performs periodic evaluations of the allowance for loan losses that include both historical, internal and external factors. The actual allocation of reserve is a function of the application of these factors to arrive at a reserve for each portfolio type. Management assigns credit ratings and individual factors to individual groups of loans. Changes in concentrations and quality are captured in the analytical metrics used in the calculation of the reserve. The components of the allowance for credit losses consist of both historical losses and estimates. 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 Corporation’s allowance for loan losses components includes the following: historical loss estimation by loan product type and by risk rating within each product type, payment (past due) status, industry concentrations, internal and external variables such as economic conditions, credit policy and underwriting changes and results of the loan review process. The Corporation’s 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 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 nonaccrual, by credit product.

The historical loss components of the allowance for commercial and industrial loans and commercial real estate loans (collectively “commercial loans”) are based principally on current risk ratings, historical loss rates adjusted, by adjusting the risk window, to reflect current events and conditions, as well as analyses of other factors that may have affected the collectibility of loans. All commercial loans with an outstanding balance over $500,000 are subject to review on an annual basis. Samples of commercial loans with a “pass” rating are individually reviewed annually. Commercial loans that management determines to be potential problem loans are individually reviewed, at a minimum, annually. The review is accomplished via a management tool known as the Watchlist Memorandum, and is designed to determine whether such loans are individually impaired, with impairment measured by reference to the collateral coverage and/or debt service coverage. Consumer credit and residential real estate reviews are limited to those loans reflecting delinquent payment status. Homogeneous loan pools, including consumer and 1-4 family residential mortgages are not subject to individual review but are evaluated utilizing risk factors such as concentration of one borrower group. The historical loss component of the allowance for these loans is based principally on loan payment status, retail classification and historical loss rates, adjusted by altering the risk window, to reflect current events and conditions.

The industry concentration component is recognized as a possible factor in the estimation of loan losses. Two industries represent possible concentrations: commercial real estate and consumer loans relying on residential home equity. 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 a judgmental component (environmental factors) that reflects management’s belief that there are additional inherent credit losses based on loss attributes not adequately captured in the lagging indicators. The environmental factors are based upon management’s review of trends in the Corporation’s primary market area as well as regional and national economic trends. Management utilizes various economic factors that could impact borrowers’ future ability to make loan payments such as changes in the interest rate environment, product supply shortages, and negative industry specific events. Management utilizes relevant articles from newspapers and other publications that describe the economic events affecting specific geographic areas and other published economic reports and data. 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 risk management staff to assess the direction of credit risk and its instant effect on losses. It is important to continue to use experiential data to confirm risk as measurable losses will continue to manifest themselves at higher than normal levels even after the economic cycle has begun an upward swing and lagging indicators begin to show improvement. The judgmental component is allocated to the specific segments of the portfolio based on the historic loss component.

The provision for loan losses remained relatively level at $2.6 million during the third quarter of 2008 as compared to $2.5 million during the third quarter of 2007. For the nine months ended September 30, 2008, the provision for loan losses increased to $7.6 million from $6.1 million for the same period in 2007. The increase in the provision was primarily due to the increase in the level of non-performing assets. Nonperforming assets as a percentage of total assets were 0.98% at September 30, 2008, compared to 0.46% at September 30, 2007. Net loans charged-off were $3.3 million during the nine months of 2008 as compared to $4.6 million in the same period in 2007.

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

Table 4—Allowance for Loans Losses

	Nine Months Ended
	September 30,
(Dollars in thousands)	2008			2007

Average loans	$	2,492,498		$	2,070,931

Allowance, beginning of period		27,328			21,154
Loans charged off:
Real estate		2,013			2,987
Commercial and industrial		751			819
Consumer		1,268			1,178
Lease financing		4			51
Total loans charged off		4,036			5,035
Recoveries:
Real estate		377			67
Commercial and industrial		66			136
Consumer		280			207
Lease financing		6			18
Total recoveries		729			428
Net loans charged off		3,307			4,607
Provision for loan losses		7,647			6,075
Allowance, end of period	$	31,668		$	22,622
Ratio of net charge offs to average
loans outstanding (annualized)		0.18	%		0.30	%

The following table sets forth an allocation of the allowance for loan losses by loan category. The specific allocations in any particular category may be reallocated in the future to reflect then current conditions. Accordingly, management considers the entire allowance to be available to absorb losses in any category.

