As filed with the Securities and Exchange Commission on December 7, 1998
Registration No. 333-67201
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO.2
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
-------------------------------
(State or other jurisdiction of
incorporation or organization)
6711
--------------------------
(Primary Standard Industrial
Classification Code Number)
23-2210237
-----------------
(I.R.S. Employer Identification No.)
HARLEYSVILLE NATIONAL CORPORATION
Post Office Box 195
483 Main Street
Harleysville, Pennsylvania 19438
(215) 256-8851
-----------------------------------------
(Address, including ZIP Code, and telephone
number, including area code, of registrant's
principal executive offices)
Walter E. Daller, Jr.
President and Chief Executive Officer
HARLEYSVILLE NATIONAL CORPORATION
Post Office Box 195
483 Main Street
Harleysville, Pennsylvania 19438
(215) 256-8851
------------------------------------------------
(Name, address, including ZIP Code, and telephone
number, including area code, of agent for
service)
With a Copy to:
Nicholas Bybel, Jr., Esquire
B. Tyler Lincoln, Esquire
SHUMAKER WILLIAMS, P.C.
P. O. Box 88
Harrisburg, Pennsylvania 17108
(717) 763-1121
With a Copy to:
Lawrence E. McAlee, Esquire
MONTEVERDE, MCALEE, FITZPATRICK,
TANKER & HURD
One Penn Center at Suburban Station
Suite 1500, 1617 JFK Blvd.
Philadelphia, PA 19103-1815
(215) 557-2900
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>
Title of Each Class Amount Proposed Maximum Proposed Maximum Amount of
of Securities to t.o be Offering Price Aggregate Registration
be Registered Registered Per Share Offering Price(2) Fee (3)
<S> <C> <C> <C> <C>
Common Stock, par value
$1.00 per share 498,008 $35.50(1) $17,679,284 $4,914.84
Common Stock, par value
$1.00 per share 17,850 $35.50 $633,675 $176.16
(1) Shares to be issued in the Merger (as defined herein) computed in
accordance with Rule 457(f)(1), solely for the purpose of calculating the
registration fee, at November 11, 1998, the latest practicable date prior
to the date of filing of this Registration Statement.
(2) Based on maximum number of shares of Registrant's Common Stock that may be
issued in connection with the proposed transaction, including stock
options. In accordance with Rule 416, this Registration Statement shall
also register any additional shares of Registrant's common stock that may
become issuable to prevent dilution resulting from stock splits, stock
dividends or similar transactions as provided by the Agreement relating to
the transaction.
(3) Registration fee paid by Registrant prior to filing original Registration
Statement on November 12, 1998.
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, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
</TABLE>
<PAGE>
Proxy/Statement Prospectus
HARLEYSVILLE NATIONAL CORPORATION
PROSPECTUS FOR
515,858 SHARES COMMON STOCK
TRADING SYMBOL: HNBC
NORTHERN LEHIGH BANCORP, INC.
PROXY STATEMENT
The Board of Directors provides this proxy statement/prospectus to you in
connection with the solicitation of proxies to be used at a Special Meeting of
Shareholders to be held at 1:00 p.m., on Thursday, January 14, 1999, at 510 Main
Street, (next to the Main Office of The Citizens National Bank of Slatington),
Slatington, Pennsylvania 18080. At the meeting, you will be asked to vote on the
merger of Northern Lehigh Bancorp, Inc. and Harleysville National Corporation
North, Inc. a subsidiary of Harleysville National Corporation.
If you approve the merger at the meeting, as a shareholder of Northern
Lehigh Bancorp, Inc, you will have the right to receive 3.57 shares of common
stock of Harleysville National Corporation for each share of Northern Lehigh
Bancorp, Inc. common stock that you own when the merger is completed.
Harleysville National Corporation common stock is quoted on the National Market
System of the Nasdaq.
Neither the Securities and Exchange Commission, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation, the
Board of Governors of the Federal Reserve System nor any state securities
commission has approved or disapproved these securities or passed upon the
accuracy or adequacy of this proxy statement/prospectus. Any representation to
the contrary is a criminal offense.
The shares of Harleysville National Corporation common stock offered in
this proxy statement/prospectus 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.
No person has been authorized to give any information or to make any
representation not contained in this proxy statement/prospectus, and if given or
made, any such information or representation should not be relied upon as having
been authorized. This proxy statement/prospectus 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 proxy statement/prospectus,
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
proxy statement/prospectus nor any distribution of the securities to which this
proxy statement/prospectus relates shall, under any circumstances, create any
implication that the information contained herein is correct at any time
subsequent to the date hereof.
The date of this proxy statement/prospectus is December 11, 1998.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY............................................................... 1
The Meeting........................................................ 1
Northern Lehigh Bancorp, Inc....................................... 1
Harleysville National Corporation.................................. 1
The Merger......................................................... 2
Certain Terms of the Merger........................................ 3
Comparison of Shareholder Rights................................... 3
Federal Income Tax Consequences of the Merger...................... 4
Accounting Treatment............................................... 5
Dissenters' Rights................................................. 5
Required Vote...................................................... 5
Regulatory Approvals............................................... 6
Management and Operations Following the Merger..................... 6
Adjournment of the Meeting......................................... 8
Opinion of Financial Advisor....................................... 8
Recommendation of the Board of Directors........................... 8
FORWARD LOOKING STATEMENTS............................................ 9
COMPARATIVE PER SHARE DATA............................................ 9
General............................................................ 9
Market Value of Securities......................................... 12
SELECTED FINANCIAL DATA AND PRO FORMA INFORMATION..................... 13
THE MEETING........................................................... 17
General............................................................ 17
Voting, Revocation and Solicitation of Proxies..................... 17
Voting Securities and Securities Ownership......................... 18
Interests of Certain Persons in Matters to be Voted Upon........... 20
APPROVAL OF THE MERGER................................................ 20
Background of the Merger, Reasons and Recommendation
of the Board of Directors....................................... 21
The Board's Determination About the Merger......................... 22
Additional Reasons for the Merger.................................. 26
Opinion of Financial Advisor....................................... 27
Dissenters' Rights................................................. 33
Terms of the Merger................................................ 36
Business Pending the Merger........................................ 38
Conditions, Amendment and Termination.............................. 39
Effective Date..................................................... 40
Interests of Certain Persons in the Merger......................... 41
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<PAGE>
Management and Operations Following the Merger..................... 42
Federal Income Tax Consequences.................................... 44
Investment Agreement............................................... 46
Accounting Treatment............................................... 46
Restriction on Resale of Common Stock Held by Affiliates .......... 47
COMPARATIVE STOCK PRICES AND DIVIDENDS AND RELATED
SHAREHOLDER MATTERS................................................ 48
Common Stock of Harleysville National Corporation.................. 49
DESCRIPTION OF HARLEYSVILLE NATIONAL CORPORATION
AND DESCRIPTION OF HARLEYSVILLE NATIONAL CORPORATION
COMMON STOCK...................................................... 50
Information Concerning Harleysville National Corporation........... 50
Incorporation of Certain Documents by Reference.................... 50
Acquisitions by Harleysville National Corporation ................. 51
Loans ............................................................. 51
Description of Harleysville National Corporation Common Stock...... 52
Dividends.......................................................... 52
Liquidation........................................................ 53
Dividend Reinvestment Plan......................................... 53
Securities Laws.................................................... 53
Anti-takeover Provisions........................................... 54
Indemnification.................................................... 56
Comparison of Shareholder Rights................................... 56
INFORMATION CONCERNING NORTHERN LEHIGH
BANCORP, INC. ..................................................... 59
Description of Business and Property............................... 59
Employees.......................................................... 60
Legal Proceedings.................................................. 60
Northern Lehigh Common Stock Market Price and Dividends............ 61
Year 2000 Issue.................................................... 61
IMPACT OF YEAR 2000 ISSUE............................................. 64
NORTHERN LEHIGH BANCORP, INC. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION................................. 66
ADJOURNMENT OF THE MEETING............................................ 88
EXPERTS............................................................... 88
LEGAL OPINIONS........................................................ 88
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<PAGE>
OTHER MATTERS......................................................... 88
AVAILABLE INFORMATION................................................. 89
NORTHERN LEHIGH BANCORP, INC.--INDEX TO FINANCIAL STATEMENTS
AND SUPPLEMENTARY FINANCIAL INFORMATION
ANNEXES
Annex A - Agreement and Plan of Reorganization
Annex B - Hopper Soliday & Co., Inc. Fairness Opinion
Annex C - Statute Regarding Dissenters' Rights
This proxy statement/prospectus incorporates important business and
financial information about HNC that is not included or delivered with the
document. This information is available, without charge to shareholders of
Northern Lehigh Bancorp, Inc.. Please direct requests for this information to
the Secretary, Harleysville National Corporation, 483 Main Street, Harleysville,
Pennsylvania 19438, telephone number (215) 256-8851. In order to ensure timely
delivery of the documents in advance of the meeting, you should make your
request no later than January 7, 1999.
-iii-
<PAGE>
SUMMARY
This summary of the transaction is not intended to contain all of the
information in the proxy statement/prospectus. It is intended to be a complete
summary of the most significant aspects of the merger transaction. The remainder
of the proxy statement/prospectus and the attached Annexes contain more detailed
information regarding the merger transaction. We urge you to read the entire
proxy statement/prospectus, including the Annexes, in order to understand the
merger transaction fully.
The Meeting
The Board of Directors of Northern Lehigh Bancorp, Inc. has called a
special meeting of shareholders for Thursday, January 14, 1999, at 1:00 p.m. at
510 Main Street, (next to the Slatington's Main Office), Slatington,
Pennsylvania 18080. Only shareholders whose ownership appears on the
shareholders record of Northern Lehigh Bancorp, Inc. at the close of business on
Monday, November 16, 1998, will be able to attend and vote at the meeting. The
main purpose of the meeting is to vote on the merger of Northern Lehigh Bancorp,
Inc. with a subsidiary of Harleysville National Corporation, a bank holding
company located in Harleysville, Montgomery County, Pennsylvania. If the merger
is completed, you will receive 3.57 shares of Harleysville National Corporation
common stock in exchange for each of your shares of Northern Lehigh Bancorp.
Inc.
Northern Lehigh Bancorp, Inc.
Northern Lehigh is a Pennsylvania business corporation and a registered
bank holding company, formed in 1983. Northern Lehigh holds all of the
outstanding capital stock of The Citizen's National Bank of Slatington. Northern
Lehigh's principal business has been directing, planning and coordinating the
business activities of The Citizens National Bank of Slatington. The Citizens
National Bank of Slatington is a national banking association, headquartered in
Slatington, Pennsylvania. The Citizens National Bank of Slatington conducts
business through three offices. Two offices, including the main office, are
located in Slatington, and the third office is located in Walnutport,
Northampton County, Pennsylvania. The Citizens National Bank of Slatington's
deposits are insured by the FDIC. As a full-service commercial bank, The
Citizens National Bank of Slatington offers checking, savings and time deposits
and commercial, consumer and mortgage loans. Northern Lehigh's executive offices
are located at 502 Main Street, Slatington, Pennsylvania 18080, and its
telephone number is (610) 767-3887. As of September 30, 1998, Northern Lehigh
had total assets of approximately $77,262,000.
Harleysville National Corporation
Harleysville National Corporation is a Pennsylvania business corporation
and a registered bank holding company. Its principal offices are located at 483
Main Street, P.O. Box 195, Harleysville, Pennsylvania 19438. Harleysville
National Corporation became a bank holding company in 1982. Harleysville
National Corporation, through its subsidiaries, engages in
-1-
<PAGE>
general commercial and retail banking services. Harleysville National
Corporation has three national banking association subsidiaries.
* The Harleysville National Bank and Trust Company
* a direct subsidiary of Harleysville National Corporation
* principal offices at the same location as Harleysville National
Corporation
* operates 21 banking offices in Bucks County, Chester County, and
Montgomery County, Pennsylvania.
* The Citizens National Bank of Lansford
* an indirect subsidiary of Harleysville National Corporation and a
direct subsidiary of Harleysville National Corporation North,
Inc., a Pennsylvania corporation
* principal offices located at:
13-15 West Ridge Street
P. O. Box 128
Lansford, Pennsylvania, 18232
* operates 5 banking offices in Carbon County and Wayne County,
Pennsylvania.
* Security National Bank
* a direct subsidiary of Harleysville National Corporation
* principal offices located at:
One Security Place
Pottstown, Pennsylvania 19464
* operates 2 banking offices in Pottstown, Pennsylvania
As of September 30, 1998, Harleysville National Corporation had consolidated
total assets of approximately $1,260,619,000.
The Merger
The proposed merger provides for Northern Lehigh Bancorp, Inc. to merge
into Harleysville National Corporation North, Inc. Northern Lehigh will cease to
exist when the merger is complete. As combined entity, Harleysville National
Corporation North, Inc. will continue after the merger and conduct business as a
subsidiary of Harleysville National Corporation. You, as a shareholder of
Northern Lehigh Bancorp, Inc., will become a shareholder of Harleysville
National Corporation when the merger is complete.
In addition to the 3.57 shares of common stock that Harleysville National
Corporation will exchange for each outstanding share of Northern Lehigh common
stock when the merger is completed, Harleysville National Corporation will
assume Northern Lehigh's 5,000 outstanding and unexercised stock options. These
stock options will entitle the holder to purchase 17,850 shares of Harleysville
National Corporation common stock.
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<PAGE>
Northern Lehigh Bancorp, Inc. shareholders will not receive any fractional
shares of Harleysville National Corporation common stock in the merger. Instead,
Harleysville National Corporation will issue a cash payment for any fractional
share of Northern Lehigh common stock that a Northern Lehigh shareholder would
be entitled to receive in the merger. All together, Harleysville National
Corporation will issue 515,858 shares of Harleysville National Corporation
common stock in this transaction.
Northern Lehigh Bancorp, Inc. and Harleysville National Corporation also
propose to merge The Citizens National Bank of Slatington into The Citizens
National Bank of Lansford. When this occurs, The Citizens National Bank of
Slatington will cease to exist. As a combined entity, The Citizens National Bank
of Lansford will survive the merger and conduct business under the name
"Citizens National Bank," and as a subsidiary of Harleysville National
Corporation North, Inc.
We attach a copy of the agreement as Annex A to this proxy statement/
prospectus. Please read the agreement carefully.
Certain Terms of the Merger
The merger is subject to various conditions, including, among others: o
approval by Northern Lehigh's shareholders; and o approval by certain banking
regulatory agencies;
The transaction is also subject to various other conditions contained in
the agreement. These conditions include that the merger qualify for a certain
type of accounting treatment. In the event that more than 10% of the outstanding
shares of Northern Lehigh exercise dissenters' rights, the accounting condition
will not be met. If this occurs, the merger will not be completed. See "APPROVAL
OF THE MERGER--Accounting Treatment."
Harleysville National Corporation and Northern Lehigh Bancorp, Inc. may
agree to amend the agreement. No amendment, however, can affect the number of
shares to be received by Northern Lehigh shareholders without the approval of
the Northern Lehigh shareholders. The agreement and merger will terminate on
June 30, 1999, unless extended by the mutual agreement of the parties. See
"APPROVAL OF THE MERGER--Business Pending the Merger."
Comparison of Shareholder Rights
On the day the merger is completed, the shareholders of Northern Lehigh
will become shareholders of Harleysville National Corporation. Northern Lehigh
and Harleysville National Corporation are each Pennsylvania business
corporations. After the merger is completed, the rights of former Northern
Lehigh shareholders will continue to be governed by Pennsylvania law, as well as
the articles of incorporation and bylaws of Harleysville National Corporation.
Certain differences exist in the rights of the shareholders of Northern Lehigh
and Harleysville National Corporation. These differences are due in part to the
differences in the Articles of Incorporation
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<PAGE>
and Bylaws of Northern Lehigh and the Articles of Incorporation and Bylaws of
Harleysville National Corporation.
The most significant differences between the rights of the shareholders of
Northern Lehigh and of shareholders of Harleysville National Corporation include
the following:
* although the Boards of Directors of each of Northern Lehigh and
Harleysville National Corporation are classified or staggered,
approximately one-third of the directors of Northern Lehigh are
elected each year for three-year terms while one-fourth of
Harleysville National Corporation's directors are elected each year
for four-year terms;
* certain anti-takeover items are contained in Harleysville National
Corporation's Articles of Incorporation, which may serve to keep
Harleysville National Corporation's current management in their
positions. Northern Lehigh's Articles of Incorporation contain some
similar items but there are certain differences in these anti-takeover
items;
* Harleysville National Corporation offers a dividend reinvestment plan
to its shareholders, while Northern Lehigh offers no plan of this
type; and
* Harleysville National Corporation common stock is registered under the
Securities Exchange Act of 1934 and is traded on the Nasdaq National
Market System, while Northern Lehigh common stock is not registered
under the Securities Exchange Act of 1934, and is traded on a limited
basis in the over-the-counter market, and is quoted and transactions
are reported on the OTC Bulletin Board.
See "DESCRIPTION OF HARLEYSVILLE NATIONAL CORPORATION AND DESCRIPTION OF
HARLEYSVILLE NATIONAL CORPORATION COMMON STOCK-- Comparison of Shareholder
Rights."
Federal Income Tax Consequences of the Merger
Northern Lehigh and Harleysville National Corporation structured the
transaction to qualify as a tax-free reorganization under the Internal Revenue
Code of 1986. Under the Internal Revenue Code, Northern Lehigh shareholders will
not recognize taxable gain or loss upon the receipt of Harleysville National
Corporation common stock in exchange for Northern Lehigh common stock. Northern
Lehigh shareholders who receive cash for fractional shares of Harleysville
National Corporation common stock will recognize taxable gain or loss, based
upon the amount of cash received. Northern Lehigh shareholders who exercise
dissenters' rights also will recognize taxable gain or loss based on the
difference between the amount of cash received by the shareholders in exercise
of dissenters' rights and the adjusted tax basis of the shares as to which
dissenters' rights are exercised. Grant Thornton, LLP will provide an opinion,
prior to the completion of the merger, confirming these and certain other
federal income tax consequences of the merger. You should consult with your own
tax advisers regarding that tax consequences of the merger with respect to your
own particular circumstances. See, "APPROVAL OF THE MERGER -- Federal Income Tax
Consequences."
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<PAGE>
Accounting Treatment
Northern Lehigh and Harleysville National Corporation intend that the
transaction be accounted for as a pooling of interests for financial reporting
purposes. This means that we will treat the companies as if they had always been
combined for accounting and financial reporting purposes.
Dissenters' Rights
The Pennsylvania Business Corporation Law of 1988 provides Northern Lehigh
Bancorp, Inc. shareholders with the right to dissent from the merger, and to
demand and receive the "fair value" of their shares of stock instead of the
Harleysville National Corporation common stock to be received in the merger. In
order to assert these dissenters' rights, you must:
* file a written notice of intent to dissent with Northern Lehigh prior
to the shareholder vote at the meeting;
* not vote in favor of the merger;
* file a written demand for payment and deposit the certificates
representing your shares as requested by the notice to demand payment
that will be sent by Northern Lehigh or Harleysville National
Corporation; and
* comply with certain other statutory procedures set forth in
Pennsylvania law.
If you sign and return your proxy without voting instructions, your proxy will
be voted in favor of the merger and you will lose any dissenters' rights that
you may have with respect to the merger. A copy of the applicable sections of
the Pennsylvania Business Corporation Law of 1988 are attached to this proxy
statement/prospectus as Annex C.
If you do not follow the procedures set forth in the statutory provisions
of the Pennsylvania law, you may lose your dissenters' rights with respect to
the merger. We urge you to read carefully "APPROVAL OF THE MERGER--Dissenters'
Rights" and Annex C to this proxy statement/prospectus.
Required Vote
In order for the merger to occur, the shareholders of Northern Lehigh must
approve the agreement. By approving the agreement, Northern Lehigh shareholders
are approving the merger. Approval of the merger requires the affirmative vote
of at least 66 2/3% of the outstanding Northern Lehigh common stock. On this
date, the directors and officers of Northern Lehigh and persons or entities that
they control own 22,674 shares of Northern Lehigh common stock, or 16.25% of the
outstanding shares. Northern Lehigh expects them to vote these shares "FOR"
approval of the merger.
Each share entitled to vote at the meeting is entitled to one vote. At
least a majority of the total number of shares of Northern Lehigh common stock
outstanding as of November 16, 1998, will be necessary to have a quorum at the
meeting. A quorum is necessary so that actions taken
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<PAGE>
at the meeting are valid. In addition to voting to approve the merger, you may
also be asked to vote on other matters that may properly come before the meeting
or any adjournments of the meeting.
Regulatory Approvals
Applications to approve the merger have been filed with certain banking
regulatory agencies. These agencies are the Board of Governors of the Federal
Reserve System, the Pennsylvania Department of Banking and the Office of the
Comptroller of the Currency. To date, the Board of Governors of the Federal
Reserve System and the Office of the Comptroller of the Currency have approved
the transaction.
Management and Operations Following the Merger
Following the merger, the Board of Directors of Harleysville National
Corporation and Harleysville National Corporation North will be the same persons
who serve on these two companies Boards of Directors immediately before the
merger. The Board of Directors of the Citizens National Bank will consist of the
present members of The Citizens National Bank of Lansford and four new people
who previously served as directors of Northern Lehigh. These persons will serve
on the Board of Directors until the director's successor is elected and
qualified. For one year after the merger the individuals who are directors of
The Citizens National Bank of Slatington, on the day of the merger, will serve
as an Advisory Board of Directors for the Slatington area. In addition, Thomas
D. Oleksa, will serve as a non-voting member of the Advisory Board.
The following tables reflect the membership of the boards following the
merger:
Board of Directors
Harleysville National Corporation
---------------------------------
Walter E. Daller, Jr., President,
Chief Executive Officer and
Chairman of the Board of Directors
John W. Clemens
Martin E. Fossler
Harold A. Herr
Thomas S. McCready
Henry M. Pollak
Palmer E. Retzlaff
Walter F. Vilsmeier
William M. Yocum
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Board of Directors
Harleysville National Corporation North, Inc.
----------------------------------------------
Walter E. Daller, Jr.
Vernon L. Hunsberger
Demetra M. Takes
Board of Directors
Citizens National Bank
----------------------
Joseph G. Bechtel
Charles J. Breidinger
Walter E. Daller, Jr.
Mark Fegley
Richard A. Koch
Walter E. Kruczek
Freddie J. Lesher
Thomas S. McCready - Chairman
Thomas D. Oleksa
Joseph Porvaznik - emeritus
Carol J. Simcoe
Charles W. Stopp
Demetra Takes
Joseph J. Velitsky
Advisory Board of Directors for the
Slatington Area
-----------------------------------
Joseph G. Bechtel
Francis P. Burbidge
Charles J. Breidinger
Henry A. Galio
Carol J. Simcoe
Charles W. Stopp
Thomas D. Oleksa
Francis P. Burbidge, President and Chief Executive Officer of The Citizens
National Bank of Slatington and a Director of Northern Lehigh, has entered into
an Executive Employment Agreement and a Consulting Agreement with The Citizens
National Bank of Lansford. These contracts provide compensation to Mr. Burbidge
and are provided to maintain Mr. Burbidge's involvement in the Citizens National
Bank after the merger is completed. For a description of these contracts, see
"APPROVAL OF THE MERGER--Interests of Certain Persons in the Merger and
- --Management and Operations Following the Merger."
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<PAGE>
Adjournment of the Meeting
If not enough votes are voted to approve the merger, the Northern Lehigh
Board of Directors intends to postpone or adjourn the meeting to a later date to
permit additional affirmative votes to be obtained. The affirmative vote of a
majority of the shares is required to approve an adjournment. The Northern
Lehigh Board of Directors recommends that shareholders vote "FOR" the proposal
to adjourn the meeting, if necessary, to permit additional votes to be obtained
to approve the agreement.
Opinion of Financial Advisor
The Northern Lehigh Board of Directors asked Hopper Soliday & Co., Inc.,
its investment banking firm located at 1703 Oregon Pike, Lancaster, Pennsylvania
17601, to provide investment banking services in the merger. These services
included providing an opinion that the value of the Harleysville National
Corporation common stock to be received by the Northern Lehigh shareholders in
the merger is fair, from a financial point of view. Hopper Soliday negotiated
the financial terms to be received by Northern Lehigh's shareholders in the
transaction, on behalf of Northern Lehigh's Board of Directors. Your Board of
Directors considered and approved the terms of the merger, including the
financial terms. Hopper Soliday did not approve the financial or other terms of
the merger. In writing its opinion Hopper Soliday considered various factors,
including Northern Lehigh's and Harleysville National Corporation's operating
results, current financial condition and perceived future prospects. We
recommend that you read the Hopper Soliday opinion, which is attached to this
proxy statement/prospectus as Annex B. You should read the opinion in its
entirety and pay particular attention to the assumptions made and other matters
considered by Hopper Soliday in rendering its opinion. See "APPROVAL OF THE
MERGER--Opinion of Financial Advisor."
Recommendation of the Board of Directors
Your Northern Lehigh Board of Directors believes that the merger is in the
best interests of you and all shareholders. We recommend that the shareholders
vote "FOR" approval of the merger.
END OF SUMMARY
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FORWARD LOOKING STATEMENTS
This proxy statement/prospectus contains and incorporates certain
statements that constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include certain statements regarding intent, belief or current
expectations about matters (including statements as to "beliefs,"
"expectations," "anticipations," "intentions" or similar words). Forward-looking
statements are also statements that are not statements of historical fact.
Forward-looking statements are subject to risks, uncertainties and assumptions.
These include:
* trends for the continued growth of the business of Harleysville
National Corporation and Northern Lehigh;
* the realization of anticipated revenues, profitability and cost
savings of the combined companies; and
* other risks and uncertainties.
If one or more of these risks or uncertainties occurs or if the underlying
assumptions prove incorrect, actual results, performance or achievements in 1999
and beyond could differ materially from those expressed in, or implied by, the
forward-looking statements.
COMPARATIVE PER SHARE DATA
General
The following table contains selected combined and equivalent per share
data for each of Harleysville National Corporation and Northern Lehigh on a
historical basis, and selected unaudited pro forma comparative per share data
assuming the transaction had been consummated as of the beginning of the
earliest period presented for earnings per share and dividends per share and as
of the end of the period presented for book value per share. The information
shows how a share of Northern Lehigh stock that you hold would have participated
in the income from continuing operations, cash dividends and book value or
Harleysville National Corporation if the merger had been complete in 1997. The
pro forma data is not necessarily indicative of results that would have been
achieved had the transaction been consummated on such date and should not be
construed as representative of future operations. The information presented
should be read in conjunction with the historical consolidated financial
statements, and notes to the financial statements, of Harleysville National
Corporation and Northern Lehigh incorporated by reference or appearing elsewhere
in this proxy statement/prospectus.
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<TABLE>
SELECTED HISTORICAL, PRO FORMA
COMBINED AND EQUIVALENT PER SHARE
DATA
<CAPTION>
As of and for the Nine
Months Ended As of and for the
September 30, Years Ended December 31,
--------------------- -------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Harleysville National
Corporation 1998 1997 1997 1996 1995 1994 1993
(HNC) ---- ---- ---- ---- ---- ---- ----
- ---------------------
Historical Per Common Share
Average Shares Outstanding:
Basic 7,026,556 7,000,120 7,005,184 6,993,535 6,949,275 6,789,795 6,533,976
Diluted 7,027,038 7,006,084 7,012,279 7,017,402 6,983,099 6,948,892 6,654,600
Book Value 17.15 15.23 15.64 14.67 13.67 11.57 11.58
Cash Dividends 0.73 0.65 0.91 0.80 0.71 0.55 0.45
Income from Operations
Basic 1.97 1.79 2.38 2.06 1.79 1.66 1.49
Diluted 1.97 1.79 2.38 2.06 1.78 1.62 1.46
HNC, NLB Combined Pro Forma
Per Common Share:(*)
Average Shares Outstanding
Basic 7,524,564 7,489,321 7,505,023 7,498,147 7,461,888 7,302,847 7,047,028
Diluted 7,533,971 7,501,322 7,517,520 7,525,720 7,498,589 7,463,868 7,168,655
Book Value 17.12 15.24 15.65 14.73 13.29 11.63 11.00
Cash Dividends 0.71 0.63 0.88 0.77 0.68 0.52 0.43
Income from Operations
Basic 1.93 1.77 2.35 2.04 1.79 1.63 1.40
Diluted 1.93 1.77 2.35 2.03 1.78 1.59 1.38
(*) 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 NLB Common Stock will be exchanged for 3.57
shares of HNC Common Stock.
-10-
<PAGE>
As of and for the Nine
Months Ended As of and for the
September 30, Years Ended December 31,
--------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Northern Lehigh Bancorp, Inc.
(NLB) 1998 1997 1997 1996 1995 1994 1993
- ----------------------------- ---- ---- ---- ---- ---- ---- ----
Historical Per Common Share
Average Shares Outstanding:
Basic 139,498 137,031 140,011 141,348 143,589 143,712 143,712
Diluted 141,998 138,722 141,524 142,386 144,395 144,251 143,993
Book Value 60.08 54.95 56.30 55.66 50.50 43.57 40.42
Cash Dividends 1.32 1.11 1.51 1.17 0.90 0.78 0.68
Income from Operations
Basic 5.06 5.41 7.00 6.08 6.48 4.25 3.21
Diluted 4.97 5.34 6.93 6.03 6.45 4.23 3.20
HNC, NLB Combined Pro Forma
Equivalent Per Common Share:(*)
Book Value 61.14 54.41 55.86 52.57 47.45 41.52 39.27
Cash Dividends 2.52 2.24 3.13 2.74 2.41 1.86 1.53
Income from Operations
Primary 6.91 6.33 8.39 7.27 6.39 5.81 5.01
Fully Diluted 6.90 6.31 8.38 7.24 6.36 5.69 4.93
</TABLE>
(*) 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 NLB Common Stock will be exchanged for 3.57
shares of HNC Common Stock.
-11-
<PAGE>
Market Value of Securities
The comparative stock price information included in this section shows
that, if the merger had taken place on July 27, 1998, the value of a share of
Northern Lehigh common stock would have been approximately $150.00 rather than
the bid price of $57.75 on July 27. On July 27, 1998, the last trading date
before public announcement of the agreement and related merger, the per share
closing bid and asked quotations for Harleysville National Corporation common
stock were $42.00 and $42.63, respectively, as reported on the Nasdaq. The pro
forma equivalent per share closing bid and asked quotations for that date, based
on the exchange ratio of 3.57 shares of Harleysville National Corporation common
stock for each share of Northern Lehigh's common stock are $149.94 and $152.19,
respectively.
The most recent sale of Northern Lehigh common stock before public
announcement of the agreement and related merger was a trade of 900 shares at
$56.00 per share on May 19, 1998. The Northern Lehigh common stock has
historically traded on a limited basis in the over-the-counter market, and is
quoted and transactions are reported on the OTC Bulletin Board and in privately
negotiated transactions.
<TABLE>
Comparative Stock Prices
(as of July 27, 1998)
<CAPTION>
Pro Forma
Historical Price Equivalent Price
Per Share Per Share
---------------- ----------------
<S> <C> <C>
Harleysville National Corporation Common Stock
July 27, 1998 Bid $ 42.00 $ N/A
July 27, 1998 Asked $ 42.63 $ N/A
Northern Lehigh Common Stock
July 27, 1998 Bid $ 57.75 $ 149.94
July 27, 1998 Asked None $ 152.19
</TABLE>
-12-
<PAGE>
SELECTED FINANCIAL DATA AND
PRO FORMA INFORMATION
We provide the following financial information to aid you in your analysis
of the financial aspects of the merger. These tables contain certain selected
historical consolidated and pro forma summary financial data, for the periods
and as of the dates indicated, for Harleysville National Corporation and for
Northern Lehigh. This data is derived from and should be read in conjunction
with, and is qualified by the consolidated financial statements of Harleysville
National Corporation and of Northern Lehigh, including the notes to those
financial statements, incorporated by reference or appearing elsewhere in this
proxy statement/prospectus. Interim unaudited data for the nine month periods
ended September 30, 1998, and 1997 reflects, in the opinion of Harleysville
National Corporation 's and Northern Lehigh's respective managements, all
adjustments necessary for a fair presentation of the data. Results for the
periods ended September 30, 1998, and 1997 are not necessarily indicative of
results that may be expected for any other periods or for the fiscal years as a
whole. In addition, the pro forma data is not necessarily indicative of results
that would have been achieved had the transaction been consummated and should
not be construed as representative of future operations.
-13-
<PAGE>
<TABLE>
HARLEYSVILLE NATIONAL CORPORATION
Selected Financial Data
(In Thousands)
<CAPTION>
As of and for the Nine Months As of and for the
Ended September 30, Years Ended December 31,
----------------------------- ------------------------------------------
(unaudited)
1998 1997 1997 1996 1995 1994 1993
----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations:
- ---------------------
Total Interest Income $ 64,720 $ 59,617 $ 80,202 $ 73,718 $ 68,491 $ 58,381 $ 53,980
Net Interest Income 36,998 34,568 46,351 42,842 39,707 37,280 32,748
Provision for Loan Losses 1,605 1,670 2,500 2,082 2,172 2,665 3,085
--------- --------- -------- -------- -------- -------- --------
Net Interest After Provision
for Loan Losses 35,393 32,898 43,851 40,760 37,535 34,615 29,663
Other Operating Income 6,929 5,167 7,391 5,115 4,437 4,746 4,963
Other Operating Expenses 23,764 20,886 28,529 25,874 24,267 23,314 21,436
--------- --------- -------- -------- -------- ------- --------
Income Before Income Taxes 18,558 17,179 22,713 20,001 17,705 16,047 13,190
Income Taxes 4,709 4,651 6,051 5,593 5,277 4,767 3,753
--------- --------- -------- -------- -------- ------- --------
Income From Continuing
Operations $ 13,849 $ 12,528 $ 16,662 $ 14,408 $ 12,428 $ 11,280 $ 9,437
Average Balance Sheet Totals:
- ----------------------------
Total Assets $ 1,181,448 $ 1,064,764 $ 1,075,702 $ 978,899 $894,350 $829,241 $776,419
Investment Securities and
Money Market Investments 361,796 309,616 314,340 277,432 241,352 246,670 257,924
Loans and Leases (Net of
Unearned Income) 769,286 699,028 706,643 652,157 607,335 540,030 472,319
Deposits 958,340 866,070 878,166 821,387 761,089 738,029 697,993
Borrowings 83,843 74,313 71,034 46,813 37,067 8,348 2,372
Shareholders' Equity 114,855 102,144 103,807 91,687 81,788 74,234 66,355
Period End:
- ----------
Total Assets $ 1,260,619 $ 1,098,488 $ 1,116,254 $1,026,128 $937,345 $862,669 $816,314
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
NORTHERN LEHIGH BANCORP, INC.
Selected Financial Data
(In Thousands)
As of and for the Nine Months As of and for the
Ended September 30, Years Ended December 31,
----------------------------- -----------------------
(unaudited)
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations:
- ----------------------
Total Interest Income $ 4,369 $ 4,140 $ 5,625 $ 5,208 $ 5,009 $ 4,500 $ 4,150
Net Interest Income 2,586 2,495 3,390 3,073 2,989 2,710 2,316
Provision for Loan Losses 75 60 90 115 70 - 108
------- ------- ------- ------- ------- ------- ------
Net Interest After Provision
for Loan Losses 2,511 2,435 3,300 2,958 2,919 2,710 2,208
Other Operating Income 196 183 200 196 300 121 149
Other Operating Expenses 1,687 1,556 2,097 1,968 1,919 1,953 1,692
------- ------- ------- ------- ------- ------- -------
Income Before Income Taxes 1,020 1,062 1,403 1,186 1,300 878 665
Income Taxes 314 321 423 327 369 268 204
------- ------- ------- ------- ------- ------- -------
Income From Continuing
Operations $ 706 $ 741 $ 980 $ 859 $ 931 $ 610 $ 461
Average Balance Sheet Totals:
- ----------------------------
Total Assets $ 74,122 $70,113 $70,871 $68,016 $64,718 $63,508 $59,142
Investment Securities and
Money Market Investments 12,808 10,381 11,000 12,691 16,501 19,588 17,146
Loans and Leases (Net of
Unearned Income) 57,849 56,225 56,357 51,875 44,620 40,211 38,405
Deposits 65,174 61,896 62,572 60,472 57,906 57,400 53,418
Borrowings - 45 33 1 17 1 -
Long-term Debt and Lease
Obligations - - - - - - -
Shareholders' Equity 8,125 7,411 7,499 6,828 6,138 5,549 5,090
Period End:
- -----------
Total Assets $ 77,262 $72,538 $72,013 $69,839 $68,514 $64,017 $62,165
</TABLE>
-15-
<TABLE>
SELECTED PRO FORMA COMBINED
(In Thousands)
September 30, 1998
<CAPTION>
Harleysville Northern
National Lehigh Pro Forma
Corporation Bancorp, Inc. Adjustments Combined
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Average Balance Sheet Totals:
Total Assets $ 1,181,448 $ 74,122 $ - $ 1,255,570
Investment Securities and
Money Market Investments 361,796 12,808 - 374,604
Loans and Leases (Net of
Unearned Income) 769,286 57,849 - 827,135
Total Deposits 958,340 65,174 - 1,023,514
Borrowings 83,843 - - 83,843
Long-term Debt and Lease
Obligations - - - -
Shareholders' Equity 114,855 8,125 - 122,980
Total Assets $ 1,260,619 $ 77,262 $ - $ 1,337,881
</TABLE>
<TABLE>
<CAPTION>
As of and for the Nine Months As of and for the
Ended September 30, Years Ended December 31,
----------------------------- ------------------------
(unaudited)
1998 1997 1997 1996 1995 1994 1993
---- ------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations:
- ---------------------
Total Interest Income $ 69,089 $ 63,757 $ 85,827 $ 78,926 $ 73,500 $ 62,881 $ 58,130
Net Interest Income 39,584 37,063 49,741 45,915 42,696 39,990 35,064
Provision for Loan Losses 1,680 1,730 2,590 2,197 2,242 2,665 3,193
-------- -------- -------- -------- -------- -------- --------
Net Interest After Provision
for Loan Losses 37,904 35,333 47,151 43,718 40,454 37,325 31,871
Other Operating Income 7,125 5,350 7,591 5,311 4,737 4,867 5,112
Other Operating Expenses 25,451 22,442 30,626 27,842 26,186 25,267 23,128
-------- -------- -------- -------- -------- -------- --------
Income Before Income Taxes 19,578 18,241 24,116 21,187 19,005 16,925 13,855
Income Taxes 5,023 4,972 6,474 5,920 5,646 5,035 3,957
-------- -------- -------- -------- -------- -------- --------
Income From Continuing
Operations $ 14,555 $ 13,269 $ 17,642 $ 15,267 $ 13,359 $ 11,890 $ 9,898
</TABLE>
-16-
<PAGE>
THE MEETING
General
The Board of Directors of Northern Lehigh provides this proxy
statement/prospectus to Northern Lehigh's shareholders for a meeting that will
be held at 510 Main Street, (next to The Citizens National Bank of Slatington's
Main Office), Slatington, Pennsylvania 18080 on Thursday, January 14,1999, at
1:00 p.m.
At the meeting, Northern Lehigh's stockholders will consider and vote on :
* the approval and adoption of the agreement that provides for the
merger;
* the approval of the adjournment or postponement of the meeting, in the
event there are not enough votes to approve the agreement and merger;
and
* other matters that properly come before the meeting or any
adjournments of the meeting.
Northern Lehigh will merge with Harleysville National Corporation North.
When the merger is completed Northern Lehigh will cease to exist and Northern
Lehigh's shareholders will receive 3.57 shares of Harleysville National
Corporation common stock in exchange for each share of Northern Lehigh common
stock that they hold. Harleysville National Corporation North, the combined
entity, will continue business as a subsidiary of Harleysville National
Corporation. A vote for approval of the agreement is a vote for approval of the
merger of Northern Lehigh into Harleysville National Corporation North and for
the exchange of Northern Lehigh common stock for Harleysville National
Corporation common stock.
To complete the merger, at least 66 2/3% of the outstanding shares of
Northern Lehigh Bancorp, Inc. must vote to approve the merger.
Voting, Revocation and Solicitation of Proxies
At least a majority of the total number of shares of Northern Lehigh common
stock outstanding on November 16, 1998 is required for a quorum at the meeting.
These shares may be represented by a shareholder in person or by completing and
returning the enclosed proxy. As of November 16, 1998, there were 139,498 shares
of Northern Lehigh common stock outstanding and entitled to vote. If you execute
a proxy, you can revoke it at any time until after the vote on the merger.
Unless revoked, shares represented by proxies will be voted at the meeting and
at all adjournments or postponements of the meeting. Your attendance at the
meeting, will not revoke your proxy. Proxies may be revoked by:
* delivery of a notice of revocation or of a later-dated proxy to Andrea
M. Beltz, Secretary, Northern Lehigh Bancorp, Inc., 502 Main Street,
Slatington, Pennsylvania 18080; or
-17-
<PAGE>
* your attendance at the meeting and your notification to the person in
charge of the meeting that you wish to vote your shares in person.
If a quorum is not present at the beginning of the meeting, the Board of
Directors of Northern Lehigh intends to adjourn the meeting to another place and
time without further notice to the shareholders. If for any other reason
Northern Lehigh believes additional time should be allowed to obtain proxies,
Northern Lehigh may adjourn the meeting with a vote of a majority of the shares
outstanding. If Northern Lehigh proposes to adjourn the meeting, the persons
named in the enclosed proxy will vote all shares for which they have voting
authority in favor of the adjournment. A proxy that withholds authority or that
is voted against the merger will not be voted in favor of any adjournment or
postponement of the meeting.
The proxyholders will vote signed and returned proxies as instructed by the
shareholders. If no instructions are indicated, the proxyholders will vote the
proxies in favor of the merger and in favor of adjournment, if necessary. A
proxy also gives the persons named as proxyholders the right to vote on other
matters incidental to the conduct of the meeting. Although the Board of
Directors knows of no other business to be presented at the meeting, if any
other matters are properly brought before the meeting, any proxy given by you
will be voted in accordance with the recommendations of the management of
Northern Lehigh. Proxies marked as abstentions will not be counted as votes
cast. Shares held by brokerage companies or in street name that have been
designated by brokers on proxy cards as not voted will not be counted as votes
cast. Proxies marked as abstentions or as broker no-votes:
* will be treated as shares present for purposes of determining whether
a quorum is present; and
* will have the same effect as a vote against the merger.
In connection with the solicitation of proxies, Northern Lehigh will:
* bear the cost of soliciting proxies;
* reimburse brokerage firms and other custodians, nominees and
fiduciaries for their reasonable expenses; and
* may, if they so decide, solicit proxies personally or by telegraph or
telephone.
Voting Securities and Securities Ownership
Only those shareholders whose ownership appears on the shareholder record
of Northern Lehigh Bancorp, Inc. as of the close of business on November 16,
1998, are entitled to vote at the meeting. Each share of Northern Lehigh common
stock is entitled to one vote. On November 16, 1998, there were 139,498 shares
of Northern Lehigh common stock outstanding. Common stock is the only issued and
outstanding class of stock of Northern Lehigh. Northern Lehigh's Board of
Directors is not aware of any individual, entity or group that owns more than
10% of the Northern Lehigh common stock.
-18-
<PAGE>
The table below shows the amount and percentage of Northern Lehigh common
stock beneficially owned by each executive officer, each director, and all
executive officers and directors of Northern Lehigh as a group as of September
30, 1998. All shares are individually owned unless otherwise indicated.
Share Ownership
---------------
Shares of Northern Lehigh
Common Stock Percent of
Beneficially Owned Shares
Name of Director September 30, 1998(1) Outstanding
----------------- --------------------- ------------
Joseph G. Bechtel 6,236(2) 4.4702%
Charles J. Breidinger 467(3) .3346%
Francis P. Burbidge 5,118(4) 3.6688%
Henry A. Galio 11,259(5) 8.0710%
Carol J. Simcoe 1,309 .9383%
Charles W. Stopp 1,453(6) 1.0413%
All directors and executive
officers as a group (8 persons) 27,674(7) 19.8382%
_______________________________
(1) The Securities "beneficially owned" are determined in accordance with the
definitions of "beneficial ownership" as set forth in the regulations of
the Commission 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 September 30, 1998. Beneficial
ownership may be disclaimed as to certain of the securities.
(2) Includes 1,236 shares owned individually by Mr. Bechtel; and 5,000 shares
owned individually by his spouse.
(3) Includes 121 shares owned jointly by Mr. Breidinger and his spouse; and 27
shares owned individually by his spouse; 110 shares owned individually, and
209 shares owned under a SEP/IRA Agreement, Jacqueline Breidinger, Trustee.
(4) Includes options to acquire 5,000 shares of Northern Lehigh common stock
granted to Mr. Burbidge under the terms of his Employment Agreement with
Northern Lehigh .
(5) Includes 8,373 shares owned individually by Mr. Galio; and 2,886 shares
owned jointly with his spouse.
(6) Includes 110 shares owned individually by Mr. Stopp; 220 shares owned
individually by his spouse; 925 shares owned jointly with his spouse; 49
shares owned under an IRA Trust Agreement for his spouse; and 49 shares
owned under an IRA Trust Agreement for Mr. Stopp. Also includes 50 shares
in PUTMA Account for David Stopp and 50 shares in PUTMA Account for Peter
Stopp.
(7) Includes six (6) directors and Stephanie L. Phillips, Senior Vice President
and Chief Loan Officer and Leon Rodenbach, Senior Vice President and Chief
Operations Officer.
-19-
<PAGE>
Interests of Certain Persons in Matters to be Voted Upon
Except as described in this proxy statement/prospectus, the directors and
executive officers of Northern Lehigh have no substantial interest in the
proposed merger, other than in their capacity as shareholders of Northern
Lehigh. As shareholders, the directors and executive officers are entitled to
receive Harleysville National Corporation stock in exchange for their Northern
Lehigh common stock on the same terms and conditions as all other shareholders
of Northern Lehigh. See "APPROVAL OF THE MERGER--Terms of the Merger,
- --Interests of Certain Persons in the Merger and -- Management and Operations
Following the Merger."
The directors and officers of Harleysville National Corporation and its
subsidiaries have no special interest in the merger, other than in their
capacity as shareholders of Harleysville National Corporation. The directors and
officers Harleysville National Corporation and its subsidiaries will not receive
any special consideration or compensation in connection with the completion of
the merger.
APPROVAL OF THE MERGER
In this section of the proxy statement/prospectus we describe the material
terms and provisions of the proposed merger. A copy of the agreement that
provides for the merger is attached to this proxy statement/prospectus as Annex
A. This is only a discussion of certain terms of the merger and is qualified in
its entirety by reference to the full text of the agreement. We urge all
shareholders to read the agreement.
The agreement provides that:
* Northern Lehigh will be merged into Harleysville National Corporation
North, Inc.;
* The Citizens National Bank of Slatington will merge into The Citizens
National Bank of Lansford; and
* You, as a shareholder of Northern Lehigh will receive 3.57 shares of
Harleysville National Corporation common stock for each share of
Northern Lehigh that you own when the merger is complete.
Northern Lehigh Bancorp, Inc. and The Citizens National Bank of Slatington
each will cease to exist. Harleysville National Corporation North, Inc., after
its merger with Northern Lehigh, will remain as a subsidiary of Harleysville
National Corporation. The Citizens National Bank of Lansford, will be the
surviving institution and will be a second-tier subsidiary of Harleysville
National Corporation. The name of The Citizens National Bank of Lansford, after
the merger with The Citizens National Bank of Slatington, will be changed to
"Citizens National Bank." This name is subject to necessary regulatory approval.
The surviving bank will be regulated by the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation.
-20-
<PAGE>
The Board of Directors of Northern Lehigh has unanimously approved and
adopted the agreement and the merger and believes the merger is in the best
interests of the shareholders of Northern Lehigh Bancorp, Inc. The Board of
Directors of Northern Lehigh unanimously recommends that shareholders vote "FOR"
the following resolutions that will be presented at the meeting:
RESOLVED, that the Agreement and Plan of Reorganization dated as of
July 28, 1998, by and among Harleysville National Corporation, Harleysville
National Corporation North, Inc., The Citizens National Bank of Lansford,
Northern Lehigh Bancorp, Inc. and The Citizens National Bank of Slatington
(the "Agreement"), 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 Northern Lehigh Bancorp, Inc. with
and into Harleysville National Corporation North, Inc., and for the merger
of The Citizens National Bank of Slatington into The Citizens National Bank
of Lansford, a national banking association and a subsidiary of
Harleysville National Corporation North, Inc., and providing that each
outstanding share of the common stock of Northern Lehigh Bancorp, Inc.
shall be converted into the right to receive 3.57 shares of Harleysville
National Corporation common stock, par value $1.00 per share, in accordance
with the terms of the Agreement, is hereby approved, adopted, ratified and
confirmed by the shareholders of Northern Lehigh Bancorp, Inc.; and
BE IT FURTHER RESOLVED, that the proper officers and directors of
Northern Lehigh Bancorp, Inc. are hereby authorized, empowered, directed
and ordered, in the name and on behalf of Northern Lehigh Bancorp, Inc., to
execute all such documents and take all such other actions, as they, in
their discretion, may in their discretion deem necessary, appropriate or
desirable to carry out the intent and the purposes contemplated by the
Agreement and the foregoing resolution.
Background of the Merger, Reasons and Recommendation of the Board of Directors
Background
Northern Lehigh's Board of Directors for several years as part of its
long-range planning practices, periodically reviewed and evaluated various
strategic options and available alternatives to maximize the economic benefits
for Northern Lehigh and its shareholders. This review and evaluation included a
possible merger. The Board has considered the merits of maintaining Northern
Lehigh's independence, Northern Lehigh combining with a smaller or similar size
bank or holding company, or merging Northern Lehigh with a larger community or
regional financial institution. This long-range plan was done annually in light
of current economic, financial and regulatory conditions and their impact and
likely future ramifications for Northern Lehigh specifically and the local
financial services industry.
After careful analysis, and based on expert advice, the Board concluded
that in today's financial services industry environment Northern Lehigh could
compete more effectively in its
-21-
<PAGE>
market area as part of a larger financial institution (which offered Northern
Lehigh, its customers, community and employees certain benefits) because
Northern Lehigh would be better able to provide larger financial accommodations
and additional financial services and products to its customers.
During its planning and merger analysis, the Board kept clearly in mind the
possible increase in the value and liquidity of the stock held by Northern
Lehigh's shareholders which would come from arranging a merger in which Northern
Lehigh's shareholders would obtain a more widely publicly-traded stock in a
larger community bank holding company. In addition, during its deliberations,
the Board also was aware of the economic effect that a merger could have on the
community of Slatington, Pennsylvania and its geographic contiguous area. The
economic and social ramifications of a merger on Northern Lehigh's officers,
employees and customers were also of concern to the Northern Lehigh Board of
Directors during their merger analysis.
Thus, Northern Lehigh's Board considered whether in a merger transaction it
would be possible to reasonably assure that, for the foreseeable future, The
Citizens National Bank of Slatington's banking offices would continue to be open
and that the Slatington community and surrounding geographic area would be able
to continue to obtain at least similar or improved banking and financial
services, the directors, officers and employees would continue to be employed
and, if possible, that the "Citizens National Bank" name and tradition of
community bank service which The Citizens National Bank of Slatington began at
the turn of the century would continue into the next century. It was with the
foregoing considerations in mind that the Northern Lehigh Board of Directors
examined all possible alternatives and the Harleysville National Corporation
merger proposal.
The Board retained Hopper Soliday, as its investment banker, to aid the
Northern Lehigh Board of Directors in its examination and evaluation of possible
merger transactions and, if appropriate, take a leading role in the discussions
with each potential merger participant and, in certain circumstances, the merger
negotiations.
For the reasons outlined below, the Board unanimously agreed to recommend
the Harleysville National Corporation merger transaction for shareholder
approval. The Board of Directors has received an opinion from Hopper Soliday to
the effect that the terms of the agreement with Harleysville National
Corporation are fair to the shareholders of Northern Lehigh from a financial
point of view. See "APPROVAL OF THE MERGER--Opinion of Financial Advisor."
The Board's Determination About the Merger
While examining the Harleysville National Corporation proposal to merge
with Northern Lehigh, the Northern Lehigh Board of Directors determined that:
-22-
<PAGE>
* the Harleysville National Corporation operating culture would be
consistent and helpful to the continued growth of The Citizens
National Bank of Slatington's community banking opportunities;
* the respective business management philosophies of Northern Lehigh and
Harleysville National Corporation were compatible;
* the Harleysville National Corporation branch bank locations and
employment opportunities, due to the lack of necessity for branch
consolidation and lack of substantial administrative job overlap,
would be very attractive for The Citizens National Bank of
Slatington's employees;
* the significant additional resources that Harleysville National
Corporation would bring to face the competitive environment in the
financial markets currently served by The Citizens National Bank of
Slatington would generally be beneficial to the Northern Lehigh
customers, staff and community;
* Harleysville National Corporation could provide more comprehensive
financial services to the markets currently served by The Citizens
National Bank of Slatington;
* projected social and economic benefits would accrue to Northern Lehigh
its shareholders and other corporate constituencies, including
employees, suppliers and customers in the communities in which
Northern Lehigh does business; and
* the terms of the proposed merger compare favorably to the financial
terms of other recent business combinations in the local financial
services industry.
In addition, the Northern Lehigh Board of Directors determined that
Harleysville National Corporation had a history of successful acquisitions, an
operating culture that is similar to Northern Lehigh's and that Harleysville
National Corporation's subsidiaries, branches and business operations are
located in a geographic area of significant potential growth.
In evaluating the proposed merger, the Northern Lehigh Board of Directors,
from the Northern Lehigh's shareholders' viewpoint, considered a variety of
financial factors, including:
* the consideration being offered to Northern Lehigh's shareholders in
relation to the market value, book value, earnings per share,
projected earnings per share of Northern Lehigh and projected
increased dividends;
* that the consideration to be received by Northern Lehigh's
shareholders reflects a premium over the values at which Northern
Lehigh common stock has traded in the market;
* the quality of a financial investment in and the liquidity of
Harleysville National Corporation common stock; and
* the current operations, financial condition and future prospects of
Harleysville National Corporation and Northern Lehigh.
In examining whether to enter into the merger, the Board of Directors also
considered, among other things, the financial terms of the transaction, the
structure of the transaction, the historic and financial performance of
Harleysville National Corporation , the commitment of
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Harleysville National Corporation to the communities its subsidiaries serve, the
culture of Harleysville National Corporation, and the opinion of Northern
Lehigh's investment banker as to the fairness of the transaction, from a
financial point of view, to Northern Lehigh's shareholders.
In addition to the benefits outlined above, the Board of Directors of
Northern Lehigh also determined that Harleysville National Corporation would be
an attractive partner for certain additional reasons. The transaction would:
* provide Northern Lehigh with additional management and support systems
that will better enable Northern Lehigh to adapt its operations to the
rapidly changing legal and competitive conditions within the banking
industry;
* permit Harleysville National Corporation to share with Northern
Lehigh, a strong commitment to the concept of community-oriented
banking; and
* will enable Northern Lehigh's banking offices to offer customers an
expanded range of products and services.
