As filed with the Securities and Exchange Commission on November 12, 1998
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------------------
HARLEYSVILLE NATIONAL CORPORATION
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(Exact name of Registrant as specified in its charter)
Pennsylvania
------------------------------
(State or other jurisdiction of
incorporation or organization)
6711
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(Primary Standard Industrial
Classification Code Number)
23-2210237
----------------------------
(I.R.S. Employer
Identification No.)
Walter E. Daller, Jr.
President and Chief Executive Officer
HARLEYSVILLE NATIONAL CORPORATION HARLEYSVILLE NATIONAL CORPORATION
Post Office Box 195 Post Office Box 195
483 Main Street 483 Main Street
Harleysville, Pennsylvania 19438 Harleysville, Pennsylvania 19438
(215) 256-8851 (215) 256-8851
- ------------------------------------- ------------------------------
(Address, including ZIP Code, and telephone (Name, address, including ZIP
number, including area code, of registrant's Code, and telephone number,
principal executive offices) including area code, of agent
for service)
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
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
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 to be Offering Price Aggregate Registration
be Registered Registered Per Share Offering Price(2) Fee
---------------- ---------- ------------ ----------------- --------------
<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
<FN>
(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.
</FN>
</TABLE>
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.
<PAGE>
[NORTHERN LEHIGH BANCORP, INC. LETTERHEAD]
November 27, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of the Shareholders
of Northern Lehigh Bancorp, Inc. (the "Corporation"), the holding company for
The Citizens National Bank of Slatington (the "Bank"), to be held on Tuesday,
January 5, 1999, 1:00 p.m., prevailing time, at 510 Main Street, (next to the
Bank's Main Office), Slatington, Pennsylvania 18080. The primary purpose of the
meeting is to consider and vote upon a merger of the Corporation with and into
Harleysville National Corporation North, Inc., a subsidiary of Harleysville
National Corporation, a Pennsylvania bank holding company located in
Harleysville, Montgomery County, Pennsylvania, and the merger of The Citizens
National Bank of Slatington with, into and under the charter of The Citizens
National Bank of Lansford, under the name "Citizens National Bank." Completion
of the transaction is subject to certain conditions, including approval of 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, the Corporation, and the Bank (the
"Agreement") by the requisite vote of the Corporation's shareholders and
approval by various regulatory agencies.
The attached Notice of Special Meeting and Proxy Statement/Prospectus
describe the formal business to be transacted at the meeting. Directors and
officers of the Corporation will be present to respond to any questions from our
shareholders.
We urge you to carefully read the enclosed Proxy Statement/Prospectus that
describes the transaction in detail and the regulatory requirements required to
consummate this transaction. The information contained in the "SUMMARY" portion
of the Proxy Statement/Prospectus sets forth the basic description of the
reorganization. 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., the Corporation's investment banker, has
advised the Board of Directors that, in its opinion, the consideration to be
received by the Corporation's shareholders pursuant to the Agreement is fair,
from a financial point of view.
The attached Proxy Statement/Prospectus contains important information
concerning the reorganization. We urge you to give it your careful attention.
Sincerely yours,
/s/ Joseph G. Bechtel
---------------------
Joseph G. Bechtel
Chairman of the Board of
Directors and President
<PAGE>
NORTHERN LEHIGH BANCORP, INC.
502 Main Street
Slatington, Pennsylvania
(610) 767-3887
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON JANUARY 5, 1999
---------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Northern
Lehigh Bancorp, Inc. will be held at 1:00 p.m., prevailing time, on Tuesday,
January 5, 1999, at 510 Main Street, (next to the Main Office of The Citizens
National Bank of Slatington), Slatington, Pennsylvania 18080 (the "Meeting"). 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 (the "Agreement"), by and among Harleysville National Corporation
("HNC"), Harleysville National Corporation North, Inc. ("HNC North"), The
Citizens National Bank of Lansford ("Lansford"), Northern Lehigh Bancorp, Inc.
("NLB") and The Citizens National Bank of Slatington ("Slatington"). Pursuant to
the Agreement, NLB will merge with and into HNC North (the "Merger") and,
immediately thereafter, Slatington will merge with, into and under the charter
of Lansford. Upon consummation of the Merger, each NLB shareholder will have the
right to receive 3.57 shares of the common stock of HNC, par value $1.00 per
share in exchange for each share of common stock of NLB, par value $10.00 per
share held by the shareholder, as provided for in the Agreement;
2. Postponement or adjournment of the Meeting to a later date, if
necessary, to permit the solicitation of proxies in the event there are not
sufficient votes at the time of the Meeting to approve the Agreement; and
3. Other matters as may properly come before the Meeting and any
adjournment or postponement thereof that are incidental to the foregoing.
We may take action on any one of the foregoing proposals at the Meeting, or
on any date or dates to which, by original or later adjournment, we may adjourn
the Meeting. Only those shareholders of record at the close of business on
Monday, November 16, 1998, will be entitled to notice of and to vote at the
Meeting.
<PAGE>
For the reasons stated in the enclosed Proxy Statement/Prospectus, your
Board of Directors believes that this transaction is in the best interests of
the Corporation and its shareholders and urges you to vote for the
reorganization. Your participation in the meeting, in person or by proxy, is
important. The affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of common stock is required to approve the Agreement. An
abstention or failure to vote has the same effect as voting against the
Agreement. 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
to assure that your shares will be voted at the meeting. If you do attend the
meeting and wish to vote in person, you must give written notice thereof to the
Secretary of the Corporation so that your proxy will be superseded by any ballot
that you submit at the meeting. On behalf of the Board of Directors, I thank you
for your support and urge you to vote "FOR" approval of the Agreement.
Please sign and date the enclosed form of Proxy, which is solicited by your
Board of Directors, and return it promptly in the enclosed envelope. The giving
of your proxy does not affect your right to vote in person in the event you
attend the Meeting.
By Order of the Board of Directors,
/s/ Joseph G. Bechtel
----------------------------------
Joseph G. Bechtel
Chairman of the Board of Directors
and President
Slatington, Pennsylvania
November 27, 1998
<PAGE>
PROXY STATEMENT/PROSPECTUS
HARLEYSVILLE NATIONAL CORPORATION
PROSPECTUS FOR
515,858 SHARES COMMON STOCK
$1.00 PAR VALUE
NORTHERN LEHIGH BANCORP, INC.
PROXY STATEMENT
The Board of Directors of Northern Lehigh Bancorp, Inc. ("NLB")furnishes
this Proxy Statement/Prospectus to you in connection with the solicitation of
proxies to be used at a Special Meeting of Shareholders of NLB (the "Meeting")
to be held at 1:00 p.m., prevailing time, on Tuesday, January 5, 1999, at 510
Main Street, (next to the Main Office of The Citizens National Bank of
Slatington), Slatington, Pennsylvania 18080. NLB first mailed the Notice of
Special Meeting, form of proxy (the "Proxy Card") and this Proxy
Statement/Prospectus to shareholders on or about November 27, 1998.
At the Meeting, holders of record of common stock of NLB, par value $10.00
per share (the "NLB Common Stock"), as of November 16, 1998 (the "Record Date"),
will be asked to consider and vote upon the approval and adoption of the
Agreement and Plan of Reorganization, dated as of July 28, 1998 (the
"Agreement"), by and among Harleysville National Corporation ("HNC"),
Harleysville National Corporation North, Inc. ("HNC North") a wholly owned
subsidiary of HNC formed to expedite the acquisition of NLB, The Citizens
National Bank of Lansford ("Lansford"), a national banking association and a
subsidiary of HNC North, NLB, and The Citizens National Bank of Slatington
("Slatington"), a wholly-owned subsidiary of NLB. We attach a copy of the
Agreement as Annex A to this Proxy Statement/ Prospectus. In addition to voting
on the Agreement, you, as shareholders of NLB, may be asked to consider and vote
upon approval of the postponement or adjournment of the Meeting, in the event
that there are not sufficient votes cast in person or by proxy at the Meeting to
approve the Agreement, and such other matters as may properly come before the
Meeting.
The Agreement provides that NLB will merge with and into HNC North, with
HNC North surviving the merger (the "Merger"), and Slatington will merge with,
into and under the charter of Lansford (the "Bank Merger"). Upon the
consummation of the Merger, each NLB shareholder will have the right to receive
3.57 shares of common stock of HNC, par value $1.00 per share (the "HNC Common
Stock") for each share of NLB Common Stock. We often refer to the Merger and
Bank Merger, collectively, as the "Reorganization."
This Proxy Statement/Prospectus does not cover resales of shares of HNC Common
Stock to be issued to affiliates of NLB in connection with the Reorganization
described herein. No such person is authorized to make use of this Proxy
Statement/Prospectus in connection with any such resale.
-------------------------
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 HNC 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.
-------------------------
The date of this Proxy Statement/Prospectus is November 27, 1998.
<PAGE>
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.
-------------------------
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY............................................................. 1
The Meeting...................................................... 1
Required Vote.................................................... 1
Forward-Looking Statements....................................... 1
Northern Lehigh Bancorp, Inc..................................... 2
Harleysville National Corporation................................ 2
Available Information............................................ 2
The Reorganization............................................... 3
Opinion of Financial Advisor..................................... 4
Recommendations of the Board of Directors........................ 4
Dissenters' Rights............................................... 4
Federal Income Tax Consequences of the Merger.................... 5
Accounting Treatment............................................. 5
Comparison of Shareholder Rights................................. 6
Conditions, Amendment and Termination............................ 6
Management and Operations Following the Merger................... 8
Expenses......................................................... 8
Dividends........................................................ 9
Adjournment of the Meeting....................................... 9
COMPARATIVE PER SHARE DATA.......................................... 10
General.......................................................... 10
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
Purpose of Meeting............................................... 19
Voting Securities and Securities Ownership....................... 19
Interests of Certain Persons in Matters to be Voted Upon......... 20
Recommendation of the Board of Directors of NLB.................. 22
APPROVAL OF THE MERGER.............................................. 22
Background of the Merger, Reasons and Recommendation
of the Board of Directors..................................... 23
The Board's Determination About the Merger....................... 24
Additional Reasons for the Merger................................ 28
Opinion of Financial Advisor..................................... 29
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<PAGE>
Dissenters' Rights............................................... 34
General....................................................... 34
Fair Value.................................................... 35
Notice of Intention to Dissent................................ 35
Notice to Demand Payment...................................... 35
Failure to Comply with Notice to Demand Payment, etc.......... 35
Payment of Fair Value of Shares............................... 36
Estimate by Dissenter of Fair Value of Shares................. 36
Valuation Proceedings......................................... 36
Cost and Expenses............................................. 37
Terms of the Merger.............................................. 37
Effect of the Merger.......................................... 37
Exchange of Shares............................................ 37
Stock Options................................................. 39
Business Pending the Merger...................................... 39
Conditions, Amendment and Termination......................... 43
Effective Date................................................ 44
Interests of Certain Persons in the Merger....................... 45
Management and Operations Following the Merger................... 46
Federal Income Tax Consequences.................................. 47
Investment Agreement............................................. 59
Accounting Treatment............................................. 50
Restriction on Resale of HNC Common Stock Held by Affiliates .... 50
COMPARATIVE STOCK PRICES AND DIVIDENDS AND RELATED
SHAREHOLDER MATTERS.............................................. 52
Common Stock of HNC ............................................. 52
Common Stock of NLB.............................................. 53
DESCRIPTION OF HARLEYSVILLE NATIONAL CORPORATION
AND DESCRIPTION OF HNC COMMON STOCK.............................. 54
Information Concerning HNC....................................... 54
Incorporation of Certain Documents by Reference.................. 54
Acquisitions by HNC ............................................. 55
Loans ........................................................ 55
Description of HNC Common Stock.................................. 56
Dividends........................................................ 56
Liquidation...................................................... 57
Dividend Reinvestment Plan....................................... 57
Securities Laws.................................................. 57
Anti-takeover Provisions......................................... 58
Indemnification.................................................. 60
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<PAGE>
Comparison of Shareholder Rights................................. 60
INFORMATION CONCERNING NORTHERN LEHIGH
BANCORP, INC. ................................................... 64
Description of Business and Property............................. 64
Employees........................................................ 65
Legal Proceedings................................................ 65
NLB Common Stock Market Price and Dividends...................... 65
Year 2000 Issue.................................................. 66
IMPACT OF YEAR 2000 ISSUE........................................... 69
NORTHERN LEHIGH BANCORP, INC. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION............................... 71
ADJOURNMENT OF THE MEETING.......................................... 94
EXPERTS............................................................. 94
LEGAL OPINIONS...................................................... 94
OTHER MATTERS....................................................... 94
ADDITIONAL INFORMATION.............................................. 95
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 NLB's shareholders.
Please direct requests 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 December 28, 1998.
-iii-
<PAGE>
SUMMARY
The following summary of the material aspects of the Reorganization is not
intended to be complete and is qualified in its entirety by the more detailed
discussion elsewhere or incorporated by reference in this Proxy
Statement/Prospectus and its Annexes. We urge you to read the entire Proxy
Statement/Prospectus, including the Annexes, in order for you to understand the
Reorganization fully.
The Meeting
We will hold the Meeting to vote on the Agreement on Tuesday, January 5,
1999, at 1:00 p.m. at 510 Main Street, (next to the Slatington's Main Office),
Slatington, Pennsylvania 18080. At the Meeting, those shareholders who hold
shares of NLB Common Stock, as of November 16, 1998, the Record Date, will
consider and vote upon approval and adoption of the Agreement. In addition, you,
as a shareholder of NLB, may be asked to consider and vote upon approval of the
adjournment or postponement of the Meeting, in the event there are not
sufficient votes cast in person or by proxy at the Meeting to approve the
Agreement. You may also be asked to vote on such other matters as may properly
come before the Meeting or any adjournments thereof. Each share entitled to vote
at the Meeting is entitled to one vote. The presence, in person or by proxy, of
at least a majority of the total number of shares of NLB Common Stock
outstanding and entitled to vote as of the Record Date will be required to
constitute a quorum at the Meeting.
Required Vote
Approval of the Agreement requires the affirmative vote of the holders of
at least 66 2/3% of the outstanding NLB Common Stock. On this date, the
directors and officers of NLB and their affiliates own 22,674 shares of NLB
Common Stock, or 16.25% of the outstanding shares. We expect them to vote these
shares "FOR" approval of the Agreement.
Forward-Looking Statements
This Proxy Statement/Prospectus contains and incorporates by reference
certain statements that constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include all statements regarding the intent, belief
or current expectations regarding the matters discussed or incorporated by
reference in this Proxy Statement/Prospectus (including statements as to
"beliefs," "expectations," "anticipations," "intentions" or similar words) and
all statements that are not statements of historical fact. Such statements are
subject to risks, uncertainties and assumptions, including, but not limited to,
trends for the continued growth of the business of HNC and NLB, the realization
of anticipated revenues, profitability and cost synergies of the combined
companies, and other risks and uncertainties. Should one or more of these risks
or uncertainties materialize or should underlying assumptions prove incorrect,
actual results,
-1-
<PAGE>
performance or achievements in 1999 and beyond could differ materially from
those expressed in, or implied by, the forward-looking statements.
Northern Lehigh Bancorp, Inc.
NLB is a Pennsylvania business corporation and a registered bank holding
company, formed in 1983. NLB holds all of the outstanding capital stock of
Slatington. NLB's principal business has been directing, planning and
coordinating the business activities of Slatington. Slatington is a national
banking association, headquartered in Slatington, Pennsylvania, that conducts
business through 3 offices. Two offices, including the main office, are located
in Slatington, and the third office is located in Walnutport, Northampton
County, Pennsylvania. Slatington's deposits are insured by the FDIC to the
maximum extent permitted by law. As a full-service commercial bank, Slatington
offers demand, savings and time deposits and commercial, consumer and mortgage
loans. NLB'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, NLB had total assets of approximately $77,262,000.
Harleysville National Corporation
HNC is a Pennsylvania business corporation and a registered bank holding
company with its principal offices located at 483 Main Street, P.O. Box 195,
Harleysville, Pennsylvania 19438. As a bank holding company formed in 1982, HNC
through its subsidiaries, engages in the general commercial and retail banking
business. HNC has three wholly-owned national banking association subsidiaries,
each of which engages in the general commercial and retail banking business. The
Harleysville National Bank and Trust Company ("Harleysville National") is a
direct subsidiary of HNC. Harleysville National has its principal offices at the
same location as HNC and operates 21 banking offices in Bucks County, Chester
County, and Montgomery County, Pennsylvania. Lansford is a second tier
subsidiary of HNC. All of the outstanding shares of Lansford are held by HNC
North, a Pennsylvania corporation and a direct subsidiary of HNC. Lansford has
its principal offices located at 13-15 West Ridge Street, P.O. Box 128,
Lansford, Pennsylvania, 18232 and operates five (5) banking offices in Carbon
County and Wayne County, Pennsylvania. Security National Bank ("Security
National") is a direct subsidiary of HNC. Security National has its principal
offices located at One Security Place, Pottstown, Pennsylvania 19464 and
operates two (2) banking offices in Pottstown, Pennsylvania. As of September 30,
1998, HNC had consolidated total assets of approximately $1,260,619,000.
Available Information
HNC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, accordingly, files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). The reports, proxy statements and other
information filed with the Commission are available for inspection
-2-
<PAGE>
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. HNC 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.
HNC Common Stock is authorized for quotation on the National Market System
of The National Association of Securities Dealers Automated Quotation System
(the "Nasdaq"). You may also inspect materials and other information concerning
HNC at the offices of the National Association of Securities Dealers, Inc. (the
"NASD") at 1735 K Street, N.W., Washington, D.C.
NLB is not subject to the information requirements of the Exchange Act and
NLB 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 (the
"OTC Bulletin Board").
This Proxy Statement/Prospectus forms a part of a Registration Statement
that HNC has filed with the Commission under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the HNC Common Stock issuable in
the Merger. This Proxy Statement/Prospectus does not contain all of the
information in the Registration Statement, certain parts of which are omitted in
accordance with the Commission's rules and regulations. You may inspect and copy
the Registration Statement, including any amendments and exhibits thereto as
stated above. Statements contained in this Proxy Statement/Prospectus as to the
contents of any contract or other document are not necessarily complete, and we
refer you, in each case to the copy of such contract or other document, filed as
an exhibit to the Registration Statement. We also qualify our discussions, in
all respects, by such reference.
