As filed with the Securities and Exchange Commission on January 2, 1996
Registration No. 33-65021
___________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
__________________________________
HARLEYSVILLE NATIONAL CORPORATION
(Exact name of Registrant as specified in its charter)
Pennsylvania 6711 23-2210237
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
Walter E. Daller, Jr.
President and Chief Executive Officer
Post Office Box 195 HARLEYSVILLE NATIONAL CORPORATION
483 Main Street Post Office Box 195
Harleysville, Pennsylvania 19438 483 Main Street
(215) 256-8851 Harleysville, Pennsylvania 19438
(Address, including ZIP Code, and (215) 256-8851
telephone number, including area (Name, address, including ZIP Code,
code, of registrant's principal and telephone number, including area
executive offices) code, of agent for service)
With a Copy to:
Nicholas Bybel, Jr., Esquire
Robin M. Wilder, Esquire
SHUMAKER WILLIAMS, P.C.
P.O. Box 88, Harrisburg, Pennsylvania 17108
(717) 763-1121
Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after the effective date of the
Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. _____
<TABLE>
CALCULATION OF REGISTRATION FEE
___________________________________________________________________________
<CAPTION>
Proposed
Title of Maximum Proposed
Each Class Amount Offering Maximum Amount of
of Securities to be Price Aggregate Registration
to be Registered Registered Per Share Offering Price Fee
___________________________________________________________________________
<S> <C> <C> <C> <C>
Common Stock par 489,594 $17.46<F1> $8,548,311.24 $2,947.69
value $1.00
per share
___________________________________________________________________________
<FN>
<F1> Estimated solely for the purpose of calculating the registration fee
and based, in accordance with Rule 457(f)(2), upon the book value of
the outstanding shares of Farmers & Merchants Bank, common stock, par
value Two Dollars ($2) per share, as of September 30, 1995 of eight
million five hundred forty-eight thousand three hundred eleven dollars
and twenty-four cents ($8,548,311.24) and the maximum of 708,016 shares
of
such stock to be converted in the reorganization into Common Stock of
the
Registrant.
</FN>
</TABLE>
__________________________________
<PAGE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
__________________________________
<PAGE>
CROSS REFERENCE SHEET PURSUANT TO
ITEM 501 OF REGULATION S-K
ITEM OF FORM S-4 LOCATION IN PROSPECTUS
1. Forepart of Registration Facing Page of Registration
Statement and Outside Front Statement; Cross Reference
Cover Page of Prospectus Sheet; Outside Front Cover
Page
2. Inside Front and Outside AVAILABLE INFORMATION
Back Cover Pages of
Prospectus
3. Risk Factors, Ratio of SUMMARY
Earnings to Fixed Charges
and Other Information
4. Terms of the Transaction THE MERGER; INFORMATION
CONCERNING HARLEYSVILLE
NATIONAL CORPORATION AND
DESCRIPTION OF HNC COMMON
STOCK; INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE
5. Pro Forma Financial PRO FORMA COMBINED FINANCIAL
Information
6. Material Contracts with THE MERGER--Business Pending
the Company Being Acquired the Effective Date
7. Additional Information Not Applicable
Required for Reoffering by
Persons and Parties Deemed
to be Underwriters
8. Interests of Named Experts Not Applicable
and Counsel
9. Disclosure of Commission INFORMATION CONCERNING
Position on Indemnification HARLEYSVILLE NATIONAL
for Securities Act CORPORATION AND DESCRIPTION OF
Liabilities HNC COMMON STOCK--
Indemnification
10. Information with Respect to INFORMATION CONCERNING
S-3 Registrants HARLEYSVILLE NATIONAL
CORPORATION AND DESCRIPTION OF
HNC COMMON STOCK
11. Incorporation of Certain INCORPORATION OF CERTAIN
Information by Reference DOCUMENTS BY REFERENCE
12. Information with Respect to Not Applicable
S-2 or S-3 Registrants
<PAGE>
13. Incorporation of Certain Not Applicable
Information by Reference
14. Information with Respect to Not Applicable
Registrants Other Than S-3
or S-2 Registrants
15. Information with Respect to Not Applicable
S-2 or S-3 Companies
16. Information with Respect to Not Applicable
S-2 or S-3 Companies
17. Information with Respect to COMPARATIVE STOCK PRICES AND
Companies Other Than S-3 or DIVIDEND AND RELATED
S-2 Companies SHAREHOLDER MATTERS;
INFORMATION CONCERNING
FARMERS & MERCHANTS BANK;
FARMERS & MERCHANTS BANK--
INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTARY FINANCIAL
INFORMATION
18. Information if Proxies, SUMMARY; GENERAL INFORMATION--
Consents or Authorizations SPECIAL MEETING OF FARMERS &
are to Be Solicited MERCHANTS SHAREHOLDERS;
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE
19. Information if Proxies, Not Applicable
Consents or Authorizations
are not to Be Solicited or
in an Exchange Offer
<PAGE>
FARMERS & MERCHANTS BANK
P.O. BOX 430, 1001 MAIN STREET, HONESDALE, PA 18431-0430
TEL. 717-253-1095, FAX 717-253-6628
_________________________________________________________________
January 2, 1995
Dear Shareholder:
You are cordially invited to attend a Special Meeting of the
Shareholders of Farmers & Merchants Bank (Honesdale, PA.) which will be
held on Wednesday, January 31, 1996, 10:00 a.m., prevailing time, at the
Central Methodist Church, Wesley Room, 11th and Church Streets, Honesdale,
Pennsylvania 18431. The primary purpose of this meeting is to consider and
vote upon a merger of Farmers & Merchants Bank (Honesdale, PA.) with and
into The Citizens National Bank of Lansford, a wholly-owned subsidiary of
Harleysville National Corporation, a Pennsylvania bank holding company
located in Harleysville, Montgomery County, Pennsylvania.
We urge you to carefully read the enclosed Prospectus/Proxy Statement
which describes the reorganization in detail and the regulatory
requirements to consummate this transaction. The information contained in
the "SUMMARY" portion of the Prospectus/Proxy Statement sets forth the
basic components of the reorganization. If you have any questions after a
review of the Prospectus/Proxy Statement consult with your own advisors or
feel free to contact me at Farmers & Merchants Bank (Honesdale, PA.),
telephone (717) 253-1096.
For the reasons stated in the enclosed Prospectus/Proxy Statement, the
Board of Directors believes that the merger is in the best interests of the
Bank and its shareholders and urges you to vote for the merger. The
approval and adoption of the Agreement and Plan of Reorganization requires
a favorable vote of the holders of two-thirds of the outstanding shares of
the Bank's common stock. It is, therefore, extremely important for you to
sign, date and return the enclosed proxy as soon as possible in the
envelope supplied for your convenience, whether or not you plan to attend
the special meeting.
Your Board of Directors strongly recommends that you vote FOR the
merger.
Sincerely yours,
/s/ Richard J. Shershenovich
Richard J. Shershenovich, President
<PAGE>
FARMERS & MERCHANTS BANK
P.O. BOX 430, 1001 MAIN STREET, HONESDALE, PA 18431-0430
TEL. 717-253-1095, FAX 717-253-6628
_________________________________________________________________
_________________________
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON JANUARY 31, 1996
_________________________
TO THE SHAREHOLDERS OF FARMERS & MERCHANTS BANK (HONESDALE, PA.):
Notice is hereby given that a Special Meeting of Shareholders of
Farmers & Merchants Bank (Honesdale, PA.)("Farmers & Merchants") will be
held at 10:00 a.m., prevailing time, on Wednesday, January 31, 1996, at the
Central Methodist Church, Wesley Room, 11th and Church Streets, Honesdale,
Pennsylvania 18431, for the following purposes:
1. To consider and act upon a proposal to approve and adopt an
Agreement and Plan of Reorganization and Agreement and Plan of Merger
providing, among other things, for the merger of Farmers & Merchants with
and into The Citizens National Bank of Lansford, a national banking
association organized under the laws of the United States and a subsidiary
of Harleysville National Corporation ("HNC"), and for the automatic
conversion of shares of the common stock of Farmers & Merchants into shares
of HNC common stock as specified in the Agreement and Plan of
Reorganization; and
2. To transact such other business as may properly come before the
Special Meeting and any adjournment or postponement thereof.
Only those shareholders of record at the close of business on Friday,
December 29, 1995, will be entitled to notice of and to vote at the Special
Meeting.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST TWO-THIRDS OF THE
OUTSTANDING SHARES OF FARMERS & MERCHANTS COMMON STOCK IS REQUIRED FOR
APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF REORGANIZATION AND
AGREEMENT AND PLAN OF MERGER. THEREFORE, WHETHER OR NOT YOU EXPECT TO
ATTEND THE SPECIAL MEETING IN PERSON, YOU ARE URGED TO SIGN, DATE AND
PROMPTLY RETURN THE ENCLOSED PROXY. A SELF-ADDRESSED STAMPED ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE. YOUR PROXY IS REVOCABLE AND MAY BE
WITHDRAWN IN THE EVENT THAT YOU WISH TO ATTEND THE MEETING AND VOTE IN
PERSON.
By Order of the Board of Directors,
/s/ Richard J. Shershenovich
Richard J. Shershenovich, President
January 2, 1996
<PAGE>
PROSPECTUS/PROXY STATEMENT
HARLEYSVILLE NATIONAL CORPORATION
489,593 SHARES COMMON STOCK
$1.00 PAR VALUE
FARMERS & MERCHANTS BANK (HONESDALE, PA.)
PROXY STATEMENT
This Prospectus/Proxy Statement relates to shares of the One Dollar
($1) par value common stock of Harleysville National Corporation ("HNC") to
be issued following, and conditioned upon, final approval of the merger of
Farmers & Merchants Bank (Honesdale, PA.) with and into The Citizens
National Bank of Lansford ("Citizens National"), a national banking
association and subsidiary of HNC. The proposed merger is described more
fully in the Proxy Statement of Farmers & Merchants Bank, (Honesdale, PA.)
which Proxy Statement is an integral part of this Prospectus and is being
furnished in connection with the convening of a Special Meeting of the
Shareholders of Farmers & Merchants Bank (Honesdale, PA.) at which a vote
on the proposed merger will be taken.
__________________________________
This Prospectus/Proxy Statement does not cover resales of shares of
HNC Common Stock to be issued to affiliates of Farmers & Merchants Bank
(Honesdale, PA.) in connection with the proposed merger described herein.
No such person is authorized to make use of this Prospectus/Proxy Statement
in connection with any such resale.
__________________________________
The shares of HNC common stock to be issued in connection with the
merger have not been approved or disapproved by the Securities and Exchange
Commission (the "SEC"), the Office of the Comptroller of the Currency (the
"OCC"), the Federal Deposit Insurance Corporation (the "FDIC") the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") or
any state securities commission, nor has the SEC, the OCC, the FDIC, the
Federal Reserve Board or any state securities commission passed upon the
accuracy or adequacy of this Prospectus. Any representation to the
contrary is a criminal offense.
__________________________________
The shares of HNC common stock offered hereby are not savings
accounts, deposits, or other obligations of a bank or savings association
and are not insured by the FDIC or any other governmental agency.
__________________________________
The date of this Prospectus/Proxy Statement is January 2, 1996.
-i-
<PAGE>
No person has been authorized to give any information or to make any
representation not contained in this Prospectus/Proxy Statement, and if
given or made, any such information or representation should not be relied
upon as having been authorized. This Prospectus/Proxy Statement does not
constitute an offer to any person to exchange or sell, or a solicitation
from any person of an offer to exchange or purchase, the securities offered
by this Prospectus/Proxy Statement, or the solicitation of a proxy from any
person, in any jurisdiction in which it is unlawful to make such an offer
or solicitation. Neither the delivery of this Prospectus/Proxy Statement
nor any distribution of the securities to which this Prospectus relates
shall under any circumstances create any implication that the information
contained herein is correct at any time subsequent to the date hereof.
__________________________________
AVAILABLE INFORMATION
HNC is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files
periodic reports, Proxy Statements and other information with the SEC.
Such periodic reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549 and
also at the regional offices of the SEC located at 75 Park Place, 14th
Floor, New York, New York 10007; Curtis Center, Independence Square West,
601 Walnut Street, Suite 1005E, Philadelphia, Pennsylvania 19106; and
Northwestern Atrium Center, 500 West Madison Street, Suite 400, Chicago,
Illinois 60661. Copies of such material may be obtained from the public
reference section of the SEC at Judiciary Plaza 450 Fifth Street, N.W.,
Washington, DC 20549, at prescribed rates.
__________________________________
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. HNC WILL PROVIDE
WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST OF ANY PERSON TO WHOM THIS
PROSPECTUS/PROXY STATEMENT IS DELIVERED, A COPY OF ANY AND ALL DOCUMENTS
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) WHICH HAVE BEEN
INCORPORATED BY REFERENCE HEREIN. SUCH REQUESTS SHOULD BE DIRECTED TO JO
ANN M. BYNON, ASSISTANT SECRETARY OF THE BOARD, HARLEYSVILLE NATIONAL
CORPORATION, 483 MAIN STREET, HARLEYSVILLE, PENNSYLVANIA 19438; TELEPHONE
(215) 256-8851. IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, ANY
REQUEST SHOULD BE MADE BY JANUARY 22, 1996.
-ii-
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents and information are hereby incorporated by
reference into this Prospectus/Proxy Statement:
1. HNC's Annual Report on Form 10-K for the year ended December 31,
1994, including, without limitation, the following items thereof:
a. Item 12, relating to the voting securities and principal
holders thereof;
b. Item 10, relating to Directors and Executive Officers;
c. Item 11, relating to Executive Compensation; and
d. Item 13, relating to certain relationships and related
transactions.
2. HNC's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995.
3. HNC's Current Report on Form 8-K dated May 18, 1995.
4. HNC's Current Report on Form 8-K dated September 14, 1995.
5. HNC's Quarterly Report on Form 10-Q for the quarter ended June
30, 1995.
6. HNC's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.
All documents filed by HNC pursuant to Sections 13(a), 13(c), 14, or
15(d) of the Securities Exchange Act of 1934 after the date of this
Prospectus/Proxy Statement and prior to the Special Meeting of the
Shareholders of Farmers & Merchants Bank (Honesdale, PA.) are hereby
incorporated by reference into this Prospectus/Proxy Statement and shall be
deemed a part hereof from the date of filing of each such document. Any
statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus/Proxy
Statement to the extent that a statement contained herein or in any
subsequently filed document which is also incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus/Proxy Statement.
-iii-
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . vi
GENERAL INFORMATION--SPECIAL MEETING OF FARMERS &
MERCHANTS SHAREHOLDERS . . . . . . . . . . . . . . . . . . 1
Introduction . . . . . . . . . . . . . . . . . . . . . 1
Date, Time and Place of Special Meeting . . . . . . . . 1
Purpose of Meeting . . . . . . . . . . . . . . . . . . 1
Shareholders Entitled to Vote . . . . . . . . . . . . . 1
Required Vote . . . . . . . . . . . . . . . . . . . . . 2
Revocation and Voting of Proxies . . . . . . . . . . . 2
Solicitation of Proxies . . . . . . . . . . . . . . . . 2
Shares Outstanding and Principal Holders Thereof . . . 2
Interests of Certain Persons in Matters to Be
Voted Upon . . . . . . . . . . . . . . . . . . . . . 3
Recommendation of the Board of Directors of
Farmers & Merchants . . . . . . . . . . . . . . . . . 5
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . 5
General Information . . . . . . . . . . . . . . . . . . 5
Background of and Principal Reasons for the Merger . . 6
Additional Reasons for the Merger . . . . . . . . . . . 8
Opinion of Financial Advisor . . . . . . . . . . . . . 9
Conversion and Exchange of Shares . . . . . . . . . . . 10
Voting Agreements . . . . . . . . . . . . . . . . . . . 12
Business Pending the Effective Date . . . . . . . . . . 13
Conditions, Amendment and Termination . . . . . . . . . 14
Effective Date . . . . . . . . . . . . . . . . . . . . 15
Management and Operations Following the Merger . . . . 15
Federal Income Tax Consequences . . . . . . . . . . . . 16
Warrant Agreement . . . . . . . . . . . . . . . . . . . 17
Accounting Treatment . . . . . . . . . . . . . . . . . 19
Rights of Dissenting Shareholders . . . . . . . . . . . 19
Restriction on Resale of HNC Common Stock Held by
Affiliates of Farmers & Merchants . . . . . . . . . . 20
COMPARATIVE STOCK PRICES AND DIVIDENDS AND RELATED
SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 21
Common Stock of HNC . . . . . . . . . . . . . . . . . . 21
Common Stock of Farmers & Merchants . . . . . . . . . . 22
-iv-
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION . . . . . . . . . . 22
INFORMATION CONCERNING HARLEYSVILLE NATIONAL CORPORATION
AND DESCRIPTION OF HNC COMMON STOCK . . . . . . . . . . . 32
Information Concerning HNC . . . . . . . . . . . . . . 32
Acquisitions by HNC . . . . . . . . . . . . . . . . . . 32
Loans . . . . . . . . . . . . . . . . . . . . . . . . . 33
Description of HNC Common Stock . . . . . . . . . . . . 33
Dividends . . . . . . . . . . . . . . . . . . . . . . . 33
Dividend Reinvestment Plan . . . . . . . . . . . . . . 34
Securities Laws . . . . . . . . . . . . . . . . . . . . 34
Anti-takeover Provisions . . . . . . . . . . . . . . . 35
Indemnification . . . . . . . . . . . . . . . . . . . . 38
Comparison of Stockholder Rights . . . . . . . . . . . 39
INFORMATION CONCERNING FARMERS & MERCHANTS BANK . . . . . . 41
Description of Business and Property . . . . . . . . . 41
Employees . . . . . . . . . . . . . . . . . . . . . . . 43
Legal Proceedings . . . . . . . . . . . . . . . . . . . 43
Farmers & Merchants Common Stock Market Price and
Dividends . . . . . . . . . . . . . . . . . . . . . . 43
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . 45
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . 45
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . 45
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . 45
FARMERS & MERCHANTS BANK--INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTARY FINANCIAL INFORMATION . . . . . . . . . 46
EXHIBITS
Exhibit A - Agreement and Plan of Reorganization and
Agreement and Plan of Merger
Exhibit B - Opinion of Danielson Associates Inc.
Exhibit C - Statute Relating to Dissenters' Rights;
12 U.S.C. Section 215a
-v-
<PAGE>
SUMMARY
The following is a summary of certain information set forth in more
detail elsewhere in this Prospectus/Proxy Statement. This summary is
provided for convenience only and does not set forth completely all
material features of the proposed merger. This summary should be read in
conjunction with and is qualified in its entirety by the more detailed
information which is set forth elsewhere in this Prospectus/Proxy Statement
and the attached exhibits or which is incorporated herein by reference.
The Parties
Harleysville National Corporation
Harleysville National Corporation ("HNC") is a Pennsylvania business
corporation and a registered bank holding company with its principal
offices located at 483 Main Street, P.O. Box 195, Harleysville,
Pennsylvania 19438. As a bank holding company, HNC engages in the general
commercial and retail banking business. HNC has three wholly-owned
subsidiaries, each of which is a national banking association and each of
which engages in the general commercial and retail banking business. The
Harleysville National Bank & Trust Company ("Harleysville National") is a
subsidiary of HNC. Harleysville National has its principal offices at the
same location as HNC and operates 16 banking offices in Montgomery County,
Pennsylvania and in Bucks County, Pennsylvania. The Citizens National Bank
of Lansford ("Citizens National") is a subsidiary of HNC. Citizens
National has its principal offices located at 13-15 West Ridge Street, P.O.
Box 128, Lansford, Pennsylvania, 18232 and operates three (3) banking
offices in Carbon County, Pennsylvania. Security National Bank ("Security
National") is a subsidiary of HNC. Security National has its principal
offices located at One Security Place, Pottstown, Pennsylvania 19464 and
operates two (2) banking offices in Pottstown, Pennsylvania. As of
September 30, 1995, HNC had consolidated total assets of approximately
Eight Hundred Forty-two Million Nine Hundred Twenty-eight Thousand Dollars
($842,928,000).
Farmers & Merchants Bank (Honesdale, PA.)
Farmers & Merchants Bank (Honesdale, PA.) ("FMB" or "Farmers &
Merchants") is a Pennsylvania-chartered commercial bank and trust company.
Its deposits are insured by the FDIC to the maximum extent permitted by
law. As a full-service commercial bank, Farmers & Merchants offers demand,
savings and time deposits and commercial, consumer and mortgage loans.
Farmers & Merchants also has a trust department. Farmers & Merchants
maintains its only banking office at 1001 Main Street, Honesdale,
Pennsylvania 18431. As of September 30, 1995, Farmers & Merchants had
total assets of approximately Sixty-five Million Five Hundred Fifty-five
Thousand Dollars ($65,555,000).
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<PAGE>
Farmers & Merchants Special Meeting
A special meeting of the shareholders of Farmers & Merchants (the
"Special Meeting") will be held on Wednesday, January 31, 1996 at 10:00
a.m., prevailing time, at the Central Methodist Church, Wesley Room, 11th
and Church Streets, Honesdale, Pennsylvania 18431. Only those shareholders
of record as of the close of business on Friday, December 29, 1995 will be
entitled to vote. As of the record date, there were approximately 708,016
shares of the common stock, par value Two Dollars ($2) per share, of
Farmers & Merchants (the "Farmers & Merchants Common Stock") outstanding,
each of which is entitled to one vote on the reorganization and merger.
SEE GENERAL INFORMATION -- SPECIAL MEETING OF FARMERS & MERCHANTS
SHAREHOLDERS.
Purpose of the Meeting
The shareholders of Farmers & Merchants will be asked at the Special
Meeting to consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Reorganization dated September 7, 1995, among HNC,
Farmers & Merchants and Citizens National. The Agreement and Plan of
Reorganization includes, as an exhibit thereto, an Agreement and Plan of
Merger, under the terms of which: (i) Farmers & Merchants will be merged
with and into Citizens National; (ii) Citizens National will survive the
merger and upon completion of the transaction will operate and trade under
the fictitious name "Farmers & Merchants Bank" in the Honesdale area;
(iii) all of the outstanding shares of the Farmers & Merchants Common Stock
will be converted into shares of the common stock, par value One Dollar
($1) per share, of HNC (the "HNC Common Stock"); and (iv) each shareholder
of Farmers & Merchants will receive shares of HNC Common Stock in exchange
for shares of Farmers & Merchants Common Stock held by him or her as
specified in the Agreement and Plan of Reorganization and cash in lieu of any
fractional shares of HNC Common Stock. SEE THE MERGER.
Required Vote
The affirmative vote of shareholders holding at least two-thirds of
the outstanding Farmers & Merchants Common Stock, given at a duly convened
and conducted meeting of the shareholders of Farmers & Merchants is
required to approve and adopt the Agreement and Plan of Reorganization and
Agreement and Plan of Merger. As of September 30, 1995, the directors of
Farmers & Merchants and their affiliates owned beneficially approximately
42.87 percent of the outstanding shares of Farmers & Merchants Common
Stock. Each member of the Board of Directors of Farmers & Merchants has
entered into an agreement (a "Support Agreement") pursuant to which he has
agreed to vote, or cause to be voted, his shares of Farmers & Merchants
Common Stock as to which he has or shares voting
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<PAGE>
power, individually or, to the extent of his proportionate interest,
jointly with other persons, as well as other shares over which he may
acquire beneficial ownership in favor of the Agreement and Plan of
Reorganization and the proposed transaction; and use his best efforts to
cause the proposed transaction to be effected. SEE GENERAL INFORMATION --
SPECIAL MEETING OF FARMERS & MERCHANTS SHAREHOLDERS - INFORMATION
CONCERNING FARMERS & MERCHANTS BANK.
Conversion and Exchange of Shares
It is expected that the effective date of the merger will be early
1996. Pursuant to the terms of the Agreement and Plan of Reorganization
and Agreement and Plan of Merger, on the effective date, each outstanding
share of Farmers & Merchants Common Stock will be exchanged for at least
.5915 but not more than .6915 shares of HNC Common Stock (the "collar
exchange ratios"). A value of Seventeen Dollars ($17) per share of Farmers
& Merchants Common Stock has been established for this transaction.
Generally, each share of Farmers & Merchants Common Stock issued and
outstanding immediately before the effective date (as defined in the
Agreement and Plan of Reorganization), will be converted into and become
shares of HNC Common Stock based on a formula pursuant to which the
Seventeen Dollars ($17) is divided by the arithmetic average of the per
share closing prices for HNC Common Stock for the twenty (20) trading days
immediately preceding the date which is five (5) business days before the
effective date of the proposed merger. In the event that HNC Common Stock
trades beyond the collar exchange ratios, the collar limits shall apply so
that shareholders of Farmers & Merchants will receive an exchange ratio of
at least .5915 shares but no more than .6915 shares of HNC Common Stock.
The exchange is subject to an anti-dilution adjustment for stock splits and
certain stock dividends. No fractional shares of HNC Common Stock will
be issued in connection with the merger. In lieu of the issuance of any
fractional share to which any former Farmers & Merchants shareholder would
otherwise be entitled, each such shareholder of Farmers & Merchants will
receive, in cash, an amount equal to the fair market value of his or her
fractional interest. SEE THE MERGER--Conversion and Exchange of Shares.
Each former shareholder of Farmers & Merchants will be required to
surrender to HNC the Farmers & Merchants Common Stock certificates held by
him or her in accordance with the instructions which will be sent
immediately following the effective date of the merger. Upon proper
surrender of his or her Farmers & Merchants Common Stock certificates, each
former shareholder of Farmers & Merchants will be promptly issued a stock
certificate representing the whole number of the shares of HNC Common Stock
into which such shareholder's Farmers & Merchants Common Stock shall have
been converted, together with a check in the amount of any cash to which he
or she is entitled in lieu of the issuance of any fractional share. SEE
THE MERGER--Conversion and Exchange of Shares, and the Agreement and Plan
of Reorganization attached as Exhibit "A" to this Prospectus/Proxy
Statement.
-viii-
<PAGE>
Reasons for the Merger
The Boards of Directors of HNC, Citizens National and Farmers &
Merchants are in unanimous agreement that the proposed reorganization and
merger of Farmers & Merchants with and into Citizens National is in the
best interests of each organization. In the case of HNC, the acquisition
of Farmers & Merchants will enable HNC and Citizens National to establish
its presence in the desirable banking market of Honesdale, Pennsylvania.
The Board of Directors of Farmers & Merchants has concluded that the
proposed merger is the most advantageous means for achieving the Board's
primary objective of providing a fair financial return to Farmers &
Merchants' shareholders and increasing the liquidity of their investment.
In addition, Farmers & Merchants' Board believes that the proposed merger
is the most effective method for enabling Farmers & Merchants to acquire
access to enhanced management support systems and specialized banking
and trust services offered by HNC, thereby permitting Farmers & Merchants
to provide expanded services to its customers.
Opinion of Farmers & Merchants' Financial Advisor
Farmers & Merchants has engaged Danielson Associates Inc.
("Danielson"), an investment banking firm located at 6110 Executive
Boulevard, Suite 504, Rockville, Maryland 20852, to act as its financial
advisor for the purpose of evaluating the financial terms of the proposed
merger. Danielson has delivered to Farmers & Merchants' Board of Directors
an opinion stating that the consideration to be offered to Farmers &
Merchants' shareholders in connection with the proposed merger is fair to
the shareholders of Farmers & Merchants from a financial point of view. A
copy of Danielson's opinion is attached to the Prospectus/Proxy Statement
as Exhibit "B" and should be read in its entirety with respect to the
assumptions made and the other matters considered by Danielson in rendering
its opinion. As a condition precedent to the obligations of Farmers &
Merchants under the Agreement and Plan of Reorganization, Farmers &
Merchants shall obtain an opinion stating that the terms of the proposed
merger are fair to the shareholders of Farmers & Merchants from a financial
point of view to be dated as of this Prospectus/Proxy Statement. SEE THE
MERGER--Opinion of Financial Advisor.
Management and Operations Following the Merger
Under the terms of the Agreement and Plan of Reorganization, Farmers &
Merchants will merge with and into Citizens National. Citizens National
will survive the merger. Citizens National has filed a fictitious name
registration in order to trade and be known as Farmers & Merchants Bank in
the Honesdale area upon and after the effective date of the merger.
Following the merger, the Board of Directors of HNC and Citizens National
will consist of the same persons who presently serve on the respective
Boards of Directors of HNC and Citizens National before the merger, each of
whom will serve until his
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<PAGE>
successor is elected and qualified. On the effective date of the merger,
the directors of Farmers & Merchants shall serve on the Regional Board of
Directors for the Honesdale Area or may serve as Directors Emeriti. The
Regional Board of Directors for the Honesdale Area will be established for
at least one year under Citizens National's Board of Directors. SEE THE
MERGER--Management and Operations Following the Merger, and GENERAL
INFORMATION--SPECIAL MEETING OF FARMERS & MERCHANTS SHAREHOLDERS--Interests
of Certain Persons in Matters to be Acted Upon.
Effective Date
The proposed merger will become effective in accordance with the
provisions specified in the "Certificate Approving Merger" to be issued by
the OCC, the receipt of which will occur as soon as reasonably practicable
after all applicable conditions to the consummation of the merger have
either been met or waived. HNC and Farmers & Merchants presently intend to
consummate the merger during the first quarter of 1996, assuming Farmers
& Merchants' shareholders approve the merger, all required regulatory
approvals are obtained, and all other conditions have been satisfied or
waived as of the closing of the merger. SEE THE MERGER--Effective Date.
If the proposed merger has not been consummated by June 30, 1996, the
Agreement and Plan of Reorganization will automatically be terminated
unless HNC and Farmers & Merchants agree in writing prior to that date to
extend the termination date. SEE THE MERGER--Conditions, Amendment and
Termination.
Comparison of Stockholder Rights
Upon consummation of the merger, the shareholders of Farmers &
Merchants will become shareholders of HNC. Several differences between the
rights of holders of Farmers & Merchants Common Stock and HNC Common Stock
arise from differences between the respective statutes applicable to
Farmers & Merchants and HNC as well as the respective Articles of
Incorporation and Bylaws of Farmers & Merchants and the Articles of
Incorporation and Bylaws of HNC.
The most significant differences between Farmers & Merchants Common
Stock and HNC Common Stock include the following: (i) Farmers & Merchants'
shareholders may exercise preemptive rights to acquire newly issued shares
of Farmers & Merchants Common Stock, while HNC's shareholders have no
preemptive rights; (ii) Farmers & Merchants' shareholders may cumulate
their shares in voting for directors while HNC's shareholders have no
cumulative voting rights; (iii) all of the directors of Farmers & Merchants
are elected annually by Farmers & Merchants' shareholders for one-year
terms, while only one-fourth of HNC's directors are elected each year for
four-year terms due to the classification of HNC's Board of Directors into
four separate classes; (iv) certain anti-takeover provisions
-x-
<PAGE>
are contained in HNC's Articles of Incorporation, which may serve to
entrench HNC's current management, while Farmers & Merchants' Articles of
Association contain some similar provisions but not all the anti-takeover
provisions applicable to HNC Common Stock; (v) HNC offers a dividend
reinvestment plan to its shareholders, while Farmers & Merchants offers no
such plan; (vi) HNC Common Stock is registered under the Securities
Exchange Act of 1934 and is traded in the over-the-counter Nasdaq National
Market System administered by the National Association of Securities
Dealers while Farmers & Merchants Common Stock is not registered under such
act and is traded on a limited basis in the local over-the-counter market.
SEE INFORMATION CONCERNING HARLEYSVILLE NATIONAL CORPORATION AND
DESCRIPTION OF HNC COMMON STOCK--Comparison of Stockholder Rights.
Restriction on Resales by Affiliates
The resale of shares of HNC Common Stock received in connection with
the proposed merger by persons who are executive officers, directors or 10
percent share-holders of Farmers & Merchants will be subject to certain
restrictions SEE THE MERGER--Restriction on Resale of HNC Common Stock
Held by Affiliates of Farmers & Merchants.
Federal Income Tax Consequences
The proposed merger is structured to qualify as a tax-free
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended. Accordingly, no taxable gain or loss will be recognized by the
shareholders of Farmers & Merchants upon the receipt of HNC Common Stock in
exchange for Farmers & Merchants Common Stock, except to the extent that
any shareholders of Farmers & Merchants receive cash in lieu of the
issuance of fractional shares of HNC Common Stock. Any Farmers & Merchants
shareholder who exercises dissenters' rights will recognize taxable gain or
loss to the extent of the difference between the amount of cash received by
such shareholder in connection with the exercise of dissenters' rights and
the adjusted tax basis of the shares as to which such shares are exercised.
An opinion must be provided by counsel for HNC prior to closing confirming
these and certain other federal income consequences of the proposed merger
prior to closing. SEE THE MERGER--Federal Income Tax Consequences.
Accounting Treatment
Consummation of the proposed merger is subject to the condition that
the transaction can be treated as a pooling of interests for financial
reporting purposes. SEE THE MERGER--Accounting Treatment.
-xi-
<PAGE>
Dissenters' Rights
Shareholders of Farmers & Merchants are entitled to exercise
dissenters' rights, assuming the proposed merger is consummated, in
accordance with Section 215a of the National Bank Act, 12 U.S.C. Section
215a. HNC has a right to terminate the proposed merger if Farmers &
Merchants shareholders exercise dissenters' rights with respect to 35,400
or more shares of Farmers & Merchants Common Stock. SEE THE MERGER--
Rights of Dissenting Shareholders; and Exhibit "C"--Statute Relating to
Dissenters' Rights.
Conditions, Amendments and Termination
Consummation of the proposed merger is subject to various conditions
and contingencies, including, among others, approval by the shareholders of
Farmers & Merchants, approval by the OCC and the absence of any pending or
threatened litigation seeking to modify, enjoin or prohibit the
transactions contemplated by the merger. All required applications for
regulatory approval have been filed by HNC and Farmers & Merchants.
To the extent permitted by law, the Agreement and Plan of
Reorganization may be amended by mutual consent and any term and condition
thereof may be waived by the party entitled to its benefit at any time
before the effective date of the merger, whether before or after it has
been approved by the shareholders of Farmers & Merchants, except that no
such amendment can affect the conversion of shares without the approval and
consent of the shareholders of Farmers & Merchants.
The Agreement and Plan of Reorganization may be terminated at any
time, whether before or after it has been approved by the shareholders of
Farmers & Merchants, by mutual consent or unilaterally by the Boards of
Directors of HNC or Farmers & Merchants if certain conditions are not
satisfied prior to June 30, 1996, or if certain events occur or fail to
occur. Nonetheless, the Agreement and Plan of Reorganization and Agreement
and Plan of Merger shall terminate on June 30, 1996, unless extended by
mutual consent of the parties. SEE THE MERGER--Conditions, Amendment and
Termination.
Selected Historical and Pro Forma Combined Per Share Data
The following tables set forth, at the dates and for the periods
indicated, financial information relating to HNC Common Stock and Farmers &
Merchants Common Stock on a per share historical and pro forma combined
basis. The pro forma and equivalent per share information is presented on
the basis of an assumed exchange ratio of .6415 shares of HNC Common Stock
for each share of Farmers & Merchants Common Stock. The information set
forth in the tables below should be read in conjunction with the pro forma
combined financial information set forth elsewhere in this Prospectus/Proxy
Statement, the
-xii-
<PAGE>
financial statements of HNC, including the notes thereto which are
incorporated herein by reference, and the financial statements of Farmers &
Merchants, including the notes thereto, which are set forth elsewhere in
this Prospectus/Proxy Statement. SEE PRO FORMA COMBINED FINANCIAL
INFORMATION; INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE; AND FARMERS &
MERCHANTS BANK--INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL
INFORMATION.
<TABLE>
SELECTED HISTORICAL, PRO FORMA COMBINED
AND EQUIVALENT PER SHARE DATA
<CAPTION>
As of and As of
for the nine and for the
Months Ended Years Ended
Sept. 30, December 31,
1995 1994 1994
<S> <C> <C> <C>
Harleysville National
Corporation (HNC)
Historical Per Common
Share:
Average Shares Outstanding:
Primary 5,891,873 5,865,915 5,847,473
Fully Diluted 5,892,389 5,865,915 5,847,473
Book Value $ 12.90 $ 12.14 $ 11.57
Cash Dividends 0.55 0.44 0.61
Income from Operations:
Primary 1.49 1.40 1.84
Fully Diluted 1.49 1.40 1.84
HNC, FMB Combined Pro
Forma Per Common
Share*
Average Shares Outstanding:
Primary 6,346,065 6,320,343 6,301,665
Fully Diluted 6,346,581 6,320,343 6,301,665
Book Value 13.33 12.50 11.95
Cash Dividends 0.54 0.42 0.58
Income from Operations:
Primary 1.46 1.36 1.79
Fully Diluted 1.46 1.36 1.79
____________________
<CAPTION>
As of and for the
Years Ended December 31,
1993 1992 1991 1990
<S> <C> <C> <C> <C>
Harleysville National
Corporation (HNC)
Historical Per Common
Share:
Average Shares Outstanding:
Primary 5,642,790 5,566,155 5,566,129 5,566,129
Fully Diluted 5,824,099 5,737,115 5,675,345 5,607,079
Book Value $ 11.58 $ 9.66 $ 8.81 $ 7.85
Cash Dividends 0.49 0.43 0.37 0.31
Income from Operations:
Primary 1.58 1.41 1.31 1.19
Fully Diluted 1.53 1.37 1.29 1.18
HNC, FMB Combined Pro
Forma Per Common
Share*
Average Shares Outstanding:
Primary 6,097,444 6,026,590 6,028,009 6,028,009
Fully Diluted 6,278,753 6,197,550 6,137,225 6,068,959
Book Value 11.32 10.15 9.22 8.29
Cash Dividends 0.48 0.42 0.38 0.32
Income from Operations:
Primary 1.55 1.39 1.29 1.20
Fully Diluted 1.50 1.35 1.27 1.19
____________________
</TABLE>
<TABLE>
<CAPTION>
As of and As of
for the nine and for the
Months Ended Years Ended
Sept. 30, December 31,
1995 1994 1994
<S> <C> <C> <C>
Farmers & Merchants
Bank (FMB)
Historical Per Common
Share
Average Shares Outstanding:
Primary 708,016 708,383 708,016
Fully Diluted 708,016 708,383 708,016
Book Value $ 12.07 $ 10.81 $ 10.75
Cash Dividends 0.31 0.30 0.37
<CAPTION>
As of and for the
Years Ended December 31,
1993 1992 1991 1990
<S> <C> <C> <C> <C>
Farmers & Merchants
Bank (FMB)
Historical Per Common
Share
Average Shares Outstanding:
Primary 708,736 717,747 720,000 720,000
Fully Diluted 708,736 717,747 720,000 720,000
Book Value $ 9.72 $ 9.37 $ 9.06 $ 8.73
Cash Dividends 0.36 0.35 0.33 0.31
-xiii-
<PAGE>
<CAPTION>
As of and As of
for the nine and for the
Months Ended Years Ended
Sept. 30, December 31,
1995 1994 1994
<S> <C> <C> <C>
Income from Operations 0.65 0.54 0.76
HNC, FMB Combined Pro
Forma Equivalent
Per Common Share*
Book Value 8.55 8.02 7.67
Cash Dividends 0.35 0.27 0.38
Income from Operations
Primary 0.94 0.87 1.15
Fully Diluted 0.94 0.87 1.15
____________________
<CAPTION>
As of and for the
Years Ended December 31,
1993 1992 1991 1990
<S> <C> <C> <C> <C>
Income from Operations 0.71 0.67 0.67 0.85
HNC, FMB Combined Pro
Forma Equivalent
Per Common Share*
Book Value 7.26 6.51 5.91 5.32
Cash Dividends 0.31 0.27 0.25 0.21
Income from Operations
Primary 0.99 0.89 0.83 0.77
Fully Diluted 0.96 0.86 0.81 0.77
____________________
* The above combined pro forma per share equivalent information is based
on average shares outstanding during the period except for the book value
per share which is based on period end shares outstanding. The number of
shares in each case has been adjusted for stock dividends and stock splits
through the periods. Each share of Farmers & Merchants Common Stock will
be exchanged for between .5915 and .6915 share of HNC Common Stock. This
presentation assumes that .6415, or the mid-point in the range, of HNC
Common Stock will be issued.
</TABLE>
Comparative Stock Prices
On September 7, 1995, the last trading date before public announcement
of the Agreement and Plan of Reorganization relating to the proposed
merger, the per share closing bid and asked quotations for HNC Common Stock
were Twenty-six Dollars ($26) and Twenty-eight Dollars and Fifty Cents
($28.50), respectively, as reported on the National Association of
Securities Dealers Automated Quotation System ("Nasdaq"). The pro forma
equivalent per share closing bid and asked quotations for such date based
upon the assumed exchange ratio of .6415 of HNC Common Stock for each share
of Farmers and Merchant's Common Stock are Sixteen Dollars and Sixty-eight
Cents ($16.68) and Eighteen Dollars and Twenty-eight Cents ($18.28),
respectively. The Farmers & Merchants Common Stock has historically been
traded on a limited basis in the local over-the-counter market and in
privately negotiated transactions. The most recent sale of Farmers &
Merchants Common Stock of which Farmers & Merchants' management is aware is
a sale of 240 shares that occurred on April 18, 1995, at a price of Fifteen
Dollars and Twenty-five Cents ($15.25) per share. Because trading in the
Farmers & Merchants Common Stock is sporadic, it cannot be said that an
established trading market exists. The foregoing historical and pro forma
equivalent per share market information is summarized in the following
table:
<TABLE>
<CAPTION>
Pro Forma
Historical Price Equivalent Price
Per Share Per Share
<S> <C> <C>
HNC Common Stock
September 7, 1995 Bid $ 26.00 N/A
September 7, 1995 Asked $ 28.50 N/A
Farmers & Merchants Common Stock
September 7, 1995 Bid $ 14.38 $ 16.68
September 7, 1995 Asked $ 14.38 $ 18.28
____________________
</TABLE>
-xiv-
<PAGE>
More detailed information concerning comparative stock prices is set
forth elsewhere in this Prospectus/Proxy Statement. SEE COMPARATIVE STOCK
PRICES AND DIVIDENDS AND RELATED SHAREHOLDER MATTERS.
Selected Historical and Pro Forma Financial Data
The following tables present selected, unaudited historical financial
data and pro forma information on a combined basis for HNC and Farmers &
Merchants. The pro forma combined information is presented as though the
proposed merger between Farmers & Merchants and Citizens National had
occurred on September 30, 1995, and reflects a pooling of interests basis
of accounting based upon an assumed exchange ratio of .6415 share of HNC
Common Stock for each share of Farmers & Merchants Common Stock. This
represents the mid-point in the range of between .5915 and .6915 share of
HNC Common Stock that will be issued. The following information should be
read in conjunction with the pro forma combined financial information,
including the notes thereto, set forth elsewhere in this Prospectus/Proxy
Statement, the financial statements of HNC, including the notes thereto,
which are incorporated herein by reference and the financial statements of
Farmers & Merchants, including the notes thereto, which are set forth
elsewhere herein. SEE PRO FORMA COMBINED FINANCIAL INFORMATION;
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE; AND FARMERS & MERCHANTS
BANK -- INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL
INFORMATION.
