-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WNBwVHK6EhSMLJB+2zuWi6YOlUK3n0sZRO2l8Swi91p4EywpOlSiW5IahOMLrt7/ uLTvmmosnfv5BRmzwF2VpA== 0000950165-96-000001.txt : 19960103 0000950165-96-000001.hdr.sgml : 19960103 ACCESSION NUMBER: 0000950165-96-000001 CONFORMED SUBMISSION TYPE: S-4EF/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19960102 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARLEYSVILLE NATIONAL CORP CENTRAL INDEX KEY: 0000702902 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232210237 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4EF/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-65021 FILM NUMBER: 96500056 BUSINESS ADDRESS: STREET 1: 483 MAIN ST CITY: HARLEYSVILLE STATE: PA ZIP: 19438 BUSINESS PHONE: 2152568851 MAIL ADDRESS: STREET 1: 483 MAIN STREET CITY: HARLEYSVILLE STATE: PA ZIP: 19438 S-4EF/A 1 As filed with the Securities and Exchange Commission on January 2, 1996 Registration No. 33-65021 ___________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________________ PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 __________________________________ HARLEYSVILLE NATIONAL CORPORATION (Exact name of Registrant as specified in its charter) Pennsylvania 6711 23-2210237 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Classification Identification No.) incorporation or Code Number) organization) Walter E. Daller, Jr. President and Chief Executive Officer Post Office Box 195 HARLEYSVILLE NATIONAL CORPORATION 483 Main Street Post Office Box 195 Harleysville, Pennsylvania 19438 483 Main Street (215) 256-8851 Harleysville, Pennsylvania 19438 (Address, including ZIP Code, and (215) 256-8851 telephone number, including area (Name, address, including ZIP Code, code, of registrant's principal and telephone number, including area executive offices) code, of agent for service) With a Copy to: Nicholas Bybel, Jr., Esquire Robin M. Wilder, Esquire SHUMAKER WILLIAMS, P.C. P.O. Box 88, Harrisburg, Pennsylvania 17108 (717) 763-1121 Approximate date of commencement of the proposed sale of the securities to the public: As soon as practicable after the effective date of the Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. _____ CALCULATION OF REGISTRATION FEE ___________________________________________________________________________
Proposed Title of Maximum Proposed Each Class Amount Offering Maximum Amount of of Securities to be Price Aggregate Registration to be Registered Registered Per Share Offering Price Fee ___________________________________________________________________________ Common Stock par 489,594 $17.46 $8,548,311.24 $2,947.69 value $1.00 per share ___________________________________________________________________________ Estimated solely for the purpose of calculating the registration fee and based, in accordance with Rule 457(f)(2), upon the book value of the outstanding shares of Farmers & Merchants Bank, common stock, par value Two Dollars ($2) per share, as of September 30, 1995 of eight million five hundred forty-eight thousand three hundred eleven dollars and twenty-four cents ($8,548,311.24) and the maximum of 708,016 shares of such stock to be converted in the reorganization into Common Stock of the Registrant.
__________________________________ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. __________________________________ CROSS REFERENCE SHEET PURSUANT TO ITEM 501 OF REGULATION S-K ITEM OF FORM S-4 LOCATION IN PROSPECTUS 1. Forepart of Registration Facing Page of Registration Statement and Outside Front Statement; Cross Reference Cover Page of Prospectus Sheet; Outside Front Cover Page 2. Inside Front and Outside AVAILABLE INFORMATION Back Cover Pages of Prospectus 3. Risk Factors, Ratio of SUMMARY Earnings to Fixed Charges and Other Information 4. Terms of the Transaction THE MERGER; INFORMATION CONCERNING HARLEYSVILLE NATIONAL CORPORATION AND DESCRIPTION OF HNC COMMON STOCK; INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 5. Pro Forma Financial PRO FORMA COMBINED FINANCIAL Information 6. Material Contracts with THE MERGER--Business Pending the Company Being Acquired the Effective Date 7. Additional Information Not Applicable Required for Reoffering by Persons and Parties Deemed to be Underwriters 8. Interests of Named Experts Not Applicable and Counsel 9. Disclosure of Commission INFORMATION CONCERNING Position on Indemnification HARLEYSVILLE NATIONAL for Securities Act CORPORATION AND DESCRIPTION OF Liabilities HNC COMMON STOCK-- Indemnification 10. Information with Respect to INFORMATION CONCERNING S-3 Registrants HARLEYSVILLE NATIONAL CORPORATION AND DESCRIPTION OF HNC COMMON STOCK 11. Incorporation of Certain INCORPORATION OF CERTAIN Information by Reference DOCUMENTS BY REFERENCE 12. Information with Respect to Not Applicable S-2 or S-3 Registrants 13. Incorporation of Certain Not Applicable Information by Reference 14. Information with Respect to Not Applicable Registrants Other Than S-3 or S-2 Registrants 15. Information with Respect to Not Applicable S-2 or S-3 Companies 16. Information with Respect to Not Applicable S-2 or S-3 Companies 17. Information with Respect to COMPARATIVE STOCK PRICES AND Companies Other Than S-3 or DIVIDEND AND RELATED S-2 Companies SHAREHOLDER MATTERS; INFORMATION CONCERNING FARMERS & MERCHANTS BANK; FARMERS & MERCHANTS BANK-- INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION 18. Information if Proxies, SUMMARY; GENERAL INFORMATION-- Consents or Authorizations SPECIAL MEETING OF FARMERS & are to Be Solicited MERCHANTS SHAREHOLDERS; INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 19. Information if Proxies, Not Applicable Consents or Authorizations are not to Be Solicited or in an Exchange Offer FARMERS & MERCHANTS BANK P.O. BOX 430, 1001 MAIN STREET, HONESDALE, PA 18431-0430 TEL. 717-253-1095, FAX 717-253-6628 _________________________________________________________________ January 2, 1995 Dear Shareholder: You are cordially invited to attend a Special Meeting of the Shareholders of Farmers & Merchants Bank (Honesdale, PA.) which will be held on Wednesday, January 31, 1996, 10:00 a.m., prevailing time, at the Central Methodist Church, Wesley Room, 11th and Church Streets, Honesdale, Pennsylvania 18431. The primary purpose of this meeting is to consider and vote upon a merger of Farmers & Merchants Bank (Honesdale, PA.) with and into The Citizens National Bank of Lansford, a wholly-owned subsidiary of Harleysville National Corporation, a Pennsylvania bank holding company located in Harleysville, Montgomery County, Pennsylvania. We urge you to carefully read the enclosed Prospectus/Proxy Statement which describes the reorganization in detail and the regulatory requirements to consummate this transaction. The information contained in the "SUMMARY" portion of the Prospectus/Proxy Statement sets forth the basic components of the reorganization. If you have any questions after a review of the Prospectus/Proxy Statement consult with your own advisors or feel free to contact me at Farmers & Merchants Bank (Honesdale, PA.), telephone (717) 253-1096. For the reasons stated in the enclosed Prospectus/Proxy Statement, the Board of Directors believes that the merger is in the best interests of the Bank and its shareholders and urges you to vote for the merger. The approval and adoption of the Agreement and Plan of Reorganization requires a favorable vote of the holders of two-thirds of the outstanding shares of the Bank's common stock. It is, therefore, extremely important for you to sign, date and return the enclosed proxy as soon as possible in the envelope supplied for your convenience, whether or not you plan to attend the special meeting. Your Board of Directors strongly recommends that you vote FOR the merger. Sincerely yours, /s/ Richard J. Shershenovich Richard J. Shershenovich, President FARMERS & MERCHANTS BANK P.O. BOX 430, 1001 MAIN STREET, HONESDALE, PA 18431-0430 TEL. 717-253-1095, FAX 717-253-6628 _________________________________________________________________ _________________________ NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON JANUARY 31, 1996 _________________________ TO THE SHAREHOLDERS OF FARMERS & MERCHANTS BANK (HONESDALE, PA.): Notice is hereby given that a Special Meeting of Shareholders of Farmers & Merchants Bank (Honesdale, PA.)("Farmers & Merchants") will be held at 10:00 a.m., prevailing time, on Wednesday, January 31, 1996, at the Central Methodist Church, Wesley Room, 11th and Church Streets, Honesdale, Pennsylvania 18431, for the following purposes: 1. To consider and act upon a proposal to approve and adopt an Agreement and Plan of Reorganization and Agreement and Plan of Merger providing, among other things, for the merger of Farmers & Merchants with and into The Citizens National Bank of Lansford, a national banking association organized under the laws of the United States and a subsidiary of Harleysville National Corporation ("HNC"), and for the automatic conversion of shares of the common stock of Farmers & Merchants into shares of HNC common stock as specified in the Agreement and Plan of Reorganization; and 2. To transact such other business as may properly come before the Special Meeting and any adjournment or postponement thereof. Only those shareholders of record at the close of business on Friday, December 29, 1995, will be entitled to notice of and to vote at the Special Meeting. THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST TWO-THIRDS OF THE OUTSTANDING SHARES OF FARMERS & MERCHANTS COMMON STOCK IS REQUIRED FOR APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF MERGER. THEREFORE, WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, YOU ARE URGED TO SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY. A SELF-ADDRESSED STAMPED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. YOUR PROXY IS REVOCABLE AND MAY BE WITHDRAWN IN THE EVENT THAT YOU WISH TO ATTEND THE MEETING AND VOTE IN PERSON. By Order of the Board of Directors, /s/ Richard J. Shershenovich Richard J. Shershenovich, President January 2, 1996 PROSPECTUS/PROXY STATEMENT HARLEYSVILLE NATIONAL CORPORATION 489,593 SHARES COMMON STOCK $1.00 PAR VALUE FARMERS & MERCHANTS BANK (HONESDALE, PA.) PROXY STATEMENT This Prospectus/Proxy Statement relates to shares of the One Dollar ($1) par value common stock of Harleysville National Corporation ("HNC") to be issued following, and conditioned upon, final approval of the merger of Farmers & Merchants Bank (Honesdale, PA.) with and into The Citizens National Bank of Lansford ("Citizens National"), a national banking association and subsidiary of HNC. The proposed merger is described more fully in the Proxy Statement of Farmers & Merchants Bank, (Honesdale, PA.) which Proxy Statement is an integral part of this Prospectus and is being furnished in connection with the convening of a Special Meeting of the Shareholders of Farmers & Merchants Bank (Honesdale, PA.) at which a vote on the proposed merger will be taken. __________________________________ This Prospectus/Proxy Statement does not cover resales of shares of HNC Common Stock to be issued to affiliates of Farmers & Merchants Bank (Honesdale, PA.) in connection with the proposed merger described herein. No such person is authorized to make use of this Prospectus/Proxy Statement in connection with any such resale. __________________________________ The shares of HNC common stock to be issued in connection with the merger have not been approved or disapproved by the Securities and Exchange Commission (the "SEC"), the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance Corporation (the "FDIC") the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") or any state securities commission, nor has the SEC, the OCC, the FDIC, the Federal Reserve Board or any state securities commission passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense. __________________________________ The shares of HNC common stock offered hereby are not savings accounts, deposits, or other obligations of a bank or savings association and are not insured by the FDIC or any other governmental agency. __________________________________ The date of this Prospectus/Proxy Statement is January 2, 1996. -i- No person has been authorized to give any information or to make any representation not contained in this Prospectus/Proxy Statement, and if given or made, any such information or representation should not be relied upon as having been authorized. This Prospectus/Proxy Statement does not constitute an offer to any person to exchange or sell, or a solicitation from any person of an offer to exchange or purchase, the securities offered by this Prospectus/Proxy Statement, or the solicitation of a proxy from any person, in any jurisdiction in which it is unlawful to make such an offer or solicitation. Neither the delivery of this Prospectus/Proxy Statement nor any distribution of the securities to which this Prospectus relates shall under any circumstances create any implication that the information contained herein is correct at any time subsequent to the date hereof. __________________________________ AVAILABLE INFORMATION HNC is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith files periodic reports, Proxy Statements and other information with the SEC. Such periodic reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549 and also at the regional offices of the SEC located at 75 Park Place, 14th Floor, New York, New York 10007; Curtis Center, Independence Square West, 601 Walnut Street, Suite 1005E, Philadelphia, Pennsylvania 19106; and Northwestern Atrium Center, 500 West Madison Street, Suite 400, Chicago, Illinois 60661. Copies of such material may be obtained from the public reference section of the SEC at Judiciary Plaza 450 Fifth Street, N.W., Washington, DC 20549, at prescribed rates. __________________________________ THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. HNC WILL PROVIDE WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST OF ANY PERSON TO WHOM THIS PROSPECTUS/PROXY STATEMENT IS DELIVERED, A COPY OF ANY AND ALL DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) WHICH HAVE BEEN INCORPORATED BY REFERENCE HEREIN. SUCH REQUESTS SHOULD BE DIRECTED TO JO ANN M. BYNON, ASSISTANT SECRETARY OF THE BOARD, HARLEYSVILLE NATIONAL CORPORATION, 483 MAIN STREET, HARLEYSVILLE, PENNSYLVANIA 19438; TELEPHONE (215) 256-8851. IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, ANY REQUEST SHOULD BE MADE BY JANUARY 22, 1996. -ii- INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents and information are hereby incorporated by reference into this Prospectus/Proxy Statement: 1. HNC's Annual Report on Form 10-K for the year ended December 31, 1994, including, without limitation, the following items thereof: a. Item 12, relating to the voting securities and principal holders thereof; b. Item 10, relating to Directors and Executive Officers; c. Item 11, relating to Executive Compensation; and d. Item 13, relating to certain relationships and related transactions. 2. HNC's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. 3. HNC's Current Report on Form 8-K dated May 18, 1995. 4. HNC's Current Report on Form 8-K dated September 14, 1995. 5. HNC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. 6. HNC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. All documents filed by HNC pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 after the date of this Prospectus/Proxy Statement and prior to the Special Meeting of the Shareholders of Farmers & Merchants Bank (Honesdale, PA.) are hereby incorporated by reference into this Prospectus/Proxy Statement and shall be deemed a part hereof from the date of filing of each such document. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus/Proxy Statement to the extent that a statement contained herein or in any subsequently filed document which is also incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus/Proxy Statement. -iii- TABLE OF CONTENTS Page SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . vi GENERAL INFORMATION--SPECIAL MEETING OF FARMERS & MERCHANTS SHAREHOLDERS . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . 1 Date, Time and Place of Special Meeting . . . . . . . . 1 Purpose of Meeting . . . . . . . . . . . . . . . . . . 1 Shareholders Entitled to Vote . . . . . . . . . . . . . 1 Required Vote . . . . . . . . . . . . . . . . . . . . . 2 Revocation and Voting of Proxies . . . . . . . . . . . 2 Solicitation of Proxies . . . . . . . . . . . . . . . . 2 Shares Outstanding and Principal Holders Thereof . . . 2 Interests of Certain Persons in Matters to Be Voted Upon . . . . . . . . . . . . . . . . . . . . . 3 Recommendation of the Board of Directors of Farmers & Merchants . . . . . . . . . . . . . . . . . 5 THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . 5 General Information . . . . . . . . . . . . . . . . . . 5 Background of and Principal Reasons for the Merger . . 6 Additional Reasons for the Merger . . . . . . . . . . . 8 Opinion of Financial Advisor . . . . . . . . . . . . . 9 Conversion and Exchange of Shares . . . . . . . . . . . 10 Voting Agreements . . . . . . . . . . . . . . . . . . . 12 Business Pending the Effective Date . . . . . . . . . . 13 Conditions, Amendment and Termination . . . . . . . . . 14 Effective Date . . . . . . . . . . . . . . . . . . . . 15 Management and Operations Following the Merger . . . . 15 Federal Income Tax Consequences . . . . . . . . . . . . 16 Warrant Agreement . . . . . . . . . . . . . . . . . . . 17 Accounting Treatment . . . . . . . . . . . . . . . . . 19 Rights of Dissenting Shareholders . . . . . . . . . . . 19 Restriction on Resale of HNC Common Stock Held by Affiliates of Farmers & Merchants . . . . . . . . . . 20 COMPARATIVE STOCK PRICES AND DIVIDENDS AND RELATED SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 21 Common Stock of HNC . . . . . . . . . . . . . . . . . . 21 Common Stock of Farmers & Merchants . . . . . . . . . . 22 -iv- PRO FORMA COMBINED FINANCIAL INFORMATION . . . . . . . . . . 22 INFORMATION CONCERNING HARLEYSVILLE NATIONAL CORPORATION AND DESCRIPTION OF HNC COMMON STOCK . . . . . . . . . . . 32 Information Concerning HNC . . . . . . . . . . . . . . 32 Acquisitions by HNC . . . . . . . . . . . . . . . . . . 32 Loans . . . . . . . . . . . . . . . . . . . . . . . . . 33 Description of HNC Common Stock . . . . . . . . . . . . 33 Dividends . . . . . . . . . . . . . . . . . . . . . . . 33 Dividend Reinvestment Plan . . . . . . . . . . . . . . 34 Securities Laws . . . . . . . . . . . . . . . . . . . . 34 Anti-takeover Provisions . . . . . . . . . . . . . . . 35 Indemnification . . . . . . . . . . . . . . . . . . . . 38 Comparison of Stockholder Rights . . . . . . . . . . . 39 INFORMATION CONCERNING FARMERS & MERCHANTS BANK . . . . . . 41 Description of Business and Property . . . . . . . . . 41 Employees . . . . . . . . . . . . . . . . . . . . . . . 43 Legal Proceedings . . . . . . . . . . . . . . . . . . . 43 Farmers & Merchants Common Stock Market Price and Dividends . . . . . . . . . . . . . . . . . . . . . . 43 EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . 45 LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . 45 OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . 45 ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . 45 FARMERS & MERCHANTS BANK--INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION . . . . . . . . . 46 EXHIBITS Exhibit A - Agreement and Plan of Reorganization and Agreement and Plan of Merger Exhibit B - Opinion of Danielson Associates Inc. Exhibit C - Statute Relating to Dissenters' Rights; 12 U.S.C. Section 215a -v- SUMMARY The following is a summary of certain information set forth in more detail elsewhere in this Prospectus/Proxy Statement. This summary is provided for convenience only and does not set forth completely all material features of the proposed merger. This summary should be read in conjunction with and is qualified in its entirety by the more detailed information which is set forth elsewhere in this Prospectus/Proxy Statement and the attached exhibits or which is incorporated herein by reference. The Parties Harleysville National Corporation Harleysville National Corporation ("HNC") is a Pennsylvania business corporation and a registered bank holding company with its principal offices located at 483 Main Street, P.O. Box 195, Harleysville, Pennsylvania 19438. As a bank holding company, HNC engages in the general commercial and retail banking business. HNC has three wholly-owned subsidiaries, each of which is a national banking association and each of which engages in the general commercial and retail banking business. The Harleysville National Bank & Trust Company ("Harleysville National") is a subsidiary of HNC. Harleysville National has its principal offices at the same location as HNC and operates 16 banking offices in Montgomery County, Pennsylvania and in Bucks County, Pennsylvania. The Citizens National Bank of Lansford ("Citizens National") is a subsidiary of HNC. Citizens National has its principal offices located at 13-15 West Ridge Street, P.O. Box 128, Lansford, Pennsylvania, 18232 and operates three (3) banking offices in Carbon County, Pennsylvania. Security National Bank ("Security National") is a subsidiary of HNC. Security National has its principal offices located at One Security Place, Pottstown, Pennsylvania 19464 and operates two (2) banking offices in Pottstown, Pennsylvania. As of September 30, 1995, HNC had consolidated total assets of approximately Eight Hundred Forty-two Million Nine Hundred Twenty-eight Thousand Dollars ($842,928,000). Farmers & Merchants Bank (Honesdale, PA.) Farmers & Merchants Bank (Honesdale, PA.) ("FMB" or "Farmers & Merchants") is a Pennsylvania-chartered commercial bank and trust company. Its deposits are insured by the FDIC to the maximum extent permitted by law. As a full-service commercial bank, Farmers & Merchants offers demand, savings and time deposits and commercial, consumer and mortgage loans. Farmers & Merchants also has a trust department. Farmers & Merchants maintains its only banking office at 1001 Main Street, Honesdale, Pennsylvania 18431. As of September 30, 1995, Farmers & Merchants had total assets of approximately Sixty-five Million Five Hundred Fifty-five Thousand Dollars ($65,555,000). -vi- Farmers & Merchants Special Meeting A special meeting of the shareholders of Farmers & Merchants (the "Special Meeting") will be held on Wednesday, January 31, 1996 at 10:00 a.m., prevailing time, at the Central Methodist Church, Wesley Room, 11th and Church Streets, Honesdale, Pennsylvania 18431. Only those shareholders of record as of the close of business on Friday, December 29, 1995 will be entitled to vote. As of the record date, there were approximately 708,016 shares of the common stock, par value Two Dollars ($2) per share, of Farmers & Merchants (the "Farmers & Merchants Common Stock") outstanding, each of which is entitled to one vote on the reorganization and merger. SEE GENERAL INFORMATION -- SPECIAL MEETING OF FARMERS & MERCHANTS SHAREHOLDERS. Purpose of the Meeting The shareholders of Farmers & Merchants will be asked at the Special Meeting to consider and vote upon a proposal to approve and adopt an Agreement and Plan of Reorganization dated September 7, 1995, among HNC, Farmers & Merchants and Citizens National. The Agreement and Plan of Reorganization includes, as an exhibit thereto, an Agreement and Plan of Merger, under the terms of which: (i) Farmers & Merchants will be merged with and into Citizens National; (ii) Citizens National will survive the merger and upon completion of the transaction will operate and trade under the fictitious name "Farmers & Merchants Bank" in the Honesdale area; (iii) all of the outstanding shares of the Farmers & Merchants Common Stock will be converted into shares of the common stock, par value One Dollar ($1) per share, of HNC (the "HNC Common Stock"); and (iv) each shareholder of Farmers & Merchants will receive shares of HNC Common Stock in exchange for shares of Farmers & Merchants Common Stock held by him or her as specified in the Agreement and Plan of Reorganization and cash in lieu of any fractional shares of HNC Common Stock. SEE THE MERGER. Required Vote The affirmative vote of shareholders holding at least two-thirds of the outstanding Farmers & Merchants Common Stock, given at a duly convened and conducted meeting of the shareholders of Farmers & Merchants is required to approve and adopt the Agreement and Plan of Reorganization and Agreement and Plan of Merger. As of September 30, 1995, the directors of Farmers & Merchants and their affiliates owned beneficially approximately 42.87 percent of the outstanding shares of Farmers & Merchants Common Stock. Each member of the Board of Directors of Farmers & Merchants has entered into an agreement (a "Support Agreement") pursuant to which he has agreed to vote, or cause to be voted, his shares of Farmers & Merchants Common Stock as to which he has or shares voting -vii- power, individually or, to the extent of his proportionate interest, jointly with other persons, as well as other shares over which he may acquire beneficial ownership in favor of the Agreement and Plan of Reorganization and the proposed transaction; and use his best efforts to cause the proposed transaction to be effected. SEE GENERAL INFORMATION -- SPECIAL MEETING OF FARMERS & MERCHANTS SHAREHOLDERS - INFORMATION CONCERNING FARMERS & MERCHANTS BANK. Conversion and Exchange of Shares It is expected that the effective date of the merger will be early 1996. Pursuant to the terms of the Agreement and Plan of Reorganization and Agreement and Plan of Merger, on the effective date, each outstanding share of Farmers & Merchants Common Stock will be exchanged for at least .5915 but not more than .6915 shares of HNC Common Stock (the "collar exchange ratios"). A value of Seventeen Dollars ($17) per share of Farmers & Merchants Common Stock has been established for this transaction. Generally, each share of Farmers & Merchants Common Stock issued and outstanding immediately before the effective date (as defined in the Agreement and Plan of Reorganization), will be converted into and become shares of HNC Common Stock based on a formula pursuant to which the Seventeen Dollars ($17) is divided by the arithmetic average of the per share closing prices for HNC Common Stock for the twenty (20) trading days immediately preceding the date which is five (5) business days before the effective date of the proposed merger. In the event that HNC Common Stock trades beyond the collar exchange ratios, the collar limits shall apply so that shareholders of Farmers & Merchants will receive an exchange ratio of at least .5915 shares but no more than .6915 shares of HNC Common Stock. The exchange is subject to an anti-dilution adjustment for stock splits and certain stock dividends. No fractional shares of HNC Common Stock will be issued in connection with the merger. In lieu of the issuance of any fractional share to which any former Farmers & Merchants shareholder would otherwise be entitled, each such shareholder of Farmers & Merchants will receive, in cash, an amount equal to the fair market value of his or her fractional interest. SEE THE MERGER--Conversion and Exchange of Shares. Each former shareholder of Farmers & Merchants will be required to surrender to HNC the Farmers & Merchants Common Stock certificates held by him or her in accordance with the instructions which will be sent immediately following the effective date of the merger. Upon proper surrender of his or her Farmers & Merchants Common Stock certificates, each former shareholder of Farmers & Merchants will be promptly issued a stock certificate representing the whole number of the shares of HNC Common Stock into which such shareholder's Farmers & Merchants Common Stock shall have been converted, together with a check in the amount of any cash to which he or she is entitled in lieu of the issuance of any fractional share. SEE THE MERGER--Conversion and Exchange of Shares, and the Agreement and Plan of Reorganization attached as Exhibit "A" to this Prospectus/Proxy Statement. -viii- Reasons for the Merger The Boards of Directors of HNC, Citizens National and Farmers & Merchants are in unanimous agreement that the proposed reorganization and merger of Farmers & Merchants with and into Citizens National is in the best interests of each organization. In the case of HNC, the acquisition of Farmers & Merchants will enable HNC and Citizens National to establish its presence in the desirable banking market of Honesdale, Pennsylvania. The Board of Directors of Farmers & Merchants has concluded that the proposed merger is the most advantageous means for achieving the Board's primary objective of providing a fair financial return to Farmers & Merchants' shareholders and increasing the liquidity of their investment. In addition, Farmers & Merchants' Board believes that the proposed merger is the most effective method for enabling Farmers & Merchants to acquire access to enhanced management support systems and specialized banking and trust services offered by HNC, thereby permitting Farmers & Merchants to provide expanded services to its customers. Opinion of Farmers & Merchants' Financial Advisor Farmers & Merchants has engaged Danielson Associates Inc. ("Danielson"), an investment banking firm located at 6110 Executive Boulevard, Suite 504, Rockville, Maryland 20852, to act as its financial advisor for the purpose of evaluating the financial terms of the proposed merger. Danielson has delivered to Farmers & Merchants' Board of Directors an opinion stating that the consideration to be offered to Farmers & Merchants' shareholders in connection with the proposed merger is fair to the shareholders of Farmers & Merchants from a financial point of view. A copy of Danielson's opinion is attached to the Prospectus/Proxy Statement as Exhibit "B" and should be read in its entirety with respect to the assumptions made and the other matters considered by Danielson in rendering its opinion. As a condition precedent to the obligations of Farmers & Merchants under the Agreement and Plan of Reorganization, Farmers & Merchants shall obtain an opinion stating that the terms of the proposed merger are fair to the shareholders of Farmers & Merchants from a financial point of view to be dated as of this Prospectus/Proxy Statement. SEE THE MERGER--Opinion of Financial Advisor. Management and Operations Following the Merger Under the terms of the Agreement and Plan of Reorganization, Farmers & Merchants will merge with and into Citizens National. Citizens National will survive the merger. Citizens National has filed a fictitious name registration in order to trade and be known as Farmers & Merchants Bank in the Honesdale area upon and after the effective date of the merger. Following the merger, the Board of Directors of HNC and Citizens National will consist of the same persons who presently serve on the respective Boards of Directors of HNC and Citizens National before the merger, each of whom will serve until his -ix- successor is elected and qualified. On the effective date of the merger, the directors of Farmers & Merchants shall serve on the Regional Board of Directors for the Honesdale Area or may serve as Directors Emeriti. The Regional Board of Directors for the Honesdale Area will be established for at least one year under Citizens National's Board of Directors. SEE THE MERGER--Management and Operations Following the Merger, and GENERAL INFORMATION--SPECIAL MEETING OF FARMERS & MERCHANTS SHAREHOLDERS--Interests of Certain Persons in Matters to be Acted Upon. Effective Date The proposed merger will become effective in accordance with the provisions specified in the "Certificate Approving Merger" to be issued by the OCC, the receipt of which will occur as soon as reasonably practicable after all applicable conditions to the consummation of the merger have either been met or waived. HNC and Farmers & Merchants presently intend to consummate the merger during the first quarter of 1996, assuming Farmers & Merchants' shareholders approve the merger, all required regulatory approvals are obtained, and all other conditions have been satisfied or waived as of the closing of the merger. SEE THE MERGER--Effective Date. If the proposed merger has not been consummated by June 30, 1996, the Agreement and Plan of Reorganization will automatically be terminated unless HNC and Farmers & Merchants agree in writing prior to that date to extend the termination date. SEE THE MERGER--Conditions, Amendment and Termination. Comparison of Stockholder Rights Upon consummation of the merger, the shareholders of Farmers & Merchants will become shareholders of HNC. Several differences between the rights of holders of Farmers & Merchants Common Stock and HNC Common Stock arise from differences between the respective statutes applicable to Farmers & Merchants and HNC as well as the respective Articles of Incorporation and Bylaws of Farmers & Merchants and the Articles of Incorporation and Bylaws of HNC. The most significant differences between Farmers & Merchants Common Stock and HNC Common Stock include the following: (i) Farmers & Merchants' shareholders may exercise preemptive rights to acquire newly issued shares of Farmers & Merchants Common Stock, while HNC's shareholders have no preemptive rights; (ii) Farmers & Merchants' shareholders may cumulate their shares in voting for directors while HNC's shareholders have no cumulative voting rights; (iii) all of the directors of Farmers & Merchants are elected annually by Farmers & Merchants' shareholders for one-year terms, while only one-fourth of HNC's directors are elected each year for four-year terms due to the classification of HNC's Board of Directors into four separate classes; (iv) certain anti-takeover provisions -x- are contained in HNC's Articles of Incorporation, which may serve to entrench HNC's current management, while Farmers & Merchants' Articles of Association contain some similar provisions but not all the anti-takeover provisions applicable to HNC Common Stock; (v) HNC offers a dividend reinvestment plan to its shareholders, while Farmers & Merchants offers no such plan; (vi) HNC Common Stock is registered under the Securities Exchange Act of 1934 and is traded in the over-the-counter Nasdaq National Market System administered by the National Association of Securities Dealers while Farmers & Merchants Common Stock is not registered under such act and is traded on a limited basis in the local over-the-counter market. SEE INFORMATION CONCERNING HARLEYSVILLE NATIONAL CORPORATION AND DESCRIPTION OF HNC COMMON STOCK--Comparison of Stockholder Rights. Restriction on Resales by Affiliates The resale of shares of HNC Common Stock received in connection with the proposed merger by persons who are executive officers, directors or 10 percent share-holders of Farmers & Merchants will be subject to certain restrictions SEE THE MERGER--Restriction on Resale of HNC Common Stock Held by Affiliates of Farmers & Merchants. Federal Income Tax Consequences The proposed merger is structured to qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended. Accordingly, no taxable gain or loss will be recognized by the shareholders of Farmers & Merchants upon the receipt of HNC Common Stock in exchange for Farmers & Merchants Common Stock, except to the extent that any shareholders of Farmers & Merchants receive cash in lieu of the issuance of fractional shares of HNC Common Stock. Any Farmers & Merchants shareholder who exercises dissenters' rights will recognize taxable gain or loss to the extent of the difference between the amount of cash received by such shareholder in connection with the exercise of dissenters' rights and the adjusted tax basis of the shares as to which such shares are exercised. An opinion must be provided by counsel for HNC prior to closing confirming these and certain other federal income consequences of the proposed merger prior to closing. SEE THE MERGER--Federal Income Tax Consequences. Accounting Treatment Consummation of the proposed merger is subject to the condition that the transaction can be treated as a pooling of interests for financial reporting purposes. SEE THE MERGER--Accounting Treatment. -xi- Dissenters' Rights Shareholders of Farmers & Merchants are entitled to exercise dissenters' rights, assuming the proposed merger is consummated, in accordance with Section 215a of the National Bank Act, 12 U.S.C. Section 215a. HNC has a right to terminate the proposed merger if Farmers & Merchants shareholders exercise dissenters' rights with respect to 35,400 or more shares of Farmers & Merchants Common Stock. SEE THE MERGER-- Rights of Dissenting Shareholders; and Exhibit "C"--Statute Relating to Dissenters' Rights. Conditions, Amendments and Termination Consummation of the proposed merger is subject to various conditions and contingencies, including, among others, approval by the shareholders of Farmers & Merchants, approval by the OCC and the absence of any pending or threatened litigation seeking to modify, enjoin or prohibit the transactions contemplated by the merger. All required applications for regulatory approval have been filed by HNC and Farmers & Merchants. To the extent permitted by law, the Agreement and Plan of Reorganization may be amended by mutual consent and any term and condition thereof may be waived by the party entitled to its benefit at any time before the effective date of the merger, whether before or after it has been approved by the shareholders of Farmers & Merchants, except that no such amendment can affect the conversion of shares without the approval and consent of the shareholders of Farmers & Merchants. The Agreement and Plan of Reorganization may be terminated at any time, whether before or after it has been approved by the shareholders of Farmers & Merchants, by mutual consent or unilaterally by the Boards of Directors of HNC or Farmers & Merchants if certain conditions are not satisfied prior to June 30, 1996, or if certain events occur or fail to occur. Nonetheless, the Agreement and Plan of Reorganization and Agreement and Plan of Merger shall terminate on June 30, 1996, unless extended by mutual consent of the parties. SEE THE MERGER--Conditions, Amendment and Termination. Selected Historical and Pro Forma Combined Per Share Data The following tables set forth, at the dates and for the periods indicated, financial information relating to HNC Common Stock and Farmers & Merchants Common Stock on a per share historical and pro forma combined basis. The pro forma and equivalent per share information is presented on the basis of an assumed exchange ratio of .6415 shares of HNC Common Stock for each share of Farmers & Merchants Common Stock. The information set forth in the tables below should be read in conjunction with the pro forma combined financial information set forth elsewhere in this Prospectus/Proxy Statement, the -xii- financial statements of HNC, including the notes thereto which are incorporated herein by reference, and the financial statements of Farmers & Merchants, including the notes thereto, which are set forth elsewhere in this Prospectus/Proxy Statement. SEE PRO FORMA COMBINED FINANCIAL INFORMATION; INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE; AND FARMERS & MERCHANTS BANK--INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION. SELECTED HISTORICAL, PRO FORMA COMBINED AND EQUIVALENT PER SHARE DATA
As of and As of for the nine and for the Months Ended Years Ended Sept. 30, December 31, 1995 1994 1994 Harleysville National Corporation (HNC) Historical Per Common Share: Average Shares Outstanding: Primary 5,891,873 5,865,915 5,847,473 Fully Diluted 5,892,389 5,865,915 5,847,473 Book Value $ 12.90 $ 12.14 $ 11.57 Cash Dividends 0.55 0.44 0.61 Income from Operations: Primary 1.49 1.40 1.84 Fully Diluted 1.49 1.40 1.84 HNC, FMB Combined Pro Forma Per Common Share* Average Shares Outstanding: Primary 6,346,065 6,320,343 6,301,665 Fully Diluted 6,346,581 6,320,343 6,301,665 Book Value 13.33 12.50 11.95 Cash Dividends 0.54 0.42 0.58 Income from Operations: Primary 1.46 1.36 1.79 Fully Diluted 1.46 1.36 1.79 ____________________ As of and for the Years Ended December 31, 1993 1992 1991 1990 Harleysville National Corporation (HNC) Historical Per Common Share: Average Shares Outstanding: Primary 5,642,790 5,566,155 5,566,129 5,566,129 Fully Diluted 5,824,099 5,737,115 5,675,345 5,607,079 Book Value $ 11.58 $ 9.66 $ 8.81 $ 7.85 Cash Dividends 0.49 0.43 0.37 0.31 Income from Operations: Primary 1.58 1.41 1.31 1.19 Fully Diluted 1.53 1.37 1.29 1.18 HNC, FMB Combined Pro Forma Per Common Share* Average Shares Outstanding: Primary 6,097,444 6,026,590 6,028,009 6,028,009 Fully Diluted 6,278,753 6,197,550 6,137,225 6,068,959 Book Value 11.32 10.15 9.22 8.29 Cash Dividends 0.48 0.42 0.38 0.32 Income from Operations: Primary 1.55 1.39 1.29 1.20 Fully Diluted 1.50 1.35 1.27 1.19 ____________________
As of and As of for the nine and for the Months Ended Years Ended Sept. 30, December 31, 1995 1994 1994 Farmers & Merchants Bank (FMB) Historical Per Common Share Average Shares Outstanding: Primary 708,016 708,383 708,016 Fully Diluted 708,016 708,383 708,016 Book Value $ 12.07 $ 10.81 $ 10.75 Cash Dividends 0.31 0.30 0.37 As of and for the Years Ended December 31, 1993 1992 1991 1990 Farmers & Merchants Bank (FMB) Historical Per Common Share Average Shares Outstanding: Primary 708,736 717,747 720,000 720,000 Fully Diluted 708,736 717,747 720,000 720,000 Book Value $ 9.72 $ 9.37 $ 9.06 $ 8.73 Cash Dividends 0.36 0.35 0.33 0.31 -xiii- As of and As of for the nine and for the Months Ended Years Ended Sept. 30, December 31, 1995 1994 1994 Income from Operations 0.65 0.54 0.76 HNC, FMB Combined Pro Forma Equivalent Per Common Share* Book Value 8.55 8.02 7.67 Cash Dividends 0.35 0.27 0.38 Income from Operations Primary 0.94 0.87 1.15 Fully Diluted 0.94 0.87 1.15 ____________________ As of and for the Years Ended December 31, 1993 1992 1991 1990 Income from Operations 0.71 0.67 0.67 0.85 HNC, FMB Combined Pro Forma Equivalent Per Common Share* Book Value 7.26 6.51 5.91 5.32 Cash Dividends 0.31 0.27 0.25 0.21 Income from Operations Primary 0.99 0.89 0.83 0.77 Fully Diluted 0.96 0.86 0.81 0.77 ____________________ * The above combined pro forma per share equivalent information is based on average shares outstanding during the period except for the book value per share which is based on period end shares outstanding. The number of shares in each case has been adjusted for stock dividends and stock splits through the periods. Each share of Farmers & Merchants Common Stock will be exchanged for between .5915 and .6915 share of HNC Common Stock. This presentation assumes that .6415, or the mid-point in the range, of HNC Common Stock will be issued.