The Reorganization
The Agreement provides that NLB will merge with and into HNC North. HNC
North (sometimes referred to as the "Surviving Corporation") will survive the
Merger, and continue business as a subsidiary of HNC. Immediately upon the
consummation of the Merger (the "Effective Date"), the parties propose to effect
the Bank Merger, pursuant to which Slatington will merge with, into and under
the charter of Lansford, with Lansford surviving the Bank Merger under the name
"Citizens National Bank." Upon consummation of the Merger, you, as a shareholder
of NLB, will have the right to receive 3.57 shares of HNC Common Stock (the
"Merger Consideration") in exchange for each share of NLB Common Stock. In
addition, on the Effective Date, HNC will assume NLB's obligations under 5,000
outstanding and unexercised stock options issued by NLB pursuant to which the
holder will be entitled to purchase 17,850 shares of HNC Common Stock. NLB
shareholders will receive a cash payment in lieu of any
-3-
<PAGE>
fractional share of NLB Common Stock that the NLB shareholders would otherwise
be entitled to receive. In the aggregate, HNC will issue 515,858 shares of HNC
Common Stock in connection with the Reorganization. Prior to the public
announcement of the Reorganization, the last reported sale price of NLB Common
Stock was a sale of 900 shares at $56.00 per share on May 19, 1998. Consummation
of the Merger is conditioned upon, among other things, the approval of the
Agreement by the requisite vote of NLB's shareholders and by various regulatory
agencies.
NLB and HNC have the right to terminate the Agreement under certain
circumstances, including if the Merger is not consummated by June 30, 1999. The
parties have the right to extend the time for closing beyond June 30, 1999, by
mutually amending the Agreement.
NLB and HNC propose to close the transaction in the first quarter of 1999,
after receipt of approval of NLB's shareholders and of all required regulatory
approvals.
Opinion of Financial Advisor
The NLB Board of Directors asked Hopper Soliday & Co., Inc. ("Hopper
Soliday"), its investment banking firm located at 1703 Oregon Pike, Lancaster,
Pennsylvania 17601, to provide investment banking services, including rendering
an opinion that the Merger Consideration is fair from a financial point of view,
to the shareholders of NLB. We recommend that you read the 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 their opinion.
Recommendations of the Board of Directors
The consideration to be received by NLB's shareholders in the transaction
was negotiated on behalf of NLB's Board of Directors, by Hopper Soliday in light
of various factors, including NLB's and HNC's operating results, current
financial condition and perceived future prospects. The NLB Board of Directors
believes that the Reorganization is in the best interests of NLB's shareholders
and recommends that shareholders vote "FOR" approval of the Agreement.
Dissenters' Rights
The Pennsylvania Business Corporation Law of 1988, as amended (the "BCL")
grants to certain shareholders, including the holders of NLB Common Stock, the
right to dissent from approval of the Merger, and to demand and receive the
"fair value" of their shares of NLB Common Stock rather than the Merger
Consideration. In order to assert these dissenters' rights, an NLB shareholder
must:
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<PAGE>
* file a written notice of intent to dissent with NLB 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 his or her shares in accordance with the terms of the
notice to demand payment that will be sent by NLB or HNC; and
* comply with certain other statutory procedures set forth in the BCL.
If you return your form of proxy without voting instructions, your proxy will be
voted in favor of the Agreement and you will forfeit any dissenters' rights that
you may have with respect to the Merger. A copy of the applicable sections of
the BCL are attached to this Proxy Statement/Prospectus as Annex C. If you
deviate from the procedures set forth in the statutory provisions of the BCL,
you may forfeit your dissenters' rights with respect to the Merger. Accordingly,
we urge you to read carefully "APPROVAL OF THE MERGER--Dissenters' Rights" and
Annex C to this Proxy Statement/Prospectus.
Federal Income Tax Consequences of the Merger
NLB and HNC structured the Reorganization to qualify as a tax-free
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"). Accordingly, the shareholders of NLB will not recognize
taxable gain or loss upon the receipt of HNC Common Stock in exchange for NLB
Common Stock, except to the extent that any shareholders of NLB receive cash in
lieu of fractional shares of HNC Common Stock. Any NLB shareholder who exercises
dissenters' rights will recognize taxable gain or loss to the extent of the
difference between the amount of cash received by the shareholder in connection
with the exercise of dissenters' rights and the adjusted tax basis of the shares
as to which dissenters' rights are exercised. The Agreement provides that Grant
Thornton, LLP will provide an opinion, prior to closing, confirming these and
certain other federal income consequences of the Reorganization. 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."
Accounting Treatment
NLB and HNC intend that the Reorganization be accounted for as a pooling of
interests for financial reporting purposes. See "APPROVAL OF THE
MERGER--Accounting Treatment."
-5-
<PAGE>
Comparison of Shareholder Rights
Upon consummation of the Merger, the shareholders of NLB will become
shareholders of HNC. NLB and HNC are each organized as Pennsylvania business
corporations and, accordingly, the rights of former NLB shareholders after the
Merger will continue to be governed by the BCL as well as the articles of
incorporation and bylaws of HNC. Certain differences exist in the rights of the
shareholders of NLB and HNC. These differences are due in part to the
differences in the Articles of Incorporation and Bylaws of NLB and the Articles
of Incorporation and Bylaws of HNC.
The most significant differences between the rights of the holders of NLB
Common Stock and of HNC Common Stock include the following:
* although the Boards of Directors of each of NLB and HNC are
classified, approximately one-third of the directors of NLB are
elected each year for three-year terms, and one-fourth of HNC's
directors are elected each year for four-year terms;
* certain anti-takeover provisions are contained in HNC's Articles of
Incorporation, which may serve to entrench HNC's current management.
NLB's Articles of Incorporation contain some similar provisions but
there are certain differences in these anti-takeover provisions;
* HNC offers a dividend reinvestment plan to its shareholders, while NLB
offers no such plan; and
* HNC Common Stock is registered under the Securities Act and is traded
on the Nasdaq while NLB Common Stock is not registered under the
Securities Act, but 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 HNC COMMON STOCK--Comparison of Shareholder Rights."
Conditions, Amendment and Termination
Consummation of the Reorganization is subject to various conditions and
contingencies, including, among others, approval by the shareholders of NLB,
approval by the Board of Governors of the Federal Reserve System (the "FRB"),
the Pennsylvania Department of Banking (the "PDB") and the Office of the
Comptroller of the Currency (the "OCC") and the absence of any pending or
threatened litigation seeking to modify, enjoin or prohibit the transactions
contemplated by the Agreement. On October 20, 1998, HNC filed a Notice with
respect to the
-6-
<PAGE>
Merger with the FRB, pursuant to Sections 3(a)(3) and 3(a)(5) of the Bank
Holding Company Act and 12 C.F.R. 225.14 (the "FRB Notice ") and, on November
20, 1998, HNC filed an Application with the PDB, pursuant to Section 115 of the
Pennsylvania Banking Code of 1965, as amended, requesting approval of HNC's
acquisition of NLB and Slatington (the "PDB Application"). In addition, on
October 20, 1998, Lansford filed a Business Combination Application Streamlined
pursuant to 12 U.S.C. 1828(c), requesting approval of the OCC to the Bank Merger
(the "OCC Application"). We await action on each of the applications. The FRB
Notice does not require further action on the part of HNC or the FRB.
The Reorganization is also subject to satisfaction of various other
conditions specified in the Agreement, including the approval of the Agreement
by the requisite vote of NLB's shareholders and the satisfaction of the criteria
necessary to permit a pooling of interests for accounting purposes. In the event
that more than 10% of the outstanding shares of NLB are subject to the exercise
of dissenters' rights, the criteria for pooling-of-interest treatment will not
be satisfied. See "APPROVAL OF THE MERGER--Accounting Treatment."
To the extent permitted by law, the parties may amend the Agreement by
mutual consent. Any term or condition of the Agreement may be waived by the
party entitled to its benefit at any time before the Effective Date, whether
before or after it has been approved by the shareholders of NLB, except that no
such amendment can affect the conversion of shares without the approval and
consent of the shareholders of NLB. The Agreement and related documents will
terminate on June 30, 1999, unless extended by mutual consent of the parties.
If the Reorganization has not been consummated by June 30, 1999, the
Agreement will automatically terminate unless, prior to that date, HNC and NLB
agree, in writing, to extend the termination date.
The Agreement provides that, at any time prior to the Effective Date and
whether before or after its approval by the shareholders of NLB, the Agreement
may be terminated and the transactions described in the Agreement abandoned:
* by the mutual written consent of HNC and NLB, if a majority of the
entire Board of Directors of each votes to terminate the Agreement;
* by NLB in the event and after written notice (a) of a material breach
by HNC of any representation, warranty, covenant or agreement
contained in the Agreement that is not cured within 30 days after
written notice is given, or (b) that any condition precedent to NLB's
obligations, as set forth in Article VI of the Agreement, has not been
met or waived by NLB at the time that the condition can no longer be
satisfied, through no fault of NLB or Slatington, on June 30, 1999;
-7-
<PAGE>
* by HNC in the event and after written notice (a) of a material breach
by NLB or Slatington of any representation, warranty, covenant or
agreement contained in the Agreement that is not cured within 30 days
after written notice, or (b) that any condition precedent to HNC's
obligations, as set forth in Article VI of the Agreement, has not been
met or waived by HNC at the time that the condition can no longer be
satisfied, through no fault of HNC, HNC North or Lansford, on June 30,
1999; or
* by HNC or NLB, if the Merger is not consummated by June 30, 1999,
unless the failure to consummate the Merger is due to the breach of
any representation, warranty or covenant contained in the Agreement by
the party seeking to terminate; provided, however, that the date may
be extended by the written agreement of the parties.
See "APPROVAL OF THE MERGER--Business Pending the Merger."
Management and Operations Following the Merger
The Agreement provides that following the Merger, the Board of Directors of
HNC and HNC North will consist of the same persons who serve on the respective
Boards of Directors of HNC and HNC North immediately before the Merger, each of
whom will serve until the director's successor is elected and qualified.
Immediately following the Effective Date and for a one year period thereafter,
the directors of Slatington, as of the Effective Date, and Thomas D. Oleksa, who
shall serve as an ex-officio member, will serve as an Advisory Board of
Directors for the Slatington area. On the Effective Date, four persons who are
acceptable to HNC, HNC North and Lansford and who previously served as directors
of NLB shall be appointed to the Board of Directors of Lansford to serve until
their successors have been elected, qualified or appointed.
In connection with the Reorganization, HNC, Lansford, NLB, Slatington and
Francis P. Burbidge, President and Chief Executive Officer of Slatington and a
Director of NLB, entered into a Release Agreement. In addition, Mr. Burbidge has
entered into an Executive Employment Agreement and a Consulting Agreement with
Lansford. 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."
Expenses
If the Agreement is terminated, in accordance with its terms: (i) by the
mutual, written consent of NLB and HNC; or (ii) by NLB or HNC in the event the
Merger is not consummated by June 30, 1999, the termination is without cost,
liability or expense on the part of any party to the other parties. In all other
instances, termination of the Agreement is without cost, liability or expense on
the part of any party to the other parties, unless the breach of a
representation,
-8-
<PAGE>
warranty or covenant is caused by the willful conduct or gross negligence of a
party, in which event such party is liable to the other parties for all
out-of-pocket costs and expenses.
Dividends
The Agreement provides that NLB may declare and pay quarterly cash
dividends in an amount not in excess of $0.44 per share during the fourth
calendar quarter of 1998.
Adjournment of the Meeting
In the event that an insufficient number of votes are cast in person or by
proxy at the Meeting to approve and adopt the Agreement, the NLB Board of
Directors intends to postpone or adjourn the Meeting to a later date to permit
the further solicitation of sufficient votes to approve the Agreement. The
affirmative vote of a majority of the shares is required in order to approve the
adjournment. The NLB Board of Directors recommends that shareholders vote "FOR"
the proposal to adjourn the Meeting, if necessary, to permit further
solicitation of proxies to approve the Agreement.
-9-
<PAGE>
COMPARATIVE PER SHARE DATA
General
The following table contains selected combined and equivalent per share
data for each of HNC and NLB on a historical basis, and selected unaudited pro
forma comparative per share data assuming the Reorganization 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 unaudited pro forma financial data has been prepared
giving effect to the Merger as a pooling-of-interests. 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
thereto, of HNC and of NLB incorporated by reference or appearing elsewhere in
this Proxy Statement/Prospectus, and we urge you to do so.
-10-
<PAGE>
<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
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
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
HNC 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
such date based upon the assumed exchange ratio of 3.57 (the "Exchange Ratio")
shares of HNC Common Stock for each share of NLB's Common Stock are $149.94 and
$152.19, respectively.
The most recent sale of NLB 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 NLB 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.
Comparative Stock Prices
(as of July 27, 1998)
Pro Forma
Historical Price Equivalent Price
Per Share Per Share
--------------- ---------------
HNC Common Stock
July 27, 1998 Bid $ 42.00 $ N/A
July 27, 1998 Asked $ 42.63 $ N/A
NLB Common Stock
July 27, 1998 Bid $ 57.75 $ 149.94
July 27, 1998 Asked None $ 152.19
- ---------------------
-12-
<PAGE>
SELECTED FINANCIAL DATA AND PRO FORMA INFORMATION
We set forth on the following tables certain selected historical
consolidated and pro forma summary financial data, for the periods and as of the
dates indicated, for HNC and for NLB. This data is derived from and should be
read in conjunction with, and is qualified in its entirety by, the consolidated
financial statements of HNC and of NLB, including the notes thereto,
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 HNC's and NLB's
respective managements, all adjustments necessary for a fair presentation of
such data. Results for the periods ended September 30, 1998, and 1997 are not
necessarily indicative of results which may be expected for any other periods or
for the fiscal years as a whole. The unaudited pro forma financial data has been
prepared giving effect to the Merger as a pooling-of-interests. 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
thereto, of HNC and of NLB incorporated by reference or appearing elsewhere in
this Proxy Statement/Prospectus, and we urge you to do so.
-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
-14-
</TABLE>
<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
Long-term Debt and Lease
Obligations - - - -
</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
We furnish this Proxy Statement/Prospectus to the holders of NLB Common
Stock in connection with the solicitation of proxies by NLB's Board of Directors
to be used at the Meeting that will be held at 510 Main Street, (next to
Slatington's Main Office), Slatington, Pennsylvania 18080 on Tuesday, January 5,
1999, at 1:00 p.m.
At the Meeting, holders of record of NLB Common Stock may consider and vote
on :
* the approval and adoption of the Agreement;
* the approval of the adjournment or postponement of the Meeting, in the
event there are not sufficient votes cast in person or by proxy at the
Meeting to approve the Agreement; and
* such other matters as may properly come before the Meeting or any
adjournments thereof.
Under the terms of the Agreement, NLB will merge with and into HNC North
and, immediately thereafter, Slatington will merge with, into and under the
charter of Lansford. Upon the consummation of the Merger and as set forth in the
Agreement, NLB's shareholders will receive 3.57 shares of HNC Common Stock in
exchange for each share of NLB Common Stock.
The last reported sale price of NLB Common Stock as reported on the OTC
Bulletin Board was _____ shares at $ _____ per share on _____, 1998. On November
__, 1998, the closing bid and asked quotations for HNC Common Stock as reported
on Nasdaq were, respectively, $______ and $______. Consummation of the Merger is
conditioned upon, among other things, the approval of the Agreement by at least
the requisite 66 2/3% vote of NLB's shareholders.
All information set forth in this Proxy Statement/Prospectus that relates
to HNC has been provided or verified by HNC. All information which relates to
NLB has been provided or verified by NLB.
Voting, Revocation and Solicitation of Proxies
The presence, in person or by proxy of at least a majority of the total
number of shares of NLB Common Stock outstanding and entitled to vote on the
Record Date, November 16, 1998, is required to constitute a quorum at the
Meeting. As of the Record Date there were 139,498 shares of NLB Common Stock
outstanding and entitled to vote. Shareholders who execute proxies retain the
right to revoke them at any time. Unless revoked, shares represented by proxies
will
-17-
<PAGE>
be voted at the Meeting and at all adjournments or postponements thereof. Your
attendance at the Meeting, will not revoke your proxy. Proxies may be revoked
by:
* delivery of notice of revocation or a later-dated proxy to Andrea M.
Beltz, Secretary, Northern Lehigh Bancorp, Inc., 502 Main Street,
Slatington, Pennsylvania 18080; or
* your appearance at the Meeting and notification to the person in
charge of the Meeting that you wish to vote your shares in person.
In the absence of instruction, all proxies will be voted FOR the proposal to
approve and adopt the Agreement and FOR adjournment of the Meeting, if required.
Although the Board of Directors knows of no other business to be presented, in
the event that any other matters are properly brought before the Meeting, any
proxy given pursuant to this solicitation will be voted in accordance with the
recommendations of the management of NLB.
If a quorum is not present at the time the Meeting is convened, the Meeting
may be adjourned to another place and time without further notice to the
shareholders. If for any other reason NLB believes additional time should be
allowed for the solicitation of proxies or for the satisfaction of conditions to
the Reorganization or the transactions contemplated thereby, NLB may adjourn the
Meeting with a vote of the holders of a majority of the shares outstanding. If
NLB proposes to adjourn the Meeting, the persons named in the enclosed Proxy
Card will vote all shares for which they have voting authority in favor of the
adjournment. A proxy that withholds discretionary authority or that is voted
against the Merger will not be voted in favor of any adjournment or postponement
of the Meeting.
Proxies solicited by the NLB Board of Directors will be voted in accordance
with the directions given in the proxies. Where no instructions are indicated,
proxies will be voted in favor of each of the proposals set forth in this Proxy
Statement/Prospectus. The proxy confers discretionary authority on the persons
named as proxyholders to vote with respect to matters incidental to the conduct
of the Meeting. If any other business is presented at the Meeting, proxies will
be voted by the proxyholders in their best judgment. Proxies marked as
abstentions will not be counted as votes cast. In addition, shares held 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 Reorganization
proposal.