For example, following the merger, Northern Lehigh's offices will be able
to provide new and expanded banking services to its customers that are provided
currently by The Citizens National Bank of Lansford. The Citizens National Bank
of Lansford has offered some innovative products to its marketplace. These
products can be easily transferred and implemented, with some modifications for
competitive pricing, into Northern Lehigh's 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 a better understanding of banking for students.
Another program offered by The Citizens National Bank of Lansford that
would benefit Northern Lehigh's 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.
In addition, the "Choice Cash" line of credit is another product that will
be of great benefit to Northern Lehigh's market. This line of credit can be
linked to a checking account affording customers the convenience of worry free
overdraft protection. No overdraft fees are incurred when using this product.
The customer makes a monthly payment on his or her line or pays the outstanding
balance, in full, at any time.
The Citizens National Bank of Slatington branches will also offer a 30-year
fixed rate mortgage product. Unlike the 3-5 year demand notes, the 30-year fixed
rate mortgage provides the opportunity to lock in a competitive interest rate
that remains the same over the entire term of the mortgage. This will be
advantageous to the many consumers in The Citizens National Bank
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of Slatington's market area who plan to remain in their homes for an indefinite
period and who desire a fixed monthly payment.
The Citizens National Bank of Lansford has a wide range of deposit and loan
products that could accommodate Northern Lehigh's customers' borrowing needs.
Lending could be expanded in Northern Lehigh's marketplace by adding more
competitive and additional products that will benefit Northern Lehigh's
community and its citizens. The Citizens National Bank of Lansford's experienced
management and greater financial resources are expected to provide a benefit.
For example, Northern Lehigh will be able to entertain more small to medium size
business loans. Thus, the transaction will enhance the ability of Northern
Lehigh's offices to remain competitive and to satisfy their customers' financial
needs.
The proposed transaction will benefit Harleysville National Corporation by
strengthening its market presence in Lehigh County, Pennsylvania, thereby
improving its ability to compete in that region.
Northern Lehigh's Board of Directors believes the proposed merger
represents an attractive opportunity to acquire access to the additional
managerial expertise and specialized services offered by Harleysville National
Corporation and its banking subsidiary, The Citizens National Bank of Lansford.
This will permit Northern Lehigh's banking offices to provide a broader range of
services to their customers in the face of increasing competition from larger
financial institutions.
As we discuss in "Management and Operations Following the Merger," Northern
Lehigh's offices will continue to employ and be administered by knowledgeable
local residents for the benefit of the local community.
In light of the careful analysis by the Board, and with the assistance
during the negotiations of Hopper Soliday, its investment banker, the Northern
Lehigh Board was able to negotiate the agreement to help assure that:
* the value and liquidity of the Northern Lehigh shareholders'
investment will increase;
* The Citizens National Bank of Slatington will continue to have a local
identity in Slatington;
* the current employees of The Citizens National Bank of Slatington's
may continue their employment;
* the service of Northern Lehigh's directors will continue for the near
future;
* the structure of The Citizens National Bank of Slatington's banking
offices, after the merger, will provide advantageous financial service
to the community and to the customers of The Citizens National Bank of
Slatington; and
* new products and services will be available to customers.
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For example, after the merger, trust services will be available to The Citizens
National Bank of Slatington's customers, and the merger will lead to greater
financial resources to serve the lending and deposit needs of the local
communities presently served by Northern Lehigh.
Northern Lehigh's Board believes that the surviving bank can expand its
resources and its range of products and services on an accelerated timetable as
compared to The Citizens National Bank of Slatington when relying on internal
growth. In general, Northern Lehigh is entering into the transaction because it
believes it can better maximize its shareholders' long-term return through an
affiliation with a larger, more diversified community financial institution.
Northern Lehigh's Board of Directors believed that Harleysville National
Corporation's greater resources would enable The Citizens National Bank of
Slatington to offer expanded services to its customers and the communities it
serves. In addition, the transaction with Harleysville National Corporation
would increase the liquidity of the stock held by Northern Lehigh's shareholders
by exchanging it for stock in a larger banking organization that is quoted and
traded on the Nasdaq National Market System.
In summary, the primary reasons that the Board has agreed to the merger
with Northern Lehigh is that, as outlined above, in the opinion of the Board,
the merger provides a fair financial return to Northern Lehigh's shareholders
and increases the liquidity of their stock while maintaining, to the extent
possible, the local identity for The Citizens National Bank of Slatington to
serve the community, and The Citizens National Bank of Slatington's customers,
employees and other constituencies. The Board concluded that the merger will
better permit in a rapidly changing, increasingly competitive market for
financial services, Northern Lehigh to compete more effectively as a part of a
larger banking organization with more resources and a wider range of products
and services than those that Northern Lehigh currently offers or in the
immediate future could offer, and that Harleysville National Corporation had a
community banking orientation, continued the name recognition of "The Citizens
National Bank" and a continued presence in the local banking market of Northern
Lehigh.
Additional Reasons for the Merger
In addition to the considerations related directly to 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. Recent changes in federal banking laws have significantly increased the
severity and complexity of federal banking regulations as well as the costs the
banks must incur in complying with those regulations. In response to these
changes, many mergers and consolidations involving banks and bank holding
companies have occurred to provide the capital and depth of management necessary
to comply with the numerous complex laws and regulations applicable to bank
holding companies. 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.
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The factors discussed above and elsewhere in this proxy
statement/prospectus are believed to all of the material factors considered by
the Northern Lehigh Board of Directors in evaluating the transaction. In view of
the wide variety of material factors considered in connection with its
evaluation of the transaction, the Northern Lehigh Board did not find it
practical to, and did not, quantify or otherwise attempt to assign any relative
weight to the various factors considered, except, however, that liquidity and
the size and attributes of Harleysville National Corporation were determined by
the Board to be significant factors. In addition, individual Northern Lehigh
directors may have given differing weights to different factors. There can be no
assurance that any of the potential opportunities considered by the Board will
be achieved through consummation of the transaction.
As stated above, Hopper Soliday has advised the Board of Directors that the
terms of the agreement are fair to Northern Lehigh's shareholders from a
financial point of view. As noted above, the Northern Lehigh Board of Directors
expects that the proposed transaction will benefit the shareholders of Northern
Lehigh by providing them with equity ownership in a larger, publicly-traded
banking organization and, thereby, increasing the liquidity of their investment.
Historically, Northern Lehigh common stock has been traded on a limited basis in
the over-the-counter market and is quoted and transactions are reported on the
OTC Bulletin Board and in privately negotiated transactions. After the merger,
the shareholders of Northern Lehigh will receive Harleysville National
Corporation common stock that is more actively traded on the Nasdaq market.
For the reasons set forth above in this section and elsewhere in this proxy
statement/prospectus, the Northern Lehigh Board of Directors had unanimously
concluded that the proposed transaction is in the best interests of Northern
Lehigh's shareholders, employees, customers and community.
Opinion of Financial Advisor
General
The Northern Lehigh Board of Directors engaged Hopper Soliday to provide
financial advisory and investment banking services to Northern Lehigh and its
sole subsidiary, The Citizens National Bank of Slatington, regarding the
possible sale of Northern Lehigh to Harleysville National Corporation. The terms
of the engagement were contained in a letter dated October 10, 1997. In this
section of the proxy statement/prospectus, Northern Lehigh and The Citizens
National Bank of Slatington are referred to together as Northern Lehigh. From
time to time during the past ten years Hopper Soliday has provided investment
banking services to Northern Lehigh. For these services, Hopper Soliday has
received normal and customary compensation. Other than this transaction, Hopper
Soliday currently has no other material relationship with Northern Lehigh or
Harleysville National Corporation.
Hopper Soliday is a regional investment banking firm. As a customary part
of its investment banking business Hopper Soliday engages in the valuation of
bank and bank holding company securities in connection with mergers,
acquisitions, underwritings, secondary
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distributions of listed and unlisted securities, private placements and
valuations for various other purposes. As an investment banking specialist in
the securities of financial institutions, Hopper Soliday has experience in, and
knowledge of, the valuation of banking companies like Northern Lehigh. The
Northern Lehigh Board selected Hopper Soliday on the basis of Hopper Soliday's:
* ability to evaluate the fairness of the merger to the shareholders of
Northern Lehigh from a financial point of view;
* qualifications;
* previous experience; and
* reputation in the banking and investment communities.
Hopper Soliday has acted exclusively for the Northern Lehigh Board in providing
its fairness opinion and will receive a fee from Northern Lehigh for its
services.
Hopper Soliday has given a written opinion to the Northern Lehigh Board,
dated July 28, 1998, and confirmed by an updated written opinion to the Northern
Lehigh Board, dated November 12, 1998, that the consideration to be received in
the merger is fair, from a financial point of view, to the shareholders of
Northern Lehigh. The full text of the updated opinion is attached as Annex B to
this proxy statement/prospectus. Northern Lehigh shareholders are urged to read
the Hopper Soliday opinion in its entirety for a description of the procedures
followed, assumptions made, matters considered, and qualifications and
limitations on the review undertaken by Hopper Soliday in rendering its opinion.
The following discussion of the opinion is qualified by the opinion. The
consideration to be received in the merger was determined by negotiation between
Northern Lehigh, represented by Hopper Soliday, and Harleysville National
Corporation. The consideration to be received in the merger was not determined
by Hopper Soliday. See "APPROVAL OF THE MERGER--Background of the Merger,
Reasons and Recommendation of the Board of Directors."
The Hopper Soliday opinion only addresses the consideration to be received
in the merger by the Northern Lehigh shareholders. The opinion is not a
recommendation to any Northern Lehigh shareholder as to how the shareholder
should vote at the meeting.
In giving its opinion dated July 28, 1998, Hopper Soliday reviewed, among
other things:
* Northern Lehigh's Annual Reports and related financial information for
years ended December 31, 1993, through December 31, 1997, and Northern
Lehigh's Quarterly FDIC Call Report and related unaudited financial
information for the period ending March 31, 1998;
* Harleysville National Corporation's Annual Reports on Form 10-K and
related financial information for years ended December 31, 1993,
through December 31, 1997, and Quarterly Report on Form 10-Q for the
period ended March 31, 1998;
* certain information concerning the respective businesses, operations,
regulatory condition and prospects of Harleysville National
Corporation and Northern Lehigh, including financial forecasts,
relating to the business, earnings, assets and
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prospects of Harleysville National Corporation and Northern Lehigh,
furnished to Hopper Soliday by Harleysville National Corporation and
Northern Lehigh, which Hopper Soliday discussed with members of senior
management of Harleysville National Corporation and Northern Lehigh;
* historical market prices and trading activity for the Harleysville
National Corporation common stock and Northern Lehigh common stock and
similar data for certain publicly traded companies which Hopper
Soliday deemed to be relevant;
* the results of operations of Harleysville National Corporation and
Northern Lehigh and similar data for certain companies which Hopper
Soliday deemed to be relevant;
* the financial terms contained in the agreement that provides for the
merger and the financial terms of certain other mergers and
acquisitions which Hopper Soliday deemed to be relevant;
* the pro forma impact of the merger on the earnings and book value per
share, consolidated capitalization and certain balance sheet and
profitability ratios of Harleysville National Corporation;
* the agreement that provides for the merger and the exhibits to the
agreement; and
* such other matters as Hopper Soliday deemed necessary.
Hopper Soliday also met with certain members of senior management and other
representatives of Harleysville National Corporation and Northern Lehigh to
discuss the items mentioned above and the details of the transaction. Hopper
Soliday also considered financial and other factors that it believed were
important under the circumstances and took into account its:
* assessment of general economic, market and financial conditions;
* experience in similar transactions; and
* experience in securities valuation and its knowledge of the banking
industry generally.
In giving its updated written opinion dated November 12, 1998, Hopper
Soliday confirmed the appropriateness of its reliance on the analyses used to
give its July 28, 1998 written opinion. This was done by performing procedures
to update certain of the analyses and by reviewing the assumptions upon which
the analyses were based and the factors considered. Hopper Soliday's opinion is
based upon conditions as they existed and could be evaluated on the respective
evaluation on July 28, 1998, and November 12, 1998. The opinion is also based
upon the information made available to Hopper Soliday through those dates.
Hopper Soliday relied without independent verification upon the accuracy
and completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its opinion. With respect to the financial
forecasts reviewed by Hopper Soliday in rendering its opinion, Hopper Soliday
assumed that the financial forecasts were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
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managements of Northern Lehigh and Harleysville National Corporation as to the
future financial performance of Northern Lehigh and Harleysville National
Corporation. Hopper Soliday did not make any independent evaluation or
appraisals of the assets or liabilities of Harleysville National Corporation nor
was it furnished with any such appraisals.
The discussion below is not intended to be a complete description of the
analyses performed by Hopper Soliday in giving its opinion. The preparation of a
fairness opinion involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances. Therefore, an opinion is not easily summarized or
discussed. Despite the separate factors disclosed below, Hopper Soliday believes
that its analyses must be considered as a whole. Hopper Soliday believes that
selecting portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create an incomplete view of the
evaluation process underlying its opinion. No one of the analyses performed by
Hopper Soliday was assigned a greater significance with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond Northern Lehigh's or Harleysville National Corporation's control. The
analyses performed by Hopper Soliday are not necessarily indicative of actual
values or future results. Results may be significantly more or less favorable
than suggested by the analyses. Additionally, analyses relating to the values of
businesses are not appraisals. These analyses do not necessarily reflect the
prices at which businesses actually may be sold.
Transaction Summary
Hopper Soliday reviewed the key financial terms of the proposed merger with
the Northern Lehigh Board, including the expected method of accounting and tax
treatment of the Northern Lehigh shareholders, the exchange ratio, the share
price of Harleysville National Corporation common stock, as of July 24, 1998,
the resulting indicated value per share of Northern Lehigh common stock in the
merger and the resulting indicated aggregate consideration to be paid in the
merger, as follows:
* The proposed method of accounting for the merger was a pooling of
interests in a tax-free exchange;
* The indicated value was $151.70 per share of Northern Lehigh common
stock, determined by multiplying the exchange ratio by the closing
price on the Nasdaq/NMS of Harleysville National Corporation common
stock on July 24, 1998; and
* The indicated aggregate consideration to be paid in the merger was
$21.1 million based on 139,498 fully diluted shares of Northern Lehigh
common stock outstanding.
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Hopper Soliday noted that:
* the value of the consideration to be received in the merger
represented a 163% premium to Northern Lehigh's market price of $57.75
per share on July 24, 1998; and
* the $151.70 per share value represented 257% of Northern Lehigh's
fully-diluted book value per share as of June 30, 1998, a multiple of
22.04 times Northern Lehigh's net income for the twelve months ended
June 30, 1998 and a premium over tangible book to core deposits of
21.6% as of March 31, 1998.
Contribution Analysis
Hopper Soliday reviewed the contribution made by each of Northern Lehigh
and Harleysville National Corporation to various balance sheet items and net
income of the combined company at the proposed exchange ratio based on balance
sheet data at March 31, 1998, and trailing twelve months earnings as of March
31, 1998. This analysis showed that:
* Northern Lehigh shareholders would own approximately 6.8% of the
aggregate shares outstanding of the combined company; and
* Northern Lehigh was contributing 5.8% of total assets, 7.2% of total
loans, 6.2% of total deposits, 6.6% of shareholders' equity and 5.2%
of net income, respectively, of the pro forma combined company as of
March 31, 1998.
Summary Comparison of Northern Lehigh, Harleysville National Corporation
and Peer Groups
Hopper Soliday compared selected balance sheet data, asset quality,
capitalization and profitability ratios and market statistics using financial
data at or for the twelve months ended March 31, 1998 and market data as of July
24, 1998 for Northern Lehigh to a peer group of Pennsylvania banks and bank
holding companies consisting of ten institutions each with total assets between
$55 million and $145 million and for Harleysville National Corporation to a peer
group of Pennsylvania banks and bank holding companies consisting of seven
institutions each with total assets between $550 million and $1.3 billion. The
analysis included the following ratios:
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<TABLE>
<CAPTION>
Harleysville
Northern National
Lehigh Harleysville Corporation
Northern Peer Group National Peer Group
Ratios Lehigh Median Corporation Median
- ------ ------ ------ ----------- ------
<S> <C> <C> <C> <C>
Equity/assets 11.16% 10.35% 9.61% 9.01%
Noncurrent assets/total assets 1.10% 0.51% 0.46% 0.59%
Allowance for loan losses/
noncurrent assets 88.12% 125.23% 228.40% 154.60%
Return on average assets 1.33% 1.24% 1.55% 1.30%
Return on average equity 12.24% 9.99% 15.94% 13.78%
Net interest margin 4.95% 4.24% 4.84% 4.35%
Price/earnings 8.60x 13.12x 17.20x 20.80x
Price/book 100.00% 129.00% 258.00% 271.00%
</TABLE>
Summary of Selected Bank Merger and Acquisition Transactions
Hopper Soliday compared the ratios of price/book, price/trailing 12 months
earnings, book/book and tangible book premium/core deposits for the proposed
merger to the mean and median ratios for a group of ten transactions announced
since January 1, 1996. The selected transactions involved the acquisition of
banks and bank holding companies headquartered in Pennsylvania with total assets
less than $500 million and announced transaction values between $4.6 million and
$137.8 million. This analysis showed that the merger consideration to be
received represented:
* 257.0% of Northern Lehigh's fully-diluted book value versus a median
of 255.1% for the selected transactions;
* a price/trailing 12 months earnings ratio of 22.0x compared to a
median of 24.7x for the selected transactions;
* a book/book of 100.0% compared to a median of 95.6% for selected
transactions; and
* a tangible book premium/core deposits ratio of 21.6% compared to a
median of 21.6% for the selected transactions.
No company or transaction used as a comparison in this analysis is
identical to Northern Lehigh, Harleysville National Corporation or the proposed
merger transaction. The analysis is not mathematical; rather, it involves
complex consideration and judgments concerning differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading value of the companies to which they were compared. The
ranges of valuations resulting from any particular analysis described above
should not be taken to be Hopper Soliday's view of the actual value of Northern
Lehigh or Harleysville National
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Corporation. The fact that any specific analysis has been referred to in this
discussion is not meant to indicate that the analysis was given more weight than
any other analyses.
In performing its analyses, Hopper Soliday made numerous assumptions. These
assumptions included:
* industry performance;
* general business and economic conditions; and
* other matters.
Many of these assumptions are beyond the control of Northern Lehigh or
Harleysville National Corporation. The analyses performed by Hopper Soliday are
not necessarily indicative of actual values or actual future results. These
results may be significantly more or less favorable than suggested by the
analyses. The analyses are not appraisals. The analyses do not reflect the
prices at which a company might actually be sold or the prices at which any
securities may trade at the present time or at any time in the future. In
addition, as described above, the opinion and the presentation to the Northern
Lehigh Board is just one of many factors taken into consideration by the
Northern Lehigh Board.
Pursuant to the Hopper Soliday engagement letter, Northern Lehigh agreed to
pay Hopper Soliday a fee of 1.00% of the aggregate consideration to be paid in
the merger. This fee is contingent upon completion of the merger. Hopper Soliday
will also be reimbursed for reasonable out-of-pocket expenses incurred on behalf
of Northern Lehigh. Northern Lehigh has agreed to indemnify and hold harmless
Hopper Soliday from and against certain liabilities under United States federal
securities laws in connection with this engagement.
Dissenters' Rights
General
Pursuant to the Pennsylvania Business Corporation Law of 1988, you, as a
shareholder of Northern Lehigh common stock, have the right to dissent from the
merger and to obtain payment of the "fair value" of your shares in the event we
complete the merger.
If you contemplate exercising your right to dissent, we urge you to read
carefully the provisions of Subchapter D of Chapter 15 of the Pennsylvania
Business Corporation Law of 1988, which is attached to this proxy
statement/prospectus as Annex C. A discussion of the provisions of the statute
is included here. The discussion describes the steps that you must take if you
want to exercise your right to dissent. You should read this summary and the
full text of the law.
Before the day of the merger, send any written notice or demand, required
concerning your exercise of dissenters' rights to Francis P. Burbidge, First
Vice President, Northern Lehigh Bancorp, Inc., 502 Main Street, Slatington,
Pennsylvania 18080-0008. After the day of the
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merger, send correspondence to Jo Ann Bynon, Corporate Secretary, Harleysville
National Corporation, 483 Main Street, Harleysville, Pennsylvania 19438.
Fair Value
The term "fair value" means the value of a share of Northern Lehigh common
stock immediately before day of the merger taking into account all relevant
factors, but excluding any appreciation or depreciation in anticipation of the
merger.
Notice of Intention to Dissent
If you wish to dissent, you must:
* file a written notice of intention to demand payment of the fair value
of your shares of Northern Lehigh common stock if the merger is
effected with Northern Lehigh, prior to the vote of shareholders on
the merger at the meeting;
* make no change in your beneficial ownership of Northern Lehigh common
stock from the date you give notice through the day of the merger; and
* not vote your Northern Lehigh common stock for approval of the
agreement.
Neither a proxy nor a vote against approval of the merger is the necessary
written notice of intention to dissent.
Notice to Demand Payment
If the merger is approved by the required vote of shareholders, Northern
Lehigh or Harleysville National Corporation, as the case may be, will mail a
notice to all dissenters who gave due notice of intention to demand payment and
who did not vote for approval of the agreement. The notice will state where and
when you must deliver a written demand for payment and where you must deposit
certificates for Northern Lehigh common stock in order to obtain payment. The
notice will include a form for demanding payment and a copy of the law. The time
set for receipt of the demand for payment and deposit of stock certificates will
be not less than 30 days from the date of mailing of the notice.
Failure to Comply with Notice to Demand Payment, etc.
You must take each step in the indicated order and in strict compliance
with the statute to keep your dissenters' rights. If you fail to follow the
steps, you will lose you right to dissent and you will receive 3.57 shares of
Harleysville National Corporation stock.
Payment of Fair Value of Shares
Promptly after the merger, or upon timely receipt of demand for payment if
the merger already has taken place, Harleysville National Corporation will send
dissenters, who have
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deposited their stock certificates, the amount that Harleysville National
Corporation estimates to be the fair value of the Northern Lehigh common stock.
The remittance or notice will be accompanied by:
* a closing balance sheet and statement of income of Northern Lehigh for
a fiscal year ending not more than 16 months before the date of
remittance or notice together with the latest available interim
financial statements;
* a statement of Harleysville National Corporation's estimate of the
fair value of the Northern Lehigh common stock; and
* a notice of the right of the dissenter to demand supplemental payment,
accompanied by a copy of the law.
Estimate by Dissenter of Fair Value of Shares
If a dissenter believes that the amount stated or remitted by Harleysville
National Corporation is less than the fair value of the Northern Lehigh common
stock, the dissenter may send an estimate of the fair value of the Northern
Lehigh common stock to Harleysville National Corporation. If Harleysville
National Corporation remits payment of estimated value of a dissenter's Northern
Lehigh common stock and the dissenter does not file his or her own estimate
within 30 days after the mailing by Harleysville National Corporation of its
remittance, the dissenter will be entitled to no more than the amount remitted
by Harleysville National Corporation.
Valuation Proceedings
If any demands for payment remain unsettled within 60 days after the latest
to occur of:
* the merger;
* timely receipt by Northern Lehigh or Harleysville National
Corporation, as the case may be, of any demands for payment; or
* timely receipt by Northern Lehigh or Harleysville National
Corporation, as the case may be, of any estimates by dissenters of the
fair value,
then, Harleysville National Corporation may file an application, in the Court of
Common Pleas of Lehigh County, requesting that the court determine the fair
value of the Northern Lehigh common stock. If this happens, all dissenters, no
matter where they reside, whose demands have not been settled, shall be made
parties to the proceeding. In addition, a copy of the application will be
delivered to each dissenter.
If Harleysville National Corporation were to fail to file the an
application, then any dissenter, on behalf of all dissenters who have made a
demand and who have not settled their claim against Harleysville National
Corporation, may file an application in the name of Harleysville National
Corporation at any time within the 30-day period after the expiration of the
60-day period and request that the Lehigh County Court determine the fair value
of the shares.
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The fair value determined by the Lehigh County Court may, but need not, equal
the dissenters' estimates of fair value. If no dissenter files an application,
then each dissenter entitled to do so shall be paid Harleysville National
Corporation's estimates of the fair value of the Northern Lehigh common stock
and no more, and may bring an action to recover any amount not previously
remitted, plus interest at a rate the Lehigh County Court finds fair and
equitable.
Harleysville National Corporation intends to negotiate in good faith with
any dissenting shareholders. If, after negotiation, a claim cannot be settled,
then Harleysville National Corporation intends to file an application requesting
that the fair value of the Northern Lehigh common stock be determined by the
Lehigh County Court.
Costs and Expenses
The costs and expenses of any valuation proceedings in the Lehigh County
Court, including the reasonable compensation and expenses of any appraiser
appointed by the Court to recommend a decision on the issue of fair value, will
be determined by the Court and assessed against Harleysville National
Corporation except that any part of the costs and expenses may be apportioned
and assessed by the Court against all or any of the dissenters who are parties
and whose action in demanding supplemental payment the Court finds to be
dilatory, obdurate, arbitrary, vexatious or in bad faith.
Terms of the Merger
We discuss the material terms of merger as described in the agreement
below. Our description is not complete. The discussion is qualified in its
entirety by reference to the agreement, a copy of which is attached as Annex A
to this proxy statement/prospectus. We urge you to read the agreement.
Effect of the Merger
Northern Lehigh will merge into Harleysville National Corporation North.
Harleysville National Corporation North will be the surviving corporation under
the name "Harleysville National Corporation North, Inc." Northern Lehigh will
cease to exist. Immediately thereafter, The Citizens National Bank of Slatington
will merge into The Citizens National Bank of Lansford under the name "Citizens
National Bank." The Citizens National Bank of Slatington will cease to exist.
Exchange of Shares
On the day of the merger, each outstanding share of Northern Lehigh common
stock will become the right to receive 3.57 shares of Harleysville National
Corporation common stock, subject to adjustment for certain stock dividends,
stock splits and similar transactions.
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Harleysville National Corporation will not issue fractional shares of
Harleysville National Corporation common stock in the merger. Each former
shareholder of Northern Lehigh will receive cash in an amount equal to the fair
market value of any fractional share interest.
Harleysville National Corporation and Northern Lehigh anticipate that the
merger will occur during the first quarter of 1999, 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 merger does not occur by June 30, 1999,
and the parties have not agreed otherwise prior to that date, the agreement will
terminate automatically. See, "Business Pending the Merger--Conditions,
Amendment and Termination"for a discussion of the various termination
provisions.
Following the merger, former shareholders of Northern Lehigh will be
required to surrender their Northern Lehigh common stock certificates to
Harleysville National Corporation. Detailed instructions concerning the
procedure for surrendering the Northern Lehigh common stock certificates will be
sent by Harleysville National Corporation to each former shareholder of Northern
Lehigh on or promptly after the merger. Upon proper surrender of stock
certificates, each former shareholder of Northern Lehigh will be issued a stock
certificate representing the number of whole shares of Harleysville National
Corporation common stock into which his or her shares of Northern Lehigh common
stock were converted. Each shareholder will also receive a check in the amount
of any cash to which he or she is entitled instead of a fractional share.
Shareholders of Northern Lehigh should not surrender their Northern Lehigh
common stock certificates for exchange until they receive written instructions
to do so from Harleysville National Corporation.
Following the merger and until properly requested and surrendered, each
Northern Lehigh common stock certificate will be deemed for all corporate
purposes to represent the number of whole shares of Harleysville National
Corporation common stock that the holder would be entitled to receive upon its
surrender. However, Harleysville National Corporation, at its option, may
withhold dividends payable after the merger to any former shareholder of
Northern Lehigh who has received written instructions from Harleysville National
Corporation but has not surrendered the Northern Lehigh common stock
certificates. Any dividends withheld, will be paid without interest to any
former shareholder of Northern Lehigh upon the proper surrender of the Northern
Lehigh common stock certificates.
All Northern Lehigh stock certificates must be surrendered to Harleysville
National Corporation within two years after the merger. In the event that any
former shareholder of Northern Lehigh does not properly surrender his or her
Northern Lehigh certificates within that time, the shares of Harleysville
National Corporation common stock that would otherwise have been issued may, at
the option of Harleysville National Corporation, be sold and the net proceeds of
the sale, together with the cash (if any) to which the stockholder is entitled
instead 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. After the sale, the sole right of the former shareholder of Northern
Lehigh will be the right to collect the net proceeds, cash and
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accumulated dividends. Subject to laws of escheat, the net proceeds, cash and
accumulated dividends will be paid to the former shareholder of Northern Lehigh,
without interest, upon proper surrender of his or her Northern Lehigh common
stock certificates.
Stock Options
As part of the transaction, 5,000 outstanding options to purchase shares of
Northern Lehigh common stock issued by Northern Lehigh will be converted, on the
day of the merger, into the right to receive options to acquire 17,850 shares,
the number of shares of Harleysville National Corporation common stock equal to
the number of shares of Northern Lehigh common stock covered by the option
multiplied by 3.57, and the exercise price for a whole share of Harleysville
National Corporation common stock shall be the stated exercise price for such
option divided by 3.57. The shares issuable upon exercise of the options will be
issued in accordance with the terms of the respective option agreements of
Northern Lehigh under which they were originally issued. See, "Terms of the
Merger and -- Accounting Treatment."
Business Pending the Merger
Northern Lehigh agreed to conduct its business in the usual, regular and
ordinary course, consistent with prudent business judgment, pending the merger.
Northern Lehigh has agreed to take action in the ordinary course of business or
get the prior written consent of Harleysville National Corporation. Northern
Lehigh and The Citizens National Bank of Slatington agreed that, among other
things, pending the merger, they will:
* not amend their Articles of Incorporation or Bylaws;
* not declare, set aside or pay any dividend or make any other
distribution in respect of Northern Lehigh and The Citizens National
Bank of Slatington common stock, except as provided in Section 4.9 of
the agreement;
* not authorize, purchase, issue or sell (or authorize, issue or grant
options, warrants or rights to purchase or sell) any shares of
Northern Lehigh common stock or any other equity or debt securities of
Northern Lehigh or any securities convertible into Northern Lehigh
common stock;
* not change the presently outstanding number of shares or effect any
capitalization, reclassification, stock dividends, stock split or like
change in capitalization;
* 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 their directors, officers, or other employees;
* 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, expand, renew or modify any
such outstanding commitment;
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* 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
December 31, 1997;
* 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;
* not enter into any participation arrangements or approvals of
extensions of credit in excess of $350,000, expand or modify any
outstanding participation arrangements or approvals; and
* 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.
There have been no material contracts or other transactions between
Northern Lehigh and Harleysville National Corporation since signing the
agreement, nor have there been any material contracts, arrangements,
relationships or transactions between Northern Lehigh and Harleysville National
Corporation during the past five years, other than in connection with the
agreement and as described in this proxy statement/prospectus.
Conditions, Amendment and Termination
The obligations of Harleysville National Corporation and Northern Lehigh to
complete the merger are subject to a number of conditions and contingencies.
These are stated in the agreement. The most significant of these conditions
include:
* approval by the shareholders of Northern Lehigh;
* approval by the Board of Governors of the Federal Reserve System, the
Office of the Comptroller of the Currency and the Pennsylvania
Department of Banking;
* receipt of a favorable opinion of Grant Thornton, LLP concerning
certain federal income tax consequences relating to the merger;
* continued effectiveness of the registration statement containing the
proxy statement/prospectus;
* determination that the merger can be accounted for as a pooling of
interests for financial reporting purposes;
* determination of compliance with all applicable federal and state
securities and anti-trust laws; and
* exercise by dissenting shareholders of dissenters' rights with respect
to less than 6,975 shares of Northern Lehigh common stock.
In connection with the regulatory approvals, Harleysville National
Corporation filed:
* a Notice with respect to the merger with the Board of Governors of the
Federal Reserve System, on October 20, 1998; and
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* an Application with the Pennsylvania Department of Banking, on
November 20, 1998.
In addition, on October 20, 1998, The Citizens National Bank of Lansford filed a
Business Combination Application - Streamlined, requesting approval of the
Office of the Comptroller of the Currency to the merger of the banks. We await
action on the applications filed with the Pennsylvania Department of Banking.
The Board of Governors of the Federal Reserve System and the Office of the
Comptroller of the Currency have approved the transaction.
Any term or condition of the agreement may be waived by the party that
would benefit from the term at any time before the merger, whether before or
after the approval of the agreement by Northern Lehigh's shareholders. However,
no change in the amount of consideration to be received by the shareholders of
Northern Lehigh can be adopted unless the shareholders of Northern Lehigh
approve the change.
The agreement may be terminated at any time before the merger, whether
before or after its approval and adoption by the shareholders of Northern Lehigh
by:
* agreement of all of the parties;
* 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 to satisfy any condition
precedent to the terminating party's obligation to consummate the
merger through no fault of the terminating party; or
* automatically in the event of a failure to consummate the merger by
June 30, 1999, unless extended in writing prior that date.
Effective Date
The agreement provides that the closing of the transaction will occur at a
time and place, after three business days notice to Northern Lehigh, as shall be
agreed upon by the parties, but no later than the 30th business day after:
* the last approval of required governmental authorities is granted and
any related waiting periods expire;
* the lifting, discharge or dismissal of any stay of any such
governmental approval or of any injunction against the merger; and
* all shareholder approvals required by the parties are received.
Immediately following the closing, provided the agreement has not been
terminated or abandoned, Northern Lehigh and Harleysville National Corporation
North will cause Articles of Merger to be prepared, completed and filed with the
Secretary of State of the Commonwealth of Pennsylvania. The merger will become
effective at 11:59 p.m. on the day on which the Articles of Merger have been
duly filed with and accepted by the Pennsylvania Department of State.
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The bank merger will become effective on the day that Northern Lehigh
mergers into Harleysville National Corporation North or the date upon which the
Office of the Comptroller of the Currency issues a Certificate of Merger with
respect to the merger of The Citizens National Bank of Slatington into The
Citizens National Bank of Lansford.
The agreement will automatically terminate and the merger will be canceled
if all applicable conditions have not been satisfied by June 30, 1999, unless
the parties have agreed prior to that date to extend the termination date of the
agreement.
Interests of Certain Persons in the Merger
Certain members of Northern Lehigh's management and the Northern Lehigh
Board may have interests in the transaction in addition to their interests as
shareholders of Northern Lehigh generally. These include, among other things,
provisions in the agreement relating to indemnification and employment. You will
find additional information about certain persons who may have an interest in
the merger in the following section entitled "Management and Operations
Following the Merger." The Northern Lehigh Board of Directors was aware of these
factors and considered them, among other matters, in approving the agreement and
the transactions contemplated by the agreement.
As of November 16, 1998, the directors and executive officers of Northern
Lehigh and The Citizens National Bank of Slatington beneficially own
approximately 27,674 shares of Northern Lehigh common stock, including 5,000
stock options held by Mr. Burbidge. On the day of the merger, each option will
be assumed by Harleysville National Corporation and shall be converted into and
become an option to acquire that number of shares of Harleysville National
Corporation common stock equal to the number of shares of Northern Lehigh common
stock covered by the option multiplied by 3.57, at an exercise price equal to
the present stated exercise price of such option divided by 3.57. Shares
issuable upon the exercise of these options to acquire Harleysville National
Corporation common stock shall be issuable in accordance with the terms of the
respective agreements of Northern Lehigh under which they were issued.
Pursuant to the agreement, Harleysville National Corporation has agreed to
indemnify the present and former officers, directors, employees and agents of
Northern Lehigh and The Citizens National Bank of Slatington against certain
liabilities arising prior to the merger, as permitted by the Articles of
Incorporation and Bylaws of Northern Lehigh , the charter and bylaws of The
Citizens National Bank of Slatington, each as in effect on the date of the
agreement.
In connection with the transaction, Mr. Burbidge entered into an Executive
Employment Agreement and a Consulting Agreement with The Citizens National Bank
of Lansford. See "APPROVAL OF THE MERGER--Management and Operations Following
the Merger," below, for a description of these agreements and for more
information regarding the interests of certain persons in the matters to be
voted upon. Also see, "APPROVAL OF THE MERGER--Terms of the Merger" for a
description of the 5,000 Northern Lehigh stock options that will be converted
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into the right to receive 17,850 options to acquire Harleysville National
Corporation common stock upon completion of the merger.
Management and Operations Following the Merger
The Boards of Directors of Harleysville National Corporation and
Harleysville National Corporation North 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. In addition, Joseph G. Bechtel, Charles J. Breidinger, Carol J.
Simcoe and Charles W. Stopp, who previously served on the Board of Directors of
Northern Lehigh, will be appointed to the Board of Directors of the Citizens
National Bank to serve until their successors have been duly elected, qualified
or appointed.
The directors added to the Board of Directors of he Citizens National Bank
will receive the same fees and benefits for their membership as the present
members of the bank's Board receive. In 1998, the each Director of The Citizens
National Bank of Lansford receives a fee of $250.00 for each board meeting
attended, an annual retainer of $3,500.00, and receives a fee of $150.00 for
each committee meeting attended. All together, as of September 30, 1998, the
Board of Directors of The Citizens National Bank of Lansford received
$47,025.00.
Harleysville National Corporation also maintains a Deferred Compensation
Plan for its directors. In the past, certain directors elected to defer, with
interest, all or part of their compensation for future distribution. Under the
terms of the plan, benefits can be paid out to the respective directors over a
ten-year period. Should the director die before age 70 or before receiving all
of the benefits, those benefits would be paid to his or her beneficiary until
age 70 or for 10 years, whichever is greater. The plan is considered an unfunded
plan that is subject to substantial risk of forfeiture and the director is not
considered vested pursuant to the plan.
On or promptly after the merger and for a period of at least one year
thereafter, the current members of the Board of Directors of The Citizens
National Bank of Slatington will become an Advisory Board of Directors for the
Slatington Area. Thomas D. Oleksa will serve as a non-voting member of the
Advisory Board. For one year following the merger, each of the members of the
Advisory Board, will receive $250.00 per quarter as compensation for services
rendered in their capacity as a member of the Advisory Board.
For at least one year following the merger, The Citizens National Bank of
Slatington's employees, who are employed in good standing and actively at work
on the day of the merger, will be offered employment and retained at current
salary levels by the Citizens National Bank, Harleysville National Corporation
or an affiliate of Harleysville National Corporation, subject to the ongoing
needs of Harleysville National Corporation, the Harleysville National
Corporation's affiliate and/or the Citizens National Bank. All continuing
employees will be entitled to participate in all benefit plans in effect on the
day of the merger, at Harleysville National Corporation or the respective
Harleysville National Corporation affiliate, as the case may be, as provided by
the terms of the particular plans. All benefits of the continuing employees who
are
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employed by Harleysville National Corporation will be maintained at a level not
less than equal to the benefits enjoyed by the employees of Northern Lehigh
prior to the merger with changes as may be deemed appropriate by the Board of
Directors of The Citizens National Bank of Lansford. The former employees of The
Citizens National Bank of Slatington will receive service credit from their
respective hire dates for employment at The Citizens National Bank of Slatington
for purposes of eligibility and vesting requirements, but not for purposes of
benefit accrual, under the respective Harleysville National Corporation
affiliate's benefit plans, and service credit from the day of the merger for
purposes of benefit calculation under the respective Harleysville National
Corporation affiliate's benefit plans.
As part of the transaction, Harleysville National Corporation, The Citizens
National Bank of Lansford, Northern Lehigh, The Citizens National Bank of
Slatington and Francis P. Burbidge, President and Chief Executive Officer of The
Citizens National Bank of Slatington and a Director of Northern Lehigh, entered
into a Release Agreement. In the release agreement, Mr. Burbidge agreed to
release any and all rights he might have under his employment agreement with
Northern Lehigh. In addition, Mr. Burbidge has entered into an Executive
Employment Agreement and a Consulting Agreement with The Citizens National Bank
of Lansford. We summarize the major provisions of these contracts below.
Mr. Burbidge's employment agreement with The Citizens National Bank of
Lansford has a one year term, beginning on the day of the merger. He will serve
as a Vice President of The Citizens National Bank of Lansford, reporting
directly to the President. The employment agreement provides that Mr. Burbidge
will receive an annual salary of $98,000. In addition, the agreement provides,
among other things, that Mr. Burbidge has a right to participate in any bonus
plan approved by the Board of Directors and insurance, vacation, pension and
other fringe benefits and perquisites.
If Mr. Burbidge's employment is terminated without "Cause," as defined in
the employment agreement, Mr. Burbidge is entitled to receive his benefits under
the agreement. If Mr. Burbidge is terminated for "Cause," as defined in the
employment agreement, his benefits terminate as of the date of his termination.
Mr. Burbidge's benefits terminate upon his death and, upon his disability. The
employment agreement also contains provisions restricting Mr. Burbidge's right
to compete with Harleysville National Corporation and The Citizens National Bank
of Lansford.
The Citizens National Bank of Lansford and Mr. Burbidge also entered into a
consulting agreement, dated as of July 28, 1998, but effective one year after
the merger of his employment agreement (described above). Under the terms of the
consulting agreement, Mr. Burbidge will act as an advisor and consultant to The
Citizens National Bank of Lansford for a period of one year. Mr. Burbidge's
compensation will be $98,000, paid in four equal quarterly installments. In the
event of Mr. Burbidge's death or disability, his benefits under the consulting
agreement will continue.
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The directors and officers of Harleysville National Corporation and its
subsidiaries have no special interest in the merger, other than in their
capacity as shareholders of Harleysville National Corporation, and will not
receive any special consideration or compensation in connection with its
consummation.
Federal Income Tax Consequences
Grant Thornton, LLP, independent accountant for Harleysville National
Corporation, will give an opinion at closing that will state that for federal
income tax purposes:
* Neither Harleysville National Corporation nor Harleysville National
Corporation North will recognize gain or loss on the incorporation of
Harleysville National Corporation North or the contribution of The
Citizens National Bank of Lansford stock to Harleysville National
Corporation North in exchange for Harleysville National Corporation
North stock.
* The initial basis and holding period of Harleysville National
Corporation in the Harleysville National Corporation North stock it
acquires in exchange for The Citizens National Bank of Lansford stock
will be equal to its basis and holding period for The Citizens
National Bank of Lansford stock delivered in the exchange.
* The initial basis and holding period of Harleysville National
Corporation North in The Citizens National Bank of Lansford stock it
receives from Harleysville National Corporation in the transaction
will be the same as Harleysville National Corporation's basis and
holding period in that stock.
* The merger of Northern Lehigh with and into Harleysville National
Corporation North will constitute a "Reorganization" within the
meaning of sections 368(a)(2)(D) of the Code.
* Harleysville National Corporation, Northern Lehigh and Harleysville
National Corporation North will be regarded as "Parties to a
Reorganization" within the meaning of section 368(b) of the Code with
respect to the merger of Northern Lehigh with and into Harleysville
National Corporation North.
* No gain or loss will be recognized by the former shareholders of
Northern Lehigh upon the exchange of their Northern Lehigh common
stock for Harleysville National Corporation common stock.
* The basis and holding periods of former Northern Lehigh shareholders
in their Northern Lehigh common stock will carry over to Harleysville
National Corporation common stock they receive in the transaction.
* Former Northern Lehigh shareholders receiving cash in lieu of
fractional shares of Harleysville National Corporation common stock
will have gain or loss on such exchanges equal to the excess of the
cash received in lieu of such fractional shares over their basis in
their Northern Lehigh common stock allocable to the fractional
interests exchanged therefor. The gain or loss will constitute capital
gain or loss, if the shares of Northern Lehigh common stock qualified
as capital assets in the hands of the exchanging shareholder within
the meaning of section 1221 of the
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Code and the capital gain or loss will be short term or long term
depending upon the shareholder's holding period for the shareholder's
Northern Lehigh common stock.
* Former Northern Lehigh shareholders exercising dissenters rights with
respect to their Northern Lehigh common stock will have gain or loss
on the receipt of cash for their Northern Lehigh common stock equal to
the excess of the cash received over their basis in their Northern
Lehigh common stock. The gain or loss will constitute capital gain or
loss, if the shares of Northern Lehigh common stock qualified as
capital assets in the hands of the exchanging shareholder within the
meaning of section 1221 of the Code and, the capital gain or loss will
be short term or long term depending upon such shareholder's holding
period for the shareholder's Northern Lehigh common stock.
* Stock option holders will not recognize any gain or loss on the
exchange of their Northern Lehigh options for Harleysville National
Corporation options.
* Harleysville National Corporation North will succeed to the tax
attributes of Northern Lehigh including net operating loss carryovers,
credit carryovers and accounting methods subject to any limitations
imposed under section 381 and 382 of the Code.
* Harleysville National Corporation's basis in its Harleysville National
Corporation North stock will be increased by the basis of Northern
Lehigh in its assets immediately prior to the merger.
* The bank merger will constitute a "Reorganization" within the meaning
of section 368(a)(1)(A) of the Code.
* Harleysville National Corporation North, The Citizens National Bank of
Slatington and The Citizens National Bank of Lansford will be regarded
as "Parties to a Reorganization" within the meaning of section 368(b)
of the Code in regard to the bank merger.
* No gain or loss will be recognized by The Citizens National Bank of
Slatington or The Citizens National Bank of Lansford in the bank
merger.
* The basis and holding periods of The Citizens National Bank of
Slatington in its assets transferred to The Citizens National Bank of
Lansford in the bank merger will carryover to The Citizens National
Bank of Lansford and become The Citizens National Bank of Lansford's
basis and holding periods in those assets.
* As a result of the bank merger, The Citizens National Bank of Lansford
will succeed to the tax attributes of The Citizens National Bank of
Slatington including net operating loss carryovers, credit carryovers
and accounting methods subject to any limitations imposed under
sections 381 and 382 of the Code.
* Upon consummation of the bank merger, Harleysville National
Corporation North's basis in its The Citizens National Bank of
Lansford stock will be increased by the basis in its stock of The
Citizens National Bank of Slatington immediately prior to the merger.
This is intended only as a general discussion of certain federal income tax
consequences of the merger under present law. We urge each shareholder of
Northern Lehigh to consult his or
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her own tax advisor concerning the particular tax consequences of the merger as
they affect his or her individual circumstances, including the impact of any
applicable estate, gift, state, local, foreign or other tax.
Investment Agreement
As part of the agreement, Northern Lehigh has entered into an investment
agreement with Harleysville National Corporation, pursuant to which Harleysville
National Corporation has an option to acquire certain shares of Northern Lehigh.
The investment agreement is attached as Exhibit "B" to the agreement, which is
attached to this proxy statement/prospectus as Annex A.
The investment agreement gives Harleysville National Corporation an option
to purchase, under certain circumstances, up to 27,760 shares of Northern
Lehigh's common stock at an exercise price of $57.00 per share, subject to
certain adjustments, which are contained in the investment agreement.
The option is designed to compensate Harleysville National Corporation for
its risks, costs and expenses and the commitment of resources associated with
the merger in the event the merger is not completed due to an attempt by a third
person to gain control of Northern Lehigh .
The option also includes provisions giving Northern Lehigh the right to
repurchase shares of Northern Lehigh common stock issued under the option in
certain limited circumstances and includes provisions for issuance of a
substitute option to purchase shares of the surviving or acquiring company in
the event of a merger or other acquisition of Northern Lehigh.
Unless the merger is completed or unless, certain conditions to closing
become incapable of occurring or Harleysville National Corporation has breached
of the agreement, Harleysville National Corporation's rights under the
investment agreement will not terminate until the later of June 30, 1999, or
eighteen (18) months after the date of an event ( described in paragraph 2 of
the investment agreement) that permits exercise or sale of the option by
Harleysville National Corporation. As of the date of this proxy
statement/prospectus, the parties to the investment agreement are not aware of
any event that would give Harleysville National Corporation the right to
exercise the option.
Accounting Treatment
The agreement contemplates that the merger will be treated as a pooling of
interests for financial accounting purposes. This accounting treatment is
different from a purchase transaction. Under this accounting method, the assets
and liabilities of Northern Lehigh will be carried forward to Harleysville
National Corporation North at their historical recorded bases. Results of
operations of Harleysville National Corporation North will include the results
of both companies for the entire fiscal year in which the merger occurs. The
reported balance sheet amounts and results of operations of the separate
corporations for prior periods will be combined, reclassified
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and conformed, as appropriate, to reflect the combined financial position and
results of operations for Harleysville National Corporation North.
If Harleysville National Corporation would be required to purchase more
than 10% of the outstanding shares of Northern Lehigh common stock for cash, due
to the purchase of fractional shares and the exercise of dissenters' rights by
Northern Lehigh shareholders, or if other conditions arise that would prevent
the merger from being treated as a pooling of interests for financial accounting
purposes, Harleysville National Corporation has the right to terminate the
agreement and to cancel the merger.
Restriction on Resale of Stock Held By Affiliates
The shares of Harleysville National Corporation common stock to be issued
upon completion of the merger have been registered with the Commission under the
Securities Act. Following the merger, these shares may be freely resold or
otherwise transferred by all former shareholders of Northern Lehigh, except
those former shareholders who are deemed "affiliates" of Northern Lehigh ,
within the meaning of Commission Rules 144 and 145. In general terms, any person
who is an executive officer, director or 10% shareholder of Northern Lehigh at
the time of the meeting may be deemed to be an affiliate of Northern Lehigh for
purposes of Commission Rules 144 and 145. This proxy statement/prospectus does
not cover resales of shares of Harleysville National Corporation common stock to
be issued to affiliates of Northern Lehigh in connection with the transaction.
Harleysville National Corporation common stock received by persons who are
deemed to be affiliates of Northern Lehigh may be resold only:
* in compliance with the provisions of Commission Rule 145(d);
* in compliance with the provisions of another applicable exemption from
the registration requirements of the Securities Act; or
* pursuant to an effective registration statement filed with the
Commission.
In general terms, Commission Rule 145(d) would permit an affiliate of Northern
Lehigh to sell shares of Harleysville National Corporation common stock received
by him or her in ordinary brokerage transactions subject to certain limitations
on the number of shares which may be resold in any consecutive three (3) month
period. An affiliate of Northern Lehigh may not, as a general rule and subject
to an exception in a case of certain de minimis sales:
* sell any shares of Northern Lehigh common stock during the 30-day
period immediately preceding the day of the merger; or
* sell any shares of Harleysville National Corporation common stock
received by him or her in exchange for his or her shares of Northern
Lehigh common stock until after the publication of financial results
covering at least thirty (30) days of post-merger combined operations.
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The ability of affiliates to resell shares of Harleysville National
Corporation common stock received in the transaction under Rule 144 or Rule 145,
as summarized herein generally, will be subject to Harleysville National
Corporation 's having satisfied its Exchange Act reporting requirements for
specified periods prior to the time of sale. Affiliates also would be permitted
to resell Harleysville National Corporation common stock received in the
transaction pursuant to an effective registration statement under the Securities
Act or another available exemption from the Securities Act regulations
requirements. This proxy statement/prospectus does not cover any resales of
Harleysville National Corporation common stock received by persons who may be
deemed to be affiliates of Harleysville National Corporation or Northern Lehigh.
Each person who may be an affiliate of Northern Lehigh is required, prior
to the closing, to provide Harleysville National Corporation with a letter
agreeing to abide by the limitations imposed by the Commission regarding the
sale or other disposition of the shares of Harleysville National Corporation
common stock that the shareholders will receive in the merger.
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COMPARATIVE STOCK PRICES AND DIVIDENDS
AND RELATED SHAREHOLDER MATTERS
Common Stock of Harleysville National Corporation
Harleysville National Corporation common stock is quoted on the National
Market System of Nasdaq under the symbol "HNBC." The table below shows, for the
periods indicated, the high and low bid quotations for Harleysville National
Corporation common stock as reported on Nasdaq, and cash dividends paid per
share. The quotations 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 periods.
Cash Dividends
1998 High Low Paid Per Share
---- ---- --- --------------
First Quarter $ 43.50 $ 39.00 $ .24
Second Quarter 43.13 40.06 .24
Third Quarter 42.88 34.50 .25
Fourth Quarter - .27
Cash Dividends
1997 High Low Paid Per Share
---- ---- --- --------------
First Quarter(1) $ 27.38 $ 23.10 $ .210
Second Quarter(1) 32.00 25.48 .210
Third Quarter 38.75 31.25 .230
Fourth Quarter 42.00 36.50 .260
Cash Dividends
1996 High(1) Low(1) Paid Per Share
---- ---- --- --------------
First Quarter(2) $ 25.85 $ 23.58 $ .181
Second Quarter(2) 25.24 23.33 .181
Third Quarter 25.24 22.38 .200
Fourth Quarter 24.76 22.38 .238
- --------------------
(1) Adjusted for a 5% stock dividend effective June 30, 1997.
(2) Adjusted for a 5% stock dividend effective June 30, 1996.
On December 2, 1998, the closing bid and asked quotations for Harleysville
National Corporation common stock as reported on Nasdaq were, respectively,
$38.25 and $38.75. As of November 19, 1998, Harleysville National Corporation
common stock was held by 2,775 holders of record. Harleysville National
Corporation 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.
-49-
<PAGE>
Common Stock of Northern Lehigh
The last reported sale price of Northern Lehigh common stock as reported on
the OTC Bulletin Board was 100 shares at $101.50 per share on November 10, 1998.
Northern Lehigh common stock has historically been traded in the
over-the-counter market, and is quoted and transactions are reported on the OTC
Bulletin Board and in privately negotiated transactions. Northern Lehigh has in
the past paid regular quarterly dividends to its shareholders on or about
January 1, April 1, July 1 and October 1, of each year.
-50-
<PAGE>
DESCRIPTION OF HARLEYSVILLE NATIONAL CORPORATION
AND DESCRIPTION OF HARLEYSVILLE NATIONAL CORPORATION COMMON
STOCK
Information Concerning Harleysville National Corporation
Through its subsidiaries, Harleysville National Corporation engages in the
general commercial and retail banking business. Harleysville National
Corporation's financial institution subsidiaries operate thirty (30) banking
offices in Bucks County, Carbon County, Chester County, and Montgomery County,
Schuylkill County and Wayne County, Pennsylvania. As of September 30, 1998,
Harleysville National Corporation had consolidated total assets of approximately
$1,260,619,000. The banking subsidiaries operate under the primary supervision
of the Office of the Comptroller of the Currency. The Harleysville National Bank
and Trust Company and The Citizens National Bank of Lansford are also authorized
to engage in trust activities.
As a registered bank holding company, Harleysville National Corporation is
subject to regulation under the Bank Holding Company Act of 1956, as amended,
and the rules and regulations of the Board of Governors of the Federal Reserve
System. Under applicable Board of Governors of the Federal Reserve System
policies, a bank holding company such as Harleysville National Corporation, 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.
The principal executive offices of Harleysville National Corporation are
located in Harleysville, Pennsylvania. As of September 30, 1998, Harleysville
National Corporation and its three subsidiary banks had in the aggregate
approximately 465 full-time equivalent employees.