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION
Selected Financial Data
(In Thousands)
<CAPTION>
As of and As of
for the Nine and for the
Months Ended Years Ended
Sept. 30, December 31,
1995 1994 1994
<S> <C> <C> <C>
Summary of Operations:
Total Interest Income $ 47,780 $ 39,887 $ 54,614
Net Interest Income 28,087 25,910 35,175
Provision for Loan Losses 1,643 2,008 2,650
_________ _________ _________
Net Interest After Provision
for Loan Losses 26,444 23,902 32,525
Other Operating Income 3,090 3,948 4,525
Other Operating Expenses 17,055 16,088 21,757
_________ _________ _________
Income Before Income Taxes 12,479 11,762 15,293
Income Taxes 3,678 3,523 4,548
_________ _________ _________
Income From Continuing
Operations $ 8,801 $ 8,239 $ 10,745
Average Balance Sheet Totals:
Total Assets $ 821,611 $ 760,003 $ 765,037
Investment Securities and
Money Market Investments 200,754 215,179 206,779
<CAPTION>
As of and for the
Years Ended December 31,
1993 1992 1991 1990
<S> <C> <C> <C> <C>
Summary of Operations:
Total Interest Income $ 50,350 $ 48,574 $ 46,667 $ 44,617
Net Interest Income 30,819 26,697 21,964 19,763
Provision for Loan
Losses 3,073 2,299 1,306 921
_________ _________ _________ _________
Net Interest After
Provision for Loan
Losses 27,746 24,398 20,658 18,842
Other Operating Income 4,868 3,410 2,932 2,154
Other Operating Expenses 20,122 17,040 13,807 12,285
_________ _________ _________ _________
Income Before Income
Taxes 12,492 10,768 9,783 8,711
Income Taxes 3,554 2,898 2,485 2,075
_________ _________ _________ _________
Income from Continuing
Operations $ 8,938 $ 7,870 $ 7,298 $ 6,636
Average Balance Sheet Totals:
Total Assets $ 714,719 $ 632,490 $ 520,103 $ 461,215
Investment Securities
and Money Market
Investments 219,610 200,349 157,079 129,224
-xv-
<PAGE>
<CAPTION>
As of and As of
for the Nine and for the
Months Ended Years Ended
Sept. 30, December 31,
1995 1994 1994
<S> <C> <C> <C>
Loans and Leases (Net of
Unearned Income) 577,625 502,037 515,101
Deposits 701,150 681,163 682,112
Borrowings 35,598 3,223 8,145
Long-term Debt and Lease
Obligations -- -- --
Shareholders' Equity 72,368 65,435 66,716
Period End:
Total Assets 842,928 781,500 799,779
Long-term Debt and Lease
Obligations -- -- --
____________________
<CAPTION>
As of and for the
Years Ended December 31,
1993 1992 1991 1990
<S> <C> <C> <C> <C>
Loans and Leases (Net of
Unearned Income) 451,057 393,323 333,389 303,351
Deposits 643,847 568,100 460,279 406,751
Borrowings 2,014 1,608 1,608 1,520
Long-term Debt and Lease
Obligations -- -- -- --
Shareholders' Equity 59,597 52,635 46,845 41,602
Period End:
Total Assets 753,941 707,559 546,988 490,176
Long-term Debt and Lease
Obligations -- -- -- --
____________________
</TABLE>
<TABLE>
FARMERS & MERCHANTS BANK
Selected Financial Data
(In Thousands)
<CAPTION>
As of and As of
for the Nine and for the
Months Ended Years Ended
Sept. 30, December 31,
1995 1994 1994
<S> <C> <C> <C>
Summary of Operations:
Total Interest Income $ 3,099 $ 2,787 $ 3,766
Net Interest Income 1,651 1,552 2,104
Provision for Loan Losses 9 15 15
_________ _________ _________
Net Interest After Provision
for Loan Losses 1,642 1,537 2,089
Other Operating Income 91 204 222
Other Operating Expenses 1,096 1,205 1,557
_________ _________ _________
Income Before Income Taxes 637 536 754
Income Taxes 178 156 219
_________ _________ _________
Income From Continuing
Operations $ 459 $ 380 $ 535
Average Balance Sheet Totals:
Total Assets $ 63,748 $ 64,482 $ 64,204
Investment Securities and
Money Market Investments 35,089 37,918 37,202
Loans and Leases (Net of
Unearned Income) 26,743 24,434 24,929
Deposits 54,826 56,191 55,917
Borrowings -- 264 203
Long-term Debt and Lease
Obligations -- -- --
Shareholders' Equity 8,112 7,475 7,518
Period End:
Total Assets 65,555 66,764 62,890
Long-term Debt and Lease
Obligations -- -- --
____________________
<CAPTION>
As of and for the
Years Ended December 31,
1993 1992 1991 1990
<S> <C> <C> <C> <C>
Summary of Operations:
Total Interest Income $ 3,630 $ 4,037 $ 4,785 $ 5,219
Net Interest Income 2,104 1,929 1,851 1,999
Provision for Loan
Losses 12 -- 9 15
_________ _________ _________ _________
Net Interest After
Provision for Loan
Losses 1,917 1,851 1,781 1,984
Other Operating Income 96 142 100 52
Other Operating Expenses 1,314 1,318 1,267 1,239
_________ _________ _________ _________
Income Before Income
Taxes 699 675 614 797
Income Taxes 199 194 134 188
_________ _________ _________ _________
Income from Continuing
Operations $ 500 $ 481 $ 480 $ 609
Average Balance Sheet Totals:
Total Assets $ 61,700 $ 60,422 $ 59,730 $ 58,016
Investment Securities
and Money Market
Investments 38,314 37,132 34,628 33,266
Loans and Leases (Net of
Unearned Income) 21,262 20,907 22,960 22,667
Deposits 54,146 52,877 52,246 50,748
Borrowings 358 380 349 259
Long-term Debt and Lease
Obligations -- -- -- --
Shareholders' Equity 6,758 6,611 6,407 6,082
Period End:
Total Assets 62,373 60,675 59,144 58,123
Long-term Debt and Lease
Obligations -- -- -- --
____________________
</TABLE>
-xvi-
<PAGE>
<TABLE>
SELECTED PRO FORMA COMBINED
(In Thousands)
September 30, 1995
<CAPTION>
Harleysville Farmers &
National Merchants Adjust- Pro Forma
Corporation Bank ments Combined
<S> <C> <C> <C> <C>
Average Balance Sheet:
Total Assets $ 821,611 $ 63,748 $ -- $ 885,359
Investment Securities and
Money Market Investments 200,754 35,089 235,843
Loans and Leases (Net of
Unearned Income) 577,625 26,743 604,368
Total Deposits 701,150 54,826 755,976
Borrowings 35,598 -- 35,598
Long-term Debt and Lease
Obligations -- -- --
Shareholders' Equity 72,368 8,112 80,480
Period End:
Total Assets $ 842,928 $ 65,555 $ -- $ 908,483
Long-term Debt and Lease
Obligations -- -- --
____________________
</TABLE>
<TABLE>
<CAPTION>
As of and As of
for the nine and for the
Months Ended Years Ended
Sept. 30, December 31,
1995 1994 1994
<S> <C> <C> <C>
Summary of Operations:
Total Interest Income $ 50,879 $ 42,674 $ 58,830
Net Interest Income 20,738 27,462 37,279
Provision for Loan Losses 1,652 2,023 2,665
_________ _________ _________
Net Interest Income After
Provision for Loan Losses 28,086 25,439 34,614
Other Operating Income 3,181 4,152 4,747
Other Operating Expenses 18,151 17,293 23,314
_________ _________ _________
Income Before Income Taxes 13,116 12,298 16,047
Income Taxes 3,856 3,679 4,767
_________ _________ _________
Income From Continuing
Operations $ 9,260 $ 8,619 $ 11,280
____________________
<CAPTION>
As of and for the
Years Ended December 31,
1993 1992 1991 1990
<S> <C> <C> <C> <C>
Summary of Operations:
Total Interest Income $ 53,980 $ 52,584 $ 51,452 $ 49,836
Net Interest Income 32,748 28,548 23,754 21,762
Provision for Loan
Losses 3,085 2,299 1,315 936
_________ _________ _________ _________
Net Interest Income
After Provision for
Loan Losses 29,663 26,249 22,439 20,826
Other Operating Income 4,964 3,552 3,032 2,206
Other Operating Expenses 21,436 18,358 15,074 13,524
_________ _________ _________ _________
Income Before Income
Taxes 13,191 11,443 10,397 9,508
Income Taxes 3,753 3,092 2,619 2,263
_________ ________ __________ _________
Income From Continuing
Operations $ 9,438 $ 8,351 $ 7,778 $ 7,245
____________________
</TABLE>
-xvii-
<PAGE>
PROSPECTUS/PROXY STATEMENT
HARLEYSVILLE NATIONAL CORPORATION
AND
FARMERS & MERCHANTS BANK
GENERAL INFORMATION--SPECIAL MEETING OF
FARMERS & MERCHANTS SHAREHOLDERS
Introduction
This Prospectus/Proxy Statement is being furnished to the holders of
Farmers & Merchants Common Stock in connection with a solicitation by
Farmers & Merchants' Board of Directors, of proxies to be voted at a
Special Meeting of Shareholders of Farmers & Merchants to be held on
January 31, 1996 (the "Special Meeting"). The purpose of the Special
Meeting is to consider and vote upon a proposal unanimously adopted by the
Board of Directors of Farmers & Merchants to approve and adopt the
Agreement and Plan of Reorganization by and among HNC, Farmers & Merchants
and Citizens National and the related Agreement and Plan of Merger between
Farmers & Merchants and Citizens National, the terms of which are described
herein.
All information set forth in this Prospectus/Proxy Statement which
relates to HNC has been provided or verified by HNC. All information which
relates to Farmers & Merchants has been provided or verified by Farmers &
Merchants.
Date, Time and Place of Special Meeting
The Special Meeting of the shareholders of Farmers & Merchants will be
held on Wednesday, January 31, 1996 at 10:00 a.m., prevailing time, at the
Central Methodist Church, Wesley Room, 11th and Church Streets, Honesdale,
Pennsylvania 18431.
Purpose of Meeting
The shareholders of Farmers & Merchants will be asked at the Special
Meeting to consider and vote upon: (i) a proposal to approve and adopt the
Agreement and Plan of Reorganization and Agreement and Plan of Merger; and
(ii) such other matters as may properly be brought before the meeting and
any adjournments thereof.
Shareholders Entitled to Vote
The Board of Directors of Farmers & Merchants has fixed the close of
business on Friday, December 29, 1995, as the record date for the
determination of shareholders of Farmers & Merchants entitled to receive
notice of and to vote at the Special Meeting.
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Required Vote
Each share of Farmers & Merchants Common Stock is entitled to one vote
on all matters submitted to a vote of the shareholders, except with respect
to the election of directors for which shareholders may cumulate their
votes. The affirmative vote of shareholders holding at least two-thirds of
the issued and outstanding shares of Farmers & Merchants Common Stock given
at a duly convened meeting of the shareholders of Farmers & Merchants is
required by state law in order to approve and adopt the Agreement and Plan
of Reorganization and Agreement and Plan of Merger.
Revocation and Voting of Proxies
The execution and return of the enclosed proxy form will not affect a
shareholder's right to attend the Special Meeting and to vote in person.
Any proxy given pursuant to this solicitation may be revoked at any time
before the proxy is voted at the meeting by: (i) delivering notice of a
revocation or a later-dated proxy to Charles P. McGinnis, Secretary,
Farmers & Merchants Bank (Honesdale, PA.), 1001 Main Street, Honesdale,
Pennsylvania 18431; or (ii) appearing at the meeting and notifying the
person in charge thereof that the shareholder wishes to vote his or her
shares in person. Unless revoked, any proxy given pursuant to this
solicitation will be voted at the meeting in accordance with the
instructions thereon. In the absence of instruction, all proxies will be
voted FOR the proposal to approve and adopt the Agreement and Plan of
Reorganization and the Agreement and Plan of Merger. Although the Board of
Directors knows of no other business to be presented, in the event that any
other matters are properly brought before the meeting, any proxy given
pursuant to this solicitation will be voted in accordance with the
recommendations of the management of Farmers & Merchants.
Solicitation of Proxies
This Prospectus/Proxy Statement is furnished in connection with the
solicitation of proxies, in the accompanying form by the Board of Directors
of Farmers & Merchants for use at the Special Meeting and at any
adjournments thereof. The expenses to be incurred in soliciting proxies
will be borne by Farmers & Merchants. In addition to the use of the mails,
the directors, officers and employees of Farmers & Merchants may, without
additional compensation, solicit proxies personally or by telephone or
telecopier.
Shares Outstanding and Principal Holders Thereof
At the close of business on December 29, 1995, Farmers & Merchants had
outstanding 708,016 shares of common stock, par value Two Dollars ($2) per
share, the only issued and outstanding class of stock (the "Farmers &
Merchants Common Stock").
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The following table sets forth as of December 12, 1995, the name and
address of each person who owns of record or who is known by the Board of
Directors of Farmers & Merchants to be the beneficial owner of more than 5
percent of the Farmers & Merchants Common Stock, the number of shares
beneficially owned by such person and the percentage of Farmers &
Merchants' outstanding shares so owned.
<TABLE>
<CAPTION>
Percent of
Outstanding
Shares Common Stock
Beneficially Beneficially
Name and Address Owned<F1> Owned
<S> <C> <C>
John J. Koehler 98,280 13.88%
1001 Main Street
Honesdale, PA 18431
Dale D. Fowler 68,726<F2> 9.70%
1001 Main Street
Honesdale, PA 18431
Richard J. Shershenovich 60,000<F3> 8.47%
1001 Main Street
Honesdale, PA 18431
Charles P. McGinnis 47,528 6.71%
1001 Main Street
Honesdale, PA 18431
____________________
<FN>
<F1> The Securities "beneficially owned" are determined in accordance with
the definitions of "beneficial ownership" as set forth in the regulations
of the SEC and, accordingly, may include securities owned by or for, among
others, the spouse and/or minor children of the individual and any other
relative who has the same residence as such individual as well as other
securities as to which the individual has or shares voting or investment
power or has the right to acquire under outstanding stock options within
sixty (60) days after December 12, 1995. Beneficial ownership may be
disclaimed as to certain of the securities.
<F2> Includes 12,144 shares owned jointly by Mr. Fowler and his spouse; and
8,820 shares owned individually by his spouse.
<F3> Includes 57,384 shares owned jointly by Mr. Shershenovich and his
spouse; and 2,616 shares owned individually by his spouse.
</FN>
</TABLE>
Interests of Certain Persons in Matters to be Voted Upon
Except as described in this section, the directors and executive
officers of Farmers & Merchants have no substantial interest in the
proposed merger, other than in their capacity as shareholders of Farmers &
Merchants. As shareholders, the directors and
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executive officers of Farmers & Merchants will be entitled to receive HNC
Common Stock in exchange for the Farmers & Merchants Common Stock in the
same proportion and on the same terms and conditions as all other
shareholders of Farmers & Merchants.
On or promptly after the effective date of the merger, Citizens
National will establish a regional Board of Directors for the Honesdale
Area ("Honesdale Regional Board of Directors") comprised of all of the
current members of Farmers & Merchants Board of Directors. Members of the
Farmers & Merchants Board of Directors have the option to serve as
Directors Emeriti of the Honesdale Regional Board of Directors. The
members of the Honesdale Regional Board of Directors and the Directors
Emeriti thereof will serve for a minimum of one year from the Effective
Date and receive fees of Two Hundred Dollars ($200) per month. Thereafter,
the members of the Honesdale Regional Board of Directors and the Directors
Emeriti thereof shall serve at the discretion of the Citizens National
Board of Directors.
During 1995, Directors of HNC have received Four Hundred Dollars
($400) for each Directors' meeting attended and Two Hundred Seventy-five
Dollars ($275) for each committee meeting attended, with the exception of
Mr. Walter E. Daller, Jr., President and Chief Executive Officer of HNC,
who does not receive committee fees. In addition, the Directors receive
other benefits consisting of an annual retainer fee and bonus.
Each member of the Board of Directors of Farmers & Merchants has
entered into an agreement (a "Support Agreement") pursuant to which he has
agreed to vote, or cause to be voted, his shares of Farmers & Merchants
Common Stock as to which he has or shares voting power, individually or, to
the extent of his proportionate interest, jointly with other persons, as
well as other shares over which he may acquire beneficial ownership in
favor of the Agreement and Plan of Reorganization and the proposed
transaction, and use his best efforts to cause the proposed transaction to
be effected. These persons own collectively 303,520 or 42.87 percent of
the Farmers & Merchants Common Stock outstanding. SEE THE MERGER--Voting
Agreements.
All persons employed by Farmers & Merchants prior to the merger will
be interviewed by Citizens National for purposes of determining employment
after the effective date. Severance payments not in excess of Seventy-five
Thousand Dollars ($75,000), in the aggregate, will be paid to FMB employees
whose employment is terminated (other than for cause) after the Effective
Date, and before the expiration of three (3) months following the Effective
Date. Richard K. Arnold will be employed by Citizens National for at least
six (6) months following the Effective Date at a salary equal to his salary
in effect prior to the consummation of the Agreement and Plan of
Reorganization.
The directors and officers of HNC and its subsidiaries have no special
interest in the proposed merger, other than in their capacity as
shareholders of HNC, and will not receive any special consideration or
compensation in connection with its consummation.
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Recommendation of the Board of Directors of Farmers & Merchants
For the reasons stated in this Prospectus/Proxy Statement, the Board
of Directors of Farmers & Merchants has unanimously approved and adopted
the Agreement and Plan of Reorganization and Agreement and Plan of Merger
and believes that the proposed merger is in the best interests of the
shareholders of Farmers & Merchants. Accordingly, the Board of Directors
unanimously recommends that the shareholders vote in favor of the proposal
to approve and adopt the Agreement and Plan of Reorganization and Agreement
and Plan of Merger. SEE THE MERGER--Background of and Principal Reasons
for the Merger.
Certain of the directors and officers of Farmers & Merchants have
personal interests in the consummation of the proposed merger in addition
to their interests as shareholders of Farmers & Merchants. SEE GENERAL
INFORMATION--SPECIAL MEETING OF FARMERS & MERCHANTS SHAREHOLDERS--Interests
of Certain Persons in Matters to be Voted Upon.
THE MERGER
General Information
The shareholders of Farmers & Merchants will be asked at the Special
Meeting to consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization among HNC, Farmers & Merchants and
Citizens National and the Agreement and Plan of Merger by and between
Farmers & Merchants and Citizens National. Under the terms of the
Agreement and Plan of Reorganization and Agreement and Plan of Merger: (i)
Farmers & Merchants will be merged with and into Citizens National; (ii)
Citizens National will survive the merger; and (iii) all of the outstanding
shares of Farmers & Merchants Common Stock will be converted into shares of
HNC Common Stock. Farmers & Merchants is a Pennsylvania-chartered
commercial bank and trust company and is currently regulated by the
Pennsylvania Department of Banking and the FDIC. Citizens National is a
national banking association, a wholly-owned subsidiary of HNC, and is
currently regulated by the OCC. Following the proposed merger of Farmers &
Merchants with and into Citizens National, the resulting bank will be a
national banking association and a member of the Federal Reserve System.
The OCC will be the primary regulator of the resulting bank. HNC, as the
parent company of Citizens National, will continue to be a registered bank
holding company that is regulated by the Federal Reserve Board. Citizens
National has registered the fictitious name "Farmers & Merchants Bank" in
order that the main office of Farmers & Merchants, which will become a
branch of Citizens National, may trade and be known in the Honesdale area
as Farmers & Merchants Bank.
The precise terms and conditions of the proposed merger are set forth
in the Agreement and Plan of Reorganization and Agreement and Plan of
Merger, a copy of each
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is set forth as Exhibit "A" hereto. THE DISCUSSION WHICH FOLLOWS IS
INTENDED ONLY AS A SUMMARY OF CERTAIN TERMS OF THE PROPOSED REORGANIZATION
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
AGREEMENT AND PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF MERGER.
The Board of Directors of Farmers & Merchants has unanimously approved
and adopted the Agreement and Plan of Reorganization and Agreement and Plan
of Merger, believes the proposed merger is in the best interests of the
shareholders of Farmers & Merchants, and unanimously recommends that the
Shareholders vote FOR the following resolutions which will be presented at
the Special Meeting:
RESOLVED, that the Agreement and Plan of Reorganization and
Agreement and Plan of Merger both dated September 7, 1995, by and among
Harleysville National Corporation, The Citizens National Bank of Lansford
and Farmers & Merchants Bank (Honesdale, PA.), entered into among the
respective entities, approved and adopted by the Board of Directors of the
respective entities, providing, among other things, for the merger of
Farmers & Merchants Bank (Honesdale, PA.) with and into The Citizens
National Bank of Lansford, a national banking association and a subsidiary
of Harleysville National Corporation, and for the automatic conversion of
shares of the common stock of Farmers & Merchants Bank (Honesdale, PA.)
into shares of Harleysville National Corporation common stock in accordance
with the Agreement and Plan of Reorganization and Agreement and Plan of
Merger, is hereby approved, adopted, ratified and confirmed by the
shareholders of Farmers & Merchants Bank (Honesdale, PA.);
BE IT FURTHER RESOLVED, that the appropriate officers and
directors of Farmers & Merchants Bank (Honesdale, PA.) are hereby
authorized, empowered, directed and ordered, in the name and on behalf of
Farmers & Merchants Bank (Honesdale, PA.), to execute all such documents
and take all such other actions as they may in their discretion determine
to be necessary, appropriate and desirable to carry out the intent and the
purposes contemplated by the aforementioned Agreement and Plan of
Reorganization and the Agreement and Plan of Merger and the foregoing
resolution.
Background of and Principal Reasons for the Merger
The Board of Directors of Farmers & Merchants has for several years,
as part of its planning, periodically reviewed and evaluated the various
strategic options and alternatives available to Farmers & Merchants. In
particular, the Board has considered the relative merits of maintaining the
independence of Farmers & Merchants and of merging Farmers & Merchants with
a larger financial institution in light of the many recent changes in
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federal and state banking laws and their impact upon the financial services
industry. The Board has also considered the desirability of increasing the
liquidity of Farmers & Merchants Common Stock held by Farmers & Merchants'
shareholders by arranging a merger in which Farmers & Merchants'
shareholders would receive publicly-traded stock of a larger banking
organization. The Board's primary consideration in taking the actions that
lead to the execution of the Agreement and Plan of Reorganization and the
Agreement and Plan of Merger was to provide a fair financial return to
Farmers & Merchants' shareholders and increase the liquidity of their
stock.
Prior to executing the Agreement and Plan of Reorganization and the
Agreement and Plan of Merger, the Board of Directors of Farmers & Merchants
retained Danielson Associates Inc. ("Danielson"), an investment banking
firm located at 6110 Executive Boulevard, Suite 504, Rockville, Maryland
20852, to provide financial advice regarding the proposed merger. The role
of Danielson was limited to determining the fair sale value of Farmers &
Merchants and in particular the fairness of the offer proposed by HNC from
a financial point of view. Danielson was not responsible for negotiating
or developing the terms of the proposed merger. The Board of Directors of
Farmers & Merchants has received an opinion from Danielson to the effect
that the terms of the Agreement and Plan of Reorganization and the
Agreement and Plan of Merger with HNC and Citizens National are fair to the
shareholders of Farmers & Merchants from a financial point of view. SEE
THE MERGER--Opinion of Financial Advisor.
For the reasons set forth below in this section and the immediately
following section of this Prospectus/Proxy Statement, the Board of
Directors of Farmers & Merchants has unanimously concluded that the
proposed merger is in the best interests of Farmers & Merchants'
shareholders, employees, customers and the community it serves. The
following discussion explains how the proposed merger is to benefit each of
these groups.
As stated above, Danielson has advised Farmers & Merchants' Board of
Directors that the terms of the Agreement and Plan of Reorganization and
the Agreement and Plan of Merger are fair to Farmers & Merchants'
shareholders from a financial point of view. In addition, the Board of
Directors expects that the proposed merger will benefit the shareholders of
Farmers & Merchants by providing them with equity ownership in a larger,
publicly-traded banking organization and, thereby, increasing the liquidity
of their investment. Historically, Farmers & Merchants Common Stock has
been traded on a limited basis in the local over-the-counter market and in
privately negotiated transactions. Upon consummation of the merger, the
shareholders of Farmers & Merchants will receive HNC Common Stock which is
more actively traded and is listed for quotation on the national market
system of the National Association of Securities Dealers Automated
Quotation System ("Nasdaq"). SEE COMPARATIVE STOCK PRICES AND DIVIDENDS
AND RELATED SHAREHOLDER MATTERS.
In addition to the benefits that the proposed merger would provide
Farmers & Merchants' shareholders, the Board of Directors of Farmers &
Merchants has determined
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that HNC and Citizens National would be attractive merger partners for
several reasons. First, the merger would provide Farmers & Merchants with
additional management and support systems which will better enable Farmers
& Merchants to adapt its operations to the rapidly changing legal and
competitive conditions within the banking industry, thus benefitting
Farmers & Merchants employees and customers.
A second benefit of the proposed merger to Farmers & Merchants'
customers is that, as described in the following section entitled
Additional Reasons for the Merger, Farmers & Merchants' Merger with HNC and
Citizens National will enable Farmers & Merchants' banking office to offer
customers an expanded range of products and services. Third, HNC and
Citizens National share with Farmers & Merchants a strong commitment to the
concept of community-oriented banking. Fourth, as discussed in the section
below entitled Management and Operations Following the Merger, Farmers &
Merchants will continue to employ and be administered by knowledgeable
local residents for the benefit of the local community.
Additional Reasons for the Merger
Recent changes in federal and state banking laws and regulations have
had a major impact upon the banking industry in Pennsylvania and throughout
the United States. In response to these changes, many mergers and
consolidations involving banks and bank holding companies have occurred.
Further merger activity is likely to occur in the future, resulting in
increased concentration levels in banking markets and other significant
changes in the competitive environment. These changes are expected to
intensify competition in local and regional banking markets. In addition,
recent changes in federal banking laws have significantly increased the
severity and complexity of federal banking regulations as well as the costs
banks must incur in complying with those regulations.
From the standpoint of Farmers & Merchants, the proposed merger
represents an attractive opportunity to acquire access to additional
managerial expertise and specialized services offered by HNC and its
banking subsidiary, Citizens National, thus permitting Farmers & Merchants'
banking office to provide a broader range of services to its customers in
the face of increasing competition from larger financial institutions. For
example, following the merger, Farmers & Merchants will be able to provide
new and expanded banking services to its customers that are provided
currently by Citizens National. Citizens National has offered some
innovative products to its marketplace. These products can be easily
transferred and implemented, with some modifications for competitive
pricing, into Farmers & Merchants' marketplace. One such product is called
Kids Banking. This program concentrates on educating youth in the workings
of the economic system, how banks interact within the economy, how to apply
for credit, how to write checks and how to budget. The program attempts to
involve local schools providing educational materials to teachers to
promote better understanding of banking for students.
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Another program offered by Citizens National that would benefit
Farmers & Merchants' marketplace is its "Seniors Program". The program
requires a deposit relationship of minimum proportions and offers selected
free banking services to seniors, along with social activities and
educational opportunities.
Citizens National has a wide range of deposit and loan products which
could accommodate Farmers & Merchants' customers' borrowing needs. Lending
could be expanded in Farmers & Merchants' marketplace by adding more
competitive and additional products which will benefit Farmers & Merchants'
community and its citizens. Citizens National's and Harleysville
National's experienced management and greater financial resources are
expected to provide a benefit. For example, Farmers & Merchants will be
able to entertain more small to medium size business loans. Thus, the
merger will enhance the ability of Farmers & Merchants to remain
competitive and to satisfy customers' financial needs. The proposed merger
will benefit HNC by expanding its market presence to the Honesdale area,
thereby allowing it to compete in that region.
The Board of Directors of Farmers & Merchants believes that the terms
of the proposed merger are fair to, and in the best interests of, Farmers &
Merchants and its shareholders and employees. Farmers & Merchants' Board
of Directors also believes that the proposed merger will significantly
enhance the ability of Farmers & Merchants to satisfy the financial needs
of its customers and the communities which it serves.
Opinion of Financial Advisor
Farmers & Merchants has engaged Danielson to act as its financial
advisor for the purpose of evaluating the financial terms of the proposed
merger. Farmers & Merchants selected Danielson because Danielson: (i) has
extensive experience in the evaluation of banking organizations involved in
merger transactions; and (ii) is familiar with Pennsylvania banking
organizations and banking markets. Danielson had no material relationship
with Farmers & Merchants during the past two years and no such relationship
is presently contemplated, except for the advice provided by Danielson to
Farmers & Merchants as described herein.
To date, Farmers & Merchants has incurred from Danielson a fee,
including expenses, of approximately Fifteen Thousand Eight Hundred Dollars
($15,800) for services rendered in connection with the proposed merger.
Such services included an independent appraisal of the fair sale value of
Farmers & Merchants and the issuance of a fairness opinion of the offer
made by HNC. Except for the preparation of a supplemental opinion,
referred to below, for which Danielson will receive an additional fee of
approximately One Thousand Dollars ($1,000), Farmers & Merchants does not
expect Danielson to provide additional services or to be paid additional
fees in connection with the proposed merger.
Danielson has delivered to the Board of Directors of Farmers &
Merchants, its opinion dated January 2, 1996, stating that, based upon
the review described therein,
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the consideration to be offered to Farmers & Merchants' shareholders in
connection with the proposed merger is fair to the shareholders of Farmers
& Merchants from a financial point of view. A copy of the opinion of
Danielson is attached to this Prospectus/Proxy Statement as Exhibit "B" and
should be read in its entirety by the shareholders of Farmers & Merchants.
As set forth in its opinion, Danielson has relied without independent
investigation upon the accuracy and completeness of the information that:
(i) was furnished by Farmers & Merchants and HNC; or (ii) is publicly
available. In determining the fair sale value of Farmers & Merchants,
Danielson has given primary emphasis to: (i) prices paid for commercial
banks with similar financial, geographic market and structural
characteristics; and (ii) the relationship of those prices to earnings and
tangible equity capital.
In the course of preparing its opinion, Danielson determined the
"fair" sale value of the Farmers & Merchants' Common Stock as well as the
valuation of the HNC Common Stock. Farmers & Merchants market, business
and prospects were analyzed and its financial performance compared with
banks in the same region as Farmers & Merchants. Likewise, the financial
and stock performances of HNC were analyzed and compared to comparable
banks whose stock is actively traded. Danielson also analyzed the movement
of trading prices of the HNC Common Stock and dividend payments thereon,
the dilutive effect of the proposed transaction with Farmers & Merchants
and HNC's financial performance in relation to the trading prices of the
HNC Common Stock. In determining the fair sale value of Farmers &
Merchants, primary emphasis was given to prices paid for commercial banks
with characteristics similar to those of Farmers & Merchants. This
analysis showed that the transaction being proposed by HNC valued at
approximately $12 Million or $17.00 per share, payable in HNC Common Stock
was deemed by Danielson to be fair to Farmers & Merchants and its
shareholders, from a financial point of view.
The foregoing provides only a summary of the opinion of Danielson and
is qualified in its entirety by reference to the full text of that opinion,
a copy of which is set forth in Exhibit "B" to this Prospectus/Proxy
Statement.
Farmers & Merchants' management has received from Danielson a
supplemental opinion which is dated as of the date of this Prospectus/Proxy
Statement confirming that the consideration to be received by Farmers &
Merchants' shareholders in connection with the merger is fair to Farmers &
Merchants shareholders from a financial point of view. The receipt of such
supplemental fairness opinion is a condition to Farmers & Merchants'
obligation to consummate the merger.
Conversion and Exchange of Shares
On the effective date of the merger, each share of Farmers & Merchants
Common Stock then issued and outstanding will automatically be converted
into and become at least .5915 but not more than .6915 shares of HNC Common
Stock (the "collar exchange
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ratios"). The actual number within the range (subject to adjustment for
certain
stock dividends, stock splits and similar transactions) will be determined
by dividing Seventeen Dollars ($17) by the arithmetic average of the per
share closing prices for HNC Common Stock for the twenty (20) trading days
immediately preceding the date which is five (5) business days before the
effective date (as defined in the Agreement and Plan of Reorganization) of
the merger, as reported on the National Market System of the National
Association of Securities Dealers Automated Quotation System. The
resulting quotient will be divided into the Seventeen Dollars ($17) and
rounded to the nearest one-thousandth. If the resulting quotient,
however, is less than .5915, or more than .6915, the collar exchange
ratios will apply. Therefore, shareholders will receive an exchange ratio
of at least .5915 shares but no more than .6915 shares of HNC Common Stock.
Following the effective date of the merger, Farmers & Merchants
shareholders will exchange their Farmers & Merchants Common Stock
certificates for HNC Common Stock certificates in accordance with
procedures described below in this section.
No fractional shares of HNC Common Stock will be issued in connection
with the merger. In lieu of the issuance of any fractional share to which
he or she would otherwise be entitled, each former shareholder of Farmers &
Merchants will receive cash in an amount equal to the fair market value of
his or her fractional interest, in an amount equal to such fractional part
of a share of HNC Common Stock multiplied by the Formula Price which is
defined as Seventeen Dollars ($17) divided by the Formula Number rounded to
the nearest cent.
HNC and Farmers & Merchants anticipate that the effective date of the
merger will occur during the first quarter of 1996, assuming no
difficulties are encountered in obtaining the required regulatory approvals
and shareholder approval, and all other conditions to closing are satisfied
without unexpected delay. If for any reason, however, the effective date
of the merger fails to occur by June 30, 1996 and the parties have not
agreed otherwise prior to that date, the Agreement and Plan of
Reorganization will terminate automatically.
Following the effective date of the merger, each former shareholder of
Farmers & Merchants will be obliged to surrender to HNC the Farmers &
Merchants Common Stock certificates held by him or her. Detailed
instructions concerning the procedure for surrendering Farmers & Merchants
Common Stock certificates will be sent by HNC to each former shareholder of
Farmers & Merchants on or promptly after the effective date of the merger.
Upon proper surrender of his or her Farmers & Merchants Common Stock
certificates, each former shareholder of Farmers & Merchants will be issued
a stock certificate representing the number of whole shares of HNC Common
Stock into which his or her shares of Farmers & Merchants Common Stock had
been converted, together with a check in the amount of any cash to which he
or she is entitled in lieu of the issuance of a fractional share of HNC
Common Stock. Shareholders of Farmers & Merchants should not surrender
their Farmers & Merchants Common Stock certificates for exchange until they
receive written instructions to do so from HNC.
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Following the effective date of the merger and until properly
requested and surrendered, each Farmers & Merchants Common Stock
certificate will be deemed for all corporate purposes to represent the
number of whole shares of HNC Common Stock which the holder would be
entitled to receive upon its surrender. Provided, however, that HNC, at
its option, may withhold dividends payable after the effective date of the
merger to any former shareholder of Farmers & Merchants who has received
written instructions from HNC but has not at that time surrendered his or
her Farmers & Merchants Common Stock certificates. Any dividends so
withheld, will be paid without interest to any former shareholder of
Farmers & Merchants upon the proper surrender of his or her Farmers &
Merchants Common Stock certificates.
All Farmers & Merchants Common Stock certificates must be surrendered
to HNC within two years after the effective date of the merger. In the
event that any former shareholder of Farmers & Merchants does not properly
surrender his or her Farmers & Merchants Common Stock certificates within
that time, the shares of HNC Common Stock that would otherwise have been
issued to him or her may, at the option of HNC, be sold and the net
proceeds of such sale, together with the cash (if any) to which he or she
is entitled in lieu of the issuance of a fractional share and any
previously accrued and unpaid dividends, will be held in a non-interest
bearing account for his or her benefit. From and after such sale, the sole
right of such former shareholder of Farmers & Merchants will be the right
to collect such net proceeds, cash and accumulated dividends. Subject to
all applicable laws of escheat, such net proceeds, cash and accumulated
dividends will be paid to such former shareholder of Farmers & Merchants,
without interest, upon proper surrender of his or her Farmers & Merchants
Common Stock certificates.
The foregoing discussion relating to the conversion and exchange of
Farmers & Merchants Common Stock is only a summary which is provided for
convenience. The foregoing discussion should be read in conjunction with,
and is qualified in its entirety by, the terms of Article II of the
Agreement and Plan of Reorganization. The Agreement and Plan of
Reorganization is reproduced in full and set forth in Exhibit "A" of this
Prospectus/Proxy Statement.
Voting Agreements
In connection with the Agreement and Plan of Reorganization, the
directors of Farmers & Merchants have entered into agreements to vote
certain shares beneficially owned by them in favor of the merger.
Specifically, each member of the Board of Directors of Farmers & Merchants
has entered into an agreement (a "Support Agreement") pursuant to which he
has agreed to vote, or cause to be voted, his shares of Farmers Common
Stock as to which he has or shares voting power, individually or, to the
extent of his proportionate interest, jointly with other persons, as well
as other shares over which he may acquire beneficial ownership in favor of
the Agreement and Plan of Reorganization and the proposed transaction, and
use his best efforts to cause the proposed transaction to be effected. In
the aggregate, these agreements commit 303,520 shares of Farmers &
-12-
<PAGE>
Merchants Common Stock or 42.87 percent of the total shares outstanding to
be voted in favor of the merger.
The agreements further provide that with respect to the shares of
Farmers & Merchants Common Stock owned by the directors, until the merger
has been consummated or the Agreement and Plan of Reorganization has been
terminated, such persons will not: (i) sell or otherwise transfer their
respective shares of Farmers & Merchants Common Stock; (ii) exercise any
previously granted stock option; (iii) directly or indirectly solicit or
encourage inquiries or proposals from or participate in any discussion or
negotiations with any other person, entity or group concerning any sale of
assets, sale of shares, merger, consolidation or similar transaction
involving Farmers & Merchants.
Business Pending the Effective Date
Pursuant to the Agreement and Plan of Reorganization, Farmers &
Merchants is required, pending the effective date of the merger, to conduct
its business in the usual, regular and ordinary course, consistent with
prudent business judgment. Farmers & Merchants may not take any action not
in the ordinary course of business without the prior written consent of
HNC. Farmers & Merchants has agreed that, in general, pending the
effective date of the merger, it will not take any of the following actions
without the written consent of HNC: (i) amend its articles of
incorporation or bylaws; (ii) enter into or assume any material contract
not in the ordinary course; (iii) breach any warranty or covenant set forth
in the Agreement and Plan of Reorganization; (iv) declare and pay cash
dividends in excess of Seven Cents ($.07) per share during each of the
third and fourth calendar quarters of 1995, and, if the effective date of
the merger is after the record date of the HNC 1996 first quarter dividend,
Farmers & Merchants may pay a regular quarterly cash dividend for the first
calendar quarter not in excess of Twelve Cents ($.12) per share; likewise,
if the effective date of the merger is after the record date of the HNC
1996 second quarter dividend, Farmers & Merchants may pay a regular
quarterly cash dividend not in excess of Twelve Cents ($.12) per share; (v)
authorize, purchase, issue or sell shares of Farmers & Merchants Common
Stock or any other equity or debt securities or derivatives; (vi) increase
the rate of compensation or make a bonus or severance payment to any
employee of Farmers & Merchants; (vii) enter into any related party
transaction other than extensions of credit in the ordinary course of
business; (viii) affect any capitalization reclassification, stock
dividends or splits; (ix) enter into or modify any pension, retirement,
stock option or similar benefit plan; (x) merge with any other entity; and
(xi) solicit or encourage inquiries in connection with a business
combination involving Farmers & Merchants, other than as contemplated by
the Agreement and Plan of Reorganization.
There have been no material contracts or other transactions between
Farmers & Merchants and HNC since signing the Agreement and Plan of
Reorganization, nor have there been any material contracts, arrangements,
relationships or transactions between Farmers & Merchants and HNC during
the past five years, other than in connection with the Agreement and Plan
of Reorganization described herein.
-13-
<PAGE>
Conditions, Amendment and Termination
The obligations of HNC and Farmers & Merchants to consummate the
merger are subject to a number of conditions and contingencies as set forth
in the Agreement and Plan of Reorganization, the most significant of which
include: (i) approval by the shareholders of Farmers & Merchants; (ii)
approval by federal banking regulators; (iii) the receipt of a favorable
opinion of counsel concerning certain federal income tax consequences
relating to the merger; (iv) continued effectiveness of the registration
statement concerning the Prospectus/Proxy Statement; (v) the absence of any
pending or threatened action, suit or proceeding before any federal, state
or local governmental authority or arbitration tribunal seeking to modify
or otherwise affect the transactions contemplated by the merger; (vi) the
continuing accuracy in all material respects of the representations and
warranties and the absence of any breach of any of the covenants made by
HNC or Farmers & Merchants; (vii) the receipt of opinions from counsel for
Farmers & Merchants and from counsel for HNC concerning certain legal
matters; (viii) the absence of any material adverse change in the financial
condition, business or future prospects of HNC or Farmers & Merchants; (ix)
the determination that the merger can be accounted for as a pooling of
interests for financial reporting purposes; (x) the determination of HNC
and Farmers & Merchants and their counsel that all applicable federal and
state securities and anti-trust laws have been complied with; (xi) the
exercise by dissenting shareholders of dissenters' rights with respect to
less than 35,400 shares of Farmers & Merchants Common Stock; (xii) the
absence of discovery of any material previously undisclosed environmental
problem affecting HNC or Farmers & Merchants; (xiii) the execution by each
of the directors of Farmers & Merchants of a support agreement; (xiv) the
execution by Farmers & Merchants of an investment agreement; (xv) the
receipt of a fairness opinion from an investment advisor as of the date of
this Prospectus/Proxy Statement concerning the fairness to the shareholders
of Farmers & Merchants from a financial point of view of the terms of the
transactions contemplated by the merger; and (xvi) the delivery of
certificates at closing, by officers of HNC and Farmers & Merchants,
confirming satisfaction of the foregoing.
To the extent permitted by law, the Agreement and Plan of
Reorganization may be amended by mutual consent and any term or condition
thereof may be waived by the party entitled to its benefit at any time
before the effective date of the merger, whether before or after the
approval of the Agreement and Plan of Reorganization by Farmers &
Merchants' shareholders and without seeking shareholder approval provided,
however, that no change to the amount of consideration to be received by
the shareholders of Farmers & Merchants can be adopted unless and until the
shareholders of Farmers & Merchants approve, adopt or ratify such change in
accordance with applicable federal and state law.
The Agreement and Plan of Reorganization may be terminated at any time
before the effective date of the merger, whether before or after its
approval and adoption by the shareholders of Farmers & Merchants by: (i)
mutual consent of all of the parties; (ii) unilateral action by each of the
parties in the event of a material breach by any other party of any
representation, warranty or covenant not cured within thirty (30) days or
failure
-14-
<PAGE>
to satisfy any condition precedent to the terminating party's obligation to
consummate the merger through no fault of the terminating party; or (iii)
automatically in the event of a failure to consummate the merger by June
30, 1996, unless extended in writing prior that date.
Effective Date
The proposed merger will become effective on the date and according to
the provisions specified in the "Certificate of Merger" issued by the OCC.
The Certificate of Merger is expected to be issued as soon as reasonably
possible after all conditions precedent have been satisfied or waived. HNC
and Farmers & Merchants intend to consummate the merger during the first
quarter of 1996, assuming that the merger is approved by Farmers &
Merchants' shareholders, all required regulatory approvals have been
obtained and all other conditions to closing have been satisfied or waived
by that time. The Agreement and Plan of Reorganization will automatically
be terminated and the proposed merger cancelled if all applicable
conditions have not been satisfied by June 30, 1996, unless the parties
have agreed prior to that date to extend the termination date. In
addition, the Agreement and Plan of Reorganization provides that the
closing of the merger must occur within sixty (60) days after all
applicable conditions, including regulatory approvals, have been satisfied.
Management and Operations Following the Merger
On the effective date of the merger, Farmers & Merchants will be
merged with and into Citizens National. Citizens National will survive the
merger. Citizens National has filed a fictitious name to trade in the
Honesdale area as Farmers & Merchants Bank after the effective date of the
transaction. The shareholders of Farmers & Merchants will become
shareholders of HNC. The Boards of Directors of HNC and Citizens National
following the merger will include the same persons who are members of those
Boards of Directors immediately before the merger, each of whom will serve
until his or her successor is elected and has qualified. Additionally,
after the merger, a Regional Board of Directors for the Honesdale area
("Honesdale Regional Board of Directors") will be established consisting of
all the current members of the Farmers & Merchants Board of Directors. The
members of Farmers & Merchants Board of Directors may serve, if they so
desire, as Directors Emeriti of the Honesdale Regional Board of Directors.
The Honesdale Regional Board of Directors, including Directors
Emeriti, if any, will serve for a minimum period of one year, receiving
fees of Two Hundred Dollars ($200) per month from the effective date, and
thereafter, at the discretion of the Citizens National Board of Directors.
Upon the effective date of the merger, all officers and employees of
Farmers & Merchants will become employees of Citizens National. Prior to
the effective date, HNC and Citizens National may interview employees of
Farmers & Merchants for purposes of
-15-
<PAGE>
determining employment after the effective date of the merger. Richard K.
Arnold will remain employed by Citizens National for at least six (6)
months after the effective date at a salary equal to his salary in effect
prior to September 7, 1995.
Federal Income Tax Consequences
Pursuant to the Agreement and Plan of Reorganization, an opinion will
be provided by Shumaker Williams, P. C., counsel for HNC, which will state,
for federal income tax purposes:
1. The transactions contemplated by the Agreement and Plan of
Reorganization will constitute a reorganization within the meaning of
Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of
1986, as amended;
2. No gain or loss will be recognized by HNC or Farmers & Merchants
as a result of the reorganization;
3. No gain or loss will be recognized by the shareholders of Farmers
& Merchants upon receipt of HNC Common Stock in exchange for the Farmers &
Merchants Common Stock pursuant to the provisions of the Agreement and Plan
of Reorganization, except in respect of cash which is received in lieu of
the issuance of fractional shares of HNC Common Stock (or by any
shareholder of Farmers & Merchants who exercises dissenters' rights);
4. In the case of cash received by any shareholder of Farmers &
Merchants in lieu of the issuance of a fractional share of HNC Common
Stock, taxable gain or loss will be recognized by such shareholder to the
extent of the difference between the amount of the cash received and the
adjusted tax basis of such fractional share interest;
5. In the case of cash received by any shareholder of Farmers &
Merchants who exercises dissenters' rights, taxable gain or loss will be
recognized by such shareholder to the extent of the difference between the
amount of the cash received and the adjusted tax basis of the shares as to
which dissenters' rights are exercised;
6. The tax basis of the HNC Common Stock to be received by the
shareholders of Farmers & Merchants pursuant to the provisions of the
Agreement and Plan of Reorganization will be the same as the tax basis of
Farmers & Merchants Common Stock surrendered in exchange therefor; and
-16-
<PAGE>
7. The holding period of the HNC Common Stock to be received by the
shareholders of Farmers & Merchants pursuant to the provisions of the
Agreement and Plan of Reorganization will include the holding period of the
Farmers & Merchants Common Stock surrendered in exchange therefor, provided
such Farmers & Merchants Common Stock is held as a capital asset on the
effective date of the proposed merger.
The foregoing is intended only as a general summary of certain federal
income tax consequences of the proposed merger under present law. Each
shareholder of Farmers & Merchants is urged to consult his or her own tax
advisor concerning the particular tax consequences of the proposed merger
as they affect his or her individual circumstances, including the impact of
any applicable estate, gift, state, local, foreign or other tax.