-18-
<PAGE>
The cost of soliciting proxies will be borne by NLB. NLB will reimburse
brokerage firms and other custodians, nominees and fiduciaries for reasonable
expenses incurred by them in sending proxy materials to the beneficial owners of
NLB Common Stock. In addition to solicitations by mail, directors, officers and
regular employees of NLB may solicit proxies personally or by telegraph or
telephone without additional compensation.
Purpose of Meeting
The shareholders of NLB will be asked at the Meeting to consider and vote
upon a proposal to approve and adopt the Agreement. In addition, shareholders of
NLB may consider and vote upon the approval of the adjournment of the Meeting,
in the event there are not sufficient votes cast in person or by proxy at the
Meeting to approve the Agreement, and such other matters as may properly come
before the Meeting or any adjournments thereof. The presence, in person or by
proxy, of at least a majority of the total number of shares of NLB Common Stock
outstanding and entitled to vote as of the Record Date will be required to
constitute a quorum at the Meeting.
Voting Securities and Securities Ownership
Holders of record of NLB Common Stock as of the close of business on the
Record Date are entitled to one vote for each share then held. At the close of
business on the Record Date there were 139,498 shares of NLB Common Stock
outstanding, the only issued and outstanding class of stock. NLB's Board of
Directors is not aware of any individual, entity or group that owns more than
10% of the NLB common stock.
The amount and percentage of NLB Common Stock beneficially owned by each
executive officer, each director, and all executive officers and directors of
NLB as a group as of September 30, 1998, is set forth below. All shares are
individually owned unless otherwise indicated.
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Share Ownership
---------------
Shares of NLB
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 the Record Date. 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 NLB Common Stock granted to Mr.
Burbidge under the terms of his Employment Agreement with NLB.
(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.
Interests of Certain Persons in Matters to be Voted Upon
Except as described in this Proxy Statement/Prospectus, the directors and
executive officers of NLB have no substantial interest in the proposed
transaction, other than in their
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capacity as shareholders of NLB. As shareholders, the directors and executive
officers of NLB will be entitled to receive HNC Common Stock in exchange for the
NLB Common Stock in the same proportion and on the same terms and conditions as
all other shareholders of NLB.
On or promptly after the Effective Date and for a period of at least one
year thereafter, the members of the Board of Directors of Slatington and Thomas
D. Oleksa, who will serve as an ex-officio member, shall be an Advisory Board of
Directors for the Slatington Area (the "Advisory Board"). The members of the
Advisory Board, for one year following the Effective Date, will receive $250.00
per quarter as compensation for services rendered in their capacity as a member
of the Advisory Board.
In 1998, Directors of HNC do not receive a fee for meetings attended, with
the exception of Messrs. McCready and Pollak, who receive one-half of the annual
retainer fee paid to directors of Harleysville National Bank for each meeting of
HNC attended. These reduced fees are paid to Messrs. McCready and Pollak in
recognition of the time and travel necessary to attend meetings of HNC.
Historically, HNC holds fewer meetings than each of its subsidiary banks. In
1998, Directors of Harleysville National receive a fee of $425.00 for each
meeting of Harleysville National attended, an annual retainer fee of $7,000.00,
and receive a fee of $310.00 for each meeting attended of a committee of the
Board of Directors of HNC or of Harleysville National. Directors are not
compensated for committee meetings less than 15 minutes in duration or committee
meetings held prior to a board meeting. Each director of Harleysville National
received a bonus of $2,400.00, in 1997. The bonus for 1998 will not be paid
until December 10, 1998. In the aggregate, as of September 30, 1998, the Board
of Directors of Harleysville National received $113,832.50.
In 1998, the Directors of Lansford receive a fee of $250.00 for each
Lansford board meeting attended, an annual retainer of $3,500.00, and receive a
fee of $150.00 for each committee meeting attended. In the aggregate, as of
September 30, 1998, the Board of Directors of Lansford received $47,025.00.
HNC 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.
In connection with the Reorganization, Mr. Burbidge entered into an
Executive Employment Agreement and a Consulting Agreement with Lansford. See
"APPROVAL OF THE MERGER--Management and Operations Following the Merger" for a
description of these agreements.
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Pursuant to the Agreement and except as may be otherwise specifically
agreed to in writing by the parties, for at least one year following the
Effective Date, Slatington's employees, who are employed, in good standing and
actively at work on the Effective Date, will be offered employment and retained
at current salary levels by Lansford, HNC or an affiliate of HNC, subject to the
ongoing needs of HNC, the HNC affiliate and/or Lansford, or any successor
thereto. All continuing employees will be entitled to participate in any and all
benefit plans in effect on the Effective Date for employees of the respective
HNC affiliate, in accordance with the terms of the particular plans. All
benefits of the continuing employees who are employed by HNC will be maintained
at a level not less than equal to the benefits enjoyed by the employees of NLB
prior to the Effective Date with such changes as may be appropriate as
determined by the Board of Directors of Lansford. Former Slatington employees
will 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.
The directors and officers of HNC and its subsidiaries have no special
interest in the Merger, other than in their capacity as shareholders of HNC, and
will not receive any special consideration or compensation in connection with
its consummation.
Recommendation of the Board of Directors of NLB
For the reasons stated in this Proxy Statement/Prospectus, the Board of
Directors of NLB has unanimously approved and adopted the Agreement and believes
that the Merger and the Bank Merger are in the best interests of the
shareholders of NLB. Accordingly, the Board of Directors of NLB unanimously
recommends that the shareholders vote in favor of the proposal to approve and
adopt the Agreement.
APPROVAL OF THE MERGER
This section of the Proxy Statement/Prospectus describes the material terms
and provisions of the proposed Reorganization, including the principal
provisions of the Agreement and related transactions. A copy of the Agreement is
attached to this Proxy Statement/Prospectus as Annex A. The discussion which
follows is intended only as a summary of certain terms of the Reorganization and
is qualified in its entirety by reference to the full text of the Agreement. All
shareholders are urged to read the Agreement in its entirety.
The Agreement provides that, subject to the satisfaction or waiver (where
permissible) of certain conditions, which are described more fully herein and
therein, NLB will be merged with, into and under the charter of HNC North and
Slatington will merge with, into and under the charter of Lansford. In
connection with the Merger, each outstanding share of NLB Common Stock will be
converted into the right to receive and become exchangeable for 3.57 shares of
HNC Common Stock plus cash in lieu of any fractional shares of HNC Common Stock.
The parties propose to name the Surviving Bank, as defined in the Agreement,
"Citizens National Bank," subject to necessary regulatory approval. The
Surviving Bank will be regulated by the
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OCC and the FDIC. Lansford, the surviving institution in the Bank Merger, will
be a second-tier subsidiary of HNC.
The Board of Directors of NLB has unanimously approved and adopted the
Agreement, believes the Merger and the Bank Merger are in the best interests of
the shareholders of NLB, and 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 with, into and under the
charter of 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
NLB's Board of Directors for several years has, as part of its long-range
planning practices, periodically reviewed and evaluated the various strategic
options and available alternatives to maximize the economic benefits for NLB and
its shareholders, including a possible merger. The Board has considered the
merits of maintaining NLB's independence, NLB combining with a smaller or
similar size bank or holding company, or merging NLB 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 NLB specifically and the local financial
services industry.
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After careful analysis, and based on expert advice, the Board concluded
that in today's financial services industry environment NLB could compete more
effectively in its market area as part of a larger financial institution (which
offered NLB, its customers, community and employees certain benefits) because
NLB 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 NLB's
shareholders which would come from arranging a merger in which NLB'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 NLB's officers, employees and customers were
also of concern to the NLB Board of Directors during their merger analysis.
Thus, NLB's Board considered whether in a merger transaction it would be
possible to reasonably assure that, for the foreseeable future, 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 Slatington
began at the turn of the century would continue into the next century. It was
with the foregoing considerations in mind that the NLB Board of Directors
examined all possible alternatives and the HNC merger proposal.
The Board retained Hopper Soliday, as its investment banker, to aid the NLB
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 that, subject
to the NLB's shareholders and the required regulatory approvals, the HNC Merger
would be recommended for approval to the shareholders. The Board of Directors
has received an opinion from Hopper Soliday to the effect that the terms of the
Agreement with HNC are fair to the shareholders of NLB 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 HNC proposal to merge with NLB, the NLB Board of
Directors determined that:
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* the HNC operating culture would be consistent and helpful to the
continued growth of Slatington's community banking opportunities;
* the respective business management philosophies of NLB and HNC were
compatible;
* the HNC branch bank locations and employment opportunities, due to the
lack of necessity for branch consolidation and lack of substantial
administrative job redundancies, would be very attractive for
Slatington's employees;
* the significant additional resources that HNC would bring to face the
competitive environment in the financial markets currently served by
Slatington would generally be beneficial to the NLB customers, staff
and community;
* HNC could provide more comprehensive financial services to the markets
currently served by Slatington;
* projected social and economic benefits would accrue to NLB, its
shareholders and other corporate constituencies, including employees,
suppliers and customers in the communities in which NLB 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 NLB Board of Directors determined that HNC had a history
of successful acquisitions, an operating culture that is similar to NLB's and
that HNC's subsidiaries, branches and business operations are located in a
geographic area of significant potential growth.
In evaluating the proposed Merger, the NLB Board of Directors, from the
NLB's shareholders' viewpoint, considered a variety of financial factors,
including:
* the consideration being offered to NLB's shareholders in relation to
the market value, book value, earnings per share, projected earnings
per share of NLB and projected increased dividends;
* that the consideration to be received by NLB's shareholders reflects a
premium over the values at which NLB Common Stock has traded in the
market;
* the quality of a financial investment in and the liquidity of HNC
Common Stock; and
* the current operations, financial condition and future prospects of
HNC and NLB.
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In examining whether to enter into the Merger, NLB's Board of Directors
also considered, among other things, the financial terms of the Reorganization,
the structure of the transaction, the historic and financial performance of HNC,
the commitment of HNC to the communities its subsidiaries serves, the culture of
HNC, and the opinion of NLB's investment banker as to the fairness of the
transaction, from a financial point of view, to NLB's shareholders.
In addition to the benefits outlined above, the Board of Directors of NLB
also determined that HNC would be an attractive Reorganization partner for
certain additional reasons. The Reorganization would (i) provide NLB with
additional management and support systems that will better enable NLB to adapt
its operations to the rapidly changing legal and competitive conditions within
the banking industry, and (ii) permit HNC to share with NLB, a strong commitment
to the concept of community-oriented banking and that the merger will enable
NLB's banking offices to offer customers an expanded range of products and
services.
For example, following the Merger, NLB's offices will be able to provide
new and expanded banking services to its customers that are provided currently
by Lansford. Lansford has offered some innovative products to its marketplace.
These products can be easily transferred and implemented, with some
modifications for competitive pricing, into NLB'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 Lansford that would benefit NLB'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 NLB'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 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 Slatington's market area who plan to remain in their homes for an
indefinite period and who desire a fixed monthly payment.
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Lansford has a wide range of deposit and loan products that could
accommodate NLB's customers' borrowing needs. Lending could be expanded in NLB's
marketplace by adding more competitive and additional products that will benefit
NLB's community and its citizens. Lansford's experienced management and greater
financial resources are expected to provide a benefit. For example, NLB will be
able to entertain more small to medium size business loans. Thus, the
Reorganization will enhance the ability of NLB's offices to remain competitive
and to satisfy their customers' financial needs.
The proposed Reorganization will benefit HNC by strengthening its market
presence in Lehigh County, Pennsylvania, thereby improving its ability to
compete in that region.
NLB's Board of Directors believes the proposed Merger represents an
attractive opportunity to acquire access to additional managerial expertise and
specialized services offered by HNC and its banking subsidiary, Lansford, thus
permitting NLB's banking offices to provide a broader range of services to their
customers in the face of increasing competition from larger financial
institutions.
As discussed in the section below entitled Management and Operations
Following the Merger, NLB'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, which is outlined above, and
with the assistance during the negotiations of Hopper Soliday, its investment
banker, the NLB Board was able to negotiate so that the Agreement contains
material provisions which help assure that the value and liquidity of the NLB
shareholders' investment increased, that Slatington will continue to have a
local identity in Slatington, the continued employment of Slatington's current
employees and continued service of NLB's directors for the near future, that the
structure of Slatington's banking offices, after the Merger, will provide
advantageous financial service to the community and to the customers of
Slatington, and new products and services. For example, trust services will be
available to Slatington's customers, and the Merger will lead to greater
financial resources to serve the lending and deposit needs of the local
communities served by NLB.
NLB'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
Slatington when relying on internal growth. In general, NLB is entering into the
Reorganization because it believes it can better maximize its shareholders'
long-term return through an affiliation with a larger, more diversified
community financial institution. NLB's Board of Directors believed that HNC's
greater resources would enable Slatington to offer expanded services to its
customers and the communities it serves. In addition, the Reorganization with
HNC would increase the liquidity of the stock held by NLB's shareholders by
exchanging it for stock in a larger banking organization that is quoted and
traded on the Nasdaq market.
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In summary, the primary reasons that the Board has agreed to the Merger
with NLB is that, for the reasons outlined above, in the opinion of the Board,
the Merger provides a fair financial return to NLB's shareholders and increases
the liquidity of their stock while maintaining, to the extent possible, the
local identity for Slatington to serve the community, and 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, NLB 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 NLB currently offers or in the immediate future could
offer, and that HNC had a community banking orientation, continued the name
recognition of "The Citizens National Bank" and a continued presence in the
local banking market of NLB.
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.
The factors discussed above and elsewhere in this Proxy
Statement/Prospectus are believed to all of the material factors considered by
the NLB Board of Directors in evaluating the Reorganization. In view of the wide
variety of material factors considered in connection with its evaluation of the
Reorganization, the NLB 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 HNC were determined by the Board to be significant factors. In addition,
individual NLB 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 Reorganization.
As stated above, Hopper Soliday has advised the Board of Directors that the
terms of the Agreement are fair to NLB's shareholders from a financial point of
view. As noted above, the NLB Board of Directors expects that the proposed
Reorganization will benefit the shareholders of NLB by providing them with
equity ownership in a larger, publicly-traded banking organization and, thereby,
increasing the liquidity of their investment. Historically, NLB Common Stock has
been traded on a limited basis on the OTC Bulletin Board and in privately
negotiated
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transactions. Upon consummation of the Reorganization, the shareholders of NLB
will receive HNC 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 NLB Board of Directors had unanimously concluded that
the proposed Reorganization is in the best interests of NLB's shareholders,
employees, customers and community.
Opinion of Financial Advisor
General
Pursuant to the engagement letter dated October 10, 1997 (the "Hopper
Soliday Engagement Letter"), the NLB Board of Directors retained Hopper Soliday
to render financial advisory and investment banking services to NLB and its sole
subsidiary Slatington (together in this section referred to as "NLB") in
connection with the possible sale of NLB to HNC. From time to time during the
past ten years Hopper Soliday has provided investment banking services to NLB
and has received normal and customary compensation for such services. Hopper
Soliday currently has no other material relationship with NLB or HNC.
Hopper Soliday is a regional investment banking firm and as a customary
part of its investment banking business is engaged in the valuation of bank and
bank holding company securities in connection with mergers, acquisitions,
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for various other purposes. As a specialist in
the securities of financial institutions, Hopper Soliday has experience in, and
knowledge of, the valuation of banking enterprises. The NLB Board selected
Hopper Soliday on the basis of Hopper Soliday's ability to evaluate the fairness
of the Merger from a financial point of view, its qualifications, its previous
experience and its reputation in the banking and investment communities. Hopper
Soliday has acted exclusively for the NLB Board in rendering its fairness
opinion and will receive a fee from NLB for its services.
Hopper Soliday has rendered a written opinion to the NLB Board, dated July
28, 1998, and confirmed by a written opinion to the NLB Board, dated November
12, 1998 (the "Hopper Soliday Opinion" or the "Opinion"), to the effect that, as
of such date, the Merger Consideration is fair, from a financial point of view,
to the shareholders of NLB. The full text of the updated Hopper Soliday Opinion
is attached as Annex B to this Proxy Statement/Prospectus and is incorporated
herein by reference. NLB 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 connection therewith. The following
summary of the Hopper Soliday Opinion is qualified in its entirety by reference
to the full text of the Hopper Soliday Opinion. The Merger Consideration was
determined by negotiation between NLB, represented by Hopper Soliday, and HNC
and was not
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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 is directed only to the Merger Consideration and
does not constitute a recommendation to any NLB shareholder as to how such
shareholder should vote at the Meeting.
In rendering its opinion dated July 28, 1998, Hopper Soliday reviewed,
among other things:
* NLB's Annual Reports and related financial information for years ended
December 31, 1993, through December 31, 1997, and NLB's Quarterly FDIC
Call Report and related unaudited financial information for the period
ending March 31, 1998;
* HNC'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 HNC and NLB, including financial
forecasts, relating to the business, earnings, assets and prospects of
HNC and NLB, furnished to Hopper Soliday by HNC and NLB, which Hopper
Soliday discussed with members of senior management of HNC and NLB;
* historical market prices and trading activity for the HNC Common Stock
and NLB Common Stock and similar data for certain publicly traded
companies which Hopper Soliday deemed to be relevant;
* the results of operations of HNC and NLB and similar data for certain
companies which Hopper Soliday deemed to be relevant;
* 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;
* 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 HNC;
* the Agreement and the Investment Agreement; and
* such other matters as Hopper Soliday deemed necessary.
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Hopper Soliday also met with certain members of senior management and other
representatives of HNC and NLB to discuss the foregoing as well as other matters
Hopper Soliday deemed relevant. Hopper Soliday also considered such financial
and other factors as it deemed appropriate under the circumstances and took into
account its assessment of general economic, market and financial conditions, and
its experience in similar transactions, as well as its experience in securities
valuation and its knowledge of the banking industry generally. Hopper Soliday's
opinions are necessarily based upon conditions as they existed and could be
evaluated on the respective dates thereof and the information made available to
Hopper Soliday through the respective dates thereof.
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 such financial forecasts were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of NLB and HNC as to the future financial performance of NLB and
HNC. Hopper Soliday did not make any independent evaluation or appraisals of the
assets or liabilities of HNC nor was it furnished with any such appraisals.