Comparative Stock Prices On September 7, 1995, the last trading date before public announcement of the Agreement and Plan of Reorganization relating to the proposed merger, the per share closing bid and asked quotations for HNC Common Stock were Twenty-six Dollars ($26) and Twenty-eight Dollars and Fifty Cents ($28.50), respectively, as reported on the National Association of Securities Dealers Automated Quotation System ("Nasdaq"). The pro forma equivalent per share closing bid and asked quotations for such date based upon the assumed exchange ratio of .6415 of HNC Common Stock for each share of Farmers and Merchant's Common Stock are Sixteen Dollars and Sixty-eight Cents ($16.68) and Eighteen Dollars and Twenty-eight Cents ($18.28), respectively. The Farmers & Merchants Common Stock has historically been traded on a limited basis in the local over-the-counter market and in privately negotiated transactions. The most recent sale of Farmers & Merchants Common Stock of which Farmers & Merchants' management is aware is a sale of 240 shares that occurred on April 18, 1995, at a price of Fifteen Dollars and Twenty-five Cents ($15.25) per share. Because trading in the Farmers & Merchants Common Stock is sporadic, it cannot be said that an established trading market exists. The foregoing historical and pro forma equivalent per share market information is summarized in the following table:
Pro Forma Historical Price Equivalent Price Per Share Per Share HNC Common Stock September 7, 1995 Bid $ 26.00 N/A September 7, 1995 Asked $ 28.50 N/A Farmers & Merchants Common Stock September 7, 1995 Bid $ 14.38 $ 16.68 September 7, 1995 Asked $ 14.38 $ 18.28 ____________________
-xiv- More detailed information concerning comparative stock prices is set forth elsewhere in this Prospectus/Proxy Statement. SEE COMPARATIVE STOCK PRICES AND DIVIDENDS AND RELATED SHAREHOLDER MATTERS. Selected Historical and Pro Forma Financial Data The following tables present selected, unaudited historical financial data and pro forma information on a combined basis for HNC and Farmers & Merchants. The pro forma combined information is presented as though the proposed merger between Farmers & Merchants and Citizens National had occurred on September 30, 1995, and reflects a pooling of interests basis of accounting based upon an assumed exchange ratio of .6415 share of HNC Common Stock for each share of Farmers & Merchants Common Stock. This represents the mid-point in the range of between .5915 and .6915 share of HNC Common Stock that will be issued. The following information should be read in conjunction with the pro forma combined financial information, including the notes thereto, set forth elsewhere in this Prospectus/Proxy Statement, the financial statements of HNC, including the notes thereto, which are incorporated herein by reference and the financial statements of Farmers & Merchants, including the notes thereto, which are set forth elsewhere herein. SEE PRO FORMA COMBINED FINANCIAL INFORMATION; INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE; AND FARMERS & MERCHANTS BANK -- INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION. HARLEYSVILLE NATIONAL CORPORATION Selected Financial Data (In Thousands)
As of and As of for the Nine and for the Months Ended Years Ended Sept. 30, December 31, 1995 1994 1994 Summary of Operations: Total Interest Income $ 47,780 $ 39,887 $ 54,614 Net Interest Income 28,087 25,910 35,175 Provision for Loan Losses 1,643 2,008 2,650 _________ _________ _________ Net Interest After Provision for Loan Losses 26,444 23,902 32,525 Other Operating Income 3,090 3,948 4,525 Other Operating Expenses 17,055 16,088 21,757 _________ _________ _________ Income Before Income Taxes 12,479 11,762 15,293 Income Taxes 3,678 3,523 4,548 _________ _________ _________ Income From Continuing Operations $ 8,801 $ 8,239 $ 10,745 Average Balance Sheet Totals: Total Assets $ 821,611 $ 760,003 $ 765,037 Investment Securities and Money Market Investments 200,754 215,179 206,779 As of and for the Years Ended December 31, 1993 1992 1991 1990 Summary of Operations: Total Interest Income $ 50,350 $ 48,574 $ 46,667 $ 44,617 Net Interest Income 30,819 26,697 21,964 19,763 Provision for Loan Losses 3,073 2,299 1,306 921 _________ _________ _________ _________ Net Interest After Provision for Loan Losses 27,746 24,398 20,658 18,842 Other Operating Income 4,868 3,410 2,932 2,154 Other Operating Expenses 20,122 17,040 13,807 12,285 _________ _________ _________ _________ Income Before Income Taxes 12,492 10,768 9,783 8,711 Income Taxes 3,554 2,898 2,485 2,075 _________ _________ _________ _________ Income from Continuing Operations $ 8,938 $ 7,870 $ 7,298 $ 6,636 Average Balance Sheet Totals: Total Assets $ 714,719 $ 632,490 $ 520,103 $ 461,215 Investment Securities and Money Market Investments 219,610 200,349 157,079 129,224 -xv- As of and As of for the Nine and for the Months Ended Years Ended Sept. 30, December 31, 1995 1994 1994 Loans and Leases (Net of Unearned Income) 577,625 502,037 515,101 Deposits 701,150 681,163 682,112 Borrowings 35,598 3,223 8,145 Long-term Debt and Lease Obligations -- -- -- Shareholders' Equity 72,368 65,435 66,716 Period End: Total Assets 842,928 781,500 799,779 Long-term Debt and Lease Obligations -- -- -- ____________________ As of and for the Years Ended December 31, 1993 1992 1991 1990 Loans and Leases (Net of Unearned Income) 451,057 393,323 333,389 303,351 Deposits 643,847 568,100 460,279 406,751 Borrowings 2,014 1,608 1,608 1,520 Long-term Debt and Lease Obligations -- -- -- -- Shareholders' Equity 59,597 52,635 46,845 41,602 Period End: Total Assets 753,941 707,559 546,988 490,176 Long-term Debt and Lease Obligations -- -- -- -- ____________________
FARMERS & MERCHANTS BANK Selected Financial Data (In Thousands)
As of and As of for the Nine and for the Months Ended Years Ended Sept. 30, December 31, 1995 1994 1994 Summary of Operations: Total Interest Income $ 3,099 $ 2,787 $ 3,766 Net Interest Income 1,651 1,552 2,104 Provision for Loan Losses 9 15 15 _________ _________ _________ Net Interest After Provision for Loan Losses 1,642 1,537 2,089 Other Operating Income 91 204 222 Other Operating Expenses 1,096 1,205 1,557 _________ _________ _________ Income Before Income Taxes 637 536 754 Income Taxes 178 156 219 _________ _________ _________ Income From Continuing Operations $ 459 $ 380 $ 535 Average Balance Sheet Totals: Total Assets $ 63,748 $ 64,482 $ 64,204 Investment Securities and Money Market Investments 35,089 37,918 37,202 Loans and Leases (Net of Unearned Income) 26,743 24,434 24,929 Deposits 54,826 56,191 55,917 Borrowings -- 264 203 Long-term Debt and Lease Obligations -- -- -- Shareholders' Equity 8,112 7,475 7,518 Period End: Total Assets 65,555 66,764 62,890 Long-term Debt and Lease Obligations -- -- -- ____________________ As of and for the Years Ended December 31, 1993 1992 1991 1990 Summary of Operations: Total Interest Income $ 3,630 $ 4,037 $ 4,785 $ 5,219 Net Interest Income 2,104 1,929 1,851 1,999 Provision for Loan Losses 12 -- 9 15 _________ _________ _________ _________ Net Interest After Provision for Loan Losses 1,917 1,851 1,781 1,984 Other Operating Income 96 142 100 52 Other Operating Expenses 1,314 1,318 1,267 1,239 _________ _________ _________ _________ Income Before Income Taxes 699 675 614 797 Income Taxes 199 194 134 188 _________ _________ _________ _________ Income from Continuing Operations $ 500 $ 481 $ 480 $ 609 Average Balance Sheet Totals: Total Assets $ 61,700 $ 60,422 $ 59,730 $ 58,016 Investment Securities and Money Market Investments 38,314 37,132 34,628 33,266 Loans and Leases (Net of Unearned Income) 21,262 20,907 22,960 22,667 Deposits 54,146 52,877 52,246 50,748 Borrowings 358 380 349 259 Long-term Debt and Lease Obligations -- -- -- -- Shareholders' Equity 6,758 6,611 6,407 6,082 Period End: Total Assets 62,373 60,675 59,144 58,123 Long-term Debt and Lease Obligations -- -- -- -- ____________________
-xvi- SELECTED PRO FORMA COMBINED (In Thousands) September 30, 1995
Harleysville Farmers & National Merchants Adjust- Pro Forma Corporation Bank ments Combined Average Balance Sheet: Total Assets $ 821,611 $ 63,748 $ -- $ 885,359 Investment Securities and Money Market Investments 200,754 35,089 235,843 Loans and Leases (Net of Unearned Income) 577,625 26,743 604,368 Total Deposits 701,150 54,826 755,976 Borrowings 35,598 -- 35,598 Long-term Debt and Lease Obligations -- -- -- Shareholders' Equity 72,368 8,112 80,480 Period End: Total Assets $ 842,928 $ 65,555 $ -- $ 908,483 Long-term Debt and Lease Obligations -- -- -- ____________________
As of and As of for the nine and for the Months Ended Years Ended Sept. 30, December 31, 1995 1994 1994 Summary of Operations: Total Interest Income $ 50,879 $ 42,674 $ 58,830 Net Interest Income 20,738 27,462 37,279 Provision for Loan Losses 1,652 2,023 2,665 _________ _________ _________ Net Interest Income After Provision for Loan Losses 28,086 25,439 34,614 Other Operating Income 3,181 4,152 4,747 Other Operating Expenses 18,151 17,293 23,314 _________ _________ _________ Income Before Income Taxes 13,116 12,298 16,047 Income Taxes 3,856 3,679 4,767 _________ _________ _________ Income From Continuing Operations $ 9,260 $ 8,619 $ 11,280 ____________________ As of and for the Years Ended December 31, 1993 1992 1991 1990 Summary of Operations: Total Interest Income $ 53,980 $ 52,584 $ 51,452 $ 49,836 Net Interest Income 32,748 28,548 23,754 21,762 Provision for Loan Losses 3,085 2,299 1,315 936 _________ _________ _________ _________ Net Interest Income After Provision for Loan Losses 29,663 26,249 22,439 20,826 Other Operating Income 4,964 3,552 3,032 2,206 Other Operating Expenses 21,436 18,358 15,074 13,524 _________ _________ _________ _________ Income Before Income Taxes 13,191 11,443 10,397 9,508 Income Taxes 3,753 3,092 2,619 2,263 _________ ________ __________ _________ Income From Continuing Operations $ 9,438 $ 8,351 $ 7,778 $ 7,245 ____________________
-xvii- PROSPECTUS/PROXY STATEMENT HARLEYSVILLE NATIONAL CORPORATION AND FARMERS & MERCHANTS BANK GENERAL INFORMATION--SPECIAL MEETING OF FARMERS & MERCHANTS SHAREHOLDERS Introduction This Prospectus/Proxy Statement is being furnished to the holders of Farmers & Merchants Common Stock in connection with a solicitation by Farmers & Merchants' Board of Directors, of proxies to be voted at a Special Meeting of Shareholders of Farmers & Merchants to be held on January 31, 1996 (the "Special Meeting"). The purpose of the Special Meeting is to consider and vote upon a proposal unanimously adopted by the Board of Directors of Farmers & Merchants to approve and adopt the Agreement and Plan of Reorganization by and among HNC, Farmers & Merchants and Citizens National and the related Agreement and Plan of Merger between Farmers & Merchants and Citizens National, the terms of which are described herein. All information set forth in this Prospectus/Proxy Statement which relates to HNC has been provided or verified by HNC. All information which relates to Farmers & Merchants has been provided or verified by Farmers & Merchants. Date, Time and Place of Special Meeting The Special Meeting of the shareholders of Farmers & Merchants will be held on Wednesday, January 31, 1996 at 10:00 a.m., prevailing time, at the Central Methodist Church, Wesley Room, 11th and Church Streets, Honesdale, Pennsylvania 18431. Purpose of Meeting The shareholders of Farmers & Merchants will be asked at the Special Meeting to consider and vote upon: (i) a proposal to approve and adopt the Agreement and Plan of Reorganization and Agreement and Plan of Merger; and (ii) such other matters as may properly be brought before the meeting and any adjournments thereof. Shareholders Entitled to Vote The Board of Directors of Farmers & Merchants has fixed the close of business on Friday, December 29, 1995, as the record date for the determination of shareholders of Farmers & Merchants entitled to receive notice of and to vote at the Special Meeting. -1- Required Vote Each share of Farmers & Merchants Common Stock is entitled to one vote on all matters submitted to a vote of the shareholders, except with respect to the election of directors for which shareholders may cumulate their votes. The affirmative vote of shareholders holding at least two-thirds of the issued and outstanding shares of Farmers & Merchants Common Stock given at a duly convened meeting of the shareholders of Farmers & Merchants is required by state law in order to approve and adopt the Agreement and Plan of Reorganization and Agreement and Plan of Merger. Revocation and Voting of Proxies The execution and return of the enclosed proxy form will not affect a shareholder's right to attend the Special Meeting and to vote in person. Any proxy given pursuant to this solicitation may be revoked at any time before the proxy is voted at the meeting by: (i) delivering notice of a revocation or a later-dated proxy to Charles P. McGinnis, Secretary, Farmers & Merchants Bank (Honesdale, PA.), 1001 Main Street, Honesdale, Pennsylvania 18431; or (ii) appearing at the meeting and notifying the person in charge thereof that the shareholder wishes to vote his or her shares in person. Unless revoked, any proxy given pursuant to this solicitation will be voted at the meeting in accordance with the instructions thereon. In the absence of instruction, all proxies will be voted FOR the proposal to approve and adopt the Agreement and Plan of Reorganization and the Agreement and Plan of Merger. Although the Board of Directors knows of no other business to be presented, in the event that any other matters are properly brought before the meeting, any proxy given pursuant to this solicitation will be voted in accordance with the recommendations of the management of Farmers & Merchants. Solicitation of Proxies This Prospectus/Proxy Statement is furnished in connection with the solicitation of proxies, in the accompanying form by the Board of Directors of Farmers & Merchants for use at the Special Meeting and at any adjournments thereof. The expenses to be incurred in soliciting proxies will be borne by Farmers & Merchants. In addition to the use of the mails, the directors, officers and employees of Farmers & Merchants may, without additional compensation, solicit proxies personally or by telephone or telecopier. Shares Outstanding and Principal Holders Thereof At the close of business on December 29, 1995, Farmers & Merchants had outstanding 708,016 shares of common stock, par value Two Dollars ($2) per share, the only issued and outstanding class of stock (the "Farmers & Merchants Common Stock"). -2- The following table sets forth as of December 12, 1995, the name and address of each person who owns of record or who is known by the Board of Directors of Farmers & Merchants to be the beneficial owner of more than 5 percent of the Farmers & Merchants Common Stock, the number of shares beneficially owned by such person and the percentage of Farmers & Merchants' outstanding shares so owned.
Percent of Outstanding Shares Common Stock Beneficially Beneficially Name and Address Owned Owned John J. Koehler 98,280 13.88% 1001 Main Street Honesdale, PA 18431 Dale D. Fowler 68,726 9.70% 1001 Main Street Honesdale, PA 18431 Richard J. Shershenovich 60,000 8.47% 1001 Main Street Honesdale, PA 18431 Charles P. McGinnis 47,528 6.71% 1001 Main Street Honesdale, PA 18431 ____________________ The Securities "beneficially owned" are determined in accordance with the definitions of "beneficial ownership" as set forth in the regulations of the SEC and, accordingly, may include securities owned by or for, among others, the spouse and/or minor children of the individual and any other relative who has the same residence as such individual as well as other securities as to which the individual has or shares voting or investment power or has the right to acquire under outstanding stock options within sixty (60) days after December 12, 1995. Beneficial ownership may be disclaimed as to certain of the securities. Includes 12,144 shares owned jointly by Mr. Fowler and his spouse; and 8,820 shares owned individually by his spouse. Includes 57,384 shares owned jointly by Mr. Shershenovich and his spouse; and 2,616 shares owned individually by his spouse.
Interests of Certain Persons in Matters to be Voted Upon Except as described in this section, the directors and executive officers of Farmers & Merchants have no substantial interest in the proposed merger, other than in their capacity as shareholders of Farmers & Merchants. As shareholders, the directors and -3- executive officers of Farmers & Merchants will be entitled to receive HNC Common Stock in exchange for the Farmers & Merchants Common Stock in the same proportion and on the same terms and conditions as all other shareholders of Farmers & Merchants. On or promptly after the effective date of the merger, Citizens National will establish a regional Board of Directors for the Honesdale Area ("Honesdale Regional Board of Directors") comprised of all of the current members of Farmers & Merchants Board of Directors. Members of the Farmers & Merchants Board of Directors have the option to serve as Directors Emeriti of the Honesdale Regional Board of Directors. The members of the Honesdale Regional Board of Directors and the Directors Emeriti thereof will serve for a minimum of one year from the Effective Date and receive fees of Two Hundred Dollars ($200) per month. Thereafter, the members of the Honesdale Regional Board of Directors and the Directors Emeriti thereof shall serve at the discretion of the Citizens National Board of Directors. During 1995, Directors of HNC have received Four Hundred Dollars ($400) for each Directors' meeting attended and Two Hundred Seventy-five Dollars ($275) for each committee meeting attended, with the exception of Mr. Walter E. Daller, Jr., President and Chief Executive Officer of HNC, who does not receive committee fees. In addition, the Directors receive other benefits consisting of an annual retainer fee and bonus. Each member of the Board of Directors of Farmers & Merchants has entered into an agreement (a "Support Agreement") pursuant to which he has agreed to vote, or cause to be voted, his shares of Farmers & Merchants Common Stock as to which he has or shares voting power, individually or, to the extent of his proportionate interest, jointly with other persons, as well as other shares over which he may acquire beneficial ownership in favor of the Agreement and Plan of Reorganization and the proposed transaction, and use his best efforts to cause the proposed transaction to be effected. These persons own collectively 303,520 or 42.87 percent of the Farmers & Merchants Common Stock outstanding. SEE THE MERGER--Voting Agreements. All persons employed by Farmers & Merchants prior to the merger will be interviewed by Citizens National for purposes of determining employment after the effective date. Severance payments not in excess of Seventy-five Thousand Dollars ($75,000), in the aggregate, will be paid to FMB employees whose employment is terminated (other than for cause) after the Effective Date, and before the expiration of three (3) months following the Effective Date. Richard K. Arnold will be employed by Citizens National for at least six (6) months following the Effective Date at a salary equal to his salary in effect prior to the consummation of the Agreement and Plan of Reorganization. The directors and officers of HNC and its subsidiaries have no special interest in the proposed merger, other than in their capacity as shareholders of HNC, and will not receive any special consideration or compensation in connection with its consummation. -4- Recommendation of the Board of Directors of Farmers & Merchants For the reasons stated in this Prospectus/Proxy Statement, the Board of Directors of Farmers & Merchants has unanimously approved and adopted the Agreement and Plan of Reorganization and Agreement and Plan of Merger and believes that the proposed merger is in the best interests of the shareholders of Farmers & Merchants. Accordingly, the Board of Directors unanimously recommends that the shareholders vote in favor of the proposal to approve and adopt the Agreement and Plan of Reorganization and Agreement and Plan of Merger. SEE THE MERGER--Background of and Principal Reasons for the Merger. Certain of the directors and officers of Farmers & Merchants have personal interests in the consummation of the proposed merger in addition to their interests as shareholders of Farmers & Merchants. SEE GENERAL INFORMATION--SPECIAL MEETING OF FARMERS & MERCHANTS SHAREHOLDERS--Interests of Certain Persons in Matters to be Voted Upon. THE MERGER General Information The shareholders of Farmers & Merchants will be asked at the Special Meeting to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Reorganization among HNC, Farmers & Merchants and Citizens National and the Agreement and Plan of Merger by and between Farmers & Merchants and Citizens National. Under the terms of the Agreement and Plan of Reorganization and Agreement and Plan of Merger: (i) Farmers & Merchants will be merged with and into Citizens National; (ii) Citizens National will survive the merger; and (iii) all of the outstanding shares of Farmers & Merchants Common Stock will be converted into shares of HNC Common Stock. Farmers & Merchants is a Pennsylvania-chartered commercial bank and trust company and is currently regulated by the Pennsylvania Department of Banking and the FDIC. Citizens National is a national banking association, a wholly-owned subsidiary of HNC, and is currently regulated by the OCC. Following the proposed merger of Farmers & Merchants with and into Citizens National, the resulting bank will be a national banking association and a member of the Federal Reserve System. The OCC will be the primary regulator of the resulting bank. HNC, as the parent company of Citizens National, will continue to be a registered bank holding company that is regulated by the Federal Reserve Board. Citizens National has registered the fictitious name "Farmers & Merchants Bank" in order that the main office of Farmers & Merchants, which will become a branch of Citizens National, may trade and be known in the Honesdale area as Farmers & Merchants Bank. The precise terms and conditions of the proposed merger are set forth in the Agreement and Plan of Reorganization and Agreement and Plan of Merger, a copy of each -5- is set forth as Exhibit "A" hereto. THE DISCUSSION WHICH FOLLOWS IS INTENDED ONLY AS A SUMMARY OF CERTAIN TERMS OF THE PROPOSED REORGANIZATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE AGREEMENT AND PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF MERGER. The Board of Directors of Farmers & Merchants has unanimously approved and adopted the Agreement and Plan of Reorganization and Agreement and Plan of Merger, believes the proposed merger is in the best interests of the shareholders of Farmers & Merchants, and unanimously recommends that the Shareholders vote FOR the following resolutions which will be presented at the Special Meeting: RESOLVED, that the Agreement and Plan of Reorganization and Agreement and Plan of Merger both dated September 7, 1995, by and among Harleysville National Corporation, The Citizens National Bank of Lansford and Farmers & Merchants Bank (Honesdale, PA.), entered into among the respective entities, approved and adopted by the Board of Directors of the respective entities, providing, among other things, for the merger of Farmers & Merchants Bank (Honesdale, PA.) with and into The Citizens National Bank of Lansford, a national banking association and a subsidiary of Harleysville National Corporation, and for the automatic conversion of shares of the common stock of Farmers & Merchants Bank (Honesdale, PA.) into shares of Harleysville National Corporation common stock in accordance with the Agreement and Plan of Reorganization and Agreement and Plan of Merger, is hereby approved, adopted, ratified and confirmed by the shareholders of Farmers & Merchants Bank (Honesdale, PA.); BE IT FURTHER RESOLVED, that the appropriate officers and directors of Farmers & Merchants Bank (Honesdale, PA.) are hereby authorized, empowered, directed and ordered, in the name and on behalf of Farmers & Merchants Bank (Honesdale, PA.), to execute all such documents and take all such other actions as they may in their discretion determine to be necessary, appropriate and desirable to carry out the intent and the purposes contemplated by the aforementioned Agreement and Plan of Reorganization and the Agreement and Plan of Merger and the foregoing resolution. Background of and Principal Reasons for the Merger The Board of Directors of Farmers & Merchants has for several years, as part of its planning, periodically reviewed and evaluated the various strategic options and alternatives available to Farmers & Merchants. In particular, the Board has considered the relative merits of maintaining the independence of Farmers & Merchants and of merging Farmers & Merchants with a larger financial institution in light of the many recent changes in -6- federal and state banking laws and their impact upon the financial services industry. The Board has also considered the desirability of increasing the liquidity of Farmers & Merchants Common Stock held by Farmers & Merchants' shareholders by arranging a merger in which Farmers & Merchants' shareholders would receive publicly-traded stock of a larger banking organization. The Board's primary consideration in taking the actions that lead to the execution of the Agreement and Plan of Reorganization and the Agreement and Plan of Merger was to provide a fair financial return to Farmers & Merchants' shareholders and increase the liquidity of their stock. Prior to executing the Agreement and Plan of Reorganization and the Agreement and Plan of Merger, the Board of Directors of Farmers & Merchants retained Danielson Associates Inc. ("Danielson"), an investment banking firm located at 6110 Executive Boulevard, Suite 504, Rockville, Maryland 20852, to provide financial advice regarding the proposed merger. The role of Danielson was limited to determining the fair sale value of Farmers & Merchants and in particular the fairness of the offer proposed by HNC from a financial point of view. Danielson was not responsible for negotiating or developing the terms of the proposed merger. The Board of Directors of Farmers & Merchants has received an opinion from Danielson to the effect that the terms of the Agreement and Plan of Reorganization and the Agreement and Plan of Merger with HNC and Citizens National are fair to the shareholders of Farmers & Merchants from a financial point of view. SEE THE MERGER--Opinion of Financial Advisor. For the reasons set forth below in this section and the immediately following section of this Prospectus/Proxy Statement, the Board of Directors of Farmers & Merchants has unanimously concluded that the proposed merger is in the best interests of Farmers & Merchants' shareholders, employees, customers and the community it serves. The following discussion explains how the proposed merger is to benefit each of these groups. As stated above, Danielson has advised Farmers & Merchants' Board of Directors that the terms of the Agreement and Plan of Reorganization and the Agreement and Plan of Merger are fair to Farmers & Merchants' shareholders from a financial point of view. In addition, the Board of Directors expects that the proposed merger will benefit the shareholders of Farmers & Merchants by providing them with equity ownership in a larger, publicly-traded banking organization and, thereby, increasing the liquidity of their investment. Historically, Farmers & Merchants Common Stock has been traded on a limited basis in the local over-the-counter market and in privately negotiated transactions. Upon consummation of the merger, the shareholders of Farmers & Merchants will receive HNC Common Stock which is more actively traded and is listed for quotation on the national market system of the National Association of Securities Dealers Automated Quotation System ("Nasdaq"). SEE COMPARATIVE STOCK PRICES AND DIVIDENDS AND RELATED SHAREHOLDER MATTERS. In addition to the benefits that the proposed merger would provide Farmers & Merchants' shareholders, the Board of Directors of Farmers & Merchants has determined -7- that HNC and Citizens National would be attractive merger partners for several reasons. First, the merger would provide Farmers & Merchants with additional management and support systems which will better enable Farmers & Merchants to adapt its operations to the rapidly changing legal and competitive conditions within the banking industry, thus benefitting Farmers & Merchants employees and customers. A second benefit of the proposed merger to Farmers & Merchants' customers is that, as described in the following section entitled Additional Reasons for the Merger, Farmers & Merchants' Merger with HNC and Citizens National will enable Farmers & Merchants' banking office to offer customers an expanded range of products and services. Third, HNC and Citizens National share with Farmers & Merchants a strong commitment to the concept of community-oriented banking. Fourth, as discussed in the section below entitled Management and Operations Following the Merger, Farmers & Merchants will continue to employ and be administered by knowledgeable local residents for the benefit of the local community. Additional Reasons for the Merger Recent changes in federal and state banking laws and regulations have had a major impact upon the banking industry in Pennsylvania and throughout the United States. In response to these changes, many mergers and consolidations involving banks and bank holding companies have occurred. Further merger activity is likely to occur in the future, resulting in increased concentration levels in banking markets and other significant changes in the competitive environment. These changes are expected to intensify competition in local and regional banking markets. In addition, recent changes in federal banking laws have significantly increased the severity and complexity of federal banking regulations as well as the costs banks must incur in complying with those regulations. From the standpoint of Farmers & Merchants, the proposed merger represents an attractive opportunity to acquire access to additional managerial expertise and specialized services offered by HNC and its banking subsidiary, Citizens National, thus permitting Farmers & Merchants' banking office to provide a broader range of services to its customers in the face of increasing competition from larger financial institutions. For example, following the merger, Farmers & Merchants will be able to provide new and expanded banking services to its customers that are provided currently by Citizens National. Citizens National has offered some innovative products to its marketplace. These products can be easily transferred and implemented, with some modifications for competitive pricing, into Farmers & Merchants' marketplace. One such product is called Kids Banking. This program concentrates on educating youth in the workings of the economic system, how banks interact within the economy, how to apply for credit, how to write checks and how to budget. The program attempts to involve local schools providing educational materials to teachers to promote better understanding of banking for students. -8- Another program offered by Citizens National that would benefit Farmers & Merchants' marketplace is its "Seniors Program". The program requires a deposit relationship of minimum proportions and offers selected free banking services to seniors, along with social activities and educational opportunities. Citizens National has a wide range of deposit and loan products which could accommodate Farmers & Merchants' customers' borrowing needs. Lending could be expanded in Farmers & Merchants' marketplace by adding more competitive and additional products which will benefit Farmers & Merchants' community and its citizens. Citizens National's and Harleysville National's experienced management and greater financial resources are expected to provide a benefit. For example, Farmers & Merchants will be able to entertain more small to medium size business loans. Thus, the merger will enhance the ability of Farmers & Merchants to remain competitive and to satisfy customers' financial needs. The proposed merger will benefit HNC by expanding its market presence to the Honesdale area, thereby allowing it to compete in that region. The Board of Directors of Farmers & Merchants believes that the terms of the proposed merger are fair to, and in the best interests of, Farmers & Merchants and its shareholders and employees. Farmers & Merchants' Board of Directors also believes that the proposed merger will significantly enhance the ability of Farmers & Merchants to satisfy the financial needs of its customers and the communities which it serves. Opinion of Financial Advisor Farmers & Merchants has engaged Danielson to act as its financial advisor for the purpose of evaluating the financial terms of the proposed merger. Farmers & Merchants selected Danielson because Danielson: (i) has extensive experience in the evaluation of banking organizations involved in merger transactions; and (ii) is familiar with Pennsylvania banking organizations and banking markets. Danielson had no material relationship with Farmers & Merchants during the past two years and no such relationship is presently contemplated, except for the advice provided by Danielson to Farmers & Merchants as described herein. To date, Farmers & Merchants has incurred from Danielson a fee, including expenses, of approximately Fifteen Thousand Eight Hundred Dollars ($15,800) for services rendered in connection with the proposed merger. Such services included an independent appraisal of the fair sale value of Farmers & Merchants and the issuance of a fairness opinion of the offer made by HNC. Except for the preparation of a supplemental opinion, referred to below, for which Danielson will receive an additional fee of approximately One Thousand Dollars ($1,000), Farmers & Merchants does not expect Danielson to provide additional services or to be paid additional fees in connection with the proposed merger. Danielson has delivered to the Board of Directors of Farmers & Merchants, its opinion dated January 2, 1996, stating that, based upon the review described therein, -9- the consideration to be offered to Farmers & Merchants' shareholders in connection with the proposed merger is fair to the shareholders of Farmers & Merchants from a financial point of view. A copy of the opinion of Danielson is attached to this Prospectus/Proxy Statement as Exhibit "B" and should be read in its entirety by the shareholders of Farmers & Merchants. As set forth in its opinion, Danielson has relied without independent investigation upon the accuracy and completeness of the information that: (i) was furnished by Farmers & Merchants and HNC; or (ii) is publicly available. In determining the fair sale value of Farmers & Merchants, Danielson has given primary emphasis to: (i) prices paid for commercial banks with similar financial, geographic market and structural characteristics; and (ii) the relationship of those prices to earnings and tangible equity capital. In the course of preparing its opinion, Danielson determined the "fair" sale value of the Farmers & Merchants' Common Stock as well as the valuation of the HNC Common Stock. Farmers & Merchants market, business and prospects were analyzed and its financial performance compared with banks in the same region as Farmers & Merchants. Likewise, the financial and stock performances of HNC were analyzed and compared to comparable banks whose stock is actively traded. Danielson also analyzed the movement of trading prices of the HNC Common Stock and dividend payments thereon, the dilutive effect of the proposed transaction with Farmers & Merchants and HNC's financial performance in relation to the trading prices of the HNC Common Stock. In determining the fair sale value of Farmers & Merchants, primary emphasis was given to prices paid for commercial banks with characteristics similar to those of Farmers & Merchants. This analysis showed that the transaction being proposed by HNC valued at approximately $12 Million or $17.00 per share, payable in HNC Common Stock was deemed by Danielson to be fair to Farmers & Merchants and its shareholders, from a financial point of view. The foregoing provides only a summary of the opinion of Danielson and is qualified in its entirety by reference to the full text of that opinion, a copy of which is set forth in Exhibit "B" to this Prospectus/Proxy Statement. Farmers & Merchants' management has received from Danielson a supplemental opinion which is dated as of the date of this Prospectus/Proxy Statement confirming that the consideration to be received by Farmers & Merchants' shareholders in connection with the merger is fair to Farmers & Merchants shareholders from a financial point of view. The receipt of such supplemental fairness opinion is a condition to Farmers & Merchants' obligation to consummate the merger. Conversion and Exchange of Shares On the effective date of the merger, each share of Farmers & Merchants Common Stock then issued and outstanding will automatically be converted into and become at least .5915 but not more than .6915 shares of HNC Common Stock (the "collar exchange -10- ratios"). The actual number within the range (subject to adjustment for certain stock dividends, stock splits and similar transactions) will be determined by dividing Seventeen Dollars ($17) by the arithmetic average of the per share closing prices for HNC Common Stock for the twenty (20) trading days immediately preceding the date which is five (5) business days before the effective date (as defined in the Agreement and Plan of Reorganization) of the merger, as reported on the National Market System of the National Association of Securities Dealers Automated Quotation System. The resulting quotient will be divided into the Seventeen Dollars ($17) and rounded to the nearest one-thousandth. If the resulting quotient, however, is less than .5915, or more than .6915, the collar exchange ratios will apply. Therefore, shareholders will receive an exchange ratio of at least .5915 shares but no more than .6915 shares of HNC Common Stock. Following the effective date of the merger, Farmers & Merchants shareholders will exchange their Farmers & Merchants Common Stock certificates for HNC Common Stock certificates in accordance with procedures described below in this section. No fractional shares of HNC Common Stock will be issued in connection with the merger. In lieu of the issuance of any fractional share to which he or she would otherwise be entitled, each former shareholder of Farmers & Merchants will receive cash in an amount equal to the fair market value of his or her fractional interest, in an amount equal to such fractional part of a share of HNC Common Stock multiplied by the Formula Price which is defined as Seventeen Dollars ($17) divided by the Formula Number rounded to the nearest cent. HNC and Farmers & Merchants anticipate that the effective date of the merger will occur during the first quarter of 1996, assuming no difficulties are encountered in obtaining the required regulatory approvals and shareholder approval, and all other conditions to closing are satisfied without unexpected delay. If for any reason, however, the effective date of the merger fails to occur by June 30, 1996 and the parties have not agreed otherwise prior to that date, the Agreement and Plan of Reorganization will terminate automatically. Following the effective date of the merger, each former shareholder of Farmers & Merchants will be obliged to surrender to HNC the Farmers & Merchants Common Stock certificates held by him or her. Detailed instructions concerning the procedure for surrendering Farmers & Merchants Common Stock certificates will be sent by HNC to each former shareholder of Farmers & Merchants on or promptly after the effective date of the merger. Upon proper surrender of his or her Farmers & Merchants Common Stock certificates, each former shareholder of Farmers & Merchants will be issued a stock certificate representing the number of whole shares of HNC Common Stock into which his or her shares of Farmers & Merchants Common Stock had been converted, together with a check in the amount of any cash to which he or she is entitled in lieu of the issuance of a fractional share of HNC Common Stock. Shareholders of Farmers & Merchants should not surrender their Farmers & Merchants Common Stock certificates for exchange until they receive written instructions to do so from HNC. -11- Following the effective date of the merger and until properly requested and surrendered, each Farmers & Merchants Common Stock certificate will be deemed for all corporate purposes to represent the number of whole shares of HNC Common Stock which the holder would be entitled to receive upon its surrender. Provided, however, that HNC, at its option, may withhold dividends payable after the effective date of the merger to any former shareholder of Farmers & Merchants who has received written instructions from HNC but has not at that time surrendered his or her Farmers & Merchants Common Stock certificates. Any dividends so withheld, will be paid without interest to any former shareholder of Farmers & Merchants upon the proper surrender of his or her Farmers & Merchants Common Stock certificates. All Farmers & Merchants Common Stock certificates must be surrendered to HNC within two years after the effective date of the merger. In the event that any former shareholder of Farmers & Merchants does not properly surrender his or her Farmers & Merchants Common Stock certificates within that time, the shares of HNC Common Stock that would otherwise have been issued to him or her may, at the option of HNC, be sold and the net proceeds of such sale, together with the cash (if any) to which he or she is entitled in lieu of the issuance of a fractional share and any previously accrued and unpaid dividends, will be held in a non-interest bearing account for his or her benefit. From and after such sale, the sole right of such former shareholder of Farmers & Merchants will be the right to collect such net proceeds, cash and accumulated dividends. Subject to all applicable laws of escheat, such net proceeds, cash and accumulated dividends will be paid to such former shareholder of Farmers & Merchants, without interest, upon proper surrender of his or her Farmers & Merchants Common Stock certificates. The foregoing discussion relating to the conversion and exchange of Farmers & Merchants Common Stock is only a summary which is provided for convenience. The foregoing discussion should be read in conjunction with, and is qualified in its entirety by, the terms of Article II of the Agreement and Plan of Reorganization. The Agreement and Plan of Reorganization is reproduced in full and set forth in Exhibit "A" of this Prospectus/Proxy Statement. Voting Agreements In connection with the Agreement and Plan of Reorganization, the directors of Farmers & Merchants have entered into agreements to vote certain shares beneficially owned by them in favor of the merger. Specifically, each member of the Board of Directors of Farmers & Merchants has entered into an agreement (a "Support Agreement") pursuant to which he has agreed to vote, or cause to be voted, his shares of Farmers Common Stock as to which he has or shares voting power, individually or, to the extent of his proportionate interest, jointly with other persons, as well as other shares over which he may acquire beneficial ownership in favor of the Agreement and Plan of Reorganization and the proposed transaction, and use his best efforts to cause the proposed transaction to be effected. In the aggregate, these agreements commit 303,520 shares of Farmers & -12- Merchants Common Stock or 42.87 percent of the total shares outstanding to be voted in favor of the merger. The agreements further provide that with respect to the shares of Farmers & Merchants Common Stock owned by the directors, until the merger has been consummated or the Agreement and Plan of Reorganization has been terminated, such persons will not: (i) sell or otherwise transfer their respective shares of Farmers & Merchants Common Stock; (ii) exercise any previously granted stock option; (iii) directly or indirectly solicit or encourage inquiries or proposals from or participate in any discussion or negotiations with any other person, entity or group concerning any sale of assets, sale of shares, merger, consolidation or similar transaction involving Farmers & Merchants. Business Pending the Effective Date Pursuant to the Agreement and Plan of Reorganization, Farmers & Merchants is required, pending the effective date of the merger, to conduct its business in the usual, regular and ordinary course, consistent with prudent business judgment. Farmers & Merchants may not take any action not in the ordinary course of business without the prior written consent of HNC. Farmers & Merchants has agreed that, in general, pending the effective date of the merger, it will not take any of the following actions without the written consent of HNC: (i) amend its articles of incorporation or bylaws; (ii) enter into or assume any material contract not in the ordinary course; (iii) breach any warranty or covenant set forth in the Agreement and Plan of Reorganization; (iv) declare and pay cash dividends in excess of Seven Cents ($.07) per share during each of the third and fourth calendar quarters of 1995, and, if the effective date of the merger is after the record date of the HNC 1996 first quarter dividend, Farmers & Merchants may pay a regular quarterly cash dividend for the first calendar quarter not in excess of Twelve Cents ($.12) per share; likewise, if the effective date of the merger is after the record date of the HNC 1996 second quarter dividend, Farmers & Merchants may pay a regular quarterly cash dividend not in excess of Twelve Cents ($.12) per share; (v) authorize, purchase, issue or sell shares of Farmers & Merchants Common Stock or any other equity or debt securities or derivatives; (vi) increase the rate of compensation or make a bonus or severance payment to any employee of Farmers & Merchants; (vii) enter into any related party transaction other than extensions of credit in the ordinary course of business; (viii) affect any capitalization reclassification, stock dividends or splits; (ix) enter into or modify any pension, retirement, stock option or similar benefit plan; (x) merge with any other entity; and (xi) solicit or encourage inquiries in connection with a business combination involving Farmers & Merchants, other than as contemplated by the Agreement and Plan of Reorganization. There have been no material contracts or other transactions between Farmers & Merchants and HNC since signing the Agreement and Plan of Reorganization, nor have there been any material contracts, arrangements, relationships or transactions between Farmers & Merchants and HNC during the past five years, other than in connection with the Agreement and Plan of Reorganization described herein. -13- Conditions, Amendment and Termination The obligations of HNC and Farmers & Merchants to consummate the merger are subject to a number of conditions and contingencies as set forth in the Agreement and Plan of Reorganization, the most significant of which include: (i) approval by the shareholders of Farmers & Merchants; (ii) approval by federal banking regulators; (iii) the receipt of a favorable opinion of counsel concerning certain federal income tax consequences relating to the merger; (iv) continued effectiveness of the registration statement concerning the Prospectus/Proxy Statement; (v) the absence of any pending or threatened action, suit or proceeding before any federal, state or local governmental authority or arbitration tribunal seeking to modify or otherwise affect the transactions contemplated by the merger; (vi) the continuing accuracy in all material respects of the representations and warranties and the absence of any breach of any of the covenants made by HNC or Farmers & Merchants; (vii) the receipt of opinions from counsel for Farmers & Merchants and from counsel for HNC concerning certain legal matters; (viii) the absence of any material adverse change in the financial condition, business or future prospects of HNC or Farmers & Merchants; (ix) the determination that the merger can be accounted for as a pooling of interests for financial reporting purposes; (x) the determination of HNC and Farmers & Merchants and their counsel that all applicable federal and state securities and anti-trust laws have been complied with; (xi) the exercise by dissenting shareholders of dissenters' rights with respect to less than 35,400 shares of Farmers & Merchants Common Stock; (xii) the absence of discovery of any material previously undisclosed environmental problem affecting HNC or Farmers & Merchants; (xiii) the execution by each of the directors of Farmers & Merchants of a support agreement; (xiv) the execution by Farmers & Merchants of an investment agreement; (xv) the receipt of a fairness opinion from an investment advisor as of the date of this Prospectus/Proxy Statement concerning the fairness to the shareholders of Farmers & Merchants from a financial point of view of the terms of the transactions contemplated by the merger; and (xvi) the delivery of certificates at closing, by officers of HNC and Farmers & Merchants, confirming satisfaction of the foregoing. To the extent permitted by law, the Agreement and Plan of Reorganization may be amended by mutual consent and any term or condition thereof may be waived by the party entitled to its benefit at any time before the effective date of the merger, whether before or after the approval of the Agreement and Plan of Reorganization by Farmers & Merchants' shareholders and without seeking shareholder approval provided, however, that no change to the amount of consideration to be received by the shareholders of Farmers & Merchants can be adopted unless and until the shareholders of Farmers & Merchants approve, adopt or ratify such change in accordance with applicable federal and state law. The Agreement and Plan of Reorganization may be terminated at any time before the effective date of the merger, whether before or after its approval and adoption by the shareholders of Farmers & Merchants by: (i) mutual consent of all of the parties; (ii) unilateral action by each of the parties in the event of a material breach by any other party of any representation, warranty or covenant not cured within thirty (30) days or failure -14- to satisfy any condition precedent to the terminating party's obligation to consummate the merger through no fault of the terminating party; or (iii) automatically in the event of a failure to consummate the merger by June 30, 1996, unless extended in writing prior that date. Effective Date The proposed merger will become effective on the date and according to the provisions specified in the "Certificate of Merger" issued by the OCC. The Certificate of Merger is expected to be issued as soon as reasonably possible after all conditions precedent have been satisfied or waived. HNC and Farmers & Merchants intend to consummate the merger during the first quarter of 1996, assuming that the merger is approved by Farmers & Merchants' shareholders, all required regulatory approvals have been obtained and all other conditions to closing have been satisfied or waived by that time. The Agreement and Plan of Reorganization will automatically be terminated and the proposed merger cancelled if all applicable conditions have not been satisfied by June 30, 1996, unless the parties have agreed prior to that date to extend the termination date. In addition, the Agreement and Plan of Reorganization provides that the closing of the merger must occur within sixty (60) days after all applicable conditions, including regulatory approvals, have been satisfied. Management and Operations Following the Merger On the effective date of the merger, Farmers & Merchants will be merged with and into Citizens National. Citizens National will survive the merger. Citizens National has filed a fictitious name to trade in the Honesdale area as Farmers & Merchants Bank after the effective date of the transaction. The shareholders of Farmers & Merchants will become shareholders of HNC. The Boards of Directors of HNC and Citizens National following the merger will include the same persons who are members of those Boards of Directors immediately before the merger, each of whom will serve until his or her successor is elected and has qualified. Additionally, after the merger, a Regional Board of Directors for the Honesdale area ("Honesdale Regional Board of Directors") will be established consisting of all the current members of the Farmers & Merchants Board of Directors. The members of Farmers & Merchants Board of Directors may serve, if they so desire, as Directors Emeriti of the Honesdale Regional Board of Directors. The Honesdale Regional Board of Directors, including Directors Emeriti, if any, will serve for a minimum period of one year, receiving fees of Two Hundred Dollars ($200) per month from the effective date, and thereafter, at the discretion of the Citizens National Board of Directors. Upon the effective date of the merger, all officers and employees of Farmers & Merchants will become employees of Citizens National. Prior to the effective date, HNC and Citizens National may interview employees of Farmers & Merchants for purposes of -15- determining employment after the effective date of the merger. Richard K. Arnold will remain employed by Citizens National for at least six (6) months after the effective date at a salary equal to his salary in effect prior to September 7, 1995. Federal Income Tax Consequences Pursuant to the Agreement and Plan of Reorganization, an opinion will be provided by Shumaker Williams, P. C., counsel for HNC, which will state, for federal income tax purposes: 1. The transactions contemplated by the Agreement and Plan of Reorganization will constitute a reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986, as amended; 2. No gain or loss will be recognized by HNC or Farmers & Merchants as a result of the reorganization; 3. No gain or loss will be recognized by the shareholders of Farmers & Merchants upon receipt of HNC Common Stock in exchange for the Farmers & Merchants Common Stock pursuant to the provisions of the Agreement and Plan of Reorganization, except in respect of cash which is received in lieu of the issuance of fractional shares of HNC Common Stock (or by any shareholder of Farmers & Merchants who exercises dissenters' rights); 4. In the case of cash received by any shareholder of Farmers & Merchants in lieu of the issuance of a fractional share of HNC Common Stock, taxable gain or loss will be recognized by such shareholder to the extent of the difference between the amount of the cash received and the adjusted tax basis of such fractional share interest; 5. In the case of cash received by any shareholder of Farmers & Merchants who exercises dissenters' rights, taxable gain or loss will be recognized by such shareholder to the extent of the difference between the amount of the cash received and the adjusted tax basis of the shares as to which dissenters' rights are exercised; 6. The tax basis of the HNC Common Stock to be received by the shareholders of Farmers & Merchants pursuant to the provisions of the Agreement and Plan of Reorganization will be the same as the tax basis of Farmers & Merchants Common Stock surrendered in exchange therefor; and -16- 7. The holding period of the HNC Common Stock to be received by the shareholders of Farmers & Merchants pursuant to the provisions of the Agreement and Plan of Reorganization will include the holding period of the Farmers & Merchants Common Stock surrendered in exchange therefor, provided such Farmers & Merchants Common Stock is held as a capital asset on the effective date of the proposed merger. The foregoing is intended only as a general summary of certain federal income tax consequences of the proposed merger under present law. Each shareholder of Farmers & Merchants is urged to consult his or her own tax advisor concerning the particular tax consequences of the proposed merger as they affect his or her individual circumstances, including the impact of any applicable estate, gift, state, local, foreign or other tax. Warrant Agreement In connection with the Agreement and Plan of Reorganization, HNC and Farmers & Merchants have entered into an "Investment Agreement" and Farmers & Merchants has issued to HNC a warrant thereunder (collectively the "Warrant Agreement") entitling HNC to purchase up to approximately 19.9 percent of Farmers & Merchants' outstanding Common Stock, upon the occurrence of certain events summarized below. The Warrant Agreement covers 140,900 shares of the Farmers & Merchants Common Stock at a per share exercise price of Seventeen Dollars ($17), subject to adjustment. The Warrant Agreement is designed to compensate HNC for its risks, costs and expenses and the commitment of resources associated with the merger in the event the merger is not consummated due to an attempt by a third person to gain control of Farmers & Merchants. The Warrant Agreement provides that HNC may not sell, assign, transfer or exercise its warrant without the written consent of Farmers & Merchants except upon: (i) a willful breach of the Agreement and Plan of Reorganization by Farmers & Merchants; (ii) the failure of Farmers & Merchants shareholders to approve the Agreement and Plan of Reorganization after the announcement by any third person of an offer or proposal to acquire 15 percent or more of the Farmers & Merchants Common Stock or merge or consolidate with Farmers & Merchants or to purchase substantially all of its assets; (iii) the acquisition by a third person of beneficial ownership of 15 percent or more of the Farmers & Merchants Common Stock; (iv) the commencement by a third person of a tender offer or exchange offer to acquire 15 percent or more of the Farmers & Merchants Common Stock; or (v) the entry by Farmers & Merchants into an agreement or understanding with a third person to acquire, merge, or consolidate with Farmers & Merchants or to acquire substantially all of its assets (each of the foregoing is referred to herein as a "Warrant Event"). No Warrant Event has occurred as of the date of this Prospectus/Proxy Statement and neither HNC nor Farmers & Merchants is aware that any Warrant Event is contemplated by any third person. The Warrant Agreement may discourage third persons -17- from making competing offers to acquire Farmers & Merchants and is intended to increase the likelihood that the merger is consummated in accordance with the terms set forth in the Agreement and Plan of Reorganization. If a Warrant Event occurs, HNC may exercise the warrant in whole or in part or may sell or transfer all or part of the warrant to other persons. Under Federal Banking Law, exercise of the warrant for more than 5 percent of the outstanding Farmers & Merchants Common Stock would require approval of the Federal Reserve Board. Any sale by HNC of the warrant or of the shares of Farmers & Merchants Common Stock purchased thereunder would be subject to a right of first refusal by Farmers & Merchants. HNC may require Farmers & Merchants, subject to regulatory approval, to redeem the warrant or any shares of Farmers & Merchants Common Stock purchased thereunder if: (i) a third person acquires beneficial ownership of 50 percent or more of the Farmers & Merchants Common Stock; or (ii) Farmers & Merchants enters into an agreement or understanding with a third person for the third person to acquire, merge or consolidate with Farmers & Merchants or to acquire substantially all of its assets (each of the foregoing is referred to herein as a "Redemption Event"). In general, the per share redemption price for the warrant would be the higher of 110 percent of the exercise price or the highest price paid or agreed to be paid by the third person in connection with the Redemption Event. The ability of Farmers & Merchants to effect any such redemption or repurchase of any shares issued under the Warrant Agreement would be subject to obtaining the approval of the Pennsylvania Department of Banking. The Pennsylvania Department of Banking could prohibit redemption if, in its view, the redemption would constitute an unsafe or unsound banking practice. The Warrant Agreement also contains provisions giving Farmers & Merchants the right to repurchase shares of Farmers & Merchants Common Stock issued under the warrant in certain limited circumstances and provisions for issuance of a substitute warrant to purchase shares of the surviving or acquiring company in the event of a merger or other acquisition of Farmers & Merchants. Unless the merger is effected, certain conditions to closing become incapable of satisfaction or HNC shall have engaged in a willful breach of the Agreement and Plan of Reorganization, the rights under the Warrant Agreement shall not terminate until the later of July 1, 1997 or twelve (12) months after the date of a Warrant Event. In the event that a Warrant Event occurs prior to the valid termination of the Agreement and Plan of Reorganization, the Warrant will remain exercisable until the date set forth above even if the Agreement and Plan of Reorganization automatically terminates on June 30, 1996, the termination date of the Agreement and Plan of Reorganization. The foregoing description is intended only as a summary of the provisions of the Warrant Agreement and does not purport to be complete. It is qualified in its entirety by reference to the Warrant Agreement which has been filed with the Securities and Exchange -18- Commission as an exhibit to the HNC SEC Form S-4 Registration Statement. The Warrant Agreement is incorporated in this Prospectus/Proxy Statement by reference to such filing. Accounting Treatment The Agreement and Plan of Reorganization contemplates that the proposed merger will be treated as a pooling of interests for financial accounting purposes. If HNC would be required to purchase more than 10 percent of the outstanding shares of Farmers & Merchants Common Stock for cash, due to the purchase of fractional shares and the exercise of dissenters' rights by Farmers & Merchants shareholders, or if other conditions arise which would prevent the merger from being treated as a pooling of interests for financial accounting purposes, HNC has the right to terminate the Agreement and Plan of Reorganization and to cancel the proposed merger. Rights of Dissenting Shareholders In accordance with the provisions of Section 215a of Title 12, United States Code (12 U.S.C. Section 215a), any shareholder of Farmers & Merchants who wishes to exercise dissenters' rights with respect to the proposed merger must either: (i) vote against the proposed merger; or (ii) file a written notice prior to or at the Special Meeting convened to vote upon the proposed merger, stating that he or she dissents from the proposed merger, which written notice should be addressed to Richard J. Shershenovich, President, Farmers & Merchants Bank (Honesdale, PA.), 1001 Main Street, Honesdale, PA 18431. In addition, any shareholder of Farmers & Merchants wishing to exercise dissenters' rights must make a written request for payment to HNC, accompanied by the surrender of his or her Farmers & Merchants Common Stock certificates at any time before thirty (30) days after the effective date of the merger which written requests and surrender should be sent to Jo Ann M. Bynon, Assistant Secretary of the Board, Harleysville National Corporation, 483 Main Street, Harleysville, Pennsylvania 19438. Dissenting shareholders who fail to follow the procedure specified in this paragraph will lose their dissenters' rights under the foregoing statutory provisions. Any dissenting shareholder who does comply with the procedures described in the preceding paragraph will be entitled, following the effective date of the merger, to receive in cash the value of the shares of Farmers & Merchants Common Stock held by him or her, determined as of the effective date of the merger. The value of any shares of Farmers & Merchants Common Stock held by such person will be determined by an appraisal committee of three persons. One member of the appraisal committee will be chosen by a majority vote of all qualifying dissenting shareholders, one member will be chosen by the Board of Directors of Farmers & Merchants and the third member will be selected by the two members so chosen. A valuation of the shares may be agreed upon by any two of the members of the appraisal committee. -19- If the appraisal committee's evaluation is not satisfactory to any qualifying dissenting shareholder, such a shareholder may, within five (5) days after receiving notice of such evaluation, appeal to the OCC, who will make a binding and final reappraisal as to the value of the shares held by such shareholder. If within ninety (90) days from the effective date of the merger: (i) one or more appraisal committee members have not been selected for any reason; or (ii) the appraisal committee is not able to agree by a vote of two or more members, on the value of the shares held by qualifying dissenting shareholders, the OCC upon the request of any interested party will make a binding and final appraisal of the value of such shares. The expenses of the OCC making a reappraisal or appraisal will be paid by HNC. The foregoing discussion is only a summary of the rights and obligations of a dissenting shareholder and is qualified in its entirety by reference to the provisions of Section 215a of Title 12 of the United States Code, which are reproduced and set forth in full in Exhibit "C" to this Prospectus/Proxy Statement. Failure to follow the procedure set forth ((in 12 U.S.C. Section 215a governing the exercise of dissenters' rights will result in the loss of such rights. Shareholders may wish to consult legal counsel if they are considering a possible exercise of dissenters' rights. Pursuant to the Agreement and Plan of Reorganization, HNC has the right to terminate such agreement and to cancel the proposed merger if Farmers & Merchants shareholders exercise dissenters' rights with respect to 35,400 or more shares of Farmers & Merchants Common Stock. HNC could waive this right but has no present intention to do so. SEE THE MERGER-- Conditions, Amendment and Termination, and THE MERGER--Accounting Treatment. Restriction on Resale of HNC Common Stock Held By Affiliates of Farmers & Merchants The shares of HNC Common Stock to be issued upon consummation of the proposed merger have been registered with the SEC under the Securities Act of 1933 (the "1933 Act") and, following the merger, may be freely resold or otherwise transferred by all former shareholders of Farmers & Merchants, except those former shareholders who are deemed "affiliates" of Farmers & Merchants, within the meaning of SEC Rules 144 and 145. In general terms, any person who is an executive officer, director or 10 percent shareholder of Farmers & Merchants at the time of the Special Meeting may be deemed to be an affiliate of Farmers & Merchants for purposes of SEC Rules 144 and 145. HNC Common Stock received by persons who are deemed to be affiliates of Farmers & Merchants may be resold only: (i) in compliance with the provisions of SEC Rule 145(d); (ii) in compliance with the provisions of another applicable exemption from the registration requirements of the 1933 Act; or (iii) pursuant to an effective registration statement filed with the SEC. In general terms, SEC Rule 145(d) would permit an affiliate of Farmers & Merchants to sell shares of HNC Common Stock received by him or her in ordinary brokerage transactions subject to certain limitations on the number of shares -20- which may be resold in any consecutive three (3) month period. Notwithstanding the foregoing, an affiliate of Farmers & Merchants may not, as a general rule and subject to an exception in a case of certain de minimis sales: (i) sell any shares of Farmers & Merchants Common Stock during the 30-day period immediately preceding the effective date of the merger; or (ii) sell any shares of HNC Common Stock received by him or her in exchange for his or her shares of Farmers & Merchants Common Stock until after the publication of financial results covering at least thirty (30) days of post-merger combined operations. Under the terms of the Agreement and Plan of Reorganization, each person who may be deemed to be an affiliate of Farmers & Merchants is required, prior to the closing of the merger, to deliver to HNC, a letter in form and substance satisfactory to HNC, acknowledging and agreeing to abide by the limitations imposed by the 1933 Act and the rules of the SEC thereunder regarding the sale or other disposition of the shares of HNC Common Stock to be received by him or her pursuant to the merger. COMPARATIVE STOCK PRICES AND DIVIDENDS AND RELATED SHAREHOLDER MATTERS Common Stock of HNC HNC Common Stock is traded in the over-the-counter market and is listed on the National Market System of the National Association of Securities Dealers Automated Quotation System ("Nasdaq") under the symbol "HNBC". The table below sets forth, for the periods indicated, high and low bid quotations for HNC Common Stock as reported on Nasdaq, and cash dividends paid per share. The quotations set forth in the table represent quotations between dealers, do not include retail markups, markdowns or commissions, and may not represent actual transactions. All information has been adjusted for stock dividends and splits throughout the period.