Warrant Agreement
In connection with the Agreement and Plan of Reorganization, HNC and
Farmers & Merchants have entered into an "Investment Agreement" and Farmers
& Merchants has issued to HNC a warrant thereunder (collectively the
"Warrant Agreement") entitling HNC to purchase up to approximately 19.9
percent of Farmers & Merchants' outstanding Common Stock, upon the
occurrence of certain events summarized below. The Warrant Agreement
covers 140,900 shares of the Farmers & Merchants Common Stock at a per
share exercise price of Seventeen Dollars ($17), subject to adjustment.
The Warrant Agreement is designed to compensate HNC for its risks,
costs and expenses and the commitment of resources associated with the
merger in the event the merger is not consummated due to an attempt by a
third person to gain control of Farmers & Merchants. The Warrant Agreement
provides that HNC may not sell, assign, transfer or exercise its warrant
without the written consent of Farmers & Merchants except upon: (i) a
willful breach of the Agreement and Plan of Reorganization by Farmers &
Merchants; (ii) the failure of Farmers & Merchants shareholders to approve
the Agreement and Plan of Reorganization after the announcement by any
third person of an offer or proposal to acquire 15 percent or more of the
Farmers & Merchants Common Stock or merge or consolidate with Farmers &
Merchants or to purchase substantially all of its assets; (iii) the
acquisition by a third person of beneficial ownership of 15 percent or more
of the Farmers & Merchants Common Stock; (iv) the commencement by a third
person of a tender offer or exchange offer to acquire 15 percent or more of
the Farmers & Merchants Common Stock; or (v) the entry by Farmers &
Merchants into an agreement or understanding with a third person to
acquire, merge, or consolidate with Farmers & Merchants or to acquire
substantially all of its assets (each of the foregoing is referred to
herein as a "Warrant Event"). No Warrant Event has occurred as of the date
of this Prospectus/Proxy Statement and neither HNC nor Farmers & Merchants
is aware that any Warrant Event is contemplated by any third person. The
Warrant Agreement may discourage third persons
-17-
<PAGE>
from making competing offers to acquire Farmers & Merchants and is intended
to increase the likelihood that the merger is consummated in accordance
with the terms set forth in the Agreement and Plan of Reorganization.
If a Warrant Event occurs, HNC may exercise the warrant in whole or in
part or may sell or transfer all or part of the warrant to other persons.
Under Federal Banking Law, exercise of the warrant for more than 5 percent
of the outstanding Farmers & Merchants Common Stock would require approval
of the Federal Reserve Board. Any sale by HNC of the warrant or of the
shares of Farmers & Merchants Common Stock purchased thereunder would be
subject to a right of first refusal by Farmers & Merchants.
HNC may require Farmers & Merchants, subject to regulatory approval,
to redeem the warrant or any shares of Farmers & Merchants Common Stock
purchased thereunder if: (i) a third person acquires beneficial ownership
of 50 percent or more of the Farmers & Merchants Common Stock; or (ii)
Farmers & Merchants enters into an agreement or understanding with a third
person for the third person to acquire, merge or consolidate with Farmers &
Merchants or to acquire substantially all of its assets (each of the
foregoing is referred to herein as a "Redemption Event"). In general, the
per share redemption price for the warrant would be the higher of 110
percent of the exercise price or the highest price paid or agreed to be
paid by the third person in connection with the Redemption Event. The
ability of Farmers & Merchants to effect any such redemption or repurchase
of any shares issued under the Warrant Agreement would be subject to
obtaining the approval of the Pennsylvania Department of Banking. The
Pennsylvania Department of Banking could prohibit redemption if, in its
view, the redemption would constitute an unsafe or unsound banking
practice.
The Warrant Agreement also contains provisions giving Farmers &
Merchants the right to repurchase shares of Farmers & Merchants Common
Stock issued under the warrant in certain limited circumstances and
provisions for issuance of a substitute warrant to purchase shares of the
surviving or acquiring company in the event of a merger or other
acquisition of Farmers & Merchants.
Unless the merger is effected, certain conditions to closing become
incapable of satisfaction or HNC shall have engaged in a willful breach of
the Agreement and Plan of Reorganization, the rights under the Warrant
Agreement shall not terminate until the later of July 1, 1997 or twelve
(12) months after the date of a Warrant Event. In the event that a Warrant
Event occurs prior to the valid termination of the Agreement and Plan of
Reorganization, the Warrant will remain exercisable until the date set
forth above even if the Agreement and Plan of Reorganization automatically
terminates on June 30, 1996, the termination date of the Agreement and Plan
of Reorganization.
The foregoing description is intended only as a summary of the
provisions of the Warrant Agreement and does not purport to be complete.
It is qualified in its entirety by reference to the Warrant Agreement which
has been filed with the Securities and Exchange
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<PAGE>
Commission as an exhibit to the HNC SEC Form S-4 Registration Statement.
The Warrant Agreement is incorporated in this Prospectus/Proxy Statement by
reference to such filing.
Accounting Treatment
The Agreement and Plan of Reorganization contemplates that the
proposed merger will be treated as a pooling of interests for financial
accounting purposes. If HNC would be required to purchase more than 10
percent of the outstanding shares of Farmers & Merchants Common Stock for
cash, due to the purchase of fractional shares and the exercise of
dissenters' rights by Farmers & Merchants shareholders, or if other
conditions arise which would prevent the merger from being treated as a
pooling of interests for financial accounting purposes, HNC has the right
to terminate the Agreement and Plan of Reorganization and to cancel the
proposed merger.
Rights of Dissenting Shareholders
In accordance with the provisions of Section 215a of Title 12, United
States Code (12 U.S.C. Section 215a), any shareholder of Farmers &
Merchants who wishes to exercise dissenters' rights with respect to the
proposed merger must either: (i) vote against the proposed merger; or (ii)
file a written notice prior to or at the Special Meeting convened to vote
upon the proposed merger, stating that he or she dissents from the proposed
merger, which written notice should be addressed to Richard J.
Shershenovich, President, Farmers & Merchants Bank (Honesdale, PA.), 1001
Main Street, Honesdale, PA 18431. In addition, any shareholder of Farmers
& Merchants wishing to exercise dissenters' rights must make a written
request for payment to HNC, accompanied by the surrender of his or her
Farmers & Merchants Common Stock certificates at any time before thirty
(30) days after the effective date of the merger which written requests and
surrender should be sent to Jo Ann M. Bynon, Assistant Secretary of the
Board, Harleysville National Corporation, 483 Main Street, Harleysville,
Pennsylvania 19438. Dissenting shareholders who fail to follow the
procedure specified in this paragraph will lose their dissenters' rights
under the foregoing statutory provisions.
Any dissenting shareholder who does comply with the procedures
described in the preceding paragraph will be entitled, following the
effective date of the merger, to receive in cash the value of the shares of
Farmers & Merchants Common Stock held by him or her, determined as of the
effective date of the merger. The value of any shares of Farmers &
Merchants Common Stock held by such person will be determined by an
appraisal committee of three persons. One member of the appraisal
committee will be chosen by a majority vote of all qualifying dissenting
shareholders, one member will be chosen by the Board of Directors of
Farmers & Merchants and the third member will be selected by the two
members so chosen. A valuation of the shares may be agreed upon by any two
of the members of the appraisal committee.
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<PAGE>
If the appraisal committee's evaluation is not satisfactory to any
qualifying dissenting shareholder, such a shareholder may, within five (5)
days after receiving notice of such evaluation, appeal to the OCC, who will
make a binding and final reappraisal as to the value of the shares held by
such shareholder. If within ninety (90) days from the effective date of
the merger: (i) one or more appraisal committee members have not been
selected for any reason; or (ii) the appraisal committee is not able to
agree by a vote of two or more members, on the value of the shares held by
qualifying dissenting shareholders, the OCC upon the request of any
interested party will make a binding and final appraisal of the value of
such shares. The expenses of the OCC making a reappraisal or appraisal
will be paid by HNC.
The foregoing discussion is only a summary of the rights and
obligations of a dissenting shareholder and is qualified in its entirety by
reference to the provisions of Section 215a of Title 12 of the United
States Code, which are reproduced and set forth in full in Exhibit "C" to
this Prospectus/Proxy Statement. Failure to follow the procedure set forth
((in 12 U.S.C. Section 215a governing the exercise of dissenters' rights
will result in the loss of such rights. Shareholders may wish to consult
legal counsel if they are considering a possible exercise of dissenters'
rights.
Pursuant to the Agreement and Plan of Reorganization, HNC has the
right to terminate such agreement and to cancel the proposed merger if
Farmers & Merchants shareholders exercise dissenters' rights with respect
to 35,400 or more shares of Farmers & Merchants Common Stock. HNC could
waive this right but has no present intention to do so. SEE THE MERGER--
Conditions, Amendment and Termination, and THE MERGER--Accounting
Treatment.
Restriction on Resale of HNC Common Stock Held By Affiliates of Farmers &
Merchants
The shares of HNC Common Stock to be issued upon consummation of the
proposed merger have been registered with the SEC under the Securities Act
of 1933 (the "1933 Act") and, following the merger, may be freely resold or
otherwise transferred by all former shareholders of Farmers & Merchants,
except those former shareholders who are deemed "affiliates" of Farmers &
Merchants, within the meaning of SEC Rules 144 and 145. In general terms,
any person who is an executive officer, director or 10 percent shareholder
of Farmers & Merchants at the time of the Special Meeting may be deemed to
be an affiliate of Farmers & Merchants for purposes of SEC Rules 144 and
145.
HNC Common Stock received by persons who are deemed to be affiliates
of Farmers & Merchants may be resold only: (i) in compliance with the
provisions of SEC Rule 145(d); (ii) in compliance with the provisions of
another applicable exemption from the registration requirements of the 1933
Act; or (iii) pursuant to an effective registration statement filed with
the SEC. In general terms, SEC Rule 145(d) would permit an affiliate of
Farmers & Merchants to sell shares of HNC Common Stock received by him or
her in ordinary brokerage transactions subject to certain limitations on
the number of shares
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<PAGE>
which may be resold in any consecutive three (3) month period.
Notwithstanding the foregoing, an affiliate of Farmers & Merchants may not,
as a general rule and subject to an exception in a case of certain de
minimis sales: (i) sell any shares of Farmers & Merchants Common Stock
during the 30-day period immediately preceding the effective date of the
merger; or (ii) sell any shares of HNC Common Stock received by him or her
in exchange for his or her shares of Farmers & Merchants Common Stock until
after the publication of financial results covering at least thirty (30)
days of post-merger combined operations.
Under the terms of the Agreement and Plan of Reorganization, each
person who may be deemed to be an affiliate of Farmers & Merchants is
required, prior to the closing of the merger, to deliver to HNC, a letter
in form and substance satisfactory to HNC, acknowledging and agreeing to
abide by the limitations imposed by the 1933 Act and the rules of the SEC
thereunder regarding the sale or other disposition of the shares of HNC
Common Stock to be received by him or her pursuant to the merger.
COMPARATIVE STOCK PRICES AND DIVIDENDS
AND RELATED SHAREHOLDER MATTERS
Common Stock of HNC
HNC Common Stock is traded in the over-the-counter market and is
listed on the National Market System of the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") under the symbol
"HNBC". The table below sets forth, for the periods indicated, high and
low bid quotations for HNC Common Stock as reported on Nasdaq, and cash
dividends paid per share. The quotations set forth in the table represent
quotations between dealers, do not include retail markups, markdowns or
commissions, and may not represent actual transactions. All information
has been adjusted for stock dividends and splits throughout the period.
<TABLE>
<CAPTION>
Cash Dividends
1995 High Low Paid Per Share
<S> <C> <C> <C>
First Quarter 28.00 25.00 0.180
Second Quarter 28.00 25.00 0.180
Third Quarter 28.50 25.00 0.190
Fourth Quarter to date 28.50 26.25 0.240<F1>
1994
First Quarter 31.43 20.00 0.133
Second Quarter 31.43 28.57 0.153
Third Quarter 30.95 26.07 0.153
Fourth Quarter 28.10 24.76 0.171
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1993
First Quarter 18.10 16.67 0.119
Second Quarter 18.57 16.67 0.119
Third Quarter 19.05 16.90 0.124
Fourth Quarter 21.19 18.10 0.128
____________________
<FN>
<F1> Payable on December 29, 1995.
</FN>
</TABLE>
On November 28, 1995, the closing bid and asked quotations for HNC
Common Stock as reported on Nasdaq were, respectively, Twenty-six Dollars
and Twenty-five Cents ($26.25) and Twenty-eight Dollars ($28.00). On
Thursday, September 7, 1995, the last trading day before public
announcement of the agreement in connection with the proposed merger, the
closing bid and asked quotations for HNC Common Stock were Twenty-six
Dollars ($26) and Twenty-eight Dollars and Fifty Cents ($28.50),
respectively, as reported on Nasdaq. As of December 12, 1995, HNC Common
Stock was held by 2,067 holders of record. HNC has in the past paid
regular quarterly cash dividends to its shareholders on or about March 31,
June 30, September 30, and December 31, of each year.
Common Stock of Farmers & Merchants
Farmers & Merchants Common Stock has historically been traded on a
limited basis in the local over-the-counter market and in privately
negotiated transactions. Because trading in Farmers & Merchants Common
Stock is sporadic, it cannot be said that an established trading market
exists. The only bid information concerning the Farmers & Merchants Common
Stock of which Farmers & Merchants management is aware came from Dean
Witter Reynolds, as quoted in the Scranton Tribune/Times of Scranton,
Pennsylvania who provided bids periodically in 1995 in the amount of
Fourteen Dollars and Thirty-eight Cents ($14.38) per share.
The most recent sale of Farmers & Merchants Common Stock of which
Farmers & Merchants management is aware is a trade of 240 shares that
occurred on April 18, 1995, at a price of Fifteen Dollars and Twenty-five
Cents ($15.25) per share.
Farmers & Merchants has in the past paid regular quarterly dividends
to its shareholders on or about March 1, June 1, September 1, and December
1, of each year.
PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined condensed balance sheet and the
unaudited pro forma combined condensed statements of income of HNC set
forth below give effect, using
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<PAGE>
the pooling of interests method of accounting, to the proposed acquisition
of Farmers & Merchants based upon an exchange ratio of .6415 share of HNC
for each share of Farmers & Merchants Common Stock. The unaudited pro
forma combined condensed balance sheet is presented as though the proposed
merger had occurred on September 30, 1995. The unaudited pro forma
combined condensed income statements are presented as though the proposed
merger had occurred on the first day of each respective reporting period
presented.
The pro forma financial information set forth below is not necessarily
indicative of the financial condition or results of operations of HNC as
they would have been had the proposed merger occurred during the periods
presented or as they may be in the future. The pro forma financial
information set forth below should be read in conjunction with the
financial statements of HNC, including the notes thereto, which are
incorporated by reference, and the financial statements of Farmers &
Merchants, including the notes thereto, which appear elsewhere in this
Prospectus/Proxy Statement. SEE INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE AND FARMERS & MERCHANTS BANK--INDEX TO FINANCIAL STATEMENTS AND
SUPPLEMENTARY FINANCIAL INFORMATION.
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Combined Pro Forma Balance Sheet
(In Thousands)
September 30, 1995
(Unaudited)
<CAPTION>
Harleysville Farmers &
National Merchants Adjust- Pro Forma
Corporation Bank ments Combined
<S> <C> <C> <C> <C>
ASSETS
Cash and Due from banks $ 33,834 $ 420 $ $ 34,254
Interest bearing deposits
in banks 347 1,959 2,306
Federal funds sold 10,600 3,750 14,350
Investment securities 108,726 13,302 122,028
Securities available for
sale 94,281 17,560 111,841
Loans 591,516 27,056 618,572
Less: Unearned income (9,488) (287) (9,775)
Allowance for loan
losses (9,290) (214) (9,504)
_________ _________ _________
Net loans 572,738 26,555 599,293
_________ _________ _________
Bank premises and
equipment, net 10,744 920 11,664
Accrued income receivable 5,635 680 6,315
Other assets 6,023 409 6,432
_________ _________ _________
Total assets $ 842,928 $ 65,555 $ 908,483
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 107,061 $ 6,057 $ $ 113,118
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<PAGE>
Interest bearing:
NOW accounts 78,170 4,912 83,082
Money market accounts 136,076 4,781 140,857
Savings 84,554 16,106 100,660
Time 305,533 24,144 329,677
_________ _________ _________
Total deposits 711,394 56,000 767,394
Accrued interest payable 10,108 319 10,427
Borrowings 40,076 -- 40,076
Other liabilities 5,567 689 6,256
_________ _________ _________
Total liabilities 767,145 57,008 824,153
Shareholders' equity:
Series preferred stock
(HNC only) -- --
Common stock outstanding
5,873,682 in 1995 for HNC
and 708,016 for FMB 5,874 1,440 (986) 6,328
Surplus 27,487 2,400 986 30,873
Undivided profits 42,500 3,550 46,050
Net unrealized gains
(losses) on securities
available for sale,
net of taxes (78) 1,157 1,079
_________ _________ _________
Total shareholders'
equity 75,783 8,547 84,330
_________ _________ _________
Total liabilities and
shareholders' equity $ 842,928 $ 65,555 $ 908,483
========= ========= =========
____________________
</TABLE>
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Pro Forma Combined Condensed Statement of Income
<CAPTION>
For Period Ended September 30, 1995
(Unaudited)
<S> <C> <C> <C>
Harleysville Farmers &
National Merchants Pro Forma
Corporation Bank Combined
(Dollars in Thousands,
except per share data)
Interest Income $ 47,780 $ 3,099 $ 50,879
Interest Expense 19,693 1,448 21,141
_________ _________ _________
Net Interest Income 28,087 1,651 29,738
Loan Loss Provision 1,643 9 1,652
_________ _________ _________
Net Interest Income After
Loan Loss Provision 26,444 1,642 28,086
-24-
<PAGE>
Noninterest Income 3,090 91 3,181
Noninterest Expense 17,055 1,096 18,151
_________ _________ _________
Income Before Income Taxes 12,479 637 13,116
Income Taxes 3,678 178 3,856
_________ _________ _________
Income From Continuing
Operations $ 8,801 $ 459 $ 9,260
Net Income Per Share
Primary 1.49 .65 1.46
Fully Diluted 1.49 .65 1.46
Average Number of Shares of
Common Stock Outstanding
Primary 5,891,873 708,016 6,346,065
Fully Diluted 5,892,389 708,016 6,346,581
____________________
</TABLE>
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Combined Pro Forma Balance Sheet
(In Thousands)
September 30, 1994
(Unaudited)
<CAPTION>
Harleysville Farmers &
National Merchants Adjust- Pro Forma
Corporation Bank ments Combined
<S> <C> <C> <C> <C>
ASSETS
Cash and Due from banks $ 36,054 $ 479 $ $ 36,533
Interest bearing deposits
in banks 690 2,177 2,867
Federal funds sold -- 2,685 2,685
Investment securities 82,073 5,525 87,598
Securities available for
sale 108,197 28,031 136,228
Loans 551,734 26,652 578,386
Less: Unearned income (9,896) (325) (10,221)
Allowance for loan
losses (7,667) (216) (7,883)
_________ _________ _________
Net loans 534,171 26,111 560,282
_________ _________ _________
Bank premises and
equipment, net 9,056 960 10,016
Accrued income receivable 4,903 575 5,478
Other assets 6,356 221 6,577
_________ _________ _________
Total assets $ 781,500 $ 66,764 $ 848,264
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 102,715 $ 6,769 $ $ 109,484
Interest bearing:
NOW accounts 81,245 5,176 86,421
Money market accounts 172,084 4,790 176,874
-25-
<PAGE>
Savings 88,489 19,261 107,750
Time 240,000 22,515 262,515
_________ _________ _________
Total deposits 684,533 58,511 743,044
Accrued interest payable 7,290 237 7,527
Borrowings 18,799 -- 18,799
Other liabilities 4,715 360 5,075
_________ _________ _________
Total liabilities 715,337 59,108 774,445
Shareholders' equity:
Series preferred stock
(HNC only) -- --
Common stock outstanding
5,451,461 in 1994 for HNC
and 708,016 for FMB 5,451 1,440 (986) 5,905
Surplus 16,555 2,400 986 19,941
Undivided profits 46,431 3,202 49,633
Net unrealized gains
(losses) on securities
available for sale,
net of taxes (2,274) 614 (1,660)
_________ _________ _________
Total shareholders'
equity 66,163 7,656 73,819
_________ _________ _________
Total liabilities and
shareholders' equity $ 781,500 $ 66,764 $ 848,264
========= ========= =========
____________________
</TABLE>
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Pro Forma Combined Condensed Statement of Income
For Period Ended September 30, 1994
(Unaudited)
<CAPTION>
Harleysville Farmers &
National Merchants Pro Forma
Corporation Bank Combined
<S> <C> <C> <C>
(Dollars in Thousands,
except per share data)
Interest Income $ 39,887 $ 2,787 $ 42,674
Interest Expense 13,977 1,235 15,212
_________ _________ _________
Net Interest Income 25,910 1,552 27,462
Loan Loss Provision 2,008 15 2,023
_________ _________ _________
Net Interest Income After
Loan Loss Provision 23,902 1,537 25,439
Noninterest Income 3,948 204 4,152
Noninterest Expense 16,088 1,205 17,293
_________ _________ _________
-26-
<PAGE>
Income Before Income Taxes 11,762 536 12,298
Income Taxes 3,523 156 3,679
_________ _________ _________
Income From Continuing
Operations $ 8,239 $ 380 $ 8,619
Net Income Per Share
Primary 1.40 .54 1.36
Fully Diluted 1.40 .54 1.36
Average Number of Shares of
Common Stock Outstanding
Primary 5,865,915 708,383 6,320,343
Fully Diluted 5,865,915 708,383 6,320,343
____________________
</TABLE>
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Combined Pro Forma Balance Sheet
(In Thousands)
December 31, 1994
(Unaudited)
<CAPTION>
Harleysville Farmers &
National Merchants Adjust- Pro Forma
Corporation Bank ments Combined
<S> <C> <C> <C> <C>
ASSETS
Cash and Due from banks $ 35,390 $ 455 $ $ 35,845
Interest bearing deposits
in banks 206 1,799 2,005
Federal funds sold -- 975 975
Investment securities 82,867 7,502 90,369
Securities available for
sale 102,211 24,237 126,448
Loans 578,063 26,818 604,881
Less: Unearned income (9,804) (322) (10,126)
Allowance for loan
losses (7,934) (216) (8,150)
_________ _________ _________
Net loans 560,325 26,280 586,605
_________ _________ _________
Bank premises and
equipment, net 8,795 953 9,748
Accrued income receivable 4,726 516 5,242
Other assets 5,259 173 5,432
_________ _________ _________
Total assets $ 799,779 $ 62,890 $ 862,669
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 110,503 $ 4,669 $ $ 115,172
Interest bearing:
NOW accounts 83,829 4,825 88,654
Money market accounts 162,219 5,534 167,753
Savings 88,201 16,950 105,151
Time 243,826 22,770 266,596
_________ _________ _________
-27-
<PAGE>
Total deposits 688,578 54,748 743,326
Accrued interest payable 8,059 259 8,318
Borrowings 35,322 -- 35,322
Other liabilities 1,245 275 1,520
_________ _________ _________
Total liabilities 733,204 55,282 788,486
Shareholders' equity:
Series preferred stock
(HNC only) -- --
Common stock outstanding
5,753,294 in 1994 for HNC
and 708,016 for FMB 5,753 1,440 (986) 6,207
Surplus 24,416 2,400 986 27,802
Undivided profits 39,718 3,311 43,029
Net unrealized gains
(losses) on securities
available for sale,
net of taxes (3,312) 457 (2,855)
_________ _________ _________
Total shareholders'
equity 66,575 7,608 74,183
_________ _________ _________
Total liabilities and
shareholders' equity $ 799,779 $ 62,890 $ 862,669
========= ========= =========
____________________
</TABLE>
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Pro Forma Combined Condensed Statement of Income
For Year Ended December 31, 1994
(Unaudited)
<CAPTION>
Harleysville Farmers &
National Merchants Pro Forma
Corporation Bank Combined
<S> <C> <C> <C>
(Dollars in Thousands,
except per share data)
Interest Income $ 54,614 $ 3,766 $ 58,380
Interest Expense 19,439 1,662 21,101
_________ _________ _________
Net Interest Income 35,175 2,104 37,279
Loan Loss Provision 2,650 15 2,665
_________ _________ _________
Net Interest Income After
Loan Loss Provision 32,525 2,089 34,614
Noninterest Income 4,525 222 4,747
Noninterest Expense 21,757 1,557 23,314
_________ _________ _________
Income Before Income Taxes 15,293 754 16,047
-28-
<PAGE>
Income Taxes 4,548 219 4,767
_________ _________ _________
Income From Continuing
Operations 10,745 535 11,280
Net Income Per Share
Primary 1.84 .76 1.79
Fully Diluted 1.84 .76 1.79
Average Number of Shares of
Common Stock Outstanding
Primary 5,847,473 708,016 6,301,665
Fully Diluted 5,847,473 708,016 6,301,665
____________________
</TABLE>
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Combined Pro Forma Balance Sheet
(In Thousands)
December 31, 1993
(Unaudited)
<CAPTION>
Harleysville Farmers &
National Merchants Adjust- Pro Forma
Corporation Bank ments Combined
<S> <C> <C> <C> <C>
ASSETS
Cash and Due from banks $ 31,599 $ 2,042 $ $ 33,641
Interest bearing deposits
in banks 1,581 1,474 3,055
Federal funds sold 13,886 3,410 17,296
Investment securities 96,604 32,436 129,040
Securities available for
sale 121,568 -- 121,568
Loans 488,048 21,602 509,650
Less: Unearned income (11,327) (184) (11,511)
Allowance for loan
losses (5,886) (201) (6,087)
_________ _________ _________
Net loans 470,835 21,217 492,052
_________ _________ _________
Bank premises and
equipment, net 8,661 872 9,533
Accrued income receivable 3,976 459 4,435
Other assets 5,231 463 5,694
_________ _________ _________
Total assets $ 753,941 $ 62,373 $ 816,314
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 105,134 $ 4,912 $ $ 110,046
Interest bearing:
NOW accounts 84,817 4,756 89,573
Money market accounts 175,853 4,828 180,681
Savings 85,338 17,383 102,721
Time 229,323 22,984 252,307
_________ _________ _________
Total deposits 680,465 54,863 735,328
Accrued interest payable 6,686 256 6,942
-29-
<PAGE>
Borrowings 2,415 327 2,742
Other liabilities 1,904 41 1,945
_________ _________ _________
Total liabilities 691,470 55,487 746,957
Shareholders' equity:
Series preferred stock
(HNC only) -- --
Common stock outstanding
5,396,120 in 1993 for HNC
and 708,736 for FMB 5,396 1,440 (986) 5,850
Surplus 15,009 2,400 986 18,395
Undivided profits 42,066 3,046 45,112
Net unrealized gains
(losses) on securities
available for sale,
net of taxes -- -- --
_________ _________ _________
Total shareholders'
equity 62,471 6,886 69,357
_________ _________ _________
Total liabilities and
shareholders' equity $ 753,941 $ 62,373 $ 816,314
========= ========= =========
____________________
</TABLE>
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Pro Forma Combined Condensed Statement of Income
For Year Ended December 31, 1993
(Unaudited)
<CAPTION>
Harleysville Farmers &
National Merchants Pro Forma
Corporation Bank Combined
<S> <C> <C> <C>
(Dollars in Thousands,
except per share data)
Interest Income $ 50,350 $ 3,630 $ 53,980
Interest Expense 19,531 1,701 21,232
_________ _________ _________
Net Interest Income 30,819 1,929 32,748
Loan Loss Provision 3,073 12 3,085
_________ _________ _________
Net Interest Income After
Loan Loss Provision 27,746 1,917 29,663
Noninterest Income 4,868 96 4,964
Noninterest Expense 20,122 1,314 21,436
_________ _________ _________
Income Before Income Taxes 12,492 699 13,191
Income Taxes 3,554 199 3,753
_________ _________ _________
Income From Continuing
Operations 8,938 500 9,438
-30-
<PAGE>
Net Income Per Share
Primary 1.58 .71 1.55
Fully Diluted 1.53 .71 1.50
Average Number of Shares of
Common Stock Outstanding
Primary 5,642,790 708,736 6,097,444
Fully Diluted 5,824,099 708,736 6,278,753
____________________
</TABLE>
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES
Pro Forma Combined Condensed Statement of Income
For Year Ended December 31, 1992
(Unaudited)
<CAPTION>
Harleysville Farmers &
National Merchants Pro Forma
Corporation Bank Combined
<S> <C> <C> <C>
(Dollars in Thousands,
except per share data)
Interest Income $ 48,547 $ 4,037 $ 52,584
Interest Expense 21,850 2,186 24,036
_________ _________ _________
Net Interest Income 26,697 1,851 28,548
Loan Loss Provision 2,299 -- 2,299
Net Interest Income After
Loan Loss Provision 24,398 1,851 26,249
Noninterest Income 3,410 142 3,552
Noninterest Expense 17,040 1,318 18,358
_________ _________ _________
Income Before Income Taxes 10,768 675 11,443
Income Taxes 2,898 194 3,092
_________ _________ _________
Income From Continuing
Operations 7,870 481 8,351
Net Income Per Share
Primary 1.41 .67 1.39
Fully Diluted 1.37 .67 1.35
Average Number of Shares of
Common Stock Outstanding
Primary 5,566,155 717,747 6,026,590
Fully Diluted 5,737,115 717,747 6,197,550
____________________
</TABLE>
-31-
<PAGE>
INFORMATION CONCERNING HARLEYSVILLE NATIONAL CORPORATION
AND DESCRIPTION OF HNC COMMON STOCK
Information Concerning HNC
HNC is a Pennsylvania business corporation and a registered bank
holding company with its headquarters in Harleysville, Pennsylvania. HNC
has three subsidiaries, The Harleysville National Bank & Trust Company
("Harleysville National"), The Citizens National Bank of Lansford
("Citizens National") and Security National Bank ("Security National").
Through its subsidiaries, HNC engages in the general commercial and retail
banking business. HNC's subsidiaries operate twenty (20) banking offices
in Bucks, Carbon and Montgomery Counties of Pennsylvania. As of September
30, 1995, HNC had consolidated total assets of approximately Eight Hundred
Forty-two Million Nine Hundred Twenty-eight Thousand Dollars
($842,928,000). Harleysville National (established in 1909), Citizens
National (established in 1903), and Security National (established in 1988)
are national banking associations who operate under the primary supervision
of the OCC. Harleysville National and Citizens National are also
authorized to engage in trust activities.
As a registered bank holding company, HNC is subject to regulation
under the Federal Bank Holding Company Act of 1956, as amended, and the
rules adopted by the Federal Reserve Board thereunder. Under applicable
Federal Reserve Board policies, a bank holding company such as HNC, is
expected to act as a source of financial strength to each of its subsidiary
banks and to commit resources to support each subsidiary bank in
circumstances when it might not do so absent such a policy. Any capital
loans made by a bank holding company to any of its subsidiary banks would
be subordinate in right of payment to the claims of depositors and certain
other creditors of such subsidiary banks.
The principal executive offices of HNC are located in Harleysville,
Pennsylvania. As of September 30, 1995, HNC and its three subsidiary banks
had in the aggregate approximately 336 full-time equivalent employees.
Acquisitions by HNC
On February 13, 1991, HNC acquired The Citizens National Bank of
Lansford, a national banking association with two branch offices and assets
of approximately Thirty-four Million Dollars ($34,000,000). On June 1,
1992, HNC acquired Summit Hill Trust Company, a Pennsylvania-chartered bank
and trust company with one office and assets of approximately Twenty-two
Million Dollars ($22,000,000). On September 25, 1992, Summit Hill Trust
Company merged with and into The Citizens National Bank of Lansford. On
May 22, 1992, Harleysville National purchased four branches from Provident
National Bank of Philadelphia, a subsidiary of PNC. This resulted in
Harleysville National's assumption of approximately One Hundred Million
Dollars ($100,000,000) of deposit liabilities, Two Million Dollars
($2,000,000) in property and equipment and Three Million Five Hundred
Thousand Dollars ($3,500,000) in intangibles consisting primarily of a
-32-
<PAGE>
deposit premium, and cash of approximately Ninety-five Million Dollars
($95,000,000). On July 1, 1994, HNC acquired Security National, a national
banking association with assets of approximately Forty Million Dollars
($40,000,000).
Loans
HNC, through its subsidiaries, grants loans and makes other credit
available to the general public. These extensions of credit are structured
to meet the varying needs of businesses, individuals, and institutional
customers and include mortgages, lines of credit, term loans, leases and
letters of credit. This activity comprises a major source of revenue for
HNC's subsidiaries and it also exposes HNC and its subsidiaries to
potential losses upon borrower default. In order to minimize the
occurrence of loss, HNC's subsidiaries follow strict loan underwriting and
risk weighing policies. While collateral continues to play an important
part in lending decisions, primary emphasis is placed upon borrowers'
underlying ability to pay. HNC's subsidiaries confine their lending
activity to customers who live or are based in their respective market
areas. By limiting lending activities to a specific geographic area, the
staff of each subsidiary becomes more knowledgeable about local market
conditions and can thereby make better credit risk assessments and
consequently more prudent lending decisions. HNC believes that this local
knowledge, when combined with prudent underwriting standards, overcomes the
risks associated with the geographic concentration of loans.
Description of HNC Common Stock
HNC is authorized to issue 30,000,000 shares of One Dollar ($1) par
value common stock ("HNC Common Stock") of which 5,873,682 shares were
issued and outstanding as of September 30, 1995. HNC also has 3,000,000
shares of series preferred stock authorized for issuance of which none have
been issued as of September 30, 1995. HNC Common Stock is quoted on the
over-the-counter National Market System of Nasdaq under the symbol "HNBC".
Dividends
The holders of HNC Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor. HNC has historically paid quarterly cash dividends to
its shareholders on or about March 31, June 30, September 30, and December
31, of each year.
The ability of HNC to pay dividends to its shareholders is dependent
primarily upon the earnings and financial condition of Harleysville
National, Citizens National, and Security National. Funds for the payment
of dividends on HNC Stock are expected for the foreseeable future to be
obtained primarily from dividends paid to HNC by its subsidiaries, which
dividends are subject to certain statutory limitations.
-33-
<PAGE>
Under applicable federal laws, the dividends that may be paid by the
HNC banking subsidiaries without prior regulatory approval are subject to
certain prescribed limitations. Because the subsidiaries of HNC are
national banks, the approval of the OCC is required under federal law if
the total of all dividends declared during any calendar year exceed the
total of the net profits, as defined, of the respective bank for the year,
combined with its retained net profits as defined for the two preceding
years. In addition to the foregoing statutory restrictions on dividends,
the OCC also has general authority to prohibit a national bank from
engaging in an unsafe or unsound banking practice. The payment of a
dividend by a bank could, depending upon the financial condition of the
bank involved and other factors, be deemed to be such an unsafe or unsound
practice.
HNC paid cash dividends of Sixty-one Cents ($0.61) per share in 1994,
and Eighteen Cents ($0.18) and Eighteen Cents ($0.18), respectively, for
each of the first two quarters of 1995.
Dividend Reinvestment Plan
The holders of HNC Common Stock may elect to participate in the HNC
Dividend Reinvestment and Stock Purchase Plan. This plan is administered
by Harleysville National as plan agent. Under the plan, dividends payable
to participating shareholders are paid to the plan agent and are used to
purchase, on behalf of the participating shareholders, additional shares of
HNC Common Stock either in the over-the-counter Nasdaq market or from HNC's
authorized but unissued shares of HNC Common Stock. Participating
shareholders may make additional voluntary cash payments which are also
used by the plan agent to purchase, on behalf of shareholders, additional
shares of HNC Common Stock. Shares of HNC Common Stock held for the
account of participating shareholders are voted by the plan agent in
accordance with the instructions of each participating shareholder as set
forth in his or her proxy.
Securities Laws
HNC, as a business corporation, is subject to the registration and
prospectus delivery requirements of the 1933 Act (detailed previously) and
is also subject to similar requirements under state securities laws. The
HNC Common Stock is registered with the SEC under Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and HNC is
subject to the periodic reporting, proxy solicitation and insider trading
requirements of the 1934 Act. The executive officers, directors and 10
percent shareholders of HNC are subject to certain restrictions affecting
their right to sell shares of HNC Common Stock owned beneficially by them.
Specifically, each such person is subject to the beneficial ownership
reporting requirements under the short-swing profit recapture provisions of
Section 16 of the 1934 Act and may sell shares of HNC Common Stock only:
(i) in compliance with the provisions of SEC Rule 144; (ii) in compliance
with
-34-
<PAGE>
the provisions of another applicable exemption from the registration
requirements of the 1933 Act; or (iii) pursuant to an effective
registration statement filed with the SEC under the 1933 Act.
Anti-takeover Provisions
The Pennsylvania Business Corporation Law of 1988, as amended (the
"BCL") and HNC's amended Articles of Incorporation and amended Bylaws
provide numerous provisions that may be deemed to be anti-takeover in
nature, both as to purpose and effect. There are four major anti-takeover
provisions under the BCL relating to corporations that have their
securities registered with the SEC under Section 12 of the 1934 Act
("Registered Corporations").
The overall effect of the various provisions described herein might be
to deter a tender offer that a majority of the shareholders might possibly
view to be in their best interest as the offer might include a substantial
premium over the market price of HNC's Common Stock at that time. In
addition, these provisions may have the effect of assisting HNC's current
management in retaining its position and placing it in a better position to
resist changes that the shareholders might want to make if dissatisfied
with the conduct of HNC's business.
Two of these statutory provisions have the effect of eliminating the
rights of the shareholders of Registered Corporations to: (i) call a
special meeting of shareholders; and (ii) propose an amendment to the
Articles of Incorporation of HNC. One effect of these provisions may be to
prevent the calling of a special meeting of shareholders for the purpose of
considering a merger, consolidation or other corporate combination which
does not have the approval of a majority of the members of HNC's Board of
Directors. Therefore, such a provision may have the effect of making HNC
less attractive as a potential takeover candidate by depriving shareholders
of the opportunity to initiate special meetings at which a possible
business combination might be proposed.
These two provisions under the BCL might serve to discourage attempts
by shareholders to disrupt the business of HNC between annual meetings of
the shareholders by calling a special meeting. Further, these provisions
will provide a greater time for consideration of any shareholder proposal
to the extent that his, her or its proposal must be deferred until the next
annual meeting of shareholders. Also, when made, such proposals must
comply with certain notice requirements and proxy solicitation rules in
advance thereof. These BCL provisions do not affect the calling of a
special meeting by the Chairman of the Board or by a majority of the
members of the Board of Directors or of its Executive Committee if, in
their judgment, there are matters to be acted upon which are in the best
interest of HNC and its shareholders.
The third BCL provision to which HNC is subject assures that all
shareholders will receive the "fair value" for their shares as the result
of a "control transaction". Fair value
-35-
<PAGE>
means an amount that is no less than the highest price paid per share by a
controlling person or group at any time during the 90-day period ending on
the date of the control transaction plus a control premium, if appropriate.
A control transaction is the acquisition by a person or a group of persons
acting in concert that has voting power over voting shares of HNC that
would entitle the holders thereof to cast at least 20 percent of the votes
that all shareholders would be entitled to cast in an election of directors
of HNC. After the occurrence of a control transaction, any shareholder
may, within a specified time period, make written demand on the controlling
person or group, for payment in an amount equal to the fair value of each
voting share as of the date on which the control transaction occurs.
The fourth major provision under the BCL relates to certain business
combinations involving Registered Corporations. Business combinations so
affected would include any one of the following transactions involving an
"interested shareholder" of HNC: (i) a merger or consolidation of HNC with
an interested shareholder or any other corporation which is, or after the
merger or consolidation would be, an affiliate or associate of the
interested shareholder; (ii) a sale, lease, exchange, mortgage, pledge,
transfer or other disposition to or with the interested shareholder or any
affiliate or associate of such interested shareholder of the assets of HNC
or any subsidiary of HNC; (iii) the issuance or transfer by HNC or any
subsidiary of HNC of any shares of HNC which has an aggregate market value
equal to 5 percent or more of the aggregate market value of all such
outstanding shares of HNC to an interested shareholder or any affiliate or
associate thereof; (iv) the adoption of any plan or proposal for the
liquidation or dissolution of HNC proposed by, or pursuant to any agreement
with, the interested shareholder or any affiliate or associate thereof; (v)
a reclassification of securities or recapitalization of HNC or any merger
or consolidation of HNC with any subsidiary of HNC, or any other
transaction proposed by, or pursuant to any agreement, arrangement, or
understanding, with, the interested shareholder or any affiliate or
associate of the interested shareholder, which has the effect, directly or
indirectly, of increasing the proportionate share of the outstanding shares
of any class or series of voting shares or securities convertible into
voting shares of HNC or any subsidiary of HNC which is, directly or
indirectly, owned by the interested shareholder or any affiliate or
associate of the interested shareholder, except as a result of immaterial
changes due to fractional share adjustments; or (vi) the receipt by the
interested shareholder or any affiliate or associate of the interested
shareholder of the benefit, directly or indirectly, of any loans, advances,
guarantees, pledges or other financial assistance or any tax credits or
other tax advantages provided by or through HNC. An interested shareholder
is any person that is the beneficial owner, directly or indirectly of
shares entitling that person to cast at least 20 percent of the votes that
all shareholders would be entitled to cast in an election of directors of
HNC.
HNC is prohibited from engaging in a business combination with an
interested shareholder other than: (i) a business combination approved by
the Board of Directors prior to the date on which the interested
shareholder became an interested shareholder; (ii) a business combination
approved by a majority of the votes that all shareholders would
-36-
<PAGE>
be entitled to cast, excluding those shares held by the interested
shareholder, at a meeting called for such purpose no earlier than three (3)
months after the interested shareholder became, and if at the time of the
meeting the interested shareholder is, the beneficial owner, directly or
indirectly, of shares entitling the interested shareholder to cast at least
80 percent of the votes that all shareholders would be entitled to cast in
an election of directors of HNC and if the business combination satisfies
certain minimum conditions (see discussion below); (iii) a business
combination approved by the affirmative vote of all of the holders of all
of the outstanding shares; (iv) a business combination approved by a
majority of the votes that all shareholders would be entitled to cast, not
including those shares beneficially owned by the interested shareholder, at
a meeting called for such purpose no earlier than five years after the
interested shareholder became an interested shareholder; (v) a business
combination approved at a shareholders' meeting called for such purpose no
earlier than five years after the interested shareholder became an
interested shareholder and that meets certain minimum conditions (see
discussion below).
The certain minimum conditions referred to above, would generally
require that the aggregate amount of the cash, and the market value of
consideration other than cash (such as stock, bonds or debentures), to be
received per share by the shareholders of HNC be at least equal to the
highest per share price paid by the interested shareholder at a time when
the interested shareholder was the beneficial owner of shares entitling him
to cast at least 5 percent of the votes that all shareholders would be
entitled to cast in an election of directors: (i) within the 5-year period
immediately prior to the announcement date of the business combination or;
(ii) in the transaction in the higher, plus, in either situation, interest
compounded annually from the earlier date on which the highest per-share
acquisition price was paid through the consummation date at the rate of 1-
year United States Treasury obligations from time to time in effect less
the aggregate among of any cash dividends paid and the market value of any
dividends paid other than cash.
The BCL provision relating to business combinations is designed to
help assure that if, despite a corporation's best efforts to remain
independent, it is nevertheless taken over, each shareholder will be
treated fairly vis-a-vis every other shareholder and that arbitrageurs and
professional investors will not profit at the expense of the corporation's
long-term public shareholders.
While these anti-takeover provisions are designed to help assure fair
treatment of all shareholder vis-a-vis other shareholders in the event of a
takeover, it is not the purpose of these provisions to assure that
shareholders receive a premium price for their shares in as takeover.
Accordingly, the provisions would not preclude the board of directors'
opposition to any future takeover proposal which it believes not to be in
the best interests of HNC and its shareholders, whether or not such a
proposal satisfies the minimum price, form of consideration and procedural
requirements under the BCL.
HNC's Articles of Incorporation and amended Bylaws contain a number of
additional provisions that could be considered anti-takeover in purpose and
effect. These provisions
-37-
<PAGE>
include: (i) the authorization of 30,000,000 shares of Common Stock and
3,000,000 shares of preferred stock; (ii) the lack of preemptive rights for
shareholders to subscribe to purchase additional shares of stock on a pro
rata basis; (iii) the requirement that an affirmative vote of the holders
of 80 percent of HNC Common Stock is required to approve an amendment to
HNC's Bylaws or to change an amendment to its Bylaws that has been approved
by the Board of Directors; and (iv) the requirement that an affirmative
vote of the holders of 80 percent of HNC's Common Stock is required to
approve a merger, consolidation, liquidation, or sale of substantially all
assets unless such transaction has received prior approval of at least 75
percent of all members of the Board of Directors in which case a majority
of the outstanding shares of common stock would be required for approval.
These provisions could give the holders of a minority of HNC's outstanding
shares a veto power over any merger, consolidation, dissolution or
liquidation of HNC, the sale of all or substantially all of its assets or
an amendment to its Bylaws unless 75 percent of management and a majority
of the shareholders believes such transaction to be desirable and
beneficial. Absent such provisions in HNC's Articles of Incorporation and
Bylaws, the affirmative vote of at least a majority of HNC's Common Stock
outstanding entitled to vote thereon would be required to approve any
merger, consolidation, dissolution, liquidation, the sale of all of its
assets or an amendment to the Bylaws.