The summary set forth below does not purport to be a complete description
of the analyses performed by Hopper Soliday in this regard. 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 and, therefore, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the separate
factors discussed below, Hopper Soliday believes that its analyses must be
considered as a whole and 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 NLB's or HNC's control.
The analyses performed by Hopper Soliday are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. Additionally, analyses relating to
the values of businesses do not purport to be appraisals or to reflect the
prices at which businesses actually may be sold.
Transaction Summary
Hopper Soliday reviewed with the NLB Board the key financial terms of the
proposed Merger, including the expected method of accounting, the Exchange
Ratio, the share price of HNC as of July 24, 1998, the resulting indicated value
per share of NLB Common Stock of the Merger and the resulting indicated
aggregate consideration to be paid in the Merger. The proposed method of
accounting for the Merger was a pooling-of-interests in a tax-free exchange.
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The indicated value was $151.70 per share of NLB Common Stock, determined by
multiplying the Exchange Ratio by the closing price on the Nasdaq/NMS of HNC
Common Stock on July 24, 1998. The indicated aggregate consideration to be paid
in the merger was $21.1 million based on 139,498 fully diluted shares of NLB
Common Stock outstanding. Hopper Soliday noted that the value of the Merger
Consideration represented a 163% premium to NLB's market price of $57.75 per
share on July 24, 1998. Hopper Soliday also noted that the $151.70 per share
value represented 257% of NLB's fully-diluted book value per share as of June
30, 1998, a multiple of 22.04 times NLB'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 NLB and HNC 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
NLB shareholders would own approximately 6.8% of the aggregate shares
outstanding of the combined company and that NLB 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 Selected Institutions - NLB
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 NLB to a group of Pennsylvania banks and bank holding companies
consisting of ten institutions each with total assets between $55 million and
$145 million (the "NLB Peer Group"). The analysis included, but was not limited
to, the following ratios: equity/assets, non-current assets/total assets,
allowance for loan losses/non current assets, return on average assets, return
on average equity, net interest margin, price/earnings and price/book. The
analysis showed that: i) NLB's equity/assets ratio was 11. 16% versus a NLB Peer
Group median of 10.35%; ii) NLB's ratio of non-current assets to total assets
was 1.10% versus a NLB Peer Group median of 0.51%; iii) NLB's allowance for loan
losses/non-current assets ratio was 88.12% versus a NLB Peer Group median of
125.23%; iv) NLB's return on average assets and return on average equity were
1.33% and 12.24%, respectively, versus NLB Peer Group medians of 1.24% and
9.99%, respectively; v) NLB's net interest margin was 4.95% versus a Peer Group
median of 4.24%; and vi) NLB's price/earnings and price/book ratios were 8.60x
and 100%, respectively, versus NLB Peer Group medians of 13.12x and 129%,
respectively.
Summary Comparison of Selected Institutions - HNC
Hopper Soliday also compared selected balance sheet data, asset quality,
capitalization and profitability ratios and market statistics using financial
data at or for the twelve months
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ended March 31, 1998, and market data as of July 24, 1998, for HNC to a group of
Pennsylvania banks and bank holding companies consisting of seven institutions
each with total assets between $550 million and $1.3 billion (the "HNC Peer
Group"). The analysis included, but was not limited to, the following ratios:
equity/assets, non-current assets/total assets, allowance for loan
losses/noncurrent assets, return on average assets, return on average equity,
net interest margin, price/earnings and price/book. The analysis showed that: i)
HNC's equity/assets ratio was 9.61% versus a HNC Peer Group median of 9.01%; ii)
HNC's ratio of noncurrent assets to total assets was 0.46% versus a HNC Peer
Group median of 0.59%; iii) HNC's allowance for loan losses/non-current assets
ratio was 228.40% versus a HNC Peer Group median of 154.60%; iv) HNC's return on
average assets and return on average equity were 1.55% and 15.94%, respectively,
versus HNC Peer Group medians of 1.30% and 13.78%, respectively; v) HNC's net
interest margin was 4.84% versus a Peer Group median of 4.35%; and vi) HNC's
price/earnings and price/book ratios were 17.20x and 258%, respectively, versus
HNC Peer Group medians of 20.80x and 271 %, respectively.
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 (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:
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i) the Merger Consideration represented 257.0% of NLB's fully-diluted book value
versus a median of 255.1% for the Selected Transactions; ii) the Merger
Consideration represented a price/trailing 12 months earnings ratio of 22.0x
compared to a median of 24.7x for the Selected Transactions; iii) the Merger
Consideration represented a book/book of 100.0% compared to a median of 95.6%
for Selected Transactions; and iv) the Merger Consideration represented 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 in the above analysis as a comparison is
identical to NLB, HNC or the contemplated transaction. Accordingly, an analysis
of the results of the foregoing 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 are being 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 NLB or HNC. The fact
that any specific analysis has been referred to in the summary above is not
meant to indicate that such analysis was given more weight than any other
analyses.
In connection with its written opinion dated November 12, 1998, Hopper
Soliday confirmed the appropriateness of its reliance on the analyses used to
render its July 28, 1998 written opinion by performing procedures to update
certain of such analyses and by reviewing the assumptions upon which such
analyses were based and the factors considered in connection herewith.
In performing its analyses, Hopper Soliday made numerous assumptions, with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of NLB or HNC. The analyses
performed by Hopper Soliday are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. The analyses do not purport to be appraisals or to
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, Hopper Soliday's opinion and presentation to
the NLB Board is just one of many factors taken into consideration by the NLB
Board.
Pursuant to the Hopper Soliday Engagement Letter, NLB agreed to pay Hopper
Soliday a fee of 1.00% of the aggregate consideration to be paid in the Merger
contingent upon consummation of the Merger. Hopper Soliday will also be
reimbursed for reasonable out-of-pocket expenses incurred on behalf of NLB. NLB
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.
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Dissenters' Rights
General
Pursuant to the BCL, you, as a holder of NLB Common Stock, have the right
to dissent from the Merger and to obtain payment of the "fair value" of your
shares in the event that the Merger is consummated.
If you contemplate exercising your right to dissent, we urge you to read
carefully the provisions of Subchapter D of Chapter 15 of the BCL attached to
this Proxy Statement/Prospectus as Annex C. The following is a summary of the
steps to be taken if you want to exercise your right to dissent, and should be
read in connection with the full text Subchapter D of Chapter 15 of the BCL. You
must take each step in the indicated order and in strict compliance with the
applicable provisions of the BCL in order to perfect your dissenters' rights.
Your failure to comply with the following steps will result in your receiving
the consideration contemplated by the Agreement in the event that the Merger is
consummated.
Any written notice or demand, required in connection with the exercise of
dissenters' rights, before the Effective Date of the Merger, must be sent to
Francis P. Burbidge, First Vice President, Northern Lehigh Bancorp, Inc., 502
Main Street, Slatington, Pennsylvania 18080- 0008, and, if after the Effective
Date of the Merger, must be sent 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 NLB Common Stock
immediately before consummation 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 with NLB, prior to the vote of shareholders on the Merger at
the Meeting, a written notice of intention to demand payment of
the fair value of your shares of NLB Common Stock if the Merger
is effected;
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* effect no change in your beneficial ownership of NLB Common Stock
from the date of the notice through the Effective Time; and
* refrain from voting your NLB Common Stock for approval of the
Agreement.
Neither a proxy nor a vote against approval of the Merger will constitute the
necessary written notice of intention to dissent.
Notice to Demand Payment
If the Agreement is approved by the required vote of shareholders, NLB or
HNC, as the case may be, will mail a notice to all dissenters who gave due
notice of intention to demand payment and who refrained from voting 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 NLB
Common Stock in order to obtain payment. The notice will include a form for
demanding payment and a copy of Subchapter D of Chapter 15 of the BCL. 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.
If you fail to timely demand payment or fail to timely deposit your share
certificates, as required by the notice, you will forfeit your dissenters'
rights and you will receive shares of HNC Common Stock, as determined in
conformity with the Agreement.
Payment of Fair Value of Shares
Promptly after the Effective Time, or upon timely receipt of demand for
payment if the Merger already has been consummated, HNC will remit to dissenters
who have deposited their stock certificates the amount that HNC estimates to be
the fair value of the NLB Common Stock. The remittance or notice will be
accompanied by:
* a closing balance sheet and statement of income of NLB 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 HNC's estimate of the fair value of the NLB Common
Stock; and
* a notice of the right of the dissenter to demand supplemental
payment under the BCL accompanied by a copy of Subchapter D of
Chapter 15 of the BCL.
Estimate by Dissenter of Fair Value of Shares
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If a dissenter believes that the amount stated or remitted by HNC is less
than the fair value of the NLB Common Stock, the dissenter may send to HNC his
or her own estimate of the fair value of the NLB Common Stock, which shall be
deemed to be a demand for payment of the amount of the deficiency. If HNC remits
payment of its estimated value of a dissenter's NLB Common Stock and the
dissenter does not file his or her own estimate within 30 days after the mailing
by HNC of its remittance, the dissenter will be entitled to no more than the
amount remitted by HNC.
Valuation Proceedings
If any demands for payment remain unsettled within 60 days after the latest
to occur of:
* the Effective Date;
* timely receipt by NLB or HNC, as the case may be, of any demands
for payment; or
* timely receipt by NLB or HNC, as the case may be, of any
estimates by dissenters of the fair value,
then, HNC may file in the Court of Common Pleas of Lehigh County (the "Lehigh
County Court") an application requesting that the fair value of the NLB Common
Stock be determined by the Lehigh County Court. If this happens, all dissenters,
wherever residing, whose demands have not been settled, shall be made parties to
the proceeding as in an action against their shares. In addition, a copy of the
application will be served on each dissenter.
If HNC were to fail to file such an application, then any dissenter, on
behalf of all dissenters who have made a demand and who have not settled their
claim against HNC, may file an application in the name of HNC at any time within
the 30-day period after the expiration of the 60-day period and request that the
fair value be determined by the Lehigh County Court. The fair value determined
by the Lehigh County Court may, but need not, equal the dissenters' estimates of
fair value. If no dissenter files such an application, then each dissenter
entitled to do so shall be paid HNC's estimates of the fair value of the NLB
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.
HNC intends to negotiate in good faith with any dissenting shareholders.
If, after negotiation, a claim cannot be settled, then HNC intends to file an
application requesting that the fair value of the NLB Common Stock be determined
by the Lehigh County Court.
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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 Lehigh County Court to recommend a decision on the issue of
fair value, will be determined by the Lehigh County Court and assessed against
HNC except that any part of the costs and expenses may be apportioned and
assessed by the Lehigh County Court against all or any of the dissenters who are
parties and whose action in demanding supplemental payment the Lehigh County
Court finds to be dilatory, obdurate, arbitrary, vexatious or in bad faith.
Terms of the Merger
We discuss the material terms of the Agreement below. Our description does
not purport to be complete and is qualified in its entirety by reference to the
Agreement, a copy of which is attached as Annex A to this Proxy
Statement/Prospectus and is incorporated by reference herein. We urge you to
read the Agreement.
Effect of the Merger
Pursuant to the Agreement, NLB will merge with and into HNC North. HNC
North will be the Surviving Corporation under the name "Harleysville National
Corporation North, Inc." Immediately thereafter, Slatington will merge with,
into and under the charter of Lansford.
Exchange of Shares
On the Effective Date of the Merger, each outstanding share of NLB Common
Stock will become the right to receive 3.57 shares of HNC Common Stock, subject
to adjustment for certain stock dividends, stock splits and similar
transactions.
HNC will not issue fractional shares of HNC Common Stock in connection with
the Merger. In lieu of the issuance of any fractional share to which you would
otherwise be entitled, each former shareholder of NLB will receive cash in an
amount equal to the fair market value of the fractional interest, as determined
pursuant to the terms of the Agreement.
HNC and NLB anticipate that the Effective Date 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 Effective Date fails to occur by June 30, 1999, and the parties have not
agreed otherwise prior to that date, the Agreement will terminate automatically.
Following the Effective Date, former shareholders of NLB will be obliged to
surrender their NLB Common Stock certificates to HNC. Detailed instructions
concerning the procedure for surrendering the NLB Common Stock certificates will
be sent by HNC to each former shareholder of NLB on or promptly after the
Effective Date. Upon proper surrender of their certificates, each former
shareholder of NLB will be issued a stock certificate representing the
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number of whole shares of HNC Common Stock into which his or her shares of NLB
Common Stock were converted, together with a check in the amount of any cash to
which he or she is entitled in lieu of the issuance of a fractional share.
Shareholders of NLB should not surrender their NLB Common Stock certificates for
exchange until they receive written instructions to do so from HNC.
Following the Effective Date and until properly requested and surrendered,
each NLB Common Stock certificate will be deemed for all corporate purposes to
represent the number of whole shares of HNC Common Stock which the holder would
be entitled to receive upon its surrender. Provided, however, that HNC, at its
option, may withhold dividends payable after the Effective Date to any former
shareholder of NLB who has received written instructions from HNC but has not at
that time surrendered his or her NLB Common Stock certificates. Any dividends so
withheld, will be paid without interest to any former shareholder of NLB upon
the proper surrender of his or her NLB Common Stock certificates.
All NLB Common Stock certificates must be surrendered to HNC within two
years after the Effective Date. In the event that any former shareholder of NLB
does not properly surrender his or her NLB Common Stock certificates within that
time, the shares of HNC Common Stock that would otherwise have been issued to
him or her may, at the option of HNC, be sold and the net proceeds of such sale,
together with the cash (if any) to which he or she is entitled in lieu of the
issuance of a fractional share and any previously accrued and unpaid dividends,
will be held in a non-interest bearing account for his or her benefit. From and
after the sale, the sole right of the former shareholder of NLB will be the
right to collect the net proceeds, cash and accumulated dividends. Subject to
all applicable laws of escheat, the net proceeds, cash and accumulated dividends
will be paid to the former shareholder of NLB, without interest, upon proper
surrender of his or her NLB Common Stock certificates.
Stock Options
In connection with the Reorganization, 5,000 outstanding options to
purchase shares of NLB Common Stock issued by NLB will be converted on the
Effective Date into the right to receive options to acquire 17,850 shares, the
number of shares of HNC Common Stock equal to the number of shares of NLB Common
Stock covered by the option multiplied by 3.57, and the exercise price for a
whole share of HNC 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 NLB
under which they were originally issued. See "APPROVAL OF THE MERGER -- Terms of
the Merger and -Accounting Treatment."
The foregoing discussion relating to the conversion and exchange of NLB
Common Stock is only a summary that is provided for convenience. The foregoing
discussion should be read in conjunction with, and is qualified in its entirety
by, the terms of the Agreement, which is reproduced in full and set forth in
Annex A to this Proxy Statement/Prospectus.
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Business Pending the Merger
The Agreement provides that NLB conduct its business in the usual, regular
and ordinary course, consistent with prudent business judgment, pending the
Effective Date. NLB may not take any action not in the ordinary course of
business without the prior written consent of HNC. NLB and Slatington have
agreed that, in general, pending the Effective Date, they will:
* use all reasonable efforts to carry on their 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");
* to the extent consistent with prudent business judgment, use all
reasonable efforts to preserve their present business organization, to
retain the services of their present officers and employees, to
maintain good relationships with their employees, and to maintain
their relationships with customers, suppliers and others having
business dealings with them;
* maintain all of their 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;
* use all reasonable efforts to preserve or collect all material claims
and causes of action belonging to them;
* keep all insurance policies now carried by them in full force and
effect;
* perform their obligations, in all material respects, under all
material agreements, contracts, instruments and other commitments to
which they are a party or by which they are bound or which relate to
or affect their properties, assets and business;
* maintain their books of account and other records in the Ordinary
Course of Business;
* 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 them and to the conduct of its business;
* not amend their Articles of Incorporation or Bylaws;
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* 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 their properties or assets to any material lien, claim,
charge, or encumbrance of any kind whatsoever;
* not take any action or permit any action to be taken that would
constitute a breach of any representation, warranty or covenant set
forth in the Agreement;
* not declare, set aside or pay any dividend or make any other
distribution in respect of NLB and 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 NLB
Common Stock or any other equity or debt securities of NLB or any
securities convertible into NLB Common Stock;
* 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 NLB or Slatington; except that they may grant general
salary increases and year-end bonuses to individual employees in the
Ordinary Course of Business consistent with past practice;
* not enter into any related party transaction of the kind contemplated
in Section 3.1(k) of the Agreement except 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 collectibility or present other unfavorable
features and after disclosure of the related party transaction to HNC;
* 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;
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* 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
them 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;
* 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
NLB or Slatington or any business combination with NLB or Slatington
other than as contemplated by the 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 them;
* 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;
* 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;
* 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;
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* 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;
* not take any action which would result in any of the representations
and warranties of NLB or Slatington set forth in the Agreement
becoming untrue as of any date after the date hereof;
* 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;
* not purchase any security for its investment portfolio except in
conformance with its investment policy in effect as of July 24, 1998;
* not waive, release, grant or transfer any rights of value or modify or
change in any material respect any existing agreement to which NLB or
Slatington is a party, other than in the Ordinary Course of Business
consistent with past practice; and
* 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.
Any action in contravention of the foregoing requires the written consent
of HNC. There have been no material contracts or other transactions between NLB
and HNC since signing the Agreement, nor have there been any material contracts,
arrangements, relationships or transactions between NLB and HNC during the past
five years, other than in connection with the Agreement and as described herein.
Conditions, Amendment and Termination
The obligations of HNC and NLB to consummate the Merger are subject to a
number of conditions and contingencies, as set forth in the Agreement, the most
significant of which include:
* approval by the shareholders of NLB;
* approval by the FRB, the OCC and the PDB;
* 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;
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* absence of any pending or threatened action, suit or proceeding before
any federal, state or local governmental authority or arbitration
tribunal seeking to modify or otherwise affect the transactions
contemplated by the Merger;
* continuing accuracy in all material respects of the representations
and warranties and the absence of any breach of any of the covenants
made by HNC or NLB;
* receipt of opinions from counsel for NLB and from counsel for HNC
concerning certain legal matters;
* absence of any material adverse change in the financial condition,
business or future prospects of HNC or NLB;
* 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;
* exercise by dissenting shareholders of dissenters' rights with respect
to less than 6,975 shares of NLB Common Stock;
* absence of discovery of any material previously undisclosed
environmental problem affecting HNC or NLB;
* execution by NLB of an Investment Agreement;
* receipt of an updated fairness opinion from Hopper Soliday, dated no
later than the date of this Proxy Statement/Prospectus, concerning the
fairness to the shareholders of NLB, from a financial point of view,
of the terms of the transactions contemplated by the Agreement; and
* delivery of certain certificates at closing, by officers of HNC and
NLB, confirming satisfaction of the foregoing.