Incorporation of Certain Documents by Reference
Certain documents previously filed by Harleysville National Corporation
with the Commission are incorporated by reference into this proxy
statement/prospectus as follows:
* The Definitive Proxy Statement on Schedule 14A for the Annual Meeting
of Shareholders on April 14, 1998;
* Harleysville National Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997;
* Harleysville National Corporation's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998;
* Harleysville National Corporation's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998;
* Harleysville National Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998; and
* Harleysville National Corporation's Current Report on Form 8-K dated
August 4, 1998.
-51-
<PAGE>
All documents filed by Harleysville National Corporation pursuant to
Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act after the date of this
proxy statement/prospectus and prior to the merger, are incorporated by
reference into this proxy statement/prospectus and are deemed a part of the
proxy statement/prospectus from the date of filing of each document. Any
statement contained in a document incorporated by reference is deemed to be
modified or superseded for purposes of this proxy statement/prospectus to the
extent that a statement contained herein or in any subsequently filed document
that is also incorporated by reference herein modifies or supersedes the
statement. Any statement so modified or superseded should not be deemed, except
as so modified or superseded, to constitute a part of this proxy
statement/prospectus. All information appearing in this proxy
statement/prospectus should be read in conjunction with, and is qualified in its
entirety by, the information, financial statements (including notes thereto)
appearing in the documents incorporated herein by reference, except to the
extent set forth in this paragraph
Acquisitions by Harleysville National Corporation
Harleysville National Corporation was incorporated in June, 1982. On
January 1, 1983, Harleysville National Corporation became the parent bank
holding company of The Harleysville National Bank and Trust Company, a
wholly-owned subsidiary of Harleysville National Corporation. On February 13,
1991, Harleysville National Corporation acquired all of the outstanding common
stock of The Citizens National Bank of Lansford. On June 1, 1992, the
Corporation acquired all of the outstanding stock of Summit Hill Trust Company.
On September 25, 1992, Summit Hill merged into and is now operating as a branch
office of The Citizens National Bank of Lansford. On July 1, 1994, Harleysville
National Corporation acquired all of the outstanding stock of Security National
Bank. On March 1, 1996, Harleysville National Corporation acquired all of the
outstanding common stock of Farmers & Merchants Bank (Honesdale, P.A.). Farmers
& Merchants Bank was merged into The Citizens National Bank of Lansford and is
now operating as a branch office of The Citizens National Bank of Lansford. On
March 17, 1997, Harleysville National Corporation Financial Company was
incorporated as a Delaware corporation. Harleysville National Corporation
Financial Company's principal business function is to expand the investment
opportunities of Harleysville National Corporation. Harleysville National
Corporation is primarily a bank holding company which provides financial
services through its three bank subsidiaries. Since commencing operations,
Harleysville National Corporation's business has consisted primarily of managing
its subsidiary banks, and its principal source of income has been dividends paid
by the banks. Harleysville National Corporation is registered as a bank holding
company under the Bank Holding Company Act of 1956.
Loans
Harleysville National Corporation, 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 Harleysville National Corporation's subsidiaries and it also exposes
Harleysville
-52-
<PAGE>
National Corporation and its subsidiaries to potential losses upon borrower
default. In order to minimize the occurrence of loss, Harleysville National
Corporation'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.
Harleysville National Corporation'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.
Harleysville National Corporation believes that this local knowledge, when
combined with prudent underwriting standards, overcomes the risks associated
with the geographic concentration of loans.
Description of Harleysville National Corporation Common Stock
Harleysville National Corporation is authorized to issue 30,000,000 shares
of Harleysville National Corporation common stock of which 7,037,814 shares were
issued and outstanding as of September 30, 1998. Harleysville National
Corporation also has 3,000,000 shares of preferred stock authorized for
issuance. No preferred stock is outstanding as of September 30, 1998.
Dividends
The holders of Harleysville National Corporation common stock are entitled
to receive dividends when, as and if declared by the Board of Directors out of
legally available funds. Harleysville National Corporation 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 Harleysville National Corporation to pay dividends to its
shareholders is dependent primarily upon the earnings and financial condition of
The Harleysville National Bank and Trust Company, The Citizens National Bank of
Lansford, and Security National Bank. Harleysville National Corporation expects
to obtain funds for the payment of dividends on Harleysville National
Corporation Stock, for the foreseeable future, primarily from dividends paid to
Harleysville National Corporation by its subsidiaries. These dividends are
subject to certain statutory limitations.
Under applicable federal laws, the dividends that Harleysville National
Corporation's banking subsidiaries may pay without prior regulatory approval are
subject to certain prescribed limitations. Because Harleysville National
Corporation's banking subsidiaries are national banks, the approval of the
Office of the Comptroller of the Currency is required under federal law if the
total of all dividends declared during any calendar year exceed the total of the
net profits of the respective bank for the year, combined with its retained net
profits, for the two preceding years. In addition to the foregoing statutory
restrictions on dividends, the Office of the Comptroller of the Currency also
has general authority to prohibit a national bank from engaging in an unsafe or
unsound banking practice. The Office of the Comptroller of the Currency could
-53-
<PAGE>
consider a bank's payment of a dividend, depending upon the financial condition
of the bank involved and other factors, to be an unsafe or unsound practice.
Harleysville National Corporation paid cash dividends of $0.91 per share in
1997, adjusted to reflect a 5% stock dividend effective on June 30, 1997.
Harleysville National Corporation paid cash dividends of $.24, $.24 and $.25,
respectively, for each of the first three quarters of 1998.
Liquidation
In the event of liquidation, dissolution or winding up of Harleysville
National Corporation , Harleysville National Corporation shareholders are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of Harleysville National Corporation
preferred stock, if any, then outstanding. On September 30, 1998, no shares of
Harleysville National Corporation preferred stock were issued or outstanding
under the Articles of Incorporation of Harleysville National Corporation.
Dividend Reinvestment Plan
Harleysville National Corporation has a Dividend Reinvestment and Stock
Purchase Plan. Shareholders of Harleysville National Corporation may elect to
participate in the plan. The plan is administered by American Stock Transfer and
Trust Company, 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 Harleysville National
Corporation common stock either in the market or from Harleysville National
Corporation's authorized but unissued shares of common stock. Participating
shareholders may make additional voluntary cash payments that are also used by
the plan agent to purchase additional shares of stock. Shares of Harleysville
National Corporation common stock held for the account of participating
shareholders and are voted by the plan agent as instructed by each participating
shareholder.
Securities Laws
Harleysville National Corporation, as a business corporation, is subject to
the registration and prospectus delivery requirements of the Securities Act.
Harleysville National Corporation is also subject to similar requirements under
state securities laws. The Harleysville National Corporation common stock is
registered with the Commission under Section 12(g) of the Exchange Act, and
Harleysville National Corporation is subject to the periodic reporting, proxy
solicitation and insider trading requirements of the Exchange Act. The executive
officers, directors and those who are beneficial owners of more than 10 percent
of the issued and outstanding shares of Harleysville National Corporation common
stock are subject to certain restrictions affecting their right to sell shares
of Harleysville National Corporation 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
-54-
<PAGE>
of the Exchange Act and may sell shares of Harleysville National Corporation
common stock only:
* in compliance with the provisions of Commission Rule 144;
* in compliance with the provisions of another applicable exemption from
the registration requirements of the Securities Act; or
* pursuant to an effective registration statement filed with the
Commission under the Securities Act.
Anti-takeover Provisions
The Pennsylvania Business Corporation Law of 1988 and Harleysville National
Corporation'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
Pennsylvania law relating to corporations that have their securities registered
with the Commission under Section 12 of the Securities Act.
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 Harleysville National Corporation's common stock at that
time. In addition, these provisions may have the effect of assisting
Harleysville National Corporation'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 Harleysville National
Corporation's business.
Two of these statutory provisions have the effect of eliminating the rights
of the shareholders of registered corporations to:
* call a special meeting of shareholders; and
* propose an amendments to the Articles of Incorporation.
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 Harleysville National Corporation's Board of Directors. This
provision may have the effect of making Harleysville National Corporation 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 may discourage attempts by shareholders to call a
special meeting of shareholders. They also provide a greater time for
consideration of any shareholder proposal to the extent that the proposal must
be deferred until the next annual meeting of shareholders. Also, when made,
shareholder proposals must comply with certain notice requirements and proxy
solicitation rules. These provisions of Pennsylvania law 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
-55-
<PAGE>
Directors or of its Executive Committee if, in their judgment, there are matters
to be acted upon which are in the best interest of Harleysville National
Corporation and its shareholders.
Harleysville National Corporation'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 include:
* authorization of 30,000,000 shares of Harleysville National
Corporation common stock and 3,000,000 shares of preferred stock;
* lack of preemptive rights for shareholders to subscribe to purchase
additional shares of stock on a pro rata basis;
* the necessity for the affirmative vote of the holders of 80 percent of
Harleysville National Corporation's common stock to approve an
amendment to Harleysville National Corporation's Bylaws or to change
an amendment to its Bylaws that was approved by the Board of
Directors; and
* the necessity for the affirmative vote of the holders of 80 percent of
Harleysville National Corporation's common stock to approve a merger,
consolidation, liquidation, or sale of substantially all assets unless
the 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 is required for approval.
These provisions could give the holders of a minority of Harleysville National
Corporation's outstanding shares a veto power over any merger, consolidation,
dissolution or liquidation of Harleysville National Corporation, the sale of all
or substantially all of its assets or an amendment to its Bylaws unless 75
percent of all members of the Board of Directors and a majority of the
shareholders believes that the transaction is desirable and beneficial. Without
these provisions in Harleysville National Corporation's Articles of
Incorporation and Bylaws, the affirmative vote of at least a majority of
Harleysville National Corporation's common stock outstanding entitled to vote
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 or staggered board are included in the amended
Bylaws of Harleysville National Corporation. A classified board has 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, 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.
Harleysville National Corporation's amended Articles of Incorporation
contain an additional anti-takeover provision that enables the Board of
Directors to oppose a tender offer on the basis of factors other than economic
benefit. Based on the Board's responsibilities to certain
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<PAGE>
constituent groups, including Harleysville National Corporation's subsidiaries
and the communities that they serve, the Board may consider factors such as:
* the impact the acquisition of Harleysville National Corporation 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 Harleysville National Corporation 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 Harleysville National Corporation , and
without willful misconduct or recklessness.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Harleysville
National Corporation, Harleysville National Corporation has been informed that,
in the opinion of the Commission, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
Comparison of Shareholder Rights
After the merger, the shareholders of Northern Lehigh will become
shareholders of Harleysville National Corporation. There are certain differences
in the rights of shareholders of these two companies These differences arise out
of differences in the articles of incorporation and bylaws of the two companies.
The most significant of these differences are those relating to anti-takeover
protection and public registration.
The Bylaws of Harleysville National Corporation 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. The Northern Lehigh Board of Directors is classified and divided
into three classes of directors and, accordingly, approximately one-third of the
directors are elected each year for a term of three years. The classification of
the Board of Directors of a company makes it more difficult for the shareholders
of the company 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 Harleysville National Corporation's
shareholders in order to replace a majority of Harleysville National
Corporation's directors, whereas it would take two annual meetings of Northern
Lehigh's shareholders to replace a majority of Northern Lehigh's Board of
Directors.
In addition to the classification of the Board of Directors, the Articles
of Incorporation and Bylaws of Harleysville National Corporation include a
number of provisions that are
-57-
<PAGE>
intended to protect the shareholders of Harleysville National Corporation
(including the present shareholders of Northern Lehigh , who will become
shareholders of Harleysville National Corporation following the merger), but
which may be considered to be anti-takeover in nature and may serve to entrench
the current management of Harleysville National Corporation. See "DESCRIPTION OF
HARLEYSVILLE NATIONAL CORPORATION AND DESCRIPTION OF HARLEYSVILLE NATIONAL
CORPORATION COMMON STOCK--Anti-takeover Provisions."
Harleysville National Corporation common stock, unlike Northern Lehigh
common stock, is registered with the Commission under Section 12(g) of the
Exchange Act. As a result, Harleysville National Corporation is subject to the
periodic reporting, proxy solicitation and insider trading requirements of the
Exchange Act, which do not apply to Northern Lehigh. Pursuant to these
requirements, Harleysville National Corporation makes available to shareholders,
potential investors and the general public a significant amount of information
regarding Harleysville National Corporation in the form of proxy statements,
periodic reports and other Commission filings. In addition, directors, executive
officers and beneficial shareholders of more than 10 percent of the issued and
outstanding shares of Harleysville National Corporation common stock are subject
to the insider trading reporting requirements and short-swing profit recapture
provisions of Section 16 of the Exchange Act.
The material differences between Northern Lehigh common stock and
Harleysville National Corporation common stock and the rights of their
respective holders, as of September 30, 1998, are summarized in the following
table:
<TABLE>
<CAPTION>
Northern Lehigh Harleysville National Corporation
--------------- ---------------------------------
<S> <C> <C>
Title Common stock, $10.00 par value per share Common stock, $1.00 par value per share
Shares Authorized 500,000 30,000,000
Shares Issued and Outstanding 139,498 7,037,814
Preferred Stock None authorized 3,000,000 shares authorized, none issued
Preemptive Rights None None
Voting: Election of Directors Non-cumulative Non-cumulative
Classification of Board of Directors Board of Directors divided into 3 classes Board of Directors divided into 4 classes
with 3 year terms; approximately 1/3 with 4 year terms; approximately 1/4 of
elected each year directors elected each year
Voting: Other Matters One vote for each share owned of record One vote for each share owned of record
Mergers, Consolidations, Liquidations Approval by a vote of at least 66 2/3% of Approval by a vote of 80% of outstanding
Sales of Substantially All Assets outstanding shares of common stock is shares of common stock. If such
required transaction has received prior approval
of at least 75% of all members of the
Board of Directors, then a majority of
the outstanding shares of common stock
would be required
-58-
<PAGE>
Special Shareholder Meetings Upon request of Chairman of the Board of Upon request by the Chairman of the
Directors, the Executive Vice President or Board, President, the Executive Vice
a majority of the Board of Directors. In President, if any, or a majority of the
addition, the holders of not less than 40% Board of Directors, or by its Executive
of the outstanding shares may call a Committee.
special meeting
Authorization to Issue Additional Shares Approval by a majority of the Board of Approval by a majority vote of the Board
Directors of Directors
Repurchase of Additional Shares Stock can be repurchased up to the extent Stock can be repurchased up to the extent
of unrestricted or unreserved undivided of unrestricted or unreserved undivided
profits and as much of its unrestricted profits and as much of its unrestricted
surplus as has been made available for surplus as has been made available for
such purpose by the prior affirmative vote such purpose by the prior affirmative vote
of shareholders; stock cannot be of shareholders; stock cannot be
repurchased when Northern Lehigh is repurchased when Harleysville National
insolvent or would be made insolvent by Corporation is insolvent or would be made
the purchase; and no more than 10 percent insolvent by the purchase; and no more
of the outstanding shares can be than 10 percent of the outstanding shares
repurchased in any twelve (12) month can be repurchased in any twelve (12)
period without prior regulatory approval; month period without prior regulatory
and provisions of the Securities Act approval; and provisions of the Securities
restrict the timing, nature and amount of Act restrict the timing, nature and amount
repurchases. of repurchases.
Stock Incentive Plan None Yes
Dissenters' Rights Yes Yes
Dividend Reinvestment Plan None Yes
Market Listed for quotation on the OTC Bulletin Listed for quotation on National Market
Board. System of Nasdaq
Registered Under Exchange Act No Yes
</TABLE>
-59-
<PAGE>
INFORMATION CONCERNING NORTHERN LEHIGH BANCORP, INC.
Description of Business and Property
Northern Lehigh was incorporated on April 27, 1983, to act as a holding
company for The Citizens National Bank of Slatington. The Citizens National Bank
of Slatington commenced operations on February 1, 1902 as a national banking
association chartered under the laws of the United States of America by the
Office of the Comptroller of the Currency. As a national bank, The Citizens
National Bank of Slatington is subject to regulation and periodic examination by
the Office of the Comptroller of the Currency. The Citizens National Bank of
Slatington's deposits are insured by the Federal Deposit Insurance Corporation.
The Citizens National Bank of Slatington's principal executive offices are
located at 502 Main Street, Slatington, Pennsylvania 18080-0008.
Below is a schedule of all The Citizens National Bank of Slatington's
properties, all of which are owned by the bank.
<TABLE>
<CAPTION>
Nature of Bank Office
or Facility Address Date Acquired
--------------- ------- -------------
<S> <C> <C>
Main Office 502 Main Street July 1, 1907
Slatington, PA 18080
Handi-Bank Office 705 Main Street January 15, 1979
Slatington, PA 18080
Lehigh Twp. Office 4421 Lehigh Drive December 19, 1985
Walnutport, PA 18088
</TABLE>
The Citizens National Bank of Slatington is a full service commercial bank
that offers a large range of commercial and retail banking services to its
customers, including personal and business checking, NOW accounts, money market
accounts, savings accounts, IRA accounts, and certificates of deposit. The bank
also offers installment loans, home equity loans, lines of credit, letters of
credit, revolving credit, term loans and commercial mortgage loans, as well as
residential and commercial construction loans.
In addition, The Citizens National Bank of Slatington provides safe deposit
boxes, traveler checks, money orders, wire transfers of funds, lock box
collections and direct deposits of social security and payroll checks. The bank
also provides credit card processing services to local merchants and retailers
and is a member of "MAC" system and provides customers with access to this
automated teller machine at work.
In the event that loan requests may exceed The Citizens National Bank of
Slatington's lending limit to any one customer, bank seeks to arrange such loans
on a participation basis with
-60-
<PAGE>
other financial institutions. The offering or continuation of the above
enumerated services are periodically evaluated.
The Citizens National Bank of Slatington competes with other commercial
banks and savings and loan associations, most of which are larger than The
Citizens National Bank of Slatington. The bank also competes with major regional
banking and financial institutions headquartered elsewhere. The Citizens
National Bank of Slatington generates the overwhelming majority of its deposit
and loan volume within its primary service area, i.e. Lehigh County,
Pennsylvania. The majority of the residents and business and employees within
The Citizens National Bank of Slatington's primary service area are within
driving time - thirty (30) minutes from The Citizens National Bank of
Slatington's office. There are 178 offices of commercial banks headquartered or
which have a presence in the greater metropolitan Allentown area where The
Citizens National Bank of Slatington is located. The bank also competes with
branch offices of numerous banks and financial institutions that are
headquartered elsewhere.
The primary service area constitutes the community delineated for The
Citizens National Bank of Slatington's Community Reinvestment Act Statement
which states the bank intends to meet the credit needs of the entire local
community. It is the policy of The Citizens National Bank of Slatington to
evaluate all applications for credit without regard to the applicant's race,
color, creed, sex, age or marital status.
The primary service area includes a wide variety of residential
neighborhoods, commercial businesses, retail stores, industrial complexes and
service institutions. The Allentown/Lehigh County area has a large number of
established businesses and a substantial employment base.
Employees
As of September 30, 1998, Northern Lehigh had 27 full-time equivalent
employees.
Legal Proceedings
The nature of the business of Northern Lehigh and The Citizens National
Bank of Slatington generates a certain amount of litigation involving matters in
the ordinary course of business. In the opinion of management of Northern Lehigh
and The Citizens National Bank of Slatington, there are no proceedings pending
to which Northern Lehigh and The Citizens National Bank of Slatington is a party
or to which their property is subject, which, if determined adversely to them,
would be material in relation to Northern Lehigh's or The Citizens National Bank
of Slatington's undivided profits or financial condition, nor are there any
proceedings pending, other than ordinary routine litigation, incident to the
business of Northern Lehigh or The Citizens National Bank of Slatington. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against Northern Lehigh or The Citizens National Bank of Slatington
by government authorities or others.
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<PAGE>
Northern Lehigh Common Stock Market Price and Dividends
The Northern Lehigh common stock has historically been traded on a limited
basis in the over-the-counter market, and is quoted and transactions are
reported on the OTC Bulletin Board, and in privately negotiated transactions.
The last reported sale of Northern Lehigh common stock before public
announcement of the agreement and related merger was a trade of 900 shares at
$56.00 per share on May 19, 1998. The last reported sale of Northern Lehigh
common stock, prior to the date of this proxy statement/prospectus, as reported
on the OTC Bulletin Board was 100 shares at $101.50 per share on November 10,
1998. There were 268 holders of record of Northern Lehigh common stock as of
September 30, 1998.
Northern Lehigh shareholders are entitled to receive the dividends when, as
and if declared by the Board of Directors out of legally available funds.
Northern Lehigh has historically paid quarterly cash dividends to its
shareholders on or about April 1, July 1, October 1, and January 1 of each year.
The ability of Northern Lehigh to pay dividends to its shareholders is dependent
upon receipt of dividends from The Citizens National Bank of Slatington.
Under federal law, the approval of the Office of the Comptroller of the
Currency is required for the payment of dividends in any calendar year by a
subsidiary national bank if the total of all dividends declared by the bank in a
calendar year exceeds that bank's net profits for that year combined with its
retained net profits for the preceding two calendar years. Moreover, no
dividends may be paid by a national bank if its "losses" equal or exceed its
undivided profits account, and no dividend may be paid in an amount in excess of
its "net profits then on hand." In addition, the Office of the Comptroller of
the Currency may find a dividend payment which otherwise meets the criteria
specified in the law, nonetheless to constitute an unsafe or unsound practice.
In accordance with the regulatory restrictions described above, as of
December 31, 1997, The Citizens National Bank of Slatington had approximately
$984,784 available for the payment of dividends. The agreement permits Northern
Lehigh to make normal dividend payments, not in excess of $0.44 per share during
the fourth quarter of 1998 to its shareholders, consistent with past practice,
prior to the day of the merger.
Northern Lehigh paid cash dividends of $1.51 per share in 1997, and $.44
for the first, second and third quarters of 1998.
Year 2000 Issue
The Year 2000 Problem
The following section contains forward-looking statements which involve
risks and uncertainties. Northern Lehigh's actual impact of the Year 2000 issue
could materially differ from that which is anticipated in these forward-looking
statements as a result of certain factors identified below.
-62-
<PAGE>
The Year 2000 problem issue is the result of potential problems with
software and computer systems or any equipment with computer chips (collectively
"systems") that store the year portion of the date as just two digits (e.g. 98
for 1998). Systems using this two-digit approach will not be able to determine
whether "00" represents the year 2000 or 1900. The problem, if not corrected,
will make those systems fail altogether or, even worse, allow them to generate
incorrect calculations causing a disruption of normal computer and related
operations.
Readiness Efforts
In 1997, a comprehensive project plan to address the Year 2000 problem and
related issues as those relate to The Citizens National Bank of Slatington's and
its affiliates(1) operations was developed, approved by the Board of Directors
and implemented. The scope of the plan includes five phases of Awareness,
Assessment, Renovation, Validation and Implementation as defined by Federal
Financial Institutions Examination Council and the banking regulatory agencies
which regulate Northern Lehigh and The Citizens National Bank of Slatington.
A project team that consists of key members of The Citizens National Bank
of Slatington's technology staff, representatives of functional business units
and senior management was developed. Additionally, the duties of the Senior Vice
President and Chief Operations Officer were aligned to serve primarily as the
Year 2000 project manager.
As assessment of the impact of the Year 2000 issue on The Citizens National
Bank of Slatington's computer systems has been completed. The scope of the
project also includes other operational and environmental systems since they may
be impacted if embedded computer chips control the functionality of those
systems. From the assessment, The Citizens National Bank of Slatington has
identified and prioritized those systems deemed to be mission critical or those
that have a significant impact on normal operations.
Slatington relies on third party vendors and service providers for its data
processing capabilities and to maintain its computer systems. Formal
communications with those providers of data processing capabilities and other
external counterparties were initiated in 1997 and 1998 to assess the Year 2000
readiness of their products and services. Their progress in meeting their
targeted schedules is being monitored for any indication that they may not be
able to address the problems in time. Thus far, responses indicate that most of
the significant providers currently have compliant versions available or are
well into the renovation and testing phases with completion scheduled for
sometime in 1998. However, The Citizens National Bank of Slatington can give no
guarantee that the systems of these service providers and vendors on which The
Citizens National Bank of Slatington's systems rely will be timely renovated.
Additionally, The Citizens National Bank of Slatington has implemented a
plan to manage the potential risk posed by the impact of the Year 2000 issue on
its major customers.
- ------------------------
(1) Slatington, the only subsidiary of Northern Lehigh, is addressing the Year
2000 issues for Northern Lehigh .
-63-
<PAGE>
Formal communications have been initiated, and the assessment is scheduled to be
significantly completed by December 31, 1998.
Current Status
The project team estimates that The Citizens National Bank of Slatington's
Year 2000 readiness project is 53% complete and that the activities involved in
assessing external risks and operational issues are 69% completed overall. The
following table provides a summary of the current status of the five phases
involved and a projected timetable for completion.
<TABLE>
<CAPTION>
Projected
Project Phase % Completed Completion Comments
- ------------- ----------- ------------ --------
<S> <C> <C> <C>
Awareness 100% Completed
Assessment 100% Completed
Renovation 80% March 31, 1999
Critical systems
Validation 50% March 31, 1999
Implementation 80% March 31, 1999
OVERALL 75%
</TABLE>
Costs
Slatington has thus far primarily used and expects to continue to primarily
use internal resources to implement its readiness plan and to upgrade or replace
and test systems affected by the Year 2000 issue. The total cost to The Citizens
National Bank of Slatington of these Year 2000 compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. In total, The Citizens National Bank of
Slatington estimates that its costs, excluding personnel expenses, for Year 2000
remediation and testing of its computer systems will amount to less than $50,000
over the three-year period from 1997 through 1999. Not included in this estimate
is the cost to replace fully depreciated systems during this period, which
occurs in the normal course of business and is not directly attributable to the
Year 2000 issue.
The costs and the timetable in which The Citizens National Bank of
Slatington plans to complete the Year 2000 readiness activities are based on
management's best estimates, which were derived using numerous assumptions of
future events including the continued availability of certain resources, third
party readiness plans and other factors. The Citizens National Bank of
Slatington can make no guarantee that these estimates will be achieved, and
actual results could differ from such plans.
-64-
<PAGE>
Risk Assessment
Based upon current information related to the progress of its major vendors
and service providers, management has determined that the Year 2000 issue will
not pose significant operational problems for its computer systems. This
determination is based on the ability of those vendors and service providers to
renovate, in a timely manner, the products and services on which The Citizens
National Bank of Slatington's systems rely. However, The Citizens National Bank
of Slatington can give no guarantee that the systems of these suppliers will be
timely renovated.
Contingency Plan
Realizing that some disruption may occur despite its best efforts, The
Citizens National Bank of Slatington is in the process of developing contingency
plans for each critical system in the event that one or more of those systems
fail. While this is an ongoing process, The Citizens National Bank of Slatington
expects to have the plan substantially documented by December 31, 1998.
IMPACT OF YEAR 2000 ISSUE
The following section contains forward-looking statements that involve
risks and uncertainties. Harleysville National Corporation's actual impact of
the Year 2000 issue could materially differ from that which is anticipated in
these forward-looking statements as a result of certain factors identified
below.
The "Year 2000 Issue" is the result of computer programs having been
written using two digits rather than four to define the applicable year. Any of
Harleysville National Corporation's computer systems that have date-sensitive
software or date- sensitive hardware may recognize a date using "00" as the Year
1900 rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send statements, or
engage in similar normal business activities.
Based on an ongoing assessment, Harleysville National Corporation has
determined that it will be required to modify or replace portions of its
software and hardware so that its computer systems will properly use dates
beyond December 31, 1999. Harleysville National Corporation presently believes
that as a result of modifications to existing software and hardware and
conversions to new software and hardware, the Year 2000 Issue can be mitigated.
However, if such modifications and conversions are not made, or are not
completed on a timely basis, the Year 2000 Issue could have a material adverse
impact on the operations of Harleysville National Corporation.
Harleysville National Corporation has initiated formal communications with
all of its vendors and large commercial customers to determine the extent to
which Harleysville National Corporation is vulnerable to those third parties'
failure to remediate their own Year 2000 Issue. Harleysville National
Corporation's estimated Year 2000 project costs include the costs and time
-65-
<PAGE>
associated with the impact of a third party's Year 2000 Issue, and are based on
presently available information.
For significant vendors, Harleysville National Corporation is validating
that they are Year 2000 compliant. If Harleysville National Corporation has not
validated their compliance by December 31, 1998, Harleysville National
Corporation will make plans to switch to a new vendor or system that is
compliant. For insignificant vendors, Harleysville National Corporation is not
necessarily validating that they are Year 2000 compliant. However, for any
insignificant vendor who responds that they will not be compliant by December
31, 1998, Harleysville National Corporation will seek a new vendor or system
that is compliant. For large commercial loan customers, Harleysville National
Corporation will take appropriate action based upon the customer's response.
Harleysville National Corporation has used both internal and external
resources to reprogram, or replace, and test its software and hardware for Year
2000 modifications. Harleysville National Corporation plans to complete the Year
2000 project within 9 months or no later than June 30, 1999, for all critical
systems. The total cost of the Year 2000 and systems conversion projects is
estimated at $300,000. Of the total projects' cost, approximately $100,000 is
attributable to the purchase of new software and hardware which will be
capitalized. We have expensed $125,000 to date, and we plan to expense $75,000
more before December 31, 1999. These costs are not expected to have a material
effect on the results of operations of Harleysville National Corporation.
The costs of the projects and the date on which Harleysville National
Corporation plans to complete both the Year 2000 modifications and systems
conversions are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
As a bank holding company, Harleysville National Corporation and its
subsidiaries are subject to the regulation and oversight of various banking
regulators. Their oversight includes the provision of specific timetables,
programs and guidance regarding Year 2000 issues. Regulatory examination of the
holding company and its subsidiaries' Year 2000 programs are conducted on a
quarterly basis and reports are submitted by Harleysville National Corporation
to the banking regulators on a periodic basis.
-66-
<PAGE>
NORTHERN LEHIGH BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On the following pages of this proxy statement/prospectus we present
management's discussion and analysis of the consolidated financial condition and
results of operations of Northern Lehigh, and its wholly-owned subsidiary, The
Citizens National Bank of Slatington. Management's discussion and analysis
discusses the significant changes in the results of operations, capital
resources and liquidity presented in its accompanying consolidated financial
statements for Northern Lehigh. Northern Lehigh's consolidated financial
condition and results of operations consist almost entirely of The Citizens
National Bank of Slatington's financial condition and results of operations.
Current performance does not guarantee, assure, or may not be indicative of
similar performance in the future.
The following discussion focuses on and highlights certain information
regarding Northern Lehigh. We recommend that you read this discussion in
conjunction with the Consolidated Financial Statements and related notes
appearing elsewhere in this proxy statement/prospectus.
We caution you not to place undue reliance on forward-looking statements in
this section, they reflect management's analysis only as of this date. Northern
Lehigh undertakes no obligation to publicly revise or update these
forward-looking statements to reflect subsequent events or circumstances.
-67-
<PAGE>
<TABLE>
NORTHERN LEHIGH BANCORP, INC.
SELECTED FINANCIAL DATA
<CAPTION>
(Dollars in thousands,
except per share data) September 30, December 31,
----------------- ----------------------------------------------
(unaudited)
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income & Expense:
Interest income $ 4,369 $ 4,140 $ 5,625 $ 5,208 $ 5,009 $ 4,500 $ 4,149
Interest expense 1,783 1,645 2,235 2,135 2,020 1,790 1,833
-------- --------- -------- -------- -------- ------- -------
Net interest income 2,586 2,495 3,390 3,073 2,989 2,710 2,316
Loan loss provision 75 60 90 115 70 - 108
-------- --------- -------- -------- -------- ------- -------
Net interest income
after loan loss
provision 2,511 2,435 3,300 2,958 2,919 2,710 2,208
Noninterest income 196 183 200 196 300 121 149
Noninterest expense 1,687 1,556 2,097 1,968 1,919 1,953 1,692
-------- --------- -------- -------- -------- ------- -------
Income before income
taxes 1,020 1,062 1,403 1,186 1,300 878 665
Income taxes 314 321 423 327 369 268 204
-------- --------- -------- -------- -------- ------- -------
Net income $ 706 $ 741 $ 980 $ 859 $ 931 $ 610 $ 461
======== ========= ======== ======== ======== ======= =======
Per share:
Basic $ 5.06 $ 5.41 $ 7.00 $ 6.08 $ 6.48 $ 4.25 $ 3.21
Diluted 4.97 5.34 6.93 6.03 6.45 4.23 3.20
Cash dividends paid 1.32 1.11 1.51 1.17 0.90 0.78 0.68
Weighted average number
of common shares:
Basic 139,498 137,031 140,011 141,348 143,589 143,712 143,712
Diluted 141,998 138,722 141,524 142,386 144,395 144,251 143,993
Book Value 60.08 54.95 56.30 55.66 50.50 43.57 40.42
Average Balance Sheet:
Total Assets $ 74,122 $ 70,113 $70,871 $ 68,016 $64,718 $ 63,508 $59,142
Investments & Money
Market Investments 12,808 10,381 11,000 12,691 16,501 19,588 17,146
Loans(Net of Unearned
Income) 57,849 56,225 56,357 51,875 44,620 40,211 38,405
Deposits 65,174 61,896 62,572 60,472 57,906 57,400 53,418
Borrowings - 45 33 1 17 1 -
Shareholders' equity 8,125 7,411 7,499 6,828 6,138 5,549 5,090
Balance Sheet at
Period End:
Total assets $ 72,262 $ 72,538 $72,013 $ 69,839 $68,514 $ 64,017 $62,165
Investments & Money
Market Investments 16,919 14,477 9,732 10,566 18,193 17,732 19,228
Loans(Net of Unearned
Income) 56,886 55,751 58,853 55,684 46,502 42,168 39,305
Deposits 68,166 64,209 63,458 62,047 61,317 57,787 56,427
Borrowings - - - - - - -
Shareholders' equity 8,381 7,665 7,854 7,162 6,498 5,710 5,296
Selected Operating
Ratios:
Return on average
assets (annualized) 1.27% 1.41% 1.38% 1.26% 1.44% 0.96% 0.78%
Return on average
shareholders' equity 11.59% 13.33% 13.07% 12.58% 15.17% 10.99% 9.06%
Leverage (assets
divided by
shareholders' equity) 8.62X 9.46X 9.17X 9.75X 10.54X 11.21X 11.74X
Average total loans
as a percentage of
average deposits 89% 91% 90% 86% 77% 70% 72%
Interest income/Average
Earning Assets* 8.35% 8.43% 8.49% 8.27% 8.40% 7.62% 7.56%
Interest expense/Average
Dep. & Borrowings 3.65% 3.54% 3.57% 3.53% 3.49% 3.12% 3.43%
Net interest income/
Average Earn. Assets* 4.99% 5.14% 5.17% 4.96% 5.09% 4.63% 4.26%
* Tax Equivalent Basis
</TABLE>
-68-
<PAGE>
Balance Sheet Analysis
The table below presents the major asset and liability categories on an average
daily basis for the periods presented, along with interest income and expense,
and key rates and yields. During the first nine months of 1998, the assets
showing the greatest increase were loans. On the liability side, the most
significant source of new funds was time deposits.
<TABLE>
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS EQUITY, INTEREST RATES AND
INTEREST DIFFERENTIAL:
<CAPTION>
(Dollars in thousands) Period Ended September 30,
----------------------------------
1998 1997
---- ----
Average Average Average Average
Assets Balance Rate Interest Balance Rate Interest
-------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Taxable investments $ 7,687 5.95% $ 457 $ 6,212 5.99% $ 372
Nontaxable investments (1) 204 6.86 14 743 9.02 67
------- ---- -------- ------- ----- -------
Total investment securities 7,891 5.97 471 6,955 6.31 439
Loans (1)(2) 57,849 8.92 5,162 56,225 8.87 4,987
Other rate-sensitive assets 4,917 5.47 269 3,426 5.52 189
------- ----- --------- ------- ----- --------
Total earning assets 70,657 8.35 5,902 66,606 8.43 5,615
Noninterest-earning assets 3,465 - - 3,507 - -
------- ---- --------- ------- ----- --------
Total assets $74,122 7.96% $ 5,902 $70,113 8.01% $ 5,615
======= ==== ========= ======= ===== ========
Liabilities and
Shareholders' Equity
Deposits:
Demand $ 7,858 - % $ - $ 6,783 - % $ -
Savings 34,452 3.37 1,161 33,909 3.22 1,092
Time 22,864 5.32 1,216 21,204 5.18 1,099
-------- ---- -------- ------- ---- -------
Total $ 65,174 3.65 2,377 61,896 3.54 2,191
Borrowings and other
interest- bearing
liabilities - - - 45 6.67 3
Other liabilities 823 - - 761 - -
--------- ---- --------- ------- ----- -------
Total liabilities 65,997 3.60 2,377 62,702 3.50 2,194
Shareholders' equity 8,125 - - 7,411 - -
----------- ---- --------- ------- ----- -------
Total liabiliites and
shareholders' equity $ 74,122 3.21% $ 2,377 $70,113 3.13% $ 2,194
=========== ===== ======= ======= ===== =======
Average effective rate on
interest-bearing
liabilities $ 57,316 4.15% $ 2,377 $55,158 3.98% $ 2,194
=========== ===== ======== ======= ===== =======
Interest Income/Earning
Assets $ 70,657 8.35% $ 5,902 $66,606 8.43% $ 5,615
Interest Expense/Earning
Assets $ 70,657 3.36 $ 2,377 $66,606 3.29 $ 2,194
---- -----
Effective Interest
Differential 4.99% 5.14%
===== =====
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<PAGE>
Year ended December 31,
-----------------------
(Dollars in thousands) 1998 1997
---- ----
Average Average Average Average
Assets Balance Rate Interest Balance Rate Interest
-------- ------- -------- ------- ------- --------
Investment securities:
Taxable investments $ 6,621 6.01% $ 398 $ 6,230 6.02% $ 375
Nontaxable investments (1) 609 10.18 62 1,965 8.04 158
------- ------ -------- ------- ----- -------
Total investment securities 7,230 6.36 460 8,195 6.50 533
Loans (1)(2) 56,357 8.96 5,050 51,875 8.80 4,567
Other rate-sensitive assets 3,770 5.52 208 4,496 5.32 239
------- ----- --------- ------- ----- --------
Total earning assets 67,357 8.49 5,718 64,566 8.27 5,339
Noninterest-earning assets 3,514 - - 3,450 - -
------- ---- --------- ------- ----- --------
Total assets $70,871 8.07% $ 5,718 $68,016 7.85% $ 5,339
======= ==== ========= ======= ===== ========
Liabilities and
Shareholders' Equity
Deposits:
Demand $ 7,048 - % $ - $ 6,650 - % $ -
Savings 34,174 3.29 1,123 32,895 3.15 1,035
Time 21,350 5.20 1,110 20,927 5.26 1,100
-------- ---- -------- ------- ---- -------
Total 62,572 3.57 2,233 60,472 3.53 2,135
Borrowings and other
interest- bearing
liabilities 33 6.06 2 1 - -
Other liabilities 767 - - 715 - -
--------- ---- --------- ------- ----- -------
Total liabilities 63,372 3.53 2,235 61,188 3.49 2,135
Shareholders' equity 7,499 - - 6,828 - -
----------- ---- --------- ------- ----- -------
Total liabiliites and
shareholders' equity $ 70,871 3.15% $ 2,235 $68,016 3.14% $ 2,135
=========== ===== ======= ======= ===== =======
Average effective rate on
interest-bearing
liabilities $ 55,557 4.02% $ 2,235 $53,823 3.97% $ 2,135
=========== ===== ======== ======= ===== =======
Interest Income/Earning
Assets $ 67,357 8.49% $ 5,718 $64,566 8.27% $ 5,339
Interest Expense/Earning
Assets $ 67,357 3.32 $ 2,235 $64,566 3.31 $ 2,135
---- -----
Effective Interest
Differential 5.17% 4.96%
===== =====
(1) The interest earned on nontaxable investment securities and loans is shown
on a tax equivalent basis.
(2) Nonaccrual loans have been included in the appropriate average loan balance
category, but interest on nonaccrual loans has not been included for
purposes of determining interest income.
</TABLE>
-70-
<PAGE>
Investment Securities
Total securities of $8,355,000 increased $2,876,000 from September 30, 1997
to September 30, 1998. This increase is the result of The Citizens National Bank
of Slatington increasing the securities held to maturity portfolio by $4,205,000
and reducing the securities available for sale portfolio by $1,329,000. The
primary increase in the held to maturity portfolio was in corporate debt
securities. The September 30, 1998 securities portfolio did not change
significantly from the December 31, 1997 and 1996 portfolios of $8,336,000 and
$8,426,000, respectively.
The September 30, 1998 federal funds sold of $8,564,000 was $434,000 lower
than the September 30, 1997 balance of $8,998,000. Federal funds sold at
September 30, 1998 were higher than the December 31, 1997 balance of $1,396,000
and the December 31, 1996 balance of $2,140,000.
There are no significant concentrations of securities (greater than 10% of
shareholders' equity) in any individual security issuer, except for five
corporate debt securities. These corporate debt securities mature within a three
month period and have an aggregate book value of $4,963,000 and a market value
of $4,959,000. The maturity analysis of investment securities held to maturity,
including the weighted average yield for each category as of September 30, 1998,
is as follows:
<TABLE>
Under 1 - 5 5 - 10 Over
1 year years years 10 years Total
------ ----- ----- -------- -----
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Obligations of other U.S. Government
agencies and corporations:
Carrying value $ 298 $ - $ - $ - $ 298
Weighted average yield 6.78% 0.00% 0.00% 0.00% 6.78%
Weighted average maturity 0 yrs 3 mos
Corporate Debt Securities:
Carrying value 4,963 - - - 4,963
Weighted average yield 5.81% 0.00% 0.00% 0.00% 5.81%
Weighted average maturity 0 yrs 2 mos
Total:
Carrying value 5,261 - - - 5,261
Weighted average yield 5.87% 0.00% 0.00% 0.00% 5.87%
Weighted average maturity 0 yrs 2 mos
</TABLE>
-71-
<PAGE>
The maturity analysis of securities available for sale, including the weighted
average yield for each category, as of September 30, 1998 is as follows:
Under 1 - 5 5 - 10 Over
1 year years years 10 years Total
------- ----- ------ -------- -----
(Dollars in thousands)
Obligations of other U.S.
Government agencies and
corporattions:
Amortized cost 1,941 2 - 934 2,877
Weighted average yield 5.83% 6.99% 0.00% 6.15% 5.94%
Weighted average maturity 8 yrs 6 mos
Obligations of states and
political subdivisions:
Amortized cost - - 200 - 200
Weighted average yield 0.00% 0.00% 11.17% 0.00% 11.17%
Weighted average maturity 9 yrs 2 mos
Equity Securities:
Amortized cost - - 34 - 34
Weighted average yield 0.00% 0.00% 5.51% 0.00% 5.51%
Weighted average maturity 10 yrs 0 mos
Total:
Amortized Cost 1,941 2 234 934 3,111
Weighted average yield 5.83% 6.99% 10.35% 6.15% 6.27%
Weighted average maturity 8 yrs 7 mos
Weighted average yield is commuted by dividing the annualized interest income,
including the accretion of discounts and the amortization of premiums, by the
carrying value. Tax-exempt securities were adjusted to a tax-equivalent basis
and are based on the federal statutory tax rate of 34%.
-72-
<PAGE>
The amortized cost and fair value of investment securities are as follows:
<TABLE>
<CAPTION>
September 30, 1998
--------------------
Available for Sale
- ------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Obligations of other
U.S. Governmental
agencies and
corporations $ 2,877 $ - $ (7) $ 2,870
Obligations of
states and
political
subdivisions 200 - (10) 190
Equity securities 34 - - 34
---------- -------- -------- ----------
Totals $ 3,111 $ - $ (17) $ 3,094
========== ========= ========= ==========
September 30, 1998
------------------
Held to Maturity
- ----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
-------- ---------- ---------- ---------
Obligations of other U.S.
Government agencies
and corporations $ 298 $ - $ - $ 298
Corporate debt securities 4,963 - (4) 4,959
------- --------- ----------- ---------
Totals $ 5,261 $ - $ (4) $ 5,257
======= ========= =========== =========
September 30, 1997
------------------
Available for Sale
- ------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
--------- ---------- ---------- ---------
U.S. Treasury Notes $ 251 $ - $ - $ 251
Obligations of other
U.S.Government agencies
and corporations 3,970 - (23) 3,947
Obligations of states and
political subdivisions 200 - (9) 191
Equity securities 34 - - 34
-------- --------- --------- ----------
Totals $ 4,455 $ - $ (32) $ 4,423
======= ========= ======== ==========
September 30, 1997
------------------
Held to Maturity
- ----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
---------- ---------- --------- --------
Obligations of other U.S.
Government agencies
and corporations $ 250 $ - $ - $ 250
Obligations of states
and political
subdivisions 20 - - 20
Corporate debt securities 786 - - 786
-------- -------- ---------- --------
Totals $ 1,056 $ - $ - $ 1,056
======== ======== ========= ========
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<PAGE>
December 31, 1997
-----------------
Available for Sale
- ------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
--------- ---------- ---------- ---------
Obligations of other U.S.
Government agencies
and corporations $ 5,678 $ 1 $ (10) $ 5,669
Obligations of states
and political
subdivisions 200 - (16) 184
Equity securities 34 - - 34
-------- --------- --------- --------
Totals $ 5,912 $ 1 $ (26) $ 5,887
========= ========= ========= ========
December 31, 1997
-----------------
Held to Maturity
- ----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
---------- ---------- ----------- ---------
Obligations of states
and political
subdivisions $ 20 $ - $ - $ 20
Corporate debt
securities 2,429 - (4) 2,425
-------- ---------- --------- --------
Totals $ 2,449 $ - $ (4) $ 2,445
======== ========= ======== ========
December 31, 1996
-----------------
Available for Sale
- ------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
-------- -------- --------- -------
U.S. Treasury Notes $ 2,005 $ 3 $ - $ 2,008
Obligations of other
U.S. Government
agencies and
corporations 1,238 - (18) 1,220
Obligations of states
and political
subdivisions 200 - (20) 180
Equity securities 34 - - 34
------- ----------- ---------- ---------
Totals $ 3,477 $ 3 $ (38) $ 3,442
======== =========== ========== =========
December 31, 1996
-----------------
Held to Maturity
- ----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
--------- ---------- ----------- --------
Obligations of other U.S. -
Government agencies
and coporations $ 2,232 $ - $ (3) $ 2,229
Obligations of states
and political
subdivisions 964 3 - 967
Corporate debt
securities 1,788 1 - 1,789
-------- ----------- ------------ ---------
Totals $ 4,984 $ 4 $ (3) $ 4,985
======== ========== ========== =======
</TABLE>
-74-
<PAGE>
Loans
Slatington grants commercial loans, residential mortgages, and consumer
loans to customers located primarily within the Lehigh Valley. The Citizens
National Bank of Slatington has a concentration of credit in commercial loans
and exposure to credit loss can be adversely impacted by downturns in local
economic and employment conditions.
Loans grew $1,119,000, or 2.0% from $56,055,000 at September 30, 1997 to
$57,174,000 at September 30, 1998. This growth was primarily the result of an
increase in real estate related loans. The September 30, 1998 loan balance was
3.5% lower than the December 31, 1997 loan balance and 2.0% higher than the
December 31, 1996 loan balance. The reduction in loans from December 31, 1997 to
September 30, 1998 was primarily the result of lower real estate related loans.
Major classifications of loans are summarized as follows at September 30, 1998
and 1997, and December 31, 1997 and 1996:
<TABLE>
<CAPTION>
September 30, December 31,
---------------- ------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Real estate loans - construction $ 2,328 $ 2,100 $ 2,665 $ 3,135
Real estate loans - other 43,748 42,935 44,718 42,866
Commercial & industrial loans 4,573 4,244 4,675 4,143
Installment loans 2,507 2,888 2,850 3,212
Municipal loans 806 829 823 848
All other loans 3,212 3,059 3,461 1,824
------- -------- -------- -------
Total 57,174 56,055 59,192 56,028
Less:
Unearned discount 288 304 339 344
Allowance for possible loan losses 743 636 667 518
-------- -------- --------- -------
Loans, Net $ 56,143 $55,115 $58,186 $55,166
======== ======= ======= =======
</TABLE>
A loan is generally classified as nonaccrual when principal or interest has
consistently been in default for a period of 90 days or more or because of a
deterioration in the financial condition of the borrower or payment in full of
principal or interest is not expected. Delinquent loans past due 90 days or more
and still accruing interest are generally well-secured and expected to be
restored to a current status in the near future. The following table details
those loans that were placed on nonaccrual status, were accounted for as
troubled debt restructurings or were delinquent 90 days or more and still
accruing interest:
-75-
<PAGE>
September 30, December 31,
(Dollars in thousands) 1998 1997 1997 1996
---- ---- ---- ----
Nonaccrual loans $ - $ 1,186 $ 925 $ 2,107
Trouble debt restructurings - 777 1,308 -
Delinquent loans 153 376 88 205
------ ------- ------- --------
Total $ 153 $ 2,339 $ 2,321 $ 2,312
===== ======= ======= =======
Allowance for Possible Loan Losses
- ----------------------------------
<TABLE>
A summary of the allowance for loan losses is as follows:
<CAPTION>
September 30, December 31,
-------------- --------------------
(Dollars in thousands) 1998 1997 1997 1996 1995
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans $ 57,849 $ 56,225 $ 53,357 $ 51,875 $ 44,620
========= ======== ======== ======== ========
Allowance, beginning of
period $ 667 $ 518 $ 518 $ 462 $ 442
-------- -------- -------- -------- --------
Loans charged off:
Commercial and industrial - - - 61 -
Installment and other - 19 19 1 9
Real estate - - - - 51
Lease financing - - - - -
-------- -------- -------- -------- --------
Total loans charged off - 19 19 62 60
-------- -------- -------- -------- --------
Recoveries:
Commercial and industrial - - - - -
Installment and other 1 19 20 3 10
Real estate - 58 58 - -
Lease financing - - - - -
------- -------- -------- -------- --------
Total recoveries 1 77 78 3 10
------- -------- -------- -------- --------
Net loans charged off (1) (58) (59) 59 50
------- -------- -------- -------- --------
Provision for loan losses 75 60 90 115 70
------- -------- -------- -------- --------
Allowance, end of period $ 743 $ 636 $ 667 $ 518 $ 462
======= ======== ======== ======== ========
Ratio of net charge offs
to average loans
outstanding 0.00% -0.10% -0.11% 0.11% 0.11%
======= ======== ======== ======== ========
<CAPTION>
December 31,
--------------------
(Dollars in thousands) 1994 1993
---- ----
<S> <C> <C>
Average loans $ 40,211 $ 38,405
======== ========
Allowance, beginning of
period $ 452 $ 397
-------- --------
Loans charged off:
Commercial and industrial - -
Installment and other 5 3
Real estate 7 59
Lease financing - -
-------- --------
Total loans charged off 12 62
-------- --------
Recoveries:
Commercial and industrial - 1
Installment and other 2 8
Real estate - -
Lease financing - -
-------- --------
Total recoveries 2 9
-------- --------
Net loans charged off 10 53
-------- --------
Provision for loan losses - 108
-------- --------
Allowance, end of period $ 442 $ 452
========= =========
Ratio of net charge offs
to average loans
outstanding 0.02% 0.14%
======== =========
</TABLE>
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 $743,000 at September 30, 1998
was 1.30% of loans, compared to 1.13% of loans at September 30, 1997. This
increase is due to The Citizens
-76-
<PAGE>
National Bank of Slatington adding $75,000 to the allowance and recovering
$1,000 of loans previously charged off, during the first nine months of 1998.
The Citizens National Bank of Slatington did not charge off any loans during the
first nine months of 1998. The $667,000 allowance for possible loan losses at
December 31, 1997 was 1.13% of loans and the $518,000 allowance for loan losses
at December 31, 1996 was .92% of loans.
Transactions in the allowance for possible loan losses account for the periods
ending September 30, 1998 and 1997, and the years ended December 31, 1997 and
1996 are summarized as follows:
September 30, December 31,
--------------- ---------------
1998 1997 1997 1996
---- ---- ---- -----
Beginning balance $ 667 $ 518 $ 518 $ 462
Provision charged to operations 75 60 90 115
Recovery of loans previously
charged off 1 77 77 3
-------- ------ ----- -------
743 655 685 580
Loans charged off - 19 18 62
-------- ------ ----- -------
Ending balance $ 743 $ 636 $ 667 $ 518
======== ====== ===== =======
Slatington premises and equipment are summarized as follows at September 30,
1998 and 1997, and Decemer 31, 1997 and 1996:
September 30, December 31,
---------------- ------------------
1998 1997 1997 1996
---- ---- ---- ----
Land $ 166 $ 166 $ 166 $ 166
Bank premises 1,324 1,260 1,308 1,212
Furniture & Equipment 1,122 1,105 1,112 1,061
------ ------ ------ ------
2,612 2,531 2,586 2,439
Less accumulated
depreciation 1,941 1,822 1,854 1,740
------ ------ ------ ------
Bank premises and
equipment, net $ 671 $ 709 $ 732 $ 699
====== ====== ====== ======
-77-
<PAGE>
Deposits
The following table is a distribution of average balances and average rates
paid on the deposit categories for September 30, 1998 and 1997, and December 31,
1997 and 1996.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 1997 1996
---------------------------------------------------------------------------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ------ ---- ------ -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing $ 7,858 -- % $ 6,783 -- % $ 7,048 -- % $ 6,650 -- %
Interest-bearing
checking accounts 8,968 2.70% 8,622 2.67% 8,554 2.68% 8,607 2.65%
Money market accounts 4,004 4.14% 4,441 3.01% 4,798 3.39% 5,435 2.65%
Savings 21,480 3.51% 20,846 3.50% 20,822 3.51% 18,853 3.52%
Time-under $100,000 20,359 5.27% 19,587 5.11% 19,539 5.14% 19,378 5.22%
Time-over $100,000 2,505 5.74% 1,617 5.84% 1,811 5.87% 1,549 5.75%
-------- ------ --------- ----- -------- ----- --------- -----
Total $ 65,174 $ 61,896 $ 62,572 $ 60,472
======== ======== ======== =========
</TABLE>
A maturity distribution of certificates of deposit of $100,000 and over is as
follows:
September 30, December 31,
(Dollars in thousands) 1998 1997 1997 1996
---- ---- ---- ----
Three months or less $ 390 $ 100 $ 821 $ 300
Over three months to six months 1,131 400 500 100
Over six months to twelve months 100 714 290 -
Over twelve months 800 910 910 1,002
------ ------ ------ ------
Total $2,421 $2,124 $2,521 $1,402
====== ====== ====== ======
Total deposits of $68,166,000 at September 30, 1998 were $3,957,000, or
6.2% higher than the September 30, 1997 balance of $64,209,000. This increase
was primarily the result of increases in time deposits, money market deposits
and interest-bearing checking accounts. These increases were partially offset by
decreases in savings and noninterest-bearing checking accounts. The September
30, 1998 deposit balance grew $4,708,000 from the December 31, 1997 balance of
$63,458,000 and $6,119,000 from the December 31, 1996 deposit balance of
$62,047,000.