Table 5—Allocation of the Allowance for Loan Losses by Loan Type

The factors affecting the allocation of the allowance during the nine-month period ended September 30, 2008 were changes in credit quality resulting from increases in criticized commercial and industrial loans and real estate loans. The allocation of the allowance for commercial and industrial loans at September 30, 2008 increased $2.5 million from December 31, 2007 primarily due to an increase in criticized loans and a 100 basis point increase in the loss ratio for substandard loans. The allocation of the allowance for real estate loans increased $1.4 million mostly due to an increase in criticized commercial and residential real estate loans and a 250 basis point increase in the loss ratio for substandard residential real estate loans. The allocation of the allowance for consumer loans increased $367,000 mostly due to a shift from fixed rate home equity loans to variable rate home equity credit lines which carry a higher loss ratio. There was no material change in the allocation of the allowance for lease financing at September 30, 2008 compared to December 31, 2007. There were no significant changes in the estimation methods and assumptions including environmental factors, loan concentrations or terms that impacted the allowance during the first nine months of 2008. The interest rate environment as well as weakening in the commercial real estate market has moderately increased our allowance allocation in concert with the historical trends. It is expected that the negative trends in the real estate industry will continue to affect credit quality into 2009. The growth in the loan portfolio and the change in the mix will result in an adjustment to the amount of the allowance allocated to each category based upon historical loss trends and other factors.

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The following table sets forth an allocation of the allowance for loan losses by category. The specific allocations in any particular category may be reallocated in the future to reflect then current conditions. Accordingly, management considers the entire allowance to be available to absorb losses in any category.

	September 30, 2008					December 31, 2007
			Percent of					Percent of
(Dollars in thousands)	Amount		Allowance			Amount		Allowance

Real estate	$	11,938		38	%	$	10,491		38	%
Commercial
and industrial		14,869		47	%		12,340		45	%
Consumer		4,852		15	%		4,485		17	%
Lease financing		9		-	%		12		-	%
Total	$	31,668		100	%	$	27,328		100	%

Nonperforming Assets

Nonperforming assets (including nonaccruing loans, net assets in foreclosure and loans past due 90 days or more past due) were 0.98% of total assets at September 30, 2008, compared to 0.56% at December 31, 2007, and 0.46% at September 30, 2007. The increase in nonaccrual loans at September 30, 2008, in relation to December 31, 2007, of $15.2 million was mainly attributable to commercial and industrial, commercial real estate, construction and residential real estate loans. The borrowers associated with these nonaccrual loans are generally unrelated and are primarily located in our market area and in most cases, for the residential real estate, our collateral is local land that has been subdivided for residential development in the growing counties of the Philadelphia suburbs and the Lehigh Valley. We understand these markets and are confident that we can manage the collateral, if necessary. In response to the situation, the Corporation increased its allowance for loan losses to approximately 1.25% of outstanding loans at June 30, 2008, and the allowance ratio remained at this level at September 30, 2008. We continue to evaluate appraisals, financial reviews and inspections. All mortgage loans within our portfolio were booked with traditional bank customers through our branch network. We have virtually no exposure to subprime borrowers – a benefit of our historically careful approach to residential mortgage lending. We continue to take a conservative approach to our lending and loan review practices. With the expectation of continued economic pressures, management continues to provide more resources to resolve troubled credits including an increased focus on earlier identification of potential problem loans and a more active approach to managing the level of criticized loans that have not reached nonaccrual status.

Net assets in foreclosure increased $1.2 million from December 31, 2007 due to the foreclosure and subsequent transfer to OREO of one construction loan which defaulted during the fourth quarter of 2007. The Bank has assumed the rights to an agreement with a homebuilder, who has been constructing homes on the site, to purchase remaining lots in the development at a fixed price which is expected to result in full payment of the loan. Foreclosed assets are carried at the lower of cost (lesser of carrying value of asset or fair value at date. 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. Efforts to liquidate assets acquired in foreclosure proceed as quickly as potential buyers can be located and legal constraints permit. 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.

The following table presents information concerning nonperforming assets. Nonperforming assets include loans that are in nonaccrual status or 90 days or more past due and loans that are in the process of foreclosure.

Table 6—Nonperforming Assets

(Dollars in thousands)	September 30, 2008			December 31, 2007			September 30, 2007

Nonaccrual loans	$	36,278		$	21,091		$	14,507
Loans 90 days or more past due		1,275			857			1,119
Total nonperforming loans		37,553			21,948			15,626
Net assets in foreclosure		1,221			28			28
Total nonperforming assets	$	38,774		$	21,976		$	15,654

Allowance for loan losses to nonperforming loans		84.3	%		124.5	%		144.8	%
Nonperforming loans to total net loans		1.50	%		0.90	%		0.75	%
Allowance for loan and lease losses to total loans		1.25	%		1.11	%		1.08	%
Nonperforming assets to total assets		0.98	%		0.56	%		0.46	%

Locally located real estate, most with acceptable loan to value ratios, secures many of the nonperforming loans.