Provisions for a classified board are included in the amended Bylaws
of HNC. A classified board will have the effect of moderating the pace of
any change in control of the Board of Directors by extending the time
required to elect a majority of the directors to at least two successive
annual meetings. However, since this extension of time also tends to
discourage a tender offer or takeover bid, this provision may also be
deemed to be anti-takeover in nature. In addition, a classified board
makes it more difficult for a majority of the shareholders to promptly
change the composition of the board of directors even though such prompt
change may be considered desirable for them.
HNC's amended Articles of Incorporation contain an additional anti-
takeover provision which enables the Board of Directors to oppose a tender
offer on the basis of factors other than economic benefit based on its
responsibilities to certain constituent groups including HNC's subsidiaries
and the communities that they serve by considering factors such as: the
impact the acquisition of HNC would have on the community; the effect of
the acquisition upon shareholders, employees, depositors, suppliers and
customers; and the reputation and business practices of the tender offeror.
Indemnification
The Bylaws of HNC provide for indemnification of its directors,
officers, employees and agents to the fullest extent permitted under the
laws of the Commonwealth of Pennsylvania, provided that the person seeking
indemnification acted in good faith, in a manner he or she reasonably
believed to be in the best interest of HNC, and without willful misconduct
or recklessness.
-38-
<PAGE>
Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to directors, officers or persons controlling HNC pursuant
to the foregoing provisions, HNC has been informed that, in the opinion of
the SEC, such indemnification is against public policy as expressed in the
1933 Act and is therefore unenforceable.
Comparison of Stockholder Rights
Upon consummation of the proposed merger, the shareholders of Farmers
& Merchants will become shareholders of HNC. Several differences between
the rights of holders of Farmers & Merchants Common Stock and HNC Common
Stock arise out of (i) differences between the Articles of Incorporation
and Bylaws of Farmers & Merchants and the Articles of Incorporation and
Bylaws of HNC, (ii) differences between the respective federal and state
laws applicable to Farmers & Merchants and HNC, and (iii) differences in
the types of corporate entities represented by Farmers & Merchants (a
Pennsylvania-chartered commercial bank and trust company) and HNC (a
Pennsylvania business corporation and registered bank holding company).
The most significant of these differences are those relating to the
election of directors, dissenters' rights, anti-takeover protection and
public registration.
The Pennsylvania Banking Code of 1965, as amended, and Farmers &
Merchants Articles of Incorporation and Bylaws provide that Farmers &
Merchants' shareholders are entitled to cumulate their votes in electing
directors. Thus, in elections for directors, Farmers & Merchants'
shareholders may cast a number of votes equal to the number of their shares
multiplied by the number of directors to be elected, and they may allocate
their votes to one or more than one director as the shareholders see fit.
Cumulative voting maximizes the ability of a minority group of Farmers &
Merchants' shareholders to elect one or more directors. HNC's shareholders
are not entitled to cumulate their votes in the election of directors under
HNC's Articles of Incorporation and Bylaws, and therefore it would be more
difficult for a minority group of HNC's shareholders to elect one or more
directors.
The Bylaws of HNC provide for a classified Board of Directors under
which there are four classes of directors and, accordingly, one-fourth of
the directors are elected each year for a term of four years. By contrast,
the entire Board of Directors of Farmers & Merchants is elected each year.
The classification of the Board of Directors of HNC makes it more difficult
for the shareholders of HNC to change a majority of the directors, even
when the only reason for such a change may be the performance of the
existing directors. It would normally take three annual meetings of HNC's
shareholders in order to replace a majority of HNC's directors, whereas all
or a majority of Farmers & Merchants' Board of Directors could be replaced
at a single annual meeting of Farmers & Merchants' shareholders.
The Articles of Incorporation and Bylaws of HNC include a number of
provisions which are intended to protect the shareholders of HNC (including
the present shareholders of Farmers & Merchants, who will become
shareholders of HNC following the merger), but
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<PAGE>
which may be considered to be anti-takeover in nature and may serve to
entrench the current management of HNC. SEE INFORMATION CONCERNING
HARLEYSVILLE NATIONAL CORPORATION AND DESCRIPTION OF HNC COMMON STOCK--
Anti-takeover Provisions. In contrast, the Articles of Incorporation and
Bylaws of Farmers & Merchants do not include similar anti-takeover
provisions.
HNC Common Stock, unlike Farmers & Merchants Common Stock, is
registered with the SEC under Section 12(g) of the 1934 Act. As a result,
HNC is subject to the periodic reporting, proxy solicitation and insider
trading requirements of the 1934 Act, which do not apply to Farmers &
Merchants. Pursuant to these requirements, HNC makes available to
shareholders, potential investors and the general public a significant
amount of information regarding HNC in the form of proxy statements,
periodic reports and other SEC filings. In addition, directors, executive
officers and 10 percent beneficial shareholders of HNC are subject to the
insider trading reporting requirements and short-swing profit recapture
provisions of Section 16 of the 1934 Act.
The material differences between Farmers & Merchants Common Stock and
HNC Common Stock and the rights of their respective holders, as of June 30,
1995, are summarized in the following table:
<TABLE>
<CAPTION>
Farmers & Merchants HNC
<S> <C> <C>
Title Common Stock, Two Common Stock, One
Dollars ($2) par value Dollar ($1) par value
per share per share
Shares Authorized 3,000,000 30,000,000
Shares Issued and
Outstanding 708,016 5,873,682
Preemptive Rights Yes None
Voting: Election of Cumulative Non-cumulative Directors
Classification of Board of Directors not Board of Directors
Board of Directors classified; all divided into 4 classes
directors elected each with 4 year terms; 1/4
year of directors elected
each year
Voting: Other One Vote for each One vote for each
Matters share owned of record share owned of record
Mergers, Consoli- Approval by vote of at Approval by a vote of
dations, Liquida- least 66 2/3 percent 80 percent of out-
tions Sales of of the outstanding standing shares of
Substantially All shares. Common Stock. If
Assets such transaction has
received prior approval
of at least 75 percent
of all members of the
Board of Directors,
then a majority
of the outstanding
shares of Common Stock
would be required.
-40-
<PAGE>
Special Shareholders Upon request by Upon request by the
Meetings Chairman of the Chairman of the Board,
Board of Directors, President, the
President, a majority Executive Vice
of the Board of President, if any, or
Directors, or at the a majority of the
request of holders of Board of Directors, or
at least 20 percent of by its Executive
of the outstanding Committee.
shares.
Authorization to Approval by a majority Approval by a majority
Issue Additional vote of the Board of vote of the Board of
Shares Directors Directors
Repurchase of Cannot reduce or Stock can be
Additional Shares retire any part of its repurchased up to the
stock without prior extent of unrestricted
regulatory approvals. or unreserved undivided
profits and as much of
its unrestricted
surplus as has been
made available for
such purpose by the
prior affirmative vote
of shareholders; stock
cannot be repurchased
when the Holding
Company is insolvent
by the purchase; and
no more than 10
percent of the
outstanding shares can
be repurchased in any
twelve (12) month
period without prior
regulatory approval;
and provisions of the
1934 Act restrict the
timing, nature and
amount of repurchases.
Stock Incentive None Yes
Plans
Dissenters' Rights Yes Yes
Dividend Reinvest- None Yes
ment Plan
Market No established market Listed for quotation on
National Systems of
Nasdaq
Registered Under No Yes
Securities Exchange
Act of 1934
</TABLE>
INFORMATION CONCERNING FARMERS & MERCHANTS BANK
Description of Business and Property
Farmers & Merchants commenced operations on August 23, 1923, as a
state chartered commercial bank and trust company. As a state-chartered
commercial bank and trust company, Farmers & Merchants is subject to
regulation and periodic examination by the Pennsylvania Department of
Banking. Farmers & Merchants' deposits are insured by the FDIC to the
maximum extent permitted by law.
The principal executive offices of Farmers & Merchants are located at
1001 Main Street, Honesdale, PA 18431. The building is a modern office
building owned by Farmers
-41-
<PAGE>
& Merchants, consisting of two (2) stories. Farmers & Merchants also owns
an adjacent house and a two-story garage nearby, each of which is used for
storage.
Farmers & Merchants is a full-service commercial bank which offers a
large range of commercial and retail banking services to its clients,
including personal and business checking accounts, NOW accounts, money
market accounts, savings accounts, IRA accounts and certificates of
deposit. Farmers & Merchants also offers installment loans, home equity
loans, lines of credit, letters of credit, revolving credit loans and term
loans, both on a secured and unsecured basis. It also makes commercial
loans and commercial mortgage loans, and residential conventional and
construction mortgage loans. In addition, Farmers & Merchants provides
safe deposit boxes, traveler's checks, money orders, wire transfer of
funds, lock box collections and direct deposit of social security and
payroll checks. Farmers & Merchants provides credit card processing
services to local merchants and retailers. Farmers & Merchants is a member
of the "MAC" system and provides clients with access to this automated
teller machine network. Farmers & Merchants also provides trust services,
international services and credit cards available to its customers through
correspondent banking institutions. In the event that certain loan
requests may exceed Farmers & Merchants' lending limit to any one customer,
Farmers & Merchants seeks to arrange such loans on a participation basis
with other financial institutions. The offering, or continuation, of the
above enumerated services is evaluated periodically.
Farmers & Merchants competes actively with other area commercial banks
and savings and loan associations, most of which are larger than Farmers &
Merchants, as well as with major regional banking and financial
institutions headquartered elsewhere. Farmers & Merchants generates the
overwhelming majority of its deposit and loan volume from within its
primary service area (i.e., Wayne County, Pennsylvania) ("PSA"). The
majority of the residents, businesses and employees within the Farmers &
Merchants' PSA are within a driving time of 30 minutes from the Farmers &
Merchants' office. There are four (4) commercial banks headquartered in
Honesdale. Farmers & Merchants competes with the branch offices of
numerous banking and financial institutions that are headquartered
elsewhere.
The PSA also constitutes the community delineated for Farmers &
Merchants' Community Reinvestment Act Statement, which states the intention
of Farmers & Merchants to meet the credit needs of the entire local
community. It is the policy of Farmers & Merchants to evaluate all
applications for credit without regard to the applicant's race, color,
creed, sex, age, or marital status.
The PSA includes a wide variety of residential neighborhoods,
commercial businesses, retail stores, industrial complexes, and service
institutions. The Honesdale area has a large number of business
establishments and a substantial employment base.
-42-
<PAGE>
Employees
As of December 12, 1995, Farmers & Merchants had twenty-four (24)
full-time equivalent employees.
Legal Proceedings
The nature of Farmers & Merchants' business generates a certain amount
of litigation involving matters in the ordinary course of business. Except
as disclosed below, in the opinion of management of Farmers & Merchants,
there are no proceedings pending to which Farmers & Merchants is a party or
to which its property is subject, which, if determined adversely to Farmers
& Merchants, would be material in relation to Farmers & Merchants'
undivided profits or financial condition, nor are there any proceedings
pending, other than ordinary routine litigation, incident to the business
of Farmers & Merchants. In addition, no material proceedings are pending
or are known to be threatened or contemplated against FMB by government
authorities or others.
Farmers & Merchants Common Stock Market Price and Dividends
Farmers & Merchants Common Stock is not traded in any established
market and no price quotations are readily available therefor. There were
approximately two hundred seventy-two (272) holders of record of Farmers &
Merchants Common Stock as of December 12, 1995. Recent sales of Farmers &
Merchants Common Stock have occurred solely between individuals in limited
over-the-counter transactions and in direct, privately negotiated
transactions. The most recent sale prior to the public announcement of the
merger on September 7, 1995, as to which management of Farmers & Merchants
is aware of the sales price, occurred on April 18, 1995 at a price of
Fifteen Dollars and Twenty-five Cents ($15.25) per share and involved a
total of 240 shares.
The holders of Farmers stock are entitled to receive the dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor, Farmers & Merchants has historically paid quarterly
cash dividends to its shareholders on or about March 1, June 1, September
1, and December 1 of each year. The ability of Farmers & Merchants to pay
dividends to its shareholders is dependent upon its earnings and financial
condition, without prior regulatory approval, subject to certain prescribed
statutory limitations.
Under the Pennsylvania Banking Code of 1965, as amended, dividends may
only be paid out of accumulated net earnings and only when such dividend
does not reduce Farmers & Merchants surplus below the amount of capital.
In addition to the foregoing statutory restrictions on dividends, the FDIC
has general authority to prohibit a state-chartered, non-member bank from
engaging in an unsafe or unsound banking practice. The payment of a
dividend by a bank could, depending upon the financial condition of the
bank involved and other factors, be deemed to be such an unsafe or unsound
practice.
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<PAGE>
Farmers & Merchants paid cash dividends of Thirty-seven Cents ($0.37)
per share in 1994, and Seventeen Cents ($0.17) for the first quarter of
1995, and Seven Cents ($0.07) in the second, third and fourth quarters of
1995. Under the terms of the Agreement and Plan of Reorganization, Farmers
& Merchants may only pay regular quarterly cash dividends in an amount not
in excess of Seven Cents ($.07) per share for the third and fourth quarters
of 1995 and under certain circumstances a cash dividend of Twelve Cents
($.12) per share for each of the first two quarters of 1996 prior to the
consummation of the proposed merger.
Certain information concerning shares of Farmers & Merchants Common
Stock owned beneficially by each director of Farmers & Merchants and by all
directors and executive officers of Farmers & Merchants as a group, as of
December 12, 1995, is set forth below:
<TABLE>
<CAPTION>
Shares of
Farmers &
Merchants
Common Stock
Beneficially Percent of
Owned December 12, Shares
Name of Director 1995<F1> Outstanding
<S> <C> <C>
Dale D. Fowler 68,726<F2> 9.70%
John J. Koehler 98,280 13.88%
Nelson W. Leet 20,688 2.92%
Charles P. McGinnis 47,528 6.71%
Richard J. Shershenovich 60,000<F3> 8.47%
Samuel C. Siepiela 2,230<F4> .31%
Wayne W. Stephens 6,068<F5> .85%
All directors and executive 313,380<F6> 44.26%
officers as a group
(10 persons)
____________________
<FN>
<F1> The Securities "beneficially owned" are determined in accordance with
the definitions of "beneficial ownership" as set forth in the regulations
of the SEC and, accordingly, may include securities owned by or for, among
others, the spouse and/or minor children of the individual and any other
relative who has the same residence as such individual as well as other
securities as to which the individual has or shares voting or investment
power or has the right to acquire under outstanding stock options within
sixty (60) days after December 12, 1995. Beneficial ownership may be
disclaimed as to certain of the securities.
<F2> Includes 12,144 shares owned jointly by Mr. Fowler and his spouse; and
8,820 shares owned individually by his spouse.
<F3> Includes 57,384 shares owned jointly by Mr. Shershenovich and his
spouse; and 2,616 shares owned individually by his spouse.
<F4> Includes 2,230 hares owned jointly with Mr. Siepiela's spouse.
<F5> Includes 6,068 shares owned jointly with Mr. Stephens' spouse.
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<PAGE>
<F6> Includes the seven (7) directors and Richard K. Arnold, Executive Vice
President and CEO, Richard M. Dulay, Vice President and Kathleen M. Hunter,
Vice President/Operations Officer, Cashier and Trust Officer.
</FN>
</TABLE>
EXPERTS
The consolidated financial statements of HNC and subsidiaries as of
December 31, 1994, and 1993, and for each of the years in the three-year
period ended December 31, 1994, have been incorporated by reference herein
and in the registration statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Farmers & Merchants as of December 31,
1994 and 1993, and for each of the years in the three-year period ended
December 31, 1994, included in this Prospectus/Proxy Statement have been
audited by Parente, Randolph, Orlando, Carey & Associates, independent
public accountants, as indicated in its reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts
in accounting and auditing.
LEGAL OPINIONS
The legality of the shares of HNC Common Stock to be issued in
connection with the merger and certain other legal matters relating to the
merger will be passed upon by the law firm of Shumaker Williams, P.C., Camp
Hill, Pennsylvania, Special Counsel to HNC.
OTHER MATTERS
The Board of Directors of Farmers & Merchants knows of no other
matters other than those discussed in this Prospectus/Proxy Statement which
will be presented at the Special Meeting. However, if any other matters
are properly brought before the Special Meeting and any adjournment
thereof, any proxy given pursuant to this solicitation will be voted in
accordance with the recommendations of the management of Farmers &
Merchants.
ADDITIONAL INFORMATION
HNC has filed with the SEC a Registration Statement in respect of the
shares of HNC Common Stock to be issued in connection with the merger. The
Registration Statement contains certain additional information which has
been omitted from this Prospectus/Proxy Statement in accordance with the
rules and regulations of the SEC and may be examined at the SEC in
Washington, D.C. Copies of the Registration Statement may be obtained from
the SEC upon payment of the prescribed fee.
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<PAGE>
FARMERS & MERCHANTS BANK
INDEX TO FINANCIAL STATEMENTS AND
SUPPLEMENTARY FINANCIAL INFORMATION
Page
Selected Financial Data 47
Management's Discussion and Analysis 48
Interim Statements 55
Balance Sheet 55
Statements of Income 56
Statement of Cash Flows 57
Statement of Changes in Shareholders' Equity 58
Report of Independent Accountants F-1
Balance Sheet F-2
Statement of Income F-3
Statement of Changes in Shareholders' Equity F-4
Statement of Cash Flows F-5
Notes to Financial Statements F-6
-46-
<PAGE>
<TABLE>
FARMERS & MERCHANTS BANK
SELECTED FINANCIAL DATA
<CAPTION>
(Dollars in thousands,
except per share data) September 30, December 31,
1995 1994 1994 1993
<S> <C> <C> <C> <C>
INCOME & EXPENSE:
Interest income . . . . $ 3,099 $ 2,787 $ 3,766 $ 3,630
Interest expense . . . 1,448 1,235 1,662 1,701
_______ _______ _______ _______
Net interest income . . 1,651 1,552 2,104 1,929
Loan loss provision . . 9 15 15 12
_______ _______ _______ _______
Net interest income after
loan loss provision . . 1,642 1,537 2,089 1,917
Noninterest income . . 91 204 222 96
Noninterest expense . . 1,096 1,205 1,557 1314
_______ _______ _______ _______
Income before
income taxes . . . . . 637 536 754 699
Income taxes . . . . . 178 156 219 199
_______ _______ _______ _______
Net income . . . . . . $ 459 $ 380 $ 535 $ 550
======= ======= ======= =======
PER SHARE:
Primary . . . . . . . . $ 0.65 $ 0.54 $ 0.76 $ 0.71
Fully diluted . . . . . 0.65 0.54 0.76 0.71
Cash dividends paid . . 0.31 0.30 0.37 0.36
Primary average shares
outstanding . . . . . . 708,016 708,383 708,016 708,736
Diluted average shares
outstanding . . . . . . 708,016 708,383 708,016 708,736
Book Value. . . . . . . 12.07 10.81 10.75 9.72
AVERAGE BALANCE SHEET:
Total Assets. . . . . . $63,748 $64,482 $64,204 $61,700
Investments & Money
Market Investments. . . 35,089 37,918 37,202 38,314
Loans (Net of Unearned
Income) . . . . . . . . 26,743 24,434 24,929 21,262
Deposits. . . . . . . . 54,826 56,191 55,917 54,146
Borrowings . . . . . . - 264 203 358
Shareholders' equity. . 8,112 7,475 7,518 6,758
Balance Sheet at Period End:
Total Assets. . . . . . $65,555 $66,764 $62,890 $62,373
Investments & Money
Market Investments. . . 36,572 38,417 34,512 37,320
Loans (Net of Unearned
Income) . . . . . . . . 26,769 26,327 26,495 21,418
Deposits. . . . . . . . 56,000 58,511 54,748 54,863
Borrowings. . . . . . . - - - 327
Shareholders' equity. . 8,547 7,656 7,607 6,886
Selected Operating Ratios:
Return on average assets
(annualized). . . . . . 0.96% 0.79% 0.83% 0.81%
Return on average
shareholders' equity. . 7.54% 6.78% 7.12% 7.40%
Leverage (assets divided
by shareholders'
equity) . . . . . . . . 7.67X 8.72X 8.27X 9.06X
Average total loans as a
percentage of average
deposits. . . . . . . . 49% 43% 45% 39%
Interest income/Average
Earning Assets* . . . . 6.73% 6.01% 6.13% 6.16%
Interest expense/Average
Dep. & Borrowings . . . 3.52% 2.91% 2.96% 3.12%
Net interest income/
Average Earn.
Assets* . . . . . . . . 3.61% 3.37% 3.45% 3.30%
<CAPTION>
FARMERS & MERCHANTS BANK
SELECTED FINANCIAL DATA
(Dollars in thousands,
except per share data) December 31,
1992 1991 1990
<S> <C> <C> <C>
INCOME & EXPENSE:
Interest income . . . . . $ 4,037 $ 4,785 $ 5,219
Interest expense . . . . 2,186 2,995 3,220
______ _______ _______
Net interest income . . . 1,851 1,790 1,999
Loan loss provision . . . - 9 15
______ _______ ______
Net interest income after
loan loss provision . . . 1,851 1,781 1,984
Noninterest income. . . . 142 100 52
Noninterest expense . . . 1,318 1,267 1,239
_______ _______ _______
Income before
income taxes. . . . . . . 675 614 797
Income taxes. . . . . . . 194 134 188
_______ ______ _______
Net income. . . . . . . . $ 481 $ 480 $ 609
======= ======== ========
PER SHARE:
Primary . . . . . . . . . $ 0.67 $ 0.67 $ 0.85
Fully diluted . . . . . . 0.67 0.67 0.85
Cash dividends paid . . . 0.35 0.33 0.31
Primary average shares
outstanding . . . . . . . 717,747 720,000 720,000
Diluted average shares
outstanding . . . . . . . 717,747 720,000 720,000
Book Value . . . . . . . 9.37 9.06 8.73
AVERAGE BALANCE SHEET:
Total Assets. . . . . . . $ 60,422 $ 59,730 $ 58,016
Investments & Money
Market Investments. . . . 37,132 34,628 33,266
Loans (Net of Unearned
Income) . . . . . . . . . 20,907 22,960 22,667
Deposits. . . . . . . . . 52,877 52,246 50,748
Borrowings. . . . . . . . 380 349 259
Shareholders' equity. . . 6,611 6,407 6,082
Balance Sheet at Period End:
Total Assets. . . . . . . $ 60,675 $ 59,144 $ 58,123
Investments & Money
Market Investments. . . . 36,063 31,982 25,660
Loans (Net of Unearned
Income) . . . . . . . . . 21,494 25,322 30,432
Deposits. . . . . . . . . 53,138 51,859 50,868
Borrowings. . . . . . . . 441 268 319
Shareholders' equity. . . 6,641 6,524 6,284
Selected Operating Ratios:
Return on average assets
(annualized). . . . . . . 0.80% 0.80% 1.05%
Return on average
shareholders' equity. . . 7.28% 7.49% 10.01%
Leverage (assets divided
by shareholders' equity). 9.14X 9.07X 9.25X
Average total loans as a
percentage of average
deposits . . . . . . . . 40% 44% 45%
Interest income/Average
Earning Assets* . . . . . 7.00% 8.48% 9.53%
Interest expense/Average
Dep. & Borrowings . . . . 4.10% 5.69% 6.31%
Net interest income/
Average Earn. Assets* . . 3.24% 3.28% 3.78%
*Tax Equivalent Basis.
</TABLE>
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<PAGE>
FARMERS & MERCHANTS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
BALANCE SHEET ANALYSIS
Investment Securities
On January 1, 1994, the Farmers & Merchants Bank (the Bank) adopted the
provisions of Statement of Financial Accounting Standards "SFAS" No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which
requires among other things, that debt and equity securities classified as
available for sale be reported at fair value with unrealized gains and
losses excluded from earnings and reported in a separate component of
shareholders, equity, net of income taxes. The net effect of unrealized
gains or losses, caused by marking an available for sale portfolio to
market, causes fluctuations in the level of shareholders' equity and
equity-related financial ratios as market value of the securities
fluctuate. As of September 30, 1995, the application of SFAS 115 resulted
in an increase in shareholders' equity of $1,156,750 (unrealized holding
gain on available-for-sale securities of $1,752,652 less deferred income
tax effect of $595,902).
Total securities of $30,861,671 decreased $2,693,749 from September 30,
1994 to September 30, 1995. This reduction is the net result of the Bank
reducing the securities available for sale portfolio by $10,470,644 and
increasing the securities held-to-maturity portfolio by $7,776,895. The
September 30, 1995 level of securities was also lower than the total
securities at December 31, 1994 and 1993 of $31,739,240 and $32,435,571,
respectively.
The September 30, 1995 federal funds sold of $3,750,000, exceeded the
September 30, 1994 balance of $2,685,000. Federal funds sold at September
30, 1995 were also higher than the December 31, 1994 balance of $975,000
and the December 31, 1993 balance of $3,410,000. The September 1995 year-
to-date average federal funds sold of $2,688,500 exceeded the average
federal funds sold for the same period in 1994 of $2,039,000. The average
federal funds sold for the entire year of 1994 of $1,772,308 were lower
than the 1993 average federal funds sold balance of $2,575,385.
Interest-bearing deposits in banks of $1,959,908 at September 30, 1995,
were lower than the September 30, 1994 balance of $2,176,624. The December
31, 1994 and 1993 balances were $1,798,620 and $1,473,757, respectively.
-48-
<PAGE>
The amortized cost and fair value of investment securities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
__________________
INVESTMENT SECURITIES Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
_________ __________ __________ ________
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 1,490 $ 17 $ - $ 1,507
Obligations of other
U.S. Government
agencies and
corporations 11,032 49 3 11,078
Obligations of
states and
political
subdivisions 780 22 2 800
________ ______ ______ ________
Totals $ 13,302 $ 88 $ 5 $ 13,385
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
__________________
AVAILABLE FOR SALE Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
_________ __________ __________ ________
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 7,517 $ 3 $ 22 $ 7,498
Obligations of other
U.S. Government
agencies and
corporations 6,003 21 87 5,937
Obligations of
states and
political
subdivisions 915 2 1 916
Mortgage-backed
securities 449 9 5 453
Corporate debt
securities 205 - - 205
Equity securities 718 1,833 - 2,551
________ ______ ______ ________
Totals $ 15,807 $1,868 $ 115 $ 17,560
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
__________________
INVESTMENT SECURITIES Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
_________ __________ __________ ________
<S> <C> <C> <C> <C>
Obligations of other
U.S. Government
agencies and
corporations $ 1,045 $ - $ 26 $ 1,019
Obligations of
states and
political
subdivisions 2,974 - 10 2,964
Other debt
securities 1,506 - 6 1,500
________ _______ _______ ________
Totals $ 5,525 $ - $ 42 $ 5,483
======== ======= ====== =========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
__________________
AVAILABLE FOR SALE Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
_________ __________ __________ ________
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 17,066 $ 8 $ 217 $ 16,857
Obligations of other
U.S. Government
agencies and
corporations 7,500 19 148 7,371
Obligations of
states and
political
subdivisions 1,015 - 42 973
Mortgage-backed
securities 604 - 16 588
Corporate debt
securities 197 - - 197
Equity securities 718 1,326 - 2,044
________ ______ ______ ________
Totals $ 27,100 $1,353 $ 423 $ 28,030
======== ====== ====== ========
</TABLE>
-49-
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
_________________
INVESTMENT SECURITIES Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
_________ __________ __________ ________
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 1,478 $ - $ 7 $ 1,471
Obligations of other
U.S. Government
agencies and
corporations 4,478 - 54 4,424
Obligations of
states and
political
subdivisions 1,045 - 21 1,024
Corporate debt
obligations 501 - 1 500
________ ______ _______ ________
Totals $ 7,502 $ - $ 83 $ 7,419
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
_________________
AVAILABLE FOR SALE Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
_________ __________ __________ ________
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 15,055 $ - $ 268 $ 14,787
Obligations of other
U.S. Government
agencies and
corporations 5,999 1 261 5,739
Obligations of
states and
political
subdivisions 1,015 - 41 974
Mortgage-backed
securities 300 - 4 296
Corporate debt
securities 261 - 15 246
Equity securities 915 1,282 2 2,195
________ ______ _____ ________
Totals $ 23,545 $1,283 $ 591 $ 24,237
======== ====== ====== ========
</TABLE>
The amortized cost and fair value of investment securities at December 31,
1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
_________________
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
_________ __________ __________ ________
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 21,098 $ 135 $ 15 $ 21,218
Obligations of other
U.S. Government
agencies and
corporations 6,362 140 1 6,501
Obligations of
states and
political
subdivisions 2,000 7 2 2,005
Other debt securities 1,937 3 9 1,931
Equity Securities 1,039 1,325 3 2,361
________ ______ _______ ________
Totals $ 32,436 $1,610 $ 30 $ 34,016
======== ====== ====== ========
</TABLE>
-50-
<PAGE>
Loans
The Bank grants installment, commercial and residential loans to customers
primarily in Wayne County, Pennsylvania, and its contiguous counties.
Although the Bank has a diversified loan portfolio, a substantial portion
of its debtors' ability to honor their contracts is dependent on the local
economy. There are no concentrations of loans to any one industry group
which exceed 10% of total loans.
Loans grew 1.5% from $26,652,365 at September 30, 1994 to $27,055,817 at
September 30, 1995. Real estate loans represented $19,538,139, or 72.2% of
total loans at September 30, 1995. Installment & commercial loans
represented 19.4% and 8.4%, respectively, of total loans at September 30,
1995. The September 30, 1995 loan portfolio grew from the $26,817,936 loan
level at December 31, 1994. This rise in loan volumes was represented in
consumer loan category. The December 31, 1994 loan balance of $26,817,936
grew $5,215,339, from the $21,602,597 balance at December 31, 1993. Real
estate loans were responsible for $4,695,533 of this growth.
Major classifications of loans are summarized as follows at September 30,
1995 and 1994, and December 31, 1994 and 1993:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994 1994 1993
____ ____ ____ ____
<S> <C> <C> <C> <C>
Real estate . . $19,538,139 $19,628,659 $19,951,503 $15,255,970
Commercial
loans. . . . . 2,274,166 2,456,004 2,618,190 2,627,506
Consumer. . . . 5,243,512 4,567,702 4,248,243 3,719,121
___________ ___________ __________ ___________
Total . . . $27,055,817 $26,652,365 $26,817,936 $21,602,597
Less:
Unearned
discount . . - 1,491 1,149 3,358
Unamortized
loan fees
and cost . . 286,605 323,776 321,111 180,934
Allowance for
possible loan
losses . . . 214,376 216,484 215,876 201,484
___________ ___________ ___________ __________
Loans,
Net. . . . $26,554,836 $26,110,614 $26,279,800 $21,216,821
=========== =========== =========== ===========
</TABLE>
Allowance for Possible Loan Losses
The provision for loan losses is based upon a credit review of the loan
portfolio, past loan loss experience, current economic conditions and other
pertinent factors which form a basis for determining the adequacy of the
allowance for possible loan losses. In the opinion of management, the
aggregate amount reserved is deemed to be adequate to absorb future loan
losses.
The allowance for possible loan losses of $214,376 at September 30, 1995
and $216,484 at September 30, 1994 were both .79% and .81%, respectively,
of total loans. The $215,876 allowance for possible loan losses at
December 31, 1994 was .81% of loans and the $201,484 allowance for loan
losses at December 31, 1993 was .93% of loans.
-51-
<PAGE>
Transactions in the allowance for possible loan losses account for the
periods ending September 30, 1995 and 1994, and the years ended December
31, 1994 and 1993 are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994 1994 1993
____ ____ ____ ____
<S> <C> <C> <C> <C>
Beginning $ 215,876 $ 201,484 $ 201,484 $ 209,993
balance
Provision
charged to
operations 9,000 15,000 15,000 12,000
Recovery of
loans previously
charged off - - - 5,559
___________ ___________ ___________ ___________
$ 224,876 $ 216,484 $ 216,484 $ 227,552
Loans charged
off 10,500 - 608 26,068
____________ ___________ __________ ___________
Ending Balance $ 214,376 $ 216,484 $ 215,876 $ 201,484
=========== =========== ========== ==========
</TABLE>
Bank Premises and Equipment
Bank premises and equipment are summarized as follows at September 30, 1995
and 1994, and December 31, 1994 and 1993:
<TABLE>
<CAPTION>
September 30, December 31,
____________________ _____________________
1995 1994 1994 1993
<S> <C> <C> <C> <C>
Land. . . . . . . . $ 215,338 $ 215,338 $ 215,338 $ 62,288
Bank premises . . . 953,150 937,870 950,284 950,184
Furniture &
Equipment. . . . . 590,720 582,435 581,885 575,684
_________ _________ _________ _________
1,759,208 1,735,643 1,747,507 1,588,156
Less accumulated
depreciation . . . 839,454 775,459 794,710 715,964
Bank premises and
equipment, net . . $ 919,754 $ 960,184 $ 952,797 $ 872,192
========= ========= ========= =========
</TABLE>
Total deposits of $56,000,618 at September 30, 1995 were $2,510,533 lower
than the $58,511,151 deposit level at September 30, 1994. A $3,164,477
reduction in savings deposits was partially offset by a $1,628,939 gain in
time deposits. The September 30, 1995 deposits grew $1,252,492 from the
December 31, 1994 balance of $54,748,126 and $1,137,310 from the December
31, 1993 deposit balance of $54,863,308.
Deposits are summarized as follows at September 30, 1995 and 1994, and
December 31, 1994 and 1993:
<TABLE>
<CAPTION>
September 30, December 31,
__________________ ___________________
1995 1994 1994 1993
____ ____ ____ ____
<S> <C> <C> <C> <C>
Noninterest
-bearing $ 6,057,290 $ 6,768,724 $ 4,669,491 $ 4,911,900
Interest-bearing
demand
deposits 4,912,480 5,176,041 4,824,551 4,756,273
Savings 20,887,150 24,051,627 22,484,463 22,210,649
Time Deposits 24,143,698 22,514,759 22,769,621 22,984,486
___________ __________ ___________ ___________
Total $56,000,618 $58,511,151 $54,748,126 $54,863,308
Deposits =========== =========== =========== ===========
</TABLE>
-52-
<PAGE>
Capital
Various regulatory agencies require banks to maintain a leverage ratio of
core capital to total assets at a prescribed level, currently 4 percent.
In addition, bank regulators have issued risk-based capital guidelines.
Under such guidelines, minimum ratios of core capital and total qualifying
capital as a percentage of risk-weighted assets and certain
off-balance-sheet items of 4 percent and 8 percent, respectively, are
required.
At September 30, 1995, the Bank met all capital requirements. Core capital
was $7,390,129 or 11.3% of total assets and 16.7% of total risk-weighted
assets, while total qualifying capital was $7,604,505, or 17.2% of total
risk-weighted assets.
INCOME STATEMENT ANALYSIS
Results of Operations
Net income for the nine month period ending September 30, 1995 of $458,975,
was $78,590 higher than the $380,385 net income for the same period ending
September 30, 1994. This growth in net income was the result of an
increase in net interest income. The annualized return on average
shareholders' equity was 7.54% at September 30, 1995, compared to 6.78% at
September 30, 1994. The December 31, 1994 net income of $534,583 was
higher than the December 31, 1993 and 1992 net income of $499,882 and
$481,375, respectively. Earnings per share were $.65 for the first nine
months of 1995, compared to $.54 for the same period in 1994.
Net Interest Income
Net interest income at September 30, 1995 of $1,651,065 was $98,644 higher
than the September 30, 1994 net interest income of $1,552,421. This
increase is primarily due to the change in the mix of earning assets during
the first nine months of 1995, compared to the same period in 1994. Lower
yielding average investments balances were $3,081,600 lower in the first
nine months of 1995, compared to the same period in 1994. This reduction
in funds was used to fund a $2,309,260 increase in the average higher
yielding loans during this period. The remaining drop in the average
investment balance during this period is the result of lower deposit
balances. The net interest margin grew from 3.37% for the nine month
period ending September 30, 1994, to 3.61% for the same period in 1995.
Net interest income at December 31, 1994 of $2,104,147 was higher than the
December 31, 1993 and 1992 net interest income of $1,928,925 and
$1,851,729, respectively. The net interest margin for the twelve month
period ending December 31, 1994 of 3.46% was higher than the 3.31% at
December 31, 1993 and the 3.25% at December 31, 1992.
Provision for Loan Losses
The provision for loan losses for the first nine months of 1995 was $9,000,
compared to $15,000 for the same period in 1994. The provision for loan
losses for the entire year of 1994 was $15,000, a $3,000 increase over
1993. There Bank did not make a provision for loan losses in 1992.
-53-
<PAGE>
Other Income
Other income declined 55.3% from $204,242 during the first nine months of
1994, to $91,227 during the same period in 1995. This decline was the
result of the decrease in security gains, partially offset by increases in
both the trust and other income categories. Other income for the entire
year of 1994 of $221,605 was $125,197 higher than 1993 other income of
$96,408 and $79,288 higher than the 1992 other income of $142,317. The
increase in the 1994 other income is a result of higher security gains and
increases in trust and other income.
Other Operating Expenses
Other expenses of $1,096,307 for the first nine months of 1995, was
$109,381 lower than the same period in 1994. This reduction in 1995 is the
result of a decrease in expenses associated with other real estate owned
property experienced during 1994. Other expenses for the entire year of
1994 of $1,556,904, was $243,193 and $238,558 higher than the same periods
in 1993 and 1992, respectively. The increase in other expenses in 1994 is
primarily related to cost associated with writing off an other real estate
owned property. Increases to advertising, FDIC premiums and meeting and
travel also contributed to this rise in other expenses.
-54-
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANK
BALANCE SHEET
UNAUDITED
As of September 30, As of December 31,
___________________ __________________
<S> <C> <C> <C> <C>
ASSETS 1995 1994 1994 1993
____ ____ ____ ____
Cash and due
from banks . . .$ 420,147 $ 479,363 $ 454,819 $ 2,041,876
Federal Funds
Sold . . . . . . 3,750,000 2,685,000 975,000 3,410,000
Interest-bearing
deposits in
banks. . . . . . 1,959,908 2,176,624 1,798,620 1,473,757
Securities held-
to-maturity (fair
value $13,385,000
at Sept. 30, 1995,
$5,483,000 at Sept.