Deposits are summarized as follows at September 30, 1998 and 1997, and December
31, 1997 and 1996:
-78-
<PAGE>
(Dollars in thousands) September 30, December 31,
----------------- ---------------
1998 1997 1997 1996
---- ---- ---- ----
Noninterest-bearing $ 7,793 $ 7,900 $ 7,875 $ 6,699
Interest-bearing checking accounts 8,949 7,724 7,853 8,767
Money market accounts 6,178 4,147 5,925 6,642
Savings 21,383 22,554 19,790 19,295
Time, under $100,000 21,442 19,760 19,494 19,242
Time, over $100,000 2,421 2,124 2,521 1,402
---------- ------- ------- -------
Total Deposits $ 68,166 $64,209 $63,458 $62,047
========== ======= ======= =======
Capital
Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets. Management believes, as of September 30, 1998
that Northern Lehigh and The Citizens National Bank of Slatington meet all
capital adequacy requirements to which they are subject.
The minimum for the Tier 1 ratio is 4.0%, and the total capital ratio (Tier
1 plus Tier 2 capital divided by risk-adjusted assets) minimum is 8.0%. At
September 30, 1998, Northern Lehigh's Tier 1 risk-adjusted capital ratio was
14.0%, and the total risk-adjusted capital ratio was 15.3%, both well above the
regulatory requirements. The risk-based capital ratio of The Citizens National
Bank of Slatington also exceed regulatory requirements at September 30, 1998.
September 30, December 31,
1998 1997 1997 1996
---- ---- ---- -----
Tier 1 Capital Ratio 14.0% 14.1% 14.0% 13.8%
Total Capital Ratio 15.3% 15.3% 15.1% 14.8%
Leverage Ratio 11.3% 11.0% 11.1% 10.7%
Results of Operations
Consolidated net income for the first nine months of 1998 was $706,000, or
4.7% below the first nine months of 1997. Basic and diluted earnings per share
for the first nine months of 1998 were $5.06 and $4.97, respectively. The Basic
and diluted earnings per share for the same period in 1997 were $5.41 and $5.34,
respectively. The decrease in net income is the result of higher operating
expenses experienced during 1998. The December 31, 1997 net income of $980,000
was 14.1% higher than the December 31, 1996 net income of $859,000 and 5.3%
higher than the December 31, 1995 net income of $931,000.
-79-
<PAGE>
On January 1, 1998, Northern Lehigh adopted the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income." Comprehensive income is the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. Other comprehensive income
consists of net unrealized gains on investment securities available for sale.
Subsequent to the adoption date, all prior-period amounts are required to be
restated to conform to the provision of SFAS No. 130. Comprehensive income for
the first nine months of 1998 was $712,000, compared to $742,000 for the first
nine months of 1997. Comprehensive income for December 31, 1997, 1996 and 1995
was $986,000, $831,000 and $1,019,000, respectively.
Net Interest Income
Net interest income at September 30, 1998 of $2,586,000 was 3.6% higher
than the September 30, 1998 net interest income of $2,495,000. This increase was
the result of a 6.1% increase in earning assets during this period. Partially
offsetting this increase was a reduction in the net interest margin during the
first nine months of 1998, compared to the same period in 1997. The net interest
margin for the first nine months of 1998 and 1997 was 4.99% and 5.13%,
respectively. This reduction in the net interest margin was due to both a
decrease in the yield on average earning assets and an increase in the interest
rate paid on average deposits and borrowings.
Net interest income at December 31, 1997 of $3,390,000 was higher than the
December 31, 1996 and 1995 net interest income of $3,073,000 and $2,989,000,
respectively. The net interest margin for the twelve-month period ending
December 31, 1997 of 5.41% was higher than the 4.96% at December 31, 1996 and
the 5.10% at December 31, 1995.
For analytical purposes, the following table reflects tax-equivalent net
interest income in recognition of the income tax savings on tax-exempt items
such as interest on municipal securities and tax-exempt loans. Adjustments are
made using a statutory federal tax rate of 34%.
-80-
<PAGE>
September 30, December 31,
(Dollars in thousands) 1998 1997 1997 1996 1995
---- ---- ---- ---- ----
Interest income $ 4,369 $ 4,140 $ 5,625 $ 5,208 $ 5,009
Interest expense 1,783 1,645 2,235 2,135 2,020
-------- -------- -------- -------- -------
Net interest income 2,586 2,495 3,390 3,073 2,989
Tax equivalent adjustment 58 70 93 131 125
-------- -------- -------- -------- -------
Net Interest income
(fully taxable
equivalent) $ 2,644 $ 2,565 $ 3,483 $ 3,204 $ 3,114
======== ======== ======== ======== =======
<TABLE>
<CAPTION>
Sept. 1998 over (under) Sept. 1997 over (under) 1996
---------------------------- -----------------------
1997
----
due to changes in due to changes in
----------------- ------------------
(Dollars in Net Net
thousands) Change Rate Volume Change Rate Volume
------- ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Investment
securities (1) $ 32 $ (24) $ 56 $ (73) $ (12) $ (61)
Loans (1) 80 (2) 82 (31) 9 (40)
Other Assets 175 30 145 483 81 402
----- ------- ----- ------- ------ -------
Total $ 287 4 283 379 78 301
------ ------- ----- ------- ------ -------
Interest Expense:
Savings deposits 69 51 18 88 46 42
Time deposits 117 29 88 10 (12) 22
Borrowings and other
interest-bearing
liabilities (3) (3) - 2 - 2
-------- -------- ------- ------- ------- -------
Total 183 77 106 100 34 66
-------- -------- ------- ------- ------- -------
Changes in net
interest income $ 104 $ (73) $ 177 $ 279 $ 44 $ 235
====== ======== ===== ====== ===== ======
<CAPTION>
1996 over (under) 1995
-----------------------
due to changes in
------------------
(Dollars in Net
thousands) Change Rate Volume
------ ------ ------
<S> <C> <C> <C>
Interest Income:
Investment
securities (1) $ (226) $ 35 $ (261)
Loans (1) (15) (26) 11
Other Assets 446 (193) 639
------- ------- -------
Total $ 205 (184) 389
------- ------- -------
Interest Expense:
Savings deposits - (7) 7
Time deposits 116 30 86
Borrowings and other
interest-bearing
liabilities (1) (1) -
-------- ------- -------
Total 115 22 93
-------- ------- -------
Changes in net
interest income $ 90 $ (206) $ 296
======== ======= ========
(1) The interest earned on nontaxable investment securities and loans is shown
on a tax equivalent basis.
</TABLE>
-81-
<PAGE>
Provision for Loan Losses
The provision for loan losses for the first nine months of 1998 was
$75,000, compared to $60,000 for the same period in 1997. The Citizens National
Bank of Slatington experienced a $1,000 net recovery of loans during the first
nine months of 1998, compared to a net recovery of $58,000 during the same
period in 1997. The provision for loan losses for the year ended December 31,
1997, 1996 and 1995 were $90,000, $115,000 and $70,000, respectively.
Other Income
Other income grew 7.1% from $183,000 during the first nine months of 1997,
to $196,000 during the same period in 1998. The increase was primarily due to
both higher credit card fees and ATM surcharges. Other income for the entire
year of 1997 of $200,000 was $4,000 higher than the 1996 other income of
$196,000, and $100,000 lower than the 1995 other income of $300,000. Other
income in 1995 included two non-recurring items that amounted to approximately
$140,000.
Other Operating Expenses
Other operating expenses of $1,687,000 for the first nine months of 1998,
was $131,000 higher than the same period in 1997. This increase was the result
of higher salaries, wages and employee benefits and other expenses. The rise in
other expenses was due to an increase in expenses related to other real estate
owned, advertising and supplies. Other operating expenses for the entire year of
1997 of $2,097,000, was $121,000 and $49,000 higher than the same periods in
1996 and 1995, respectively.
-82-
<PAGE>
NORTHERN LEHIGH BANCORP, INC.
BALANCE SHEET
(Dollars in thousands) As of September 30, As of December 31,
-------------------- ------------------
(unaudited)
Assets 1998 1997 1997 1996
---- ---- ---- ----
Cash and due from banks $ 2,160 $ 852 $ 2,074 $ 2,531
Federal Funds Sold 8,564 8,998 1,396 2,140
Securities available
for sale 3,094 4,423 5,887 3,442
Securities held to maturity
(fair value $5,257 at
Sept. 30, 1998, $1,056
at Sept. 30, 1997
$2,445 at December 31,
1997 and), $4,985 at
December 31, 1996) 5,261 1,056 2,449 4,984
Loans 57,174 56,055 59,192 56,028
Unearned income (288) (304) (339) (344)
Allowance for loan losses (743) (636) (667) (518)
------- ------- ------- ----------
Net loans 56,143 55,115 58,186 55,166
------- ------- ------- ---------
Bank premises and equipment,
net 671 709 732 699
Other real estate owned 559 676 560 93
Other assets 810 709 729 784
------ ------- ------- ---------
Total assets $ 77,262 $72,538 $72,013 $ 69,839
======== ======= ======= =========
Liabilities and
Shareholders' Equity
Deposits:
Noninterest-bearing $ 7,793 $ 7,900 $ 7,875 $ 6,699
Interest-bearing:
Checking accounts 8,949 7,724 7,853 8,767
Money market accounts 6,178 4,147 5,925 6,642
Savings 21,383 22,554 19,790 19,295
Time, under $100,000 21,442 19,760 19,494 19,242
Time, Over $100,000 2,421 2,124 2,521 1,402
------- -------- -------- ----------
Total deposits 68,166 64,209 63,458 62,047
Other liabilities 715 664 701 630
------ -------- -------- ---------
Total liabilities 68,881 64,873 64,159 62,677
------- -------- -------- ---------
Shareholder's Equity:
Common Stock, par value
$10 per share; authorized
500,000 shares; 143,712
shares issued and 139,498
shares outstanding in
September 30, 1998 and
1997 and December 31, 1997;
131,040 shares issued and
128,676 shares outstanding
in December 31, 1996 1,437 1,437 1,437 1,310
Additional paid in capital 507 507 507 0
Retained earnings 6,636 5,930 6,115 5,974
Net unrealized gain on
securities available
for sale (11) (21) (17) (23)
------- ------- -------- ---------
8,569 7,853 8,042 7,261
Treasury stock at cost 188 188 188 99
------- ------- -------- ----------
Total shareholders' equity 8,381 7,665 7,854 7,162
------- ------- -------- ----------
Total liabilities and
shareholders' equity $ 77,262 $ 72,538 $ 72,013 $ 69,839
======== ======== ======== ========
-83-
<PAGE>
<TABLE>
NORTHERN LEHIGH BANCORP, INC.
STATEMENTS OF INCOME
<CAPTION>
(Dollars in thousands) For the nine months ended For the years ended
except average number of September 30, December 31,
common shares and per share ------------------------- -------------------
information) (unaudited)
<S> <C> <C> <C> <C> <C>
Interest Income 1998 1997 1997 1996 1995
---- ---- ---- ---- ----
Loans, including fees $ 3,817 $ 3,686 $ 4,978 $ 4,490 $ 4,035
Investment securities:
Taxable 343 279 398 375 644
Exempt from federal taxes 7 33 41 104 76
Federal funds sold 202 142 208 239 254
--------- ------- ------- ------- -------
Total interest income 4,369 4,140 5,625 5,208 5,009
--------- ------- ------- ------- -------
Interest Expense
Savings deposits 871 819 1,123 1,035 1,035
Time, under $100,000 804 753 1,004 1,011 905
Time, over $100,000 108 71 106 89 79
Borrowed funds 0 2 2 0 1
---------- -------- -------- -------- -------
Total interest expense 1,783 1,645 2,235 2,135 2,020
---------- -------- -------- -------- -------
Net interest income 2,586 2,495 3,390 3,073 2,989
Provision for loan losses 75 60 90 115 70
---------- -------- -------- -------- -------
Net interest income after
provision for loan losses 2,511 2,435 3,300 2,958 2,919
---------- -------- -------- -------- -------
Other Operating Income
Service charges 63 68 52 64 52
Other income 133 115 148 132 248
--------- ------- --------- -------- -------
Total other operating
income 196 183 200 196 300
--------- ------- --------- -------- -------
Net interest income after
provision for loan losses
And other operating income 2,707 2,618 3,500 3,154 3,219
--------- -------- --------- ------- -------
Other Operating Expenses
Salaries, wages and
employee benefits 801 717 974 955 916
Occupancy 261 265 354 332 312
Other expenses 625 574 769 681 691
--------- -------- -------- -------- -------
Total other operating
expenses 1,687 1,556 2,097 1,968 1,919
--------- -------- -------- -------- -------
Income before income
tax expense 1,020 1,062 1,403 1,186 1,300
Income tax expense 314 321 423 327 369
--------- -------- -------- -------- -------
Net income $ 706 $ 741 $ 980 $ 859 $ 931
========= ======== ======== ======== =======
Weighted average number
of common shares:
Basic 139,498 137,031 140,011 141,348 143,589
========= ======== ========= ======== =======
Diluted 141,998 138,722 141,524 142,386 144,395
========= ======== ========= ======== =======
Net Income per share
information:
Basic $ 5.06 $ 5.41 $ 7.00 $ 6.08 $ 6.48
========= ======== ========= ======== =======
Diluted $ 4.97 $ 5.34 $ 6.93 $ 6.03 $ 6.45
========= ======== ========= ======== =======
Cash Dividend per share $ 1.32 $ 1.11 $ 1.51 $ 1.17 $ 0.90
========= ======== ========= ======== =======
</TABLE>
-84-
<PAGE>
<TABLE>
NORTHERN LEHIGH BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and the
period ending September 30, 1998
UNAUDITED
<CAPTION>
Net Unrealized
Gain (Loss) on
(Dollars in thousands) Investment
Additional Securities Total
Common Paid in Retained Available Treasury Shareholders'
Stock Capital Earnings for Sale Stock Equity
------- ---------- -------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1996 $ 1,310 $ - $ 5,282 $ 5 $ (99) $ 6,498
Net Income - - 859 - - 859
Cash Dividends
($1.30 per share) - - (167) - - (167)
Net unrealized loss
on investment
securities available
for sale - - - (28) - (28)
------- --------- ---------- ------------ ---------- ----------
Balance, December
31, 1996 1,310 - 5,974 (23) (99) 7,162
Net Income - - 980 - - 980
Cash Dividends
($1.51 per share) - - (206) - - (206)
Stock dividend declared 127 507 (633) - - 1
Net unrealized loss
on investment
securities available
for sale - - - 6 - 6
Purchases of treasury
stock - - - - (89) (89)
-------- --------- ----------- ------------ ---------- ---------
Balance, December
31, 1997 1,437 507 6,115 (17) (188) 7,854
Net Income - - 706 - - 706
Cash Dividends
($1.32 per share) - - (185) - - (185)
Net unrealized loss
on investment - - - - - -
securities available
for sale - - - 6 - 6
--------- --------- ------------ ----------- ---------- -------
Balance,
September, 30 1998 1,437 507 6,636 (11) (188) 8,381
========= ========= ============ =========== ========== =======
</TABLE>
-85-
<PAGE>
<TABLE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Dollars in thousands)
Nine Months Ended Sept. 30, Year Ended December 31,
(unaudited)
--------------------------- ----------------------
Operating Activities: 1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ 706 $ 741 $ 980 $ 859
Adjustments to
reconcile net income
to net cash provided
by operating activities:
Provision for loan
losses 75 60 90 115
Depreciation 86 83 115 105
Net gain on sale of
other real estate
owned - (11) (11) (2)
Net amortization
of investment
Securities discount
/premiums (124) 31 16 104
(Increase) decrease
in accrued income
receivable (1) 88 92 10
Net increase in
other assets (80) (13) (38) (8)
Increase (decrease)
in accrued interest
payable 24 26 24 (10)
Net (decrease) increase
in other liabilities (14) 8 46 (60)
------- ------ ------ ---------
Net cash provided by
operating activities 672 1,013 1,314 1,113
------ ------- ------ ---------
Investing Activities:
Proceeds from sales of
securities available
for sale - - 5,265 -
Purchases of securities
available for sale (1,950) (2,276) (14,954) (2,009)
Purchases of securities
held to maturity (15,435) (6,241) (3,899) (5,130)
Proceeds, maturity
or calls of securities
available for sale 4,734 5,221 7,208 4,321
Proceeds, maturity
or calls of securities
held to maturity 12,766 6,214 6,464 4,715
Net (decrease) increase
in loans 1,968 (685) (3,672) (9,470)
Purchases of premises
and equipment (25) (93) (147) (79)
Proceeds from sales of
other real estate 1 104 104 84
------ ------- ------- --------
Net cash used in
investing activities 2,059 2,244 (3,631) (7,568)
------ ------- --------- --------
Financing Activities:
Net increase in
deposits 4,708 2,162 1,411 730
Cash dividends &
fractional shares (185) (151) (206) (167)
Purchase of treasury
stock - (89) (89) -
------- --------- --------- --------
Net cash provided by
financing activities 4,523 1,922 1,116 563
------- --------- --------- --------
Increase in cash and
cash equivalents 7,254 5,179 (1,201) (5,892)
Cash and cash
equivalents
at beginning
of period 3,470 4,671 4,671 10,563
------- -------- -------- --------
Cash and cash
equivalents at
end of the period $ 10,724 $ 9,850 $ 3,470 $ 4,671
======== ======== ======= =======
Supplemental disclosures
of cash flow information
Cash paid during the period for:
Interest $ 1,759 $ 1,619 $ 2,210 $ 2,146
======== ======== ======== =======
Non-cash transactions:
Transfer from loans
to other real estate
owned $ - $ 676 $ 676 $ 168
========= ======== ======== =======
See accompanying notes to consolidated financial statements.
</TABLE>
-86-
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the consolidated financial
position of Northern Lehigh Bancorp, Inc. (the "Corporation") and its
wholly-owned subsidiary - The Citizens National Bank of Slatington (the "Bank")
- - as of September 30, 1998, the results of its operations for the nine month
periods ended September 30, 1998 and 1997 and the cash flows for the nine month
periods ended September 30, 1998 and 1997. It is suggested that these unaudited
consolidated financial statements be read in conjunction with the audited
consolidated financial statements of the Corporation and the notes thereto set
forth in the Corporation's 1997 annual report.
The results of operations for the nine month periods ended September 30, 1998
and 1997 are not necessarily indicative of the results to be expected for the
full year.
Note 2 - Income tax expense is less than the amount calculated using the
statutory tax rate, primarily the result of tax exempt income earned from state
and municipal securities and loans.
Note 3 - During 1997, the Corporation adopted the provisions of the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share." SFAS No. 128 eliminates primary and fully
diluted earnings per share and requires presentation of basic and diluted
earnings per share (EPS) in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share exclude
dilution and are computed by dividing income available to common shareholders by
the weighted-average common shares outstanding during the period. Diluted
earnings per share take into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock. Prior periods' earnings per share calculations have been
restated to reflect the adoption of SFAS No. 128.
Note 4 - On June 2, 1997, the Corporation distributed 12,672 shares of common
stock in connection with a 10% stock dividend. As a result of the stock
dividend, common stock was increased by $126,720, additional paid-in capital was
increased $506,880, and retained earnings was decreased by $633,600.
Note 5 - On January 1, 1998, the Corporation adopted the Financial Accounting
Standards Board issued SFAS No. 129, Disclosure Information about Capital
Structure. SFAS No. 129 summarizes previously issued disclosure guidance
contained within APB Opinion No. 10 and 15, as well as SFAS No. 47. The
Corporation's current disclosures were not affected by the adoption of SFAS No.
129.
Note 6 - On January 1, 1998, the Corporation adopted the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards to provide prominent disclosure of comprehensive
income items. Comprehensive income is the
-87-
<PAGE>
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. Other comprehensive
income consists of net unrealized gains on investment securities available for
sale. Subsequent to the adoption date, all priorperiod amounts are required to
be restated to conform to the provision of SFAS No. 130. Comprehensive income
for the first nine months of 1998 was $712,000, compared to $742,000 for the
first nine months of 1997. Comprehensive income for December 31, 1997, 1996 and
1995 was $987,000, $831,000 and $1,018,000, respectively. The adoption of SFAS
No. 130 did not have a material impact on the Corporation's financial position
or results of operation.
Note 7 - On January 1, 1998, the Corporation adopted the Financial Accounting
Standards Board issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The adoption
of SFAS No. 131 did not have an impact on the Corporation's financial position
or results of operation.
Note 8 - The American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The SOP was issued to provide
authoritative guidance on the subject of accounting for the costs associated
with the purchase or development of computer software. The statement is
effective for fiscal years beginning after December 15, 1998. This statement is
not expected to have a material impact on the Corporation's financial position
or results of operations.
Note 9 - In June, 1998, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activity." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of
derivative (gains or losses) depends on the intended use of the derivative and
resulting designation. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Earlier application is permitted
only as of the beginning of any fiscal quarter. The company is currently
reviewing the provisions of SFAS No.133.
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<PAGE>
ADJOURNMENT OF THE MEETING
If there are not enough votes cast at the meeting to approve the agreement,
the Northern Lehigh Board of Directors intends to adjourn the meeting to a later
date to permit further solicitation of votes in favor of the agreement. The
affirmative vote of a majority of the shares outstanding is required in order to
approve any such adjournment. At the meeting, Northern Lehigh will announce the
place and date to which the meeting would be adjourned. Under the Northern
Lehigh Bylaws, it is not be necessary to give any notice of the time and place
of the adjourned meeting other than the announcement at the meeting.
The Northern Lehigh Board of Directors recommends that you vote "FOR" the
proposal to adjourn the meeting if necessary to permit further solicitation of
proxies to approve the agreement.
EXPERTS
The consolidated financial statements of Harleysville National Corporation
and subsidiaries as of December 31, 1997, and 1996, and for each of the years in
the three-year period ended December 31, 1997, have been incorporated by
reference herein and in the registration statement in reliance upon the report
of Grant Thornton, LLP, independent certified public accountants, and upon the
authority of the firm as experts in accounting and auditing.
The financial statements of Northern Lehigh as of December 31, 1997, 1996
and 1995, included in this proxy statement/prospectus have been audited by
Stokes Kelly & Hinds, LLC, independent public accountants, as indicated in its
reports with respect thereto, and are included herein in reliance upon the
authority of the firm as experts in accounting and auditing.
LEGAL OPINIONS
The legality of the shares of Harleysville National Corporation common
stock to be issued in connection with the merger and certain other legal matters
relating to the transaction will be passed upon by the law firm of Shumaker
Williams, P.C., Camp Hill, Pennsylvania, Special Counsel to Harleysville
National Corporation.
OTHER MATTERS
Northern Lehigh's Board of Directors knows of no other matters, other than
those discussed in this proxy statement/prospectus, that will be presented at
the meeting. However, if any other matters are properly brought before the
meeting and any adjournment thereof, any proxy given pursuant to this
solicitation will be voted in accordance with the recommendations of the
management of Northern Lehigh.
-89-
<PAGE>
AVAILABLE INFORMATION
Harleysville National Corporation is subject to the informational
requirements of the Securities Exchange Act of 1934, and, accordingly, files
reports, proxy statements and other information with the Securities and Exchange
Commission. The reports, proxy statements and other information filed with the
Commission are available for inspection and copying at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and at World Trade Center, Suite 1300, New York, New York 10048. Copies of these
documents may also be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. Harleysville National Corporation is an electronic filer
with the Commission. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the Commission Web
site is: http://www.sec.gov.
You may also inspect materials and other information concerning
Harleysville National Corporation at the offices of the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C., because
Harleysville National Corporation common stock is authorized for quotation on
the National Market System of The National Association of Securities Dealers
Automated Quotation System.
Northern Lehigh is not subject to the information requirements of the
Exchange Act and Northern Lehigh common stock is not authorized for quotation on
the Nasdaq or on any stock exchange, but is traded on a limited basis in the
over-the-counter market and is quoted and transactions are reported on the OTC
Electronic Bulletin Board.
This proxy statement/prospectus forms a part of a Registration Statement
that Harleysville National Corporation has filed with the Commission under the
Securities Act of 1933, with respect to the Harleysville National Corporation
common stock that Harleysville National Corporation intends to issue in the
merger. This proxy statement/prospectus does not contain all of the information
in the Registration Statement. The Commission's rules and regulations permit
omission of certain information. You may inspect and copy the Registration
Statement, including any amendments and exhibits at the locations mentioned
above. Statements contained in this proxy statement/prospectus as to the
contents of any contract or other document are not necessarily complete. We
refer you to the copy of the contract or other document, filed as an exhibit to
the Registration Statement. We also qualify our discussions by these documents.
All information in this proxy statement/prospectus that relates to
Harleysville National Corporation has been provided or verified by Harleysville
National Corporation. All information which relates to Northern Lehigh has been
provided or verified by Northern Lehigh.
<PAGE>
NORTHERN LEHIGH BANCORP, INC.
INDEX TO FINANCIAL STATEMENTS AND
SUPPLEMENTARY FINANCIAL INFORMATION
Page
Selected Financial Data and Pro Forma Information 13
Management's Discussion and Analysis 66
Interim Statements
Balance Sheet 82
Statements of Income 83
Statements of Cash Flows 84
Statement of Changes in Shareholders' Equity 85
YEARS ENDED DECEMBER 31, 1997 AND 1996
Independent Auditor's Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Changes in Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
YEARS ENDED DECEMBER 31, 1996 AND 1995
Independent Auditor's Report F-28
Consolidated Balance Sheets F-29
Consolidated Statements of Income F-30
Consolidated Statements of Changes in Shareholders' Equity F-31
Consolidated Statements of Cash Flows F-32
Notes to Consolidated Financial Statements F-33
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<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
DECEMBER 31, 1997 AND 1996
<PAGE>
[STOKES KELLY & HINDS, LLC LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Northern Lehigh Bancorp, Inc.
Slatington, Pennsylvania
We have audited the accompanying consolidated balance sheets of Northern Lehigh
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northern Lehigh
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ Stokes Kelly & Hinds, LLC
------------------------------
STOKES KELLY & HINDS, LLC
Pittsburgh, Pennsylvania
January 29, 1998
F-2
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
1997 1996
---- ----
ASSETS
Cash and due from banks $ 2,073,961 $ 2,531,407
Federal Funds sold 2,396,000 2,140,000
Securities available for sale 5,887,669 3,441,623
Securities held to maturity, market
value of $2,444,857
and $4,985,063 in 1997 and 1996 2,448,742 4,983,527
Loans 59,191,748 56,028,053
Unearned income (338,994) (334,225)
Allowance for loan losses (666,608) (518,226)
-------------- --------------
Net loans 58,186,146 55,165,602
Premises and equipment, net 731,542 699,107
Other real estate owned 560,034 93,314
Other assets 728,684 784,387
-------------- --------------
TOTAL ASSETS $72,012,778 $69,838,867
============ ===========
LIABILITIES
Deposits
Non-interest bearing $ 7,874,861 $ 6,699,020
Interest bearing 55,583,345 55,348,057
------------- ------------
Total deposits 63,458,206 62,047,077
Other liabilities 700,782 629,689
--------------- --------------
Total liabilities 64,158,988 62,676,766
SHAREHOLDERS' EQUITY
Common stock, par value $10,
authorized 500,000 shares;
143,712 shares issued and
139,498 shares outstanding
in 1997; 131,040 shares issued
and 128,676 shares
outstanding in 1996 1,437,120 1,310,400
Additional paid-in capital 506,880 -
Retained earnings 6,114,488 5,973,485
Unrealized loss on securities
available for sale -
net of deferred taxes of
$(8,507) and $(11,895) in 1997
and 1996 (16,513) (23,087)
Treasury stock at cost; 4,214
shares in 1997 and
2,364 shares in 1996 (188,185) (98,697)
-------------- ---------------
Total shareholders' equity 7,853,790 7,162,101
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $72,012,778 $69,838,867
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------
1997 1996
---- ----
INTEREST INCOME
Interest and fees on loans $4,977,715 $4,490,488
Interest and dividends on securities:
Taxable 398,498 375,297
Exempt from federal income taxes 40,732 103,833
Interest on federal funds sold 208,420 238,754
---------- ----------
Total interest income 5,625,365 5,208,372
INTEREST EXPENSE
Interest on deposits 2,232,708 2,134,930
Interest on short-term borrowings 1,836 55
---------- ---------
Total interest expense 2,234,544 2,134,387
--------- ---------
NET INTEREST INCOME 3,390,821 3,073,387
PROVISION FOR LOAN LOSSES 90,000 115,000
---------- ---------
Net interest income after
provision for loan losses 3,300,821 2,958,387
OTHER OPERATING INCOME
Service charges on deposit accounts 52,023 63,671
Other service charges and fees 107,094 87,797
Other income 40,024 44,484
Net security gains 446 -
---------- -------------
Total other operating income 199,587 195,952
OTHER OPERATING EXPENSES
Salaries and employee benefits 973,701 955,496
Occupancy expense 353,730 331,711
Other operating expense 770,136 681,673
---------- ----------
Total other operating expenses 2,097,567 1,968,880
--------- ---------
INCOME BEFORE INCOME TAXES 1,402,841 1,185,459
INCOME TAX EXPENSE 422,602 326,627
---------- ----------
NET INCOME $ 980,239 $ 858,832
=========== ==========
PER SHARE DATA
Net Income $ 7.00 $ 6.08
============= ============
Net Income - assuming dilution $ 6.93 $ 6.03
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Additional Unrealized Total
Common Paid-in Retained Loss on Securities Treasury Shareholders'
Stock Capital Earnings Available for Sale Stock Equity
------ ---------- -------- ------------------ ----- --------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1996 $1,310,400 - $5,281,932 $ 4,679 $ (98,697) $ 6,498,314
Net income - - 858,832 - 858,832
Cash dividends declared
($1.30 per share) - - (167,279) - - (167,279)
Net change in unrealized loss
on securities available
for sale - Net of
deferred taxes - - - (27,766) - (27,766)
--------------- --- ---------------- -------- ---------- -----------
Balance - December 31, 1996 1,310,400 5,973,485 (23,087) (98,697) 7,162,101
Net income - - 980,239 - - 980,239
Cash dividends declared
($1.51 per share) - - (205,636) - - (205,636)
Stock dividend declared 126,720 506,880 (633,600) - - -
Net change in unrealized loss
on securities available
for sale - Net of deferred taxes - - - 6,574 - 6,574
Purchases of treasury stock - - - - (89,488) (89,488)
---------------- --- ------------------ -------- ---------- -----------
Balance - December 31, 1997 $1,437,120 $506,880 $6,114,488 $(16,513) $(188,185) $7,853,790
========== ======== ========== ========= ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
</TABLE>
F-5
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1997 1996
---- ----
OPERATING ACTIVITIES
Net income $ 980,239 $ 858,832
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 90,000 115,000
Depreciation 114,944 104,664
Net security gains (446) -
Net gain on sale of assets (10,976) (1,687)
Net amortization of securities and loan fees 16,188 103,582
Deferred income tax benefit (44,481) (12,051)
Decrease in accrued interest receivable 92,302 10,429
Decrease in other assets 6,836 3,587
Increase (decrease) in accrued interest
payable 24,292 (9,969)
Decrease in income taxes payable (2,342) (116,926)
Increase in other liabilities 46,801 58,320
------------ -----------
Net cash provided by operating
activities 1,313,357 1,113,781
INVESTING ACTIVITIES
Proceeds from sales of securities available
for sale 5,265,200 -
Purchases of securities available for sale (14,953,912) (2,009,275)
Purchases of securities held to maturity (3,898,971) (5,130,099)
Maturities and calls of securities available
for sale 7,207,997 4,321,031
Maturities and calls of securities held to
maturity 6,464,000 4,715,000
Net increase in loans (3,671,933) (9,470,266)
Purchases of premises and equipment (147,379) (79,112)
Proceeds from sales of assets 104,190 84,457
------------- --------------
Net cash used in investing activities (3,630,808) (7,568,364)
FINANCING ACTIVITIES
Net increase in deposits 1,411,129 730,126
Dividends paid (205,636) (167,279)
Purchases of treasury stock (89,488) -
----------- --------------
Net cash provided by financing activities 1,116,005 562,847
---------- ------------
Net decrease in cash and cash equivalents (1,201,446) (5,891,736)
Cash and cash equivalents at beginning of year 4,671,407 10,563,143
----------- ----------
Cash and cash equivalents at end of year $3,469,961 $4,671.407
========== ==========
Supplemental disclosures of cash flow
information Cash paid during the year
for:
Interest $2,210,252 $2,145,755
========== ==========
Income taxes $ 465,000 $ 458,225
=========== ===========
Non-cash transactions:
Transfer from loans to other
real estate owned $ 676,210 $ 168,214
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General:
The accompanying consolidated financial statements include the accounts of
Northern Lehigh Bancorp, Inc. (the "Corporation") and its wholly owned
subsidiary, The Citizens National Bank of Slatington (the "Bank"). All
material intercompany transactions have been eliminated.
The following summary of accounting and reporting policies is presented to
aid the reader in obtaining a better understanding of the financial
statements and related financial data of the Corporation and the Bank
contained in this report. Such policies conform to generally accepted
accounting principles ("GAAP") and to general practice within the banking
industry. In preparing financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and income
and expenses during the reporting period. Actual results could differ from
those estimates.
Certain items of the consolidated financial statements, as of December 31,
1996, have been reclassified to conform with the December 31, 1997
presentation. None of these reclassifications affected net income.
Securities:
The Corporation has adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
This statement addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. Those investments are to be classified in
three categories and accounted for as follows (a) securities held to
maturity, (b) trading securities and (c) securities available for sale.
Debt securities that the Corporation has the positive intent and ability to
hold to maturity are classified as securities held to maturity and are
reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. Debt and equity
securities not classified as either held to maturity securities or trading
securities are classified as securities available for sale and are reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders' equity.
F-7
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities (Continued):
Net gain or loss on the sale of securities is determined using the specific
identification method.
Loans:
Loans are stated at the principal amount outstanding. When a loan becomes
past due and doubt exists as to the ultimate collection of principal and
interest, the accrual of income is discontinued and is only recognized at
the time payment is received.
The Corporation has adopted Financial Accounting Standards Board Statement
No. 114 "Accounting by Creditors for Impairment of a Loan" ("FAS 114"), as
amended by Statement No. 118 "Accounting By Creditors for Impairment of a
Loan Income Recognition and Disclosures", ("FAS 118"). These statements
address the accounting by creditors, such as banks, for the impairment of
certain loans. The Corporation considers a loan to be impaired when, based
on current information and events, it is probable that the Corporation will
be unable to collect principal or interest due according to the contractual
terms of the loan. Loan impairment is measured based on the present value
of expected cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loans observable market price or the fair
value of the collateral if the loan is collateral dependent.
Payment received on impaired loans are applied against the recorded
investment in the loan. For loans other than those that the Corporation
expects repayment through liquidation of the collateral, when the remaining
recorded investment in the impaired loan is less than or equal to the
present value of the expected cash flows, income is recorded on a cash
basis.
Loan Origination Fees and Costs:
The net fees and costs directly related to the origination of a loan are
deferred and amortized over the life of the loan as an adjustment of the
loan yield.
Other Real Estate Owned:
Real estate, other than bank premises, is recorded at the lower of cost or
market at the time of acquisition. Expenses related to holding the
property, net of rental income, are generally charged against earnings in
the current period.
F-8
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses:
The allowance for loan losses represents management's estimate of an amount
adequate to provide for losses which may be incurred on loans currently
held. Management determines the adequacy of the allowance based on reviews
of individual credits, historical patterns of loan charge-offs and
recoveries, industry experience, current economic trends, and other factors
relevant to the collectibility of the loans currently in the portfolio. The
allowance is increased by provisions charged to operating expense and
reduced by net charge-offs.
Premises and Equipment:
Premises and equipment are carried at cost less accumulated depreciation
and amortization. For financial statement reporting and income tax
purposes, depreciation is computed both on the straight-line and
accelerated methods over the estimated useful lives of the premises and
equipment. Charges for maintenance and repairs are expensed as incurred.
Income Taxes:
Certain income and expense items are accounted for in different years for
financial reporting purposes than for income tax purposes. Deferred taxes
are provided to recognize these temporary differences. The principal items
involved are discount accretion on securities, provision for possible loan
losses and accrued benefits. Income tax expense is not proportionate to
earnings before taxes, principally because income from obligations of
states and political subdivisions is nontaxable.
Earnings per Share:
Earnings per common share have been computed based upon the number of
weighted average number of shares outstanding during each of the years.
Stock options granted were not considered in the computation because their
effect was not material. The weighted average shares outstanding was
140,011 for 1997 and 141,348 for 1996. The weighted average shares
outstanding for 1996 has been adjusted for a 10% stock dividend declared in
April 1997.
F-9
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per Share (Continued):
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS
128"). This statement redefines the standards for computing earnings per
share (EPS) previously found in Accounting Principles board opinion No. 15,
"Earnings Per Share." FAS 128 establishes new standards for computing and
presenting EPS and requires dual presentation of "basic" and "diluted" EPS
on the face of income statement for all entities with complex capital
structures. Under FAS 128, basic EPS is to be computed based upon income
available to common shareholders and the weighted average number of common
shares outstanding for the period. Diluted EPS is to reflect the potential
dilution exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
Corporation. FAS 128 also requires the restatement of all prior-period EPS
data presented.
Comprehensive Income:
On January 1, 1998, the Corporation adopted the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards to provide prominent disclosure of
comprehensive income items. Comprehensive income is the change in equity of
a business enterprise during a period from transactions and other events
and circumstances from non-owner sources. Other comprehensive income
consists of net unrealized gains on investment securities available for
sale. Subsequent to the adoption date, all prior-period amounts are
required to be restated to conform to the provision of SFAS No. 130.
Comprehensive income for December 31, 1997 and 1996 was $987,000 and
$831,000, respectively. The adoption of SFAS No. 130 did not have a
material impact on the Corporation's financial position or results of
operation.
Employee Benefit Plan:
The Bank has a non-contributory defined contribution pension plan covering
all employees over 21 years of age and having at least one year of service
(Note 9).
The Bank also has a deferred compensation plan involving directors of the
Bank. The plan requires defined annual payments for ten years beginning at
age 65 or death. The annual benefit is based upon the amount deferred plus
interest. The present value of these deferred compensation liabilities was
approximately $207,177 and $183,588 at December 31, 1997 and 1996,
respectively.
F-10
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Employee Benefit Plan (Continued):
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"). This new standard defines a fair value based
method of accounting for an employee stock option or similar equity
instrument. This statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to continue
to measure compensation using the intrinsic value approach under Accounting
Principles Board (APB) Opinion No. 25, the former standard.
The Corporation has elected, as permitted by FAS 123, to apply APB Opinion
25 and related Interpretations in accounting for its plan. Accordingly, no
compensation cost has been recognized for its stock options outstanding.
Had compensation cost for the Corporation's stock option plan been
determined based upon the fair value at the grant dates for awards under
the plan consistent with the method of FAS 123, the effect on the
Corporation's net income and earnings per share would not be material.
Cash and Cash Equivalents:
For purposes of reporting cash flows, the Corporation has defined cash and
cash equivalents as those amounts included in the balance sheet captions
"Cash and cash equivalents" and "Federal funds sold."
2. CASH AND DUE FROM BANKS
Regulations of the Board of Governors of the Federal Reserve System impose
uniform reserve requirements on all depository institutions with
transaction accounts (checking accounts, NOW accounts, etc.). Reserves are
maintained in the form of vault cash or a non-interest bearing balance held
with the Federal Reserve Bank. The Bank also, from time to time, maintains
deposits with the Federal Reserve Bank and other banks for various services
such as check clearing. The Bank's reserve requirement was $285,000 and
$269,000 at December 31, 1997 and 1996, respectively.
F-11
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
3. SECURITIES
The amortized cost and estimated market values of securities are as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Securities Available for Sale:
December 31, 1997
- ------------------
Obligations of U. S. Government
corporations and agencies $5,678, 689 $1,418 $(10,438) $5,669,669
Obligations of states and political
subdivisions 200,000 - (16,000) 184,000
Equity securities 34,000 - - 34,000
------------- ----------- --------- ----------
$5,912,689 $1,418 $(26,438) $5,887,669
========== =========== ========= ==========
December 31, 1996
- -----------------
U. S. Treasury securities $2,004,809 $2,652 $ - $3,441,623
Obligations of U. S. Government
corporations and agencies 1,237,796 - (17,634) 1,220,162
Obligations of states and political
subdivisions 200,000 - (20,000) 180,000
Equity securities 34,000 - - 34,000
-------------- ----------- --------- -----------
$3,476,605 $2,652 $(37,634) $3,441,623
============== =========== ========= ===========
Securities Held to Maturity:
December 31, 1997
- -----------------
Obligations of states and
political subdivisions $ 20,000 $ - $ - $ 20,000
Corporate debt securities 2,428,742 - (3,885) 2,424,857
----------- ----------- --------- ----------
$2,448,742 $ - $ (3,885) $2,444,857
========== =========== ========= ==========
December 31, 1996
- ------------------
Obligations of U. S. Government
corporations and agencies $2,231,673 $ 98 $ (2,667) $2,229,104
Obligations of states and
political subdivisions 964,049 3,229 (96) 967,182
Corporate debt securities 1,787,805 972 - 1,788,777
----------- -------- ---------- ----------
$4,983,527 $4,299 $ (2,763) $4,985,063
========== ====== ========= ==========
</TABLE>
F-12
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
3. SECURITIES (CONTINUED)
The amortized cost and estimated market values of securities at December
31, 1997, by contractual maturity, are shown below. 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.
Securities Available for Sale Securities Held to Maturity
--------------------------- ----------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
-------- ------------ -------- ------------
Due within 1 year $ 265,486 $ 265,482 $2,428,742 $2,424,857
Due after 1 but
within 5 years 4,333,310 4,334,469 - -
Due after 5 but
within 10 years 213,790 197,753 - -
Due after 10 years 1,066,103 1,055,965 20,000 20,000
Equity securities 34,000 34,000 - -
------------- ------------- ------------ ----------
$5,912,689 $5,887,669 $2,448,742 $2,444,857
========== ========== ========== ==========
Included in equity securities are Federal Reserve Bank and Atlantic Central
Bankers Bank stock in the amount of $34,000 at December 31, 1997 and 1996.
Proceeds from the sales of securities during 1997 were $5,265,200. Gross
gains of $446 were realized on sales of securities in 1997. There are no
sales of securities in 1996.
Securities with amortized cost and estimated market values of approximately
$7,047,537 and $7,044,808 at December 31, 997, and $6,988,336 at December
31, 1996, were pledged to secure public deposits and for other purposes
required or permitted by law.
The Corporation did not hold any derivative financial instruments such as
futures, forwards, swap or option contracts at December 31, 997 and 1996.
The changes in net unrealized holding loss on securities available for sale
that has been included in the separate component of shareholders' equity
for the years ended December 31, is as follows:
F-13
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
3. SECURITIES (CONTINUED)
1997 1996
---- ----
Gross change in unrealized loss
on securities available for sale $9,962 $(42,070)
Deferred taxes 3,388 (14,304)
----- --------
Net change in unrealized loss
on securities available for sale $6,574 $(27,766)
====== =========
4. LOANS
The composition of the Bank's loan portfolio at December 31, is as follows:
1997 1996
---- ----
Real estate loans - construction $2,664,804 $3,134,691
Real estate loans - other 44,717,674 42,866,459
Commercial and industrial loans 4,674,518 4,142,561
Installment loans 2,850,260 3,212,011
Municipal loans 823,019 847,785
All other loans 3,461,473 1,824,546
------------- -------------
$59,191,748 $56,028,053
=========== ===========
The Bank grants commercial loans, residential mortgages, and consumer loans
to customers located primarily within the Lehigh Valley. The Bank has a
concentration of credit in commercial loans and exposure to credit loss can be
adversely impacted by downturns in local economic and employment conditions.
F-14
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
5. ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are summarized as follows:
1997 1996
---- ----
Balance at January l, $ 518,226 $ 462,128
Loans charged against allowance (19,604) (61,583)
Recoveries on previously charged off loans 76,986 2,681
Provision charged to operating expense 90,000 15,000
----------- ----------
Balance at December 31, $ 666,608 $ 518,226
========= =========
Impairment of loans having recorded investments of $2,145,594 and
$1,927,506 at December 31, 1997 and 1996 has been recognized in conformity
with FAS 114 as amended by FAS 188. The average recorded investment in
impaired loans during 1997 and 1996 was $2,408,336 and $1,989,623,
respectively. There was no allowance for loan losses related to these loans
at December 31, 1997 and 1996, respectively. Additions charged to expense
for the allowance for impaired loans amounted to $60,000 in 1996 and direct
write-downs charged against the allowance amounted to $60,000 in 1996.
There was no addition charged to expense for the allowance for impaired
loans and there were no direct write-downs charged against allowance in
1997. Interest income on impaired loans of $33,320 and $44,774 was
recognized for cash payments received in 1997 and 1996.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation 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. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of these
instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments. The Corporation does not issue
any other instruments with significant off-balance-sheet risk.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit written is represented by the contract
or notional amount of those instruments. The Corporation uses the same
credit policies in making commitments and conditional obligations as it
does for on-balancesheet instruments. The following table identifies the
contract or notional amount of those instruments at December 31,:
F-15
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
1997 1996
---- ----
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $7,163,272 $8,691,684
Standby letters of credit $ 674,243 $ 609,327
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Corporation
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by the Corporation upon
extension of credit is based on management's credit evaluation of the
counter party. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, and income-producing commercial
properties.
Standby letters of credit written are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers.
F-16
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
7. PREMISES AND EQUIPMENT
The depreciation provision charged to operating expense amounted to
$114,944 in 1997 and $104,664 in 1996. The composition of premises and
equipment at December 31, is as follows:
1997 1996
---- ----
Premises $1,278,882 $1,212,088
Furniture and fixtures 1,112,201 1,061,116
Leasehold improvements 29,500 -
------------- -----------
2,420,583 2,273,204
Less accumulated depreciation 1,854,580 1,739,636
-------------- ---------
566,003 533,568
Land 165,539 165,539
------------ ------------
$ 731,542 $ 699,107
=========== ===========
8. INTEREST BEARING DEPOSITS
Interest bearing deposits include certificates of deposit issued in
denominations of $100,000 or greater which amounted to $2,520,686 and
$1,402,187 at December 31, 1997 and 1996. Interest expense related to
certificates of $100,000 or greater was $106,239 and $89,006 for the years
ended December 31, 1997 and 1996, respectively.
Interest bearing deposits at December 31, are further detailed as follows:
1997 1996
---- ----
Savings accounts $19,790,499 $19,295,25
NOW accounts 7,852,920 8,767,068
Money Market accounts 5,924,696 6,642,328
Certificates and other time deposits 22,015,230 20,643,409
------------ ------------
$55,583,345 $55,348,057
=========== ===========
F-17
<PAGE>
NORTHERN BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
8. INTEREST BEARING DEPOSITS (CONTINUED)
Included in interest bearing deposits at December 31, 1997 were time
deposits with the following scheduled maturities:
1998 $13,614,831
1999 3,724,128
2000 3,267,737
2001 667,620
2002 740,914
--------------
$22,015,230
============
9. PENSION PLAN
The Bank has a non-contributory defined benefit pension plan covering all
employees over 21 years of age and having at least one year of service. The
plan calls for benefits to be paid to eligible employees at retirement
based primarily upon years of service with the Bank and compensation rates
near retirement. Contributions to the plan reflect benefits attributed to
employees' services to date, as well as services expected to be earned in
the future. Plan assets consist of primarily common and preferred stock,
investment-grade corporate bonds, and U.S. government obligations. The
following table sets forth the plan's funded status at December 31, as
follows:
1997 1996
---- ----
Vested benefit obligation $596,348 $572,187
Nonvested benefits 8,336 6,575
----------- -----------
Accumulated benefit obligation 604,684 578,762
Effect of projected future
compensation levels 185,788 201,234
--------- ---------
Projected benefit obligation ("PBO") 790,472 779,996
Plan assets at fair value 707,359 575,669
--------- ---------
PBO in excess of plan assets 83,113 204,327
Unrecognized prior service cost (5,545) (5,897)
Unamortized transition asset 57,472 62,422
Unrecognized net gain (loss) 77,999 (60,908)
---------- ---------
Accrued pension cost included in
other liabilities $213,039 $199,944
======== ========
F-18
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
9. PENSION PLAN (CONTINUED)
Net pension cost for 1997 and 1996, included the following components:
1997 1996
---- ----
Service cost $ 51,127 $ 48,126
Interest cost 49,549 49,142
Return on plan assets (132,998) (64,094)
Net amortization and deferral 82,346 16,288
---------- ----------
Net periodic pension cost $ 50,024 $ 49,462
========= =========
The discount rate and average rate of increase in future compensation
levels used in determining the actuarial present value of projected benefit
obligation and the expected return on the plan assets are summarized as
follows:
1997 1996
---- ----
Discount rate 7.0% 7.0%
Increase in future compensation levels 5.0% 6.0%
Expected return on plan assets 8.0% 8.0%
10. STOCK OPTION PLANS
On July 26, 1989, the Corporation adopted an Incentive Stock Option Plan
whereby, the Corporation entered into Incentive Stock Option Agreements
with an officer of the Bank. The maximum number of shares of common stock
that may be optioned or sold under the Plan is 5,000 shares. The options
may be exercised at any time from the period commencing one year and ending
ten years from the date of the agreements. The options expire beginning in
1999 through 2004. The Corporation had 5,000 shares of outstanding stock
options at December 31, 1997 and 1996, respectively, with a weighted
average exercise price of $34.87 per share. There were no shares granted,
exercised, or forfeited in 1997 or 1996.
11. INCOME TAXES
The balance sheet includes a net deferred tax asset of approximately
$267,104 and $226,011 at December 31, 1997 and 1996, respectively. The
Corporation has not established a valuation allowance as it is management's
belief that it has adequate taxable income and carrybacks to realize the
net deferred tax asset. The components of the net deferred tax asset at
December 31, 1997 and 1996 are as follows:
F-19
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
11. INCOME TAXES (CONTINUED)
1997 1996
---- ----
Deferred compensation $ 70,440 $ 62,419
Allowance for loan losses 140,440 109,510
Unrealized loss on securities available
for sale 8,507 11,894
Pension reserve 72,434 67,982
----------- -----------
Total deferred tax assets 291,491 251,805
Securities accretion 1,200 2.147
Deferred loan fees 23,187 23,647
----------- -----------
Total deferred tax liabilities 24,387 25,794
----------- -----------
Net deferred tax asset at
December 31, $ 267,104 $ 226,011
========== =========
Applicable income tax expense components:
Current $ 467,083 $ 338,678
Deferred benefit (44,481) (12,051)
----------- -----------
Total income tax expense $ 422,602 $ 326,627
========== =========
Tax at statutory rate $ 476,966 $ 403,056
Increase (decrease) resulting from:
Nontaxable interest income (61,201) (86,022)
Other 6,837 9,593
------------- ------------
Total tax provision $ 422,602 $ 326,627
=========== ==========
F-20
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
12. EARNINGS PER SHARE
The following is a reconciliation of the basic and diluted EPS
computations.
Income Per-
(Numerator) Shares Share
(In Thousands) (Denominator) Amount
-------------- ------------- ------
For the Year Ended December 31, 1997
Net Income Per Common Share
Income available to common stockholders $980,239 140,011 $7.00
=====
Effect to Dilutive Securities
Options - 1,513
--------- ----------
Net Income Per Common Share-Assuming
dilutions
Income available to common stockholders
assuming conversions $980,239 141,524 $6.93
======== ======= =====
For the Year Ended December 31, 1996
Net Income Per Common Share
Income available to common stockholders $858,832 141,524 $6.08
=====
Effect to Dilutive Securities
Options - 1,038
--------- ----------
Net Income Per Common Share-Assuming
dilutions
Income available to common stockholders
assuming conversions $858,832 142,386 $6.03
======== ======= =====
13. STOCK DIVIDEND
On June 2, 1997, the Corporation distributed 12,672 shares of common stock
in connection with 10% stock dividend. As a result of the stock dividend,
common stock was increased by $126,720, additional paid-in capital was
increased by $506,880, and retained earnings was decreased by $633,600. All
references in the accompanying consolidated financial statements to the
number of common shares and per share amounts for 1996 have been restated
to reflect the stock dividend.
F-21
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
14. CONTINGENCIES AND COMMITMENTS
There are no legal proceedings to which the Corporation or the Bank are a
party, except proceedings which arise in the normal course of business and,
in the opinion of management, will not have any material effect on the
consolidated financial position of the Corporation and the Bank.
15. DIVIDEND RESTRICTIONS
The amount of funds available to a parent from its subsidiary bank is
limited for all national banks by restrictions imposed by the Comptroller
of the Currency. At December 31, 1997, dividends were restricted not to
exceed $2,657,197. These restrictions have not had, and are not expected to
have, a significant impact on the Corporation's ability to meet its cash
obligations.
16. RELATED PARTY TRANSACTIONS
Some of the Corporation's or its Bank's directors, principal officers,
principal shareholders, and their related interests had transactions with
the Bank in the ordinary course of business during 1997. All loans and
commitments to loans in such transactions were made on substantially the
same terms, including collateral and interest rates, as those prevailing at
the time for comparable transactions. In the opinion of management, these
transactions do not involve more than normal risk of collectibility or
present other unfavorable features. It is anticipated that further such
extensions of credit will be made in the future.
The aggregate amount of credit extended to these directors and principal
officers was $1,137,358 and $1,052,972 at December 31, 1997 and 1996,
respectively.
The following is an analysis of loans to these parties during 1997:
Balances at January 1, 1997 $1,052,972
Advances 162,218
Repayments (77,832)
-------------
Balances at December 31, 1997 $1,137,358
==========
F-22
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
17. CAPITAL REQUIREMENTS
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific capital
guidelines that involve quantitative measures of the assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts of ratios (set forth in the
tables below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined). Management believes, as of December
31, 1997, that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1997 the most recent notification from the regulatory
agencies categorized the Corporation and the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Corporation and the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since those notifications that
management believes have changed those categories.