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The following table presents information concerning impaired loans. Impaired loans are loans for which it is probable that all principal and interest will not be collected according to the contractual terms of the loan agreement. Impaired loans are included in the nonaccrual loan total. The increase in impaired loans at September 30, 2008 of $11.7 million compared to December 31, 2007 was mostly due to the previously aforementioned increases in nonaccrual commercial real estate, construction and residential real estate loans.

Table 7—Impaired Loans

(Dollars in thousands)	September 30, 2008		December 31, 2007		September 30, 2007

Impaired Loans	$	21,509	$	9,803	$	5,604

Average year-to-date impaired loans	$	16,259	$	7,539	$	7,613

Impaired loans with specific loss allowances	$	21,509	$	9,803	$	5,604

Loss allowances reserved on impaired loans	$	4,572	$	2,229	$	1,320

Year-to-date income recognized on impaired loans	$	137	$	31	$	31

The Bank’s policy for interest income recognition on impaired 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.

Noninterest Income

Noninterest income was $10.4 million for the third quarter of 2008, an increase of $680,000 or 7.0% from $9.8 million in the third quarter of 2007, driven by growth in service charges on deposits, partially offset by a decrease in wealth management income. Service charges on deposits of $3.4 million increased by $964,000 or 39.2% primarily from increased return check and overdraft fees as well East Penn deposit accounts. Wealth management income of $3.8 million decreased by $746,000, or 16.5% during the third quarter of 2008 as compared to the same period in 2007 mostly due to a lower level of life insurance revenue from Cornerstone. Major revenue component sources of wealth management income include investment management and advisory fees, trust fees, estate and tax planning fees, brokerage fees, and insurance related fees. Other income during the third quarter of 2008 also included a higher level of automated teller machine and point of sale revenue over the third quarter of 2007. For the nine-month period ended September 30, 2008, non-interest income was $32.9 million, an increase of $3.7 million, or 12.7% from the same period in 2007, primarily due to the previously aforementioned increases in service charges on deposits and automated teller machine and point of sale revenue partially offset by the decrease in wealth management income. Other income included a gain of $302,000 from the mandatory redemption of Visa Class B stock in conjunction with Visa’s initial public offering during the first quarter of 2008. Net security gains were $225,000 during the first nine months of 2008 compared to $475,000 during the comparable period in 2007.

Noninterest Expense

Noninterest expense was $25.2 million for the third quarter of 2008, an increase of $6.3 million or 33.4% from $18.9 million in the third quarter of 2007, and was $73.3 million, an increase of $15.6 million or 26.9% for the nine months ended September 30, 2008, over the comparable period in 2007. These increases were primarily driven by the acquisition of East Penn Financial, charges related to the upcoming merger with Willow Financial Bancorp as well as branch expansion. Salaries and benefits expense rose $1.8 million during the third quarter of 2008 and $5.8 million during the first nine months of 2008 primarily due to higher staffing levels resulting from the East Penn Financial acquisition and branch expansion. Occupancy expenses increased $681,000 and $2.5 million for the three and nine months ended September 30, 2008, respectively over the comparable periods in 2007, mainly due to the addition of the East Penn branches as well as rent expense on the bank properties in the sale-leaseback transaction completed in the fourth quarter of 2007. Other expenses increased $2.9 million and $6.3 million for the three and nine month periods ended September 30, 2008, respectively over the same periods in 2007 mostly due to additional professional and consulting fees, FDIC insurance assessments and the identifiable intangible asset amortization related to the East Penn acquisition.

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Income Taxes

The effective income tax rates for the three months and nine months ended September 30, 2008 were 17.1% and 20.0%, respectively versus the applicable federal statutory rate of 35% and the applicable state tax rates. The effective income tax rates for the three and nine months ended September 30, 2007 were 22.1% and 22.0%, respectively. The Corporation’s effective rates during 2008 and 2007 were lower than the statutory tax rate primarily as a result of tax-exempt income earned from state and municipal securities and loans and bank-owned life insurance. The effective income tax rates for 2008 were lower than the same periods in 2007 primarily due to a higher level of tax exempt income during 2008 as well as lower net income during the third quarter of 2008 compared to the third quarter of 2007.