Cash Dividends 1995 High Low Paid Per Share First Quarter 28.00 25.00 0.180 Second Quarter 28.00 25.00 0.180 Third Quarter 28.50 25.00 0.190 Fourth Quarter to date 28.50 26.25 0.240 1994 First Quarter 31.43 20.00 0.133 Second Quarter 31.43 28.57 0.153 Third Quarter 30.95 26.07 0.153 Fourth Quarter 28.10 24.76 0.171 -21- 1993 First Quarter 18.10 16.67 0.119 Second Quarter 18.57 16.67 0.119 Third Quarter 19.05 16.90 0.124 Fourth Quarter 21.19 18.10 0.128 ____________________ Payable on December 29, 1995.
On November 28, 1995, the closing bid and asked quotations for HNC Common Stock as reported on Nasdaq were, respectively, Twenty-six Dollars and Twenty-five Cents ($26.25) and Twenty-eight Dollars ($28.00). On Thursday, September 7, 1995, the last trading day before public announcement of the agreement in connection with the proposed merger, the closing bid and asked quotations for HNC Common Stock were Twenty-six Dollars ($26) and Twenty-eight Dollars and Fifty Cents ($28.50), respectively, as reported on Nasdaq. As of December 12, 1995, HNC Common Stock was held by 2,067 holders of record. HNC has in the past paid regular quarterly cash dividends to its shareholders on or about March 31, June 30, September 30, and December 31, of each year. Common Stock of Farmers & Merchants Farmers & Merchants Common Stock has historically been traded on a limited basis in the local over-the-counter market and in privately negotiated transactions. Because trading in Farmers & Merchants Common Stock is sporadic, it cannot be said that an established trading market exists. The only bid information concerning the Farmers & Merchants Common Stock of which Farmers & Merchants management is aware came from Dean Witter Reynolds, as quoted in the Scranton Tribune/Times of Scranton, Pennsylvania who provided bids periodically in 1995 in the amount of Fourteen Dollars and Thirty-eight Cents ($14.38) per share. The most recent sale of Farmers & Merchants Common Stock of which Farmers & Merchants management is aware is a trade of 240 shares that occurred on April 18, 1995, at a price of Fifteen Dollars and Twenty-five Cents ($15.25) per share. Farmers & Merchants has in the past paid regular quarterly dividends to its shareholders on or about March 1, June 1, September 1, and December 1, of each year. PRO FORMA COMBINED FINANCIAL INFORMATION The unaudited pro forma combined condensed balance sheet and the unaudited pro forma combined condensed statements of income of HNC set forth below give effect, using -22- the pooling of interests method of accounting, to the proposed acquisition of Farmers & Merchants based upon an exchange ratio of .6415 share of HNC for each share of Farmers & Merchants Common Stock. The unaudited pro forma combined condensed balance sheet is presented as though the proposed merger had occurred on September 30, 1995. The unaudited pro forma combined condensed income statements are presented as though the proposed merger had occurred on the first day of each respective reporting period presented. The pro forma financial information set forth below is not necessarily indicative of the financial condition or results of operations of HNC as they would have been had the proposed merger occurred during the periods presented or as they may be in the future. The pro forma financial information set forth below should be read in conjunction with the financial statements of HNC, including the notes thereto, which are incorporated by reference, and the financial statements of Farmers & Merchants, including the notes thereto, which appear elsewhere in this Prospectus/Proxy Statement. SEE INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE AND FARMERS & MERCHANTS BANK--INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION. HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES Combined Pro Forma Balance Sheet (In Thousands) September 30, 1995 (Unaudited)
Harleysville Farmers & National Merchants Adjust- Pro Forma Corporation Bank ments Combined ASSETS Cash and Due from banks $ 33,834 $ 420 $ $ 34,254 Interest bearing deposits in banks 347 1,959 2,306 Federal funds sold 10,600 3,750 14,350 Investment securities 108,726 13,302 122,028 Securities available for sale 94,281 17,560 111,841 Loans 591,516 27,056 618,572 Less: Unearned income (9,488) (287) (9,775) Allowance for loan losses (9,290) (214) (9,504) _________ _________ _________ Net loans 572,738 26,555 599,293 _________ _________ _________ Bank premises and equipment, net 10,744 920 11,664 Accrued income receivable 5,635 680 6,315 Other assets 6,023 409 6,432 _________ _________ _________ Total assets $ 842,928 $ 65,555 $ 908,483 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 107,061 $ 6,057 $ $ 113,118 -23- Interest bearing: NOW accounts 78,170 4,912 83,082 Money market accounts 136,076 4,781 140,857 Savings 84,554 16,106 100,660 Time 305,533 24,144 329,677 _________ _________ _________ Total deposits 711,394 56,000 767,394 Accrued interest payable 10,108 319 10,427 Borrowings 40,076 -- 40,076 Other liabilities 5,567 689 6,256 _________ _________ _________ Total liabilities 767,145 57,008 824,153 Shareholders' equity: Series preferred stock (HNC only) -- -- Common stock outstanding 5,873,682 in 1995 for HNC and 708,016 for FMB 5,874 1,440 (986) 6,328 Surplus 27,487 2,400 986 30,873 Undivided profits 42,500 3,550 46,050 Net unrealized gains (losses) on securities available for sale, net of taxes (78) 1,157 1,079 _________ _________ _________ Total shareholders' equity 75,783 8,547 84,330 _________ _________ _________ Total liabilities and shareholders' equity $ 842,928 $ 65,555 $ 908,483 ========= ========= ========= ____________________
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES Pro Forma Combined Condensed Statement of Income
For Period Ended September 30, 1995 (Unaudited) Harleysville Farmers & National Merchants Pro Forma Corporation Bank Combined (Dollars in Thousands, except per share data) Interest Income $ 47,780 $ 3,099 $ 50,879 Interest Expense 19,693 1,448 21,141 _________ _________ _________ Net Interest Income 28,087 1,651 29,738 Loan Loss Provision 1,643 9 1,652 _________ _________ _________ Net Interest Income After Loan Loss Provision 26,444 1,642 28,086 -24- Noninterest Income 3,090 91 3,181 Noninterest Expense 17,055 1,096 18,151 _________ _________ _________ Income Before Income Taxes 12,479 637 13,116 Income Taxes 3,678 178 3,856 _________ _________ _________ Income From Continuing Operations $ 8,801 $ 459 $ 9,260 Net Income Per Share Primary 1.49 .65 1.46 Fully Diluted 1.49 .65 1.46 Average Number of Shares of Common Stock Outstanding Primary 5,891,873 708,016 6,346,065 Fully Diluted 5,892,389 708,016 6,346,581 ____________________
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES Combined Pro Forma Balance Sheet (In Thousands) September 30, 1994 (Unaudited)
Harleysville Farmers & National Merchants Adjust- Pro Forma Corporation Bank ments Combined ASSETS Cash and Due from banks $ 36,054 $ 479 $ $ 36,533 Interest bearing deposits in banks 690 2,177 2,867 Federal funds sold -- 2,685 2,685 Investment securities 82,073 5,525 87,598 Securities available for sale 108,197 28,031 136,228 Loans 551,734 26,652 578,386 Less: Unearned income (9,896) (325) (10,221) Allowance for loan losses (7,667) (216) (7,883) _________ _________ _________ Net loans 534,171 26,111 560,282 _________ _________ _________ Bank premises and equipment, net 9,056 960 10,016 Accrued income receivable 4,903 575 5,478 Other assets 6,356 221 6,577 _________ _________ _________ Total assets $ 781,500 $ 66,764 $ 848,264 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 102,715 $ 6,769 $ $ 109,484 Interest bearing: NOW accounts 81,245 5,176 86,421 Money market accounts 172,084 4,790 176,874 -25- Savings 88,489 19,261 107,750 Time 240,000 22,515 262,515 _________ _________ _________ Total deposits 684,533 58,511 743,044 Accrued interest payable 7,290 237 7,527 Borrowings 18,799 -- 18,799 Other liabilities 4,715 360 5,075 _________ _________ _________ Total liabilities 715,337 59,108 774,445 Shareholders' equity: Series preferred stock (HNC only) -- -- Common stock outstanding 5,451,461 in 1994 for HNC and 708,016 for FMB 5,451 1,440 (986) 5,905 Surplus 16,555 2,400 986 19,941 Undivided profits 46,431 3,202 49,633 Net unrealized gains (losses) on securities available for sale, net of taxes (2,274) 614 (1,660) _________ _________ _________ Total shareholders' equity 66,163 7,656 73,819 _________ _________ _________ Total liabilities and shareholders' equity $ 781,500 $ 66,764 $ 848,264 ========= ========= ========= ____________________
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES Pro Forma Combined Condensed Statement of Income For Period Ended September 30, 1994 (Unaudited)
Harleysville Farmers & National Merchants Pro Forma Corporation Bank Combined (Dollars in Thousands, except per share data) Interest Income $ 39,887 $ 2,787 $ 42,674 Interest Expense 13,977 1,235 15,212 _________ _________ _________ Net Interest Income 25,910 1,552 27,462 Loan Loss Provision 2,008 15 2,023 _________ _________ _________ Net Interest Income After Loan Loss Provision 23,902 1,537 25,439 Noninterest Income 3,948 204 4,152 Noninterest Expense 16,088 1,205 17,293 _________ _________ _________ -26- Income Before Income Taxes 11,762 536 12,298 Income Taxes 3,523 156 3,679 _________ _________ _________ Income From Continuing Operations $ 8,239 $ 380 $ 8,619 Net Income Per Share Primary 1.40 .54 1.36 Fully Diluted 1.40 .54 1.36 Average Number of Shares of Common Stock Outstanding Primary 5,865,915 708,383 6,320,343 Fully Diluted 5,865,915 708,383 6,320,343 ____________________
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES Combined Pro Forma Balance Sheet (In Thousands) December 31, 1994 (Unaudited)
Harleysville Farmers & National Merchants Adjust- Pro Forma Corporation Bank ments Combined ASSETS Cash and Due from banks $ 35,390 $ 455 $ $ 35,845 Interest bearing deposits in banks 206 1,799 2,005 Federal funds sold -- 975 975 Investment securities 82,867 7,502 90,369 Securities available for sale 102,211 24,237 126,448 Loans 578,063 26,818 604,881 Less: Unearned income (9,804) (322) (10,126) Allowance for loan losses (7,934) (216) (8,150) _________ _________ _________ Net loans 560,325 26,280 586,605 _________ _________ _________ Bank premises and equipment, net 8,795 953 9,748 Accrued income receivable 4,726 516 5,242 Other assets 5,259 173 5,432 _________ _________ _________ Total assets $ 799,779 $ 62,890 $ 862,669 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 110,503 $ 4,669 $ $ 115,172 Interest bearing: NOW accounts 83,829 4,825 88,654 Money market accounts 162,219 5,534 167,753 Savings 88,201 16,950 105,151 Time 243,826 22,770 266,596 _________ _________ _________ -27- Total deposits 688,578 54,748 743,326 Accrued interest payable 8,059 259 8,318 Borrowings 35,322 -- 35,322 Other liabilities 1,245 275 1,520 _________ _________ _________ Total liabilities 733,204 55,282 788,486 Shareholders' equity: Series preferred stock (HNC only) -- -- Common stock outstanding 5,753,294 in 1994 for HNC and 708,016 for FMB 5,753 1,440 (986) 6,207 Surplus 24,416 2,400 986 27,802 Undivided profits 39,718 3,311 43,029 Net unrealized gains (losses) on securities available for sale, net of taxes (3,312) 457 (2,855) _________ _________ _________ Total shareholders' equity 66,575 7,608 74,183 _________ _________ _________ Total liabilities and shareholders' equity $ 799,779 $ 62,890 $ 862,669 ========= ========= ========= ____________________
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES Pro Forma Combined Condensed Statement of Income For Year Ended December 31, 1994 (Unaudited)
Harleysville Farmers & National Merchants Pro Forma Corporation Bank Combined (Dollars in Thousands, except per share data) Interest Income $ 54,614 $ 3,766 $ 58,380 Interest Expense 19,439 1,662 21,101 _________ _________ _________ Net Interest Income 35,175 2,104 37,279 Loan Loss Provision 2,650 15 2,665 _________ _________ _________ Net Interest Income After Loan Loss Provision 32,525 2,089 34,614 Noninterest Income 4,525 222 4,747 Noninterest Expense 21,757 1,557 23,314 _________ _________ _________ Income Before Income Taxes 15,293 754 16,047 -28- Income Taxes 4,548 219 4,767 _________ _________ _________ Income From Continuing Operations 10,745 535 11,280 Net Income Per Share Primary 1.84 .76 1.79 Fully Diluted 1.84 .76 1.79 Average Number of Shares of Common Stock Outstanding Primary 5,847,473 708,016 6,301,665 Fully Diluted 5,847,473 708,016 6,301,665 ____________________
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES Combined Pro Forma Balance Sheet (In Thousands) December 31, 1993 (Unaudited)
Harleysville Farmers & National Merchants Adjust- Pro Forma Corporation Bank ments Combined ASSETS Cash and Due from banks $ 31,599 $ 2,042 $ $ 33,641 Interest bearing deposits in banks 1,581 1,474 3,055 Federal funds sold 13,886 3,410 17,296 Investment securities 96,604 32,436 129,040 Securities available for sale 121,568 -- 121,568 Loans 488,048 21,602 509,650 Less: Unearned income (11,327) (184) (11,511) Allowance for loan losses (5,886) (201) (6,087) _________ _________ _________ Net loans 470,835 21,217 492,052 _________ _________ _________ Bank premises and equipment, net 8,661 872 9,533 Accrued income receivable 3,976 459 4,435 Other assets 5,231 463 5,694 _________ _________ _________ Total assets $ 753,941 $ 62,373 $ 816,314 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 105,134 $ 4,912 $ $ 110,046 Interest bearing: NOW accounts 84,817 4,756 89,573 Money market accounts 175,853 4,828 180,681 Savings 85,338 17,383 102,721 Time 229,323 22,984 252,307 _________ _________ _________ Total deposits 680,465 54,863 735,328 Accrued interest payable 6,686 256 6,942 -29- Borrowings 2,415 327 2,742 Other liabilities 1,904 41 1,945 _________ _________ _________ Total liabilities 691,470 55,487 746,957 Shareholders' equity: Series preferred stock (HNC only) -- -- Common stock outstanding 5,396,120 in 1993 for HNC and 708,736 for FMB 5,396 1,440 (986) 5,850 Surplus 15,009 2,400 986 18,395 Undivided profits 42,066 3,046 45,112 Net unrealized gains (losses) on securities available for sale, net of taxes -- -- -- _________ _________ _________ Total shareholders' equity 62,471 6,886 69,357 _________ _________ _________ Total liabilities and shareholders' equity $ 753,941 $ 62,373 $ 816,314 ========= ========= ========= ____________________
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES Pro Forma Combined Condensed Statement of Income For Year Ended December 31, 1993 (Unaudited)
Harleysville Farmers & National Merchants Pro Forma Corporation Bank Combined (Dollars in Thousands, except per share data) Interest Income $ 50,350 $ 3,630 $ 53,980 Interest Expense 19,531 1,701 21,232 _________ _________ _________ Net Interest Income 30,819 1,929 32,748 Loan Loss Provision 3,073 12 3,085 _________ _________ _________ Net Interest Income After Loan Loss Provision 27,746 1,917 29,663 Noninterest Income 4,868 96 4,964 Noninterest Expense 20,122 1,314 21,436 _________ _________ _________ Income Before Income Taxes 12,492 699 13,191 Income Taxes 3,554 199 3,753 _________ _________ _________ Income From Continuing Operations 8,938 500 9,438 -30- Net Income Per Share Primary 1.58 .71 1.55 Fully Diluted 1.53 .71 1.50 Average Number of Shares of Common Stock Outstanding Primary 5,642,790 708,736 6,097,444 Fully Diluted 5,824,099 708,736 6,278,753 ____________________
HARLEYSVILLE NATIONAL CORPORATION AND SUBSIDIARIES Pro Forma Combined Condensed Statement of Income For Year Ended December 31, 1992 (Unaudited)
Harleysville Farmers & National Merchants Pro Forma Corporation Bank Combined (Dollars in Thousands, except per share data) Interest Income $ 48,547 $ 4,037 $ 52,584 Interest Expense 21,850 2,186 24,036 _________ _________ _________ Net Interest Income 26,697 1,851 28,548 Loan Loss Provision 2,299 -- 2,299 Net Interest Income After Loan Loss Provision 24,398 1,851 26,249 Noninterest Income 3,410 142 3,552 Noninterest Expense 17,040 1,318 18,358 _________ _________ _________ Income Before Income Taxes 10,768 675 11,443 Income Taxes 2,898 194 3,092 _________ _________ _________ Income From Continuing Operations 7,870 481 8,351 Net Income Per Share Primary 1.41 .67 1.39 Fully Diluted 1.37 .67 1.35 Average Number of Shares of Common Stock Outstanding Primary 5,566,155 717,747 6,026,590 Fully Diluted 5,737,115 717,747 6,197,550 ____________________
-31- INFORMATION CONCERNING HARLEYSVILLE NATIONAL CORPORATION AND DESCRIPTION OF HNC COMMON STOCK Information Concerning HNC HNC is a Pennsylvania business corporation and a registered bank holding company with its headquarters in Harleysville, Pennsylvania. HNC has three subsidiaries, The Harleysville National Bank & Trust Company ("Harleysville National"), The Citizens National Bank of Lansford ("Citizens National") and Security National Bank ("Security National"). Through its subsidiaries, HNC engages in the general commercial and retail banking business. HNC's subsidiaries operate twenty (20) banking offices in Bucks, Carbon and Montgomery Counties of Pennsylvania. As of September 30, 1995, HNC had consolidated total assets of approximately Eight Hundred Forty-two Million Nine Hundred Twenty-eight Thousand Dollars ($842,928,000). Harleysville National (established in 1909), Citizens National (established in 1903), and Security National (established in 1988) are national banking associations who operate under the primary supervision of the OCC. Harleysville National and Citizens National are also authorized to engage in trust activities. As a registered bank holding company, HNC is subject to regulation under the Federal Bank Holding Company Act of 1956, as amended, and the rules adopted by the Federal Reserve Board thereunder. Under applicable Federal Reserve Board policies, a bank holding company such as HNC, is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each subsidiary bank in circumstances when it might not do so absent such a policy. Any capital loans made by a bank holding company to any of its subsidiary banks would be subordinate in right of payment to the claims of depositors and certain other creditors of such subsidiary banks. The principal executive offices of HNC are located in Harleysville, Pennsylvania. As of September 30, 1995, HNC and its three subsidiary banks had in the aggregate approximately 336 full-time equivalent employees. Acquisitions by HNC On February 13, 1991, HNC acquired The Citizens National Bank of Lansford, a national banking association with two branch offices and assets of approximately Thirty-four Million Dollars ($34,000,000). On June 1, 1992, HNC acquired Summit Hill Trust Company, a Pennsylvania-chartered bank and trust company with one office and assets of approximately Twenty-two Million Dollars ($22,000,000). On September 25, 1992, Summit Hill Trust Company merged with and into The Citizens National Bank of Lansford. On May 22, 1992, Harleysville National purchased four branches from Provident National Bank of Philadelphia, a subsidiary of PNC. This resulted in Harleysville National's assumption of approximately One Hundred Million Dollars ($100,000,000) of deposit liabilities, Two Million Dollars ($2,000,000) in property and equipment and Three Million Five Hundred Thousand Dollars ($3,500,000) in intangibles consisting primarily of a -32- deposit premium, and cash of approximately Ninety-five Million Dollars ($95,000,000). On July 1, 1994, HNC acquired Security National, a national banking association with assets of approximately Forty Million Dollars ($40,000,000). Loans HNC, through its subsidiaries, grants loans and makes other credit available to the general public. These extensions of credit are structured to meet the varying needs of businesses, individuals, and institutional customers and include mortgages, lines of credit, term loans, leases and letters of credit. This activity comprises a major source of revenue for HNC's subsidiaries and it also exposes HNC and its subsidiaries to potential losses upon borrower default. In order to minimize the occurrence of loss, HNC's subsidiaries follow strict loan underwriting and risk weighing policies. While collateral continues to play an important part in lending decisions, primary emphasis is placed upon borrowers' underlying ability to pay. HNC's subsidiaries confine their lending activity to customers who live or are based in their respective market areas. By limiting lending activities to a specific geographic area, the staff of each subsidiary becomes more knowledgeable about local market conditions and can thereby make better credit risk assessments and consequently more prudent lending decisions. HNC believes that this local knowledge, when combined with prudent underwriting standards, overcomes the risks associated with the geographic concentration of loans. Description of HNC Common Stock HNC is authorized to issue 30,000,000 shares of One Dollar ($1) par value common stock ("HNC Common Stock") of which 5,873,682 shares were issued and outstanding as of September 30, 1995. HNC also has 3,000,000 shares of series preferred stock authorized for issuance of which none have been issued as of September 30, 1995. HNC Common Stock is quoted on the over-the-counter National Market System of Nasdaq under the symbol "HNBC". Dividends The holders of HNC Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefor. HNC has historically paid quarterly cash dividends to its shareholders on or about March 31, June 30, September 30, and December 31, of each year. The ability of HNC to pay dividends to its shareholders is dependent primarily upon the earnings and financial condition of Harleysville National, Citizens National, and Security National. Funds for the payment of dividends on HNC Stock are expected for the foreseeable future to be obtained primarily from dividends paid to HNC by its subsidiaries, which dividends are subject to certain statutory limitations. -33- Under applicable federal laws, the dividends that may be paid by the HNC banking subsidiaries without prior regulatory approval are subject to certain prescribed limitations. Because the subsidiaries of HNC are national banks, the approval of the OCC is required under federal law if the total of all dividends declared during any calendar year exceed the total of the net profits, as defined, of the respective bank for the year, combined with its retained net profits as defined for the two preceding years. In addition to the foregoing statutory restrictions on dividends, the OCC also has general authority to prohibit a national bank from engaging in an unsafe or unsound banking practice. The payment of a dividend by a bank could, depending upon the financial condition of the bank involved and other factors, be deemed to be such an unsafe or unsound practice. HNC paid cash dividends of Sixty-one Cents ($0.61) per share in 1994, and Eighteen Cents ($0.18) and Eighteen Cents ($0.18), respectively, for each of the first two quarters of 1995. Dividend Reinvestment Plan The holders of HNC Common Stock may elect to participate in the HNC Dividend Reinvestment and Stock Purchase Plan. This plan is administered by Harleysville National as plan agent. Under the plan, dividends payable to participating shareholders are paid to the plan agent and are used to purchase, on behalf of the participating shareholders, additional shares of HNC Common Stock either in the over-the-counter Nasdaq market or from HNC's authorized but unissued shares of HNC Common Stock. Participating shareholders may make additional voluntary cash payments which are also used by the plan agent to purchase, on behalf of shareholders, additional shares of HNC Common Stock. Shares of HNC Common Stock held for the account of participating shareholders are voted by the plan agent in accordance with the instructions of each participating shareholder as set forth in his or her proxy. Securities Laws HNC, as a business corporation, is subject to the registration and prospectus delivery requirements of the 1933 Act (detailed previously) and is also subject to similar requirements under state securities laws. The HNC Common Stock is registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and HNC is subject to the periodic reporting, proxy solicitation and insider trading requirements of the 1934 Act. The executive officers, directors and 10 percent shareholders of HNC are subject to certain restrictions affecting their right to sell shares of HNC Common Stock owned beneficially by them. Specifically, each such person is subject to the beneficial ownership reporting requirements under the short-swing profit recapture provisions of Section 16 of the 1934 Act and may sell shares of HNC Common Stock only: (i) in compliance with the provisions of SEC Rule 144; (ii) in compliance with -34- the provisions of another applicable exemption from the registration requirements of the 1933 Act; or (iii) pursuant to an effective registration statement filed with the SEC under the 1933 Act. Anti-takeover Provisions The Pennsylvania Business Corporation Law of 1988, as amended (the "BCL") and HNC's amended Articles of Incorporation and amended Bylaws provide numerous provisions that may be deemed to be anti-takeover in nature, both as to purpose and effect. There are four major anti-takeover provisions under the BCL relating to corporations that have their securities registered with the SEC under Section 12 of the 1934 Act ("Registered Corporations"). The overall effect of the various provisions described herein might be to deter a tender offer that a majority of the shareholders might possibly view to be in their best interest as the offer might include a substantial premium over the market price of HNC's Common Stock at that time. In addition, these provisions may have the effect of assisting HNC's current management in retaining its position and placing it in a better position to resist changes that the shareholders might want to make if dissatisfied with the conduct of HNC's business. Two of these statutory provisions have the effect of eliminating the rights of the shareholders of Registered Corporations to: (i) call a special meeting of shareholders; and (ii) propose an amendment to the Articles of Incorporation of HNC. One effect of these provisions may be to prevent the calling of a special meeting of shareholders for the purpose of considering a merger, consolidation or other corporate combination which does not have the approval of a majority of the members of HNC's Board of Directors. Therefore, such a provision may have the effect of making HNC less attractive as a potential takeover candidate by depriving shareholders of the opportunity to initiate special meetings at which a possible business combination might be proposed. These two provisions under the BCL might serve to discourage attempts by shareholders to disrupt the business of HNC between annual meetings of the shareholders by calling a special meeting. Further, these provisions will provide a greater time for consideration of any shareholder proposal to the extent that his, her or its proposal must be deferred until the next annual meeting of shareholders. Also, when made, such proposals must comply with certain notice requirements and proxy solicitation rules in advance thereof. These BCL provisions do not affect the calling of a special meeting by the Chairman of the Board or by a majority of the members of the Board of Directors or of its Executive Committee if, in their judgment, there are matters to be acted upon which are in the best interest of HNC and its shareholders. The third BCL provision to which HNC is subject assures that all shareholders will receive the "fair value" for their shares as the result of a "control transaction". Fair value -35- means an amount that is no less than the highest price paid per share by a controlling person or group at any time during the 90-day period ending on the date of the control transaction plus a control premium, if appropriate. A control transaction is the acquisition by a person or a group of persons acting in concert that has voting power over voting shares of HNC that would entitle the holders thereof to cast at least 20 percent of the votes that all shareholders would be entitled to cast in an election of directors of HNC. After the occurrence of a control transaction, any shareholder may, within a specified time period, make written demand on the controlling person or group, for payment in an amount equal to the fair value of each voting share as of the date on which the control transaction occurs. The fourth major provision under the BCL relates to certain business combinations involving Registered Corporations. Business combinations so affected would include any one of the following transactions involving an "interested shareholder" of HNC: (i) a merger or consolidation of HNC with an interested shareholder or any other corporation which is, or after the merger or consolidation would be, an affiliate or associate of the interested shareholder; (ii) a sale, lease, exchange, mortgage, pledge, transfer or other disposition to or with the interested shareholder or any affiliate or associate of such interested shareholder of the assets of HNC or any subsidiary of HNC; (iii) the issuance or transfer by HNC or any subsidiary of HNC of any shares of HNC which has an aggregate market value equal to 5 percent or more of the aggregate market value of all such outstanding shares of HNC to an interested shareholder or any affiliate or associate thereof; (iv) the adoption of any plan or proposal for the liquidation or dissolution of HNC proposed by, or pursuant to any agreement with, the interested shareholder or any affiliate or associate thereof; (v) a reclassification of securities or recapitalization of HNC or any merger or consolidation of HNC with any subsidiary of HNC, or any other transaction proposed by, or pursuant to any agreement, arrangement, or understanding, with, the interested shareholder or any affiliate or associate of the interested shareholder, which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class or series of voting shares or securities convertible into voting shares of HNC or any subsidiary of HNC which is, directly or indirectly, owned by the interested shareholder or any affiliate or associate of the interested shareholder, except as a result of immaterial changes due to fractional share adjustments; or (vi) the receipt by the interested shareholder or any affiliate or associate of the interested shareholder of the benefit, directly or indirectly, of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by or through HNC. An interested shareholder is any person that is the beneficial owner, directly or indirectly of shares entitling that person to cast at least 20 percent of the votes that all shareholders would be entitled to cast in an election of directors of HNC. HNC is prohibited from engaging in a business combination with an interested shareholder other than: (i) a business combination approved by the Board of Directors prior to the date on which the interested shareholder became an interested shareholder; (ii) a business combination approved by a majority of the votes that all shareholders would -36- be entitled to cast, excluding those shares held by the interested shareholder, at a meeting called for such purpose no earlier than three (3) months after the interested shareholder became, and if at the time of the meeting the interested shareholder is, the beneficial owner, directly or indirectly, of shares entitling the interested shareholder to cast at least 80 percent of the votes that all shareholders would be entitled to cast in an election of directors of HNC and if the business combination satisfies certain minimum conditions (see discussion below); (iii) a business combination approved by the affirmative vote of all of the holders of all of the outstanding shares; (iv) a business combination approved by a majority of the votes that all shareholders would be entitled to cast, not including those shares beneficially owned by the interested shareholder, at a meeting called for such purpose no earlier than five years after the interested shareholder became an interested shareholder; (v) a business combination approved at a shareholders' meeting called for such purpose no earlier than five years after the interested shareholder became an interested shareholder and that meets certain minimum conditions (see discussion below). The certain minimum conditions referred to above, would generally require that the aggregate amount of the cash, and the market value of consideration other than cash (such as stock, bonds or debentures), to be received per share by the shareholders of HNC be at least equal to the highest per share price paid by the interested shareholder at a time when the interested shareholder was the beneficial owner of shares entitling him to cast at least 5 percent of the votes that all shareholders would be entitled to cast in an election of directors: (i) within the 5-year period immediately prior to the announcement date of the business combination or; (ii) in the transaction in the higher, plus, in either situation, interest compounded annually from the earlier date on which the highest per-share acquisition price was paid through the consummation date at the rate of 1- year United States Treasury obligations from time to time in effect less the aggregate among of any cash dividends paid and the market value of any dividends paid other than cash. The BCL provision relating to business combinations is designed to help assure that if, despite a corporation's best efforts to remain independent, it is nevertheless taken over, each shareholder will be treated fairly vis-a-vis every other shareholder and that arbitrageurs and professional investors will not profit at the expense of the corporation's long-term public shareholders. While these anti-takeover provisions are designed to help assure fair treatment of all shareholder vis-a-vis other shareholders in the event of a takeover, it is not the purpose of these provisions to assure that shareholders receive a premium price for their shares in as takeover. Accordingly, the provisions would not preclude the board of directors' opposition to any future takeover proposal which it believes not to be in the best interests of HNC and its shareholders, whether or not such a proposal satisfies the minimum price, form of consideration and procedural requirements under the BCL. HNC's Articles of Incorporation and amended Bylaws contain a number of additional provisions that could be considered anti-takeover in purpose and effect. These provisions -37- include: (i) the authorization of 30,000,000 shares of Common Stock and 3,000,000 shares of preferred stock; (ii) the lack of preemptive rights for shareholders to subscribe to purchase additional shares of stock on a pro rata basis; (iii) the requirement that an affirmative vote of the holders of 80 percent of HNC Common Stock is required to approve an amendment to HNC's Bylaws or to change an amendment to its Bylaws that has been approved by the Board of Directors; and (iv) the requirement that an affirmative vote of the holders of 80 percent of HNC's Common Stock is required to approve a merger, consolidation, liquidation, or sale of substantially all assets unless such transaction has received prior approval of at least 75 percent of all members of the Board of Directors in which case a majority of the outstanding shares of common stock would be required for approval. These provisions could give the holders of a minority of HNC's outstanding shares a veto power over any merger, consolidation, dissolution or liquidation of HNC, the sale of all or substantially all of its assets or an amendment to its Bylaws unless 75 percent of management and a majority of the shareholders believes such transaction to be desirable and beneficial. Absent such provisions in HNC's Articles of Incorporation and Bylaws, the affirmative vote of at least a majority of HNC's Common Stock outstanding entitled to vote thereon would be required to approve any merger, consolidation, dissolution, liquidation, the sale of all of its assets or an amendment to the Bylaws. Provisions for a classified board are included in the amended Bylaws of HNC. A classified board will have the effect of moderating the pace of any change in control of the Board of Directors by extending the time required to elect a majority of the directors to at least two successive annual meetings. However, since this extension of time also tends to discourage a tender offer or takeover bid, this provision may also be deemed to be anti-takeover in nature. In addition, a classified board makes it more difficult for a majority of the shareholders to promptly change the composition of the board of directors even though such prompt change may be considered desirable for them. HNC's amended Articles of Incorporation contain an additional anti- takeover provision which enables the Board of Directors to oppose a tender offer on the basis of factors other than economic benefit based on its responsibilities to certain constituent groups including HNC's subsidiaries and the communities that they serve by considering factors such as: the impact the acquisition of HNC would have on the community; the effect of the acquisition upon shareholders, employees, depositors, suppliers and customers; and the reputation and business practices of the tender offeror. Indemnification The Bylaws of HNC provide for indemnification of its directors, officers, employees and agents to the fullest extent permitted under the laws of the Commonwealth of Pennsylvania, provided that the person seeking indemnification acted in good faith, in a manner he or she reasonably believed to be in the best interest of HNC, and without willful misconduct or recklessness. -38- Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to directors, officers or persons controlling HNC pursuant to the foregoing provisions, HNC has been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the 1933 Act and is therefore unenforceable. Comparison of Stockholder Rights Upon consummation of the proposed merger, the shareholders of Farmers & Merchants will become shareholders of HNC. Several differences between the rights of holders of Farmers & Merchants Common Stock and HNC Common Stock arise out of (i) differences between the Articles of Incorporation and Bylaws of Farmers & Merchants and the Articles of Incorporation and Bylaws of HNC, (ii) differences between the respective federal and state laws applicable to Farmers & Merchants and HNC, and (iii) differences in the types of corporate entities represented by Farmers & Merchants (a Pennsylvania-chartered commercial bank and trust company) and HNC (a Pennsylvania business corporation and registered bank holding company). The most significant of these differences are those relating to the election of directors, dissenters' rights, anti-takeover protection and public registration. The Pennsylvania Banking Code of 1965, as amended, and Farmers & Merchants Articles of Incorporation and Bylaws provide that Farmers & Merchants' shareholders are entitled to cumulate their votes in electing directors. Thus, in elections for directors, Farmers & Merchants' shareholders may cast a number of votes equal to the number of their shares multiplied by the number of directors to be elected, and they may allocate their votes to one or more than one director as the shareholders see fit. Cumulative voting maximizes the ability of a minority group of Farmers & Merchants' shareholders to elect one or more directors. HNC's shareholders are not entitled to cumulate their votes in the election of directors under HNC's Articles of Incorporation and Bylaws, and therefore it would be more difficult for a minority group of HNC's shareholders to elect one or more directors. The Bylaws of HNC provide for a classified Board of Directors under which there are four classes of directors and, accordingly, one-fourth of the directors are elected each year for a term of four years. By contrast, the entire Board of Directors of Farmers & Merchants is elected each year. The classification of the Board of Directors of HNC makes it more difficult for the shareholders of HNC to change a majority of the directors, even when the only reason for such a change may be the performance of the existing directors. It would normally take three annual meetings of HNC's shareholders in order to replace a majority of HNC's directors, whereas all or a majority of Farmers & Merchants' Board of Directors could be replaced at a single annual meeting of Farmers & Merchants' shareholders. The Articles of Incorporation and Bylaws of HNC include a number of provisions which are intended to protect the shareholders of HNC (including the present shareholders of Farmers & Merchants, who will become shareholders of HNC following the merger), but -39- which may be considered to be anti-takeover in nature and may serve to entrench the current management of HNC. SEE INFORMATION CONCERNING HARLEYSVILLE NATIONAL CORPORATION AND DESCRIPTION OF HNC COMMON STOCK-- Anti-takeover Provisions. In contrast, the Articles of Incorporation and Bylaws of Farmers & Merchants do not include similar anti-takeover provisions. HNC Common Stock, unlike Farmers & Merchants Common Stock, is registered with the SEC under Section 12(g) of the 1934 Act. As a result, HNC is subject to the periodic reporting, proxy solicitation and insider trading requirements of the 1934 Act, which do not apply to Farmers & Merchants. Pursuant to these requirements, HNC makes available to shareholders, potential investors and the general public a significant amount of information regarding HNC in the form of proxy statements, periodic reports and other SEC filings. In addition, directors, executive officers and 10 percent beneficial shareholders of HNC are subject to the insider trading reporting requirements and short-swing profit recapture provisions of Section 16 of the 1934 Act. The material differences between Farmers & Merchants Common Stock and HNC Common Stock and the rights of their respective holders, as of June 30, 1995, are summarized in the following table:
Farmers & Merchants HNC Title Common Stock, Two Common Stock, One Dollars ($2) par value Dollar ($1) par value per share per share Shares Authorized 3,000,000 30,000,000 Shares Issued and Outstanding 708,016 5,873,682 Preemptive Rights Yes None Voting: Election of Cumulative Non-cumulative Directors Classification of Board of Directors not Board of Directors Board of Directors classified; all divided into 4 classes directors elected each with 4 year terms; 1/4 year of directors elected each year Voting: Other One Vote for each One vote for each Matters share owned of record share owned of record Mergers, Consoli- Approval by vote of at Approval by a vote of dations, Liquida- least 66 2/3 percent 80 percent of out- tions Sales of of the outstanding standing shares of Substantially All shares. Common Stock. If Assets such transaction has received prior approval of at least 75 percent of all members of the Board of Directors, then a majority of the outstanding shares of Common Stock would be required. -40- Special Shareholders Upon request by Upon request by the Meetings Chairman of the Chairman of the Board, Board of Directors, President, the President, a majority Executive Vice of the Board of President, if any, or Directors, or at the a majority of the request of holders of Board of Directors, or at least 20 percent of by its Executive of the outstanding Committee. shares. Authorization to Approval by a majority Approval by a majority Issue Additional vote of the Board of vote of the Board of Shares Directors Directors Repurchase of Cannot reduce or Stock can be Additional Shares retire any part of its repurchased up to the stock without prior extent of unrestricted regulatory approvals. or unreserved undivided profits and as much of its unrestricted surplus as has been made available for such purpose by the prior affirmative vote of shareholders; stock cannot be repurchased when the Holding Company is insolvent by the purchase; and no more than 10 percent of the outstanding shares can be repurchased in any twelve (12) month period without prior regulatory approval; and provisions of the 1934 Act restrict the timing, nature and amount of repurchases. Stock Incentive None Yes Plans Dissenters' Rights Yes Yes Dividend Reinvest- None Yes ment Plan Market No established market Listed for quotation on National Systems of Nasdaq Registered Under No Yes Securities Exchange Act of 1934