F-23
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
17. CAPITAL REQUIREMENTS (CONTINUED)
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets)
Northern Lehigh Bancorp, Inc. $8,536,911 15.1% $4,511,043 >8.0% $5,638,305 >10.0%
Citizens National Bank 8,533,787 14.9% 4,574,907 >8.0% 5,718,634 >10.0%
Tier I Capital (to Risk Weighted Assets)
Northern Lehigh Bancorp, Inc. $7,870,303 14.0% $2,255,322 >4.0% $3,382,983 >6.0%
Citizens National Bank 7,867,179 13.8% 2,287,454 >4.0% 3,431,180 >6.0%
Tier I Capital (to Average Assets)
Northern Lehigh Bancorp, Inc. $7,870,303 11.1% $2,834,488 >4.0% $3,543,110 >5.0%
Citizens National Bank 7,867,179 11.1% 2,834,423 >4.0% 3,543,029 >5.0%
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)
Northern Lehigh Bancorp, Inc. $7,802,111 14.8% $4,210,704 >8.0% $5,263,379 >10.0%
Citizens National Bank 7,695,745 14.4% 4,268,850 >8.0% 5,336,063 >10.0%
Tier I Capital (to Risk Weighted Assets)
Northern Lehigh Bancorp, Inc. $7,283,885 13.8% $2,105,352 >4.0% $3,158,028 >6.0%
Citizens National Bank 7,177,519 13.5% 2,134,425 >4.0% 3,201,638 >6.0%
Tier I Capital (to Risk Weighted Assets)
Northern Lehigh Bancorp, Inc. $7,283,885 10.7% $2,712,186 >4.0% $3,390,232 >5.0%
Citizens National Bank 7,177,519 10.6% 2,712,088 >4.0% 3,390,110 >5.0%
</TABLE>
F-24
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
18. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial statements of Northern Lehigh Bancorp, Inc., follow:
Condensed Balance Sheets December 31,
------------------
(Dollars in thousands) 1997 1996
---- ----
Assets:
Cash $ 1 $ 2
Investments in subsidiaries 7,851 7,154
Other assets 2 6
----- -----
Total assets $ 7,854 $ 7,162
Liabilities and shareholders' equity:
Other liabilities $ - $ -
------- -------
Total liabilities - -
------- -------
Shareholders' equity:
Common Stock 1,437 1,310
Additional-paid-in-capital 507 -
Retained earnings 6,115 5,974
Net unrealized gains on investment
securities available for sale (17) (23)
Treasury Stock (188) (99)
--------- --------
Total shareholders' equity 7,854 7,162
-------- --------
Total liabilities and shareholders'
equity $ 7,854 $ 7,162
======= =======
Years Ended
Condensed Statements of Income December 31,
------------
(Dollars in thousands) 1997 1996
---- ----
Dividends from banks $ 295 $ 280
Other income - -
-------- --------
Total operating income 295 280
Operating expense 7 17
-------- ----------
Income before income taxes and equity
in undistributed net income of banks 288 263
Income taxes (2) (6)
--------- -----------
Income before equity in undistributed net
income of banks 290 269
Equity in undistributed net income of banks 690 590
--------- -----------
Net income $ 980 $ 859
========= ========
F-25
<PAGE>
Years Ended
Condensed Statements of Cash Flows December 31,
------------------
(Dollars in thousands) 1997 1996
-------------------
Operating activities:
Net income $ 980 $ 859
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed net income
of banks (690) (590)
Net (increase) decrease in other assets 4 (4)
------ ---------
Net cash provided by operating activities 294 265
------ ---------
Financing activities:
Cash dividends and fractional shares (206) (167)
Increase in loans payable - (99)
Purchase of Treasury Stock (89) -
----------- -----------
Net cash used in financing activities: (295) (266)
---------- -----------
Increase (decrease) in cash (1) (1)
Cash at beginning of year 2 3
------------ -----------
Cash at end of year $ 1 $ 2
=========== ==========
F-26
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITOR'S REPORT
DECEMBER 31, 1996
F-27
<PAGE>
JARRETT STOKES & KELLY
CERTIFIED PPUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Northern Lehigh Bancorp, Inc.
Slatington, Pennsylvania
We have audited the accompanying consolidated balance sheets of Northern Lehigh
Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northern Lehigh
Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ Jarrett Stokes & Kelly
-------------------------------
JARRETT STOKES & KELLY
Allison Park, Pennsylvania
February 6, 1997
F-28
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
1996 1995
---- ----
ASSETS
Cash and due from banks $ 2,531,407 $ 2,776,143
Federal funds sold 2,140,000 7,787,000
Securities available for sale 3,441,623 5,777,054
Securities held to maturity, market
value of $4,985,063 and
$4,635,203 in 1996 and 1995 4,983,527 4,628,729
Loans 56,028,053 46,991,782
Unearned income (344,225) (489,528)
Reserve for possible loan losses (518,226) (462,128)
------------- -------------
Net loans 55,165,602 46,040,126
Premises and equipment, net 699,107 732,429
Other real estate owned 93,214 -
Other assets 784,387 772,048
-------------- --------------
TOTAL ASSETS $69,838,867 $68,513,529
=========== ===========
LIABILITIES
Deposits
Non-interest bearing $ 6,699,020 $ 6,195,503
Interest bearing 55,348,057 55,121,448
------------ -----------
Total deposits 62,047,077 61,316,951
Other liabilities 629,689 698,264
-------------- -------------
Total liabilities 62,676,766 62,015,215
SHAREHOLDERS' EQUITY
Common stock, par value $10;
authorized 500,000 shares;
131,040 shares issued;
128,676 shares outstanding 1,310,400 1,310,400
Retained earnings 5,973,485 5,281,932
Unrealized gain (loss) on
securities available for sale -
net of deferred taxes of
($11,894) and $2,410 in 1996 and 1995 (23,087) 4,679
Treasury stock at cost; 2,364 shares (98,697) (98,697)
--------------- --------------
Total shareholders' equity 7,162,101 6,498,314
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $69,838,867 $68,513,529
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------
1996 1995
---- ----
INTEREST INCOME
Interest and fees on loans $4,490,488 $4,035,405
Interest and dividends on securities:
Taxable 375,297 644,415
Exempt from federal income taxes 103,833 76,326
Interest on federal funds sold 238,754 253,483
------------ ------------
Total interest income 5,208,372 5,009,629
INTEREST EXPENSE
Interest on deposits 2,134,930 2,018,573
Interest on short-term borrowings 55 1,038
---------------- --------------
Total interest expense 2,134,985 2,019,611
----------- -----------
NET INTEREST INCOME 3,073,387 2,990,018
PROVISION FOR POSSIBLE LOAN LOSSES 115,000 70,000
------------ -------------
Net interest income after provision for
possible loan losses 2,958,387 2,920,018
OTHER OPERATING INCOME
Service charges on deposit accounts 63,671 51,978
Other service charges and fees 87,797 85,288
Other income 44,484 161,968
Net security gains - 294
------------------ ---------------
Total other operating income 195,952 299,528
OTHER OPERATING EXPENSES
Salaries and employee benefits 955,496 915,635
Occupancy expense 331,711 311,940
Other operating expense 681,673 691,848
------------ ------------
Total other operating expenses 1,968,880 1,919,423
----------- -----------
INCOME BEFORE INCOME TAXES 1,185,459 1,300,123
INCOME TAX EXPENSE 326,627 369,272
------------ -----------
NET INCOME $ 858,832 $ 930,851
=========== ===========
PER SHARE DATA
Net income $ 6.08 $ 6.48
=========== ===========
Net income - assuming dilution 6.03 6.45
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
<TABLE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Unrealized
Gain (Loss) on Total
Common Retained Securities Treasury Shareholders'
Stock Earnings Available For Sale Stock Equity
----- -------- ------------------- ----- -------------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1995 $1,310,400 $4,482,121 $(82,895) $ - $5,709,626
Net income - 930,851 - - 930,851
Cash dividends declared
($1.00 per share) - (131,040) - - (131,040)
Net change in unrealized gain
(loss) on securities available
for sale - net of
deferred taxes - - 87,574 - 87,574
Purchases of treasury
stock - - - (98,697) (98,697)
------------- ------------ ---------- ---------- -----------
Balance -
December 31, 1995 1,310,400 5,281,932 4,679 (98,697) 6,498,314
Net income - 858,832 - - 858,832
Cash dividends declared
($1.30 per share) - (167,279) - - (167,279)
Net change in unrealized gain
(loss) on securities
available for sale -
net of deferred taxes - - (27,766) - (27,766)
-------------- ----------- ------------- ---------- -----------
Balance -
December 31, 1996 $1,310,400 $5,973,485 $ (23,087) $ (98,697) $7,162,101
========== ========== ================ ======== ==========
The accompanying notes are an integral part of these consolidated financial
statements
</TABLE>
F-31
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
1996 1995
---- ----
OPERATING ACTIVITIES
Net income $ 858,832 $ 930,851
Adjustments to reconcile net income
to net cash provided by operating
activities
Provision for loan losses 115,000 70,000
Depreciation 104,664 96,101
Net security (gains) losses - (294)
Net gain on sale of assets (1,687) (38,966)
Net amortization of securities
and loan fees 103,582 77,286
Deferred income tax benefit (12,051) (25,653)
(Increase) decrease in accrued
interest receivable 10,429 56,621
Decrease in other assets 3,587 65,437
Increase (decrease) in accrued
interest payable (9,969) 66,211
Increase in income taxes payable (116,926) 31,740
Increase in other liabilities 58,320 80,868
------------- ---------------
Net cash provided by
operating activities 1,113,781 1,410,202
INVESTING ACTIVITIES
Purchases of securities available
for sale (2,009,375) -
Purchases of securities held
to maturity (5,130,099) (2,956,230)
Maturities and calls of securities
available for sale 4,321,031 2,958,148
Maturities and calls of securities
held to maturity 4,715,000 7,279,494
Net increase in loans (9,470,266) (4,336,701)
Purchases of premises and equipment (79,112) (82,399)
Proceeds from sales of assets 84,457 177,111
------------- --------------
Net cash provided by (used in)
investing activities (7,568,364) 3,039,423
FINANCING ACTIVITIES
Net increase in deposits 730,126 3,529,519
Dividends paid (167,279) (131,040)
Purchases of treasury stock - (98,697)
-------------- --------------
Net cash provided by financing
activities 562,847 3,299,782
------------ -------------
Net increase (decrease) in
cash and cash equivalents (5,891,736) 7,749,407
Cash and cash equivalents at
beginning of year 10,563,143 2,813,736
----------- -------------
Cash and cash equivalents at
end of year $ 4,671,407 $10,563,143
=========== ===========
Supplemental disclosures of cash
flow information Cash paid during
the year for:
Interest $ 2,145,755 $ 2,085,822
=========== ============
Income taxes $ 458,225 $ 363,510
============ ============
Non-cash transactions:
Transfer from loans to other
real estate owned $ 168,214 $ -
============ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General:
The accompanying consolidated financial statements include the accounts of
Northern Lehigh Bancorp, Inc. (the "Corporation") and its wholly owned
subsidiary, The Citizens National Bank of Slatington (the "Bank"). All
material intercompany transactions have been eliminated.
The following summary of accounting and reporting policies is presented to
aid the reader in obtaining a better understanding of the financial
statements and related financial data of the Corporation and the Bank
contained in this report. Such policies conform to generally accepted
accounting principles ("GAAP") and to general practice within the banking
industry. In preparing financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and income
and expenses during the reporting period. Actual results could differ from
those estimates.
Certain items of the consolidated financial statements, as of December 31,
1995, have been reclassified to conform with the December 31, 1996
presentation. None of these reclassifications affected net income.
Securities:
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115 ("FAS No. 115"), "Accounting for
Certain Investments in Debt and Equity Securities." This statement
addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities. Those investments are to be classified in three categories and
accounted for as follows (a) securities held to maturity, (b) trading
securities and (c) securities available for sale.
Debt securities that the Corporation has the positive intent and ability to
hold to maturity are classified as securities held to maturity and are
reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with
unrealized gains and losses included in earnings. Debt and equity
securities not classified as either held to maturity securities or trading
securities are classified as securities available for sale and are reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of shareholders' equity.
Loans:
Loans are stated at the principal amount outstanding. When a loan becomes
past due and doubt exists as to the ultimate collection of principal and
interest, the accrual of income is discontinued and is only recognized at
the time payment is received.
Loan Origination Fees and Costs:
The net fees and costs directly related to the origination of a loan are
deferred and amortized over the life of the loan as an adjustment of the
loan yield.
Other Real Estate Owned:
Real estate, other than bank premises, is recorded at the lower of cost or
market at the time of acquisition. Expenses related to holding the
property, net of rental income, are generally charged against earnings in
the current period.
F-33
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reserve for Possible Loan Losses:
The reserve for possible loan losses represents management's estimate of an
amount adequate to provide for losses which may be incurred on loans
currently held. Management determines the adequacy of the reserve based on
reviews of individual credits, historical patterns of loan charge-offs and
recoveries, industry experience, current economic trends, and other factors
relevant to the collectibility of the loans currently in the portfolio. The
reserve is increased by provisions charged to operating expense and reduced
by net charge-offs.
Premises and Equipment:
Premises and equipment are carried at cost less accumulated depreciation
and amortization. For financial statement reporting and income tax
purposes, depreciation is computed both on the straight-line and
accelerated methods over the estimated useful lives of the premises and
equipment. Charges for maintenance and repairs are expensed as incurred.
Income Taxes:
Certain income and expense items are accounted for in different years for
financial reporting purposes than for income tax purposes. Deferred taxes
are provided to recognize these temporary differences. The principal items
involved are discount accretion on securities, provision for possible loan
losses and accrued benefits. Income tax expense is not proportionate to
earnings before taxes, principally because income from obligations of
states and political subdivisions is nontaxable.
Earnings per Share:
During 1997, the Corporation adopted the provisions of the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share." SFAS No. 128 eliminates
primary and fully diluted earnings per share and requires presentation of
basic and diluted earnings per share (EPS) in conjunction with the
disclosure of the methodology used in computing such earnings per share.
Basic earnings per share exclude dilution and are computed by dividing
income available to common shareholders by the weighted-average common
shares outstanding during the period. Diluted earnings per share take into
account the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and converted into common
stock. Prior periods' earnings per share calculations have been restated to
reflect the adoption of SFAS No. 128.
Comprehensive Income:
On January 1, 1998, the Corporation adopted the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards to provide prominent disclosure of
comprehensive income items. Comprehensive income is the change in equity of
a business enterprise during a period from transactions and other events
and circumstances from non-owner sources. Other comprehensive income
consists of net unrealized gains on investment securities available for
sale. Subsequent to the adoption date, all prior-period amounts are
required to be restated to conform to the provision of SFAS No. 130.
Comprehensive income for December 31, 1996 and 1995 was $831,000 and
$1,018,000, respectively. The adoption of SFAS No. 130 did not have a
material impact on the Corporation's financial position or results of
operation.
F-34
<PAGE>
Employee Benefit Plan:
The Bank has a non-contributory defined contribution pension plan covering
all employees over 21 years of age and having at least one year of service
(Note 9).
The Bank also has a deferred compensation plan involving directors of the
Bank. The plan requires defined annual payments for ten years beginning at
age 65 or death. The annual benefit is based upon the amount deferred plus
interest. The present value of these deferred compensation liabilities was
approximately $183,588 and $162,702 at December 31, 1996 and 1995,
respectively.
Cash and Cash Equivalents:
For purposes of reporting cash flows, the Corporation has defined cash and
cash equivalents as those amounts included in the balance sheet captions
"Cash and cash equivalents" and "Federal funds sold."
2. CASH AND DUE FROM BANKS
Regulations of the Board of Governors of the Federal Reserve System impose
uniform reserve requirements on all depository institutions with
transaction accounts (checking accounts, NOW accounts, etc.). Reserves are
maintained in the form of vault cash or a non-interest bearing balance held
with the Federal Reserve Bank. The Bank also, from time to time, maintains
deposits with the Federal Reserve Bank and other banks for various services
such as check clearing. The Bank's reserve requirement was $269,000 and
$316,000 at December 31, 1996 and 1995, respectively.
3. SECURITIES
The amortized cost and estimated market values of securities are as
follows:
F-35
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- --------
Securities Available
for Sale:
December 31, 1996
- -----------------
U.S. Treasury securities $2,004,809 $2,652 $ - $2,007,461
Obligations of U.S. Government
corporations and agencies 1,237,796 - (17,634) 1,220,162
Obligations of states and
political subdivisions 200,000 - (20,000) 180,000
Equity securities 34,000 - - 34,000
------------- ---------- ----------- -----------
$3,476,605 $2,652 $ (37,634) $3,441,623
========== ====== ========== ==========
December 31, 1995
- -----------------
U.S. Treasury securities $4,102,240 $11,824 $ (962) $4,113,102
Obligations of U.S.
Government corporations
and agencies 1,458,726 9,354 (128) 1,467,952
Obligations of states and
political subdivisions 175,000 - (13,000) 162,000
Equity securities 34,000 - - 34,000
------------- --------- ----------- ----------
$5,769,966 $21,178 $ (14,090) $5,777,054
========== ======= ========== ==========
F-36
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
3. SECURITIES (CONTINUED)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- --------- -------
Securities Held to Maturity:
December 31, 1996
- -----------------
Obligations of
U.S. Government
corporations and
agencies $2,231,673 $ 98 $ (2,667) $2,229,104
Obligations of states
and political
subdivisions 964,049 3,229 (96) 967,182
Corporate debt
securities 1,787,805 972 - 1,788,777
----------- ---------- ------------ -----------
$4,983,527 $ 4,299 $ (2,763) $4,985,063
========== ======== ============ ==========
December 31, 1995
- -----------------
Obligations of
U.S. Government
corporations and
agencies $1,012,224 $ 516 $ - $1,012,740
Obligations of states
and political
subdivisions 2,500,800 4,953 (864) 2,504,889
Corporate debt
securities 1,115,705 1,869 - 1,117,574
----------- --------- ----------- -----------
$4,628,729 $ 7,338 $ (864) $4,635,203
========== ======== ============ ===========
The amortized cost and estimated market values of securities at December 31,
1996, by contractual maturity, are shown below. 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.
Securities Available for Sale Securities Held to Maturity
----------------------------- ---------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ----------- --------- ------------
Due within 1 year $2,004,809 $2,007,461 $4,023,862 $4,022,143
Due after 1 but within
5 years - - 808,316 811,420
Due after 5 but within
10 years 237,304 217,096 151,349 151,500
Due after 10 years 1,200,492 1,183,066 - -
Equity securities 34,000 34,000 - -
------------- --------- ---------- ----------
$3,476,605 $3,441,623 $4,983,527 $4,985,063
========== ========== ========== ==========
Included in equity securities are Federal Reserve Bank and Atlantic Central
Bankers Bank stock in the amount of $34,000 at December 31, 1996 and 1995.
Gross gains of $0 and $294 were realized on calls and maturities of securities
in 1996 and 1995, respectively. In November 1995, the Financial Accounting
Standards Board issued a special report "A Guide to Implementation of FAS 115 on
Accounting for Certain Investments in Debt and Equity Securities - Questions and
Answers." As permitted by the Guide, the Bank transferred securities from the
held to maturity classification to the available for sale classification in
November 1995. The amortized cost of these securities as of the date of transfer
was $175,000 with a fair market value of $150,000.
F-37
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
3 SECURITIES (CONTINUED)
Securities with amortized cost and market values of approximately
$6,988,336 and $6,992,562 at December 31, 1996, and $8,129,902 and
$8,143,484 at December 31, 1995, were pledged to secure public deposits and
for other purposes required or permitted by law.
The Corporation did not hold any derivative financial instruments such as
futures, forwards, swap or option contracts at December 31, 1996.
The changes in net unrealized holding gain or loss on securities available
for sale that has been included in the separate component of shareholders'
equity for the year ended December 31, is as follows:
1996 1995
---- ----
Gross change in unrealized gain (loss)
on securities available for sale $(42,070) $132,688
Deferred taxes (14,304) 45,114
---------- ----------
Net change in unrealized gain (loss)
on securities available for sale $(27,766) $ 87,574
========= =========
4. LOANS
The composition of the Corporation's loan portfolio at December 31, is as
follows:
1996 1995
---- ----
Real estate loans - construction $ 3,134,691 $ 2,208,479
Real estate loans - other 42,866,459 35,767,340
Commercial and industrial loans 4,142,561 3,317,669
Installment loans 3,212,011 3,068,558
Municipal loans 847,785 931,222
All other loans 1,824,546 1,698,514
------------- -------------
$56,028,053 $46,991,782
=========== ===========
The Corporation grants commercial loans, residential mortgages, and
consumer loans to customers located primarily within the Lehigh Valley.
Although the Corporation has a diversified portfolio, exposure to credit
loss can be adversely impacted by downturns in local economic and
employment conditions.
F-38
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
5. RESERVE FOR POSSIBLE LOAN LOSSES
Transactions in the reserve for possible loan losses are summarized as
follows:
1996 1995
---- ----
Reserve balance at January 1, $462,128 $442,125
Loans charged against reserve (61,583) (60,078)
Recoveries on previously charged off loans 2,681 10,081
Provision charged to operating expense 115,000 70,000
--------- ----------
Reserve balance at December 31, $518,226 $462,128
======== ========
5. RESERVE FOR POSSIBLE LOAN LOSSES (CONTINUED)
In May 1993, the Financial Accounting Standards Board issued Statement No.
114 "Accounting by Creditors for Impairment of a Loan" ("FAS 114") which
was amended in October 1994 by Statement No. 118 "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures" ("FAS 118")
which addresses the disclosure of certain loans where it is probable that
the creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Additionally, FAS 118 requires the
disclosure of how the creditor recognizes interest income related to these
impaired loans. The Corporation adopted FAS 114, as amended by FAS 118,
beginning January 1, 1995. The effect of adoption was not material.
Impairment of loans having recorded investments of $1,927,506 and
$1,230,868 at December 31, 1996 and 1995 has been recognized in conformity
with FAS 114 as amended by FAS 118. The average recorded investment in
impaired loans during 1996 and 1995 was $1,989,623 and $1,247,324,
respectively. The total reserve for loan losses related to these loans was
$0 at December 31, 1996 and 1995, respectively. Additions charged to
expense for the reserve for impaired loans amounted to $60,000 and $41,458
in 1996 and 1995. Direct write-downs charged against the reserve amounted
to $60,000 and $51,458 in 1996 and 1995. Interest income on impaired loans
of $44,774 and $33,295 was recognized for cash payments received in 1996
and 1995.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation 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. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of these
instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments. The Corporation does not issue
any other instruments with significant off-balance-sheet risk.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit written is represented by the contract
or notional amount of those instruments. The Corporation uses the same
credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. The following table identifies the
contract or notional amount of those instruments at December 31,:
F-39
<PAGE>
1996 1995
------ -----
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $8,691,684 $5,409,799
Standby letters of credit $ 609,327 $ 767,988
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Corporation
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by the Corporation upon
extension of credit is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, and income-producing commercial
properties.
Standby letters of credit written are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers.
7. PREMISES AND EQUIPMENT
The depreciation provision charged to operating expense amounted to
$104,664 in 1996, and $96,101 in 1995. The composition of premises and
equipment at December 31, is as follows:
1996 1995
---- ----
Premises $1,212,088 $1,189,257
Furniture and fixtures 1,061,116 1,022,814
----------- -----------
2,273,204 2,212,071
Less accumulated depreciation 1,739,636 1,645,181
----------- -----------
533,568 566,890
Land 165,539 165,539
------------ ------------
$ 699,107 $ 732,429
=========== ===========
8. DEPOSITS
Interest bearing deposits include certificates of deposit issued in
denominations of $100,000 or greater which amounted to $1,402,187 and
$1,703,134 at December 31, 1996 and 1995. Interest expense related to
certificates of $100,000 or greater was $89,006 and $78,851 for the years
ended December 31, 1996 and 1995, respectively.
F-40
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
Interest bearing deposits at December 31, are further detailed as follows:
1996 1995
---- ----
Savings accounts $19,295,252 $18,200,377
NOW accounts 8,767,068 8,864,057
Money Market accounts 6,642,328 7,267,698
Certificates and other time deposits 20,643,409 20,789,316
------------ ------------
$55,348,057 $55,121,448
=========== ===========
9. PENSION PLAN
The Bank has a non-contributory defined benefit pension plan covering all
employees over 21 years of age and having at least one year of service. The
plan calls for benefits to be paid to eligible employees at retirement
based primarily upon years of service with the Bank and compensation rates
near retirement. Contributions to the plan reflect benefits attributed to
employees' services to date, as well as services expected to be earned in
the future. Plan assets consist of primarily common and preferred stock,
investment-grade corporate bonds, and U.S. government obligations. The
following table sets forth the plan's funded status at December 31, as
follows:
1996 1995
---- ----
Vested benefit obligation $572,187 $476,142
Nonvested benefits 6,575 6,430
----------- -----------
Accumulated benefit obligation 578,762 482,572
Effect of projected future
compensation levels 201,234 121,963
--------- ---------
Projected benefit obligation ("PBO") 779,996 604,535
Plan assets at fair value 575,669 545,862
--------- ---------
PBO in excess of plan assets 204,327 58,673
Unrecognized prior service cost (5,897) (6,249)
Unamortized transition asset 62,422 67,372
Unrecognized net gain (loss) (60,908) 32,611
--------- ----------
Accrued pension cost included in
other liabilities $199,944 $152,407
======== ========
Net pension cost for 1996 and 1995, included the following components:
1996 1995
---- ----
Service cost $ 48,126 $ 43,051
Interest cost 49,142 37,046
Return on plan assets (64,094) (100,330)
Net amortization and deferral 16,288 57,418
-------- ---------
Net periodic pension cost $ 49,462 $ 37,185
========= =========
The discount rate and average rate of increase in future compensation levels
used in determining the actuarial present value of projected benefit obligation
and the expected return on the plan assets are summarized as follows:
F-41
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
Discount rate 7.0% 7.0%
Increase in future compensation levels 6.0% 6.0%
Expected return on plan assets 8.0% 8.5%
10. STOCK OPTION PLANS
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123 "Accounting for
Stock-Based Compensation." This new standard defines a fair value based
method of accounting for an employee stock option or similar equity
instrument. This statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to continue
to measure compensation using the intrinsic value approach under Accounting
Principles Board (APB) Opinion No. 25, the former standard.
On July 26, 1989, the Corporation adopted an Incentive Stock Option Plan
whereby, the Corporation entered into Incentive Stock Option Agreements
with an officer of the Bank. The maximum number of shares of common stock
that may be optioned or sold under the Plan is 5,000 shares. The options
may be exercised at any time from the period commencing one year and ending
ten years from the date of the agreements.
The Corporation has elected, as permitted by FASB Statement 123, to apply
APB Opinion 25 and related Interpretations in accounting for its plan.
Accordingly, no compensation cost has been recognized for its stock options
outstanding. Had compensation cost for the Corporation's stock option plan
been determined based upon the fair value at the grant dates for awards
under the plan consistent with the method of SFAS No. 123, the effect on
the Corporation's net income and earnings per share would not be material.
A summary of the status of the Corporation's outstanding stock options as
of December 31, 1996 and changes for the year ending on that date is
presented below:
Weighted-Average Exercise
Shares Price Per Share
------ -----------------------
Outstanding 1/1/96 5,000 $34.87
Granted - -
Exercised - -
Forfeited - -
-------- -------
Outstanding 12/31/96 5,000 $34.87
11. EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation established an Employee Stock Ownership Plan in 1985 which
allows all qualified employees to invest plan assets primarily in
securities of the Corporation. In 1995, this plan was formally dissolved.
F-42
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
12. INCOME TAXES
The balance sheet includes a net deferred tax asset of approximately
$226,011 and $199,656 at December 31, 1996 and 1995, respectively. The
components of the net deferred tax asset at December 31, 1996 and 1995 are
as follows:
1996 1995
---- ----
Deferred compensation $ 62,419 $ 55,318
Reserve for possible loan losses 109,510 90,437
Unrealized loss on securities available
for sale 11,894 -
Pension reserve 67,982 51,819
Reserve for securities losses - 8,500
--------- ----------
Total deferred tax assets 251,805 206,074
Unrealized gain on securities available
for sale - 2,410
Securities accretion 2,147 3,933
Deferred loan fees 23,647 75
---------- -------------
Total deferred tax liabilities 25,794 6,418
---------- -----------
Net deferred tax asset at December 31, $226,011 $199,656
======== ========
Applicable income tax expense components:
Current 338,678 $394,925
Deferred benefit (12,051) (25,653)
--------- ---------
Total income tax expense $326,627 $369,272
======== ========
F-43
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
13. EARNINGS PER SHARE
The following is a reconciliation of the basic and diluted EPS
computations.
Income
(Numerator) Shares Per-Share
(In Thousands) (Denominator) Amount
-------------- ----------- ---------
For the Year Ended December 31, 1996
Net Income Per Common Share
Income available to common
stockholders $858,832 141,348 $6.08
=====
Effect to Dilutive Securities
Options - 1,038
-------------- -----------
Net Income Per Common Share
- Assuming dilutions
Income available to common
stockholders assuming conversions $858,832 142,386 $6.03
=====
For the Year Ended December 31, 1995
Net Income Per Common Share
Income available to common stockholders $930,851 143,589 $6.48
=====
Effect of Dilutive Securities
Options - 806
-------- ---------
Net Income Per Common Share
- Assuming dilutions
Income available to common
stockholders assuming conversions $930,851 $144,395 $6.45
======== ======== =====
14. STOCK DIVIDEND
On June 2, 1997, the Corporation distributed 12,672 shares of common stock
in connection with 10% stock dividend. As a result of the stock dividend,
common stock was increased by $126,720, additional paid-in capital was
increased by $506,880, and retained earnings was decreased by $633,600. All
references in the accompanying consolidated financial statements to the per
share amounts for 1996 and 1995 have been restated to reflect the stock
dividend.
15. CONTINGENCIES AND COMMITMENTS
There are no legal proceedings to which the Corporation or the Bank are a
party, except proceedings which arise in the normal course of business and,
in the opinion of management, will not have any material effect on the
consolidated financial position of the Corporation and the Bank.
F-44
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
16. CONTINGENCIES AND COMMITMENTS
There are no legal proceedings to which the Corporation or the Bank are a
party, except proceedings which arise in the normal course of business and,
in the opinion of management, will not have any material effect on the
consolidated financial position of the Corporation and the Bank.
17. RELATED PARTY TRANSACTIONS
Some of the Corporation's or its Bank's directors, principal officers,
principal shareholders, and their related interests had transactions with
the Bank in the ordinary course of business during 1996. All loans and
commitments to loans in such transactions were made on substantially the
same terms, including collateral and interest rates, as those prevailing at
the time for comparable transactions. In the opinion of management, these
transactions do not involve more than normal risk of collectibility or
present other unfavorable features. It is anticipated that further such
extensions of credit will be made in the future.
The aggregate amount of credit extended to these directors and principal
officers was $1,052,972 and $1,072,751 at December 31, 1996 and 1995,
respectively.
The following is an analysis of loans to these parties during 1996:
Balances at January 1, 1996 $1,072,751
Advances 80,000
Repayments (99,779)
------------
Balances at December 31, 1996 $1,052,972
==========
18. CAPITAL REQUIREMENTS
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific capital
guidelines that involve quantitative measures of the assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios (set forth in the
tables below) of total and Tier I capital (as defined in the regulations)
to riskweighted assets (as defined). Management believes, as of December
31, 1996, that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notification from the regulatory
agencies categorized the corporation and the bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Corporation and the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since those notifications that
management believes have changed those categories.
F-45
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
18. CAPITAL REQUIREMENTS (CONTINUED)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions:
------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets)
Northern Lehigh
Bancorp, Inc. $7,802,111 14.8% $4,210,704 >8.0% $5,263,379 >10.0%
- -
Citizens National Bank 7,695,745 14.4% 4,268,850 >8.0% 5,336,063 >10.0%
- -
Tier I Capital
(To Risk Weighted Assets)
Northern Lehigh
Bancorp, Inc. 7,283,885 13.8% 2,105,352 >4.0% 3,158,028 >6.0%
- -
Citizens National Bank 7,177,519 13.5% 2,134,425 >4.0% 3,201,638 >6.0%
- -
Tier I Capital
(to Average Assets)
Northern Lehigh
Bancorp, Inc. 7,283,885 10.7% 2,712,186 >4.0% 3,390,232 >5.0%
- -
Citizens National
Bank 7,177,519 10.6% 2,712,088 >4.0% 3,390,110 >5.0%
- -
As of December 31, 1995:
Total Capital
(to Risk Weighted
Assets)
Northern Lehigh
Bancorp, Inc. 7,054,460 16.2% 3,489,833 >8.0% 4,362,291 >10.0%
- -
Citizens National
Bank 7,049,454 15.8% 3,562,972 >8.0% 4,453,715 >10.0%
- -
Tier I Capital
(to Risk Weighted
Assets)
Northern Lehigh
Bancorp, Inc. 6,592,332 15.1% 1,744,916 >4.0% 2,617,375 >6.0%
- -
Citizens National
Bank 6,587,325 14.8% 1,781,486 >4.0% 2,672,229 >6.0%
- -
Tier I Capital
(to Average Assets)
Northern Lehigh
Bancorp, Inc. 6,592,332 10.2% 2,580,700 >4.0% 3,225,875 >5.0%
- -
Citizens National
Bank 6,587,325 10.2% 2,580,448 >4.0% 3,225,560 >5.0%
- -
</TABLE>
F-46
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
19. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
Condensed financial statements of Northern Lehigh Bancorp, Inc., follow:
Condensed Balance Sheets December 31,
-------------
(Dollars in thousands) 1996 1995
---- ----
Assets:
Cash $ 2 $ 3
Investments in subsidiaries 7,154 6,592
Other assets 6 2
------- -------
Total assets $ 7,162 $ 6,597
======= =======
Liabilities and shareholders' equity:
Loan payable to bank subsidiary $ - $ 99
------- -------
Total liabilities - 99
------- -------
Shareholders' equity:
Common Stock 1,310 1,310
Additional-paid-in-capital - -
Retained earnings 5,974 5,282
Net unrealized gains on investment
securities available for sale (23) 5
Treasury Stock (99) (99)
-------- --------
Total shareholders' equity 7,162 6,498
-------- --------
Total liabilities and shareholders'
equity $ 7,162 $ 6,597
======= =======
Years Ended
Condensed Statements of Income December 31,
------------
(Dollars in thousands) 1996 1995
---- ----
Dividends from bank $ 280 $ 131
Other income - -
-------- --------
Total operating income 280 131
Operating expense 17 6
-------- --------
Income before income taxes and
equity in undistributed net income of banks 263 125
Income taxes (6) (2)
--------- ---------
Income before equity in undistributed net
income of banks 269 127
Equity in undistributed net income of banks 590 804
--------- ---------
Net income $ 859 $ 931
========= ========
F-47
<PAGE>
NORTHERN LEHIGH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
Condensed Statements of Cash Flows
Years Ended
December 31,
-------------
(Dollars in thousands) 1996 1995
---- ----
Operating activities:
Net income $ 859 $ 931
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed net income of banks (590) (804)
Net (increase) decrease in other assets (4) (1)
----------- ----------
Net cash provided by operating activities 265 126
----------- ----------
Financing activities:
Cash dividends and fractional shares (167) (131)
Increase in loans payable (99) 99
Purchase of Treasury Stock - (99)
----------- -----------
Net cash used in financing activities: (266) (131)
----------- -----------
Increase (decrease) in cash (1) (5)
Cash at beginning of year 3 8
------------ -----------
Cash at end of year $ 2 $ 3
============ ===========
F-48
<PAGE>
ANNEXES
A Agreement and Plan of Reorganization
B Hopper Soliday & Co., Inc. Fairness Opinion
C Statute Regarding Dissenters' Rights
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF THE 28TH DAY OF JULY, 1998
BY AND AMONG
HARLEYSVILLE NATIONAL CORPORATION,
HNC NORTH, INC.
THE CITIZENS NATIONAL BANK OF LANSFORD,
NORTHERN LEHIGH BANCORP, INC.
AND
THE CITIZENS NATIONAL BANK OF SLATINGTON
<PAGE>
TABLE OF CONTENTS
-----------------
Page(s)
-------
ARTICLE I
THE PLAN OF MERGER
SECTION 1.1 The Merger, Closing: Effective Time.........................2
ARTICLE II
CONVERSION OF SHARES AND
EXCHANGE OF STOCK CERTIFICATES
SECTION 2.1 Conversion of Shares.......................................3
SECTION 2.2 Exchange of Stock Certificates.............................5
SECTION 2.3 Other Matters..............................................8
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of NLBI and Slatington......9
SECTION 3.2 Representations and Warranties of HNC.....................26
SECTION 3.3 Representations and Warranties of HNC North...............29
SECTION 3.4 Representations And Warranties Of CNB.....................29
ARTICLE IV
COVENANTS OF NLBI AND SLATINGTON
SECTION 4.1 Conduct of Business.......................................30
SECTION 4.2 Best Efforts..............................................33
SECTION 4.3 Access to Properties and Records..........................34
SECTION 4.4 Subsequent Financial Statements...........................34
SECTION 4.5 Board and Committee Minutes...............................35
SECTION 4.6 Update Schedule...........................................35
SECTION 4.7 Notice....................................................35
SECTION 4.8 Other Proposals...........................................35
SECTION 4.9 Dividends.................................................36
SECTION 4.10 Core Deposits............................................36
SECTION 4.11 Affiliate Letters........................................36
SECTION 4.12 No Purchases or Sales of HNC Common
Stock During Price Determination Period.................36
SECTION 4.13 Accounting Treatment.....................................36
SECTION 4.14 Press Releases...........................................37
SECTION 4.15 Professional Fees........................................37
SECTION 4.16 Phase I Environmental Audit..............................37
<PAGE>
ARTICLE V
COVENANTS OF HNC, HNC NORTH AND CNB
SECTION 5.1 Best Efforts..............................................37
SECTION 5.2 Access to Properties and Records..........................38
SECTION 5.3 Subsequent Financial Statements...........................38
SECTION 5.4 Update Schedule...........................................38
SECTION 5.5 Notice....................................................38
SECTION 5.6 No Purchase or Sales of HNC Common Stock
During Price Determination Period........................39
SECTION 5.7 Publicity..................................................39
ARTICLE VI
CONDITIONS TO CONSUMMATION
SECTION 6.1 Common Conditions.........................................39
SECTION 6.2 Conditions to Obligations of HNC and HNC North............41
SECTION 6.3 Conditions to the Obligations of NLBI and Slatington......44
ARTICLE VII
TERMINATION
SECTION 7.1 Termination..............................................44
SECTION 7.2 Effect of Termination....................................45
SECTION 7.3 Expenses.................................................45
ARTICLE VIII
POST MERGER AGREEMENTS
SECTION 8.1 Employees. ............................................46
SECTION 8.2 Directors...............................................47
SECTION 8.3 Advisory Board of Directors.............................47
SECTION 8.4 Benefits................................................47
ARTICLE IX
OTHER MATTERS
SECTION 9.1 Certain Definitions; interpretation......................48
SECTION 9.2 Survival.................................................48
SECTION 9.3 Parties in Interest......................................49
SECTION 9.4 Captions.................................................49
SECTION 9.5 Severability.............................................49
SECTION 9.6 Access; Confidentiality..................................49
SECTION 9.7 Waiver and Amendment.....................................49
SECTION 9.8 Counterparts.............................................50
SECTION 9.9 Governing Law............................................50
SECTION 9.10 Expenses................................................50
SECTION 9.11 Notices.................................................50
SECTION 9.12 Entire Agreement: Etc...................................52
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION dated as of the 28th day of July, 1998
(this 'Plan" or this "Agreement"), is entered into by and among Harleysville
National Corporation, a Pennsylvania corporation ("HNC"), HNC North, Inc.
Pennsylvania corporation, ("HNC North"), The Citizens National Bank of Lansford,
a national banking association ("CNB"), Northern Lehigh Bancorp, Inc., a
Pennsylvania corporation ("NLBI"), and The Citizens National Bank of Slatington,
a national banking association ("Slatington").
RECITALS:
WHEREAS, HNC is a Pennsylvania chartered, multi-institution bank holding
company; and
WHEREAS, HNC North is a wholly-owned subsidiary of HNC; and
WHEREAS, CNB is a wholly-owned national bank subsidiary of HNC North; and
WHEREAS, NLBI is a Pennsylvania bank holding company; and
WHEREAS, Slatington is the wholly-owned national bank subsidiary of NLBI;
and
WHEREAS, the boards of directors of HNC, HNC North, CNB, NLBI and
Slatington have each determined that it is in the best interests of their
respective shareholders for NLBI to statutorily merge with and into HNC North
(the "Merger"), and for the subsequent, immediate merger of Slatington with and
into CNB (the "Bank Merger"), all upon the terms and subject to the conditions
set forth herein and in the Agreement and Plan of Merger of even date herewith
by and between CNB and Slatington (the "Bank Merger Agreement"); and
WHEREAS, the parties desire to make certain representations, warranties,
covenants and agreements in connection with this Agreement and to set forth the
conditions to the Merger and the Bank Merger; and
WHEREAS, NLBI and HNC North desire to merge in the manner provided for
herein and to adopt this Agreement as a plan of reorganization and to consummate
such plan in accordance with the provisions of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, concurrently with the execution and delivery of this Agreement,
CNB and Slatington have entered into an Agreement and Plan of Merger of even
date herewith (the "Bank Merger Agreement") attached hereto as Exhibit "A",
providing for the merger of Slatington with and into CNB in accordance with the
terms and conditions set forth therein; and
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to HNC's willingness to enter into this Agreement,
NLBI and HNC have entered into a stock option agreement of even date herewith
(the "Investment Agreement") attached hereto as Exhibit "B", granting HNC an
option to purchase from NLBI authorized and unissued
1
<PAGE>
shares equal to 19.9% of the shares of NLBI's common stock outstanding on the
date of the Investment Agreement, subject to the terms and conditions set forth
therein.
NOW, THEREFORE, in consideration of their mutual promises and obligations
hereunder, the parties hereto, intending to be legally bound hereby, adopt and
make this Agreement and prescribe the terms and conditions hereof and the manner
and basis of carrying it into effect, which shall be as follows:
ARTICLE I
THE PLAN OF MERGER
SECTION 1.1 The Merger, Closing: Effective Time.
(a) Subject to the terms and conditions of this Agreement and in accordance
with the applicable laws of the Commonwealth of Pennsylvania, at the
Effective Time (as defined in Section 1. 1 (d)), NLBI shall be merged with
and into HNC North and the separate corporate existence of NLBI shall
thereupon cease. HNC North shall be the surviving corporation in the Merger
(sometimes hereinafter referred to as the "Surviving Corporation") and
shall continue to be governed by the laws of the Commonwealth of
Pennsylvania and shall be a registered bank holding company under the Bank
Holding Company Act of 1956, as amended, and the separate corporate
existence of HNC North with all its rights, privileges, immunities, powers
and franchises shall continue unaffected by the Merger. The name of the
Surviving Corporation shall be "HNC North, Inc.". The Merger shall have the
effects specified in the Pennsylvania Business Corporation Law of 1988, as
amended (the "PBCL"').
(b) Subject to the terms and conditions of this Agreement, Slatington shall
merge with and into CNB (the " Bank 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.ss.215a (the "Bank Merger Act"). CNB shall be the surviving
corporation in the Bank Merger (sometimes hereinafter referred to as the
"Surviving Bank") and shall continue to be a national banking association
and the separate corporate existence of CNB with all its rights,
privileges, immunities, powers and franchises shall continue unaffected by
the Bank Merger. The name of the Surviving Bank shall be "The Citizens
National Bank", "Citizens Bank, N.A." or "The Citizens National Bank of
Pennsylvania", subject to any necessary prior regulatory approval.
(c) The closing of the Merger (the "Closing") shall take place at such place
and time and on such date, following three (3) business days' notice to
NLBI, as shall be agreed upon by all parties, which date shall not be later
than the 30th business day after (i) the last approval of required
governmental authorities is granted and any related waiting periods expire,
(ii) the lifting, discharge or dismissal of any stay of any such
2
<PAGE>
governmental approval or of any injunction against the Merger and (iii) all
shareholder approvals required by the parties hereunder are received.
(d) Immediately following the Closing, and provided that this Agreement has not
been terminated or abandoned pursuant to Article VII hereof, HNC North and
NLBI will cause articles of merger (the "Articles of Merger") to be
delivered and properly filed with the Department of State of the
Commonwealth of Pennsylvania (the "Department of State"). The Merger shall
become effective on 11:59 p.m. on the day on which the Closing occurs and
Articles of Merger are filed with the Department of State or such later
date and time as may be specified in the Articles of Merger (the "Effective
Time"). The "Effective Date" when used herein means the day on which the
Effective Time for the Merger occurs. The Bank Merger of Slatington with
and into CNB shall become effective and the Bank Merger Agreement shall be
consummated on the Effective Date or the date upon which the OCC issues a
Certificate of Merger, whichever is later (the "Bank Merger Effective
Date"). On the Bank Merger Effective Date, Slatington shall cease to exist
as a separate banking institution, and CNB shall become the surviving
institution of the Bank Merger.
(e) At the Effective Time, the articles of incorporation and bylaws of HNC
North in effect immediately prior to the Effective Time shall be the
articles of incorporation and bylaws of the Surviving Corporation. At the
Effective Time, the directors and officers of HNC North immediately prior
to the Effective Time shall be and become the directors and officers of the
Surviving Corporation with such additions or deletions as HNC, in its sole
discretion, may determine.
ARTICLE II
CONVERSION OF SHARES AND
EXCHANGE OF STOCK CERTIFICATES
SECTION 2.1 Conversion of Shares.
On the Effective Date (as defined in Section 1.1(d) of this Agreement) the
shares of NLBI Common Stock (defined below) then outstanding shall be converted
into shares of HNC Common Stock (defined below), as follows:
(a) General.
-------
Subject to the provisions of this Article II, each share of NLBI Common
Stock, par value $10.00 per share ("NLBI Common Stock") issued and
outstanding immediately before the Effective Date shall, on the Effective
Date, be converted into and become, without any action on the part of the
holder thereof, the right to receive 3.57 shares of HNC Common Stock, par
value, $1.00 per share ("HNC Common Stock") (the "Exchange Ratio"). Subject
to the provisions of Section 2.1(b), the aggregate number of shares of HNC
Common Stock to be issued under this Agreement shall not exceed 498,008
shares and the Exchange Ratio shall be 3.57.
3
<PAGE>
(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
Exchange Ratio shall be proportionately adjusted accordingly.
(c) Assumption of Stock Options.
----------------------------
HNC shall assume the obligations of NLBI under the stock options,
outstanding as of the date of this Agreement, to purchase 5,000 shares of
NLBI Common Stock which remain unexercised on the Effective Date (the "NLBI
Options"). The holder of the NLBI Options shall receive stock options to
purchase, on the same terms and conditions as were applicable under the
assumed NLBI Options, a number of shares of HNC Common Stock equal to the
product of the Exchange Ratio and the number of shares of NLBI Common Stock
subject to such NLBI Option. The option exercise price per share of HNC
Common Stock shall be equal to the option exercise price per share of NLBI
Common Stock divided by the Exchange Ratio (the option price per share, as
so determined, being rounded upward to the nearest full cent). Such options
to be received by the NLBI Option holder shall be subject to proportional
adjustment under Section 2.1(b) of this Agreement. Provided, however, that
the obligation to assume the NLBI Options by HNC is conditioned upon
receipt of copies of all executed outstanding options as disclosed on Annex
2.1(c).
(d) 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 NLBI 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 Closing Market
Price (as defined in Section 2.1(e) of this Article II).
(e) 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 November 2, 1998 were to be the Effective Date, then the Price
Determination Period would be September 28, 29, 30, October 1, 2, 5, 6, 7,
8, 9, 12, 13, 14, 15, 16, 19, 20, 21, 22, 23, 1998.) 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
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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 two market makers in HNC Common
Stock listed in HNC's 1998 Annual Report to Shareholders; 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 NLBI.
(f) NLBI Treasury Stock.
--------------------
Each share of NLBI Common Stock issued and held in the treasury of NLBI as
of the Effective Date, if any, shall be canceled, and no cash, stock, or
other property shall be delivered in exchange therefor.
(g) 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.
(h) HNC North Common Stock. Each share of HNC North 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 North Common Stock.
SECTION 2.2 Exchange of Stock Certificates.
NLBI 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 NLBI 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 NLBI Common Stock
pursuant to Section 2.1(d) above. The Exchange Agent shall, on or promptly
after the Effective Date, mail to each former shareholder of NLBI a notice
specifying the procedures to be followed in surrendering such shareholder's
NLBI Common Stock certificates.
(b) Surrender of Certificates.
---------------------------
As promptly as possible after receipt of the Exchange Agent's notice, each
former shareholder of NLBI shall surrender his NLBI Common
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Stock certificates to the Exchange Agent; provided, that if any former
shareholder of NLBI shall be unable to surrender his NLBI 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 NLBI Common Stock certificates
from a former NLBI 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 NLBI 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(d) 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 NLBI who has not prior to the payment date surrendered his
NLBI 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 NLBI upon proper surrender of his NLBI Common Stock
certificates.
(d) Failure to Surrender Certificates.
----------------------------------
All NLBI 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 NLBI shall not have properly surrendered his NLBI
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 NLBI 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 NLBI,
without interest, upon proper surrender of his NLBI 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 NLBI 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 NLBI 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
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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 NLBI 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 NLBI
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 NLBI Common Stock, transmittal materials for use in exchanging
certificates representing NLBI 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 NLBI Certificates.
---------------------------------------------------------------------
Upon the Effective Date, the stock transfer books for NLBI Common Stock
will be closed and no further transfers of shares of NLBI Common Stock will
thereafter be made or recognized. All certificates for shares of NLBI
Common Stock surrendered pursuant to this Article II will be canceled by
HNC.
(h) Rights Evidenced by Certificate.
--------------------------------
Each certificate for shares of HNC Common Stock issued in exchange for
certificates of NLBI 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 NLBI 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 NLBI 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 NLBI 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 NLBI Common Stock are surrendered by a NLBI shareholder to
HNC for exchange, HNC shall have the right
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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(d) to each person
entitled thereto.
(j) Unclaimed Shares.
------------------
In the event that any certificates for shares of NLBI Common Stock have not
been surrendered for exchange in accordance with this Section on or before
the second anniversary of the Effective Time, HNC may at any time
thereafter, with or without notice to the holders of record of such
certificates, sell for the accounts of any or all of such holders any or
all of the shares of HNC Common Stock which such holders are entitled to
receive under Section 2.1(a) hereof (the "Unclaimed Shares"). Any such sale
may be made by public or private sale or sale at any broker's board or on
any securities exchange in such manner and at such times as HNC shall
determine. If, in the opinion of counsel for HNC, it is necessary or
desirable, any Unclaimed Shares may be registered for sale under the
Securities Act of 1933, as amended (the "Securities Act") and applicable
state laws. HNC shall not be obligated to make any sale of Unclaimed Shares
if it shall determine not do so, even if notice of sale of the Unclaimed
Shares has been given. The net proceeds of any such sale of Unclaimed
Shares shall be held for holders of the unsurrendered certificates for
shares of NLBI Common Stock whose Unclaimed Shares have been sold, to be
paid to them upon surrender of the certificates for shares of NLBI Common
Stock. From and after any such sale, the sole right of the holders of the
unsurrendered certificates for shares of NLBI Common Stock whose Unclaimed
Shares have been sold shall be the right to collect the net sale proceeds
held by HNC for their respective accounts, and such holders shall not be
entitled to receive any interest on such net sale proceeds held by HNC.
SECTION 2.3 Other Matters.
(a) Notwithstanding any term of this Agreement to the contrary, HNC may, in its
discretion at any time prior to the Effective Time, designate a direct or
indirect wholly-owned subsidiary to substitute for HNC North as the
constituent corporation in the Merger by written notice to NLBI so long as
the exercise of this right does not cause a material delay in consummation
of the transactions contemplated herein. HNC shall also have the right to
cause NLBI or such substitute to be the Surviving Corporation of the Merger
described at Section 1.1(a), so long as the exercise of such right does not
have a material adverse effect on the interests of the NLBI shareholders or
cause a material delay in, or otherwise adversely affect, consummation of
the transactions contemplated herein; if such right is exercised, this
Agreement shall be deemed to be modified to accord such change.
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<PAGE>
(b) Nothing set forth in this Agreement or any Exhibit hereto shall be
construed:
(i) to preclude HNC or HNC North from acquiring or assuming, or to limit
in any way the right of HNC or HNC North to acquire or assume, prior
to or following the Effective Date, the stock, or assets or
liabilities of any other financial services institution or other
corporation or entity, whether by issuance or exchange of HNC Common
Stock, or otherwise;
(ii) to preclude HNC or HNC North from issuing, or to limit in any way the
right of either of them to issue, prior to or following the Effective
Date, HNC Common Stock, HNC Preferred Stock or other securities;
(iii)to preclude HNC from granting employee, director or compensatory
options at any time with respect to HNC Common Stock, HNC Preferred
Stock or other securities;
(iv) 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
(v) to preclude HNC or HNC North from taking, or to limit in any way the
right of either of them to take, any other action not expressly and
specifically prohibited by the terms of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of NLBI and Slatington.
NLBI and Slatington represent and warrant to HNC and HNC North (and the
word "it" in this Article III refers to NLBI, Slatington and each subsidiary of
either) that, as of even date herewith and except as specifically disclosed in
the Annex of disclosure schedules included herewith, as follows:
(a) Corporate Organization and Qualification.
--------------------------------------------
NLBI is a corporation duly incorporated, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania and is in good
standing as a foreign corporation in each jurisdiction where the properties
owned, leased or operated, or the business conducted, by NLBI requires such
qualification, except for such failure to qualify or be in such good
standing which, when taken together with all other such failures, would not
have a Material Adverse Effect on NLBI and its subsidiaries, taken as a
whole. NLBI is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended. NLBI owns, directly or indirectly all of
the issued and outstanding shares of capital stock of Slatington.
Slatington is a national banking association duly organized, validly
existing and in good standing under the
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laws of the United States of America. NLBI and Slatington each have the
requisite corporate and other power and authority (including all federal,
state, local and foreign governmental authorizations) to carry on their
respective businesses as now being conducted and to own its properties and
assets. NLBI has made available to HNC a complete and correct copy of the
articles of incorporation and bylaws of NLBI, and Slatington has made
available to HNC and HNC North a complete and correct copy of the charter
and bylaws of Slatington and such charter or articles, as applicable, and
such bylaws are in full force and effect as of the date hereof.
(b) Authorized Capital.
--------------------
The authorized capital stock of NLBI consists of 500,000 shares of NLBI
Common Stock of which 139,498 shares were issued and outstanding as of the
date of this Agreement and 4,214 shares were issued and held as treasury
shares as of the date of this Agreement. The stock of Slatington consists
of 16,500 shares of common stock, $10.00 par value per share, of which
16,500 shares of common stock were issued and outstanding as of the date of
this Agreement; all of these are held by NLBI. All of the outstanding
shares of capital stock of NLBI and Slatington have been duly authorized
and are validly issued, fully paid and nonassessable. Neither NLBI nor
Slatington has any shares of capital stock reserved for issuance except
pursuant to the Investment Agreement. Neither NLBI nor Slatington has any
outstanding bonds, debentures, notes or other obligations the holders of
which have the right to vote (or convertible into or exercisable for
securities having the right to vote) with shareholders on any matter. The
shares of Slatington's common stock owned by NLBI are owned free and clear
of all liens, pledges, security interests, claims or other encumbrances.
The outstanding shares of capital stock of NLBI and Slatington have not
been issued in violation of any preemptive rights. Except as set forth in
Annex 3.1 (b) and in Annex 3.1(m), and as provided in the Investment
Agreement, there are no outstanding subscriptions, options, warrants,
rights, convertible securities or other agreements or commitments of any
character relating to the issued or unissued capital stock or other
securities of NLBI and Slatington. After the Effective Time, NLBI will have
no obligation which is being assumed by HNC or HNC North which will result
in any obligation to issue, transfer or sell any shares of capital stock
pursuant to any Employee Plan (as defined in Section 3.1 (m)).
(c) Subsidiaries.
-------------
The only subsidiaries of NLBI are as listed and described at Annex 3.l(c).