Balance Sheet Analysis

Total assets at September 30, 2008 remained level with total assets reported at the year ended December 31, 2007. Loans grew by $78.1 million at September 30, 2008 since December 31, 2007 primarily in the commercial mortgage and commercial and industrial portfolios. Other assets were $23.9 million higher at September 30, 2008 compared to December 31, 2007 mostly due to the increase in deferred tax resulting from the increase in unrealized losses on investment securities available for sale. Deposits grew by $33.2 million since December 31, 2007 primarily due to increases in certificates of deposits including public funds accounts partially offset by a reduction in money market balances as customers moved from floating rate to fixed rate deposits. In addition, savings account balances were higher at September 30, 2008 compared to December 31, 2007 largely the result of a new higher rate e-savings product while interest-bearing checking account balances decreased for the same time period. Long-term borrowings increased $47.0 million from December 31, 2007 mainly to lock in lower rates on borrowings maturing over the next twelve months.

Capital

Capital formation is important to the Corporation's well being and future growth. Capital for the period ending September 30, 2008 was $311.0 million, a decrease of $28.3 million from the capital balance at December 31, 2007 of $339.3 million. The reduction in capital was primarily the result of an increase in the accumulated other comprehensive loss related to investment securities. Management believes that the Corporation's current capital and liquidity positions are adequate to support its operations. Management is not aware of any recommendations by any regulatory authority, which, if it were to be implemented, would have a material effect on the Corporation's capital.

Table 8—Regulatory Capital

(Dollars in thousands)						For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Program
As of September 30, 2008	Actual Amount		Ratio			Amount		Ratio			Amount		Ratio

Total Capital (to risk weighted assets):
Corporation	$	339,068		10.92	%	$	248,510		8.00	%	$	310,638		10	%
Harleysville National Bank		322,352		10.42	%		247,535		8.00	%		309,419		10	%
Tier 1 Capital (to risk weighted assets):
Corporation		307,301		9.89	%		124,255		4.00	%		186,383		6	%
Harleysville National Bank		290,585		9.39	%		123,768		4.00	%		185,652		6	%
Tier 1 Capital (to average assets):
Corporation		307,301		8.13	%		151,272		4.00	%		189,090		5	%
Harleysville National Bank		290,585		7.71	%		150,688		4.00	%		188,360		5	%

(Dollars in thousands)						For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Program
As of December 31, 2007	Actual Amount		Ratio			Amount		Ratio			Amount		Ratio

Total Capital (to risk weighted assets):
Corporation	$	329,887		10.67	%	$	247,273		8.00	%	$	309,091		10	%
Harleysville National Bank		312,880		10.16	%		246,286		8.00	%		307,858		10	%
Tier 1 Capital (to risk weighted assets):
Corporation		302,459		9.79	%		123,637		4.00	%		185,455		6	%
Harleysville National Bank		285,452		9.27	%		123,143		4.00	%		184,715		6	%
Tier 1 Capital (to average assets):
Corporation		302,459		8.72	%		138,795		4.00	%		173,494		5	%
Harleysville National Bank		285,452		8.29	%		137,722		4.00	%		172,153		5	%

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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 generally common stockholder’s equity and retained earnings adjusted to exclude disallowed goodwill and identifiable intangibles as well as the inclusion of qualifying trust preferred securities. Tier 2 capital is the allowance for loan losses. The minimum for the Tier 1 ratio is 4.0% and the total capital ratio (Tier 1 plus Tier 2 capital divided by risk-adjusted assets) minimum is 8.0%. At September 30, 2008, the Corporation’s Tier 1 risk-adjusted capital ratio was 9.89%, and the total risk-adjusted capital ratio was 10.92%, both well above the regulatory requirements. The risk-based capital ratios of the Bank also exceeded regulatory requirements at September 30, 2008.

The leverage ratio consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and identifiable intangibles. Banking organizations are expected to have ratios from 4% to 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 8.13% at September 30, 2008 and 8.72% at December 31, 2007. The lower leverage ratio of the Corporation at September 30, 2008 was mainly due to the increase in average assets from the purchase of East Penn Bank in November 2007.

The year-to-date September 30, 2008 cash dividend per share of $.60 was the same as the cash dividend for the first nine months of 2007. The proportion of net income paid out in dividends for the first nine months of 2008 was 88.5%, compared to 85.0% for the same period in 2007. Activity in both the Corporation’s dividend reinvestment and stock purchase plan did not have a material impact on capital during the first nine months of 2008.

Liquidity

Liquidity is a measure of the ability of the Corporation to meet its current cash 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 Bank arranges its mix of cash, money market investments, investment securities and loans in order to match the volatility, seasonality, interest sensitivity and growth trends of its deposit funds. The Corporation’s decisions with regard to liquidity are based on projections of potential sources and uses of funds for the next 120 days under the Corporation’s asset/liability model.