INFORMATION CONCERNING FARMERS & MERCHANTS BANK Description of Business and Property Farmers & Merchants commenced operations on August 23, 1923, as a state chartered commercial bank and trust company. As a state-chartered commercial bank and trust company, Farmers & Merchants is subject to regulation and periodic examination by the Pennsylvania Department of Banking. Farmers & Merchants' deposits are insured by the FDIC to the maximum extent permitted by law. The principal executive offices of Farmers & Merchants are located at 1001 Main Street, Honesdale, PA 18431. The building is a modern office building owned by Farmers -41- & Merchants, consisting of two (2) stories. Farmers & Merchants also owns an adjacent house and a two-story garage nearby, each of which is used for storage. Farmers & Merchants is a full-service commercial bank which offers a large range of commercial and retail banking services to its clients, including personal and business checking accounts, NOW accounts, money market accounts, savings accounts, IRA accounts and certificates of deposit. Farmers & Merchants also offers installment loans, home equity loans, lines of credit, letters of credit, revolving credit loans and term loans, both on a secured and unsecured basis. It also makes commercial loans and commercial mortgage loans, and residential conventional and construction mortgage loans. In addition, Farmers & Merchants provides safe deposit boxes, traveler's checks, money orders, wire transfer of funds, lock box collections and direct deposit of social security and payroll checks. Farmers & Merchants provides credit card processing services to local merchants and retailers. Farmers & Merchants is a member of the "MAC" system and provides clients with access to this automated teller machine network. Farmers & Merchants also provides trust services, international services and credit cards available to its customers through correspondent banking institutions. In the event that certain loan requests may exceed Farmers & Merchants' lending limit to any one customer, Farmers & Merchants seeks to arrange such loans on a participation basis with other financial institutions. The offering, or continuation, of the above enumerated services is evaluated periodically. Farmers & Merchants competes actively with other area commercial banks and savings and loan associations, most of which are larger than Farmers & Merchants, as well as with major regional banking and financial institutions headquartered elsewhere. Farmers & Merchants generates the overwhelming majority of its deposit and loan volume from within its primary service area (i.e., Wayne County, Pennsylvania) ("PSA"). The majority of the residents, businesses and employees within the Farmers & Merchants' PSA are within a driving time of 30 minutes from the Farmers & Merchants' office. There are four (4) commercial banks headquartered in Honesdale. Farmers & Merchants competes with the branch offices of numerous banking and financial institutions that are headquartered elsewhere. The PSA also constitutes the community delineated for Farmers & Merchants' Community Reinvestment Act Statement, which states the intention of Farmers & Merchants to meet the credit needs of the entire local community. It is the policy of Farmers & Merchants to evaluate all applications for credit without regard to the applicant's race, color, creed, sex, age, or marital status. The PSA includes a wide variety of residential neighborhoods, commercial businesses, retail stores, industrial complexes, and service institutions. The Honesdale area has a large number of business establishments and a substantial employment base. -42- Employees As of December 12, 1995, Farmers & Merchants had twenty-four (24) full-time equivalent employees. Legal Proceedings The nature of Farmers & Merchants' business generates a certain amount of litigation involving matters in the ordinary course of business. Except as disclosed below, in the opinion of management of Farmers & Merchants, there are no proceedings pending to which Farmers & Merchants is a party or to which its property is subject, which, if determined adversely to Farmers & Merchants, would be material in relation to Farmers & Merchants' undivided profits or financial condition, nor are there any proceedings pending, other than ordinary routine litigation, incident to the business of Farmers & Merchants. In addition, no material proceedings are pending or are known to be threatened or contemplated against FMB by government authorities or others. Farmers & Merchants Common Stock Market Price and Dividends Farmers & Merchants Common Stock is not traded in any established market and no price quotations are readily available therefor. There were approximately two hundred seventy-two (272) holders of record of Farmers & Merchants Common Stock as of December 12, 1995. Recent sales of Farmers & Merchants Common Stock have occurred solely between individuals in limited over-the-counter transactions and in direct, privately negotiated transactions. The most recent sale prior to the public announcement of the merger on September 7, 1995, as to which management of Farmers & Merchants is aware of the sales price, occurred on April 18, 1995 at a price of Fifteen Dollars and Twenty-five Cents ($15.25) per share and involved a total of 240 shares. The holders of Farmers stock are entitled to receive the dividends when, as and if declared by the Board of Directors out of funds legally available therefor, Farmers & Merchants has historically paid quarterly cash dividends to its shareholders on or about March 1, June 1, September 1, and December 1 of each year. The ability of Farmers & Merchants to pay dividends to its shareholders is dependent upon its earnings and financial condition, without prior regulatory approval, subject to certain prescribed statutory limitations. Under the Pennsylvania Banking Code of 1965, as amended, dividends may only be paid out of accumulated net earnings and only when such dividend does not reduce Farmers & Merchants surplus below the amount of capital. In addition to the foregoing statutory restrictions on dividends, the FDIC has general authority to prohibit a state-chartered, non-member bank from engaging in an unsafe or unsound banking practice. The payment of a dividend by a bank could, depending upon the financial condition of the bank involved and other factors, be deemed to be such an unsafe or unsound practice. -43- Farmers & Merchants paid cash dividends of Thirty-seven Cents ($0.37) per share in 1994, and Seventeen Cents ($0.17) for the first quarter of 1995, and Seven Cents ($0.07) in the second, third and fourth quarters of 1995. Under the terms of the Agreement and Plan of Reorganization, Farmers & Merchants may only pay regular quarterly cash dividends in an amount not in excess of Seven Cents ($.07) per share for the third and fourth quarters of 1995 and under certain circumstances a cash dividend of Twelve Cents ($.12) per share for each of the first two quarters of 1996 prior to the consummation of the proposed merger. Certain information concerning shares of Farmers & Merchants Common Stock owned beneficially by each director of Farmers & Merchants and by all directors and executive officers of Farmers & Merchants as a group, as of December 12, 1995, is set forth below:
Shares of Farmers & Merchants Common Stock Beneficially Percent of Owned December 12, Shares Name of Director 1995 Outstanding Dale D. Fowler 68,726 9.70% John J. Koehler 98,280 13.88% Nelson W. Leet 20,688 2.92% Charles P. McGinnis 47,528 6.71% Richard J. Shershenovich 60,000 8.47% Samuel C. Siepiela 2,230 .31% Wayne W. Stephens 6,068 .85% All directors and executive 313,380 44.26% officers as a group (10 persons) ____________________ The Securities "beneficially owned" are determined in accordance with the definitions of "beneficial ownership" as set forth in the regulations of the SEC and, accordingly, may include securities owned by or for, among others, the spouse and/or minor children of the individual and any other relative who has the same residence as such individual as well as other securities as to which the individual has or shares voting or investment power or has the right to acquire under outstanding stock options within sixty (60) days after December 12, 1995. Beneficial ownership may be disclaimed as to certain of the securities. Includes 12,144 shares owned jointly by Mr. Fowler and his spouse; and 8,820 shares owned individually by his spouse. Includes 57,384 shares owned jointly by Mr. Shershenovich and his spouse; and 2,616 shares owned individually by his spouse. Includes 2,230 hares owned jointly with Mr. Siepiela's spouse. Includes 6,068 shares owned jointly with Mr. Stephens' spouse. -44- Includes the seven (7) directors and Richard K. Arnold, Executive Vice President and CEO, Richard M. Dulay, Vice President and Kathleen M. Hunter, Vice President/Operations Officer, Cashier and Trust Officer.
EXPERTS The consolidated financial statements of HNC and subsidiaries as of December 31, 1994, and 1993, and for each of the years in the three-year period ended December 31, 1994, have been incorporated by reference herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements of Farmers & Merchants as of December 31, 1994 and 1993, and for each of the years in the three-year period ended December 31, 1994, included in this Prospectus/Proxy Statement have been audited by Parente, Randolph, Orlando, Carey & Associates, independent public accountants, as indicated in its reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing. LEGAL OPINIONS The legality of the shares of HNC Common Stock to be issued in connection with the merger and certain other legal matters relating to the merger will be passed upon by the law firm of Shumaker Williams, P.C., Camp Hill, Pennsylvania, Special Counsel to HNC. OTHER MATTERS The Board of Directors of Farmers & Merchants knows of no other matters other than those discussed in this Prospectus/Proxy Statement which will be presented at the Special Meeting. However, if any other matters are properly brought before the Special Meeting and any adjournment thereof, any proxy given pursuant to this solicitation will be voted in accordance with the recommendations of the management of Farmers & Merchants. ADDITIONAL INFORMATION HNC has filed with the SEC a Registration Statement in respect of the shares of HNC Common Stock to be issued in connection with the merger. The Registration Statement contains certain additional information which has been omitted from this Prospectus/Proxy Statement in accordance with the rules and regulations of the SEC and may be examined at the SEC in Washington, D.C. Copies of the Registration Statement may be obtained from the SEC upon payment of the prescribed fee. -45- FARMERS & MERCHANTS BANK INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION Page Selected Financial Data 47 Management's Discussion and Analysis 48 Interim Statements 55 Balance Sheet 55 Statements of Income 56 Statement of Cash Flows 57 Statement of Changes in Shareholders' Equity 58 Report of Independent Accountants F-1 Balance Sheet F-2 Statement of Income F-3 Statement of Changes in Shareholders' Equity F-4 Statement of Cash Flows F-5 Notes to Financial Statements F-6 -46- FARMERS & MERCHANTS BANK SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data) September 30, December 31, 1995 1994 1994 1993 INCOME & EXPENSE: Interest income . . . . $ 3,099 $ 2,787 $ 3,766 $ 3,630 Interest expense . . . 1,448 1,235 1,662 1,701 _______ _______ _______ _______ Net interest income . . 1,651 1,552 2,104 1,929 Loan loss provision . . 9 15 15 12 _______ _______ _______ _______ Net interest income after loan loss provision . . 1,642 1,537 2,089 1,917 Noninterest income . . 91 204 222 96 Noninterest expense . . 1,096 1,205 1,557 1314 _______ _______ _______ _______ Income before income taxes . . . . . 637 536 754 699 Income taxes . . . . . 178 156 219 199 _______ _______ _______ _______ Net income . . . . . . $ 459 $ 380 $ 535 $ 550 ======= ======= ======= ======= PER SHARE: Primary . . . . . . . . $ 0.65 $ 0.54 $ 0.76 $ 0.71 Fully diluted . . . . . 0.65 0.54 0.76 0.71 Cash dividends paid . . 0.31 0.30 0.37 0.36 Primary average shares outstanding . . . . . . 708,016 708,383 708,016 708,736 Diluted average shares outstanding . . . . . . 708,016 708,383 708,016 708,736 Book Value. . . . . . . 12.07 10.81 10.75 9.72 AVERAGE BALANCE SHEET: Total Assets. . . . . . $63,748 $64,482 $64,204 $61,700 Investments & Money Market Investments. . . 35,089 37,918 37,202 38,314 Loans (Net of Unearned Income) . . . . . . . . 26,743 24,434 24,929 21,262 Deposits. . . . . . . . 54,826 56,191 55,917 54,146 Borrowings . . . . . . - 264 203 358 Shareholders' equity. . 8,112 7,475 7,518 6,758 Balance Sheet at Period End: Total Assets. . . . . . $65,555 $66,764 $62,890 $62,373 Investments & Money Market Investments. . . 36,572 38,417 34,512 37,320 Loans (Net of Unearned Income) . . . . . . . . 26,769 26,327 26,495 21,418 Deposits. . . . . . . . 56,000 58,511 54,748 54,863 Borrowings. . . . . . . - - - 327 Shareholders' equity. . 8,547 7,656 7,607 6,886 Selected Operating Ratios: Return on average assets (annualized). . . . . . 0.96% 0.79% 0.83% 0.81% Return on average shareholders' equity. . 7.54% 6.78% 7.12% 7.40% Leverage (assets divided by shareholders' equity) . . . . . . . . 7.67X 8.72X 8.27X 9.06X Average total loans as a percentage of average deposits. . . . . . . . 49% 43% 45% 39% Interest income/Average Earning Assets* . . . . 6.73% 6.01% 6.13% 6.16% Interest expense/Average Dep. & Borrowings . . . 3.52% 2.91% 2.96% 3.12% Net interest income/ Average Earn. Assets* . . . . . . . . 3.61% 3.37% 3.45% 3.30% FARMERS & MERCHANTS BANK SELECTED FINANCIAL DATA (Dollars in thousands, except per share data) December 31, 1992 1991 1990 INCOME & EXPENSE: Interest income . . . . . $ 4,037 $ 4,785 $ 5,219 Interest expense . . . . 2,186 2,995 3,220 ______ _______ _______ Net interest income . . . 1,851 1,790 1,999 Loan loss provision . . . - 9 15 ______ _______ ______ Net interest income after loan loss provision . . . 1,851 1,781 1,984 Noninterest income. . . . 142 100 52 Noninterest expense . . . 1,318 1,267 1,239 _______ _______ _______ Income before income taxes. . . . . . . 675 614 797 Income taxes. . . . . . . 194 134 188 _______ ______ _______ Net income. . . . . . . . $ 481 $ 480 $ 609 ======= ======== ======== PER SHARE: Primary . . . . . . . . . $ 0.67 $ 0.67 $ 0.85 Fully diluted . . . . . . 0.67 0.67 0.85 Cash dividends paid . . . 0.35 0.33 0.31 Primary average shares outstanding . . . . . . . 717,747 720,000 720,000 Diluted average shares outstanding . . . . . . . 717,747 720,000 720,000 Book Value . . . . . . . 9.37 9.06 8.73 AVERAGE BALANCE SHEET: Total Assets. . . . . . . $ 60,422 $ 59,730 $ 58,016 Investments & Money Market Investments. . . . 37,132 34,628 33,266 Loans (Net of Unearned Income) . . . . . . . . . 20,907 22,960 22,667 Deposits. . . . . . . . . 52,877 52,246 50,748 Borrowings. . . . . . . . 380 349 259 Shareholders' equity. . . 6,611 6,407 6,082 Balance Sheet at Period End: Total Assets. . . . . . . $ 60,675 $ 59,144 $ 58,123 Investments & Money Market Investments. . . . 36,063 31,982 25,660 Loans (Net of Unearned Income) . . . . . . . . . 21,494 25,322 30,432 Deposits. . . . . . . . . 53,138 51,859 50,868 Borrowings. . . . . . . . 441 268 319 Shareholders' equity. . . 6,641 6,524 6,284 Selected Operating Ratios: Return on average assets (annualized). . . . . . . 0.80% 0.80% 1.05% Return on average shareholders' equity. . . 7.28% 7.49% 10.01% Leverage (assets divided by shareholders' equity). 9.14X 9.07X 9.25X Average total loans as a percentage of average deposits . . . . . . . . 40% 44% 45% Interest income/Average Earning Assets* . . . . . 7.00% 8.48% 9.53% Interest expense/Average Dep. & Borrowings . . . . 4.10% 5.69% 6.31% Net interest income/ Average Earn. Assets* . . 3.24% 3.28% 3.78% *Tax Equivalent Basis.
-47- FARMERS & MERCHANTS BANK MANAGEMENT'S DISCUSSION AND ANALYSIS BALANCE SHEET ANALYSIS Investment Securities On January 1, 1994, the Farmers & Merchants Bank (the Bank) adopted the provisions of Statement of Financial Accounting Standards "SFAS" No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires among other things, that debt and equity securities classified as available for sale be reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders, equity, net of income taxes. The net effect of unrealized gains or losses, caused by marking an available for sale portfolio to market, causes fluctuations in the level of shareholders' equity and equity-related financial ratios as market value of the securities fluctuate. As of September 30, 1995, the application of SFAS 115 resulted in an increase in shareholders' equity of $1,156,750 (unrealized holding gain on available-for-sale securities of $1,752,652 less deferred income tax effect of $595,902). Total securities of $30,861,671 decreased $2,693,749 from September 30, 1994 to September 30, 1995. This reduction is the net result of the Bank reducing the securities available for sale portfolio by $10,470,644 and increasing the securities held-to-maturity portfolio by $7,776,895. The September 30, 1995 level of securities was also lower than the total securities at December 31, 1994 and 1993 of $31,739,240 and $32,435,571, respectively. The September 30, 1995 federal funds sold of $3,750,000, exceeded the September 30, 1994 balance of $2,685,000. Federal funds sold at September 30, 1995 were also higher than the December 31, 1994 balance of $975,000 and the December 31, 1993 balance of $3,410,000. The September 1995 year- to-date average federal funds sold of $2,688,500 exceeded the average federal funds sold for the same period in 1994 of $2,039,000. The average federal funds sold for the entire year of 1994 of $1,772,308 were lower than the 1993 average federal funds sold balance of $2,575,385. Interest-bearing deposits in banks of $1,959,908 at September 30, 1995, were lower than the September 30, 1994 balance of $2,176,624. The December 31, 1994 and 1993 balances were $1,798,620 and $1,473,757, respectively. -48- The amortized cost and fair value of investment securities are as follows:
SEPTEMBER 30, 1995 __________________ INVESTMENT SECURITIES Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains (Losses) Value _________ __________ __________ ________ U.S. Treasury Notes $ 1,490 $ 17 $ - $ 1,507 Obligations of other U.S. Government agencies and corporations 11,032 49 3 11,078 Obligations of states and political subdivisions 780 22 2 800 ________ ______ ______ ________ Totals $ 13,302 $ 88 $ 5 $ 13,385 ======== ====== ====== ========
SEPTEMBER 30, 1995 __________________ AVAILABLE FOR SALE Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains (Losses) Value _________ __________ __________ ________ U.S. Treasury Notes $ 7,517 $ 3 $ 22 $ 7,498 Obligations of other U.S. Government agencies and corporations 6,003 21 87 5,937 Obligations of states and political subdivisions 915 2 1 916 Mortgage-backed securities 449 9 5 453 Corporate debt securities 205 - - 205 Equity securities 718 1,833 - 2,551 ________ ______ ______ ________ Totals $ 15,807 $1,868 $ 115 $ 17,560 ======== ====== ====== ========
SEPTEMBER 30, 1994 __________________ INVESTMENT SECURITIES Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains (Losses) Value _________ __________ __________ ________ Obligations of other U.S. Government agencies and corporations $ 1,045 $ - $ 26 $ 1,019 Obligations of states and political subdivisions 2,974 - 10 2,964 Other debt securities 1,506 - 6 1,500 ________ _______ _______ ________ Totals $ 5,525 $ - $ 42 $ 5,483 ======== ======= ====== =========
SEPTEMBER 30, 1994 __________________ AVAILABLE FOR SALE Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains (Losses) Value _________ __________ __________ ________ U.S. Treasury Notes $ 17,066 $ 8 $ 217 $ 16,857 Obligations of other U.S. Government agencies and corporations 7,500 19 148 7,371 Obligations of states and political subdivisions 1,015 - 42 973 Mortgage-backed securities 604 - 16 588 Corporate debt securities 197 - - 197 Equity securities 718 1,326 - 2,044 ________ ______ ______ ________ Totals $ 27,100 $1,353 $ 423 $ 28,030 ======== ====== ====== ========
-49-
DECEMBER 31, 1994 _________________ INVESTMENT SECURITIES Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains (Losses) Value _________ __________ __________ ________ U.S. Treasury Notes $ 1,478 $ - $ 7 $ 1,471 Obligations of other U.S. Government agencies and corporations 4,478 - 54 4,424 Obligations of states and political subdivisions 1,045 - 21 1,024 Corporate debt obligations 501 - 1 500 ________ ______ _______ ________ Totals $ 7,502 $ - $ 83 $ 7,419 ======== ====== ====== ========
DECEMBER 31, 1994 _________________ AVAILABLE FOR SALE Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains (Losses) Value _________ __________ __________ ________ U.S. Treasury Notes $ 15,055 $ - $ 268 $ 14,787 Obligations of other U.S. Government agencies and corporations 5,999 1 261 5,739 Obligations of states and political subdivisions 1,015 - 41 974 Mortgage-backed securities 300 - 4 296 Corporate debt securities 261 - 15 246 Equity securities 915 1,282 2 2,195 ________ ______ _____ ________ Totals $ 23,545 $1,283 $ 591 $ 24,237 ======== ====== ====== ========
The amortized cost and fair value of investment securities at December 31, 1993 are as follows:
DECEMBER 31, 1993 _________________ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains (Losses) Value _________ __________ __________ ________ U.S. Treasury Notes $ 21,098 $ 135 $ 15 $ 21,218 Obligations of other U.S. Government agencies and corporations 6,362 140 1 6,501 Obligations of states and political subdivisions 2,000 7 2 2,005 Other debt securities 1,937 3 9 1,931 Equity Securities 1,039 1,325 3 2,361 ________ ______ _______ ________ Totals $ 32,436 $1,610 $ 30 $ 34,016 ======== ====== ====== ========
-50- Loans The Bank grants installment, commercial and residential loans to customers primarily in Wayne County, Pennsylvania, and its contiguous counties. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent on the local economy. There are no concentrations of loans to any one industry group which exceed 10% of total loans. Loans grew 1.5% from $26,652,365 at September 30, 1994 to $27,055,817 at September 30, 1995. Real estate loans represented $19,538,139, or 72.2% of total loans at September 30, 1995. Installment & commercial loans represented 19.4% and 8.4%, respectively, of total loans at September 30, 1995. The September 30, 1995 loan portfolio grew from the $26,817,936 loan level at December 31, 1994. This rise in loan volumes was represented in consumer loan category. The December 31, 1994 loan balance of $26,817,936 grew $5,215,339, from the $21,602,597 balance at December 31, 1993. Real estate loans were responsible for $4,695,533 of this growth. Major classifications of loans are summarized as follows at September 30, 1995 and 1994, and December 31, 1994 and 1993:
SEPTEMBER 30, DECEMBER 31, 1995 1994 1994 1993 ____ ____ ____ ____ Real estate . . $19,538,139 $19,628,659 $19,951,503 $15,255,970 Commercial loans. . . . . 2,274,166 2,456,004 2,618,190 2,627,506 Consumer. . . . 5,243,512 4,567,702 4,248,243 3,719,121 ___________ ___________ __________ ___________ Total . . . $27,055,817 $26,652,365 $26,817,936 $21,602,597 Less: Unearned discount . . - 1,491 1,149 3,358 Unamortized loan fees and cost . . 286,605 323,776 321,111 180,934 Allowance for possible loan losses . . . 214,376 216,484 215,876 201,484 ___________ ___________ ___________ __________ Loans, Net. . . . $26,554,836 $26,110,614 $26,279,800 $21,216,821 =========== =========== =========== ===========
Allowance for Possible Loan Losses The provision for loan losses is based upon a credit review of the loan portfolio, past loan loss experience, current economic conditions and other pertinent factors which form a basis for determining the adequacy of the allowance for possible loan losses. In the opinion of management, the aggregate amount reserved is deemed to be adequate to absorb future loan losses. The allowance for possible loan losses of $214,376 at September 30, 1995 and $216,484 at September 30, 1994 were both .79% and .81%, respectively, of total loans. The $215,876 allowance for possible loan losses at December 31, 1994 was .81% of loans and the $201,484 allowance for loan losses at December 31, 1993 was .93% of loans. -51- Transactions in the allowance for possible loan losses account for the periods ending September 30, 1995 and 1994, and the years ended December 31, 1994 and 1993 are summarized as follows:
SEPTEMBER 30, DECEMBER 31, 1995 1994 1994 1993 ____ ____ ____ ____ Beginning $ 215,876 $ 201,484 $ 201,484 $ 209,993 balance Provision charged to operations 9,000 15,000 15,000 12,000 Recovery of loans previously charged off - - - 5,559 ___________ ___________ ___________ ___________ $ 224,876 $ 216,484 $ 216,484 $ 227,552 Loans charged off 10,500 - 608 26,068 ____________ ___________ __________ ___________ Ending Balance $ 214,376 $ 216,484 $ 215,876 $ 201,484 =========== =========== ========== ==========
Bank Premises and Equipment Bank premises and equipment are summarized as follows at September 30, 1995 and 1994, and December 31, 1994 and 1993:
September 30, December 31, ____________________ _____________________ 1995 1994 1994 1993 Land. . . . . . . . $ 215,338 $ 215,338 $ 215,338 $ 62,288 Bank premises . . . 953,150 937,870 950,284 950,184 Furniture & Equipment. . . . . 590,720 582,435 581,885 575,684 _________ _________ _________ _________ 1,759,208 1,735,643 1,747,507 1,588,156 Less accumulated depreciation . . . 839,454 775,459 794,710 715,964 Bank premises and equipment, net . . $ 919,754 $ 960,184 $ 952,797 $ 872,192 ========= ========= ========= =========
Total deposits of $56,000,618 at September 30, 1995 were $2,510,533 lower than the $58,511,151 deposit level at September 30, 1994. A $3,164,477 reduction in savings deposits was partially offset by a $1,628,939 gain in time deposits. The September 30, 1995 deposits grew $1,252,492 from the December 31, 1994 balance of $54,748,126 and $1,137,310 from the December 31, 1993 deposit balance of $54,863,308. Deposits are summarized as follows at September 30, 1995 and 1994, and December 31, 1994 and 1993:
September 30, December 31, __________________ ___________________ 1995 1994 1994 1993 ____ ____ ____ ____ Noninterest -bearing $ 6,057,290 $ 6,768,724 $ 4,669,491 $ 4,911,900 Interest-bearing demand deposits 4,912,480 5,176,041 4,824,551 4,756,273 Savings 20,887,150 24,051,627 22,484,463 22,210,649 Time Deposits 24,143,698 22,514,759 22,769,621 22,984,486 ___________ __________ ___________ ___________ Total $56,000,618 $58,511,151 $54,748,126 $54,863,308 Deposits =========== =========== =========== ===========
-52- Capital Various regulatory agencies require banks to maintain a leverage ratio of core capital to total assets at a prescribed level, currently 4 percent. In addition, bank regulators have issued risk-based capital guidelines. Under such guidelines, minimum ratios of core capital and total qualifying capital as a percentage of risk-weighted assets and certain off-balance-sheet items of 4 percent and 8 percent, respectively, are required. At September 30, 1995, the Bank met all capital requirements. Core capital was $7,390,129 or 11.3% of total assets and 16.7% of total risk-weighted assets, while total qualifying capital was $7,604,505, or 17.2% of total risk-weighted assets. INCOME STATEMENT ANALYSIS Results of Operations Net income for the nine month period ending September 30, 1995 of $458,975, was $78,590 higher than the $380,385 net income for the same period ending September 30, 1994. This growth in net income was the result of an increase in net interest income. The annualized return on average shareholders' equity was 7.54% at September 30, 1995, compared to 6.78% at September 30, 1994. The December 31, 1994 net income of $534,583 was higher than the December 31, 1993 and 1992 net income of $499,882 and $481,375, respectively. Earnings per share were $.65 for the first nine months of 1995, compared to $.54 for the same period in 1994. Net Interest Income Net interest income at September 30, 1995 of $1,651,065 was $98,644 higher than the September 30, 1994 net interest income of $1,552,421. This increase is primarily due to the change in the mix of earning assets during the first nine months of 1995, compared to the same period in 1994. Lower yielding average investments balances were $3,081,600 lower in the first nine months of 1995, compared to the same period in 1994. This reduction in funds was used to fund a $2,309,260 increase in the average higher yielding loans during this period. The remaining drop in the average investment balance during this period is the result of lower deposit balances. The net interest margin grew from 3.37% for the nine month period ending September 30, 1994, to 3.61% for the same period in 1995. Net interest income at December 31, 1994 of $2,104,147 was higher than the December 31, 1993 and 1992 net interest income of $1,928,925 and $1,851,729, respectively. The net interest margin for the twelve month period ending December 31, 1994 of 3.46% was higher than the 3.31% at December 31, 1993 and the 3.25% at December 31, 1992. Provision for Loan Losses The provision for loan losses for the first nine months of 1995 was $9,000, compared to $15,000 for the same period in 1994. The provision for loan losses for the entire year of 1994 was $15,000, a $3,000 increase over 1993. There Bank did not make a provision for loan losses in 1992. -53- Other Income Other income declined 55.3% from $204,242 during the first nine months of 1994, to $91,227 during the same period in 1995. This decline was the result of the decrease in security gains, partially offset by increases in both the trust and other income categories. Other income for the entire year of 1994 of $221,605 was $125,197 higher than 1993 other income of $96,408 and $79,288 higher than the 1992 other income of $142,317. The increase in the 1994 other income is a result of higher security gains and increases in trust and other income. Other Operating Expenses Other expenses of $1,096,307 for the first nine months of 1995, was $109,381 lower than the same period in 1994. This reduction in 1995 is the result of a decrease in expenses associated with other real estate owned property experienced during 1994. Other expenses for the entire year of 1994 of $1,556,904, was $243,193 and $238,558 higher than the same periods in 1993 and 1992, respectively. The increase in other expenses in 1994 is primarily related to cost associated with writing off an other real estate owned property. Increases to advertising, FDIC premiums and meeting and travel also contributed to this rise in other expenses. -54-
FARMERS & MERCHANTS BANK BALANCE SHEET UNAUDITED As of September 30, As of December 31, ___________________ __________________ ASSETS 1995 1994 1994 1993 ____ ____ ____ ____ Cash and due from banks . . .$ 420,147 $ 479,363 $ 454,819 $ 2,041,876 Federal Funds Sold . . . . . . 3,750,000 2,685,000 975,000 3,410,000 Interest-bearing deposits in banks. . . . . . 1,959,908 2,176,624 1,798,620 1,473,757 Securities held- to-maturity (fair value $13,385,000 at Sept. 30, 1995, $5,483,000 at Sept. 30, 1994 and $7,419,000 at December 31, 1994). . . . . . 13,301,765 5,524,870 7,501,996 - Securities available for sale . . . . 17,559,906 28,030,550 24,237,244 - Investment securities (fair value $34,016,000 at December 31, 1993) . . . . . - - - 32,435,571 Loans, net. . . . 26,554,836 26,110,614 26,279,800 21,216,821 Bank premises and equipment, net. . . . . . . 919,754 960,184 952,797 872,192 Accrued income receivable . . . 679,535 574,593 515,533 459,131 Other real estate owned . . . . . 202,364 - - 233,984 Other assets. . . 207,247 222,471 173,804 229,859 ____________ ___________ ___________ ___________ Total assets . .$65,555,462 $66,764,269 $62,889,613 $62,373,191 ============ =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest -bearing. . . .$ 6,057,290 $ 6,768,724 $ 4,669,491 $ 4,911,900 Interest -bearing demand deposits. . . . 4,912,480 5,176,041 4,824,551 4,756,273 Savings. . . . . 20,887,150 24,051,627 22,484.463 22,210,649 Time deposits. . 24,143,698 22,514,759 22,769,621 22,984,486 ___________ ___________ ___________ ___________ Total deposits . 56,000,618 58,511,151 54,748,126 54,863,308 Accrued interest payable. . . . . 319,322 237,349 258,942 256,100 U.S. Treasury demand notes . . - - - 326,511 Other liabilities . 688,643 359,324 275,092 41,216 ___________ ___________ ___________ ___________ Total liabilities. . . 57,008,583 59,107,824 55,282,160 55,487,135 ___________ ____________ ___________ ___________ Shareholder's Equity: Common Stock, par value $2.00 per share, 3,000,000 shares authorized; 720,000 shares issued and outstanding, of which 11,984 are held in the treasury as of Sept. 30, 1995, Sept. 30, 1994, and December 31, 1994 and 11,264 are held in the treasury as of December 31, 1993 . . . . . . 1,440,000 1,440,000 1,440,000 1,440,000 Surplus . . . . 2,400,000 2,400,000 2,400,000 2,400,000 Undivided profits. . . . 3,670,689 3,322,517 3,431,198 3,158,696 Net unrealized losses on securities available for sale, net of taxes. . . . . 1,156,750 614,488 456,815 - ___________ ___________ ___________ ___________ 8,667,439 7,777,005 7,728,013 6,998,696 Less treasury stock - at cost 120,560 120,560 120,560 112,640 ___________ ___________ ___________ ___________ Total shareholders' equity . . . . . 8,546,879 7,656,445 7,607,453 6,886,056 ___________ ___________ ___________ ___________ Total liabilities and shareholders' equity . . . . .$65,555,462 $66,764,269 $62,889,613 $62,373,191 =========== =========== =========== ===========
-55-
FARMERS & MERCHANTS BANK STATEMENTS OF INCOME UNAUDITED FOR THE NINE MONTHS ENDED SEPTEMBER 30, __________________________ INTEREST INCOME 1995 1994 ____ ____ Loans, including fees . . . . . . $ 1,669,090 $ 1,476,180 Investment securities . . . . . . 1,254,573 1,195,506 Federal funds sold. . . . . . . . 113,249 62,204 Deposits in banks . . . . . . . . 62,296 52,739 ___________ ___________ Total interest income . . . . . 3,099,208 2,786,629 ___________ ___________ INTEREST EXPENSE Interest on deposits. . . . . . . 1,448,143 1,229,370 Interest on other borrowings. . . - 4,838 ___________ ___________ Total interest expense . . . . . 1,448,143 1,234,208 ___________ ___________ Net interest income. . . . . . . 1,651,065 1,552,421 Provision for loan losses . . . . 9,000 15,000 ___________ ___________ Net interest income after provision for loan losses. . . . 1,642,065 1,537,421 ___________ ___________ OTHER OPERATING INCOME Service charges . . . . . . . . . 17,962 19,871 Security gains (losses), net. . . 361 138,137 Trust income. . . . . . . . . . . 38,505 21,872 Other Income. . . . . . . . . . . 34,399 24,362 ___________ ___________ Total other income . . . . . . . 91,227 204,242 ___________ ___________ Net interest income after provision for loan losses and other income. . . . . . . . 1,733,292 1,741,663 ___________ ___________ OTHER OPERATING EXPENSES Salaries, wages and employee benefits . . . . . . . . . . . . 513,892 505,008 Net occupancy . . . . . . . . . . 86,051 89,796 Furniture and equipment . . . . . 49,572 64,572 Other expenses. . . . . . . . . . 446,792 546,312 ___________ ___________ Total other expenses. . . . . . . 1,096,307 1,205,688 ___________ ___________ Income before income taxes. . . . 636,985 535,975 Income tax expense. . . . . . . . 178,010 155,590 ___________ ___________ Net income. . . . . . . . . . . . $ 458,975 $ 380,385 =========== =========== FOR THE YEARS ENDED DECEMBER 31, __________________________ INTEREST INCOME 1994 1993 1992 ____ ____ ____ Loans, including fees . . . $ 2,006,654 $ 1,791,936 $ 2,023,490 Investment securities . . . 1,608,438 1,704,447 1,808,904 Federal funds sold. . . . . 81,640 82,316 138,912 Deposits in banks . . . . . 69,639 51,266 65,307 ___________ ___________ ___________ Total interest income. . . 3,766,371 3,629,965 4,036,613 ___________ ___________ ___________ INTEREST EXPENSE Interest on deposits. . . . 1,659,357 1,691,810 2,174,131 Interest on other borrowings . . . . . . . . 2,867 9,230 10,753 ___________ ___________ ___________ Total interest expense . . 1,662,224 1,701,040 2,184,884 ___________ ___________ ___________ Net interest income. . . . 2,104,147 1,928,925 1,851,729 Provision for loan losses . 15,000 12,000 - ___________ ___________ ___________ Net interest income after provision for loan losses. . . . . . . . . . 2,089,147 1,916,925 1,851,729 ___________ ___________ ___________ OTHER OPERATING INCOME Service charges . . . . . . 27,310 28,879 26,395 Security gains (losses), net . . . . . . . . . . . 138,137 39,126 89,730 Trust income. . . . . . . . 21,872 4,745 6,882 Other Income. . . . . . . . 34,286 23,658 19,310 __________ ___________ ___________ Total other income . . . . 221,605 96,408 142,317 __________ ___________ ___________ Net interest income after provision for loan losses and other income. . . . . 2,310,752 2,013,333 1,994,046 __________ ___________ ___________ OTHER OPERATING EXPENSES Salaries, wages and employee benefits . . . . . . . . . 643,101 595,156 611,896 Net occupancy . . . . . . . 118,950 100,817 70,460 Furniture and equipment . . 84,663 104,474 85,054 Other expenses. . . . . . . 710,190 513,259 550,936 __________ ___________ ___________ Total other expenses . . . 1,556,904 1,313,706 1,318,346 __________ ___________ ___________ Income before income taxes . . . . . . . . . . 753,848 699,627 675,700 Income tax expense. . . . . 219,265 199,745 194,325 __________ ___________ ___________ Net income. . . . . . . . . $ 534,583 $ 499,882 $ 481,375 ========== =========== ===========
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FARMERS & MERCHANTS BANK STATEMENT OF CASH FLOWS UNAUDITED As of September 30, As of December 31, ____________________ ____________________ 1995 1994 1994 1993 ____ ____ ____ ____ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income . . $ 458,975 $ 380,385 $ 534,583 $ 499,882 Adjustments to reconcile net income to net cash provided by operating activities Depreciation. . . 44,745 59,495 79,295 103,076 Deferred income taxes . . . . . . - - (39,859) (9,009) Amortization of investment securities . . . . 60,892 88,282 111,159 237,330 Accretion of investment securities . . . .(33,977) (13,614) (26,390) (28,599) Gain on sale of investment securities . . . . (361) (138,137) (138,137) (39,126) Loss on sale of assets acquired through fore- closure . . . . . 719 87,262 87,263 - Loss on disposition of bank premises and equipment. . . - - - 2,023 Change in: Accrued interest receivable . . . (164,002) (115,462) (56,402) 102,426 Other assets. . . (33,443) 7,388 31,230 (328,262) Accrued interest payable. . . . . 60,380 (18,751) 2,842 (39,177) Other liabilities 52,978 (2,490) 63,231 (133,771) ________ ________ _________ _________ Net cash provided by operating activities . . . 446,906 334,358 648,815 366,793 ________ _________ _________ ________ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of interest -bearing deposits in banks . . . 1,205,563 582,915 920,584 1,199,000 Purchases of interest-bearing deposits in banks. . . . . (1,366,851) (1,285,782) (1,245,447) (1,577,987) Proceeds from sale of securities . . - 267,207 267,207 89,616 Proceeds from maturity of securities . . 11,473,908 10,513,214 13,994,740 17,180,735 Purchase of securities . . (9,562,385)(10,905,759) (12,820,104)(18,297,415) Net decrease (increase) in loans . . . (478,119) (4,893,793) (5,062,979) (67,659) Bank premises and equipment additions. . . . (11,702) (147,485) (159,900) (131,602) Proceeds from sale of assets acquired through foreclosure. . . - 146,720 146,721 - __________ __________ ___________ ___________ Net cash provided by (used in) investing activities . . 1,260,414 (5,722,763) (3,959,178) (1,605,312) __________ __________ ___________ ___________ CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposit accounts. . . . 1,252,492 3,647,843 (115,182) 1,727,035 Increase (decrease) in U.S. Treasury Tax & Loan note . - (326,511) (326,511) (114,227) Cash dividends . . (219,484) (212,520) (262,081) (255,144) Purchase of treasury stock. . - (7,920) (7,920) - __________ __________ ___________ ___________ Net cash provided by (used in) financing activities. . . 1,033,008 3,100,892 (711,694) 1,357,664 __________ __________ ___________ __________ Net increase (decrease) in cash and cash equivalents . . 2,740,328 (2,287,513) (4,022,057) 119,145 Cash and cash equivalents, beginning of year . . . . . . 1,429,819 5,451,876 5,451,876 5,332,731 _________ __________ __________ _________ Cash and cash equivalents, end of year. . . $4,170,147 $3,164,363 $1,429,819 $5,541,876 ========== ========== ========== ========== Supplemental disclosure of cash flow information: Interest paid during the year. . . . $1,387,763 $1,252,959 $1,659,381 $1,740,217 Income taxes paid during the year. . . . $ 63,909 $ 57,111 $ 228,444 $ 316,387 Loans transferred to foreclosed assets held for sale during the year. . . . . . $ 203,083 $ - $ - $ 233,984 FARMERS & MERCHANTS BANK STATEMENT OF CASH FLOWS UNAUDITED As of December 31, ____________________ 1992 ____ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income . . . . . . . . . . . . . . . . . . $ 481,375 Adjustments to reconcile net income to net cash provided by operating activities Depreciation. . . . . . . . . . . . . . . . . 71,067 Deferred income taxes . . . . . . . . . . . . (31,536) Amortization of investment securities . . . . 230,605 Accretion of investment securities . . . . . (37,747) Gain on sale of investment securities . . . . (89,730) Loss on sale of assets acquired through foreclosure . . . . . . . . . . . . . . . . -- Loss on disposition of bank premises and equipment . . . . . . . . . . . . . . . -- Change in: Accrued interest receivable . . . . . . . . 97,938 Other assets . . . . . . . . . . . . . . . . (43,902) Accrued interest payable . . . . . . . . . . (152,018) Other liabilities . . . . . . . . . . . . . . 147,007 __________ Net cash provided by operating activities . . 673,059 __________ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of interest-bearing deposits in banks . . . . . . . . . . . . . 1,994,000 Purchases of interest-bearing deposits in banks. . . . . . . . . . . . . . . . . . . . (1,394,770) Proceeds from sale of securities . . . . . . 1,243,218 Proceeds from maturity of securities . . . . 17,911,462 Purchase of securities . . . . . . . . . . . (24,527,229) Net decrease (increase) in loans . . . . . . 3,822,903 Bank premises and equipment additions . . . . (589,279) Proceeds from sale of assets acquired through foreclosure . . . . . . . . . . . . -- __________ Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . (1,539,695) __________ CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposit accounts . . . . . . . . . . . . . . . . . . 1,277,753 Increase (decrease) in U.S. Treasury Tax & Loan note . . . . . . . . . . . . . . . 172,695 Cash dividends . . . . . . . . . . . . . . . . (251,749) Purchase of treasury stock . . . . . . . . . . (112,640) __________ Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . 1,086,059 __________ Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . 219,423 Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . 5,113,308 __________ Cash and cash equivalents, end of year . . . . $5,332,731 ========== Supplemental disclosure of cash flow information: Interest paid during the year . . . . . . . . $2,336,902 Income taxes paid during the year . . . . . . $ 82,204 Loans transferred to foreclosed assets held for sale during the year . . . . . . . . $ --
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FARMERS & MERCHANTS BANK STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 THE PERIOD ENDING SEPTEMBER 30, 1995 UNAUDITED Common Undivided Stock Surplus Profits Balance, December 31, 1991 $ 1,200,000 $ 2,400,000 $ 2,924,332 Net Income - - 481,375 Cash Dividends ($.35 per share) - - (251,749) Stock Split 240,000 - (240,000) Purchase of Treasury Stock - - - ____________ ___________ __________ Balance, December 31, 1992 $ 1,440,000 $ 2,400,000 $ 2,913,958 Net Income - - 499,882 Cash Dividends ($.36 per share) - - (255,144) ____________ ___________ __________ Balance, December 31, 1993 1,440,000 2,400,000 3,158,696 Net Income - - 534,583 Cash Dividends ($.37 per share) - - (262,081) Treasury Stock Acquisition - - (255,144) Implementation of SFAS No. 115 - - - Net Unrealized Loss - - - ____________ ___________ __________ Balance, December 31, 1994 1,440,000 2,400,000 3,431,198 Net Income - - 458,975 Cash Dividends ($.31 per share) - - (219,484) Net Unrealized Gain - - - ____________ ___________ __________ Balance, September 30, 1995 $ 1,440,000 $ 2,400,000 $ 3,670,689 =========== =========== =========== FARMERS & MERCHANTS BANK STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 THE PERIOD ENDING SEPTEMBER 30, 1995 UNAUDITED Unrealized Gain (loss) on Treasury Securities Stock Total Balance, December 31, 1991 $ - $ - $ 6,524,332 Net Income - - 481,375 Cash Dividends ($.35 per share) - - (251,749) Stock Split - - - Purchase of Treasury Stock - 112,640 (112,640) ____________ ___________ __________ Balance, December 31, 1992 - 112,640 $ 6,641,318 Net Income - - 499,882 Cash Dividends ($.36 per share) - - (255,144) Treasury Stock Acquisition - 7,920 (7,920) Implementation of SFAS No. 115 875,665 - 875,665 Net Unrealized Loss (418,850) - (418,850) ____________ ____________ ______________ Balance, December 31, 1994 456,815 120,560 7,607,453 Net Income - - 458,975 Cash Dividends ($.31 per share) - - (219,484) Net Unrealized Gain 699,935 - 699,935 ___________ ____________ ____________ Balance, September 30, 1995 $ 1,156,750 $ 120,560 $ 8,546,879 =========== =========== ===========
-58- FARMERS AND MERCHANTS BANK ========================== FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TABLE OF CONTENTS ================= Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. . . . 1 FINANCIAL STATEMENTS: Balance Sheet . . . . . . . . . . . . . . . . . . . . . 2 Statement of Income . . . . . . . . . . . . . . . . . . 3 Statement of Changes in Shareholders' Equity. . . . . . 4 Statement of Cash Flows . . . . . . . . . . . . . . . . 5 Notes to Financial Statements . . . . . . . . . . . . . 6-19 ______________________ PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES _____________________________________________ CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors Farmers & Merchants Bank Honesdale, Pennsylvania: We have audited the accompanying balance sheets of Farmers & Merchants Bank as of December 31, 1994 and 1993, and the related statements of income, changes in shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Farmers & Merchants Bank as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1994 the Bank changed its method of accounting for investment securities by adopting Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." /s/ Parente, Randolph, Orlando, Carey & Associates Wilkes-Barre, Pennsylvania January 13, 1995 F-1
FARMERS & MERCHANTS BANK ======================== BALANCE SHEET DECEMBER 31, 1994 AND 1993 _________________________________________________________________ 1994 1993 _________________________________________________________________ ASSETS ====== CASH AND CASH EQUIVALENTS . . . . . . . . $ 1,429,819 $ 5,451,876 INTEREST-BEARING DEPOSITS IN BANKS. . . . 1,798,620 1,473,757 SECURITIES HELD-TO-MATURITY (fair value $7,418,669). . . . . . . . . 7,501,996 - SECURITIES AVAILABLE-FOR-SALE . . . . . . 24,237,244 - INVESTMENT SECURITIES (fair value $34,016,000) . . . . . . . . - 32,435,571 LOANS, NET. . . . . . . . . . . . . . . . 26,279,800 21,216,821 BANK PREMISES AND EQUIPMENT . . . . . . . 952,797 872,192 ACCRUED INTEREST RECEIVABLE . . . . . . . 515,533 459,131 FORECLOSED ASSETS HELD FOR SALE . . . . . - 233,984 OTHER ASSETS. . . . . . . . . . . . . . . 173,804 229,859 ___________ _________ TOTAL . . . . . . . . . . $62,889,613 $62,373,191 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ==================================== LIABILITIES: Demand deposits . . . . . . . . . . . . $ 4,669,491 $ 4,911,900 Interest-bearing demand deposits. . . . 4,824,551 4,756,273 Savings deposits. . . . . . . . . . . . 22,484,463 22,210,649 Time deposits . . . . . . . . . . . . . 22,769,621 22,984,486 Total deposits. . . . . . 54,748,126 54,863,308 Accrued interest payable. . . . . . . . 258,942 256,100 Other liabilities . . . . . . . . . . . 275,092 41,216 U.S. Treasury Tax and Loan note . . . . - 326,511 Total liabilities . . . . 55,282,160 55,487,135 ___________ ___________ SHAREHOLDERS' EQUITY: Common stock, par value $2 per share, 3,000,000 shares authorized; 720,000 shares issued and outstanding, of which 11,984 and 11,264 are held in the treasury as of December 31, 1994 and 1993, respectively. . . . . . . . . . . . . 1,440,000 1,440,000 Additional paid-in capital. . . . . . . 2,400,000 2,400,000 Retained earnings . . . . . . . . . . . 3,431,198 3,158,696 Net unrealized holding gains on securities available-for-sale . . . . . . . . . 456,815 - ___________ ___________ 7,728,013 6,998,696 Less treasury stock - at cost . . . . . 120,560 112,640 ___________ __________ Shareholders' equity, net . . . 7,607,453 6,886,056 TOTAL . . . . . . . . . . $62,889,613 $62,373,191 =========== ===========
______________________________________________________________________ See Notes to Financial Statements F-2
FARMERS & MERCHANTS BANK ======================== STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 _________________________________________________________________ 1994 1993 _________________________________________________________________ INTEREST INCOME: Interest and fees on loans. . . . . . . $ 2,006,654 $ 1,791,936 Interest and dividends on investments . 1,608,438 1,704,447 Interest on federal funds sold. . . . . 81,640 82,316 Interest on deposits in banks . . . . . 69,639 51,266 Total interest income . . 3,766,371 3,629,965 INTEREST EXPENSE: Interest on deposits. . . . . . . . . . 1,659,357 1,691,810 Interest on other borrowings. . . . . . 2,867 9,230 ___________ __________ Total interest expense. . $ 1,662,224 $ 1,701,040 NET INTEREST INCOME . . . . . . . . . . . 2,104,147 1,928,925 PROVISION FOR LOAN LOSSES . . . . . . . . 15,000 12,000 ___________ ___________ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . 2,089,147 1,916,925 OTHER OPERATING INCOME: Trust Department income . . . . . . . . 21,872 4,745 Service charges on deposit accounts . . 27,310 28,879 Other income. . . . . . . . . . . . . . 34,286 23,658 Securities gains, net . . . . . . . . . 138,137 39,126 ___________ ___________ Total other operating income. . 221,605 96,408 ___________ ___________ OTHER OPERATING EXPENSES: Salaries, wages and employee benefits . 643,101 595,156 Occupancy expense, net. . . . . . . . . 118,950 100,817 Furniture and equipment expense . . . . 84,663 104,474 Other expenses. . . . . . . . . . . . . 710,190 513,259 Total other operating expenses. 1,556,904 1,313,706 __________ __________ INCOME BEFORE PROVISION FOR INCOME TAXES. 753,848 699,627 PROVISION FOR INCOME TAXES. . . . . . . . 219,265 199,745 NET INCOME. . . . . . . . . . . . . . . . $ 534,583 $ 499,882 ========== ========== EARNINGS PER SHARE. . . . . . . . . . . . $ .76 $ .71 ========== ==========