The only subsidiaries of Slatington are as listed and described at Annex
3.1(c). Each such subsidiary is duly organized and existing as a
corporation, is in good standing under the laws of the jurisdiction in
which it was organized, and has adequate corporate power to carry on its
business as now conducted. All of the outstanding capital stock of all such
subsidiaries has been validly issued, is fully paid and nonassessable
(other than as provided at 12 U.S.C.Section 55) and is owned by NLBI or
Slatington, free and clear of all liens, security interests and
encumbrances. All such subsidiaries are organized under Pennsylvania law
and make no use of fictitious names in the conduct of their respective
businesses.
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(d) Corporate Authority.
--------------------
Subject only to approval of this Agreement by the holders of the number of
votes required by NLBI's articles of incorporation or bylaws cast by all
holders of NLBI Common Stock (without any minority, class or series voting
requirement), and, subject to the regulatory approvals specified in Section
6.1(b) hereof, NLBI and Slatington each has the requisite corporate power
and authority, and legal right, and has taken all corporate action
necessary in order to execute and deliver this Agreement and to consummate
the transactions applicable to either NLBI or Slatington contemplated
hereby. This Agreement has been duly and validly executed and delivered by
NLBI and Slatington and constitutes the valid and binding obligations of
NLBI and Slatington enforceable against each, in accordance with its terms,
except to the extent enforcement is limited by bankruptcy, insolvency and
other similar laws affecting creditors' rights or the application by a
court of equitable principles.
(e) No Violations.
--------------
The execution, delivery and performance of this Agreement by it does not,
the execution, delivery and performance of the Investment Agreement by it
will not, and the consummation of the transactions contemplated hereby by
it will not, constitute (i) subject to receipt of the required regulatory
approvals specified in Section 6.1(b), a breach or violation of, or a
default under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, to which it (or any of its respective
properties) is subject, which breach, violation or default would have a
Material Adverse Effect on it, or enable any person to enjoin the Merger,
(ii) a breach or violation of, or a default under NLBI's articles of
incorporation, the charter of Slatington, or the bylaws of either of them,
or (iii) except as disclosed in Annex 3.1(e), a breach or violation of, or
a default under (or an event which with due notice or lapse of time or both
would constitute a default under), or result in the termination of,
accelerate the performance required by, or result in the creation of any
lien, pledge, security interest, charge or other encumbrance upon any of
the properties or assets of it under any of the terms, conditions or
provisions of any note, bond, indenture, deed of trust, loan agreement or
other agreement, instrument or obligation to which it is a party, or to
which any of its respective properties or assets may be bound, or affected,
except for any of the foregoing that, individually or in the aggregate,
would not have a Material Adverse Effect on it or enable any person to
enjoin the Merger; and the consummation of the transactions contemplated
hereby or, upon its execution and delivery, the Investment Agreement, will
not require any approval, consent or waiver under any such law, rule,
regulation, judgment, decree, order, governmental permit or license or the
approval, consent or waiver of any other party to any such agreement,
indenture or instrument, other than (w) all required approvals, consents
and waivers of governmental authorities, (x) the approval of its
shareholders referred to in Section 6.1(a), (y) any such approval, consent
or waiver that already has been obtained, and (z) any other approvals,
consents or waivers, the absence of which, individually or in the
aggregate, would not result in a Material Adverse Effect on it or enable
any person to enjoin the Merger.
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(f) Reports.
(i) NLBI's consolidated statement of financial condition as of December
31, 1997 previously provided to HNC and each statement of financial
condition provided after the date hereof to HNC (including in each
case any related notes and schedules) as required by Section 4.4
hereof fairly presents or will fairly present the financial position
of it as of its date and each of the statements of income and
shareholders' equity and of cash flows provided therewith (including
in each case any related notes and schedules), fairly presents or will
fairly present the results of operations, shareholders' equity and
cash flows, as the case may be, of it for the periods set forth
therein (subject, in the case of unaudited interim statements, to
normal year-end audit adjustments that are not material in amount or
effect), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as
maybe noted therein.
(ii) Except as set forth in Annex 3.1(f), it has timely filed all material
reports, registrations and statements, together with any amendments
required to be made with respect thereto, that it was required to file
since January 1, 1998 with (A) the Office of the Comptroller of the
Currency (the "OCC"), (B) the Federal Deposit Insurance Corporation
(the "FDIC"), (C) the Board of Governors of the Federal Reserve System
(the "Board"), (D) the Securities and Exchange Commission (the "SEC"),
(E) any state banking department or commission or other regulatory
authority ("State Regulator") and collectively with the SEC, the OCC,
the FDIC, and the Board, the "NLBI Regulatory Agencies", and (F) any
other regulatory authority, and all other material reports and
statements required to be filed by it since January 1, 1998 including,
without limitation, any report or statement required to be filed
pursuant to the laws, rules or regulations of the United States or any
NLBI Regulatory Agency, and has paid all fees and assessments due and
payable in connection therewith, and no such report, registration or
statement contains any material misstatement or omission or is
otherwise in material noncompliance with any law, regulation or
requirement.
(g) Absence of Certain Changes or Events. Since January 1, 1998 to the
date hereof, it has not incurred any material liability, except in the
ordinary course of its business consistent with past practice, nor has
there been any change in the financial condition, properties, assets,
business, results of operations or prospects of it which, individually
or in the aggregate, has had, or might reasonably be expected to
result in, a Material Adverse Effect on it.
(h) Taxes. Its federal income tax returns have been examined and closed or
otherwise closed by operation of law through 1988. All federal, state,
local and foreign tax returns, including, but not limited to, any and
all Pennsylvania tax filings arising
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under the Bank Shares Tax, Single Excise Tax and the Amended 1989 Bank
Shares Tax and/or similar taxes, required to be filed by it or on its
behalf, have been timely filed, or requests for extensions have been
timely filed and any such extension shall have been granted and not
have expired, and, to the knowledge of management, all such filed
returns are complete and accurate in all material respects. All taxes
shown on such returns, and all taxes required to be shown on returns
for which extensions have been granted, have been paid in full or
adequate provision has been made for any such taxes on its balance
sheet (in accordance with generally accepted accounting principles)
other than those taxes which are being contested in appropriate forums
in proceedings which are being diligently pursued. Adequate provision
has been made on its balance sheet (in accordance with generally
accepted accounting principles consistently applied) for all federal,
state, local and foreign tax liabilities for periods subsequent to
those for which returns have been filed. There is no audit
examination, deficiency, or refund litigation pending or, to the
knowledge of NLBI or Slatington, threatened, with respect to any taxes
that could result in a determination that would have a Material
Adverse Effect on it. All taxes, interest, additions and penalties due
with respect to completed and settled examinations or concluded
litigation relating to it have been paid in full or adequate provision
has been made for any such taxes on its balance sheet (in accordance
with generally accepted accounting principles). It has not executed an
extension or waiver of any statute of limitations on the assessment or
collection of any tax due that is currently in effect.
(i) Litigation and Liabilities.
---------------------------
Except as set forth in Annex 3.1(i), there are no (i) civil, criminal
or administrative actions, suits, claims, hearings, investigations or
proceedings before any court, governmental agency or otherwise pending
or, to the knowledge of management, threatened against it or (ii)
obligations or liabilities, whether or not accrued (contingent or
otherwise, including, without limitation, those relating to
environmental and occupational safety and health matters, or any other
facts or circumstances of which its management is aware that could
reasonably be expected to result in any claims against or obligations
or liabilities of it), that, alone or in the aggregate, are reasonably
likely to have a Material Adverse Effect on it or to hinder or delay,
in any material respect, consummation of the transactions contemplated
by this Agreement.
(j) Absence of Regulatory Actions.
------------------------------
It is not a party to any cease and desist order, written agreement or
memorandum of understanding with, or a party to any commitment letter
or similar undertaking to, or is subject to any order or directive by,
or is a recipient of any extraordinary supervisory letter from, or has
adopted any board resolutions at the request of, federal or state
governmental authorities, including, without limitation, the NLBI
Regulatory Agencies, charged with the supervision or regulation of
financial or depository institutions or engaged in the insurance of
bank deposits, nor has it been advised by any NLBI Regulatory Agency
that such body is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such
order, directive, written agreement, memorandum of understanding,
extraordinary supervisory letter, commitment letter, board resolution
or similar undertaking.
(k) Agreements.
-----------
(i) Except for the Investment Agreement and as set forth in Annex
3.1(k) attached hereto, as of the date of this Agreement, it is
not a party to, or bound by, any oral or written:
(A) "material contract" as such term is defined in Item
601(b)(10) of Regulation S-K promulgated by the SEC;
(B) consulting agreement not terminable on thirty (30) days or
less notice involving the payment of more than $10,000 per
annum, in the case of any such agreement;
(C) agreement with any officer or other key employee the
benefits of which are contingent, or the terms of which are
materially altered, upon the occurrence of a transaction of
the nature contemplated by this Agreement;
(D) agreement with respect to any officer providing any term of
employment or compensation guarantee extending for a period
longer than one year or for a payment in excess of $10,000;
(E) agreement or plan, including any stock option plan, stock
appreciation rights plan, employee stock ownership plan,
restricted stock plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of the
benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated
on the basis of any of the transactions contemplated by this
Agreement;
(F) agreement containing covenants that limit its ability to
compete in any line of business or with any person, or that
involve any restriction on the geographic area in which, or
method by which, it may carry on its business (other than as
may be required by law or any regulatory agency);
(G) agreement, contract or understanding, other than this
Agreement, and the Investment Agreement, regarding the
capital stock of NLBI and/or Slatington or committing to
dispose of some or all of the
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capital stock or substantially all of the assets of NLBI
and/or Slatington; or
(H) collective bargaining agreement, contract, or other
agreement or understanding with a labor union or labor
organization.
(ii) It is not in default under or in violation of any provision of
any note, bond, indenture, mortgage, deed of trust, loan
agreement, lease or other agreement to which it is a party or to
which any of its respective properties or assets is subject,
other than such defaults or violations as could not reasonably be
expected, individually or in the aggregate, to have a Material
Adverse Effect on it.
(1) Labor Matters.
--------------
It is not the subject of any proceeding asserting that it has
committed an unfair labor practice or seeking to compel it to bargain
with any labor organization as to wages and conditions of employment,
nor is there any strike, other labor dispute or organizational effort
involving it pending or threatened.
(m) Employee Benefit Plans.
------------------------
Annex 3.1(m) contains a complete list of all pension, retirement,
stock option, stock purchase, stock ownership, savings, stock
appreciation right, profit sharing, deferred compensation, consulting,
bonus, group insurance, severance and other employee benefits,
incentive and welfare policies, contracts, plans and arrangements, and
all trust agreements related thereto, in respect to any of its present
or former directors, officers or other employees (hereinafter referred
to collectively as the "Employee Plans").
(i) All of the Employee Plans comply in all material respects with
all applicable requirements of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), the Code and other
applicable laws; it has not engaged in a "prohibited transaction"
(as defined in Section 406 of ERISA or Section 4975 of the Code)
with respect to any Employee Plan which is likely to result in
any material penalties, taxes or other events under Section
502(i) of ERISA or Section 4975 of the Code which would have a
Material Adverse Effect on it.
(ii) No liability to the Pension Benefit Guaranty Corporation has been
or is expected by it to be incurred with respect to any Employee
Plan which is subject to Title IV of ERISA ("Pension Plan"), or
with respect to any "singleemployer plan" (as defined in Section
4001 (a)(15) of ERISA) currently or formerly maintained by it or
any entity which is considered one employer with NLBI or
Slatington under Section 4001 of ERISA or Section 414 of the Code
(an "ERISA Affiliate").
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(iii)No Pension Plan or single-employer plan of an ERISA Affiliate 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; all
contributions to any Pension Plan or single-employer plan of an
ERISA Affiliate that were required by Section 302 of ERISA and
were due prior to the date hereof have been made on or before the
respective dates on which such contributions were due; the fair
market value of the assets of each Pension Plan or
single-employer plan of an ERISA Affiliate exceeds the present
value of the "benefit liabilities" (as defined in Section
4001(a)(16) of ERISA) under such Pension Plan or single employer
plan of an ERISA Affiliate as of the end of the most recent plan
year with respect to the respective Pension Plan or
single-employer plan of an ERISA Affiliate ending prior to the
date hereof, calculated on the basis of the actuarial assumptions
used in the most recent actuarial valuation for such Pension Plan
or single-employer plan of an ERISA Affiliate as of the date
hereof; and 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 Pension
Plan or single-employer plan of an ERISA Affiliate within the
12-month period ending on the date hereof.
(iv) Neither has it provided, nor is it required to provide, security
to any Pension Plan or to any single-employer plan of an ERISA
Affiliate pursuant to Section 401(a)(29) of the Code.
(v) Neither it nor any ERISA Affiliate has contributed to any
"multi-employer plan," as defined in Section 3(37) of ERISA, on
or after September 26, 1980.
(vi) Each Employee Plan of it which is an "employee pension benefit
plan" (as defined in Section 3(2) of ERISA) and which is intended
to be qualified under Section 401(a) of the Code (a "Qualified
Plan") has received a favorable determination letter from the
Internal Revenue Service ("IRS") covering the requirements of the
Tax Equity and Fiscal Responsibility Act of 1982, the Retirement
Equity Act of 1984 and the Deficit Reduction Act of 1984 and the
Tax Reform Act of 1986; it is not aware of any circumstances
likely to result in revocation of any such favorable
determination letter; each such Employee Plan has been amended to
reflect the requirements of subsequent legislation applicable to
such plans; and each Qualified Plan has complied at all relevant
times in all material respects with all applicable requirements
of Section 401(a) of the Code.
(vii)Each Qualified Plan which is an "employee stock ownership plan"
(as defined in Section 4975(e)(7) of the Code) has at all
relevant times satisfied all of the applicable requirements of
Sections 409 and 4975(e)(7) of the Code and the regulations
thereunder.
15
<PAGE>
(viii) Neither it nor any ERISA Affiliate has committed any act or
omission or engaged in any transaction that has caused it to
incur, or created a material risk that it may incur, liability
for any excise tax under Sections 4971 through 4980B of the Code,
other than excise taxes which heretofore have been paid and fully
reflected in its financial statements.
(ix) There is no pending or threatened litigation, administrative
action or proceeding relating to any Employee Plan, other than
routine claims for benefits.
(x) There has been no announcement or legally binding commitment by
it to create an additional Employee Plan, or to amend an Employee
Plan, except for amendments required by applicable law which do
not materially increase the cost of such. Employee Plan, and it
does not have any obligations for retiree health and life
benefits under any Employee Plan that cannot be terminated
without incurring any liability thereunder.
(xi) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby will not result in any
payment or series of payments by NLBI or Slatington to any person
which is an "excess parachute payment" (as defined in Section
280G of the Code) under any Employee Plan, increase any benefits
payable under any Employee Plan, or accelerate the time of
payment or vesting of any such benefit.
(xii)All annual reports have been filed timely with respect to each
Employee Plan, it has made available to HNC a true and correct
copy of (A) reports on the applicable form of the Form 5500
series filed with the IRS for plan years beginning after 1987,
(B) such Employee Plan, including amendments thereto, (C) each
trust agreement and insurance contract relating to such Employee
Plan, including amendments thereto, (D) the most recent summary
plan description for such Employee Plan, including amendments
thereto, if the Employee Plan is subject to Title I of ERISA, (E)
the most recent actuarial report or valuation if such Employee
Plan is a Pension Plan and (F) the most recent determination
letter issued by the IRS if such Employee Plan is a Qualified
Plan.
(xiii) There are no retiree health benefit plans except as required to
be maintained by COBRA.
(n) Title to Assets.
----------------
It has good and marketable title to its properties and assets (other
than property as to which it is lessee), except for (i) such items
shown in the NLBI consolidated financial statements or notes thereto;
(ii) liens on real property for current real estate taxes not yet
delinquent, or (iii) such defects in title which would not,
individually or in the aggregate, have a Material Adverse Effect on
it. With
16
<PAGE>
respect to any property leased by it, there are no defaults by
it, or any of the other parties thereto, or any events which,
with the giving of notice or lapse of time or both, would
become defaults by it or any of the other parties thereto,
under any of such leases, except for such defaults or events
which would not, individually or in the aggregate, have a
Material Adverse Effect on it; and all such leases are in full
force and effect and are enforceable against it, as the case
may be, and there is no circumstance existing as of the date
of this Agreement which causes or would cause such leases to
be unenforceable against any of the other parties thereto
except as the same may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the
rights of creditors generally as well as principles of equity
to the extent enforcement by a court of equity is required.
(o) Compliance with Laws.
---------------------
It has all permits, licenses, certificates of authority, orders
and approvals of, and has made all filings, applications and
registrations with, federal, state, local and foreign
governmental or regulatory bodies that are required in order to
permit it to carry on its business as it is presently conducted
and the absence of which could, individually or in the aggregate,
have a Material Adverse Effect on it; all such permits, licenses,
certificates of authority, orders and approvals are in full force
and effect, and no suspension or cancellation of any of them is
threatened.
(p) Fees.
-----
Except as set forth in Annex 3.1(p) attached hereto, neither it
nor any of its respective officers, directors, employees or
agents have employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees,
commissions, or finder's fees, and no broker or finder has acted
directly or indirectly for it in connection with this Agreement
or the transactions contemplated hereby.
(q) Environmental Matters.
----------------------
For purposes of this Section 3.1, 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, 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. ss.9601, et seq., the Resource Conservation
and Recovery Act, as amended, 42 U.S.C. ss.6901, et seq., the
Clean Air Act, as amended, 42 U.S.C. ss.7401, et seq., the
Federal Water Pollution Control Act, as amended, 33 U.S.C.
ss.1251, et seq., the Toxic Substances Control Act, as amended,
15 U.S.C. ss.9601, et seq., the Emergency
17
<PAGE>
Planning and Community Right to Know Act, 42 U.S.C. ss.11001, et
seq., the Safe Drinking Water Act, 42 U.S.C. ss.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.
"Slatington Loan Portfolio Properties and Other Properties Owned"
means those properties serving as collateral for loans in
Slatington's loan portfolio, or properties owned or operated by
Slatington (including, without limitation, in a fiduciary
capacity).
Except as set forth on Annex 3.1(q) hereto:
(i) Neither NLBI nor Slatington has been or is in violation of
or liable under any Environmental Law.
(ii) To the knowledge of NLBI and Slatington, none of the
Slatington Loan Portfolio Properties and Other Properties
Owned have been or are in violation of or liable under any
Environmental Law.
(iii)Neither NLBI nor Slatington has any 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 Slatington, except as disclosed on Annex 3.1(q).
In particular, without limiting the generality of the
foregoing sentence, except as disclosed on Annex 3.1(q),
neither NLBI nor Slatington have any knowledge that: (i) any
materials containing asbestos have been used or 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 NLBI or Slatington; (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
18
<PAGE>
estate acquired by means of foreclosure or exercise of any
other creditor's right) or leased by NLBI or Slatington;
(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 NLBI or Slatington.
(iv) Except as previously disclosed in Annex 3.1(q), there is no
legal, administrative, arbitration or other proceeding,
claim, action, cause of action or governmental investigation
of any nature seeking to impose, or that, to the knowledge
of NLBI and Slatington, could result in the imposition on
NLBI or Slatington 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 threatened against NLBI or
Slatington; to the knowledge of NLBI and Slatington, there
is no reasonable basis for any such proceeding, claim,
action or governmental investigation; and neither NLBI nor
Slatington is 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.
(r) Allowance.
---------
The allowance for loan and lease losses shown on NLBI's
consolidated statement of financial condition as of December 31,
1997 was, and the allowance for loan and lease losses shown on
NLBI's consolidated statement of financial condition for periods
ending after the date of this Agreement will be, in the opinion
of management of NLBI and Slatington, adequate, as of the date
thereof, under generally accepted accounting principles
applicable to commercial banks and all other applicable
regulatory requirements for all losses reasonably anticipated in
the Ordinary Course of Business as of the date thereof based on
information available as of such date. It has disclosed to HNC in
writing prior to the date hereof the amounts of all loans,
leases, advances, credit enhancements, other extensions of
credit, commitments and interest-bearing assets of it that it has
classified internally as "Other Loans Specially Mentioned,"
"Special Mention," "Substandard," "Doubtful," "Loss,"
"Classified," "Criticized," "Credit Risk Assets," "Concerned
Loans" or words of similar import, and it shall disclose promptly
to HNC after the end of each quarter after the date hereof and on
the Effective Date the amount of each such classification. It has
disclosed to HNC in writing prior to the date hereof the amounts
of all overdrafts occurring since January 1, 1998 and it shall
disclose promptly to HNC after the end of each quarter after the
date hereof and on the Effective Date the amount of such
overdrafts. The OREO and in-substance foreclosures included in
any of its non-performing assets are carried net of reserves at
the lower of cost or market value based on current independent
appraisals or current management appraisals.
19
<PAGE>
(s) Anti-takeover Provisions Applicable.
------------------------------------
The provisions of Chapter 25 of the PBCL relating to protection
of shareholders do not apply to NLBI, this Agreement, the
Investment Agreement, the Merger and the transactions
contemplated hereby.
(t) Material Interests of Certain Persons.
--------------------------------------
Except as noted in Annex 3.1(t), none of its respective officers
or directors, or any "associate" (as such term is defined in Rule
12b-2 under the Securities Exchange Act of 1934 (the "Exchange
Act")) of any such officer or director, has any material interest
in any material contract or property (real or personal), tangible
or intangible, used in or pertaining to its business.
(u) Insurance.
---------
It is presently insured, and has been insured, in the amounts,
with the companies and since the periods set forth in Annex
3.1(u). All of the insurance policies and bonds maintained by it
are in full force and effect, it is not in default thereunder and
all material claims thereunder have been filed in due and timely
fashion. In the judgment of its management, such insurance
coverage is adequate.
(v) Dividends.
---------
The only dividends or other distributions which it has made on
its capital stock since January 1, 1997 are set forth in Annex
3.1(v).
(w) Books and Records.
-------------------
Its books and records have been, and are being, maintained in
accordance with applicable legal and accounting requirements and
reflect in all material respects the substance of events and
transactions that should be included therein.
(x) Board Action.
--------------
Its board of directors (at a meeting duly called and held) has
been duly convened and by the requisite vote of the directors (a)
determined that the Merger is advisable and in the best interests
of it and its shareholders, (b) approved this Agreement, the Bank
Merger Agreement, the Investment Agreement and the transactions
contemplated hereby and thereby and (c) directed that the
Agreement be submitted for consideration by its shareholders at
the NLBI Shareholders' Meeting (as hereafter defined) with the
recommendation of the board of directors that the shareholders
approve the merger and the transactions contemplated thereby.
(y) Fairness Opinions.
------------------
Its board of directors has received a written opinion, a copy of
which has been furnished to HNC, to the effect that the
consideration to be received by its shareholders pursuant to this
Agreement, at the time of its execution, is fair to such holders
from a financial point of view.
(z) Fidelity Bonds.
--------------
Since at least December 31, 1990, Slatington has continuously
maintained fidelity bonds insuring it against acts of dishonesty
by its employees in such amounts as is customary for a bank of
its size. Since December 31, 1990, the aggregate amount of all
potential claims under such bonds has not exceeded $50,000 and
neither NLBI nor Slatington is aware of any facts which would
reasonably form the basis of a claim under such bonds. Neither
NLBI nor Slatington has reason to
20
<PAGE>
believe that its fidelity coverage will not be renewed by its
carrier on substantially the same terms as its existing coverage.
(aa) Condition of Tangible Assets.
-----------------------------
Except as set forth in Annex 3.1(aa), all buildings,
structures and improvements on the real property owned or
leased by it are in good condition, ordinary wear and tear
excepted, and are free from structural defects in all
material respects. The equipment, including heating, air
conditioning and ventilation equipment owned by it, is in
good operating condition, ordinary wear and tear excepted.
The operation and use of the property in the business
conform in all material respects to all applicable laws,
ordinances, regulations, permits, licenses and certificates.
(bb) Loans by Slatington.
--------------------
Since December 31, 1990 and except as shown on Annex
3.1(bb), in the aggregate, the loans by Slatington have been
lawfully made, constitute valid debts of the obligors, have
been incurred in the Ordinary Course of Business, are
subject to the terms of payment as shall have been agreed
upon between Slatington and each customer, and Slatington
does not know of any applicable set-off or counterclaim
which in the aggregate would have a Material Adverse Effect
on it. A list of all loans thirty (30) days or more past due
as of April 30, 1998, and as of the last day of each month
for each of the preceding twelve (12) months thereto is
attached hereto as Annex 3.1(bb)-A. No part of the amount
collectible under any loan is contingent upon performance by
Slatington of any obligation and no agreement for
participation, in which Slatington has relinquished or
agreed to share control with a participation in management
of the facility, or agreement providing for deductions or
discounts have been made with respect to any part of such
debts, except as expressly disclosed in Annex 3.1(bb).
Slatington does not know of any pending, threatened or
expected actions in connection with any material loans or
commitments presently or previously made by Slatington
relating to claims based on theories of "lenders' liability"
or any other basis.
(cc) Regulatory Compliance - OCC.
-----------------------------
Slatington is in compliance in all material respects with
the applicable rules and regulations of the OCC, except as
noted in Annex 3.1(cc).
(dd) Regulatory Compliance - FDIC.
-------------------------------
Except as noted on Annex 3.1(dd) hereto and except where the
failure to comply would not have a Material Adverse Effect
on it, it is in compliance in all material respects with the
rules and regulations of the FDIC to the extent such rules
and regulations are deemed applicable by regulatory
determination.
(ee) Capital Compliance.
--------------------
As of the date of this Agreement, Slatington was in
compliance with the minimum capital requirements applicable
to national banking associations, including as to leverage
ratio requirements, tangible capital requirements and risk
based capital requirements.
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(ff) Year 2000 Compliance.
---------------------
NLBI and Slatington are in compliance with all requirements
announced or promulgated by the NLBI Regulatory Agencies and
by the Federal Financial Institutions Examination Council in
connection with Year 2000 preparedness and compliance.
(gg) Assessments Fully Paid.
-------------------------
All payments, fees and charges assessed by appropriate state
and federal agencies against Slatington, and due on or prior
to the date of this Agreement, have been paid in full.
(hh) Annual Reports and Financial Statements.
----------------------------------------
NLBI has delivered to HNC true and complete copies of (i)
its Balance Sheets, Statements of Earnings, Statements of
Stockholders' Equity and Statements of Cash Flows of NLBI
for the years ended December 31, 1997, 1996 and 1995,
certified by independent public accountants, and (ii) NLBI's
Quarterly Reports for the quarter ended June 30, 1998,
containing unaudited consolidated balance sheets of NLBI as
at such dates and unaudited consolidated statements of
earnings and cash flows of NLBI for the three month period
reflected therein. NLBI has also delivered to HNC true and
correct copies of its annual reports to shareholders for the
years 1997, 1996 and 1995. All such reports (collectively,
the "NLBI Reports") (i) comply in all material respects with
the requirements of the Financial Accounting Standards Board
("FASB") and the American Institute of Certified Public
Accountants, (ii) do not contain any untrue statement of a
material fact and (iii) do not omit to state a material fact
required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under
which they were made, not misleading. No documents to be
filed by NLBI with the SEC or any regulatory agency in
connection with this Agreement, or the transactions
contemplated hereby will contain any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are
made, not misleading. All documents which NLBI is
responsible for filing with the SEC or any regulatory agency
in connection with the Merger will comply as to form in all
material respects with the requirements of applicable law.
(ii) Proxy Statement/Prospectus., Etc.
----------------------------------
Except for information relating to HNC and its subsidiaries
and pro forma financial information reflecting the combined
operations of HNC and NLBI, neither (i) the Proxy
Statement/Prospectus (as defined herein at Section 5.1(b))
or any amendment or supplement thereto, at the time it is
filed with the SEC, at the time the Registration Statement
(as defined hereinafter at Section 5.1(b)) is declared
effective, at the time the Proxy Statement/Prospectus is
mailed to the shareholders of NLBI or at the date of the
meeting of the NLBI shareholders at which the shareholders
will consider this Agreement (the "NLBI Shareholders'
Meeting") nor (ii) any other documents to be filed by NLBI
with the SEC or any regulatory agency in connection with
this Agreement, or the transactions contemplated hereby,
will contain any untrue statement of material fact or omit
to
22
<PAGE>
state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading.
(jj) Significant Customers.
----------------------
All significant customers of NLBI are identified in Annex
3.1(jj). For purposes of this Section 3.1, a "significant
customer" shall mean any customer who, at any time between
January 1, 1997 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.
(kk) Complete and Accurate Disclosure.
---------------------------------
Neither this Agreement (insofar as it relates to NLBI, NLBI
Common Stock and NLBI's involvement in the transactions
contemplated hereby) nor any financial statement, schedule
(including without limitation the Annexes attached hereto,
certificate, or other statement or document delivered by
NLBI to HNC and HNC North 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
NLBI to HNC in connection with the Registration Statement
(as defined in Section 5.1(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.
(ll) Beneficial Ownership of HNC Common Stock.
----------------------------------------------
Prior to the Effective Date, NLBI 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
(5%) of the outstanding shares of HNC Common Stock.
(mm) Non-Registration Under the 1934 Act.
-------------------------------------
NLBI 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.
(nn) Deposit Insurance.
------------------
The deposits of Slatington 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 Slatington has paid all assessments and
filed all reports required by the Federal Deposit Insurance
Act.
23
<PAGE>
(oo) Repurchase Agreements.
-----------------------
With respect to any agreement pursuant to which NLBI has
purchased securities subject to an agreement to resell, if
any, NLBI 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 Annex 3.1(oo), which
identifies location and type of securities, NLBI maintains
physical possession of purchased securities that are subject
to an agreement to resell.
(pp) Assumability of Contracts and Leases.
-------------------------------------
Except as disclosed on Annex 3.1(pp), all Material Contracts
between NLBI or Slatington 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 NLBI or Slatington 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 Annex 3.1(pp), each lease pursuant to which
NLBI or Slatington, 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 NLBI.
(qq) Absence of Questionable Payments.
-----------------------------------
From and after December 31, 1992 neither NLBI nor Slatington
has, nor, to the knowledge of NLBI or Slatington, has any
director, officer, agent, employee, consultant or other
person associated with or acting on behalf of, NLBI or
Slatington (i) used any NLBI or Slatington 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 NLBI or Slatington corporate funds, or
established or maintained any unlawful or unrecorded
accounts with funds received from NLBI or Slatington.
(rr) Powers of Attorney; Guarantees.
-------------------------------
Except as set forth on Annex 3.1(rr), Slatington does not
have any power of attorney outstanding, or any obligation or
liability either actual, constructive 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 Annex 3.1(rr)
(ss) Adjustable Rate Mortgages.
-------------------------
Slatington 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
24
<PAGE>
requirements of any court or governmental authorities having
jurisdiction over adjustable rate mortgages.
(tt) CRA Compliance.
---------------
Slatington has received a satisfactory compliance rating and
has received a satisfactory Community Reinvestment Act
rating. Slatington has no knowledge of any facts or
circumstances which would prevent it from receiving such
satisfactory ratings upon its next appropriate examination.
(uu) Derivatives.
------------
Except as set forth on Annex 3.1(uu), Slatington does not
own or hold any derivatives, "caps", or "floors", in its
investment portfolio.
(vv) Accuracy of Representations.
---------------------------
Until and as of Closing, NLBI will promptly notify HNC if
any of the representations contained in this Section 3.1
cease to be true and correct subsequent to the date hereof.
Further, no representations made by NLBI or Slatington
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.
SECTION 3.2 Representations and Warranties of HNC.
HNC represents and warrants to NLBI and Slatington that, as of even date
herewith and except as specifically disclosed in the Annex of disclosure
schedules included herewith, as follows:
(a) Authority.
---------
The execution and delivery of this Agreement and the consummation of the
transactions contemplated herein 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 or the
consummation of the transactions contemplated herein. This Agreement has
been duly executed and delivered by HNC and, assuming due authorization,
execution and delivery by NLBI, receipt of required regulatory approvals
and the approval of the NLBI shareholders, constitutes a valid and binding
obligation of HNC, enforceable against HNC in accordance with its terms,
except to the extent enforcement is limited by bankruptcy, insolvency and
other similar laws affecting creditor's rights or principles of equity.
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.
(b) 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, directly or
indirectly all of the issued and outstanding shares of capital stock of
Harleysville
25
<PAGE>
National Bank and Trust Company, HNC North, Inc., 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 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.
(c) 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, as of the date of this Agreement, 7,028,960 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 Merger
have been duly authorized and, when issued in accordance with the terms of
this Agreement, will be validly issued, fully paid and nonassessable.
(d) 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 NLBI are true, correct, and
complete in all material respects.
(e) Annual Reports and Financial Statements.
----------------------------------------
HNC has delivered to NLBI true and complete copies of (i) HNC's Annual
Report on Form 10-K for HNC's fiscal year ended December 31, 1997,
containing consolidated balance sheets of HNC at December 31, 1997 and
December 31, 1996 and consolidated statements of earnings, changes in
shareholders' equity and cash flows of HNC for the three years ended
December 31, 1997, 1996 and 199,5 and such financial statements have been
certified by Grant Thornton LLP, and (ii) HNC's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, containing unaudited consolidated
balance sheets of HNC as at such date and unaudited consolidated statement
of earnings and cash flows of HNC for the three-month period reflected
therein. HNC has also delivered to NLBI true and correct copies of its
annual reports on Form 10-K for the years 1997, 1996 and 1995, together
with its annual reports to shareholders for the same periods. All such
reports (collectively, the "HNC Reports") (i) comply in all material
respects with the requirements of the rules and regulations of the SEC,
(ii) do not contain any untrue statement of a material fact and (iii) do
not omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. No documents to
be filed by HNC with the SEC or any regulatory agency in connection with
this Agreement, or the transactions contemplated hereby will contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they are made, not misleading.
All documents which HNC is
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responsible for filing with the SEC or any regulatory agency in connection
with the Merger will comply as to form in all material respects with the
requirements of applicable law.
(f) Absence of Undisclosed Liabilities.
----------------------------------
Except as disclosed in Annex 3.2(f) or as reflected noted or adequately
reserved against in the HNC Balance Sheet, at June 30, 1998, 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 Annex 3.2(f), since June 30,
1998, 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.
(g) Absence of Changes.
-------------------
Since June 30, 1998, 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.
(h) Litigation.
-----------
Except as disclosed in Annex 3.2(h): (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 3.2(h), HNC shall be deemed to include
CNB.
(i) Proxy Statement/Prospectus.
--------------------------
At the time the Proxy Statement/Prospectus (as defined in Section 5.1 of
this Agreement) is mailed to the shareholders of NLBI 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, HNC North and CNB, HNC Common Stock, and actions taken and
statements made by HNC, HNC North and CNB in connection with the
transactions contemplated herein (other than information provided by NLBI
to HNC, HNC North and CNB), will: (i) comply in all material respects with
applicable provisions of the 1933 Act and the 1934 Act
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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 3.3 Representations and Warranties of HNC North.
(a) Organization.
------------
HNC North is a corporation duly organized, validly existing and duly
subsisting under the laws of the Commonwealth of Pennsylvania. All of the
outstanding shares of capital stock of HNC North have been validly issued,
are fully paid and nonassessable and are owned directly by HNC free and
clear of any lien, charge or other encumbrance.
(b) Authority.
----------
HNC North has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder. The execution,
delivery and performance of this Agreement by HNC North and the
consummation of the transactions described herein have been duly and
validly authorized by all necessary corporate actions (including without
limitation shareholder action) in respect thereof on the part of HNC North.
This Agreement is a valid and binding obligation of HNC North, enforceable
against HNC North in accordance with its terms, except to the extent
enforcement is limited by bankruptcy, insolvency and other similar laws
affecting creditor's rights or general principles of equity.
(c) Capitalization.
---------------
The authorized capital stock of HNC North consists of ten million
(10,000,000) shares of common stock, par value $1.00 per share ("HNC North
Common Stock"). All outstanding shares of HNC North Common Stock have been
duly issued and are validly outstanding, fully paid and nonassessable and
are owned by HNC as sole shareholder.
(d) Approval.
---------
HNC will, as the sole shareholder of HNC North, vote to approve this
Agreement and the Merger.
SECTION 3.4 Representations And Warranties Of CNB
CNB represents and warrants to NLBI and Slatington as of even date herewith
as follows:
(a) 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.
(b) 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.
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CNB has full power and lawful authority to own and hold its properties and
to carry on its present business.
(c) 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 IV
COVENANTS OF NLBI AND SLATINGTON
SECTION 4.1 Conduct of Business.
Except as otherwise consented to by HNC, HNC North and CNB in writing, NLBI
and Slatington shall each:
(a) use all reasonable efforts to carry on its business in, and only in, the
ordinary course of business consistent with customary business practices of
prudently managed banks (hereinafter referred to as "Ordinary Course of
Business");
(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 NLBI or
Slatington;
(c) maintain all of NLBI's and Slatington'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 NLBI and Slatington;
(e) keep in full force and effect all insurance policies now carried by NLBI
and Slatington;
(f) perform in all material respects each of NLBI's and Slatington's
obligations under all material agreements, contracts, instruments and other
commitments to which
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NLBI or Slatington is a party or by which NLBI or Slatington 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 NLBI and Slatington and to
the conduct of its business;
(i) not amend NLBI's or Slatington'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
NLBI or Slatington'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 NLBI and Slatington Common Stock, except as provided in
Section 4.9 of this Article IV;
(m) not authorize, purchase, issue or sell (or authorize, issue or grant
options, warrants or rights to purchase or sell) any shares of NLBI Common
Stock or any other equity or debt securities of NLBI or any securities
convertible into NLBI 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 NLBI or Slatington; except that NLBI or Slatington may grant
general salary increases and year-end bonuses to individual employees in
the ordinary course of business consistent with past practice;
(o) not enter into any related party transaction of the kind contemplated in
Section 3.1(k) 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 arm's length transactions with
other persons that do not involve more than the normal risk of
collectability 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 NLBI or Slatington or any
business combination with NLBI or Slatington 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
NLBI or Slatington;
(t) not change any method, practice or principle of accounting except as may be
required by generally accepted accounting principles or any applicable
regulation or take any action that would preclude satisfaction of the
condition to closing contained in Section 6.2(e) 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, expand, 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 December 31, 1997;
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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) not enter into any participation arrangements or approvals of extensions of
credit in excess of $350,000.00 or renew, expand or modify any outstanding
participation arrangements or approvals;
(y) not take any action which would result in any of the representations and
warranties of NLBI or Slatington set forth in this Agreement becoming
untrue as of any date after the date hereof;
(z) 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;
(aa) not purchase any security for its investment portfolio except in
conformance with its investment policy in effect as of July 24, 1998;
(bb) not waive, release, grant or transfer any rights of value or modify or
change in any material respect any existing agreement to which NLBI or
Slatington is a party, other than in the Ordinary Course of Business
consistent with past practice;
(cc) 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
(dd) not agree to any of the foregoing items (i) through (cc).
SECTION 4.2 Best Efforts.
NLBI and Slatington shall cooperate with HNC, HNC North and CNB and shall
each 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 VI of this Agreement and to consummate this Agreement and the Bank
Merger Agreement. In particular, without limiting the generality of the
foregoing sentence, NLBI and Slatington shall:
(a) cooperate with HNC, HNC North 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 5.1(b) of this Agreement);
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(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 NLBI and Slatington;
(c) after receipt of all required regulatory approvals, cooperate with HNC, HNC
North and CNB in making Slatington's employees reasonably available for
training by CNB prior to the Effective Date, to the extent that such
training is deemed reasonably necessary by CNB to ensure that Slatington's
offices 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 Slatington in light
of generally accepted accounting principles, directives of governmental
authorities, and all regulations, rules and directives of the OCC and FDIC;
(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; and
(g) modify the Articles of Incorporation or Bylaws or any other documents of
NLBI or Slatington reasonably requested by HNC necessary to effectuate the
transactions contemplated hereby.
(h) vote all shares of Slatington common stock held by NLBI affirmatively to
approve and adopt this Agreement and the Bank Merger Agreement.
SECTION 4.3 Access to Properties and Records.
NLBI and Slatington shall give to HNC, HNC North and 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 NLBI or Slatington as
HNC, HNC North or CNB may reasonably request, subject to the obligations of HNC,
HNC North and CNB and their authorized representatives to maintain the
confidentiality of all non-public information concerning NLBI or Slatington
obtained by reason of such access.
SECTION 4.4 Subsequent Financial Statements.
Between the date of execution of this Agreement and the Effective Date,
NLBI shall promptly prepare and deliver to HNC, HNC North and CNB as soon as
practicable all internal
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monthly and quarterly financial statements, reports to shareholders and reports
to regulatory authorities prepared by or for NLBI, including all audit reports
submitted to NLBI by independent auditors in connection with each annual,
interim or special audit of the books of NLBI made by such accountants. In
particular, without limiting the generality of the foregoing sentence, NLBI
shall deliver to HNC, HNC North and CNB as soon as practicable a balance sheet
as of June 30, 1998 and a related statement of income for the three (3) months
then ended (which financial statements are hereinafter referred to as the " June
30, 1998 Financial Statements"). The representations and warranties set forth in
Section 3.1(hh) of this Agreement shall apply to the June 30, 1998 Financial
Statements.
SECTION 4.5 Board and Committee Minutes.
NLBI and Slatington 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 4.6 Update Schedule.
NLBI and Slatington shall promptly disclose to HNC, HNC North and CNB in
writing any change, addition, deletion or other modification to the information
set forth in the Annexes to this Agreement. Notwithstanding the foregoing,
disclosures made subsequent to the date of this Agreement shall not relieve NLBI
or Slatington from any and all liabilities for prior statements and disclosures
to HNC, HNC North and CNB.
SECTION 4.7 Notice.
NLBI and Slatington shall promptly notify HNC, HNC North 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, HNC North 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
NLBI or Slatington.
SECTION 4.8 Other Proposals.
NLBI and Slatington shall not, nor shall either of them 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 persons other than HNC, HNC North or CNB concerning the
fact of, or the terms and conditions of, this Agreement, or concerning any
acquisition of NLBI or Slatington, or any assets or business thereof (except
that NLBI officers may respond to inquiries from analysts, regulatory
authorities and holders of NLBI Common Stock in the Ordinary Course of
Business); and NLBI shall notify HNC immediately if any such discussions or
negotiations are sought to be initiated with NLBI by any such person other than
HNC or if any such
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requests for information, inquiries, proposals or communications are received
from any person other than HNC.
SECTION 4.9 Dividends.
Between the date of this Agreement and the Effective Date, NLBI shall only
declare and pay cash dividends as provided herein. NLBI shall only pay regular
quarterly cash dividends in an amount not in excess of $0.44 per share during
each of the third and fourth calendar quarters of 1998.
SECTION 4.10 Core Deposits.
Slatington shall use commercially reasonable efforts to maintain deposits.
SECTION 4.11 Affiliate Letters.
NLBI shall deliver or cause to be delivered to HNC, HNC North and CNB, at
or before the Closing (as defined in Section 1.1(c) of this Agreement), a letter
or agreement from each officer, director and shareholder of NLBI 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 NLBI, in form and
substance satisfactory to HNC, HNC North 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 4.12 No Purchases or Sales of HNC Common Stock During Price
Determination Period.
Neither NLBI, Slatington nor any executive officer or director of NLBI or
Slatington nor any shareholder of NLBI 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 NLBI 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 4.13 Accounting Treatment.
NLBI acknowledges that HNC presently intends to treat the business
combination contemplated by this Agreement as a "pooling of interests" for
financial reporting purposes. Neither NLBI nor Slatington shall 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 from treating such business combination as a "pooling
of interests" for financial reporting purposes.
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SECTION 4.14 Press Releases.
Neither NLBI nor Slatington shall 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
NLBI or Slatington from making any disclosure which its counsel deems reasonably
necessary.
SECTION 4.15 Professional Fees.
NLBI shall not incur professional expenses in connection with the
transactions contemplated by this Agreement in excess of $275,000, unless NLBI
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 4.16 Phase I Environmental Audit.
NLBI and Slatington shall permit, if HNC elects to do so at its own
expense, a "phase I environmental audit" to be performed at any physical
location owned or occupied on the date hereof by NLBI or Slatington.
ARTICLE V
COVENANTS OF HNC, HNC NORTH AND CNB
From the date of this Agreement until the Effective Date (as defined in
Section 1.1(d) of this Agreement), HNC, HNC North and CNB covenant and agree to
do the following:
SECTION 5.1 Best Efforts.
HNC, HNC North and CNB shall cooperate with NLBI and Slatington 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 VI of this Agreement and to consummate this Agreement. In particular,
without limiting the generality of the foregoing sentence, HNC, HNC North and
CNB agree to do the following:
(a) Applications for Regulatory Approval. HNC, HNC North and CNB shall promptly
prepare and file, with the cooperation and assistance of NLBI and
Slatington, 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 NLBI, and file with the SEC, a registration statement
under the 1933 Act (the "Registration Statement") for the purpose of
registering the shares of HNC
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Common Stock to be issued under the provisions of this Agreement. HNC may
rely upon all information provided to it by NLBI 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 NLBI or by its agents and
representatives. HNC will advise NLBI, after it receives notice thereof, of
the time when the Registration Statement or any Pre- or PostEffective
Amendment thereto has become effective or any supplement or amendment has
been filed.
(c) State Securities Laws. HNC, HNC North and CNB, with the cooperation of NLBI
and Slatington, 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 5.2 Access to Properties and Records.
HNC, HNC North and CNB shall give to NLBI and Slatington and to its
authorized representatives (including without limitation 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, HNC North and CNB as they may
reasonably request, subject to their obligation and the obligation of their
authorized representatives to maintain the confidentiality of all non-public
information concerning HNC, HNC North or CNB obtained by reason of such access.
SECTION 5.3 Subsequent Financial Statements.
Between the date of execution of this Agreement and the Effective Date, HNC
shall promptly prepare and deliver to NLBI 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 3.2 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 5.4 Update Schedule.
HNC, HNC North and CNB shall promptly disclose to NLBI and Slatington in
writing any change, addition, deletion or other modification to the information
set forth in its Annexes to this Agreement.
SECTION 5.5 Notice.
HNC, HNC North and CNB shall promptly notify NLBI and Slatington in writing
of any actions, claims, investigations or other developments which, if pending
or in existence on the date
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of this Agreement, would have been required to be disclosed to them 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, HNC North or CNB.
SECTION 5.6 No Purchase or Sale 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, stock option plans or HNC's
dividend reinvestment and stock purchase plan.
SECTION 5.7 Publicity.
HNC shall provide to NLBI, for review and comment, copies of any public
disclosure or press releases related to this Agreement and the Bank Merger
Agreement and the transactions contemplated hereby or thereby, prior to any
public release of such disclosure or press release.
ARTICLE VI
CONDITIONS TO CONSUMMATION
SECTION 6.1 Common Conditions.
The respective obligations of the parties to effect the Merger shall be
subject to the satisfaction or waiver prior to the Effective Time of the
following conditions:
(a) The Agreement, the Bank Merger Agreement and the transactions contemplated
hereby and thereby shall have been approved by the requisite vote of the
shareholders of NLBI and HNC (if applicable) in accordance with applicable
law.
(b) All approvals, consents or waivers required by any of the NLBI Regulatory
Agencies or the HNC Regulatory Agencies with respect to this Agreement
(including the Merger) and the Bank Merger Agreement and the transactions
contemplated hereby and thereby including, without limitation, the
approvals, notices to, consents or waivers of (i) the Board, and (ii) the
Pennsylvania Department of Banking (the NLBI Regulatory Agencies and the
HNC Regulatory Agencies, are, collectively the "Regulatory Agencies") shall
have been obtained and shall remain in full force and effect, and all
applicable statutory waiting periods (including without limitation all
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applicable statutory waiting periods relating to the Merger and the Bank
Merger) shall have expired; and the parties shall have procured all other
regulatory approvals, consents or waivers of governmental authorities or
other persons that are necessary or appropriate to the consummation of the
transactions contemplated by this Agreement and the Bank Merger Agreement
except those approvals, consents or waivers, if any, of which failure to
obtain would not, individually or in the aggregate, have a Material Adverse
Effect on HNC, HNC North, NLBI or Slatington (after giving effect to the
transaction contemplated hereby); provided, however, that no such approval
shall have imposed any condition or requirement which in the opinion of the
board of directors of HNC, HNC North or CNB renders consummation of the
Merger or the Bank Merger inadvisable.
(c) All other requirements prescribed by law which are necessary to the
consummation of the transactions contemplated by this Agreement shall have
been satisfied.
(d) No party hereto shall be subject to any order, decree or injunction of a
court or agency of competent jurisdiction which enjoins or prohibits the
consummation of the Merger or any other transaction contemplated by this
Agreement, and no litigation or proceeding shall be pending against any of
the parties herein or any of their subsidiaries brought by any governmental
agency seeking to prevent consummation of the transactions contemplated
hereby.
(e) 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 consummation of the Merger or
the Bank Merger or any other transaction contemplated by this Agreement.
(f) The Registration Statement shall have been filed (the date of which is
referred to herein as the "Filing Date") by HNC with the SEC under the 1933
Act, and shall have been declared effective prior to the time the Proxy
Statement/ Prospectus is first mailed to the shareholders of NLBI, and no
stop order with respect to the effectiveness of the Registration Statement
shall have been issued; the HNC Common Stock to be issued pursuant to this
Agreement shall be duly registered or qualified under the securities or
"blue sky" laws of all states in which such action is required for purposes
of the initial issuance of such shares and the distribution thereof to the
shareholders of NLBI entitled to receive such shares.
(g) A ruling from the IRS or an opinion of Shumaker Williams, P.C., counsel to
HNC and HNC North, or from an accounting firm acceptable to HNC to the
effect that:
(i) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code and NLBI, HNC and HNC North will each be a
"party to a reorganization" within the meaning of Section 368(b) of
the Code;
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(ii) No gain or loss will be recognized by NLBI, HNC or HNC North by reason
of the Merger;
(iii)Except for cash received in lieu of fractional shares and cash
received by NLBI Shareholders who exercise their dissenter's rights,
no gain or loss will be recognized by the shareholders of NLBI who
receive solely HNC Common Stock upon the exchange of their shares of
NLBI Common Stock for shares of HNC Common Stock;
(iv) The tax basis of the HNC Common Stock to be received by the NLBI
shareholders will be, in each instance, the same as the basis of the
NLBI Common Stock surrendered in exchange therefor;
(v) The holding period of the HNC Common Stock received by a NLBI
shareholder receiving HNC Common Stock will include the period during
which the NLBI Common Stock surrendered in exchange therefor was held;
(vi) Cash received by a NLBI shareholder in lieu of a fractional share
interest of HNC Common Stock or upon exercise of dissenter's rights
will be treated as having been received as a distribution in full
payment in exchange for the fractional share interest of HNC Common
Stock, or the tax basis in the shares surrendered, as the case may be,
which he would otherwise be entitled to receive and will qualify as
capital gain or loss; and
(vii)Subject to any limitations imposed under Sections 381 and 382 of the
Code, HNC North, as the survivor to the Merger, will carry-over and
take into account all accounting items and tax attributes of NLBI,
including but not limited to earning and profits, methods of
accounting, and tax basis and holding periods of NLBI.
In case a ruling from the IRS is sought, NLBI and HNC shall cooperate
and each shall furnish to the other and to the IRS such information
and representations as shall, in the opinion of counsel for HNC and
NLBI, be necessary or advisable to obtain such ruling.
SECTION 6.2 Conditions to Obligations of HNC and HNC North.
The obligations of HNC and HNC North to effect the Merger shall be subject
to the satisfaction or waiver prior to the Effective Time of the following
additional conditions:
(a) Each of the representations and warranties of NLBI and Slatington contained
in this Agreement shall be true and correct in all material respects as of
the Effective Date as if made on such date (or on the date when made in the
case of any representation or warranty which specifically relates to an
earlier date); each of NLBI and Slatington shall have performed each of its
covenants and agreements contained in
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this Agreement; and HNC and HNC North shall have received certificates
signed by the President and the Cashier of Slatington and the President and
Secretary of NLBI, dated as of the date of the Closing, to the foregoing
effect.
(b) Stokes, Kelly & Hinds, LLC or such other accounting firm as is acceptable
to the parties, shall have furnished to HNC an "agreed upon procedures"
letter, dated the Effective Date, in form and substance satisfactory to HNC
to the effect that, based upon a procedure performed with respect to the
financial condition of NLBI, Slatington and affiliates, for the period from
December 31, 1997 to a specified date not more than five (5) days prior to
the date of such letter, including but not limited to (a) their inspection
of the minute books of NLBI, Slatington and affiliates, (b) inquiries made
by them of officers and other employees of NLBI, Slatington and affiliates
responsible for financial and accounting matters as to transaction, and
events during the period, as to consistency of accounting procedures with
prior periods and as to the existence and disclosure of any material
contingent liabilities, and (c) of other specified procedures and inquiries
performed by them, nothing has come to their attention that would indicate
that (A) during the period from December 31, 1997 to a specified date not
more than five (5) days prior to the date of such letter, there was any
change in the capitalization of NLBI or Slatington on a consolidated basis,
or (B) any material adjustments would be required to the audited financial
statements for the period ended December 31, 1997 in order for them to be
in conformity with generally accepted accounting principles applied on a
consistent basis with that of prior periods.
(c) HNC shall have received an opinion or opinions dated as of the Effective
Date, from Monteverde, McAlee, Fitzpatrick, Tanker & Hurd, substantially in
the form attached hereto as Exhibit C.
(d) There shall not have occurred any change in the financial condition,
properties, assets, business or results of operation of NLBI or Slatington
which, individually or in the aggregate, has had or might reasonably be
expected to result in a Material Adverse Effect on NLBI or Slatington.
(e) The Merger shall as of the date of the Closing meet the requirements for
pooling-of-interests accounting treatment under generally accepted
accounting principles and under the accounting rules of the SEC, and HNC
shall have received a letter from Grant Thornton LLP in form and substance
reasonably satisfactory to HNC as to the matters specified in Section
6.2(e).
(f) HNC shall have received from each of the persons identified by NLBI
pursuant to Section 4.11 hereof an executed counterpart of an affiliate's
agreement in the form contemplated by such Section.
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(g) Except as otherwise provided in this Agreement, prior to Closing, all
issued and outstanding options, warrants or rights to acquire NLBI Common
Stock or any capital stock of Slatington ("Slatington Common Stock") shall
have been canceled. No compensation or other rights will be payable or
exchangeable in the Merger in respect of any such rights which remain
unexercised at the Effective Time.
(h) Dissenting Shareholders. Holders of no more than five percent (5%) of the
issued and outstanding shares of NLBI (6,975 shares) shall have exercised
their statutory appraisal or Dissenters' Rights.
(i) Environmental Matters. No environmental problem of the kind contemplated in
Section 3.1(q) of Article III of this Agreement and not previously
disclosed on Annex 3.1(q) 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 NLBI or Slatington; 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 9.1 of
this Agreement. The result of any "phase I environmental audit" conducted
pursuant to Section 4.16 with respect to owned or occupied bank premises
shall be reasonably satisfactory to HNC.