The resulting projections as of September 30, 2008 show the potential sources of funds exceeding the potential uses of funds. The accuracy of this prediction can be affected by limitations inherent in the model and by the occurrence of future events not anticipated when the projections were made. The Corporation has external sources of funds which can be drawn upon when funds are required. One source of external liquidity is an available line of credit with the FHLB. As of September 30, 2008, the Bank had borrowings outstanding with the FHLB of $213.8 million, all of which were long-term. At September 30, 2008, the Bank had unused lines of credit at the FHLB of $367.6 million and unused federal funds lines of credit of $195.0 million. In addition, the Corporation’s funding sources include investment and loan portfolio cash flows, fed funds sold and short-term investments, as well as access to the brokered certificate of deposit market and repurchase agreement borrowings. The Corporation has pledged available for sale investment securities with a carrying value of $833.5 million and held to maturity securities of $53.0 million. The Corporation could also increase its liquidity through its pricing on certificates of deposit products. The Corporation believes it has adequate funding sources to maintain sufficient liquidity under varying business conditions.

There are no known trends or any known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in liquidity increasing or decreasing in any material way, although a significant portion of the Corporation’s time deposits mature within the next twelve months. Despite the anticipated market volatility and rate environment for much of 2008, we expect to be able to retain most of these deposits. In the event that additional funds are required, the Corporation believes its short-term liquidity is adequate as outlined above.

Recent Developments

The global and U.S economies are experiencing significantly reduced business activity as a result of, among other factors, disruptions in the financial system in the past year. Dramatic declines in the housing market during the past year, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail.

In response to this financial crisis, the United States government passed the Emergency Economic Stabilization Act of 2008, (the “EESA”) on October 3, 2008 which provides the United States Treasury Department (the “Treasury”) with broad authority to implement certain actions to help restore stability and liquidity to the U.S. markets. Pursuant to the EESA, the Treasury has the ability to purchase or insure up to $700 billion in troubled assets held by financial institutions under the Troubled Asset Relief Program (“TARP”). On October 14, 2008, the Treasury announced it would purchase equity stakes in financial institutions under a Capital Purchase Program (the “CPP”) of up to $250 billion of the $700 billion authorized under the TARP. The CPP provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. The CPP also requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by the Treasury. Applications must be submitted by November 14, 2008 and are subject to approval by the Treasury. The Corporation is currently evaluating whether it will participate in the CPP.

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The EESA included a provision for a temporary increase in the Federal Deposit Insurance (FDIC) from $100,000 to $250,000 per depositor effective October 3, 2008 through December 31, 2009. In addition, the FDIC announced the Temporary Liquidity Guarantee Program effective October 14, 2008, enabling the FDIC to temporarily provide a 100% guarantee of newly issued senior unsecured debt of all FDIC-insured institutions and their holding companies issued before June 30, 2009, as well as deposits in non-interest bearing transaction deposit accounts through December 31, 2009. Coverage under the Temporary Liquidity Guarantee Program is available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum for non-interest bearing transaction deposits. The Corporation has determined it will continue to participate in the Temporary Liquidity Guarantee Program for non-interest bearing deposit accounts after the 30 day initial period and is assessing its participation for issuance of unsecured debt.

It is not clear at this time what impact these programs announced by the Treasury and other bank regulatory agencies and any additional programs that may be initiated in the future, will have on the Corporation or the financial markets as a whole. However, the Corporation remains well-capitalized with strong liquidity.

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 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 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 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.

Branching

During 2008, the Corporation opened new branches in Flourtown, Montgomery County and Whitehall, Lehigh County. The Bank plans to relocate its Pottstown East End branch, Montgomery County in the fourth quarter of 2008. The Bank also plans to add branches in Warrington, Bucks County and Conshohocken, Montgomery County in early 2009. These plans are subject to change as management continues to evaluate its market and its business needs. The Corporation continues to evaluate potential new branch sites that are contiguous to our current service area and will expand the Bank’s market area and market share of loans and deposits.

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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 subsidiary. 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 of the Corporation, using policies and procedures approved by the Corporation’s Board of Directors, is responsible for managing the rate sensitivity position.

During the fourth quarter of 2007 and the first nine months of 2008, the economy has experienced a continued decline in the housing market, reductions in credit facilities, disruptions in the financial system, and volatility in the financial markets, all resulting in short-term rate reductions by the Federal Open Market Committee and the creation of programs by Congress and the Treasury Department for the purpose of stabilizing and providing liquidity to the U.S. financial markets. This has created a challenging interest rate environment for the Corporation which has impacted our interest rate sensitivity exposure. A detailed discussion of market risk is provided on pages 24 and 25 of this Form 10-Q.