______________________________________________________________________ See Notes to Financial Statements F-3
FARMERS & MERCHANTS BANK ======================== STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 _________________________________________________________________ ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS _________________________________________________________________ BALANCE, DECEMBER 31, 1992 . . . . . . . . . . $ 1,440,000 $ 2,400,000 $ 2,913,958 NET INCOME. . . . . . . . . 499,882 CASH DIVIDENDS ($.36 per share). . . . . . . . . . (255,144) ____________ ___________ ____________ BALANCE, DECEMBER 31, 1993 1,440,000 2,400,000 3,158,696 NET INCOME. . . . . . . . . 534,583 CASH DIVIDENDS ($.37 per share) . . . . . (262,081) TREASURY STOCK ACQUISITION. IMPLEMENTATION OF SFAS NO. 115. . . . . . . NET UNREALIZED LOSS . . . . ____________ ___________ ____________ BALANCE, DECEMBER 31, 1994 . . . . $ 1,440,000 $ 2,400,000 $ 3,431,198 =========== =========== =========== FARMERS & MERCHANTS BANK ======================== STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 _________________________________________________________________ NET UNREALIZED HOLDING GAINS ON SECURITIES AVAILABLE- TREASURY SHAREHOLDERS' FOR-SALE STOCK EQUITY, NET _________________________________________________________________ BALANCE, DECEMBER 31, 1992 . . . . . . . . . . $ 112,640 $ 6,641,318 NET INCOME. . . . . . . . . 499,882 CASH DIVIDENDS ($.36 per share) (255,144) ____________ _____________ ___________ BALANCE, DECEMBER 31, 1993 . . . . . . . . . . 112,640 6,886,056 NET INCOME. . . . . . . . . 534,583 CASH DIVIDENDS ($.37 per share). . . . . (262,081) TREASURY STOCK ACQUISITION. 7,920 (7,920) IMPLEMENTATION OF SFAS NO. 115. . . . . . . $ 875,665 875,665 NET UNREALIZED LOSS . . . . (418,850) (418,850) ____________ __________ __________ BALANCE, DECEMBER 31, 1994 . . . $ 456,815 $ 120,560 $ 7,607,453 =========== =========== ===========
______________________________________________________________________ See Notes to Financial Statements F-4
FARMERS & MERCHANTS BANK ======================== STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 _________________________________________________________________ 1994 1993 _________________________________________________________________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income. . . . . . . . . . . . . . $ 534,583 $ 499,882 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation. . . . . . . . . . . . $ 79,295 103,076 Deferred income taxes . . . . . . . (39,859) (9,009) Amortization of investment securities . . . . . . . . . . . . 111,159 237,330 Accretion of investment securities . . . . . . . . . . . . (26,390) (28,599) Gain on sale of investment securities . . . . . . . . . . . . (138,137) (39,126) Loss on sale of assets acquired through foreclosure . . . 87,263 - Loss on disposition of bank premises and equipment . . . . . . - 2,023 Change in: Accrued interest receivables . . . (56,402) 102,426 Other assets . . . . . . . . . . . 31,230 (328,262) Accrued interest payable. . . . . . 2,842 (39,177) Other liabilities . . . . . . . . . 63,231 (133,771) _________ ___________ Net cash provided by operating activities . . . . . 648,815 366,793 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of interest-bearing deposits in banks. . . . . . . . . . 920,584 1,199,000 Purchases of interest-bearing deposits in banks . . . . . . . . . (1,245,447) (1,577,987) Proceeds from sale of securities 267,207 89,616 Proceeds from maturities of securities . . . . . . . . . . . 13,994,740 17,180,735 Purchases of securities . . . . . . . (12,820,104) (18,297,415) Net decrease in loans . . . . . . . . (5,062,979) (67,659) Bank premises and equipment additions. . . . . . . . . . . . . . (159,900) (131,602) Proceeds from sale of assets acquired through foreclosure . . . . 146,721 - Net cash used in investing activities . . . . . . . . . . . . . (3,959,178) (1,605,312) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposit accounts . . . . . . . . . . (115,182) 1,727,035 Decrease in U.S. Treasury Tax and Loan note. . . . . . . . . . . . (326,511) (114,227) Cash dividends. . . . . . . . . . . . (262,081) (255,144) Purchase of treasury stock. . . . . . (7,920) - Net cash provided by (used in) financing activities. . . . . . (711,694) 1,357,664 __________ ___________ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . . . (4,022,057) 119,145 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . . . . . . 5,451,876 5,332,731 _________ __________ CASH AND CASH EQUIVALENTS, END OF YEAR . . . . . . . . . . . . . $ 1,429,819 $ 5,451,876 =========== ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid during the year . . . . $ 1,659,381 $ 1,740,217 Income taxes paid during the year . . $ 228,444 $ 316,387 Loans transferred to foreclosed assets held for sale during the year. . . . . . . . . . . . . . $ - $ 233,984
See Notes to Financial Statements ______________________________________________________________________ F-5 FARMERS & MERCHANTS BANK ======================== NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The more significant of the accounting and reporting policies followed by Farmers & Merchants Bank (the "Bank") are summarized below and are in accordance with generally accepted accounting principles. INVESTMENT SECURITIES As of January 1, 1994, the Bank adopted the provisions of Statement of Financial Accounting Standards "SFAS" No. 115, "Accounting for Certain Investments in Debt and Equity Securities," for accounting and reporting for investment securities. In accordance with SFAS No. 115, such investments are accounted for as follows: Securities Held-to-Maturity - includes debt securities that the Bank has the positive intent and ability to hold to maturity. These securities are reported at amortized cost. Trading Securities - includes debt and equity securities bought and held principally for the purpose of selling them in the near term. At December 31, 1994, the Bank did not hold any trading securities. Securities Available-for-Sale - includes debt and equity securities not classified as either held-to-maturity securities or trading securities. Such securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported as a separate component of shareholders' equity net of deferred income taxes. At December 31, 1993, debt securities are reported at amortized cost and equity securities are reported at the lower of aggregate cost or market value. F-6 FARMERS & MERCHANTS BANK NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ The cumulative effect of the adoption of SFAS No. 115 as of January 1, 1994 resulted in an increase in shareholders' equity of $875,665 (unrealized holding gain on available-for -sale securities of $1,326,764 less deferred income tax effect of $451,099). The fair value of investments, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. ALLOWANCE FOR POSSIBLE LOAN LOSSES The provision for loan losses is based upon a credit review of the loan portfolio, past loan loss experience, current economic conditions and other pertinent factors which form a basis for determining the adequacy of the allowance for possible loan losses. In the opinion of management, the aggregate amount reserved is deemed to be adequate to absorb future loan losses. INTEREST ON LOANS Interest income on loans, other than discounted installment loans, is computed based upon the principal amount outstanding. Interest on discounted installment loans is recognized using the sum-of-the-months-digits method which does not differ materially from the interest method. Loans are placed in nonaccrual status when management believes that collection of the interest is uncertain. Any payments received on nonaccrual loans are applied, first to the outstanding loan amounts, then to the recovery of any charged -off loan amounts. Any excess is treated as a recovery of lost interest. F-7 FARMERS & MERCHANTS BANK NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ LOAN FEES Nonrefundable loan origination fees and certain direct loan origination costs are recognized over the life of the related loans as an adjustment of yield. Prior to 1988, the Bank recognized such fees and costs in the year received or incurred. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation. Routine maintenance and repair expenditures are expenses as incurred while significant expenditures are capitalized. Depreciation expense is determined on the straight-line and accelerated methods over the following ranges of useful lives: Building and improvements. . . . . . . . . 5 to 40 years Furniture and equipment. . . . . . . . . . 3 to 20 years FORECLOSED ASSETS HELD FOR SALE Foreclosed assets held for sale are carried at the lower of fair value minus estimated costs to sell or cost. The costs of holding and maintaining the property and gains or losses on dispositions are included in the statement of income caption "Other expenses". INCOME TAXES Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. EARNINGS PER SHARE Earnings per share of common stock is computed using the weighted-average number of shares outstanding, 708,016 and 708,736 in 1994 and 1993, respectively. F-8 FARMERS & MERCHANTS BANK NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ STATEMENT OF CASH FLOWS The Bank considers amounts due from banks and federal funds sold to be cash equivalents. Federal funds are sold for one day periods. TRUST ASSETS Property held by the Bank in a fiduciary or agency capacity for its customers is not included in the accompanying balance sheet since such items are not assets of the Bank. RECLASSIFICATION Certain reclassification have been made to the 1993 financial statements to conform to the 1994 presentation. 2. CASH AND CASH EQUIVALENTS: The Bank is required to maintain average reserve balances with the Federal Reserve Bank or a participating bank based on a percentage of deposits. The average amounts of those reserve balances for the years ended December 31, 1994 and 1993 were $164,692 and $145,346, respectively. Deposits with one financial institution are insured up to $100,000. The Bank maintains cash and cash equivalents with other financial institutions in excess of the insured amount. F-9 FARMERS & MERCHANTS BANK NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ 3. INVESTMENT SECURITIES: The amortized cost and fair value of investment securities at December 31, 1994 are as follows (in thousands):
. . . . . . . . . . 1994. . . . . . . . . GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ____ _____ ______ _____ Securities Held-to- Maturity: Obligations of the U.S. Treasury $ 1,478 $ - $ 7 $ 1,471 Obligations of other U.S. government corporations and agencies . . . 4,478 - 54 4,424 Obligations of state and political subdivisions . . . 1,045 - 21 1,024 Corporate debt obligations. . . . 501 - 1 500 _______ _____ ____ _______ Total . . . . . . $ 7,502 $ - $ 83 $ 7,419 ======= ===== ==== ======= Securities Available- for-Sale: Obligations of the U.S. Treasury $15,055 $ - $268 $14,787 Obligations of other U.S. government corporations and agencies . . . 3,999 - 189 3,810 Obligations of state and political subdivisions . . . 1,015 41 974 Corporate debt securities . . . . 261 - 15 246 Mortgage-backed securities . . . . 2,300 1 76 2,225 _______ _____ _____ _______ Total debt securities . . . 22,630 1 589 22,042 Equity securities . . . 915 1,282 2 2,195 _______ _____ _____ _______ TOTAL $23,545 $1,283 $591 $24,237 ======= ====== ===== =======
F-10 FARMERS & MERCHANTS BANK NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ The amortized cost and fair value of investment securities at December 31, 1993 are as follows (in thousands):
GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ____ _____ ______ _____ U.S. Treasury securities. . . . . . $21,098 $ 135 $15 $21,218 Obligations of other U.S. government agencies and corporations. . . . . 6,362 140 1 6,501 Obligations of states and political subdivisions. . . . . 2,000 7 2 2,005 Other debt securities. . . . . . 1,937 3 9 1,931 _______ ______ ____ _______ Subtotal. . . . . . 31,397 285 27 31,655 Equity securities 1,039 1,325 3 2,361 _______ ______ ____ _______ Total . . . $32,436 $1,610 $30 $34,016 ======= ======= === =======
The amortized cost and estimated market value of debt securities at December 31, 1994 by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
SECURITIES SECURITIES . . .HELD-TO-MATURITY. . . AVAILABLE-FOR-SALE. AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ____ _____ ______ _____ Due in one year or less . . . . . $1,757 $1,741 $14,028 $13,838 Due from one year to five years 5,245 5,187 8,054 7,675 Due from five to ten years . . . . . . . . - - 548 529 Due after ten years . . 500 491 - - ______ ______ _______ _______ Total debt securities $7,502 $7,419 $22,630 $22,042 ====== ====== ======= =======
F-11 FARMERS & MERCHANTS BANK NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ Proceeds from the sale of securities available-for-sale during 1994 were $267,207. These sales resulted in gross gains of $138,137. There were no sales of investments in debt securities during the year ended December 31, 1993. Investment securities having a fair value of approximately $6,570,000 at December 31, 1994 were pledged to secure governmental deposits, trust funds and for other purposes as required by law. There is no significant concentration of investments in any individual security issue (excluding U.S. government and its agencies) that was in excess of 10% of total investments at December 31, 1994. The Bank may be required to sell certain of its equity securities with a December 31, 1994 fair value of $333,319 no later than December 19, 1996, unless regulatory authority approval to retain these investments is obtained. The Bank has no derivative financial instruments requiring disclosure under SFAS No. 119. 4. LOANS: Major classifications of loans are summarized as follows at December 31, 1994 and 1993:
1994 1993 ____ ____ Real estate . . . . . $19,951,503 $15,255,970 Commercial loans. . . 2,618,190 2,627,506 Consumer 4,248,243 3,719,121 ___________ ___________ Total. . . 26,817,936 21,602,597 Less: Unearned discount. . 1,149 3,358 Unamortized loan fees and costs . . . . . 321,111 180,934 Allowance for possible loan losses . . . . 215,876 201,484 __________ __________ Loans, net. . . . . . $26,279,800 $21,216,821 =========== ===========
F-12 FARMERS & MERCHANTS BANK NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ Transactions in the allowance for possible loan losses account for the years ended December 31, 1994 and 1993 are summarized as follows:
1994 1993 ____ ____ Beginning Balance . . . . $201,484 $209,993 Provision charged to operations . . . . . . . 15,000 12,000 Recovery of loans previously charged off. . . . . . . - 5,559 ________ ________ 216,484 227,552 Loans charged off . . . . 608 26,068 ________ ________ Ending balance. . . . . . $215,876 $201,484 ======== ========
The Bank grants installment, commercial and residential loans to customers primarily in Wayne County, Pennsylvania, and its contiguous counties. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent on the local economy. There are no concentrations of loans to any one industry group which exceed 10% of total loans. In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which must be adopted by the Bank in 1995. SFAS No. 114 applies to loans other than groups of smaller-balance homogenous loans (generally consumer loans) that are collectively evaluated for impairment. The standard requires that impairment of such loans be measured generally based on the present value of expected future principal and interest cash flows, discounted at the loan's effective interest rate, and established as a valuation allowance related to those impaired loans. Under SFAS No. 114, a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due. Presently, credit losses on all loans are accounted for through the allowance for credit losses, which is maintained at a level adequate to absorb losses inherent in the portfolio. The Bank does not anticipate a material increase in the allowance as a result of the implementation of SFAS No. 114. F-13 FARMERS & MERCHANTS NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ 5. BANK PREMISES AND EQUIPMENT: Bank premises and equipment are summarized as follows at December 31, 1994 and 1993:
1994 1993 ____ ____ Land. . . . . . . . . . . $ 215,338 $ 62,288 Bank premises . . . . . . 950,284 950,184 Furniture and equipment . 581,885 575,684 __________ ___________ 1,747,507 1,588,156 Less accumulated depreciation 794,710 715,964 Bank premises and equipment, net . . . . . . . . . . $ 952,797 $ 872,192 ========== ==========
6. DEPOSITS: Deposits are summarized as follows at December 31, 1994 and 1993 (in thousands):
. . . . . . . .1994 . . . . . . . . ____ INTEREST- BEARING DEMAND DEMAND SAVINGS TIME ______ ______ _______ _____ Deposits of individuals, partnerships and corporations . . . . . $ 3,898 $ 4,758 $22,054 $22,670 Deposits of U.S. government . . . . . . 136 Deposits of state and political subdivisions . . . . . 258 67 430 100 Certified and official checks, etc. . . . . . 377 _______ _______ _______ ________ Total deposits. . $ 4,669 $ 4,825 $22,484 $22,770 ======= ======= ======= ======= . . . . . . . .1993 . . . . . . . . ____ INTEREST- BEARING DEMAND DEMAND SAVINGS TIME ______ ______ _______ _____ Deposits of individuals, partnerships and corporations . . . . . $ 4,277 $ 4,686 $22,197 $22,849 Deposits of U.S. government . . . . . . 118 Deposits of state and political subdivisions . . . . . 214 70 14 135 Certified and official checks, etc. . . . . . 303 _______ _______ _______ ________ Total deposits. . $ 4,912 $ 4,756 $22,211 $22,984 ======= ======= ======= =======
Time deposits of $100,000 or more aggregated approximately $1,582,000 and $1,441,000 at December 31, 1994 and 1993, respectively. Interest related to time deposits of $100,000 or more was approximately $53,300 and $47,000 for the years ended December 31, 1994 and 1993, respectively. F-14 FARMERS & MERCHANTS NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ 7. PENSION PLAN: The Bank has a noncontributory defined benefit pension plan (the "Plan") for all employees meeting certain age and length of service requirements. Benefits are based primarily on years of service and the average annual compensation during the highest five consecutive years within the final ten years of employment. The Bank's funding policy is consistent with the funding requirements of federal law and regulations. Plan assets are invested in a diversified correspondent bank employee benefit fund comprised of cash equivalents, corporate fixed income obligations, common stock and U. S. government securities. Net periodic pension income for 1994 and 1993 includes the following components (in thousands):
1994 1993 ____ ____ Service costs benefits earned during the period . . . . . $ (42) $ (39) Interest cost on projected benefit obligation . . . . . . . . . . . . (73) (66) Return on assets . . . . . . . . . . 121 117 Net amortization . . . . . . . . . . 14 21 _____ _____ Net periodic pension income. . . $ 20 $ 33 ===== =====
As of January 1, 1994 and 1993, the retirement plan assets were $1,569,000 and $1,522,000, respectively; the projected benefit obligation was $1,114,000 and $961,000, respectively; and the accumulated benefit obligation was $783,000 and $669,000 including vested benefits of $756,000 and $653,000, respectively. The funded status of the Plan and amount recognized in the Bank's balance sheet at December 31, 1994 and 1993 were (in thousands):
1994 1993 ____ ____ Projected benefit obligation . . . . $(1,114) $ (961) Plan assets at fair value. . . . . . 1,569 1,522 _______ ______ Excess of assets over projected benefit obligation. . . . . . . . . 455 561 Unrecognized net asset at transition. . . . . . . . . . . . . (179) (191) Unrecognized net gain. . . . . . . . (175) (288) ________ _______ Prepaid pension cost . . . . . . $ 101 $ 82 ======= =======
F-15 FARMERS & MERCHANTS BANK NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ The projected benefit obligation was determined using an assumed discount rate of 7.5% in 1994 and 8.0% in 1993, and an assumed long-term rate of compensation increase of 6.0% in both 1994 and 1993. An assumed long-term rate of return on Plan assets of 8.5% was used for both 1994 and 1993. 8. INCOME TAXES: The following temporary differences gave rise to the net deferred tax asset at December 31, 1994 and 1993:
1994 1993 ____ _____ Deferred tax asset: Loan fees . . . . . . . . . . . . $ 109,178 $61,518 Allowance for loan losses. . . . 3,629 - _________ _______ Total . . . . . . . . . . 112,807 61,518 _________ _______ Deferred tax liabilities: Securities available-for-sale 235,329 - Accretion . . . . . . . . . . . . 15,429 7,751 Depreciation. . . . . . . . . . . 5,407 6,937 Pension . . . . . . . . . . . . . 31,708 24,955 Allowance for loan losses . . . . - 1,471 Total. . . . . . . . . . . 287,873 41,114 ________ _______ Deferred tax asset (liability), net. . . . . . . . . . . . . . . $(175,066) $20,404 ========== =======
The deferred tax asset (liability), net is included in other assets or other liabilities in the accompanying financial statements. The provision for income taxes consists of the following:
1994 1993 ____ _____ Currently payable. . . . . . . . $259,124 $208,754 Deferred benefit . . . . . . . . (39,859) (9,009) _________ _________ Total provision. . . . . . . $219,265 $199,745 ======== ========
F-16 FARMERS & MERCHANTS BANK NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ Deferred income tax results from the following temporary differences:
1994 1993 ____ ____ Pension. . . . . . . . . . . . . $ 6,753 $ 13,674 Loan losses. . . . . . . . . . . (5,100) 1,471 Accretion . . . . . . . . . . . 7,678 842 Depreciation . . . . . . . . . . (1,530) (8,327) Loan fees. . . . . . . . . . . . (47,660) (16,669) _________ __________ Total deferred benefit. . . . $(39,859) $ (9,009) ========= =========
A reconciliation of income tax at the statutory rate to the Bank's effective rate is as follows:
. . . 1994. . . . . . 1993. . . Provision at the expected statutory rate . . . . . $256,308 34.0% $237,873 34.0% Effect of tax-exempt income . . . . . . . . . (45,029) (6.0) (43,501) (6.2) Nondeductible expenses. . 4,668 .6 3,835 .5 Other items, net. . . . . 3,318 .5 1,538 .2 _______ ____ ________ _____ Effective income tax and rate. . . . . $219,265 29.1% $199,745 28.5% ======== ===== ======== =====
9. LOANS TO DIRECTORS AND EXECUTIVE OFFICERS: During 1994 and 1993, certain directors and executive officers of the Bank, including their immediate families and companies in which they are principal owners (more than 10%), were indebted to the Bank. Such loans were made in the ordinary course of business at the Bank's normal credit terms, including interest rate and collateralization, and do not represent more than a normal risk of collection. Total loans to these customers at December 31, 1994 and 1993 are as follows:
1994 1993 ____ ____ Executive officers. . . . . . $ 234,970 $ 282,525 Directors and affiliated interests. . . . . . . . . . 1,168,344 1,568,734 __________ __________ Total $1,403,314 $1,851,259 ========== ==========
F-17 FARMERS & MERCHANTS BANK NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Bank is a party to financial instruments with off-balance -sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve to varying degrees elements of credit, interest rate or liquidity risk in excess of the amount recognized in the balance sheet. The Bank's exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The financial instruments whose contract amounts represent credit risk at December 31, 1994 were as follows: Commitments to extend credit . . . . . . . $2,452,420 Standby letters of credit. . . . . . . . . 42,765 Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates of other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Bank evaluates each customer's credit -worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank on extension of credit, is based on management's credit assessment of the counterpart. Standby letters of credit written are conditional commitments issued by the Bank guaranteeing performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. 11. REGULATORY RESTRICTIONS: Various regulatory agencies require banks to maintain a leverage ratio of core capital to total assets at a prescribed level, currently 4 percent. In addition, bank regulators have issued risk-based capital guidelines. Under such guidelines, minimum ratios of core capital and total qualifying capital as a percentage of risk-weighted assets and certain off-balance -sheet items of 4 percent and 8 percent, respectively, are required at December 31, 1994. F-18 FARMERS & MERCHANTS BANK NOTES TO FINANCIAL STATEMENTS ______________________________________________________________________ At December 31, 1994, the Bank met all capital requirements. Core capital was $7,150,638 or 11.4 percent of total assets and 28.0 percent of total risk-weighted assets, while total qualifying capital was $7,366,514 or 28.9 percent of total risk-weighted assets. 12. FINANCIAL INSTRUMENT DISCLOSURE: SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," will be implemented by the Bank in 1995. SFAS No. 107 requires the disclosure of the fair value of financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value. ______________________________________________________________________ F-19 EXHIBITS A Agreement and Plan of Reorganization and Agreement and Plan of Merger B Danielson Fairness Opinion C Statute Regarding Dissenters' Rights EXHIBIT A Agreement and Plan of Reorganization and Agreement and Plan of Merger Execution Copy 09/07/95 AGREEMENT AND PLAN OF REORGANIZATION AMONG HARLEYSVILLE NATIONAL CORPORATION THE CITIZENS NATIONAL BANK OF LANSFORD AND FARMERS & MERCHANTS BANK (HONESDALE, PA.) September 7, 1995 Execution Copy 09/07/95 TABLE OF CONTENTS Page ARTICLE I AGREEMENT AND PLAN OF MERGER . . . . . . . . 1 1.1 Agreement and Plan of Merger . . . . . 1 ARTICLE II CONVERSION OF SHARES AND EXCHANGE OF STOCK CERTIFICATES . . . . . . . . . . . 2 2.1 Conversion of Shares . . . . . . . . . 2 2.2 Exchange of Stock Certificates . . . . 4 ARTICLE III REPRESENTATIONS AND WARRANTIES OF FMB . . . . . . . . . . . . . . . . . . . 6 3.1 Authority . . . . . . . . . . . . . . . 6 3.2 Organization and Standing . . . . . . . 7 3.3 No Subsidiaries . . . . . . . . . . . . 7 3.4 Capitalization . . . . . . . . . . . . 7 3.5 Articles of Incorporation, Bylaws and Minute Books . . . . . . . . . . . . . 8 3.6 Consents . . . . . . . . . . . . . . . 8 3.7 Financial Statements and Regulatory Reports . . . . . . . . . . . . . . . . 8 3.8 Absence of Undisclosed Liabilities . . 8 3.9 Absence of Changes . . . . . . . . . . 9 3.10 Dividends, Distributions and Stock Purchases . . . . . . . . . . . . . . . 9 3.11 Taxes . . . . . . . . . . . . . . . . . 9 3.12 Title to and Condition of Assets . . . 9 3.13 Contracts . . . . . . . . . . . . . . . 10 3.14 Litigation and Governmental Directives . . . . . . . . . . . . . . 11 3.15 Compliance with Laws; Governmental Authorizations . . . . . . . . . . . . 11 3.16 Insurance . . . . . . . . . . . . . . . 12 3.17 Financial Institutions Bonds . . . . . 12 3.18 Labor Relations . . . . . . . . . . . . 12 3.19 Employee Benefit Plans . . . . . . . . 12 3.20 Related Party Transactions . . . . . . 13 3.21 No Finder . . . . . . . . . . . . . . . 14 3.22 Significant Customers . . . . . . . . . 14 3.23 Complete and Accurate Disclosure . . . 14 3.24 Beneficial Ownership of HNC Common Stock . . . . . . . . . . . . . . . . . 14 3.25 Environmental Matters . . . . . . . . . 14 3.26 Proxy Statement/Prospectus . . . . . . 16 3.27 Non-Registration Under the 1934 Act . . 16 3.28 Deposit Insurance . . . . . . . . . . . 17 i Execution Copy 09/07/95 3.29 Repurchase Agreements . . . . . . . . . 17 3.30 Assumability of Contracts and Leases . 17 3.31 Loans . . . . . . . . . . . . . . . . . 17 3.32 Materiality . . . . . . . . . . . . . . 17 3.33 Absence of Questionable Payments . . . 17 3.34 Powers of Attorney; Guarantees . . . . 18 3.35 Adjustable Rate Mortgages . . . . . . . 18 3.36 CRA Compliance . . . . . . . . . . . . 18 3.37 Derivatives . . . . . . . . . . . . . . 18 3.38 Loan Loss Reserve . . . . . . . . . . . 18 3.39 Loan Portfolio . . . . . . . . . . . . 18 3.40 Annual Meeting Documents . . . . . . . 18 3.41 Trust Department and Fiduciary Relationships . . . . . . . . . . . . . 19 3.42 Accuracy of Representations . . . . . . 19 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF HNC . . . . 19 4.1 Authority . . . . . . . . . . . . . . . 19 4.2 Organization and Standing . . . . . . . 19 4.3 Capitalization . . . . . . . . . . . . 20 4.4 Articles of Incorporation and Bylaws . 20 4.5 Financial Statements . . . . . . . . . 20 4.6 Absence of Undisclosed Liabilities . . 20 4.7 Absence of Changes . . . . . . . . . . 21 4.8 Litigation . . . . . . . . . . . . . . 21 4.9 Proxy Statement/Prospectus . . . . . . 21 ARTICLE V REPRESENTATIONS AND WARRANTIES OF CNB . . . . . . . . . . . . . . . . . . . . . 21 5.1 Capital Structure of CNB . . . . . . . 21 5.2 Organization and Standing . . . . . . . 22 5.3 Authorized and Effective Agreement . . 22 ARTICLE VI COVENANTS OF FMB . . . . . . . . . . . . . . 22 6.1 Conduct of Business . . . . . . . . . . 22 6.2 Best Efforts . . . . . . . . . . . . . 25 6.3 Access to Properties and Records . . . 26 6.4 Subsequent Financial Statements . . . . 26 6.5 Board and Committee Minutes . . . . . . 27 6.6 Update Schedule . . . . . . . . . . . . 27 6.7 Notice . . . . . . . . . . . . . . . . 27 6.8 Other Proposals . . . . . . . . . . . . 27 6.9 Dividends . . . . . . . . . . . . . . . 27 ii Execution Copy 09/07/95 6.10 Core Deposits . . . . . . . . . . . . . 27 6.11 Affiliate Letters . . . . . . . . . . . 27 6.12 No Purchases or Sales of HNC Common Stock During Price Determination Period . . . . . . . . . . . . . . . . 28 6.13 Accounting Treatment . . . . . . . . . 28 6.14 Press Releases . . . . . . . . . . . . 28 6.15 Professional Fees . . . . . . . . . . . 28 6.16 Phase I Environmental Audit . . . . . . 28 6.17 Loan Loss Reserves . . . . . . . . . . 28 ARTICLE VII COVENANTS OF HNC AND CNB . . . . . . . . . . 29 7.1 Best Efforts . . . . . . . . . . . . . 29 7.2 Access to Properties and Records . . . 29 7.3 Subsequent Financial Statements . . . . 30 7.4 Update Schedule . . . . . . . . . . . . 30 7.5 Notice . . . . . . . . . . . . . . . . 30 7.6 No Purchase or Sales of HNC Common Stock During Price Determination Period . . . . . . . . . . . . . . . . 30 ARTICLE VIII CONDITIONS PRECEDENT . . . . . . . . . . . . 30 8.1 Common Conditions . . . . . . . . . . . 30 8.2 Conditions Precedent to Obligations of HNC and CNB . . . . . . . . . . . . 32 8.3 Conditions Precedent to the Obligations of FMB . . . . . . . . . . . . . . . . 37 ARTICLE IX TERMINATION, AMENDMENT AND WAIVER . . . . . . 39 9.1 Termination . . . . . . . . . . . . . . 39 9.2 Effect of Termination . . . . . . . . . 40 9.3 Amendment . . . . . . . . . . . . . . . 40 9.4 Waiver . . . . . . . . . . . . . . . . 40 ARTICLE X RIGHTS OF DISSENTING SHAREHOLDERS OF FMB . . . . . . . . . . . . . . . . . . . . . 41 10.1 Rights of Dissenting Shareholders of FMB . . . . . . . . . . . . . . . . 41 ARTICLE XI CLOSING AND EFFECTIVE DATE . . . . . . . . . 41 11.1 Closing . . . . . . . . . . . . . . . . 41 11.2 Effective Date . . . . . . . . . . . . 41 iii Execution Copy 09/07/95 ARTICLE XII NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . 41 12.1 No Survival . . . . . . . . . . . . . . 41 ARTICLE XIII POST-MERGER AGREEMENTS . . . . . . . . . . . 42 13.1 Employees . . . . . . . . . . . . . . . 42 13.2 Regional Board of Directors . . . . . . 43 13.3 Regional Presence . . . . . . . . . . . 44 ARTICLE XIV GENERAL PROVISIONS . . . . . . . . . . . . . 44 14.1 Expenses . . . . . . . . . . . . . . . 44 14.2 Other Mergers and Acquisitions . . . . 44 14.3 Access; Confidentiality . . . . . . . . 45 14.4 Notices . . . . . . . . . . . . . . . . 45 14.5 Captions . . . . . . . . . . . . . . . 46 14.6 Counterparts . . . . . . . . . . . . . 46 14.7 Severability . . . . . . . . . . . . . 46 14.8 Parties in Interest . . . . . . . . . . 46 14.9 Entire Agreement . . . . . . . . . . . 46 14.10 Governing Law . . . . . . . . . . . . . 46 EXHIBITS: AGREEMENT AND PLAN OF MERGER . . . . . . . . A-1 ("BANK MERGER AGREEMENT") INVESTMENT AGREEMENT . . . . . . . . . . . . B-1 SUPPORT AGREEMENT . . . . . . . . . . . . . . C-1 SCHEDULE I . . . . . . . . . . . . . . . . . I-1 SCHEDULE II . . . . . . . . . . . . . . . . .II-1 iv Execution Copy 09/07/95 AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization (hereinafter "Agreement") is dated and made this 7th day of September, 1995, by and among HARLEYSVILLE NATIONAL CORPORATION, a Pennsylvania business corporation having its corporate headquarters at 483 Main Street, P.O. Box 195, Harleysville, Pennsylvania 19438 ("HNC"); The Citizens National Bank of Lansford, a national banking association and a subsidiary of HNC, having its corporate headquarters at 13-15 W. Ridge Street, P.O. Box 128, Lansford, Pennsylvania, 18232 ("CNB"); and Farmers & Merchants Bank (Honesdale, PA.), a Pennsylvania state-chartered bank and trust company having its corporate headquarters at 1001 Main Street, P.O. Box 430, Honesdale, Pennsylvania 18431 ("FMB"). Background: HNC is a Pennsylvania business corporation and a registered bank holding company. CNB is a national banking association and a wholly-owned subsidiary of HNC. FMB is a Pennsylvania state-chartered bank and trust company. HNC wishes to acquire FMB, and FMB wishes to merge with and into CNB. Subject to the terms and conditions of this Agreement, the foregoing transaction will be accomplished by means of a reorganization and merger under which FMB will be merged with and into CNB. CNB will survive the merger, and all of the outstanding shares of the $2.00 par value common stock of FMB ("FMB Common Stock") will be converted into shares of the $1.00 par value common stock of HNC ("HNC Common Stock") in the manner, on the terms, and subject to the conditions of this Agreement. WITNESSETH: NOW, THEREFORE, in consideration of the premises, mutual promises, covenants, agreements, representations and warranties hereinafter set forth, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties agree as follows: ARTICLE I AGREEMENT AND PLAN OF MERGER Section 1.1. Agreement and Plan of Merger. Subject to the terms and conditions of this Agreement, FMB shall merge with and into CNB (the "Merger") in accordance with the Agreement and Plan of Merger attached hereto as Exhibit "A" ("Bank Merger Agreement") and pursuant to the provisions of The National Bank Merger Act, 12 U.S.C. Section 215a (the "Bank Merger Act"). As a condition to HNC's entry into this Agreement and the Bank Merger Agreement, and to induce such entry, FMB is entering into an Investment Agreement with HNC (the "Investment Agreement") attached hereto as Exhibit "B". 1 Execution Copy 09/07/95 ARTICLE II CONVERSION OF SHARES AND EXCHANGE OF STOCK CERTIFICATES Section 2.1. Conversion of Shares. On the Effective Date (as defined in Section 11.2 of this Agreement) the shares of FMB Common Stock then outstanding shall be converted into shares of HNC Common Stock, as follows: (a) General. Subject to the provisions of this Article II, each share of FMB Common Stock issued and outstanding immediately before the Effective Date (other than shares of such common stock, if any, then owned by FMB) shall, on the Effective Date, be converted into and become, without any action on the part of the holder thereof, the Formula Number (as hereinafter defined) of shares of HNC Common Stock. Shares of FMB Common Stock held by FMB in a fiduciary or similar capacity shall not be deemed owned by such entity for purposes of this Article II. Each share of CNB Common Stock issued and outstanding immediately prior to the Effective Date shall, on the Effective Date, continue to be issued and outstanding as provided in Section 5.2 of the Agreement and Plan of Merger. Each share of FMB Common Stock owned by HNC or any subsidiary of HNC on the Effective Date, if any, shall be cancelled. (i) Pricing; Certain Definitions. (A) "Formula Number" shall be determined as follows: (1) divide $17.00 by the "Closing Market Price" of HNC Common Stock as hereinafter defined (the resulting quotient being referred to herein as the "Basic Quotient"); and (2) (aa) if the Basic Quotient is less than .5915, then the Formula Number shall be .5915; (bb) if the Basic Quotient is greater than .6915, then the Formula Number shall be .6915; (cc) if the Basic Quotient is between .5915 and .6915, then the Formula Number shall be the Basic Quotient, rounded to the nearest four decimal places; (B) "Formula Price" shall mean $17.00 divided by the Formula Number, the resulting quotient being rounded to the nearest cent. 2 Execution Copy 09/07/95 (b) Anti-dilution Provision. In the event that HNC shall at any time before the Effective Date: (i) declare or pay a dividend in shares of HNC Common Stock, (ii) combine the outstanding shares of HNC Common Stock into a smaller number of shares, or (iii) subdivide the outstanding shares of HNC Common Stock into a greater number of shares, or (iv) reclassify the shares of HNC stock, then the Pricing provisions of Section 2.1 (a) of this Article II shall be proportionately adjusted accordingly. Provided, however, that no adjustment shall be made under this Section 2.1(b) to the Pricing provided in Section 2.1(a) for any HNC stock dividend declared in the amount of five percent (5%) or less of the number of outstanding shares of HNC Common Stock after the date hereof. (c) No Fractional Shares. No fractional shares of HNC Common Stock, and no scrip or certificates therefor, shall be issued in connection with the Merger. In lieu of the issuance of any fractional share to which he would otherwise be entitled, each former shareholder of FMB shall receive in cash an amount equal to the fair market value of his fractional interest, which fair market value shall be determined by multiplying such fraction by the Formula Price (as defined in Section 2.1(a) of this Article II). (d) Closing Market Price. For purposes of this Agreement, the Closing Market Price shall be the arithmetic average of the per share closing prices for HNC Common Stock for the twenty (20) trading days immediately preceding the date which is five (5) business days before the Effective Date, as reported on the National Market System of the National Association of Securities Dealers Automated Quotation System (NASDAQ/NMS), the foregoing twenty (20) trading days being hereinafter sometimes referred to as the "Price Determination Period". (For example, if December 29, 1995 were to be the Effective Date, then the Price Determination Period would be November 24, 27, 28, 29, 30, December 1, 4, 5, 6, 7, 8, 11, 12, 13, 14, 15, 18, 19, 20, 21, 1995.) In the event that NASDAQ/NMS shall fail to report a closing price for HNC Common Stock for any trading day during the Price Determination Period, then the closing price for that day shall be equal to the average of the closing bid price and the closing asked price as quoted on NASDAQ/NMS for that day. In the event that NASDAQ/NMS shall fail to report a closing price, closing bid price and closing asked price, respectively, for HNC Common Stock for any trading day during the Price Determination Period, then the closing price for that day shall be equal to the average of the closing bid prices and the closing asked prices as quoted: (i) by F.J. Morrisey & Co., Inc. and by Janney Montgomery Scott, Inc.; or, in the event that neither of these firms is then making a market in HNC Common Stock, (ii) by two brokerage firms then making a market in HNC Common Stock to be selected by HNC and approved by FMB. (e) FMB Treasury Stock. Each share of FMB Common Stock issued and held in the treasury of FMB as of the Effective Date, if any, shall be cancelled, and no cash, stock, or other property shall be delivered in exchange therefor. 3 Execution Copy 09/07/95 (f) HNC Common Stock. (i) Each share of HNC Common Stock issued and outstanding immediately prior to the Effective Date, shall, on and after the Effective Date, continue to be issued and outstanding as an identical share of HNC Common Stock. (ii) Each share of HNC Common Stock issued and held in the treasury of HNC as of the Effective Date, if any, shall, on and after the Effective Date, continue to be issued and held in the treasury of HNC. Section 2.2. Exchange of Stock Certificates. FMB Common Stock certificates shall be exchanged for HNC Common Stock certificates in accordance with the following procedures: (a) Exchange Agent. The transfer agent of HNC shall act as exchange agent (the "Exchange Agent") to receive FMB Common Stock certificates from the holders thereof and to exchange such stock certificates for HNC Common Stock certificates and (if applicable) to pay cash for fractional shares of FMB Common Stock pursuant to Section 2.1(c) above. The Exchange Agent shall, on or promptly after the Effective Date, mail to each former shareholder of FMB a notice specifying the procedures to be followed in surrendering such shareholder's FMB Common Stock certificates. (b) Surrender of Certificates. As promptly as possible after receipt of the Exchange Agent's notice, each former shareholder of FMB shall surrender his FMB Common Stock certificates to the Exchange Agent; provided, that if any former shareholder of FMB shall be unable to surrender his FMB Common Stock certificates due to loss or mutilation thereof, he may make a constructive surrender by following procedures comparable to those customarily used by HNC for issuing replacement certificates to HNC shareholders whose HNC Common Stock certificates have been lost or mutilated. Upon receiving a proper actual or constructive surrender of FMB Common Stock certificates from a former FMB shareholder, the Exchange Agent shall issue to such shareholder, in exchange therefor, a HNC Common Stock certificate representing the whole number of shares of HNC Common Stock into which such shareholder's shares of FMB Common Stock have been converted in accordance with this Article II, together with a check in the amount of any cash to which such shareholder is entitled, pursuant to Section 2.1(c) of this Agreement, in lieu of the issuance of a fractional share. (c) Dividend Withholding. Dividends, if any, payable by HNC after the Effective Date to any former shareholder of FMB who has not prior to the payment date surrendered his FMB Common Stock certificates may, at the option of HNC, be withheld. Any dividends so withheld shall be paid, without interest, to such former shareholder of FMB upon proper surrender of his FMB Common Stock certificates. 