To the extent permitted by law, the Agreement may be amended by mutual
consent of the parties and any term or condition of the Agreement may be waived
by the party entitled to its benefit at any time before the Effective Date,
whether before or after the approval of the Agreement by NLB's shareholders and
without seeking shareholder approval provided, however, that no change in the
amount of consideration to be received by the shareholders of NLB can be adopted
unless and until the shareholders of NLB approve, adopt or ratify the change, in
accordance with applicable federal and state law.
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The Agreement may be terminated at any time before the Effective Date ,
whether before or after its approval and adoption by the shareholders of NLB by:
* mutual consent 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 ("Closing") will occur at such time
and place, following three business days notice to NLB, 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 in accordance with its terms, NLB and HNC North will
cause articles of merger to be prepared, completed and filed with the Secretary
of State of the Commonwealth of Pennsylvania (the "Pennsylvania Department of
State").
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. The Bank Merger will become effective on the Effective Date or the
date upon which the OCC issues a Certificate of Merger with respect to the
merger of Slatington with, into and under the charter of Lansford, on which date
the separate existence of Slatington shall cease, and Lansford shall be the
surviving institution. The parties propose to name the surviving institution
"Citizens National Bank." HNC and NLB intend to consummate the Reorganization
during the first quarter of 1999, assuming that the Merger is approved by NLB's
shareholders, all required regulatory approvals have been obtained and all other
conditions to closing have been satisfied or waived by that time. The Agreement
will automatically be terminated and the Merger canceled if all
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applicable conditions have not been satisfied by June 30, 1999, unless the
parties have agreed prior to that date to extend the termination date.
Interests of Certain Persons in the Merger
Certain members of NLB's management and the NLB Board may be deemed to have
interests in the Reorganization in addition to their interests as shareholders
of NLB 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 NLB 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 the Record Date, the directors and executive officers of NLB and
Slatington beneficially own approximately 27,674 shares of NLB Common Stock,
including 5,000 stock options held by Mr. Burbidge. On the Effective Date, each
option shall be assumed by HNC and shall be converted on the Effective Date into
and become an option to acquire that number of shares of HNC Common Stock equal
to the number of shares of NLB 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 such options to
acquire HNC Common Stock shall be issuable in accordance with the terms of the
respective agreements of NLB under which they were issued.
Pursuant to the Agreement, HNC has agreed to indemnify the present and
former officers, directors, employees and agents of NLB and Slatington against
certain liabilities arising prior to the effective time of the Merger to the
full extent permitted by the Articles of Incorporation and Bylaws of NLB, the
charter and bylaws of Slatington, each as in effect on the date of the
Agreement.
The Agreement provides that, except as may be otherwise specifically agreed
to in writing by the parties, for at least one year following the Effective
Date, Slatington's employees, who are employed in good standing and actively at
work on the Effective Date, will be offered employment and retained at current
salary levels by Lansford, HNC or an affiliate of HNC, subject to the ongoing
needs of HNC, the HNC's affiliate and/or Lansford, or any successor thereto. All
continuing employees will be entitled to participate in any and all benefit
plans in effect on the Effective Date, at HNC or the respective HNC affiliate,
as the case may be, in accordance with the terms of the particular plans. All
benefits of the continuing employees who are employed by HNC will be maintained
at a level not less than equal to the benefits enjoyed by the employees of NLB
prior to the Effective Date with such changes as may be appropriate as
determined by the Board of Directors of Lansford. The former Slatington
employees will 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
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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.
Management and Operations Following the Merger
On the Effective Date, NLB will be merged with and into HNC North. HNC
North will survive the Merger. The shareholders of NLB will become shareholders
of HNC. The Boards of Directors of HNC and HNC 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, four persons, acceptable to
HNC, HNC North and Lansford and who previously served on the Board of Directors
of NLB, shall be appointed to the Board of Directors of Lansford to serve until
their successors have been duly elected, qualified or appointed.
Immediately following the Effective Date, the directors of Slatington, as
of the Effective Date and Thomas D. Oleksa, who will serve as an ex-officio
member, shall serve as an Advisory Board of Directors for the Slatington area.
The Advisory Board of Directors will be established for at least one year.
In connection with the Reorganization, HNC, Lansford, NLB, Slatington and
Francis P. Burbidge, President and Chief Executive Officer of Slatington and a
Director of NLB, entered into a Release Agreement, pursuant to which Mr.
Burbidge agreed to release any and all rights he might have under his employment
agreement with NLB. In addition, Mr. Burbidge has entered into an Employment
Agreement and a Consulting Agreement with Lansford. We summarize the major
provisions of these contracts below.
Mr. Burbidge's employment agreement with Lansford has a one year term,
beginning on the Effective Date. He will serve as a Vice President of Lansford,
reporting to the President. The agreement provides that Mr. Burbidge will
receive an annual salary of $98,000. In addition, the agreement provides, among
other things, a right to participate in any bonus plan approved by the Board of
Directors and insurance, vacation, pension and other fringe benefits and
perquisites for Mr. Burbidge.
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, as
defined in the employment agreement. The employment agreement also contains
provisions restricting Mr. Burbidge's right to compete with HNC and Lansford.
Lansford and Mr. Burbidge also entered into a consulting agreement, dated
as of July 28, 1998, but effective one year after the effective date of his
employment agreement (described above). Under the terms of the consulting
agreement, Mr. Burbidge will act as an advisor and
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consultant to 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.
The directors and officers of HNC and its subsidiaries have no special
interest in the Merger, other than in their capacity as shareholders of HNC, and
will not receive any special consideration or compensation in connection with
its consummation.
Federal Income Tax Consequences
The Agreement provides that Grant Thornton, LLP, independent accountant for
HNC, will render an opinion at Closing that will state that for federal income
tax purposes:
* Neither HNC nor HNC North will recognize gain or loss on the
incorporation of HNC North or the contribution of Lansford stock to
HNC North in exchange for HNC North stock.
* The initial basis and holding period of HNC in the HNC North stock it
acquires in exchange for Lansford stock will be equal to its basis and
holding period for the Lansford stock delivered in the exchange.
* The initial basis and holding period of HNC North in the Lansford
stock it receives from HNC in the Reorganization will be the same as
HNC's basis and holding period in that stock.
* The merger of NLB with and into HNC North will constitute a
"Reorganization" within the meaning of sections 368(a)(2)(D) of the
Code.
* HNC, NLB and HNC 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 NLB with and into HNC North.
* No gain or loss will be recognized by the former shareholders of NLB
upon the exchange of their NLB Common Stock for HNC Common Stock.
* The basis and holding periods of former NLB shareholders in their NLB
Common Stock will carry over to HNC Common Stock they receive in the
Reorganization.
* Former NLB shareholders receiving cash in lieu of fractional shares of
HNC 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 NLB Common Stock allocable to the fractional
interests exchanged therefor. The gain or loss will constitute capital
gain or loss, if the shares of NLB Common Stock
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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 the shareholder's holding period for the
shareholder's NLB Common Stock.
* Former NLB shareholders exercising dissenters rights with respect to
their NLB Common Stock will have gain or loss on the receipt of cash
for their NLB Common Stock equal to the excess of the cash received
over their basis in their NLB Common Stock. The gain or loss will
constitute capital gain or loss, if the shares of NLB 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 NLB Common Stock.
* Stock option holders will not recognize any gain or loss on the
exchange of their NLB options for HNC options.
* HNC North will succeed to the tax attributes of NLB including net
operating loss carryovers, credit carryovers and accounting methods
subject to any limitations imposed under section 381 and 382 of the
Code.
* HNC's basis in its HNC North stock will be increased by the basis of
NLB 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.
* HNC North, Slatington and 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 Slatington or Lansford in the
Bank Merger.
* The basis and holding periods of Slatington in its assets transferred
to Lansford in the Bank Merger will carryover to Lansford and become
Lansford's basis and holding periods in those assets.
* As a result of the Bank Merger, Lansford will succeed to the tax
attributes 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.
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* Upon consummation of the Bank Merger, HNC North's basis in its
Lansford stock will be increased by the basis in its Slatington stock
immediately prior to the merger.
The foregoing is intended only as a general summary of certain federal
income tax consequences of the Merger under present law. We urge each
shareholder of NLB to consult his or 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
In connection with the Agreement, NLB has entered into an Investment
Agreement with HNC, pursuant to which HNC has an option (the "Option")to acquire
certain shares of NLB. 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 provides that, under certain circumstances, HNC may
purchase up to 27,760 shares of NLB's Common Stock. The exercise price of the
NLB Common Stock is $57.00 per share, subject to certain adjustments, as set
forth in the Investment Agreement and the Option.
The Option is designed to compensate HNC for its risks, costs and expenses
and the commitment of resources associated with the Merger in the event the
Merger is not consummated due to an attempt by a third person to gain control of
NLB.
The Option also includes provisions giving NLB the right to repurchase
shares of NLB Common Stock issued under the Option in certain limited
circumstances and 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 NLB.
Unless the Merger is effected, certain conditions to Closing become
incapable of satisfaction or HNC has engaged in a willful breach of the
Agreement, the 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 HNC. As of the date of this Proxy Statement/Prospectus,
the parties to the Investment Agreement are not aware of any event that would
give HNC the right to exercise the Option.
We intend the foregoing description to be only a summary of the provisions
of the Investment Agreement. The discussion does not purport to be complete and
is qualified in its entirety by reference to the Investment Agreement, which is
attached as Exhibit "B" to the Agreement, and included in this Proxy
Statement/Prospectus at Annex A. We recommend that you read the Investment
Agreement.
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Accounting Treatment
The Agreement contemplates that the Merger will be treated as a pooling of
interests for financial accounting purposes. If HNC would be required to
purchase more than 10% of the outstanding shares of NLB Common Stock for cash,
due to the purchase of fractional shares and the exercise of dissenters' rights
by NLB shareholders, or if other conditions arise that would prevent the Merger
from being treated as a pooling of interests for financial accounting purposes,
HNC has the right to terminate the Agreement and to cancel the Merger.
Restriction on Resale of HNC Common Stock Held By Affiliates
The shares of HNC Common Stock to be issued upon consummation of the Merger
have been registered with the Commission under the Securities Act and, following
the Merger, may be freely resold or otherwise transferred by all former
shareholders of NLB, except those former shareholders who are deemed
"affiliates" of NLB, within the meaning of Commission Rules 144 and 145. In
general terms, any person who is an executive officer, director or 10%
shareholder of NLB at the time of the Meeting may be deemed to be an affiliate
of NLB for purposes of Commission Rules 144 and 145.
HNC Common Stock received by persons who are deemed to be affiliates of NLB
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 NLB to
sell shares of HNC Common Stock received by him or her in ordinary brokerage
transactions subject to certain limitations on the number of shares which may be
resold in any consecutive three (3) month period. Notwithstanding the foregoing,
an affiliate of NLB may not, as a general rule and subject to an exception in a
case of certain de minimis sales:
* sell any shares of NLB Common Stock during the 30-day period
immediately preceding the Effective Date; or
* sell any shares of HNC Common Stock received by him or her in exchange
for his or her shares of NLB 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 HNC Common Stock received in
the Reorganization under Rule 144 or Rule 145, as summarized herein generally,
will be subject to HNC's having satisfied its Exchange Act reporting
requirements for specified periods prior to the time of sale. Affiliates also
would be permitted to resell HNC Common Stock received in the Reorganization
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 HNC Common Stock
received by persons who may be deemed to be affiliates of HNC or NLB.
Under the terms of the Agreement, each person who may be deemed to be an
affiliate of NLB is required, prior to the Closing, to deliver to HNC, a letter
in form and substance satisfactory to HNC, acknowledging and agreeing to abide
by the limitations imposed by the 1933 Act and the rules of the Commission
thereunder regarding the sale or other disposition of the shares of HNC Common
Stock to be received by him or her pursuant to the Merger.
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COMPARATIVE STOCK PRICES AND DIVIDENDS
AND RELATED SHAREHOLDER MATTERS
Common Stock of HNC
HNC Common Stock is traded in the over-the-counter market and is listed on
the National Market System of Nasdaq under the symbol "HNBC." We set forth on
the table below, for the periods indicated, the high and low bid quotations for
HNC Common Stock as reported on Nasdaq, and cash dividends paid per share. The
quotations set forth in the table represent quotations between dealers, do not
include retail markups, markdowns or commissions, and may not represent actual
transactions. All information has been adjusted for stock dividends and splits
throughout the 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 - -
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.
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On November __, 1998, the closing bid and asked quotations for HNC Common
Stock as reported on Nasdaq were, respectively, $______ and $_______. On July
27, 1998, the last trading day before public announcement of execution of the
Agreement in connection with the Merger, the closing bid and asked quotations
for HNC Common Stock were $42.00 and $42.63, respectively, as reported on
Nasdaq. As of November __, 1998, HNC Common Stock was held by ______ holders of
record. HNC has in the past paid regular quarterly cash dividends to its
shareholders on or about March 31, June 30, September 30, and December 31, of
each year.
Common Stock of NLB
The last reported sale price of NLB Common Stock as reported on the OTC
Bulletin Board was ____ shares at $ ____ per share on ____, 1998. NLB 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. The last reported sale price on NLB Common Stock before
public announcement of execution of the Agreement in connection with the Merger
was a trade of 900 shares at $56.00 per share on May 19, 1998. NLB 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.
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DESCRIPTION OF HARLEYSVILLE NATIONAL CORPORATION
AND DESCRIPTION OF HNC COMMON STOCK
Information Concerning HNC
HNC is a Pennsylvania business corporation and a registered bank holding
company with its headquarters in Harleysville, Pennsylvania. HNC has three bank
subsidiaries, Harleysville National, Lansford and Security National. Through its
subsidiaries, HNC engages in the general commercial and retail banking business.
HNC's financial institution subsidiaries operate thirty (30) banking offices in
Bucks County, Carbon County, Chester County, and Montgomery County, Shuylkill
County and Wayne County, Pennsylvania. As of September 30, 1998, HNC had
consolidated total assets of approximately $1,260,619,000. Harleysville National
(established in 1909), Lansford (established in 1903), and Security National
(established in 1988) are national banking associations each of which operates
under the primary supervision of the OCC. Harleysville National and Lansford are
also authorized to engage in trust activities. Lansford is a second tier
subsidiary of HNC. All of the outstanding shares of Lansford transferred to HNC
North, a Pennsylvania corporation, established in 1998, and a wholly-owned
subsidiary of HNC, on July 24, 1998.
As a registered bank holding company, HNC is subject to regulation under
the Bank Holding Company Act of 1956, as amended, and the rules adopted by the
FRB thereunder. Under applicable FRB policies, a bank holding company such as
HNC, is expected to act as a source of financial strength to each of its
subsidiary banks and to commit resources to support each subsidiary bank in
circumstances when it might not do so absent such a policy.
The principal executive offices of HNC are located in Harleysville,
Pennsylvania. As of September 30, 1998, HNC 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 HNC with the Commission pursuant to
the Exchange Act or Securities Act, as the case may be, 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;
* HNC's Annual Report on Form 10-K for the year ended December 31, 1997;
* HNC's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998;
* HNC's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998;
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* HNC's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998; and
* HNC's Current Report on Form 8-K dated August 4, 1998.
All documents filed by HNC 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 consummation of the transactions contemplated herein, are hereby incorporated
by reference into this Proxy Statement/Prospectus and shall be deemed a part
hereof from the date of filing of each document. Any statement contained in a
document incorporated by reference herein shall be 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 such statement. Any
statement so modified or superseded shall 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 the
immediately preceding statement.
Acquisitions by HNC
HNC was incorporated in June, 1982. On January 1, 1983, HNC became the
parent bank holding company of Harleysville National, a wholly-owned subsidiary
of HNC. On February 13, 1991, HNC acquired all of the outstanding common stock
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 Lansford. On July 1, 1994, HNC
acquired all of the outstanding stock of Security National. On March 1, 1996,
HNC acquired all of the outstanding common stock of Farmers & Merchants Bank
(Honesdale, P.A.) ("F&M"). F&M was merged into Lansford and is now operating as
a branch office of Lansford. On March 17, 1997, HNC Financial Company was
incorporated as a Delaware corporation. HNC Financial Company's principal
business function is to expand the investment opportunities of HNC. HNC is
primarily a bank holding company which provides financial services through its
three bank subsidiaries. Since commencing operations, HNC's business has
consisted primarily of managing its subsidiary banks, and its principal source
of income has been dividends paid by the banks. HNC is registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended (the
"Bank Holding Company Act").
Loans
HNC, through its subsidiaries, grants loans and makes other credit
available to the general public. These extensions of credit are structured to
meet the varying needs of businesses, individuals, and institutional customers
and include mortgages, lines of credit, term loans, leases
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and letters of credit. This activity comprises a major source of revenue for
HNC's subsidiaries and it also exposes HNC and its subsidiaries to potential
losses upon borrower default. In order to minimize the occurrence of loss, HNC's
subsidiaries follow strict loan underwriting and risk weighing policies. While
collateral continues to play an important part in lending decisions, primary
emphasis is placed upon borrowers' underlying ability to pay. HNC's subsidiaries
confine their lending activity to customers who live or are based in their
respective market areas. By limiting lending activities to a specific geographic
area, the staff of each subsidiary becomes more knowledgeable about local market
conditions and can thereby make better credit risk assessments and consequently
more prudent lending decisions. HNC believes that this local knowledge, when
combined with prudent underwriting standards, overcomes the risks associated
with the geographic concentration of loans.
Description of HNC Common Stock
HNC is authorized to issue 30,000,000 shares of HNC common stock of which
7,037,814 shares were issued and outstanding as of September 30, 1998. HNC also
has 3,000,000 shares of preferred stock authorized for issuance. No preferred
stock is outstanding as of September 30, 1998. HNC Common Stock is quoted on the
Nasdaq under the symbol "HNBC".