Item 4 – Controls and Procedures

(i) Management’s Report on Disclosure Controls

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

(ii) Changes in Internal Controls

In connection with the ongoing review of the Corporation’s internal controls over financial reporting as defined in rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, the Corporation regularly assesses the adequacy of its internal control over financial reporting and enhances its controls in response to internal control assessments and internal and external audit and regulatory recommendations. There have been no changes in the Corporation’s internal control over financial reporting during the third quarter of 2008 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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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 - 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 its subsidiaries by government authorities.

Item 1A. Risk Factors

Except for the addition of the risk factors detailed below, there has been no material changes in risk factors from those previously disclosed under Item 1A, “Risk Factors.” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007.

The soundness of other financial institutions may adversely affect the Corporation.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Corporation has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose the Corporation to credit risk in the event of a default by a counterparty or client. In addition, the Corporation’s credit risk may be exacerbated when the collateral held by the Corporation cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Corporation. Such losses could have a material adverse affect on the Corporation’s financial condition and results of operations.

Current levels of market volatility may have materially adverse effects on the Corporation’s liquidity, financial condition and/or profitability.

The capital and credit markets have been experiencing volatility and disruption for more than twelve months. In some cases, the markets have exerted downward pressure on stock prices, security prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength. If the current levels of market disruption and volatility continue or worsen, there can be no assurance that the Corporation will not experience adverse effects, which may be material, on its liquidity, financial condition and/or profitability.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Corporation did not repurchase any shares of its stock under the Corporation’s stock repurchase programs during the first nine months of 2008. The maximum number of shares that may yet be purchased under the plans was 731,761 as of September 30, 2008. (1) The repurchased shares are used for general corporate purposes.

(1)

On May 12, 2005, the Board of Directors authorized a plan to purchase up to 1,416,712 shares (restated for five percent stock dividend paid on September 15, 2006 and September 15, 2005) or 4.9%, of its outstanding common stock. The repurchases under the plan are currently suspended pursuant to the consummation of the pending merger with Willow Financial Bancorp, Inc.

Item 3. Defaults Upon Senior Securities

Not applicable

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

(a), (c) The shareholders of Harleysville National Corporation approved and adopted the Agreement and Plan of Merger dated as of May 20, 2008 by and between Harleysville National Corporation and Willow Financial Bancorp, Inc. at a special meeting of shareholders held on September 9, 2008. The information required by this item is incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the Commission on September 10, 2008.

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Item 5. Other Information

(a)	None to report.

(b)	There were no material changes in the manner shareholders may recommend nominees to the Registrant’s Board of Directors.

Item 6. Exhibits

The exhibits listed on the Exhibit Index at the end of this Report are filed with or incorporated as part of this Report (as indicated in connection with each Exhibit).

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SIGNATURES

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

HARLEYSVILLE NATIONAL CORPORATION

Date: November 7, 2008

/s/ Paul D. Geraghty

Paul D. Geraghty, President, Chief Executive Officer and

	Director
	(Principal executive officer)

Date: November 7, 2008 /s/ George S. Rapp

George S. Rapp, Executive Vice President and Chief Financial Officer

(Principal financial and accounting officer)