4 Execution Copy 09/07/95 (d) Failure to Surrender Certificates. All FMB Common Stock certificates must be surrendered to the Exchange Agent within two (2) years after the Effective Date. In the event that any former shareholder of FMB shall not have properly surrendered his FMB Common Stock certificates within two (2) years after the Effective Date, the shares of HNC Common Stock that would otherwise have been issued to him may, at the option of HNC, be sold and the net proceeds of such sale, together with the cash (if any) to which he is entitled in lieu of the issuance of a fractional share and any previously accrued dividends, shall be held in a non-interest bearing account for his benefit. From and after any such sale, the sole right of such former shareholder of FMB shall be the right to collect such net proceeds, cash and accumulated dividends. Subject to all applicable laws of escheat, such net proceeds, cash and accumulated dividends shall be paid to such former shareholder of FMB, without interest, upon proper surrender of his FMB Common Stock certificates. (e) Expenses of Share Surrender and Exchange. All costs and expenses associated with the foregoing surrender and exchange procedure shall be borne by HNC. Notwithstanding the foregoing, no party hereto will be liable to any holder of FMB Common Stock for any amount paid in good faith to a public official or agency pursuant to any applicable abandoned property, escheat or similar law. (f) Exchange Procedures. Each certificate for shares of FMB Common Stock delivered for exchange under this Article II must be endorsed in blank by the registered holder thereof or be accompanied by a power of attorney to transfer such shares endorsed in blank by such holder. If more than one certificate is surrendered at one time and in one transmittal package for the same shareholder account, the number of whole shares of HNC Common Stock for which certificates will be issued pursuant to this Article II will be computed on the basis of the aggregate number of shares represented by the certificates so surrendered. If shares of FMB Common Stock or payments of cash are to be issued or made to a person other than the one in whose name the surrendered certificate is registered, the certificate so surrendered must be properly endorsed in blank, with signature(s) guaranteed, or otherwise in proper form for transfer, and the person to whom certificates for shares of HNC Common Stock is to be issued or to whom cash is to be paid shall pay any transfer or other taxes required by reason of such issuance or payment to a person other than the registered holder of the certificate for shares of FMB Common Stock which are surrendered. As promptly as practicable after the Effective Date, HNC shall send or cause to be sent to each shareholder of record of FMB Common Stock transmittal materials for use in exchanging certificates representing FMB Common Stock for certificates representing HNC Common Stock into which the former have been converted in the Reorganization and Merger. (g) Closing of Stock Transfer Books; Cancellation of FMB Certificates. Upon the Effective Date, the stock transfer books for FMB Common Stock will be closed and no further transfers of shares of FMB Common Stock will thereafter be made or recognized. All certificates for shares of FMB Common Stock surrendered pursuant to this Article II will be cancelled by HNC. 5 Execution Copy 09/07/95 (h) Rights Evidenced by Certificate. Each certificate for shares of HNC Common Stock issued in exchange for certificates for FMB Common Stock pursuant to Section 2.2(f) hereof will be dated as of the Effective Date and be entitled to dividends and all other rights and privileges pertaining to such shares of HNC Common Stock from the Effective Date. Until surrendered, each certificate theretofore evidencing shares of FMB Common Stock will, from and after the Effective Date, evidence solely the right to receive certificates for shares of HNC Common Stock pursuant to Section 2.2(f) hereof. If certificates for shares of FMB Common Stock are exchanged for HNC Common Stock at a date following one or more record dates for the payment of dividends or of any other distribution on the shares of HNC Common Stock subsequent to the Effective Date, HNC will pay cash in an amount equal to dividends theretofore payable on such HNC Common Stock and pay or deliver any other distribution to which holders of shares of HNC Common Stock have theretofore become entitled. No interest will accrue or be payable in respect of dividends or cash otherwise payable under this Section 2.2 upon surrender of certificates for shares of HNC Common Stock. Notwithstanding the foregoing, no party hereto will be liable to any holder of FMB Common Stock for any amount paid in good faith to a public official or agency pursuant to any applicable abandoned property, escheat or similar law. Until such time as certificates for shares of FMB Common Stock are surrendered by a FMB shareholder to HNC for exchange, HNC shall have the right to withhold dividends or any other distributions, without interest, on the shares of the HNC Common Stock issuable to such shareholder. (i) Payment Procedures. As soon as practical after the Effective Date, HNC shall make payment of the cash consideration provided for in Section 2.1(c) to each person entitled thereto. ARTICLE III REPRESENTATIONS AND WARRANTIES OF FMB FMB represents and warrants to HNC and CNB as of even date herewith as follows: Section 3.1. Authority. FMB has all requisite corporate power and authority to enter into and perform all of its obligations under this Agreement and the Bank Merger Agreement. The execution and delivery of this Agreement and the Bank Merger Agreement and the performance of the transactions contemplated herein and therein have been duly and validly authorized by the Board of Directors of FMB and, except for the approval of this Agreement and the Bank Merger Agreement by its shareholders, FMB has taken all corporate action necessary on its part to authorize this Agreement and the Bank Merger Agreement and the performance of the transactions contemplated herein and therein. This Agreement and the Bank Merger Agreement have been duly executed and delivered by FMB and, assuming due authorization, execution and delivery by HNC and CNB, constitute valid and binding obligations of FMB, in each case enforceable against it in accordance with their 6 Execution Copy 09/07/95 respective terms, subject to bankruptcy, insolvency, and other laws of general applicability relating to or affecting creditors' rights and general equity principles. Neither the execution and delivery of this Agreement and the Bank Merger Agreement, nor consummation of the transactions contemplated hereby or thereby, nor compliance by FMB with any of the provisions hereof or thereof shall (i) conflict with or result in a breach of any provisions of the Articles of Incorporation or By-laws of FMB, (ii) constitute or result in a material breach of any term, condition or provisions of, or constitute a default under or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any lien, charge security interest or other encumbrance upon any property or asset of FMB pursuant to any note, bond, mortgage, indenture, deed of trust, license, agreement or other instrument or obligation, or (iii) violate any order, writ, injunction, decree, statute, code, ordinance, rule, regulation or judgment applicable to FMB. The Investment Agreement has been duly executed and delivered by FMB and constitutes, assuming due authorization, execution and delivery thereof by HNC, a valid and binding obligation of FMB enforceable in accordance with its terms. Section 3.2. Organization and Standing. FMB is a duly organized bank and trust company, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. FMB (i) has full power and authority to carry out its business as now conducted and (ii) is duly qualified to do business in the states of the United States and foreign jurisdictions where its ownership or leasing of property or the conduct of its business requires such qualification and where failure to so qualify would have a material adverse effect on the financial condition, results of operations, business or prospects of FMB. Section 3.3. No Subsidiaries. FMB owns no subsidiaries, directly or indirectly. Section 3.4. Capitalization. The authorized capital stock of FMB consists solely of 3,000,000 shares of common stock, par value Two Dollars ($2.00) per share ("FMB Common Stock"), of which, at the date hereof, 720,000 shares are issued of which 708,016 shares are outstanding. All outstanding shares of FMB Common Stock have been duly issued and are validly outstanding, fully paid and nonassessable. None of the shares of FMB Common Stock have been issued in violation of the preemptive rights of any person or entity. Except as provided by the Investment Agreement, there are no authorized, issued, or outstanding options, convertible securities, warrants or other rights to purchase or acquire any of the FMB Common Stock from FMB, and there is no commitment of FMB to issue the same. There are no outstanding agreements, restrictions, contracts, commitments or demands of any character to which FMB is a party, which relate to the transfer or restrict the transfer of any shares of FMB Common Stock. Except as disclosed on Schedule I, and except as set forth in the Investment Agreement, to the knowledge of FMB, there are no shareholder agreements, understandings or commitments relating to the right of FMB to vote or dispose of its shares. 7 Execution Copy 09/07/95 Section 3.5. Articles of Incorporation, Bylaws and Minute Books. The copies of the Articles of Incorporation and Bylaws of FMB which have been delivered to HNC and CNB are true, correct and complete. Except as disclosed on Schedule I, all minute books of FMB have been made available to HNC and CNB for inspection and are true, correct and complete in all material respects and record the actions taken by the Board of Directors of FMB at the meetings documented in the minutes. Section 3.6. Consents. Except for the consents, approvals, filings and registrations contemplated by Sections 8.1(b) and (d) hereof, and compliance with any conditions contained therein, and the approval of this Agreement and the Bank Merger Agreement by the Board of Directors and shareholders of FMB, no consents or approvals of, or filings or registrations with, any public body or authority are necessary, and no consents or approvals of any third parties are necessary, or will be, in connection with (i) the execution and delivery of this Agreement or the Bank Merger Agreement by FMB, and (ii) the consummation by FMB of the transactions contemplated hereby. FMB has no reason to believe that any required consents or approvals will not be received or will be received with conditions, limitations or restrictions unacceptable to it or which would adversely impact FMB's ability to consummate the transactions contemplated by this Agreement. Section 3.7. Financial Statements and Regulatory Reports. FMB has delivered to HNC and CNB its (i) Balance Sheets, Statements of Earnings, Statements of Stockholders' Equity, and Statements of Cash Flows of FMB for the years ended December 31, 1994 and December 31, 1993, certified by Parente, Randolph, Orlando, Carey & Associates and (ii) Call Reports, Consolidated Reports of Condition and Income, (the aforementioned consolidated report of condition and income as of June 30, 1995, is referred to herein as the "Bank Balance Sheet") and accompanying schedules, filed by FMB with any regulatory authority for each calendar quarter, beginning with the quarter ended December 31, 1992, through the Closing Date ("FMB Regulatory Reports"). Each of the foregoing financial statements fairly presents the financial condition, assets and liabilities, and results of operations of FMB at their respective dates and for the respective periods then ended and have been prepared in accordance with generally accepted accounting principles consistently applied, except as otherwise noted in a footnote thereto. The books and records of FMB are maintained in accordance with generally accepted accounting principles consistently applied. The FMB Regulatory Reports have been, or will be, prepared in accordance with applicable regulatory accounting principles and practices applied on a consistent basis throughout the periods issued by such statements, and fairly present, or will fairly present, the financial position, results of operations and changes in shareholders' equity of FMB as of and for the periods ended on the dates thereof, in accordance with applicable regulatory accounting principles applied on a consistent basis. Section 3.8. Absence of Undisclosed Liabilities. Except as disclosed in Schedule I, or as reflected, noted or adequately reserved against in the Bank Balance Sheet, as at June 30, 1995, FMB had no liabilities (whether accrued, absolute, contingent or otherwise) or asset impairment which are required to be reflected, noted or reserved against therein under generally accepted accounting principles or which are in any case or 8 Execution Copy 09/07/95 in the aggregate material. Except as disclosed in Schedule I, since June 30, 1995, FMB has not incurred any such liability, other than liabilities of the same nature as those set forth in the Bank Balance Sheet, all of which have been reasonably incurred in the ordinary course of business consistent with customary business practices of prudently managed banks (hereinafter referred to as "Ordinary Course of Business"). Section 3.9. Absence of Changes. Since June 30, 1995, FMB has conducted its business in the Ordinary Course of Business and, except as disclosed in Schedule I, FMB has not undergone any change in condition (financial or otherwise), assets, liabilities, business or operations, other than changes in the Ordinary Course of Business which have not been, either in any case or in the aggregate, materially adverse. Section 3.10. Dividends, Distributions and Stock Purchases. Except as disclosed on Schedule I, since June 30, 1995, FMB has not declared, set aside, made or paid any dividend or other distribution in respect of the FMB Common Stock, or purchased, issued or sold any shares of FMB Common Stock. Section 3.11. Taxes. FMB has filed all federal, state, county, municipal and foreign tax returns, reports and declarations which are required to be filed by FMB. Except as disclosed in Schedule I, (i) FMB has paid all taxes, penalties and interest which have become due pursuant thereto or which became due pursuant to assessments, and (ii) FMB has not received any notice of deficiency or assessment of additional taxes and no tax audits are in process. The Internal Revenue Service ("IRS") has not, to the knowledge of FMB, commenced, or given notice of its intention to commence any examination or audit of the federal income tax returns of FMB for any year through and including the year ended December 31, 1989. FMB has not granted any waiver of any statute of limitations or otherwise agreed to any extension of a period for the assessment of any federal, state, county, municipal or foreign income tax. Except as disclosed in Schedule I, the accruals and reserves reflected in the Bank Balance Sheet are adequate to cover all taxes (including interest and penalties, if any, thereon) payable or accrued as a result of its operations for all periods prior to the date of the Bank Balance Sheet. Section 3.12. Title to and Condition of Assets. Except as disclosed in Schedule I, FMB has good and marketable title to all real and personal properties and assets reflected in the Bank Balance Sheet or acquired subsequent to June 30, 1995 (other than property and assets disposed of in the Ordinary Course of Business), free and clear of all liens or encumbrances of any kind whatsoever other than: (i) as reflected in the Bank Balance Sheet or in Schedule I; (ii) liens of current taxes not yet due; and (iii) such imperfections of title, encumbrances and easements, if any, as are not substantial in character, amount or extent and do not materially detract from the value, or interfere with the present or pro- posed use, of the properties and assets subject thereto. The structures and other improvements to real estate, furniture, fixtures and equipment reflected in the Bank Balance Sheet or acquired subsequent to June 30, 1995, are in good operating condition and repair (ordinary wear and tear excepted) and comply in all material respects with all applicable laws, ordinances and regulations, including without limitation all building codes, zoning ordinances and other similar laws. FMB owns or has the right to use all real 9 Execution Copy 09/07/95 and personal properties and assets necessary to the conduct of its business as now conducted. Section 3.13. Contracts. Each written or oral contract (other than contracts with customers reasonably incurred by FMB in the Ordinary Course of Business) which involves aggregate payments or receipts in excess of $10,000 per year, including without limitation every employment contract, employment benefit plan, agreement, lease, license, and other commitment to which FMB is a party or by which FMB or its properties may be bound ("Material Contracts"), is identified in Schedule I. Except as disclosed in Schedule I, all such contracts, agreements, leases, licenses and other commitments are valid and in full force and effect, and all parties thereto have in all material respects performed all obligations required to be performed by them to date and are not in default in any material respect. Schedule I identifies all such contracts, agreements, leases, licenses and other commitments which require the consent or approval of third parties to the execution and delivery of this Agreement or to the consummation of the transactions contemplated herein. FMB is not a party to or subject to (i) any employment, consulting or severance contract or arrangement with any past or present officer, director or employee, except for "at will" arrangements (ii) any plan, arrangement or contract providing for bonuses, options, deferred compensation, profit sharing or similar arrangements for or with any past or present officers, directors or employees of FMB; (iii) any collective bargaining agreement with any labor union relating to employees of FMB; (iv) any agreement which by its terms limits the payment of dividends by FMB; (v) any instrument evidencing or related to indebtedness for borrowed money in excess of $20,000, whether directly or indirectly, by way of purchase money obligation, conditional sale, lease purchase, guaranty or otherwise, in respect of which FMB is an obligor to any person, which instrument evidences or relates to indebtedness other than deposits, repurchase agreements, bankers acceptances and "treasury tax and loan" accounts established in the Ordinary Course of Business and transactions in federal funds or which contains financial covenants or other restrictions (other than those relating to the payment of principal and interest when due) which would be applicable on or after the Closing Date to HNC or any HNC subsidiary; (vi) any contract (other than this Agreement) limiting the freedom of FMB to engage in any type of banking or banking-related business permissible under law; or (vii) any contract, plan or arrangement which provides for payments or benefits in certain circumstances which, together with other payments or benefits payable to any participant therein or party thereto, might render any portion of any such payments or benefits subject to disallowance of deduction therefor as a result of the application of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"). No party to any material contract, plan, arrangement or instrument that requires annual payments in excess of $10,000 will have the right to terminate any or all of the provisions of any such contract, plan, arrangement or instrument as a result of the transactions contemplated by this Agreement and none of the employees of FMB possess the right to terminate their employment as a result of the execution of this Agreement. No plan, employment agreement, termination agreement, or similar agreement or arrangement to which FMB is a party or under which FMB may be liable contains provisions which 10 Execution Copy 09/07/95 permit an employee or independent contractor to terminate it without cause and continue to accrue future benefits thereunder. No such agreement, plan or arrangement provides for acceleration in the vesting of benefits or payments due thereunder upon the occurrence of a change in ownership or control of FMB absent the occurrence of a subsequent event; provides for benefits which may cause the disallowance of a federal income tax deduction under Section 280G of the Code; or requires FMB to provide a benefit in the form of FMB Common Stock or determined by reference to the value of FMB Common Stock. Section 3.14. Litigation and Governmental Directives. Except as disclosed in Schedule I: (i) there is no litigation, investigation or proceeding pending, or to the knowledge of FMB threatened, that involves FMB or its properties and that, if determined adversely, would materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of FMB; (ii) there are no outstanding orders, writs, injunctions, judgments, decrees, regulations, directives, consent agreements or memoranda of understanding issued by any federal, state or local court or governmental authority or arbitration tribunal issued against or with the consent of FMB that materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of FMB or that in any manner restrict FMB's right to conduct its business as presently conducted, or challenge the validity or propriety of any of the transactions contemplated by the Agreement, or which could adversely affect the ability of FMB to perform under this Agreement; and (iii) FMB is not aware of any fact or condition presently existing that might give rise to any litigation, investigation or proceeding which, if determined adversely to FMB, would materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of FMB. All litigation in which FMB is involved as a plaintiff (other than routine collection and foreclosure suits initiated in the Ordinary Course of Business in which the amount sought to be recovered is less than $5,000) is identified in Schedule I. Section 3.15. Compliance with Laws; Governmental Authorizations. Except as disclosed in Schedule I or where noncompliance would not have a material and adverse effect upon the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of FMB: (i) FMB is in compliance with all statutes, laws, ordinances, rules, regulations, judgments, orders, decrees, directives, consent agreements, memoranda of understanding, permits, concessions, grants, franchises, licenses, and other governmental authorizations or approvals applicable to FMB or to any of its properties; (ii) all permits, concessions, grants, franchises, licenses and other governmental authorizations and approvals necessary for the conduct of the business of FMB as presently conducted have been duly obtained and are in full force and effect and there are no proceedings pending, or to the knowledge of FMB threatened, which may result in the revocation, cancellation, suspension or materially adverse modification of any thereof; and (iii) FMB has not received any notification or communication from any regulatory authority (A) asserting that it is not in substantial compliance with any of the statues, regulations or ordinances which such regulatory authorities enforce; (B) requiring or threatening to require FMB, or indicating that it may be required, to enter into a cease and desist order, agreement or memorandum of understanding or any other agreement restricting or limiting, or purporting to restrict or limit, in any manner the operations of FMB, including without 11 Execution Copy 09/07/95 limitation, any restriction on the payment of dividends (any such notice, communication, memorandum, agreement or order described herein is referred to as a "Regulatory Agreement"); (C) threatening to revoke any license, franchise, permit or governmental authorization which is material to FMB; FMB has not consented to or entered into any Regulatory Agreement; (D) requesting board resolutions be adopted pursuant to regulatory action, except as disclosed to HNC in Schedule I. Section 3.16. Insurance. All policies of insurance, including all policies of title insurance and financial institutions bonds, held by or on behalf of FMB are listed on Schedule I. All such policies of insurance are in full force and effect and no notices of cancellation have been received in connection therewith. All such policies of insurance have been issued by reputable insurers which in respect of amounts, types and risks, such insurance is customary with industry practices for the business conducted by FMB. Section 3.17. Financial Institutions Bonds. Since January 1, 1992, FMB has continuously maintained in full force and effect a financial institutions bond on Form 24 as listed in Schedule I insuring FMB against acts of dishonesty by each of its employees. Except as disclosed on Schedule I, no claim has been made under any such bond and FMB is not aware of any fact or condition presently existing which might form the basis of a claim under any such bond. FMB has no reason to believe that its present financial institutions bond will not be renewed by its carrier on substantially the same terms and at the same rate as now in effect. Section 3.18. Labor Relations. FMB is not a party to or bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is FMB the subject of a proceeding asserting that FMB has committed an unfair labor practice or seeking to compel FMB to bargain with any labor organization as to wages and conditions of employment, nor is there any strike or other labor dispute involving FMB pending, or to the knowledge of FMB, threatened, that might materially adversely affect the condition (financial or otherwise), assets, liabilities, business or operations of FMB. Except as set forth on Schedule I, FMB is not subject to or a party in any Complaint or action before the Pennsylvania Human Relations Commission, the Equal Employment Opportunity Commission, or the Department of Labor. Except as disclosed on Schedule I, there are no labor disputes pending, or to the knowledge of FMB threatened, that might materially and adversely affect the condition (financial or otherwise), assets, liabilities, business or operations of FMB. Section 3.19. Employee Benefit Plans. Each "employee benefit plan", as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that now covers any employee of FMB, its predecessors or affiliates, complies in all material respects with all applicable requirements of ERISA, the Code and other applicable laws. Neither FMB nor any of its predecessors or affiliates has engaged in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) or any breach of fiduciary responsibility under Part 4 of Title I of ERISA, with respect to any such plan which prohibited transaction is likely to result in any material penalties or taxes under Section 502 of ERISA or Section 4975 of the Code, or any material 12 Execution Copy 09/07/95 liability to any participant or beneficiary of such plan. No material liability to the Pension Benefit Guaranty Corporation has been or is expected to be incurred by FMB with respect to itself or its predecessors or affiliates with respect to any such plan which is subject to Title IV of ERISA, or with respect to any "single employer plan" (as defined in Section 4001(a)(15) of ERISA) currently or formerly maintained. No such plan had an "accumulated funding deficiency" (as defined in Section 302 of ERISA) (whether or not waived) as of the last day of the end of the most recent plan year ending prior to the date hereof. The fair market value of the assets of each such plan exceeds the present value of the "benefit liabilities" (as defined in Section 4001(a)(16) of ERISA) under each such plan as of the end of the most recent plan year, calculated on the basis of the actuarial assumptions used in the most recent actuarial valuation for each such plan. No notice of a "reportable event" (as defined in Section 4043 of ERISA) for which the 30-day reporting requirement has not been waived has been required to be filed for any of such plans within the 12- month period ending of the date hereof. Neither FMB, its predecessors or affiliates has provided, or is required to provide, security to any such plans pursuant to Section 401(a)(29) of the Code. FMB, its predecessors and affiliates have contributed to no "multi-employer plan", as defined in Section 3(37) of ERISA, on or after September 26, 1980, except as set forth on Schedule I. All actuarial valuations and other documents and information concerning benefit plans delivered or made available in connection with this Agreement are true and correct of the date(s) shown thereon, and all actuarial methods and assumptions are appropriate for such plans, and are consistent with the methods and assumptions permitted by the Code and ERISA. Except as set forth on Schedule I, all such plans are funded to such level as assets of each such plan would then be sufficient to pay all vested accrued benefits thereunder, and there would be no employer liability under Title IV of ERISA. Since 1990, there has been no audit of any benefit plan of FMB by the Department of Labor, the IRS or the Pension Benefit Guaranty Corporation ("PBGC"). There has not been any audit of the Pension Plan or any of FMB's other employee benefit plans by the Department of Labor, the IRS or the PBGC since 1988. FMB, its predecessors and affiliates, have no obligation for retiree health and life benefits under any benefit plan, contract, or arrangement, except as set forth on Schedule I. FMB has no obligation for any post-retirement benefits under any plan, contract or arrangement except as set forth on Schedule I. Section 3.20. Related Party Transactions. Except as disclosed in Schedule I, FMB has no contract, extension of credit, business arrangement or other relationship of any kind with any of the following persons: (i) any present or former officer or director of FMB; (ii) any shareholder owning five percent or more of the outstanding FMB Common Stock; and (iii) any "associate" (as defined in SEC Rule 405) of the foregoing persons or any business in which any of the foregoing persons is an officer, director, employee or five percent or greater equity owner. Each such extension of credit disclosed in Schedule I has been made in the Ordinary Course of Business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable arms' length transactions with other persons that do not involve more than a normal risk of collectibility or present other unfavorable features. 13 Execution Copy 09/07/95 Section 3.21. No Finder. Except as disclosed in Schedule I and the engagement of Danielson Associates, Inc. to render a fairness opinion in connection with the transaction contemplated by this Agreement, FMB has not paid or become obligated to pay any fee or commission of any kind whatsoever to any broker, finder or other intermediary for, on account of or in connection with the transactions contemplated in this Agreement. Section 3.22. Significant Customers. All significant customers of FMB are identified in Schedule I. For purposes of this Section 3.22, a "significant customer" shall mean any customer who, at any time between January 1, 1994 and the date of this Agreement, had or has (i) aggregate outstanding loans in the amount of $50,000 or more, or (ii) aggregate daily deposits in the amount of $50,000 or more. Section 3.23. Complete and Accurate Disclosure. Neither this Agreement (insofar as it relates to FMB, FMB Common Stock and FMB's involvement in the transactions contemplated hereby) nor any financial statement, schedule (including without limitation Schedule I), certificate, or other statement or document delivered by FMB to HNC and CNB in connection herewith contains any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact or omits to state any material fact necessary to make the statements contained herein or therein not false or misleading. In particular, without limiting the generality of the foregoing sentence, the information provided and the representations made by FMB to HNC and CNB in connection with the Registration Statement (as defined in Section 7.1(b) of this Agreement), both at the time such information and representations are provided and made and at the time of the Closing, will be true and accurate in all material respects and will not contain any false or misleading statement with respect to any material fact or omit to state any material fact necessary (i) to make the statements made therein not false or misleading, or (ii) to correct any statement contained in an earlier communication with respect to such information or representations which has become false or misleading. Section 3.24. Beneficial Ownership of HNC Common Stock. Prior to the Effective Date, FMB and its officers and directors will not in the aggregate own beneficially (within the meaning of SEC Rule 13d-3(d)(1)) more than five percent of the outstanding shares of HNC Common Stock. Section 3.25. Environmental Matters. For purposes of this Section 3.24, the following terms shall have the indicated meaning: "Environmental Law" means any federal, state or local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement with any governmental entity relating to: the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil, plant and animal life or any other natural resource); and the use, storage, recycling, treatment, generation, transportation, processing, handling, 14 Execution Copy 09/07/95 labeling, production, release or disposal of Hazardous Substances. The term Environmental Law includes without limitation: the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901, et seq., the Clean Air Act, as amended, 42 U.S.C. Section 7401, et seq., the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1251, et seq., the Toxic Substances Control Act, as amended, 15 U.S.C. Section 9601, et seq., the Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 11001, et seq., the Safe Drinking Water Act, 42 U.S.C. Section 300f, et seq., and all comparable state and local laws; and any common law (including without limitation common law that may impose strict liability) that may impose liability or obligation for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Substance. "Hazardous Substance" means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous or otherwise regulated under any Environmental Law, whether by type or by quantity, including any material containing any such substance as a component. Hazardous Substances include without limitation petroleum or any derivative or by-product thereof, asbestos, radioactive material, and polychlorinated biphenyls. "FMB Loan Portfolio Properties and Other Properties Owned" means those properties serving as collateral for loans in FMB's loan portfolio, or properties owned or operated by FMB (including, without limitation, in a fiduciary capacity). Except as set forth on Schedule I hereto: (a) FMB has not been or is not in violation of or liable under any Environmental Law. (b) To the knowledge of FMB, after reasonable investigation, none of the FMB Loan Portfolio Properties and Other Properties Owned have been or are in violation of or liable under any Environmental Law. (c) After reasonable investigation, FMB has no knowledge that any environmental contaminant, pollutant, toxic or hazardous waste or other similar substance has been generated, used, stored, processed, disposed of or discharged onto any of the real estate now or previously owned or acquired (including without limitation any real estate acquired by means of foreclosure or exercise of any other creditor's right) or leased by FMB, except as disclosed on Schedule I. In particular, without limiting the generality of the foregoing sentence, except as disclosed on Schedule I, FMB has no knowledge that: (i) any materials containing asbestos have been used or 15 Execution Copy 09/07/95 incorporated in any building or other structure or improvement located on any of the real estate now or previously owned or acquired (including without limitation any real estate acquired by means of foreclosure or exercise of any other creditor's right) or leased by FMB; (ii) any electrical transformers, fluorescent light fixtures with ballasts or other equipment containing PCB's are or have been located on any of the real estate now or previously owned or acquired (including without limitation any real estate acquired by means of foreclosure or exercise of any other creditor's right) or leased by FMB; (iii) any underground storage tanks for the storage of gasoline, petroleum products or other toxic or hazardous substances are or have ever been located on any of the real estate now or previously owned or acquired (including without limitation any real estate acquired by means of foreclosure or exercise of any other creditor's right) or leased by FMB. (d) Except as previously disclosed in Schedule I, there is no legal, administrative, arbitration or other proceeding, claim, action, or to the knowledge of FMB cause of action or governmental investigation of any nature seeking to impose, or that could result in the imposition, on FMB of any liability arising under any local, state or federal environmental statute, regulation or ordinance including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, pending or to the knowledge of FMB threatened against FMB; there is no reasonable basis for any such proceeding, claim, action or governmental investigation; and FMB is not subject to any agreement, order, judgment, decree or memorandum by or with any court, governmental authority, regulatory agency or third party imposing any such liability. Section 3.26. Proxy Statement/Prospectus. At the time the Proxy Statement/ Prospectus (as defined in Section 7.1(b) of this Agreement) is mailed to the shareholders of FMB and at all times subsequent to such mailing, up to and including the Effective Date, such Proxy Statement/Prospectus (including any pre- and post-effective amendments and supplements thereto), with respect to all information relating to FMB, FMB Common Stock, and actions taken and statements made by FMB in connection with the transactions contemplated herein (except for information provided by HNC and CNB to FMB) will: (i) comply in all material respects with applicable provisions of the Securities Act of 1933, as amended (the "1933 Act"), and the pertinent rules and regulations thereunder; and (ii) not contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omits to state any material fact that is necessary to be stated therein in order (A) to make the statements therein not false or misleading, or (B) to correct any statement in an earlier communication with respect to the Proxy Statement/Prospectus which has become false or misleading. Section 3.27. Non-Registration Under the 1934 Act. FMB Common Stock is neither registered nor required to be registered under Section 12 of the Securities Exchange Act of 1934 (the "1934 Act") and is not subject to the periodic reporting requirements imposed by Section 13 or 15(d) of the 1934 Act. 16 Execution Copy 09/07/95 Section 3.28. Deposit Insurance. The deposits of FMB are insured by the Bank Insurance Fund, as administered by the Federal Deposit Insurance Corporation ("FDIC") in accordance with the Federal Deposit Insurance Act, and FMB has paid all assessments and filed all reports required by the Federal Deposit Insurance Act. Section 3.29. Repurchase Agreements. With respect to any agreement, pursuant to which FMB has purchased securities subject to an agreement to resell, if any, FMB has a valid, perfected first lien or security interest in the government securities or other collateral securing the repurchase agreement, and the value of such collateral equals or exceeds the amount of the debt secured thereby. Except as disclosed on Schedule I, which identifies location and type of securities, FMB maintains physical possession of purchased securities that are subject to an agreement to resell. Section 3.30. Assumability of Contracts and Leases. Except as disclosed on Schedule I, all Material Contracts between FMB and any other entity or person are assumable and assignable and do not contain any term or provision that would accelerate or increase payments that would otherwise be due by FMB to such person or entity, or change or modify the provisions or terms of such leases, contracts and agreements by reason of this Agreement or the transactions contemplated hereby. Except as disclosed on Schedule I, each lease pursuant to which FMB, as lessee, leases real or personal property is valid and in effect in accordance with its respective terms, and there is not, under any of such leases, on the part of the lessee any material existing default or any event which with notice or lapse of time, or both, would constitute such a default, other than defaults which would not individually or in the aggregate have a material adverse effect on the financial condition, business, prospects, or operating results of FMB. Section 3.31. Loans. Except as disclosed on Schedule I, each loan reflected as an asset on FMB's financial statements as of June 30, 1995, or acquired since that date, is the legal, valid and binding obligation of the obligor named therein, enforceable in accordance with its terms, subject to bankruptcy, insolvency and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. All such loans, and the collateral and other security therefor, and the documentation for the same, meet the requirements, rules, regulations or directives of the FDIC, or other applicable governmental authorities. Section 3.32. Materiality. For purposes of this Article III, unless otherwise defined, the term "material" or "materially" refers to amounts in excess of $20,000. Section 3.33. Absence of Questionable Payments. From and after July 1, 1990, FMB has not, nor, to the knowledge of FMB, has any director, officer, agent, employee, consultant or other person associated with or acting on behalf of, FMB (i) used any FMB corporate funds for unlawful contributions, gifts, entertainment or unlawful expenses relating to political activity; or (ii) made any direct or indirect unlawful payments to governmental officials from any FMB corporate funds, or established or maintained any unlawful or unrecorded accounts with funds received from FMB. 17 Execution Copy 09/07/95 Section 3.34. Powers of Attorney; Guarantees. Except as set forth on Schedule I, FMB does not have any power of attorney outstanding, or any obligation or liability either actual, construing or contingent, as guarantor, surety, cosigner, endorser, co-maker or indemnitor in respect of the obligation of any person, corporation, partnership, joint venture, association, organization or other entity, except for letters of credit issued in the ordinary course of business which are listed on Schedule I. Section 3.35. Adjustable Rate Mortgages. FMB has made all interest rate adjustments to any mortgage loan according to the terms of said mortgage loan and has complied and is in compliance in all material respects with all federal, state and other applicable laws, rules and regulations, including orders, writs, decrees, injunctions and other requirements of any court or governmental authorities having jurisdiction over adjustable rate mortgages. Section 3.36. CRA Compliance. FMB has received a satisfactory compliance rating and has received a satisfactory Community Reinvestment Act rating. FMB has no knowledge of any facts or circumstances which would prevent it from receiving such satisfactory ratings upon its next appropriate examination. Section 3.37. Derivatives. Except as set forth on Schedule I, FMB does not own or hold any derivatives, "caps", or "floors", in its investment portfolio. Section 3.38. Loan Loss Reserve. The loan loss reserve of FMB is and shall remain adequate in light of generally accepted accounting principles, directives of governmental authorities, and all regulations, rules and directives of the OCC and the FDIC. No regulatory authority requested FMB to increase the allowance for loan losses during 1994, 1993, 1992 or 1991. Section 3.39. Loan Portfolio. Except as disclosed on Schedule I, all evidences of indebtedness reflected as assets of FMB are in all respects binding obligations of the respective primary obligors associated therewith, and no material amount thereof is subject to any defenses known to FMB which may be asserted against FMB. Except as set forth in Schedule I, FMB has delivered to HNC a true and correct list and brief description of all real property (other than personal residences) in which FMB has an interest as a creditor or mortgagee securing an amount or amounts greater than $25,000 to one borrower or a series of related borrowers. Except as set forth in such list (i) there are no outstanding loans by FMB with an unpaid balance of $10,000 or more on which a default has occurred, and (ii) FMB has no loans reflected as assets in such financial statements which have principal balances in excess of $10,000 except for fully-secured mortgage loans. For purposes hereof, "default" shall include but not be limited to a failure of an obligor to make payments with respect to any loans for 30 days or more past the due date for such payment. Section 3.40. Annual Meeting Documents. FMB has delivered, or will deliver, to HNC copies of its (i) annual reports to shareholders for the three years ended December 31, 1994, 1993 and 1992, (ii) semi-annual reports to shareholders for the period ended 18 Execution Copy 09/07/95 June 30, 1995, and (iii) proxy materials used or for use in connection with its meetings of shareholders held in 1995, 1994 and 1993. Section 3.41. Trust Department and Fiduciary Relationships. FMB has established, maintained and administered all fiduciary and custodian relationships, accounts and agreements; and undertaken and performed all fiduciary and custodian duties, obligations, and responsibilities in compliance with all applicable laws, statutes, rules, regulations and the governing instruments of such fiduciary and custodian relationships. Section 3.42. Accuracy of Representations. Until, and as of, Closing, FMB will promptly notify HNC if any of the representations contained in this Article III cease to be true and correct subsequent to the date hereof. Further, no representations made by FMB pursuant to this Agreement contain any untrue statement of material fact or omit to state a material fact necessary to make the statements not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF HNC HNC represents and warrants to FMB as of even date herewith as follows: Section 4.1. Authority. The execution and delivery of this Agreement and the Bank Merger Agreement and the consummation of the transactions contemplated herein and therein have been duly and validly authorized by the Board of Directors of HNC, and no other corporate action on the part of HNC is necessary to authorize the approval of this Agreement and the Bank Merger Agreement or the consummation of the transactions contemplated herein and therein. This Agreement and the Bank Merger Agreement have been duly executed and delivered by HNC and, assuming due authorization, execution and delivery by FMB, and receipt of required regulatory approvals, constitutes a valid and binding obligation of HNC. Assuming regulatory approval, the execution, delivery and consummation of this Agreement will not constitute a violation or breach of or default under the Articles of Incorporation or the Bylaws of HNC or any statute, rule, regulation, order, decree, directive, agreement, indenture or other instrument to which HNC is a party or by which HNC or any of its properties are bound. Section 4.2. Organization and Standing. HNC is a business corporation that is duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. HNC is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and has full power and lawful authority to own and hold its properties and to carry on its present business. HNC owns all of the issued and outstanding shares of capital stock of Harleysville National Bank and Trust Company, The Citizens National Bank of Lansford and Security National Bank. Harleysville National Bank & Trust Company, The Citizens National Bank of Lansford and Security National Bank are national banking associations validly existing and in good standing under the laws of the United States, and are duly authorized to engage in the banking 19 Execution Copy 09/07/95 business as insured banks under the Federal Deposit Insurance Act, as amended. Harleysville National Bank and Trust Company and The Citizens National Bank of Lansford are authorized to engage in trust activities. Section 4.3. Capitalization. The authorized capital stock of HNC consists of Thirty Million (30,000,000) shares of common stock, par value One Dollar ($1.00) per share ("HNC Common Stock") of which at June 30, 1995, 5,873,685 shares were issued and outstanding. All outstanding shares of HNC Common Stock have been duly issued and are validly outstanding, fully paid and nonassessable. The shares of HNC Common Stock to be issued in connection with the Bank Merger have been duly authorized and, when issued in accordance with the terms of this Agreement and the Bank Merger Agreement, will be validly issued, fully paid and nonassessable. Section 4.4. Articles of Incorporation and Bylaws. The copies of the Articles of Incorporation, as amended, and of the Bylaws, as amended, of HNC which have been delivered to FMB are true, correct, and complete in all material respects. Section 4.5. Financial Statements. HNC has delivered to FMB the following financial statements: (i) Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Shareholders' Equity, and Consolidated Statements of Cash Flows as of and for the years ended December 31, 1994 and December 31, 1993, certified by KPMG Peat Marwick and set forth in the Annual Report to the shareholders of HNC for the year ended on December 31, 1994; and (ii) a Consolidated Statement of Condition, a Consolidated Statement of Income and a Consolidated Statement of Changes in Shareholders' Equity for the three-month period ended March 31, 1995, set forth in a "Quarterly Report" to the shareholders of HNC (the foregoing Consolidated Statement of Condition being hereinafter referred to as the "HNC Balance Sheet"). Each of the foregoing financial statements fairly presents the consolidated financial position, assets, liabilities and results of operations of HNC at their respective dates and for the respective periods then ended and has been prepared in accordance with generally accepted accounting principles consistently applied, except as otherwise noted in a footnote thereto and subject in the case of the interim financial statements contained in the aforesaid Quarterly Report to normal recurring year-end adjustments, which are not material in any case or in the aggregate. Section 4.6. Absence of Undisclosed Liabilities. Except as disclosed in Schedule II or as reflected, noted or adequately reserved against in the HNC Balance Sheet, at March 31, 1995, HNC had no material liabilities (whether accrued, absolute, contingent or otherwise) which are required to be reflected, noted or reserved against therein under generally accepted accounting principles or which are in any case or in the aggregate material. Except as described in Schedule II, since March 31, 1995, HNC has not incurred any such liability other than liabilities of the same nature as those set forth in the HNC Balance Sheet, all of which have been reasonably incurred in the Ordinary Course of Business. 