30, 1994 and
$7,419,000 at
December 31,
1994). . . . . . 13,301,765 5,524,870 7,501,996 -
Securities
available
for sale . . . . 17,559,906 28,030,550 24,237,244 -
Investment
securities
(fair value
$34,016,000 at
December 31,
1993) . . . . . - - - 32,435,571
Loans, net. . . . 26,554,836 26,110,614 26,279,800 21,216,821
Bank premises
and equipment,
net. . . . . . . 919,754 960,184 952,797 872,192
Accrued income
receivable . . . 679,535 574,593 515,533 459,131
Other real estate
owned . . . . . 202,364 - - 233,984
Other assets. . . 207,247 222,471 173,804 229,859
____________ ___________ ___________ ___________
Total assets . .$65,555,462 $66,764,269 $62,889,613 $62,373,191
============ =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest
-bearing. . . .$ 6,057,290 $ 6,768,724 $ 4,669,491 $ 4,911,900
Interest
-bearing
demand
deposits. . . . 4,912,480 5,176,041 4,824,551 4,756,273
Savings. . . . . 20,887,150 24,051,627 22,484.463 22,210,649
Time deposits. . 24,143,698 22,514,759 22,769,621 22,984,486
___________ ___________ ___________ ___________
Total deposits . 56,000,618 58,511,151 54,748,126 54,863,308
Accrued interest
payable. . . . . 319,322 237,349 258,942 256,100
U.S. Treasury
demand notes . . - - - 326,511
Other liabilities . 688,643 359,324 275,092 41,216
___________ ___________ ___________ ___________
Total
liabilities. . . 57,008,583 59,107,824 55,282,160 55,487,135
___________ ____________ ___________ ___________
Shareholder's Equity:
Common Stock,
par value $2.00
per share, 3,000,000
shares authorized;
720,000 shares issued
and outstanding, of
which 11,984 are held
in the treasury as of
Sept. 30, 1995,
Sept. 30, 1994,
and December 31, 1994
and 11,264 are held in
the treasury as of
December 31,
1993 . . . . . . 1,440,000 1,440,000 1,440,000 1,440,000
Surplus . . . . 2,400,000 2,400,000 2,400,000 2,400,000
Undivided
profits. . . . 3,670,689 3,322,517 3,431,198 3,158,696
Net unrealized
losses on
securities
available for
sale, net of
taxes. . . . . 1,156,750 614,488 456,815 -
___________ ___________ ___________ ___________
8,667,439 7,777,005 7,728,013 6,998,696
Less treasury
stock - at cost 120,560 120,560 120,560 112,640
___________ ___________ ___________ ___________
Total
shareholders'
equity . . . . . 8,546,879 7,656,445 7,607,453 6,886,056
___________ ___________ ___________ ___________
Total
liabilities and
shareholders'
equity . . . . .$65,555,462 $66,764,269 $62,889,613 $62,373,191
=========== =========== =========== ===========
</TABLE>
-55-
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANK
STATEMENTS OF INCOME
UNAUDITED
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
__________________________
<S> <C> <C>
INTEREST INCOME 1995 1994
____ ____
Loans, including fees . . . . . . $ 1,669,090 $ 1,476,180
Investment securities . . . . . . 1,254,573 1,195,506
Federal funds sold. . . . . . . . 113,249 62,204
Deposits in banks . . . . . . . . 62,296 52,739
___________ ___________
Total interest income . . . . . 3,099,208 2,786,629
___________ ___________
INTEREST EXPENSE
Interest on deposits. . . . . . . 1,448,143 1,229,370
Interest on other borrowings. . . - 4,838
___________ ___________
Total interest expense . . . . . 1,448,143 1,234,208
___________ ___________
Net interest income. . . . . . . 1,651,065 1,552,421
Provision for loan losses . . . . 9,000 15,000
___________ ___________
Net interest income after
provision for loan losses. . . . 1,642,065 1,537,421
___________ ___________
OTHER OPERATING INCOME
Service charges . . . . . . . . . 17,962 19,871
Security gains (losses), net. . . 361 138,137
Trust income. . . . . . . . . . . 38,505 21,872
Other Income. . . . . . . . . . . 34,399 24,362
___________ ___________
Total other income . . . . . . . 91,227 204,242
___________ ___________
Net interest income after
provision for loan losses
and other income. . . . . . . . 1,733,292 1,741,663
___________ ___________
OTHER OPERATING EXPENSES
Salaries, wages and employee
benefits . . . . . . . . . . . . 513,892 505,008
Net occupancy . . . . . . . . . . 86,051 89,796
Furniture and equipment . . . . . 49,572 64,572
Other expenses. . . . . . . . . . 446,792 546,312
___________ ___________
Total other expenses. . . . . . . 1,096,307 1,205,688
___________ ___________
Income before income taxes. . . . 636,985 535,975
Income tax expense. . . . . . . . 178,010 155,590
___________ ___________
Net income. . . . . . . . . . . . $ 458,975 $ 380,385
=========== ===========
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
__________________________
<S> <C> <C> <C>
INTEREST INCOME 1994 1993 1992
____ ____ ____
Loans, including fees . . . $ 2,006,654 $ 1,791,936 $ 2,023,490
Investment securities . . . 1,608,438 1,704,447 1,808,904
Federal funds sold. . . . . 81,640 82,316 138,912
Deposits in banks . . . . . 69,639 51,266 65,307
___________ ___________ ___________
Total interest income. . . 3,766,371 3,629,965 4,036,613
___________ ___________ ___________
INTEREST EXPENSE
Interest on deposits. . . . 1,659,357 1,691,810 2,174,131
Interest on other
borrowings . . . . . . . . 2,867 9,230 10,753
___________ ___________ ___________
Total interest expense . . 1,662,224 1,701,040 2,184,884
___________ ___________ ___________
Net interest income. . . . 2,104,147 1,928,925 1,851,729
Provision for loan losses . 15,000 12,000 -
___________ ___________ ___________
Net interest income after
provision for loan
losses. . . . . . . . . . 2,089,147 1,916,925 1,851,729
___________ ___________ ___________
OTHER OPERATING INCOME
Service charges . . . . . . 27,310 28,879 26,395
Security gains (losses),
net . . . . . . . . . . . 138,137 39,126 89,730
Trust income. . . . . . . . 21,872 4,745 6,882
Other Income. . . . . . . . 34,286 23,658 19,310
__________ ___________ ___________
Total other income . . . . 221,605 96,408 142,317
__________ ___________ ___________
Net interest income after
provision for loan losses
and other income. . . . . 2,310,752 2,013,333 1,994,046
__________ ___________ ___________
OTHER OPERATING EXPENSES
Salaries, wages and employee
benefits . . . . . . . . . 643,101 595,156 611,896
Net occupancy . . . . . . . 118,950 100,817 70,460
Furniture and equipment . . 84,663 104,474 85,054
Other expenses. . . . . . . 710,190 513,259 550,936
__________ ___________ ___________
Total other expenses . . . 1,556,904 1,313,706 1,318,346
__________ ___________ ___________
Income before income
taxes . . . . . . . . . . 753,848 699,627 675,700
Income tax expense. . . . . 219,265 199,745 194,325
__________ ___________ ___________
Net income. . . . . . . . . $ 534,583 $ 499,882 $ 481,375
========== =========== ===========
</TABLE>
-56-
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANK
STATEMENT OF CASH FLOWS
UNAUDITED
As of September 30, As of December 31,
____________________ ____________________
<S> <C> <C> <C> <C>
1995 1994 1994 1993
____ ____ ____ ____
CASH FLOWS FROM
OPERATING
ACTIVITIES:
Net Income . . $ 458,975 $ 380,385 $ 534,583 $ 499,882
Adjustments to
reconcile net
income to net
cash provided by
operating
activities
Depreciation. . . 44,745 59,495 79,295 103,076
Deferred income
taxes . . . . . . - - (39,859) (9,009)
Amortization of
investment
securities . . . . 60,892 88,282 111,159 237,330
Accretion of
investment
securities . . . .(33,977) (13,614) (26,390) (28,599)
Gain on sale of
investment
securities . . . . (361) (138,137) (138,137) (39,126)
Loss on sale of
assets acquired
through fore-
closure . . . . . 719 87,262 87,263 -
Loss on disposition
of bank premises
and equipment. . . - - - 2,023
Change in:
Accrued interest
receivable . . . (164,002) (115,462) (56,402) 102,426
Other assets. . . (33,443) 7,388 31,230 (328,262)
Accrued interest
payable. . . . . 60,380 (18,751) 2,842 (39,177)
Other liabilities 52,978 (2,490) 63,231 (133,771)
________ ________ _________ _________
Net cash provided
by operating
activities . . . 446,906 334,358 648,815 366,793
________ _________ _________ ________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale
of interest
-bearing
deposits
in banks . . . 1,205,563 582,915 920,584 1,199,000
Purchases of
interest-bearing
deposits in
banks. . . . . (1,366,851) (1,285,782) (1,245,447) (1,577,987)
Proceeds from
sale of
securities . . - 267,207 267,207 89,616
Proceeds from
maturity of
securities . . 11,473,908 10,513,214 13,994,740 17,180,735
Purchase of
securities . . (9,562,385)(10,905,759) (12,820,104)(18,297,415)
Net decrease
(increase)
in loans . . . (478,119) (4,893,793) (5,062,979) (67,659)
Bank premises
and equipment
additions. . . . (11,702) (147,485) (159,900) (131,602)
Proceeds from
sale of assets
acquired through
foreclosure. . . - 146,720 146,721 -
__________ __________ ___________ ___________
Net cash provided
by (used in)
investing
activities . . 1,260,414 (5,722,763) (3,959,178) (1,605,312)
__________ __________ ___________ ___________
CASH FLOWS FROM
FINANCING ACTIVITIES
Net increase
(decrease) in
deposit
accounts. . . . 1,252,492 3,647,843 (115,182) 1,727,035
Increase
(decrease)
in U.S. Treasury
Tax & Loan note . - (326,511) (326,511) (114,227)
Cash dividends . . (219,484) (212,520) (262,081) (255,144)
Purchase of
treasury stock. . - (7,920) (7,920) -
__________ __________ ___________ ___________
Net cash provided
by (used in)
financing
activities. . . 1,033,008 3,100,892 (711,694) 1,357,664
__________ __________ ___________ __________
Net increase
(decrease) in
cash and cash
equivalents . . 2,740,328 (2,287,513) (4,022,057) 119,145
Cash and cash
equivalents,
beginning of
year . . . . . . 1,429,819 5,451,876 5,451,876 5,332,731
_________ __________ __________ _________
Cash and cash
equivalents,
end of year. . . $4,170,147 $3,164,363 $1,429,819 $5,541,876
========== ========== ========== ==========
Supplemental disclosure
of cash flow information:
Interest paid during
the year. . . . $1,387,763 $1,252,959 $1,659,381 $1,740,217
Income taxes
paid during
the year. . . . $ 63,909 $ 57,111 $ 228,444 $ 316,387
Loans transferred
to foreclosed assets
held for sale
during the
year. . . . . . $ 203,083 $ - $ - $ 233,984
<CAPTION>
FARMERS & MERCHANTS BANK
STATEMENT OF CASH FLOWS
UNAUDITED
As of December 31,
____________________
<S> <C>
1992
____
CASH FLOWS FROM
OPERATING
ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . $ 481,375
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation. . . . . . . . . . . . . . . . . 71,067
Deferred income taxes . . . . . . . . . . . . (31,536)
Amortization of investment securities . . . . 230,605
Accretion of investment securities . . . . . (37,747)
Gain on sale of investment securities . . . . (89,730)
Loss on sale of assets acquired through
foreclosure . . . . . . . . . . . . . . . . --
Loss on disposition of bank premises
and equipment . . . . . . . . . . . . . . . --
Change in:
Accrued interest receivable . . . . . . . . 97,938
Other assets . . . . . . . . . . . . . . . . (43,902)
Accrued interest payable . . . . . . . . . . (152,018)
Other liabilities . . . . . . . . . . . . . . 147,007
__________
Net cash provided by operating activities . . 673,059
__________
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of interest-bearing
deposits in banks . . . . . . . . . . . . . 1,994,000
Purchases of interest-bearing deposits in
banks. . . . . . . . . . . . . . . . . . . . (1,394,770)
Proceeds from sale of securities . . . . . . 1,243,218
Proceeds from maturity of securities . . . . 17,911,462
Purchase of securities . . . . . . . . . . . (24,527,229)
Net decrease (increase) in loans . . . . . . 3,822,903
Bank premises and equipment additions . . . . (589,279)
Proceeds from sale of assets acquired
through foreclosure . . . . . . . . . . . . --
__________
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . (1,539,695)
__________
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit
accounts . . . . . . . . . . . . . . . . . . 1,277,753
Increase (decrease) in U.S. Treasury
Tax & Loan note . . . . . . . . . . . . . . . 172,695
Cash dividends . . . . . . . . . . . . . . . . (251,749)
Purchase of treasury stock . . . . . . . . . . (112,640)
__________
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . 1,086,059
__________
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . 219,423
Cash and cash equivalents, beginning of
year . . . . . . . . . . . . . . . . . . . . . 5,113,308
__________
Cash and cash equivalents, end of year . . . . $5,332,731
==========
Supplemental disclosure of cash flow
information:
Interest paid during the year . . . . . . . . $2,336,902
Income taxes paid during the year . . . . . . $ 82,204
Loans transferred to foreclosed assets
held for sale during the year . . . . . . . . $ --
</TABLE>
-57-
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 THE
PERIOD ENDING SEPTEMBER 30, 1995
UNAUDITED
Common Undivided
Stock Surplus Profits
<S> <C> <C> <C>
Balance, December 31,
1991 $ 1,200,000 $ 2,400,000 $ 2,924,332
Net Income - - 481,375
Cash Dividends
($.35 per share) - - (251,749)
Stock Split 240,000 - (240,000)
Purchase of Treasury
Stock - - -
____________ ___________ __________
Balance, December 31,
1992 $ 1,440,000 $ 2,400,000 $ 2,913,958
Net Income - - 499,882
Cash Dividends
($.36 per share) - - (255,144)
____________ ___________ __________
Balance, December 31,
1993 1,440,000 2,400,000 3,158,696
Net Income - - 534,583
Cash Dividends
($.37 per share) - - (262,081)
Treasury Stock
Acquisition - - (255,144)
Implementation of SFAS
No. 115 - - -
Net Unrealized Loss - - -
____________ ___________ __________
Balance, December 31,
1994 1,440,000 2,400,000 3,431,198
Net Income - - 458,975
Cash Dividends
($.31 per share) - - (219,484)
Net Unrealized Gain - - -
____________ ___________ __________
Balance, September 30,
1995 $ 1,440,000 $ 2,400,000 $ 3,670,689
=========== =========== ===========
<CAPTION>
FARMERS & MERCHANTS BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 THE
PERIOD ENDING SEPTEMBER 30, 1995
UNAUDITED
Unrealized
Gain (loss) on Treasury
Securities Stock Total
<S> <C> <C> <C>
Balance, December 31,
1991 $ - $ - $ 6,524,332
Net Income - - 481,375
Cash Dividends
($.35 per share) - - (251,749)
Stock Split - - -
Purchase of Treasury
Stock - 112,640 (112,640)
____________ ___________ __________
Balance, December 31,
1992 - 112,640 $ 6,641,318
Net Income - - 499,882
Cash Dividends
($.36 per share) - - (255,144)
Treasury Stock
Acquisition - 7,920 (7,920)
Implementation of SFAS
No. 115 875,665 - 875,665
Net Unrealized Loss (418,850) - (418,850)
____________ ____________ ______________
Balance, December 31,
1994 456,815 120,560 7,607,453
Net Income - - 458,975
Cash Dividends
($.31 per share) - - (219,484)
Net Unrealized Gain 699,935 - 699,935
___________ ____________ ____________
Balance, September 30,
1995 $ 1,156,750 $ 120,560 $ 8,546,879
=========== =========== ===========
</TABLE>
-58-
<PAGE>
FARMERS AND MERCHANTS BANK
==========================
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1994 AND 1993
AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
TABLE OF CONTENTS
=================
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. . . . 1
FINANCIAL STATEMENTS:
Balance Sheet . . . . . . . . . . . . . . . . . . . . . 2
Statement of Income . . . . . . . . . . . . . . . . . . 3
Statement of Changes in Shareholders' Equity. . . . . . 4
Statement of Cash Flows . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . 6-19
______________________
<PAGE>
PARENTE, RANDOLPH, ORLANDO,
CAREY & ASSOCIATES
_____________________________________________
CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Farmers & Merchants Bank
Honesdale, Pennsylvania:
We have audited the accompanying balance sheets of Farmers & Merchants
Bank as of December 31, 1994 and 1993, and the related statements of
income, changes in shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Farmers &
Merchants Bank as of December 31, 1994 and 1993, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1994 the Bank
changed its method of accounting for investment securities by adopting
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
/s/ Parente, Randolph, Orlando, Carey
& Associates
Wilkes-Barre, Pennsylvania
January 13, 1995
F-1
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANK
========================
BALANCE SHEET
DECEMBER 31, 1994 AND 1993
_________________________________________________________________
1994 1993
_________________________________________________________________
ASSETS
======
<S> <C> <C>
CASH AND CASH EQUIVALENTS . . . . . . . . $ 1,429,819 $ 5,451,876
INTEREST-BEARING DEPOSITS IN BANKS. . . . 1,798,620 1,473,757
SECURITIES HELD-TO-MATURITY
(fair value $7,418,669). . . . . . . . . 7,501,996 -
SECURITIES AVAILABLE-FOR-SALE . . . . . . 24,237,244 -
INVESTMENT SECURITIES
(fair value $34,016,000) . . . . . . . . - 32,435,571
LOANS, NET. . . . . . . . . . . . . . . . 26,279,800 21,216,821
BANK PREMISES AND EQUIPMENT . . . . . . . 952,797 872,192
ACCRUED INTEREST RECEIVABLE . . . . . . . 515,533 459,131
FORECLOSED ASSETS HELD FOR SALE . . . . . - 233,984
OTHER ASSETS. . . . . . . . . . . . . . . 173,804 229,859
___________ _________
TOTAL . . . . . . . . . . $62,889,613 $62,373,191
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
====================================
<S> <C> <C>
LIABILITIES:
Demand deposits . . . . . . . . . . . . $ 4,669,491 $ 4,911,900
Interest-bearing demand deposits. . . . 4,824,551 4,756,273
Savings deposits. . . . . . . . . . . . 22,484,463 22,210,649
Time deposits . . . . . . . . . . . . . 22,769,621 22,984,486
Total deposits. . . . . . 54,748,126 54,863,308
Accrued interest payable. . . . . . . . 258,942 256,100
Other liabilities . . . . . . . . . . . 275,092 41,216
U.S. Treasury Tax and Loan note . . . . - 326,511
Total liabilities . . . . 55,282,160 55,487,135
___________ ___________
SHAREHOLDERS' EQUITY:
Common stock, par value $2 per share, 3,000,000
shares authorized; 720,000 shares issued and
outstanding, of which 11,984 and 11,264 are held
in the treasury as of December 31, 1994 and 1993,
respectively. . . . . . . . . . . . . 1,440,000 1,440,000
Additional paid-in capital. . . . . . . 2,400,000 2,400,000
Retained earnings . . . . . . . . . . . 3,431,198 3,158,696
Net unrealized holding gains on securities
available-for-sale . . . . . . . . . 456,815 -
___________ ___________
7,728,013 6,998,696
Less treasury stock - at cost . . . . . 120,560 112,640
___________ __________
Shareholders' equity, net . . . 7,607,453 6,886,056
TOTAL . . . . . . . . . . $62,889,613 $62,373,191
=========== ===========
</TABLE>
______________________________________________________________________
See Notes to Financial Statements
F-2
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANK
========================
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
_________________________________________________________________
1994 1993
_________________________________________________________________
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans. . . . . . . $ 2,006,654 $ 1,791,936
Interest and dividends on investments . 1,608,438 1,704,447
Interest on federal funds sold. . . . . 81,640 82,316
Interest on deposits in banks . . . . . 69,639 51,266
Total interest income . . 3,766,371 3,629,965
INTEREST EXPENSE:
Interest on deposits. . . . . . . . . . 1,659,357 1,691,810
Interest on other borrowings. . . . . . 2,867 9,230
___________ __________
Total interest expense. . $ 1,662,224 $ 1,701,040
NET INTEREST INCOME . . . . . . . . . . . 2,104,147 1,928,925
PROVISION FOR LOAN LOSSES . . . . . . . . 15,000 12,000
___________ ___________
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES . . . . . . . . . . . . . . 2,089,147 1,916,925
OTHER OPERATING INCOME:
Trust Department income . . . . . . . . 21,872 4,745
Service charges on deposit accounts . . 27,310 28,879
Other income. . . . . . . . . . . . . . 34,286 23,658
Securities gains, net . . . . . . . . . 138,137 39,126
___________ ___________
Total other operating income. . 221,605 96,408
___________ ___________
OTHER OPERATING EXPENSES:
Salaries, wages and employee benefits . 643,101 595,156
Occupancy expense, net. . . . . . . . . 118,950 100,817
Furniture and equipment expense . . . . 84,663 104,474
Other expenses. . . . . . . . . . . . . 710,190 513,259
Total other operating expenses. 1,556,904 1,313,706
__________ __________
INCOME BEFORE PROVISION FOR INCOME TAXES. 753,848 699,627
PROVISION FOR INCOME TAXES. . . . . . . . 219,265 199,745
NET INCOME. . . . . . . . . . . . . . . . $ 534,583 $ 499,882
========== ==========
EARNINGS PER SHARE. . . . . . . . . . . . $ .76 $ .71
========== ==========
</TABLE>
______________________________________________________________________
See Notes to Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANK
========================
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
_________________________________________________________________
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
_________________________________________________________________
<S> <C> <C> <C>
BALANCE, DECEMBER 31,
1992 . . . . . . . . . . $ 1,440,000 $ 2,400,000 $ 2,913,958
NET INCOME. . . . . . . . . 499,882
CASH DIVIDENDS ($.36 per
share). . . . . . . . . . (255,144)
____________ ___________ ____________
BALANCE, DECEMBER 31, 1993 1,440,000 2,400,000 3,158,696
NET INCOME. . . . . . . . . 534,583
CASH DIVIDENDS
($.37 per share) . . . . . (262,081)
TREASURY STOCK ACQUISITION.
IMPLEMENTATION OF
SFAS NO. 115. . . . . . .
NET UNREALIZED LOSS . . . . ____________ ___________ ____________
BALANCE,
DECEMBER 31, 1994 . . . . $ 1,440,000 $ 2,400,000 $ 3,431,198
=========== =========== ===========
<CAPTION>
FARMERS & MERCHANTS BANK
========================
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
_________________________________________________________________
NET
UNREALIZED
HOLDING
GAINS ON
SECURITIES
AVAILABLE- TREASURY SHAREHOLDERS'
FOR-SALE STOCK EQUITY, NET
_________________________________________________________________
<S> <C> <C> <C>
BALANCE, DECEMBER 31,
1992 . . . . . . . . . . $ 112,640 $ 6,641,318
NET INCOME. . . . . . . . . 499,882
CASH DIVIDENDS ($.36 per
share) (255,144)
____________ _____________ ___________
BALANCE, DECEMBER 31,
1993 . . . . . . . . . . 112,640 6,886,056
NET INCOME. . . . . . . . . 534,583
CASH DIVIDENDS
($.37 per share). . . . . (262,081)
TREASURY STOCK ACQUISITION. 7,920 (7,920)
IMPLEMENTATION OF
SFAS NO. 115. . . . . . . $ 875,665 875,665
NET UNREALIZED LOSS . . . . (418,850) (418,850)
____________ __________ __________
BALANCE,
DECEMBER 31, 1994 . . . $ 456,815 $ 120,560 $ 7,607,453
=========== =========== ===========
</TABLE>
______________________________________________________________________
See Notes to Financial Statements
F-4
<PAGE>
<TABLE>
<CAPTION>
FARMERS & MERCHANTS BANK
========================
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
_________________________________________________________________
1994 1993
_________________________________________________________________
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . $ 534,583 $ 499,882
Adjustments to reconcile
net income to net cash provided
by operating activities:
Depreciation. . . . . . . . . . . . $ 79,295 103,076
Deferred income taxes . . . . . . . (39,859) (9,009)
Amortization of investment
securities . . . . . . . . . . . . 111,159 237,330
Accretion of investment
securities . . . . . . . . . . . . (26,390) (28,599)
Gain on sale of investment
securities . . . . . . . . . . . . (138,137) (39,126)
Loss on sale of assets
acquired through foreclosure . . . 87,263 -
Loss on disposition of bank
premises and equipment . . . . . . - 2,023
Change in:
Accrued interest receivables . . . (56,402) 102,426
Other assets . . . . . . . . . . . 31,230 (328,262)
Accrued interest payable. . . . . . 2,842 (39,177)
Other liabilities . . . . . . . . . 63,231 (133,771)
_________ ___________
Net cash provided by
operating activities . . . . . 648,815 366,793
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of interest-bearing
deposits in banks. . . . . . . . . . 920,584 1,199,000
Purchases of interest-bearing
deposits in banks . . . . . . . . . (1,245,447) (1,577,987)
Proceeds from sale of securities 267,207 89,616
Proceeds from maturities
of securities . . . . . . . . . . . 13,994,740 17,180,735
Purchases of securities . . . . . . . (12,820,104) (18,297,415)
Net decrease in loans . . . . . . . . (5,062,979) (67,659)
Bank premises and equipment
additions. . . . . . . . . . . . . . (159,900) (131,602)
Proceeds from sale of assets
acquired through foreclosure . . . . 146,721 -
Net cash used in investing
activities . . . . . . . . . . . . . (3,959,178) (1,605,312)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in
deposit accounts . . . . . . . . . . (115,182) 1,727,035
Decrease in U.S. Treasury Tax
and Loan note. . . . . . . . . . . . (326,511) (114,227)
Cash dividends. . . . . . . . . . . . (262,081) (255,144)
Purchase of treasury stock. . . . . . (7,920) -
Net cash provided by (used in)
financing activities. . . . . . (711,694) 1,357,664
__________ ___________
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS. . . . . . . . . (4,022,057) 119,145
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR . . . . . . . . . . 5,451,876 5,332,731
_________ __________
CASH AND CASH EQUIVALENTS,
END OF YEAR . . . . . . . . . . . . . $ 1,429,819 $ 5,451,876
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year . . . . $ 1,659,381 $ 1,740,217
Income taxes paid during the year . . $ 228,444 $ 316,387
Loans transferred to foreclosed
assets held for sale during
the year. . . . . . . . . . . . . . $ - $ 233,984
</TABLE>
See Notes to Financial Statements
______________________________________________________________________
F-5
<PAGE>
FARMERS & MERCHANTS BANK
========================
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The more significant of the accounting and reporting policies
followed by Farmers & Merchants Bank (the "Bank") are
summarized below and are in accordance with generally accepted
accounting principles.
INVESTMENT SECURITIES
As of January 1, 1994, the Bank adopted the provisions of
Statement of Financial Accounting Standards "SFAS" No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," for accounting and reporting for investment
securities. In accordance with SFAS No. 115, such investments
are accounted for as follows:
Securities Held-to-Maturity - includes debt securities that
the Bank has the positive intent and ability to hold to
maturity. These securities are reported at amortized cost.
Trading Securities - includes debt and equity securities
bought and held principally for the purpose of selling them
in the near term. At December 31, 1994, the Bank did not
hold any trading securities.
Securities Available-for-Sale - includes debt and equity
securities not classified as either held-to-maturity
securities or trading securities. Such securities are
reported at fair value, with unrealized holding gains and
losses excluded from earnings and reported as a separate
component of shareholders' equity net of deferred income
taxes.
At December 31, 1993, debt securities are reported at
amortized cost and equity securities are reported at the lower
of aggregate cost or market value.
F-6
<PAGE>
FARMERS & MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
The cumulative effect of the adoption of SFAS No. 115 as of
January 1, 1994 resulted in an increase in shareholders'
equity of $875,665 (unrealized holding gain on available-for
-sale securities of $1,326,764 less deferred income tax effect
of $451,099).
The fair value of investments, except certain state and
municipal securities, is estimated based on bid prices
published in financial newspapers or bid quotations received
from securities dealers. The fair value of certain state and
municipal securities is not readily available through market
sources other than dealer quotations, so fair value estimates
are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and
the instruments being valued.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provision for loan losses is based upon a credit review of
the loan portfolio, past loan loss experience, current
economic conditions and other pertinent factors which form a
basis for determining the adequacy of the allowance for
possible loan losses. In the opinion of management, the
aggregate amount reserved is deemed to be adequate to absorb
future loan losses.
INTEREST ON LOANS
Interest income on loans, other than discounted installment
loans, is computed based upon the principal amount
outstanding. Interest on discounted installment loans is
recognized using the sum-of-the-months-digits method which
does not differ materially from the interest method. Loans
are placed in nonaccrual status when management believes that
collection of the interest is uncertain. Any payments
received on nonaccrual loans are applied, first to the
outstanding loan amounts, then to the recovery of any charged
-off loan amounts. Any excess is treated as a recovery of
lost interest.
F-7
<PAGE>
FARMERS & MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
LOAN FEES
Nonrefundable loan origination fees and certain direct loan
origination costs are recognized over the life of the related
loans as an adjustment of yield. Prior to 1988, the Bank
recognized such fees and costs in the year received or
incurred.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less
accumulated depreciation. Routine maintenance and repair
expenditures are expenses as incurred while significant
expenditures are capitalized.
Depreciation expense is determined on the straight-line and
accelerated methods over the following ranges of useful lives:
Building and improvements. . . . . . . . . 5 to 40 years
Furniture and equipment. . . . . . . . . . 3 to 20 years
FORECLOSED ASSETS HELD FOR SALE
Foreclosed assets held for sale are carried at the lower of
fair value minus estimated costs to sell or cost. The costs
of holding and maintaining the property and gains or losses on
dispositions are included in the statement of income caption
"Other expenses".
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized
or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the
provision for income taxes.
EARNINGS PER SHARE
Earnings per share of common stock is computed using the
weighted-average number of shares outstanding, 708,016 and
708,736 in 1994 and 1993, respectively.
F-8
<PAGE>
FARMERS & MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
STATEMENT OF CASH FLOWS
The Bank considers amounts due from banks and federal funds
sold to be cash equivalents. Federal funds are sold for one
day periods.
TRUST ASSETS
Property held by the Bank in a fiduciary or agency capacity
for its customers is not included in the accompanying balance
sheet since such items are not assets of the Bank.
RECLASSIFICATION
Certain reclassification have been made to the 1993 financial
statements to conform to the 1994 presentation.
2. CASH AND CASH EQUIVALENTS:
The Bank is required to maintain average reserve balances with
the Federal Reserve Bank or a participating bank based on a
percentage of deposits. The average amounts of those reserve
balances for the years ended December 31, 1994 and 1993 were
$164,692 and $145,346, respectively.
Deposits with one financial institution are insured up to
$100,000. The Bank maintains cash and cash equivalents with
other financial institutions in excess of the insured amount.
F-9
<PAGE>
FARMERS & MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
3. INVESTMENT SECURITIES:
The amortized cost and fair value of investment securities at
December 31, 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
. . . . . . . . . . 1994. . . . . . . . .
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
____ _____ ______ _____
<S> <C> <C> <C> <C>
Securities Held-to-
Maturity:
Obligations of
the U.S. Treasury $ 1,478 $ - $ 7 $ 1,471
Obligations of
other U.S.
government
corporations
and agencies . . . 4,478 - 54 4,424
Obligations of
state and
political
subdivisions . . . 1,045 - 21 1,024
Corporate debt
obligations. . . . 501 - 1 500
_______ _____ ____ _______
Total . . . . . . $ 7,502 $ - $ 83 $ 7,419
======= ===== ==== =======
Securities Available-
for-Sale:
Obligations of the
U.S. Treasury $15,055 $ - $268 $14,787
Obligations of
other U.S.
government
corporations
and agencies . . . 3,999 - 189 3,810
Obligations of
state and
political
subdivisions . . . 1,015 41 974
Corporate debt
securities . . . . 261 - 15 246
Mortgage-backed
securities . . . . 2,300 1 76 2,225
_______ _____ _____ _______
Total debt
securities . . . 22,630 1 589 22,042
Equity securities . . . 915 1,282 2 2,195
_______ _____ _____ _______
TOTAL $23,545 $1,283 $591 $24,237
======= ====== ===== =======
</TABLE>
F-10
<PAGE>
FARMERS & MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
The amortized cost and fair value of investment securities at
December 31, 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
____ _____ ______ _____
<S> <C> <C> <C> <C>
U.S. Treasury
securities. . . . . . $21,098 $ 135 $15 $21,218
Obligations of
other U.S.
government
agencies and
corporations. . . . . 6,362 140 1 6,501
Obligations of
states and
political
subdivisions. . . . . 2,000 7 2 2,005
Other debt
securities. . . . . . 1,937 3 9 1,931
_______ ______ ____ _______
Subtotal. . . . . . 31,397 285 27 31,655
Equity securities 1,039 1,325 3 2,361
_______ ______ ____ _______
Total . . . $32,436 $1,610 $30 $34,016
======= ======= === =======
</TABLE>
The amortized cost and estimated market value of debt
securities at December 31, 1994 by contractual maturity, are
shown below (in thousands). Expected maturities will differ
from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES SECURITIES
. . .HELD-TO-MATURITY. . . AVAILABLE-FOR-SALE.
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
____ _____ ______ _____
<S> <C> <C> <C> <C>
Due in one
year or less . . . . . $1,757 $1,741 $14,028 $13,838
Due from one year to
five years 5,245 5,187 8,054 7,675
Due from five to ten
years . . . . . . . . - - 548 529
Due after ten years . . 500 491 - -
______ ______ _______ _______
Total debt securities $7,502 $7,419 $22,630 $22,042
====== ====== ======= =======
</TABLE>
F-11
<PAGE>
FARMERS & MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
Proceeds from the sale of securities available-for-sale during
1994 were $267,207. These sales resulted in gross gains of
$138,137.
There were no sales of investments in debt securities during
the year ended December 31, 1993.
Investment securities having a fair value of approximately
$6,570,000 at December 31, 1994 were pledged to secure
governmental deposits, trust funds and for other purposes as
required by law.
There is no significant concentration of investments in any
individual security issue (excluding U.S. government and its
agencies) that was in excess of 10% of total investments at
December 31, 1994.
The Bank may be required to sell certain of its equity
securities with a December 31, 1994 fair value of $333,319 no
later than December 19, 1996, unless regulatory authority
approval to retain these investments is obtained.
The Bank has no derivative financial instruments requiring
disclosure under SFAS No. 119.
4. LOANS:
Major classifications of loans are summarized as follows at
December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
____ ____
<S> <C> <C>
Real estate . . . . . $19,951,503 $15,255,970
Commercial loans. . . 2,618,190 2,627,506
Consumer 4,248,243 3,719,121
___________ ___________
Total. . . 26,817,936 21,602,597
Less:
Unearned discount. . 1,149 3,358
Unamortized loan fees
and costs . . . . . 321,111 180,934
Allowance for possible
loan losses . . . . 215,876 201,484
__________ __________
Loans, net. . . . . . $26,279,800 $21,216,821
=========== ===========
</TABLE>
F-12
<PAGE>
FARMERS & MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
Transactions in the allowance for possible loan losses account
for the years ended December 31, 1994 and 1993 are summarized
as follows:
<TABLE>
<CAPTION>
1994 1993
____ ____
<S> <C> <C>
Beginning Balance . . . . $201,484 $209,993
Provision charged to
operations . . . . . . . 15,000 12,000
Recovery of loans previously
charged off. . . . . . . - 5,559
________ ________
216,484 227,552
Loans charged off . . . . 608 26,068
________ ________
Ending balance. . . . . . $215,876 $201,484
======== ========
</TABLE>
The Bank grants installment, commercial and residential loans
to customers primarily in Wayne County, Pennsylvania, and its
contiguous counties. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent on the local economy.
There are no concentrations of loans to any one industry group
which exceed 10% of total loans.
In May 1993, the FASB issued SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," which must be adopted by
the Bank in 1995. SFAS No. 114 applies to loans other than
groups of smaller-balance homogenous loans (generally consumer
loans) that are collectively evaluated for impairment. The
standard requires that impairment of such loans be measured
generally based on the present value of expected future
principal and interest cash flows, discounted at the loan's
effective interest rate, and established as a valuation
allowance related to those impaired loans. Under SFAS No.
114, a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be
unable to collect all amounts due. Presently, credit losses
on all loans are accounted for through the allowance for
credit losses, which is maintained at a level adequate to
absorb losses inherent in the portfolio. The Bank does not
anticipate a material increase in the allowance as a result of
the implementation of SFAS No. 114.
F-13
<PAGE>
FARMERS & MERCHANTS
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
5. BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are summarized as follows at
December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
____ ____
<S> <C> <C>
Land. . . . . . . . . . . $ 215,338 $ 62,288
Bank premises . . . . . . 950,284 950,184
Furniture and equipment . 581,885 575,684
__________ ___________
1,747,507 1,588,156
Less accumulated depreciation 794,710 715,964
Bank premises and equipment,
net . . . . . . . . . . $ 952,797 $ 872,192
========== ==========
</TABLE>
6. DEPOSITS:
Deposits are summarized as follows at December 31, 1994 and
1993 (in thousands):
<TABLE>
<CAPTION>
. . . . . . . .1994 . . . . . . . .
____
INTEREST-
BEARING
DEMAND DEMAND SAVINGS TIME
______ ______ _______ _____
<S> <C> <C> <C> <C>
Deposits of individuals,
partnerships and
corporations . . . . . $ 3,898 $ 4,758 $22,054 $22,670
Deposits of U.S.
government . . . . . . 136
Deposits of state and
political
subdivisions . . . . . 258 67 430 100
Certified and official
checks, etc. . . . . . 377
_______ _______ _______ ________
Total deposits. . $ 4,669 $ 4,825 $22,484 $22,770
======= ======= ======= =======
<CAPTION>
. . . . . . . .1993 . . . . . . . .
____
INTEREST-
BEARING
DEMAND DEMAND SAVINGS TIME
______ ______ _______ _____
<S> <C> <C> <C> <C>
Deposits of individuals,
partnerships and
corporations . . . . . $ 4,277 $ 4,686 $22,197 $22,849
Deposits of U.S.
government . . . . . . 118
Deposits of state and
political
subdivisions . . . . . 214 70 14 135
Certified and official
checks, etc. . . . . . 303
_______ _______ _______ ________
Total deposits. . $ 4,912 $ 4,756 $22,211 $22,984
======= ======= ======= =======
</TABLE>
Time deposits of $100,000 or more aggregated approximately
$1,582,000 and $1,441,000 at December 31, 1994 and 1993,
respectively. Interest related to time deposits of $100,000
or more was approximately $53,300 and $47,000 for the years
ended December 31, 1994 and 1993, respectively.
F-14
<PAGE>
FARMERS & MERCHANTS
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
7. PENSION PLAN:
The Bank has a noncontributory defined benefit pension plan
(the "Plan") for all employees meeting certain age and length
of service requirements. Benefits are based primarily on
years of service and the average annual compensation during
the highest five consecutive years within the final ten years
of employment. The Bank's funding policy is consistent with
the funding requirements of federal law and regulations. Plan
assets are invested in a diversified correspondent bank
employee benefit fund comprised of cash equivalents, corporate
fixed income obligations, common stock and U. S. government
securities.
Net periodic pension income for 1994 and 1993 includes the
following components (in thousands):
<TABLE>
<CAPTION>
1994 1993
____ ____
<S> <C> <C>
Service costs benefits
earned during the period . . . . . $ (42) $ (39)
Interest cost on projected benefit
obligation . . . . . . . . . . . . (73) (66)
Return on assets . . . . . . . . . . 121 117
Net amortization . . . . . . . . . . 14 21
_____ _____
Net periodic pension income. . . $ 20 $ 33
===== =====
</TABLE>
As of January 1, 1994 and 1993, the retirement plan assets
were $1,569,000 and $1,522,000, respectively; the projected
benefit obligation was $1,114,000 and $961,000, respectively;
and the accumulated benefit obligation was $783,000 and
$669,000 including vested benefits of $756,000 and $653,000,
respectively.
The funded status of the Plan and amount recognized in the
Bank's balance sheet at December 31, 1994 and 1993 were (in
thousands):
<TABLE>
<CAPTION>
1994 1993
____ ____
<S> <C> <C>
Projected benefit obligation . . . . $(1,114) $ (961)
Plan assets at fair value. . . . . . 1,569 1,522
_______ ______
Excess of assets over projected
benefit obligation. . . . . . . . . 455 561
Unrecognized net asset at
transition. . . . . . . . . . . . . (179) (191)
Unrecognized net gain. . . . . . . . (175) (288)
________ _______
Prepaid pension cost . . . . . . $ 101 $ 82
======= =======
</TABLE>
F-15
<PAGE>
FARMERS & MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
The projected benefit obligation was determined using an
assumed discount rate of 7.5% in 1994 and 8.0% in 1993, and an
assumed long-term rate of compensation increase of 6.0% in
both 1994 and 1993. An assumed long-term rate of return on
Plan assets of 8.5% was used for both 1994 and 1993.
8. INCOME TAXES:
The following temporary differences gave rise to the net
deferred tax asset at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
____ _____
<S> <C> <C>
Deferred tax asset:
Loan fees . . . . . . . . . . . . $ 109,178 $61,518
Allowance for loan losses. . . . 3,629 -
_________ _______
Total . . . . . . . . . . 112,807 61,518
_________ _______
Deferred tax liabilities:
Securities available-for-sale 235,329 -
Accretion . . . . . . . . . . . . 15,429 7,751
Depreciation. . . . . . . . . . . 5,407 6,937
Pension . . . . . . . . . . . . . 31,708 24,955
Allowance for loan losses . . . . - 1,471
Total. . . . . . . . . . . 287,873 41,114
________ _______
Deferred tax asset (liability),
net. . . . . . . . . . . . . . . $(175,066) $20,404
========== =======
</TABLE>
The deferred tax asset (liability), net is included in other
assets or other liabilities in the accompanying financial
statements.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1994 1993
____ _____
<S> <C> <C>
Currently payable. . . . . . . . $259,124 $208,754
Deferred benefit . . . . . . . . (39,859) (9,009)
_________ _________
Total provision. . . . . . . $219,265 $199,745
======== ========
</TABLE>
F-16
<PAGE>
FARMERS & MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
Deferred income tax results from the following temporary
differences:
<TABLE>
<CAPTION>
1994 1993
____ ____
<S> <C> <C>
Pension. . . . . . . . . . . . . $ 6,753 $ 13,674
Loan losses. . . . . . . . . . . (5,100) 1,471
Accretion . . . . . . . . . . . 7,678 842
Depreciation . . . . . . . . . . (1,530) (8,327)
Loan fees. . . . . . . . . . . . (47,660) (16,669)
_________ __________
Total deferred benefit. . . . $(39,859) $ (9,009)
========= =========
</TABLE>
A reconciliation of income tax at the statutory rate to the
Bank's effective rate is as follows:
<TABLE>
<CAPTION>
. . . 1994. . . . . . 1993. . .
<S> <C> <C> <C> <C>
Provision at the expected
statutory rate . . . . . $256,308 34.0% $237,873 34.0%
Effect of tax-exempt
income . . . . . . . . . (45,029) (6.0) (43,501) (6.2)
Nondeductible expenses. . 4,668 .6 3,835 .5
Other items, net. . . . . 3,318 .5 1,538 .2
_______ ____ ________ _____
Effective income
tax and rate. . . . . $219,265 29.1% $199,745 28.5%
======== ===== ======== =====
</TABLE>
9. LOANS TO DIRECTORS AND EXECUTIVE OFFICERS:
During 1994 and 1993, certain directors and executive officers
of the Bank, including their immediate families and companies
in which they are principal owners (more than 10%), were
indebted to the Bank. Such loans were made in the ordinary
course of business at the Bank's normal credit terms,
including interest rate and collateralization, and do not
represent more than a normal risk of collection. Total loans
to these customers at December 31, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
1994 1993
____ ____
<S> <C> <C>
Executive officers. . . . . . $ 234,970 $ 282,525
Directors and affiliated
interests. . . . . . . . . . 1,168,344 1,568,734
__________ __________
Total $1,403,314 $1,851,259
========== ==========
</TABLE>
F-17
<PAGE>
FARMERS & MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
10. 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. Those instruments involve to varying degrees elements
of credit, interest rate or liquidity risk in excess of the
amount recognized in the balance sheet.
The Bank's exposure to credit loss from nonperformance by the
other party to the financial instruments for commitments to
extend credit and standby letters of credit is represented by
the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
The financial instruments whose contract amounts represent
credit risk at December 31, 1994 were as follows:
Commitments to extend credit . . . . . . . $2,452,420
Standby letters of credit. . . . . . . . . 42,765
Commitments to extend credit are legally binding agreements to
lend to customers. Commitments generally have fixed
expiration dates of other termination clauses and may require
payment of fees. Since many of the commitments are expected
to expire without being drawn upon, the total commitment
amounts do not necessarily represent future liquidity
requirements. The Bank evaluates each customer's credit
-worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank on extension of
credit, is based on management's credit assessment of the
counterpart.
Standby letters of credit written are conditional commitments
issued by the Bank guaranteeing performance by a customer to
a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending
loan facilities to customers.
11. REGULATORY RESTRICTIONS:
Various regulatory agencies require banks to maintain a
leverage ratio of core capital to total assets at a prescribed
level, currently 4 percent. In addition, bank regulators have
issued risk-based capital guidelines. Under such guidelines,
minimum ratios of core capital and total qualifying capital as
a percentage of risk-weighted assets and certain off-balance
-sheet items of 4 percent and 8 percent, respectively, are
required at December 31, 1994.
F-18
<PAGE>
FARMERS & MERCHANTS BANK
NOTES TO FINANCIAL STATEMENTS
______________________________________________________________________
At December 31, 1994, the Bank met all capital requirements.
Core capital was $7,150,638 or 11.4 percent of total assets
and 28.0 percent of total risk-weighted assets, while total
qualifying capital was $7,366,514 or 28.9 percent of total
risk-weighted assets.
12. FINANCIAL INSTRUMENT DISCLOSURE:
SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments," will be implemented by the Bank in 1995. SFAS
No. 107 requires the disclosure of the fair value of financial
instruments, both assets and liabilities recognized and not
recognized in the balance sheet, for which it is practicable
to estimate fair value.
______________________________________________________________________
F-19
<PAGE>
EXHIBITS
A Agreement and Plan of Reorganization and Agreement and Plan
of Merger
B Danielson Fairness Opinion
C Statute Regarding Dissenters' Rights
<PAGE>
EXHIBIT A
Agreement and Plan of Reorganization
and
Agreement and Plan of Merger
<PAGE>
Execution Copy
09/07/95
AGREEMENT AND PLAN OF REORGANIZATION
AMONG
HARLEYSVILLE NATIONAL CORPORATION
THE CITIZENS NATIONAL BANK OF LANSFORD
AND
FARMERS & MERCHANTS BANK (HONESDALE, PA.)
September 7, 1995
<PAGE>
Execution Copy
09/07/95
TABLE OF CONTENTS
Page
ARTICLE I AGREEMENT AND PLAN OF MERGER . . . . . . . . 1
1.1 Agreement and Plan of Merger . . . . . 1
ARTICLE II CONVERSION OF SHARES AND EXCHANGE
OF STOCK CERTIFICATES . . . . . . . . . . . 2
2.1 Conversion of Shares . . . . . . . . . 2
2.2 Exchange of Stock Certificates . . . . 4
ARTICLE III REPRESENTATIONS AND WARRANTIES
OF FMB . . . . . . . . . . . . . . . . . . . 6
3.1 Authority . . . . . . . . . . . . . . . 6
3.2 Organization and Standing . . . . . . . 7
3.3 No Subsidiaries . . . . . . . . . . . . 7
3.4 Capitalization . . . . . . . . . . . . 7
3.5 Articles of Incorporation, Bylaws and
Minute Books . . . . . . . . . . . . . 8
3.6 Consents . . . . . . . . . . . . . . . 8
3.7 Financial Statements and Regulatory
Reports . . . . . . . . . . . . . . . . 8
3.8 Absence of Undisclosed Liabilities . . 8
3.9 Absence of Changes . . . . . . . . . . 9
3.10 Dividends, Distributions and Stock
Purchases . . . . . . . . . . . . . . . 9
3.11 Taxes . . . . . . . . . . . . . . . . . 9
3.12 Title to and Condition of Assets . . . 9
3.13 Contracts . . . . . . . . . . . . . . . 10
3.14 Litigation and Governmental
Directives . . . . . . . . . . . . . . 11
3.15 Compliance with Laws; Governmental
Authorizations . . . . . . . . . . . . 11
3.16 Insurance . . . . . . . . . . . . . . . 12
3.17 Financial Institutions Bonds . . . . . 12
3.18 Labor Relations . . . . . . . . . . . . 12
3.19 Employee Benefit Plans . . . . . . . . 12
3.20 Related Party Transactions . . . . . . 13
3.21 No Finder . . . . . . . . . . . . . . . 14
3.22 Significant Customers . . . . . . . . . 14
3.23 Complete and Accurate Disclosure . . . 14
3.24 Beneficial Ownership of HNC Common
Stock . . . . . . . . . . . . . . . . . 14
3.25 Environmental Matters . . . . . . . . . 14
3.26 Proxy Statement/Prospectus . . . . . . 16
3.27 Non-Registration Under the 1934 Act . . 16
3.28 Deposit Insurance . . . . . . . . . . . 17
i
<PAGE>
Execution Copy
09/07/95
3.29 Repurchase Agreements . . . . . . . . . 17
3.30 Assumability of Contracts and Leases . 17
3.31 Loans . . . . . . . . . . . . . . . . . 17
3.32 Materiality . . . . . . . . . . . . . . 17
3.33 Absence of Questionable Payments . . . 17
3.34 Powers of Attorney; Guarantees . . . . 18
3.35 Adjustable Rate Mortgages . . . . . . . 18
3.36 CRA Compliance . . . . . . . . . . . . 18
3.37 Derivatives . . . . . . . . . . . . . . 18
3.38 Loan Loss Reserve . . . . . . . . . . . 18
3.39 Loan Portfolio . . . . . . . . . . . . 18
3.40 Annual Meeting Documents . . . . . . . 18
3.41 Trust Department and Fiduciary
Relationships . . . . . . . . . . . . . 19
3.42 Accuracy of Representations . . . . . . 19
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF HNC . . . . 19
4.1 Authority . . . . . . . . . . . . . . . 19
4.2 Organization and Standing . . . . . . . 19
4.3 Capitalization . . . . . . . . . . . . 20
4.4 Articles of Incorporation and Bylaws . 20
4.5 Financial Statements . . . . . . . . . 20
4.6 Absence of Undisclosed Liabilities . . 20
4.7 Absence of Changes . . . . . . . . . . 21
4.8 Litigation . . . . . . . . . . . . . . 21
4.9 Proxy Statement/Prospectus . . . . . . 21
ARTICLE V REPRESENTATIONS AND WARRANTIES OF
CNB . . . . . . . . . . . . . . . . . . . . . 21
5.1 Capital Structure of CNB . . . . . . . 21
5.2 Organization and Standing . . . . . . . 22
5.3 Authorized and Effective Agreement . . 22
ARTICLE VI COVENANTS OF FMB . . . . . . . . . . . . . . 22
6.1 Conduct of Business . . . . . . . . . . 22
6.2 Best Efforts . . . . . . . . . . . . . 25
6.3 Access to Properties and Records . . . 26
6.4 Subsequent Financial Statements . . . . 26
6.5 Board and Committee Minutes . . . . . . 27
6.6 Update Schedule . . . . . . . . . . . . 27
6.7 Notice . . . . . . . . . . . . . . . . 27
6.8 Other Proposals . . . . . . . . . . . . 27
6.9 Dividends . . . . . . . . . . . . . . . 27
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6.10 Core Deposits . . . . . . . . . . . . . 27
6.11 Affiliate Letters . . . . . . . . . . . 27
6.12 No Purchases or Sales of HNC Common
Stock During Price Determination
Period . . . . . . . . . . . . . . . . 28
6.13 Accounting Treatment . . . . . . . . . 28
6.14 Press Releases . . . . . . . . . . . . 28
6.15 Professional Fees . . . . . . . . . . . 28
6.16 Phase I Environmental Audit . . . . . . 28
6.17 Loan Loss Reserves . . . . . . . . . . 28
ARTICLE VII COVENANTS OF HNC AND CNB . . . . . . . . . . 29
7.1 Best Efforts . . . . . . . . . . . . . 29
7.2 Access to Properties and Records . . . 29
7.3 Subsequent Financial Statements . . . . 30
7.4 Update Schedule . . . . . . . . . . . . 30
7.5 Notice . . . . . . . . . . . . . . . . 30
7.6 No Purchase or Sales of HNC Common
Stock During Price Determination
Period . . . . . . . . . . . . . . . . 30
ARTICLE VIII CONDITIONS PRECEDENT . . . . . . . . . . . . 30
8.1 Common Conditions . . . . . . . . . . . 30
8.2 Conditions Precedent to Obligations
of HNC and CNB . . . . . . . . . . . . 32
8.3 Conditions Precedent to the Obligations
of FMB . . . . . . . . . . . . . . . . 37
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER . . . . . . 39
9.1 Termination . . . . . . . . . . . . . . 39
9.2 Effect of Termination . . . . . . . . . 40
9.3 Amendment . . . . . . . . . . . . . . . 40
9.4 Waiver . . . . . . . . . . . . . . . . 40
ARTICLE X RIGHTS OF DISSENTING SHAREHOLDERS OF
FMB . . . . . . . . . . . . . . . . . . . . . 41
10.1 Rights of Dissenting Shareholders
of FMB . . . . . . . . . . . . . . . . 41
ARTICLE XI CLOSING AND EFFECTIVE DATE . . . . . . . . . 41
11.1 Closing . . . . . . . . . . . . . . . . 41
11.2 Effective Date . . . . . . . . . . . . 41
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ARTICLE XII NO SURVIVAL OF REPRESENTATIONS
AND WARRANTIES . . . . . . . . . . . . . . . 41
12.1 No Survival . . . . . . . . . . . . . . 41
ARTICLE XIII POST-MERGER AGREEMENTS . . . . . . . . . . . 42
13.1 Employees . . . . . . . . . . . . . . . 42
13.2 Regional Board of Directors . . . . . . 43
13.3 Regional Presence . . . . . . . . . . . 44
ARTICLE XIV GENERAL PROVISIONS . . . . . . . . . . . . . 44
14.1 Expenses . . . . . . . . . . . . . . . 44
14.2 Other Mergers and Acquisitions . . . . 44
14.3 Access; Confidentiality . . . . . . . . 45
14.4 Notices . . . . . . . . . . . . . . . . 45
14.5 Captions . . . . . . . . . . . . . . . 46
14.6 Counterparts . . . . . . . . . . . . . 46
14.7 Severability . . . . . . . . . . . . . 46
14.8 Parties in Interest . . . . . . . . . . 46
14.9 Entire Agreement . . . . . . . . . . . 46
14.10 Governing Law . . . . . . . . . . . . . 46
EXHIBITS: AGREEMENT AND PLAN OF MERGER . . . . . . . . A-1
("BANK MERGER AGREEMENT")
INVESTMENT AGREEMENT . . . . . . . . . . . . B-1
SUPPORT AGREEMENT . . . . . . . . . . . . . . C-1
SCHEDULE I . . . . . . . . . . . . . . . . . I-1
SCHEDULE II . . . . . . . . . . . . . . . . .II-1
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AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (hereinafter "Agreement") is
dated and made this 7th day of September, 1995, by and among HARLEYSVILLE
NATIONAL CORPORATION, a Pennsylvania business corporation having its
corporate headquarters at 483 Main Street, P.O. Box 195, Harleysville,
Pennsylvania 19438 ("HNC"); The Citizens National Bank of Lansford, a
national banking association and a subsidiary of HNC, having its corporate
headquarters at 13-15 W. Ridge Street, P.O. Box 128, Lansford,
Pennsylvania, 18232 ("CNB"); and Farmers & Merchants Bank (Honesdale, PA.),
a Pennsylvania state-chartered bank and trust company having its corporate
headquarters at 1001 Main Street, P.O. Box 430, Honesdale, Pennsylvania
18431 ("FMB").