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EXHIBIT INDEX

Exhibit No	Description of Exhibits
(2.1)	Purchase Agreement, dated as of November 15, 2005, by and among Harleysville National Bank and Trust Company, Cornerstone Financial Consultants, Ltd., Cornerstone Advisors Asset Management, Inc., Cornerstone Institutional Investors, Inc., Cornerstone Management Resources, Inc., John R. Yaissle, Malcolm L. Cowen, II, and Thomas J. Scalici. (Incorporated by reference to Exhibit 2.1 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Commission on March 15, 2006. The schedules and exhibits to the Purchase Agreement are listed at the end of the Purchase Agreement but have been omitted from the exhibit to Form 10-K. The Registrant agrees to supplementally furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.)
(2.2)	Merger Agreement, dated as of May 15, 2007, by and among Harleysville National Corporation, East Penn Financial Corporation, East Penn Bank and HNC-EPF, LLC, as amended. (Incorporated by reference to Annex A of the Corporation’s Registration Statement No. 333-145820 on Form S-4/A, filed with the Commission on September 27, 2007. The schedules and exhibits to the Merger Agreement are listed at the end of the Merger Agreement but have been omitted from the Annex to Form S-4. The Registrant agrees to supplementally furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.)
(2.3)	Agreement for Purchase and Sale of Partnership Interests, dated as of December 27, 2007, by and among each of the applicable entities (“Buyer”) and 2007 PA HOLDINGS, LLC (“HNB”) and PA BRANCH HOLDINGS, LLC, (“Bank Branch”) (HNB and Bank Branch are referred to collectively as “Seller”). (Incorporated by reference to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Commission on March 14, 2008. The schedules and exhibits to the Agreement for Purchase and Sale of Partnership Interests are listed at the end of the agreement but have been omitted from the Exhibit to Form 10-K. The Registrant agrees to supplementally furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.)
(2.4)	Merger Agreement, dated as of May 20, 2008, by and among Harleysville National Corporation and Willow Financial Bancorp. (Incorporated by reference to Annex A of the Registrant’s Registration Statement No. 333-152007 on Form S-4, as amended, filed with the Commission on July 31, 2008. The schedules and exhibits to the Merger Agreement are listed at the end of the Merger Agreement but have been omitted from the Annex to Form S-4. The Registrant agrees to supplementally furnish a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request.)
(3.1)	Harleysville National Corporation Amended and Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Corporation’s Registration Statement No. 333-111709 on Form S-4, as filed on January 5, 2004.)
(3.2)	Harleysville National Corporation Amended and Restated By-laws. (Incorporated by reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K/A, filed with the Commission on August 16, 2007.)
(10.1)	Harleysville National Corporation 1993 Stock Incentive Plan.** (Incorporated by reference to Exhibit 4.3 of Registrant’s Registration Statement No. 33-69784 on Form S-8, filed with the Commission on October 1, 1993.)
(10.2)	Harleysville National Corporation Stock Bonus Plan.*** (Incorporated by reference to Exhibit 99A of Registrant’s Registration Statement No. 333-17813 on Form S-8, filed with the Commission on December 13, 1996.)
(10.3)	Supplemental Executive Retirement Plan.* (Incorporated by reference to Exhibit 10.3 of Registrant’s Annual Report in Form 10-K for the year ended December 31, 1997, filed with the Commission on March 27, 1998.)
(10.4)	Walter E. Daller, Jr., Chairman and former President and Chief Executive Officer’s Employment Agreement dated October 26, 1998.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 25, 1999.)
(10.5)	Consulting Agreement and General Release dated November 12, 2004 between Walter E. Daller, Jr., Harleysville National Corporation and Harleysville National Bank and Trust Company.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on November 16, 2004.)
(10.6)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Walter E. Daller, Jr.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
(10.7)	Employment Agreement dated October 26, 1998 by and among Harleysville National Corporation, Harleysville National Bank and Trust Company and Demetra M. Takes, President and Chief Executive Officer of Harleysville National Bank and Trust Company.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 25, 1999.)

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(10.8)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Demetra M. Takes, President and Chief Executive Officer of Harleysville National Bank and Trust Company.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
(10.9)	Harleysville National Corporation 1998 Stock Incentive Plan.** (Incorporated by reference to Registrant’s Registration Statement No. 333-79971 on Form S-8, filed with the Commission on June 4, 1999.)
(10.10)	Harleysville National Corporation 1998 Independent Directors Stock Option Plan, as amended and restated effective February 8, 2001.** (Incorporated by reference to Appendix “A” of Registrant’s Definitive Proxy Statement, filed with the Commission on March 9, 2001.)
(10.11)	Supplemental Executive Retirement Benefit Agreement dated February 23, 2004 between Michael B. High, Executive Vice President and former Chief Financial Officer, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on May 10, 2004.)
(10.12)	Employment Agreement effective April 1, 2005 between Michael B. High, Executive Vice President and Chief Operating Officer of the Corporation, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on November 16, 2004.)
(10.13)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Michael B. High, Executive Vice President and Chief Operating Officer of the Corporation.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
(10.14)	Harleysville National Corporation 2004 Omnibus Stock Incentive Plan, as amended and restated effective November 9, 2006.** (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on November 15, 2006).
(10.15)	Employment Agreement dated August 23, 2004 between James F. McGowan, Jr., Executive Vice President & Chief Credit Officer and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on August 25, 2004.
(10.16)	Supplemental Executive Retirement Benefit Agreement dated August 23, 2004 between James F. McGowan, Jr., Executive Vice President & Chief Credit Officer, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on August 25, 2004.)
(10.17)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and James F. McGowan, Jr., Executive Vice President & Chief Credit Officer.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
(10.18)	Employment Agreement dated September 27, 2004 between John Eisele, former Executive Vice President & President of Millennium Wealth Management and Private Banking, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on September 29, 2004.)
(10.19)	Supplemental Executive Retirement Benefit Agreement dated September 27, 2004 between John Eisele, former Executive Vice President & President of Millennium Wealth Management and Private Banking, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on September 29, 2004.)
(10.20)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and John Eisele, former Executive Vice President & President of Millennium Wealth Management and Private Banking.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)
(10.21)	Separation Agreement and Mutual Release dated June 15, 2007 and effective July 19, 2007 between John Eisele, former Executive Vice President & President of Millennium Wealth Management and Private Banking, Harleysville Management Services, LLC., Harleysville National Bank and Trust Company and Harleysville National Corporation.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on July 19, 2007.)
(10.22)	Employment Agreement effective January 1, 2005 between Gregg J. Wagner, the former President and Chief Executive Officer of the Corporation, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on November 16, 2004.)
(10.23)	Amendment to Supplemental Executive Retirement Benefit Agreement dated March 14, 2005 by and among Harleysville Management Services, LLC and Gregg J. Wagner, the former President and Chief Executive Officer of the Corporation.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on March 14, 2005.)