20 Execution Copy 09/07/95 Section 4.7. Absence of Changes. Since March 31, 1995, there has not been any material and adverse change in the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of HNC or CNB. Section 4.8. Litigation. Except as disclosed in Schedule II: (i) there is no litigation, investigation or proceeding pending, or to the knowledge of HNC threatened, that involves HNC or its properties and that, if determined adversely to HNC, would materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of HNC; (ii) there are no outstanding orders, writs, injunctions, decrees, consent agreements, memoranda of understanding or other directives of any federal, state or local court or governmental authority or of any arbitration tribunal against HNC which materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of HNC or restrict in any manner the right of HNC to conduct its business as presently conducted; and (iii) HNC is not aware of any fact or condition presently existing that might give rise to any litigation, investigation or proceeding which, if determined adversely to HNC, would materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of HNC. For purposes of this Section 4.8, HNC shall be deemed to include CNB. Section 4.9. Proxy Statement/Prospectus. At the time the Proxy Statement/ Prospectus (as defined in Section 7.1(b) of this Agreement) is mailed to the shareholders of FMB and at all times subsequent to such mailing, up to and including the Effective Date, the Proxy Statement/Prospectus (including any pre- and post-effective amendments and supplements thereto), with respect to all information relating to HNC and CNB, HNC Common Stock, and actions taken and statements made by HNC and CNB in connection with the transactions contemplated herein (other than information provided by FMB to HNC and CNB), will: (i) comply in all material respects with applicable provisions of the 1933 Act and the 1934 Act and the pertinent rules and regulations thereunder; and (ii) not contain any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omits to state any material fact that is necessary to be stated therein in order (A) to make the statements therein not false or misleading, or (B) to correct any statement in an earlier communication with respect to the Proxy Statement/Prospectus which has become false or misleading. ARTICLE V REPRESENTATIONS AND WARRANTIES OF CNB CNB represents and warrants to FMB as of even date herewith as follows: Section 5.1. Capital Structure of CNB. CNB is authorized to issue One Million (1,000,000) shares of capital stock, par value One Dollar ($1.00) per share, of which all shares outstanding are owned by HNC. 21 Execution Copy 09/07/95 Section 5.2. Organization and Standing. CNB is a national banking association which is duly organized, validly existing and in good standing under the laws of the United States. CNB has full power and lawful authority to own and hold its properties and to carry on its present business. Section 5.3. Authorized and Effective Agreement. The execution, delivery and performance of this Agreement and the Bank Merger Agreement have been duly and validly authorized by the Board of Directors of the CNB. Subject to appropriate shareholder and regulatory approvals, neither the execution and delivery of this Agreement or the Bank Merger Agreement nor the consummation of the transactions provided for herein or therein will violate any agreement to which CNB is a party or by which it is bound or any law, regulation, order, decree or any provision of its Articles of Incorporation or By-laws. ARTICLE VI COVENANTS OF FMB From the date of this Agreement until the Effective Date (as defined in Section 11.2 of this Agreement), FMB covenants and agrees to do the following: Section 6.1. Conduct of Business. Except as otherwise consented to by HNC and CNB in writing, FMB shall: (a) use all reasonable efforts to carry on its business in, and only in, the Ordinary Course of Business consistent with past practices and written policies; (b) to the extent consistent with prudent business judgment, use all reasonable efforts to preserve its present business organization, to retain the services of its present officers and employees, to maintain good relationships with its employees, and to maintain its relationships with customers, suppliers and others having business dealings with FMB; (c) maintain all of FMB's structures, equipment and other real property and tangible personal property in good repair, order and condition, except for ordinary wear and tear and damage by unavoidable casualty; (d) use all reasonable efforts to preserve or collect all material claims and causes of action belonging to FMB; (e) keep in full force and effect all insurance policies now carried by FMB; (f) perform in all material respects each of FMB's obligations under all material agreements, contracts, instruments and other commitments to which FMB 22 Execution Copy 09/07/95 is a party or by which FMB may be bound or which relate to or affect its properties, assets and business; (g) maintain its books of account and other records in the Ordinary Course of Business; (h) comply in all material respects with all statutes, laws, ordinances, rules and regulations, decrees, orders, consent agreements, examination reports, memoranda of understanding and other federal, state, county, local and municipal governmental directives applicable to FMB and to the conduct of its business; (i) not amend FMB's Articles of Incorporation or Bylaws; (j) not enter into or assume any material contract, incur any material liability or obligation, make any material commitment, acquire or dispose of any property or asset or engage in any transaction or subject any of FMB's properties or assets to any material lien, claim, charge, or encumbrance of any kind whatsoever; (k) not take or permit to be taken any action which would constitute a breach of any representation, warranty or covenant set forth in this Agreement; (l) not declare, set aside or pay any dividend or make any other distribution in respect of FMB Common Stock, except as provided in Section 6.9 of this Article VI; (m) not authorize, purchase, issue or sell (or authorize, issue or grant options, warrants or rights to purchase or sell) any shares of FMB Common Stock or any other equity or debt securities of FMB or any securities convertible into FMB Common Stock; (n) not increase the rate of compensation of, pay a bonus or severance compensation to, or enter into any employment, severance, deferred compensation or other agreement with any officer, director, employee or consultant of FMB, except that FMB may grant reasonable salary increases and bonuses to its officers and employees in the Ordinary Course of Business to the extent consistent with FMB's past practice; (o) not enter into any related party transaction of the kind contemplated in Section 3.20 of Article III of this Agreement except such related party transactions relating to extensions of credit made in accordance with all applicable laws, regulations and rules and in the Ordinary Course of Business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable arms' length transactions with other persons that do not involve more than the normal risk of collectibility or present other unfavorable features and after disclosure of such to HNC; 23 Execution Copy 09/07/95 (p) not change the presently outstanding number of shares or effect any capitalization, reclassification, stock dividends, stock split or like change in capitalization; (q) not enter into or substantially modify (except as may be required by applicable law) any pension, retirement, stock option, stock warrant, stock purchase, stock appreciation right, savings, profit sharing, deferred compensation, severance, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, or plan or arrangement, or any trust agreement related thereto, in respect to any of its directors, officers, or other employees; (r) not merge with or into, or consolidate with, or be purchased or acquired by, any other corporation, financial institution, entity, or person (or agree to any such merger, consolidation, affiliation, purchase or acquisition) or permit (or agree to permit) any other corporation, financial institution, entity or person to be merged with it or consolidate or affiliate with any other corporation, financial institution, entity or person; acquire control over any other firm, financial institution, corporation or organization or create any subsidiary; acquire, liquidate, sell or dispose (or agree to acquire, liquidate, sell or dispose) of any assets, other than in the Ordinary Course of Business and consistent with prior practice; (s) not solicit or encourage inquiries or proposals with respect to, furnish any information relating to, or participate in any negotiations or discussions concerning any acquisition or purchase of all or a substantial equity interest or portion of the assets in or of FMB or any business combination with FMB other than as contemplated by this Agreement, or authorize or permit any officer, director, agent or affiliate of it to do any of the above; or fail to notify HNC immediately if any such inquiries or proposals are received by, any such information is requested from, or any such negotiations are sought to be initiated with FMB; (t) not change any method, practice or principle of accounting except as may be required by generally accepted accounting principles or any applicable regulator or take any action that would preclude satisfaction of the condition to closing contained in Section 8.1(c) relating to financial accounting treatment of the Merger; (u) not make any loan or other credit facility commitment in excess of $100,000 (including without limitation, lines of credit and letters of credit) to any affiliate or compromise, expend, renew or modify any such outstanding commitment; (v) not enter into any swap or similar commitment, agreement or arrangement which is not consistent with past practice and which increases the credit or interest rate risk over the levels existing at June 30, 1995; 24 Execution Copy 09/07/95 (w) not enter into any derivative, cap or floor or similar commitment, agreement or arrangement, except in the Ordinary Course of Business and consistent with past practices; (x) take any action which would result in any of the representations and warranties of FMB set forth in this Agreement becoming untrue as of any date after the date hereof; (y) not sell, exchange or otherwise dispose of any investment securities or loans that are held for sale, prior to scheduled maturity and other than pursuant to policies agreed upon from time to time by the parties; (z) not purchase any security for its investment portfolio not rated "A" or higher by either Standard & Poor's Corporation or Moody's Investor Services, Inc.; (aa) not waive, release, grant or transfer any rights of value or modify or change in any material respect any existing agreement to which FMB is a party, other than in the ordinary course of business consistent with past practice; (bb) not knowingly take any action that would, under any statute, regulation or administrative practice of any regulatory agency, materially or adversely affect the ability of any party to this Agreement to obtain any required approvals for consummation of the transaction; and (cc) not agree to any of the foregoing items (i) through (bb). Section 6.2. Best Efforts. FMB shall cooperate with HNC and CNB and shall use its best efforts to do or cause to be done all things necessary or appropriate on its part in order to fulfill the conditions precedent set forth in Article VIII of this Agreement and to consummate this Agreement. In particular, without limiting the generality of the foregoing sentence, FMB shall: (a) cooperate with HNC and CNB in the preparation of all required applications for regulatory approval of the transactions contemplated by this Agreement and in the preparation of the Registration Statement (as defined in Section 7.1(b) of this Agreement); (b) call a special or annual meeting of its shareholders and take, in good faith, all actions which are necessary or appropriate on its part in order to secure the approval and adoption of this Agreement and the Bank Merger Agreement by its shareholders at that meeting, including recommending the approval of such agreements by the shareholders of FMB; 25 Execution Copy 09/07/95 (c) cooperate with HNC and CNB in making FMB's employees reasonably available for training by HNC and CNB prior to the Effective Date, to the extent that such training is deemed reasonably necessary by HNC and CNB to ensure that FMB's office will be properly operated as a part of CNB after the Merger; (d) make additions to loan loss reserves and make loan write- offs, write-downs and other adjustments that reasonably should be made by FMB in light of generally accepted accounting principles, directives of governmental authorities, and all regulations, rules and directives of the FDIC, Department of Banking, and Federal Reserve, prior to the closing of FMB's books of account for its fiscal year ending December 31, 1994, and for the period from that date until the Effective Date; (e) execute and deliver the Investment Agreement in the form attached hereto as Exhibit "B"; (f) suspend any dividend reinvestment and/or stock repurchase plan, as soon as practicable; (g) modify the Articles of Incorporation or Bylaws or any other documents of FMB reasonably requested by HNC necessary to effectuate the transactions contemplated hereby; and (h) use its best efforts to assure that the directors of FMB shall have executed and delivered the Support Agreement in the form attached hereto as Exhibit "C". Section 6.3. Access to Properties and Records. FMB shall give to HNC, CNB and their authorized representatives (including without limitation their counsel, accountants, economic and environmental consultants and other designated representatives) reasonable access during normal business hours to all properties, books, contracts, documents and records of FMB as HNC or CNB may reasonably request, subject to the obligation of HNC, CNB and their authorized representatives to maintain the confidentiality of all non-public information concerning FMB obtained by reason of such access. Section 6.4. Subsequent Financial Statements. Between the date of execution of this Agreement and the Effective Date, FMB shall promptly prepare and deliver to HNC and CNB as soon as practicable all internal monthly and quarterly financial statements, reports to shareholders and reports to regulatory authorities prepared by or for FMB, including all audit reports submitted to FMB by independent auditors in connection with each annual, interim or special audit of the books of FMB made by such accountants. In particular, without limiting the generality of the foregoing sentence, FMB shall deliver to HNC and CNB as soon as practicable a balance sheet as of September 30, 1995, and a related statement of income for the nine (9) months then ended (which financial statements are hereinafter referred to as the "September 30, 1995 Bank Financial 26 Execution Copy 09/07/95 Statements"). The representations and warranties set forth in Sections 3.7, 3.8 and 3.9 of this Agreement shall apply to the September 30, 1995 Bank Financial Statements. Section 6.5. Board and Committee Minutes. FMB shall provide to HNC, within 10 days after any meeting of the Board of Directors, or any committee thereof, or any senior or executive management committee, a copy of the minutes of such meeting. Section 6.6. Update Schedule. FMB shall promptly disclose to HNC and CNB in writing any change, addition, deletion or other modification to the information set forth in Schedule I. Section 6.7. Notice. FMB shall promptly notify HNC and CNB in writing of any actions, claims, investigations, proceedings or other developments which, if pending or in existence on the date of this Agreement, would have been required to be disclosed to HNC and CNB in order to ensure the accuracy of the representations and warranties set forth in this Agreement or which otherwise could materially and adversely affect the condition (financial or otherwise), assets, liabilities, business operations or future prospects of FMB. Section 6.8. Other Proposals. FMB shall not, nor shall it permit any officer, director, employee, agent, consultant, counsel or other representative to, directly or indirectly, solicit, encourage, initiate or engage in discussions or negotiations with, or respond to requests for information, inquiries or other communications from, any person other than HNC concerning the fact of, or the terms and conditions of, this Agreement, or concerning any acquisition of FMB, or any assets or business thereof (except that FMB officers may respond to inquiries from analysts, regulatory authorities and holders of FMB Common Stock in the Ordinary Course of Business); and FMB shall notify HNC immediately if any such discussions or negotiations are sought to be initiated with FMB by any such person other than HNC or if any such requests for information, inquiries, proposals or communications are received from any person other than HNC. Section 6.9. Dividends. Between the date of this Agreement and the Effective Date, FMB shall only declare and pay cash dividends as provided herein. FMB shall only pay regular quarterly cash dividends in an amount not in excess of $.07 per share during each of the third and fourth calendar quarters of 1995. If the Effective Date of the Merger is after the record date of the HNC 1996 first quarter dividend, then FMB shall be permitted to pay a regular quarterly cash dividend for the first calendar quarter of 1996 in an amount not in excess of $.12 per share. Section 6.10. Core Deposits. FMB shall use commercially reasonable efforts to maintain deposits. Section 6.11. Affiliate Letters. FMB shall deliver or cause to be delivered to HNC and CNB, at or before the Closing (as defined in Section 11.1 of this Agreement), a letter or agreement from each officer, director and shareholder of FMB who may be deemed to be an "affiliate" (as that term is defined for purposes of Rules 145 and 405 27 Execution Copy 09/07/95 promulgated by the SEC under the 1933 Act) of FMB, in form and substance satisfactory to HNC and CNB, under the terms of which each such officer, director or shareholder acknowledges and agrees to abide by all limitations imposed by the 1933 Act and by all rules, regulations and releases promulgated thereunder with respect to the sale or other disposition of the shares of HNC Common Stock to be received by such person pursuant to this Agreement. Section 6.12. No Purchases or Sales of HNC Common Stock During Price Determination Period. Neither FMB nor any executive officer or director of FMB nor any shareholder of FMB who may be deemed to be an "affiliate" (as that term is defined for purposes of Rules 145 and 405 promulgated by the SEC under the 1933 Act) of FMB shall purchase or sell on NASDAQ, or submit a bid to purchase or an offer to sell on NASDAQ, directly or indirectly, any shares of HNC Common Stock or any options, rights or other securities convertible into shares of HNC Common Stock during the Price Determination Period. Section 6.13. Accounting Treatment. FMB acknowledges that HNC and CNB presently intend to treat the business combination contemplated by this Agreement as a "pooling of interests" for financial reporting purposes. FMB shall not take (and shall use its best efforts not to permit any of its directors, officers, employees, shareholders, agents, consultants or other representatives to take) any action which would preclude HNC and CNB from treating such business combination as a "pooling of interests" for financial reporting purposes. Section 6.14. Press Releases. FMB shall not issue any press release related to this Agreement and the Bank Merger Agreement or the transactions contemplated hereby or thereby as to which HNC has not given its prior written consent, and shall consult with HNC as to the form and substance of other public disclosures related thereto; provided, however, that nothing contained herein shall prohibit FMB from making any disclosure which its counsel deems reasonably necessary. Section 6.15. Professional Fees. FMB shall not incur professional expenses in connection with the transactions contemplated by this Agreement in excess of $30,000, unless FMB and HNC mutually agree in writing to increase such amount because of unique and unforeseen circumstances. Such professional expenses shall include those paid and payable to attorneys, accountants, consultants and investment bankers. Section 6.16. Phase I Environmental Audit. FMB shall permit, if HNC elects to do so at its own expense, to cause a "phase I environmental audit" to be performed at any physical location owned or occupied by FMB on the date hereof. Section 6.17. Loan Loss Reserves. FMB shall increase its Loan Loss Reserves by $120,000 from the date hereof to Closing. 28 Execution Copy 09/07/95 ARTICLE VII COVENANTS OF HNC AND CNB From the date of this Agreement until the Effective Date (as defined in Section 11.2 of this Agreement), HNC and CNB covenant and agree to do the following: Section 7.1. Best Efforts. HNC and CNB shall cooperate with FMB and shall use their best efforts to do or cause to be done all things necessary or appropriate on their part in order to fulfill the conditions precedent set forth in Article VIII of this Agreement and to consummate this Agreement. In particular, without limiting the generality of the foregoing sentence, HNC and CNB agree to do the following: (a) Applications for Regulatory Approval. HNC and CNB shall promptly prepare and file, with the cooperation and assistance of FMB, all required applications for regulatory approval of the transactions contemplated by this Agreement and the Bank Merger Agreement. (b) Registration Statement. HNC shall promptly prepare, with the cooperation and assistance of FMB, and file with the SEC a registration statement under the 1933 Act (the "Registration Statement") for the purpose of registering the shares of HNC Common Stock to be issued under the provisions of this Agreement. HNC may rely upon all information provided to it by FMB in this connection and HNC shall not be liable for any untrue statement of a material fact or any omission to state a material fact in the Registration Statement or in the proxy statement and prospectus (the "Proxy Statement/Prospectus") which is prepared as a part thereof, if such statement is made by HNC in reliance upon any information provided to HNC by FMB or by its agents and representatives. HNC will advise FMB, after it receives notice thereof, of the time when the Registration Statement or any Pre- or Post-Effective Amendment thereto has become effective or any supplement or amendment has been filed. (c) State Securities Laws. HNC and CNB, with the cooperation of FMB, shall promptly take all such actions as may be necessary or appropriate in order to comply with all applicable securities laws of any state having jurisdiction over the transactions contemplated by this Agreement. Section 7.2. Access to Properties and Records. HNC and CNB shall give to FMB and to its authorized representatives (including without limitation FMB's counsel, accountants, economic and environmental consultants and other designated representatives) reasonable access during normal business hours to all properties, books, contracts, documents and records of HNC and CNB as FMB may reasonably request, subject to the obligation of FMB and its authorized representatives to maintain the confidentiality of all non-public information concerning HNC or CNB obtained by reason of such access. 29 Execution Copy 09/07/95 Section 7.3. Subsequent Financial Statements. Between the date of execution of this Agreement and the Effective Date, HNC shall promptly prepare and deliver to FMB as soon as practicable each Quarterly Report to HNC's shareholders and any Annual Report to HNC's shareholders normally prepared by HNC. The representations and warranties set forth in Sections 4.5, 4.6 and 4.7 of this Agreement shall apply to the financial statements set forth in the foregoing Quarterly Reports and any Annual Report to HNC's shareholders. Section 7.4. Update Schedule. HNC and CNB shall promptly disclose to FMB in writing any change, addition, deletion or other modification to the information set forth in Schedule II. Section 7.5. Notice. HNC and CNB shall promptly notify FMB in writing of any actions, claims, investigations or other developments which, if pending or in existence on the date of this Agreement, would have been required to be disclosed to FMB in order to ensure the accuracy of the representations and warranties set forth in this Agreement or which otherwise could materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of HNC or CNB. Section 7.6. No Purchase or Sales of HNC Common Stock During Price Determination Period. Neither HNC nor any subsidiary of HNC, nor any executive officer or director of HNC or any subsidiary of HNC, nor any shareholder of HNC who may be deemed to be an "affiliate" (as that term is defined for purposes of Rules 145 and 405 promulgated by the SEC under the 1933 Act) of HNC, shall purchase or sell on NASDAQ, or submit a bid to purchase or an offer to sell on NASDAQ, directly or indirectly, any shares of HNC Common Stock or any options, rights or other securities convertible into shares of HNC Common Stock during the Price Determination Period; provided, however, that HNC may purchase shares of HNC Common Stock in the Ordinary Course of Business during the Price Determination Period pursuant to HNC's employee benefit plans or HNC's dividend reinvestment and stock purchase plan. ARTICLE VIII CONDITIONS PRECEDENT Section 8.1. Common Conditions. The obligations of the parties to consummate this Agreement shall be subject to the satisfaction of each of the following common conditions prior to or as of the Closing, except to the extent that any such condition shall have been waived in accordance with the provisions of Section 9.4 of this Agreement: 30 Execution Copy 09/07/95 (a) Shareholder Approvals. This Agreement shall have been duly authorized, approved and adopted by the shareholders of FMB, as required by applicable provisions of The National Bank Act, the Pennsylvania Banking Code of 1965, as amended, and the required provisions of FMB's Articles of Incorporation. (b) Regulatory Approvals. The parties hereto shall have received all regulatory approvals required in connection with the transactions contemplated by this Agreement and the Bank Merger Agreement, and all notice periods and waiting periods required after the granting of such approvals shall have passed; provided, however, that no such approval shall have imposed any condition or requirement which, in the opinion of the Board of Directors of HNC renders consummation of the Merger inadvisable. (c) Tax Matters. There shall have been received an opinion of counsel from Shumaker Williams, P.C., reasonably satisfactory in form and substance to HNC and CNB and to FMB, to the effect that: (i) The transactions contemplated by this Agreement and by the Bank Merger Agreement will constitute a reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986, as amended; (ii) No gain or loss will be recognized by HNC or CNB or by FMB as a result of the reorganization; (iii) No gain or loss will be recognized by the shareholders of FMB upon receipt of HNC Common Stock in exchange for FMB Common Stock pursuant to the provisions of this Agreement (except in respect of cash which is received in lieu of the issuance of fractional shares of HNC Common Stock and any shareholder of FMB who receives payment in cash as a dissenting shareholder); (iv) The tax basis of the HNC Common Stock to be received by the shareholders of FMB pursuant to the provisions of this Agreement will be the same as the tax basis of the FMB Common Stock surrendered in exchange therefor; (v) The holding periods of the HNC Common Stock to be received by the shareholders of FMB pursuant to the provisions of this Agreement will include the holding periods of the FMB Common Stock surrendered in exchange therefor, provided that such FMB Common Stock is held as a capital asset on the Effective Date; and 31 Execution Copy 09/07/95 (vi) CNB, as the surviving bank to the Bank Merger, will carry-over and take into account all accounting items and tax attributes of FMB, including but not limited to earnings and profits, methods of accounting, and tax basis and holding periods of the assets of FMB. (d) Registration Statement. The Registration Statement (as defined in Section 7.1(b) of this Agreement, including any amendments thereto) shall have been declared effective by the SEC; the information contained therein shall be true, complete and correct in all material respects as of the date of mailing of the Proxy Statement/Prospectus (as defined in Section 7.1(b) of this Agreement) to the shareholders of FMB and HNC; regulatory clearance for the offering contemplated by the Registration Statement (the "Offering") shall have been received from each federal and state regulatory authority having jurisdiction over the Offering, and no stop order shall have been issued or proceedings instituted or threatened by any federal or state regulatory authority to suspend or terminate the effectiveness of the Registration Statement or the Offering. (e) No Suits. No action, suit or proceeding shall be pending or threatened before any federal, state or local court or governmental authority or before any arbitration tribunal which seeks to modify, enjoin or prohibit or otherwise adversely and materially affect the transactions contemplated by this Agreement. (f) Statutes; Orders. No statute, rule, regulation, order, injunction or decree shall have been enacted, entered, promulgated or enforced by any governmental authority which prohibits, restricts or makes illegal the consummation of the transactions contemplated by this Agreement. (g) Other Requirements. All other requirements prescribed by law which are necessary to the consummation of the transactions contemplated by this Agreement shall have been satisfied. (h) Antitrust Laws. All applicable notifications, statutory and regulatory Antitrust Law requirements have been met. Section 8.2. Conditions Precedent to Obligations of HNC and CNB. The obligations of HNC and CNB to consummate this Agreement shall be subject to the satisfaction of each of the following conditions prior to or as of the Closing, except to the extent that any such condition shall have been waived by HNC and CNB in accordance with the provisions of Section 9.4 of this Agreement: (a) Accuracy of Representations and Warranties. All of the representations and warranties of FMB as set forth in this Agreement and the information contained in Schedule I and all Bank Closing Documents (as defined in Section 8.2(j) of this Agreement) shall be true and correct in all material respects as of the Closing as if made on such date (or on the date to which it relates in the case of any representation or warranty which expressly relates to an earlier date). 32 Execution Copy 09/07/95 (b) Covenants Performed. FMB shall have performed or complied in all material respects with each of the covenants required by this Agreement to be performed or complied with by it. (c) Opinion of Counsel for FMB. FMB shall have delivered to HNC and CNB an opinion of its counsel, Hugh A. Benson, Jr., Esq., in form and substance reasonably satisfactory to HNC and CNB, to the effect that, as of the Closing: (i) FMB is a Pennsylvania state-chartered bank and trust company duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and has full power and lawful authority to own and hold its properties and to carry on its present business; (ii) FMB is an insured bank under the provisions of the Federal Deposit Insurance Act, as amended; (iii) the authorized capital of FMB consists exclusively of 3,000,000 shares of common stock of Two Dollars ($2.00) par value per share, of which 720,000 shares are validly issued, 708,016 shares are outstanding, fully paid and non-assessable and 11,984 shares are held as treasury shares; and, to the knowledge of such counsel after reasonable inquiry, there are no outstanding obligations, options or rights of any kind entitling other persons to purchase or sell any such shares and there are no outstanding securities or other instruments of any kind convertible into such shares; (iv) FMB has full corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated herein, and all corporate actions required to be taken by FMB to authorize the execution and delivery of this Agreement and the performance of the transactions contemplated herein have been taken; (v) this Agreement has been duly executed and delivered by FMB and, assuming due authorization, execution and delivery by HNC and CNB, constitutes a valid and binding obligation of FMB and is enforceable against FMB in accordance with its terms, subject to bankruptcy, insolvency, and other laws of general applicability relating to or affecting creditors' rights and general equity principles; (vi) the performance of this Agreement by FMB will not violate the Articles of Incorporation or the Bylaws of FMB or, to the knowledge of such counsel after reasonable inquiry, any applicable statute, rule, regulation, order, decree, directive, consent agreement, memorandum of understanding, contract, indenture or other instrument to which FMB is a party or by which its properties are bound; 33 Execution Copy 09/07/95 (vii) to the knowledge of such counsel after reasonable inquiry, there is no action, suit or proceeding pending or threatened of the kind contemplated under Section 8.1(e) of this Agreement; (viii) to the knowledge of such counsel after reasonable inquiry, there is no action, suit or proceeding pending or threatened against FMB (except as described in Schedule I to this Agreement or in such counsel's opinion) that, if determined adversely to FMB, would have a material and adverse effect upon the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of FMB; (ix) no consent, approval, authorization or order of any federal, state or local court or governmental authority is required to be obtained by FMB in connection with the consummation of the transactions contemplated in this Agreement, other than such consents, approvals, authorizations and orders as have been obtained prior to the Closing; and (x) such other legal matters incident to the matters contemplated hereby as may reasonably be requested by HNC and CNB. For purposes of Clause (viii) above, any action, suit or proceeding seeking to recover from FMB damages, fines, penalties or other relief having a monetary value of $10,000 or more shall be deemed to be "material". In giving the foregoing opinion, such counsel may rely as to matters of fact without independent investigation, to the extent such counsel deems such reliance necessary, appropriate, and reasonable, provided, however, that such reliance is expressly noted in such opinion, and on certificates of federal, state or local governmental officials and on certificates of officers and directors of FMB. Such counsel may expressly exclude any opinions as to choice of law matters and antitrust matters and may add other qualifications and explanations of the basis of its opinions as are reasonably acceptable to HNC and CNB. [The opinion of FMB's counsel shall be governed by the Legal Opinion Accord ("Accord") of the American Bar Association Section of Business Law (1991). The term "Actual Knowledge" as used herein shall have the meaning set forth in the Accord. In addition, such opinion may be limited to present statutes, regulations, rulings and formal agency and judicial interpretations and to facts as they presently exist; in rendering such opinion, such counsel need assume no obligation to revise or supplement it should the present laws be changed by the legislative or regulatory action, judicial decision or otherwise after such opinion is rendered. Such counsel may assume that any agreement is the valid and binding obligation of any parties to such agreement other than FMB. In giving such opinion, such counsel may rely as to all matters of facts or certificates of officers or directors of FMB and certificates of public officials, so long as such reliance and the facts thereunder are expressly stated. Such counsel's opinion shall be limited to matters governed by federal laws and by the laws of the Commonwealth of Pennsylvania. With respect 34 Execution Copy 09/07/95 to matters involving the application of Pennsylvania law, such counsel may rely, to the extent it deems proper and as specified in its opinion, upon the opinion of local counsel.] (d) Financial Confirmation. Within sixty (60) days of the execution of this Agreement, HNC and CNB (and their accountants if the advice of such accountants is deemed necessary or desirable by HNC and CNB) shall have established to their satisfaction that the Bank Balance Sheet fairly presents the financial condition, assets and liabilities of FMB as at June 30, 1995, and that, since December 31, 1994, there has not been any material and adverse change in the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of FMB. (e) Accountants' Comfort Letter. HNC shall have received "comfort" letters from FMB's independent certified public accountants dated (i) the date of the mailing of the Proxy Statement and (ii) the Effective Date, in each case substantially to the effect that: (A) it is a firm of independent public accountants with respect to FMB within the rules and regulations of the SEC; (B) in its opinion the audited financial statements of FMB examined by it and included in the Proxy Statement comply as to form in all material respects with the applicable rules and regulations of the SEC; and (C) on the basis of specified procedures (which do not constitute an examination in accordance with generally accepted auditing standards), nothing has come to its attention which causes it to believe: (1) that the financial statements, if any, of FMB included in such Proxy Statement do not comply in all material respects with the applicable accounting requirements and of the rules and regulations of the SEC and (2) that any such unaudited financial statements of FMB from which unaudited quarterly financial information set forth in such Proxy Statement has been derived, are not fairly presented in conformity with generally accepted accounting principles applied on a basis consistent with that of the audited financial statements. (f) Accounting Treatment. HNC, CNB and their accountants shall have established to their satisfaction that, as of the Closing, the transactions contemplated by this Agreement can be accounted for as a "pooling of interests" for financial reporting purposes. (g) Federal and State Securities and Antitrust Laws. HNC, CNB and their counsel shall have determined to their satisfaction that, as of the Closing, all applicable securities and antitrust laws of the federal government and of any state government having jurisdiction over the transactions contemplated by this Agreement shall have been complied with. 35 Execution Copy 09/07/95 (h) Dissenting Shareholders. Holders of no more than five percent (5%) of the issued and outstanding shares of FMB (35,400) shall have exercised their statutory appraisal or Dissenters' Rights. (i) Environmental Matters. No environmental problem of the kind contemplated in Section 3.25 of Article III of this Agreement and not previously disclosed on Schedule I shall have been discovered which would, or which potentially could, materially and adversely affect the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of FMB; provided, that for purposes of determining the materiality of an undisclosed environmental problem or problems, the definition of "material" shall be governed by the proviso to Section 8.2 of this Agreement. The result of any "Phase I environmental audit" conducted pursuant to Section 6.16 with respect to owned or occupied bank premises shall be reasonably satisfactory to HNC. (j) Closing Documents. FMB shall have delivered to HNC and CNB: (i) a certificate signed by FMB's Chairman of the Board or President and by its Secretary, or such other designated and authorized officers, verifying that, to the best of their knowledge after reasonable investigation, all of the representations and warranties of FMB set forth in this Agreement are true and correct in all material respects as of the Closing and that FMB has performed in all material respects each of the covenants required to be performed by it under this Agreement; (ii) all consents and authorizations of landlords and other persons that are necessary to permit this Agreement to be consummated without violation of any lease or other agreement to which FMB is a party or by which FMB or any of its properties are bound; and (iii) such other certificates and documents as HNC, CNB and their counsel may reasonably request (all of the foregoing certificates and other documents being herein referred to as the "Bank Closing Documents"). (k) FMB's Shareholders Equity. The total shareholders equity of FMB (excluding the reserve for loan losses) on a generally accepted accounting basis on the Effective Date shall be no less than Seven Million Nine Hundred Thousand Dollars ($7,900,000). (l) Benefit Plans. HNC and CNB shall have determined within 60 days of the execution of this Agreement that the medical, health, insurance, and employee benefit plans or programs of FMB shall not contain any provision or term which upon assumption by HNC or CNB on the Effective Date would require HNC or CNB to provide benefits or incur cost in excess of those provided or paid by HNC or CNB to or on behalf of its existing employees. (m) Investment Agreement. FMB shall have executed and delivered to HNC an "Investment Agreement" in the form attached hereto as Exhibit "B". 36 Execution Copy 09/07/95 (n) Support Agreement. Each of the Directors of FMB shall have executed and delivered to HNC a "Support Agreement" in the form attached hereto as Exhibit "C". Section 8.3. Conditions Precedent to the Obligations of FMB. The obligation of FMB to consummate this Agreement shall be subject to the satisfaction of each of the following conditions prior to or as of the Closing, except to the extent that any such condition shall have been waived by FMB in accordance with the provisions of Section 9.4 of this Agreement: (a) Accuracy of Representations and Warranties. All of the representations and warranties of HNC and CNB as set forth in this Agreement and the information contained in Schedule II and all HNC/CNB Closing Documents (as defined in Section 8.3(e) of this Agreement) shall be true and correct in all material respects as of the Closing as if made on such date (or on the date to which it relates in the case of any representation or warranty which expressly relates to an earlier date). (b) Covenants Performed. HNC and CNB shall have performed or complied in all material respects with each of the covenants required by this Agreement to be performed or complied with by them. (c) Opinion of Counsel for HNC and CNB. HNC and CNB shall have delivered to FMB an opinion of its special counsel, Shumaker Williams, P.C., in form and substance reasonably satisfactory to FMB, to the effect that, as of the Closing: (i) HNC is a business corporation that is duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania; (ii) HNC is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and has full corporate power and authority to own and hold its properties and to carry on its present business; (iii) CNB is a national banking association that is duly organized and validly existing under the laws of the United States and has full corporate power and authority to own and hold its properties and to carry on its present business; (iv) HNC and CNB have full corporate power and authority to execute and deliver this Agreement and to carry out the transactions contemplated herein, and all corporate actions required to be taken by HNC and CNB to authorize the execution and delivery of this Agreement and the performance of the transactions contemplated herein have been taken; 37 Execution Copy 09/07/95 (v) this Agreement has been duly authorized, executed and delivered by HNC and CNB and, assuming due authorization, execution and delivery by FMB, constitutes a valid and binding obligation of each of HNC and CNB and is enforceable against HNC in accordance with its terms, subject to bankruptcy, insolvency, and other laws of general applicability relating to or affecting creditors' rights and general equity principles; (vi) to the knowledge of such counsel, there is no action, suit, or proceeding pending or threatened against HNC or CNB (except as described in Schedule II to this Agreement or in such counsel's opinion) that, if determined adversely to HNC or CNB, would have a material and adverse affect upon the condition (financial or otherwise), assets, liabilities, business, operations or future prospects of HNC or CNB; (vii) to the knowledge of such counsel after reasonable investigation, there is no action, suit or proceeding pending or threatened of the kind contemplated under Section 8.1(e) of this Agreement; (viii) the shares of HNC Common Stock to be issued under this Agreement have been duly authorized and, when issued, will be validly issued, fully paid and non-assessable; (ix) no consent, approval, authorization or order of any federal, state or local court or governmental authority is required to be obtained by HNC or CNB in connection with the consummation of the transactions contemplated in this Agreement, other than such consents, approvals, authorizations and orders as have been obtained prior to the Closing; and (x) such other legal matters incident to the matters contemplated hereby as may reasonably be requested by FMB. In giving the foregoing opinion, such counsel may rely as to matters of fact without reasonable investigation, to the extent such counsel deems such reliance necessary, appropriate and reasonable, provided, however, that such reliance is expressly noted on such opinion, and on certificates of federal, state or local governmental officials and on certificates of officers and directors of HNC and CNB. Such counsel may exclude any opinions as to choice of law matters and antitrust matters and may add other qualifications and explanations of the basis of its opinions as are reasonably acceptable to FMB. (d) Fairness Opinion. FMB shall have obtained from Danielson Associates, Inc. or from another independent financial advisor selected by the Board of Directors of FMB, an opinion dated as of the date of the Proxy Statement/Prospectus for the special or annual meeting of FMB's shareholders contemplated by Section 6.2(b) of this Agreement, stating that the consideration to be received by the holders of FMB Common Stock is fair, from a financial point of view, to such shareholders. 38 Execution Copy 09/07/95 (e) Closing Documents. HNC shall have delivered to FMB: (i) a certificate signed by its Chairman of the Board or President and its Secretary verifying that, to the best of their knowledge after reasonable investigation, all of the representations and warranties of HNC and CNB set forth in this Agreement are true and correct in all material respects as of the Closing and that HNC and CNB have performed in all material respects each of the covenants required to be performed by them; and (ii) such other certificates and documents as FMB and its counsel may reasonably request (all of the foregoing certificates and documents being herein referred to as the "HNC/CNB Closing Documents"). ARTICLE IX TERMINATION, AMENDMENT AND WAIVER Section 9.1. Termination. This Agreement may be terminated at any time before the Effective Date (whether before or after the authorization, approval and adoption of this Agreement by the shareholders of FMB) as follows: (a) Mutual Consent. This Agreement may be terminated by mutual consent of the parties upon the affirmative vote of a majority of each of the Boards of Directors of FMB, HNC and CNB, followed by written notices given to each of the other parties. (b) Unilateral Action by HNC and CNB. This Agreement may be terminated unilaterally by the affirmative vote of each of the Boards of Directors of HNC and CNB, followed by written notice given to FMB, if: (i) there has been a material breach by FMB of any representation, warranty or covenant set forth in this Agreement and such breach has not been cured within thirty (30) days after written notice of such breach has been given by HNC and CNB to FMB; or (ii) any condition precedent to HNC's and CNB's obligations as set forth in Article VIII of this Agreement remains unsatisfied, through no fault of HNC or CNB, on June 30, 1996. (c) Unilateral Action By FMB. This Agreement may be terminated unilaterally by the affirmative vote of a majority of the Board of Directors of FMB, followed by written notice given to HNC and CNB, if: (i) there has been a material breach by HNC or CNB of any representation, warranty or covenant set forth in this Agreement and such breach has not been cured within thirty (30) days after written notice of such breach has been given to HNC and CNB; or (ii) any condition precedent to FMB's obligations as set forth in Article VIII of this Agreement remains unsatisfied, through no fault of FMB, on June 30, 1996. (d) Automatic Termination. If, for any reason, this transaction shall not have been consummated by June 30, 1996, this Agreement shall terminate automatically as of that date unless extended, in writing, prior to said date by mutual action of the Boards of Directors of the parties hereto. 