Dividends
The holders of HNC Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. HNC has historically paid quarterly cash dividends to its shareholders
on or about March 31, June 30, September 30, and December 31, of each year.
The ability of HNC to pay dividends to its shareholders is dependent
primarily upon the earnings and financial condition of Harleysville National,
Lansford, and Security National. Funds for the payment of dividends on HNC Stock
are expected for the foreseeable future to be obtained primarily from dividends
paid to HNC by its subsidiaries, which dividends are subject to certain
statutory limitations.
Under applicable federal laws, the dividends that may be paid by the HNC
banking subsidiaries without prior regulatory approval are subject to certain
prescribed limitations. Because the banking subsidiaries of HNC are national
banks, the approval of the OCC is required under federal law if the total of all
dividends declared during any calendar year exceed the total of the net profits,
as defined, of the respective bank for the year, combined with its retained net
profits, as defined, for the two preceding years. In addition to the foregoing
statutory restrictions on dividends, the OCC also has general authority to
prohibit a national bank from engaging in an unsafe or unsound banking practice.
The payment of a dividend by a bank could, depending upon the financial
condition of the bank involved and other factors, be deemed to be such an unsafe
or unsound practice.
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HNC paid cash dividends of $0.91 per share in 1997, adjusted to reflect a
5% stock dividend effective on June 30, 1997. HNC 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 HNC, HNC
shareholders are entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior distribution rights of HNC preferred stock, if
any, then outstanding. On September 30, 1998, no shares of HNC preferred stock
were issued or outstanding under the Articles of Incorporation of HNC.
Dividend Reinvestment Plan
The holders of HNC Common Stock may elect to participate in the HNC
Dividend Reinvestment and Stock Purchase Plan. This plan is administered by
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 HNC Common Stock either in the over-the-counter Nasdaq market or from
HNC's authorized but unissued shares of HNC Common Stock. Participating
shareholders may make additional voluntary cash payments that are also used by
the plan agent to purchase, on behalf of shareholders, additional shares of HNC
Common Stock. Shares of HNC Common Stock held for the account of participating
shareholders are voted by the plan agent in accordance with the instructions of
each participating shareholder as set forth in his or her proxy.
Securities Laws
HNC, as a business corporation, is subject to the registration and
prospectus delivery requirements of the Securities Act and is also subject to
similar requirements under state securities laws. The HNC Common Stock is
registered with the Commission under Section 12(g) of the Exchange Act, and HNC
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 HNC Common Stock are subject to certain restrictions affecting their
right to sell shares of HNC Common Stock owned beneficially by them.
Specifically, each such person is subject to the beneficial ownership reporting
requirements under the short-swing profit recapture provisions of Section 16 of
the Exchange Act and may sell shares of HNC Common Stock only:
* in compliance with the provisions of Commission Rule 144;
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* 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 BCL and HNC's amended Articles of Incorporation and amended Bylaws
provide numerous provisions that may be deemed to be anti-takeover in nature,
both as to purpose and effect. There are four major anti-takeover provisions
under the BCL relating to corporations that have their securities registered
with the Commission under Section 12 of the Securities Act ("Registered
Corporations").
The overall effect of the various provisions described herein might be to
deter a tender offer that a majority of the shareholders might possibly view to
be in their best interest as the offer might include a substantial premium over
the market price of HNC's Common Stock at that time. In addition, these
provisions may have the effect of assisting HNC's current management in
retaining its position and placing it in a better position to resist changes
that the shareholders might want to make if dissatisfied with the conduct of
HNC's business.
Two of these statutory provisions have the effect of eliminating the rights
of the shareholders of Registered Corporations to:
* call a special meeting of shareholders; and
* propose an amendment to the Articles of Incorporation of HNC.
One effect of these provisions may be to prevent the calling of a special
meeting of shareholders for the purpose of considering a merger, consolidation
or other corporate combination which does not have the approval of a majority of
the members of HNC's Board of Directors. Therefore, such a provision may have
the effect of making HNC less attractive as a potential takeover candidate by
depriving shareholders of the opportunity to initiate special meetings at which
a possible business combination might be proposed.
These two provisions under the BCL might serve to discourage attempts by
shareholders to disrupt the business of HNC between annual meetings of the
shareholders by calling a special meeting. Further, these provisions will
provide a greater time for consideration of any shareholder proposal to the
extent that his, her or its proposal must be deferred until the next annual
meeting of shareholders. Also, when made, such proposals must comply with
certain notice requirements and proxy solicitation rules in advance thereof.
These BCL provisions do not affect the calling of a special meeting by the
Chairman of the Board or by a majority of the
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<PAGE>
members of the Board of Directors or of its Executive Committee if, in their
judgment, there are matters to be acted upon which are in the best interest of
HNC and its shareholders.
HNC's Articles of Incorporation and amended Bylaws contain a number of
additional provisions that could be considered anti-takeover in purpose and
effect. These provisions include:
* the authorization of 30,000,000 shares of HNC Common Stock and
3,000,000 shares of preferred stock;
* the lack of preemptive rights for shareholders to subscribe to
purchase additional shares of stock on a pro rata basis;
* the requirement that an affirmative vote of the holders of 80 percent
of HNC Common Stock is required to approve an amendment to HNC's
Bylaws or to change an amendment to its Bylaws that has been approved
by the Board of Directors; and
* the requirement that an affirmative vote of the holders of 80 percent
of HNC's Common Stock is required to approve a merger, consolidation,
liquidation, or sale of substantially all assets unless such
transaction has received prior approval of at least 75 percent of all
members of the Board of Directors in which case a majority of the
outstanding shares of common stock would be required for approval.
These provisions could give the holders of a minority of HNC's outstanding
shares a veto power over any merger, consolidation, dissolution or liquidation
of HNC, the sale of all or substantially all of its assets or an amendment to
its Bylaws unless 75 percent of all members of the Board of Directors and a
majority of the shareholders believes such transaction to be desirable and
beneficial. Absent such provisions in HNC's Articles of Incorporation and
Bylaws, the affirmative vote of at least a majority of HNC's Common Stock
outstanding entitled to vote thereon would be required to approve any merger,
consolidation, dissolution, liquidation, the sale of all of its assets or an
amendment to the Bylaws.
Provisions for a classified board are included in the amended Bylaws of
HNC. A classified board will have the effect of moderating the pace of any
change in control of the Board of Directors by extending the time required to
elect a majority of the directors to at least two successive annual meetings.
However, since this extension of time also tends to discourage a tender offer or
takeover bid, this provision may also be deemed to be anti-takeover in nature.
In addition, a classified board makes it more difficult for a majority of the
shareholders to promptly change the composition of the board of directors even
though such prompt change may be considered desirable for them.
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<PAGE>
HNC'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 its responsibilities to
certain constituent groups including HNC's subsidiaries and the communities that
they serve by considering factors such as: the impact the acquisition of HNC
would have on the community; the effect of the acquisition upon shareholders,
employees, depositors, suppliers and customers; and the reputation and business
practices of the tender offeror.
Indemnification
The Bylaws of HNC provide for indemnification of its directors, officers,
employees and agents to the fullest extent permitted under the laws of the
Commonwealth of Pennsylvania, provided that the person seeking indemnification
acted in good faith, in a manner he or she reasonably believed to be in the best
interest of HNC, and without willful misconduct or recklessness.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling HNC pursuant to
the foregoing provisions, HNC has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Comparison of Shareholder Rights
Upon consummation of the Merger, the shareholders of NLB will become
shareholders of HNC. Differences between the rights of holders of NLB Common
Stock and HNC Common Stock arise out of differences between the Articles of
Incorporation and Bylaws of NLB and the Articles of Incorporation and Bylaws of
HNC. The most significant of these differences are those relating to
anti-takeover protection and public registration.
The Bylaws of HNC provide for a classified Board of Directors under which
there are four classes of directors and, accordingly, one-fourth of the
directors are elected each year for a term of four years. The NLB 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 HNC to change a majority of the
directors, even when the only reason for such a change may be the performance of
the existing directors. It would normally take three annual meetings of HNC's
shareholders in order to replace a majority of HNC's directors, whereas it would
take two annual meetings of NLB's shareholders to replace a majority of NLB's
Board of Directors.
In addition to the classification of the Board of Directors, the Articles
of Incorporation and Bylaws of HNC include a number of provisions which are
intended to protect the shareholders of HNC (including the present shareholders
of NLB, who will become shareholders
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<PAGE>
of HNC following the merger), but which may be considered to be anti-takeover in
nature and may serve to entrench the current management of HNC. See "DESCRIPTION
OF HARLEYSVILLE NATIONAL CORPORATION AND DESCRIPTION OF HNC COMMON
STOCK--Anti-takeover Provisions."
HNC Common Stock, unlike NLB Common Stock, is registered with the
Commission under Section 12(g) of the Exchange Act. As a result, HNC is subject
to the periodic reporting, proxy solicitation and insider trading requirements
of the Exchange Act, which do not apply to NLB. Pursuant to these requirements,
HNC makes available to shareholders, potential investors and the general public
a significant amount of information regarding HNC in the form of proxy
statements, periodic reports and other Commission filings. In addition,
directors, executive officers and beneficial shareholders of more than 10
percent of the issued and outstanding shares of HNC Common Stock are subject to
the insider trading reporting requirements and short-swing profit recapture
provisions of Section 16 of the Exchange Act. HNC Common Stock is also
authorized for quotation on the Nasdaq.
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<PAGE>
The material differences between NLB Common Stock and HNC Common Stock and
the rights of their respective holders, as of September 30, 1998, are summarized
in the following table:
<TABLE>
<CAPTION>
NLB HNC
---- ---
<S> <C> <C>
Title Common Stock, $10.00 par value per Common Stock, $1.00 par value per share
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 Board of Directors divided into 4 classes
classes with 3 year terms; with 4 year terms; approximately 1/4 of
approximately 1/3 elected each directors elected each year
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
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
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<PAGE>
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 NLB is insolvent or repurchased when HNC is insolvent or
would be made insolvent by the purchase; would be made insolvent by the purchase;
and no more than 10 percent of the and no more than 10 percent of the
outstanding shares can be repurchased in outstanding shares can be repurchased in
any twelve (12) month period without any twelve (12) month period without
prior regulatory approval; and provisions prior regulatory approval; and provisions
of the Securities Act restrict the timing, of the Securities Act restrict the timing,
nature and amount of repurchases. nature and amount 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>
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<PAGE>
INFORMATION CONCERNING NORTHERN LEHIGH BANCORP, INC.
Description of Business and Property
NLB was incorporated on April 27, 1983, to act as a holding company for
Slatington. Slatington commenced operations on February 1, 1902 as a national
banking association chartered under the laws of the United States of America by
the OCC. As a national bank, Slatington is subject to regulation and periodic
examination by the OCC. Slatington's deposits are insured by the Federal Deposit
Insurance Corporation to the maximum extent permitted by law. Slatington's
principal executive offices are located at 502 Main Street, Slatington,
Pennsylvania 18080-0008.
Below is a schedule of all the Slatington's properties, all of which are
owned by the Bank.
Nature of Bank Office
or Facility Address Date Acquired
- ----------------------- ------- ---------------
Main Office 502 Main Street July 1, 1907
Slatington, PA 18080
Handi-Bank Office 705 Main Street January 15, 1979
Slatington, PA 18080
Lehigh Twsp Office 4421 Lehigh Drive December 19, 1985
Walnutport, PA 18088
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. Slatington 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, 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. Slatington 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 Slatington's lending limit to
any one customer of Slatington, Slatington seeks to arrange such loans on a
participation basis with other financial
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<PAGE>
institutions. The offering or continuation of the above enumerated services are
periodically evaluated.
Slatington competes with other commercial banks and savings and loan
associations, most of which are larger than Slatington, as well as major
regional banking and financial institutions headquartered elsewhere. Slatington
generates the overwhelming majority of its deposit and loan volume within its
primary service area, i.e. Lehigh County, Pennsylvania ("PSA"). The majority of
the residents and business and employees within Slatington's PSA are within
driving time - thirty (30) minutes from Slatington's office. There are 178
offices of commercial banks headquartered or which have a presence in the
greater metropolitan Allentown area where Slatington is located. Slatington also
competes with branch offices of numerous banks and financial institutions that
are headquartered elsewhere.
The PSA constitutes the community delineated for Slatington's Community
Reinvestment Act Statement which states that the intention of Slatington is to
meet the credit needs of the entire local community. It is the policy of
Slatington to evaluate all applications for credit without regard to the
applicant's race, color, creed, sex, age or marital status.
The PSA includes a wide variety of residential neighborhoods, commercial
businesses, retail stores, industrial complexes and service institutions. The
Allentown/Lehigh County area has a large number of established businesses and a
substantial employment base.
Employees
As of September 30, 1998, NLB had 27 full-time equivalent employees.
Legal Proceedings
The nature of the business of NLB and Slatington generates a certain amount
of litigation involving matters in the ordinary course of business. In the
opinion of management of NLB and Slatington, there are no proceedings pending to
which NLB and Slatington is a party or to which their property is subject,
which, if determined adversely to them, would be material in relation to NLB's
or Slatington's undivided profits or financial condition, nor are there any
proceedings pending, other than ordinary routine litigation, incident to the
business of NLB or Slatington. In addition, no material proceedings are pending
or are known to be threatened or contemplated against NLB or Slatington by
government authorities or others.
NLB Common Stock Market Price and Dividends
The NLB 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 most recent sale
of NLB 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 price of NLB Common Stock as reported on the OTC Bulletin Board
was ____ shares at $____ per share on _____, 1998. There were 268 holders of
record of NLB Common Stock as of September 30, 1998.
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<PAGE>
The holders of NLB Common Stock are entitled to receive the dividends when,
as and if declared by the Board of Directors out of funds legally available
therefor, NLB 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 NLB to pay dividends to its shareholders is dependent upon receipt of
dividends from Slatington.
Under federal law, the approval of the OCC is required for the payment of
dividends in any calendar year by a subsidiary national bank if the total of all
dividends declared by such 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
OCC 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, Slatington had approximately $984,784 available for the
payment of dividends. The Agreement permits NLB 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 Effective Date.
NLB 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. NLB'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 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.
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<PAGE>
Readiness Efforts
In 1997, a comprehensive project plan to address the Year 2000 problem and
related issues as those relate to 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 NLB and Slatington.
A project team that consists of key members 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 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,
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, Slatington can give no guarantee that the systems of
these service providers and vendors on which Slatington's systems rely will be
timely renovated.
Additionally, Slatington has implemented a plan to manage the potential
risk posed by the impact of the Year 2000 issue on its major customers. 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 Slatington's Year 2000 readiness project is
53% complete and that the activities involved in assessing external risks and
operational issues are 69%
- -----------------------------
(1) Slatington, the only subsidiary of NLB, is addressing the Year 2000 issues
for NLB.
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<PAGE>
completed overall. The following table provides a summary of the current status
of the five phases involved and a projected timetable for completion.
Projected
Project Phase % Completed Completion Comments
- ------------- ----------- ---------- --------
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%
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 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, 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 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. Slatington can make no guarantee that these estimates will be achieved,
and actual results could differ from such plans.
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 Slatington's
systems rely. However, Slatington can give no guarantee that the systems of
these suppliers will be timely renovated.
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<PAGE>
Contingency Plan
Realizing that some disruption may occur despite its best efforts,
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, Slatington expects to have the plan substantially documented by
December 31, 1998.
IMPACT OF YEAR 2000 ISSUE
The following section contains forward-looking statements which involve
risks and uncertainties. HNC'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
HNC'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, HNC 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. HNC 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 HNC.
HNC has initiated formal communications with all of its vendors and large
commercial customers to determine the extent to which HNC is vulnerable to those
third parties' failure to remediate their own Year 2000 Issue. HNC's estimated
Year 2000 project costs include the costs and time associated with the impact of
a third party's Year 2000 Issue, and are based on presently available
information.
For significant vendors, HNC is validating that they are Year 2000
compliant. If HNC has not validated their compliance by December 31, 1998, HNC
will make plans to switch to a new vendor or system that is compliant. For
insignificant vendors, HNC 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, HNC will seek a new vendor or system that is
compliant. For large commercial loan customers, HNC will take appropriate action
based upon the customer's response.
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<PAGE>
HNC has used both internal and external resources to reprogram, or replace,
and test its software and hardware for Year 2000 modifications. HNC 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 HNC.
The costs of the projects and the date on which HNC 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, HNC 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
HNC to the banking regulators on a periodic basis.
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<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 NLB, and its wholly-owned subsidiary, Slatington. The
following is management's discussion and analysis of the significant changes in
the results of operations, capital resources and liquidity presented in its
accompanying consolidated financial statements for NLB. NLB's consolidated
financial condition and results of operations consist almost entirely 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.
NLB is a one-bank holding company headquartered in Slatington,
Pennsylvania. NLB's wholly-owned subsidiary is Slatington. Slatington is engaged
in commercial banking activities that provide financial services to both
consumer and commercial customers. As a national bank, Slatington is subject to
the supervision, examination and regulation of the OCC. Slatington is a member
of the Federal Deposit Insurance Corporation (FDIC) and the deposits of
Slatington's customers are insured by the agency to the maximum extent permitted
by law.
The following discussion focuses on and highlights certain information
regarding NLB. We recommend that you read this discussion in conjunction with
the Consolidated Financial Statements and related notes appearing elsewhere in
this Proxy Statement/Prospectus.
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, such as statements that include the
words "expect", "estimate", "project", "anticipate", "should", "intend",
"probability", "risk", "target", "objective" and similar expressions or
variations on such expressions. In particular, this document includes
forward-looking statements relating, but not limited to, NLB's potential
exposures to various types of market risks, such as interest rate risk and
credit risk. Such statements are subject to certain risks and uncertainties. For
example, certain of the market risk disclosures are dependent on choices about
key model characteristics and assumptions and are subject to various
limitations. By their nature, certain of the market risk disclosures are only
estimates and could be materially different from what actually occurs in the
future. As a result, actual income gains and losses could materially differ from
those that have been estimated. Other factors that could cause actual results to
differ materially from those estimated by the forward-looking statements
contained in this document include, but are not limited to: general economic
conditions in market areas in which NLB has significant business activities or
investments; the monetary and interest rate policies of the Board of Governors
of the FRB; inflation; deflation; unanticipated turbulence in interest rates;
changes in laws, regulations and taxes; changes in competition and pricing
environments; natural disasters; the inability to hedge certain risks
economically; the adequacy of loss reserves; acquisitions or restructurings;
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<PAGE>
technological changes; changes in consumer spending and saving habits; and the
success of NLB in managing the risks involved in the foregoing.