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(10.24)	Complete Settlement Agreement and General Release dated November 29, 2006 and effective December 8, 2006 between Gregg J. Wagner and Harleysville National Corporation, Harleysville National Bank and Trust Company and Harleysville Management Services, LLC .* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on December 13, 2006.)
(10.25)	Employment Agreement dated May 18, 2005, between George S. Rapp, Senior Vice President and Chief Financial Officer, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on May 20, 2005.)
(10.26)	Amended and Restated Declaration of Trust for HNC Statutory Trust III by and among Wilmington Trust Company, as Institutional Trustee and Delaware Trustee, Harleysville National Corporation, as Sponsor, and the Administrators named therein, dated as of September 28, 2005. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q/A, filed with the Commission on November, 9, 2005.)
(10.27)	Indenture between Harleysville National Corporation, as Issuer, and Wilmington Trust Company, as Trustee, for Fixed/Floating Rate Junior Subordinated Debt Securities, dated as of September 28, 2005. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q/A, filed with the Commission on November, 9, 2005.)
(10.28)	Guarantee Agreement between Harleysville National Corporation and Wilmington Trust Company, dated as of September 28, 2005. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q/A, filed with the Commission on November, 9, 2005.)
(10.29)	Employment Agreement effective July 12, 2006 between Lewis C. Cyr, Chief Lending Officer of the Corporation, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K, filed with the Commission on July 12, 2006.)
(10.30)	Employment Agreement dated July 12, 2007 between Paul D. Geraghty, President and Chief Executive Officer of the Corporation and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Commission on July 12, 2007.)
(10.31)	Amended and Restated Declaration of Trust for HNC Statutory Trust IV by and among Wilmington Trust Company, as Institutional Trustee and Delaware Trustee, Harleysville National Corporation, as Depositor, and the Administrators named therein, dated as of August 22, 2007. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on November 8, 2007.)
(10.32)	Indenture between Harleysville National Corporation, as Issuer, and Wilmington Trust Company, as Trustee, for Fixed/Floating Rate Junior Subordinated Debt Securities, dated as of August 22, 2007. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on November 8, 2007.)
(10.33)	Guarantee Agreement between Harleysville National Corporation and Wilmington Trust Company, dated as of August 22, 2007. (Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q, filed with the Commission on November 8, 2007.)
(10.34)	Employment Agreement dated November 16, 2007 between Brent L. Peters, Executive Vice President and President of the East Penn Bank Division of Harleysville National Bank and Trust Company, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Commission on March 14, 2008.)
(10.35)	Employment Agreement dated April 17, 2008 between Joseph D. Blair, Executive Vice President and President of the Millennium Wealth Management Division of Harleysville National Bank and Trust Company, and Harleysville Management Services, LLC.* (Incorporated by reference to Registrant's Quarterly Report on Form 10-Q filed with the Commission on August 8, 2008).
(11)	Computation of Earnings per Common Share, incorporated by reference to Part II, Item 8, Footnote 6, “Earnings Per Share,” of this Report on Form 10-Q.
(31.1)	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
(31.2)	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
(32.1)	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
(32.2)	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.

*	Management contract or compensatory plan arrangement.

**	Shareholder approved compensatory plan pursuant to which the Registrant’s Common Stock may be issued to employees of the Corporation.

***	Non-shareholder approved compensatory plan pursuant to which the Registrant’s Common Stock may be issued to employees of the Corporation.

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