Background:
HNC is a Pennsylvania business corporation and a registered bank
holding company. CNB is a national banking association and a wholly-owned
subsidiary of HNC. FMB is a Pennsylvania state-chartered bank and trust
company. HNC wishes to acquire FMB, and FMB wishes to merge with and into
CNB. Subject to the terms and conditions of this Agreement, the foregoing
transaction will be accomplished by means of a reorganization and merger
under which FMB will be merged with and into CNB. CNB will survive the
merger, and all of the outstanding shares of the $2.00 par value common
stock of FMB ("FMB Common Stock") will be converted into shares of the
$1.00 par value common stock of HNC ("HNC Common Stock") in the manner, on
the terms, and subject to the conditions of this Agreement.
WITNESSETH:
NOW, THEREFORE, in consideration of the premises, mutual promises,
covenants, agreements, representations and warranties hereinafter set
forth, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally
bound hereby, the parties agree as follows:
ARTICLE I
AGREEMENT AND PLAN OF MERGER
Section 1.1. Agreement and Plan of Merger. Subject to the terms and
conditions of this Agreement, FMB shall merge with and into CNB (the
"Merger") in accordance with the Agreement and Plan of Merger attached
hereto as Exhibit "A" ("Bank Merger Agreement") and pursuant to the
provisions of The National Bank Merger Act, 12 U.S.C. Section 215a (the
"Bank Merger Act"). As a condition to HNC's entry into this Agreement and
the Bank Merger Agreement, and to induce such entry, FMB is entering into
an Investment Agreement with HNC (the "Investment Agreement") attached
hereto as Exhibit "B".
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ARTICLE II
CONVERSION OF SHARES AND
EXCHANGE OF STOCK CERTIFICATES
Section 2.1. Conversion of Shares. On the Effective Date (as
defined in Section 11.2 of this Agreement) the shares of FMB Common Stock
then outstanding shall be converted into shares of HNC Common Stock, as
follows:
(a) General. Subject to the provisions of this Article II, each
share of FMB Common Stock issued and outstanding immediately before the
Effective Date (other than shares of such common stock, if any, then owned
by FMB) shall, on the Effective Date, be converted into and become, without
any action on the part of the holder thereof, the Formula Number (as
hereinafter defined) of shares of HNC Common Stock. Shares of FMB Common
Stock held by FMB in a fiduciary or similar capacity shall not be deemed
owned by such entity for purposes of this Article II. Each share of CNB
Common Stock issued and outstanding immediately prior to the Effective Date
shall, on the Effective Date, continue to be issued and outstanding as
provided in Section 5.2 of the Agreement and Plan of Merger. Each share of
FMB Common Stock owned by HNC or any subsidiary of HNC on the Effective
Date, if any, shall be cancelled.
(i) Pricing; Certain Definitions.
(A) "Formula Number" shall be determined as follows:
(1) divide $17.00 by the "Closing Market Price"
of HNC Common Stock as hereinafter defined (the resulting quotient being
referred to herein as the "Basic Quotient"); and
(2) (aa) if the Basic Quotient is less than
.5915, then the Formula Number shall be .5915;
(bb) if the Basic Quotient is greater than
.6915, then the Formula Number shall be .6915;
(cc) if the Basic Quotient is between .5915
and .6915, then the Formula Number shall be the Basic Quotient, rounded to
the nearest four decimal places;
(B) "Formula Price" shall mean $17.00 divided by the
Formula Number, the resulting quotient being rounded to the nearest cent.
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(b) Anti-dilution Provision. In the event that HNC shall at any
time before the Effective Date: (i) declare or pay a dividend in shares of
HNC Common Stock, (ii) combine the outstanding shares of HNC Common Stock
into a smaller number of shares, or (iii) subdivide the outstanding shares
of HNC Common Stock into a greater number of shares, or (iv) reclassify the
shares of HNC stock, then the Pricing provisions of Section 2.1 (a) of this
Article II shall be proportionately adjusted accordingly. Provided,
however, that no adjustment shall be made under this Section 2.1(b) to the
Pricing provided in Section 2.1(a) for any HNC stock dividend declared in
the amount of five percent (5%) or less of the number of outstanding shares
of HNC Common Stock after the date hereof.
(c) No Fractional Shares. No fractional shares of HNC Common
Stock, and no scrip or certificates therefor, shall be issued in connection
with the Merger. In lieu of the issuance of any fractional share to which
he would otherwise be entitled, each former shareholder of FMB shall
receive in cash an amount equal to the fair market value of his fractional
interest, which fair market value shall be determined by multiplying such
fraction by the Formula Price (as defined in Section 2.1(a) of this Article
II).
(d) Closing Market Price. For purposes of this Agreement, the
Closing Market Price shall be the arithmetic average of the per share
closing prices for HNC Common Stock for the twenty (20) trading days
immediately preceding the date which is five (5) business days before the
Effective Date, as reported on the National Market System of the National
Association of Securities Dealers Automated Quotation System (NASDAQ/NMS),
the foregoing twenty (20) trading days being hereinafter sometimes referred
to as the "Price Determination Period". (For example, if December 29, 1995
were to be the Effective Date, then the Price Determination Period would be
November 24, 27, 28, 29, 30, December 1, 4, 5, 6, 7, 8, 11, 12, 13, 14, 15,
18, 19, 20, 21, 1995.) In the event that NASDAQ/NMS shall fail to report a
closing price for HNC Common Stock for any trading day during the Price
Determination Period, then the closing price for that day shall be equal to
the average of the closing bid price and the closing asked price as quoted
on NASDAQ/NMS for that day. In the event that NASDAQ/NMS shall fail to
report a closing price, closing bid price and closing asked price,
respectively, for HNC Common Stock for any trading day during the Price
Determination Period, then the closing price for that day shall be equal to
the average of the closing bid prices and the closing asked prices as
quoted: (i) by F.J. Morrisey & Co., Inc. and by Janney Montgomery Scott,
Inc.; or, in the event that neither of these firms is then making a market
in HNC Common Stock, (ii) by two brokerage firms then making a market in
HNC Common Stock to be selected by HNC and approved by FMB.
(e) FMB Treasury Stock. Each share of FMB Common Stock issued
and held in the treasury of FMB as of the Effective Date, if any, shall be
cancelled, and no cash, stock, or other property shall be delivered in
exchange therefor.
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(f) HNC Common Stock.
(i) Each share of HNC Common Stock issued and outstanding
immediately prior to the Effective Date, shall, on and after the Effective
Date, continue to be issued and outstanding as an identical share of HNC
Common Stock.
(ii) Each share of HNC Common Stock issued and held in the
treasury of HNC as of the Effective Date, if any, shall, on and after the
Effective Date, continue to be issued and held in the treasury of HNC.
Section 2.2. Exchange of Stock Certificates. FMB Common Stock
certificates shall be exchanged for HNC Common Stock certificates in
accordance with the following procedures:
(a) Exchange Agent. The transfer agent of HNC shall act as
exchange agent (the "Exchange Agent") to receive FMB Common Stock
certificates from the holders thereof and to exchange such stock
certificates for HNC Common Stock certificates and (if applicable) to pay
cash for fractional shares of FMB Common Stock pursuant to Section 2.1(c)
above. The Exchange Agent shall, on or promptly after the Effective Date,
mail to each former shareholder of FMB a notice specifying the procedures
to be followed in surrendering such shareholder's FMB Common Stock
certificates.
(b) Surrender of Certificates. As promptly as possible after
receipt of the Exchange Agent's notice, each former shareholder of FMB
shall surrender his FMB Common Stock certificates to the Exchange Agent;
provided, that if any former shareholder of FMB shall be unable to
surrender his FMB Common Stock certificates due to loss or mutilation
thereof, he may make a constructive surrender by following procedures
comparable to those customarily used by HNC for issuing replacement
certificates to HNC shareholders whose HNC Common Stock certificates have
been lost or mutilated. Upon receiving a proper actual or constructive
surrender of FMB Common Stock certificates from a former FMB shareholder,
the Exchange Agent shall issue to such shareholder, in exchange therefor, a
HNC Common Stock certificate representing the whole number of shares of HNC
Common Stock into which such shareholder's shares of FMB Common Stock have
been converted in accordance with this Article II, together with a check in
the amount of any cash to which such shareholder is entitled, pursuant to
Section 2.1(c) of this Agreement, in lieu of the issuance of a fractional
share.
(c) Dividend Withholding. Dividends, if any, payable by HNC
after the Effective Date to any former shareholder of FMB who has not prior
to the payment date surrendered his FMB Common Stock certificates may, at
the option of HNC, be withheld. Any dividends so withheld shall be paid,
without interest, to such former shareholder of FMB upon proper surrender
of his FMB Common Stock certificates.
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(d) Failure to Surrender Certificates. All FMB Common Stock
certificates must be surrendered to the Exchange Agent within two (2) years
after the Effective Date. In the event that any former shareholder of FMB
shall not have properly surrendered his FMB Common Stock certificates
within two (2) years after the Effective Date, the shares of HNC Common
Stock that would otherwise have been issued to him may, at the option of
HNC, be sold and the net proceeds of such sale, together with the cash (if
any) to which he is entitled in lieu of the issuance of a fractional share
and any previously accrued dividends, shall be held in a non-interest
bearing account for his benefit. From and after any such sale, the sole
right of such former shareholder of FMB shall be the right to collect such
net proceeds, cash and accumulated dividends. Subject to all applicable
laws of escheat, such net proceeds, cash and accumulated dividends shall be
paid to such former shareholder of FMB, without interest, upon proper
surrender of his FMB Common Stock certificates.
(e) Expenses of Share Surrender and Exchange. All costs and
expenses associated with the foregoing surrender and exchange procedure
shall be borne by HNC. Notwithstanding the foregoing, no party hereto will
be liable to any holder of FMB Common Stock for any amount paid in good
faith to a public official or agency pursuant to any applicable abandoned
property, escheat or similar law.
(f) Exchange Procedures. Each certificate for shares of FMB
Common Stock delivered for exchange under this Article II must be endorsed
in blank by the registered holder thereof or be accompanied by a power of
attorney to transfer such shares endorsed in blank by such holder. If more
than one certificate is surrendered at one time and in one transmittal
package for the same shareholder account, the number of whole shares of HNC
Common Stock for which certificates will be issued pursuant to this Article
II will be computed on the basis of the aggregate number of shares
represented by the certificates so surrendered. If shares of FMB Common
Stock or payments of cash are to be issued or made to a person other than
the one in whose name the surrendered certificate is registered, the
certificate so surrendered must be properly endorsed in blank, with
signature(s) guaranteed, or otherwise in proper form for transfer, and the
person to whom certificates for shares of HNC Common Stock is to be issued
or to whom cash is to be paid shall pay any transfer or other taxes
required by reason of such issuance or payment to a person other than the
registered holder of the certificate for shares of FMB Common Stock which
are surrendered. As promptly as practicable after the Effective Date, HNC
shall send or cause to be sent to each shareholder of record of FMB Common
Stock transmittal materials for use in exchanging certificates representing
FMB Common Stock for certificates representing HNC Common Stock into which
the former have been converted in the Reorganization and Merger.
(g) Closing of Stock Transfer Books; Cancellation of FMB
Certificates. Upon the Effective Date, the stock transfer books for FMB
Common Stock will be closed and no further transfers of shares of FMB
Common Stock will thereafter be made or recognized. All certificates for
shares of FMB Common Stock surrendered pursuant to this Article II will be
cancelled by HNC.
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(h) Rights Evidenced by Certificate. Each certificate for
shares of HNC Common Stock issued in exchange for certificates for FMB
Common Stock pursuant to Section 2.2(f) hereof will be dated as of the
Effective Date and be entitled to dividends and all other rights and
privileges pertaining to such shares of HNC Common Stock from the Effective
Date. Until surrendered, each certificate theretofore evidencing shares of
FMB Common Stock will, from and after the Effective Date, evidence solely
the right to receive certificates for shares of HNC Common Stock pursuant
to Section 2.2(f) hereof. If certificates for shares of FMB Common Stock
are exchanged for HNC Common Stock at a date following one or more record
dates for the payment of dividends or of any other distribution on the
shares of HNC Common Stock subsequent to the Effective Date, HNC will pay
cash in an amount equal to dividends theretofore payable on such HNC Common
Stock and pay or deliver any other distribution to which holders of shares
of HNC Common Stock have theretofore become entitled. No interest will
accrue or be payable in respect of dividends or cash otherwise payable
under this Section 2.2 upon surrender of certificates for shares of HNC
Common Stock. Notwithstanding the foregoing, no party hereto will be
liable to any holder of FMB Common Stock for any amount paid in good faith
to a public official or agency pursuant to any applicable abandoned
property, escheat or similar law. Until such time as certificates for
shares of FMB Common Stock are surrendered by a FMB shareholder to HNC for
exchange, HNC shall have the right to withhold dividends or any other
distributions, without interest, on the shares of the HNC Common Stock
issuable to such shareholder.
(i) Payment Procedures. As soon as practical after the
Effective Date, HNC shall make payment of the cash consideration provided
for in Section 2.1(c) to each person entitled thereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FMB
FMB represents and warrants to HNC and CNB as of even date herewith as
follows:
Section 3.1. Authority. FMB has all requisite corporate power and
authority to enter into and perform all of its obligations under this
Agreement and the Bank Merger Agreement. The execution and delivery of
this Agreement and the Bank Merger Agreement and the performance of the
transactions contemplated herein and therein have been duly and validly
authorized by the Board of Directors of FMB and, except for the approval of
this Agreement and the Bank Merger Agreement by its shareholders, FMB has
taken all corporate action necessary on its part to authorize this
Agreement and the Bank Merger Agreement and the performance of the
transactions contemplated herein and therein. This Agreement and the Bank
Merger Agreement have been duly executed and delivered by FMB and, assuming
due authorization, execution and delivery by HNC and CNB, constitute valid
and binding obligations of FMB, in each case enforceable against it in
accordance with their
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respective terms, subject to bankruptcy, insolvency, and other laws of
general applicability relating to or affecting creditors' rights and
general equity principles. Neither the execution and delivery of this
Agreement and the Bank Merger Agreement, nor consummation of the
transactions contemplated hereby or thereby, nor compliance by FMB with any
of the provisions hereof or thereof shall (i) conflict with or result in a
breach of any provisions of the Articles of Incorporation or By-laws of
FMB, (ii) constitute or result in a material breach of any term, condition
or provisions of, or constitute a default under or give rise to any right
of termination, cancellation or acceleration with respect to, or result in
the creation of any lien, charge security interest or other encumbrance
upon any property or asset of FMB pursuant to any note, bond, mortgage,
indenture, deed of trust, license, agreement or other instrument or
obligation, or (iii) violate any order, writ, injunction, decree, statute,
code, ordinance, rule, regulation or judgment applicable to FMB. The
Investment Agreement has been duly executed and delivered by FMB and
constitutes, assuming due authorization, execution and delivery thereof by
HNC, a valid and binding obligation of FMB enforceable in accordance with
its terms.
Section 3.2. Organization and Standing. FMB is a duly organized
bank and trust company, validly existing and in good standing under the
laws of the Commonwealth of Pennsylvania. FMB (i) has full power and
authority to carry out its business as now conducted and (ii) is duly
qualified to do business in the states of the United States and foreign
jurisdictions where its ownership or leasing of property or the conduct of
its business requires such qualification and where failure to so qualify
would have a material adverse effect on the financial condition, results of
operations, business or prospects of FMB.
Section 3.3. No Subsidiaries. FMB owns no subsidiaries, directly or
indirectly.
Section 3.4. Capitalization. The authorized capital stock of FMB
consists solely of 3,000,000 shares of common stock, par value Two Dollars
($2.00) per share ("FMB Common Stock"), of which, at the date hereof,
720,000 shares are issued of which 708,016 shares are outstanding. All
outstanding shares of FMB Common Stock have been duly issued and are
validly outstanding, fully paid and nonassessable. None of the shares of
FMB Common Stock have been issued in violation of the preemptive rights of
any person or entity. Except as provided by the Investment Agreement,
there are no authorized, issued, or outstanding options, convertible
securities, warrants or other rights to purchase or acquire any of the FMB
Common Stock from FMB, and there is no commitment of FMB to issue the same.
There are no outstanding agreements, restrictions, contracts, commitments
or demands of any character to which FMB is a party, which relate to the
transfer or restrict the transfer of any shares of FMB Common Stock.
Except as disclosed on Schedule I, and except as set forth in the
Investment Agreement, to the knowledge of FMB, there are no shareholder
agreements, understandings or commitments relating to the right of FMB to
vote or dispose of its shares.
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Section 3.5. Articles of Incorporation, Bylaws and Minute Books.
The copies of the Articles of Incorporation and Bylaws of FMB which have
been delivered to HNC and CNB are true, correct and complete. Except as
disclosed on Schedule I, all minute books of FMB have been made available
to HNC and CNB for inspection and are true, correct and complete in all
material respects and record the actions taken by the Board of Directors of
FMB at the meetings documented in the minutes.
Section 3.6. Consents. Except for the consents, approvals, filings
and registrations contemplated by Sections 8.1(b) and (d) hereof, and
compliance with any conditions contained therein, and the approval of this
Agreement and the Bank Merger Agreement by the Board of Directors and
shareholders of FMB, no consents or approvals of, or filings or
registrations with, any public body or authority are necessary, and no
consents or approvals of any third parties are necessary, or will be, in
connection with (i) the execution and delivery of this Agreement or the
Bank Merger Agreement by FMB, and (ii) the consummation by FMB of the
transactions contemplated hereby. FMB has no reason to believe that any
required consents or approvals will not be received or will be received
with conditions, limitations or restrictions unacceptable to it or which
would adversely impact FMB's ability to consummate the transactions
contemplated by this Agreement.
Section 3.7. Financial Statements and Regulatory Reports. FMB has
delivered to HNC and CNB its (i) Balance Sheets, Statements of Earnings,
Statements of Stockholders' Equity, and Statements of Cash Flows of FMB for
the years ended December 31, 1994 and December 31, 1993, certified by
Parente, Randolph, Orlando, Carey & Associates and (ii) Call Reports,
Consolidated Reports of Condition and Income, (the aforementioned
consolidated report of condition and income as of June 30, 1995, is
referred to herein as the "Bank Balance Sheet") and accompanying schedules,
filed by FMB with any regulatory authority for each calendar quarter,
beginning with the quarter ended December 31, 1992, through the Closing
Date ("FMB Regulatory Reports"). Each of the foregoing financial
statements fairly presents the financial condition, assets and liabilities,
and results of operations of FMB at their respective dates and for the
respective periods then ended and have been prepared in accordance with
generally accepted accounting principles consistently applied, except as
otherwise noted in a footnote thereto. The books and records of FMB are
maintained in accordance with generally accepted accounting principles
consistently applied. The FMB Regulatory Reports have been, or will be,
prepared in accordance with applicable regulatory accounting principles and
practices applied on a consistent basis throughout the periods issued by
such statements, and fairly present, or will fairly present, the financial
position, results of operations and changes in shareholders' equity of FMB
as of and for the periods ended on the dates thereof, in accordance with
applicable regulatory accounting principles applied on a consistent basis.
Section 3.8. Absence of Undisclosed Liabilities. Except as
disclosed in Schedule I, or as reflected, noted or adequately reserved
against in the Bank Balance Sheet, as at June 30, 1995, FMB had no
liabilities (whether accrued, absolute, contingent or otherwise) or asset
impairment which are required to be reflected, noted or reserved against
therein under generally accepted accounting principles or which are in any
case or
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in the aggregate material. Except as disclosed in Schedule I, since June
30, 1995, FMB has not incurred any such liability, other than liabilities
of the same nature as those set forth in the Bank Balance Sheet, all of
which have been reasonably incurred in the ordinary course of business
consistent with customary business practices of prudently managed banks
(hereinafter referred to as "Ordinary Course of Business").
Section 3.9. Absence of Changes. Since June 30, 1995, FMB has
conducted its business in the Ordinary Course of Business and, except as
disclosed in Schedule I, FMB has not undergone any change in condition
(financial or otherwise), assets, liabilities, business or operations,
other than changes in the Ordinary Course of Business which have not been,
either in any case or in the aggregate, materially adverse.
Section 3.10. Dividends, Distributions and Stock Purchases. Except
as disclosed on Schedule I, since June 30, 1995, FMB has not declared, set
aside, made or paid any dividend or other distribution in respect of the
FMB Common Stock, or purchased, issued or sold any shares of FMB Common
Stock.
Section 3.11. Taxes. FMB has filed all federal, state, county,
municipal and foreign tax returns, reports and declarations which are
required to be filed by FMB. Except as disclosed in Schedule I, (i) FMB
has paid all taxes, penalties and interest which have become due pursuant
thereto or which became due pursuant to assessments, and (ii) FMB has not
received any notice of deficiency or assessment of additional taxes and no
tax audits are in process. The Internal Revenue Service ("IRS") has not,
to the knowledge of FMB, commenced, or given notice of its intention to
commence any examination or audit of the federal income tax returns of FMB
for any year through and including the year ended December 31, 1989. FMB
has not granted any waiver of any statute of limitations or otherwise
agreed to any extension of a period for the assessment of any federal,
state, county, municipal or foreign income tax. Except as disclosed in
Schedule I, the accruals and reserves reflected in the Bank Balance Sheet
are adequate to cover all taxes (including interest and penalties, if any,
thereon) payable or accrued as a result of its operations for all periods
prior to the date of the Bank Balance Sheet.
Section 3.12. Title to and Condition of Assets. Except as disclosed
in Schedule I, FMB has good and marketable title to all real and personal
properties and assets reflected in the Bank Balance Sheet or acquired
subsequent to June 30, 1995 (other than property and assets disposed of in
the Ordinary Course of Business), free and clear of all liens or
encumbrances of any kind whatsoever other than: (i) as reflected in the
Bank Balance Sheet or in Schedule I; (ii) liens of current taxes not yet
due; and (iii) such imperfections of title, encumbrances and easements, if
any, as are not substantial in character, amount or extent and do not
materially detract from the value, or interfere with the present or pro-
posed use, of the properties and assets subject thereto. The structures
and other improvements to real estate, furniture, fixtures and equipment
reflected in the Bank Balance Sheet or acquired subsequent to June 30,
1995, are in good operating condition and repair (ordinary wear and tear
excepted) and comply in all material respects with all applicable laws,
ordinances and regulations, including without limitation all building
codes, zoning ordinances and other similar laws. FMB owns or has the right
to use all real
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and personal properties and assets necessary to the conduct of its business
as now conducted.
Section 3.13. Contracts. Each written or oral contract (other than
contracts with customers reasonably incurred by FMB in the Ordinary Course
of Business) which involves aggregate payments or receipts in excess of
$10,000 per year, including without limitation every employment contract,
employment benefit plan, agreement, lease, license, and other commitment to
which FMB is a party or by which FMB or its properties may be bound
("Material Contracts"), is identified in Schedule I. Except as disclosed
in Schedule I, all such contracts, agreements, leases, licenses and other
commitments are valid and in full force and effect, and all parties thereto
have in all material respects performed all obligations required to be
performed by them to date and are not in default in any material respect.
Schedule I identifies all such contracts, agreements, leases, licenses and
other commitments which require the consent or approval of third parties to
the execution and delivery of this Agreement or to the consummation of the
transactions contemplated herein.
FMB is not a party to or subject to (i) any employment, consulting or
severance contract or arrangement with any past or present officer,
director or employee, except for "at will" arrangements (ii) any plan,
arrangement or contract providing for bonuses, options, deferred
compensation, profit sharing or similar arrangements for or with any past
or present officers, directors or employees of FMB; (iii) any collective
bargaining agreement with any labor union relating to employees of FMB;
(iv) any agreement which by its terms limits the payment of dividends by
FMB; (v) any instrument evidencing or related to indebtedness for borrowed
money in excess of $20,000, whether directly or indirectly, by way of
purchase money obligation, conditional sale, lease purchase, guaranty or
otherwise, in respect of which FMB is an obligor to any person, which
instrument evidences or relates to indebtedness other than deposits,
repurchase agreements, bankers acceptances and "treasury tax and loan"
accounts established in the Ordinary Course of Business and transactions in
federal funds or which contains financial covenants or other restrictions
(other than those relating to the payment of principal and interest when
due) which would be applicable on or after the Closing Date to HNC or any
HNC subsidiary; (vi) any contract (other than this Agreement) limiting the
freedom of FMB to engage in any type of banking or banking-related business
permissible under law; or (vii) any contract, plan or arrangement which
provides for payments or benefits in certain circumstances which, together
with other payments or benefits payable to any participant therein or party
thereto, might render any portion of any such payments or benefits subject
to disallowance of deduction therefor as a result of the application of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code").
No party to any material contract, plan, arrangement or instrument
that requires annual payments in excess of $10,000 will have the right to
terminate any or all of the provisions of any such contract, plan,
arrangement or instrument as a result of the transactions contemplated by
this Agreement and none of the employees of FMB possess the right to
terminate their employment as a result of the execution of this Agreement.
No plan, employment agreement, termination agreement, or similar agreement
or arrangement to which FMB is a party or under which FMB may be liable
contains provisions which
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permit an employee or independent contractor to terminate it without cause
and continue to accrue future benefits thereunder. No such agreement, plan
or arrangement provides for acceleration in the vesting of benefits or
payments due thereunder upon the occurrence of a change in ownership or
control of FMB absent the occurrence of a subsequent event; provides for
benefits which may cause the disallowance of a federal income tax deduction
under Section 280G of the Code; or requires FMB to provide a benefit in the
form of FMB Common Stock or determined by reference to the value of FMB
Common Stock.
Section 3.14. Litigation and Governmental Directives. Except as
disclosed in Schedule I: (i) there is no litigation, investigation or
proceeding pending, or to the knowledge of FMB threatened, that involves
FMB or its properties and that, if determined adversely, would materially
and adversely affect the condition (financial or otherwise), assets,
liabilities, business, operations or future prospects of FMB; (ii) there
are no outstanding orders, writs, injunctions, judgments, decrees,
regulations, directives, consent agreements or memoranda of understanding
issued by any federal, state or local court or governmental authority or
arbitration tribunal issued against or with the consent of FMB that
materially and adversely affect the condition (financial or otherwise),
assets, liabilities, business, operations or future prospects of FMB or
that in any manner restrict FMB's right to conduct its business as
presently conducted, or challenge the validity or propriety of any of the
transactions contemplated by the Agreement, or which could adversely affect
the ability of FMB to perform under this Agreement; and (iii) FMB is not
aware of any fact or condition presently existing that might give rise to
any litigation, investigation or proceeding which, if determined adversely
to FMB, would materially and adversely affect the condition (financial or
otherwise), assets, liabilities, business, operations or future prospects
of FMB. All litigation in which FMB is involved as a plaintiff (other than
routine collection and foreclosure suits initiated in the Ordinary Course
of Business in which the amount sought to be recovered is less than $5,000)
is identified in Schedule I.
Section 3.15. Compliance with Laws; Governmental Authorizations.
Except as disclosed in Schedule I or where noncompliance would not have a
material and adverse effect upon the condition (financial or otherwise),
assets, liabilities, business, operations or future prospects of FMB: (i)
FMB is in compliance with all statutes, laws, ordinances, rules,
regulations, judgments, orders, decrees, directives, consent agreements,
memoranda of understanding, permits, concessions, grants, franchises,
licenses, and other governmental authorizations or approvals applicable to
FMB or to any of its properties; (ii) all permits, concessions, grants,
franchises, licenses and other governmental authorizations and approvals
necessary for the conduct of the business of FMB as presently conducted
have been duly obtained and are in full force and effect and there are no
proceedings pending, or to the knowledge of FMB threatened, which may
result in the revocation, cancellation, suspension or materially adverse
modification of any thereof; and (iii) FMB has not received any
notification or communication from any regulatory authority (A) asserting
that it is not in substantial compliance with any of the statues,
regulations or ordinances which such regulatory authorities enforce; (B)
requiring or threatening to require FMB, or indicating that it may be
required, to enter into a cease and desist order, agreement or memorandum
of understanding or any other agreement restricting or limiting, or
purporting to restrict or limit, in any manner the operations of FMB,
including without
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limitation, any restriction on the payment of dividends (any such notice,
communication, memorandum, agreement or order described herein is referred
to as a "Regulatory Agreement"); (C) threatening to revoke any license,
franchise, permit or governmental authorization which is material to FMB;
FMB has not consented to or entered into any Regulatory Agreement; (D)
requesting board resolutions be adopted pursuant to regulatory action,
except as disclosed to HNC in Schedule I.
Section 3.16. Insurance. All policies of insurance, including all
policies of title insurance and financial institutions bonds, held by or on
behalf of FMB are listed on Schedule I. All such policies of insurance are
in full force and effect and no notices of cancellation have been received
in connection therewith. All such policies of insurance have been issued
by reputable insurers which in respect of amounts, types and risks, such
insurance is customary with industry practices for the business conducted
by FMB.
Section 3.17. Financial Institutions Bonds. Since January 1, 1992,
FMB has continuously maintained in full force and effect a financial
institutions bond on Form 24 as listed in Schedule I insuring FMB against
acts of dishonesty by each of its employees. Except as disclosed on
Schedule I, no claim has been made under any such bond and FMB is not aware
of any fact or condition presently existing which might form the basis of a
claim under any such bond. FMB has no reason to believe that its present
financial institutions bond will not be renewed by its carrier on
substantially the same terms and at the same rate as now in effect.
Section 3.18. Labor Relations. FMB is not a party to or bound by any
collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor is FMB the
subject of a proceeding asserting that FMB has committed an unfair labor
practice or seeking to compel FMB to bargain with any labor organization as
to wages and conditions of employment, nor is there any strike or other
labor dispute involving FMB pending, or to the knowledge of FMB,
threatened, that might materially adversely affect the condition (financial
or otherwise), assets, liabilities, business or operations of FMB. Except
as set forth on Schedule I, FMB is not subject to or a party in any
Complaint or action before the Pennsylvania Human Relations Commission, the
Equal Employment Opportunity Commission, or the Department of Labor.
Except as disclosed on Schedule I, there are no labor disputes pending, or
to the knowledge of FMB threatened, that might materially and adversely
affect the condition (financial or otherwise), assets, liabilities,
business or operations of FMB.
Section 3.19. Employee Benefit Plans. Each "employee benefit plan",
as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), that now covers any employee of FMB, its
predecessors or affiliates, complies in all material respects with all
applicable requirements of ERISA, the Code and other applicable laws.
Neither FMB nor any of its predecessors or affiliates has engaged in any
"prohibited transaction" (as defined in Section 406 of ERISA or Section
4975 of the Code) or any breach of fiduciary responsibility under Part 4 of
Title I of ERISA, with respect to any such plan which prohibited
transaction is likely to result in any material penalties or taxes under
Section 502 of ERISA or Section 4975 of the Code, or any material
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liability to any participant or beneficiary of such plan. No material
liability to the Pension Benefit Guaranty Corporation has been or is
expected to be incurred by FMB with respect to itself or its predecessors
or affiliates with respect to any such plan which is subject to Title IV of
ERISA, or with respect to any "single employer plan" (as defined in Section
4001(a)(15) of ERISA) currently or formerly maintained. No such plan had
an "accumulated funding deficiency" (as defined in Section 302 of ERISA)
(whether or not waived) as of the last day of the end of the most recent
plan year ending prior to the date hereof. The fair market value of the
assets of each such plan exceeds the present value of the "benefit
liabilities" (as defined in Section 4001(a)(16) of ERISA) under each such
plan as of the end of the most recent plan year, calculated on the basis of
the actuarial assumptions used in the most recent actuarial valuation for
each such plan. No notice of a "reportable event" (as defined in Section
4043 of ERISA) for which the 30-day reporting requirement has not been
waived has been required to be filed for any of such plans within the 12-
month period ending of the date hereof. Neither FMB, its predecessors or
affiliates has provided, or is required to provide, security to any such
plans pursuant to Section 401(a)(29) of the Code. FMB, its predecessors
and affiliates have contributed to no "multi-employer plan", as defined in
Section 3(37) of ERISA, on or after September 26, 1980, except as set forth
on Schedule I. All actuarial valuations and other documents and
information concerning benefit plans delivered or made available in
connection with this Agreement are true and correct of the date(s) shown
thereon, and all actuarial methods and assumptions are appropriate for such
plans, and are consistent with the methods and assumptions permitted by the
Code and ERISA. Except as set forth on Schedule I, all such plans are
funded to such level as assets of each such plan would then be sufficient
to pay all vested accrued benefits thereunder, and there would be no
employer liability under Title IV of ERISA. Since 1990, there has been no
audit of any benefit plan of FMB by the Department of Labor, the IRS or the
Pension Benefit Guaranty Corporation ("PBGC"). There has not been any
audit of the Pension Plan or any of FMB's other employee benefit plans by
the Department of Labor, the IRS or the PBGC since 1988. FMB, its
predecessors and affiliates, have no obligation for retiree health and life
benefits under any benefit plan, contract, or arrangement, except as set
forth on Schedule I. FMB has no obligation for any post-retirement
benefits under any plan, contract or arrangement except as set forth on
Schedule I.
Section 3.20. Related Party Transactions. Except as disclosed in
Schedule I, FMB has no contract, extension of credit, business arrangement
or other relationship of any kind with any of the following persons: (i)
any present or former officer or director of FMB; (ii) any shareholder
owning five percent or more of the outstanding FMB Common Stock; and (iii)
any "associate" (as defined in SEC Rule 405) of the foregoing persons or
any business in which any of the foregoing persons is an officer, director,
employee or five percent or greater equity owner. Each such extension of
credit disclosed in Schedule I has been made in the Ordinary Course of
Business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable arms' length
transactions with other persons that do not involve more than a normal risk
of collectibility or present other unfavorable features.
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Section 3.21. No Finder. Except as disclosed in Schedule I and the
engagement of Danielson Associates, Inc. to render a fairness opinion in
connection with the transaction contemplated by this Agreement, FMB has not
paid or become obligated to pay any fee or commission of any kind
whatsoever to any broker, finder or other intermediary for, on account of
or in connection with the transactions contemplated in this Agreement.
Section 3.22. Significant Customers. All significant customers of
FMB are identified in Schedule I. For purposes of this Section 3.22, a
"significant customer" shall mean any customer who, at any time between
January 1, 1994 and the date of this Agreement, had or has (i) aggregate
outstanding loans in the amount of $50,000 or more, or (ii) aggregate daily
deposits in the amount of $50,000 or more.
Section 3.23. Complete and Accurate Disclosure. Neither this
Agreement (insofar as it relates to FMB, FMB Common Stock and FMB's
involvement in the transactions contemplated hereby) nor any financial
statement, schedule (including without limitation Schedule I), certificate,
or other statement or document delivered by FMB to HNC and CNB in
connection herewith contains any statement which, at the time and in light
of the circumstances under which it is made, is false or misleading with
respect to any material fact or omits to state any material fact necessary
to make the statements contained herein or therein not false or misleading.
In particular, without limiting the generality of the foregoing sentence,
the information provided and the representations made by FMB to HNC and CNB
in connection with the Registration Statement (as defined in Section 7.1(b)
of this Agreement), both at the time such information and representations
are provided and made and at the time of the Closing, will be true and
accurate in all material respects and will not contain any false or
misleading statement with respect to any material fact or omit to state any
material fact necessary (i) to make the statements made therein not false
or misleading, or (ii) to correct any statement contained in an earlier
communication with respect to such information or representations which has
become false or misleading.
Section 3.24. Beneficial Ownership of HNC Common Stock. Prior to the
Effective Date, FMB and its officers and directors will not in the
aggregate own beneficially (within the meaning of SEC Rule 13d-3(d)(1))
more than five percent of the outstanding shares of HNC Common Stock.
Section 3.25. Environmental Matters. For purposes of this Section
3.24, the following terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with
any governmental entity relating to: the protection, preservation or
restoration of the environment (including, without limitation, air, water
vapor, surface water, groundwater, drinking water supply, surface soil,
subsurface soil, plant and animal life or any other natural resource); and
the use, storage, recycling, treatment, generation, transportation,
processing, handling,
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labeling, production, release or disposal of Hazardous Substances. The
term Environmental Law includes without limitation: the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42
U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act,
as amended, 42 U.S.C. Section 6901, et seq., the Clean Air Act, as amended,
42 U.S.C. Section 7401, et seq., the Federal Water Pollution Control Act,
as amended, 33 U.S.C. Section 1251, et seq., the Toxic Substances Control
Act, as amended, 15 U.S.C. Section 9601, et seq., the Emergency Planning
and Community Right to Know Act, 42 U.S.C. Section 11001, et seq., the Safe
Drinking Water Act, 42 U.S.C. Section 300f, et seq., and all comparable
state and local laws; and any common law (including without limitation
common law that may impose strict liability) that may impose liability or
obligation for injuries or damages due to, or threatened as a result of,
the presence of or exposure to any Hazardous Substance.
"Hazardous Substance" means any substance presently listed,
defined, designated or classified as hazardous, toxic, radioactive or
dangerous or otherwise regulated under any Environmental Law, whether by
type or by quantity, including any material containing any such substance
as a component. Hazardous Substances include without limitation petroleum
or any derivative or by-product thereof, asbestos, radioactive material,
and polychlorinated biphenyls.
"FMB Loan Portfolio Properties and Other Properties Owned" means
those properties serving as collateral for loans in FMB's loan portfolio,
or properties owned or operated by FMB (including, without limitation, in a
fiduciary capacity).
Except as set forth on Schedule I hereto:
(a) FMB has not been or is not in violation of or liable under
any Environmental Law.
(b) To the knowledge of FMB, after reasonable investigation,
none of the FMB Loan Portfolio Properties and Other Properties Owned have
been or are in violation of or liable under any Environmental Law.
(c) After reasonable investigation, FMB has no knowledge that
any environmental contaminant, pollutant, toxic or hazardous waste or other
similar substance has been generated, used, stored, processed, disposed of
or discharged onto any of the real estate now or previously owned or
acquired (including without limitation any real estate acquired by means of
foreclosure or exercise of any other creditor's right) or leased by FMB,
except as disclosed on Schedule I. In particular, without limiting the
generality of the foregoing sentence, except as disclosed on Schedule I,
FMB has no knowledge that: (i) any materials containing asbestos have been
used or
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incorporated in any building or other structure or improvement located on
any of the real estate now or previously owned or acquired (including
without limitation any real estate acquired by means of foreclosure or
exercise of any other creditor's right) or leased by FMB; (ii) any
electrical transformers, fluorescent light fixtures with ballasts or other
equipment containing PCB's are or have been located on any of the real
estate now or previously owned or acquired (including without limitation
any real estate acquired by means of foreclosure or exercise of any other
creditor's right) or leased by FMB; (iii) any underground storage tanks for
the storage of gasoline, petroleum products or other toxic or hazardous
substances are or have ever been located on any of the real estate now or
previously owned or acquired (including without limitation any real estate
acquired by means of foreclosure or exercise of any other creditor's right)
or leased by FMB.
(d) Except as previously disclosed in Schedule I, there is no
legal, administrative, arbitration or other proceeding, claim, action, or
to the knowledge of FMB cause of action or governmental investigation of
any nature seeking to impose, or that could result in the imposition, on
FMB of any liability arising under any local, state or federal
environmental statute, regulation or ordinance including, without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, pending or to the knowledge of FMB
threatened against FMB; there is no reasonable basis for any such
proceeding, claim, action or governmental investigation; and FMB is not
subject to any agreement, order, judgment, decree or memorandum by or with
any court, governmental authority, regulatory agency or third party
imposing any such liability.
Section 3.26. Proxy Statement/Prospectus. At the time the Proxy
Statement/ Prospectus (as defined in Section 7.1(b) of this Agreement) is
mailed to the shareholders of FMB and at all times subsequent to such
mailing, up to and including the Effective Date, such Proxy
Statement/Prospectus (including any pre- and post-effective amendments and
supplements thereto), with respect to all information relating to FMB, FMB
Common Stock, and actions taken and statements made by FMB in connection
with the transactions contemplated herein (except for information provided
by HNC and CNB to FMB) will: (i) comply in all material respects with
applicable provisions of the Securities Act of 1933, as amended (the "1933
Act"), and the pertinent rules and regulations thereunder; and (ii) not
contain any statement which, at the time and in light of the circumstances
under which it is made, is false or misleading with respect to any material
fact, or omits to state any material fact that is necessary to be stated
therein in order (A) to make the statements therein not false or
misleading, or (B) to correct any statement in an earlier communication
with respect to the Proxy Statement/Prospectus which has become false or
misleading.
Section 3.27. Non-Registration Under the 1934 Act. FMB Common Stock
is neither registered nor required to be registered under Section 12 of the
Securities Exchange Act of 1934 (the "1934 Act") and is not subject to the
periodic reporting requirements imposed by Section 13 or 15(d) of the 1934
Act.
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Section 3.28. Deposit Insurance. The deposits of FMB are insured by
the Bank Insurance Fund, as administered by the Federal Deposit Insurance
Corporation ("FDIC") in accordance with the Federal Deposit Insurance Act,
and FMB has paid all assessments and filed all reports required by the
Federal Deposit Insurance Act.
Section 3.29. Repurchase Agreements. With respect to any agreement,
pursuant to which FMB has purchased securities subject to an agreement to
resell, if any, FMB has a valid, perfected first lien or security interest
in the government securities or other collateral securing the repurchase
agreement, and the value of such collateral equals or exceeds the amount of
the debt secured thereby. Except as disclosed on Schedule I, which
identifies location and type of securities, FMB maintains physical
possession of purchased securities that are subject to an agreement to
resell.