In addition to historical information, this Form S-4 contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. For example, risks and uncertainties can
arise with changes in: general economic conditions, including their impact on
capital expenditures; business conditions in the financial services industry;
the regulatory environment; rapidly changing technology and evolving banking
industry standards; competitive factors, including increased competition with
community, regional and national financial institutions; new service and product
offerings by competitors; and price pressures. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. NLB undertakes no obligation
to publicly revise or update these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Readers should carefully
review the risk factors described in other documents NLB files from time to time
with the Commission.
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<TABLE>
NORTHERN LEHIGH BANKCORP, INC.
SELECTED FINANCIAL DATA
<CAPTION>
(Dollars in thousands,
except per share data) September 30, December 31,
----------------- ----------------------------------------------
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>
-74-
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%
===== =====
-75-
<PAGE>
Year ended December 31,
-----------------------
(Dollars in thousands) 1997 1996
---- ----
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>
-76-
<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 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>
<CAPTION>
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>
The maturity analysis of securities available for sale, including the weighted
average yield for each category, as of September 30, 1998 is as follows:
-77-
<PAGE>
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%.
-78-
<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
======== ======== ========= ========
-79-
<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>
-80-
<PAGE>
Loans
- -----
Slatington grants commercial loans, residential mortgages, and consumer
loans to customers located primarily within the Lehigh Valley. 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:
-81-
<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.
-82-
<PAGE>
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 both the Bank adding $75,000 to the allowance and recovering
$1,000 of loans previously charged off, during the first nine months of 1998.
The Bank 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
====== ====== ====== ======
-83-
<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, 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.
-84-
<PAGE>
Deposits are summarized as follows at September 30, 1998 and 1997, and
December 31, 1997 and 1996:
(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 the Corporation and the Bank 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, the Corporation's Tier 1 risk-adjusted capital ratio was
14.0% and the total riskadjusted capital ratio was 15.3%, both well above the
regulatory requirements. The riskbased capital ratio of the Bank 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
-85-
<PAGE>
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.
On January 1, 1998, the Corporation 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
then 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 recognititon 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%.
-86-
<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>
-87-
<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 Bank 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.
-88-
<PAGE>
NORTHERN LEHIGH BANCORP, INC.
BALANCE SHEET
Unaudited
(Dollars in thousands) As of September 30, As of December 31,
-------------------- ------------------
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
======== ======== ======== ========
-89-
<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>
-90-
<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>
-91-
<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>
-92-
<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 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 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 calculation 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
-93-
<PAGE>
to provide prominent disclosure of comprehensive income items. Comprehensive
income in 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 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 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. 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 operations.
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 and
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.
-94-
<PAGE>
ADJOURNMENT OF THE MEETING
Approval of the Agreement requires the affirmative vote of the holders of
at least 66 2/3% of all outstanding shares of the NLB Common Stock. If there is
an insufficient number of votes cast in person or by proxy at the Meeting to
approve the Agreement, the NLB 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, NLB will
announce the place and date to which the Meeting would be adjourned. Under the
NLB 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 NLB 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 HNC 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 NLB 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 HNC Common Stock to be issued in connection
with the Merger and certain other legal matters relating to the Reorganization
will be passed upon by the law firm of Shumaker Williams, P.C., Camp Hill,
Pennsylvania, Special Counsel to HNC.
OTHER MATTERS
Your 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 NLB.
-95-
<PAGE>
ADDITIONAL INFORMATION
HNC has filed, with the Commission, a Registration Statement in respect of
the shares of HNC Common Stock to be issued in connection with the Merger. The
Registration Statement contains certain additional information that has been
omitted from this Proxy Statement/Prospectus in accordance with the rules and
regulations of the Commission and may be examined at the Commission in
Washington, D.C. Copies of the Registration Statement may be obtained from the
Commission upon payment of the prescribed fee or free of charge at the
Commission website: http://www.sec.gov.
-96-
<PAGE>
NORTHERN LEHIGH BANCORP, INC.
INDEX TO FINANCIAL STATEMENTS AND
SUPPLEMENTARY FINANCIAL INFORMATION
Page
----
Selected Financial Data
Management's Discussion and Analysis
Interim Statements
Balance Sheet
Statements of Income
Statement of Cash Flows
Statement of Changes in Shareholders' Equity
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
<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
4
<PAGE>
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
5
<PAGE>
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
6
<PAGE>
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
7
<PAGE>
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.
8
<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
9
<PAGE>
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.
11
<PAGE>
(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
12
<PAGE>
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
13
<PAGE>
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.
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<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
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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.
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(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.
21
<PAGE>
(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
26
<PAGE>
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
27
<PAGE>
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.
28
<PAGE>
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
29
<PAGE>
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;
30
<PAGE>
(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
44
<PAGE>
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.
45
<PAGE>
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.
46
<PAGE>
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
47
<PAGE>
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
48
<PAGE>
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.
49
<PAGE>
If to NLBI, to:
Northern Lehigh Bancorp, Inc.
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 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
50
<PAGE>
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.
51
<PAGE>
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 Title: Thomas D. Oleksa
President
NORTHERN LEHIGH BANCORP, INC.
By: /s/ Francis P. Burbidge
--------------------------------
Secretary Francis P. Burbidge
Title: President and Chief Executive
Officer
THE CITIZENS NATIONAL BANK OF
SLATINGTON
By: /s/ Francis P. Burbidge
-------------------------------
Cashier Francis P. Burbidge
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:
By: /s/ Francis P. Burbidge
--------------------------------
Francis P. Burbidge, President
[BANK SEAL]
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 __th day of July, 1998, before me, a Notary Public for the
Commonwealth and County aforesaid, personally came Francis P. Burbidge, as
President, and ______________________, as 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 ______________________________
________________________________________ 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.
(Seal of Notary) Notary Public, Lehigh County
My commission expires:
<PAGE>
COMMONWEALTH OF PENNSYLVANIA :
: SS.
COUNTY OF CARBON :
On this __th 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.
(Seal of Notary) Notary Public, Carbon County
My commission expires:
<PAGE>
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: By:/s/ Francis P. Burbidge
Corporate Secretary --------------------------------
Francis P. Burbidge
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: By:______________________________
Francis P. Burbidge, President
Corporate Secretary
<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 __, 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 /s/ Nicholas Bybel, Jr., Esquire
--------------------------------
Nicholas Bybel, Jr.
cc: Walter E. Daller, Jr., President and Chief Executive Officer
HARLEYSVILLE NATIONAL CORPORATION
Thomas D. Oleksa, President
THE CITIZENS NATIONAL BANK OF LANSFORD
<PAGE>
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>
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>
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. ss.ss.1101-4162 (BCL) provides that a business
corporation shall have the power under certain circumstances to indemnify its
directors, officers, employees and agents against certain expenses incurred by
them in connection with any threatened, pending or completed action, suit or
proceeding.
Article 10 of the 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 BCL.
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, HNC North, Inc. and The
Citizens National Bank of Lansford (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 HNC'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 HNC'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 HNC's Registration
Statement No. 333-17813 on Form S-8, filed on December 13, 1996.)
II-1
<PAGE>
4.2 Harleysville National Corporation Amended Bylaws. (Incorporated by
reference to Exhibit 4B to HNC'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 HNC 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 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.)
<PAGE>
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.
24 Power of Attorney. (Included on Signature Page.)
99.1 Form of Northern Lehigh Bancorp, Inc. Proxy.
99.2 Letter to Shareholders of Northern Lehigh Bancorp, Inc. (Included in
Proxy Statement contained herein.)
99.3 Notice of Meeting. (Included in Proxy Statement contained herein.)
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:
(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
II-3
<PAGE>
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 that, for purposes of determining any liability under the Securities Act,
each such post-operative
<PAGE>
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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, hereunto duly authorized, in the City of Harleysville, Commonwealth
of Pennsylvania on November 12, 1998.
HARLEYSVILLE NATIONAL CORPORATION
By: /s/ Walter E. Daller, Jr.
-------------------------------------
Walter E. Daller, Jr.
President, CEO and Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Walter E. Daller, Jr. and Demetra M.
Takes, and each of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them, or their or his substitutes, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Capacity Date
/s/ Walter E. Daller, Jr.
- ------------------------- President, CEO and Chairman November 12, 1998
Walter E. Daller, Jr. of the Board and Director
(Principal Executive Officer)
/s/ Vernon L. Hunsberger
- ------------------------ Treasurer November 12, 1998
Vernon L. Hunsberger (Principal Accounting or
Financial Officer)
/s/ John W. Clemens
- ------------------------ Director November 12, 1998
John W. Clemens
<PAGE>
/s/ Martin E. Fossler
- ------------------------ Director November 12, 1998
Martin E. Fossler
/s/ Harold A. Herr
- ------------------------ Director November 12, 1998
Harold A. Herr
/s/ Thomas S. McCready
- ------------------------ Director November 12, 1998
Thomas S. McCready
/s/ Henry M. Pollak
- ----------------------- Director November 12, 1998
Henry M. Pollak
/s/ Palmer E. Retzlaff
- ---------------------- Director November 12, 1998
Palmer E. Retzlaff
/s/ Walter F. Vilsmeir
- ---------------------- Director November 12, 1998
Walter F. Vilsmeier
/s/ William M. Yocum
- --------------------- Director November 12, 1998
William M. Yocum
<PAGE>
EXHIBIT INDEX
Page
Number
In Sequential
Number
Number Title System
- ------ ------ -----------
2.1 Agreement and Plan of Reorganization (the "Agreement")
dated July 28, 1998, among Harleysville National
Corporation, HNC North, Inc. and The Citizens
National Bank of Lansford (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 HNC'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 HNC'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 HNC'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 HNC'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
HNC 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.)
<PAGE>
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.)
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.
24 Power of Attorney. (Included on Signature Page.)
99.1 Form of Northern Lehigh Bancorp, Inc. Proxy.
99.2 Letter to Shareholders of Northern Lehigh Bancorp,
Inc. (Included in Proxy
Statement contained herein.)
<PAGE>
99.3 Notice of Meeting. (Included in Proxy Statement
contained herein.)
99.4 Statute Relating to Dissenters' Rights.
(Included as Annex C to the Proxy
Statement contained herein.)
SHUMAKER WILLIAMS, P.C.
3425 SIMPSON FERRY ROAD
CAMP HILL, PENNSYLVANIA 17011
717-763-1121
November 12, 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: Merger of 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, HNC North, Inc., The Citizens National Bank of
Lansford, Northern Lehigh Bancorp, Inc. And The Citizens National Bank of
Slatington (the "Agreement");
<PAGE>
Mr.Walter E. Daller, Jr.
President and CEO
HARLEYSVILLE NATIONAL CORPORATION
Mr. Joseph G. Bechtel
President
NORTHERN LEHIGH BANCORP, INC.
November 12, 1998
Page 2
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
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.
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the ___ day of ___________, 1998, between THE
CITIZENS NATIONAL BANK OF LANSFORD (the "Bank"), and FRANCIS P. BURBRIDGE, an
adult individual (the "Executive"), sometimes referred to collectively as (the
"Parties.")
WHEREAS, the Bank desires to employ the Executive as a Vice President under
the terms and conditions set forth herein; and
WHEREAS, the Executive desires to serve the Bank in an executive capacity
under the terms and conditions set forth in this Executive Employment Agreement
(the "Agreement");
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein and intending to be legally bound hereby, the parties agree as
follows:
1. TERMS OF EMPLOYMENT. The Bank hereby shall employ the Executive and the
Executive hereby accepts employment with the Bank for a term of one (1) year
beginning on the Effective Date as set forth in Section 1.1 of the Agreement and
Plan of Reorganization 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 (the "Merger Agreement") and
ending one (1) year later, subject, however, to prior termination of this
Agreement as set forth below.
2. POSITION AND DUTIES. The Executive shall serve as a Vice President
reporting only to the President and Chief Executive Officer of the Bank and
shall perform general managerial and administrative functions related to the
operation of the Bank and shall have other powers and duties as may from time to
time be prescribed by the Board of Directors and the President and Chief
Executive Officer of the Bank.
<PAGE>
3. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall not engage in any
business or commercial activities, duties or pursuits which compete with the
business or commercial activities of the Bank or subsidiary of the Bank, or any
parent corporation or affiliate thereof, nor may the Executive serve as a
director or officer or in any other capacity in a company which competes with
the Bank.
4. COMPENSATION. For all of the services rendered by the Executive
hereunder, the Bank shall pay Executive an annual salary of Ninety-Eight
Thousand Dollars ($98,000.00), minus legally required withholdings and
deductions. The salary shall be paid in installments at such times as the Bank
customarily pays its other senior officers.
5. FRINGE BENEFITS, VACATION, EXPENSES, AND PERQUISITES.
(a) EMPLOYEE BENEFIT PLANS. The Executive shall be entitled to participate
in or receive benefits under all Bank employment benefit plans
including, but not limited to, any pension plan, profit-sharing plan,
savings plan, life insurance plan or disability insurance plan as made
available by the Bank to its employees, subject to and on a basis
consistent with terms, conditions and overall administration of such
plans and arrangements.
(b) VACATION, HOLIDAYS, SICK DAYS AND PERSONAL DAYS. The Executive shall
be entitled to the number of paid vacation days in each calendar year
determined by the Bank from time to time for its senior executive
officers. The Executive shall also be entitled to all paid holidays,
sick days and personal days given by the Bank to its employees.
<PAGE>
(c) BUSINESS EXPENSES. During the term of his employment hereunder, the
Executive shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by him, which are properly accounted for,
in accordance with the policies and procedures established by the
Board of Directors of the Bank for its senior executive officers.
6. LIABILITY INSURANCE. The Bank shall use its best efforts to obtain
insurance coverage for the Executive under an insurance policy covering officers
and directors of the Bank against lawsuits, arbitrations or other legal or
regulatory proceedings; however, nothing herein shall be construed to require
the Bank to obtain such insurance, if the Board of Directors of the Bank
determine that such coverage cannot be obtained at a reasonable price.
7. UNAUTHORIZED DISCLOSURE. During the term of his employment hereunder, or
at any later time, the Executive shall not, without the written consent of the
Board of Directors of the Bank or a person authorized thereby, knowingly
disclose to any person, other than an employee of the Bank or a person to whom
disclosure is reasonably necessary or appropriate in connection with the
performance by the Executive of his duties as an executive of the Bank, any
material confidential information obtained by him while in the employ of the
Bank with respect to any of the Bank's services, products, improvements,
formulas, designs or styles, processes, customers, methods of business or any
business practices the disclosure of which could be or will be materially
damaging to the Bank provided, however, that confidential information shall not
include any information known generally to the public (other than as a result of
unauthorized disclosure by the Executive or any person with the assistance,
consent or direction of the Executive) or any information of a type not
otherwise considered confidential by persons engaged in the same
<PAGE>
business or a business similar to that conducted by the Bank or any information
that must be disclosed as required by law.
8. RESTRICTIVE COVENANT. The Executive covenants and agrees that the
Executive shall not directly or indirectly, within the marketing area of the
Bank (defined as an area within twenty-five (25) miles of any branch location of
the Bank or any branch of any other bank owned, either directly or indirectly,
by Harleysville National Corporation), enter into or engage generally in direct
or indirect competition with the Bank or any subsidiary of the Bank, either as
an individual on his own or as a partner or joint venturer, or as a director,
officer, shareholder, employee, agent, independent contractor, lessor or
creditor of or for any person, for a period of one (1) year after the date of
termination of his employment. The existence of any claim or cause of action of
the Executive against the Bank, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Bank of this
covenant. The Executive agrees that any breach of the restrictions set forth in
this paragraph or any other paragraph of this Agreement, will result in
irreparable injury to the Bank for which it shall have no adequate remedy at law
and the Bank shall be entitled to injunctive relief in order to enforce the
provisions hereof. In the event that this paragraph shall be determined by any
court of competent jurisdiction to be unenforceable in part by reason of it
being too great a period of time or covering too great a geographical area, it
shall be in full force and effect as to that period of time or geographical area
determined to be reasonable by the court.
9. NON-SOLICITATION. Executive covenants and agrees that while employed by
the Bank and for a period of one (1) year after the termination of Executive's
employment, either voluntarily or involuntarily, Executive shall not, either
directly or indirectly in any capacity
<PAGE>
whatsoever, (a) obtain, solicit, divert, appeal to, attempt to obtain, attempt
to solicit, attempt to divert, or attempt to appeal to any customers, clients or
referral sources of the Bank to divert their business from the Bank; (b) solicit
any person who was employed by the Bank to leave the employ of the Bank. For
purposes of this covenant, "customers, clients, and referral sources" shall
include all persons who are or were customers, clients or referral sources of
the Bank at any time during the employment of Executive by the Bank.
The existence of any claim by Executive, whether predicated upon this
Agreement or otherwise, shall not constitute defense to the Bank's enforcement
of or attempts to enforce this provision.
10. NOTIFICATION OF NON-DISCLOSURE/TRADE SECRET, RESTRICTIVE COVENANT AND
NON-SOLICITATION PROVISIONS. During his employment, and for a period of one (1)
year following termination of his employment with the Bank, Executive agrees to
inform any prospective employer of existence of the Non-Disclosure, Restrictive
Covenant and NonSolicitation provisions of this Agreement.
11. TERMINATION.
(a) Death. The Executive's employment hereunder shall terminate upon his
death.
(b) Disability. If the Executive becomes disabled because of sickness,
physical or mental disability, or any other reason, the Bank shall
have the option to terminate this Agreement by giving written notice
of termination to the Executive. Executive shall be deemed to have
become "disabled" only in the event and at such time as he qualifies
(after expiration of any applicable
<PAGE>
waiting period) to receive benefits for total disability under the
employee disability insurance benefit plan referred to in paragraph
5(a) above.