39 Execution Copy 09/07/95 (e) Due Diligence Termination. HNC may terminate this Agreement by giving written notice to FMB, if any matter or thing has come to the attention of HNC in the course of its investigation of the schedules attached to this Agreement or otherwise with respect to FMB that, in its sole opinion, leads it to believe that any such matter or thing materially and adversely affects the financial or business performance or prospects of FMB so that it would be inadvisable for HNC, in its sole and exclusive judgment, exercised in a commercial and reasonable manner, to proceed with this transaction. Section 9.2. Effect of Termination. (a) Effect. In the event of termination, this Agreement shall become null and void and the transactions contemplated herein shall thereupon be abandoned, except that the provisions relating to limited liability and confidentiality set forth in Sections 9.2(b) and 9.2(c) of this Agreement shall survive. (b) Limited Liability. The termination of this Agreement in accordance with the terms of Section 9.1 shall create no liability on the part of any party, or on the part of any party's directors, officers, shareholders, agents or representatives, except that if this Agreement is terminated by HNC and CNB by reason of a material breach by FMB, or if this Agreement is terminated by FMB by reason of a material breach by HNC or CNB, and such breach involves an intentional, willful or grossly negligent misrepresentation or breach of covenant, the breaching party shall be liable to the non-breaching party or parties for all costs and expenses reasonably incurred by the non-breaching party or parties in connection with the preparation, execution and consummation of this Agreement, including the fees of its or their counsel, accountants, consultants and other representatives. (c) Confidentiality. In the event of the termination of this Agreement, neither HNC nor CNB nor FMB shall use or disclose to any other person any confidential information obtained by it during the course of its investigation of the other party or parties. Section 9.3. Amendment. To the extent permitted by law, this Agreement may be amended at any time before the Effective Date (whether before or after the authorization, approval and adoption of this Agreement by the shareholders of FMB) by a written instrument duly authorized, executed and delivered by HNC and CNB and by FMB; provided, however, that any amendment to the provisions of Article II of this Agreement relating to the consideration to be received by the former shareholders of FMB in exchange for their shares of FMB Common Stock shall not take effect until such amendment has been approved, adopted or ratified by the shareholders of FMB in accordance with applicable federal and state law. Section 9.4. Waiver. Any term or condition of this Agreement may be waived, to the extent permitted by law, by the party or parties entitled to the benefit thereof at any time before the Effective Date (whether before or after the authorization, 40 Execution Copy 09/07/95 approval and adoption of this Agreement by the shareholders of FMB) by a written instrument duly authorized, executed and delivered by such party or parties. ARTICLE X RIGHTS OF DISSENTING SHAREHOLDERS OF FMB Section 10.1. Rights of Dissenting Shareholders of FMB. The shareholders of FMB shall be entitled to and may exercise dissenters' rights if and to the extent they are entitled to do so under the provisions of 12 U.S.C. Section 215a or applicable law. ARTICLE XI CLOSING AND EFFECTIVE DATE Section 11.1. Closing. Provided that all conditions precedent set forth in Article VIII of this Agreement shall have been satisfied or shall have been waived in accordance with Section 9.4 of this Agreement, the parties shall hold a closing (the "Closing") at the offices of HNC at 483 Main Street, Harleysville, Pennsylvania, or such other mutually agreed upon location, within sixty (60) days after the receipt of all required regulatory approvals and after the expiration of all applicable waiting periods on a date to be agreed upon by the parties, at which time the parties shall deliver the FMB Closing Documents, the HNC/CNB Closing Documents, the opinions of counsel required by Sections 8.1(c), 8.2(c) and 8.3(c) of this Agreement, and such other documents and instruments as may be necessary or appropriate to effectuate the purposes of this Agreement. Section 11.2. Effective Date. The Merger of FMB with and into CNB shall become effective and this Agreement and the Bank Merger Agreement shall be consummated on the date upon which the Closing has occurred and the OCC issues a Certificate of Merger (the "Effective Date"). At the Effective Date, FMB shall cease to exist as a separate banking institution, and CNB shall become the surviving institution of the Merger. ARTICLE XII NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES Section 12.1. No Survival. The representations and warranties of FMB and of HNC and CNB set forth in this Agreement shall expire and be terminated on the Effective Date by consummation of this Agreement, and no such representation or warranty shall thereafter survive. 41 Execution Copy 09/07/95 ARTICLE XIII POST-MERGER AGREEMENTS Section 13.1. Employees. (a) Prior to the Effective Date, HNC and CNB shall interview employees of FMB for purposes of determining employment after the Effective Date. Nothing in this Agreement, however, shall obligate or require HNC and CNB to hire or employ any FMB employee after the Effective Date. (b) Immediately following the Effective Date, former FMB employees who are employed by CNB shall be entitled to participate in any benefit plans in effect at such time for employees of CNB in accordance with the terms of such plans. Former FMB employees who are employed by CNB shall receive service credit from their respective hire dates for employment at FMB for purposes of eligibility and vesting requirements (but not for purposes of benefit accrual) under CNB's benefit plans, and service credit from the Effective Date for purposes of benefit calculation under CNB's benefit plans. (c) Pre-existing condition requirements for health, life, disability and other benefits and any insurance waiting period will only be waived for employees offered employment with CNB to the extent that the CNB's insurance policies or programs would permit same without an increase in CNB's premiums or costs associated therewith. (d) As provided herein, HNC will provide, after the Merger, severance payments to employees of FMB (other than employees whose severance benefits are provided for in written employment agreements) whose employment is terminated (other than for cause) after the Effective Date, and before the expiration of 3 months following the Effective Date. HNC, CNB and FMB shall consult and mutually agree upon the individual amounts to be received by former FMB employees who are eligible for severance payments. Factors to be considered in the determination of individual severance payments to former FMB employees include, among others: years of service, title and responsibilities. Severance payments shall not exceed $75,000 in the aggregate and, HNC's and CNB's liability under this Section 13.1(d) shall not exceed $75,000. (e) Richard K. Arnold shall be employed by CNB for at least 6 months following the Effective Date at a salary equal to his salary in effect prior to the date of this Agreement. A performance review of Mr. Arnold by appropriate officers of CNB and HNC will occur within 3 months of the Effective Date. Notwithstanding the above, after the Effective Date, Mr. Arnold may be terminated for cause under the provisions of CNB and HNC's applicable policies at any time. 42 Execution Copy 09/07/95 Section 13.2. Regional Board of Directors. (a) Composition; Term; Duties. Immediately following the Effective Date and for a period of at least one (1) year thereafter, there shall be established a Regional Board of Directors for the Honesdale Area (the "Regional Board of Directors") comprised of the following members of the Board of Directors of FMB as of the date of this Agreement: John J. Koehler, Richard J. Shershenovich, Charles P. McGinnis, Dale D. Fowler, Nelson W. Leet, Samuel C. Siepiela and Wayne W. Stephens. All other members of the FMB Board of Directors who do not serve on the Regional Board of Directors may serve as Directors Emeriti. Except as provided herein, the Regional Board of Directors and Directors Emeriti shall serve at the will and direction of the Board of Directors of CNB. Except as provided herein, the Board of Directors of CNB shall determine from time to time, among other things, the duties, obligations, responsibilities, compensation and subsequent terms of the Regional Board of Directors and Directors Emeriti. (b) Compensation. For one (1) year following the Effective Date, members of the Regional Board of Directors, including Directors Emeriti, shall receive Board Fees of Two Hundred Dollars ($200) per month as compensation for services rendered in their capacity as a Director. After the expiration of the one (1) year term following the Effective Date, compensation of the Regional Board of Directors and Directors Emeriti shall be determined by the Board of Directors of CNB in accordance with Section 13.2(a). (c) Benefits. The members of the Regional Board of Directors and Directors Emeriti shall receive the following Benefits for service on the Regional Board of Directors. For one (1) year following the Effective Date, members of the Regional Board of Directors, including Directors Emeriti, shall be entitled to have premiums paid by CNB for participation in a health insurance plan the benefits and terms of which are reasonably comparable to that of CNB, HNC or FMB. In no event, however, shall the cash payments or premiums to be paid by CNB for health insurance coverage, pursuant to an alternative comparable plan, or CNB's or HNC's liability hereunder, exceed $16,000, in the aggregate, for all members of the Regional Board of Directors and Directors Emeriti. For one (1) year following the Effective Date, CNB shall also pay the premiums for the current group life insurance policies for the members of the Regional Board of Directors, including Directors Emeriti, subject to the availability of such continued participation. If such participation is not available, members of the Regional Board of Directors, including Directors Emeriti, shall be entitled to have the premiums paid by CNB for participation in another group life insurance policy the benefits and terms of which are comparable to that of CNB, HNC or FMB. In no event, however, shall the premiums paid by CNB for life insurance for members of the Regional Board of Directors and Directors Emeriti, whether pursuant to an existing policy of CNB, HNC or FMB, or pursuant to a comparable policy, or CNB's or HNC's liability hereunder exceed, in the aggregate, the amount paid by FMB for such life insurance coverage during 1994 for the Directors of FMB. 43 Execution Copy 09/07/95 (d) Liability Insurance. For a period of two years following the Effective Date, HNC shall purchase for the benefit of the former directors of FMB, liability insurance commonly referred to as tail coverage on terms comparable to the FMB insurance plan currently in effect, so long as said insurance can be purchased from a reputable insurer at commercially reasonable rates and terms, including the term that such policy be on a "claims made" basis. Section 13.3. Regional Presence. Subject to regulatory approval, CNB shall file a fictitious name registration for Farmers & Merchants Bank of Honesdale, so that such name may be utilized for marketing purposes by CNB in the Honesdale Area after the Effective Date. ARTICLE XIV GENERAL PROVISIONS Section 14.1. Expenses. Except as provided in Section 9.2(b) of this Agreement, each party shall pay its own expenses incurred in connection with this Agreement and the consummation of the transactions contemplated herein. For purposes of this Section 14.1, the cost of printing the Proxy Statement/Prospectus shall be deemed to be an expense of HNC and CNB. Section 14.2. Other Mergers and Acquisitions. Subject to the right of FMB to refuse to consummate this Agreement pursuant to Section 9.1(c) of this Agreement, nothing set forth in this Agreement or any Exhibit hereto shall be construed: (a) to preclude HNC from acquiring, or to limit in any way the right of HNC to acquire, prior to or following the Effective Date, the stock or assets of any other financial services institution or other corporation or entity, whether by issuance or exchange of HNC Common Stock or otherwise; (b) to preclude HNC from issuing, or to limit in any way the right of HNC to issue, prior to or following the Effective Date, HNC Common Stock, HNC Preferred Stock or other securities; (c) to preclude HNC from granting options at any time with respect to HNC Common Stock, HNC Preferred Stock or other securities; (d) to preclude option holders of HNC from exercising options at any time with respect to HNC Common Stock, HNC Preferred Stock or other securities; or (e) to preclude HNC from taking, or to limit in any way the right of HNC to take, any other action not expressly and specifically prohibited by the terms of this Agreement. 44 Execution Copy 09/07/95 Section 14.3. Access; Confidentiality. The parties hereby agree to conduct the investigations and discussions contemplated by Section 6.3 and Section 7.2 of this Agreement in a manner so as to not interfere unreasonably with normal operations and customer and employee relationships. If the transactions contemplated by this Agreement are not consummated, the parties hereby agree to destroy or return all documents and records obtained from the other or their respective representatives, during the course of any investigation and will cause all information with respect to the other party obtained pursuant to this Agreement or preliminarily thereto to be kept confidential, except to the extent such information becomes public through no fault of the party which has obtained such information or any of its respective representatives or agents and except to the extent disclosure of any such information is legally required. Each party hereby agrees to give the other party prompt notice of any contemplated disclosure where such disclosure is so legally required. Section 14.4. Notices. All notices, claims, requests, demands and other communications which are required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly delivered if delivered in person, transmitted by facsimile machine (but only if receipt is acknowledged in writing), mailed by registered or certified mail, return receipt requested or sent by recognized overnight delivery service guaranteeing next day delivery addressed as follows: (a) If to HNC and/or CNB, to: Mr. Walter E. Daller, Jr. President and Chief Executive Officer HARLEYSVILLE NATIONAL CORPORATION 483 Main Street, P.O. Box 195 Harleysville, Pennsylvania 19438 With a copy to: Nicholas Bybel, Jr., Esquire SHUMAKER WILLIAMS, P.C. 3425 Simpson Ferry Road Camp Hill, Pennsylvania 17011 (b) If to FMB, to: Mr. Richard J. Shershenovich President FARMERS & MERCHANTS BANK 1001 Main Street, P.O. Box 430 Honesdale, Pennsylvania 18431 45 Execution Copy 09/07/95 With a Copy to: Hugh A. Benson, Jr., Esquire 106 North Market Street Selinsgrove, PA 17870 Section 14.5. Captions. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. Section 14.6. Counterparts. This Agreement may be executed simultaneously in several counterparts, each of which shall be deemed an original, but all such counterparts together shall be deemed to be one and the same instrument. Section 14.7. Severability. If any provision of this Agreement or the application thereof to any party or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to other parties or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. Section 14.8. Parties in Interest. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that the rights and obligations of any party under this Agreement may not be assigned or delegated by that party without the prior written consent of each other party. Section 14.9. Entire Agreement. This Agreement, including the documents and other writings referred to herein or delivered pursuant hereto sets forth the entire understanding and agreement of the parties hereto and supersedes any and all prior agreements, arrangements and understandings, oral or written, relating to the subject matter hereof. Section 14.10. Governing Law. This Agreement shall be governed by and construed in accordance with the domestic internal laws of the Commonwealth of Pennsylvania, without regard to the conflict laws principles thereof. 46 Execution Copy 09/07/95 IN WITNESS WHEREOF, intending to be legally bound hereby, this Agreement is executed as of the day and year first above written. ATTEST: HARLEYSVILLE NATIONAL CORPORATION By: /s/ Jo Ann M. Bynon By: /s/ Walter E. Daller, Jr. __________________________ __________________________ Jo Ann M Bynon, Assistant Walter E. Daller, Jr. Secretary of the Board President and Chief Executive Officer [CORPORATE SEAL] ATTEST: THE CITIZENS NATIONAL BANK OF LANSFORD By: /s/ Demetra M. Takes By: /s/ Thomas D. Oleksa ___________________________ ___________________________ Demetra M. Takes, Corporate Thomas D. Oleksa, President Secretary [BANK SEAL] ATTEST: FARMERS & MERCHANTS BANK (HONESDALE, PA.) By: /s/ Charles P. McGinnis By: /s/ Richard J. Shershenovich __________________________ ____________________________ Charles P. McGinnis Richard J. Shershenovich Corporate Secretary President [BANK SEAL] 47 Execution Copy 09/07/95 AGREEMENT AND PLAN OF MERGER EXHIBIT A OF FARMERS & MERCHANTS BANK (HONESDALE, PA.) with and into THE CITIZENS NATIONAL BANK OF LANSFORD under the charter and title of THE CITIZENS NATIONAL BANK OF LANSFORD THIS AGREEMENT AND PLAN OF MERGER ("Bank Merger Agreement") is dated as of September 7, 1995, by and between THE CITIZENS NATIONAL BANK OF LANSFORD, a national banking association, having its principal office at 13-15 W. Ridge Street, P.O. Box 128, Lansford, Pennsylvania 18232 ("CNB"), and FARMERS & MERCHANTS BANK (HONESDALE, PA.), a Pennsylvania state- chartered bank, having its principal office at 1001 Main Street, P.O. Box 430, Honesdale, Pennsylvania 18431 ("FMB") (the two parties being sometimes collectively referred to as the "Constituent Banks") each acting pursuant to resolutions approved and adopted by the vote of a majority of its directors. WITNESSETH: WHEREAS, FMB and CNB are parties to an Agreement and Plan of Reorganization of even date herewith (the "Reorganization Agreement") which provides, among other things, for the execution of the Bank Merger Agreement and the merger of FMB with and into CNB (the "Merger") in accordance with the terms and conditions set forth therein and herein; and WHEREAS, the respective Boards of Directors of FMB and CNB deem the Merger in accordance with the Reorganization Agreement and pursuant to the terms and conditions herein set forth or referred to, desirable and in the best interests of the Constituent Banks and their respective shareholders; and WHEREAS, the respective Boards of Directors of FMB and CNB have adopted resolutions approving and adopting this Bank Merger Agreement, and the respective Boards of Directors of FMB, CNB and Harleysville National Corporation, the parent bank holding company of CNB ("HNC") have adopted resolutions approving and adopting the Reorganization Agreement, and the Boards of Directors of FMB and CNB have directed that this Bank Merger Agreement and the Reorganization Agreement be submitted to their respective shareholders; and A - 1 Execution Copy 09/07/95 WHEREAS, the approval of this Bank Merger Agreement and the Reorganization Agreement requires the affirmative vote of the holders of at least two-thirds of the outstanding shares of FMB Common Stock and the holders of at least two-thirds of the outstanding shares of CNB Common Stock; NOW, THEREFORE, in consideration of their mutual covenants and agreements contained herein and in the Reorganization Agreement, and for the purpose of stating the method, terms and conditions of the Merger, including the rights of the shareholders of FMB, and such other details and provisions as are deemed desirable, the parties hereto, intending to be legally bound hereby, agree as follows: 1. The Merger. Subject to the terms and conditions of this Bank Merger Agreement and the Reorganization Agreement, and in accordance with the provisions of the Act of November 7, 1918, as amended (12 U.S.C. Section 215a) (the "Bank Merger Act") (as defined in Section 1.1 of the Reorganization Agreement), FMB shall be merged with and into CNB under the Bank Merger Act, and CNB shall be the surviving association. On the Effective Date, the separate existence of FMB shall cease, and CNB shall be the surviving association (the "Surviving Association"), the principal and branch offices of FMB shall become authorized branch offices of CNB ; and all the property (real, personal and mixed), rights, powers, duties, and obligations of FMB and CNB shall be taken and deemed to be transferred to and vested in the Surviving Association, CNB, without further act or deed, as provided by applicable laws and regulations. 2. Name and Location of Principal Office. The name of the Surviving Association shall be The Citizens National Bank of Lansford, and the location of its principal office shall be 13-15 W. Ridge Street, Lansford, Pennsylvania 18232. 3. Articles of Association. The Articles of Association of CNB as in effect immediately prior to the Effective Date, at the Effective Date and thereafter, shall be the Articles of Association of the Surviving Association, until amended in accordance with applicable law. 4. Bylaws. The Bylaws of CNB as in effect immediately prior to the Effective Date, at the Effective Date and thereafter, shall be the Bylaws of the Surviving Association, until amended in accordance with applicable law. 5. Conversion of Shares. The manner and basis of converting shares of common stock of the Constituent Banks shall be as follows: 5.1. Conversion of FMB Common Stock. On the Effective Date (as defined in Section 11.2 of the Reorganization Agreement), the shares of FMB Common Stock then outstanding and eligible for conversion under Article II of the Reorganization Agreement shall be converted into shares of HNC Common Stock in accordance with the terms of and as provided in Section 2.1 of the Reorganization Agreement. A - 2 Execution Copy 09/07/95 5.2. Stock of CNB. The shares of CNB Common Stock issued and outstanding immediately prior to the Effective Date shall continue to be issued and outstanding shares of Common Stock of the Surviving Association. From and after the Effective Date, each certificate that, prior to the Effective Date, represented shares of CNB Common Stock, shall evidence ownership of shares of such Common Stock of the Surviving Association. 6. Surrender and Exchange of FMB Certificates. On the Effective Date (as defined in Section 11.2 of the Reorganization Agreement), the shares of FMB Common Stock certificates shall be exchanged for HNC Common Stock certificates in accordance with and as provided in Section 2.2 of the Reorganization Agreement. 7. Effect of Merger. On the Effective Date, the Surviving Association shall succeed, without further act or deed, to all of the property, rights, powers, duties and obligations of the Constituent Banks in accordance with the Bank Merger Act. Any claim existing or action pending by or against either of the Constituent Banks may be prosecuted to judgment as if the Merger had not taken place, and the Surviving Association may be substituted in its place. 8. Continuation of Business. The Surviving Association shall continue in business with the assets and liabilities of each of the Constituent Banks. The Surviving Association shall be a national banking association organized and having perpetual existence under the laws of the United States. Any branch offices of the Surviving Association shall consist of CNB's and FMB's present principal and branch offices and any other branch office or offices that CNB and FMB may be authorized to have as of the Effective Date. As of the Effective Date, the separate existence of FMB shall cease. 9. Board of Directors and Officers. The Directors and Officers of CNB as in effect immediately prior to the Effective Date shall be the Directors and Officers of the Surviving Association, until such time as their successors have been elected, qualified, or appointed in the case of directors, and appointed in the case of officers. 10. Dissenters' Rights of FMB Shareholders. The rights and remedies of a dissenting shareholder under the Bank Merger Act, shall be afforded to any holder of FMB Common Stock who objects to this Bank Merger Agreement and who takes the necessary steps to perfect the rights of a dissenting shareholder. 11. Effective Date of the Bank Merger. The Effective Date of the Merger shall be as defined and provided for in Section 11.2 of the Reorganization Agreement. 12. Further Assurances. If at any time the Surviving Association shall consider or be advised that any further assignments, conveyances or assurances are necessary or desirable to vest, perfect or confirm in the Surviving Association title to any property or rights of FMB, or otherwise carry out the provisions hereof, the proper officers and directors of FMB, as of the Effective Date, on behalf of FMB shall execute and deliver any and all proper assignments, conveyances and assurances, and do all things necessary or A - 3 Execution Copy 09/07/95 desirable to vest, perfect or confirm title to such property or rights in the Surviving Association and otherwise carry out the provisions hereof. 13. Shareholder Approval. This Bank Merger Agreement shall be approved and adopted by the affirmative vote of shareholders of each of the Constituent Banks owning at least two-thirds of its common stock outstanding. 14. Termination and Amendment. This Bank Merger Agreement may be terminated as provided in Section 9.1 of the Reorganization Agreement. Notwithstanding prior approval by the shareholders of FMB, this Bank Merger Agreement shall be terminated and the Merger shall be abandoned in the event that prior to the Effective Date the Reorganization Agreement is terminated as provided therein. Since time is of the essence to this Bank Merger Agreement, if for any reason the transaction shall not have been consummated by June 30, 1996, this Bank Merger Agreement shall terminate automatically as of that date unless extended, in writing, prior to said date by mutual action of the Boards of Directors of the parties. If there is termination after approval of the Merger by the Office of the Comptroller of the Currency (the "OCC"), the parties shall execute and file with the OCC prior to the Effective Date a statement of termination of the Merger. Notwithstanding prior approval by the shareholders of FMB, this Agreement may be amended in any respect in the manner and subject only to the limitations set forth in Section 9.3 of the Reorganization Agreement. 15. Obligations. The obligations of CNB and FMB to effect the Merger shall be subject to all terms and conditions contained in the Agreement and Plan of Reorganization, except as may be provided by applicable law. 16. Extensions; Waivers. Each party, by a written instrument signed by a duly authorized officer, may extend the time for the performance of any of the obligations or other acts of the party hereto, and may waive compliance with any obligations of the other party contained in this Bank Merger Agreement. 17. Notices. Any notice or other communication required or permitted under this Bank Merger Agreement shall be given, and shall be effective, in accordance with the provisions of the Reorganization Agreement. 18. Counterparts; Headings. This Bank Merger Agreement may be executed in several counterparts, and by the parties hereto on separate counterparts, each of which will constitute an original. The headings and captions contained herein are for reference purposes only and do not constitute a part hereof. 19. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. A - 4 Execution Copy 09/07/95 IN WITNESS WHEREOF, the signatures and seals of said merging banks this 7th day of September, 1995, each hereunto set by its President or a Vice President and attested by its duly authorized officer, pursuant to a resolution of its Board of Directors, acting by a majority thereof, and witness the signatures hereto of a majority of each of said Boards of Directors. ATTEST: FARMERS & MERCHANTS BANK (HONESDALE, PA.) By: /s/ Charles P. McGinnis By: /s/ Richard J. Shershenovich __________________________ ____________________________ Charles P. McGinnis Richard J. Shershenovich Corporate Secretary President [BANK SEAL] /s/ John J. Koehler ____________________________ John J. Koehler /s/ Dale D. Fowler ____________________________ Dale D. Fowler /s/ Nelson W. Leet ____________________________ Nelson W. Leet /s/ Samuel C. Siepiela ____________________________ Samuel C. Siepiela /s/ Wayne W. Stephens ____________________________ Wayne W. Stephens /s/ Richard J. Shershenovich ____________________________ Richard J. Shershenovich /s/ Charles P. McGinnis ____________________________ Charles P. McGinnis Directors of Farmers & Merchants Bank (Honesdale, PA.), Wayne County, Pennsylvania A - 5 Execution Copy 09/07/95 ATTEST: THE CITIZENS NATIONAL BANK OF LANSFORD By: /s/ Demetra M. Takes By: /s/ Thomas D. Oleksa __________________________ __________________________ Demetra M. Takes Thomas D. Oleksa Corporate Secretary President [BANK SEAL] /s/ Thomas S. McCready, Esq. /s/ Frank J. Lochetto ______________________________ ______________________________ Thomas S. McCready, Esq. Frank J. Lochetto /s/ William H. Fegley, Sr. /s/ Thomas D. Oleksa ______________________________ ______________________________ William H. Fegley, Sr. Thomas D. Oleksa /s/ Walter E. Kruczek /s/ Demetra M. Takes ______________________________ ______________________________ Walter E. Kruczek Demetra M. Takes /s/ James D. McMahon ______________________________ James D. McMahon /s/ Joseph M. Porvaznik ______________________________ Joseph M. Porvaznik /s/ John J. Trojan ______________________________ John J. Trojan /s/ Joseph J. Veltisky, Esq. ______________________________ Joseph J. Veltisky /s/ Walter E. Daller, Jr. ______________________________ Walter E. Daller, Jr. Directors of The Citizens National Bank of Lansford, Carbon County, Pennsylvania A - 6 Execution Copy 09/07/95 COMMONWEALTH OF PENNSYLVANIA : : SS. COUNTY OF CARBON : On this 7th day of September, 1995, before me, a Notary Public for the Commonwealth and County aforesaid, personally came Richard J. Shershenovich, as President, and Charles P. McGinnis, as Secretary, of Farmers & Merchants Bank (Honesdale, PA.), and each in his said capacity acknowledged the foregoing instrument to be the act and deed of said banking institution and the seal affixed thereto to be its seal; and came also Richard J. Shershenovich, Charles P. McGinnis, John J. Koehler, Dale D. Fowler, Nelson W. Leet, Samuel C. Siepiela, and Wayne W. Stephens being a majority of the Board of Directors of said banking institution, and each of them acknowledged said instrument to be the act and deed of said banking institution and of himself as director thereof. WITNESS my official seal and signature this day and year aforesaid. /s/ Judith N. Johnson ______________________________ (Seal of Notary) Notary Public, Carbon County My commission expires: January 17, 1998 ______________________________ COMMONWEALTH OF PENNSYLVANIA : : SS. COUNTY OF CARBON : On this 7th day of September, 1995, before me, a Notary Public for the Commonwealth and County aforesaid, personally came Thomas D. Oleksa, as President, and Demetra M. Takes, as Secretary, of The Citizens National Bank of Lansford, and each in his capacity acknowledged the foregoing instrument to be the act and deed of said national banking association and the seal affixed thereto to be its seal; and came also Thomas D. Oleksa, Demetra M. Takes, Thomas S. McCready, Esq., William H. Fegley, Sr., Walter E. Kruczek, James D. McMahon, Joseph M. Porvaznik, John J. Trojan, Joseph J. Velitsky, Esq., Walter E. Daller, Jr., and Frank J. Lochetto being a majority of the Board of Directors of said national banking association and each of them acknowledged said instrument to be the act and deed of said national banking association and of himself as a director thereof. WITNESS my official seal and signature this day and year aforesaid. /s/ Judith N. Johnson ______________________________ (Seal of Notary) Notary Public, Carbon County My commission expires: January 17, 1998 ______________________________ EXHIBIT B Danielson Associates Inc. Fairness Opinion Exhibit B DANIELSON ASSOCIATES INC. 6110 Executive Boulevard Suite 504 Rockville, Maryland 20852-3903 Tel: (301) 468-4884 Fax: (301) 468-0013 January 2, 1996 Board of Directors Farmers & Merchants Bank 1001 Main Street Honesdale, Pennsylvania 18431 Dear Members of the Board: Set forth herein is the updated opinion of Danielson Associates Inc. ("Danielson Associates") as to the "fairness" of the offer of Harleysville National Corporation ("Harleysville") to buy all of the outstanding common stock of the Farmers & Merchants Bank ("Farmers & Merchants" or the "Bank"). The "fair" sale value is defined as the price at which all of the Farmers & Merchants common stock would change hands between a willing seller and a willing buyer, each having reasonable knowledge of the relevant facts. In the course of preparing the original opinion dated September 6, 1995, the Bank's market was analyzed, its business and prospects were discussed with management, and its financial performance compared to banks in the region as well as other Pennsylvania banks. Also, any unique characteristics were considered. The financial and stock performance of Harleysville also was analyzed and compared to comparable banks whose common stock is actively- traded. The prior movement of its common stock and dividend payments was examined, the dilutive effect of this merger on Harleysville's common stock analyzed, its financial performance was related to its stock value and any unique characteristics were considered. This opinion is based on data supplied by both Farmers & Merchants and Harleysville, and it relies on some public information, all of which is believed to be reliable, but neither the completeness nor the accuracy of such information can be guaranteed. The opinion assumes, based on management's representation, that there are still no significant loan problems beyond those stated in the most recent reports to regulatory agencies and in the monthly report to the directors. Board of Directors January 2, 1996 Page Two In determining the "fair" sale value of Farmers & Merchants, primary emphasis was given to prices paid for commercial banks with similar financial, market and structural characteristics. These prices were then related to earnings and capital, also referred to as "book." In determining the "fair" market value of Harleysville's common stock, primary emphasis was given to the market value of comparable banks. The analysis showed its stock to be "fairly" valued. Based on the analysis of both Farmers & Merchants and Harleysville's recent performance and potential, comparisons with similar transactions, and any unique characteristics, it was determined that the $12 million or $17 per share, offered to Farmers & Merchants by Harleysville, which was to be in Harleysville common stock that was "fairly" valued at that time, represented a "fair" offer from a financial point of view to Farmers & Merchants and its shareholders. Subsequently there has been no change in the performance of Harleysville, but there has been a decline in the value of its stock. Harleysville's average closing price for the ten trading days ending December 27, 1995 was $27.10. The value of the transaction, though, remains unchanged, and the Harleysville stock price is still comfortably above the $24.58 price at which the transaction value would begin to decline. Since the transaction value has not changed, this offer is still "fair" from a financial point of view to Farmers & Merchants and its shareholders. Respectfully submitted, /s/ Arnold G. Danielson Arnold G. Danielson President Danielson Associates Inc. EXHIBIT C Statute Regarding Dissenters' Rights EXCERPTS FROM SECTION 215a OF THE NATIONAL BANK ACT RELATING TO DISSENTERS' RIGHTS (b) If a merger shall be voted for at the called meetings by the necessary majorities of the shareholders of each association or State bank participating in the plan of merger, and thereafter the merger shall be approved by the comptroller, any shareholder of any association or State bank to be merged into the receiving association who has voted against such merger at the meeting of the association or bank of which he is a stockholder, or has given notice in writing at or prior to such meeting to the presiding officer that he dissents from the plan of merger, shall be entitled to receive the value of the shares so held by him when such merger shall be approved by the Comptroller upon written request made to the receiving association at any time before thirty days after the date of consummation of the merger, accompanied by the surrender of his stock certificates. (c) The value of the shares of any dissenting shareholder shall be ascertained, as of the effective date of the merger, by an appraisal made by a committee of three persons, composed of (1) one selected by the vote of the holders of the majority of the stock, the owners of which are entitled to payment in cash; (2) one selected by the directors of the receiving association; and (3) one selected by the two so selected. The valuation agreed upon by any two of the three appraisers shall govern. If the value so fixed shall not be satisfactory to any dissenting shareholder who has requested payment, that shareholder may, within five days after being notified of the appraised value of his shares, appeal to the Comptroller, who shall cause a reappraisal to be made which shall be final and binding as to the value of the shares of the appellant. (d) If, within ninety days from the date of consummation of the merger, for any reason one or more of the appraisers is not selected as herein provided, or the appraisers fail to determine the value of such shares, the Comptroller shall upon written request of any interested party cause an appraisal to be made which shall be final and binding on all parties. The expenses of the Comptroller in making the reappraisal or the appraisal, as the case may be, shall be paid by the receiving association. The value of the shares ascertained shall be promptly paid to the dissenting shareholders by the receiving association. The shares of stock of the receiving association which would have been delivered to such dissenting shareholders had they not requested payment shall be sold by the receiving association at an advertised public auction, and the receiving association shall have the right to purchase any of such shares at such public auction, if it is the highest bidder therefor, for the purpose of reselling such shares within thirty days thereafter to such person or persons and at such price not less than par as its board of directors by resolution may determine. If the shares are sold at public auction at a price greater than the amount paid to the dissenting shareholders, the excess in such sale price shall be paid to such dissenting shareholders. The appraisal of such shares of stock in any State bank shall be determined in the manner prescribed by the law of the State in such cases, rather than as provided in this section, if such provision is made in the State law; and no such merger shall be in contravention of the law of the State under which such bank is incorporated. The provisions of this subsection shall apply only to shareholders of (and stock owned by them in) a bank or association being merged into the receiving association. _________________________ Section 215(b)(4) of the National Bank Act defines the term "receiving association," as used in Section 215a, to mean the national banking association into which one or more national banking associations or one or more State banks, located within the same State, merge. PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers. Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law of 1988, as amended (15 Pa. C.S. Sections 1101-4162 (BCL) provides that a business corporation shall have the power under certain circumstances to indemnify its directors, officers, employees and agents against certain expenses incurred by them in connection with any threatened, pending or completed action, suit or proceeding. Article 10 of the Bylaws of Harleysville National Corporation provides for the indemnification of its directors, officers, employees and agents in accordance with, and to the maximum extent permitted by, the provisions of Subchapter D of Chapter 17 of the BCL. Item 21. Exhibits and Financial Statement Schedules. (a) Exhibits: An Exhibit Index containing a list of all exhibits filed with this Registration Statement is included on page II-6. (b) Financial Statement Schedules: None required. (c) Opinion of Financial Advisor: Furnished as part of Prospectus/Proxy Statement. Item 22. Undertakings. (a) 1. The undersigned Registrant hereby undertakes as follows: (A) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; II-1 Provided, however, that paragraphs (1)(a)(i) and (1)(a)(ii) above do not apply if the registration statement is on Form S-3 or Form S-8 and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registration pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (B) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (C) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. 2. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. 3. The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to the reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. The registrant undertakes that every prospectus (i) that is filed pursuant to the preceding paragraph, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-operative amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 4. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the bylaws of the registrant, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against II-2 public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one (1) business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (c) The undersigned registrant hereby undertakes to supplement by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Harleysville, Commonwealth of Pennsylvania, on the 2nd day of January, 1996. HARLEYSVILLE NATIONAL CORPORATION /s/ Walter E. Daller, Jr. By: ______________________________ Walter E. Daller, Jr. President and Chief Executive Officer Pursuant to the requirements of the securities Act of 1933, this amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature and Capacity Date ______________________ ____ John W. Clemens, Director January 2, 1996 Walter E. Daller, Jr., Director/ January 2, 1996 President/Chief Executive Officer (Principal Executive Officer) Martin E. Fossler, Director January 2, 1996 Harold A. Herr, Director January 2, 1996 Howard E. Kalis, III, Director January 2, 1996 Bradford W. Mitchell, Director January 2, 1996 Walter F. Vilsmeier, Director January 2, 1996 William M. Yocum, Director January 2, 1996 Vernon L. Hunsberger, Chief Financial January 2, 1996 and Accounting Officer (Principal Financial Officer and Principal Accounting Officer) /s/ Walter E. Daller, Jr. ___________________________ Walter E. Daller, Jr. (Attorney-in-Fact) /s/ Demetra M. Takes ___________________________ Demetra M. Takes (Attorney-in-Fact) II-4 EXHIBIT INDEX Page Number In Sequential Number Number Title System 2 Agreement and Plan of Reorganization dated 104 September 7, 1995, among Harleysville National Corporation, The Citizens National Bank of Lansford and Farmers & Merchants Bank (Honesdale, PA.) and Agreement and Plan of Merger dated September 7, 1995, between The Citizens National Bank of Lansford and Farmers & Merchants Bank (Honesdale, PA.) (included as Exhibit A to the Proxy Statement contained herein) 2(a) Investment Agreement (previously filed) 2(b) Form of Support Agreement (previously filed) 3(a) Amended Articles of Incorporation of Harleysville National Corporation (previously filed) 3(b) Amended Bylaws of Harleysville National Corporation (previously filed) 5 Opinion of Shumaker Williams, P.C. (previously filed) 13 Annual Report on Form 10-K for Harleysville National Corporation for the Year Ending December 31, 1994; Quarterly Reports on Form 10-Q for Harleysville National Corporation for the quarters ending June 30, 1995 and March 31, 1995, and current reports on Form 8-K dated April 12, 1995, May 18, 1995 and September 14, 1995 for Harleysville National Corporation all incorporated by reference hereto II-5 23(a) Consent of Shumaker Williams, P.C. (included as part of Exhibits 5 and 8) (previously filed) 23(b) Consent of KPMG Peat Marwick LLP (previously filed) 23(c) Consent of Parente, Randolph, Orlando, Carey & Associates (previously filed) 23(d) Consent of Danielson Associates Inc. 174 24 Power of Attorney (included on Signature Page) (previously filed) 99(a) Form of Proxy (previously filed) 99(b) Letter to Shareholders of Farmers & Merchants 5 Bank (Honesdale, PA.) (included in Proxy Statement contained herein) 99(c) Notice of Special Meeting (included in Proxy 6 Statement contained herein) 99(d) Statute Relating to Dissenters' Rights (included 167 as Exhibit C to the Proxy Statement contained herein) II-6 EX-23 2 EXHIBIT 23(d) OPINION OF DANIELSON ASSOCIATES INC. DANIELSON ASSOCIATES INC. 6110 Executive Boulevard Suite 504 Rockville, Maryland 20852-3903 TEL: (301) 468-4884 FAX: (301) 468-0013 Exhibit 23(d) We hereby consent to the reference to our name appearing herein under the captions entitled "GENERAL INFORMATION--SPECIAL MEETING OF FARMERS & MERCHANTS SHAREHOLDERS--Background of and Principal Reasons for Merger" and "Opinion of Financial Advisor." We further consent to the use of our letter to the Board of Directors of Farmers & Merchants Bank concerning the fairness of the financial terms of the proposed merger, appearing as Exhibit B to the Prospectus/Proxy Statement contained herein. /s/ Arnold G. Danielson ___________________________________ Arnold G. Danielson, President Rockville, Maryland January 2, 1996 -----END PRIVACY-ENHANCED MESSAGE-----