(j) NLBI's Shareholders Equity. The total shareholders' equity of NLBI on a
generally accepted accounting basis on the Effective Date shall be no less
than $8,000,000.
(k) Benefit Plans. HNC and CNB shall have determined within forty-five (45)
days of the execution of this Agreement that the medical, health,
insurance, and employee benefit plans or programs of NLBI and/or Slatington
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
material costs in excess of those provided or paid by HNC or CNB to or on
behalf of its existing employees.
(l) 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 NLBI's Balance Sheet fairly presents
the financial condition, assets and liabilities of NLBI as at June 30,
1998, and that, since June 30, 1998 there has not been any material and
adverse change in the condition (financial or otherwise), assets,
liabilities, business, operations or future prospects of NLBI or
Slatington.
(m) Litigation. All litigation pending against NLBI or Slatington which,
individually or in the aggregate, would have a Material Adverse Effect on
NLBI's consolidated operations, business or future prospects, shall have
been settled or otherwise resolved on terms satisfactory to HNC.
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SECTION 6.3 Conditions to the Obligations of NLBI and Slatington.
The obligations of NLBI to effect the Merger shall be subject to the
satisfaction or waiver prior to the Effective Time of the following additional
conditions:
(a) Each of the representations, warranties and covenants of HNC and HNC North
contained in this Agreement shall be true and correct in all material
respects on the Effective Date as if made on such date (or on the date when
made in the case of any representation or warranty which specifically
relates to an earlier date); HNC and HNC North shall have performed each of
its covenants and agreements, which are material to its operations and
prospects, contained in this Agreement; and NLBI shall have received
certificates signed by the President or Vice President and Secretary or
Assistant Secretary of HNC and HNC North.
(b) NLBI shall have received an opinion dated as of the Effective Date, from
Shumaker Williams, P.C., Camp Hill, Pennsylvania, counsel to HNC and HNC
North, substantially in the form attached hereto as Exhibit D.
(c) There shall not have occurred any change in the financial condition,
properties, assets or business or results of operation of HNC and HNC North
which, individually or in the aggregate, has had or might reasonably be
expected to result in a Material Adverse Effect on HNC or the Material
Subsidiaries taken as a whole.
(d) The status of all Material pending litigation that might reasonably be
expected to result in a Materially Adverse Effect to HNC or the Material
Subsidiaries taken as a whole, shall be satisfactory to NLBI.
(e) NLBI shall have received an updated opinion from Hopper, Soliday & Co.,
Inc. as of a date no later than the date of the Proxy Statement/Prospectus
mailed to the NLBI shareholders in connection with the Merger to the effect
that the Merger consideration is fair to NLBI's shareholders from a
financial point of view.
(f) The shares of HNC Common Stock to be issued in the Merger shall have been
authorized to be listed for quotation on the NASDAQ National Market System.
ARTICLE VII
TERMINATION
SECTION 7.1 Termination.
This Agreement and the Bank Merger Agreement may be terminated, and the
Merger and the Bank Merger abandoned, prior to the Effective Date, either before
or after its approval by the shareholders of NLBI:
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(a) by the mutual, written consent of NLBI and HNC if the board of directors of
each so determines by a vote of a majority of the members of the entire
Board;
(b) by NLBI if (i) by written notice to HNC that there has been a material
breach by HNC of any representation, warranty, covenant or agreement
contained herein and such breach is not cured or not curable within thirty
(30) days after written notice of such breach is given to HNC by NLBI or
(ii) by written notice to HNC that any condition precedent to NLBI's
obligations as set forth in Article VI of this Agreement has not been met
or waived by NLBI at such time as such condition can no longer be satisfied
through no fault of NLBI or Slatington, on June 30, 1999.
(c) by HNC by written notice to the other parties, in the event (i) of a
material breach by NLBI or Slatington of any representation, warranty,
covenant or agreement contained herein and such breach is not cured or not
curable within thirty (30) days after written notice of such breach is
given to NLBI by HNC or (ii) any condition precedent to HNC's obligations
as set forth in Article VI of this Agreement has not been met or waived by
HNC at such time as such condition can no longer be satisfied, through no
fault of HNC, HNC North or CNB, on June 30, 1999.
(d) by HNC or NLBI by written notice to the other, in the event that the Merger
is not consummated by June 30, 1999, unless the failure to so consummate by
such time is due to the breach of any representation, warranty or covenant
contained in this Agreement by the party seeking to terminate, provided,
however, that such date may be extended by the written agreement of the
parties hereto.
SECTION 7.2 Effect of Termination.
In the event of the termination of this Agreement and the Bank Merger
Agreement as provided above, this Agreement and the Bank Merger Agreement shall
thereafter become void and have no effect, except that the provisions of Section
3.1(p) (Fees), Sections 4.3 and 5.2 (relating to confidentiality and return of
documents), Section 4.14 and 5.7 (Press Releases and Publicity) and Sections 7.3
and 9.10 (Expenses) of this Agreement shall survive any such termination and
abandonment.
SECTION 7.3 Expenses.
Any termination of this Agreement pursuant to Sections 7.1(a) or 7.l(d)
hereof shall be without cost, expense or liability on the part of any party to
the others. Any termination of this Agreement pursuant to Section 7.1(b) or
7.1(c) hereof shall also be without cost, liability or expense on the part of
any party to the others, unless the breach of a representation or warranty or
covenant is caused by the willful conduct or gross negligence of a party or the
circumstances of, in which event said party shall be liable to the other parties
for all out-of pocket costs and expenses, including without limitation,
reasonable legal, accounting and investment banking fees and expenses, incurred
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by such other party in connection with their entering into this Agreement and
their carrying out of any and all acts contemplated hereunder ("Expenses").
ARTICLE VIII
POST MERGER AGREEMENTS
SECTION 8.1 Employees.
(a) Except as may be otherwise specifically agreed to in writing by the
parties, for at least one (1) year following the Effective Date,
Slatington's employees who are employed in good standing and actively at
work as of the Effective Date (the "Continuing Employees") will be offered
employment and retained at current salary levels by CNB, HNC or an HNC
affiliate, subject to the ongoing needs of HNC, any HNC affiliate and/or
CNB, or any successor, with such changes in the future as may be
appropriate, as determined by HNC's, HNC affiliate's and/or CNB's governing
body. Notwithstanding the foregoing, HNC and/or CNB shall retain the right
to terminate any of the Continuing Employees at any time following the
Effective Date for "Good Reason", as that term shall be defined by HNC
and/or CNB in its sole and absolute discretion.
(b) Immediately following the Effective Date, former Slatington employees who
are employed by CNB, HNC or an HNC affiliate (collectively, the "HNC
Affiliates") as provided in Section 8.1(a) as Continuing Employees shall be
entitled to participate in any and all benefit plans in effect at such time
for employees of the respective HNC Affiliate in accordance with the terms
of such plans. Subject to the terms and conditions of the Plans, former
Slatington employees who are employed by the respective HNC Affiliate shall
receive service credit from their respective hire dates for employment at
Slatington for purposes of eligibility and vesting requirements (but not
for purposes of benefit accrual) under the respective HNC Affiliate's
benefit plans, and service credit from the Effective Date for purposes of
benefit calculation under the respective HNC Affiliate's benefit plans.
(e) CNB, HNC and HNC North reserve any and all rights they may have regarding
modification, amendment or termination of Slatington's present pension and
profit sharing plans.
(d) After the Effective Date, those current employees of Slatington who are
employed by CNB will, subject to the terms of the applicable plans and
policies, receive service credit for purposes of satisfying waiting periods
in CNB's health and welfare benefit plans.
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SECTION 8.2 Directors.
On the Effective Date, four (4) persons who are acceptable to HNC, HNC
North and CNB and who previously served as directors of NLBI shall be appointed
to the board of directors of CNB and shall serve until such time as their
successors have been duly elected, qualified, or appointed.
SECTION 8.3 Advisory 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 an
Advisory Board of Directors for the Slatington Area (the "Advisory Board of
Directors") comprised of the members of the Board of Directors of
Slatington as of the Effective Date and Thomas D. Oleksa, who shall serve
on the Advisory Board of Directors as an ex-officio member. Except as
provided herein, the Advisory Board of Directors 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 Advisory Board of Directors.
(b) Compensation. For one (1) year following the Effective Date, members of the
Advisory Board of Directors, shall receive Board Fees of two hundred and
fifty dollars ($250.00) per quarter as compensation for services rendered
in their capacity as an Advisory Director. After the expiration of the one
(1) year term following the Effective Date, compensation of the Advisory
Board of Directors shall be determined by the Board of Directors of CNB in
accordance with Section 8.3(a).
SECTION 8.4 Benefits.
For six (6) months following the Effective Date, and subject to the terms
and conditions of the applicable health insurance policy, CNB shall pay the
health insurance premiums for the individuals who were members of the Slatington
Board of Directors and had health insurance coverage through Slatington prior to
the Effective Date. CNB shall, subject to the terms and conditions of its health
insurance contracts, attempt to provide group health insurance which has
benefits and terms reasonably comparable to CNB or HNC. Should group health
insurance be unavailable to Slatington's board members through CNB's or HNC's
health insurance carrier, CNB shall, for each of the six (6) months following
the Effective Date, in lieu of providing continued health insurance coverage
through CNB, pay to those members of the Slatington board of directors who
obtained health care coverage through Slatington prior to the Effective Date an
amount equal to the monthly group health insurance premium paid for that
individual board member in 1997.
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ARTICLE IX
OTHER MATTERS
SECTION 9.1 Certain Definitions; interpretation.
As used in this Agreement, the following terms shall have the meanings
indicated:
"Material" means material to the party in question (as the case may
be) and its respective subsidiaries, taken as a whole.
"Material Adverse Effect," with respect to a person, means any
condition, event, change or occurrence that has or results in an
effect which is material and adverse to (A) the financial condition,
properties, assets, business or results of operations of such person
and its subsidiaries, taken as a whole, or (B) the ability of such
person to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement. In the case of
Slatington, receipt of a CAMELS rating in connection with a safety and
soundness examination which is lower than the rating given to
Slatington in connection with the safety and soundness examination
most recently reported prior to the date of this Agreement shall be
deemed to have a "Material Adverse Effect" on Slatington.
"Person" includes an individual, corporation, partnership,
association, trust or unincorporated organization.
"Subsidiary," with respect to a person, means any other person
controlled by such person.
When a reference is made in this Agreement to Exhibits, Sections, Annexes
or Schedules, such reference shall be to a Section of, or Annex or Schedule to,
this Agreement unless otherwise indicated. The table of contents, tie sheet and
headings contained in this Agreement are for ease of reference only and shall
not affect the meaning or interpretation of this Agreement. Whenever the words
"include," "includes," or "including" are used in this Agreement, they shall be
deemed followed by the words "without limitation". Any singular term in this
Agreement shall be deemed to include the plural, and any plural term the
singular.
SECTION 9.2 Survival.
The representations, warranties and agreements of the parties set forth in
this Agreement shall not survive the Effective Time, and shall be terminated and
extinguished at the Effective Time, and from and after the Effective Time none
of the parties hereto shall have any liability to the other on account of any
breach or failure of any of those representations, warranties and agreement;
provided, however, that the foregoing clause shall not (i) apply to agreements
of the parties which
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by their terms are intended to be performed either in whole or in part after the
Effective Time, and (ii) shall not relieve any person of liability for fraud,
deception or intentional misrepresentation.
SECTION 9.3 Parties in Interest.
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto and their respective successors and assigns, and, other than
the right to receive the consideration payable in the Merger pursuant to Article
II hereof, is not intended to and shall not confer upon any other person any
rights, benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 9.4 Captions.
The captions contained in this Agreement are for reference purposes only
and are not part of this Agreement.
SECTION 9.5 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 9.6 Access; Confidentiality.
The parties hereby agree to conduct the investigations and discussions
contemplated by Section 4.3 and Section 5.2 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 9.7 Waiver and Amendment.
Prior to the Effective Time, any provision of this Agreement may be: (i)
waived by the party benefitted by the provision; or (ii) amended or modified at
any time (including the structure of the transaction) by an agreement in writing
between the parties hereto approved by their respective boards of directors,
except that no amendment or waiver may be made that would change the form
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or the amount of the merger consideration or otherwise have the effect of
prejudicing the NLBI shareholders' interest in the merger consideration
following the NLBI Shareholders' Meeting.
SECTION 9.8 Counterparts.
This Agreement may be executed in counterparts, each of which shall be
deemed to constitute an original, but all of which together shall constitute one
and the same instrument.
SECTION 9.9 Governing Law.
This Agreement shall be governed by, and interpreted in accordance with,
the laws of the Commonwealth of Pennsylvania, or, to the extent it may control,
federal law, without reference to the choice of law principles thereof.
SECTION 9.10 Expenses.
Subject to the provisions of Section 7.3 hereof, each party hereto will
bear all Expenses incurred by it in connection with this Agreement and the
transactions contemplated hereby; provided, however, that all filing and other
fees (other than federal and state income taxes) required to be paid to any
governmental agency or authority in connection with the consummation of the
transactions contemplated hereby shall be paid by HNC.
SECTION 9.11 Notices.
All notices, requests, acknowledgments and other communications hereunder
to a party shall be in writing and shall be deemed to have been duly given when
delivered by hand, telecopy, telegram or telex (confirmed in writing) to such
party at its address set forth below or such other address as such party may
specify by notice to the other party hereto.
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If to NLBI, to:
Northern Lehigh Bancorp, Inc.
502 Main Street
P.O. Box 8
Slatington, PA 18080-0008
Attention: Francis P. Burbidge
First Vice President
With copies to:
Monteverde, McAlee, Fitzpatrick, Tanker & Hurd
One Penn Center at Suburban Station, Suite 1500
1617 John F. Kennedy Boulevard
Philadelphia, PA 19103-1815
Attention: Lawrence E. McAlee, Esquire
If to Slatington, to:
The Citizens National Bank of Slatington
502 Main Street
P.O. Box 8
Slatington, PA 18080-0008
Attention: Francis P. Burbidge
President and Chief Executive Officer
With copies to:
Monteverde, McAlee, Fitzpatrick, Tanker & Hurd
One Penn Center at Suburban Station, Suite 1500
1617 John F. Kennedy Boulevard
Philadelphia, PA 19103-1815
Attention: Lawrence E. McAlee, Esquire
If to HNC, to:
Harleysville National Corporation
P. O. Box 195
Harleysville, PA 19438
Attention: Walter E. Daller, Jr.
President and Chief Executive Officer
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With copies to:
Shumaker Williams, P.C.
3425 Simpson Ferry Road
Camp Hill, PA 17011
Attention: Nicholas Bybel, Jr., Esquire
If to HNC North, to:
HNC North, Inc.
c/o Harleysville National Corporation
P. O. Box 195
Harleysville, PA 19438
Attention: Walter E. Daller, Jr.
President and Chief Executive Officer
With copies to:
Shumaker Williams, P.C.
3425 Simpson Ferry Road
Camp Hill, PA 17011
Attention: Nicholas Bybel, Jr., Esquire
SECTION 9.12 Entire Agreement: Etc.
This Agreement, together with such other agreements as are executed by the
parties in connection herewith, on the date hereof, represent the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and supersede any and all other oral or written agreements
heretofore made. All terms and provisions of this Agreement, together with such
other agreements as are executed by the parties in connection herewith, on the
date hereof, shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Nothing in this Agreement is
intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement except as expressly provided.
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IN WITNESS WHEREOF, the parties hereto have caused this to be executed by
their duly authorized officers as of the day and year first above written.
HARLEYSVILLE NATIONAL CORPORATION
/s/ Jo Ann M. Bynon By: /s/ Walter E. Daller, Jr.
- -------------------------- ---------------------------------
Jo Ann M. Bynon, Secretary Walter E. Daller, Jr.
Title: President and Chief Executive
Officer
HNC NORTH, INC.
/s/ Jo Ann M. Bynon By: /s/ Walter E. Daller, Jr.
- -------------------------- --------------------------------
Jo Ann M. Bynon, Secretary Walter E. Daller, Jr.
Title: President and Chief Executive
Officer
THE CITIZENS NATIONAL BANK
OF LANSFORD
/s/ Martha A. Rex By: /s/ Thomas D. Oleksa
- ------------------------- -------------------------------
Martha A. Rex, Cashier Thomas D. Oleksa
Title: President
NORTHERN LEHIGH BANCORP, INC.
Andrea M. Beltz By: /s/ Joseph G. Bechtel
- ------------------------ --------------------------------
Andrea M. Beltz Joseph G. Bechtel
Secretary Title: President and Chairman of the
Board of Directors
THE CITIZENS NATIONAL BANK OF
SLATINGTON
Andrea M. Beltz By: /s/ Francis P. Burbidge
- ----------------------- -------------------------------
Andrea M. Beltz Francis P. Burbidge
Assistant Cashier Title: President and Chief Executive
Officer
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
<PAGE>
AGREEMENT AND PLAN OF MERGER
OF
THE CITIZENS NATIONAL BANK OF SLATINGTON, PA
with and into
THE CITIZENS NATIONAL BANK OF LANSFORD
under the charter of
THE CITIZENS NATIONAL BANK OF LANSFORD
THIS AGREEMENT AND PLAN OF MERGER ("Bank Merger Agreement") is dated as of
July 28, 1998, 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 THE CITIZENS NATIONAL BANK OF
SLATINGTON, PA., a national banking association, having its principal office at
502 Main Street, Slatington, Pennsylvania 18080 ("Slatington") (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, Slatington 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 Slatington with and into CNB (the "Bank Merger") in accordance
with the terms and conditions set forth therein and herein; and
WHEREAS, the respective Boards of Directors of Slatington and CNB deem the
Bank 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
<PAGE>
WHEREAS, the respective Boards of Directors of Slatington and CNB have
adopted resolutions approving and adopting this Bank Merger Agreement, and the
respective Boards of Directors of Slatington, CNB and HNC North, Inc., the
parent bank holding company of CNB ("HNC North") have adopted resolutions
approving and adopting the Reorganization Agreement, and the Boards of Directors
of Slatington and CNB have directed that this Bank Merger Agreement and the
Reorganization Agreement be submitted to their respective shareholders; and
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 Slatington 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 Bank Merger, including the
rights of the shareholders of Slatington, and such other details and provisions
as are deemed desirable, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. The Bank 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. ss.215a) (the
"Bank Merger Act") (as defined in Section 1.1 of the Reorganization Agreement),
Slatington 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 Slatington shall cease, and CNB shall be the surviving association
(the "Surviving Association"), the principal and branch offices of Slatington
shall become authorized branch offices of CNB ; and all the property (real,
personal and mixed), rights, powers, duties, and obligations of Slatington 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. Subject to any necessary prior
regulatory approval, the name of the Surviving Association shall be The Citizens
National Bank, Citizens Bank, N. A. or The Citizens National Bank of
Pennsylvania, 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.
<PAGE>
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 Slatington Common Stock. On the Effective Date (as
defined in Section 1.1(d) of the Reorganization Agreement), the shares of
Slatington Common Stock then outstanding and eligible for conversion shall,
by virtue of the merger and without any action on the part of the holder
thereof, be converted into shares of CNB Common Stock in accordance with
the terms of and as provided in this Bank Merger Agreement. From and after
the Effective Date, each certificate which, prior to the Effective Time,
represented shares of Slatington Common Stock shall evidence ownership of
shares of CNB Common Stock on the basis set forth herein.
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 Slatington Certificates. On the Effective
Date, Slatington Common Stock certificates shall be exchanged for CNB Common
Stock certificates.
7. Effect of Bank 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 Bank 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 Slatington's
present principal and branch offices and any other branch office or offices that
CNB and Slatington may be authorized to have as of the Effective Date. As of the
Effective Date, the separate existence of Slatington shall cease.
<PAGE>
9. Board of Directors and Officers. The directors of CNB as in effect
immediately prior to the Effective Date shall be the directors of the Surviving
Association, and four (4) persons appointed by Slatington and who are acceptable
to CNB shall be appointed to serve as directors of CNB until such time as their
successors have been duly elected, qualified, or appointed. The officers of CNB
as in effect immediately prior to the Effective Date shall be the officers of
the Surviving Association, with such changes as shall be made from time to time
by the Board of Directors of CNB.
10. Effective Date of the Bank Merger. The Effective Date of the Bank
Merger shall be as defined and provided for in Section 1.1(d) of the
Reorganization Agreement.
11. 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 Slatington, or otherwise carry
out the provisions hereof, the proper officers and directors of Slatington, as
of the Effective Date, on behalf of Slatington shall execute and deliver any and
all proper assignments, conveyances and assurances, and do all things necessary
or desirable to vest, perfect or confirm title to such property or rights in the
Surviving Association and otherwise carry out the provisions hereof.
12. 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.
13. Termination and Amendment. This Bank Merger Agreement may be terminated
as provided in Section 7.1 of the Reorganization Agreement. This Bank Merger
Agreement shall be terminated and the Bank 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, 1999, 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 Bank 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 Bank Merger. Notwithstanding prior approval by
the shareholders of Slatington, this Bank Merger Agreement may be amended in any
respect in the manner and subject only to the limitations set forth in Section
8.7 of the Reorganization Agreement.
14. Notwithstanding any term of this Bank Merger Agreement to the contrary,
CNB may, in its discretion at any time prior to the Effective Time, designate a
direct or indirect wholly-owned subsidiary to substitute for CNB as the
constituent association in the Bank Merger by written notice to Slatington so
long as the exercise of this right does not cause a material delay in
consummation of the transactions contemplated herein. CNB shall also have the
right to cause Slatington to be the Surviving Corporation of the Bank Merger
described so long as the exercise of such right does not
<PAGE>
have a material adverse effect on the interests of the Slatington shareholder or
cause a material delay in, or otherwise adversely affect, consummation of the
transactions contemplated herein; if such right is exercised, this Bank Merger
Agreement shall be deemed to be modified to accord such change.
15. Obligations. The obligations of CNB and Slatington to effect the Bank
Merger shall be subject to all terms and conditions contained in the
Reorganization Agreement, 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 Bank Merger Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania,
except to the extent governed or controlled by federal law.
<PAGE>
IN WITNESS WHEREOF, the signatures and seals of said merging banks this
28th day of July, 1998, 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: CITIZENS NATIONAL BANK OF SLATINGTON
By: /s/ Andrea M. Beltz
- ---------------------------------- By: /s/ Francis P. Burbidge
Andrea M. Beltz, A.C. --------------------------------
Francis P. Burbidge, President
[BANK SEAL]
/s/ Joseph G. Bechtel
_____________________________ -------------------------------
Joseph G. Bechtel
/s/ Francis P. Burbidge
_____________________________ -------------------------------
Francis P. Burbidge
/s/ Henry A. Galio
-------------------------------
Henry A. Galio
/s/ C. W. Stopp
-------------------------------
C. W. Stopp
/s/ Carol J. Simcoe
-------------------------------
Carol J. Simcoe
/s/ C. J. Breidinger
-------------------------------
C. J. Breidinger
Directors of Citizens National Bank of
Slatington, Lehigh County, Pennsylvania
<PAGE>
THE CITIZENS NATIONAL BANK
OF LANSFORD
ATTEST:
BY: /s/ Martha A. Rex By: /s/ Thomas D. Oleksa
-------------------- -------------------------------
Martha A. Rex, Cashier Thomas D. Oleksa, President
[BANK SEAL]
/s/ Thomas S. McCready /s/ Walter E. Daller, Jr.
- ------------------------ ------------------------------
Thomas S. McCready, Esq. Walter E. Daller, Jr.
/s/ Mark Fegley /s/ Thomas D. Oleksa
- ----------------------- --------------------------------
Mark Fegley Thomas D. Oleksa
/s/ Walter E. Kruczek /s/ Demetra M. Takes
- ----------------------- --------------------------------
Walter E. Kruczek Demetra M. Takes
/s/ Richard A. Koch /s/ Freddie J. Lesher
- ----------------------- --------------------------------
Richard A. Koch Freddie J. Lesher
/s/ Joseph J. Velitsky /s/ Joseph M. Porvaznik
- ----------------------- -------------------------------
Joseph J. Velitsky, Esq. Joseph M. Porvaznik
The Directors of The Citizens National
Bank of Lansford, Carbon County, Pennsylvania
<PAGE>
COMMONWEALTH OF PENNSYLVANIA :
: SS.
COUNTY OF LEHIGH
On this 28th day of July, 1998, before me, a Notary Public for the
Commonwealth and County aforesaid, personally came Francis P. Burbidge, as
President, and Andrea M. Beltz, as Assistant Cashier, of Citizens National Bank
of Slatington, 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 Joseph G. Bechtel, Henry A. Galio,
Charles W. Stopp, Carol J. Simcoe, Charles J. Breidinger 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/ Janice C. Hofmann
--------------------------------
Janice C. Hofmann
(Seal of Notary) Notary Public, Lehigh County
My commission expires:
August 7, 1999
-------------------------------
<PAGE>
COMMONWEALTH OF PENNSYLVANIA :
: SS.
COUNTY OF CARBON :
On this 21th day of July, 1998, before me, a Notary Public for the
Commonwealth and County aforesaid, personally came Thomas D. Oleksa, as
President, and Martha A. Rex, as Cashier, 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., Mark Fegley, Richard A. Koch, Walter E. Kruczek, Freddie J.
Lesher, Joseph J. Velitsky, Esq, Joseph M. Porvaznik and Walter E. Daller, Jr.
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.
Judith N. Johnson
----------------------------
Judith N. Johnson
(Seal of Notary) Notary Public, Carbon County
My commission expires:
January 17, 2002
----------------------------
EXHIBIT B
INVESTMENT AGREEMENT
<PAGE>
INVESTMENT AGREEMENT
THIS AGREEMENT dated as of July 28, 1998, between HARLEYSVILLE NATIONAL
ORPORATION ("HNC") and NORTHERN LEHIGH BANCORP, INC. ("NLBI"),
WITNESSETH:
WHEREAS, HNC and NLBI have, simultaneously with executing this Agreement,
entered into an Agreement and Plan of Reorganization dated as of the date hereof
(the "Plan"); and
WHEREAS, as a condition to HNC's entry into the Plan and in consideration
of such entry, NLBI has agreed to issue to HNC, on the terms and conditions set
forth herein, options entitling HNC to purchase up to an aggregate of 27,760
shares (the "Shares") of NLBI's common stock, par value $10.00 per share ("NLBI
Common Stock");
NOW, THEREFORE, in consideration of the execution of the Plan and the
agreements herein contained, HNC and NLBI, intending to be legally bound hereby,
agree as follows:
1. Concurrently with the execution of the Plan and this Agreement, NLBI
shall issue to HNC a option or options in the form of Attachment A hereto (the
"Option", which term as used herein shall include any options issued upon
transfer or exchange of the original Option or pursuant to Paragraph 4 of this
Agreement) to purchase up to 27,760 shares of NLBI Common Stock. Each Option
shall be exercisable at a price per share of $57.00, subject to adjustment as
therein provided (the "Exercise Price"). So long as the Option is outstanding
and unexercised, NLBI shall at all times maintain and reserve, free from
preemptive rights, such number of authorized but unissued or treasury shares of
NLBI Common Stock as may be necessary so that the Option may be exercised
without additional authorization of NLBI Common Stock after giving effect to all
other options, warrants, convertible securities and other rights to acquire
shares of NLBI Common Stock at the time outstanding. NLBI represents and
warrants that it has duly authorized the issuance of the Shares upon exercise of
the Option and covenants that the Shares issued upon exercise of the Option
shall be duly authorized, validly issued and fully paid and nonassessable and
subject to no preemptive rights. The Option and the Shares are hereinafter
collectively referred to, from time to time, as the "Securities".
So long as the Option is owned by HNC, in no event shall HNC exercise the
Option for a number of shares of NLBI Common Stock which, when added to the
number of shares of NLBI Common Stock owned or controlled by HNC (otherwise than
in a fiduciary capacity) would result in HNC owning or controlling (otherwise
than in a fiduciary capacity) more than 19.9 percent of the shares of NLBI
Common Stock issued and outstanding immediately after giving effect to such
exercise.
2. Subject to the terms and conditions hereof, HNC may exercise or sell the
Option, in whole or in part, upon: (i) a willful breach of the Plan by NLBI
which would permit termination of
<PAGE>
the Plan by HNC; (ii) the failure of NLBI's shareholders to approve the Plan at
a meeting called for such purpose after the announcement by any person (other
than HNC) of an offer or proposal to acquire 15 percent or more of NLBI Common
Stock, or to acquire, merge or consolidate with NLBI or to purchase or acquire
all or substantially all of NLBI's assets; (iii) the acquisition by any person
(other than HNC) of beneficial ownership of 15 percent or more of NLBI Common
Stock exclusive of shares of NLBI Common Stock sold directly or indirectly to
such person by HNC; (iv) any person (other than HNC) shall have commenced a
tender or exchange offer, or shall have filed an application with an appropriate
bank regulatory authority with respect to a publicly announced offer, to
purchase or acquire securities of NLBI such that, upon consummation of such
offer, such person would own, control or have the right to acquire 15 percent or
more of NLBI Common Stock (before giving effect to any exercise of the Option);
or (v) NLBI shall have entered into an agreement or other understanding with a
person (other than HNC) for such person to acquire, merge or consolidate with
NLBI or to purchase or acquire all or substantially all of NLBI's assets. HNC's
right to exercise the Option shall terminate and be of no further effect, except
as to notices of exercise given prior thereto, upon termination of the Option as
provided in Paragraph 10 thereof. As used in this Paragraph 2, "person" and
"beneficial ownership" shall have the same meanings as in the Option.
Notwithstanding the foregoing, NLBI shall not be obligated to issue Shares upon
exercise of the Option (i) in the absence of any required governmental or
regulatory approval or consent necessary for NLBI to issue the Shares or for HNC
to exercise the Option or prior to the expiration or termination of any waiting
period required by law or (ii) so long as any injunction or other order, decree
or ruling issued by any federal or state court of competent jurisdiction is in
effect which prohibits the sale or delivery of the Shares. Any sale of the
Option, in whole or in part, or any of the Shares by HNC, other than a sale to a
majority-owned subsidiary of HNC, shall be subject to the right of first refusal
of NLBI (or any assignee or assignees of NLBI the identity of whom or which
prior to the date thereof has been given to HNC) at a price equal to the written
offer price which HNC receives from a third party (other than a majority-owned
subsidiary of HNC) and intends to accept. The right of first refusal shall
terminate 15 days after notice of HNC's intention to sell has been delivered to
NLBI. If an offer is made for a consideration which in whole or in part consists
of other than cash, the value of the non-cash portion of the consideration shall
be determined by a recognized investment banking firm selected jointly by HNC
and NLBI, and such determination shall in no event be made later than the fifth
day after notice of HNC's intention to sell has been delivered to NLBI. In the
event of the failure or refusal of NLBI to purchase the Option or all the Shares
covered by HNC's notice to sell, HNC may, within 30 days from the date of such
notice, unless additional time is needed to give notification to or to obtain
approval from any governmental or regulatory authority and, if so required,
within five days after the date on which the required notification period has
expired or been terminated or such approval has been obtained and any requisite
waiting period with respect thereto has passed, sell all, but not less than all,
of the portion of the Option or such Shares covered by such notice to such
proposed transferee at no less than the price specified and on terms no more
favorable to the buyer than those set forth in the notice.
3. Subject to applicable regulatory restrictions, from and after the date
on which any event described in the second paragraph of this Paragraph 3 occurs,
the Holder as defined in the Option (which shall include a former Holder) who
has exercised the Option in whole or in part shall have the right to require
NLBI to redeem some or all of the Shares at a redemption price per share
<PAGE>
(the "Redemption Price") equal to the highest of (i) 150 percent of the Exercise
Price, (ii) the highest price paid or agreed to be paid for any share of NLBI
Common Stock by an Acquiring Person (as defined in the Option) during the twelve
months immediately preceding the date notice of the election to require
redemption is given by the Holder under the third paragraph of this Paragraph 3
(as appropriately adjusted to reflect any of the events described in Paragraph
7(A) of the Option) and (iii) in the event of a sale of all or substantially all
of NLBI's assets, (x) the sum of the price paid in such sale for such assets and
the current market value of the remaining assets of NLBI as determined by a
recognized investment banking firm selected by such Holder, divided by (y) the
number of shares of NLBI Common Stock then outstanding. If the price paid
consists in whole or in part of the securities or assets other than cash, the
value of such securities or assets shall be their then current market value as
determined by a recognized investment banking firm selected by the Holder. The
Holder's right to require NLBI to redeem some or all of the Shares under this
Paragraph 3 shall expire on the close of business on the 180th day following the
occurrence of any event described in the second paragraph of this Paragraph 3.
The redemption rights provided in this Paragraph 3 shall become exercisable
upon the occurrence of any of the following events: (i) the acquisition by any
person (other than HNC or any subsidiary of HNC) of beneficial ownership of 25
percent or more of the NLBI Common Stock (before giving effect to any exercise
of the Option) exclusive of shares of NLBI Common Stock sold directly or
indirectly to such person by HNC or (ii) a transaction of the type specified in
Paragraph 2(v) shall have been consummated. As used in this Paragraph 3 "person"
and "beneficial ownership" shall have the same meanings as in the Option.
The Holder may exercise its right to require NLBI to redeem some or all of
the Shares pursuant to this Paragraph 3 by surrendering for such purpose to
NLBI, at its principal office within the time period specified in the preceding
paragraph, a certificate or certificates representing the number of Shares to be
redeemed accompanied by a written notice stating that it elects to require NLBI
to redeem all or a specified number of such Shares in accordance with the
provisions of this Paragraph 3. As promptly as practicable, and in any event
within ten business days after the surrender of such certificates and the
receipt of such notice relating thereto, NLBI shall deliver or cause to be
delivered to the Holder the applicable Redemption Price for the Shares which it
is not then prohibited under applicable law or regulation from redeeming, and,
if the Holder has given NLBI notice that less than the full number of Shares
evidenced by the surrendered certificate or certificates are to be redeemed, a
new certificate or certificates, of like tenor, for the number of Shares
evidenced by such surrendered certificate or certificates, less the number of
Shares redeemed. To the extent that NLBI is prohibited under applicable law or
regulation, or by judicial or administrative action, from redeeming all of the
Shares as to which the Holder has given notice to redeem hereunder, NLBI shall
immediately notify the Holder and thereafter deliver or cause to be delivered to
the Holder the applicable Redemption Price for such number of the Shares as it
is not prohibited from redeeming within ten business days after the date on
which NLBI is no longer so prohibited; provided, however, that at the option of
HNC, at any time after receipt of such notice from NLBI, NLBI shall deliver to
the Holder a certificate for such number of the Shares as it is then prohibited
from redeeming, or, at the Holder's option, all the Shares, and NLBI shall have
no further obligation to redeem such Shares.
<PAGE>
4. In the event that NLBI issues any additional Shares of NLBI Common Stock
pursuant to outstanding stock options after the date of this Agreement, NLBI
shall issue additional options to HNC, such that, after such issuance, the
number of Shares of NLBI Common Stock subject to all options hereunder, together
with any shares of NLBI Common Stock previously issued pursuant hereto, equals
19.9 percent of the shares of NLBI Common Stock then issued and outstanding.
Such additional options shall be identical to the Option.
5. NLBI will not enter into any transaction described in (a), (b) or (c) of
Paragraph 6(A) of the Option unless the Acquiror (as defined in the Option)
assumes in writing, in form and substance satisfactory to the Holder, all the
obligations of NLBI hereunder.
6. This Agreement shall not be assignable by HNC except to any direct or
indirect subsidiary, affiliate or successor of HNC.
7. Without limiting the foregoing or any remedies available to HNC, it is
specifically acknowledged that HNC would not have an adequate remedy at law for
any breach of this Agreement and will be entitled to specific performance of the
obligations under, and injunctive relief against actual or threatened violations
of the obligations of any person subject to this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in counterparts by their duly authorized officers and their corporate
seals to be hereunto affixed, all as of the day and year first above written.
[CORPORATE SEAL]
ATTEST: NORTHERN LEHIGH BANCORP, INC.
By: /s/ Andrea M. Beltz By:/s/ Francis P. Burbidge
------------------------- --------------------------------
Andrea M. Beltz Francis P. Burbidge
Corporate Secretary First Vice-President
[CORPORATE SEAL]
ATTEST: HARLEYSVILLE NATIONAL
CORPORATION
By: /s/ Jo Ann M. Bynon By: /s/ Walter E. Daller, Jr.
---------------------- -------------------------------
Jo Ann M. Bynon, Secretary Walter E. Daller, Jr.
President and CEO
<PAGE>
ATTACHMENT A
OPTION
to Purchase up to 27,760 Shares of
Common Stock
of
Northern Lehigh Bancorp, Inc.
This is to certify that, for value received, HARLEYSVILLE NATIONAL
CORPORATION ("HNC") or any permitted transferee (HNC or such transferee
hereinafter the "Holder") is entitled to purchase, subject to the provisions of
this Option and of the Agreement (as hereinafter defined), from NORTHERN LEHIGH
BANCORP, INC. ("NLBI"), at any time on or after the date hereof, an aggregate of
up to 27,760 fully paid and nonassessable shares of common stock, par value
$10.00 per share ("NLBI Common Stock") of NLBI at a price per share equal to
$57.00 subject to adjustment as herein provided (the "Exercise Price").
1. Exercise of Option.
Subject to the provisions hereof and the limitations set forth in Paragraph
2 of an Investment Agreement dated as of July 28, 1998, by and between HNC and
NLBI (the "Agreement") executed and delivered in connection with an Agreement
and Plan of Reorganization dated as of July 28, 1998, between HNC and NLBI (the
"Plan"), this Option may be exercised at any time or from time to time on or
after the date hereof. This Option shall be exercised by presentation and
surrender hereof to NLBI at its principal office, accompanied by (i) a written
notice of exercise, (ii) payment to NLBI, for the account of NLBI, of the
Exercise Price for the number of shares of NLBI Common Stock specified in such
notice and (iii) a certificate of the Holder specifying the event or events
which have occurred which entitle the Holder to exercise the Option. The
Exercise Price for the number of shares of NLBI Common Stock specified in the
notice shall be payable in immediately available funds. This Option may not be
exercised in part for less than 4,000 shares, except (i) for an initial exercise
resulting in ownership of approximately 5 percent of the outstanding shares of
NLBI Common Stock after giving effect to the exercise, (ii) as limited by
applicable law, regulation or regulatory order or (iii) when this Option becomes
exercisable for less than 4,000 shares, the remaining shares for which it is
then exercisable.
Upon such presentation and surrender, NLBI shall issue promptly (and within
five business days if requested by the Holder) to the Holder or its assignee,
transferee or designee the shares of NLBI Common Stock to which the Holder is
entitled hereunder.
If this Option should be exercised in part only, NLBI shall, upon surrender
of this Option for cancellation, execute and deliver a new Option evidencing the
rights of the Holder thereof to purchase the balance of the shares of NLBI
Common Stock purchasable hereunder. Upon receipt
<PAGE>
by NLBI of this Option, in proper form for exercise, the Holder shall be deemed
to be the holder of record of the shares of NLBI Common Stock issuable upon such
exercise, notwithstanding that the stock transfer books of NLBI may then be
closed or that certificates representing such shares of NLBI Common Stock shall
not then be actually delivered to the Holder. NLBI shall pay all expenses, and
any and all United States federal, state and local taxes and other charges, that
may be payable in connection with the preparation, issue and delivery of stock
certificates pursuant to this Paragraph 1 in the name of the Holder or its
assignee, transferee or designee.
2. Reservation of Shares; Preservation of Rights of Holder.
NLBI shall at all times while this Option is outstanding and unexercised
maintain and reserve, free from preemptive rights, such number of authorized but
unissued or treasury shares of NLBI Common Stock as may be necessary so that
this Option may be exercised without additional authorization of NLBI Common
Stock after giving effect to all other options, warrants, convertible securities
and other rights to acquire shares of NLBI Common Stock at the time outstanding.
NLBI further agrees
(i) that it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other
voluntary act, avoid or seek to avoid the observance or performance of
any of the covenants, stipulations or conditions to be observed or
performed hereunder or under the Agreement by NLBI,
(ii) that it will use its best efforts to take all action (including (A)
complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. ss.18a and the regulations
promulgated thereunder and (B) in the event that under the Bank
Holding Company Act of 1956 or the Change in Bank Control Act or any
other law, prior approval of the Board of Governors of the Federal
Reserve System (the "Board"), the Securities Regulatory Commissions
(SEC), or any other regulatory agency is necessary before this Option
may be exercised, cooperating fully with the Holder in preparing any
and all such applications and providing such information to the Board
as such agency may require) in order to permit the Holder to exercise
this Option and NLBI duly and effectively to issue shares of NLBI
Common Stock hereunder, and
(iii)that it will promptly take all action necessary to protect the rights
of the Holder against dilution as provided herein.
3. Fractional Shares.
NLBI shall not be required to issue fractional shares of NLBI Common Stock
upon exercise of this Option but shall pay for such fraction of a share in cash
or by certified or official bank check at the Exercise Price.
4. Exchange, Transfer or Loss of Option.
This Option is exchangeable or, subject to Paragraph 2 of the Investment
Agreement, transferable, without expense, at the option of the Holder, upon
presentation and surrender hereof at the principal office of NLBI for other
Options of different denominations entitling the Holder to purchase in the
aggregate the same number of shares of NLBI Common Stock purchasable hereunder.
The term "Option" as used herein includes any Options for which this Option may
be exchanged. Upon receipt by NLBI of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Option, and (in the case of
loss, theft or destruction) of reasonably satisfactory indemnification, and upon
surrender and cancellation of this Option, if mutilated, NLBI will execute and
deliver a new Option of like tenor and date.
<PAGE>
This Option may not be exercised or sold except in accordance with the
terms of the Agreement.
5. Redemption.
(A) Subject to applicable regulatory restrictions, from and after the
date on which any event described in the second paragraph of Paragraph 3 of
the Agreement occurs, the Holder shall have the right to require NLBI to
redeem this Option at a redemption price (the "Redemption Amount") equal to
the highest of (i) the number of shares of NLBI Common Stock for which this
Option is then exercisable (the "Conversion Number") multiplied by the
Exercise Price multiplied by 150%, (ii) (x) the highest price paid or
agreed to be paid for any share of NLBI Common Stock by the Acquiring
Person (as hereinafter defined) during the twelve months immediately
preceding the date notice of the election to require redemption is given by
the Holder under Paragraph 5(B)(such price to be appropriately adjusted to
reflect the effect of any of the events described in Paragraph 7(A)
hereof), less the Exercise Price, multiplied by (y) the Conversion Number,
and (iii) in the event of the sale of all or substantially all of the
assets of NLBI, the Conversion Number multiplied by (x)(I) the sum of (a)
the price paid for such assets, (b) the current market value of the
remaining assets of NLBI, as determined by a recognized investment banking
firm selected by the Holder, and (c) the Exercise Price multiplied by the
Conversion Number, divided by (II) the sum of the number of shares of NLBI
Common Stock then outstanding and the Conversion Number, less (y) the
Exercise Price. If, for the purpose of this calculation or calculating the
Assigned Value (as hereinafter described), the price paid consists in whole
or in part of securities or assets other than cash, the value of such
securities or assets shall be their then current market value as determined
by a recognized investment banking firm selected by the Holder. The
Holder's right to require NLBI to redeem this Option under this Paragraph 5
shall expire at the close of business on the 180th day following the
occurrence of any event described in the second paragraph of Paragraph 3 of
the Agreement.
(B) The Holder of this Option may exercise its right to require NLBI
to redeem this Option pursuant to this Paragraph 5 by surrendering for such
purpose to NLBI, at its principal office, within the period specified
above, this Option accompanied by a written notice stating that the Holder
elects to require NLBI to redeem this Option in accordance with the
provisions of this Paragraph 5. As promptly as practicable, and in any
event within ten business days after the surrender of this Option and the
receipt of such notice relating thereto, NLBI shall deliver or cause to be
delivered to the Holder the Redemption Amount therefor or the portion
thereof which it is not then prohibited under applicable law and regulation
from delivering to the Holder.
To the extent that NLBI is prohibited under applicable law or
regulation, or as a result of administrative or judicial action, from
redeeming this Option in full, NLBI shall immediately notify the Holder and
thereafter deliver or cause to be delivered to the Holder the portion of
the Redemption Amount which it is no longer prohibited from delivering to
the Holder within ten business days after the date on which NLBI is no
longer so prohibited;
<PAGE>
provided, however, that, at the option of the Holder, at any time after
receipt of such notice, NLBI shall deliver to the Holder a new Option
evidencing the right to the Holder to purchase that number of shares of
NLBI Common Stock obtained by multiplying the Conversion Number in effect
at such time by a fraction, the numerator of which is the Redemption Amount
less the portion thereof (if any) theretofore delivered to the Holder and
the denominator of which is the Redemption Amount, and NLBI shall have no
further obligation to redeem such new Option.
(C) As used in this Option, the following terms have the meanings
indicated:
(a) "Acquiring Person" shall mean any "Person" (hereinafter
defined) who or which shall be the "Beneficial Owner" (as hereinafter
defined) of 15% or more of NLBI Common Stock;
(b) A "Person" shall mean any individual, firm, corporation or
other entity and include as well any syndicate or group deemed to be a
"person" by Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended;
(c) A Person shall be a "Beneficial Owner" of all securities:
(i) which such Person or any of its "Affiliates" (as
hereinafter defined) or "Associates" (as hereinafter defined)
beneficially owns, directly or indirectly; and
(ii) which such Person or any of its Affiliates or
Associates has (1) the right to acquire (whether such right is
exercisable immediately or only after the passage of time or
otherwise) pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, or (2) the right to
vote pursuant to any agreement, arrangement or understanding; and
(d) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations promulgated under the Securities Exchange Act of 1934, as
amended, as in effect on the date of the Agreement.
6. Certain Transactions.
(A) In case NLBI
(a) shall consolidate with or merge into any Person, other than
the Holder or one of its Affiliates, and shall not be the continuing
or surviving corporation of such consolidation or merger,
(b) shall permit any Person, other than the Holder or one of its
Affiliates, to merge into NLBI and NLBI shall be the continuing or
surviving corporation, but, in connection with such merger, the then
outstanding shares of NLBI Common Stock shall be changed into or
exchanged for stock or other securities of any other
<PAGE>
Person or cash or any other property or shall represent less than 25%
of the shares of NLBI Common Stock immediately after giving effect to
the merger, or
(c) shall sell or otherwise transfer all or substantially all of
its assets to any Person, other than the Holder or one of its
Affiliates, then, and in each such case, the agreement governing such
transaction shall make proper provision so that this Option shall (at
the option of the Holder, in whole or in part), upon the consummation
of any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, a option, at the option
of the Holder, of either (I) the Acquiring Bank (as hereinafter
defined), (II) any company which controls the Acquiring Bank, or (III)
in the case of a merger described in clause (A)(b), NLBI, in which
case such option shall be a newly issued option (in any such case, the
"Substitute Option").
(B) The following terms have the meanings indicated:
(a) "Acquiring Corporation" shall mean (I) the continuing or
surviving corporation of a consolidation or merger with NLBI (if other
than the NLBI), (II) the corporation merging into NLBI in a merger in
which the NLBI is the continuing or surviving person and in connection
with which the then outstanding shares of NLBI Common Stock are
changed into or exchanged for stock of other securities of any other
Person or cash or any other property or shall represent less than 50%
of the shares of NLBI Common Stock immediately after giving effect to
the merger, and (III) the transferee of all or substantially all of
NLBI's assets, NLBI or all or substantially all of the NLBI's assets;
(b) "Substitute Common Stock" shall mean the common stock issued
by the issuer of the Substitute Option;
(c) "Assigned Value" shall mean the Redemption Price per share of
NLBI Common Stock (as defined in Paragraph 3 of the Agreement)
multiplied by the Conversion Number;
(d) "Average Price" shall mean the average closing price (or if
unavailable, the average of the daily averages of the closing bid and
asked prices) of a share of Substitute Common Stock for the one year
immediately preceding the consolidation, merger or sale in question,
but in no event higher than the closing price (or average of the
closing bid and asked prices) of a share of Substitute Common Stock on
the day preceding such consolidation, merger or sale; provided that if
NLBI is the issuer of the Substitute Option, the Average Price shall
be computed with respect to a share of the common stock issued by the
Person merging into NLBI or by any company which controls such Person,
as the Holder may elect. If the Average Price cannot be computed as
aforesaid because neither closing prices nor closing bid and asked
prices are available for such one-year period, then the Average Price
shall be the average fair market value of a share of Substitute Common
Stock for such period (but in no event higher than the fair market
value on
<PAGE>
the day preceding such consolidation, merger or sale) as determined by
a recognized investment banking firm selected by HNC.
(C) The Substitute Option shall have the same terms as this Option
provided that if the terms of the Substitute Option cannot, for legal
reasons, be the same as this Option, such terms shall be as similar as
possible and in no event less advantageous to the Holder. The issuer of the
Substitute Option shall also enter into an agreement with the then Holder
of the Substitute Option in substantially the same form as the Agreement,
which shall be applicable to the Substitute Option. For purposes of the
Substitute Option and such agreement, any event referred to in Paragraph 2
or Paragraph 3 of the Agreement shall be deemed to have occurred when it
occurred with respect to NLBI.
(D) The Substitute Option shall be immediately exercisable for such
number of shares of Substitute Common Stock as is equal to the Assigned
Value divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall be equal to the Exercise
Price multiplied by a fraction in which the numerator is the Conversion
Number and the denominator is the number of shares of Substitute Common
Stock for which the Substitute Option is exercisable.
(E) In no event, pursuant to any of the foregoing paragraphs, shall
the Substitute Option be exercisable for more than 19.9% of the aggregate
of the outstanding shares of Substitute Common Stock and the shares of
Substitute Common Stock issuable upon exercise of the Substitute Option.
7. Adjustment.
The number of shares of NLBI Common Stock purchasable upon the exercise of
this Option and the Exercise Price shall be subject to adjustment from time to
time as provided in this Paragraph 7:
(A)(1) In case NLBI shall pay or make a dividend or other distribution
on any class of capital stock of NLBI in NLBI Common Stock, the number of
shares of NLBI Common Stock purchasable upon exercise of this Option shall
be increased by multiplying such number of shares by a fraction of which
the denominator shall be the number of shares of NLBI Common Stock
outstanding at the close of business on the day immediately preceding the
date of such distribution and the numerator shall be the sum of such number
of shares and the total number of shares constituting such dividend or
other distribution, such increase to become effective immediately after the
opening of business on the day following such distribution, provided,
however, that in no event shall the Option be exercised for more than 19.9%
of the shares of NLBI Common Stock issued and outstanding.
(2) In case outstanding shares of NLBI Common Stock shall be
subdivided into a greater number of shares of NLBI Common Stock, the number
of shares of NLBI Common Stock purchasable upon exercise of this Option at
the opening of business on the day following the day upon which such
subdivision
<PAGE>
becomes effective shall be proportionately increased, and, conversely, in
case outstanding shares of NLBI Common Stock shall each be combined into a
smaller number of shares of NLBI Common Stock, the number of shares of NLBI
Common Stock purchasable upon exercise of this Option at the opening of
business on the day following the day upon which such combination becomes
effective shall be proportionately decreased, such increase or decrease, as
the case may be, to become effective immediately after the opening of
business on the day following the day upon which such subdivision or
combination becomes effective, provided, however, that in no event shall
the Option be exercised for more than 19.9% of the shares of NLBI Common
Stock issued and outstanding.
(3) The reclassification (excluding any transaction in which a
Substitute Option would be issued) of NLBI Common Stock into securities
(other than NLBI Common Stock) and/or cash and/or other consideration shall
be deemed to involve a subdivision or combination, as the case may be, of
the number of shares of NLBI Common Stock outstanding immediately prior to
such reclassification into the number or amount of securities and/or cash
and/or other consideration outstanding immediately thereafter and the
effective date of such reclassification shall be deemed to be "the day upon
which such subdivision becomes effective," or "the day upon which such
combination becomes effective," as the case may be, within the meaning of
clause (2) above.
(4) NLBI may make such increases in the number of shares of NLBI
Common Stock purchasable upon exercise of this Option, in addition to those
required by this subparagraph (A), as shall be determined by its Board of
Directors to be advisable in order to avoid taxation so far as practicable
of any dividend of stock or stock rights or any event treated as such for
federal income tax purposes to the recipients.
(B) Whenever the number of shares of NLBI Common Stock purchasable upon
exercise of this Option is adjusted as herein provided, the Exercise Price shall
be adjusted by a fraction in which the numerator is equal to the number of
shares of NLBI Common Stock purchasable prior to the adjustment and the
denominator is equal to the number of shares of NLBI Common Stock purchasable
after the adjustment.
(C) For the purpose of this Paragraph 7, the term "NLBI Common Stock" shall
include any shares of NLBI of any class or series which has no preference or
priority in the payment of dividends or in the distribution of assets upon any
voluntary or involuntary liquidation, dissolution or winding up of NLBI and
which is not subject to redemption by NLBI.
8. Notice.
(A) Whenever the number of shares for which this Option is exercisable is
adjusted as provided in Paragraph 7, NLBI shall promptly compute such adjustment
and mail to the Holder a certificate, signed by a principal financial officer of
NLBI, setting forth the number of shares of NLBI Common Stock for which this
Option is exercisable as a result of such adjustment, a brief statement of the
facts requiring such adjustment and the computation thereof and when such
adjustment will become effective.
<PAGE>
(B) Upon the occurrence of any event which results in this Option becoming
redeemable, as provided in Paragraph 5, NLBI shall promptly notify the Holder of
such event; and promptly compute the Redemption Amount and furnish to the Holder
a certificate, signed by a principal financial officer of NLBI, setting forth
the Redemption Amount and the basis and computation thereof.
(C) Upon the occurrence of an event which results in this Option becoming
convertible into, or exchangeable for, the Substitute Option, as provided in
Paragraph 6, the Acquiring Bank and NLBI shall promptly notify the Holder of
such event; and, upon receipt from the Holder of its choice as to the issuer of
the Substitute Option, the Acquiring Bank and NLBI shall promptly compute the
number of shares of Substitute Common Stock for which the Substitute Option is
exercisable and furnish to the Holder a certificate, signed by a principal
financial officer of each of the Acquiring Bank and NLBI, setting forth the
number of shares of Substitute Common Stock for which the Substitute Option is
exercisable, a computation thereof and when such adjustment will become
effective.
9. Rights of Holder.
(A) Without limiting the foregoing or any remedies available to the Holder,
it is specifically acknowledged that the Holder would not have an adequate
remedy at law for any breach of the provision of this Option and will be
entitled to specific performance of the
<PAGE>
obligations under, and injunctive relief against actual or threatened violations
of the obligations of any Person subject to, this Option.
(B) Except as provided in the third paragraph of Paragraph 1 hereof, the
Holder shall not, by virtue hereof, be entitled to any rights of a shareholder
in NLBI.
10. Termination.
This Option and the rights conferred hereby shall terminate (i) upon
willful breach of the Agreement by HNC, (ii) at the Effective Time of the Merger
pursuant to the Plan, (iii) upon termination of the Plan by HNC pursuant to
Section 7.1(e) of the Plan; or (iv) to the extent this Option has not previously
been exercised, on the later of (A) September 30, 1999 or (B) 18 months after
the occurrence of an event described in Paragraph 2 of the Agreement, provided
that such termination pursuant to this clause iv shall not affect any redemption
under Paragraph 5 as to which exercise under Paragraph 5(B) has previously
occurred.