Section 3.30. Assumability of Contracts and Leases. Except as
disclosed on Schedule I, all Material Contracts between FMB and any other
entity or person are assumable and assignable and do not contain any term
or provision that would accelerate or increase payments that would
otherwise be due by FMB to such person or entity, or change or modify the
provisions or terms of such leases, contracts and agreements by reason of
this Agreement or the transactions contemplated hereby. Except as
disclosed on Schedule I, each lease pursuant to which FMB, as lessee,
leases real or personal property is valid and in effect in accordance with
its respective terms, and there is not, under any of such leases, on the
part of the lessee any material existing default or any event which with
notice or lapse of time, or both, would constitute such a default, other
than defaults which would not individually or in the aggregate have a
material adverse effect on the financial condition, business, prospects, or
operating results of FMB.
Section 3.31. Loans. Except as disclosed on Schedule I, each loan
reflected as an asset on FMB's financial statements as of June 30, 1995, or
acquired since that date, is the legal, valid and binding obligation of the
obligor named therein, enforceable in accordance with its terms, subject to
bankruptcy, insolvency and other laws of general applicability relating to
or affecting creditors' rights and to general equity principles. All such
loans, and the collateral and other security therefor, and the
documentation for the same, meet the requirements, rules, regulations or
directives of the FDIC, or other applicable governmental authorities.
Section 3.32. Materiality. For purposes of this Article III, unless
otherwise defined, the term "material" or "materially" refers to amounts in
excess of $20,000.
Section 3.33. Absence of Questionable Payments. From and after July
1, 1990, FMB has not, nor, to the knowledge of FMB, has any director,
officer, agent, employee, consultant or other person associated with or
acting on behalf of, FMB (i) used any FMB corporate funds for unlawful
contributions, gifts, entertainment or unlawful expenses relating to
political activity; or (ii) made any direct or indirect unlawful payments
to governmental officials from any FMB corporate funds, or established or
maintained any unlawful or unrecorded accounts with funds received from
FMB.
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Section 3.34. Powers of Attorney; Guarantees. Except as set forth on
Schedule I, FMB does not have any power of attorney outstanding, or any
obligation or liability either actual, construing or contingent, as
guarantor, surety, cosigner, endorser, co-maker or indemnitor in respect of
the obligation of any person, corporation, partnership, joint venture,
association, organization or other entity, except for letters of credit
issued in the ordinary course of business which are listed on Schedule I.
Section 3.35. Adjustable Rate Mortgages. FMB has made all interest
rate adjustments to any mortgage loan according to the terms of said
mortgage loan and has complied and is in compliance in all material
respects with all federal, state and other applicable laws, rules and
regulations, including orders, writs, decrees, injunctions and other
requirements of any court or governmental authorities having jurisdiction
over adjustable rate mortgages.
Section 3.36. CRA Compliance. FMB has received a satisfactory
compliance rating and has received a satisfactory Community Reinvestment
Act rating. FMB has no knowledge of any facts or circumstances which would
prevent it from receiving such satisfactory ratings upon its next
appropriate examination.
Section 3.37. Derivatives. Except as set forth on Schedule I, FMB
does not own or hold any derivatives, "caps", or "floors", in its
investment portfolio.
Section 3.38. Loan Loss Reserve. The loan loss reserve of FMB is and
shall remain adequate in light of generally accepted accounting principles,
directives of governmental authorities, and all regulations, rules and
directives of the OCC and the FDIC. No regulatory authority requested FMB
to increase the allowance for loan losses during 1994, 1993, 1992 or 1991.
Section 3.39. Loan Portfolio. Except as disclosed on Schedule I, all
evidences of indebtedness reflected as assets of FMB are in all respects
binding obligations of the respective primary obligors associated
therewith, and no material amount thereof is subject to any defenses known
to FMB which may be asserted against FMB. Except as set forth in Schedule
I, FMB has delivered to HNC a true and correct list and brief description
of all real property (other than personal residences) in which FMB has an
interest as a creditor or mortgagee securing an amount or amounts greater
than $25,000 to one borrower or a series of related borrowers. Except as
set forth in such list (i) there are no outstanding loans by FMB with an
unpaid balance of $10,000 or more on which a default has occurred, and (ii)
FMB has no loans reflected as assets in such financial statements which
have principal balances in excess of $10,000 except for fully-secured
mortgage loans. For purposes hereof, "default" shall include but not be
limited to a failure of an obligor to make payments with respect to any
loans for 30 days or more past the due date for such payment.
Section 3.40. Annual Meeting Documents. FMB has delivered, or will
deliver, to HNC copies of its (i) annual reports to shareholders for the
three years ended December 31, 1994, 1993 and 1992, (ii) semi-annual
reports to shareholders for the period ended
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June 30, 1995, and (iii) proxy materials used or for use in connection with
its meetings of shareholders held in 1995, 1994 and 1993.
Section 3.41. Trust Department and Fiduciary Relationships. FMB has
established, maintained and administered all fiduciary and custodian
relationships, accounts and agreements; and undertaken and performed all
fiduciary and custodian duties, obligations, and responsibilities in
compliance with all applicable laws, statutes, rules, regulations and the
governing instruments of such fiduciary and custodian relationships.
Section 3.42. Accuracy of Representations. Until, and as of,
Closing, FMB will promptly notify HNC if any of the representations
contained in this Article III cease to be true and correct subsequent to
the date hereof. Further, no representations made by FMB pursuant to this
Agreement contain any untrue statement of material fact or omit to state a
material fact necessary to make the statements not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HNC
HNC represents and warrants to FMB as of even date herewith as
follows:
Section 4.1. Authority. The execution and delivery of this
Agreement and the Bank Merger Agreement and the consummation of the
transactions contemplated herein and therein have been duly and validly
authorized by the Board of Directors of HNC, and no other corporate action
on the part of HNC is necessary to authorize the approval of this Agreement
and the Bank Merger Agreement or the consummation of the transactions
contemplated herein and therein. This Agreement and the Bank Merger
Agreement have been duly executed and delivered by HNC and, assuming due
authorization, execution and delivery by FMB, and receipt of required
regulatory approvals, constitutes a valid and binding obligation of HNC.
Assuming regulatory approval, the execution, delivery and consummation of
this Agreement will not constitute a violation or breach of or default
under the Articles of Incorporation or the Bylaws of HNC or any statute,
rule, regulation, order, decree, directive, agreement, indenture or other
instrument to which HNC is a party or by which HNC or any of its properties
are bound.
Section 4.2. Organization and Standing. HNC is a business
corporation that is duly organized, validly existing and in good standing
under the laws of the Commonwealth of Pennsylvania. HNC is a registered
bank holding company under the Bank Holding Company Act of 1956, as
amended, and has full power and lawful authority to own and hold its
properties and to carry on its present business. HNC owns all of the
issued and outstanding shares of capital stock of Harleysville National
Bank and Trust Company, The Citizens National Bank of Lansford and Security
National Bank. Harleysville National Bank & Trust Company, The Citizens
National Bank of Lansford and Security National Bank are national banking
associations validly existing and in good standing under the laws of the
United States, and are duly authorized to engage in the banking
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business as insured banks under the Federal Deposit Insurance Act, as
amended. Harleysville National Bank and Trust Company and The Citizens
National Bank of Lansford are authorized to engage in trust activities.
Section 4.3. Capitalization. The authorized capital stock of HNC
consists of Thirty Million (30,000,000) shares of common stock, par value
One Dollar ($1.00) per share ("HNC Common Stock") of which at June 30,
1995, 5,873,685 shares were issued and outstanding. All outstanding shares
of HNC Common Stock have been duly issued and are validly outstanding,
fully paid and nonassessable. The shares of HNC Common Stock to be issued
in connection with the Bank Merger have been duly authorized and, when
issued in accordance with the terms of this Agreement and the Bank Merger
Agreement, will be validly issued, fully paid and nonassessable.
Section 4.4. Articles of Incorporation and Bylaws. The copies of
the Articles of Incorporation, as amended, and of the Bylaws, as amended,
of HNC which have been delivered to FMB are true, correct, and complete in
all material respects.
Section 4.5. Financial Statements. HNC has delivered to FMB the
following financial statements: (i) Consolidated Balance Sheets,
Consolidated Statements of Income, Consolidated Statements of Shareholders'
Equity, and Consolidated Statements of Cash Flows as of and for the years
ended December 31, 1994 and December 31, 1993, certified by KPMG Peat
Marwick and set forth in the Annual Report to the shareholders of HNC for
the year ended on December 31, 1994; and (ii) a Consolidated Statement of
Condition, a Consolidated Statement of Income and a Consolidated Statement
of Changes in Shareholders' Equity for the three-month period ended March
31, 1995, set forth in a "Quarterly Report" to the shareholders of HNC (the
foregoing Consolidated Statement of Condition being hereinafter referred to
as the "HNC Balance Sheet"). Each of the foregoing financial statements
fairly presents the consolidated financial position, assets, liabilities
and results of operations of HNC at their respective dates and for the
respective periods then ended and has been prepared in accordance with
generally accepted accounting principles consistently applied, except as
otherwise noted in a footnote thereto and subject in the case of the
interim financial statements contained in the aforesaid Quarterly Report to
normal recurring year-end adjustments, which are not material in any case
or in the aggregate.
Section 4.6. Absence of Undisclosed Liabilities. Except as
disclosed in Schedule II or as reflected, noted or adequately reserved
against in the HNC Balance Sheet, at March 31, 1995, HNC had no material
liabilities (whether accrued, absolute, contingent or otherwise) which are
required to be reflected, noted or reserved against therein under generally
accepted accounting principles or which are in any case or in the aggregate
material. Except as described in Schedule II, since March 31, 1995, HNC
has not incurred any such liability other than liabilities of the same
nature as those set forth in the HNC Balance Sheet, all of which have been
reasonably incurred in the Ordinary Course of Business.
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Section 4.7. Absence of Changes. Since March 31, 1995, there has
not been any material and adverse change in the condition (financial or
otherwise), assets, liabilities, business, operations or future prospects
of HNC or CNB.
Section 4.8. Litigation. Except as disclosed in Schedule II: (i)
there is no litigation, investigation or proceeding pending, or to the
knowledge of HNC threatened, that involves HNC or its properties and that,
if determined adversely to HNC, would materially and adversely affect the
condition (financial or otherwise), assets, liabilities, business,
operations or future prospects of HNC; (ii) there are no outstanding
orders, writs, injunctions, decrees, consent agreements, memoranda of
understanding or other directives of any federal, state or local court or
governmental authority or of any arbitration tribunal against HNC which
materially and adversely affect the condition (financial or otherwise),
assets, liabilities, business, operations or future prospects of HNC or
restrict in any manner the right of HNC to conduct its business as
presently conducted; and (iii) HNC is not aware of any fact or condition
presently existing that might give rise to any litigation, investigation or
proceeding which, if determined adversely to HNC, would materially and
adversely affect the condition (financial or otherwise), assets,
liabilities, business, operations or future prospects of HNC. For purposes
of this Section 4.8, HNC shall be deemed to include CNB.
Section 4.9. Proxy Statement/Prospectus. At the time the Proxy
Statement/ Prospectus (as defined in Section 7.1(b) of this Agreement) is
mailed to the shareholders of FMB and at all times subsequent to such
mailing, up to and including the Effective Date, the Proxy
Statement/Prospectus (including any pre- and post-effective amendments and
supplements thereto), with respect to all information relating to HNC and
CNB, HNC Common Stock, and actions taken and statements made by HNC and CNB
in connection with the transactions contemplated herein (other than
information provided by FMB to HNC and CNB), will: (i) comply in all
material respects with applicable provisions of the 1933 Act and the 1934
Act and the pertinent rules and regulations thereunder; and (ii) not
contain any statement which, at the time and in light of the circumstances
under which it is made, is false or misleading with respect to any material
fact, or omits to state any material fact that is necessary to be stated
therein in order (A) to make the statements therein not false or
misleading, or (B) to correct any statement in an earlier communication
with respect to the Proxy Statement/Prospectus which has become false or
misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CNB
CNB represents and warrants to FMB as of even date herewith as
follows:
Section 5.1. Capital Structure of CNB. CNB is authorized to issue
One Million (1,000,000) shares of capital stock, par value One Dollar
($1.00) per share, of which all shares outstanding are owned by HNC.
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Section 5.2. Organization and Standing. CNB is a national banking
association which is duly organized, validly existing and in good standing
under the laws of the United States. CNB has full power and lawful
authority to own and hold its properties and to carry on its present
business.
Section 5.3. Authorized and Effective Agreement. The execution,
delivery and performance of this Agreement and the Bank Merger Agreement
have been duly and validly authorized by the Board of Directors of the CNB.
Subject to appropriate shareholder and regulatory approvals, neither the
execution and delivery of this Agreement or the Bank Merger Agreement nor
the consummation of the transactions provided for herein or therein will
violate any agreement to which CNB is a party or by which it is bound or
any law, regulation, order, decree or any provision of its Articles of
Incorporation or By-laws.
ARTICLE VI
COVENANTS OF FMB
From the date of this Agreement until the Effective Date (as defined
in Section 11.2 of this Agreement), FMB covenants and agrees to do the
following:
Section 6.1. Conduct of Business. Except as otherwise consented to
by HNC and CNB in writing, FMB shall:
(a) use all reasonable efforts to carry on its business in, and
only in, the Ordinary Course of Business consistent with past practices and
written policies;
(b) to the extent consistent with prudent business judgment, use
all reasonable efforts to preserve its present business organization, to
retain the services of its present officers and employees, to maintain good
relationships with its employees, and to maintain its relationships with
customers, suppliers and others having business dealings with FMB;
(c) maintain all of FMB's structures, equipment and other real
property and tangible personal property in good repair, order and
condition, except for ordinary wear and tear and damage by unavoidable
casualty;
(d) use all reasonable efforts to preserve or collect all
material claims and causes of action belonging to FMB;
(e) keep in full force and effect all insurance policies now
carried by FMB;
(f) perform in all material respects each of FMB's obligations
under all material agreements, contracts, instruments and other commitments
to which FMB
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is a party or by which FMB may be bound or which relate to or affect its
properties, assets and business;
(g) maintain its books of account and other records in the
Ordinary Course of Business;
(h) comply in all material respects with all statutes, laws,
ordinances, rules and regulations, decrees, orders, consent agreements,
examination reports, memoranda of understanding and other federal, state,
county, local and municipal governmental directives applicable to FMB and
to the conduct of its business;
(i) not amend FMB's Articles of Incorporation or Bylaws;
(j) not enter into or assume any material contract, incur any
material liability or obligation, make any material commitment, acquire or
dispose of any property or asset or engage in any transaction or subject
any of FMB's properties or assets to any material lien, claim, charge, or
encumbrance of any kind whatsoever;
(k) not take or permit to be taken any action which would
constitute a breach of any representation, warranty or covenant set forth
in this Agreement;
(l) not declare, set aside or pay any dividend or make any other
distribution in respect of FMB Common Stock, except as provided in Section
6.9 of this Article VI;
(m) not authorize, purchase, issue or sell (or authorize, issue
or grant options, warrants or rights to purchase or sell) any shares of FMB
Common Stock or any other equity or debt securities of FMB or any
securities convertible into FMB Common Stock;
(n) not increase the rate of compensation of, pay a bonus or
severance compensation to, or enter into any employment, severance,
deferred compensation or other agreement with any officer, director,
employee or consultant of FMB, except that FMB may grant reasonable salary
increases and bonuses to its officers and employees in the Ordinary Course
of Business to the extent consistent with FMB's past practice;
(o) not enter into any related party transaction of the kind
contemplated in Section 3.20 of Article III of this Agreement except such
related party transactions relating to extensions of credit made in
accordance with all applicable laws, regulations and rules and in the
Ordinary Course of Business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable arms' length transactions with other persons that do not involve
more than the normal risk of collectibility or present other unfavorable
features and after disclosure of such to HNC;
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(p) not change the presently outstanding number of shares or
effect any capitalization, reclassification, stock dividends, stock split
or like change in capitalization;
(q) not enter into or substantially modify (except as may be
required by applicable law) any pension, retirement, stock option, stock
warrant, stock purchase, stock appreciation right, savings, profit sharing,
deferred compensation, severance, consulting, bonus, group insurance or
other employee benefit, incentive or welfare contract, or plan or
arrangement, or any trust agreement related thereto, in respect to any of
its directors, officers, or other employees;
(r) not merge with or into, or consolidate with, or be purchased
or acquired by, any other corporation, financial institution, entity, or
person (or agree to any such merger, consolidation, affiliation, purchase
or acquisition) or permit (or agree to permit) any other corporation,
financial institution, entity or person to be merged with it or consolidate
or affiliate with any other corporation, financial institution, entity or
person; acquire control over any other firm, financial institution,
corporation or organization or create any subsidiary; acquire, liquidate,
sell or dispose (or agree to acquire, liquidate, sell or dispose) of any
assets, other than in the Ordinary Course of Business and consistent with
prior practice;
(s) not solicit or encourage inquiries or proposals with respect
to, furnish any information relating to, or participate in any negotiations
or discussions concerning any acquisition or purchase of all or a
substantial equity interest or portion of the assets in or of FMB or any
business combination with FMB other than as contemplated by this Agreement,
or authorize or permit any officer, director, agent or affiliate of it to
do any of the above; or fail to notify HNC immediately if any such
inquiries or proposals are received by, any such information is requested
from, or any such negotiations are sought to be initiated with FMB;
(t) not change any method, practice or principle of accounting
except as may be required by generally accepted accounting principles or
any applicable regulator or take any action that would preclude
satisfaction of the condition to closing contained in Section 8.1(c)
relating to financial accounting treatment of the Merger;
(u) not make any loan or other credit facility commitment in
excess of $100,000 (including without limitation, lines of credit and
letters of credit) to any affiliate or compromise, expend, renew or modify
any such outstanding commitment;
(v) not enter into any swap or similar commitment, agreement or
arrangement which is not consistent with past practice and which increases
the credit or interest rate risk over the levels existing at June 30, 1995;
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(w) not enter into any derivative, cap or floor or similar
commitment, agreement or arrangement, except in the Ordinary Course of
Business and consistent with past practices;
(x) take any action which would result in any of the
representations and warranties of FMB set forth in this Agreement becoming
untrue as of any date after the date hereof;
(y) not sell, exchange or otherwise dispose of any investment
securities or loans that are held for sale, prior to scheduled maturity and
other than pursuant to policies agreed upon from time to time by the
parties;
(z) not purchase any security for its investment portfolio not
rated "A" or higher by either Standard & Poor's Corporation or Moody's
Investor Services, Inc.;
(aa) not waive, release, grant or transfer any rights of value or
modify or change in any material respect any existing agreement to which
FMB is a party, other than in the ordinary course of business consistent
with past practice;
(bb) not knowingly take any action that would, under any statute,
regulation or administrative practice of any regulatory agency, materially
or adversely affect the ability of any party to this Agreement to obtain
any required approvals for consummation of the transaction; and
(cc) not agree to any of the foregoing items (i) through (bb).
Section 6.2. Best Efforts. FMB shall cooperate with HNC and CNB and
shall use its best efforts to do or cause to be done all things necessary
or appropriate on its part in order to fulfill the conditions precedent set
forth in Article VIII of this Agreement and to consummate this Agreement.
In particular, without limiting the generality of the foregoing sentence,
FMB shall:
(a) cooperate with HNC and CNB in the preparation of all
required applications for regulatory approval of the transactions
contemplated by this Agreement and in the preparation of the Registration
Statement (as defined in Section 7.1(b) of this Agreement);
(b) call a special or annual meeting of its shareholders and
take, in good faith, all actions which are necessary or appropriate on its
part in order to secure the approval and adoption of this Agreement and the
Bank Merger Agreement by its shareholders at that meeting, including
recommending the approval of such agreements by the shareholders of FMB;
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(c) cooperate with HNC and CNB in making FMB's employees
reasonably available for training by HNC and CNB prior to the Effective
Date, to the extent that such training is deemed reasonably necessary by
HNC and CNB to ensure that FMB's office will be properly operated as a part
of CNB after the Merger;
(d) make additions to loan loss reserves and make loan write-
offs, write-downs and other adjustments that reasonably should be made by
FMB in light of generally accepted accounting principles, directives of
governmental authorities, and all regulations, rules and directives of the
FDIC, Department of Banking, and Federal Reserve, prior to the closing of
FMB's books of account for its fiscal year ending December 31, 1994, and
for the period from that date until the Effective Date;
(e) execute and deliver the Investment Agreement in the form
attached hereto as Exhibit "B";
(f) suspend any dividend reinvestment and/or stock repurchase
plan, as soon as practicable;
(g) modify the Articles of Incorporation or Bylaws or any other
documents of FMB reasonably requested by HNC necessary to effectuate the
transactions contemplated hereby; and
(h) use its best efforts to assure that the directors of FMB
shall have executed and delivered the Support Agreement in the form
attached hereto as Exhibit "C".
Section 6.3. Access to Properties and Records. FMB shall give to
HNC, CNB and their authorized representatives (including without limitation
their counsel, accountants, economic and environmental consultants and
other designated representatives) reasonable access during normal business
hours to all properties, books, contracts, documents and records of FMB as
HNC or CNB may reasonably request, subject to the obligation of HNC, CNB
and their authorized representatives to maintain the confidentiality of all
non-public information concerning FMB obtained by reason of such access.
Section 6.4. Subsequent Financial Statements. Between the date of
execution of this Agreement and the Effective Date, FMB shall promptly
prepare and deliver to HNC and CNB as soon as practicable all internal
monthly and quarterly financial statements, reports to shareholders and
reports to regulatory authorities prepared by or for FMB, including all
audit reports submitted to FMB by independent auditors in connection with
each annual, interim or special audit of the books of FMB made by such
accountants. In particular, without limiting the generality of the
foregoing sentence, FMB shall deliver to HNC and CNB as soon as practicable
a balance sheet as of September 30, 1995, and a related statement of income
for the nine (9) months then ended (which financial statements are
hereinafter referred to as the "September 30, 1995 Bank Financial
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Statements"). The representations and warranties set forth in Sections
3.7, 3.8 and 3.9 of this Agreement shall apply to the September 30, 1995
Bank Financial Statements.
Section 6.5. Board and Committee Minutes. FMB shall provide to HNC,
within 10 days after any meeting of the Board of Directors, or any
committee thereof, or any senior or executive management committee, a copy
of the minutes of such meeting.
Section 6.6. Update Schedule. FMB shall promptly disclose to HNC
and CNB in writing any change, addition, deletion or other modification to
the information set forth in Schedule I.
Section 6.7. Notice. FMB shall promptly notify HNC and CNB in
writing of any actions, claims, investigations, proceedings or other
developments which, if pending or in existence on the date of this
Agreement, would have been required to be disclosed to HNC and CNB in order
to ensure the accuracy of the representations and warranties set forth in
this Agreement or which otherwise could materially and adversely affect the
condition (financial or otherwise), assets, liabilities, business
operations or future prospects of FMB.
Section 6.8. Other Proposals. FMB shall not, nor shall it permit
any officer, director, employee, agent, consultant, counsel or other
representative to, directly or indirectly, solicit, encourage, initiate or
engage in discussions or negotiations with, or respond to requests for
information, inquiries or other communications from, any person other than
HNC concerning the fact of, or the terms and conditions of, this Agreement,
or concerning any acquisition of FMB, or any assets or business thereof
(except that FMB officers may respond to inquiries from analysts,
regulatory authorities and holders of FMB Common Stock in the Ordinary
Course of Business); and FMB shall notify HNC immediately if any such
discussions or negotiations are sought to be initiated with FMB by any such
person other than HNC or if any such requests for information, inquiries,
proposals or communications are received from any person other than HNC.
Section 6.9. Dividends. Between the date of this Agreement and the
Effective Date, FMB shall only declare and pay cash dividends as provided
herein. FMB shall only pay regular quarterly cash dividends in an amount
not in excess of $.07 per share during each of the third and fourth
calendar quarters of 1995. If the Effective Date of the Merger is after
the record date of the HNC 1996 first quarter dividend, then FMB shall be
permitted to pay a regular quarterly cash dividend for the first calendar
quarter of 1996 in an amount not in excess of $.12 per share.
Section 6.10. Core Deposits. FMB shall use commercially reasonable
efforts to maintain deposits.
Section 6.11. Affiliate Letters. FMB shall deliver or cause to be
delivered to HNC and CNB, at or before the Closing (as defined in Section
11.1 of this Agreement), a letter or agreement from each officer, director
and shareholder of FMB who may be deemed to be an "affiliate" (as that term
is defined for purposes of Rules 145 and 405
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promulgated by the SEC under the 1933 Act) of FMB, in form and substance
satisfactory to HNC and CNB, under the terms of which each such officer,
director or shareholder acknowledges and agrees to abide by all limitations
imposed by the 1933 Act and by all rules, regulations and releases
promulgated thereunder with respect to the sale or other disposition of the
shares of HNC Common Stock to be received by such person pursuant to this
Agreement.
Section 6.12. No Purchases or Sales of HNC Common Stock During Price
Determination Period. Neither FMB nor any executive officer or director of
FMB nor any shareholder of FMB who may be deemed to be an "affiliate" (as
that term is defined for purposes of Rules 145 and 405 promulgated by the
SEC under the 1933 Act) of FMB shall purchase or sell on NASDAQ, or submit
a bid to purchase or an offer to sell on NASDAQ, directly or indirectly,
any shares of HNC Common Stock or any options, rights or other securities
convertible into shares of HNC Common Stock during the Price Determination
Period.
Section 6.13. Accounting Treatment. FMB acknowledges that HNC and
CNB presently intend to treat the business combination contemplated by this
Agreement as a "pooling of interests" for financial reporting purposes.
FMB shall not take (and shall use its best efforts not to permit any of its
directors, officers, employees, shareholders, agents, consultants or other
representatives to take) any action which would preclude HNC and CNB from
treating such business combination as a "pooling of interests" for
financial reporting purposes.
Section 6.14. Press Releases. FMB shall not issue any press release
related to this Agreement and the Bank Merger Agreement or the transactions
contemplated hereby or thereby as to which HNC has not given its prior
written consent, and shall consult with HNC as to the form and substance of
other public disclosures related thereto; provided, however, that nothing
contained herein shall prohibit FMB from making any disclosure which its
counsel deems reasonably necessary.
Section 6.15. Professional Fees. FMB shall not incur professional
expenses in connection with the transactions contemplated by this Agreement
in excess of $30,000, unless FMB and HNC mutually agree in writing to
increase such amount because of unique and unforeseen circumstances. Such
professional expenses shall include those paid and payable to attorneys,
accountants, consultants and investment bankers.
Section 6.16. Phase I Environmental Audit. FMB shall permit, if HNC
elects to do so at its own expense, to cause a "phase I environmental
audit" to be performed at any physical location owned or occupied by FMB on
the date hereof.
Section 6.17. Loan Loss Reserves. FMB shall increase its Loan Loss
Reserves by $120,000 from the date hereof to Closing.
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ARTICLE VII
COVENANTS OF HNC AND CNB
From the date of this Agreement until the Effective Date (as defined
in Section 11.2 of this Agreement), HNC and CNB covenant and agree to do
the following:
Section 7.1. Best Efforts. HNC and CNB shall cooperate with FMB and
shall use their best efforts to do or cause to be done all things necessary
or appropriate on their part in order to fulfill the conditions precedent
set forth in Article VIII of this Agreement and to consummate this
Agreement. In particular, without limiting the generality of the foregoing
sentence, HNC and CNB agree to do the following:
(a) Applications for Regulatory Approval. HNC and CNB shall
promptly prepare and file, with the cooperation and assistance of FMB, all
required applications for regulatory approval of the transactions
contemplated by this Agreement and the Bank Merger Agreement.
(b) Registration Statement. HNC shall promptly prepare, with
the cooperation and assistance of FMB, and file with the SEC a registration
statement under the 1933 Act (the "Registration Statement") for the purpose
of registering the shares of HNC Common Stock to be issued under the
provisions of this Agreement. HNC may rely upon all information provided
to it by FMB in this connection and HNC shall not be liable for any untrue
statement of a material fact or any omission to state a material fact in
the Registration Statement or in the proxy statement and prospectus (the
"Proxy Statement/Prospectus") which is prepared as a part thereof, if such
statement is made by HNC in reliance upon any information provided to HNC
by FMB or by its agents and representatives. HNC will advise FMB, after it
receives notice thereof, of the time when the Registration Statement or any
Pre- or Post-Effective Amendment thereto has become effective or any
supplement or amendment has been filed.
(c) State Securities Laws. HNC and CNB, with the cooperation of
FMB, shall promptly take all such actions as may be necessary or
appropriate in order to comply with all applicable securities laws of any
state having jurisdiction over the transactions contemplated by this
Agreement.
Section 7.2. Access to Properties and Records. HNC and CNB shall
give to FMB and to its authorized representatives (including without
limitation FMB's counsel, accountants, economic and environmental
consultants and other designated representatives) reasonable access during
normal business hours to all properties, books, contracts, documents and
records of HNC and CNB as FMB may reasonably request, subject to the
obligation of FMB and its authorized representatives to maintain the
confidentiality of all non-public information concerning HNC or CNB
obtained by reason of such access.
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Section 7.3. Subsequent Financial Statements. Between the date of
execution of this Agreement and the Effective Date, HNC shall promptly
prepare and deliver to FMB as soon as practicable each Quarterly Report to
HNC's shareholders and any Annual Report to HNC's shareholders normally
prepared by HNC. The representations and warranties set forth in Sections
4.5, 4.6 and 4.7 of this Agreement shall apply to the financial statements
set forth in the foregoing Quarterly Reports and any Annual Report to HNC's
shareholders.
Section 7.4. Update Schedule. HNC and CNB shall promptly disclose
to FMB in writing any change, addition, deletion or other modification to
the information set forth in Schedule II.
Section 7.5. Notice. HNC and CNB shall promptly notify FMB in
writing of any actions, claims, investigations or other developments which,
if pending or in existence on the date of this Agreement, would have been
required to be disclosed to FMB in order to ensure the accuracy of the
representations and warranties set forth in this Agreement or which
otherwise could materially and adversely affect the condition (financial or
otherwise), assets, liabilities, business, operations or future prospects
of HNC or CNB.
Section 7.6. No Purchase or Sales of HNC Common Stock During Price
Determination Period. Neither HNC nor any subsidiary of HNC, nor any
executive officer or director of HNC or any subsidiary of HNC, nor any
shareholder of HNC who may be deemed to be an "affiliate" (as that term is
defined for purposes of Rules 145 and 405 promulgated by the SEC under the
1933 Act) of HNC, shall purchase or sell on NASDAQ, or submit a bid to
purchase or an offer to sell on NASDAQ, directly or indirectly, any shares
of HNC Common Stock or any options, rights or other securities convertible
into shares of HNC Common Stock during the Price Determination Period;
provided, however, that HNC may purchase shares of HNC Common Stock in the
Ordinary Course of Business during the Price Determination Period pursuant
to HNC's employee benefit plans or HNC's dividend reinvestment and stock
purchase plan.
ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.1. Common Conditions. The obligations of the parties to
consummate this Agreement shall be subject to the satisfaction of each of
the following common conditions prior to or as of the Closing, except to
the extent that any such condition shall have been waived in accordance
with the provisions of Section 9.4 of this Agreement:
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(a) Shareholder Approvals. This Agreement shall have been duly
authorized, approved and adopted by the shareholders of FMB, as required by
applicable provisions of The National Bank Act, the Pennsylvania Banking
Code of 1965, as amended, and the required provisions of FMB's Articles of
Incorporation.
(b) Regulatory Approvals. The parties hereto shall have
received all regulatory approvals required in connection with the
transactions contemplated by this Agreement and the Bank Merger Agreement,
and all notice periods and waiting periods required after the granting of
such approvals shall have passed; provided, however, that no such approval
shall have imposed any condition or requirement which, in the opinion of
the Board of Directors of HNC renders consummation of the Merger
inadvisable.
(c) Tax Matters. There shall have been received an opinion of
counsel from Shumaker Williams, P.C., reasonably satisfactory in form and
substance to HNC and CNB and to FMB, to the effect that:
(i) The transactions contemplated by this Agreement and by
the Bank Merger Agreement will constitute a reorganization within the
meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue
Code of 1986, as amended;
(ii) No gain or loss will be recognized by HNC or CNB or by
FMB as a result of the reorganization;
(iii) No gain or loss will be recognized by the shareholders
of FMB upon receipt of HNC Common Stock in exchange for FMB Common Stock
pursuant to the provisions of this Agreement (except in respect of cash
which is received in lieu of the issuance of fractional shares of HNC
Common Stock and any shareholder of FMB who receives payment in cash as a
dissenting shareholder);
(iv) The tax basis of the HNC Common Stock to be received by
the shareholders of FMB pursuant to the provisions of this Agreement will
be the same as the tax basis of the FMB Common Stock surrendered in
exchange therefor;
(v) The holding periods of the HNC Common Stock to be
received by the shareholders of FMB pursuant to the provisions of this
Agreement will include the holding periods of the FMB Common Stock
surrendered in exchange therefor, provided that such FMB Common Stock is
held as a capital asset on the Effective Date; and
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(vi) CNB, as the surviving bank to the Bank Merger, will
carry-over and take into account all accounting items and tax attributes of
FMB, including but not limited to earnings and profits, methods of
accounting, and tax basis and holding periods of the assets of FMB.
(d) Registration Statement. The Registration Statement (as
defined in Section 7.1(b) of this Agreement, including any amendments
thereto) shall have been declared effective by the SEC; the information
contained therein shall be true, complete and correct in all material
respects as of the date of mailing of the Proxy Statement/Prospectus (as
defined in Section 7.1(b) of this Agreement) to the shareholders of FMB and
HNC; regulatory clearance for the offering contemplated by the Registration
Statement (the "Offering") shall have been received from each federal and
state regulatory authority having jurisdiction over the Offering, and no
stop order shall have been issued or proceedings instituted or threatened
by any federal or state regulatory authority to suspend or terminate the
effectiveness of the Registration Statement or the Offering.
(e) No Suits. No action, suit or proceeding shall be pending or
threatened before any federal, state or local court or governmental
authority or before any arbitration tribunal which seeks to modify, enjoin
or prohibit or otherwise adversely and materially affect the transactions
contemplated by this Agreement.
(f) Statutes; Orders. No statute, rule, regulation, order,
injunction or decree shall have been enacted, entered, promulgated or
enforced by any governmental authority which prohibits, restricts or makes
illegal the consummation of the transactions contemplated by this
Agreement.
(g) Other Requirements. All other requirements prescribed by
law which are necessary to the consummation of the transactions
contemplated by this Agreement shall have been satisfied.
(h) Antitrust Laws. All applicable notifications, statutory and
regulatory Antitrust Law requirements have been met.
Section 8.2. Conditions Precedent to Obligations of HNC and CNB.
The obligations of HNC and CNB to consummate this Agreement shall be
subject to the satisfaction of each of the following conditions prior to or
as of the Closing, except to the extent that any such condition shall have
been waived by HNC and CNB in accordance with the provisions of Section 9.4
of this Agreement:
(a) Accuracy of Representations and Warranties. All of the
representations and warranties of FMB as set forth in this Agreement and
the information contained in Schedule I and all Bank Closing Documents (as
defined in Section 8.2(j) of this Agreement) shall be true and correct in
all material respects as of the Closing as if made on such date (or on the
date to which it relates in the case of any representation or warranty
which expressly relates to an earlier date).
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(b) Covenants Performed. FMB shall have performed or complied
in all material respects with each of the covenants required by this
Agreement to be performed or complied with by it.
(c) Opinion of Counsel for FMB. FMB shall have delivered to HNC
and CNB an opinion of its counsel, Hugh A. Benson, Jr., Esq., in form and
substance reasonably satisfactory to HNC and CNB, to the effect that, as of
the Closing:
(i) FMB is a Pennsylvania state-chartered bank and trust
company duly organized, validly existing and in good standing under the
laws of the Commonwealth of Pennsylvania and has full power and lawful
authority to own and hold its properties and to carry on its present
business;
(ii) FMB is an insured bank under the provisions of the
Federal Deposit Insurance Act, as amended;
(iii) the authorized capital of FMB consists exclusively of
3,000,000 shares of common stock of Two Dollars ($2.00) par value per
share, of which 720,000 shares are validly issued, 708,016 shares are
outstanding, fully paid and non-assessable and 11,984 shares are held as
treasury shares; and, to the knowledge of such counsel after reasonable
inquiry, there are no outstanding obligations, options or rights of any
kind entitling other persons to purchase or sell any such shares and there
are no outstanding securities or other instruments of any kind convertible
into such shares;
(iv) FMB has full corporate power and authority to execute
and deliver this Agreement and to carry out the transactions contemplated
herein, and all corporate actions required to be taken by FMB to authorize
the execution and delivery of this Agreement and the performance of the
transactions contemplated herein have been taken;
(v) this Agreement has been duly executed and delivered by
FMB and, assuming due authorization, execution and delivery by HNC and CNB,
constitutes a valid and binding obligation of FMB and is enforceable
against FMB in accordance with its terms, subject to bankruptcy,
insolvency, and other laws of general applicability relating to or
affecting creditors' rights and general equity principles;
(vi) the performance of this Agreement by FMB will not
violate the Articles of Incorporation or the Bylaws of FMB or, to the
knowledge of such counsel after reasonable inquiry, any applicable statute,
rule, regulation, order, decree, directive, consent agreement, memorandum
of understanding, contract, indenture or other instrument to which FMB is a
party or by which its properties are bound;
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(vii) to the knowledge of such counsel after reasonable
inquiry, there is no action, suit or proceeding pending or threatened of
the kind contemplated under Section 8.1(e) of this Agreement;
(viii) to the knowledge of such counsel after reasonable
inquiry, there is no action, suit or proceeding pending or threatened
against FMB (except as described in Schedule I to this Agreement or in such
counsel's opinion) that, if determined adversely to FMB, would have a
material and adverse effect upon the condition (financial or otherwise),
assets, liabilities, business, operations or future prospects of FMB;
(ix) no consent, approval, authorization or order of any
federal, state or local court or governmental authority is required to be
obtained by FMB in connection with the consummation of the transactions
contemplated in this Agreement, other than such consents, approvals,
authorizations and orders as have been obtained prior to the Closing; and
(x) such other legal matters incident to the matters
contemplated hereby as may reasonably be requested by HNC and CNB.
For purposes of Clause (viii) above, any action, suit or
proceeding seeking to recover from FMB damages, fines, penalties or other
relief having a monetary value of $10,000 or more shall be deemed to be
"material". In giving the foregoing opinion, such counsel may rely as to
matters of fact without independent investigation, to the extent such
counsel deems such reliance necessary, appropriate, and reasonable,
provided, however, that such reliance is expressly noted in such opinion,
and on certificates of federal, state or local governmental officials and
on certificates of officers and directors of FMB. Such counsel may
expressly exclude any opinions as to choice of law matters and antitrust
matters and may add other qualifications and explanations of the basis of
its opinions as are reasonably acceptable to HNC and CNB.
[The opinion of FMB's counsel shall be governed by the Legal
Opinion Accord ("Accord") of the American Bar Association Section of
Business Law (1991). The term "Actual Knowledge" as used herein shall have
the meaning set forth in the Accord. In addition, such opinion may be
limited to present statutes, regulations, rulings and formal agency and
judicial interpretations and to facts as they presently exist; in rendering
such opinion, such counsel need assume no obligation to revise or
supplement it should the present laws be changed by the legislative or
regulatory action, judicial decision or otherwise after such opinion is
rendered. Such counsel may assume that any agreement is the valid and
binding obligation of any parties to such agreement other than FMB. In
giving such opinion, such counsel may rely as to all matters of facts or
certificates of officers or directors of FMB and certificates of public
officials, so long as such reliance and the facts thereunder are expressly
stated. Such counsel's opinion shall be limited to matters governed by
federal laws and by the laws of the Commonwealth of Pennsylvania. With
respect
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to matters involving the application of Pennsylvania law, such counsel may
rely, to the extent it deems proper and as specified in its opinion, upon
the opinion of local counsel.]
(d) Financial Confirmation. Within sixty (60) days of the
execution of this Agreement, HNC and CNB (and their accountants if the
advice of such accountants is deemed necessary or desirable by HNC and CNB)
shall have established to their satisfaction that the Bank Balance Sheet
fairly presents the financial condition, assets and liabilities of FMB as
at June 30, 1995, and that, since December 31, 1994, there has not been any
material and adverse change in the condition (financial or otherwise),
assets, liabilities, business, operations or future prospects of FMB.
(e) Accountants' Comfort Letter. HNC shall have received
"comfort" letters from FMB's independent certified public accountants dated
(i) the date of the mailing of the Proxy Statement and (ii) the Effective
Date, in each case substantially to the effect that:
(A) it is a firm of independent public accountants with
respect to FMB within the rules and regulations of the SEC;
(B) in its opinion the audited financial statements of FMB
examined by it and included in the Proxy Statement comply as to form in all
material respects with the applicable rules and regulations of the SEC; and
(C) on the basis of specified procedures (which do not
constitute an examination in accordance with generally accepted auditing
standards), nothing has come to its attention which causes it to believe:
(1) that the financial statements, if any, of FMB included in such Proxy
Statement do not comply in all material respects with the applicable
accounting requirements and of the rules and regulations of the SEC and (2)
that any such unaudited financial statements of FMB from which unaudited
quarterly financial information set forth in such Proxy Statement has been
derived, are not fairly presented in conformity with generally accepted
accounting principles applied on a basis consistent with that of the
audited financial statements.
(f) Accounting Treatment. HNC, CNB and their accountants shall
have established to their satisfaction that, as of the Closing, the
transactions contemplated by this Agreement can be accounted for as a
"pooling of interests" for financial reporting purposes.
(g) Federal and State Securities and Antitrust Laws. HNC, CNB
and their counsel shall have determined to their satisfaction that, as of
the Closing, all applicable securities and antitrust laws of the federal
government and of any state government having jurisdiction over the
transactions contemplated by this Agreement shall have been complied with.
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(h) Dissenting Shareholders. Holders of no more than five
percent (5%) of the issued and outstanding shares of FMB (35,400) shall
have exercised their statutory appraisal or Dissenters' Rights.
(i) Environmental Matters. No environmental problem of the kind
contemplated in Section 3.25 of Article III of this Agreement and not
previously disclosed on Schedule I shall have been discovered which would,
or which potentially could, materially and adversely affect the condition
(financial or otherwise), assets, liabilities, business, operations or
future prospects of FMB; provided, that for purposes of determining the
materiality of an undisclosed environmental problem or problems, the
definition of "material" shall be governed by the proviso to Section 8.2 of
this Agreement. The result of any "Phase I environmental audit" conducted
pursuant to Section 6.16 with respect to owned or occupied bank premises
shall be reasonably satisfactory to HNC.
(j) Closing Documents. FMB shall have delivered to HNC and CNB:
(i) a certificate signed by FMB's Chairman of the Board or President and by
its Secretary, or such other designated and authorized officers, verifying
that, to the best of their knowledge after reasonable investigation, all of
the representations and warranties of FMB set forth in this Agreement are
true and correct in all material respects as of the Closing and that FMB
has performed in all material respects each of the covenants required to be
performed by it under this Agreement; (ii) all consents and authorizations
of landlords and other persons that are necessary to permit this Agreement
to be consummated without violation of any lease or other agreement to
which FMB is a party or by which FMB or any of its properties are bound;
and (iii) such other certificates and documents as HNC, CNB and their
counsel may reasonably request (all of the foregoing certificates and other
documents being herein referred to as the "Bank Closing Documents").
(k) FMB's Shareholders Equity. The total shareholders equity of
FMB (excluding the reserve for loan losses) on a generally accepted
accounting basis on the Effective Date shall be no less than Seven Million
Nine Hundred Thousand Dollars ($7,900,000).
(l) Benefit Plans. HNC and CNB shall have determined within 60
days of the execution of this Agreement that the medical, health,
insurance, and employee benefit plans or programs of FMB shall not contain
any provision or term which upon assumption by HNC or CNB on the Effective
Date would require HNC or CNB to provide benefits or incur cost in excess
of those provided or paid by HNC or CNB to or on behalf of its existing
employees.
(m) Investment Agreement. FMB shall have executed and delivered
to HNC an "Investment Agreement" in the form attached hereto as Exhibit
"B".
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(n) Support Agreement. Each of the Directors of FMB shall have
executed and delivered to HNC a "Support Agreement" in the form attached
hereto as Exhibit "C".
Section 8.3. Conditions Precedent to the Obligations of FMB. The
obligation of FMB to consummate this Agreement shall be subject to the
satisfaction of each of the following conditions prior to or as of the
Closing, except to the extent that any such condition shall have been
waived by FMB in accordance with the provisions of Section 9.4 of this
Agreement:
(a) Accuracy of Representations and Warranties. All of the
representations and warranties of HNC and CNB as set forth in this
Agreement and the information contained in Schedule II and all HNC/CNB
Closing Documents (as defined in Section 8.3(e) of this Agreement) shall be
true and correct in all material respects as of the Closing as if made on
such date (or on the date to which it relates in the case of any
representation or warranty which expressly relates to an earlier date).
(b) Covenants Performed. HNC and CNB shall have performed or
complied in all material respects with each of the covenants required by
this Agreement to be performed or complied with by them.