(c) Cause. The Bank may terminate the Executive's employment hereunder for
"Cause." As used in this Agreement, the Bank shall have "Cause" to
terminate the Executive's employment hereunder upon: (1) the willful
failure by the Executive to substantially perform his duties hereunder
after notice from the Bank and a failure to cure such violation within
thirty (30) days of said notice; (2) the willful engaging by the
Executive in misconduct injurious to the Bank; (3) the willful
violation by the Executive of any provisions of this Agreement, after
notice from the Bank and a failure to cure such violation within
thirty (30) days of said notice, or if said violation cannot be cured
within thirty (30) days, within a reasonable time thereafter unless
the Executive is diligently attempting to cure the violation; (4) the
dishonesty or gross negligence of the Executive in the performance of
his duties; (5) the breach of Executive's fiduciary duty involving
personal profit; (6) the violation of any law, rule or regulation
governing banks or bank officers or any final cease and desist order
issued by a bank or insurance regulatory authority any of which
materially jeopardizes the business of the Bank; or (7) conduct on the
part of Executive which brings public discredit to the Bank.
12. PAYMENTS UPON TERMINATION. In the event that the Executive is
terminated, other than for Cause, as defined in Paragraph 11(c), the Executive
shall be entitled to receive his salary pursuant to Paragraph 4, for the
remainder of the term set forth in Paragraph 1. In the event
<PAGE>
that the Executive is terminated for Cause, as defined in Paragraph 11(c), the
Bank shall pay the Executive his salary up until the date of termination and
shall have no further obligations to the Executive.
13. DAMAGES FOR BREACH OF CONTRACT. In the event of a breach of this
Agreement by either the Bank or the Executive resulting in damages to another
party to this Agreement, that party may recover from the party breaching the
Agreement only those damages as set forth herein. In no event shall any party be
entitled to the recovery of attorney's fees or costs.
14. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when hand-delivered or mailed by United States
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: Francis P. Burbridge
313 No. Bobbin Mill Lane
Broomall, PA 19008
If to the Bank: President
The Citizens National Bank of Lansford
12-15 W. Ridge Street
P.O. Box 128
18232-0128
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
15. SUCCESSORS. This Agreement shall inure to the benefit of and be binding
upon the Executive, his personal representatives, heirs or assigns and to the
Bank and any successors or assigns of the Bank.
<PAGE>
16. SEVERABILITY. If any provision of this Agreement is declared
unenforceable for any reason, the remaining provisions of this Agreement shall
be unaffected thereby and shall remain in full force and effect.
17. AMENDMENT. This Agreement may be amended or canceled only by mutual
agreement of the parties in writing.
18. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. In the event of Executive's
death, any moneys that may be due him from the Bank under this Agreement, as of
the date of death shall be paid to the person designated by him in writing for
this purpose, or in the absence of any such designation to his estate.
19. LAW GOVERNING. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
20. ENTIRE AGREEMENT. This Agreement supersedes any and all agreements,
either oral or in writing, between the parties with respect to the employment of
the Executive by the Bank and this Agreement contains all the covenants and
agreements between the parties with respect to the employment.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement to be duly executed in their respective names
and, in the case of the Bank , by its authorized representatives the day and
year above mentioned.
<PAGE>
ATTEST: THE CITIZENS NATIONAL BANK OF LANSFORD
/s/ Martha Rex, Cashier By: /s/ Thomas D. Oleksa
- ----------------------------- --------------------------------
Martha Rex, Cashier Thomas D. Oleksa, President
WITNESS:
/s/ Andrea M. Beltz /s/ Francis P. Burbridge
- ------------------------------ --------------------------------
Andrea M. Beltz Francis P. Burbridge
CONSULTING AGREEMENT
THIS AGREEMENT is made as of the ___ day of ___________, 1998, between THE
CITIZENS NATIONAL BANK OF LANSFORD (the "Bank"), and FRANCIS P. BURBRIDGE, an
adult individual (the "Consultant"), sometimes referred to collectively as (the
"Parties.")
WHEREAS, the Bank desires to retain the Consultant under the terms and
conditions set forth herein;
WHEREAS, the parties have entered into an Employment Agreement;
WHEREAS, the Consultant desires to serve the Bank as an advisor and
consultant capacity under the terms and conditions set forth in this Consulting
Agreement (the "Agreement");
WHEREAS, Bank would like to retain Consultant as a resource person for
marketing the Bank's services and products and for his ability to offer advice
relating to the institution and business history of the Bank; and
WHEREAS, Consultant has agreed to make himself available to Bank to offer
any information, advice and experience to the Bank.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
intending to be legally bound hereby, the parties agree as follows:
1. Effective Date. This Consulting Agreement shall take effect exactly one
year after the Effective Date of the Executive Employment Agreement. It is
intended by the parties that this Agreement shall become effective at the
expiration of the one (1) year term set forth in the Executive Employment
Agreement between the Consultant and the Bank. If the Executive Employment
Agreement is terminated by the Bank "For Cause," then this Consulting Agreement
shall not take effect.
<PAGE>
2. Nature of Consultant Position.
(a) The Bank desires to make use of Consultant's expertise and experience
in the community banking business.
(b) Following the expiration of the Executive Employment Agreement, unless
the Executive Employment Agreement is terminated by the Bank "For Cause"
pursuant to Paragraph 11(c) of the Executive Employment Agreement, the Bank
shall engage Consultant and Consultant shall accept such engagement for a period
of one (1) year (the "Consulting Term") to undertake such consulting duties and
to perform such consulting services as reasonably may be assigned to him by the
President and Chief Executive Officer of the Bank, as further defined in
Paragraph 3.
(c) Consultant shall be an independent contractor and not an employee of
the Bank and, subject only to the terms of Paragraph 3, shall determine his own
method of operation in accomplishing such tasks as may be assigned. Consultant
shall not be entitled to receive any compensation, commissions, or benefits
other than those expressly provided for in this Agreement or in his capacity as
a duly elected member of the Board of Directors of the Bank.
3. Scope of Consulting Duties.
During the Consulting Term, Consultant shall be available, upon reasonable
notice by the President and Chief Executive Officer of Bank to assist the Bank
in an advisory or special assignment capacity and in his areas of experience and
competence. Consultant will give the Bank at least three (3) weeks notice of any
trips Consultant may take which are outside of the Bank"s traditional marketing
area. Upon such notice the Consultant shall not be required to accept any
consulting assignments until returning from such travel. It is the understanding
of the parties that
<PAGE>
the Consultant's travel will not be of such frequency and duration as to make
Consultant unreasonably inaccessible to the Bank.
4. Member of the Board of Directors.
Consultant may continue his membership on the Board during the Consulting
Term for so long as he is duly elected by Bank to such position.
5. Compensation.
(a) During the Consulting Term, the Bank shall compensate the Consultant
for his services the amount of Ninety-Eight Thousand Dollars ($98,000.00). This
amount shall be paid in four (4) quarterly installments of Twenty-Four Thousand
Five Hundred Dollars ($24,500.00) each, on or about January 1, 2000, April 1,
2000, July 1, 2000 and October 1, 2000.
(b) For so long as the Consultant is a duly elected and qualified member of
the Board, the Consultant shall be entitled to the same compensation as paid to
other members of the Board and shall be entitled to the same benefits.
(c) It is understood by the parties that Bank shall furnish Consultant with
an appropriate Internal Revenue Service Form 1099 that evidences payment of this
miscellaneous income to the Consultant.
6. Death or Disability.
If, during the Consulting Term, the Consultant dies or becomes disabled,
then payments shall continue in accordance with Paragraph 5(a). In the event of
Consultant's disability, payments shall be made to Consultant. In the event of
Consultant's death, payments due him under this Consulting Agreement shall be
paid to the person designated by him in writing for this purpose, or in the
absence of any such designation, to his estate.
<PAGE>
7. Nontransferability.
Neither the Consultant nor his estate shall have any right to commute,
anticipate, encumber or dispose of any payment under this Agreement. Such
payments and accompanying rights are nonassignable and nontransferable, except
as otherwise specifically provided in this Agreement.
8. Non-Competition.
It is hereby agreed that during the term of engagement hereunder and for
one year thereafter, the Consultant will not, without the prior written approval
of the Board of Directors of the Bank become an officer, employee, agent,
independent contractor, partner or director of any business enterprise in
substantial direct competition with the Bank or any subsidiary or parent of the
Bank, as the business of the Bank or any subsidiary or parent, may be
constituted during the term of engagement or at the time of such termination.
For the purposes of this Paragraph 8, a business enterprise shall be considered
in "substantial direct competition" with the Bank or any subsidiary or parent of
the Bank if, during a year (adjusted for fractions of a year in respect of a new
enterprise) when such competition is prohibited, the business enterprise sells a
product or service which is competitive with a product or service sold by the
Bank or its subsidiaries, within twenty-five (25) miles of the Bank or any of
its subsidiaries or their affiliates.
9. Binding Effect.
This Agreement shall inure to the benefit of and be binding upon the Bank,
its successors and assigns, including, without limitation, any person,
partnership, company or corporation which may acquire substantially all of the
Bank's assets or business or with or into which the Bank may be liquidated,
consolidated, merged or otherwise combined. In addition, this
<PAGE>
Agreement shall inure to the benefit of and be binding upon Consultant, his
heirs, distributees and personal representatives.
10. Waiver.
The failure of either party to insist in any one or more instances upon
performance of any term or condition of this Agreement shall not be construed as
a waiver of its future performance. The obligations of either party with respect
to such term, covenant or condition shall continue in full force and effect. 11.
Notices. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when handdelivered or mailed by United States
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive: Francis P. Burbridge
313 No. Bobbin Mill Lane
Broomall, PA 19008
If to the Bank: President
The Citizens National Bank of Lansford
12-15 W. Ridge Street
P.O. Box 128
18232-0128
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
<PAGE>
12. Entire Agreement. With the exception of paragraph 8, "Restrictive
Covenant" in the Executive Employment Agreement, the provisions of which shall
continue, this Agreement supersedes all previous agreements between Consultant
and the Bank. This Agreement cannot be amended, modified or supplemented in any
respect except by a subsequent written agreement entered into by both parties.
13. Governing Law. This Agreement shall be construed in accordance with and
governed by the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, this Agreement is executed the date and year first
above written.
ATTEST: THE CITIZENS NATIONAL BANK OF LANSFORD
/s/ Martha Rex /s/ Thomas D. Oleksa
____________________________ By:____________________________________
Martha Rex, Cashier Thomas D. Oleksa, President
WITNESS:
/s/ Andrea M. Beltz /s/ Francis P. Burbidge
- ---------------------------- ------------------------------------
Andrea M. Belt Francis P. Burbidge
RELEASE AGREEMENT
THIS AGREEMENT, made this ______ day of ___________, 1998, by and among 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 ("the Bank"), and THE CITIZENS NATIONAL BANK OF SLATINGTON, a national
banking association, having its principal office at 502 Main Street, Slatington,
Pennsylvania 18080 ("Slatington"), and HARLEYSVILLE NATIONAL CORPORATION, a
Pennsylvania corporation ("HNC"), NORTHERN LEHIGH BANCORP, INC., a Pennsylvania
corporation ("NLBI"), and FRANCIS P. BURBRIDGE (the "Executive").
WITNESSETH:
WHEREAS, the Bank is entering into an agreement whereby the Bank, a
subsidiary of HNC, shall merge with Slatington each acting pursuant to
resolutions approved and adopted by the vote of a majority of its directors;
WHEREAS, the Executive is an employee of Slatington and Slatington and
Executive have entered into an Employment Agreement, including a Change in
Control provision, and any amendments or modifications thereto, ("Prior
Employment Agreement"), which Prior Employment Agreement is attached hereto as
Exhibit "A"; and
WHEREAS, the Executive, and the Bank have agreed that the Executive will
work for the Bank after the Effective Date of the merger transaction; and
WHEREAS, the Executive has agreed to release any and all rights Executive
may have under the Prior Employment Agreement and/or any other employment
agreement or understanding Executive may have with Slatington;
<PAGE>
NOW THEREFORE, in consideration of the mutual covenants set forth herein,
the parties agree as follows:
1. Effective Date. This Agreement shall take effect and become effective on
the "Effective Date" of the Agreement and Plan of Reorganization by and among
Harleysville National Corporation, HNC North, Inc., The Citizens National Bank
of Lansford, Pennsylvania, Northern Lehigh Bancorp, Inc. and The Citizens
National Bank of Slatington ("Merger Agreement") as defined in Article I,
Section 1.1(d) of the Merger Agreement.
2. Release of Prior Employment Agreement. In consideration of the Executive
becoming employed by the Bank, the Executive releases the Bank, HNC and any of
its direct of indirect subsidiaries and affiliates, NLBI and Slatington from any
liability, obligation, duty or contractual requirement, for payment or otherwise
set forth in any and all provisions of the Prior Employment Agreement or any
other employment agreement or understanding Executive may have with Slatington,
NLBI, the Bank or HNC.
3. Release Consideration. In consideration for the Release referred to in
Paragraph 2, the Bank shall, on the Effective Date of the Merger Agreement, pay
Executive the gross sum of One Hundred Four Thousand Dollars ($104,000), minus
applicable taxes and withholdings. In addition, the Executive and the Bank will
enter into a one year Executive Employment Agreement and a one year Consulting
Agreement.
4. Source of Payments. It is intended by the parties hereto that all
payments provided in this Agreement shall be paid the Bank.
<PAGE>
5. No Attachment.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge, or hypothecation, or to
execution, attachment, levy or similar process or assignment by
operation of law, and any attempt, voluntary or involuntary, to affect
any such action shall be null, void and of no effect.
(b) This Agreement shall be binding upon and inure to the benefit of the
Executive, the Bank, NLBI, HNC, and any direct or indirect
subsidiaries and affiliates of HNC and their respective successors and
assigns.
6. Modification and Waiver.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party
charged with such waiver or estoppel. No such written waiver shall be
deemed a continuing waiver unless specifically stated therein, and
each such waiver shall operate only as to the specific term or
condition for the future or as to any act other than that specifically
waived.
<PAGE>
7. Severability. If, for any reason, any provision of this Agreement, or
any part of any provisions, is held invalid, such invalidity shall not affect
any other provision of this Agreement or any part of such provision not held so
invalid, and each such other provision and part thereof shall, to the extend
consistent with law, continue in full force and effect.
8. Headings for Reference Only. The headings of sections and paragraphs
herein are included solely for convenience of reference and shall not control
the meaning or interpretation of any of the provisions of this Agreement.
9. Governing Law. The validity, interpretation, performance and enforcement
of this Agreement shall be governed by Pennsylvania Law.
10. Successor to the Bank. The Bank shall require any successor or
assignee, whether direct or indirect, by purchase, merger, consolidation or
otherwise, to all or substantially all the business or assets of the Bank or the
Holding Company, expressly and unconditionally to assume and agree to perform
the Bank's obligations under this Agreement, in the same manner and to the same
extent that the Bank would be required to perform if no such succession or
assignment had taken place.
<PAGE>
IN WITNESS WHEREOF, the Bank, Slatington and HNC has caused this Agreement
to be executed by its duly authorized officers, and Executive has signed this
Agreement on the ________ day of _______________, 1998.
ATTEST: THE CITIZENS NATIONAL BANK OF LANSFORD
/s/ Martha Rex By /s/ Thomas D. Oleksa
- ------------------------ ---------------------------------------
Martha Rex, Cashier Thomas D. Oleksa, President
THE CITIZENS NATIONAL BANK OF
SLATINGTON
/s/ Andrea M. Beltz By /s/ Joseph G. Bechtel
- ------------------------ ---------------------------------------
Andrea M. Beltz, Secretary Joseph G. Bechtel, Director
HARLEYSVILLE NATIONAL CORPORATION
/s/ Jo Ann Bynon By
- --------------------------- ---------------------------------------
Jo Ann M. Bynon, Secretary Walter E. Daller, Jr., President
NORTHERN LEHIGH BANCORP, INC.
Andrea M. Beltz By /s/ Joseph G. Bechtel
- -------------------------- ---------------------------------------
Andrea M. Beltz, Secretary Joseph G. Bechtel, President
WITNESS:
/s/ Francis P. Burbidge
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Francis P. Burbidge
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Jurisdiction
of
Subsidiary Incorporation
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Harleysville National Bank and Trust Company United States of America
BWR Company Pennsylvania
Security National Bank United States of America
HNC Financial Company Delaware
Harleysville National Corporation North, Inc. Pennsylvania
The Citizens National Bank of Lansford United States of America
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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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
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GRANT THORNTON LLP
Philadelphia, Pennsylvania
November 10, 1998
Exhibit 23.3
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
consolidated 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
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Stokes Kelly & Hinds, LLC
Pittsburgh, Pennsylvania
November 10, 1998
Exhibit 23.4
CONSENT OF HOPPER SOLIDAY & CO., INC.
We hereby consent to the inclusion of our updated opinion letter, dated
November 12, 1998, to the Board of Directors of Northern Lehigh Bancorp, Inc.
(the "Company") as Annex B to the Proxy Statement/Prospectus relating to the
proposed merger of the Company with and into Harleysville National Corporation
North, Inc., a subsidiary of Harleysville National Corporation ("HNC"),
contained in HNC's Registration Statement on Form S-4, and to the references to
our firm and such opinion in the Joint Proxy Statement/Prospectus. In giving our
consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended
(the "Act"), or the rules and regulations of the Securities and Exchange
Commission thereunder (the "Regulations"), nor do we admit that we are experts
with respect to any part of the Registration Statement within the meaning of the
term "experts" as used in the Act or the Regulations.
/s/ Hopper Soliday & Co., Inc.
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November 12, 1998 Hopper Soliday & Co., Inc.
Lancaster, Pennsylvania
Exhibit 99.1
NORTHERN LEHIGH BANCORP, INC.
PROXY
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 5, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints __________ and __________
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. (the
"Company) 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 on
Tuesday, January 5, 1999, commencing at 1:00 p.m., prevailing 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:______________________, 1999__
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Signature of Shareholder
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Signature of Shareholder
Number of Shares Held of Record
on November 16, 1998
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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.