11. Governing Law.
This Option shall be governed by, and interpreted in accordance with, the
substantive laws of the Commonwealth of Pennsylvania.
Dated: July 28, 1998
[CORPORATE SEAL]
ATTEST: NORTHERN LEHIGH BANCORP, INC.
By: /s/ Andrea M. Beltz By: /s/ Francis P. Burbidge
------------------------ ------------------------------
Corporate Secretary Francis P. Burbidge,
First Vice President
<PAGE>
EXHIBIT C
<PAGE>
[Letterhead of Monteverde, McAlee, Fitzpatrick, Tanker & Hurd]
[Date of Closing]
Board of Directors
HARLEYSVILLE NATIONAL CORPORATION
P. O. Box 195
Harleysville, PA 19438
Ladies and Gentlemen:
We have acted as Special Counsel to Northern Lehigh Bancorp, Inc. ("NLBI"),
a Pennsylvania corporation, and The Citizens National Bank of Slatington
("Slatington"), a national banking association, in connection with the Agreement
and Plan of Reorganization, dated as of July __, 1998 (as amended, the
"Agreement"), by and among Harleysville National Corporation ("HNC"), HNC North,
Inc. ("HNC North"), The Citizens National Bank of Lansford ("CNB"), NLBI and
Slatington, pursuant to which NLBI will be merged with and into HNC North (the
"Merger"). While this firm represents NLBI and Slatington in connection with
specific legal matters as to which we are consulted by them, we do not perform
or provide legal services to either NLBI or Slatington in connection with the
day-to-day operations of their business or routine legal proceedings related
thereto. This opinion is being delivered to you in accordance with the
provisions of Section 6.2(c) of the Agreement.
This Opinion Letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord of the ABA Section of Business Law (1991) (the
"Accord"). As a consequence, it is subject to the qualifications, exceptions,
definitions, limitations on coverage and other limitations, all as more
particularly described in the Accord, and this Opinion Letter should be read in
conjunction therewith. Except as otherwise indicated herein, capitalized terms
used in this opinion letter are defined as set forth in the Agreement or the
Accord. The law covered by the opinions expressed herein is limited to the
federal law of the United States and the laws of the Commonwealth of
Pennsylvania.
In connection with the opinions expressed herein, we have examined
originals, or copies certified or otherwise identified to our satisfaction, of
the articles of incorporation. the articles of association, the certificate of
incorporation, the certificate of good standing, the by-laws, the Agreement and
such other corporate and other records, certificates and documents as we have
considered necessary or appropriate for the purposes of rendering the opinions
set forth below.
<PAGE>
Based upon and subject to the foregoing and the other terms and provisions
hereof, it is our opinion that:
1. NLBI is a business corporation that is duly organized, validly existing
and in good standing under the laws of the Commonwealth of Pennsylvania as
evidenced in the Subsisting Corporation Certificate issued by the Commonwealth
of Pennsylvania, Corporation Bureau, and is in good standing as a foreign
corporation in each jurisdiction where the properties owned, leased or operated,
or the business conducted, by NLBI requires such qualification, except for such
failure to qualify or be in such good standing which, when taken together with
all other such failures, would not have a Material Adverse Effect on NLBI and
its subsidiaries, taken as a whole. NLBI is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended.
2. Slatington is a national banking association that is duly organized ,
validly existing and in good standing under the laws of the United States of
America.
3. Each of NLBI and Slatington has the requisite corporate power and
authority (including all federal, state, local and foreign governmental
authorizations) to carry on their respective businesses as they are now being
conducted and to own their respective properties and assets.
4. The authorized capital stock of NLBI consists of ___________ shares of
NLBI Common Stock, par value $10.00 per share, of which ______________ shares
are issued and outstanding and _________ shares are issued and held as treasury
shares. The authorized capital stock of Slatington consists of ________ shares
of common stock, $10.00 par value per share, of which _____________ shares of
common stock are issued and outstanding as of the date hereof, all of which are
held by NLBI. All of the outstanding shares of capital stock of NLBI and
Slatington have been duly authorized and are validly issued, fully paid and
nonassessable. Neither NLBI nor Slatington has any shares of capital stock
reserved for issuance except pursuant to the Investment Agreement.
5. To our actual knowledge, neither NLBI nor Slatington has any outstanding
bonds, debentures, notes or other obligations the holders of which have the
right to vote (or convertible into or exercisable for securities having the
right to vote) with shareholders on any matter. The shares of Slatington's
common stock owned by NLBI are owned free and clear of all liens, pledges,
security interests, claims or other encumbrances. The outstanding shares of
capital stock of NLBI and Slatington have not been issued in violation of any
preemptive rights. To our actual knowledge, other than as set forth in Annexes
3.1 (b) and 3.1(m) of the Agreement, and as provided in the Investment
Agreement, there are no outstanding subscriptions, options, warrants, rights,
convertible securities or other agreements or commitments of any character
relating to the issued or unissued capital stock or other securities of NLBI and
Slatington.
<PAGE>
6. To our actual knowledge, the only subsidiaries of NLBI and Slatington
are as set forth Annex 3.l(c) of the Agreement. Each such subsidiary is duly
organized and existing as a corporation, is in good standing under the laws of
the jurisdiction in which it was organized, and has adequate corporate power to
carry on its business as now conducted. All of the outstanding capital stock of
all such subsidiaries has been validly issued, is fully paid and nonassessable
and is owned by NLBI or Slatington, free and clear of all liens, security
interests and encumbrances. All such subsidiaries are organized under
Pennsylvania law and make no use of fictitious names in the conduct of their
respective businesses.
7. Each of NLBI and Slatington has the requisite corporate power and
authority to execute and deliver the Agreement and to carry out the transactions
contemplated therein, and all corporate actions required to be taken by NLBI and
Slatington to authorize the execution and delivery of the Agreement and the
performance of the transactions contemplated therein have been taken. The
Agreement has been duly authorized, executed and delivered by NLBI and
Slatington and constitutes a valid and binding obligation of NLBI and Slatington
and is enforceable against each 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.
8. The execution, delivery and performance of the Agreement will not, and
the execution, delivery and performance of the Investment Agreement will not,
and the consummation of the transactions contemplated thereby will not,
constitute (i) a breach or violation of, or a default under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, to
which NLBI or CNB (or any of its respective properties) is subject, which
breach, violation or default would have a Material Adverse Effect on it, or
enable any person to enjoin the Merger, (ii) a breach or violation of, or a
default under NLBI's articles of incorporation, the charter of Slatington, or
the bylaws of either of them, or (iii) except as disclosed in Annex 3.1(e), a
breach or violation of, or a default under (or an event which with due notice or
lapse of time or both would constitute a default under), or result in the
termination of, accelerate the performance required by, or result in the
creation of any lien, pledge, security interest, charge or other encumbrance
upon any of the properties or assets of NLBI or Slatington under any of the
terms, conditions or provisions of any note, bond, indenture, deed of trust,
loan agreement or other agreement, instrument or obligation to which either is a
party, or to which any of their respective properties or assets may be bound, or
affected, except for any of the foregoing that, individually or in the
aggregate, would not have a Material Adverse Effect on it or enable any person
to enjoin the Merger.
9. The consummation of the transactions contemplated by the Agreement does
not require as to NLBI or Slatington any approval, consent or waiver under any
such law, rule, regulation, judgment, decree, order, governmental permit or
license or , to our actual knowledge, the approval, consent or waiver of any
other party to any such agreement, indenture or instrument, other than (i) all
required approvals, consents and waivers of governmental
<PAGE>
authorities, (ii) the approval of its shareholders referred to in Section
6.1(a).
10. To our actual knowledge, except as set forth in Annex 3.1(i) to the
Agreement, there are no (i) civil, criminal or administrative actions, suits,
claims, hearings, investigations or proceedings before any court, governmental
agency or otherwise pending or, to the knowledge of management, threatened
against NLBI or Slatington or (ii) obligations or liabilities, whether or not
accrued (contingent or otherwise, including, without limitation, those relating
to environmental and occupational safety and health matters, or any other facts
or circumstances of which the management of NLBI or Slatington is aware that
could reasonably be expected to result in any claims against or obligations or
liabilities of either NLBI or Slatington), that, alone or in the aggregate, are
reasonably likely to have a Material Adverse Effect on NLBI or Slatington or to
hinder or delay, in any material respect, consummation of the transactions
contemplated by this Agreement.
11. To our actual knowledge, neither NLBI nor Slatington is a party to any
cease and desist order, written agreement or memorandum of understanding with,
or a party to any commitment letter or similar undertaking to, or is subject to
any order or directive by, or is a recipient of any extraordinary supervisory
letter from, or has adopted any board resolutions at the request of, federal or
state governmental authorities, including, without limitation, the NLBI
Regulatory Agencies, charged with the supervision or regulation of financial or
depository institutions or engaged in the insurance of bank deposits nor has it
been advised by any NLBI Regulatory Agency that such body is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter, board
resolution or similar undertaking.
The General Qualifications apply to the opinions expressed at paragraphs 3
and 8 hereof.
This opinion is furnished by us as Special Counsel to NLBI and Slatington
solely for your benefit and solely in connection with the above-described
transaction and for no other purpose. You may not, without our express written
approval, deliver copies of this opinion or extracts therefrom to any other
person and no one other than you is entitled to rely on this opinion. Our
opinion is as of the date hereof, and we undertake no duty to update such
opinion after the date hereof.
Sincerely,
<PAGE>
EXHIBIT D
<PAGE>
[Letterhead of Shumaker Williams, P.C.]
[Date of Closing]
Board of Directors
NORTHERN LEHIGH BANCORP, INC.
502 Main Street P.O. Box 8
Slatington, PA 18080-0008
VIA HAND DELIVERY
RE: Acquisition of Northern Lehigh Bancorp, Inc. ("NLBI") [and The
Citizens National Bank of Slatington]("Slatington") pursuant to a
merger of NLBI with and into HNC North, Inc. ("HNC North"), a wholly
owned subsidiary of Harleysville National Corporation ("HNC") [and a
merger of Slatington with and into The Citizens National Bank of
Lansford ("CNB")]
Our File No. 649-98
Ladies and Gentlemen:
We have acted as special counsel to Harleysville National Corporation
("HNC"), a Pennsylvania corporation, HNC North, Inc. ("HNC North"), a
Pennsylvania corporation and The Citizens National Bank of Lansford, a national
banking association ("CNB") in connection with the preparation of the Agreement
and Plan of Reorganization dated as of July 28, 1998 by and among HNC, HNC
North, CNB, Northern Lehigh Bancorp, Inc. ("NLBI"), a Pennsylvania corporation,
and The Citizens National Bank of Slatington ("Slatington"), a national banking
association (as amended, the "Agreement") in which the principal terms of the
merger (the "Merger") of NLBI with and into HNC North are set forth. We also
have participated on HNC's behalf in various matters and transactions related to
the Merger. This opinion letter is provided to you at the request of HNC
pursuant to Section 6.3(b) of the Agreement.
This Opinion Letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord of the ABA Section of Business Law (1991) (the
"Accord"). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this opinion letter should be
read in conjunction therewith. Except as otherwise indicated herein, capitalized
terms used in this opinion letter are defined as set forth in the Agreement or
the Accord. The law covered by the opinions expressed herein is limited to the
federal law of the United States and the laws of the Commonwealth of
Pennsylvania.
In connection with the opinions expressed herein, we have examined
originals or copies certified or otherwise identified to our satisfaction of the
articles of incorporation, the certificate of incorporation, the by-laws, the
Agreement, and such corporate and other records, certificates and documents as
we have considered necessary or appropriate for the purposes of rendering the
opinions set forth below.
<PAGE>
Based upon and subject to the foregoing and the other terms and provisions
hereof, we are of the opinion that:
1. HNC is a business corporation that is duly organized, validly existing
and in good standing under the laws of the Commonwealth of Pennsylvania as
evidenced in the Subsisting Corporation Certificate issued by the Commonwealth
of Pennsylvania, Corporation Bureau.
2. HNC North is a business corporation that is duly organized, validly
existing and duly subsisting under the laws of the Commonwealth of Pennsylvania.
All of the outstanding shares of capital stock of HNC North have been validly
issued, are fully paid and nonassessable and are owned directly by HNC free and
clear of any lien, charge or other encumbrance.
3. 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.
4. CNB is a national banking association which is duly organized and
validly existing and in good standing under the laws of the United States of
America and has full corporate power and authority to own and hold its
properties and to carry on its present business.
5. HNC, HNC North and CNB have full corporate power and authority to
execute and deliver the Agreement and to carry out the transactions contemplated
therein, and all corporate actions required to be taken by HNC, HNC North and
CNB to authorize the execution and delivery of the Agreement and the performance
of the transactions contemplated therein have been taken.
6. The Agreement has been duly authorized, executed and delivered by HNC,
HNC North and CNB and, assuming due authorization, execution and delivery by
NLBI and Slatington and receipt of required regulatory approvals and the
approval of the NLBI shareholders, constitutes a valid and binding obligation of
each of HNC, HNC North and CNB and is enforceable against HNC and HNC North 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.
7. The execution, delivery and consummation of the Agreement will not
constitute a violation or breach of or default under the Articles of
Incorporation or the Bylaws of HNC, HNC North or CNB or any statute, rule,
regulation, order, decree, directive, agreement, indenture or other instrument
to which any of them is a party or by which any of them or any of their
properties are bound.
<PAGE>
8. To our actual knowledge, except as disclosed in Annex 3.2(h) to the
Agreement: (i) there is no litigation, investigation or proceeding pending, or
to the knowledge of HNC threatened, that involves HNC, HNC North or CNB or any
of their properties and that, if determined adversely to any of them, would
materially and adversely affect the condition (financial or otherwise), assets,
liabilities, business, operations or future prospects of HNC, HNC North or CNB;
(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, HNC North or CNB which materially and adversely affect the condition
(financial or otherwise), assets, liabilities, business, operations or future
prospects of HNC, HNC North or CNB or restrict in any manner the right of any of
them to conduct its business as presently conducted; and (iii) we are 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,
HNC North or CNB, would materially and adversely affect the condition (financial
or otherwise), assets, liabilities, business, operations or future prospects of
HNC, HNC North or CNB.
9. 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, of
which as of the date hereof, __________ 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 under the Agreement have been duly authorized and, when issued in
accordance with the Agreement, will be validly issued, fully paid and
non-assessable.
The General Qualifications apply to the opinions set forth in paragraphs 5
and 7 hereof.
This opinion is furnished by us as Special Counsel to HNC, HNC North and
CNB, solely for your benefit and solely in connection with the above-described
transaction and for no other purpose. You may not, without our express written
approval, deliver copies of this opinion or extracts therefrom to any other
person and no one other than you is entitled to rely on this opinion. Our
opinion is as of the date hereof, and we undertake no duty to update such
opinion after the date hereof.
Sincerely,
SHUMAKER WILLIAMS, P.C.
By:
--------------------------------
Nicholas Bybel, Jr., Esquire
cc: Walter E. Daller, Jr., President and Chief Executive Officer
HARLEYSVILLE NATIONAL CORPORATION
Thomas D. Oleksa, President
THE CITIZENS NATIONAL BANK OF LANSFORD
<PAGE>
ANNEXES
to be executed by
HARLEYSVILLE NATIONAL CORPORATION
HNC NORTH, INC.
and
THE CITIZENS NATIONAL BANK OF LANSFORD
pursuant to provisions of
Sections 3.2, 3.3 and 3.4 of the attached
Agreement and Plan of Reorganization
Annex 3.2(f) Absence of Undisclosed Liabilities
None.
Annex 3.2(h) Litigation
None.
IN WITNESS WHEREOF, this Annex is executed as of the 28th day of July,
1998.
HARLEYSVILLE NATIONAL CORPORATION
By: /s/ Walter E. Daller, Jr.
------------------------------------
Walter E. Daller, Jr., President and
Chief Executive Officer
(CORPORATE SEAL)
Attest: /s/ Jo Ann M. Bynon
------------------------------------
Jo Ann M. Bynon, Secretary
ANNEX B
HOPPER SOLIDAY FAIRNESS OPINION
<PAGE>
HOPPER SOLIDAY & CO., INC.
Investment Bankers
1703 Oregon Pike, Lancaster, PA 17601-4201
P. O. Box 4548, Lancaster, PA 17604-4548
Telephone (717) 560-3006 Fax (717) 560-3063
November 12, 1998
Board of Directors
Northern Lehigh Bancorp, Inc.
502 Main Street
Slatington, PA 18080
Directors:
You have requested our opinion, as investment bankers, as to the fairness,
from a financial point of view, of the terms of the proposed acquisition (the
"Merger") of Northern Lehigh Bancorp, Inc. and its sole subsidiary ("Northern
Lehigh") by Harleysville National Corporation ("Harleysville"). Pursuant to the
Agreement and Plan or Reorganization (the "Agreement") dated July 28, 1998
between Northern Lehigh and its subsidiary and Harleysville and its
subsidiaries, each share of Northern Lehigh common Stock outstanding at the
Effective Time of Merger will be converted into and become the right to receive
3.57 shares of Harleysville Common Stock (the "Merger Consideration").
Hopper Soliday & Co., Inc. ("Hopper Soliday"), as a customary part of its
investment banking business, is engaged in valuing businesses and their
securities in connection with mergers and acquisitions, stock purchase offers,
negotiated underwritings, secondary distributions of securities, private
placements and for estate, corporate reorganization and other purposes.
Hopper Soliday reviewed, among other things: i) Northern Lehigh's Annual
Reports and related financial information for years ended December 31, 1995
through December 31, 1997 and Northern Lehigh's Quarterly FDIC Call Report and
related unaudited financial information for the period ending March 31, 1998;
ii) Harleysville's Annual Reports on Form 10-K and related financial information
for years ended December 31, 1996 and December 31, 1997 and Quarterly Report on
Form 10-Q for the period ended March 31, 1998; iii) certain information
concerning the respective businesses, operations, regulatory condition and
prospects of Harleysville and Northern Lehigh, including financial forecasts,
relating to the business, earnings, assets and prospects of Harleysville and
Northern Lehigh, furnished to Hopper Soliday by Harleysville and Northern
Lehigh, which Hopper Soliday discussed with members of senior management of
Harleysville and Northern Lehigh; iv) historical market prices and trading
activity for the Harleysville Common Stock and Northern Lehigh Common Stock and
similar data for certain publicly traded companies which Hopper Soliday deemed
to be relevant; v) the
<PAGE>
Board of Directors
November 12, 1998
Page 2
results of operations of Harleysville and Northern Lehigh and similar data for
certain companies which Hopper Soliday deemed to be relevant; vi) the financial
terms of the Merger contemplated by the Agreement and the financial terms of
certain other mergers and acquisitions which Hopper Soliday deemed to be
relevant; vii) the pro forma impact of the Merger on the earnings and book value
per share, consolidated capitalization and certain balance sheet and
profitability ratios of Harleysville; viii) the Agreement; ix) such other
matters as Hopper Soliday deemed necessary. Hopper Soliday also met with certain
members of senior management and other representatives of Harleysville and
Northern Lehigh to discuss the foregoing as well as other matters Hopper Soliday
deemed relevant.
In conducting our review and in arriving at our opinion, we relied upon and
assumed the accuracy and completeness of the financial and other information
provided to us or that which was publicly available and did not attempt
independently to verify such information. We relied upon the managements of
Harleysville and Northern Lehigh as to the reasonableness and achievability of
the financial and operating forecasts and projections reflected the best
currently available estimates and judgements of such managements and that such
forecasts and projections would be realized in the amounts and in the time
periods estimated by such managements. We also assumed, without independent
verification, that the aggregate allowances for loan losses for Harleysville and
Northern Lehigh were adequate to cover such losses. We did not make any or
obtain any evaluations or appraisals of the assets of Harleysville and Northern
Lehigh, nor did we examine any individual loan credit files. Our opinion is
limited to the fairness, from a financial point of view, to the shareholders of
Northern Lehigh of the Merger Consideration.
In connection with this opinion, Hopper Soliday confirmed the
appropriateness of its reliance on the analyses used to render its July 28, 1998
written opinion to the Board of Directors of Northern Lehigh Bancorp, Inc. by
performing procedures to update certain analyses and by reviewing the
assumptions upon which such analyses were based and the factors considered in
connection therewith.
In rendering our opinion we have assumed that in the course of obtaining
the necessary regulatory approvals for the Merger, no conditions will be imposed
that will have a material adverse effect on the contemplated benefits of the
Merger to either Harleysville or, on a pro forma basis, the resulting company
following the Merger. Our opinion necessarily is based upon conditions as they
exist on, and can be evaluated as of, the date of this letter.
We have acted as financial advisor to the Board of Directors of Northern
Lehigh in connection with this transaction and will receive a fee for our
services, a substantial portion of which is contingent upon the consummation of
the Merger. In the past, Hopper Soliday has
<PAGE>
Board of Directors
November 12, 1998
Page 3
provided financial advisory services for Northern Lehigh and has received fees
for rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of Northern Lehigh and may not be used for any other purpose without
our prior written consent, except that this opinion may be included in its
entirety in any filing with the Securities and Exchange Commission in connection
with the Merger. In addition, we express no opinion or recommendations as to how
the holders of Northern Lehigh Common Stock should vote at the stockholders'
meeting held in connection with the Merger.
On the basis of the aforementioned analysis, and subject to the
qualifications described above, as of the date hereof, we are of the opinion
that the Merger Consideration provided for by the Merger Agreement is fair to
the shareholders of Northern Lehigh from a financial point of view.
Sincerely,
/s/ Hopper Soliday & Co., Inc.
- ------------------------------
Hopper Soliday & Co., Inc.
<PAGE>
ANNEX C
PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988, AS AMENDED
EXCERPTS FROM SUBCHAPTER 19C
<PAGE>
PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988, AS AMENDED
EXCERPTS FROM SUBCHAPTER 19C
Section 1930. Dissenters rights
(a) General rule. If any shareholder of a domestic business corporation
that is to be a party to a merger or consolidation pursuant to a plan
of merger or consolidation objects to the plan of merger or
consolidation and complies with the provisions of Subchapter D of
Chapter 15 (relating to dissenters rights), the shareholder shall be
entitled to the rights and remedies of dissenting shareholders therein
provided, if any. See also section 1906(c) (relating to dissenters
rights upon special treatment).
SUBCHAPTER 15D
Dissenters Rights
Section:
1571. Application and effect of subchapter.
1572. Definitions.
1573. Record and beneficial holders and owners.
1574. Notice of intention to dissent.
1575. Notice to demand payment.
1576.Failure to comply with notice to demand payment, etc. 1577. Release of
restrictions or payment for shares. 1578. Estimate by dissenter of fair
value of shares. 1579. Valuation proceedings generally. 1580. Costs and
expenses of valuation proceedings.
Section 1571. Application and effect of Subchapter.
(a) General rule. Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent
from, and to obtain payment of the fair value of his shares in the
event of, any corporate action, or to otherwise obtain fair value for
his shares, where this part expressly provides that a shareholder
shall have the rights and remedies provided in this subchapter. See:
Section 1906(c) (relating to dissenters rights upon special
treatment).
Section 1930 (relating to dissenters rights).
Section 1931(d) (relating to dissenters rights in share exchanges).
Section 1932(c) (relating to dissenters rights in asset transfers).
Section 1952(d) (relating to dissenters rights in division).
Section 1962(c) (relating to dissenters rights in conversion).
<PAGE>
Section 2104(b) (relating to procedure).
Section 2324 (relating to corporation option where a restriction on
transfer of a security is held invalid).
Section 2325(b) (relating to minimum vote requirement).
Section 2704(c) (relating to dissenters rights upon election).
Section 2705(d) (relating to dissenters rights upon renewal of
election).
Section 2907(a) (relating to proceedings to terminate breach of
qualifying conditions).
Section 7104(b)(3) (relating to procedure).
(b) Exceptions.
(1) Except as otherwise provided in paragraph (2), the holders of the
shares of any class or series of shares that, at the record date
fixed to determine the shareholders entitled to notice of and to
vote at the meeting at which a plan specified in any of section
1930, 1931(d), 1932(c) or 1952(d) is to be voted on, are either:
(i) listed on a national securities exchange; or
(ii) held of record by more than 2,000 shareholders;
shall not have the right to obtain payment of the fair value of
any such shares under this subchapter.
(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that
paragraph in the case of:
(i) Shares converted by a plan if the shares are not converted
solely into shares of the acquiring, surviving, new or other
corporation or solely into such shares and money in lieu of
fractional shares.
(ii) Shares of any preferred or special class unless the
articles, the plan or the terms of the transaction entitle
all shareholders of the class to vote thereon and require
for the adoption of the plan or the effectuation of the
transaction the affirmative vote of a majority of the votes
cast by all shareholders of the class.
(iii)Shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).
(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares,
property or assets of another corporation by the issuance of shares,
obligations or otherwise, with or without assuming the liabilities of
the other corporation and with or without the intervention of another
corporation or other person, shall not be
<PAGE>
entitled to the rights and remedies of dissenting shareholders
provided in this subchapter regardless of the fact, if it be the case,
that the acquisition was accomplished by the issuance of voting shares
of the corporation to be outstanding immediately after the acquisition
sufficient to elect a majority or more of the directors of the
corporation.
(c) Grant of optional dissenters rights. The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders
shall have dissenters rights in connection with any corporate action
or other transaction that would otherwise not entitle such
shareholders to dissenters rights.
(d) Notice of dissenters rights. Unless otherwise provided by statute, if
a proposed corporate action that would give rise to dissenters rights
under this subpart is submitted to a vote at a meeting of
shareholders, there shall be included in or enclosed with the notice
of meeting:
(1) a statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the
fair value of their shares by complying with the terms of this
subchapter; and
(2) a copy of this subchapter.
(e) Other statutes. The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this
part that makes reference to this subchapter for the purpose of
granting dissenters rights.
(f) Certain provisions of articles ineffective. This subchapter may not be
relaxed by any provision of the articles.
(g) Cross references. See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine
abolished) and 2512 (relating to dissenters rights procedure).
Section 1572. Definitions.
The following words and phrases when used in this subchapter shall have the
meanings given to them in this section unless the context clearly indicates
otherwise:
"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation,
division, conversion or otherwise of that issuer. A plan of division may
designate which of the resulting corporations is the successor corporation
for the purposes of this subchapter. The successor corporation in a
division shall have sole responsibility for payments to dissenters and
other liabilities under this subchapter except as otherwise provided in the
plan of division.
<PAGE>
"Dissenter." A shareholder or beneficial owner who is entitled to and does
assert dissenters rights under this subchapter and who has performed every
act required up to the time involved for the assertion of those rights.
"Fair value." The fair value of shares immediately before the effectuation
of the corporate action to which the dissenter objects, taking into account
all relevant factors, but excluding any appreciation or depreciation in
anticipation of the corporate action.
"Interest." Interest from the effective date of the corporate action until
the date of payment at such rate as is fair and equitable under all of the
circumstances, taking into account all relevant factors, including the
average rate currently paid by the corporation on its principal bank loans.
Section 1573. Record and beneficial holders and owners.
(a) Record holders of shares. A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the
shares registered in his name only if he dissents with respect to all
the shares of the same class or series beneficially owned by any one
person and discloses the name and address of the person or persons on
whose behalf he dissents. In that event, his rights shall be
determined as if the shares as to which he has dissented and his other
shares were registered in the names of different shareholders.
(b) Beneficial owners of shares. A beneficial owner of shares of a
business corporation who is not the record holder may assert
dissenters rights with respect to shares held on his behalf and shall
be treated as a dissenting shareholder under the terms of this
subchapter if he submits to the corporation not later than the time of
the assertion of dissenters rights a written consent of the record
holder. A beneficial owner may not dissent with respect to some but
less than all shares of the same class or series owned by the owner,
whether or not the shares so owned by him are registered in his name.
Section 1574. Notice of intention to dissent.
If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent
and obtain payment of the fair value of his shares must file with the
corporation, prior to the vote, a written notice of intention to demand
that he be paid the fair value for his shares if the proposed action is
effectuated, must effect no change in the beneficial ownership of his
shares from the date of such filing continuously through the effective date
of the proposed action and must refrain from voting his shares in approval
of such action. A dissenter who fails in any respect shall not acquire any
right to payment of the fair value of his shares under this subchapter.
Neither a proxy nor a vote against the proposed corporate action shall
constitute the written notice required by this section.
<PAGE>
Section 1575. Notice to demand payment.
(a) General rule. If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation,
the corporation shall mail a further notice to all dissenters who gave
due notice of intention to demand payment of the fair value of their
shares and who refrained from voting in favor of the proposed action.
If the proposed corporate action is to be taken without a vote of
shareholders, the corporation shall send to all shareholders who are
entitled to dissent and demand payment of the fair value of their
shares a notice of the adoption of the plan or other corporate action.
In either case, the notice shall:
(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order
to obtain payment.
(2) Inform holders of uncertificated shares to what extent transfer
of shares will be restricted from the time that demand for
payment is received.
(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person
on whose behalf the shareholder dissents, acquired beneficial
ownership of the shares.
(4) Be accompanied by a copy of this subchapter.
(b) Time for receipt of demand for payment. The time set for receipt of
the demand and deposit of certificated shares shall be not less than
30 days from the mailing of the notice.
Section 1576. Failure to comply with notice to demand payment, etc.
(a) Effect of failure of shareholder to act. A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares)
to timely deposit certificates, as required by a notice pursuant to
section 1575 (relating to notice to demand payment) shall not have any
right under this subchapter to receive payment of the fair value of
his shares.
(b) Restriction on uncertificated shares. If the shares are not
represented by certificates, the business corporation may restrict
their transfer from the time of receipt of demand for payment until
effectuation of the proposed corporate action or the release of
restrictions under the terms of section 1577(a) (relating to failure
to effectuate corporate action).
(c) Rights retained by shareholder. The dissenter shall retain all other
rights of a shareholder until those rights are modified by
effectuation of the proposed corporate action.
<PAGE>
Section 1577. Release of restrictions or payment for shares.
(a) Failure to effectuate corporate action. Within 60 days after the date
set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it
shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason
of the demand for payment.
(b) Renewal of notice to demand payment. When uncertificated shares have
been released from transfer restrictions and deposited certificates
have been returned, the corporation may at any later time send a new
notice conforming to the requirements of section 1575 (relating to
notice to demand payment), with like effect.
(c) Payment of fair value of shares. Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for
payment if the corporate action has already been effectuated, the
corporation shall either remit to dissenters who have made demand and
(if their shares are certificated) have deposited their certificates
the amount that the corporation estimates to be the fair value of the
shares, or give written notice that no remittance under this section
will be made. The remittance or notice shall be accompanied by:
(1) The closing balance sheet and statement of income of the issuer
of the shares held or owned by the dissenter for a fiscal year
ending not more than 16 months before the date of remittance or
notice together with the latest available interim financial
statements.
(2) A statement of the corporation's estimate of the fair value of
the shares.
(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy
of this subchapter.
(d) Failure to make payment. If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by
subsection (c), it shall return any certificates that have been
deposited and release uncertificated shares from any transfer
restrictions imposed by reason of the demand for payment. The
corporation may make a notation on any such certificate or on the
records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which
notation has been so made shall be transferred, each new certificate
issued therefor or the records relating to any transferred
uncertificated shares shall bear a similar notation, together with the
name of the original dissenting holder or owner of such shares. A
transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those that the original dissenter
had after making demand for payment of their fair value.
<PAGE>
Section 1578. Estimate by dissenter of fair value of shares.
(a) General rule. If the business corporation gives notice of its estimate
of the fair value of the shares, without remitting such amount, or
remits payment of its estimate of the fair value of a dissenter's
shares as permitted by section 1577(c) (relating to payment of fair
value of shares) and the dissenter believes that the amount stated or
remitted is less than the fair value of his shares, he may send to the
corporation his own estimate of the fair value of the shares, which
shall be deemed a demand for payment of the amount or the deficiency.
(b) Effect of failure to file estimate. Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing
by the corporation of its remittance or notice, the dissenter shall be
entitled to no more than the amount stated in the notice or remitted
to him by the corporation.
Section 1579. Valuation proceedings generally.
(a) General rule. Within 60 days after the latest of:
(1) effectuation of the proposed corporate action;
(2) timely receipt of any demands for payment under Section 1575
(relating to notice to demand payment); or
(3) timely receipt of any estimates pursuant to section 1578
(relating to estimate by dissenter of fair value of shares);
if any demands for payment remain unsettled, the business corporation
may file in court an application for relief requesting that the fair
value of the shares be determined by the court.
(b) Mandatory joinder of dissenters. All, dissenters, wherever residing,
whose demands have not been settled shall be made parties to the
proceeding as in an action against their shares. A copy of the
application shall be served on each such dissenter. If a dissenter is
a nonresident, the copy may be served on him in the manner provided or
prescribed by or pursuant to 42 Pa.C.S. Ch. 53 (relating to bases of
jurisdiction and interstate and international procedure).
(c) Jurisdiction of the court. The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive
evidence and recommend a decision on the issue of fair value. The
appraiser shall have such power and authority as may be specified in
the order of appointment or in any amendment thereof.
<PAGE>
(d) Measure of recovery. Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares
is found to exceed the amount, if any, previously remitted, plus
interest.
(e) Effect of corporation's failure to file application. If the
corporation fails to file an application as provided in subsection
(a), any dissenter who made a demand and who has not already settled
his claim against the corporation may do so in the name of the
corporation at any time within 30 days after the expiration of the
60-day period. If a dissenter does not file an application within the
30-day period, each dissenter entitled to file an application shall be
paid the corporation's estimate of the fair value of the shares and no
more, and may bring an action to recover any amount not previously
remitted.
Section 1580. Costs and expenses of valuation proceedings.
(a) General rule. The costs and expenses of any proceeding under section
1579 (relating to valuation proceedings generally), including the
reasonable compensation and expenses of the appraiser appointed by the
court, shall be determined by the court and assessed against the
business corporation except that any part of the costs and expenses
may be apportioned and assessed as the court deems appropriate against
all or some of the dissenters who are parties and whose action in
demanding supplemental payment under section 1578 (relating to
estimate by dissenter of fair value of shares) the court finds to be
dilatory, obdurate, arbitrary, vexatious or in bad faith.
(b) Assessment of counsel fees and expert fees where lack of good faith
appears. Fees and expenses of counsel and of experts for the
respective parties may be assessed as the court deems appropriate
against the corporation and in favor of any or all dissenters if the
corporation failed to comply substantially with the requirements of
this subchapter and may be assessed against either the corporation or
a dissenter, in favor of any other party, if the court finds that the
party against whom the fees and expenses are assessed acted in bad
faith or in a dilatory, obdurate, arbitrary or vexatious manner in
respect to the rights provided by this subchapter.
(c) Award of fees for benefits to other dissenters. If the court finds
that the services of counsel for any dissenter were of substantial
benefit to other dissenters similarly situated and should not be
assessed against the corporation, it may award to those counsel
reasonable fees to be paid out of the amounts awarded to the
dissenters who were benefitted.
<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) 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 Amended 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 Pennsylvania Business
Corporation Law of 1988, as amended .
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits:
2.1 Agreement and Plan of Reorganization (the "Agreement") dated July 28,
1998, among Harleysville National Corporation, Harleysville National
Corporation North, Inc., The Citizens National Bank of Lansford,
Northern Lehigh Bancorp, Inc. and The Citizens National Bank of
Slatington (Included in Annex A to the Proxy Statement contained
herein).
2.2 Investment Agreement (Included as Exhibit B to the Agreement, which
Agreement is included in Annex A to the Proxy Statement contained
herein).
3(i) Harleysville National Corporation Amended Articles of Incorporation.
(Incorporated by reference to Exhibit 4A to Harleysville National
Corporation's Registration Statement No. 333-17813 on Form S-8, filed
on December 13, 1996.)
3(ii)Harleysville National Corporation Amended Bylaws. (Incorporated by
reference to Exhibit 4B to Harleysville National Corporation 's
Registration Statement No. 333-17813 on Form S-8, filed on December
13, 1996.)
4.1 Harleysville National Corporation Amended Articles of Incorporation.
(Incorporated by reference to Exhibit 4A to Harleysville National
Corporation's Registration Statement No. 333-17813 on Form S-8, filed
on December 13, 1996.)
<PAGE>
4.2 Harleysville National Corporation Amended Bylaws. (Incorporated by
reference to Exhibit 4B to Harleysville National Corporation's
Registration Statement No. 333-17813 on Form S-8, filed on December
13, 1996.)
5 Opinion of Shumaker Williams, P.C. re: Legality of Harleysville
National Corporation Common Stock.
8 Form of Opinion of Grant Thornton, LLP re: Tax Matters. (Included in
the proxy statement/prospectus "APPROVAL OF THE MERGER -- Federal
Income Tax Consequences.")
10.1 Harleysville National Corporation 1993 Stock Incentive Plan.
(Incorporated by Reference to Exhibit 4.3 of Registration Statement
No. 33-57790 on Form S-8, filed with the Commission on October 1,
1993.)
10.2 Harleysville National Corporation Stock Bonus Plan. (Incorporated by
Reference to Exhibit 99A of Registration Statement No. 33-17813 on
Form S-8, filed with the Commission on December 13, 1996.)
10.3 Supplemental Executive Retirement Plan. (Incorporated by Reference to
Exhibit 10.3 to the Annual Report on Form 10-K of Harleysville
National Corporation for the year ended December 31, 1997, filed on
March 27, 1998.)
10.4 Executive Employment Agreement, dated as of July 28, 1998, between The
Citizens National Bank of Lansford and Francis P. Burbidge.
10.5 Consulting Agreement, dated as of July 28, 1998, between The Citizens
National Bank of Lansford and Francis P. Burbidge.
10.6 Release Agreement, dated as of July 28, 1998, by and among The
Citizens National Bank of Lansford, The Citizens National Bank of
Slatington, Harleysville National Corporation, Northern Lehigh
Bancorp, Inc. and Francis P. Burbidge.
11 Statement re: Computation of Earnings Per Share. (Included at page 11
of the Joint proxy statement/prospectus contained herein.)
<PAGE>
12 Computation of Ratios. (Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.)
21 Subsidiaries of Registrant.
23.1 Consent of Shumaker Williams, P.C.
23.2 Consent of Grant Thornton, LLP.
23.3 Consent of Stokes Kelly & Hinds, LLC.
23.4 Consent of Hopper Soliday & Co., Inc.
24 Power of Attorney.
99.1 Form of Northern Lehigh Bancorp, Inc. Proxy.
99.2 Letter to Shareholders of Northern Lehigh Bancorp, Inc.
99.3 Notice of Meeting.
99.4 Statute Relating to Dissenters' Rights. (Included as Annex C to the
Proxy Statement contained herein.)
(b) Financial Statement Schedules:
None required.
(c) Opinion of Financial Advisor:
The Opinion of Financial Advisor is included in the proxy
statement/prospectus as Annex B.
Item 22. Undertakings.
(a)
1. The undersigned Registrant hereby undertakes as follows:
<PAGE>
(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;
(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;
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 Exchange Act that are incorporated by
reference in the registration statement.
(B) That, for the purpose of determining any liability under the
Securities Act, 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, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) 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
<PAGE>
that, for purposes of determining any liability under the Securities Act, 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 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 Commission such
indemnification is against 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 2 to Registrant's Registration
Statement No. 333-67201 to be signed on its behalf by the undersigned, hereunto
duly authorized, in the City of Harleysville, Commonwealth of Pennsylvania on
December 4, 1998.
HARLEYSVILLE NATIONAL CORPORATION
By: /s/ Walter E. Daller, Jr.
-----------------------------------
Walter E. Daller, Jr.
President, CEO and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 2 to Registrant's Registration Statement No.
333-67201 has been signed by the following persons in the capacities and on the
dates indicated
<TABLE>
<CAPTION>
Capacity Date
-------- -----
<S> <C> <C>
Walter E. Daller, Jr. President, CEO and Chairman December 4, 1998
of the Board and Director
(Principal Executive Officer)
Vernon L. Hunsberger Treasurer December 4, 1998
(Principal Accounting or
Financial Officer)
John W. Clemens Director December 4, 1998
Martin E. Fossler Director December 4, 1998
Harold A. Herr Director December 4, 1998
Thomas S. McCready Director December 4, 1998
Henry M. Pollak Director December 4, 1998
Palmer E. Retzlaff Director December 4, 1998
Walter F. Vilsmeier Director December 4, 1998
William M. Yocum Director December 4, 1998
By /s/ Walter E. Daller, Jr.
-------------------------
Walter E. Daller, Jr.
(Attorney-in-Fact)
By /s/ Demetra M. Takes
--------------------------
Demetra M. Takes
(Attorney-in-Fact)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Page
Number
In Sequential
Number
Number Title System
------ ----- -------------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization (the "Agreement") dated July 28,
1998, among Harleysville National Corporation, Harleysville National
Corporation North, Inc., The Citizens National Bank of Lansford,
Northern Lehigh Bancorp, Inc. and The Citizens National Bank of
Slatington (Included in Annex A to the Proxy Statement contained
herein).
2.2 Investment Agreement (Included as Exhibit B to the Agreement, which
Agreement is included in Annex A to the Proxy Statement contained
herein).
3(i) Harleysville National Corporation Amended Articles of Incorporation.
(Incorporated by reference to Exhibit 4A to Harleysville National
Corporation 's Registration Statement No. 333-17813 on Form S-8, filed
on December 13, 1996.)
3(ii)Harleysville National Corporation Amended Bylaws. (Incorporated by
reference to Exhibit 4B to Harleysville National Corporation 's
Registration Statement No. 333-17813 on Form S-8, filed on December
13, 1996.)
4.1 Harleysville National Corporation Amended Articles of Incorporation.
(Incorporated by reference to Exhibit 4A to Harleysville National
Corporation 's Registration Statement No. 333-17813 on Form S-8, filed
on December 13, 1996.)
4.2 Harleysville National Corporation Amended Bylaws. (Incorporated by
reference to Exhibit 4B to Harleysville National Corporation 's
Registration Statement No. 333-17813 on Form S-8, filed on December
13, 1996.)
5 Opinion of Shumaker Williams, P.C. re: Legality of Harleysville
National Corporation Common Stock.
8 Form of Opinion of Grant Thornton, LLP re: Tax Matters. (Included in
the proxy statement/prospectus "APPROVAL OF THE MERGER -- Federal
Income Tax Consequences.")
<PAGE>
10.1 Harleysville National Corporation 1993 Stock Incentive Plan.
(Incorporated by Reference to Exhibit 4.3 of Registration Statement
No. 33-57790 on Form S-8, filed with the Commission on October 1,
1993.)
10.2 Harleysville National Corporation Stock Bonus Plan. (Incorporated by
Reference to Exhibit 99A of Registration Statement No. 33-17813 on
Form S-8, filed with the Commission on December 13, 1996.)
10.3 Supplemental Executive Retirement Plan. (Incorporated by Reference to
Exhibit 10.3 to the Annual Report on Form 10-K of Harleysville
National Corporation for the year ended December 31, 1997, filed on
March 27, 1998.)
10.4 Executive Employment Agreement, dated as of July 28, 1998, between The
Citizens National Bank of Lansford and Francis P. Burbidge.*
10.5 Consulting Agreement, dated as of July 28, 1998, between The Citizens
National Bank of Lansford and Francis P. Burbidge.*
10.6 Release Agreement, dated as of July 28, 1998, by and among The
Citizens National Bank of Lansford, The Citizens National Bank of
Slatington, Harleysville National Corporation, Northern Lehigh
Bancorp, Inc. and Francis P. Burbidge.*
11 Statement re: Computation of Earnings Per Share. (Included at page 11
of the proxy statement/prospectus contained herein.)
12 Computation of Ratios. (Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.)
21 Subsidiaries of Registrant.*
23.1 Consent of Shumaker Williams, P.C. (Included as part of Exhibit 5.)
23.2 Consent of Grant Thornton, LLP.
23.3 Consent of Stokes Kelly & Hinds, LLC.
23.4 Consent of Hopper Soliday & Co., Inc.*
<PAGE>
24 Power of Attorney.*
99.1 Form of Northern Lehigh Bancorp, Inc. Proxy.
99.2 Letter to Shareholders of Northern Lehigh Bancorp, Inc.
99.3 Notice of Meeting.
99.4 Statute Relating to Dissenters' Rights. (Included as Annex C to the
Proxy Statement contained herein.)
__________________________
* Previously Filed.
</TABLE>
SHUMAKER WILLIAMS, P.C.
3425 SIMPSON FERRY ROAD
CAMP HILL, PENNSYLVANIA 17011
717-763-1121
December 4, 1998
Mr. Walter E. Daller, Jr. Mr. Joseph G. Bechtel
President and CEO President
HARLEYSVILLE NATIONAL CORPORATION NORTHERN LEHIGH BANCORP, INC.
483 Main Street 502 Main Street
Harleysville, PA 19438 Slatington, PA 18080
RE: Harleysville National Corporation/Northern Lehigh Bancorp, Inc.
Our File No. 649-98
Gentlemen:
In connection with the proposed offering of up to 515,858 shares of common
stock, par value $1.00 per share (the "Common Stock"), by Harleysville National
Corporation (the "Company"), covered by the Company's Registration Statement on
Form S-4 (the "Registration Statement") filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Common Stock, we, as special counsel to the Company, have reviewed:
1. Articles of Incorporation of the Company;
2. The Bylaws of the Company;
3. Resolutions adopted by the Board of Directors of the Company relating to
the Registration Statement, certified by the Secretary of the Company;
4. The Agreement and Plan of Reorganization, dated as of July 28, 1998, by and
among, the Company, Harleysville National Corporation North, Inc., The
Citizens National Bank of Lansford, Northern Lehigh Bancorp, Inc. and The
Citizens National Bank of Slatington (the "Agreement");
5. The Registration Statement; and
6. Copies of the certificates representing shares of the Common Stock.
Based on our review of the foregoing, it is our opinion that:
a. The Company has been duly incorporated under the laws of the
Commonwealth of Pennsylvania and is validly existing and in good standing under
the laws of the Commonwealth; and
<PAGE>
b. The Common Stock covered by the Registration Statement has been duly
authorized and, when issued pursuant to the terms described in the Registration
Statement and the Agreement, will be legally issued by the Company and fully
paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the reference to us in the related Proxy Statement/Prospectus. In
giving this consent, we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ Shumaker Williams, P.C.
----------------------------
SHUMAKER WILLIAMS, P.C.
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 8, 1998 accompanying the
consolidated financial statements of Harleysville National Corporation and
Subsidiaries included in the Annual Report on Form 10-K for the year ended
December 31, 1997, which is incorporated by reference in this Registration
Statement and Proxy Statement/Prospectus. We consent to the incorporation by
reference of the aforementioned report in the Registration Statement and Proxy
Statement/Prospectus and to the use of our name as it appears under the caption
"Experts."
/s/ Grant Thornton LLP
----------------------------
Grant Thornton, LLP
Philadelphia, Pennsylvania
December 2, 1998
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the inclusion in the Registration Statement on Form S-4 of
Harleysville National Corporation, filed with the Commission in connection with
the registration of 515,858 shares of common stock, par value $1.00 per share,
of our report, dated January 29, 1998, relating to the consolidated balance
sheets of Northern Lehigh Bancorp, Inc. and subsidiary as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows and of our report, dated February 6, 1997,
relating to the consolidated balance sheets of Northern Lehigh Bancorp, Inc. and
subsidiary as of December 31, 1996 and 1995, and the related consoidated
statements of income, changes in shareholders' equity and cash flows. We also
consent to the reference to our firm under the caption "Experts" in the related
Proxy Statement/Prospectus.
/s/ Stokes Kelly & Hinds, LLC
-----------------------------------
Stokes Kelly & Hinds, LLC
Pittsburgh, Pennsylvania
December 4, 1998
Exhibit 99.1
NORTHERN LEHIGH BANCORP, INC.
PROXY
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 14, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Richard A. Fox, George L.
Dilliard and Richard C. Mantz and each or any of them, proxies of the
undersigned, with full power of substitution, to vote all of the shares of
Northern Lehigh Bancorp, Inc. that the undersigned may be entitled to vote at
the Special Meeting of Shareholders of the company to be held at 510 Main Street
(next to The Citizens National Bank of Slatington's Main Office) in Slatington,
Pennsylvania 18080 on Thursday, January 14, 1999, commencing at 1:00 p.m.,
Eastern Standard Time, and at any adjournment or postponement thereof, as
follows:
1. PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF REORGANIZATION.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
2. PROPOSAL TO POSTPONE OR ADJOURN THE SPECIAL MEETING OF SHAREHOLDERS TO
ANOTHER TIME AND/OR PLACE FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES,
IN THE EVENT THAT THERE ARE NOT SUFFICIENT VOTES AT THE TIME OF THE SPECIAL
MEETING TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF REORGANIZATION.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The Board of Directors recommends a vote FOR this proposal.
<PAGE>
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting and any
adjournment or postponement thereof.
THIS PROXY, WHEN PROPERLY SIGNED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1 AND FOR PROPOSAL 2.
Dated: _______________________ , 199__
__________________________________________
Signature of Shareholder
__________________________________________
Signature of Shareholder
Number of Shares Held of Record
on November 16, 1998
__________________________________
THIS PROXY MUST BE DATED, SIGNED BY THE SHAREHOLDER AND RETURNED PROMPTLY
TO THE COMPANY IN THE ENCLOSED ENVELOPE. WHEN SHARES ARE HELD BY JOINT TENANTS,
BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR
GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF MORE THAN ONE TRUSTEE, ALL SHOULD
SIGN. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR
AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON.
EXHIBIT 99.2
[NORTHERN LEHIGH BANCORP, INC. LETTERHEAD]
December 11, 1998
Dear Shareholder:
You are invited to attend a special meeting of the shareholders of your
company, Northern Lehigh Bancorp, Inc., the holding company for The Citizens
National Bank of Slatington. This special meeting will be held on Thursday,
January 14, 1999, at 1:00 p.m., at 510 Main Street, (next to the Bank's Main
Office), Slatington, Pennsylvania 18080. The main purpose of the meeting is to
vote on the merger of Northern Lehigh Bancorp, Inc. with a subsidiary of
Harleysville National Corporation, a bank holding company located in
Harleysville, Montgomery County, Pennsylvania. If the merger is completed, you
will receive 3.57 shares of Harleysville National Corporation common stock in
exchange for each of your shares of Northern Lehigh Bancorp. Inc. The exchange
of Northern Lehigh stock for Harleysville National Corporation stock (other than
cash paid for fractional shares) will be tax-free to Northern Lehigh
shareholders for federal income purposes. Completion of the merger is subject to
certain conditions. The two principal conditions that the merger must meet are
that the shareholders of Northern Lehigh Bancorp, Inc. approve the merger and
that certain banking regulatory agencies approve the merger.
The attached notice of special meeting and proxy statement/prospectus
describe the formal business to be transacted at the meeting. The directors and
officers of Northern Lehigh Bancorp, Inc. will be present at the meeting to
respond to any questions from our shareholders.
We urge you to carefully read the enclosed proxy statement/prospectus that
describes the merger in detail and the requirements needed to complete the
merger. The information contained in the "SUMMARY" portion of the proxy
statement/prospectus gives a basic description of the merger. If you have any
questions after a review of the proxy statement/prospectus consult with your own
advisors or contact Francis P. Burbidge, First Vice President of the
Corporation, telephone (610) 767-3887.
Hopper Soliday & Co., Inc., Northern Lehigh Bancorp, Inc's investment
banker, provided the Board of Directors with an opinion that the consideration
to be received by the shareholders in the merger transaction is fair, from a
financial point of view.
Your Board of Directors believes that the merger is in the best interests
of the shareholders and urges you to vote for the merger.
Sincerely yours,
/s/ Joseph G. Bechtel
------------------------
/s/ Joseph G. Bechtel
Chairman of the Board of
Directors and President
EXHIBIT 99.3
NORTHERN LEHIGH BANCORP, INC.
502 Main Street
Slatington, Pennsylvania
(610) 767-3887
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON JANUARY 14, 1999
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Northern
Lehigh Bancorp, Inc. will be held at 1:00 p.m., Eastern Standard Time, on
Thursday, January 14, 1999, at 510 Main Street, (next to the Main Office of The
Citizens National Bank of Slatington), Slatington, Pennsylvania 18080. We
enclose a form of proxy and a proxy statement/prospectus for the meeting.
We are holding the meeting for the purpose of considering and acting upon
the following matters:
1. Approval and adoption of the Agreement and Plan of Reorganization, dated
July 28, 1998 by and among Harleysville National Corporation, Harleysville
National Corporation North, Inc., The Citizens National Bank of Lansford,
Northern Lehigh Bancorp, Inc. and The Citizens National Bank of Slatington. The
agreement provides that Northern Lehigh Bancorp, Inc. will merge with
Harleysville National Corporation North, Inc. and, immediately thereafter, The
Citizens National Bank of Slatington will merge with The Citizens National Bank
of Lansford. Upon completion of the merger, each Northern Lehigh Bancorp, Inc.
shareholder will have the right to receive 3.57 shares of Harleysville National
Corporation common stock, par value $1.00 per share, in exchange for each share
of common stock of Northern Lehigh Bancorp, Inc., par value $10.00 per share,
held by the shareholder;
2. Postponement or adjournment of the meeting to a later date, if
necessary, to permit the solicitation of additional proxies in the event that
there are not sufficient votes at the time of the meeting to approve the
agreement and the merger; and
3. Other matters as may properly come before the meeting and any
adjournment or postponement of the meeting.
We may take action on any one of these proposals at the meeting, or on any
dates to which, we may adjourn the meeting. Only those shareholders whose
ownership appears on the shareholder records of Northern Lehigh Bancorp, Inc. at
the close of business on Monday, November 16, 1998, will be entitled to receive
notice of the meeting and to vote at the meeting.
Your Board of Directors believes that this merger is in the best interests
of Northern Lehigh Bancorp, Inc. and its shareholders. Our reasons for this
belief are provided in the enclosed proxy statement/prospectus. We urge you to
vote for the merger. Your participation at the meeting, in
<PAGE>
person or by sending in a completed proxy, is important. We need the affirmative
vote of at least 66 2/3% of the outstanding shares of common stock to approve
the merger.
If you do not send in a completed proxy or you do not attend the meeting
and vote, it has the same effect as voting against the merger. Therefore, we
urge you to complete, sign, date and return the enclosed form of proxy in the
enclosed postage-paid envelope as soon as possible so that your shares will be
voted at the meeting. If you do attend the meeting and wish to vote in person,
you can do so by giving written notice to the Secretary of the Northern Lehigh
Bancorp, Inc. Your ballot at the meeting will replace your proxy.
On behalf of the Board of Directors, I thank you for your support and urge
you to vote "FOR" approval of the agreement and merger.
By Order of the Board of Directors,
/s/ Joseph G. Bechtel
----------------------------------
Joseph G. Bechtel
Chairman of the Board of Directors
and President
Slatington, Pennsylvania
December 11, 1998