(c) Opinion of Counsel for HNC and CNB. HNC and CNB shall have
delivered to FMB an opinion of its special counsel, Shumaker Williams,
P.C., in form and substance reasonably satisfactory to FMB, to the effect
that, as of the Closing:
(i) HNC is a business corporation that is duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Pennsylvania;
(ii) HNC is a registered bank holding company under the Bank
Holding Company Act of 1956, as amended, and has full corporate power and
authority to own and hold its properties and to carry on its present
business;
(iii) CNB is a national banking association that is duly
organized and validly existing under the laws of the United States and has
full corporate power and authority to own and hold its properties and to
carry on its present business;
(iv) HNC and CNB have full corporate power and authority to
execute and deliver this Agreement and to carry out the transactions
contemplated herein, and all corporate actions required to be taken by HNC
and CNB to authorize the execution and delivery of this Agreement and the
performance of the transactions contemplated herein have been taken;
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(v) this Agreement has been duly authorized, executed and
delivered by HNC and CNB and, assuming due authorization, execution and
delivery by FMB, constitutes a valid and binding obligation of each of HNC
and CNB and is enforceable against HNC in accordance with its terms,
subject to bankruptcy, insolvency, and other laws of general applicability
relating to or affecting creditors' rights and general equity principles;
(vi) to the knowledge of such counsel, there is no action,
suit, or proceeding pending or threatened against HNC or CNB (except as
described in Schedule II to this Agreement or in such counsel's opinion)
that, if determined adversely to HNC or CNB, would have a material and
adverse affect upon the condition (financial or otherwise), assets,
liabilities, business, operations or future prospects of HNC or CNB;
(vii) to the knowledge of such counsel after reasonable
investigation, there is no action, suit or proceeding pending or threatened
of the kind contemplated under Section 8.1(e) of this Agreement;
(viii) the shares of HNC Common Stock to be issued under this
Agreement have been duly authorized and, when issued, will be validly
issued, fully paid and non-assessable;
(ix) no consent, approval, authorization or order of any
federal, state or local court or governmental authority is required to be
obtained by HNC or CNB in connection with the consummation of the
transactions contemplated in this Agreement, other than such consents,
approvals, authorizations and orders as have been obtained prior to the
Closing; and
(x) such other legal matters incident to the matters
contemplated hereby as may reasonably be requested by FMB.
In giving the foregoing opinion, such counsel may rely as to
matters of fact without reasonable investigation, to the extent such
counsel deems such reliance necessary, appropriate and reasonable,
provided, however, that such reliance is expressly noted on such opinion,
and on certificates of federal, state or local governmental officials and
on certificates of officers and directors of HNC and CNB. Such counsel may
exclude any opinions as to choice of law matters and antitrust matters and
may add other qualifications and explanations of the basis of its opinions
as are reasonably acceptable to FMB.
(d) Fairness Opinion. FMB shall have obtained from Danielson
Associates, Inc. or from another independent financial advisor selected by
the Board of Directors of FMB, an opinion dated as of the date of the Proxy
Statement/Prospectus for the special or annual meeting of FMB's
shareholders contemplated by Section 6.2(b) of this Agreement, stating that
the consideration to be received by the holders of FMB Common Stock is
fair, from a financial point of view, to such shareholders.
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(e) Closing Documents. HNC shall have delivered to FMB: (i) a
certificate signed by its Chairman of the Board or President and its
Secretary verifying that, to the best of their knowledge after reasonable
investigation, all of the representations and warranties of HNC and CNB set
forth in this Agreement are true and correct in all material respects as of
the Closing and that HNC and CNB have performed in all material respects
each of the covenants required to be performed by them; and (ii) such other
certificates and documents as FMB and its counsel may reasonably request
(all of the foregoing certificates and documents being herein referred to
as the "HNC/CNB Closing Documents").
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1. Termination. This Agreement may be terminated at any
time before the Effective Date (whether before or after the authorization,
approval and adoption of this Agreement by the shareholders of FMB) as
follows:
(a) Mutual Consent. This Agreement may be terminated by mutual
consent of the parties upon the affirmative vote of a majority of each of
the Boards of Directors of FMB, HNC and CNB, followed by written notices
given to each of the other parties.
(b) Unilateral Action by HNC and CNB. This Agreement may be
terminated unilaterally by the affirmative vote of each of the Boards of
Directors of HNC and CNB, followed by written notice given to FMB, if: (i)
there has been a material breach by FMB of any representation, warranty or
covenant set forth in this Agreement and such breach has not been cured
within thirty (30) days after written notice of such breach has been given
by HNC and CNB to FMB; or (ii) any condition precedent to HNC's and CNB's
obligations as set forth in Article VIII of this Agreement remains
unsatisfied, through no fault of HNC or CNB, on June 30, 1996.
(c) Unilateral Action By FMB. This Agreement may be terminated
unilaterally by the affirmative vote of a majority of the Board of
Directors of FMB, followed by written notice given to HNC and CNB, if: (i)
there has been a material breach by HNC or CNB of any representation,
warranty or covenant set forth in this Agreement and such breach has not
been cured within thirty (30) days after written notice of such breach has
been given to HNC and CNB; or (ii) any condition precedent to FMB's
obligations as set forth in Article VIII of this Agreement remains
unsatisfied, through no fault of FMB, on June 30, 1996.
(d) Automatic Termination. If, for any reason, this transaction
shall not have been consummated by June 30, 1996, this Agreement shall
terminate automatically as of that date unless extended, in writing, prior
to said date by mutual action of the Boards of Directors of the parties
hereto.
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(e) Due Diligence Termination. HNC may terminate this Agreement
by giving written notice to FMB, if any matter or thing has come to the
attention of HNC in the course of its investigation of the schedules
attached to this Agreement or otherwise with respect to FMB that, in its
sole opinion, leads it to believe that any such matter or thing materially
and adversely affects the financial or business performance or prospects of
FMB so that it would be inadvisable for HNC, in its sole and exclusive
judgment, exercised in a commercial and reasonable manner, to proceed with
this transaction.
Section 9.2. Effect of Termination.
(a) Effect. In the event of termination, this Agreement shall
become null and void and the transactions contemplated herein shall
thereupon be abandoned, except that the provisions relating to limited
liability and confidentiality set forth in Sections 9.2(b) and 9.2(c) of
this Agreement shall survive.
(b) Limited Liability. The termination of this Agreement in
accordance with the terms of Section 9.1 shall create no liability on the
part of any party, or on the part of any party's directors, officers,
shareholders, agents or representatives, except that if this Agreement is
terminated by HNC and CNB by reason of a material breach by FMB, or if this
Agreement is terminated by FMB by reason of a material breach by HNC or
CNB, and such breach involves an intentional, willful or grossly negligent
misrepresentation or breach of covenant, the breaching party shall be
liable to the non-breaching party or parties for all costs and expenses
reasonably incurred by the non-breaching party or parties in connection
with the preparation, execution and consummation of this Agreement,
including the fees of its or their counsel, accountants, consultants and
other representatives.
(c) Confidentiality. In the event of the termination of this
Agreement, neither HNC nor CNB nor FMB shall use or disclose to any other
person any confidential information obtained by it during the course of its
investigation of the other party or parties.
Section 9.3. Amendment. To the extent permitted by law, this
Agreement may be amended at any time before the Effective Date (whether
before or after the authorization, approval and adoption of this Agreement
by the shareholders of FMB) by a written instrument duly authorized,
executed and delivered by HNC and CNB and by FMB; provided, however, that
any amendment to the provisions of Article II of this Agreement relating to
the consideration to be received by the former shareholders of FMB in
exchange for their shares of FMB Common Stock shall not take effect until
such amendment has been approved, adopted or ratified by the shareholders
of FMB in accordance with applicable federal and state law.
Section 9.4. Waiver. Any term or condition of this Agreement may be
waived, to the extent permitted by law, by the party or parties entitled to
the benefit thereof at any time before the Effective Date (whether before
or after the authorization,
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approval and adoption of this Agreement by the shareholders of FMB) by a
written instrument duly authorized, executed and delivered by such party or
parties.
ARTICLE X
RIGHTS OF DISSENTING SHAREHOLDERS OF FMB
Section 10.1. Rights of Dissenting Shareholders of FMB. The
shareholders of FMB shall be entitled to and may exercise dissenters'
rights if and to the extent they are entitled to do so under the provisions
of 12 U.S.C. Section 215a or applicable law.
ARTICLE XI
CLOSING AND EFFECTIVE DATE
Section 11.1. Closing. Provided that all conditions precedent set
forth in Article VIII of this Agreement shall have been satisfied or shall
have been waived in accordance with Section 9.4 of this Agreement, the
parties shall hold a closing (the "Closing") at the offices of HNC at 483
Main Street, Harleysville, Pennsylvania, or such other mutually agreed upon
location, within sixty (60) days after the receipt of all required
regulatory approvals and after the expiration of all applicable waiting
periods on a date to be agreed upon by the parties, at which time the
parties shall deliver the FMB Closing Documents, the HNC/CNB Closing
Documents, the opinions of counsel required by Sections 8.1(c), 8.2(c) and
8.3(c) of this Agreement, and such other documents and instruments as may
be necessary or appropriate to effectuate the purposes of this Agreement.
Section 11.2. Effective Date. The Merger of FMB with and into CNB
shall become effective and this Agreement and the Bank Merger Agreement
shall be consummated on the date upon which the Closing has occurred and
the OCC issues a Certificate of Merger (the "Effective Date"). At the
Effective Date, FMB shall cease to exist as a separate banking institution,
and CNB shall become the surviving institution of the Merger.
ARTICLE XII
NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Section 12.1. No Survival. The representations and warranties of FMB
and of HNC and CNB set forth in this Agreement shall expire and be
terminated on the Effective Date by consummation of this Agreement, and no
such representation or warranty shall thereafter survive.
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ARTICLE XIII
POST-MERGER AGREEMENTS
Section 13.1. Employees.
(a) Prior to the Effective Date, HNC and CNB shall interview
employees of FMB for purposes of determining employment after the Effective
Date. Nothing in this Agreement, however, shall obligate or require HNC
and CNB to hire or employ any FMB employee after the Effective Date.
(b) Immediately following the Effective Date, former FMB
employees who are employed by CNB shall be entitled to participate in any
benefit plans in effect at such time for employees of CNB in accordance
with the terms of such plans. Former FMB employees who are employed by CNB
shall receive service credit from their respective hire dates for
employment at FMB for purposes of eligibility and vesting requirements (but
not for purposes of benefit accrual) under CNB's benefit plans, and service
credit from the Effective Date for purposes of benefit calculation under
CNB's benefit plans.
(c) Pre-existing condition requirements for health, life,
disability and other benefits and any insurance waiting period will only be
waived for employees offered employment with CNB to the extent that the
CNB's insurance policies or programs would permit same without an increase
in CNB's premiums or costs associated therewith.
(d) As provided herein, HNC will provide, after the Merger,
severance payments to employees of FMB (other than employees whose
severance benefits are provided for in written employment agreements) whose
employment is terminated (other than for cause) after the Effective Date,
and before the expiration of 3 months following the Effective Date. HNC,
CNB and FMB shall consult and mutually agree upon the individual amounts to
be received by former FMB employees who are eligible for severance
payments. Factors to be considered in the determination of individual
severance payments to former FMB employees include, among others: years of
service, title and responsibilities. Severance payments shall not exceed
$75,000 in the aggregate and, HNC's and CNB's liability under this Section
13.1(d) shall not exceed $75,000.
(e) Richard K. Arnold shall be employed by CNB for at least 6
months following the Effective Date at a salary equal to his salary in
effect prior to the date of this Agreement. A performance review of Mr.
Arnold by appropriate officers of CNB and HNC will occur within 3 months of
the Effective Date. Notwithstanding the above, after the Effective Date,
Mr. Arnold may be terminated for cause under the provisions of CNB and
HNC's applicable policies at any time.
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Section 13.2. Regional Board of Directors.
(a) Composition; Term; Duties. Immediately following the
Effective Date and for a period of at least one (1) year thereafter, there
shall be established a Regional Board of Directors for the Honesdale Area
(the "Regional Board of Directors") comprised of the following members of
the Board of Directors of FMB as of the date of this Agreement: John J.
Koehler, Richard J. Shershenovich, Charles P. McGinnis, Dale D. Fowler,
Nelson W. Leet, Samuel C. Siepiela and Wayne W. Stephens. All other
members of the FMB Board of Directors who do not serve on the Regional
Board of Directors may serve as Directors Emeriti. Except as provided
herein, the Regional Board of Directors and Directors Emeriti shall serve
at the will and direction of the Board of Directors of CNB. Except as
provided herein, the Board of Directors of CNB shall determine from time to
time, among other things, the duties, obligations, responsibilities,
compensation and subsequent terms of the Regional Board of Directors and
Directors Emeriti.
(b) Compensation. For one (1) year following the Effective
Date, members of the Regional Board of Directors, including Directors
Emeriti, shall receive Board Fees of Two Hundred Dollars ($200) per month
as compensation for services rendered in their capacity as a Director.
After the expiration of the one (1) year term following the Effective Date,
compensation of the Regional Board of Directors and Directors Emeriti shall
be determined by the Board of Directors of CNB in accordance with Section
13.2(a).
(c) Benefits. The members of the Regional Board of Directors
and Directors Emeriti shall receive the following Benefits for service on
the Regional Board of Directors. For one (1) year following the Effective
Date, members of the Regional Board of Directors, including Directors
Emeriti, shall be entitled to have premiums paid by CNB for participation
in a health insurance plan the benefits and terms of which are reasonably
comparable to that of CNB, HNC or FMB. In no event, however, shall the
cash payments or premiums to be paid by CNB for health insurance coverage,
pursuant to an alternative comparable plan, or CNB's or HNC's liability
hereunder, exceed $16,000, in the aggregate, for all members of the
Regional Board of Directors and Directors Emeriti. For one (1) year
following the Effective Date, CNB shall also pay the premiums for the
current group life insurance policies for the members of the Regional Board
of Directors, including Directors Emeriti, subject to the availability of
such continued participation. If such participation is not available,
members of the Regional Board of Directors, including Directors Emeriti,
shall be entitled to have the premiums paid by CNB for participation in
another group life insurance policy the benefits and terms of which are
comparable to that of CNB, HNC or FMB. In no event, however, shall the
premiums paid by CNB for life insurance for members of the Regional Board
of Directors and Directors Emeriti, whether pursuant to an existing policy
of CNB, HNC or FMB, or pursuant to a comparable policy, or CNB's or HNC's
liability hereunder exceed, in the aggregate, the amount paid by FMB for
such life insurance coverage during 1994 for the Directors of FMB.
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(d) Liability Insurance. For a period of two years following
the Effective Date, HNC shall purchase for the benefit of the former
directors of FMB, liability insurance commonly referred to as tail coverage
on terms comparable to the FMB insurance plan currently in effect, so long
as said insurance can be purchased from a reputable insurer at commercially
reasonable rates and terms, including the term that such policy be on a
"claims made" basis.
Section 13.3. Regional Presence. Subject to regulatory approval, CNB
shall file a fictitious name registration for Farmers & Merchants Bank of
Honesdale, so that such name may be utilized for marketing purposes by CNB
in the Honesdale Area after the Effective Date.
ARTICLE XIV
GENERAL PROVISIONS
Section 14.1. Expenses. Except as provided in Section 9.2(b) of this
Agreement, each party shall pay its own expenses incurred in connection
with this Agreement and the consummation of the transactions contemplated
herein. For purposes of this Section 14.1, the cost of printing the Proxy
Statement/Prospectus shall be deemed to be an expense of HNC and CNB.
Section 14.2. Other Mergers and Acquisitions. Subject to the right
of FMB to refuse to consummate this Agreement pursuant to Section 9.1(c) of
this Agreement, nothing set forth in this Agreement or any Exhibit hereto
shall be construed:
(a) to preclude HNC from acquiring, or to limit in any way the
right of HNC to acquire, prior to or following the Effective Date, the
stock or assets of any other financial services institution or other
corporation or entity, whether by issuance or exchange of HNC Common Stock
or otherwise;
(b) to preclude HNC from issuing, or to limit in any way the
right of HNC to issue, prior to or following the Effective Date, HNC Common
Stock, HNC Preferred Stock or other securities;
(c) to preclude HNC from granting options at any time with
respect to HNC Common Stock, HNC Preferred Stock or other securities;
(d) to preclude option holders of HNC from exercising options at
any time with respect to HNC Common Stock, HNC Preferred Stock or other
securities; or
(e) to preclude HNC from taking, or to limit in any way the
right of HNC to take, any other action not expressly and specifically
prohibited by the terms of this Agreement.
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Section 14.3. Access; Confidentiality. The parties hereby agree to
conduct the investigations and discussions contemplated by Section 6.3 and
Section 7.2 of this Agreement in a manner so as to not interfere
unreasonably with normal operations and customer and employee
relationships. If the transactions contemplated by this Agreement are not
consummated, the parties hereby agree to destroy or return all documents
and records obtained from the other or their respective representatives,
during the course of any investigation and will cause all information with
respect to the other party obtained pursuant to this Agreement or
preliminarily thereto to be kept confidential, except to the extent such
information becomes public through no fault of the party which has obtained
such information or any of its respective representatives or agents and
except to the extent disclosure of any such information is legally
required. Each party hereby agrees to give the other party prompt notice
of any contemplated disclosure where such disclosure is so legally
required.
Section 14.4. Notices. All notices, claims, requests, demands and
other communications which are required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly
delivered if delivered in person, transmitted by facsimile machine (but
only if receipt is acknowledged in writing), mailed by registered or
certified mail, return receipt requested or sent by recognized overnight
delivery service guaranteeing next day delivery addressed as follows:
(a) If to HNC and/or CNB, to:
Mr. Walter E. Daller, Jr.
President and Chief Executive Officer
HARLEYSVILLE NATIONAL CORPORATION
483 Main Street, P.O. Box 195
Harleysville, Pennsylvania 19438
With a copy to:
Nicholas Bybel, Jr., Esquire
SHUMAKER WILLIAMS, P.C.
3425 Simpson Ferry Road
Camp Hill, Pennsylvania 17011
(b) If to FMB, to:
Mr. Richard J. Shershenovich
President
FARMERS & MERCHANTS BANK
1001 Main Street, P.O. Box 430
Honesdale, Pennsylvania 18431
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With a Copy to:
Hugh A. Benson, Jr., Esquire
106 North Market Street
Selinsgrove, PA 17870
Section 14.5. Captions. The captions contained in this Agreement are
for reference purposes only and are not part of this Agreement.
Section 14.6. Counterparts. This Agreement may be executed
simultaneously in several counterparts, each of which shall be deemed an
original, but all such counterparts together shall be deemed to be one and
the same instrument.
Section 14.7. Severability. If any provision of this Agreement or
the application thereof to any party or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the
application of such provisions to other parties or circumstances shall not
be affected thereby and shall be enforced to the greatest extent permitted
by law.
Section 14.8. Parties in Interest. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that the rights and obligations
of any party under this Agreement may not be assigned or delegated by that
party without the prior written consent of each other party.
Section 14.9. Entire Agreement. This Agreement, including the
documents and other writings referred to herein or delivered pursuant
hereto sets forth the entire understanding and agreement of the parties
hereto and supersedes any and all prior agreements, arrangements and
understandings, oral or written, relating to the subject matter hereof.
Section 14.10. Governing Law. This Agreement shall be governed by and
construed in accordance with the domestic internal laws of the Commonwealth
of Pennsylvania, without regard to the conflict laws principles thereof.
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IN WITNESS WHEREOF, intending to be legally bound hereby, this
Agreement is executed as of the day and year first above written.
ATTEST: HARLEYSVILLE NATIONAL
CORPORATION
By: /s/ Jo Ann M. Bynon By: /s/ Walter E. Daller, Jr.
__________________________ __________________________
Jo Ann M Bynon, Assistant Walter E. Daller, Jr.
Secretary of the Board President and Chief
Executive Officer
[CORPORATE SEAL]
ATTEST: THE CITIZENS NATIONAL BANK OF
LANSFORD
By: /s/ Demetra M. Takes By: /s/ Thomas D. Oleksa
___________________________ ___________________________
Demetra M. Takes, Corporate Thomas D. Oleksa, President
Secretary
[BANK SEAL]
ATTEST: FARMERS & MERCHANTS BANK
(HONESDALE, PA.)
By: /s/ Charles P. McGinnis By: /s/ Richard J. Shershenovich
__________________________ ____________________________
Charles P. McGinnis Richard J. Shershenovich
Corporate Secretary President
[BANK SEAL]
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AGREEMENT AND PLAN OF MERGER EXHIBIT A
OF
FARMERS & MERCHANTS BANK (HONESDALE, PA.)
with and into
THE CITIZENS NATIONAL BANK OF LANSFORD
under the charter and title of
THE CITIZENS NATIONAL BANK OF LANSFORD
THIS AGREEMENT AND PLAN OF MERGER ("Bank Merger Agreement") is dated
as of September 7, 1995, by and between THE CITIZENS NATIONAL BANK OF
LANSFORD, a national banking association, having its principal office at
13-15 W. Ridge Street, P.O. Box 128, Lansford, Pennsylvania 18232 ("CNB"),
and FARMERS & MERCHANTS BANK (HONESDALE, PA.), a Pennsylvania state-
chartered bank, having its principal office at 1001 Main Street, P.O. Box
430, Honesdale, Pennsylvania 18431 ("FMB") (the two parties being sometimes
collectively referred to as the "Constituent Banks") each acting pursuant
to resolutions approved and adopted by the vote of a majority of its
directors.
WITNESSETH:
WHEREAS, FMB and CNB are parties to an Agreement and Plan of
Reorganization of even date herewith (the "Reorganization Agreement") which
provides, among other things, for the execution of the Bank Merger
Agreement and the merger of FMB with and into CNB (the "Merger") in
accordance with the terms and conditions set forth therein and herein; and
WHEREAS, the respective Boards of Directors of FMB and CNB deem the
Merger in accordance with the Reorganization Agreement and pursuant to the
terms and conditions herein set forth or referred to, desirable and in the
best interests of the Constituent Banks and their respective shareholders;
and
WHEREAS, the respective Boards of Directors of FMB and CNB have
adopted resolutions approving and adopting this Bank Merger Agreement, and
the respective Boards of Directors of FMB, CNB and Harleysville National
Corporation, the parent bank holding company of CNB ("HNC") have adopted
resolutions approving and adopting the Reorganization Agreement, and the
Boards of Directors of FMB and CNB have directed that this Bank Merger
Agreement and the Reorganization Agreement be submitted to their respective
shareholders; and
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WHEREAS, the approval of this Bank Merger Agreement and the
Reorganization Agreement requires the affirmative vote of the holders of at
least two-thirds of the outstanding shares of FMB Common Stock and the
holders of at least two-thirds of the outstanding shares of CNB Common
Stock;
NOW, THEREFORE, in consideration of their mutual covenants and
agreements contained herein and in the Reorganization Agreement, and for
the purpose of stating the method, terms and conditions of the Merger,
including the rights of the shareholders of FMB, and such other details and
provisions as are deemed desirable, the parties hereto, intending to be
legally bound hereby, agree as follows:
1. The Merger. Subject to the terms and conditions of this Bank
Merger Agreement and the Reorganization Agreement, and in accordance with
the provisions of the Act of November 7, 1918, as amended (12 U.S.C.
Section 215a) (the "Bank Merger Act") (as defined in Section 1.1 of the
Reorganization Agreement), FMB shall be merged with and into CNB under the
Bank Merger Act, and CNB shall be the surviving association. On the
Effective Date, the separate existence of FMB shall cease, and CNB shall be
the surviving association (the "Surviving Association"), the principal and
branch offices of FMB shall become authorized branch offices of CNB ; and
all the property (real, personal and mixed), rights, powers, duties, and
obligations of FMB and CNB shall be taken and deemed to be transferred to
and vested in the Surviving Association, CNB, without further act or deed,
as provided by applicable laws and regulations.
2. Name and Location of Principal Office. The name of the Surviving
Association shall be The Citizens National Bank of Lansford, and the
location of its principal office shall be 13-15 W. Ridge Street, Lansford,
Pennsylvania 18232.
3. Articles of Association. The Articles of Association of CNB as
in effect immediately prior to the Effective Date, at the Effective Date
and thereafter, shall be the Articles of Association of the Surviving
Association, until amended in accordance with applicable law.
4. Bylaws. The Bylaws of CNB as in effect immediately prior to the
Effective Date, at the Effective Date and thereafter, shall be the Bylaws
of the Surviving Association, until amended in accordance with applicable
law.
5. Conversion of Shares. The manner and basis of converting shares
of common stock of the Constituent Banks shall be as follows:
5.1. Conversion of FMB Common Stock. On the Effective Date (as
defined in Section 11.2 of the Reorganization Agreement), the shares of FMB
Common Stock then outstanding and eligible for conversion under Article II
of the Reorganization Agreement shall be converted into shares of HNC
Common Stock in accordance with the terms of and as provided in Section 2.1
of the Reorganization Agreement.
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5.2. Stock of CNB. The shares of CNB Common Stock issued and
outstanding immediately prior to the Effective Date shall continue to be
issued and outstanding shares of Common Stock of the Surviving Association.
From and after the Effective Date, each certificate that, prior to the
Effective Date, represented shares of CNB Common Stock, shall evidence
ownership of shares of such Common Stock of the Surviving Association.
6. Surrender and Exchange of FMB Certificates. On the Effective
Date (as defined in Section 11.2 of the Reorganization Agreement), the
shares of FMB Common Stock certificates shall be exchanged for HNC Common
Stock certificates in accordance with and as provided in Section 2.2 of the
Reorganization Agreement.
7. Effect of Merger. On the Effective Date, the Surviving
Association shall succeed, without further act or deed, to all of the
property, rights, powers, duties and obligations of the Constituent Banks
in accordance with the Bank Merger Act. Any claim existing or action
pending by or against either of the Constituent Banks may be prosecuted to
judgment as if the Merger had not taken place, and the Surviving
Association may be substituted in its place.
8. Continuation of Business. The Surviving Association shall
continue in business with the assets and liabilities of each of the
Constituent Banks. The Surviving Association shall be a national banking
association organized and having perpetual existence under the laws of the
United States. Any branch offices of the Surviving Association shall
consist of CNB's and FMB's present principal and branch offices and any
other branch office or offices that CNB and FMB may be authorized to have
as of the Effective Date. As of the Effective Date, the separate existence
of FMB shall cease.
9. Board of Directors and Officers. The Directors and Officers of
CNB as in effect immediately prior to the Effective Date shall be the
Directors and Officers of the Surviving Association, until such time as
their successors have been elected, qualified, or appointed in the case of
directors, and appointed in the case of officers.
10. Dissenters' Rights of FMB Shareholders. The rights and remedies
of a dissenting shareholder under the Bank Merger Act, shall be afforded to
any holder of FMB Common Stock who objects to this Bank Merger Agreement
and who takes the necessary steps to perfect the rights of a dissenting
shareholder.
11. Effective Date of the Bank Merger. The Effective Date of the
Merger shall be as defined and provided for in Section 11.2 of the
Reorganization Agreement.
12. Further Assurances. If at any time the Surviving Association
shall consider or be advised that any further assignments, conveyances or
assurances are necessary or desirable to vest, perfect or confirm in the
Surviving Association title to any property or rights of FMB, or otherwise
carry out the provisions hereof, the proper officers and directors of FMB,
as of the Effective Date, on behalf of FMB shall execute and deliver any
and all proper assignments, conveyances and assurances, and do all things
necessary or
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desirable to vest, perfect or confirm title to such property or rights in
the Surviving Association and otherwise carry out the provisions hereof.
13. Shareholder Approval. This Bank Merger Agreement shall be
approved and adopted by the affirmative vote of shareholders of each of the
Constituent Banks owning at least two-thirds of its common stock
outstanding.
14. Termination and Amendment. This Bank Merger Agreement may be
terminated as provided in Section 9.1 of the Reorganization Agreement.
Notwithstanding prior approval by the shareholders of FMB, this Bank Merger
Agreement shall be terminated and the Merger shall be abandoned in the
event that prior to the Effective Date the Reorganization Agreement is
terminated as provided therein. Since time is of the essence to this Bank
Merger Agreement, if for any reason the transaction shall not have been
consummated by June 30, 1996, this Bank Merger Agreement shall terminate
automatically as of that date unless extended, in writing, prior to said
date by mutual action of the Boards of Directors of the parties. If there
is termination after approval of the Merger by the Office of the
Comptroller of the Currency (the "OCC"), the parties shall execute and file
with the OCC prior to the Effective Date a statement of termination of the
Merger. Notwithstanding prior approval by the shareholders of FMB, this
Agreement may be amended in any respect in the manner and subject only to
the limitations set forth in Section 9.3 of the Reorganization Agreement.
15. Obligations. The obligations of CNB and FMB to effect the Merger
shall be subject to all terms and conditions contained in the Agreement and
Plan of Reorganization, except as may be provided by applicable law.
16. Extensions; Waivers. Each party, by a written instrument signed
by a duly authorized officer, may extend the time for the performance of
any of the obligations or other acts of the party hereto, and may waive
compliance with any obligations of the other party contained in this Bank
Merger Agreement.
17. Notices. Any notice or other communication required or permitted
under this Bank Merger Agreement shall be given, and shall be effective, in
accordance with the provisions of the Reorganization Agreement.
18. Counterparts; Headings. This Bank Merger Agreement may be
executed in several counterparts, and by the parties hereto on separate
counterparts, each of which will constitute an original. The headings and
captions contained herein are for reference purposes only and do not
constitute a part hereof.
19. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania.
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IN WITNESS WHEREOF, the signatures and seals of said merging banks
this 7th day of September, 1995, each hereunto set by its President or a
Vice President and attested by its duly authorized officer, pursuant to a
resolution of its Board of Directors, acting by a majority thereof, and
witness the signatures hereto of a majority of each of said Boards of
Directors.
ATTEST: FARMERS & MERCHANTS BANK
(HONESDALE, PA.)
By: /s/ Charles P. McGinnis By: /s/ Richard J. Shershenovich
__________________________ ____________________________
Charles P. McGinnis Richard J. Shershenovich
Corporate Secretary President
[BANK SEAL]
/s/ John J. Koehler
____________________________
John J. Koehler
/s/ Dale D. Fowler
____________________________
Dale D. Fowler
/s/ Nelson W. Leet
____________________________
Nelson W. Leet
/s/ Samuel C. Siepiela
____________________________
Samuel C. Siepiela
/s/ Wayne W. Stephens
____________________________
Wayne W. Stephens
/s/ Richard J. Shershenovich
____________________________
Richard J. Shershenovich
/s/ Charles P. McGinnis
____________________________
Charles P. McGinnis
Directors of Farmers &
Merchants Bank (Honesdale,
PA.), Wayne County,
Pennsylvania
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ATTEST: THE CITIZENS NATIONAL BANK OF
LANSFORD
By: /s/ Demetra M. Takes By: /s/ Thomas D. Oleksa
__________________________ __________________________
Demetra M. Takes Thomas D. Oleksa
Corporate Secretary President
[BANK SEAL]
/s/ Thomas S. McCready, Esq. /s/ Frank J. Lochetto
______________________________ ______________________________
Thomas S. McCready, Esq. Frank J. Lochetto
/s/ William H. Fegley, Sr. /s/ Thomas D. Oleksa
______________________________ ______________________________
William H. Fegley, Sr. Thomas D. Oleksa
/s/ Walter E. Kruczek /s/ Demetra M. Takes
______________________________ ______________________________
Walter E. Kruczek Demetra M. Takes
/s/ James D. McMahon
______________________________
James D. McMahon
/s/ Joseph M. Porvaznik
______________________________
Joseph M. Porvaznik
/s/ John J. Trojan
______________________________
John J. Trojan
/s/ Joseph J. Veltisky, Esq.
______________________________
Joseph J. Veltisky
/s/ Walter E. Daller, Jr.
______________________________
Walter E. Daller, Jr.
Directors of The Citizens
National Bank of Lansford,
Carbon County, Pennsylvania
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COMMONWEALTH OF PENNSYLVANIA :
: SS.
COUNTY OF CARBON :
On this 7th day of September, 1995, before me, a Notary Public for the
Commonwealth and County aforesaid, personally came Richard J.
Shershenovich, as President, and Charles P. McGinnis, as Secretary, of
Farmers & Merchants Bank (Honesdale, PA.), and each in his said capacity
acknowledged the foregoing instrument to be the act and deed of said
banking institution and the seal affixed thereto to be its seal; and came
also Richard J. Shershenovich, Charles P. McGinnis, John J. Koehler, Dale
D. Fowler, Nelson W. Leet, Samuel C. Siepiela, and Wayne W. Stephens being
a majority of the Board of Directors of said banking institution, and each
of them acknowledged said instrument to be the act and deed of said banking
institution and of himself as director thereof.
WITNESS my official seal and signature this day and year aforesaid.
/s/ Judith N. Johnson
______________________________
(Seal of Notary) Notary Public, Carbon County
My commission expires:
January 17, 1998
______________________________
COMMONWEALTH OF PENNSYLVANIA :
: SS.
COUNTY OF CARBON :
On this 7th day of September, 1995, before me, a Notary Public for the
Commonwealth and County aforesaid, personally came Thomas D. Oleksa, as
President, and Demetra M. Takes, as Secretary, of The Citizens National
Bank of Lansford, and each in his capacity acknowledged the foregoing
instrument to be the act and deed of said national banking association and
the seal affixed thereto to be its seal; and came also Thomas D. Oleksa,
Demetra M. Takes, Thomas S. McCready, Esq., William H. Fegley, Sr., Walter
E. Kruczek, James D. McMahon, Joseph M. Porvaznik, John J. Trojan, Joseph
J. Velitsky, Esq., Walter E. Daller, Jr., and Frank J. Lochetto being a
majority of the Board of Directors of said national banking association and
each of them acknowledged said instrument to be the act and deed of said
national banking association and of himself as a director thereof.
WITNESS my official seal and signature this day and year aforesaid.
/s/ Judith N. Johnson
______________________________
(Seal of Notary) Notary Public, Carbon County
My commission expires:
January 17, 1998
______________________________
<PAGE>
EXHIBIT B
Danielson Associates Inc.
Fairness Opinion
<PAGE>
Exhibit B
DANIELSON ASSOCIATES INC.
6110 Executive Boulevard
Suite 504
Rockville, Maryland 20852-3903
Tel: (301) 468-4884
Fax: (301) 468-0013
January 2, 1996
Board of Directors
Farmers & Merchants Bank
1001 Main Street
Honesdale, Pennsylvania 18431
Dear Members of the Board:
Set forth herein is the updated opinion of Danielson Associates Inc.
("Danielson Associates") as to the "fairness" of the offer of Harleysville
National Corporation ("Harleysville") to buy all of the outstanding common
stock of the Farmers & Merchants Bank ("Farmers & Merchants" or the "Bank").
The "fair" sale value is defined as the price at which all of the Farmers &
Merchants common stock would change hands between a willing seller and a
willing buyer, each having reasonable knowledge of the relevant facts.
In the course of preparing the original opinion dated September 6, 1995,
the Bank's market was analyzed, its business and prospects were discussed
with management, and its financial performance compared to banks in the
region as well as other Pennsylvania banks. Also, any unique characteristics
were considered.
The financial and stock performance of Harleysville also was
analyzed and compared to comparable banks whose common stock is actively-
traded. The prior movement of its common stock and dividend payments was
examined, the dilutive effect of this merger on Harleysville's common stock
analyzed, its financial performance was related to its stock value and any
unique characteristics were considered.
This opinion is based on data supplied by both Farmers & Merchants and
Harleysville, and it relies on some public information, all of which is
believed to be reliable, but neither the completeness nor the accuracy of
such information can be guaranteed. The opinion assumes, based on
management's representation, that there are still no significant loan
problems beyond those stated in the most recent reports to regulatory
agencies and in the monthly report to the directors.
<PAGE>
Board of Directors
January 2, 1996
Page Two
In determining the "fair" sale value of Farmers & Merchants, primary
emphasis was given to prices paid for commercial banks with similar
financial, market and structural characteristics. These prices were then
related to earnings and capital, also referred to as "book."
In determining the "fair" market value of Harleysville's common stock,
primary emphasis was given to the market value of comparable banks.
The analysis showed its stock to be "fairly" valued.
Based on the analysis of both Farmers & Merchants and Harleysville's
recent performance and potential, comparisons with similar transactions, and
any unique characteristics, it was determined that the $12 million or $17 per
share, offered to Farmers & Merchants by Harleysville, which was to be in
Harleysville common stock that was "fairly" valued at that time, represented
a "fair" offer from a financial point of view to Farmers & Merchants and its
shareholders.
Subsequently there has been no change in the performance of
Harleysville, but there has been a decline in the value of its stock.
Harleysville's average closing price for the ten trading days ending December
27, 1995 was $27.10. The value of the transaction, though, remains
unchanged, and the Harleysville stock price is still comfortably above the
$24.58 price at which the transaction value would begin to decline. Since
the transaction value has not changed, this offer is still "fair" from a
financial point of view to Farmers & Merchants and its shareholders.
Respectfully submitted,
/s/ Arnold G. Danielson
Arnold G. Danielson
President
Danielson Associates Inc.
<PAGE>
EXHIBIT C
Statute Regarding Dissenters' Rights
<PAGE>
EXCERPTS FROM SECTION 215a OF THE
NATIONAL BANK ACT RELATING TO DISSENTERS' RIGHTS
(b) If a merger shall be voted for at the called meetings by the
necessary majorities of the shareholders of each association or State bank
participating in the plan of merger, and thereafter the merger shall be
approved by the comptroller, any shareholder of any association or State
bank to be merged into the receiving association who has voted against such
merger at the meeting of the association or bank of which he is a
stockholder, or has given notice in writing at or prior to such meeting to
the presiding officer that he dissents from the plan of merger, shall be
entitled to receive the value of the shares so held by him when such merger
shall be approved by the Comptroller upon written request made to the
receiving association at any time before thirty days after the date of
consummation of the merger, accompanied by the surrender of his stock
certificates.
(c) The value of the shares of any dissenting shareholder shall be
ascertained, as of the effective date of the merger, by an appraisal made
by a committee of three persons, composed of (1) one selected by the vote
of the holders of the majority of the stock, the owners of which are
entitled to payment in cash; (2) one selected by the directors of the
receiving association; and (3) one selected by the two so selected. The
valuation agreed upon by any two of the three appraisers shall govern. If
the value so fixed shall not be satisfactory to any dissenting shareholder
who has requested payment, that shareholder may, within five days after
being notified of the appraised value of his shares, appeal to the
Comptroller, who shall cause a reappraisal to be made which shall be final
and binding as to the value of the shares of the appellant.
(d) If, within ninety days from the date of consummation of the
merger, for any reason one or more of the appraisers is not selected as
herein provided, or the appraisers fail to determine the value of such
shares, the Comptroller shall upon written request of any interested party
cause an appraisal to be made which shall be final and binding on all
parties. The expenses of the Comptroller in making the reappraisal or the
appraisal, as the case may be, shall be paid by the receiving association.
The value of the shares ascertained shall be promptly paid to the
dissenting shareholders by the receiving association. The shares of stock
of the receiving association which would have been delivered to such
dissenting shareholders had they not requested payment shall be sold by the
receiving association at an advertised public auction, and the receiving
association shall have the right to purchase any of such shares at such
public auction, if it is the highest bidder therefor, for the purpose of
reselling such shares within thirty days thereafter to such person or
persons and at such price not less than par as its board of directors by
resolution may determine. If the shares are sold at public auction at a
price greater than the amount paid to the dissenting shareholders, the
excess in such sale price shall be paid to such dissenting shareholders.
The appraisal of such shares of stock in any State bank shall be determined
in the manner prescribed by the law of the State in such cases, rather than
as provided in this section, if such provision is made in the State law;
and no such merger shall be in contravention of the law of the State under
which such bank is incorporated. The provisions of this subsection shall
apply only to shareholders of (and stock owned by them in) a bank or
association being merged into the receiving association.
_________________________
Section 215(b)(4) of the National Bank Act defines the term "receiving
association," as used in Section 215a, to mean the national banking
association into which one or more national banking associations or one or
more State banks, located within the same State, merge.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation
Law of 1988, as amended (15 Pa. C.S. Sections 1101-4162 (BCL) provides that
a business corporation shall have the power under certain circumstances to
indemnify its directors, officers, employees and agents against certain
expenses incurred by them in connection with any threatened, pending or
completed action, suit or proceeding.
Article 10 of the Bylaws of Harleysville National Corporation
provides for the indemnification of its directors, officers, employees and
agents in accordance with, and to the maximum extent permitted by, the
provisions of Subchapter D of Chapter 17 of the BCL.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits: An Exhibit Index containing a list of all exhibits
filed with this Registration Statement is included on page II-6.
(b) Financial Statement Schedules:
None required.
(c) Opinion of Financial Advisor:
Furnished as part of Prospectus/Proxy Statement.
Item 22. Undertakings.
(a)
1. The undersigned Registrant hereby undertakes as follows:
(A) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement: (i)
to include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement;
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<PAGE>
Provided, however, that paragraphs (1)(a)(i) and (1)(a)(ii)
above do not apply if the registration statement is on Form S-3 or Form S-8
and the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registration pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(B) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(C) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
2. The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial
bona fide offering thereof.
3. The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to the reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed
pursuant to the preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-operative amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
4. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the bylaws of the
registrant, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against
II-2
<PAGE>
public policy as expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one
(1) business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
(c) The undersigned registrant hereby undertakes to supplement by
means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that was not
the subject of and included in the registration statement when it became
effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Harleysville, Commonwealth of Pennsylvania, on the 2nd day of
January, 1996.
HARLEYSVILLE NATIONAL CORPORATION
/s/ Walter E. Daller, Jr.
By: ______________________________
Walter E. Daller, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the securities Act of 1933, this
amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature and Capacity Date
______________________ ____
John W. Clemens, Director January 2, 1996
Walter E. Daller, Jr., Director/ January 2, 1996
President/Chief Executive Officer
(Principal Executive Officer)
Martin E. Fossler, Director January 2, 1996
Harold A. Herr, Director January 2, 1996
Howard E. Kalis, III, Director January 2, 1996
Bradford W. Mitchell, Director January 2, 1996
Walter F. Vilsmeier, Director January 2, 1996
William M. Yocum, Director January 2, 1996
Vernon L. Hunsberger, Chief Financial January 2, 1996
and Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Walter E. Daller, Jr.
___________________________
Walter E. Daller, Jr.
(Attorney-in-Fact)
/s/ Demetra M. Takes
___________________________
Demetra M. Takes
(Attorney-in-Fact)
II-4
<PAGE>
EXHIBIT INDEX
Page
Number In
Sequential
Number
Number Title System
2 Agreement and Plan of Reorganization dated 104
September 7, 1995, among Harleysville
National Corporation, The Citizens National
Bank of Lansford and Farmers & Merchants Bank
(Honesdale, PA.) and Agreement and Plan
of Merger dated September 7, 1995, between
The Citizens National Bank of Lansford and
Farmers & Merchants Bank (Honesdale, PA.)
(included as Exhibit A to the Proxy Statement
contained herein)
2(a) Investment Agreement (previously filed)
2(b) Form of Support Agreement (previously filed)
3(a) Amended Articles of Incorporation of
Harleysville National Corporation (previously filed)
3(b) Amended Bylaws of Harleysville National
Corporation (previously filed)
5 Opinion of Shumaker Williams, P.C. (previously filed)
13 Annual Report on Form 10-K for Harleysville
National Corporation for the Year Ending
December 31, 1994; Quarterly Reports on Form
10-Q for Harleysville National Corporation
for the quarters ending June 30, 1995 and
March 31, 1995, and current reports on
Form 8-K dated April 12, 1995, May 18, 1995
and September 14, 1995 for Harleysville
National Corporation all incorporated
by reference hereto
II-5
<PAGE>
23(a) Consent of Shumaker Williams, P.C. (included as
part of Exhibits 5 and 8) (previously filed)
23(b) Consent of KPMG Peat Marwick LLP (previously filed)
23(c) Consent of Parente, Randolph, Orlando, Carey &
Associates (previously filed)
23(d) Consent of Danielson Associates Inc. 174
24 Power of Attorney (included on Signature Page) (previously
filed)
99(a) Form of Proxy (previously filed)
99(b) Letter to Shareholders of Farmers & Merchants 5
Bank (Honesdale, PA.) (included in Proxy
Statement contained herein)
99(c) Notice of Special Meeting (included in Proxy 6
Statement contained herein)
99(d) Statute Relating to Dissenters' Rights (included 167
as Exhibit C to the Proxy Statement contained
herein)
II-6
EXHIBIT 23(d)
OPINION OF DANIELSON ASSOCIATES INC.
<PAGE>
DANIELSON ASSOCIATES INC.
6110 Executive Boulevard
Suite 504
Rockville, Maryland 20852-3903
TEL: (301) 468-4884
FAX: (301) 468-0013
Exhibit 23(d)
We hereby consent to the reference to our name appearing
herein under the captions entitled "GENERAL INFORMATION--SPECIAL
MEETING OF FARMERS & MERCHANTS SHAREHOLDERS--Background of and
Principal Reasons for Merger" and "Opinion of Financial Advisor."
We further consent to the use of our letter to the Board of
Directors of Farmers & Merchants Bank concerning the fairness of
the financial terms of the proposed merger, appearing as Exhibit B
to the Prospectus/Proxy Statement contained herein.
/s/ Arnold G. Danielson
___________________________________
Arnold G. Danielson, President
Rockville, Maryland
January 2, 1996
